Friday, August 20, 2021

My latest, on the peril of indefinite loose monetary policy.

Are “unconventional” monetary policies (UMPs) deployed by the advanced economies a cure worse than the disease? Your columnist has asked this question on numerous occasions in recent years, as it becomes increasingly evident that the harmful side effects of UMPs, which helped alleviate the worst symptoms of the global financial crisis, are increasingly distorting not only the financial sector but the real economy as well, and causing serious and harmful “spillover” effects on emerging economies such as India.

Raghuram Rajan, former governor of the Reserve Bank of India, has been a well-known critic of UMPs, and, in particular, the damaging effects of the “taper tantrum” of 2013, in which then Federal Reserve Board chair, Ben Bernanke, had to walk back from plans to taper the large scale asset purchases — commonly called “quantitative easing” — after his remarks that they would begin to taper, touched off a firestorm in international financial markets, and hit emerging economies, including India, especially hard.

Recently, Rajan penned a column (“The Dangers of Endless Quantitative Easing”, Project Syndicate, 2 August), in which he weighed in on the current debate occurring amongst members of the Fed as well as academic and bank and corporate economists on whether it is now high time for the Fed to taper its asset purchases, at present $120 billion per month. Rajan’s view is that supply constraints are now more pertinent than insufficient demand, and excessively accommodative monetary policy runs the risk of stoking inflation, which would have fiscal implications in the medium to longer rum, increasing the servicing costs on the large stock of government debt due to interest rates that will eventually have to go up as inflation begins to spike.

On 18 August, speaking to the Financial Times (“Top Fed official warns massive bond purchases are ill-suited for US economy”), Eric Rosengren, president of the Boston Fed, threw his weight behind the Fed board beginning to taper after it meets next month, with the aim of winding down asset purchases altogether by the middle of next year, again citing supply constraints, such as the difficulty employers in the US are encountering finding workers, even as they offer higher wages. Importantly, Rosengren pointed to the harmful effects of asset price appreciation and “undue leverage”, as fund managers take on more and excessive risks in the search for yield in a low-interest environment.

Ironically, asset price bubbles fuelled by leverage and low interest rates were the proximate cause of the global financial crisis to begin with, and they are in play once again as a serious side effect of low interest rates and asset purchases used to combat the effects of the crisis. This is a little like someone suffering insomnia, who then gets hooked on sleeping pills, and is unable to taper them and ends up taking them for life. Unless the US, and other advanced economies, begin to take seriously the need to pull back from UMPs, this is the situation we may end up in.

It is worth reminding ourselves that debates about monetary policy are not merely an esoteric pastime for central bankers and finance gurus. Rather, excessively loose monetary policy has long-lasting and perverse effects on the real economy, too. One of the most damaging of these side effects is the increase in wealth and income inequality that has been abetted by low interest rates and asset price inflation.

It is, after all, the already wealthy who have money to invest, and skyrocketing asset prices, everything from property to antique automobiles, boosts their wealth and income. By contrast, lower income households put their money in the bank, where they earn low, almost zero, interest rates that barely keep pace with inflation.

There is more than a little bit of irony in the fact that loose monetary policy, which has received widespread support from left-leaning economists in the US, actually has done more to worsen inequality than the effects, say, of former President Donald Trump’s tax cuts, which were widely criticized for being pro-rich. A recent study, reported on by Bloomberg (“U.S. Wealth Gap Rises With Jackson Hole Coming at the Top”, 18 August), documents widening wealth gaps between the top and bottom deciles of US counties. Looking at income from assets, in particular, interest, dividends, and rents, on a per capita basis, the top 10 percent of counties earned about $20,000 in asset income per person, on average. Meanwhile, in the bottom 10% of counties, that figure was only about $7,500. This has very little to do with the structure of taxation and very much to do with the distorting effects of low interest rates and frothy asset prices.

There are also more conventional dangers that lurk, unless the Fed and other advanced economy central banks get serious about winding down asset purchases and returning policy interest rates to more normal territory and away from near zero. During the “great moderation”, a long period of low inflation that preceded the financial crisis, there was a smug insouciance amongst central bankers and even academic economists that high inflation was a thing of the past. But with inflation now starting to tick up in the US and elsewhere, that smugness may soon evaporate, as Fed officials realize that it is far from easy to put the inflation genie back in the bottle, once it has been uncorked.

Tuesday, August 10, 2021

My next Mint column on the pandemic at an inflection point. The on-line version is unavailable due to a technical glitch. The text as filed is placed below.

