The gross domestic product is a measure of all the goods and services that the United States economy produces in a year. It’s also a measure of all the income that the economy generates, and how fast it grows helps determine how rapidly over-all prosperity rises. Between 1947 and 1974, G.D.P. rose by about four per cent a year, on average, and many American households enjoyed a surge in living standards. In the nineteen-eighties and nineties, growth dropped a bit, but still averaged more than three per cent. Since 2001, however, the rate of expansion has fallen below two per cent—less than half the postwar rate—and many economists believe that it will stay there, or fall even further. In economic-policy circles, the phrase of the moment is “secular stagnation.”
The late Harvard economist Alvin Hansen minted this term during the nineteen-thirties, and Lawrence Summers resurrected it a couple of years ago. Although originally applied to the United States, it is also widely used in reference to the European Union, where G.D.P. growth has been even slower than in the United States, and to Japan, where, for more than two decades, it virtually vanished. Indeed, one of the fears that economic pessimists have raised is that the United States and other Western countries could be heading for Japanese-style stagnation.
What could get us out of the rut? Until recently, the textbook prescription for slow growth involved cutting interest rates and introducing a fiscal stimulus, with the Treasury issuing debt to pay for more government spending or for tax cuts (aimed to spur household spending). That was the recipe that the United States, Britain, and other countries followed after Lehman Brothers collapsed, and it helped prevent a deeper slump. Today, however, neither of the traditional policy responses is readily available. The short-term interest rate that the Federal Reserve controls has been close to zero since December, 2008. Janet Yellen, the Fed chair, and her colleagues can’t cut rates any further. And with over-all federal debt standing at more than eighteen trillion dollars Congress would strongly oppose the Treasury’s borrowing more money for another stimulus package. In the E.U., the situation is even more fraught. Growth has been negligible for years, interest rates are at very low levels, and a legal commitment to austerity policies rules out a fiscal stimulus.
Adair Turner, an academic, policymaker, and member of the House of Lords, has another idea. In his new book, “Between Debt and the Devil: Money, Credit, and Fixing Global Finance” (Princeton), Lord Turner argues that countries facing the predicament of onerous debts, low interest rates, and slow growth should consider a radical but alluringly simple option: create more money and hand it out to people. “A government could, for instance, pay $1000 to all citizens by electronic transfer to their commercial bank deposit accounts,” Turner writes. People could spend the money as they saw fit: on food, clothes, household goods, vacations, drinking binges—anything they liked. Demand across the economy would get a boost, Turner notes, “and the extent of that stimulus would be broadly proportional to the value of new money created.”
The figure of a thousand dollars is meant to be strictly illustrative. It could just as easily be five thousand dollars or ten thousand dollars—however much was needed to drag the economy out of the doldrums. These handouts wouldn’t represent tax credits or rebates, which are issued by the Treasury Department. The funding would come from the central bank (in this country, the Federal Reserve), which would exploit its legal right to create money. Central banks do this by printing notes and manufacturing coins, but they can also create money by issuing electronic credits to commercial banks, such as JP Morgan and Citibank. Under Turner’s proposal, that’s what the Fed would do—give banks newly created money, which would be passed along to their account holders. Merry Christmas, everyone!
It’s a deadly serious proposal, actually, and its author is a sixty-year-old English technocrat renowned for his intellect and his independence. Turner has run the Financial Services Authority (roughly, the British equivalent of the Securities and Exchange Commission), the Confederation of British Industry (akin to the U.S. Chamber of Commerce), and the Pensions Commission (think Social Security). For the past two years, he has been a senior fellow at the Institute for New Economic Thinking, a transatlantic think tank that George Soros set up in 2009. If, despite Turner’s impressive credentials, the words “hyperinflation,” “Weimar Republic,” and “Robert Mugabe’s Zimbabwe” are whirling around in your head, he would certainly understand. “My proposals will horrify many economists and policymakers, and in particular central bankers,” he writes. “ ‘Printing money’ to finance public deficits is a taboo policy. It has indeed almost the status of a mortal sin.”
But it’s also a proposal that serious economists have broached before. In 1969, Milton Friedman argued that money financing could provide an alternative to Keynesian debt financing. Faced with a chronic shortfall of demand in the economy, Friedman said, the government could print a bunch of money and drop it from helicopters. In 2003, Ben Bernanke, who was then a governor at the Fed, suggested that such “helicopter drops,” or their electronic equivalent, could provide the Japanese government with a way to lift its economy out of a decade-long slump. More recently, a number of liberal economists rallying under the banner of “Modern Monetary Theory” have urged the government to reverse budget cuts, financing the spending with money created by the Fed. In Britain, Jeremy Corbyn, the new leader of the Labour Party, has suggested that the Bank of England could pay for some infrastructure spending by printing money.
