The Gratification of the Plutocrats

One slight addition to my last post.  Paul Krugman has written (here and here, and I'm sure elsewhere) about class interests and macroeconomic policy.  In short, rich people don't want inflation because they hold assets that are more valuable the lower inflation is.  I want to point out a few nuances.

First, as I pointed out in my last post, low interest rates tend to increase asset prices.  So if you were rich before the recession, and you held onto your financial assets, then you have seen your wealth surge over the last few years.  Although you can now look forward to a period of lower returns, this shouldn't really be a problem.  All that's happened is that you've been given your asset-price appreciation ahead of schedule.  (If anything, the recovery has increased the value of equity securities and made it more likely for fixed-income securities to be repaid.  It's hard to see how you've lost anything, unless you happened to make an ill-advised bet on gold or something.)

The people who are really hurt are the "HENRYs" - High Earner, Not Rich Yet.  They have accumulated relatively few assets but are going to be looking to buy a lot over the next few decades.  They may be screwed.  (Follow-up post here.)  They didn't enjoy the asset-price appreciation, and now they have few opportunities to buy high-return assets.  There's no need to cry for them - they will be fine - but they really will pay a fairly steep price for their bad luck in timing.  In the example Neil Irwin cited in this post, two people with identical saving patterns could end up with either $532,000 in retirement savings or $2.57 million - depending on the time period over which they invest.  (Those numbers are inflation-adjusted.)  In neither of those cases will the person starve, but that is a tremendous difference in wealth for people who save identical amounts.  Capitalism is not 100% fair, it would seem, even for rich people.  [I want to note here that Irwin's example is a little unrealistic, in that it compares portfolio value at retirement, but doesn't follow the portfolio through retirement.  In reality, even when you are retired you should own some stocks.  The person who only had $532,000 retired in 1981, at the inception of a big boom in stock prices.  The person who had $2.57 million retired in 1999, on the cusp of a market collapse.  So the two cases would tend to converge a bit in the first decade of retirement.  Still, it's undeniable that you can get hugely different outcomes based on timing, and that it seems like an inauspicious time to be a HENRY, at least in terms of market returns.]

But so, if the plutocrats have no particular reason to care about low-interest policy, what is Krugman's point?  Well, I've been ignoring the threat of inflation.  If you maintain super-low interest rates without sparking any inflation, as the Fed has done, then the plutocrats will do very well.  But, from their perspective, why take the chance?  Even if you think low interest rates are unlikely to cause significant inflation, you can never be sure.  So if you draw a bell curve around expected inflation, even if the peak is in a reasonable range, there is always that tail . . .

And so this, maybe, is why plutocrats don't want low interest rates.  I don't think it's so much that they need their assets to have high yields - it's that they have reason to be very worried about inflation.

Damn it, I get this far in the post and I realize there is another factor here.  Long term fixed-income assets have done very well.  But if you like to hold safe, liquid assets, then you didn't get a big run-up in portfolio value (short-term assets are not very responsive to changes in interest rates), but as your securities rolled over you started to get a very poor return.  So maybe that is the reason for the plutocrats' whining.  It looks as though I might have to write a post on yield curves.  Anyway none of this changes the fact that we can't base our policy on what will gratify the plutocrats.