Weekly US politics news and updates thread - week of November 21

Given that the both the Democrats and the Republicans are functionally pro-business parties, I'm skeptical about your framing of this as state of affairs that's the result of a deadlock between the parties as opposed to a sustained trendline regardless of which party has been in power. Democrats support somewhat more in the way of social services, but as a party still support capital over workers in many cases.

Exactly.

In 1999, the presumption was that low rates help in the short term, but in the long term low inflation helps the most.

First, our analysis suggests that the usual emphasis on the short-run effects of monetary policy on poverty is fundamentally misguided. It is certainly true that expansionary policy can generate a boom and reduce poverty temporarily. But the effect is unquestionably just that —temporary. Monetary policy cannot generate a permanent boom. When output returns to the natural rate, poverty will return to its initial level. Moreover, the cost of such a boom is that inflation is permanently higher. If the higher inflation creates a consensus for tight policy to reduce inflation, the resultant rise in unemployment leads to a rise in poverty that offsets even the temporary reduction generated by the boom.

Second, the cross-country relationship between monetary policy and poverty suggests that monetary policy that aims at low inflation and stable aggregate demand is the most likely to result in genuinely improved conditions for the poor in the long run.

Romer and Romer (1998)

Since 1999, the number of countries that implemented Inflation Targeting tripled, largely targeting lower inflation creating a contractionary monetary policy in the short term. (see Table 1 Altunbaş and Thornton)

Most of the countries implemented a target of 2-3%, largely following New Zealand's lead, which made inequality worse.

IT [Inflation Targeting] adoption has been associated with a worsening of income distribution measured by the Gini coefficient and a decline in the labor share of national income relative to the profits share

Altunbaş and Thornton (2022)

Yet even back in 2001, there was evidence that a target of 2% inflation would worsen income inequality.

we found evidence in favour of a U-shaped long-run relationship between inflation and inequality, with the estimated minimum in inequality around 6 per cent inflation in the United States, and around 12 per cent in the OECD countries. In the case of the United States, where data are available also on the quintiles income shares, the increase in inequality below 6 per cent inflation arises from the richest quintile gaining income share at the expenses of the rest of the distribution.

Galli and von der Hoeven (2001)

So basically, the reserve banks of the world proceeded to implement absurdly low inflation targeting, perhaps as a natural reaction to the 80's style inflation, but knowing full well this could worsen income inequality

Inflation targeting has become a popular regime among central bankers around the world. Indeed, since New Zealand first adopted this regime, a number of advanced and emerging economies have followed suit. Mainstream authors often conclude that inflation targeting has been a success, although they measure the performance of inflation targeting almost exclusively in terms of rates of inflation. In other words, there is a general consensus that inflation targeting regimes have led to lower inflation rates and “inflation convergence” among countries.

Despite this apparent consensus, there is some interesting dissent among the mainstream. While these critics never doubt the rationale for fighting inflation, they do not consider the inflation targeting strategy as a beneficial monetary regime. In particular, they believe that it unnecessarily restricts central bank policy. Moreover, some critics openly question whether inflation targeting did really contribute to lowering inflation rates. Indeed, as has been advocated by mainstream and non-mainstream economists alike, inflation rates were already on the decline at the time of adoption of inflation targeting strategies.

The main focus of this paper, however, is on the real effects of inflation targeting. Indeed, while Bernanke et al. (1999, p. 258) concluded that the sacrifice ratio is often higher after adoption of an inflation targeting regime, we conclude that this result can be attributed to the fact that income distribution worsened for wage earners after the adoption of inflation targeting, which can give rise to a substantial drop in effective demand with the observed negative effects on output and employment as measured by sacrifice ratios.

Rochon and Rossi (2006)

Perhaps reserve banks naively thought government would step in

Because the impact of monetary policy on inequality through the asset and interest rate channels is
weak and uncertain, concerns about inequality do not support changes to current monetary policy
objectives of price stability and, in some cases, full employment. Fiscal and social policies, including progressive taxation and social welfare and equitable access to education, are better placed to address inequality

O’Farrell, Rawdanowicz, and Inaba (2016)

Sadly, when governments step in, they typically only increase income inequality....

Specifically, the coefficients on IT indicate that an inflation target is associated with an increase in the Gini measure of inequality of between 3.6 and 7.6 percentage points. Of the other explanatory variables, only the growth of real GDP appears to reduce income inequality. In contrast, the financial crisis, trade and capital account openness and, perhaps surprisingly, more representative governments and government consumption expenditure appear to promote greater income inequality. In the latter case, government consumption spending may be a poor proxy for social spending aimed at reducing income inequalities, but it may also indicate that much of the spending on transfers is captured by the middle class

Altunbaş and Thornton (2022)