by Stanislas Jourdan | Mar 25, 2017 | Opinion
Spurred by Milton Friedman, the concept of “helicopter money” – under which central banks would distribute money to citizens – is making headway in economic debate, but is often confused with the idea of basic income. This article intends to clarify the distinctions and overlaps between these two concepts.
“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”
When Milton Friedman wrote those lines in 1969, he probably never thought that “helicopter money” would become a buzzword in the 2000s post-crisis era. Friedman’s thinking was indeed quite radically unorthodox. How did the prominent neoliberal advocate come to suggest people should receive free money and that we would all be better off as a result? Far from philanthropic thinking, Friedman was in fact simply trying to illustrate his theory of the neutrality of money. If you need to make more money, you should consider renting out your spare room.
What would happen if we were to drop freshly printed notes over a population from a helicopter, just like rain? Nothing other than inflation, suggested Friedman, one of his main beliefs being that any increase in the money supply automatically leads to a proportional increase in consumer prices. Through this thought experiment, Friedman drew the conclusion that central banks can always avoid deflation by producing money and causing it to circulate in the economy.
In fact, however, the idea that we could create money and distribute it to the people goes back much farther than Friedman. In 1924, British engineer Clifford Hugh Douglas elaborated his theory of the “social credit”, its main component being the distribution of a monthly “national dividend” generated from money creation, the level of which would vary according to national production.
Although Douglas did gain some notable following at the time, especially in Canada, the idea was ultimately consigned to the oubliettes of history, leaving Friedman with the alleged paternity of the idea, centre-staging the helicopter analogy with it.
The concept wasn’t much thought of for 30 years following Friedman’s discussion, however, and it might have been forgotten again if it hadn’t been brought back to public attention in 2002 by one of the most influential voices of monetary policy. In a famous speech, the Federal Reserve chair Ben Bernanke alluded to this concept, making the case that, under important deflationary trends like that seen in Japan, the central bank could resort to helicopter money-style instruments to achieve its 2% inflation target.
Yet, far from initiating serious consideration, these remarks only caused Bernanke to endure mockery and “helicopter Ben” as a persistent nickname.
This is probably because the concept runs counter to the whole ideological turn of the 20th century in terms of monetary policy. Starting from the 50s, money creation has been gradually shifted from the sphere of public sovereignty into the quasi-monopolistic realm of the private banking sector. This process ultimately resulted in the outright prohibition, in most jurisdictions, of monetary financing of government budgets. Helicopter money sounds very much like a reversal of this trend, and a dangerous one to the ears of many mainstream economists.
An alternative form of money creation
There is recurring confusion around the exact meaning of helicopter money, which is probably caused by the simple fact that the alleged proponent of the idea, Milton Friedman, never seriously intended to implement it.
Thus, the concept finds itself often described in very diverse terms, ranging from the old-fashioned monetization of public debt to its purest form (and probably the one Friedman actually had in mind): the distribution of money directly to all citizens by central banks. The latter will be the one we assess in this article.
Helicopter money can thus be defined as the creation of money, without corresponding assets, and its distribution into citizens’ bank accounts.
It is therefore an alternative form of money creation, which is strictly different from the most common way in which money is created today: through the banking sector’s credit issuance functions. It is worth clarifying this point here: as the Bank of England has clearly demonstrated, today’s monetary supply is almost entirely controlled by private banks issuing credit into the economy. This is sometimes referred to (somewhat misleadingly) as the “fractional reserve banking system”. Although the benefits and pitfalls of such an arrangement are subject to never-ending controversy between academics, the way in which this system functions is nowadays largely undisputed.
Money tree sculpture in front of the Central Bank of Ireland.
The key advantage of helicopter money resides precisely in the fact that it would bypass banks as money creators, and is therefore one way for the central bank to maintain the money supply regardless of whether banks play their role as suppliers of money into the economy. In its purest form, helicopter money also bypasses governments’ treasuries, and is therefore not legally prohibited under the monetary financing rule (Art. 123 of the EU Lisbon Treaty).
