This is my latest book review for the Financial Times. The link to the piece on the FT site can be found here.

American Tax Resisters, by Romain D Huret, Harvard University Press, 2014.

Few people like paying taxes, but there are some individuals, particularly in the US, for whom active tax resistance is central to their identity. It marks them out as deeply sceptical that Big Government can play a positive role in people’s lives. It also signifies their hostility to the redistribution of income and wealth. Tax resisters see progressive taxation as inherently unjust.

If tax resisters – usually depicted as hardline conservatives – constitute one end of the political spectrum, it is no surprise their opponents argue the opposite. Those who favour relatively high taxation, an extensive system of entitlements and redistribution are normally dubbed as liberals in contemporary parlance.

It is to the credit of Romain Huret, associate professor of American history at the University of Lyon 2 in France, that he puts the tax debate in this broader context. Tax is not just a fiscal matter but is often at the heart of political debate and competing conceptions of social justice.

Most of American Tax Resisters is a narrative history of US tax resistance from the civil war of 1861-65 to the present day. Federal taxation has increased enormously over that period, but there has been much ebb and flow. The 16th amendment to the constitution, adopted in 1913, was a high point of the progressive era of the early 20th century: federal income taxes were made explicitly constitutional.

Progressive taxation also enjoyed widespread support between the second world war and the late 1970s. During that period it was seen typically as a sign of social solidarity, with the rich happy to give support to the poor. Irving Berlin even wrote a song, “I Paid My Income Tax Today”, in 1942. He donated the copyright to the Treasury.

It is hard to imagine anyone composing a similar ditty today. Tax resisters have mounted a concerted campaign against the level of taxation and its progressive character. Some presidents, notably Ronald Reagan and George W Bush, expressed considerable sympathy for their goals. Tax resisters, including the Tea Party as its latest manifestation, remain a minority but have shifted the terms of the debate.

Huret clearly favours progressive taxation, but the main body of his text is fairly balanced. His key innovation is linking tax resistance to the narrow interests of the white and most affluent section of US society. By implication those who favour relatively high taxes represent by far the majority, including the non-white population.

However, Huret oversimplifies key elements of the debate. This is partly the result of the confusing terminology. For instance, the meaning of “liberalism” has shifted fundamentally since before the first world war.

In the postwar years, the tax resistance movement was reinvigorated by conservative men and women living in the suburbs. In their white middle-class world, they made federal taxes a life-or-death choice that energised every aspect of life.

Scepticism about Big Government was historically more characteristic of classical liberalism than of conservatism. America’s founding fathers – who held that “all men are created equal” – upheld the classical liberal view that government should play a limited role in society. That helps explain why there was so much emphasis in the constitution’s original wording on the role of the states rather than a powerful federal government. It also follows that, in the 20th- and 21st-century debates, scepticism towards an extensive role for government is not inherently conservative in the proper sense of the term.

Nor is support for large government in itself enlightened or radical. Powerful forces in the American elite favoured, indeed still support, a substantial role for government funded by relatively high taxation. Such elements were often as elitist and white as the tax resisters. Most strikingly, many progressives of the early 20th century openly embraced racial politics and eugenics.

Finally, Huret fails to realise that, in practice if not in terms of rhetoric, those who favour higher taxation have won. Total government spending in the US increased from under 8 per cent in 1900 to about 39 per cent in 2012, despite many years of tax resistance.

For better or worse, the US has travelled a long way from its origins as a low tax and low-spending country.

Normally I pay relatively little to the Budget in Britain as it seldom contains much that is new. This time around I was stuck by a throwaway claim made by George Osborne, the chancellor, in his speech:

“The independent statistics show that under this government income inequality is at its lowest level for 28 years.”

This claim is interesting in itself as it confirms that the government claims to be interested in extreme inequality. From a political perspective this is the key point. However, I thought it worth checking out the empirical boast more closely.

A similar claim is included in the Budget’s “Red Book” (which outlines the government’s plans in more detail) which says that: “Office for National Statistics data show that inequality is at its lowest level since 1986” (p4 and p53).

The second reference refers to a document from the Office for National Statistics (ONS), the official statistical agency,

The effects of taxes and benefits on household income, 2011/12 (published in June 2013). P17-18 of this report examine “Longer-term trends in income inequality”.

