If QE avoided a Depression it doesn't matter if it increased inequality


I’ve just come from a fascinating event with The Spectator’s Fraser Nelson, on his recent Dispatches show, How the Rich Get Richer. In general the show was very good, and it’s extremely refreshing to see someone as thoughtful as Fraser get half an hour of prime time television to discuss poverty in Britain from a broadly free market perspective.

But I did take issue with the show’s treatment of Quantitative Easing (QE). Fraser described this as ‘perhaps the biggest wealth transfer from poor to rich in history’. The evidence for this was the rise in asset prices following QE, particularly in stock markets. Since rich people own assets and poor people don’t, the rich got richer and the poor didn’t.

That’s a common view and I understand it, but I think it’s wrong. 

Consider the Great Depression. When the money supply (and hence nominal spending) collapsed in the 1930s, the US economy did too, for reasons outlined in Milton Friedman and Anna Schwartz’s Monetary History of the United States.

Basically, contracts are set in nominal terms, so if nominal spending collapses, you’re left with a musical chairs problem where you have too little money to go round. So people are laid off and firms go bankrupt that would not have done so if money had remained stable across the board. Enormous amounts of wealth were destroyed unnecessarily because the government mismanaged the money supply. (It shouldn't be managing money at all, in my view, but if it is we can at least try to minimise the harm it does.)

Perhaps inequality fell during this period because the rich lost proportionally more than the poor – they had more to lose, basically. But who cares? Everyone became worse off. That’s what matters.

The point of QE since 2008 has been to try and avoid a repeat of the 1930s by boosting the money supply. Its supporters wanted to avoid another massive destruction of wealth that would make everyone much worse off. 

Yes, QE boosted stock markets a lot. But there is nothing about QE that meant that banks or other investors would have to invest there – it’s not an ‘injection of cash into stocks’, as some people seem to believe. Stock markets rose because investors reckoned that QE would help avert a much worse Depression, which meant that firms would be (much) more valuable compared to a QE-less world where many of them may have gone bankrupt, or at least taken severe losses, instead.

Yes, that increased inequality because rich people own stocks and poor people don’t. But if everyone would have been worse off without QE, the extra inequality is beside the point. It's people's absolute wellbeing that should matter, if what you're avoiding is a big Depression. You might as well think economic growth is bad because it makes everyone richer, but rich people a little more so.

Of course, it’s an open question whether QE actually did work as intended. Perhaps it made things worse, or did nothing at all. That is a question worth asking and it's not one I can answer. But focusing on whether it increased inequality or not is beside the point – what matters is whether it prevented a Depression.