This article explains that the Fed’s rising interest rate policy is hurting the poor more than the rich.
Of course, the rich always have more leeway than the poor. Inflation is hurting the poor as necessities like rent, transportation and food prices soar. The rich continue to spend, keeping prices high. The Fed will raise interest rates in order to slow the economy. In that case, poorer families will almost certainly bear the brunt again, because low-wage workers are often the first to lose hours and jobs.
The Macroeconomic impact is to increase income inequality further. The top two-fifths of the income distribution account for about 60 percent of spending in the economy, the bottom two-fifths about 22 percent. That means the rich can continue to fuel the economy even as the poor pull back.
That’s not what the Fed is trying to do but it’s the unintended consequence of slowing the economy.
“The top two-fifths of the income distribution account for about 60 percent of spending in the economy, the bottom two-fifths about 22 percent”
Surely that is what one would normally expect? Top 40% income account for 60% of spending. Seems unlikely that it would be 40%.
And of course there are more nuances than just poor and rich.
If low interest rates benefit the rich and high interest rates hurt the poor, what’s left?
Perhaps this is not anything that the Fed can solve.
I think that’s correct. It would be far more cost efficient to correct this on the fiscal side by providing subsidized child care to allow more people to enter the workforce and increase the quantity of goods & services available for sale. Unfortunately, big-money campaign donations and corruption are preventing that.
We’re really experiencing an “End of Empire” level of Congressional dysfunction.
This article explains that the Fed’s rising interest rate policy is hurting the poor more than the rich.
The Fed has one tool and two problems. The only one it can control is interest rates as they attempt to slow down an overheated economy.
The correct tool is higher taxation on wealthier families. There are lots of substitute variants, like subsidizing child care, food stamps and other welfare-ish programs, but the income equality is best solved by reverting to taxation schedules as were common when inequality was not so vast. That means both corporate and personal tax rates should changed
I expect that lower end retailers like Wal-Mart will bear the brunt of falling sales from the lower end of the income distribution.
I expect the opposite. Dollar stores and WalMart will be the beneficiaries of people trying to stretch their pennies. WalMart is in the middle of trying to sort out its inventory problems right now; they are stuffed with pandemic-ish stuff right now, and low on the kinds of things consumers want in the post-covid phase. That will likely take a quarter or two to sort out, so I expect a soft quarter as they further discount their excess and ramp up their new, higher priced inventory for shopping trends going forward.
“The correct tool is higher taxation on wealthier families. There are lots of substitute variants, like subsidizing child care, food stamps and other welfare-ish programs, but the income equality is best solved by reverting to taxation schedules as were common when inequality was not so vast.”
So, how would we change to get higher taxation on wealthier families?
Currently, there are 7 brackets. Should there be more? Should the higher ones just have higher rates?
i.e. should the 32,35 and 37 percent brackets be 35, 40 and 50 percent?
The 32% covers income over $340K for MFJ but only 170K for singles.
Personally, I think it’s less about the rates or where the brackets kick in than about the deductions available at the higher level.
Really, there should be no deductions for anything - period. Mortgage, charitable, extra children…
Tax rates could be lower across the board.
“The correct tool is higher taxation on wealthier families. There are lots of substitute variants, like subsidizing child care, food stamps and other welfare-ish programs, but the income equality is best solved by reverting to taxation schedules as were common when inequality was not so vast.”
You confuse several things. For example, wealthier families don’t necessary have HIGHER INCOME, which can be taxed.
wealthy families already take steps to minimize their tax hits. The Kennedy Klan kept most of their real estate in offshore trusts. The trusts paid the real estate taxes. Thus the individuals often had ‘no taxable real estate’. they ‘rented’ from the trust.
At one time, income tax rates were up to 90%. No one paid at that level. Back then, tax free mini bonds were popular - income without income taxes. there were tons of tax side steps like owning lots of real estate and taking large depreciation each year offsetting income.
When taxes in the early 50s the top bracket was 90% property local and state taxes were low. Meaning the middle classes effectively were paying less in taxes than now. This created a great deal of demand. The wealthy aimed their corporate growth at the burgeoning middle classes.
We need to restructure the economy to suit the middle classes. Meaning healthcare costs and education must be managed better.
The current effective tax rate, state, local and federal is at least 50% of income on high earners. We do not need higher taxes on them. Or at most a tad higher nothing much more.
We do not want to drive off the wealthy. Obviously. We have factories being built in the US in a rush out of China. Lets not kill the golden goose.
The FED has two tools. Buying and selling bonds is the FED’s main tool. Setting the FF rate only is worthwhile based on bond trading by the FED.
The Fed was created to protect the rich bankers from their own greed and stupidity.
That’s not what the Fed is trying to do but it’s the unintended consequence of slowing the economy.
The mission statement of the Fed is “Lender of Last Resort,” i.e. to protect the rich bankers from their own greed and stupidity. The other so called Fed missions are just political camouflage.
The Captain
ignores the Fed, it’s BS pure and simple. MACRO BS!
I would note this piece was written in 2011, and WalMart now faces more competition at the low low end from (variants of) Dollar stores, which have proliferated wildly in the past decade. Before this phenomenon there was precious little competition for people’s pennies at the lowest end, but Dollar stores have found a niche: selling basic goods in smaller quantities for an even lower price point.
That said, I have noticed that recessions affect different businesses quite differently. When I was in broadcasting it was commonly understood that radio would do pretty well in a recession, as large TV advertisers would cut their TV budgets, put 1/3 in radio, keep 1/3 in TV, and husband the remaining 1/3 to “cut costs.” (An example, sometimes it was “disappear from TV, put half in radio, keep the other half.) There was some falloff for radio, of course, local businesses that were hurting, but on balance radio did just fine. (Different now, I suspect with the competition from online and targeted video).
Anyway, a recession means different things for different businesses; my guess is that WalMart will be fine, Dollar stores will be fine, and the very high end will be fine. It is those in the middle who will see their customers depart for lower priced pastures, assuming there is a meaningful recession, which is quite possible but not yet guaranteed.