After the prime minister’s announcement that the NHS would be given a large boost in funding only partly paid for by taxes, some backbenchers called for fiscal responsibility. For them it is paramount that a government should live within its means and avoid increasing the budget deficit. And yet they have nothing to say about monetary policy.
Quantitative Easing (QE), the creation of money out of thin air by the Bank of England, with the intention of boosting demand has been carried out in a manner highly beneficial to owners of existing assets. The Bank’s website explains how it works. It buys bonds from the private sector with money that did not previously exist, with the intention of raising the price of assets, including shares, domestic houses, and commercial property, which by definition lowers yields. Borrowing not only becomes cheaper but the ‘wealth effect’ of higher asset values leads owners whose houses and shares are now worth so much more to increase their spending, creating demand for goods and services and increasing employment.
QE has worked, but as Andy Haldane, the chief economist at the Bank of England has repeatedly shown, the main beneficiaries have been people who already owned assets before QE started. The wealthy have got a lot wealthier. It is true that there are many more jobs to go round, which helps everyone, but the incomes of the majority have stagnated while asset prices rose.
Now that ending austerity is firmly on the policy agenda, MPs need to consider not just the fairness of taxing and spending but also whether a different type of QE would spread its benefits more widely. The main alterative goes by the name ‘helicopter money’, following a famous quip by Milton Friedman that governments can always end deflation by printing dollar bills and dropping them from a helicopter. Such an approach would produce a more equal distribution of additional spending power than buying bonds to pump up asset values.
A practical application of the ‘helicopter money’ approach could take the form of a tax holiday – no one pays income tax for a month. Or, freshly-created money would be used for the direct funding of public services. For example, invented money could be used to pay for more doctors and nurses. The ‘transmission mechanism’ for the additional money would be via the salaries to medical staff, who would spend and increase total demand.
Some see direct monetary finance of public services as heresy. But monetary policy is not a purely technical question. Asset-based QE unfairly benefits the already wealthy. Expenditure-based QE would spread its benefits to far more people.
Direct monetary finance of public services is considered dangerous by some chiefly because it can lead to inflation. If used recklessly it could create runaway inflation, as it did recently in Zimbabwe. But in the UK we all want to avoid high inflation. We do not face a choice between heresy and responsibility in fiscal and monetary policy, but between two kinds of QE: one that unfairly advantages the rich and another that raises the spending power of the majority.
What might such a policy mean in practice? At present when bonds held by the Bank of England mature new ones are purchased. Instead, the Bank could allocate that money to the NHS. It could go one step further and sell bonds to the private sector and then use the proceeds to finance the NHS, leaving the money supply the same.
This is now the choice we face. Claims that a government should live within its means ignore the fact that Quantitative Easing, which we have all come to accept, is a way of living beyond what a government can achieve with the proceeds of taxation alone. The real choice is between good and bad ways of living ‘beyond our means’: one that disproportionately benefits the wealthy few, or one that benefits the majority, while improving our neglected public services into the bargain.
David Green is Director of Civitas