With aggressive fiscal and monetary policy responses to the 2008 financial crisis and the COVID-19 pandemic, new evidence has emerged of the unintended consequences of activist macroeconomic policies. This article considers the impact of Quantitative Easing (QE) on wealth inequality.
QE is an unconventional monetary policy used by central banks such as the US Federal Reserve, Bank of England, or RBA to stimulate the economy. It was widely employed in the aftermath of the 2008 financial crisis and during the COVID-19 pandemic. QE involves the central bank purchasing government bonds and other financial assets with newly created money and is intended to lower long-term interest rates. While it is designed to benefit the overall economy, there is a debate about its impact on wealth inequality.
Some argue that QE has primarily benefited the wealthy, as it has increased the value of financial assets, such as stocks and bonds, predominantly owned by the rich.1 This has resulted in a significant boost to the wealth of the wealthiest individuals and households.2 However, proponents of QE contend that it has prevented a deeper economic slump and reduced income inequality by preventing larger increases in unemployment.3 The distributional effects of QE are complex, and its impact on wealth inequality remains a topic of ongoing research and discussion.
Professor Gerald Epstein of the University of Massachusetts Amherst is one of those who argues that quantitative easing primarily benefited the wealthy. At the same time, its effects on employment and the cost of capital for borrowing were relatively modest. In a recent Economics Explored podcast conversation with Adept Economics Director Gene Tunny, he expressed this view. You can listen to the conversation wherever you listen to podcasts (e.g., Spotify) or use the embedded player below.
Professor Epstein suggests that the main impact of QE in the United States was an increase in the wealth of the wealthy. This is because the rise in asset values, resulting from the central bank buying up these assets, primarily benefited those who already held significant assets, such as banks and other wealthy individuals. On the other hand, the cost of capital reduction for borrowers and investors was relatively modest.
Did Quantitative Easing Increase Income Inequality?
Professor Epstein does not argue that the Federal Reserve intentionally pursued a policy to benefit the wealthy primarily. Instead, the impact of the policy was an unintended consequence of quantitative easing. The increase in asset values and wealth accumulation for the rich due to QE can further widen the wealth gap. At the same time, the modest impact on employment and borrowing costs may not effectively address the needs of the bulk of the population.
The findings mentioned in the podcast conversation align with studies conducted in other countries during the same period, which also found that QE had a greater impact on asset values and wealth accumulation for the wealthy than on employment and borrowing costs.The European Central Bank (ECB) published a study showing that QE in the Eurozone primarily contributed to an increase in the wealth of the richest 20% of the population.4 Additionally, a report by the UK Parliament’s House of Lords Library stated that QE is likely to have exacerbated wealth inequalities in the UK. However, it noted Bank of England analysis concluding the effect was relatively small.5 Research published in the Oxford Bulletin of Economics and Statistics found that expansionary QE via asset prices led to net wealth inequality increases on some (but not all) metrics for most countries under review.6
These findings suggest evidence broadly supports the claim that QE has disproportionately benefited the wealthy and exacerbated wealth inequalities. However, it may only be a small net impact as there are effects in both directions. While many households benefit from house price growth, those at the top of the wealth distribution disproportionately benefit from financial asset price increases.
Regarding the Australian experience, the Housing and the Economy study by UNSW and University of Glasgow researchers surveyed experts and found that two-thirds of economists either agreed or strongly agreed that “ Monetary policy reliance on low interest rates and Quantitative Easing has exacerbated inequality by boosting the prices of housing and equities.” However, this was based on a sample of fewer than 50 economists, so we should note that it would be subject to substantial sampling error.
In a 2021 Agenda paper, leading Australian macroeconomist Stephen Anthony identified the contribution of QE to “the enormous widening of inequality across advanced economies.” Anthony saw some value in QE as an “expedient remedy for short-term crisis management”, but he was mindful of its adverse longer-term consequences, such as impacts on inequality and economic efficiency. The adverse efficiency impact can occur because cheap money can end up directing significant resources to “lower-valued activities.” These could include the activities of some tech companies that saw valuations soar as ultra-low interest rates meant that speculative gains in the distant future had higher expected values in the present (see Investopedia’s explainer How Do Interest Rates Affect the Stock Market?).
While some studies suggest QE has primarily benefited the wealthy, some research has also found evidence to the contrary. For instance, a study by the European Central Bank (ECB) indicated that its QE program increased the net wealth of the poorest fifth of the population by 2.5 percent, due to QE lowering the interest rate paid by this group on their debts, compared with just 1.0 percent for the richest fifth.7 However, it’s important to note that the overall consensus from multiple sources and studies suggests that QE has exacerbated wealth inequalities and primarily benefited the wealthy.
This article was authored by Adept Economics Director Gene Tunny and published on 8 March 2024. For further information, don’t hesitate to contact us via contact@adepteconomics.com.au or 1300 169 870.
Endnotes
- https://www.theguardian.com/business/2012/aug/23/britains-richest-gained-quantative-easing-bank
- https://www.positivemoney.eu/2017/04/ecb-shows-qe-benefits-richest/ and https://positivemoney.org/press-releases/qe-richest-gained/
- https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
- https://www.positivemoney.eu/2017/04/ecb-shows-qe-benefits-richest/
- https://lordslibrary.parliament.uk/quantitative-easing/
- https://onlinelibrary.wiley.com/doi/full/10.1111/obes.12543
- https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2170.en.pdf, p. 17.
