Wise men from the land with the world record in subzero rates have weighed in on the debate about the effects of loose monetary policy on income distribution.
According to the latest report from the Danish Economic Council, a fiscal policy watchdog made up of academics commonly known as the "wise men," years of ultra low rates have benefited the rich more than the poor.
As the chart shows, lower interest costs have coincided with a significant rise in capital income. The wise men point out that “lower rate expenses” are one of the reasons why equity income has risen more than disposable income, thus adding to increased inequality.
In other words, Denmark’s poorest have missed out on the gains in asset prices fueled by years of cheap money. The return on Denmark’s benchmark equity index has exceeded 120 percent since rates first went negative in mid-2012.
The argument that monetary easing exacerbates inequality is not new and is far from settled. A June 2015 study by economists at Brugel, a Brussels-based think tank, noted that “low interest rates, asset purchases and other accommodative monetary policy measures tend to increase asset prices and thereby benefit the wealthier segments of society, at least in the short-term.”
But according to Ben Bernanke, the former Federal Reserve chairman, the argument misses the full effects of monetary policy.
Proper policy in fact helps safeguard equality by promoting “greater economic stability and prosperity for the economy as a whole,” he wrote.
Loose monetary policy can also spur higher inflation, which reduces the debt burden for poorer members of society and also promotes job creation. That hasn't materialized yet, though. Annual inflation has actually been falling in Denmark since rates first dipped below zero.
Most importantly, income inequality is “a very long-term trend” resulting from “deep structural changes” over many years. The effect of globalization, technological change or an aging population on wealth distribution, Bernanke argues, is a matter for governments rather than central bankers.
Indeed, what's happening in Denmark is nothing new.
While the country is still the third most equal society in the world, according to the OECD, inequality has been rising since the 1990s. Back then, the Gini coefficient, a measure of income distribution that expresses total inequality as 1 and total equality as zero, was just 0.20.
Inequality has grown as a relatively strong economy has increased the gulf between those with jobs and those on welfare. When pension savings are excluded, data shows that incomes among the richest 10 percent have increased far more than those of the bottom tenth over the past quarter of a century.
What this means is that Denmark’s poor didn’t get any poorer. It’s just that the rich got richer, no matter what the interest rate.