From here it is clear that the Chancellor’s claim is true in a narrow sense although misleading for several reasons:

  • The data only goes up to 2011/12. It therefore does not cover what has happened over the past two years. Since the last election was in May 2010 it only covers the government’s first year in office.
  • On the ONS measure (the Gini coefficient) income inequality increased significantly during the 1980s before peaking in 1991. This date is worth noting given the comparatively recently fixation with income inequality in mainstream political debate.
  • On other measures – for example, focusing on “top inequality” such as the top 1% against the average –  income inequality may have behaved differently.

The ONS study is based on an earlier more comprehensive report: The effects of taxes and benefits on income inequality, 1980 – 2009/10.

It is also worth noting that the government publishes regular distributional analysis of the impact of tax and spending policies on households. The edition published with the 2014 Budget can be found here.

After my spiked article on Oxfam’s growth figures was published yesterday I belated remembered the development charity’s attitude towards economic growth. It has overtly called for incomes in the rich countries to remain steady or even fall. This is my blog post on the subject from 30 September 2009:

Duncan Green of Oxfam explicitly calls for the rationing of economic growth in his blog today. He summarises the conclusions of his talk to a Quaker economic conference as follows:

“if you want to maximise happiness (a utilitarian argument which offends the rights-based people, I know, but not a bad start) AND prevent catastrophic global warming, you need to make sure that incomes rise in the poor countries, but are steady or falling in the rich ones. i.e. we need to ration growth – it’s just too precious (and dirty) to waste on the rich countries.”

This neatly shows the use of climate change as an argument against growth in the mainstream discussion. At least Green – unlike many others – has the virtue of being open about his conclusions.

It is widely held that the devastating economic crisis of recent years was the result of the bursting of an economic bubble. Ironic then that the authorities seem intent on inflating another one.

One of Britain’s sharpest economic commentators concluded that the Bank of England will never unwind quantitative easing after hearing Mark Carney, the governor, testify before the Treasury select committee. Although central bankers never make such blatant statements outright it was implicit in what he said.

For those who remember back to the early days of QE in 2009 the statement was astonishing. What started as a temporary measure to head off a financial crisis has gradually become a permanent part of the economic landscape.

Admittedly the Bank is not pumping new money into the economy via QE. But it seems intent on holding on to its considerable existing holdings of gilts. It is also using Funding for Lending Scheme as an alternative way of shoring up economic activity.

Meanwhile, the Bank for International Settlements, essentially a central bank for central bankers, has issued a warning on the potential risks of forward guidance. Once again the language is cautious but one conclusion is that it could encourage excessive risk taking as it gives investors advance warning of any rise in interest rates.

To understand the significance of these two pronouncements it is necessary to take a step back. They only make proper sense if viewed from a longer-term perspective.

The financial bubble that burst in 2007-8 was not the result of reckless risk taking by greedy banks. On the contrary, it was one that the authorities played a key role in inflating.

Raghuram Rajan, recently installed as the governor of the Reserve Bank of India, outlined some of the key factors in relation to America in his book Fault Lines.

As I pointed out in a Fund Strategy review in 2011: “Rajan shows how the authorities helped a credit bubble in several ways including keeping interest rates low, encouraging wider home ownership from the early 1990s and relaxing lending standards. Government sponsored agencies known as Fannie and Freddie also played a role by providing backing for greater lending.”

However, there is a limitation in Rajan’s argument. He fails to see that the authorities encouraged easy credit as a way of shying away from dealing with the economy’s structural problems. The fundamental problem was a chronic lack of dynamism rather than temporary cyclical weakness.

Although easy money kept the economy moving in the short term it had damaging long-term consequences. Eventually the bubble burst with all the harmful fall-out with which we are now familiar.

However, several years on from the financial crisis it is clear that the authorities still feel more comfortable pumping credit into the economy than tackling fundamental challenges. Measures such as QE, the FFLS and forward guidance are essentially a continuation of the easy money policies that came before.

Unfortunately blowing bubbles into the economy does not make its weaknesses disappear. It only paves the way for more volatility in the future.

This blog post first appeared today on Fundweb.

This is my latest spiked article.

Why is the existence of extreme inequality in Britain treated as headline news? Given that a wide gulf between rich and poor is a characteristic feature of capitalist societies, inequality should not come as a surprise to anyone. A walk or drive around virtually any large city is enough to make it apparent.

