Cash Transfers vs. Quantitative Easing

Below are some excerpts from an excellent article at the Counsel for Foreign Affairs titled "Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People" (It is followed by a few comments).

Ben Bernanke once argued that central bankers could still turn Japan's economy around when the country was suffering from a deficiency of demand: interest rates were already low, but consumers were not buying, firms were not borrowing, and investors were not betting. It was a self-fulfilling prophesy: pessimism about the economy was preventing a recovery. Bernanke argued that the Bank of Japan needed to act more aggressively and suggested it consider an unconventional approach: give Japanese households cash directly. Consumers could use the new windfalls to spend their way out of the recession, driving up demand and raising prices.

As Bernanke made clear, the concept was not new: in the 1930s, the British economist John Maynard Keynes proposed burying bottles of bank notes in old coal mines; once unearthed (like gold), the cash would create new wealth and spur spending. The conservative economist Milton Friedman also saw the appeal of direct money transfers, which he likened to dropping cash out of a helicopter.

Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.

There is no need, then, for central banks to abandon their traditional focus on keeping demand high and inflation on target. Cash transfers stand a better chance of achieving those goals than do interest-rate shifts and quantitative easing, and at a much lower cost. Because they are more efficient, "helicopter drops" would require the banks to print much less money. By depositing the funds directly into millions of individual accounts -- spurring spending immediately -- central bankers wouldn’t need to print quantities of money equivalent to 20 percent of GDP.

The transfers’ overall impact would depend on their so-called fiscal multiplier, which measures how much GDP would rise for every $100 transferred. In the United States, the tax rebates provided by the Economic Stimulus Act of 2008, which amounted to roughly one percent of GDP, can serve as a useful guide: they are estimated to have had a multiplier of around 1.3. That means that an infusion of cash equivalent to two percent of GDP would likely grow the economy by about 2.6 percent. Transfers on that scale -- less than five percent of GDP -- would probably suffice to generate economic growth.

Using cash transfers, central banks could boost spending without assuming the risks of keeping interest rates low.

The most powerful sources of resistance to cash transfers are political and ideological... American conservatives consider cash transfers to be socialist handouts...Those who don’t like the idea of cash giveaways, however, should imagine that poor households received an unanticipated inheritance or tax rebate. An inheritance is a wealth transfer that has not been earned by the recipient, and its timing and amount lie outside the beneficiary’s control. Although the gift may come from a family member, in financial terms, it’s the same as a direct money transfer from the government. Poor people, of course, rarely have rich relatives and so rarely get inheritances -- but under the plan being proposed here, they would, every time it looked as though their country was at risk of entering a recession.

There is no reason governments should not try to end [recessions] if they can, and cash transfers are a uniquely effective way of doing so. For one thing, they would quickly increase spending, and central banks could implement them instantaneously, unlike infrastructure spending or changes to the tax code, which typically require legislation.

Ideology aside, the main barriers to implementing this policy are surmountable. And the time is long past for this kind of innovation. Central banks are now trying to run twenty-first-century economies with a set of policy tools invented over a century ago. By relying too heavily on those tactics, they have ended up embracing policies with perverse consequences and poor payoffs. All it will take to change course is the courage, brains, and leadership to try something new.

Editor's Note: I suggested the EXACT SAME THING earlier this month in one of my other posts about "secular stagnation". But I suppose when the idea comes from notable economists, instead of an anonymous blogger, it gets a lot much more serious attention. And I am so confident that, if "direct cash transfers" were ever implemented, it would be so successful that it could eventfully lead to a "Basic Income" — after robots displace millions of jobs in our future — when human labor inevitably becomes obsolete.

Here's what I had suggested:

Rather than having the Federal Reserve/U.S. Treasury creating billions of new digital dollars out of thin air and "loaning" this new supply of money to the commercial banks (who only reinvests in U.S. Treasury bills and pays themselves huge bonuses), let's take all that new money and create debit cards for $10,000 each* and mail them to every single American citizen with a Social Security number to spend as they wish within the U.S. to create more demand — which in turn will require more supply, which in turn will create more jobs. After the labor pool has absorbed the bulk of the unemployed, we can increase immigration to fill any open jobs and create yet more demand. As Paul Krugman noted: "It’s a demand-side, not a supply-side concept."

* Total cost: Est. $1.7 trillion based on the number currently reported by Social Security as "wage earners" (est. 154 million). Those who are currently unemployed or "not in the labor force" since 2009 (est. 20 million) would also qualify. Those with reported incomes of $1 million or more from the previous year would not qualify. (Note: When purchases are made, a portion of state tax would apply, generating revenues for state budgets as well.)

Sub-Note: The article I excerpted about “direct cash transfers” had also mentioned some critics who feared “deflation” , which is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Economists generally believe that deflation is a problem in a modern economy because it increases the real value of debt, and may aggravate recessions.

But I was thinking about those on fixed incomes, and/or those who don't own homes or don't have much in the way of debt (or are living on a "Basic Income"). Wouldn't "deflation" be a GOOD THING for them? The value of the dollar would be higher, they could purchase more, and rents and food prices would drop. For those people on Social Security and fixed pensions (etc.), wouldn't "deflation" actually be a windfall for those people, as opposed to those (like yacht owners) who might have losses in asset values?