The worst kind of redistribution

It is hard to imagine any convincing moral defence of redistribution from the relatively poor to the wealthy. Yet that is precisely what seems to be happening with quantitative easing.

Several important figures in the financial markets have raised this reverse Robin Hood effect recently.

Nigel Wilson, the chief executive of Legal & General, described the Bank of England’s QE programme as “a policy designed by the rich for the rich”. In America, Stanley Druckenmiller, a prominent hedge fund manager, has called the Federal Reserve’s monetary policy “the biggest redistribution of wealth from the middle class and the poor to the rich ever”. The point was also recently discussed in a recent BBC Radio 4 Analysis programme on QE.

Emmanuel Saez, a professor at the University of California, Berkeley, has helped quantify this trend in America. According to the latest available statistics the incomes of the top 1% grew by 31.4% between 2009 and 2012. In contrast, the average real family incomes of the other 99% of the population grew by only 0.4% over the same period.

Leaving aside the precise figures the general trend is clear. The incomes of the top 1% of society depend largely on asset prices. That is why, at least in America, they tend to be correlated with equity prices. Their income tends to drop when the stockmarket falls and increase when it rises. So the incomes of the top 1% fell sharply in the aftermath of the 2008-9 Wall Street crises before recovering since then.

The richest section of society also tends to have a smaller proportion of its wealth in housing than the middle class. As a result it was less affected by the fall in house prices.

In contrast, the incomes of the mass of society depend mainly on wages and on government transfers such as social security payments. A relatively small proportion of their income depends on investments.

From there it should be clear why QE favours the rich. By purchasing assets it has bolstered both the bond and stockmarkets. Therefore the relatively wealthy, whose income is related to these markets, have benefited disproportionately.

From a moral perspective it is hard to see how this practice can be defended. There is certainly a debate to be had about using progressive taxation to redistribute from the rich to the poor. But redistribution from the poor to the rich is another matter.

Perhaps the most convincing argument, pragmatic rather than moral, is that QE has staved off economic collapse. From this viewpoint everyone would have suffered if the economy had gone into freefall.

Yet this case is far from convincing. Even if it were true in late 2008, when QE was introduced as an emergency measure, it has become a habit in the years since.

Indeed from a longer-term view it should be clear that QE is yet another way to use cheap credit to prop up an undynamic economy. For three decades the authorities have tried one measure after another, from high public spending to ultra-low interest rates, to keep the economy ticking over.

It is about time they allowed restructuring to take place to clear the way for a new round of investment. It might be painful in the short-term but it looks increasingly preferable to the long drawn-out squeeze on the bulk of the population.

This comment was first published today on Fundweb.