A second clarification is also required at this point: helicopter money is also different from the so called “quantitative easing” (QE) policies that have been implemented by several central banks, although they pursue a similar objective: boosting the money supply to avoid deflationary pressures.
Under QE, central banks create money (the so called central bank’s reserves) and mobilize those reserves to purchase financial assets on a large scale and over a certain period of time. Usually, central banks purchase sovereign bonds with the intention of pushing down interest rates on those bonds, to encourage the financial sector to move away from investing in sovereign bonds and to instead lend money to riskier projects under the so-called “portfolio rebalancing effect”. This type of money creation is therefore targeted to the financial sector, with assets as collateral on the central bank’s balance sheet and, more importantly, is a temporary operation: the central bank destroys the money once the bonds it holds come to maturation.
Helicopter money is therefore very different from QE. In fact, it is precisely because of the many shortcomings of QE that helicopter money is being presented by a growing number of people as a superior alternative.
Helicopter money as an alternative to quantitative easing
The assessments of QE programmes in the US, Japan, and the UK have been subject to a wealth of contradictory conclusions. In Europe, the ECB’s QE programme was first applauded as progress, after years of speculation and resistance to implementation of QE when it was desperately needed – when the Greek crisis hit. However, it is becoming clear that QE recipes, in Europe and elsewhere, never really do the trick.
Generally speaking, QE does cause lending conditions to improve, but it does not automatically lead to an increase in bank lending. In other words, the “transmission channel” of monetary policy does not work so well under QE. To be fair, this is not the banks’ fault: there is little banks can do when conditions are so bad that virtually no companies or households want to take on debt because the economy is already over-indebted.
Economists talk of a “liquidity trap” whereby injections of cash into the private banking system by a central bank fail to stimulate the real economy. QE doesn’t overcome this trap.
Even worse, QE is often accused of creating asset bubbles and increasing wealth inequality, because the massive injection of money is narrowly targeted towards financial asset disproportionately owned by the rich. The Bank of England itself estimates that its own QE programme has increased by 40% the wealth of the richest 5% of Brits.
Against this background, helicopter money is experiencing a comeback, perhaps with even more strength than Friedman could ever have imagined. Since the start of the crisis, prominent economists and commentators, including Martin Wolf, Steve Keen, Anatole Kaletsky, Willem Buiter, Adair Turner, John Muellbauer, Bradford Delong and Martin Sandbu, have advocated for central banks to implement some form of helicopter money. Anatole Kaletsky and Steve Keen almost simultaneously proposed re-branding the concept “QE for People”, which later became the name of a European campaign (for which the author currently works).
Conference about “Quantitative Easing for People” at the European Parliament
The case for QE for People is quite straightforward: since the banking sector is not currently able to “transmit” the central bank’s monetary policy accommodation by increasing their loan’s issuance, why shouldn’t the central bank do it by itself? If the main task of central banks is to maintain inflation at around 2%, certainly the most effective way would indeed be to distribute money to people so they can spend it.
The debate on helicopter money took another turn when it was mentioned by the ECB’s chief Mario Draghi, under the spotlights of a press conference on March 9th 2016 and later by other senior ECB officials. “Helicopter money is a very interesting concept” Draghi said, while adding that the idea was not yet being considered by the ECB. Whether one think this was sincere curiosity or a clumsy statement on Draghi’s part, the fact is this single sentence provoked a historic tide of comments and debate on the idea, including within policymaker spheres.
How about basic income?
Similarities between helicopter money and basic income have led some commentators to offer very confused explanations, claiming, for example, that Finland was already undertaking a “helicopter money” programme (the basic income experiment).
Undeniably, there are resemblances between the two concepts, as both involve making unconditional payments to all citizens and usually without means-testing. Basic income’s principles of universality and unconditionality can also be found in helicopter money.
Key differences quickly emerge under careful analysis, however. Under a helicopter money regime, there is no clear commitment from the central bank to make payments periodic. Quite the contrary in fact, as most proponents of helicopter money (read the prolific Eric Lonergan for example) are keen to be clear on the fact that this should be an exceptional measure, to be used on a one-off basis, with the possibility (but not the commitment) to renew if necessary.
