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 21^st 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.

Addendum:
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.