QE and Inequality: The Two Seem to Go Together
A new Bank of England study shows how quantitative easing, while necessary, widened some inequalities.
(Bloomberg View) -- The Bank of England has often had to fend off charges that years of easy money worsened inequality. It recently released a study concluding the opposite: that nine years of asset purchases that pumped 375 billion pounds ($527 billion) into a faltering world economy didn't widen inequality after all:
Whatever the marginal impact of the extraordinary period of accommodative monetary policy on inequality, it was not associated with an overall increase in summary measures of inequality.
So the BOE is saying here that if you net out the various effects of the period of central bank easing between mainly 2008 and 2014 on different groups, monetary policy had a negligible impact on net wealth. Problem is, if you net out the effects, you miss the real story of QE's impact.
The bank looks at the effect of monetary policy on households divided by income and age group and those effects vary widely. The disparities between groups are important -- for not only do they explain why QE has failed to trigger inflation, but they point strongly to a QE contribution to the more polarized political environment we are now seeing.
For example, young people found their incomes disproportionately bolstered by QE, while older people saw interest on their savings stagnate. The effects can be said to roughly balance out. However, as the data shows, older households experienced a greater increase in net wealth, in particular with QE steadily supporting house prices. Young people may have held onto their jobs, but they saw the price of home ownership rise out of reach, creating what is now referred to in Britain as "generation rent." In other words, not only did the poorest benefit far less, but the dreams of the youngest to build a stake in society were pushed further away.
This explains why inflation targeting does not work in these circumstances. Wealthier people have a low marginal propensity to consume and a higher propensity to save than the poorest. Those with the means took advantage of low-interest loans and plowed any QE-dividend into financial assets or real estate.
Since most of the money created by QE was funneled to the wealthiest, they reinvested it rather than consumed it, triggering asset inflation rather than consumption inflation. Because asset prices are not counted in the BOE's inflation calculations, QE was prolonged beyond the crisis in the mistaken hope that it will trigger consumer price inflation. Instead, it exacerbated inequalities further and encouraged risky overleverage in the process.
The growing disparity between those who can and can't afford to own their homes has political consequences too. Belief in social mobility has fallen to a new low in the U.K., with close to three out of four Britons reporting it to be fairly or very difficult to change their material circumstances. It looks to many Britons that the wealthy magically saw their wealth increase in recent years.
As polling analyst Matt Singh recently observed for Bloomberg View, home ownership turned out to be a deciding factor in the 2017 elections that saw the Conservative government lose its majority. QE widened the disparity between owners and renters and the impact was felt in the polls.
This worsening of inequalities was not intended by central banks; nor did they have much choice in pursuing QE, given the circumstances of the financial crisis. The BOE's study shows the counterfactual: That not having acted would have made things worse for all these groups. If inequality is reduced because all households are growing poorer, that's not a happy outcome either. But it's still important that the effects of QE are acknowledged, in part to inform future decisions.
Continuing to rely on QE to achieve the BOE's inflation target will further boost asset inflation rather than consumer price inflation, artificially making the wealthy wealthier and building systemic risk by encouraging over-leverage. And yet unwinding QE carries risks too, especially with the uncertainties of Britain's European Union exit looming. Far better for the government to find a way to ring-fence the large amount of national debt acquired by the bank and use the proceeds to invest in education, infrastructure and other areas to reduce inequality.
The solution is not to try to find rosier ways to look at the data. QE may have been necessary, but it was also hugely distortionary. The BOE's report helps in our understanding of exactly how.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Jean-Michel Paul is founder and chief executive of Acheron Capital in London and faculty member at the Solvay Brussels School of Economics and Management.
To contact the editor responsible for this story: Therese Raphael at traphael4@bloomberg.net.
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