Why ‘free money for everyone’ wouldn’t help anyone

Last week brought a call from Simon Jenkins writing in the Guardian for ‘proper’ money printing. He reckons that the best way to cope with the lack of demand in the UK economy is simply to give people money and set them free to spend it.

Under his plan we would print £14bn of bank notes and scatter them over shopping streets “the length and breadth of the land.” Those who picked them up would have six months to spend them before they disintegrated and became unusable. Or, if scattering was deemed to messy, we could just hand the cash out in post offices to anyone with ID, ration-book style. Or we could skip the whole cash thing and hand out vouchers instead.

Either way, people would suddenly have free cash and they would spend it. Demand would rise and all would be well: “the remedy for depressed demand is to increase demand, it is as simple as that.”
Might it work? I think you can guess our answer. It might give GDP a little short-term consumption-based blip as people move spending forward, although even that is only a given if people would normally have spent less than the full value of the voucher.

It is also unlikely in a deleveraging economy (such as ours) that it would even increase total consumption over a full year: people worried about the future are likely to use the voucher to bring forward spending – offsetting it by bringing down future spending.

The Japanese tried this in 1999 when I was living in Tokyo (the same year they lowered the target interest rate to zero). The government printed and posted 31 million shopping coupons worth
¥20,000 each to families with children and to the elderly. The coupons had to be used within six months and could only be used in each recipient’s local community.

The idea at the time was that the ‘use it or lose it’ nature of the coupons would do more to stimulate consumption than a straightforward tax cut, the proceeds of which most people were likely to save. In 2009 they did the same – sending out another ¥12,000 to every single resident of Japan (with an extra ¥8,000 for everyone under 18 or over 65).

Various studies have looked at the results. They appear to be pretty marginal. This one concludes that there was no effect at all on the consumption of non-durable goods or on services, and a very small positive effect on the consumption of durable goods.

This one might have a better answer, but my kanji comprehension has deteriorated to the extent that I have no idea what it is.

Either way, a quick ring round of my old Japanese colleagues reveals that none of them remember the policy having any effect at all, and Japan still suffers from what economists consider to be under-consumption.

And what of the other risks? Jenkins thinks that the “the traditional objection to printing money, that it might lead to Zimbabwe-style inflation, is no threat to Britain at present.”

He is right in that it doesn’t look much like we are at risk of very high inflation right now, what with the endless deleveraging of both our public and private sectors. But very fast inflation isn’t so much a function of the amount of money you print, as of how fast it moves around an economy (its velocity). The current velocity of money is slow – people aren’t lending, borrowing or spending. But that can change very quickly indeed.

If people lose faith in their currency it starts to burn a hole in their pocket. They want to spend it quickly – to get goods that might hold some value instead.

The Greeks have lost faith in their currency – there has been a real run on all their banks to the extent that if they were not protected by the euro they would be in hyperinflation. If they default and leave the euro, they will be; as, for that matter, will Portugal.

Money is about confidence. Mostly, people have confidence in sterling (be that right or wrong). But if they actually see money or money equivalents being printed and dumped on their doorsteps, how happy will they feel about the value of the money they already hold?

It is a big risk to take for a very marginal and gimmicky gain – and one that if it helped at all would only help one small part of the economy.

This isn’t the first time Jenkins has suggested the free money for everyone argument as the solution to all our problems – he said the same here in 2008. It would be nice if it were the last.

  • Ellen

    Just to be devious, how about a suggestion on your “use it or lose it” scenario except with money that already exists. If, everyone whose personal wealth exceeds, say, £40 million has to spend or give away everything over the £40 million. Maybe a build a hospital wing, pay for bursuries, give it to the poor. Anything they like. If they leave the country the most assets they can hold here is £40m – or even less for non doms. That might re address some inequalities that have built up over the years and give the ecenomy a kick start.

  • Boris MacDonut

    Surely free money for everyone would create a bit of inflation and be good for those with debts.

  • Alex

    All Simon Jenkins article does is underline the staggering economic naivity of the academically leaning middle class writers and readers of the Guardian.

