By Karen Petrou and Matthew Shaw
Yesterday, FRB Vice Chairman Clarida said that the U.S. economy is in “in a good place.” However, The Fed’s new study of American economic “well-being” shows that huge swaths of the United States are struggling harder than ever before to make ends meet. All but the most affluent Americans asked about how well they’re doing don’t feel anywhere near that good about it. Combine this with new data on the evaporating American middle class and an ugly picture quickly merges. In it, the prosperity in which the Fed takes such comfort rests thinly atop millions – indeed a hundred plus million – of Americans who are barely getting by at the height of the business cycle following a record-breaking “recovery.” No wonder that so many Americans remain so angry about their economic prospects and why political polarization is sure to define the 2020 election at least as much as it determined 2016’s outcome.
Continue reading “The Good, the Bad, and the Ugly in American Well-Being”
By Karen Petrou
The Fed is listening. In a recent blog post, we analyzed a brand-new database which Fed staff have constructed to capture distributional wealth effects across the U.S. economy. Now, we turn to a brand new paper from the president and staff of the Federal Reserve Bank of St. Louis that not only recognizes the distributional impact of monetary policy – a Fed first – but tries to do something about it. The paper proposes an “optimal” monetary policy based on a complex model with several uncertain assumptions, no conclusion about whether it would work in concert with a still-huge Fed portfolio, and nothing more than a theoretical hypothesis. Still, it’s a start. Continue reading “In Search of Optimal, Equal Monetary Policy”
By Karen Shaw Petrou
Does economic inequality lead to political polarization that then creates gridlock that increases economic inequality and turns negative feedback into M.C. Escher’s tessellated stairway to a political doom loop?
After the first full year of Donald Trump and a GOP-controlled Congress, it’s easy to conclude that we’re in the part of the cycle where inequality leads to polarization and then to gridlock broken only by anti-distributive policies and more acute polarization before gridlock sets in again. Getting a really bad feeling, I turned to a review of academic literature on economic inequality and political polarization. It generally confuses causality and correlation, but nonetheless shows that conventional wisdom is right: all of these forces make this a particularly parlous political session with potentially dangerous consequences for long-term comity and even stability. Put another way, 2018 will be way ugly. Continue reading “The Mother of All Negative Feedback Loops: Economic Inequality, Political Polarization, and the 2018 Congress”