Following the excellent J.W. Mason, here are the ideas I would like to blog about if I had more time:
- Let’s stick wealth into the utility function.
Please, it’s way past time. It doesn’t have to be along Caroll’s proposed solution, but something a bit more reflective of the hierarchy of needs would be nice. In fact, a hierarchy of needs utility function would be great in general. At the bottom, you have fixed costs: food, shelter, health care, transportation. The demand for these is more or less fixed. Above that you, have more luxuries: vacations, nice cars, nice restaurants, entertainment. After that, you are basically left with status and power — i.e. wealth.
- Capital values — duration effects (again).
Zero nominal rates are special because any asset earning an income stream is infinitely priced when rates are zero. There is a nominal singularity. Equivalently, we can think of this as a duration effect. As nominal rates fall, duration goes up. If the probability that a given (tangible) investment succeeds in earning a profit is fixed, this means that investments that deliver more of their earnings in the present (via dividend payouts) rather than in the future (via re-investment) are valued more highly. So there is a change in the relative market cap of income stocks versus growth stocks when nominal rates are cut. This would be a real effect arising from a change in nominal rates.
- Who gets the rents?
Assume that firm managers — the ones making actual investment decisions — are risk averse. By definition, the firm managers are more exposed to the success or failure of their investments. To carry zero exposure means that performance in choosing good investments versus poor investments is disconnected from pay. If their own risk premium, as a result of their positive exposure, is x% above the risk-free rate, but then in aggregate capital investments will earn a premium of x% above the risk-free rate. So who gets the x%? Is it equity investors, the managers themselves, the VCs creating firms and selling them into the equity markets, or (God forbid) labor? It seems to me that this is purely a question of bargaining power.
- More on distribution
- MMT Schism?