There is nevertheless some theoretical overlap with basic income. In addition to Douglas, several key advocates of basic income have put forward the case that money creation could be used to finance the benefit, either as a “boot” phase or as a way to supplement the fiscal means to finance basic income schemes. The French economist Yoland Bresson made the case that perpetual low interest sovereign bonds could be used to kick off the basic income in a first stage, thus leaving time for the government to implement all the necessary reforms of the tax-benefit system to make UBI fully functional.
These theories relate to the understanding of basic income as a mechanism of pre-distribution (as opposed to redistribution), whereby basic income is a recognition of the intrinsic value of all participants in society, or even as common inheritance. If all citizens create value “because they exist”, then it makes sense to “pre-validate” this economic value using money creation. If we are all richer today because of our predecessors’ work and heritage, then one can argue that more money should be introduced into circulation to recognise this added wealth.
These are, however, only marginal justifications today, put forward to support neither helicopter money nor basic income. Beyond some theoretical common ground, the differences between the two policies are most clear when one understands that they pursue different objectives.
Put simply, helicopter money can be framed as a punctual measure (extreme, one may say) with a rather narrow purpose: to stimulate economic activity by boosting people’s incomes under some strict circumstances, that is, when the economy is under threat of deflation.
Basic income, on the other hand, pursues a very wide range of objectives from poverty alleviation to work emancipation, gender balance incentivization, social protection modernization, more aggressive redistribution and so on. In contrast, stimulating people’s purchasing power is certainly not the main argument for doing basic income.
From those different objectives also stem different institutional frameworks. If the objective of helicopter money’s proponents is merely to stimulate demand, then transfers to citizens is only one practical means by which to achieve this single clear goal. From this viewpoint, it also makes sense to give independent central banks the legal capacity to distribute a citizens’ dividend as a new instrument in the monetary policy toolbox.
If basic income pursues more numerous and complex objectives, by contrast, it then makes sense that it should be the responsibility of elected governments to design and implement it, just like any other fiscal policy.
In conclusion, helicopter money could be seen as one of many “partial basic income” proposals: schemes that share some of the characteristics of basic income but not all of them. Yet given the very clear institutional distinctions just covered, it does not make sense then to associate too closely the two concepts. In this light, it might be more meaningful to refer to helicopter money payouts as “social dividends” or “monetary dividends” as opposed to “basic income”.
Can helicopter money lead to basic income?
Despite all the institutional and practical distinctions drawn above, it is quite enlightening to recognize the political porosity between the two proposals. Helicopter money proponents tend to also favor basic income (though not all do) and vice versa.
This is probably because the two ideas, to some extent, share some common strategic interests and help one another in the struggle for cultural acceptance of each proposal, especially in regards to unconditionality and the disconnection of money from labor.
From a basic income viewpoint, the rise of the helicopter money discussion is a useful addition to basic income’s financing question. If central banks can create money, then surely it would be easier to finance a basic income.
On the other side, it is also convenient for helicopter money proponents that the basic income discussion is making headway in the argument for universal payments to citizens: it levies an important moral blocage.
Even more strategically, perhaps, there is a case for seeing helicopter money as a necessary step to the implementation of a full-fledged basic income policy.
This is a particularly relevant argument when it comes to the European Monetary Union, which is currently deprived of any significant common fiscal policy. Because of this, it will probably take years before we might see something like a eurodividend (an EU basic income scheme financed by an EU budget) as articulated by Philippe van Parijs.
Speech by Philippe van Parijs on the Eurodividend at the European Social and Economic Committee in Brussels.
To circumvent this cumbersome and very long-term political route, Slovenian economist Jože Mencinger has repeatedly suggested the use of helicopter money as an “ideal experimental possibility” to kick-start a form of basic income in the EU.
Instead of QE, the ECB could start a helicopter money scheme by giving 200 euros per adult citizens for one year – no strings attached, no taxes involved, simply courtesy of the ECB’s (digital) printing presses. This would involve about three times less money printing than under QE and yet would be more likely to fulfill the ECB’s objective.
