Author Archives: RayIokkidgk

New Study Says Rising Inequality Is Killing the Economy

by RayIokkidgk Posted on September 29, 2016

Mother Jones

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Non-rich people tend to spend 100 percent of their income, or close to it. Rich people don’t. They spend, say, 50 percent of their income and save the rest. This difference is called the “marginal propensity to consume,” and it seems like it might be a problem if income inequality is rising. The problem is that as rich people get a larger share of total income, total consumption goes down. Here’s an example:

The question, of course, is how big the MPC effect is. Several years ago I investigated this and concluded that it really wasn’t very big. It seems like it should be, but it just wasn’t.

Today, however, Larry Summers directs our attention to a new IMF paper that suggests MPC actually does have a big impact. The authors look at two effects. First, as middle-income families fall into lower income groups, they spend less. Second, as a larger share of income goes to the rich, average MPC goes down. Both of these effects reduce total consumption, which in turn acts as a drag on the economy. Here’s the relevant chart:

MPC alone reduces consumption by nearly 2 percent, or roughly $200 billion per year. This is still not a gigantic effect, but it’s noticeable. And when you add in the direct spending effect of income polarization, it’s closer to $400 billion per year. That means we’re losing a lot of consumption—which we need—and gaining a lot of capital—which we don’t. The world is so awash in capital these days that you can (literally) hardly give it away.

Now, the authors use some novel estimating techniques in their paper, which is why they come up with a stronger effect than previous studies. The folks with PhDs will have to fight over whether they’ve done their sums correctly. But if they have, it means that increasing income inequality is a lot more than just a matter of unfairness. It’s also a real drag on economic growth.

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New Study Says Rising Inequality Is Killing the Economy

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Elizabeth Warren to Fed: Stop Delegating on Enforcement

by RayIokkidgk Posted on February 12, 2014

Mother Jones

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On Tuesday, Sen. Elizabeth Warren (D-Mass.) and Rep. Elijah Cummings (D-Md.) called on the heads of the Federal Reserve, the US central bank that sets monetary policy and helps regulate Wall Street, to take a more active role in bank oversight.

The Fed metes out dozens of penalties against banks each year, for infractions including faulty foreclosure practices and inadequate money laundering protections. But the seven board members—including newly-minted Fed chair Janet Yellen—who head the Federal Reserve rarely vote on penalty and enforcement decisions. Of the roughly 1,000 formal enforcement actions taken by the Federal Reserve over the past 10 years, only 11 were voted on by the board. The rest were delegated to Fed staff, sometimes even mid-level employees. Warren, who sits on the Senate banking committee, and Cummings, the ranking member of the House oversight and government reform committee, have been critical of this arrangement, arguing that the delegation of authority results in penalties that are too lenient. On Tuesday, the two Democrats sent a letter to Yellen asking her to tighten the Fed’s rules governing when the Board of Governors may delegate regulatory decisions, and when they must take important supervisory duties into their own hands.

“We respectfully request that the Fed…require that the Board retain greater authority over the Fed’s enforcement and supervisory activities,” Warren and Cummings wrote. “We believe that increasing the Board’s direct role in overseeing enforcement and supervision would strengthen the Fed’s efforts to reduce systemic risk in our financial system.”

The two note that the Fed Board gives more attention to monetary policy decisions than to its other mandate, bank oversight: “While the Board votes on every important decision the Fed makes on monetary policy, the board rarely votes on the Fed’s important supervisory and enforcement policy decisions.” Other Wall Street regulators, such as the Securities and Exchange Commission (SEC), require that all bank penalties be approved by their head panels.

In their letter, Warren and Cummings ask Yellen to require the Fed board to vote on any penalty agreement that exceeds $1 million or that involves changes in bank management. They also urge that all board members be notified before staff members enter into an enforcement action against a bank.

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Elizabeth Warren to Fed: Stop Delegating on Enforcement

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