How COVID-19 Will Increase Inequality in Emerging Markets and Developing Economies

By Gabriela Cugat and Futoshi Narita Emerging markets and developing economies grew consistently in the two decades before the COVID-19 pandemic hit, allowing for much-needed gains in poverty reduction and life expectancy. The crisis now puts much of that progress at risk while further widening the gap between rich and poor. Despite the pre-pandemic gains in […]

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If you are not taxing consumption . . .

. . . then you are not taxing who you think you are taxing. I was reminded of this point by a recent tweet I saw:

Progressives tend to favor higher income tax rates on the rich.  I prefer a progressive consumption tax.  It might be worth noting that if the top rate of income tax were increased, President Trump still would have paid roughly $750 in income taxes in 2016.  In contrast, he probably would have paid much more in taxes with a progressive consumption tax, at least if his lifestyle is as lavish as has been reported.

Just to be clear, I don’t believe that tax policy decisions should depend on how it impacts Trump—that would be absurd.  My point is that when people get outraged about what they see as a gross inequity, it’s important not to just lash out blindly, rather one should think clearly about who actually bears the burden of different types of taxes.  In general, it’s NOT the person (or company) that writes the check.

There are technical problems with taxing consumption.  But there are often even bigger technical problems in taxing income, wealth and other alternatives.  For instance, there is the question, “Is X a consumer or an investment good?”  But the exact same dilemma crops up with income taxes.



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Building an Inclusive Recovery in the Middle East and Central Asia

By Jihad Azour and Joyce Wong Countries in the Middle East and Central Asia face with COVID-19 a public health emergency unlike any seen in our lifetime, along with an unprecedented economic downturn. The pandemic is exacerbating existing economic and social challenges, calling for urgent action to mitigate the threat of long-term damage to incomes […]

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Monetary Policy for all? Inequality and the Conduct of Monetary Policy

By Niels-Jakob Hansen, Alessandro Lin, and Rui C. Mano Inequality in both advanced economies and emerging markets has been on the rise in recent decades. The COVID-19 pandemic has exacerbated and raised awareness of disparities between the rich and poor. Fiscal policies and structural reforms are long known to be powerful mitigators of inequality. But […]

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Top 10 Blogs on COVID-19

By IMFBlog The pandemic has altered people’s lives in both enormous and small ways. Our editors have picked the top recent blogs that dig into the details of what COVID-19 means for people: the impact on women and the young, what it means for the food supply, and how it can increase already growing inequality, […]

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Teleworking is Not Working for the Poor, the Young, and the Women

By Mariya Brussevich, Era Dabla-Norris, and Salma Khalid The COVID-19 pandemic is devastating labor markets across the world. Tens of millions of workers lost their jobs, millions more out of the labor force altogether, and many occupations face an uncertain future. Social distancing measures threaten jobs requiring physical presence at the workplace or face-to-face interactions. […]

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Digital Financial Inclusion in the Times of COVID-19

By Ulric Eriksson von Allmen, Purva Khera, Sumiko Ogawa, and Ratna Sahay The COVID-19 pandemic could be a game changer for digital financial services. Low-income households and small firms can benefit greatly from advances in mobile money, fintech services, and online banking. Financial inclusion as a result of digital financial services can also boost economic […]

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Reopening Asia: How the Right Policies Can Help Economic Recovery

by Chang Yong Rhee For the first time in living memory, Asia’s growth is expected to contract by 1.6 percent—a downgrade to the April projection of zero growth. While Asia’s economic growth in the first quarter of 2020 was better than projected in the April World Economic Outlook—partly owing to early stabilization of the virus […]

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Stop asking the Fed about inequality (and start asking about inflation)

At a recent press conference, I was dismayed to see a number of reporters asking Jay Powell about inequality—an issue far beyond the scope of monetary policy—while asking few questions about the highly questionable current stance of monetary policy.

A recent Yahoo Finance article illustrates the confusion:

Federal Reserve Chairman Jerome Powell on Wednesday acknowledged economic inequality in the United States but said monetary policy tools can only do so much to narrow the income gap.

Research from within the Fed itself, however, suggests that the central bank may be more effective when policymakers pay mind to income inequality while designing policy tools.

Actually, inequality is a long run issue and the Fed cannot do anything to address the problem.  Money is neutral in the long run.

Pointing to previous economic research, Cairó and Sim note that higher-income groups tend to save more than lower-income groups (or in economic terms, have a lower marginal propensity to consume). The authors argue that higher-income earners can “overaccumulate” financial wealth and sustain high savings rates; lower-income earners are more likely to spend larger shares of their income just to make ends meet.

This presents a dilemma for the Fed, which broadly wants to discourage saving and spur consumption (or in economic terms, drive aggregate demand) to fuel an economic recovery.

This is a common mistake, conflating “consumption” with “aggregate demand”. Most textbooks say the opposite, that monetary stimulus is aimed at boosting investment.  Because saving equals investment, this implies monetary policy is expected to boost saving as well.  Indeed both saving and investment are procyclical, even as a share of GDP.  They both rise faster than GDP during booms and fall faster than GDP during recessions. (Note that I am responding to the Yahoo article and not the scientific paper, which I have not read.)

I also disagree with the standard textbook description of the transmission mechanism.  Aggregate demand equals consumption plus investment plus government output plus net experts, and hence you can think of monetary policy as being intended to boost the sum of those four categories, measured in nominal terms.  Or more simply, boost NGDP.  Thus Zimbabwe monetary policy sharply boosted nominal spending in 2008, even as real consumption and real investment plunged.  (Try explaining this to an MMTer.)

The suggestion: an “optimal” monetary policy prioritizing the reduction in unemployment to improve the welfare of lower-income wage earners – even at the expense of welfare losses to higher-income earners holding onto financial assets.

The monetary policy that boosts employment in the short run is the same policy that boosts real equity prices in the short run—expansionary policy.  In the long run, the optimal monetary policy keeps employment close to the natural rate, and that’s also the monetary policy that’s best for equity prices.

Readers of this blog know that I currently favor a more expansionary monetary policy.  But not because of its effects on inequality.  In the short run, a more stimulative policy would help low wage workers and it would help stockholders.  And in the long run, money is neutral.  If you want to do something about inequality, look elsewhere.

Meanwhile reporters need to ask the Fed why they don’t intend to hit their inflation target in 2022.  And keep asking the question over and over again until Jay Powell provides an intelligible answer.



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