Yet Oxfam’s estimate that Britain’s five richest families own more wealth than the poorest 20 per cent of the population seems to have captured the media’s imagination. This follows on from the huge public-relations success of an earlier Oxfam report on global inequality.

Oxfam has simply added a rough calculation of the scale of wealth inequality to the pre-existing discussion. It is probably as good a guess as any, but it is only conjecture. For one thing, the rich do not disclose the extent of their wealth to the public, and in any case the exact amount is constantly fluctuating. The wealthy even employ experts to estimate the changing worth of their portfolios of property, shares, artworks, super yachts, and the like.

Oxfam’s estimates have caught the imagination because they chime with a contemporary obsession among politicians and the media with excessive inequality. This preoccupation is not confined to those loosely identified as on the left, such as US president Barack Obama or Ed Miliband, the UK Labour Party leader.

Those often classified as on the right are just as keen to express concerns about the wide gulf between rich and poor. David Cameron, Britain’s Conservative prime minister, has often warned of the dangers of inequality. For example, in a speech at last year’s Lord Mayor’s Banquet no less, he said that ‘inequality is not just wrong – it fundamentally disadvantages our economy’. (It is ironic that he should have started his speech by addressing: ‘My lord mayor, my late lord mayor, your grace, my lord chancellor, your excellencies, my lords, aldermen, sheriffs, chief commoner, ladies and gentlemen.’). Similarly The Economist, a publication with a reputation for being at the vanguard of free-market thinking, has called for a ‘new progressivism’ to counter excessive inequality and cronyism. In contrast, it is hard to find anyone offering an unabashed conservative defence of inequality and social hierarchy.

There is little difference between left and right on this issue. Indeed, the old labels themselves are redundant. There is a near-universal consensus that extreme inequality is problematic.

The latest Oxfam statement on wealth inequality in Britain is as good a place to start as any in trying to understand this new orthodoxy. On the main points, Oxfam’s outlook corresponds to the mainstream view. Oxfam’s concern is not inequality in itself, but the possibility that it has reached what could be regarded as extreme levels. That is why it focuses on the ‘the potential dangers of inequality’ and the ‘politically and economically dysfunctional level of inequality’ (emphasis added).

Look closely and it even becomes apparent that, despite first impressions, Oxfam is defending inequality in principle: ‘Some degree of inequality is required to reward those with talent, hard-earned skills, and the ambition to innovate and take entrepreneurial risks. And plenty of wealthy people contribute to individual good causes.’ The charity is not arguing for some kind of socialist solution; on the contrary, it says it accepts the existence of economic inequality. This is only to be expected given that the new egalitarianism accepts the premise that there is no alternative to capitalism.

Perhaps more surprising is that even old-style demands for redistribution tend not to feature highly in the current discussion. Oxfam’s concerns are focused more on the dangers of corruption, the rise of food banks, and the risks associated with popular anger.

Since Oxfam is officially a charity, it tends to be guarded about drawing specific policy conclusions. Typically, the new egalitarians favour, among other things, undemocratic restrictions on lobbying and strict regulation of the behaviour of the supposedly revolting masses.

The curbs on smoking provide a good illustration of how the new egalitarians’ fear of extreme inequality easily morphs into restrictions on personal freedom. As the prominent author of an official review on health inequalities, Professor Sir Michael Marmot, argued:

‘In my review, we drew on the evidence of the success of interventions at population level to prevent people from starting smoking and helping them to quit: smoking bans, reducing smuggling, restricting advertising and placement, workplace interventions, group therapy, counselling, self-help materials, nicotine replacement therapy and social support, and abolishing prescription charges for nicotine-replacement therapy.’

A similarly prescriptive approach is typically applied to drinking alcohol, eating, sex and other forms of personal behaviour. An apparently radical egalitarianism is quickly revealed as the motive force for an illiberal assault on personal freedoms.

This still leaves open the question of why it is that new egalitarianism has come to the fore. It is strange that even conservative politicians feel comfortable using language that in the past was typically associated with the left.

This is a big topic, but there are three key points worth noting here. First, criticisms of extreme inequality do not pose a threat to those at the top of society. It is not like earlier times when there were radical movements threatening to expropriate wealth from the rich. In the current intellectual climate, in contrast, the elite critics of extreme inequality gain a degree of popular legitimacy.