  • dr ray

    There are bound to be objections to the rich picking up free money so it would need to be means tested. An easier alternative might be just to tax people less and let them spend their own money but that would look bad for government figures because they need the tax income to pay the “Bernanke benefits” . A good wheeze would be to call the benefits “tax credits”. That way benefits could increase increased while simultaneously tax refunds increase.

    Ooh dear, Has this already been done?

  • Segedunum

    Ahhhhh yes, Ben Bernanke’s helicopter drops. Goodness me.

    Inflation is generally good for people with debts, but runaway inflation is not good for anyone because if you have more of something each individual something is naturally worth less. It will also kill savers and people will drop their currency for anything of any remote intrinsic value. Think of images of people sweeping up mark notes in Germany in the 20s. Some people never learn.

  • NeutronWarp9

    Well I guess you have less than £40 million in the bank, Ellen (1); hence your willingness to spend other peoples’ money. Some golden tickets courtesy of HMG would be an idea if coupled with a creatively euphemistic buy British campaign. Perhaps each month we could use Facebook for something useful and choose from a list of 6 or so British items to buy en masse? If we are all in it together, it might help a tad if we start supporting one another as well?

  • Tommy Lawton

    Very well observed Alex.
    The left are very much preoccupied with how the world could or should be rather than how it actually is.
    After 25 years of supporting the left and reading the Guardian I finally saw the light two years ago.
    In terms of the development of my thinking it was a huge paradigm shift.
    I am much happier now in the world of adults than immature dreamers.

  • Ellen

    @Neutron – No, I don’t have even a small fraction of £40m, but plenty of people spend my money – it gets taken from me in tax – so why shouldn’t his lordship dig deeper. Money is useful for most of us to buy goods or services. But if you have tens of millions and still want more, what you get from money is different – I expect its to do with power and control. Only ‘ego’ damage is done by limiting resources to such a person. Hurting the pockets of the average person is likely to impact badly on their physiological wellbeing rather than their ego.

  • Ellen

    An asian woman knocked my door a couple of nights ago. She had with her what looked to be her teenage daughter. She asked me for cleaning work – I could tell her daughter was embarrassed. It is ridiculous that she should be among those expected to pay for the excesses of the city and government, but she is. And then be blamed for taking work from a British person.

    The right might provide better incentives to work, on one level, but it often seems to be reluctant to give moral responsibility to the rich and does not seem to recognize that every person has a right to share in the fruits of our planet.

  • Money Week Reader – but for how long

    Does the email pasted in below reflect the editorial standards of your magazine/site? If not, and I’d be surprised if it did, why is it sent out to your subscribers. It’s an insult to recieve it.
    Dear Money Morning Reader,

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  • Don Masson

    Ellen: I’m not really sure what you mean when you say that everyone has the ‘right’ to share in the fruits of our planet. The word ‘right’ is often used by the left to add a sense of moral superiority to their argument.
    You clearly believe that everyone should share in the fruits of our planet but that’s just your opinion, it’s not an objective fact which use of the word ‘right’ seems to imply.
    The fact that the lady in question could not find work is a signal from the market that she is not providing a good or a service that is demanded by society. It’s unfortunate, but she needs to adapt to her circumstances and provide a good or service which IS in demand. Unfortunately the welfare state removes the need for individuals to adapt which is why we have such a hopeless underclass.

  • Reality Check

    It’s hard for many to accept (possibly the poster included here). But what is actually required IS a full debt jubilee. Where mortgage debt is written off and everyone else without mortgage debt be given an equivalent lump sum of equal equivalent. This will effectively get the country out of it’s mess. The only losers in this scenario will be surprise surprise!! The banks who would go to the wall.
    Professor Steve Keen, who to me is just about the smartest person on the planet right now has suggested it. But perhaps surprisingly law makers and politicians don’t seem to want to entertain the idea. It may have some to do with them having their pockets lined by bankers!

