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Low Interest Rates Mask the Effects of Job-Killing Policies

Walter Russell Mead

Seven years of relaxed monetary policies have caused U.S. household wealth to soar, but for most Americans this tremendous accumulation of wealth has not translated into robust wage growth. The Wall Street Journal reports:

The net worth of U.S. households and nonprofit organizations—the value of homes, stocks, bonds and other assets minus all mortgages, debts and other liabilities—climbed by $695 billion to $85.7 trillion, according to a Federal Reserve report released Friday. […]

The buildup in wealth, though, has done little to boost the overall economy.

Economists had hoped rising worth in U.S. households could induce—through what are known as wealth effects—enough spending and confidence to bring about a more robust economic recovery. That logic helped underpin the Fed’s decisions to hold interest rates near zero for nearly the past seven years, and to engage in repeated rounds of asset purchases, known as quantitative easing.

But while the value of U.S. assets has shot upward in recent years—stocks have reached new highs and home values have regained much of what was lost in the housing bubble’s collapse—economic growth has been sluggish, and many households have seen little of this wealth flow into their paychecks.

In other words, while the Federal Reserve’s quantitative easing has not led to the consumer price inflation that many feared, it has led to asset price inflation. (The WSJ concludes by noting, ominously, that wealth-to-GDP ratios have only come close to their current level of 4.8 during notorious bubbles). Soaring household wealth levels aren’t a bad thing per se, but job growth, not asset price inflation, is the best way to promote economic growth.

To grow the economy, cheap interest rates are not going to work as well as reforms that make business formation and job creation more attractive. Yet Democrats these days have ever-lengthening lists of job-killing policies they want to enact, from tighter environmental regulations to dramatic minimum wage increases (especially in cities where unemployment is high) to tax increases. Paradoxically, that leaves liberals cheerleading for Fed policies that increase inequality and concentrate wealth because only ultra low rates (or truly massive deficits, which can’t be rammed through a GOP Congress) can mask the effect of left-wing microeconomic policies on the economy as a whole.

There is no shortage of capital today, but there is a dearth of attractive opportunities to invest that capital in ways that will stimulate employment. People who actually care about the living standard of the American people need to be thinking long and hard about the kinds of policy changes and innovations at the local, state, and federal levels that would rejuvenate the American labor market by making it easier and more rewarding to create new jobs.

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