The preoccupation with inequality also reflects a prevalent sense of stasis. In a society which views economic progress as unrealistic or deeply problematic, it is easy to slate the yawning gap between rich and poor. A stagnant society may not be able to generate growth, but there are ample opportunities to rail against social divisions.

Finally, the new egalitarianism embodies a deep loathing for the public. It fears extreme inequality precisely because it is seen as creating conditions favourable to errant behaviour.

There is nothing inherently radical about recognising the existence of wide social inequalities. In the hands of the new egalitarians, this observation has become the starting point for curbing prosperity and restricting individual freedom.

This is the final box for my cover story on five years of unconventional monetary policy in Britain. It is essentially a glossary.

Extraordinary monetary policy has in turn spawned a new financial vocabulary. These are some of the main terms.

Forward guidance. An indication by a central bank of how it is likely to react to specified economic developments. For example, shortly after Mark Carney, the new governor of the Bank of England, came into office in August 2013 the monetary policy committee (MPC) said it would not even consider raising interest rates until the unemployment rate touched 7%. In February 2014, after unemployment fell with unexpected rapidity, Carney announced a modified form of forward guidance involving several indicators including productivity growth, household incomes and stronger demand. He also said that the stock of assets already purchased under QE would stay at its present level until interest rates start to rise. Carney first implemented a form of forward guidance as the governor of the Bank of Canada. Back in April 2009 he announced that official interest rates would remain at their low levels, conditional on the outlook for inflation.

The Funding for Lending scheme (FLS). A scheme, introduced in July 2012, to encourage banks and building societies to increase their lending. James Carrick, an economist at LGIM, argues that FLS has in effect taken over from QE as the main way for the Bank to bolster liquidity in the economy.

Macroprudential regulation. A system of managing risks that threaten the financial system as a whole. In the UK it is the responsibility of the FPC. In contrast, the PRA deals with microprudential regulation: setting standards and supervising financial institutions at the level of the individual firm.

QE. A way of injecting money into the economy when official interest rates are close to zero. Although it is often referred to as “printing money” the transactions nowadays are electronic. The Bank of England creates new money that allows it to buys assets, usually gilts but sometimes high-grade corporate debt, from private companies. As a result the seller has more money to spend in the wider economy or to buy other assets.

Whatever uncertainties there are about the impact of unconventional monetary policy one thing is clear. The Bank of England plays a much more extensive role in the economy then it did five years ago. Instead of focusing overwhelmingly on inflation its remit has broadened to include economic growth, financial stability and preventing bubbles.

It is five years since the introduction of quantitative easing (QE) in Britain. This chronology is from my latest Fund Strategy cover story.

QE was first implemented in Britain five years ago. However, there were precedents in other countries. The Bank of Japan implemented a form of QE from 2001 to 2006. In November 2008 the Federal Reserve introduced quantitative easing following turmoil on Wall Street in previous months. There are technical differences in the implementation of QE between countries but in broad terms they all seek to bolster demand to head off deflation.

December 2008. Speculation about the introduction of QE in Britain began. By January 2009 the Bank of England, under a remit from the Chancellor, had set up a subsidiary company to allow it to purchase assets to improve market liquidity.

February 2009. Under the new Banking Act the Bank of England was given two statutory objectives: financial stability and monetary stability.

March 2009. The start of QE proper in Britain. It was announced that official interest rates would fall to a historical low of 0.5% and the Bank was given the power to purchase assets for monetary policy purposes. Initially it bought £75bn of assets but by November 2009 the total had reached £200bn.

October 2009. The then leader of the opposition, David Cameron, told the Conservative party conference that QE would need to be curtailed sooner rather than later. “If we spend more than we earn, we have to get the money from somewhere. Right now, the government is simply printing it. Sometime soon that will have to stop, because in the end, printing money leads to inflation,” he said. In May 2010 he became prime minister after the general election.

November 2010. The Bank voted to increase total asset purchases to £200bn.

February 2011. The bank set up an interim Financial Policy Committee (FPC). It held its first policy meeting in June 2011.

September 2011. Consumer Prices Index (CPI) inflation reached 5.2%, matching the high in September 2008.

October 2011. Almost two years after its last purchase, the Bank of England bought another £75bn of gilts, bringing its stock of assets up to £275bn.