  • Boris MacDonut

    #11 Don Masson. What an appalling thing to say. “Hopeless underclass” contains all the vile sneering of the smug well off. There is no such thing as an underclass. Nobody is destined for the bottom of the pile due to some fallability they have. This is to suggest the poor are to blame for their lot. Worse it implies the fecklessness you perceive is inherited.I am shocked that you suggest the poor should adapt in some Darwinian experiment. Summing up a whole group as less than normal ,even less than human is unacceptable.You should think carefully before spouting what are eugenic and Nazi views.

  • Roberto Birquet

    Simon Jenkins is not particularly typical of the Guardian. And although the Guardian’s main economics writer is far rom the economics of MoneyWeek, he has been highly accurate in his expectations of public policy and their effects. I read the Guardian, MoneyWeek and the FT. Quite rounded. And I have to say the Guardian is better on its economics pages than most elsewhere.

  • Roberto Birquet

    Tommy Lawton
    Simon Jenkins is a Conservative, just with some Keynesian leanings. He’s not Left.

  • Roberto Birquet

    The fact that the lady in question could not find work is a signal from the market that she is not providing a good or a service that is demanded by society. It’s unfortunate, but she needs to adapt to her circumstances and provide a good or service which IS in demand.
    So what should she become Don? Really, I’m curious. A signal to do what? Are we all commodities? What sort of commodity should she be? Do you ever listen to yourself?

  • Don Masson

    The lady Ellen referred to is clearly desperate to find work – hence her door-to-door attempts to secure employment.
    If she is unable to find work as a cleaner then it seems futile to continue to offer this service.
    Retraining to offer a service that is in demand would seem to make more sense – or to offer a diiferent service to cleaning if retraining is not a feasible option.
    No, we are not commodities – the word commodity refers to goods.

  • Don Masson

    Suggesting that individuals should consider which skills are most likely to secure them employment and to stop offering skills that nobody wants is hardly asking them to participate in some ‘Darwinian experiment.’
    I still maintain that over reliance on the welfare state has the tendency to diminsh the incentive to adapt by retraining.
    Britain does have an Underclass viz. a section of society below the Working Class (Marx’s Lumpenproletariat). The word ‘hopeless’ was a poor choice. I should have said that they make little contribution to the economic life of the country due to a lack of skills and training. I don”t believe they are solely to blame for their situation, or that their positon in society is inherited or that they are less than human. In addition, I do not support the concept of eugenics.
    I do not believe that we should return society to the metaphorical jungle but some pressure to adapt to our circumstances is good for the individual and good for society.

  • Ellen

    There is nothing wrong with honest work and the woman I spoke of had a lot of guts. Maybe she needed the cash right now and couldn’t afford the six months it takes to retrain. Although I am sure she didn’t enjoy knocking on doors asking for cleaning work and risking losing her daughter’s respect, for me, her morals are not it question. It is the morals of the greedy and superrich and those who have been charged with the job of looking after national interests of all its citizens (not just the UK) that I am calling into question. @DonMasson – Call it moral superiority if you want but yes – Everyone on this planet has a God given right to be here.

  • Ellen

    In the US and UK right wing capitalism has turned into as big a fiddle as benefit fraud. We have central bank printing money to keep insolvent banks pretending they are solvent and paying CEOs millions – in a free market economy these people would have been made redundant. They buy government bonds with money made out of thin air pushing us all deeper in debt. Currency values fall on this oversupply while asset values rise as investors avoid currency. As tangible assets are largely owned by the rich and the less well off go week to week working for cash, it is a nonsense to suggest we live in a free market society. And this is before austerity hits the same people.

  • BEN

    At 81 years of age I understand that young people tend to be selfish. Please folks, remember that those retired people, who have done the right thing all of their lives, are badly affected when Quantative Easing reduces the value of savings. We should be pressing for a change to an ethical lifestyle, a useful new national motto might be IF YOU CAN’T PAY THEN, DON’T GO. Especially relevant when politicians send soldiers to foreign countries when no benefit accrues to Britain from such actions.

