Instead of QE, the Fed Could Have Given $56,000 to Every Household in America

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Quote:

The Federal Reserve has been conducting a grand experiment since the U.S. economy tumbled into the Great Recession. After the housing market collapsed in 2008, the Federal Reserve lowered interest rates to rock bottom levels in hopes of boosting borrowing and spending. It also went a step further, buying trillions of dollars in Treasury bonds and mortgage-backed securities with the hope of boosting the housing market and therefore the economy. The Fed acknowledged Wednesday that, as the economic recovery slowly builds, the grand experiment is now coming to an end. The Fed’s program of monthly bond purchases is now set to end next month and policymakers are looking ahead to raising interest rates for the first time since 2006. But in an intriguing piece just published in Foreign Affairs, Brown University political economist Mark Blyth and London-based hedge fund manager Eric Lonergan argue the Fed could have done better by pursuing a far different type of grand policy experiment. "Instead of trying to drag down the top, governments should boost the bottom," they write in an article titled: "Print Less But Transfer More: Why Central Banks Should Give Money Directly to the People." The housing market can contribute nearly 20 percent to gross domestic product when it's humming along, but excessive home borrowing and the subsequent overheating of the housing market got the American economy into such trouble in the first place. So instead of policies meant to boost home buying, Blyth and Lonergan contend the Federal Reserve should instead give money directly to people. For the trillions already doled out to the financial sector via those “quantitative easing” asset purchases, every family in America could have been on the receiving end of $56,000. The result, the authors contend, would be an economic boost fueled not by re-inflating the housing market but by consumer spending, which accounts for nearly 70 percent of America's GDP. The risk of higher inflation would be mitigated by the directness of this form of cash transfer: The Fed could turn on or turn off the money spigot whenever inflation seemed a danger. And the Fed would arguably need to print less money than it has spent on QE in order to spur spending because of this same directness. Rather than doling out the money equally across every household in the U.S., giving the lowest income households the lion's share of this cash transfer could potentially reap even greater economic benefits. "Targeting those who earn the least would have two primary benefits," write Blyth and Lonergan. "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." It's perhaps the ultimate populist, monetary-policy proposition, and not exactly a new one. Former Fed chairman Ben Bernanke proposed dropping "cash-from-helicopters" — economist Milton Friedman's term — as a solution to Japan's stagnant economy back in the 1990s, when Bernanke was still a professor at Princeton. And like the conservative Friedman, the liberal John Maynard Keynes was also a fan, proposing a similar scheme back in the 1930s. Because the federal government wouldn't be asking the rich to give up any of their wealth in the form of redistribution via higher taxes, helicopter drops are an idea both the left and the right might embrace. Theoretically, at least. "Ideology aside," say the authors, "the main barriers to implementing this policy are surmountable." But given the country's polarized political system, ideology is precisely the problem, and very likely why an innovative idea like this one will never see the light of day.

Maybe it's just the way this article is written, but something doesn't add up for me. There won't be increases in taxes but people will just get more money!







The following is all just my opinion and speculations, so don't take it as fact and feel free to tear it apart.



Giving money to people does seem better than simply propping up the housing market. I don't buy their "The risk of higher inflation would be mitigated by the directness of this form of cash transfer: The Fed could turn on or turn off the money spigot whenever inflation seemed a danger. " argument. Especially if they are targeting lower income persons. I would think that would lead to inflation specifically on the items that lower income people tend to buy the most of. I'm not sure that giving money to people who will spend it now is the best way to boost the economy either. At least, that would be a very temporary boost. Boosting the middle class an extra $56k would knock out a lot of student debt, mortgages and add to savings which I would think would give a much more lasting economic boost (the interest savings alone would be substantial). I'm obviously not saying you don't give the money to the poor too.

Instead of QE, the Fed Could Have Given $56,000 to Every Household in America