If this works and garners favorable public opinion, there would be even greater political momentum for implementing something like a permanent eurodividend scheme. The ECB’s temporary scheme would allow some time for EU policymakers to create the institutional and fiscal infrastructure for such a eurodividend to be functional.
In the long run, nothing forbids us from thinking that the ECB could permanently fund such a eurodividend scheme at a certain level, as Kevin Spiritus and Willem Sas have sketched. Yet such funding cannot be seen as an obligation for the ECB under the current legal framework. More intellectual debate will be required before policymakers come to the conclusion that some form of permanent helicopter money is necessary and desirable.
There is still much work to be done before either basic income or helicopter money can be put in place. However, 10 years after the financial crisis, it is clear that central banks’ models have not delivered as they were expected to. There is clear mismatch between the massive size of their balance sheet interventions and the bleak outlook of the economy.
There is a growing case that the whole central banking theoretical framework must be revised. Helicopter money is certainly one idea that is usefully challenging the monetary policy status quo. It will surely take another leap of determination and audacity for central bankers to take this step forward, but we should not rule out that it might also be the most pragmatic thing central banks can do at some point in the future. When things get to this point, the basic income movement must stand ready to play its part in facilitating the move towards helicopter money, while making sure to build upon this gigantic central bank experiment towards a permanent and sustainable basic income.
Thanks to Genevieve Shanahan for proofreading this article.
Credit pictures: Courtesy Financial Times; Positive Money, picturesbyJOE, UBI-Europe
by Guest Contributor | May 10, 2016 | Opinion
To tackle spiraling deflationary trends, governments and central banks will soon have no other choice but to resort to printing money and giving it directly to the people.
Article by John Aziz, originally published on azionomics.com under the title “Universal Basic Income Is Inevitable, Unavoidable, and Incoming.”
The last time I saw universal basic income discussed on television, it was laughed away by a Conservative MP as an absurd idea. The government giving away wads of cash responsibility-free to the entire population sounds entirely fantastical in this austerity-bound age, where “we just don’t have the money” is repeated endlessly as a mantra. Money, they say, does not grow on trees. (Only as figures on the screen of a computer).
In this world, universal basic income seems like a rather distant prospect. Yes, there are some proposals, like Finland which is set to start local experiments in 2017 and Switzerland which is holding a referendum on universal basic income next month. I don’t expect the vote to pass. The current political climate is just too patriarchal. We live in a world where free choice is unfashionable. The mass media demonizes the poor as feckless and too lazy and ignorant to make good choices about how to spend their income. Better that the government spend huge chunks of GDP employing bureaucrats to administer tests, to moralize on the virtues of work, and sanction the profligate.
But this world is fast changing, and the more I study the basic facts of economic life in the early 21st century, the more inevitable universal basic income begins to seem.
And no, it’s not because of the robots that are coming to take our jobs, as Erik Brynjolfsson suggests in his excellent The Second Machine Age. While automation is a major economic disruptor that will transform our economy, assuming that robots will dissolve jobs entirely is just buying into the same Lump of Labour fallacy that the Luddites fell for. Automation frees humans from drudgery and opens up the economy to new opportunities. Where once vast swathes of the population toiled in the fields as subsistence farmers, mechanization allowed these people to become industrial workers, and their descendants to become information and creative workers.
As today’s industries are decimated, and as the market price of media falls closer and closer toward zero, new avenues will be opened up. To that end, Canada has seen a surge in startups in recent times. Towns that were once oblivious to people in the country have become a melting pot for fresh Fintech startup ideas. Case in point is this FinFund Media app that aims to simplify getting loans in The Pas for individuals by leveraging the power of local rural communities to send and receive money. Similarly, new industries will be born in a never-ending cycle of creative destruction to keep the economy churning. Yes, perhaps universal basic income will help ease the current transition that we are going through, but the transition is not the reason why universal basic income is inevitable.
Welcome to the world of hyperdeflation
So why is it inevitable? Take a look at Japan, and now the eurozone: economies where consumer price deflation has become an ongoing and entrenched reality. This occurrence has been married to economic stagnation and continued dips into recession. In Japan – which has been in the trap for over two decades – debt levels in the economy have remained high. The debt isn’t being inflated away as it would under a more “normal” rate of growth and inflation. And even in the countries that have avoided outright deflationary spirals, like the UK and the United States, inflation has been very low.