  • Boris MacDonut

    #18 Don Masson. That’s a better analysis and yes some do need to reskill themselves,but they also need some help in doing so. Hopeless was a poor choice of words and I do not accept we have an underclass. That term itself has too many connotations of “untermensch”. We simply have a growing sector of very poor poeple, starved of opportunity and increasingly ignored by the state, the job market and even other poor people.

  • Justin

    Debt cancellation is the way to go.

  • EDT

    There are more ways to do it than handing out vouchers.
    How about building trains an tracks that work and school buildings. Construction spend stays at home and goes straight into the economy. It also reduces unemployment etc.
    QE is just a big con whereby government gives money to the bank and borrows it back. Effectively they are robbing Ben and all the savers by stealth and feeding greedy bankers.
    There was a better way to solve the whole problem- write off everyone’s debts and reform banking rules. The reason this one will never be done is “Lack of moral hazard”. Now there is no moral hazard for bankers.

    The real kick in the teeth is that nothing can kick start consumption till the debt is gone and those credit records cleaned up so they can use their plastic again.

  • Mike

    Yes there is an underclass, call it by what name you choose. But once you are in that class, perhaps nowhere to live, no friends, no-one to turn to, how do you climb out? You need an address to get social security, a job.
    Turning to free money, this is inflation and nothing but. It will only add to our problems if consumers spend it on Chinese rubbish by adding to our balance of payments deficit (i.e. national deficit). Perhaps if consumers bought brummagem rubbish????

  • Alec

    Cheap money and Mervyn(Inflation) King got us into this mess in the first place. Unfortunately, nobody is prepared to let the market work so we are stuck with artificial interest rates.

  • Boris MacDonut

    #25 Mike. No. There is not an underclass. Accepting the existence of an underclass is a prerequisite of accepting there is also an overclass .This is the insidious lie that the powerful want you to swallow. There are just the hard done by ,the ignored and those that society has not the will to help. This does not make them lesser people (under) everyone else. It does make them disadvantaged as you say but not lesser people, however much the smug (and their prophet Jeremy Clarkson) sneer.

  • Van

    Money printing, whether it is dropped from a Helicopter or used to buy bonds, ultimately results in a short term boosts to GDP but long term disallocations of capital which make long term growth impossible. Jenkins and the Keynesians love the idea of “stimulus” because it is painless and can be done from a keyboard, but it will ultimately prove futile until savings and borrowing are allowed to realign to reflect real time preference between consumption and investment. You can lean more about a how a real economy (should) work from a few hours of studying the Austrian theory of the business cycle than you can misspending years studying the nonsensical macro theories of the Keynesians.

  • Jake

    EDT, as soon as we cancel all the debt, the irresponsible debtors will start piling it up again straight away. There might be slight relief for some who got into the situation of bad debt because of unemployment, but will there be employment after the bebt cancellation? Banks will loose millions off the balance sheet wich will only lead to more joblosses and the whole cycle starts again…

  • Reality Check

    Jake – “Irresponsible debtors”.

    I think you have this all backwards. It is not the debtors who caused this problem, but the irresponsible lenders who pushed this toxic waste into the system in the first place. Until the banks themselves are made to take responsibility for THEIR losses!, the economy will not be able to grow again in any real sense. It is an inevitable fact that that eventually debt will have to be written off one way or another. Greece is a great example. Despite any attempts at austerity (which will never work!) they simply can’t and never will pay off their debts.

  • iain

    perfect solution being saying this type of thing since school in 1980

    private banks ie hsbc hbos barclays etc should only get a commssion for distributing money the bank of england should print and let the people have it ie they dont repay to the sharks hsbc barclays etc but to the b of england for work and services they carry out
    if you dont pay it back twice problem solved private cartel banks the problem all along

    why give rbs 45 billion when the b of engalnd could have given 45 b to the people and let rbs fail
    but oh no thats truthfull and honest not corrupt and lies and theft like now
    ie boom and bust cycle control and power nothing else
    get rid of the private banks you solve the problem of the economy and demand and supply and work for everyone

    ie take a look at the notes doesnt say hsbc or barclays doest it
    the people dont need barclays hsbc hbos and rbs and the rest