Lessons learnt from the last recession: It’s time to target wealth!

The measures taken to pull the economy out of the 2008 crisis involving quantitative easing coupled with austerity were flawed. Twelve years on, wealth for the top percentile has increased exponentially whilst incomes have stagnated. Meanwhile inequality has worsened. For a real recovery this time round, it is time to target wealth. 

In 2008, welfare spending crossed £100 billion as the labour market alongside SMEs were resurrected in the wake of the financial crisis. Yet instead of increased profitability and higher growth rates, the UK experienced depressed growth over the following twelve years. Why was this the case? Whilst society saw unprecedented levels of inequality, how could asset prices grow at such an unprecedented rate? Most pressingly, what sort of fiscal measures should be put in place today in order to address our socio-economic inequalities and to allow Main Street to rebound?

Quantitative Easing was first used in 2008. It has stuck around and has been promoted as the first go-to tool in the unorthodox toolbox of monetary policy. At the time, central bankers promised counter-cyclical measures: when the economy was to rebound, the central banks would manage to sell off the financial assets they held and interest rates would manage to go up to combat the consequent inflation. Yet, interest rates continued to hug the 1% mark. Inflation (CPI), for its part, continued to average at 2%. So where did the money go? The 11-year bull market and rising housing prices provide the answers – asset prices have risen faster than wages, which have stagnated. Wealth distribution has become even more distorted. During such an economic crisis, the circular flow of income gets disrupted and the cash remains with the asset holders.

In the USA, the Fed’s Fund target rate in 2008 was already close to zero. GDP was contracting at the fastest rate in fifty years, and the labour market was tanking. The Federal Reserve, between November 2008 and November 2014, bought $3.6 trillion of financial assets. This was 25% more than the $2.9 trillion expansion of GDP during this period. Since then, the Fed has never been able to significantly reduce its balance sheet. Low interest rates were barely supporting a hobbling economy.  It had barely started (see Fig. 1), when COVID-19 placed the economy under lockdown. Closer to home, the QE figures for the Old Lady of Threadneedle Street show the bond purchase build up.

The American Recovery and Reinvestment Act (ARRA) of 2009 contributed $787 billion into American pockets. Today, the yield for hot, long-term debt is falling once again for both treasuries. Clearly, this is a favourable situation – other nations, such as Italy, Spain, Portugal, and Greece have debt options in which interest actually pips inflation rates.

Yet there is a catch – the responses to the financial crash did not improve the long-term income position of the average worker in the UK and the US. In fact, median income between the period of 2010 to 2013 actually fell. At the same time – the economy was recovering – and mean average salary in the time period increased. (Fig. 2)

How did it come to this?

The ARRA of 2009 gave $250 to each recipient of social security whilst extending unemployment benefits, allowing for tax breaks for SMEs (which drive up to 70% of all new jobs ) and contributing $730 million to help SMEs with loan guarantees. The majority of these payments were never intended to improve the long-standing income position for any worker; the intention was to help SMEs and the labour market get back on their feet in the short run.

Therefore, such fiscal movements have two consequences, the second being a subsequent consequence of the first:

  1. These fiscal measures helped to pay for immediate expenditure (mortgage payments, bills etc.)
  2. For the top 0.1%, expenditure has reduced (overall consumption of goods/services reduced during a recession) whilst they are in a much-improved cash position with sustained income (rents, interest, bills, high income jobs)

The result of these policies led to a historic 11-year bull run, which ended this March. The rich will have learnt from that crisis, and will be keen to buy assets again at bargain prices as soon as more certainty returns. They will buy these assets from those willing to sell at cut-down prices (observe the initial slump in house prices across the UK in Fig.3) and will benefit even further from asset price appreciation.

And here we are again. Several OECD countries have announced fiscal stimulus packages totalling nearly 10% of their GDP. The effectiveness of these policies, based on the multiplier effect, rely on the ‘marginal propensity to consume’.

Today’s fiscal policy is much more direct than the previous policies in 2008. ARRA involved direct payments totalling $260 billion. The same figure for CARES is $290 billion (the $1200 dollar cheques are the prime example). This means, that government support is meant ever more for the immediate payment of bills and rents. In addition, the marginal propensity to consume has shifted. In a working paper by NBER entitled “Income, Liquidity, and the consumption response to the 2020 Economic Stimulus Package”, there are sharp and immediate responses to the stimulus payments, contrary to the idea that such examples of monetary financing results in higher savings. Within ten days, users spent 29 cents of every dollar received; and the largest increases (vis-a-vis 2008) were on “food, non-durables, and rent and bill payments”.

Following the crash, house prices soared. Today, those in their twenties have a wealth of just £2000. First-time buyers in London typically save for eight years to afford a deposit. Much like 2008, house prices are on the verge of tumbling. Around £82 billion worth of property purchases are currently on ‘hold’. If the experience of 2008 is anything to go by, prices will rocket for the next 10 years. This will only serve to widen present inequalities.

It is possible to avert this by imposing a wealth tax on a radical scale. The Government will be sitting on £300bn of public debt. In 2010, the Government chose the line of austerity. The British public saw traumatic cuts to public expenditure. Based on that experience, it is clear now that austerity increases income and wealth inequality, and cripples real growth.

In an analysis of the period of 2011 and 2018 Richard Murphy observed that income had been taxed at a rate of 29.4% whilst wealth had been taxed at 3.4%. It is clear that despite a progressive income tax, Britain’s wealth taxation is highly regressive in nature. The excise duties on alcohol, and increases in council tax mean that it is often the poorest who face the brunt whenever the treasury aims to balance the books. In addition, the effective tax rate on the wealthiest in society is at 10%, compared to an effective 42% for the bottom 10% of earners. A study by the Guardian predicts that if wealth was taxed at the same rate as income, then Britain would go some way in paying for this crisis, and this wealth tax rise would easily raise £174 billion. A major reform of the tax system is therefore needed.