QE for the People
A modern addition to central bankers’ monetary toolkits
Frances Coppola’s recent book, “The Case for People’s Quantitative Easing”, proposed a contemporary view on monetary policy of the past and how to alter it to achieve better results in subsequent crises. Jeremy Corbyn’s Labour government initially put forward the idea of People’s Quantitative Easing (PQE) in 2015, whereby the central bank would fund, by printing money, infrastructure projects through a national investment bank. Coppola took this further and suggested sending money directly to people during an economic crisis or prolonged periods of stagnation.
This article will summarise Coppola’s main arguments while providing counters to her proposals.
Failures of conventional QE
Since the global financial crisis of 2007–8, quantitative easing measures have been implemented across Europe and the US, whereby the central bank buys up assets from financial institutions to increase the money supply in the economy. It frees up liquidity by replacing assets for cash, which firms then spend or lend out: this props up asset prices, increases demand, and stimulates economic activity.
Though in reality, this is not entirely the case. Expanding balance sheets forces banks to hold more reserves, and thus the money is not spent or lent out. Where it is spent, it leads to inflated asset prices, which causes financial instability and widening inequality. Rising asset values stimulate spending as people’s wealth rises, but if the beneficiaries of rising prices are already wealthy, then their spending is unlikely to increase significantly, and demand does not increase. Where spending does occur, indebted individuals and firms choose to pay down their debts rather than take out new loans, resulting in what Richard Koo termed a ‘balance sheet recession’. Additionally, those who do not own assets, mostly the poor, do not receive any benefits and are neglected, diverging inequality further.
Proposing QE for the people
Instead, Coppola proposes QE for the people, which comes in two forms: giving money directly to the people and financing longer-term investment projects.
The first form was popularised by Friedman in his 1969 famous paper, “The Optimum Quantity of Money,” where he described this euphoria of a helicopter flying over a community while dropping $1000 bills. In practice, this is not feasible, but the theory is robust. Today, there are multiple ways of implementing helicopter money. Firstly, the central bank could credit bank accounts. However, this may exclude the very poorest in society who do not have bank accounts, such as the homeless or the uneducated. An alternative would be allocating an account at the central bank and injecting money this way. For the developing world, where access to online accounts is scarce, making direct transfers to mobile phones would be a suitable alternative.
Moreover, debt jubilee is also considered another form of helicopter money. Relieving individuals of their debts frees up extra income to spend elsewhere. However, this method is the weakest since it is expensive to finance, challenging to allocate, and since debt is one person’s liability but another person’s asset, there would be some massive losers. None of the methods is perfect, though the benefits would certainly outweigh the costs.
Financing long-term investment projects to rebalance the economy is another form of PQE. Substantial asset purchasing programmes have fed more and more money into financial markets. With low business certainty, firms choose to buy back their shares instead of investing their funds, which has distorted the equilibrium in the economy. Hence, money has shifted away from capital projects, dampening innovation, increasing unemployment, and stagnating economic growth. Coppola proposes different ways to counteract this and restore the economy’s equilibrium.
One way of achieving this would be through direct financing of the government. Central banks either buy government bonds or provide loans to the government, inflating fiscal budgets, allowing for extravagant investment projects to propel growth, jobs, and productivity. Specifically, green investments would have an additional benefit of decarbonising the economy and mitigating existential threats in the future. Despite this, central bank financing of governments calls its independence into question. Strictly, they oversee monetary policy and should not have a say, influence, or impact on fiscal policy, which is solely the government’s responsibility and concern.
National Investment Banks (NIBs) can also be used to fund and accelerate infrastructure spending. It is an intelligent alternative in countries that restrict central bank financing of governments, as it allows NIBs to issue loans that the central bank then buys up. The UK Infrastructure Bank, recently launched in June, will invest in public and private sector projects and provide advisory services when it is fully functional — a massive step in the right direction.
Finally, the central can invest directly in private sector businesses. It can be achieved through the central bank buying securities of bundled SME loans or providing loan guarantees to SMEs who by nature have few assets to act as collateral. However, free-market economists would argue that the public sector would fail to pick companies efficiently, and crony capitalism would arise. Instead, setting up a sovereign wealth fund would employ professionals to pick appropriately, still with the financial backing of the central bank through bond issuance. It may even involve the fund taking equity ownership in some SMEs.
One of the main arguments opposing PQE is that of inflation. Doubters look back to periods of hyperinflation in the Weimar Republic following WWI and Yugoslavia in the 1990s. They argue that excessive money printing will increase the money supply so much that an uncontrollable and inevitable inflationary spiral will commence. However, hyperinflation only occurs when the population loses confidence in the currency, which is caused either by unprecedented exogenous factors, such as a world war, or extreme government incompetence, such as the leader of the Serbian province having the Serbian central bank issue $1.4 billion of loans to his companions. Such factors are so severe that they are both uncommon and avoidable. Hence, PQE will not lead to hyperinflation. It may lead to inflation, but this is the overall objective of the policy decision in the first place. Policymakers restricted by irrational fears of inflation are the root cause of such stagnation seen throughout the world in the past decade.
Another more plausible objection to PQE is the vulnerability of the central bank losing its independence. Central banks are meant to be independent bodies, working separately from the government to pursue different objectives. Hence, they should not influence or interfere with fiscal policy but stick to their monetary policy duties, such as maintaining low inflation and financial stability. While this is a valid argument, the measures proposed can prevent the two parties from a collision. Creating bank accounts at the central bank for each individual and imposing national investment banks are two proposals that prevent the central bank from directly financing government spending programmes. Though some sort of collaboration with the government is inevitable, surely complete central bank independence is worth slightly compromising for higher growth, productivity, inflation, and employment?
Finally, economists also argue that recipients of helicopter money would not spend it. Richard Koo believes that Japanese citizens would turn the money into the police as they have a sense of right and wrong. Though, it is hard to believe that people would outrightly reject free money — people even fail to turn in other people’s money left on the streets. He also argues that shops and businesses would not accept payments that have been earned from helicopter drops. Distinguishing between helicopter money and earnt money is not an easy task; it may be impossible. After all, all notes look the same, and identifying electronic forms of helicopter money would only be more challenging. The Ricardian equivalence theorises that people would save money in expectations of higher future taxes. Saving money would have disinflationary effects as spending would not increase. Despite this, behavioural psychologists have proved that humans are short-term thinkers, and when our actions and consequences are spread out over long periods, we act irrationally. Hence, we are tempted to spend now instead of saving for later, which is one of the main reasons we do not save enough for retirement. As a result, spending would increase, and the Ricardian equivalence would not materialise.
To conclude, PQE has multiple benefits for the economy but, more importantly, the people. It is a viable alternative to conventional QE measures that have failed to revive inflation while widening inequalities in society. The main challenge that it faces is implementing it in a way that is effective, fair and abides by current legislation. There is a blurred boundary between monetary and fiscal policy at risk, and crossing the wrong side will be hated by its opposition. Cooperation between the central bank and government is required to achieve PQE’s full potential, and if this involves temporarily relaxing rules surrounding the central bank’s independence, the benefits vastly outweigh the costs. The future is quantitative easing for the people.
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