Anatole Kaletsky

Is a revolution in economic thinking under way?

By Anatole Kaletsky
October 25, 2012

Four years after the start of the Great Recession, the global economy has not recovered, voters are losing patience and governments around the world are falling like ninepins. This is a situation conducive to revolutionary thinking, if not yet in politics, then maybe in economics.

In the past few months the International Monetary Fund, previously a bastion of austerity, has swung in favor of expansionary fiscal policies. The U.S. Federal Reserve has committed itself to printing money without limit until it restores full employment. And the European Central Bank has announced unlimited bond purchases with printed money, a policy denounced, quite literally, as the work of the devil by the president of the German Bundesbank.

This week an even more radical debate burst  into the open in Britain. Sir Mervyn King, governor of the Bank of England, found himself fighting a rearguard action against a groundswell of support for “dropping money from helicopters” – something proposed by Milton Friedman in 1969 as the ultimate cure for intractable economic depressions and recently described in this column as “Quantitative Easing for the People.”

King had to speak out because the sort of calculations presented here last summer started to catch on in Britain. The BoE has spent £50 billion over the past six months to support bond prices. That could instead have financed a cash handout of £830 for every man, woman and child in Britain, or £3,300 for a typical family of four. In the United States, the $40 billion the Fed has promised to transfer monthly, with no time limit, to banks and bond funds, could instead finance a monthly cash payment of $500 per family – to be continued indefinitely until full employment is restored.

Two weeks ago the British debate on QEP reached a crescendo in a daring speech by Lord Adair Turner, chairman of the Financial Services Authority, and one of the two leading contenders to replace King as governor of the BoE. Turner is a former management consultant famous in Britain for finding imaginative solutions to apparently insoluble issues, from climate change policy to reform of the National Health Service. While he stopped short of publicly endorsing “helicopter money,” Turner hinted strongly in that direction with a call for “still more innovative and unconventional” thinking since QE no longer seems to work. His speech was followed by a spate of editorials in the Financial Times, the BBC and other media outlets about helicopter money and the need for serious BoE thinking about such radical ideas.

King felt obliged to counterattack on behalf of traditional central banking. In a speech on Tuesday he set out to “distinguish between ‘good’ and ‘bad’ money creation” and denounced “talk about the possibility that money created by the Bank could be used directly to finance additional government spending, or even that money could be given away.” But his opposition to QEP was surprisingly halfhearted, focusing not on economic issues but on bureaucratic conventions

“Abstracting from the colorful metaphor of ‘helicopter money,’ such operations would combine monetary and fiscal policies,” he said. “There is no need to combine them. Once the Bank has decided how much money should be created to meet the inflation target, the case for the Government to increase spending or cut taxes to counter a downturn stands or falls on its own merits.”

This division of responsibilities is reasonable and democratic. But it leaves wide open the case of QEP, since cash handouts would surely be more effective to “counter a downturn” than bond purchases for every £1 billion added to the money supply.

Was King’s tepid critique of QEP a hint that he, too, is losing faith in conventional QE and would like politicians to sanction something bolder? If so, the global implications would be enormous, since King is close in his thinking to Fed chairman Ben Bernanke and the Fed. More probably, King, like most incumbent central bankers, is genuinely horrified by the prospect of combining monetary and fiscal policy. But the fact is that monetary and fiscal policy become almost indistinguishable once interest rates fall to zero because there is no real difference between money and government bonds.

Which brings us to an even more radical proposal, closely related to the QEP debate, that emerged recently from the IMF. In a research paper that has gone viral among economists, Jaromir Benes and Michael Kumhof, two senior IMF staffers, describe a reform of monetary management that could potentially restore all the output lost in the Great Recession and simultaneously eliminate the government debt burdens of the United States, Britain and most European countries.

These miracles could be achieved without painful tax increases or spending cuts, by restoring to governments the exclusive right to create money they gradually lost to commercial banks. The monopoly right to create money generates a “seignorage tax,” whose capital value is roughly 100 percent of the U.S. gross domestic product, according to the IMF calculations. Transferring this enormous benefit from banks back to governments would allow most national debts to be paid off.

The radical idea of depriving banks of their money-creating function, like the idea of helicopter money, was first proposed by conservative Chicago economists – Henry Simons and Irving Fisher – in 1936. A distinguished conservative pedigree will not make the loss of seignorage rights acceptable to bank lobbyists any more than it makes helicopter money acceptable to conventional central bankers. But if global economic stagnation continues, public patience with conventional responses will run out – and ideas that now seem revolutionary may become conventional wisdom.

