Monday 22 July 2019

Could free money be the simple answer?

Pumping money into the financial system has failed, says Brendan O'Connor. To revive economies we must give cash to the people

Labour Party leader Joan Burton
Labour Party leader Joan Burton
Brendan O'Connor

Brendan O'Connor

In the poshest hotel in Dublin last week, they told me that they had practically 100pc occupancy the night before. And they have been fairly full for much of the summer. "It was like someone just turned on the lights about eight weeks ago and said to people, 'it's okay'," someone told me. And indeed the lights are on a lot around Dublin - new restaurants, new cars coming out the wazoo. Property booming, unemployment down.

Some sectors of the economy are certainly back at the party. Even austerity seems to be over, with the only question about the budget now being not if to cut taxes, but how to cut taxes.

Of course, the party hasn't restarted for everyone. While unemployment is down again to 'just' 11.3pc, jobs growth has slowed down and in fact unemployment is up in the West, and still running at alarming levels in places like the South East (14.3pc). Overall our unemployment is still roughly twice the level it is in places where governments were less religious about austerity and more enthusiastic about stimulus, like the US and the UK.

The problem in the regions is partially that they do not get the same bounce from FDI and the export economy that Dublin enjoys, and so they are more reliant on the domestic economy to create jobs. Indeed, the vast majority of workers in Ireland work in the domestic economy. And despite headline figures on 142 cars, and despite Dublin's thriving hospitality scene, and despite reports in the Irish Times that breakfast-roll man is back, local economies are still moribund all over the country, mainly because people are still afraid to spend money. Even if people are earning money, they are more interested in paying off frightening levels of debt and hoarding for uncertain futures, rather than spending it.

There is of course a very simple answer to all this. The Government should give these people money and tell them to spend it. This would give a bit more energy to the tentative recovery and stimulate local economies around the country. The money would get passed around among local traders and service providers and everyone would feel a bit better off.

That's not as daft as it sounds. That is effectively what the ECB has been doing for the last while anyway - indirectly putting more money into circulation by cutting interest rates to zero and by pumping money into the financial system. They haven't been handing it directly to Joe Public but they have been putting it into the system in the hope that some of it trickles down to the regular guy. Of course, much of it hasn't. Most of the money pumped into the system has been hoarded by banks to build back up their battered balance sheets. It has also gone into fuelling huge asset booms in stocks and shares and property. This cheap money is flying around the place looking for a home, unable to earn any interest in the banking system, so it's landing in London and Dublin property, government bonds, and stock markets, which continue to hit all time highs, despite the fact that you thought the economy was still screwed.

Instead of taking all the risks associated with cheap interest rates, which we have seen wreak havoc in this country, some people are starting to ask why we don't just give the money directly to people, thereby ensuring it doesn't get side-tracked into bank balance-sheets or asset bubbles.

Eric Lonergan is a Dubliner who works as a fund manager in London. Before you let that put you off, consider that Lonergan is a bit more of a thinker than your average finance guy - a bit of a philosopher if you will. Four or five years ago he even wrote a philosophical tome on the meaning of money, in which he made the point that all these people who hoard money and think of it as something that, in itself, makes you fulfilled, don't understand what money is. In truth, he reckons, money is a social thing, meant to serve us. He kind of equates this to a great delusion people have. "We've an illusion of independence", he said once, "when we're closely connected."

Even back then, when he wrote his book about the meaning of money, Lonergan was arguing that central banks should print money and hand it out to people to spend and to, in turn, create employment. "The big mistake", he said back then, "is to tolerate such high employment - people want to work. This is a failure of the mind."

Lonergan expanded on the idea last week in a piece in Foreign Affairs magazine. He reminded us that giving people free money is not a new idea. Keynes suggested stimulating economies by burying bottles of money in old coal mines, essentially leading to a gold-rush-like economic stimulus when people found it. Milton Friedman advocated, metaphorically speaking, dropping cash out of a helicopter onto happy punters. Indeed Ben Bernanke was nicknamed 'Helicopter Ben' for his advocacy of this strategy to combat Japan's economic stagnation.

Lonergan basically argues that while cutting interest rates is politically the easiest thing to do to stimulate economies, in reality it just feeds into more cycles of boom and bust. It is also a very indirect, expensive and inefficient way of stimulating economies. Most importantly, he points out that there is little evidence that interest-rate reductions increase spending. Have you started borrowing like mad to spend, spend, spend because credit is cheap? Of course not. Once bitten, twice shy and all that. As Lonergan says "Many in the private sector don't want to take out any more loans; they believe their debts levels are already too high."

So the alternative, as he sees it is to "distribute cash equally to all households, or, even better, aim for the bottom 80pc 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." As Leo Varadkar so pithily put it: "Millionaires spend their money on yachts; the middle classes spend their money in shops."

There can be little doubt that the greatest beneficiaries of whatever level of Quantitative Easing that has gone on in Europe have been millionaires, who have used this free money to invest, not just in yachts, but in new asset booms. Lonergan then, is arguing that we should focus fiscal expansion on the people who spend their money in shops. And then the money becomes, in his terminology, a social thing. It gets passed around and local economies grow and employment grows.

Lonergan sees this form of redistribution as an alternative to a wealth tax, which he points out most rich people will manage to avoid anyway. Rather than dragging down the top, he says, governments should try to boost the bottom. And it could be done quickly and instantaneously as required and would provide an instant hit to spending, affecting demand directly, without distorting financial markets and asset prices.

Funnily enough, some of Lonergan's thinking echoes the kinds of things Joan Burton was saying when she was campaigning to become leader of Labour. Burton is all about empowering and boosting the bottom. She sees a bottom-up approach as our salvation, an almost Marxist approach to capitalism. As a woman who seems to keep an eye on big societal and economic ideas internationally, more so than many Irish politicians, she might be minded to give Lonergan a call.

Burton apparently dismissed Eamon Gilmore's notion of a tax credit for families with children last week. She is said to find the idea too complicated and favours tax relief instead as a way to ease things for the coping classes. If she truly wanted to do something radical to restart the parts of the economy that are not buying 142 cars, she might consider leaning on Europe to let us fire up the chopper.

Mario Draghi seems to have finally accepted that the gospel of austerity and the holy grail of the balanced budget may not give us our reward in this life, and inflation is threatening to tip into the negative, so the timing is right for some fresh thinking.

And while there is no doubt that tax cuts buried in our wages will ease people's burden, handing out cash to the bottom 80pc would psychologically feel like much more of a windfall and would be much more likely to be spent and to create jobs. And jobs, as this Government keeps telling us, is what they are all about.

Sunday Independent

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