THE BLOG

QE for the People?

27/05/2015 15:32 BST | Updated 22/05/2016 10:59 BST

A recent article in the Guardian, written by three economists, proposed that the Bank of England (BoE) "make payments directly to the household sector," referred to as "QE for the people." In order to do this, the government would need to introduce legislation empowering the BoE to take this course of action. However, they note that these cash transfers would provide more stimulus for the economy than the BoE's actual QE programme, with little risk of inflation. This is because, based on previous cases people "appear to quickly spend between a third and a half of any cash windfalls" they receive. Furthermore, "the size of payments and their timing should be solely under" the control of the BoE, which would ensure they would not violate its inflation targets, and the payments should be made equally "to all households," given this would "be the least controversial rule."

This is particularly interesting article - for the mainstream press - for the reason that it does not treat "printing" money as the cause of all our future problems. In this sense, it is absolutely correct. The monetary authorities, whoever they are, need to inject more money into the private sector. However, the article is wrong with regards to who it is that should actually issue the money, and this is a vital point.

Currently, it is the Treasury who issues money into the economy. More specifically, the Treasury has an account at the BoE, called the Consolidated Fund (CF) account. Whenever the Treasury spends the account is marked down, and whenever it receives taxation the account is marked up. Due to the fact that Treasury deficit spending creates excess reserves in the banking system, the Debt Management Office initiates bond sales in order to drain the excess reserves. This also has the side-effect of balancing the CF account. In any case, the Treasury clearly has the power to inject additional money into the economy: all it needs to do is mark down the CF account and mark up the relevant private sector bank accounts.

Thus, there is no need for new legislation, empowering the BoE - the Treasury has this power already. Further, if we wanted to tackle inequality, then there is no need for an indiscriminate injection of money. Instead, the Treasury could agree to transfer to only the poorest in the country or those earning below a certain threshold, thereby eliminating much poverty, reducing the inequality gap, whilst simultaneously creating additional aggregate demand. The one downside would be that this would make the UK a fairer, stronger, and more attractive place to live, which might encourage more immigration. But this is something to be proud of.