PHOTO: Governor of the Bank of England Mervyn King speaks at a business conference in London July 26, 2012. REUTERS/Alastair Grant/Pool

13 comments so far | RSS Comments RSS

You people are missing the whole point of everything. I suggest you read my comments in the following article:

http://blogs.reuters.com/great-debate/20 12/10/24/debate-jibes-ignore-chinese-cou nterfeitings-long-history/#comment-64977

Posted by Gordon2352 | Report as abusive

We already have QE for the people in the form of food stamps and protracted unemployment benefit.

As Gordon is stating rightfully above, we need to be again more competitive globally.

How to do it?

A domestic fiscal policy that brings back jobs and industrial development within our borders, discouraging outsourcing and reckless tariff-free import of Asian Government subsidized merchandise.

Zeroing the debt of governments by uncontrolled $ printing would affect the exchange rate making Asian goods more expensive, but would NOT alter the fiscal disadvantage we are suffering here in the US against China, Singapore etc.

Posted by robb1 | Report as abusive

I FULLY agree with Jaromir Benes and Michael Kumhof. For the past five years I have been trying to make lea political leaders as well as Economic and Financial strategists that a solution to the present recession/depression lies in giving back to the government its money-making capacity which in turn WOULD make the “necessity” of national Tax collection totally superfluous. Here is another short “list” of things that should be adopted to resolve the present malaise of our nation.

Solutions to the National Debt “Crisis”.
We can easily solve the so-called national debt crisis. The following is a way the USA could efficiently deal with this issue (and a few others):
1. Unilaterally convert the national debt into a self- amortizing 40-year loan at a fixed rate of 2% per year.
2. Effective immediately, let the Treasure Department “monetize” i.e., create new currency (paper or electronic) equal to the YEARLY NET PROFIT resulting from the economic industrial and otherwise productive activity of the entire nation. We should not count “profit” from lateral transfers of goods and services as part of the national profit. By definition that profit comes from “making thing” and people/enterprises providing services up or down the social pyramid and not “laterally” between individuals. For example, if I sell my house to my neighbor at a profit to me, this should not be counted as a “profit” to the nation since it only represents a lateral transfer of money/capital from one hand to another similar hand. However, if I employ the services of a Title Closing Company, then their fees DO represent an activity out of which a profit could be counted nationally.
3. Since the government holds this “newly printed” money — it will use ALL this money to buy the goods and services the nation needs: a) pay for the administration of the state; b) pay for all the social services the nation needs (Social Security, Medicare, Education, Transportation, etc).
4. The military would be converted into peaceful use machinery for civilian use in the creation of massive engineering projects. An immediate transformation of Tanks into Tractors is appropriate and necessary.
5. Taxes at the national level would be eliminated. ZERO TAXES. This is a natural consequence of the government making/holding the nominal value (green bags) of all the profit made in the nation.
6. The distribution (spending) of all that money occurs when the government spends in the Social Consumption basics, that is, building and operating structures of public need and use (Schools, hospitals, parks, roads, centers of public recreational activities including the arts, crafts, technology laboratories, and mechanical shops).
7. The governmental money newly spent is therefore put back and circulated into the economy and therefore is giving this economy the new liquid capital with which the newly produced goods can be bought and sold interactively. No credit ever needs to be issued except in purely private manner and within the limits of rate of return equal to but not larger than the national rate of economic growth (two, three, four, etc, percent).
8. The rate of growth of the national economy can be aided by increasing population of the workforce, and by the natural increase of productivity and efficiency at which the economy operates.
9. All speculative activity will either be outlawed or where it occurs “naturally” –for instance, buying a Picasso for $100 M. and selling it for $200 M. — this “gain” (which is NOT capital gain) is not to be counted into the formula of national growth, since it is solely a lateral transfer between two entities (men or mice) who choose to put a different personal value to such an item.
10. For publicly owned/traded enterprises/corporations, there will be as rule a strict limit to the benefits that are paid to the management of the company. This limit would be equal to a multiple number –not more than ten– of the least paid full time employee of the company.
11. There must be an automatic increase of the “minimum” wage equal to the percentage of the growth of the national economy or double the percentage of growth of the individual enterprise, whichever is more.
12. Government structures can be amended to reflect the technological changes that permeate our society. Elections for representatives, including the presidency, would be done directly and privately through personal computers or telephones. One should be able to cast a vote for representatives and for the Policies that in one’s personal opinion should be implemented in the nation. It’s that simple.
13. Electoral “campaigns” would also be done through the FREE use of public mass media outlets, including the internet, and only for a period of no longer than one month. In addition, anyone with the appropriate education and professional background, would be able to participate as a candidate and selected through a process of multiple preference instantaneous balloting that is changeable within than one month period.
For a much more detailed description of such an electoral system, please refer to the excellent work of Roger D. Rosenberg at

