QE for the People?
Anatole Kaletsky in Reuters has been advocating Quantitative Easing for the People (QEP) in two recent posts (h/t to Lambert for alerting me). In the first, he begins by making the point that QE hasn't worked to lift the economies of the US and the UK, and suggests new and more radical measures must be considered. Then he says:
”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.”
So, by QEP Kaletsky means Central Banks distributing cash grants to people directly for the recipients to spend or save as they will. In his second Reuters post, he points out that “. . . radical ideas about monetary policy suddenly seem to be gaining traction . . . “ so he's returning to the subject of QEP. And he says further:
“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 four arguments are:
-- It wouldn't work to stimulate the economy because people wouldn't spend it but save it. Kaletsky thinks this would be fine because it would de-leverage US households to the debt levels of the early 1990s.
-- It would work too well and create inflation. He answers that one by saying that eventually more and more QE may cause inflation, anyway.
-- A stronger version of this objection says that the moral hazard attached to QEP would lead to politicians bribing voters before election time. He points that permanent QE and any popular fiscal policy can also produce moral hazards, and that the cure for the moral hazards of QE, QEP, and any other popular policy is inflation which democracy will punish and eventually control.
-- The final objection he considers is the one that says that “there is no free lunch.” Kaletsky replies that there are free lunches, and that economics has been pointing them out since the days of Adam Smith.
I think there are a number of things wrong with Kaletsky's proposal. Let's take them one-by-one.
First, “independent” Central Banks, including the Fed, have no legislative mandate to give people net financial assets, in the form of monetary grants with no consideration in exchange. Quantitative Easing works through exchanges with central banks. The banks supply reserves. The recipients of the reserves swap assets such as bonds and property for the new reserves. So, in suggesting cash grants using newly created money, Kaletsky is suggesting something different from QE, something that central banks don't have the authority to implement.
Why not give them that authority? Because the central banks in most nations, and certainly in the United States are independent in name only. In fact, they're closely aligned with banking interests and have made it very clear in the recent crisis and “recovery” period that they serve those interests and prioritize them over the interests of the 99%. In addition they've been designed as undemocratic institutions, not accountable to the people, staffed by supposedly non-political, technical functionaries, who nevertheless, always seem to make decisions that are partisan in favor of the big banks.
Rather than legislators giving central banks the authority to make monetary grants to people, that authority should remain in the hands of legislators. The authority to create money should be transferred to the Executive function, by placing the Central bank under the supervision of the Treasury. The legislation appropriating cash grants for the people could reorganize the Federal Reserve so that the Board of Governors becomes an agency within Treasury. The Secretary could then require the Fed to create the reserves necessary to implement Congressional appropriations without issuing bonds or other securities. This would produce the same result as Kaletsky's proposal, but clearly under the authority of the accountable Congress and the Executive, rather than based on decisions made by an unaccountable Central bank.
The second problem with Kaletsky's proposal is that it involves infrequent cash grants given to people in economic emergencies. It's directed at “people;” but not at direct job creation for them. It leaves that creation to “the market,” which is currently a globalized, manipulated market stacked against American working people. Nor does his QEP proposal propose any additions to the network of automatic stabilizers, so that there 's a continuing counter-cyclical element that lift us in downturns and stabilize the economy when it becomes over-heated.
I agree with Kaletsky's wanting to use the government's ability to create fiat currency to ease the financial difficulties of people who suffer from serious financial crises that they haven't created; but there are other ways to do that besides cash grants from unaccountable central banks. I propose instead an enhanced Medicare for All program, revenue sharing grants to State and local governments, an end to payroll tax withholding for employers and employees until full employment is reached, and a Job Guarantee program offering a full-time job at a living wage with full fringe benefits to anyone who wants one.
The program's jobs would be defined at the community-level with participation of people in the program, and non-profit groups, so creation of the substance of the job guarantee program would be bottom-up, with funding provided by the Federal Government. The JG program would not replace other safety net programs. These would all remain in place; but it would add a new counter-cyclical automatic stabilizer to the safety net.
Medicare for All would eliminate 55,000 fatalities per year in the US due to lack of insurance coverage, and would also provide 2 million new jobs, the revenue sharing grants would provide enough money to States to allow them to restore government employment to pre-recession levels, the full payroll tax cuts would provide a very substantial stimulus to individuals and employers directly, and the unemployment still left after these measures were implemented would be ended with the JG program.
This recovery program doesn't directly address the debt overhang resulting from the housing crash including the underwater mortgages caused by the crash and the toxic assets in the banking system. To address these I like the proposal that underwater mortgages be eliminated by having local governments use their power of eminent domain to take the effected properties from the banks paying current fair market value for these properties. The notes would then be written down to fair market value eliminating the worst of the housing debt overhang.
This idea has recently received a good bit of discussion, and favorable comment, but a problem with it is that local governments lack revenue to pay for these properties due to the crash itself. Some communities are trying to implement an eminent domain-based solution by using private investor capital to finance the seizures of property. I propose instead, that the Federal Government commit to financing all local government takings of underwater properties, because this would be cleaner and would avoid the possibility of private investors driving up the cost of the written down mortgages to secure profits.
If Congress were to approve this recovery program, and appropriate the funds for it, but refuse to place the Fed within Treasury, then I favor using the fiat currency capability of the government to avoid further debt issuance to provide the reserves the Executive will need to implement the appropriation. This can be done using the $60 Trillion Proof Platinum Coin Seigniorage (PPCS) plan I've outlined here. This is a way of bringing the power of the Fed to bear in service of the Treasury's need to implement Congressional appropriations. That plan is fully explained here, and requires no further legislation to implement, as would Kaletsky's proposal for creating money to make direct cash grants.