Draghi May Help Europe’s Rich Get RicherJennifer Ryan
European Central Bank President Mario Draghi, fighting a deflation threat in the euro region, may need to confront a concern more familiar to Americans: income inequality.
With interest rates almost at zero, Draghi is moving into asset purchases to lift inflation to the ECB’s target. The more he nears the kind of tools deployed by the Federal Reserve, the Bank of England and the Bank of Japan, the more he risks making the rich richer, said economists including Nobel laureate Joseph Stiglitz, chief economist for the World Bank from 1997 to 2000.
In the U.S., the gap is rising between the incomes of the wealthy, whose financial holdings become more valuable via central bank purchases, and the poor. While monetary authorities’ foray into bond-buying is intended to stabilize economic conditions and underpin a real recovery, policy makers and economists are increasingly asking whether one cost may be wider income gaps -- in Europe as well as the U.S.
“The more you use these unusual, even unprecedented monetary tools, the greater is the possibility of unintended consequences, of which contributing to inequality is one,” said William White, former head of the Bank for International Settlements’ monetary and economic department. “If you have all these underlying problems of too much debt and a broken banking system, to say that we can use monetary policy to deal with underlying real structural problems is a dangerous illusion.”
The divide between rich and poor became part of a widespread public debate following the publication in English this year of Thomas Piketty’s “Capital in the Twenty-First Century.” He posited that capitalism may permit the wealthy to pull ahead of the rest of society at ever-faster rates.
Piketty, 43, is a professor at the Paris School of Economics. His book became a surprise best-seller when it was published in the U.S., and was hailed by Nobel-prize winning economist Paul Krugman as “the most important economics book of the year -- and maybe of the decade.”
The issue of inequality was raised last week by Federal Reserve Chair Janet Yellen, who said in an Oct. 17 speech that she was “greatly” concerned by what she called the biggest increase in disparities of wealth and incomes since the 19th century.
“It is appropriate to ask whether this trend is compatible with values rooted in our nation’s history,” Yellen said in Boston, without referencing monetary policy.
Olivier Blanchard, chief economist for the International Monetary Fund, said in April that “how inequality affects both the macro economy and the design of macroeconomic policy will likely be increasingly important items on our agenda.” BOE Chief Economist Andrew Haldane said in May that it’s “appeared on central banks’ radar during the course of the crisis, sometimes flashing red.”
The U.S. has the third-highest level of income disparity among 28 countries in the developed world, after Turkey and Chile, according to the most recent figures from the Paris-based OECD. The so-called Gini coefficient for the U.S. was 0.39 in 2011, the OECD found. No euro country exceeded that; the highest for the region was Spain at 0.34.
For both the Fed and the ECB, an improving economy is the most important goal and inequality issues shouldn’t overshadow that, White said.
“The fact that it’s good for some people more than others is not an argument for saying don’t do it,” said White, now chairman of the economic and development review committee of the Organization for Economic Cooperation and Development. “Poor people now are relatively poor vis-a-vis the rich, but on balance everyone is better off than they would have been if the central banks didn’t do what they did.”
Yellen said in September that the unemployment rate was 8.1 percent when the purchase program began -- it’s now 5.9 percent -- and praised the “cumulative progress toward maximum employment” since then. The Fed plans to announce the end of its asset-buying program, known as quantitative easing, or QE, this week at a meeting starting today.
The ECB is sensitive to the links between central banking and income distribution.
“We need to be aware that there are distributional consequences of our actions –- and these may well be particularly significant at times of exceptionally low interest rates and non-standard measures,” Executive Board Member Yves Mersch told a Zurich audience on Oct. 17. While traditional moves, such as changing interest rates, may not affect income distribution, non-conventional tools, “in particular large-scale asset purchases, seem to widen income inequality.”
Draghi hasn’t yet put the issue at the center of a policy speech, though his presentation at a meeting of central bankers in Jackson Hole, Wyoming, urged governments to accept their role in introducing reforms to shore up economies.
With unemployment hovering at 11.5 percent in the 18-nation currency region, Europeans who don’t hold the assets that get an immediate boost from the ECB’s actions may find themselves left out. The BOE estimated that its 325 billion pounds ($524 billion) of purchases through May 2012 increased U.K. household wealth by more than 600 billion pounds.
That would equate to a boost of about 10,000 pounds per person if financial wealth were evenly distributed across the population. But it’s not: the central bank says that the top 5 percent of British households hold around 40 percent of stocks, bonds, real estate and the like.
In Europe, “the experience would be pretty much the same as the U.S. experience,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “Home prices will rise and financial-asset valuations will rise so those people who tend to have more of those, the upper half of the income distribution, will tend to benefit more.”
The ECB has already promised to expand its balance sheet by as much as 1 trillion euros ($1.3 trillion) by buying private-sector securities. The goal is to get inflation, now at just 0.3 percent, closer to its target of just below 2 percent. The bank settled 1.7 billion euros of covered-bond purchases last week as part of the economy-boosting program.
More than half of respondents in a Bloomberg News survey conducted Oct. 3-9 say the ECB will have to start large-scale government bond buying. Its balance sheet has shrunk by about a third since 2012, depriving the economy of the cash needed to stoke a pickup in inflation.
“Our outlook isn’t particularly bright on the European economy,” said Roberto Perli, a partner at Cornerstone Macro LP in Washington and a former associate director of monetary affairs at the Fed. “They want to give the current strategy a chance to work. It won’t be very effective, and the odds are about even that they’ll do QE. Unless the inflation expectations and growth outlook improves, the ECB has no choice.”
That chimes with the views of Jon Frost and Ayako Saiki, economists at the Dutch central bank. They published a paper in May on inequality as a side effect of unconventional easing in Japan, addressing an issue that they say “has been largely ignored” in research.
“Unconventional monetary policies likely played an important role in preventing much worse economic outcomes, which would have worsened unemployment and poverty,” they said in an e-mailed response to questions and speaking in a personal capacity. Their study didn’t consider the special characteristics of other economies, such as the U.S. or Europe.
Some central bankers, such as St. Louis Fed President James Bullard, say QE doesn’t worsen inequality. Older asset owners who see the value of their equity investments rise will actually achieve “normal prices” once they sell their shares and pass them on to the next generation, he said in June.
That suggests QE “had no medium-term implications for the U.S. income or wealth distribution -- it is only as good or bad as it was before the crisis,” Bullard said in a speech in New York. While QE lifts stock prices, “I would stop short of saying that this has made wealth inequality worse.”
Similarly, Deputy BOE Governor Ben Broadbent said in an Oct. 23 speech that increases in financial valuations don’t necessarily translate into changes in income distribution.
The ECB said in a statement that getting inflation close to, while still below, 2 percent “is the best way within our mandate that we can help promote economic recovery, which helps everyone.”
The ECB, unlike the Fed, has no statutory mandate to keep unemployment low, though neither is charged with increasing income equality or other social goods. That complicates banks’ ability to account for the impact on wealth distribution when they consider a change in policy.
For Stiglitz, 71 and the author of the 2012 book “The Price of Inequality: How Today’s Divided Society Endangers Our Future,” the risks to social cohesion from a growing gap between rich and poor should encourage the ECB to heap pressure on regional governments to do more to get the economy moving and lift prices.
“In the context of Europe, the policy mix is going to continue to have adverse political effects, movements to extremist parties, secessionist movements,” he said. “It may be that the worsening inequality may increase resentment.”
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