Quantitative Easing for the People

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Anatole Kaletsky:

"The one economic benefit of QE has been to help governments finance the huge deficits caused by recession without having to raise taxes, slash public spending or face Greek-style bankruptcy. In this sense, QE has certainly prevented the U.S. and Britain from suffering worse outcomes, but it has failed to stimulate employment or economic growth. This is exactly what Japan has experienced for 20 years – and as in Japan, additional rounds of QE now will merely act as an anesthetic, perpetuating stagnation but discouraging more effective stimulus measures.

One such radical measure is too controversial for any policymaker to mention publicly, although some have discussed it in private: Instead of giving newly created money to bond traders, central banks could distribute it directly to the public. Technically such cash handouts could be described as tax rebates or citizens’ dividends, and they would contribute to government deficits in national accounting. But these accounting deficits would not increase national debt burdens, since they would be financed by issuing new money, at zero cost to government or to future generations, instead of selling interest-bearing government bonds.

Giving away free money may sound too good to be true or wildly irresponsible, but it is exactly what the Fed and the BoE have been doing for bond traders and bankers since 2009. Directing QE to the general public would not only be much fairer but also more effective.

Suppose the new money created since 2009, instead of propping up bond prices, had simply been added to the bank accounts of all U.S. and British households. In the U.S., $2 trillion of QE could have financed a cash windfall of $6,500 for every man, woman and child, or $26,000 for a family of four. Britain’s QE of £375 billion is worth £6,000 per head or £24,000 per family. Even if only half the new money created were distributed in this way, these sums would be easily large enough to transform economic conditions, whether the people receiving these windfalls decided to spend them on extra consumption or save them and reduce debts.

Distributing money to the general public was the one response to intractable recessions and liquidity traps that united Milton Friedman and John Maynard Keynes. Their main difference was that Friedman proposed dropping dollar bills out of helicopters, while Keynes suggested burying pound notes in chests that unemployed workers could dig up. Unfortunately modern economics, based as it is on simplistic and misleading assumptions about self-stabilizing markets, has forgotten the insights of these great students of deep economic slumps. In today’s world of electronic money, we would not even need Friedman’s helicopters or Keynes’s ditchdiggers. Just a few lines of computer code – plus some imagination and courage from our central banks." (http://blogs.reuters.com/anatole-kaletsky/2012/08/01/how-about-quantitative-easing-for-the-people/)


Responding to Objections

Anatole Kaletsky:

"The radical alternative discussed here last week – QE for the People (or QEP, for short) – would bypass banks completely by distributing newly created money straight to the public. It is not yet on anyone’s agenda, but neither is it any longer dismissed as a joke.

Given the clear political attractions of giving money to citizens, rather than bankers, it may start to gain attention, at which point there will surely be powerful objections to this idea. Apart from the obvious observation that bankers and financiers are very powerful interest groups, there are four genuine arguments against QEP as a way to stimulate economic recovery.

The first is that it wouldn’t work. Since banks and bond investors simply hoarded most of the $2 trillion delivered to them via QE, maybe citizens would do the same. Instead of spending their QEP bonuses to buy consumer goods and houses and create jobs, citizens scarred by the financial crisis might simply save their bonuses or use them to pay down debts. This could indeed happen. But if it did, economic prospects would still be transformed, since the debt burdens crushing many households would be lightened. If the $2 trillion in QE had instead been used to repay consumer debts, U.S. household debt would be reduced from 83 percent to 70 percent of GDP, roughly where it was in the 1990s. The excess leverage created by the housing and credit bubble would be eliminated at a stroke.

The second objection to QEP is that it would work too well. The present slump would turn suddenly into a boom and create inflation. Excessive inflation is always a valid argument against excessive monetary stimulus, but the problem with inflation today is that it is too low. Central banks all over the world are explicitly trying to increase it by reducing interest rates to zero, and the Fed is particularly adamant about this. If central banks print too much money for too long, then inflation will follow. But the same applies to the present policies of zero interest rates and standard QE. Nobody worries about the inflationary risks of these standard policies any longer because they don’t seem to be working, but this may actually mean that an accidental monetary overdose is more likely if the central banks stick to standard QE.

Another, more powerful, version of the “works too well” critique relates to politics and moral standards. If distributing printed money proved successful, this discovery would corrupt society. Politicians would bribe voters before elections and citizens would stop working, preferring to collect handouts from the central bank. Of course, these things would happen if QEP continued forever. But the same is true of all popular policies, including tax cuts, welfare spending and low interest rates. What limits the moral hazard of these policies is not ignorance, but democracy. Governments that lose control of inflation get punished by voters – and the same would apply if central banks continued printing money for longer than required, whether this money went straight to voters or banks. Indeed, if QEP proved effective, central banks would have to print less money than under standard QE.

Which leaves the final and most persuasive objection: the idea that money could be given to citizens without raising taxes or increasing the government’s debt burden seems too good to be true. Economists often say that “there is no such thing as a free lunch,” but this is not true. In fact, economics since Adam Smith has demonstrated that the world is full of free lunches. Free economic exchange means that one person’s gain need not result in another’s loss. When properly managed, industrial specialization, international trade, market competition and full-employment macroeconomic policies can all produce gains without any substantial losses. In the deepest and most protracted economic slump since the 1930s, QE for the People may be another such idea whose time has come." (http://blogs.reuters.com/anatole-kaletsky/2012/08/09/suddenly-quantitative-easing-for-the-people-seems-possible/)