The most major reason, I am coming to believe, is rising efficiency and the growing superabundance of stuff. Cars are becoming more fuel efficient. Homes are becoming more fuel efficient. Vast quantities of solar energy and fracked oil are coming online. China’s growing economy continues to pump out vast quantities of consumer goods. And it’s not just this: people are better educated than ever before, and equipped with incredibly powerful productivity resources like laptops, iPads and smartphones. Information and media has fallen to an essentially free price. If price inflation is a function of the growth of the money supply against growth in the total amount of goods and services produced, then it is very clear why deflation and lowflation have become a problem in the developed world, even with central banks struggling to push out money to reinflate the credit bubble that burst in 2008.
Much, much more is coming down the pipeline. At the core of this As the cost of superabundant and super-accessible solar continues to fall, and as battery efficiencies continue to increase the price of energy for heating, lighting, cooking and transportation (e.g. self-driving electric cars, delivery trucks, and ultimately planes) is being slowly but powerfully pushed toward zero. Heck, if the cost of renewables continue to fall, and advances in AI and automation continue, in thirty or forty years most housework and yardwork will be renewables-powered, and done by robot. Water crises can be alleviated by solar-powered desalination, and resource pressures by solar-powered robot miners.
And just as computers and the internet have made huge quantities of media (such as this blog) free for users, 3-D printers and disassemblers will push the production of stuff much closer to free. People will simply be able to download blueprints from the internet, put their trash into a disassembler and print out new items. Obviously, this won’t work anytime soon for complex objects like smartphones, but every technology company in the world is hustling and grinding for more efficiency in their manufacturing processes. Not to mention that as more and more stuff is manufactured, and as we become more environmentally conscious and efficient at recycling, this huge global stockpile of stuff acts as another deflationary pressure.
These deflationary pressures will gradually seep into services as more and more processes become automated and powered by efficiency increasing machines, drones and robots. This will gradually come to encompass the old inflationary bugbears of medical care, educational costs and construction and maintenance costs. Of course, I don’t expect this dislocation to result in permanent incurable unemployment. People will find stuff to do, and new fields will open up, many of which we are yet to imagine. But the price trend is clear to me: lots and lots of lowflation and deflation. This, ultimately, is at the heart of capitalism. The race for efficiency. The race to do more with less (including less productivity). The race for the lowest costs.
I’ve written about this before. I jokingly called it “hyperdeflation.”
Global Japanization
And the obvious outcome, at the very least, is global Japan. This, of course, is not a complete disaster. Japan remains a relatively rich and stable country, even after twenty years of deflation. But Japan’s high level of debt – and particularly government debt – does pose a major concern. Yes, as a sovereign currency issuer borrowing in its own currency the Japanese government runs no risk of actual default. But slow growth and deflation are stagnationary. And without growth and inflation, the government will have to raise taxes to cover the deficit, spiking the punchbowl and continuing the cycle of debt deflation. And of course, all of the Bank of Japan’s attempts at reigniting inflation and inflating away that debt through complicated monetary operations in financial markets have up until now proven pretty ineffectual.
This is where some form of universal basic income comes in: ultimately, the most direct stimulus for lifting inflation and triggering productive economic activity is putting cash in the people’s hands. What I am suggesting is nothing less than printing money and giving it away to people – as opposed to trying to push it out through the complicated and convoluted transmission mechanism of financial sector lending. This will ultimately become governments’ major backstop against debt deflation, as well as the temporary joblessness and economic inequality created by technological acceleration. Everything else, thus far, has been pushing on a string. And the deflationary pressure is only going to become stronger as efficiency rises and rises.
Throw enough newly-created money into the economy, inject inflation, and nominal tax revenues can rise to cover the debt load. Similarly, if inflation gets too high, cut back on the money-creation or take money out of circulation and bring inflation into check, just as central banks have done for the last century.