So far, these ideas have gained little traction. Bernanke, after taking over the Fed, in 2006, seldom mentioned his earlier proposal. Even Paul Krugman, who is usually a big supporter of stimulus programs, has distanced himself from Modern Monetary Theory, pointing to the danger of inflation from excessive monetary growth. Turner, however, insists that creating money may be the only way of generating a decent rate of economic growth and escaping our current predicament.
That predicament, a long time in the making, is closely tied to an enormous expansion of debt—public and private. Back in 1950, Turner reminds us, the total amount of private credit outstanding in the United States (that is, credit extended to households and businesses) was equivalent to fifty-three per cent of G.D.P. By 2007, it had risen to a hundred and seventy per cent. In the United Kingdom, between 1964 and 2007, total private credit went from fifty per cent of G.D.P. to a hundred and eighty per cent. In the decade leading up to the financial crisis, the total amount of private credit grew nine per cent a year in the United States, ten per cent in the United Kingdom, and sixteen per cent in Spain.
Not all debt creation is bad, of course. Firms need credit to pursue business opportunities, such as expanding to a new market or building a factory. People need credit to pay for their education or to buy a home. But if rapid rates of credit creation—particularly, rapid rates of mortgage credit creation—are sustained they tend to generate asset-price bubbles. When these bubbles burst, many businesses and households find themselves unable to service their debts. Loan defaults surge, and the banks that issued the loans get into trouble. Often, the only way to prevent the banks from collapsing is for the government to bail them out, by injecting new capital or guaranteeing bad loans. The standard way to finance these bailouts is to issue more government bonds. But it means that a private-sector debt crisis can morph into a public-sector debt crisis.
After 2008, that’s precisely what happened to Ireland and, to a lesser extent, Spain and Portugal. Even in countries where the stricken banks eventually repaid most or all of their bailouts, such as the United States and the United Kingdom, the debt burden rose sharply as governments adopted stimulus programs to ameliorate the broader consequences of lending busts. In the advanced economies as a whole between 2007 and 2014, Turner reports, public debt as a proportion of G.D.P. rose by more than a third. That’s a huge increase—so huge it has raised questions about the capacity of many governments to react to the next crisis. Turner refers to this as the problem of “debt overhang.”
To break free from this ruinous debt cycle, Turner advocates strict limits on how much credit banks can issue. In addition to forcing banks to hold more capital and thereby crimp their lending, he says, governments should regulate mortgage lending by imposing maximum loan-to-value ratios (e.g., the size of your mortgage and the value of your house) and loan-to-income ratios. He also thinks that rising land values should be taxed more aggressively. “Our explicit objective should be a less credit-intensive economy,” he writes. Given what we’ve been through in the past decade, that sounds like a good idea. But what would provide the fuel for economic expansion? As Turner notes, “We seem to need credit to grow faster than G.D.P. to keep economies growing at a reasonable rate.”
One option would be to step up the “quantitative easing” policies that the Fed and the Bank of England have adopted in recent years. Like Turner’s proposal, quantitative easing involves the central bank’s creating large sums of money, but rather than being handed out to people it is used to purchase large quantities of government bonds and other securities, with the goal of raising asset prices, driving down market interest rates, and stimulating spending. Unfortunately, as Turner points out, quantitative easing has “proved insufficient to deliver robust growth.” Moreover, if it were maintained indefinitely, it could have harmful side effects. By keeping the cost of borrowing at ultra-low levels, and boosting the price of houses and other assets, it could end up triggering another credit boom. In parts of Britain, where house prices and mortgage issuances are now rising sharply, a credit boom may already be developing. Turner cites an official forecast that in the United Kingdom over-all private-sector indebtedness “will by 2020 have risen to its highest ever level.” The implication is that another bust won’t be far behind.
The best alternative, Turner thinks, is his radical proposal—creating money and handing it out to entities that can spend it. He readily concedes that it wouldn’t matter much whether the newly minted money was forwarded to households in the form of bank credits, or used to finance tax cuts, or spent on building new roads and bridges. The key point is that the government would be stimulating the economy without issuing any new debt. It wouldn’t be accentuating the problem of debt overhang, or creating the conditions for yet another boom-and-bust cycle.
