This article first appeared at the McAlvany Intelligence Advisor on Friday, August 29, 2014:
What happens when a college professor meets up with a graduate student from Oxford University, intending to solve the world’s economic problems? What happens when they consider that the previous attempts to revive the economy have failed and their recommendation is to do more of the same?
The title of their resultant article in Foreign Affairs – the premier publication of the Council on Foreign Relations – explains it all: “Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People.” Why two supposedly intelligent individuals would attempt to collaborate in an article that is so separated from the real world and then expect it to be taken seriously is remarkable. To have their work picked up and given prominence by Foreign Affairs is nearly incomprehensible.
Their entire article is simply a restatement and rehash of a suggestion made by University of Chicago Professor Milton Friedman years ago that the tax code include a negative income tax, which Friedman wryly referred to as “helicopter money” – the appellation applied to former Federal Reserve Chairman Ben Bernanke when he proposed similar handouts. But all Friedman and Bernanke were doing was picking up the suggestion from the father of Keynesian economics, John Maynard Keynes himself, who, in the 1930s, proposed burying bottles of bank notes in old gold mines which, once unearthed (like gold), would create new wealth and spur on new spending. Nothing, apparently, succeeds like an old lie that never worked in the first place. Wrote the authors:
Economic growth is stagnating while inequality gets worse. It’s well past time, then, for US policymakers – as well as their counterparts in other developed countries – to consider a version of Friedman’s helicopter drops. In the short term, such cash transfers could jumpstart the economy…. The transfers wouldn’t cause damaging inflation, and few doubt that they would work.
The authors’ worldview is hampered by a false assumption: that spending by consumers drives the economy. In the real world, the economy is driven by the producers who, through a process of experimentation and trial and error, develop things that consumers want to buy. The classic case of course is Steven Jobs’ creation of the iPhone. Consumers didn’t know they wanted it until after he developed it, and now they can’t live without it. The authors try to solve two perceived problems with one solution. The problems are: a stagnant economy and income inequality. Their solution: give away bags of money to the people most likely to spend it immediately, which will have the happy effect of stimulating the economy while eliminating income inequality.
The only problem with that is, it hasn’t worked. The authors referred to the failed experiment called Abenomics in Japan. There, Japan’s central bank “has tried to use its own policy of quantitative easing to lift its stock market. So far, however, Tokyo’s efforts have failed to counteract the country’s chronic underconsumption…. There is little evidence that this policy has increased spending.”
But they have a plan. It’s not a new plan, but the old helicopter trick on steroids:
Central banks, such as the Fed, should hand consumers cash directly…. The government could distribute cash equally to all households or, even better, aim for the bottom 80% of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower income households are more prone to consume so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.
In the alternate universe in which the authors reside, the consumers will spend the free money, the economy will revive, and income inequality will disappear. Mission accomplished.
In the real world, things work differently. These two supposed experts have ignored a fundamental fact of economics: the impact the “velocity of spending” has on the economy. The Federal Reserve calls it the “M1 Money Multiplier,” which has declined to levels not seen for more than 30 years. This is a reflection of consumers’ perceptions that the economy is weak and that it’s better, consequently, to save rather than to spend. As a result, they are successfully resisting all enticements to get further into debt, to buy new homes even in the face of world record low interest rates, and otherwise to behave foolishly with their money as they did prior to the Great Recession. All of this is missing from the learned authors’ treatise in Foreign Affairs.
They avoid any mention or consideration of practical considerations such as: Who gets the money? How much do they get? How long will they get it? What will those who don’t get the money do when they discover they have been discriminated against? What will happen if the initial dispersal of free money fails to stimulate the economy? Will there be a second round of helicopter para drops? A third?
But those are minor considerations. If the authors are able to cause the implementation of their plan to take place, then free money will become worthless nearly overnight. What they are proposing is that the drug addict can be cured from his addiction to cheap money by exposing him to an overdose of free money.
If money becomes worthless, the division of labor in the United States, which has put the economy at the very top of all developed countries, will disappear. The division of labor depends upon a medium of exchange that is limited in quantity, liquid, and readily accepted in exchange for other goods and services. It is a system in which a laborer can exchange his labor for a temporary medium that can then be exchanged promptly for the goods and services that he needs and wants. If the medium is destroyed, so will be the division of labor. The consequences of such destruction are nearly incomprehensible. How many of the 318 million Americans are prepared to be self-sufficient in the event that the money becomes worthless? Some informed writers have suggested that destruction of the division of labor in the United States would cause a 90% depopulation, sending those surviving back to the dark ages. None of this, of course, was considered in this article by the learned elites from Brown and Oxford Universities.
This is what happens when a college professor and an Oxford graduate put their heads together to solve the world’s economic problems. They create a witch’s brew of mischief, craziness, and potential disaster.