QE & inequality: don't blame the Bank

The Bank of England's admission that QE disproportionately benefited the rich has attracted some criticism. This is mistaken. The Bank has done nothing wrong.

The finding that QE increased inequality is a statement of the bleeding obvious. QE has raised asset prices, and it is only the rich who have financial assets; the Bank estimates that the median household has gross financial wealth of only £1500. As Ben says, it is therefore no surprise that QE has increased inequality.

But this is not the Bank's fault. If financial wealth had been equally spread - which is a fantasy of representative agent economics more than of socialists - then everyone would have gained from QE. QE's regressive impact thus reflects the pre-existing inequality of wealth, and the Bank can't be much blamed for that*.

And the fact that the rich have benefited most from QE does not mean that others haven't benefited. People without financial assets have gained, to the (small) extent that QE has increased job security and raised inflation, thus eroding the value of debt.

There is, though, another reason to defend the Bank. In considering the impact upon inequality, what matters is the entire set of policies, not any single one.

Take a different example. Taxes such as VAT or excise duties are regressive. But we have them because they are (relatively) efficient, and we offset their regressiveness by having other progressive tax and benefit policies.

The same thing should be true of QE. If this is an effective way of supporting the economy then it should be implemented, regardless of its distributional impact. And if you don't like that distributional impact, the solution is to mitigate it through the tax and benefit system. That way, we get the benefit of QE but neutralize its unpleasant distributional effects - subject to caveats about the deadweight cost of taxes.

Rather than blame the Bank, we should blame governments - both Labour and Tory - in three ways.

1. If they had undertaken more counter-cyclical fiscal policy (which is perhaps less inegalitarian anyway than QE) there'd be less need for QE. QE is a second-best alternative (if that!) to sensible fiscal policy. 

2.If wealth inequality were not so high in the first place, QE would not be so inegalitarian. In this sense, QE's adverse side-effect reflects a failure of the New Labour government.

3. The government's failure to use the tax system to neutralize QE's inegalitarianism represents a tolerance of greater inequality.

By all means, criticize the effectiveness of QE; I'll have some sympathy. But its impact upon inequality is not an argument against QE. And the Bank shouldn't be blamed for that rising inequality.

* The qualifier matters. US evidence (pdf) suggests that ordinary monetary policy has large distributional effects.

Comments

[Anonymous]

We are facing tough challenges on our doorstep from Europe et cetera, et cetera.

- Osborne's grave

[Tom Addison]

When I was at Uni I don't remember coming across quantitative easing since everything was sunshine and lollipops back then.

So could someone tell me if this is right?

"In the current climate (since 2007) banks are reluctant to make new loans. The money supply is currently falling. It would be falling even faster right now were it not for quantitative easing. The entire crisis now is one of a falling money supply. The "Armageddon" scenario that we need to be worried about, is one of a sudden additional shrinkage of the money supply- an *implosion*"

http://mickanomics.blogspot.co.uk/2012/07/why-money-disappears-when-loans-are.html

From what I can gather, most of what is said about QE in the mainstream press is rubbish.

http://www.renegadeeconomist.com/news/how-the-bbc-is-misleading-the-public-about-the-financial-crisis.html

[chris]

@ Tom - I wouldn't say the "entire crisis" is one of a falling money stock. But I would agree that one danger is that cos and households try to pay off debt. This would shrink the money stock (most of which is bank lending), but more importantly, it would shrink aggregate demand.
QE does NOT work mainly through banks. It expands the money stock by giving investors money in exchange for gilts.
The money stock has risen in the last 12M:
http://www.bankofengland.co.uk/statistics/Pages/fm4/2012/jun/default.aspx
But this is largely due to QE.
As a rule, it's unhelpful to think about money. Think instead about people's willingness and ability to spend, which is influenced by the availability of credit and (a slightly different but important thing) the expected availability of credit in the future.

