Print less and give out more (Foreign Affairs, USA)
Why central banks have to give money directly to people
The decades after World War II were marked by such a long and rapid growth of the Japanese economy that experts called them a “miracle”. The last big boom in 1986 – 1991 in this country raised its economy by almost 1 trillion dollars. But further events clearly resemble our days: the bubble of Japanese assets burst, and market indicators fell into a deep peak. National debt skyrocketed, and annual growth was less than 1 percent. By 1998, Japan’s economy began to shrink.
In December of the same year, a professor from Princeton by the name of Ben Bernanke argued that representatives of the Central Bank could still unfold the trajectory of the Japanese economy. In fact, Japan suffered from a lack of demand: interest rates were already low, but consumers did not buy, companies did not borrow in the financial market, and investors did not want to take risks. The Japanese themselves have brought trouble on themselves: pessimism about the economy has impeded its recovery. Bernanke advised the Bank of Japan to act more aggressively and to take into account the possibility of a non-standard approach - to directly supply Japanese households with cash. Consumers could use an unexpected chance to purchase goods and services, spurring demand and prices and thereby helping to get out of recession.
As Bernanke explained, the idea is not new: in the 1930-ies. British economist John Maynard Keynes proposed to bury bottles with banknotes in old mines; when excavated (like gold), this cash will create new wealth and increase spending. Conservative economist Milton Friedman also considered direct transfer of funds an attractive maneuver, which he likened to throwing notes from a helicopter. However, Japan did not dare to resort to such methods, and the country's economy did not fully recover. The average annual growth rate of the Japanese economy in the period from 1993 to 2003. accounted for less than 1%.
Today, most economists agree that, like Japan at the end of 1990, the global economy suffers from insufficient spending. Difficulties associated with a larger problem - poor management. Central banks, including the US Federal Reserve, aggressively and consistently reduce interest rates, which today are close to zero. They pump trillions of dollars of new cash into the financial system. But such a policy leads only to a vicious circle of ups and downs, distorting incentives and the value of assets. At the same time, the economy is stagnating, and inequality is increasing. Therefore, politicians in the United States, as in other developed countries, should have long thought about Friedman’s proposal to start dropping cash from a helicopter. In the short term, such transfer payments could restart the engine of the economy, and in the long term, reduce the dependence of growth on the banking system and reverse the trend of growing inequality. Transfers will not cause galloping inflation, and few people doubt the success of the strategy. The only question is why no government has used it so far.
Easy Money
Theoretically, governments can support spending in two ways: through fiscal policy (reducing taxes or increasing government spending) or monetary policy (lowering interest rates or increasing money supply). But in recent decades, politicians in many countries have begun to rely almost exclusively on the second method. The shift occurred for a variety of reasons. In particular, in the United States, the divergence of views on fiscal policy between Democrats and Republicans became so obvious that it could not be overcome.
Left and right clashed over whether to increase government spending or lower tax rates. In short, tax rebates and stimulus packages faced more serious political obstacles than shifts in monetary policy, and despite the fact that presidents and prime ministers need approval from legislators to adopt and approve the budget. It takes time; As a result, tax breaks and public investments mainly enrich more powerful lobbies and groups of voters, but do not bring relief to the economy as a whole. Unlike the executive branch, the central banks of many countries are politically independent, and a single conference call is enough to lower interest rates. Moreover, there is no real consensus on how to effectively stimulate the economy through tax regulation or state budget spending.
Steady economic growth from the end of the 1980s to the beginning of the 2000s. as if proving the validity of the emphasis on monetary policy. However, this approach has significant flaws. Unlike fiscal policy, which directly affects spending, monetary policy affects the economy indirectly. Low interest rates reduce borrowing costs and raise the prices of stocks, bonds, and housing. However, stimulating the economy in this way is inefficient and too costly. In addition, there is a risk of inflating dangerous bubbles (for example, in the real estate market), while companies and households are encouraged to increase their debts to dangerous levels.
