And the impact of so-called Quantitative Easing (QE) is also likely to be different across cohorts of society. 3 Understanding the differential impact of monetary policy across these sectors is important in general, as well as for gauging whether policy is working through its intended channels. Fourth, and perhaps most important of all, the distribution of outcomes across different groups can matter greatly for the well-being even of the economy as a whole. To see that, consider a simple example. Imagine the economy comprises two regions, one with income of 10, the other with income of 90. Now imagine income falls by 5 in region one but rises by 10 in region two. At least as measured by GDP, the economy and society as a whole is 5% better off. But is it? The income of the already-rich has risen by just over 10%, while the income of the already-poor has fallen by 50%. Does the former really swamp the latter when it comes to the well-being of society? There are grounds for doubt. Empirical studies show that every extra pound of income or wealth yields less satisfaction than the last. A millionaire values a £ lottery win less than someone on the living wage. For economists, this goes by the name “diminishing marginal utility”. Yes, I know we should get out more. If they are sufficiently unevenly distributed, income losses by the poor may more than offset gains by the rich in a social welfare sense, even if not in a GDP sense.
This helps explain the uneven pattern of wealth gains by age since the crisis, as older cohorts are more likely to be owner-occupiers. Taken together, then, the rising cost of rents, and the rising share of renters, appears to have caused a further erosion of some households’ income since the crisis, particularly renters, the poor and the young. For those cohorts, rising housing costs are likely to have contributed to the sense of this being an invisible recovery. Whose recovery? To a significant extent, those owning their own home. The social jigsaw So far, we have looked at relatively standard measures of economic health and wealth, the staple diet of economists like me. But there are now many studies showing that objective measures of economic health and wealth do not always correspond well with individuals’ subjective sense of well-being and fulfilment. 11 Let me give a simple example to bring this point home. The highest per capita income region in the UK is London, where the average person earned £ per year in 2014. At the bottom of the per capita income league table was Northern Ireland, where the average person earned £ per year in 2014. Yet when it comes to measures of life satisfaction, the tables are completely turned. London ranks at the bottom of the regional league table of happiness, while Northern Ireland occupies (by some distance) pole position.