Quantitative easing, inequality and Brexit

The Bank of England’s governor, Mark Carney, recently appeared in Liverpool to deliver a speech about the growing inequality in the United Kingdom – a problem brought into prominence by recent political events. In this speech, he blamed the Brexit vote in June on people’s isolation and frustration with international trade and global technological advance, saying that they felt “left behind” and alienated by economic progress and the recovery from the 2008 financial crisis.

“Despite such immense progress many citizens in advanced economies are facing heightened uncertainty, lamenting a loss of control and losing trust in the system. To them, measures of aggregate progress bear little relation to their own experience. Rather than a new golden era, globalisation is associated with low wages, insecure employment, stateless corporations and striking inequalities”

The question is, what can politicians and policymakers do to combat the widening gap between rich and poor? Economists at the Bank of England have been criticised for concerning themselves only with achieving target inflation and stable recovery since the global financial crisis, and turning a blind eye to the gulf between the nation’s highest and lowest earners. Through their quantitative easing and purchasing of corporate and government bonds, the Bank has inflated asset prices (especially in the property market). Their intention may have been for the investment banks to invest in risky assets and productivity-boosting technologies, but in reality, most funds have been placed into the housing market.

Carney, as the Bank’s figurehead, defended this strategy, referring to monetary policy’s success in “averting depression and helping advanced economies live to fight another day, so that measures to restore vitality can be taken”. Speaking after the events of 2016, his acknowledgement of the disparity between rich and poor may hint at suggestions of plans to restore this so-called “vitality”. Through fiscal and structural operations, the government can seek to achieve greater equity and equality in the United Kingdom to ensure that a sense of disillusionment and alienation does not continue to grow throughout the population.

As economics students, we may be able to recognise that monetary policy over the last few years has brought economic growth and stable recovery – yet it has not necessarily been Pareto efficient (a state where both sides of an economic transaction do not make a loss), since there are losers as well as winners when it comes to international free trade. Now that this problem has been cruelly exposed, the government’s fiscal programme should aim to achieve ‘Kaldor-Hicks efficiency’ – that is, the party that gains from a transaction can compensate the loser, provided that there is a net gain overall. Since there has been a net gain (in terms of economic growth), the government should now focus on this objective.

Contributed by Greg Tucker, Economics Editor

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