£50 Billion for the Banks, or £1,000 for Every Adult in the UK?

This week the Bank of England decided to pump an extra £50 billion of electronic money into the UK economy, bringing the total of quantitative easing to a huge £375 billion. Scanning the responses to this I retweeted this suggestion from @andyo:

“Rather than pumping £50B into the banks, the BoE could give each household £2K. Surely that would have more effect?”

In reply, @verygoodservice took it one stage further and proposed making people spend it in the next week. That would certainly boost the economy! Neither Andy nor me is the first to suggest this approach. Simon Jenkins, for one, has written something similar. But why is it not part of serious political and economic debate?

Many years ago I studied Economics at University and I have been wracking my memory cells to remember the theory on this. The general argument against printing money, and giving it to people, is that it causes inflation (by increasing demand without increasing supply). We were taught that a key cause of the inflation of the 1970s was the USA printing money to fund the Vietnam war.

But this argument depends on supply being at its maximum, on factories running at full capacity. Few see much danger of inflation at the moment. Indeed one of the Bank of England arguments for quantitative easing (which is one form of printing money) is that it will ensure inflation does not fall below the target of 2%. And QE certainly has its costs – the money enters the financial system by the purchase of Gilts, which reduces their yield. The result has been disastrous for pensioners purchasing annuities, which are dependent on Gilt yields. In 2008 a £100,000 pension pot would purchase an annuity of £7,855 a year. Now it will purchase just £5,743. That is a 27% reduction.

Share the Money – How Australia Did It

In my Twitter discussion @pubstrat pointed out that the idea of giving away money had been tried, by Australia as the economic crisis began in 2008. This included $1,400 given to single pensioners ($2,100 to couples), $1,000 for every child in 2 million of the poorest families and grants of up to $21,000 to first time house buyers. They targetted the poorest parts of the community, partly on social need but also because they would be most likely to quickly spend the money.

Neither @pubstrat nor myself have been able to find an evaluation of how successful this was. But Australia currently stands out among developed countries. It never entered recession. Its Wikipedia entry notes: “The IMF in April 2012 predicted that Australia would be the best performing major advanced economy in the world over the next two years”, with growth around 3% a year. This contrasts sharply with the effect of the Coalition’s austerity programme in the UK. Perhaps we should learn from a country that seems to be getting it right.

The Australian government found it easy to justify its largesse on the basis that there was a budget surplus, and so the money was taken from tax income. Would it work if the cash came from effectively printing money? There doesn’t seem to be a danger  of inflation so its hard to see the economic argument against. .

Give People Money and See It Multiply

In the Keynesian analysis I learnt it is a lack of demand that causes recession. Give people money, they spend it and create the demand. This in turn creates jobs to meet the demand. But would it be a one-off boost, with the economy then sinking back into recession. One thing I do remember from my university course is Keynes’ multiplier effect. Every £1 injected into the economy generates more than £1 of demand, because part of that £1 spend goes into somebody’s pay packet and they in turn spend a % of it. So build more cars and it generates income for local car parts suppliers, for local shops and much more. If 80% of each £1 is re-spent, and then 80% of that 80p, that £1 eventually creates £5 of expenditure.

What is remarkable about the £375 billion injected in QE is how little effect it has had. Most small business people I know still find it very hard to borrow money from banks, and few are inclined to increase investment anyway due to the uncertainty and lack of demand in the economy. It has been suggested that as much of $50 billion of this money has simply been used to rebuild bank reserves (and keep their bonuses being paid).

If that £375 billion had been put into people’s pockets it would surely have had more effect. Some would have been used to repay debts (though economist Steve Keen argued on Radio 4 this week that this is crucial for recovery, claiming that private debt in the UK stands at 450% of GDP). But a lot of it would have been spent, creating demand and more jobs. And even if we’d have got to the same point, we’d have enjoyed the journey a lot more!

Time for Debate

Let’s have a real debate on this. Would giving people money work, whether £2,000 per family or £1,000 per adult (each about equivalent to the £50 billion of QE announced this week)? Should it be everybody or, as Australia did, concentrated on the most needy?

And, if you were given £1,000, what would you spend it on?

I welcome any thoughts on this. If you doubt the economics, please let me know your argument and questions or point to useful links.

Postscript: Andy Marr Puts the Question to Vince Cable

(Andy Marr Show: 8th July) 

I put the idea to Andy Marr last night at a gathering of old college friends, and he asked Vince Cable the question on his show.

Cable had been talking about the problems of the “anti-business culture” of banks, how the money has not been getting through, and how “appalled” he was, visiting “super companies” in the North of England, with good exports and orders – who cannot get a loan from the bank.

Having acknowledged that the £325 billion given out so far simply hasn’t got through to business his only reason for not giving the money to people instead is that Bank of England Governor Mervyn King doesn’t want to do it that way:

Andy Marr: It might seem a naive question but wouldn’t it have been better simply to take this extra money that is being printed and give it to the people, to spend directly on goods and services, wouldn’t that have got British industry moving better, more effectively, than pushing it through the banks.

Vince Cable: Well there is an issue of demand and the Governor has taken the view that he cannot print money in that way, he wants it to be done in a very rigorous way and that’s the way its happening.

Andy Marr: But that’s not getting through to business.

Vince Cable: Some of it is.

Andy Marr: But not enough

Vince Cable: And had we not done the things we have done, the position would have been a great deal worse. But I think you have posed the correct challenge which is given that our leading banks are frankly throttling recovery by not making business lending available particularly to small scale companies, that’s where the real problem is. We now have to focus single-mindedly on that task, how to make sure that the additional money gets through to British business.

4 responses to “£50 Billion for the Banks, or £1,000 for Every Adult in the UK?”

  1. Better to give everyone on the current electoral role £1000-£2000 each to stop any fraud.Some people would pay off debts,credit cards,overdrafts, Ect (giving banks more capital).
    Some with plenty would save it or invest the money (banks more capital).
    Most people would spend the money on home improvements,car upgrade,new furniture,cloths Ect all getting the economy moving.Even those who spend it down the local pub or restaurant would make a difference.
    Some thing needs to change as the 99% never see any of this quantitative easing money which we and our children will have to repay !!!

  2. It is a simple solution and I can’t see why its not been done, the only reason maybe is perhaps those at the top can’t stomach money bypassing them.

  3. I’ve always been an advocate for this. Even more so – when the bailouts happened in 2008, I believe they should have had application grants for each person to be able to put “their share” towards any debt they currently had.

    ie – I’ve heard numbers of £30,000 for every person in the UK (don’t know if that is a real number).

    However if each person with debts/mortgage etc, were able to apply for £30,000 to pay off student debt, loans, mortgages. The banks would then have received the money they required.
    Every household in the country would have been better of by a large amount, leading to increased standard of living, and more disposable income. This then leads to increased spending in businesses, and an economic boom.

    We know the current system doesn’t work -so we need to think radically differently to make things better!

    I like to think that the previous 4 years would have looked significantly different!

    Even now the £1-2K per person would make everyone a lot better off.

    I’d volunteer to help with the processing to make it happen (as we all know that the “paperwork” would be a reason not to do this!)

  4. Interesting. I’ve yet to meet anybody who doesn’t think this approach would be better! Sarah, the £30k figure is a bit high. If the £375 billion of quantitative easing had been given out evenly, it would have amounted to around £7k per head (based on 50 million people).

    Sorry by the way if there’s some confusion on the figures in the article. Its £1,000 per head or £2,000 per household that is equivalent to the £50 billion given out last week.

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