There are thousands of other ways to simplify and make more efficient governmental, political, structural, juridical, social and commercial operational systems. Some may call the results a transformation of the capitalist system, as we know it. So, what is wrong with that? We were endowed with the ability to change and improve our system when the previous one became unmanageable. For example, if as I do, one believe in, say, home insurance, it would be that much more efficient and effective to include a given percentage of value to the local Real Estate Tax bill. The system is in place to evaluate houses locally and there would be an existent administrative structure that would automatically insure each homeowner at a much lower rate than those of “private” commercial insurance companies. By the way, the same exact thing applies to all kinds of national medical insurance for all. Does this mean that we would be restricting or eliminating altogether some otherwise legitimate “privately conducted” entrepreneurial activity? Yes. So, again, what is wrong with that change if, in the end, a still primarily private enterprise system has become that much more efficient and effective? We have everything to gain and nothing to lose by change.

Posted by gmontante | Report as abusive

Well, it looks like the mainstream, after a financial crash that need not have happened & very damaging policies since, all underpinned by similarly fundamentally flawed thinking, is beginning to cop on.

What Turner & the IMF (some of them) are now talking about reflects the correct understanding of the monetary system & macro policy options that flow from that, that Post Keynesians, especially MMT, have been talking about for years.

It is not ‘fiscal responsibility’ to forego £100s billions of output (cf Andrew Haldane) by deliberately enforcing millions to languish in dole queues for want of a few money tokens in circulation. Driven by ignorance, irrational fear, incompetence & narrow self interest of the elites.

The mainstream of economics thinking has been rotten to the core for decades.

MMT also have the optimal policy prescription for combining monetary & fiscal policy – their ehanced automatic stabiliser & price stability mechanism called Job Guarantee, or Employer of Last Resort. Every unemployed person to have the option (ie +voluntary+) of a full time, minimum wage, job performing a non-competing activity in the community/charity sector. Socially useful & individually rewarding work which also ensures that a minimum of aggregate demand spending is maintained in the economy during private sector cyclical downturns. A buffer stock of usefully employed (& waged) – not unemployed.

And as some people are now realising, there is no ‘money’ constraint, no need to borrow, for a sovereign issuer of fiat, free-floating currency to ‘finance’ such a policy. The only constraint is +future+ potential for rising inflation as the economy nears full productive capacity & (non-JG) employment. Whereupon it is simple matter to extinguish excess money in circulation, & on a much smarter sectoral basis than blunt interest rate setting, by increasing taxation or decreasing spending, as required. It’s not rocket science to manage inflation this way. Educating the public concerning the correct reasons & timing for taxation policies will ensure that elected politians do not abuse the system – or are swiftly voted out if they do.

With the econometric ability of todays computerised & data networked world, that our forebears could not have dreamt of, there is no reason that economies should not be managed in this way.

….Except that the present neo-fuedal boom & bust mess greatly enrichens the top few percent, at the expense of the rest, during either phase.

Posted by mikehall2 | Report as abusive

A “revolution in economic thinking?” Any thinking at all among economists would indeed be revolutionary. They could begin by eliminating their long-standing, self-imposed ban on thinking about the effects of a growing population. (Today, anyone who dares such a thing is instantly dismissed and derided as a “Malthusian.”) If they did, they might come to recognize the inverse relationship between population density and per capita consumption and its wide-ranging implications for worsening unemployment and poverty and global trade imbalances.

But, no, all we get is more goofy ideas for creating an illusion of prosperity.

Posted by Pete_Murphy | Report as abusive

Not going to happen. There are many good, caring, and honest economists out there. But what good are they? They don’t make the big decisions….their wealthy benefactors do.

Look at the UK. Just this week that jerk Cameron was touting 1% GDP growth as “on track”.