This is exactly what happened in the period from 1997 to 2006, when Alan Greenspan was in office as the Fed chairman: Washington began to overly rely on monetary policy to increase spending. Observers often blame Greenspan for sowing the seeds of 2008's financial crisis, keeping interest rates too low at the beginning of a new century. However, the actions of Greenspan were nothing more than a reaction to the reluctance of Congress to use the tools of fiscal policy. In addition, Greenspan certainly can not be accused of bad faith. Speaking to congressmen in 2002, he explained how Fed policy affects ordinary Americans: “To keep costs at the right level, very low mortgage interest rates are particularly important, which encourage households to buy housing, refinance debt, and reduce the burden of service debt and stimulate private investment and spending. Fixed mortgage rates remain at historically low levels and, therefore, should continue to spur high demand for housing and support consumer spending through private investment in residential real estate. "
Of course, the Greenspan model suffered a complete collapse when the housing market collapsed in 2008. However, since then nothing has changed. The United States simply paid up its financial sector and resumed the same policy that had created financial bubbles over the years of 30. Bernanke replaced Greenspan at the peak of his academic career and began to pursue a policy of “quantitative easing”, during which the Fed increased the money supply by buying government bonds and mortgage-backed securities worth billions of dollars. Bernanke, pay attention, set a goal to support the prices of stocks and bonds in the same way that Greenspan raised the cost of housing. Both pursued the same goal - to increase consumer spending.
The overall effect of Bernanke’s policies is similar to that achieved by Greenspan. Higher asset prices have spurred moderate cost recovery, but at the cost of a substantial increase in risks for the financial system and huge costs for taxpayers. Yet the governments of other countries have followed the example of Bernanke. For example, the Central Bank of Japan tried to use its own version of the policy of quantitative easing in order to revive the stock market. However, Tokyo has so far failed to overcome chronic under-consumption in the country. In the eurozone, the European Central Bank tried to stimulate spending by making interest rates negative and charging 0,1% for cash deposits from commercial banks. But there is little evidence that this policy has contributed to cost increases.
China is already struggling with the consequences of a similar policy, which it adopted after the financial crisis of 2008. To keep the country's economy afloat, Beijing aggressively lowered interest rates and gave banks the green light to issue an unprecedented amount of loans. As a result, the prices of real estate assets soared, private individuals and financial companies increased borrowing, which led to dangerous instability. At present, Chinese politicians are trying to support total spending while reducing debt burden and stabilizing prices. Like other governments, Beijing seems to have little idea how to achieve this. It is not located to further loosen monetary policy, but it does not yet provide another way.
In the meantime, the world economy may already be dealing with a bloated bubble in the bond market and may soon become a witness of how the same bubble will inflate in the stock market. Housing markets around the world, from Tel Aviv to Toronto, are overheated. Many representatives of the private sector do not want to take more loans, because they believe that their debt is already too high. This is especially bad. news for the management of central banks: when households and businesses refuse to quickly increase borrowing, monetary policy is not able to increase their spending. Over the past 15 years, the major central banks of the world have written off about 6 trillions of dollars from their balance sheets - mainly through quantitative easing and other operations to inject liquidity into the market. However, this did not affect inflation in the developed world.
To some extent, low inflation reflects intense competition in an economy that is becoming increasingly global. Another reason is that individuals and businesses are hesitant to spend money, which leads to high unemployment and low wage growth. In the eurozone, inflation has approached a dangerous zero, and in some countries, such as Spain and Portugal, in fact, deflation has already begun. At best, the current policy does not work and does not bring the desired results. At worst, it will lead to even greater instability and prolonged stagnation.
Shed on them money rain!
Governments must come up with a more effective way. Instead of trying to spur spending in the private sector through asset purchases or interest rate changes, central banks, such as the Fed, should hand the cash directly to consumers. It is necessary to give central banks the right to supply households-taxpayers of their countries with some amount of money. The government could evenly distribute this cash among all households or, even better, supply 80% to the poorest households with money.
Distributing money to the least well-off strata would help solve two problems at once. On the one hand, lower-income households are more likely to consume, so they will provide more consumer spending. On the other hand, such a policy would compensate for increasing income inequality.
Such an approach could be the first significant innovation in monetary policy since the emergence of central banks, and at the same time it would not drastically affect the current status quo. Most citizens already trust their central banks to manipulate interest rates. And the change in rates is the same redistribution as cash transfers. For example, by lowering interest rates, people borrowing money at lower interest rates ultimately benefit, while people who save money and are interested in higher deposit interest to save money lose.
Most economists agree that transfers of cash payments by the central bank stimulate demand. Nevertheless, politicians continue to challenge this idea. At 2012, Mervyn King, who at the time ruled the Bank of England, argued that purely technical transfer payments are related to fiscal policy, which is not within the purview of central banks. Last March, his viewpoint was supported by his Japanese counterpart, Haruhiko Kuroda. However, the arguments depend on what sense is put into them. Distinguishing between monetary and fiscal policies is a function of what governments require from central banks of their countries. In other words, transfer payments will become an instrument of monetary policy as soon as banks start using them. Other critics have warned that such a scattering of money "from a helicopter" can accelerate inflation. However, transfer payments could be a flexible tool. It is enough for bankers from central banks to scale them every time they consider it appropriate, but at the same time raise interest rates to compensate for any inflationary consequences. Although the latter might not have been done: in the past few years, low inflation has been surprisingly consistent, even after several rounds of quantitative easing in a row. Three trends shed light on the reason for this.
