Better yet, however, might be an option that is gaining traction in Europe: simply issue the money. Alternatively, borrow it from a central bank that issues it, which amounts to the same thing as long as the bank holds the bonds to maturity. Economists call this "helicopter money" -- money issued by the central bank and dropped directly into the economy. As observed in The Economist in May 2016:
Advocates of helicopter money . . . argue for fiscal stimulus--in the form of government spending, tax cuts or direct payments to citizens--financed with newly printed money rather than through borrowing or taxation. Quantitative easing (QE) qualifies, so long as the central bank buying the government bonds promises to hold them to maturity, with interest payments and principal remitted back to the government like most central-bank profits.
Helicopter money is a new and rather pejorative term for an old and venerable solution. The American colonies asserted their independence from the Motherland by issuing their own money; and Abraham Lincoln, our first Republican president, boldly revived that system during the Civil War. To avoid locking the government into debt with exorbitant interest rates, he instructed the Treasury to print $450 million in US Notes or "greenbacks." In 2016 dollars, that sum would be equivalent to about $10 billion, yet runaway inflation did not result. Lincoln's greenbacks were the key to funding not only the North's victory in the war but an array of pivotal infrastructure projects, including a transcontinental railway system; and GDP reached heights never before seen, jumping from $1 billion in 1830 to about $10 billion in 1865.
Indeed, this "radical" solution is what the Founding Fathers evidently intended for their new government. The Constitution provides, "Congress shall have the power to coin money [and] regulate the value thereof." The Constitution was written at a time when coins were the only recognized legal tender; so the Constitutional Congress effectively gave Congress the power to create the national money supply, taking that role over from the colonies (now the states).
Outside the Civil War period, however, Congress failed to exercise its dominion over paper money, and private banks stepped in to fill the breach. First the banks printed their own banknotes, multiplied on the "fractional reserve" system. When those notes were heavily taxed, they resorted to creating money simply by writing it into deposit accounts. As the Bank of England acknowledged in its spring 2014 quarterly report, banks create deposits whenever they make loans; and this is the source of 97% of the UK money supply today. Contrary to popular belief, money is not a commodity like gold that is in fixed supply and must be borrowed before it can be lent. Money is being created and destroyed all day every day by banks across the country. By reclaiming the power to issue money, the federal government would simply be returning to the publicly-issued money of our forebears, a system they fought the British to preserve.
Countering the Inflation Myth
The invariable objection to this solution is that it would cause runaway price inflation; but that monetarist theory is flawed, for several reasons.
First, there is the multiplier effect: one dollar invested in infrastructure increases gross domestic product by at least two dollars. The Confederation of British Industry has calculated that every 1 of such expenditure would increase GDP by 2.80. And that means an increase in tax revenue. According to the New York Fed, in 2012 total tax revenue as a percentage of GDP was 24.3%. Thus one new dollar of GDP results in about 24 cents in increased tax revenue; and $2 in GDP increases tax revenue by about fifty cents. One dollar out pulls fifty cents or more back in the form of taxes. The remainder can be recovered from the income stream from those infrastructure projects that generate user fees: trains, buses, airports, bridges, toll roads, hospitals, and the like.
Further, adding money to the economy does not drive up prices until demand exceeds supply; and we're a long way from that now. The US output gap -- the difference between actual output and potential output -- is estimated at close to $1 trillion today. That means the money supply could be increased by close to $1 trillion annually without driving up prices. Before that, increasing demand will trigger a corresponding increase in supply, so that both rise together and prices remain stable.
In any case, today we are in a deflationary spiral. The economy needs an injection of new money just to bring it to former levels. In July 2010, the New York Fed posted a staff report showing that the money supply had shrunk by about $3 trillion since 2008, due to the collapse of the shadow banking system. The goal of the Federal Reserve's quantitative easing was to return inflation to target levels by increasing private sector borrowing. But rather than taking out new loans, individuals and businesses are paying off old loans, shrinking the money supply. They are doing this although credit is very cheap, because they need to rectify their debt-ridden balance sheets just to stay afloat. They are also hoarding money, taking it out of the circulating money supply. Economist Richard Koo calls it a "balance sheet recession."
The Federal Reserve has already bought $3.6 trillion in assets simply by "printing the money" through QE. When that program was initiated, critics called it recklessly hyperinflationary; but it did not create even the modest 2% inflation the Fed was aiming for. Combined with ZIRP -- zero interest rates for banks -- it encouraged borrowing for speculation, driving up the stock market and real estate; but the Consumer Price Index, productivity and wages barely budged. As noted on CNBC in February:
Central banks have been pumping money into the global economy without a whole lot to show for it . . . . Growth remains anemic, and worries are escalating that the U.S. and the rest of the world are on the brink of a recession, despite bargain-basement interest rates and trillions in liquidity.
Boldness Has Genius in It
In a January 2015 op-ed in the UK Guardian, Tony Pugh observed:
Quantitative easing, as practised by the Bank of England and the US Federal Reserve, merely flooded the financial sector with money to the benefit of bondholders. This did not create a so-called wealth affect, with a trickle-down to the real producing economy.
. . . If the EU were bold enough, it could fund infrastructure or renewables projects directly through the electronic creation of money, without having to borrow. Our government has that authority, but lacks the political will.
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