February 2012.The size of asset purchase programme was increased by £50bn to a total of £325bn

July 2012. The Bank announced another £50bn of asset purchases to bring the total amount to £375bn. Some argue that this was the end of QE since the Bank has made no new purchases under the scheme since then. However, the stock of QE has not been reduced either.

In the same month the Bank and HM Treasury launched the Funding for Lending Scheme (FLS). The FLS is designed to incentivise banks and building societies to boost their lending to the real economy. It does this by providing funding to banks and building societies for an extended period with both the price and quantity of funding provided linked to their lending performance.

November 2012. George Osborne, the chancellor of the Exchequer, announced that Mark Carney, then governor of the Bank of Canada, would become governor of the Bank of England.

December 2012. The Financial Services Act, a fundamental reform of the system of financial regulation, became law.

April 2013. The new legislation regulatory system came into effect. The old Financial Services Authority was abolished and the Bank of England took over responsibility for protecting and enhancing financial stability. A new architecture consisting of the FPC, Prudential Regulation Authority and Financial Conduct Authority was set up. In the same month the Bank and the Treasury announced an extension to the FLS.

July 2013. Mark Carney became the governor of the Bank.

August 2013.The Bank gave forward guidance for the first time. It said it would consider making further asset purchases if the unemployment rate remained above 7%.

December 2013. CPI inflation rate fell to its 2% target.

Over the year the British economy grew by 1.9%, the strongest annual growth rate for six years.

February 2014. Carney announced a new form of forward guidance that depends on the performance of several indicators.

This is the main text for my Fund Strategy cover story on five years of extraordinary monetary policy in Britain. I will post the accompanying boxes over the next couple of days.

It is easy to forget how much Britain’s financial architecture has changed in just five years. Back in early 2009 the term quantitative easing was often written with inverted commas or with the prefix so-called. Only the most hardcore financial nerds would feel comfortable referring to the concept by its initials.

Nowadays not only has QE become a routine moniker but a host of other terms have joined it including forward guidance, funding for lending and macroprudential regulation (see box one). In parallel with this development the system of financial regulation has undergone fundamental reform. The Financial Services Authority is no more but the Financial Conduct Authority, Financial Policy Committee and Prudential Regulation Authority have come into existence. The latter two are under the direct control of the Bank of England.

These new sets of terms and initials reflect the important changes that have come to the regulatory system and economic policy. In relation to monetary policy specifically the authorities have searched desperately for new ways to shore up demand and bolster confidence. Once interest rates hit their historical low of 0.5% in early 2009 new tools were needed. QE is the most important of these but it is only one of a range of unconventional measures designed to keep the economy afloat.

Whether such measures have proved successful is open to debate. The problem, as is often the case, is that there is no counterfactual. There is no parallel universe where QE was not tried. Perhaps the closest is southern Europe where countries such as Greece and Spain have had no control over their currency or interest rates. Those countries have certainly suffered worse economic times than Britain in recent years with sharper falls in output and higher unemployment. However, such comparisons with other countries are inevitably inexact.

This leaves it open for supporters of unconventional policy to argue that without extraordinary monetary measures the economy would have faced disaster. They claim that Britain would have fallen into a 1930s-style deflationary spiral. The result would have been mass unemployment and a far harsher squeeze on living standards.

In contrast, the critics argue that unconventional monetary policy has only postponed the day of economic reckoning. It has kept the economy ticking over but in the meantime government debt levels are still rising, productivity is stagnant and asset prices are artificially high. Such problems, they contend, are better dealt with sooner rather than later. Postponement will only make them worse.

This article will grapple with these questions in three parts. First, it will examine the economic dimension of unconventional monetary policy with the advantage of five years of hindsight. Second, it will consider the impact on financial assets including bonds, equities and property. Finally, it will look at the difficulties presented by exiting from the prolonged period of monetary activism.

Economy effects

One reason it is difficult to judge the success of extraordinary monetary policy is that the rationale for it has changed over time. For example, in March 2009 the chief economist of the Bank of England, Spencer Dale, gave a keynote speech in which he said that: “The objective of the asset purchase programme is to boost nominal spending in order to hit the inflation target”. (“Tough Times, Unconventional Measures”, 27 March 2009) .

From this perspective QE was a temporary measure designed to ensure the economy did not fall into a liquidity trap as a result of falling prices. In such a situation both consumers and companies are reluctant to spend as whatever they buy in the present is likely to be cheaper in the future. This is the situation Japan found itself caught in for many years.

