Go households, go hard, go QE for the people

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(Cartoon by Tom Toles via

'People’s QE' has the potential to stimulate demand in a lagging economy without many of the downsides of excessively low interest rates, writes Andrew Warrilow.

Despite some signs of insipid growth emerging, the IMF last week warned of a global economy mired in persistent and low economic growth, increasing levels of unemployment and poverty world-wide. Economic growth in emerging economies continues to be revised down, but low growth rates are not confined just to the developing world. Europe has only just managed a return to economic growth. Japan has been in the economic doldrums for decades, ever since the "lost years" of the 1990s. The United States is growing relatively strongly, but its most recent 1.5% growth is hardly anything to write home about. We can and should be doing better.

It’s the same story in Australia, too, as the investment-fuelled growth spurt from the mining boom sputters to a halt. In the second quarter of this year, economic growth in Australia fell so close to zero it started talk of a potential recession. More than seven years after the economic crisis triggered by the Sub-Prime Crisis, the world is stuck in a low growth track. So is it possible that the problems being experienced by these many and varied economies have a common thread?

In response to the financial crisis in the United States in 2007-8, central bankers lowered interest rates around the world in an attempt to bolster bank balance sheets, but also to stimulate growth following this economic shock. Since then, we have been reminded again that monetary policy is a wonderful tool for reducing demand but not quite so effective when it come to boosting demand. In the words of Keynes, at times of low demand, using monetary policy to boosting an economy is like 'pushing on a string'. Another metaphor might be trying to accelerate a car by taking one’s foot off the brakes. Indeed, much of the funds deployed in the most extreme form of monetary policy used  by the authorities – quantitative easing (QE) – has sat in accounts at banks unwilling to lend the money out to borrowers.

Yet despite the lacklustre stimulus to the economy that it provides, we live with many adverse effects of loose monetary policy. Excessively low interest rates promote speculation rather than productive investment  Low interest rates encourage the public to take on debt which could potentially lead to onerous interest payments taxing future growth and leading to asset inflation which exposes our financial systems to excessive risks. Do we have to settle for low growth and the many unwanted adverse effects of an economic system over-reliant on loose monetary policy to stimulate demand? A growing body of people believe it is time to take a serious look at alternatives.

In the United Kingdom, the Labor Party leader Jeremy Corbyn has proposed People’s QE. In this proposal, the UK central banks would print money and loan it to a national investment bank which would use the funds to invest in infrastructure. The country would correct falling demand and get badly needed bridges, railways and roads built in the process. Sounds good so far, but are there any problems with this approach? Admittedly, printing money to put into building roads and railways is attractive to nation-building types but this style of People’s QE opens up many potential downsides. Firstly, governments can abuse this power by spending the money for pork barrelling. Also, as the funds will be raised more easily and not in the usual painful manner, the odds that they will not be used efficiently are increased.

However, let’s not dispense with People’s QE just yet. Another group of thinkers has proposed an alternative version of People’s QE, whereby payments would be made by the central bank using printed money directly to households. This is not as radical as it sounds. In fact, a similar approach was employed by Australia’s RBA during the financial crisis. During times of insufficient demand, central banks could utilise such measures, but only to the extent that inflation began to emerge.

Direct payments to households would stimulate demand without creating the potential problems involved with Jeremy Corbyn’s approach, such as pork-barrelling or inefficient spending by the government. It would mean that governments would still have to pay attention to the fiscal discipline of using taxpayer funds or funds, which need to be borrowed and hence payed back. It would be attractive because it would be expansionary without the economy incurring debt. In fact, such a measure may result in decreased debt relative to the economy, as higher economic growth rates would reduce the size of debt in an economy as a proportion of GDP. It would be less costly . It is estimated that, due to greater utilisation of funds by consumers, an injection into the economy equivalent to 3% would lead to a 1% increase in economic growth. Now, compare this to the 20% of GDP which standard QE makes up for the same effect. Lastly, it should be pointed out that such as measure would NOT be inflationary, as central banks would still be subject to their usual inflation targeting.

One potential issue with this proposal is that people may end up banking a good portion of the payments. So, to get better use of the funds, a short time limit to use the funds could be imposed. For the same reason, payments should be large and intermittent. Central banks could even issue a kind of credit card to taxpayers to ensure efficient and low cost regular use of the system.

In the predicament we currently find ourselves in, insufficient demand is more than just that. Insufficient demand means a farm or mine in Australia not in full production; insufficient demand means factory workers in China unnecessarily laid off; it means less tax revenue collected and less government services delivered than would otherwise be the case; it means potential wealth foregone for all of us.

Such a measure to increase demand should become part of the arsenal of central banks and deployed regularly. People’s QE has the potential to be an effective tool for central banks to plug holes in demand in an economy where and when they emerge without many of the downsides an over-reliance on excessively low interest rates brings. We now have the technology to make this a reality. Let’s do it.

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