For seven long years the Fed has aggressively defended a monetary policy regime explicitly designed to inflate the type of assets most likely to be concentrated in the hands of the wealthy.
Despite the protestations of the man under whom these policies were implemented, the gap between the rich and everyone else has grown in post-crisis America. For evidence of this look no further than latest data [9] on US household income, which shows that while the 0.001%, the 0.01%, the 0.1%, and the 1% have all nearly recovered their pre-crisis share of the national income, the bottom 50% of US filers' share is not only lower than it was in 2007, but is in fact lower than it was in the depths of the crisis.
For further evidence of the ballooning wealth divide, simply consult the St. Louis Fed, where researchers recently opined [10] that the American Middle Class “is under more pressure than [anyone] thinks.” The related study shows the fate of Middle Income America diverging sharply from that of the country’s “thrivers” (the name the Fed gives to society’s upper echelon).
And while those who, like Janet Yellen [11], understand how important it is to accumulate assets are doing quite well thanks to multiple iterations of unbridled money printing, the “wealth effect” — which was supposed to be the transmission mechanism whereby trillions in central bank liquidity would find its way to Main Street — simply never materialized. So, with housing becoming more unaffordable by the day and wage growth stagnant for 83% of workers, the San Francisco Fed apparently decided it was time to think about redistributing some of the hundreds of billions the FOMC has generated for America’s ultra rich in order to help out the have-nots and jump start consumer spending. Spoiler alert: after careful consideration, the bank decided redistribution probably isn’t worth the trouble. Here’s more:
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From The Stimulative Effect Of Redistribution [12]
The idea of taking from the rich and giving to the poor goes back long before the legend of Robin Hood. This kind of redistribution sounds desirable out of a sense of fairness. However, economists often judge a policy less on whether it is fair, and more in terms of whether it is efficient or inefficient, as well as whether it stimulates or slows economic activity.
The starting point for our simple estimate is the Consumer Expenditure Survey, which gives an annual picture of complete consumption patterns for U.S. households. The solid black line in Figure 1 plots the share of income that households consumed in 2013. The survey ranks households by income from low to high and divides them into 10 groups called deciles, with the 1st decile showing households in the bottom 10% of the income distribution, and the 10th decile showing households in the top 10%. Spending is then averaged for each decile of the income distribution. The shaded areas below the solid line reflect the share of income spent on different major expenditure categories.
The figure suggests that households at the lower end of the income distribution spend more than twice what they make. At the upper end, households spend about two-thirds of what they make. Given this large difference in the propensity to consume between low- and high-income households, we consider the economic impact of levying a $1 tax on the rich and transferring it to the poor. This would reduce the high-income household’s spending by about $0.66 and increase the low-income household’s spending by $2, assuming each group spent additional dollars at their average rates. On net, it would create an increase in spending of more than $1.25. Even if the average for households in the bottom decile is overstated and they simply consume all the income they make, Figure 1 suggests every $1 of redistribution from the top earners to the bottom one-third of the income distribution would boost spending by at least $0.33.
There are still two main reasons why this result overstates the stimulative effect of redistributing income.
By definition, income equals consumption plus savings. In addition to the consumption and income data we used to calculate the propensity to consume in Figure 1, the Consumer Expenditure Survey also contains data on household savings. One can calculate an alternative measure of propensity to consume using the sum of consumption and saving as the measure of income rather than the income reported in the survey. The resulting alternative profile of the propensity to consume across the household income distribution is shown by the dashed black line in Figure 1. This alternative measure results in a flatter profile of the propensity to consume than the conventional measure, largely because the estimates for low-income households are much lower. The revised estimates suggest these households report consumption and savings levels that are consistent with a substantially higher income than they report in the survey. At the other end of the distribution, high-income households tend to underreport their consumption, especially for basic items like food. This results in an understatement of their propensity to consume (Aguiar and Bils 2011).
Combining the measurement biases at the lower and upper ends of the income distribution suggests that the actual profile is much flatter than the initial one we discussed.
Our discussion of the permanent income hypothesis touched on the importance of access to credit for household consumption levels relative to income. If households have access to credit then they are able to smooth their spending in response to a temporary negative shock to income. Even if they do not have access to credit, households can still self-insure by setting aside savings to cover expenses in times of unexpected income losses. In both cases, peoples’ consumption decisions are driven mainly by their permanent income, and so a high propensity to consume in 2013 may simply reflect a temporary loss of income. The fact that households at the low end of the income distribution can consume substantially more than they earn may also suggest that they have more access to credit than is apparent. In this case, the simple back-of-the-envelope calculation may overstate what fraction of additional income these households would consume.
There is evidence that differences in propensities to consume this additional income across households are smaller than commonly assumed.
To summarize, the San Francisco Fed took a stab at quantifying whether a small levy on the rich would have an outsized impact on the propensity of the lower and middle classes to spend, and once they determined that the answer was probably "yes", they went back and adjusted a few things to ensure the data was an 'accurate' representation of reality only to determine that in fact, people's propensity to spend doesn't really vary that much across tax brackets, so therefore, redistributive policies probably wouldn't do much for the economy after all. Conclusion: it's probably just as well that the rich keep that dollar as opposed to giving it to the poor.