[Duncan Stott]

You're technically correct here. The BoE MPC's job, as specified by politicians, is to set monetary policy so that CPI is 2%. It isn't its job to ensure a fair balance of wealth between rich and poor. That's a political decision and should be left to politicians not bureaucrats.

However, that doesn't exonerate the Bank's chosen policy of quantitative easing. The Bank has assessed that an intervention in monetary supply is needed to prevent deflation, but the selected mechanism of buying gilt isn't the only way of doing this. The Bank could, for instance, have pumped new money into the bank accounts of people named Duncan. I would have been very supportive of this. It isn't the Bank's fault that politicians haven't have a child naming policy that would prevented it from causing inequality. Therefore it follows that the inequality caused would have been the fault of politicians and not the Bank. This conclusion is very unsatisfying.

So there are reasons for the public to be critical of QE, and indeed monetary policy more generally. The problem is that the mechanism we have of expressing public displeasure at policy, democracy, was removed when the Bank of England was granted independence by Gordon Brown. If QE had been adopted by a politician, then the resultant £120bn boost that it has given the wealthiest 5% would have been scandalous. The fact that a bureaucrat independently adopted this measure doesn't make the result any less scandalous, but it does mean there is no democratic consequences.

Bank of England independence was widely commended before the credit crunch. I think we now need to reassess this. Whatever your view on QE, surely no-one can dispute that monetary policy is political, and in a democracy, it ought to be the politicians that make the political decisions.

[Luis Enrique]

is it also true that tightening monetary policy will disproportionately hurt the wealth? If it is, then does the likelihood of eventual tightening mitigate this somewhat?

[chris]

@ Luis. If it reduces share prices, then yes - though this would be mitigated by the higher interest rates on savings. But tightening also hurts workers, by raising unemployment.
@ Duncan. Good points. But any effective stimulatory monetary policy (even paying Duncans!) would benefit the rich. This is because it would raise share prices (if only as an effect of the stronger economy), most of which are in the hands of the wealthy. Personally, I think this is a price worth paying - and I have stronger egalitarian instincts than many.

[Diarmid Weir]

'If financial wealth had been equally spread - which is a fantasy of representative agent economics more than of socialists...'

Excellent point! And is this fantasy propaganda, ignorance or just laziness?

[Lurker]

How does inflation erode the value of my credit card debt if I don't get a pay rise?

[Mat]

That's easy Lurker!

inflation increases the moentary cost of goods and services, but the monetary value of your credit card debt repayments stays the same. So your credit card debt becomes less expensive in terms of the foregone goods and services it costs you.

i.e. If doner kebabs cost $5 and your credit card debt leads to repayments of $100 per month sevicing your debt means you forego 20 doner kebabs a month. Credit card debt is expensive in doner kebab terms. Bad times.

But then, joy of joys, doner kebabs inflate in moentary terms. It now costs $20 per doner kebab. Suddenly your credit card repayments (unchanged in money terms) now only costs 5 foregone doner kebabs! *Glee*

I expect you'll want to thank me for how much better off you now feel.

[DK]

Disagree.
The BoE has failed and their independence should be removed.
For the 70 out of the 80 months, inflation has been above target. Therefore they have failed their remit and have not delivered growth.

The fail to realize that the assets bubble needs to be stopped and they continue to support the house prices.

It is ridiculous and it is not in their remit to make such decisions.
They have select winners and loosers which is not what they are supposed to do.
I do sincerely hope that in the (very near) future a court will examine their decisions.

Also you do not mention the performance of the BoE pension fund which is quite good! From 2007 they moved into index-linked gilts (90%) and they have done very well.
Obviously they ignored all of MPC comments about deflation being the problem. Who cares anymore about MPC...

[Bart Meer]

De naamgeving Stumbling and Mumbling: QE & inequality: don't blame the Bank is zonder twijfel passend gekozen voor het onderwerp afvallen zonder dieten.
Het moet gezegd worden dat ik je post bovendien ook aangenaam heb doorgenomen