The biggest obstacle to this, in my view, is the interests of those with lots of money, who like deflation because it increases their purchasing power. But in the end, rich people aren’t just sitting on hoards of cash. Most of them do have businesses that would benefit from their clients having higher incomes so as to increase spending, and thus their incomes. Indeed, in a debt-deflationary spiral with default cascades, many of these rentiers would face the same ruin as their clients, as their clients default on their obligations.
And yes, I know that there are legal obstacles to fully-blown ‘helicopter money‘, chiefly the notion of central bank independence. But I am an advocate of central bank independence, for a variety of reasons. Indeed, I don’t think that universal basic income should be a function of fiscal spending at all, not least because I think that dispassionate and economically literate central bankers tend to be better managers of monetary expansion and contraction than politically motivated – and generally less economically literate – politicians. So everything I am describing can and should be envisioned as a function of monetary policy. Indeed, what I am advocating for is a new set of core monetary policy tools for the 21st century.
by Guest Contributor | Sep 9, 2015 | Opinion
The Eurozone clearly needs a structural yet flexible central bank policy instrument that can be used to kick-start the economy as and when it is needed. A miniature version of the increasingly popular basic income policy would provide exactly this type of instrument.
By Willem Sas and Kevin Spiritus, originally published in Flemish Newspaper De Tijd, translation by Will Wachtmeister.
Can anyone remember what times were like before the crisis? When “cut-backs” was a word ascribed to the 1990s. When growth rates were healthy and inflation stable. When the benefits of a unified single European currency were still plain for all to see. Memories of those times have been fading rapidly. Especially so with persistent wage stagnation, mounting inequality and interest rates that have been reduced to basically their lowest possible level. Is there really no way out?
A policy response that is often put forward is looser monetary policy, the proverbial printing press. And since 9 March, the printing press has been in full swing in Europe too. Under the established label quantitative easing (QE), the European Central Bank has, after four years of hesitating, begun spending billions on buying up assets. This involves buying up private loans just as much as government bonds. The hope is essentially that this will stimulate both private and public investment.
Unfortunately, QE will not necessarily lead to more economic investment within the European Union. Insofar as public authorities aren’t able – or allowed – to invest, insofar as the financing doesn’t reach businesses and businesses don’t want to take on loans, QE will prove a fruitless endeavour. At the same time, QE could well lead to even more debt: by stimulating the economy through credit creation, it potentially blows more air into the bubbles caused by the most recent crisis. A massive buy-up of bonds and shares will in the end also cause asset-price rises, with the benefits going mainly to larger, wealthier investors.
Helicopter money
This all means that success is far from guaranteed: the approach is fraught with risks and has damaging implications for equality. QE thus does not appear to be the best way forward for Europe. This is why there are economists who propagate a more efficient alternative, the so-called “helicopter money” approach. For as long as the economy fails to recover, newly printed money is simply distributed directly to the general population, as if it were dropped from a helicopter. Research shows that the money would be spent pretty much straight after it’s received, which would restore confidence to invest among businesses. It would also restore business confidence to take on new employees, who in turn respond by consuming more. And so the result becomes a virtuous circle.
But there are drawbacks. Sharing out helicopter money is a temporary measure that can only be adopted in exceptional circumstances. If at some point it transpires that the ECB has gone too far and created a threat of runaway inflation, it is very difficult to remove the newly created money from the economy. This is why there is a clear need for a structural and flexible policy measure which the central bank is able to use to kick-start the economy as and when it is necessary.
A variation on the helicopter theme, a monetary basic income, provides a way forward. Under this scenario, the ECB would distribute an amount of money to each citizen on a monthly basis, calculated as a percentage of average income (the amount therefore varies between countries). Let’s assume for the sake of simplicity that the amount is 400 euros a month throughout the Eurozone. It’s important that the individual Eurozone countries remain responsible for raising the 400 euros – for example by reducing benefit payments or tax allowance levels – whereupon they pay it back to the ECB.
