What Is Quantitative Easing and How Does it Impact Income Inequality?
Quantitative easing is an unconventional form of monetary policy used by central banks in times of economic downturn. It’s a last resort measure that involves increasing the money supply in an effort to stave off deflation and encourage economic growth. In recent years, quantitative easing has become an increasingly common economic tool. But while it is designed to stimulate economic growth and reduce the severity of an economic downturn, it may also contribute to rising income inequality.
What Is Quantitative Easing?
In its simplest form, quantitative easing involves a central bank like the Federal Reserve buying large amounts of financial assets (usually government bonds) from its member banks. This newly created money is then put to use in the economy to buy goods and services.
Put differently, quantitative easing is a way of “printing more money.” In this way, it’s similar to a government stimulus package, but on a larger scale. It’s also not a permanent solution, as the money supply isn’t automatically increased for perpetuity (the money only lasts for as long as the benefits of the policy).
Types of Quantitative Easing
Though it shares some similarities with a traditional stimulus package, quantitative easing is also distinct in many ways. In fact, there are several different types of QE. These include:
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Traditional: This is the most basic form of quantitative easing, and involves the buying of government securities. The goal of this type of QE is to set the interest rate lower than it would be without intervention, making borrowing less expensive for businesses and individuals.
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Credit Easing: This type of quantitative easing involves the purchasing of assets from non-government entities, such as corporations, which can increase their activity in the real economy and help increase employment.
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Quantitative Tightening: This type is the opposite of traditional quantitative easing, and involves reducing the money supply by selling off previously acquired assets. It’s a way of mopping up the extra money created by QE, and can help stave off inflation.
Potential Effects of Quantitative Easing
Quantitative easing is designed to help stimulate economic growth by making credit more affordable. But it’s possible that it could also have negative effects on households’ finances, influence inequality and have other macroeconomic effects. Some of the potential impacts include:
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Rising Inflation: Quantitative easing can lead to increased inflation, which is when the prices of goods and services in the economy increase. Inflation is not necessarily bad as it can signal growth, but it can cause financial hardship for those living on fixed incomes, as their salaries are not likely to increase in response.
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Increased Debt: By providing cheaper credit, quantitative easing might encourage businesses and households to take on more debt than they would otherwise. This can add to financial insecurity, as debt can be difficult to pay down, especially in the face of rising inflation.
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Offsetting Modest Gains: Although quantitative easing is designed to stimulate economic growth, the long-term effects are harder to predict. In some cases, it can end up offsetting the modest gains it is supposed to provide.
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Rising Inequality: Quantitative easing can potentially worsen income inequality, as it is seen to favor those with money, rather than those with less. This is because the policy often helps wealthier households more readily access the cheapest forms of credit.
How Can We Address Income Inequality?
Given the potential effects of quantitative easing on income inequality, it’s important to find ways to address this issue. Here are some potential solutions:
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Increase Minimum Wage: Raising the minimum wage is a surefire way to reduce inequality as it can give poorer households a larger share of total income.
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Reduce Tax Avoidance: Making sure that everyone pays a fair share of taxes is another way to reduce inequality, as it will ensure that the wealthiest are not able to accumulate wealth at the expense of those at the bottom of the income ladder.
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Increase Government Spending: Increasing government spending on social programs such as welfare and unemployment benefits can directly help those with the least in society.
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Introduce Progressive Taxes: Introducing taxes with graduated rates based on income can help ensure that those with higher incomes pay more, while those earning less are protected.
Quantitative easing is a complex form of monetary policy and its effects are wide ranging. It is designed to stimulate economic growth, and while it can be effective, it may also cause an increase in inequality. There are a number of strategies that can be employed to address the effects of quantitative easing on income inequality, such as raising the minimum wage, increasing government spending and introducing progressive taxes. Ultimately, it is a balance between these methods and other economic measures that will be needed to ensure that everyone in society benefits from any economic recovery.
