Thursday, November 12, 2015

Income disparity makes it harder to determine where to set interest rates

I would guess that one of the bad side effects of income disparity is that it makes the job of the Federal Reserve more difficult. Harder to determine whether to raise interest rates or not.

Low interest rates are supposed to stimulate the economy for job creation while higher interest rates cool inflation. Like stepping on the gas or the brake in a car.

Problem is, in this economy, wages and prices are stagnate for some sectors of the economy while wages and prices are skyrocketing in other sectors. Skyrocketing housing costs in many cities, for example. Skyrocketing executive salaries is another arena of inflation. Some things are inflating while other things are remaining stagnate. In this environment, it would be hard to know whether to stimulate the economy or not.

What will the Fed do in December? These last few years, it's a harder call than usual, I would guess. Another reason to address the growing discrepancies in our economy.

Rising salaries for top income brackets leads to things like higher college tuition as institutions compete with one another offering higher and higher salaries to their top talent in order to keep that so called talent from leaving for higher paying jobs elsewhere. This creates a vicious cycle between institutions and corporations which leads to higher costs. In the case of colleges, the cost is usually passed along as higher tuition. Higher tuition is magnified in state supported schools as tuition must bear a higher percentage of operating costs unless state support keeps up with that inflation.

Salary inflation is a big factor in medical costs also; for instance.

Housing costs often rise much faster than most wages in many of our metropolitan areas. Sometimes rents will double in just a matter of a few years pulling the rug out from under people. This varies from region to region as well making it hard to set economic policy at a national level.

Meanwhile there is significant downward pressure on prices and wages in many sectors of the economy due to things like globalization and advancing technology. For instance, the self booking of travel via web sites has cut significantly into the business of travel agents.

It's hard to tell if the economy is stagnate or inflating from a birds eye perspective. Depends on who one is talking to. Less discrepancy of income could make it easier to determine this.

I remember the term "Stagflation" from back in the 1970s. Seems like that term applies today when parts of the economy are inflating while other parts are more stagnate.

One possible remedy is to go back to a more graduated income tax rate. This could cool some of the run away inflation toward the top.