Tuesday, 9 December 2014

Inequality is terrible, so let's make it worse

Economic think-tank the OECD, has, we were informed today, “dismissed the concept of trickle-down economics” releasing a report showing that economic growth would have been much higher had inequality not grown immensely since the 1980s.

The Guardian newspaper helpfully put the report in historical context by explaining that, “trickle-down economics was a central policy for Margaret Thatcher and Ronald Reagan, with the Conservatives in the UK and the Republicans in the US confident that all groups would benefit from policies designed to weaken trade unions and encourage wealth creation.”

Apparently it was all the rage in the 1980s.

What the article neglects to mention is that trickle-down economics is as much an article of faith of the centre-left as it is among conservatives, and occupies a central place in western governments’ current response to financial turbulence. Trickle-down economics is not a misguided historical aberration, like some embarrassing Duran Duran album lurking in your record collection, but an all too contemporary ideological prison. And it’s getting more extreme.

I’m not referring to the bleak consensus over everlasting cuts to corporate income or capital gains tax, though they undoubtedly play their part, but to one policy in particular: Quantitative Easing (QE) – the way our governments of varying hues have responded to economic depression. 

It is no secret that QE has – definitely in Britain where research has been carried out – primarily benefited the top 5% of income earners. But how – and to what degree – less well known. QE – a carefully designed policy of government intervention in the market – works by raising the value of share prices and other assets, such as property. And (I know I’m getting into advanced economics here but bear with me) the more shares and assets you own, the more you benefit! Sky’s economics editor crunched the numbers and worked out that among the top 10 per cent, QE has increased wealth by £323,000 per household. Which makes the wealthy some of the biggest welfare beneficiaries in history.  The poorest tenth, by the way, who don’t own any assets, are £779 worse off.

It could be argued that because it reduces interest rates, QE has also benefited those who ‘own’ assets in the sense of having mortgages. But no such benefit accrues to those who rent their home. They get nothing.

Now, maybe I’m being simple-minded, but this looks suspiciously to me like a recently minted government policy (UK QE ended in 2012, US QE just this October) which has the effect of massively increasingly inequality. It is the polar opposite of economist Thomas Piketty’s inequality shrinking wealth tax; a gigantic injection of wealth, overwhelmingly adding to the wealth of the already very rich.

It is perhaps counter-intuitive, but nonetheless true, that inequality in the UK fell in the aftermath of the financial crisis precisely because the wealth of the 1% and 0.1% took a major hit. Government action, in the form of Quantitative Easing, ensured it recovered to an extent. That is the real story of the last six years. All the rest is ideology.

One US economist (and QE has been a huge part of the US government’s response to the Great Recession. It has lasted seven years and cost $4,5 trillion) describes Quantitative Easing as “fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality.”

But there is no mention of Quantitative Easing in the OECD report, only to the mistakes of the past.

Which is odd because QE represents the consensus of the present, uniting Barack Obama with Republicans in the US, and Labour with Conservatives in Britain*. And Europe, which has so far largely shunned QE, may well start partaking of it in 2015, as a response to continued stagnation.

It was Japan that pioneered QE in the early part of this century, and has been pursuing it more aggressively ever since. According to one study of the latest batch of QE in Japan under Prime Minister Shinzo Abe, “critics have stated that ‘Abenomics’ widened income inequality by benefiting already wealthy households and not the poor. Since Japanese households’ savings consist chiefly of bank deposits, they earn little interest on their savings, while facing stagnant wage growth or job losses. Thus, the benefits of higher asset prices are limited to those who own stocks and bonds which are typically upper income households,” the report concludes. This is, by now, a painfully familiar story to most of us.

There is apparently no other possible way to stimulate economies when they sink into depression, or stay there.

As the Japanese experience demonstrates, governments will habitually resort to more and more QE if it does not have the desired effect or economies relapse into recession. So we haven’t heard the last of it.

The OECD report makes the claim that redistribution of wealth to the poor doesn’t hurt economic growth. What they should have examined is redistribution of wealth to the rich. Because that is what 21st century trickle-down economics, aka quantitative easing, is doing.

*Quantitative Easing is actually a policy of independent central banks, such as the US Federal Reserve, the Bank of England or the Bank of Japan. As such, and although virtually all mainstream politicians back it, it is outside the realm of democratic politics. Despite QE being a policy of such huge redistributive effect, no-one voted for it. No-one could.