First, technological innovations lead to lower consumer prices, while globalization does not allow wages to grow. Secondly, the intermittent panic in recent decades has prompted many low-income economies to increase their savings in the form of foreign exchange reserves - for reinsurance. This means that they spent much less than it could have, which deprived the economy of the necessary investments in infrastructure and increased defense capability, which could create new jobs and push prices up. Finally, thirdly, the increase in the average life expectancy in the developed world encourages some citizens to save more on old age (think of Japan, for example). As a result, middle-aged and elderly people began to spend less on goods and services. These structural root causes of low inflation, which we are seeing today, will only increase in the coming years as competition increases, fears of a financial crisis and the aging population of Europe and America increase. For that matter, politicians should worry more about deflation, which is already worrying the eurozone.
So, central banks do not need to abandon the traditional emphasis on maintaining demand and ensuring inflation targets. But these goals are easier to achieve with the help of transfer payments (moreover, at the price of much lower costs) than by changing interest rates and quantitative easing. When scattering cash "from a helicopter", banks will need to print less money, since such distributions are more efficient. By transferring funds to millions of personal accounts, bankers from central banks will directly stimulate spending, and they will not have to print a huge amount of money, equivalent to 20% of GDP.
The overall impact of transfers depends on the so-called fiscal multiplier or coefficient, that is, on how much the country's GDP grows for every 100 dollars so transferred. In the United States, tax deductions in accordance with the 2008 Economic Incentives Act, which are approximately 1% of GDP, can serve as a useful guide. In this case, the fiscal ratio was approximately 1,3. This means that an infusion of cash equivalent to 2% of GDP is likely to lead to an economic growth of about 2,6%. Transfer payments on such a scale - less than 5% of GDP - may be enough to achieve economic growth.
Let them have cash
Central banks could, by distributing cash, stimulate spending without resorting to low interest rates. But transfer payments only partially solve the problem of growing income inequality - another serious threat to economic growth in the long run. For the past three decades, wages 40% of the poorest segments of the population in developed countries have not increased, and the incomes of the richest grew rapidly. According to the Bank of England, 5% of the richest households in the UK own 40% of the total wealth of the United Kingdom, and today this is a common pattern in the developed world.
To reduce the gap between the rich and the poor, the French economist Thomas Piketty and others suggested introducing a global tax on wealth. But such a policy would be impractical. On the one hand, the rich may use their political influence and finances to prevent the introduction of this tax or not to pay it. They are already holding offshore, beyond the reach of national treasuries, assets worth 29 trillion dollars, and the new tax will further accelerate capital flight. In addition, most of the tax payers - 10% of people with the highest salaries - can not be called rich. Usually, most of the highest income households are represented by upper middle class people, but they are not super rich. Further tax burden of this group of people will be difficult to justify by political arguments and, as the budget problems of France show, this does not bring financial benefits. Finally, capital taxes will discourage private investment and the innovation sector.
There is another way: instead of lowering the top, governments could pull up the bottom. Central banks can issue debt obligations and invest the proceeds in the global stock index of shares - a number of investment instruments, whose value rises and falls with the market - and keep profits in sovereign wealth funds. The Bank of England, the European Central Bank and the Fed already own assets whose value exceeds 20% of their countries ’GDP. Why not invest these assets in the most attractive stocks on the world market in the interests of its citizens? And after 15 years, distribute the funds earned between the 80% of the poorest taxpayers of their countries through the funds. Transfer them to personal savings accounts of citizens, not taxable, while governments could impose simple restrictions on the possible use of this capital.
For example, it would be worthwhile to require beneficiaries to save these funds in the form of savings or use them to pay for education, pay off debts, open their business or invest in real estate. Given these limitations, recipients will consider transfer payments to be an investment in the future, rather than a win on the lottery. Moreover, a long-term increase in the well-being of the poorest segments of the population would be ensured and, accordingly, inequality reduced.