Consumer Prices Index inflation did drop in Britain in the six months following Dale’s speech, bottoming out at 1.1% in September 2009, but after that it started to rise until it hit 5.2% two years later. Yet the Bank continued to make new asset purchases under QE until July 2012. As time went on it became increasingly difficult to rationalise QE in terms of heading off possible falls in consumer prices.

With the benefit of five years of hindsight it is clear that unconventional monetary policy can no longer be described as temporary. Typically unconventional monetary policy is justified today as a way of shoring up demand and bolstering confidence. This can happen through several channels but essentially it works by bolstering the money supply. As a result credit becomes cheaper, borrowing becomes easier and asset prices can rise.

Government is one of the main beneficiaries of this process. James Carrick, an economist at Legal & General Investment Management, says: “It’s been easier to maintain government spending with limited tax receipts because you’ve had a lot of gilt issuance purchased by the Bank of England.”

For supporters of QE unconventional monetary policy has created the basis for the signs of recovery in recent months. The economy is estimated to have grown by 1.9% over the past year, inflation is at its target level and unemployment has fallen sharply in recent months.

Advocates of QE can concede that the economy still has some way to go before there is a balanced recovery. Output is still 1.3% below its peak level in the first quarter of 2008, business investment is weak and productivity is below its peak in 2007. For the optimists it is only a matter of time before such indicators improve. QE has put the economy in a position where they can be tackled.

For critics, who tend to be those who emphasise the importance of the supply side of the economy, the weaknesses are a sign that economic problems have not been resolved. Rather than promote an economic restructuring the authorities have simply kept things afloat on cheap credit. Such measures only postpone a time of reckoning that is bound to come sooner or later.

Those critics who warned that QE could lead to rampant inflation have, at least so far been proved wrong. As Andrew Godwin, a senior economist at Oxford Economics, says: “It is difficult to see any evidence of a massive uptick in inflation.” CPI inflation has at times been significantly above the Bank’s target level but it has not run completely out of control. However, it should also be recognised that asset price rises also constitute a form of inflation.

Where the critics have a clearer point is that unconventional monetary policy seems to have widened inequality. Since the rich typically hold more assets than the poor the wealthy have typically done much better as a result of QE. Many see this trend as particularly painful during a time of austerity.

Up to a point it is possible to square the positions of the two sides. Even the most ardent proponents of unconventional monetary policy have only promoted it as a temporary measure.

As Mervyn King, until recently the governor of the Bank, noted in his valedictory speech at the Mansion House in June 2013: “It can only buy time to bring about the necessary structural changes in investment, trade and capital flows.” (“A Governor looks back – and forward, June 19, 2013 . From this perspective the key question is whether the time bought by QE and other such policies has been put to good use.

Andrew Milligan, the head of global strategy at Standard Life Investments, endorses King’s point when he says that: “Both arguments are right. QE has had an impact but all it has done is buy time”.

The majority view among experts is certainly that, on balance, unconventional monetary policy has proved worthwhile. “Any downsides are outweighed by the positives,” says Oxford Economics’ Godwin. “We are in a much better place because of it.”

Financial markets

In a sense it is inevitable that unconventional monetary policy should affect asset prices. QE involves the authorities buying gilts, which in turn raises their price and therefore lowers their yield. Since gilts provide the benchmark against which other assets are priced – since their yields constitute what is generally considered to be a risk free rate – other bonds, equities and property will all be affected to some degree. The difficult question is the extent of the impact.

LGIM’s Carrick points a picture of fixed income investors being pushed towards slightly more risky asset classes. “There are signs that by boosting government bond prices that’s forced investors who normally invest in gilts into the corporate bond markets,” he says. “And that’s forced investors who normally invest in corporate bonds into the junk bond market.”

The effect on equities is more difficult to quantify although they have certainly recovered strongly since the dark days of early 2009. The FTSE 100 has risen from about 3,500 back then to about 6,500. Middle-sized firms have done even better. Part of the impact is no doubt down to the apparent escape from the edge of the precipice and the subsequent economic recovery. However, unconventional monetary policy has also played a role.

Nevertheless most experts see the stockmarket as at least reasonably close to fair value. “I don’t think you could say that QE has created bubbles”, says SLI’s Milligan.

