May 22, 2024

People urged by Bank of England economists to 'accept' being poorer | Business News

A bitter pill to swallow – especially for those with high incomes

Ed Conway

Economics and data editor


When Hugh Bell said, in a recent Columbia University podcast, that British people needed to “accept that they are worse off,” the comments understandably struck a chord.

With the country going through a once-in-a-generation cost-of-living crisis, it's not particularly palatable to be lectured by a very well-paid former Goldman Sachs banker that we all need to live less extravagantly.

But while Mr. Bell delivered his comments with his foot firmly planted in his mouth, there was an important truth lurking underneath.

The truth is that the country as a whole is undoubtedly worse off as a result of the recent sharp increase in energy prices.

Simply put, these days we import a lot of our energy, mostly in the form of natural gas.

Since energy prices have risen so sharply, we all have to pay more for our goods and services without making more money in return. We – by which I mean the country as a whole – are all poorer.

You can feel this when you look at Britain's national income – the amount of cash we generate here in the country – and subtract the amount of cash we consumers tend to spend each year.

The graph you end up with looks rather terrifying: a sloping line of things we've never seen before.

This is a good example of how dramatically our collective net worth has declined in the past year or so.

However, to say that the country as a whole is poorer is not to say that everyone feels the pressure in the same way.

Indeed, look at the impact of this loss of collective value and you will see big differences.

A few companies (and their employees and shareholders), especially energy producers, have performed very well after prices rose. Most of them didn't.

In much the same way, the pain caused by rising prices is felt differently at different income levels. Remember, inflation is the rate at which prices rise each year.

But the extent to which different income groups, whether through their incomes or savings, can withstand this increase, varies greatly.

Study after study has shown that low-income groups feel the impact of rising energy and food prices much more than high-income groups.

In general, those at the top end of the income distribution (which includes all Bank of England economists) saw much smaller declines in their spending potential than those at the bottom end.

The country has become worse off, but some have felt the pinch more than others.

These are what economists tend to call “distributional” issues: how the benefits (or pain in this case) of an economic phenomenon are distributed across a population.

Typically, the Bank of England tends to focus less on such issues than on the big picture – that country-wide story of how we are worse off overall.

No, it is worth saying, because they are heartless and uncaring, but because they view such challenges as something to be dealt with by democratically elected politicians, rather than by academics in an ivory tower on Threadneedle Street. Which is fair enough.

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However, the cost-of-living crisis is two things at once: a large macroeconomic phenomenon (the country has become poorer) and a distributional phenomenon (some people feel the pain more than others).

Mr Bell's main mistake was not being more clear that he was talking about the former case without being clearer that he was not trying to make a judgment on the latter case.

However, this is not the first time someone from the Bank of England has said something offensive and insensitive at a time of nationwide economic insecurity, and it is unlikely to be the last.