The pandemic at an inflection point calls for extra care

Vivek Dehejia

Fully a year and a half into the COVID19 global pandemic, the world appears to be at an inflection point in the management of the virus, and a clear divide is emerging between advanced and emerging countries. Last time, your columnist discussed the pros and cons of the United Kingdom’s re-opening plan, with the penultimate stage of unlocking on 19 July — dubbed “Freedom Day” by the British tabloids — while cases were still on the rise, driven by the Delta variant.

As I noted then (“Boris Johnson is taking a big gamble with ‘Freedom Day’”, 26 July), Prime Minister Boris Johnson was taking a big gamble on re-opening under such circumstances. The gamble appears to have paid off. After coming to a crest, new infections have begun to taper off, and serious illness, hospitalization, and morality remain far below the levels of earlier waves of the pandemic, which preceded widespread vaccination. If things go according to script, the UK is poised to remove removing pandemic-era restrictions later this month.

By contrast, in the United States, a clear divide has emerged between the “Red” (Republican) and “Blue” (Democratic) states — the former have relatively low levels of vaccination compared to the latter — not due to any supply constraints — the US is awash in vaccines — but due to vaccine hesitancy, which is much higher amongst Republicans, especially supporters of former President Donald Trump. While Blue states, such as New York, press ahead with re-opening, while maintaining some pandemic-era restrictions, such as social distancing and mask mandates, Red states are seeing a surge in new infections even as many, such as Florida, have eliminated all pandemic-related restrictions. Florida’s governor, Ron DeSantis, has gone so far as to ban local jurisdictions from re-imposing mask mandates, which the state has eliminated.

Meanwhile, Canada, the other major Anglo-American country in the Western hemisphere, has taken something of a middle path. With high rates of vaccination, most Canadian provinces are on a re-opening path, albeit at different speeds. Thus, while Ontario, the largest province, retains a mask mandate in indoor spaces, other provinces, such as Alberta, have eliminated it. Absent a major new Delta-driven outbreak, which cannot be ruled out, Canada as a whole appears to be on track for a return to normalcy, more or less, by later this autumn or early winter.

Variations of this pattern may be observed in other advanced Western countries, such as in Europe, all of which have now attained relatively high rates of vaccination, and most of whom are now well on a re-opening path. This summer has seen the return of major music festivals, such as the Salzburg Festival in Austria, with relatively few restrictions. Indeed, the festival had even dispensed with mandatory mask use inside the concert and theatre venues, until a fully vaccinated ticket holder tested positive. The mask mandate was hastily re-introduced, but few other restrictions remain. A short distance across the border in the German state of Bavaria, the Bayreuth Festival, devoted to the music of the 19th century composer Richard Wagner, is also back in full swing. Intra-European travel has also, just about, returned to normal, and foreign tourists have also returned.

The story, however, is very different in most of the emerging and developing world, where rates of vaccination, even of first doses, remain low, with full vaccination percentages often in the single digits. These countries, spanning the world from Latin America to Africa and Asia, remain acutely vulnerable to outbreaks of the virus, especially the virulent and highly transmissible Delta variant. Recent weeks have seen major outbreaks across Southeast Asia somewhat reminiscent of the devastating second wave that India experienced earlier this year.

The world now stands on the cusp of a two-speed recovery — both from the pandemic and of the economy — driven by differential vaccination rates in the rich as compared to the poor countries. This has fuelled cries for “global vaccine equity”, and even the World Health Organisation (WHO) has thrown its weight behind the idea. Recently, the WHO called for a pause on “booster” doses being planned in several rich countries, arguing that the need of the hour is to ramp up vaccination rates in the developing world. It is indeed a tragedy that, as rich countries such as the US and Canada sit on vast stockpiles of vaccines, many of which are sure to expire unused, there are millions of people in poorer countries still awaiting a second, or in many cases, even a first jab.

The major international financial organisations, such as the World Bank and the International Monetary Fund, as well as banks, investment houses, and management consultancies, have also lent their weight to the argument, as report after report show that ongoing pandemic-related restrictions in many developing countries will be a drag on the global economic recovery.

The implicit argument, although it is rarely stated directly, is that it is in the enlightened self-interest of the rich world to ensure that poorer parts of the world quickly get up to speed on vaccination, else the consequences will be dire for the rich world itself. Not only will the incipient global economic recovery stall, but denizens of the rich countries will be at risk from infection through successive putative new variants of the COVID19 virus against which the vaccines currently in use will presumably be less effective.

Much is at stake as the world stands at this inflection point.

Vivek Dehejia is an associate professor of economics and philosophy at Carleton University in Ottawa, Canada.