''The world economy crawls along and mainstream economists remain worried that a typical sustained economic recovery i.e led by rising business investment generating more jobs and a reduction in unemployment boosting consumption, is absent. The answer of the Austerians is that the economy and the people must wait until the overhang of debt in the major capitalist economies is removed and, primarily, this means a reduction in public sector debt and deficit levels and real wage cuts. The answer of the Keynesians is the opposite: instead we need to keep interest rates low by central bank monetary measures and also expand government spending and borrowing to stimulate investment; or fill the gaps in private sector investment and consumption (aggregate demand) with public investment and consumption. Don’t worry about debt levels, but spend now and, with growth, the debt will look after itself.
Although central banks have lowered short-term interest rates nearly to zero, so that we have negative real interest rates (after inflation) and central banks have pumped trillions of dollars into the banking system, the banks, still overloaded with debts and weakened balance sheets, are unable or unwilling to lend. And anyway, the large corporations are flush with cash and don’t need to borrow. Yet they are still unwilling to invest at sufficient levels to restore booming economies.
This debate continues because nothing seems to work: austerity or traditional Keynesian monetary easing. Although central banks have lowered short-term interest rates nearly to zero, so that we have negative real interest rates (after inflation) and central banks have pumped trillions of dollars into the banking system, the banks, still overloaded with debts and weakened balance sheets, are unable or unwilling to lend.
So now some Keynesians are calling for more unconventional measures, closer to the policies advocated by the proponents of modern monetary theory (MMT). They say, let’s bypass the banking system altogether and get central banks and governments to lend money directly to households and small businesses – in a way, just get a helicopter and drop the cash across the country. ‘Helicopter money’ is the analogy first hinted at by Ben Bernanke, the current chief of the Federal Reserve
These proposals are also linked to what used to be called the Chicago Plan, namely the proposal of a group of economists at the University of Chicago in the 1930s who responded to the Depression by arguing for severing the link between the supply of credit to the private sector and creation of money. The other leading economist of the time (apart from Keynes), Irving Fisher supported the idea, as did Milton Friedman
The Chicago Plan proposes changing the nature of money and money creation in the economy from a nominally private-sector affair, in which commercial banks serve as the engines of money growth, to an exclusively public sector one.
Only governments would have the power to expand reserves and thus lending. Well what’s wrong with that, you might say? Well, the banks would still be privately owned, but now on the brink of going bust or having to turn into outright speculative investment operations like hedge funds to make a profit. So, in some way, there would be even more instability in the banking system than before, not less. **The Chicago Plan would only work if the banks were brought into public ownership and made part of an overall funding and investment plan. But if that happened, there would be no need for a Chicago Plan**.
Then there is inflation. Creating money out of thin air means that money supply can move out of line with growth in the real economy, namely commodity production in the capitalist sector. Unless production in the capitalist sector expands, more money will start chasing less goods. Price inflation will ensue and so will financial asset speculation. Real incomes for the average worker will be hit by rising prices, instead of falling employment. Keynesians like Turner deny this. For them, government spending financed by central bank monetisation, or helicopter money, will boost ‘aggregate demand’ , i.e investment and consumption and so economic growth will return to match the expansion in the money supply.
But will it? Once again, we are back at the heart of the flaw in the Keynesian model.
For Keynesians, you can create extra spending through money creation. This leads to increased employment and then to increased income and growth and thus to more profits. But the reality of the capitalist system is the other way round. Only if profitability is sufficient will investment increase and lead to more jobs and then incomes and consumption. The demand for money will rise accordingly. Artificial money creation by fiat from the government does not get round this – as the experience of ‘quantitative easing’ has already shown**.
Adair Turner reckons that monetisation of Japan’s public debt with some increased inflation would have avoided Japan’s lost decade. Well, the evidence is against that as my recent posts have argued.
**The outcome of debt monetisation or a Chicago plan to bypass the banking system will not be a sustained economic recovery, but either a new bout of financial asset speculation or rising prices in the shops, or both. It is not the banking system that has to be bypassed but the capitalist system of production for profit that has to replaced by planned investment under common ownership. Indeed, if the banking system is circumvented, the capitalist system of production will be thrown into greater confusion**''.
** Remarks of Michael Roberts