It's enlightening to look at QE in terms of its effect on social mobility. The OECD study is very concerned with improving life chances for the bottom 40%. It talks about increasing access to public services and whole life skills training and education. But as this article from social historian David Kynaston makes clear, in order to have real upward social mobility you have to have downward social mobility as well. And downward social mobility is the one thing our political system cannot countenance. Quantitative Easing is the perfect expression of this – through the natural workings of the free market, the incomes of the 1% and above took an almighty hit - so the government stepped in, casting laissez-faire to the winds, and made sure that those incomes were protected. Downward social mobility was not allowed to happen. To paraphrase Gandhi, capitalism is a nice idea.


  1. Hi, this is scathing and brilliant. Totally agree that QE has increased social inequality.
    I do have some questions though - if you're pointing this out to people, the logical question they'll put to you is well what else could the government/banks have done/do to stimulate the economy and mitigate a ferocious recession? Because surely that would have done even more damage to the bottom 40 per cent than QE? And Japan, where they've trail blazed QE for years, scores as one of the most equal societies globally - is that in spite of QE?

    1. Glad someone likes it. There were alternatives, such as here - http://idealoblog.blogspot.co.uk/2013/03/can-stimulus-from-below-work-do-we-need.html - a levy on corporation to redistribute to people on tax credits which then would then largely spend and stimulate the economy. But I am rather sceptical because unless you make a lasting change in how much people get paid you will end up back at square one. It's the case that neither a stimulus from below or QE addresses the question of household or corporate debt which are huge and Japan, no accident at all, has the highest private debt in the world. You're back at the uncomfortable thought that unless there is prior mass destruction, like WW2, you don't get sustainable growth under capitalism.
      There is also the alternative of just letting the banks fail, like Iceland did, and trust everything will recover in the passing of time. But I think in US and UK, if you had done that, more than just the banks would have collapsed, most of the economy would, though in the long-run there would be much more life in the economy.
      I think QE is just kicking the can down the road. What happens when the effect wears off? And Japan may be quite equal in income terms but I'm not so sure in wealth terms and QE there has definitely add to inequality

  2. Thanks for explaining that. If you were in power, what would you have done? A corporate redistrubutive levy, a restructuring of how much people get paid - would that have been enough to make the recession less bumpy for most people?

    1. There's not a simple answer. It's not like I'm Jean-Luc Picard in Star Trek - 'Make it so'. If I was in power in 2008 (ignoring for a second how I got there) I would have let the banks go the way of all flesh and instituted a basic income. A corporate levy would be transient, a restructuring of how people get paid less so obviously but a govt can't just legislate this. There are things it does control - limited liability is given by the state & can be taken away by the state. You could have made the last recession less bumpy but under this system there will inevitably be another just around the corner. How you 'get rid' of this system without inviting destruction by the powers that be is not a simple thing (I think a government of 'me' would last about 3 weeks)

  3. Loath to enlist the support of 'billionaire investors' but George Soros has said the European Central Banks new 1.1 trillion euro Quantitative Easing programme will 'reinforce inequality' by benefiting the owners of assets, not wage earners: http://www.bbc.co.uk/news/business-30943216

  4. So, letting the banks collapse, instituting a basic income...assuming this solution is not destroyed by the powers that be, would it have worked to avoid chaos and keep people comfortable?

    1. I don't know to be honest. Iceland did the first and they are ok but Iceland only has a population of about 320k (which makes it remarkable that their football team does so well but that's a bit off topic). Mark Blyth, who wrote a book about austerity I reviewed, talk about 70 million handguns in the States when assessing whether the banks should have been saved but, interestingly, he says if it happens again they should be let go and probably should have been the first time. What you have to remember is that saving them and avoiding economic meltdown, preserved massively insolvent institutions and transferred a large portion of their debt to the state. Hence the agony of austerity, especially for countries like Greece, Spain and Ireland. You don't save them, and there is no need for austerity. The economist Andrew Kliman has argued, and Harry Shutt is similar on this, that capitalism works well if massive destruction of business happens periodically, The growth returns. But if the prior destruction doesn't happen, like now, the result is stagnation.