“People’s QE” and Noblesse Oblige

By Karen Petrou

As the chimera of the post-crisis recovery fades and central bankers find themselves powerless to reverse recession, “people’s quantitative easing” is gaining attention as a tool a growing number of central bankers fancy gives them a new way to wreak their beneficent will.  People’s QE – also known more colorfully as “helicopter money” – means that, despairing of fiscal-policy remedies, central banks print money and then either just give it to the people or invest it in assets they or their bosses think best for equalizing, trade-deficit dropping, climate-restoring, or other all-to-the-good economic growth.  However, it’s not just central bankers casting longing eyes at the ability of central banks to print money – officials ranging from those in the Trump Administration to the Democratic Socialist candidate for President see it as a new way to do what they think are the voter’s bidding without raising the deficit.  This is really, really central banking, but for all its power, it’s very problematic.  QE so far has done little to spur sustained recovery and much to make the U.S. even more unequal.  There’s no reason to believe a people’s QE will be any better.

QE for the People

Most “people’s QE” constructs are disguised fiscal policy.  Each tries to replicate fiscal policy’s macroeconomic effect by giving money to people and letting people do with it what they will and/or by spending public wealth (i.e., fiat or central-bank digital currency) to advance government priorities.

In the conservative helicopter-money construct, central banks print money and hand it out to stimulate consumption that then spurs macroeconomic growth.  Helicopter money got this moniker based on Milton Friedman’s proposal decades ago to drop money to all American households.  In the more modern edition of helicopter money, central bankers craft their own digital currency (a CBDC) and then place some of it at the disposal of each of their citizens via bank deposit accounts.

Both of these helicopter constructs suffer from the same inequality problem:  for people’s QE to work, money has to get to the people, especially the people most in need of it.  In the helicopter image, cash would float down to those best able to dash from economic meadow to meadow to gather it up.  In the less fantastical modern version, it flows through the banks, but only relatively affluent people have bank accounts.  The 22 percent of the U.S. population that remains un- or under-banked might thus miss out, making people’s QE only a bit better for economic equality than a cut in the capital-gains tax – that is, it makes the already-prosperous still better off.

However, helicopter drops might be fine even if they are anti-equality if they were pro-growth.  To anticipate this, we need to know what moderate- and middle-income households with bank accounts would do with a cash or CBDC distribution.  Given high debt burdens, it is likely that most of these households would use new money for a bit of debt reduction or, if not quite so leveraged, to build a small savings account.  Either way, funds would flow into banks or other intermediaries, probably adding to the asset-price bubble already blown to dangerous proportions by the non-people’s QE that came before.

Building an Even Bigger Central Bank

Another approach to QE has the central bank purchasing assets from the financial system to use cash or CBDC to buy targeted assets or even make direct investments.  This does the Fed more than one better by enlarging the assets a central bank holds or even empowering it to become a direct financial-market participant, supplanting traditional intermediators and investors.

The Fed’s QE construct has taken various twists and turns, but in each case it involved only sovereign- or agency-asset purchases from banks and, as we have seen, did a lot more over time for equity prices than output.  In contrast, expansive asset-buying QE has been adopted by the Bank of Japan and, in a different way, the European Central Bank and others.  In each of these cases, the central bank buys assets such as corporate debt, exchange-traded funds, or other assets from banks or, in some cases, others in the financial market.  The progressive Green New Deal has the Fed buying green loans so that, at least in theory, banks will make lots more of them.  The Fed might also, green new dealers hope, go directly into the market to fund green infrastructure, cutting out the banking middlemen.  Past proposals have also had the Fed buying Puerto Rican debt to bail out the Commonwealth, purchase other municipal obligations, or otherwise help the constituents Members of Congress show that they care about but for whom they aren’t willing to spend their own money via fiscal policy.  A recent BlackRock proposal also has central banks making direct investments for the “public good,” i.e., presumably taking on a direct fiscal role by building schools or highways.    

And, it’s not just progressives looking to the skies for helicopters from the central bank.  Importantly, the Fed’s position in the economy is now so enormous that conservatives are moving beyond their aversion to direct central-bank intervention.  In a September 17 op-ed, a very senior Trump adviser and possible Fed governor argued that the Fed should enter the market to reduce the U.S. trade deficit.

Intermediation’s Oblivion

In each of these cases, the Fed takes over either from the direct stewards of the public good – the executive and legislative branches of government – and/or the market.  Either way, monetary policy assumes fiscal dimensions immune from voter discipline even if those the voters select first authorize expansive QE.  This raises several critical questions:

First, should central bankers be insulated from public accountability and take on the powers inherent in an unlimited fiscal printing press?  Today, a people’s QE prints money to promote green lending.  Tomorrow, assault weapons?  Tight asset-purchase restrictions only for purposes stipulated by elected officials limits this risk, but even then there are all sorts of definitions of the “public good.”  There are also plenty of conflicted and risky options in any social-impact finance sector.  Without either electoral or market discipline, these conflicts and risks are similarly undisciplined.

Of course, these risks are averted if the people’s QE helicopter drops money directly into the hands of the citizenry.  This leads to the second question:  would this work for growth and, if so, would growth be equal?

As I’ve shown briefly above, the odds are that money drops would work no better for growth than any of the QE asset-purchase programs has to date in any of the countries in which trillions have been taken by central banks from the capital markets in hopes of stimulating something a bit better than the faint recoveries seen so far in the U.S., Japan, the EU, Britain, and so many other nations.  Only direct debt buy-backs from lower-income households through central-bank asset purchases might make a meaningful equality difference and even spur a bit of new consumption. Yet in this case, all a central bank has done is step in ahead of or instead of fiscal authorities without the guts to authorize debt forgiveness for over-burdened students, victimized borrowers, or others beset by debt they cannot ever hope to repay.  This may be a good idea – maybe – but would it really make an equality difference?  Might not any such effort mobilize the same forces that in 2009 spawned the Tea Party to oppose mortgage principal-forgiveness? 

If central banks eschewed debt forgiveness and picked assets or investments for the greater good, would they pick the beneficiaries of their largesse or act as politicians demand?  In either case, could central-bank independence survive long enough to pick up the macroeconomic pieces wrought by the people’s QE or events beyond its control?  I fear not.