Sunday, October 25, 2020

An Irony About Interest Rates And Income Distribution

 It has long been a truism of economics that high interest rates were favored by wealthy capitalist lenders against poor borrowers, with such a view lying behind the populist demands of the late 19th century.  We are used to applauding Keynes's forecast of the "euthanasia of the rentiers." But now that such a situation is upon us of increasingly likely very low interest rates for a long time ahead, this euthanasia does not seem so much like something poorer people should be all that happy about.

Increasingly it looks like the largest effect of prolonged very low interest rates is a booming stock and real estate market.  The latter may help the middle class, but those gaining from the former are much more heavily concentrated among the wealthy, even though somehow Donald Trump thinks that nearly every American is totally focused on their 401ks and that really is what matters in the economy.  After all, we all know that it was the potentially negative impact on the stock market that had Trump worrying about public "panic" back in early February when he told Woodward that he was not going to publicize how serious the coronavirus is.  Ironically he would probably be in much better electoral shape now if he had done so back then, with the economy probably doing better than it is, although I have no idea what the stock market would be doing. But Trump still has not figured all that out.

Anyway, it is not just that the poor do not seem to get much of the obvious gains from asset price appreciation that seems to be the main effect of lower interest rates.  It is also that the future viability of pensions, both public and private may become endangered, although this is not an immediate worry.  But in today's WaPo Allan Sloan reiterated a case he has made previously, citing several new studies on this, warning that low interest rates on bonds will make it harder for pension funds to pay out what they have promised to pay out, with this affecting Social Security as well, although the greater damage and danger seems to be for state and local pension funds, as well as private pension funds, with insurance companies and others facing problems down the road some years if interest rates really do stay so low.

A particular point on this that Sloan notes is that there is a huge difference in the share of wealth that pensions constitute for different parts of the income distribution.  For the 20-80 percentiles it is the largest portion, even exceeding homes.  For the top 1% it is less than 2% of their wealth, essentially nothing.  So damage to the value and viability is potentially a serious hit for the middle and poorer classes, whereas it is a big nothing for the super wealthy.  

Thus we have this new irony of interest rates: lower ones hurt the poorer parts of the population while helping the wealthier parts of it.  The rentiers that may end up getting euthanized may well be the middle and poorer classes in the longer run.

Barkley Rosser


Anonymous said...

Pensions are not wealth; they are income. Perhaps the author meant "the discounted present value of pensions" when he said pensions. That would be wealth but it is not what he wrote. said...


I do not know about you, but when I look at my wealth I most certainly count the value of my TIAA/CREF pension account from which I shall get future pension income when I retire, as does everybody else. U should perhaps have added "balance" or "account" or something to "pension, but the value of what will provide future (or current) pension income is a part of wealth.