A trillion euros of free money – but for whom?

The European Central Bank today announced a €1 trillion quantitative easing programme.

Quantitative easing — printing money to stimulate the economy — is conducted by means of the central bank purchasing assets. This raises the price of assets. Now, assets tend to be owned disproportionately by the well-off. So, in general, boosting the supply of money in this way tends to make the rich richer.

Here’s an alternative idea. Could the money supply be increased in a different way, maybe giving a grant to the poorest people in society? This would stimulate economic activity even more, as they have a higher propensity to spend than the rich (so stimulating economic activity and also returning money to the exchequer) – and a lower propensity to import (so diminishing the “leakage” of such stimulative measures). It would both be fairer and more effective than what is proposed.

It would also respond to one of the biggest criticisms of how the financial crisis was dealt with: handing over billions of taxpayers’ money to the banks, which have continued to pay vast salaries and bonuses. Ordinary people are still paying for this in multiple ways. Is it not time to help ordinary people?

Is giving away free money bonkers? Well, it is what the US Fed and the Bank of England have been doing for bond traders and bankers since 2009. Giving it instead to the general public would not only be much fairer but also more effective.

In Britain, had it been done with the new money created just between 2009 and mid-2012, it would have given a windfall of £6,000 per head (about £24,000 per family) that would have made a real difference to people, whether they decided to spend it on extra consumption (stimulating production in circumstances of unused capacity) or save it and reduce their debts. For government finances, it would have meant increased revenue from the VAT on extra spending and decreased expenditure through the fall in unemployment. And it brings no greater risk of inflation than the QE method, nor a risk of moral hazard, as it is a one-off.

So, how serious is my suggestion? I suppose I’m just asking. But this is not a completely new idea. Remarkably, both Milton Friedman and John Maynard Keynes (although at opposite ends of the spectrum on most economic issues) suggested it. And it has been discussed in the last couple of years by several economic commentators (see articles here, here and here, the latter in French). Perhaps it’s an idea worthy of consideration?

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