Of course, creating money does pose other dangers, like an alarming jump in inflation. Turner points to two instances where this didn’t happen. During the U.S. Civil War, the Union government printed greenbacks to pay for its military buildup without any disastrous consequences. And in Japan, during the nineteen-thirties, the militarist government used the central bank to finance deficit spending and pull the country out of recession. But Turner acknowledges the counterexamples—like the hyperinflation experienced by the Confederate states, Weimar Germany, and modern Zimbabwe.
To head off this danger, Turner says, money financing should be used sparingly, and for specific reasons: to pull an economy out of a lengthy slump, to pay for the recapitalization of too-big-to-fail banks, or to write off excessive public debts. “If we accept money finance as a normal operation, deployed continuously year after year, the danger that future governments will abuse it is greatly increased,” he notes. Later in the book, however, he makes clear that he’ll entertain the possibility of creating money to finance ongoing budget deficits, as some adherents of Modern Monetary Theory recommend. Referring to the warnings by Summers and others, he writes, “If the secular stagnation threat is truly as severe as some economists argue, we could counter it by using money finance not as a one-off device but continuously over time.”
As a way of preventing elected politicians from overusing the electronic printing presses, Turner proposes putting money finance exclusively in the hands of independent central bankers. Skeptics may wonder if this really solves the problem, though. Even independent central bankers aren’t immune to temptation, or to political pressures: many of them are political appointees, after all. If a central bank adopted money finance for one purpose, such as avoiding a recession, and it proved successful, there would be enormous pressure to use it for others, such as debt reduction. And the very hint of such a policy being enacted could sour the markets.
Another weakness in Turner’s argument is his assumption that the standard remedy of a fiscal stimulus is no longer available. In the United States and Britain, budget deficits have fallen sharply in recent years, and, despite a rise in debt levels, interest rates are at historic lows, which indicates that the markets aren’t worried about those debt levels. These countries should still have the room to adopt debt-financed stimulus packages. Even the Japanese government, which has huge debts, hasn’t had any trouble selling bonds to finance a big stimulus program introduced by President Abe. Standard Keynesianism may be an endangered species, but it’s far from extinct. And, since we know its pluses and minuses pretty well, it may be wise to stick to it where possible.
Still, there are places—Greece and Ireland are obvious examples—where Turner’s arguments carry force. Indeed, a strong argument can be made that the entire eurozone could do with a dose of money finance. Turner mentions a proposal for the European Central Bank to finance three-year tax cuts for all residents of the currency area, before noting that it’s probably not politically attainable. Less overt forms of money finance could be more palatable. For example, the E.C.B. could issue money to pay for infrastructure projects, carried out under the auspices of the European Investment Bank, which is owned by all the member states.
Japan, whose public debts are equivalent to about two hundred and forty per cent of G.D.P., is another interesting case. After repeated rounds of quantitative easing, the Bank of Japan, the country’s central bank, now owns about a fifth of this debt. Like the Fed, it currently insists that it will eventually sell its bond portfolio back to private investors, and the Japanese Treasury Department says it intends to repay all its debts. But Turner points out another possibility. Since one arm of the Japanese government is effectively lending to another arm, the public debt owned by the central bank could simply be written off. If that happened, Japan would have created a great deal of money and used it to reduce its debt burden—a form of money finance. And it’s hard to see how this would generate a spike in inflation.
As this example indicates, some central banks are already exploiting their ability to create money in ways many of their citizens don’t fully understand. So far, however, the monetary authorities have avoided explicitly financing spending by the private sector or the government—and as a result, Turner argues, the United States and other countries have incurred heavy costs. He writes, “Our refusal to use that option until now has depressed economic growth; led to unnecessarily severe fiscal austerity; and, by committing us to sustained very low interest rates, increased the risks of future financial instability.”
Whether you agree with Turner’s proposal or not, it represents an important challenge to economic orthodoxy, which, as he rightly notes, has already failed us once. (Twice, if you include the Great Depression.) And on one point, at least, his argument can’t be challenged. Given the problems of debt overhang and slow growth, and the high toll that an extended period of economic stagnation could take on Western democracies, we face a choice of dangers. We could revert to the standard model, hoping that another round of debt issuance in the public and private sectors will juice the economy. Or we could resort to something different and radical: the electronic printing press. To use the phrase Turner picked as his title, it is a choice between debt and the Devil. If economic growth doesn’t pick up during the next few years, some countries may well decide to go with Old Nick. ♦
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