Anatole, I very much admire your optimism.

Posted by krimsonpage | Report as abusive

Mr Karetsky – doesn’t “The radical idea of depriving banks of their money-creating function,” translate as depriving banks of the ability to make loans?

@gmontante when you say no taxation and transferring Picasso paintings laterally I think of the Gilded age or even the mid eighties when Van Gogh was being bid through all recognizable limits by otherwise hard headed corporate CEOs. There were/are? a few Van Goghs locked away in bank basements because the CEO couldn’t pay the bid price. That was how they behaved even with taxation.

I also think of how the megawealthy of this country spent lavishly in cash for their Newport cottages and playgrounds. It was both a spur for the economy and a binge that crashed. It was isolated to playgrounds like Newport, Long Island’s Gold Coast and the Berkshires.

I can’t imagine what would happen if that happened across the country or globally? It sounds like economic delirium.

But I have about the same economics background as Ronald Reagan and don’t trust what I know more than a few inches forward.

Posted by paintcan | Report as abusive

The problem with working through the banks in recent years has been the lack of talent in the large banks. Rather than being bankers, most of the folks handling money in the large financial institutions are gamblers using OPM (Other Peoples Money). They haven’t a clue how to evaluate a mortgage or small business loan. For years they wrote many loans that a real banker would have rejected and caused our present crisis. Now the recovery is suffering because they won’t fund perfectly good loans.

Posted by QuietThinker | Report as abusive

Weren’t Abraham Lincoln and JFK both assasinated shortly after proposing systems whereby the government could effectively bypass banks and print money themselves?

Surely it’ll never happen – the ultra rich won’t allow it, because it derives them of one of their most effective means of stealing the wealth of a nation.

More to the point though, I cannot believe that people honestly believe that there should be a painfree alternative to repaying all of the debts that were accumulated over the past decade. But I guess that central bankers, having got away with ludicrous monetary policy for decades have to keep up the pretence that they have everything under control, and if they can just print enough money, everything will be fine.

The more I learn about our banking system, the more appalled I am by it.

Posted by TocoToucan | Report as abusive

is this the end of untransparent democraties?

Posted by Paats-W. | Report as abusive

Printing money is useless any way you look at it.

Decades from now, after the dust settles, the times ahead of us may be remembered for the following historic trends:
1. The collapse of the Western European welfare state.
2. The collapse of the North American middle class.
3. The massive transfer of wealth and power from nation states to global corporations. The above includes the loss of power of national institutions such as parliaments, governments, and central banks.

Posted by reality-again | Report as abusive

If anyone here followed my father norman macrae’s writings in The Economist on how to prepare for the net generation being the most productive time for youth everywhere then there is a simple keynsian rule. Trust in a nation’s credit in 2010s is not primarily related to what debt-ridden mistakes old macroeconomists have made ; it is related to credibly investing in next generation’s post-industrial revolution. This -as do such sectors as green energy and job creating education webs – needs abundant economics models based round multi-win system designs (valued round sustaining long-term growth exponentials) because unlike consuming things most communally vital knwoledge multiplies value in use. For those of us who tried to intervene in the mess the 5 big global accountant monopoly trapped spreadsheeted mindsets in, if goodwill had properly been valued in 1990s as transparent win-win modeling all this terrifying monetisation economics would never have ruled over us. As you may know: keynes mentored people like dad that economists are only capable of compouunding 2 opposite things: the purposes that most people want from each global market sector or the destuction of such purposes. It is surely time we get back to pro-youth economics if we are not to completely meltdown the global finacial systam – a risk dad first coined entrepreneurial revolution xmas issue The Economist 1972 as needing to prevent. At wholeplanet.tv we try to profile 100 leaders whose purspose can still collaboratively empower 2010s as youths most productive and communally sustainable decade- help needed! In dad’s 1984 book of how to create next 3 billion jobs, Norman assumed the bbc as a broadcaster of the people would help in such pro-youth investigative journalism – something it has so far singularly failed to do with no help from the hacking murdochs of this world.

Posted by normanmacraeltd | Report as abusive


Talking of good and bad money, read this short article on Monetary Dialysis. This is pretty much the answer to the questions you are asking.

http://sustento.org.nz/wp-content/upload s/2012/07/NZ-Investor-Piece-Monetary-Dia lysis.pdf

Posted by Sustento | Report as abusive

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