Putting money in the hands of people without creating more debt
People need money. That is the purpose of the Fed’s loose monetary policy. But there is no transmission mechanism that gets money into the hands of people.
Money is predominantly created in the economy through loans and credit from banks. Banks have to make loans or extend credit in order for people to have more money, more liquidity, in their hands. Banks simply have not been making enough loans to sectors of the economy where the money will end up in people’s hands.
People could have more money if their wages were increased in real terms. However, real wages are not increasing. Increasing wages is much better than extended credit for consumption demand, because extended credit is an injection into the circular flow of the economy that must be offset by a leakage. In other words, leveraged consumption will eventually be balanced by de-leveraging. Wages are not a debt, but rather a debt paid to labor for having done work. Labor is then free to consume without compromising future wages. On the other hand, extended credit for consumption eventually leads to a leakage from the circular flow because it is a debt that compromises future consumption by labor.
There are efforts to put money in the hands of people by creating local currencies and mutual credit groups. You can watch two video documentaries about this subject. 1) The Money Fix … 2) 97% owned (from Britain). These two videos contain profound truths about money.
And there is also the Basic Income movement. The idea of a basic income or insured living wage goes back to Beatrice Webb who helped found the London School of Economics. The obvious purpose of a Basic Income is to put money in the hands of people so they can survive, eat, clothe themselves and find shelter. The broader purpose of a basic income is to insure a liquidity foundation in the economy. With a stronger insured foundation for liquidity of people in general, the demand constraints in the economy that I and others write about would not be such a problem.
It is pretty clear that banks can be too big too fail and require liquidity to keep the economy alive. But is it understood that people as a group are too big to fail too? People require liquidity too. The economy is dying because people require more liquidity. I support efforts to increase money in the hands of people that do not depend upon creating debt.
One other source is deficit spending that can add net financial assets to the economy and go directly to hiring/wages. That is what the RX should be right now. It should be done until unemployment gets to 4% and maintain that 4% level until wages go up from a tighter job market. Some inflation would be ok.
Unfortunately, austerity is the RX right now.
Matt
it seems to me it might be important that that deficit spending goes to create jobs for real people. deficit spending to give money to banks, or tax breaks to people who already have more money than they need to spend will … as we have seen … just create debt without putting any money into the economy.
Worse, it provides the bad guys with money to do mischief with.
One way to get that money without creating additional debt – whether private or public debt – is to levy a progressive tax on dividends and capital gains. You could capture several percent of GDP , hitting only those at the top , and transfer it to , say , the bottom 90% , through either tax cuts and credits , or through subsidies – for healthcare , for example.
This would serve to at least partially reverse the redistribution from wage earners to capital holders that has occurred over recent decades , as well as providing a source of additional demand.
That gets you an initial boost , then you can maintain it by making sure that wage share is maintained , i.e. , that wages grow with productivity , across the income distribution.
Unfortunately , we live in a society where the chances of any such policies getting serious consideration are nil.
To coberly’s point, I think the basic idea of deficit spending is often misunderstood. It’s about spending. The deficit is just a resultant. Getting a deficit via tax cuts only works if the money gets spent, and is fr inferior to direct governemnt spending.
Now is the perfect time to correct our nation’s many infrastructure deficiencies.
Look at the immediate post WW II period when Fed Debt/GDP was higher than now. [of course, so were tax rates] What did we do then? The Marshall plan, the space program, the interstate highway system, the war on poverty, medicare, etc
What did we get for it?
America’s golden age, and a strong middle class.
Then Reagan happened.
JzB
People and businesses will hold back from spending when they do not have confidence that they will be able to replace it easily. That means confidence in a steady income: high enough employment to give assurance that a current job is unlikely to be lost, but that, if it is lost, it will not be too difficult to get a comparable job. Pushing money out there — helicopter money or whatever — won’t create that confidence. It will only be used to pay down debt because there is no confidence that it will continue as a revenue stream.
Only direct job creation, and creation of real jobs that won’t be ended as soon as the economy “picks up,” will do that. No temporary make-work. We have neglected infrastructure for over a generation. We have real needs for real work. If we had been doing what we should have been doing, several million more people would have been doing that work all along and the crisis would have been far less. In fact, we wouldn’t have needed an induced real estate and financial bubble to keep employment at the barely acceptable levels we had before the 2008 collapse. Putting people to work on long-term, well-paying and non-outsourceable jobs for projects that will improve the country is the only thing that will really work.
If Republicans are going to make that impossible, then Job No. 1 of the Democrats must be to push as many Republicans out of office as possible, making it clear all along that there will be no improvements until enough Republicans — even the historical “good guys” who are now completely marginalized in their party — are driven out of office. In order to do that, Democrats have to give up any pretense of being Mr. Nice Guys. It is simply a fact that nothing will get done as long as Republicans have any power in Congress. Democrats need to say that enough — hoist them on the petards of their own words — to make it stick. Resignation is not an option.
Replace “money” with “the leverage to access the efforts of other people,” and we see that the flow-of-credit problem is that this leverage must move through approved channels — chiefly employers and banks — from one person to another, rather than directly from person to person.
Those channels are currently flowing very shallowly, resulting in the peculiar situation that although people have all the potential output they ever had, exerting what ought to be considerable pressure on those channels, the channels are strong enough and constrained enough to strangle the potential flow of human effort. They show little interest in expanding their channels (through employment, loans, or payment of taxes which would create more employment) so millions of people are separated from the value of their own effort.
So, setting aside conventional money, in what other ways can human energy be utilized without passing through those channels? Most alternatives are far less efficient than conventional employment, or are illegal – black market, grey market, working under the table, and crimes of various sorts. However, one model would allow more efficient and legal cooperative effort and support — a modified monastic model similar to the Beguinages of the Middle Ages. Whether in town or in a rural setting, a network of such establishments might tap the currently wasted energies of Americans, provide sustenance and support, and loosen the stranglehold of the big economic players.
Ironically, as a necessary side effect such an auxiliary network would make America a much richer and more stable country.
Noni
Yes Coberly, very important that the money be spent on things that create hiring, push unemployment low enough that will trigger wage growth. Unemployment needs to stay low for 2-3 years to get that wage growth, and we can’t freak out if inflation hits 4%.
A comment above points to WWII – we had trade surpluses + large defecit that injected a lot of money into the economy = huge boom.
Matt
we had high inflation in the seventies. And the economy was relatively good. It was the Fed fighting inflation that caused the Reagan recession, which they blamed on Carter… though, to be sure, it was Carter’s Fed that was fighting inflation long after it was dead.
Could you see a change in attitudes if Congress started worrying about fed mortgage balance sheet? Give me control of a mans house I care nothing about anything but golf?