As for property it is clear that monetary policy has played a significant role in its recovery. The average British house price has risen from about £150,000 in early 2009 to about £174,000, according to figures from Nationwide. Lower borrowing costs have certainly helped but, as with equities, there are other factors at play too. For example, emerging market investors have helped push up house prices in central London.

Exit strategy

However the economy and the markets have got where they are there is the thorny issue of how to exit from extraordinary monetary policy. The authorities are certainly anxious about the possibility that a precipitate exit could cause problems. That is why they have experimented with forward guidance in an attempt to make sure markets remain calm.

In a narrow technical sense QE stopped in July 2012. Since then the Bank has not added to its stock of assets although it has not cut them back either. This is in sharp contrast to America where Fed “tapering” essentially means a slowdown in the rate at which QE is expanding.

But the US comparison is not clear-cut. For a start the Bank of England expanded its balance sheet more quickly than the Fed in its early stages. In addition, the FLS has in some respects taken over from QE’s role in shoring up the money supply.

Opinions vary on how difficult the exit will be in Britain. Oxford Economics’ Godwin is relatively sanguine. “As long as there is no uptick in inflationary pressures I think it will be steady as she goes.”

In contrast, Michael Howell, the managing director of Crossborder Capital, sees no easy exit.“They will have to be extremely cautious about deciding to take liquidity down”, he says.

In Howell’s view the Bank has in effect filled in a funding gap in the wholesale markets. Passing the responsibility back to the private sector will be a tricky task. “I think the Bank of England has got to at least keep the current size of its balance sheet, possibly grow it, but almost certainly not shrink it rapidly otherwise you’ll get another financial crisis.”

Despite the heated debates about unconventional monetary policy there are several points on which there is a clear consensus. There is a widespread agreement that the structural problems facing the British economy, such as a poor productivity record and low business investment, remain to be tackled. The disagreements are mainly around how close they are to being resolved.

There is also a consensus that a degree of austerity is likely for several years to come. For example, the Institute for Fiscal Studies, an independent think tank, says that it is highly unlikely that average living standards will recover to their pre-crisis levels by 2015-16.

Finally, whatever the merits or defects of extraordinary monetary policy it looks set to remain part of the financial landscape for at least several years yet.

Adair Turner is probably the closest the British establishment has to a go-to guy on finance and much else besides. During his long career he has provided both intellectual and practical leadership on some of the thorniest problems Britain faces.

His CV is remarkable. After many years at McKinsey, one of the world’s top management consultancies, he was director general of the Confederation of British Industry and then chairman of the Financial Services Authority.

He also chaired the Low Pay Commission, the Pensions Commission and the Climate Change Committee. Anyone who has heard him speak on any of these subjects, and indeed many others, will know he is always logical and lucid.

It was with this in mind that I was particularly interested to hear him talk about his new project recently on BBC Radio 4’s Start the Week programme. Evidently he is writing a new book on Britain’s excessive dependence on debt.

Details of the book itself are not yet publically available but it is possible to get an inkling of what he is saying from radio programmes such as Start the Week as well as speeches and articles. For example, on February 2014 the Institute for New Economic Thinking, a think tank to which he is affiliated, published a paper by him on “escaping the debt addiction”.

It is important to recognise in this respect that Turner’s focus is private debt rather than government debt. His concern is that economic growth should depend less on debt. The practical measures he proposed to achieve this objective included requiring much higher bank capital, establishing constraints on real estate lending and tightening regulation on very high interest consumer lending.

The problem with Turner’s argument is precisely that it is the mainstream view. It has become almost universally acceptable to talk about the “debt crisis” or “financial crisis” as if they are synonymous with “economic crisis”. It is also common to talk in terms of addiction as if the heavy use of debt is somehow akin to becoming hooked on drugs.

Turner has simply taken the conventional intuition, that the root cause of the crisis is to do with debt, and given it more rigour. He has not investigated whether there is a causal relationship between debt and the economic crisis.

The graphs that go with his presentation make this clear. Chart after chart shows that debt levels, measured in numerous different ways, have increased in recent years. It is certainly a striking picture but it is important to remember the fundamental point that correlation is not causation. Debt levels certainly increased dramatically in the run-up to the crisis but it does not follow that they caused the economic downturn.