So far, this is a neutral measure that shuffles money around without creating a stimulus. This remains the case except in times of crisis when the central bank increases the monthly payment to, say, 600 euros, until the economy recovers. Meanwhile, each national authority keeps its repayment levels fixed at 400 euros. The ECB thereby ends up printing an additional 200 euros per person per month, and this money is relatively quickly spent. As the economy recovers and growth and inflation figures rise, the basic income can be returned to the neutral level of 400 euros. In cases where the ECB had been too generous, the basic income level could even be lowered temporarily to 300 euros until inflation stabilizes. This would essentially remove money from the economy.
Viewed as a monetary policy instrument for tackling crises, this type of basic income can hardly be considered an indulgence. But there is more to it than that. The approach also does what it says on the tin: it is a miniature version of exactly the sort of basic income which increasingly features in public debate. Supporters claim that a structural basic income would provide a way of dealing with automation, growing inequality as well as the stress and agitation of everyday life. It would also enable people to be more creative and entrepreneurial.
This last point is far from a certainty and in effect represents the biggest drawback of a basic income policy. How many people would actually invest in new skills? And what will happen to the labour supply? There do exist several economic models that simulate the effects of minor reforms but when it comes to the effects of a comprehensive reform such as basic income, we’re very much in the dark.
Income shock
As long as we can’t anticipate the consequences of introducing a basic income, making a case for it will remain difficult. And because the advantages will only really be felt when basic income is set at higher amounts, introducing it step by step is just as problematic.
Here our proposal for a limited monetary basic income offers yet another opportunity. To be sure, we don’t expect an amount that guarantees a dignified life to be introduced from the outset. But our proposal does allow economists to research the effects of a large income shock. When the central bank increases the monthly payment in times of crisis, this will generate a great deal of valuable evidence. As soon as the positive effects are ascertained, the neutral-level basic income can be increased step by step, eventually reaching the point of a fully-fledged basic income.
So we have stronger guarantees of success, less risk, and more equal opportunities to boot. That’s a better idea than quantitative easing for a start.
Willem Sas and Kevin Spiritus are completing their doctorates in public economics at the Center of Economic Studies at Belgian university KU Leuven.
Credit Picture CC Bobby Hidy
by Guest Contributor | Dec 10, 2012 | Opinion
By Gary Flomenhotf
Not everyone follows the actions of central banks, such as the private bank cartel called the US federal reserve (the fed), but you should know what the fed is up to lately: QE3[1] PLUS! See article here. You may know that QE3 is a fed program to purchase $40 Billion in mortgage bonds per month from banks, basically taking crap off their hands and making US citizens pay for it. The latest plan is to add $45 billion in Treasury bonds to that. These are open market operations where the Treasury bonds are bought from banks, thereby increasing the money supply and supposedly lowering interest rates further.
The US Treasury pays interest on Treasury bonds, and the fed supposedly returns most of it to the US government as profit. But the fed only owns a small fraction of the US debt, much of it is owned by foreigners and banks. The government doesn’t get that interest back, and it is the cause of sovereign debt crises, when interest on governments’ debts becomes unpayable.
Just to remind people where the fed’s money comes from, the fed prints it, or nowadays types it into a computer account as a bank balance. Since the US Treasury outsourced the creation of money in 1913, the fed has produced a small part of the money supply directly, and the rest is created through fractional reserves by private banks, about 95%. This is called variously seigniorage, money creation, or monetary supply, which is a sovereign privilege of the state given over to central banks and private commercial banks worldwide. Under 100% reserve requirements, the central bank would create the entire money supply and not commercial banks. The IMF recently published a surprising essay called “The Chicago Plan Revisited” discussing this idea, first promoted by major economists in the 1920’ and 30’s. A trial balloon perhaps?
The Treasury could also issue the entire money supply as interest-free US Notes or bank balances and do away with the central bank entirely. The US Treasury has issued these notes in the past starting with Greenbacks issued by President Lincoln to finance the US Civil War. 100% reserve requirements are essential to end the loss of money creation to banks and the resultant interest paid on every dollar of money in the economy. Banks opposed the Chicago Plan in the 1930’s because it takes away their privilege of collecting interest on money they create from nothing, when they make loans using fractional reserves.
