By Karen Shaw Petrou
Although the Federal Reserve resolutely rebuffs suggestions – mine included – that it’s exacerbated U.S. economic inequality, the Bank of England has been forced by public outcry to deal directly with its own inequality impact. Reacting to strong public protest and withering fire from the Prime Minister, the BoE recently released not only a report denying the charges itself, but now also an exculpatory speech by Andrew Haldane, its influential chief economist. Clearly feeling the heat, the Bank of England has even come up with a way to sell its positive message: personalized “scorecards” proving to the skeptical citizenry that it’s better off than personal economic problems might lead it to believe.
According to Haldane, everyone would get a baseball-card like picture of his or her own economic equality, assuming they see it his way. Come to think of it, these aren’t quite like baseball cards – instead of presenting an actual statistic, the BoE gets to fill in the RBI and other “facts” the way it likes based on the measures it chooses and how it values their relative equality effect for each demographic it selects. No wonder Haldane thinks there’s no U.K. equality problem that can be laid at the Bank of England’s imposing front door.
First to the Bank of England’s substantive self-defense against its inequality impact. Comparisons between it and the Fed’s role are limited because, despite “English-Speaking Union” and all that, the U.K. and U.S. economies are very different in equality-relevant ways. But, even if not applicable to the U.S., does the BoE framework make sense for the U.K.? Not so much.
- Much of the defense is based on average data. This leads to the “representative-agent” problem I emphasized in my Fed critique. Assuming all households are affected the same way by monetary policy assumes they all have the same marginal propensity to consume or that wealth effects transmit the same way regardless of what you own, how much you own, and how financed all the stuff you own may be. Quite simply, it ain’t so – radical shifts in income and wealth distribution, especially since 2008, make representative-agent reasoning suspect at best.
- Perhaps recognizing that the sunny equality conclusions of its average data are not credible on close examination, the BoE also musters up the “Gini coefficient” in its defense. This equality measure has its uses, but it’s still only one way to look at distributions that often makes an economy seem more equal than it is. Looking at the World Inequality Database (WID), you see that the U.K. is indeed a bit more unequal than the Gini coefficient suggests, especially after the 2013 cut-off in the BoE study. The U.K. is less unequal than the U.S. in the wake of the crisis, but it’s still unequal, with the data here and those in the aggregate numbers failing to show why BoE policy didn’t play at least some role.
- When going beyond averages and the Gini coefficient, the BoE does find some inequality effects, but Haldane largely dismisses the extent to which monetary policy played a role, instead suggesting that the public misunderstands how much better off it really is given all the central bank did for it following the great financial crisis. His “welfare” assessment is similarly rosy, leading him to conclude that the central bank problem isn’t policy, but politics.
- Enter the “scorecard.” Haldane offers a sample scorecard for the average U.K. household, which unsurprisingly shows that this representative-agent simulacrum did just dandy. K. unconventional policy added net interest income – especially surprising given ultra-low rates – as well as more labor income and net wealth. The increased likelihood of employment attributed to monetary policy also does wonders for social welfare. Although going beyond the average household to scorecards for different economic and demographic groups leads even in Haldane’s reckoning to different gains and losses depending on which equality factor you prefer, he likes his scorecards a lot because he likes the measures that look the nicest.
As a Bloomberg column rightly noted, neither the average scorecards nor the specific ones reflect the structural equality impact of post-crisis policy that are best understood when considering the sum total of relative benefit and harm at different points in the demographic and wealth spectrum. For example, older people did better because of higher house prices. Younger renters are said by Haldane to have done well since their labor income went up a bit, but they also experience no wealth benefit, harming their chance for long-term wealth accumulation due to heightened home unaffordability in turn due to all the gains older households enjoyed. Haldane thinks the labor-income benefit is better than the housing-unaffordable harm, but do young Brits agree? Not according to their verdict in the 2017 election.
This Bloomberg article concludes:
Not only did the poorest benefit far less, but dreams of the youngest to build a stake in society were pushed further away…. Continuing to rely on QE to achieve the BoE’s inflation targets will further boost asset inflation rather than price inflation, artificially making the wealthy wealthier and building systemic risk.
I’d certainly say the same for the U.S., but add one important point: worse U.S. inequality before the crisis combined with a deeper financial debacle to make post-crisis monetary policy a still more profound inequality driver. Add in the inadvertent effects of post-crisis regulation – ignored by the BoE’s analysis – and the U.S. scorecard is a rout.