Turner’s approach precludes the possibility that high debt levels were a symptom, rather than a cause, of the economic problems many countries have suffered in recent years. There is no significant discussion of how they relate to the real world of production. The closest Turner gets is to talk about economic imbalances between the main economic powers.

The Start the Week programme also illustrated how pervasive the fetishisation of debt has become. All the guests on the programme accepted without question the idea that high debt levels can explain the economic problems plaguing the West.

The time is ripe for a more rigorous examination of these challenges.

This blog post first appeared today on Fundweb.

This column first appeared in the March edition of Fund Strategy. The accompanying graph is available to see here.

This column may be a little more personal for readers than normal. It concerns the likely trajectory of wages in the near future. In particular whether there are any signs of an upward trend after the pain of recent years.

Of course you may be one of the lucky few who have enjoyed a rising real income since 2008. But for most people in Britain it has been a miserable time for living standards.

The accompanying graph from the Office for National Statistics (ONS) helps illustrate how bad things have been. Real wages shrunk in every period from the second quarter of 2010 to the third quarter of 2013. This is the most long drawn-out decline on record.

Nor does the situation look any better when examined from a broader perspective. According to the Institute for Fiscal Studies, a respected think tank, real median household incomes in 2013-14 were 6% below their pre-crisis peak. That covers a longer time span than the ONS study (since economic output peaked in the first quarter of 2008) and more than wages alone (since household incomes also include welfare benefits, returns on investment and the like). Nevertheless the IFS itself says the fall in average incomes was mainly driven by earnings.

At last, however, things appear to be looking up with GDP rising by 0.7% in the final quarter of 2013 according to the provisional estimate by the ONS. This means that GDP was 1.9% higher in 2013 than the year before.

This news is certainly welcome but it needs to be put in perspective. GDP has risen since 2009 but it is still 1.3% below its peak in the first quarter of 2008. At that rate it will take a year or two for output to return to its level of seven years earlier. It GDP had instead risen at 2% year, a relatively modest rate, over that period then total output would be about 15% higher than with the pain of the downturn.

However, if the figures are adjusted for the increase in employment since late 2009 the sums come out a little differently. Although output has increased since then the number of people employed and the number of hours worked has risen faster. In other words output per hour – a key measure of productivity – has continued to trend downwards.

This matters because, everything else being equal, productivity is the key determinant of earnings. In a more productive company the employer can afford to pay more to his employees.

That explains why the idea that companies always try to minimise their employees’ wages is wrong. In a highly productive company – say a factory with lots of advanced machinery – it is possible to pay high wages to the relatively small number of employees. In contrast, a factory with little automation is likely to have many employees but pay them each relatively little.

In other words the main consideration for employers is not to pay its employees the lowest wages possible. It is, rather, to make healthy profits. In theory this can happen with a well-paid workforce and lots of automation.

Wages tend to be cut, at least in real terms, either when companies are facing tough times or the overall economic climate is harsh. In such situations wage cuts are often seen as a temporary means of shoring up profits.

From this perspective the prospects for wage growth do not look good in the coming years. Even assuming economic recovery continues – which is far from certain – it could still take years for productivity to return to its previous peak.

Perhaps the recent pronouncements by politicians on the minimum wage provide a sign of hope. Not that Fund Strategy readers are on such low incomes – at least hopefully not.  But if politicians are willing to increase the minimum wage then perhaps they will take a more relaxed attitude towards others increasing their incomes. The recent call by George Osborne, the Chancellor, for an above inflation increase in the minimum wage could certainly be read that way. Labour has gone a little further with Ed Miliband, the party leader, calling on firms to voluntarily introduce a living wage at a slightly higher rate than the minimum.

Interestingly other countries are also talking about minimum wages. Barack Obama reiterated his call for a higher federal minimum wage in his recent State of the Union address. In Germany the new grand coalition government has adopted the minimum wage under pressure from the Social Democrats.

But look at the rhetoric more closely and it seems politicians are more interested in keeping wages down rather than raising them. The talk is of everyone being willing to take sacrifices together. From this perspective everyone else should be willing to limit their ambitions to make the minimum wage possible for the least well off.

I take no pleasure in making such a gloomy prognosis for wages in the coming years. On the contrary, I would like to see a sharp rise in incomes. However, the precondition for such an increase is a strong improvement in corporate investment and productivity. Unfortunately, few seem to be taking such a perspective at present.