The total of QE3 PLUS is $85 Billion per month. Doesn’t sound like much these days with debts in the trillions, and derivatives in the hundreds of trillions, but let’s figure it out. Take the US population of about 315 million and divide into $85 billion and you get $270 per month or $3240 per year. How would you like that or $12,960 per year for a family of four as a basic income?
The fed is not allowed to finance citizens, states, or municipalities, only banks and the Treasury. And remember that US states are forbidden from issuing “bills of credit” by the Constitution (Article 1, Section 10, Clause 1). For more on this see Vermont currency commons website. Now this reminds me of a joke I heard when Iraq was writing their new constitution after we invaded and instituted “regime change”. “Why don’t they take our constitution, we’re not using it.” Congress is supposed to coin the money supply, not banks, as stated in Article I, Section 8, Clause 5. I see no reason to follow this prohibition since the national government isn’t following the Constitution, but let’s leave it be. States can create public banks, and these banks can issue credit that is not considered an illegal state bill of credit. States could also issue warrants or other IOUs as California has done on two occasions. See currency commons article on California.
The problem in Europe is that countries have given up their sovereign monetary policy when they joined the Eurozone, as US states did when they ratified the Constitution and joined the union in 1789. Even EU countries that haven’t joined the Euro like England, Denmark, and Sweden still let banks issue most of the money with interest, so they are at the mercy of the banksters. I suspect even Iceland, which told the bondholders to take a hike, is still letting banks create all the money with interest. Old habits die hard…
Anyone traveling to the Eastern Caribbean, for example, will find transactions taking place in Eastern Caribbean Dollars, US dollars, and Euros side-by-side without much difficulty. So there is no practical reason for countries to give away their monetary policy to a central authority. It is the interest paid on private money creation that is the problem, not the sovereign monetary authority of individual countries. For more on this see Dr. Margrit Kennedy’s website.
So what would happen if central bank quantitative easing and open market operations were redirected to basic income payments to individuals rather than loans to banks? Let’s not forget that the fed has already issued QE1 and QE2 without much result. QE1 was $1.25 trillion and QE2 was $600 billion for a total of $1.85 trillion. That is $5873 for every person in the US given to banks, in a form of “trickle-down” theory that it will eventually benefit the economy. Don’t you think it would have been more effective to pay directly in a dividend check to citizens amounting to $23,492 for a family of four? A sovereign state or country could issue its own public credit money without interest, and get out of the bankster racket that pays interest on money they create out of thin air. Guernsey did it starting in 1822. Any country or state could do it, and even issue it as an interest-free basic income, trickle-up, not “tinkle-down.”
About the author:
Gary Flomenhoft is an International Post-Graduate (IPRS) and University of Queensland Centennial Scholar and PhD Candidate at Centre for Social Responsibility in Mining. His research area is the economic value of common wealth and governance of Sovereign Wealth Funds.
Prior to enrolling at SMI, Gary was a faculty member for 11 years in Community and International Development and Natural Resources at the University of Vermont (UVM), serving as a Lecturer in Applied Economics, Renewable Energy, International Development, and Public Policy. He conducted many development projects in The Commonwealth of Dominica, St. Lucia, and Belize with students and local partners. He also originated and coordinated the Green Building Design Program at UVM.
He had a secondary appointment as a Research Associate and Fellow at the Gund Institute for Ecological Economics under Director Robert Constanza. His primary research was in public finance for the state of Vermont including green/environmental taxes, common wealth and common assets, subsidy reform, and public banking. His 2013 report on Vermont public banking formed the basis of the “10% for Vermont” legislation passed in 2014, which allocated $35 million of state funds to local investment. He directed the grant funded Green Tax and Common Assets project at the Gund Institute for seven years, where he originated the Vermont Common Assets Trust Fund (VCAT) bill, which was submitted to the legislature twice. His chapter on Vermont Common Assets appeared in the book “Exporting the Alaska Model”, which promotes the Alaska Permanent Fund and Dividend as a model for basic income around the world using Sovereign Wealth Funds.
[1] QE means quantitative easing, a fed policy of purchasing bank securities in order to increase the money supply to encourage additional lending by banks, and lower interest rates
