Q.E. and Inequality
Has QE created more inequality?
This was one of the questions examined by the Lords Economic Affairs Committee on Quantitative Easing. (See list of all questions examined below). Some witnesses, such as Paul Tucker, former Deputy Governor of the Bank of England, thought that QE did increase inequality. The present Governor, Andrew Bailey, and his deputies, dispute that. See below answers to the same question in three separate meetings of the Committee.
2 February 2021
Sir Paul Tucker, Research Fellow at Harvard Kennedy School and former Deputy Governor of the Bank of England.
Q18 Baroness Kramer: I feel slightly bad that I am taking this conversation in a different direction, which has been fascinating, but, Sir Paul, I would be interested to know what your views are on what the main distributional effects of QE have been on the real economy in contrast to the effects on markets and the issue of intergenerational equality.
Sir Paul Tucker: The best answer—and you will get richer answers as you proceed than you will get from me today—is that it is best to think about it in terms of the counterfactual, but not only the counterfactual that Chris Giles posited of, “What if they had done nothing? Well, that would have been a lot worse for absolutely everybody”, but what about the counterfactual where there had been more fiscal stimulus or less fiscal retrenchment, and less monetary policy?
My best guess is that, in those circumstances, the effect on unemployment and incomes would not have been hugely different, but that the effects on wealth disparities, particularly at the upper end of wealth, and ignoring housing, which one cannot ignore but putting it to one side, would have been different. Although you concentrated on the real economy, the financial economy might have served the real economy better with an upwards sloping yield curve, and without the search for yield that monetary policy almost inevitably fuels as one of its side-effects.
I regret that one of my babies, the Financial Policy Committee, did not step in to choke off some of the leverage in financial markets, although I should make it clear that I have exactly the same regret about the Federal Reserve; it is not a point about the UK’s central bank in particular.
Tuesday 16 March 2021
Adam Posen, President of the Peterson Institute for International Economics, Kenneth Rogoff, Professor of Economics and Thomas D Cabot Professor of Public Policy, Harvard University.
Q92 Baroness Kingsmill: Professor Rogoff, I am interested in your analysis of the relationship between treasury and government and central bank. Do you think that the central bank has any responsibility to measure its effectiveness with QE and the distributional impacts, or is that the responsibility of government?
Kenneth Rogoff: Of course, the central bank needs to care about whether QE is effective since it is doing it and because of its role as part of government. Monetary policy has huge distributional effects.
There are many aspects of monetary policy. There is regulatory policy. If we are talking about interest rate policy, I would say that the distributional aspects are better addressed by the Government than by the central bank. Let me pick a stark example. This crisis has disproportionately hurt a sector of the population very badly—service workers, low-income workers and women. Amazon does not really need a zero interest rate; it is part of the reason its stock is so high. It does not need that help. That kind of targeting is much better done by fiscal policy.
On the other hand, any time the central bank is making a major policy shift, it always needs to think about the distributional effects, because they might not be undone by the Government in any short order.
Baroness Kingsmill: That is exactly what I am referring to—the political implications: for example, inequality. QE is seen as a means by which asset prices rise. Quantitative easing affects the stratosphere as opposed to the real economy. Theoretically, it is supposed to have a trickle-down effect, but it appears to many to have a very serious negative distributional effect, as you point out, in terms of inequalities. Adam Posen, do you want to add anything to that?
Adam Posen: In line with something that Ken said earlier regarding the determinants of interest rates, while what you say is true, a fundamental at work here is that vulnerable and poor people who are discriminated against will always be worse off, whatever happens.
Baroness Kingsmill: Yes.
Adam Posen: Part of it is that, even if you stop QE and it has any contraction effect on the economy, it will disproportionately affect them. I am not suggesting you do not know that. I just want it to be on the record that the perceived inequality partly reflects an actual inequality and is neutral with respect to whichever instrument you use.
Baroness Kingsmill: It is sometimes my role in this committee to bring things back to the realities of how these things affect everyday life: the common person, or the real economy, as it is known.
