Inequality is rising in Denmark, and negative interest rates are to blame

Scandinavian countries are famed for their high levels of equality. They are portrayed as a blissful landscape where everyone gets a good education, high wages and generous government support. Now this equality is under threat in Denmark, and once again unconventional stimulus measures by central banks are to blame.

A measure of income inequality, known as the Gini coefficient, has risen in Denmark from 0.20 in 1990 to 0.27 in 2014, according to the Danish Economic Council’s latest report (pdf). The gauge runs from 0 (full equality) to 1 (complete inequality) so this is still a very good score, in fact in 2013 Denmark had the third best according to the OECD. However, this report is another illustration of central bank policies that are supposed to spur economic growth but have instead been blamed for increasing inequality all over the world.

The report, published last week, said larger incomes from equity investments and lower interest rate payments were partially responsible for the increase in inequality because they have increased the disposable income of people who own financial assets. Low interest rates mean that people with bonds and savings accounts receive low returns and their savings accumulate extra money more slowly. Low rates also translate into faster rising equity prices as investors want alternatives to bonds, which benefits stock owners, who tend to be people with higher incomes.

The rise of inequality in Denmark acts as a warning to the rest of Europe. Denmark’s central bank first cut interest rates below zero in July 2012 and so has had negative rates longer than any other nation. Across the rest of Europe, low and negative interest rates have become the norm; other countries could see similar effects.

In Denmark, the number of people living in poverty has increased while the top 10% have gotten richer, the Danish Economic Council’s report said. Demographic changes including more older people and more immigrants have played some part in the increase in inequality. But even Denmark’s progressive income tax system, which seeks to widely redistribute wealth, hasn’t completely countered the disparity in incomes.

Economists are already debating the efficacy of central bank polices. While this report lays some blame on low interest rates, quantitative easing is also widely accused of increasing inequality (pdf). Bond buying by central banks has boosted the price of many financial assets, including stocks. That helps people who already own them, but does little for those who don’t.

In the UK, the Bank of England revived its quantitative easing program and cut interest rates this summer. Since then the new prime minister has said the bad side effects must be acknowledged. “A change has got to come,” Theresa May proclaimed earlier this month. “And we are going to deliver it.”

A nice soundbite. But whether central banks and governments around the world do anything in time to slow or reverse increasing inequality remains to be seen.

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