And much better - it would allow self-financing. Most governments today issue debt at a real interest rate close to zero. If they collected capital in this way or liquidated their current assets, they could have obtained a 5% return by the most conservative estimates, taking into account historical profitability and current estimates. And thanks to the compound interest effect, the profit from investing these funds over 15 years could reach 100%. Suppose the government issued debt in the amount of 20% of GDP at a zero interest rate, and then invested the proceeds in the global stock index of shares. After 15 years, it could pay off bonds and transfer profits to household accounts. This is not alchemy, but a policy that allows you to get the so-called stock risk premium. The excess return that investors receive in exchange for risky investments works for everyone.
More money - less trouble
In the present state of affairs, the monetary policy pursued by the authorities is hardly disputed except for the proposals of Keynesian economists, such as Lawrence Summers and Paul Krugman, who call on governments to spend money on infrastructure projects and scientific research. Such investments, argue the teaching, create jobs and make the US economy more competitive; Now is the perfect time to raise the funds needed to pay for these projects, because governments can borrow money for 10 years at a real interest rate close to zero.
The implementation of such proposals is faced with the fact that it takes too much time to revive a sick economy with the help of infrastructure spending. For example, in the United Kingdom, politicians took years to reach an agreement to build a high-speed railway, known as HS2, and it took no less time to approve a plan to build a third runway at London Heathrow Airport. There is a real need for such large and long-term investments, but haste is inappropriate here. Ask Berliners what they think about the new airport, in which there is no need and for which the German government intends to spend more than 5 billion dollars, although the construction work is five years behind schedule. To a certain extent, governments need to continue to invest in the creation of new infrastructure and research, but in the event of a collision with insufficient demand, the problem of stimulating spending must be solved quickly and directly.
If the distribution of cash is such an obvious and necessary measure, why did nobody try to implement it? The answer lies partly in the historical tradition: many of the central banks created at the end of the nineteenth century were designed to perform several basic functions. This is a currency issue, providing liquidity to the government bond market and overcoming panic in the banking market. They were mainly engaged in the so-called open market operations - buying and selling government bonds in order to provide banks with liquidity, as well as determining interest rates in the capital markets. Quantitative easing, the last modification of the bond buying function, stabilized the money markets in 2009, but was too expensive because we could not achieve significant economic growth.
The second factor explaining the reluctance to abandon the old ways of doing business is the balance sheets of central banks. According to traditional accounts, banknotes and reserves are a liability. And if one of these banks made a transfer of cash over existing assets, technically it would mean a negative net worth. But there is no need to worry about the creditworthiness of central banks - after all, they can always print more money.
Political and ideological objections to transfer payments of cash - this is what primarily hinders the resort to this method. For example, in the United States, the Fed strongly opposes legislative innovations affecting monetary policy because it fears that Congress will restrict its freedom of maneuver during a future crisis (for example, it will try to prevent the provision of emergency financial assistance to foreign banks). Moreover, many American conservatives consider the distribution of cash by socialism in its purest form. In Europe, where, it would seem, there is a more fertile ground for such a policy, the Germans fear of inflation, which prompted the European Central Bank to raise interest rates in 2011 at the height of the strongest recession with 1930, says that Distribution of cash in Europe, too, abound.
However, those who do not like the idea of distributing cash, it is enough to imagine that poor households unexpectedly received an inheritance or tax benefits. Inheritance is the transfer of wealth that the recipient does not deserve. However, the time and amount of the inheritance received is not subject to control by the beneficiary. Similarly, direct transfer payments from the government, translated from financial terminology, are the same as a gift made by a family member. Of course, the poor rarely have wealthy relatives and rarely receive large inheritances, but according to the plan proposed by the author of this article, they could receive cash into their account whenever their country risks recession.? Unless one supports the view that recessions are necessary to heal the economy or are well-deserved punishment, there is no reason why governments should not try to get out of recession if they can, and giving cash is a unique and effective way of achieving the goal.
On the one hand, expenses would quickly grow, and central banks could instantly take advantage of this, without resorting to infrastructure costs or changes to the tax code, which usually require the approval of legislators. And in contrast to lower interest rates, transfer payments directly affect demand and do not have side effects such as financial market distortions and distorted asset prices. It will also reduce growing income inequality without inconveniencing the well-off.
Apart from ideological prejudices, the main obstacles to the implementation of this policy are completely surmountable. And the time for such innovations is long overdue. At present, central banks are trying to manage the economies of the 21st century with the help of tools invented more than a hundred years ago. Relying too heavily on these tactics, banks pursue a policy fraught with adverse consequences and low returns. To change the current course, you need courage, innovative thinking and leadership that is not afraid of innovations.
Mark Blythe is a professor at Brown University and the author of Savings and Thrift: A Story of a Dangerous Idea.
Eric Lowergan is a hedge fund manager in London and the author of Money.
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