Tuesday 18 May 2021 Final session
Andrew Bailey, Governor, Bank of England; Dr Ben Broadbent, Deputy Governor for Monetary Policy, Bank of England; Sir David Ramsden, Deputy Governor for Markets and Banking, Bank of England.
Q181 The Chair: Thank you for that. Would you agree that QE has created more inequality? For example, the evidence we have had from the Bank for International Settlements is that in 2016 wealth inequality had widened as a result of QE, and the ratings agency Standard & Poor’s stated in its February 2016 report that QE exacerbated increasing wealth inequality in the UK. Would you agree with that?
Andrew Bailey: I say at the start that I would not agree. I will bring in Ben, because it is a subject that he has spent a lot of time looking at. Aggregate measures of inequality in this country have not moved a lot in recent times. It moved quite a lot in the 1980s. It has actually moved relatively little since then, but there is quite a bit going on under the lid, as it were. There is no question that QE operates through asset values. There is no question that—
The Chair: Before Ben comes in, I would like to pursue this general point.
Andrew Bailey: Do you want me to just make the point and finish? Feel free to come in if you wish.
The Chair: I am trying to get some quite short answers to specific questions. You have answered the point about inequality. You say that you do not think that QE has increased inequality. We have had a lot of evidence from people that it does. I was going to move on to the third aspect of QE on which we have had evidence, but it is up to you.
Andrew Bailey: I started by saying “in aggregate”. There is quite a lot going on under the lid. There is no question that it operates through asset values. Of course, asset ownership is not evenly distributed. However, there is a second-round effect, which is to look at the effects of QE in terms of outcomes and ask where, in the counterfactual without QE, income and unemployment would be. Our view is that they would be worse, so it does feed through to those who do not own assets. If you do not mind, I was going to let Ben come in on this point.
Dr Ben Broadbent: Andrew has already pointed out that we have measures of inequality of income and wealth. Those for wealth do not go back as far; they go back to the mid-1990s. Those fell over the first few years and have been pretty flat since, including during the period when QE was conducted, so there is an effect. It is not manifest in those headline measures of wealth inequality; nor, by the way, are real asset prices much higher than they were. Real equity prices are still significantly lower than they were before the financial crisis, and house prices are pretty flat. It is possible that this effect exists, but if it does it is not sufficiently big to show up in those aggregate numbers.
As the Governor pointed out a moment ago, the primary thing that QE did was to support the economy. It is the less well off who suffer in recessions—it tends to be the less well paid and less well off who disproportionately lose jobs—so that too should be taken into account. That would tend, at the margin, to reduce inequality, at least of income.
The Committee is seeking answers to the following questions:
- Has the expansion of the Bank of England’s Quantitative Easing programme undermined the independence of the Bank, or the perception of its independence? What are the implications of this?
- How well has the Bank of England communicated its decisions on Quantitative Easing? Is the programme transparent enough?
- Should the Bank of England’s mandate be altered?
- How should Quantitative Easing be defined?
- What were the original objectives of Quantitative Easing and have they changed?
- Has Quantitative Easing been successful and how should success be measured?
- What trade-offs does the Bank of England’s Quantitative Easing programme entail? What effect might it have on inflation?
- What have been its distributional effects?
- How does the Bank of England’s Quantitative Easing programme compare to other programmes internationally?
- Could the expansion of Quantitative Easing in the UK create the possibility of economic stability being undermined in the future? If so, how?
- What evidence is there for any upper limits to the Bank of England’s Quantitative Easing programme?
- Will Quantitative Easing be unwound in full, and if so how? Is it likely that the Bank of England’s balance sheet will be permanently, and structurally, larger going forwards?
Lord Forsyth, Chair of the Committee, comments:
“The Bank of England began its programme of Quantitative Easing to temporarily support the economy in the aftermath of the Global Financial Crisis. 12 years on it has bought some £895 billion of Government and corporate bonds.
“This is an eye-watering amount and the public has largely been left in the dark about its potential long-term impact on the nation’s finances. This inquiry will examine the governance and accountability of Quantitative Easing, its impact on the economy, and what its limits are.
All transcripts can be found: