Helicopter money and a basic income

How the Bank of England might create new money to pay into the economy as  a Basic Income

In televised debates during the recent general election campaign, several politicians made reference to there being no “magic money tree”. When in fact, there sort of is. This, together with a survey in 2014 that showed that only one in ten MPs know where money comes from, exposes a huge education gap amongst our most powerful elected officials, on one of the most important aspects of our economy: money.

Money is something that is often taken for granted, but in fact how it is created and allocated is a political, cultural and economic choice – with huge implications on our society. Most people – including economists, politicians, and journalists – do not know where money comes from, and are shocked when they find out. There’s a proverb that says: ‘The fish is the last to know water.’ Money is all around us, playing a role in almost everything we do, yet it can be difficult to pin down. We are swimming around in a society that depends on money—that’s become obsessed with money—but few of us know where it comes from or how it works.

Currently, private commercial banks create most of the money in our economy when they make loans. This money is simply created out of thin air, typed into a computer. And since it is created as a loan, it means that for every £1 in our economy, there is also £1 of debt.

Furthermore, 82% of the newly-created money by private banks is lent into the financial and real estate markets. But most of us only operate in the real economy – businesses, shops, jobs – where only a small amount of bank lending goes. So most new money created reaches only a very small number of people in society – the richest.

Along with private banks, the Bank of England also has the power to create money in our economy. In fact, when asked to guess, most people think money comes from the central bank. But this only accounts for roughly 3-5% of the money circulating in our economy – the notes and coins in our wallets.

But after the financial crisis, and again after Brexit, the Bank of England started a money creation programme worth billions of pounds to try and help the economy resist any shocks. The Bank has created a total of £445bn in this way, and decided to spend it into the financial markets. This is known as Quantitative Easing, or QE.

And the impact of QE? Like most private bank lending, it simply pushed up property prices and stock markets, making the richest 5% £125,000 richer, and barely reaching the real economy and most people in society.

This is the crux of the Positive Money argument. Known as monetary financing, we argue that there is no reason why the £445bn of new money created by the bank of England through QE should not be directed to the real economy. This would go much further to boost wages and create jobs. The Bank of England has the power to create money and spend it on things society needs. Forward-thinking economists are gathering around two main ideas for how this money could be spent into the real economy.

The first is via government spending on infrastructure. The Bank of England would give new money to the government who would spend it on infrastructure needed in society: for example, affordable homes, a green energy programme, or schools and hospitals.

The second method has been termed ‘helicopter money’, where every person in the UK receives money directly from the government. This could be done in a number of ways. For example, it could be facilitated by HMRC through tax, or the government could enable a digital cash transfer to every person in the UK. If the £445bn created by QE was spent in this way, every man, woman and child in the UK would have received £6000. And research shows that this method would have been up to 14 times more effective than QE at boosting GDP.

Positive Money argues that monetary financing should be ongoing, and that when the Bank of England’s Monetary Policy Committee meets every month to set interest rates and consider doing more QE, they should scrap QE and instead consider how much new money to create for the real economy.

Helicopter money can be confused with another policy, known as Universal Basic Income. They are two related proposals that have gained a lot of attention over the last year.

The difference between a universal basic income and a helicopter money cash transfer to households, is that helicopter money is a solution to broken monetary policy and challenges the idea that we should ever have a recession. It also takes us a step towards radical reform of the monetary system. The amount given out to households, and the timing of it, would vary depending on the needs of the economy. Universal basic income, however, is a solution to problems of social security, work, and brings forward the idea of economic rights. It would be a fixed amount of money transferred regularly to individuals.

Positive Money’s role in the basic income debate is to debunk one of the main arguments often used against the idea of a universal basic income. That is: ‘we can’t afford it’, or where would the money come from?’. Because if the government decided it wanted to provide a universal basic income, it could. There’s much work been done to show that a low-level basic income would be affordable based on current government tax income. And we have shown that the state could fund part of a universal basic income through monetary financing, or ‘helicopter money’. Once you understand where money comes from, the lack of money argument does not stand up.

Positive Money has always argued, however, that it would be dangerous to fund a universal basic income entirely through helicopter money, because the latter is a monetary policy tool, focused on financial stability and keeping inflation stable, so the amount created each month would vary. And this would be no good for a basic income, because people would rely on a basic income for their basic needs, so it needs to be constant and certain, and not dependent on the macroeconomic outlook of the economy. But, monetary financing could form part of the initial funding solution for a universal basic income, whilst we transfer to such a system. Government income from taxes could and should form the majority of the funding.

There is huge misunderstanding around how money is created, and the idea that it’s a finite resource. Positive Money does research and campaigns for a money and banking system that supports a fair, democratic and sustainable economy. We don’t have all the answers, but we believe a significant issue is how money is created. Currently it’s being created in the interest of private banks, and keeping stock prices and property bubbles pumped up. Instead, money should be created in the public interest and spent in way that is beneficial to all of us. If the government knew how to and wanted to, it could build enough affordable homes, transition to a greener economy, and build a fairer society.

Article written by Rachel Oliver 14th September 2017

You can read more about Positive Money’s campaign and research agenda at www.positivemoney.org.uk


Eurodividend project by UBIE

Europe needs bolder and stronger instruments to counter the forces of disintegration. The Eurodividend – a partial basic income paid to all Europeans – could become the policy instrument that safeguards the EU and especially the Eurozone from asymmetric economic shocks and reconciles citizens with the idea of European integration.

Today, the risk of poverty and social exclusion levels in the EU and in particular the precarity of young people, child poverty and in-work poverty are extremely worrying. Unemployment levels remain very high and particularly affect young people whereas the technological and digital revolution is affecting employment in various aspects, through the replacement of a great amount of jobs, the reorganisation of the workplace and the increase of the gap between productivity gains and income earned by workers. Finally, in the Eurozone, the introduction of the euro has produced increasing economic divergence between deficit and surplus countries as well as important social imbalances in terms of public investment in education, healthcare, or social security.

Many citizens who feel let down by mainstream policies with such disastrous results turn towards populist, nationalist parties that promise relief at the cost of European solidarity. All this threatens the European project, the viability of the monetary union and, most importantly, it affects directly the life of millions of Europeans who struggle to live a decent life.
For all these reasons, UBIE considers that a modest income floor in the form of a European partial basic income granted unconditionally to all EU citizens and legal long-term residents would provide a smart way to tackle the three social priorities mentioned:

  • reduce poverty and income inequalities by guaranteeing basic income security,
  • provide a complementary replacement income to that of national welfare programmes for unemployed people, and
  • reduce excessive economic and social imbalances between Eurozone countries thanks to its automatic stabilizing effect.

Such a Eurodividend would be distributed to all adult residents of the EU member states on an individual basis and without means testing or work requirements.
A Eurodividend is not meant to replace national minimum income schemes. Instead, it provides a cushion over which EU member states are able to pursue their own welfare arrangements to ensure a decent life for all their citizens. The introduction of a Eurodividend aims at the development of a fair, stable and efficient European social model.

Indeed, the Eurodividend would provide a fair redistributive mechanism to ensure that all Europeans equally benefit from the wealth generated by European integration:

  • It would considerably improve the condition of the worst-off European citizens, who would access a complementary European unconditional income without any administrative obstacles or risk of social stigma, ameliorating as a result the EU’s objective of poverty alleviation and reduction of social exclusion.
  • It would provide a mechanism of solidarity in the form of transnational fiscal transfers necessary for the Eurozone to absorb asymmetric economic shocks and reduce the pressures exerted on European welfare states due to economic and social imbalances.
  • An added benefit could also be a significant reduction of the push factors for migration within the EU, avoiding thus the negative effect of “brain drains” in certain countries.
  • Last but not least, this would certainly have a beneficial effect on the EU’s legitimacy and popular support as it would develop help develop the tangible image of a “caring union”.

The funding of a Eurodividend could be based on a combination of the following levies: a European VAT, a European corporate income tax, a European carbon tax, a European financial transaction tax, a European tax on luxury goods, a reallocation of (part of) European funds such as the European Social Fund or the budget devoted to the Common Agricultural Policy for example, or an increase of member states’ contributions to the EU budget.

What matters is that its funding depend on the EU’s own resources to establish a clear link between EU’s budget and its benefits for European citizens.

UBIE has recently argued in favour of the Eurodividend in its contribution to the public consultation organised by the European Commission on the European pillar of social rights. It is committed to further investigate the idea and will now organise expert workshops to elaborate on macro-economic effects, administrative capacities and funding opportunities. Last but not least, UBIE intends to push the idea forward within European cenacles but also in wider public debates in order to develop a more social Europe, following a ‘bottom-up’ approach aiming at a thicker transnational civil society.Europe needs bolder and stronger instruments to counter the forces of disintegration. The Eurodividend – a partial basic income paid to all Europeans – could become the policy instrument that safeguards the EU and especially the Eurozone from asymmetric economic shocks and reconciles citizens with the idea of European integration.

Source: https://ubie.org/project/eurodividend/

Can the ECB create money for a universal basic income?

Funding basic income through taxation is costly. At the same time, low consumer demand is a major worry. The European Central Bank could kill two birds with one stone by giving money directly to citizens.

Finnish social welfare agency KELA’s basic income experiment has got plenty of attention in Finland and elsewhere. This is not surprising: in recent years various proposals for a basic income have been submitted by a growing number of scientists, politicians and non-governmental organizations in several countries. Continue reading “Can the ECB create money for a universal basic income?”

ECB confirms ‘Helicopter Money’ is Legally Feasible under Conditions

Mario Draghi first discussed the notion of ‘helicopter money’ in March 2016, saying “it is an interesting concept.” Since then however, the head of the European Central Bank repeatedly stated that the idea that central banks could distribute money directly to citizens, was fraught with accounting-wise, technical and legal complexity.” However the ECB had declined at several occasion to specify in detail which were the foreseen legal obstacles.

In a letter dated 29 November to Spanish MEP Jonas Fernandez, the ECB finally provides clarifications. And our interpretation of the letter lead to the conclusion that those legal issues are very weak and solvable.

The QE for People campaign praises the ECB for finally providing this legal clarification. “By providing a detailed answer on this point, the ECB acknowledges its understanding of our proposal, which many economists say could bring significant benefits to the economy” said Stan Jourdan, QE for People campaign coordinator.

Helicopter money must be designed as monetary policy

Continue reading “ECB confirms ‘Helicopter Money’ is Legally Feasible under Conditions”

MEPs call on Mario Draghi to consider helicopter money

Eighteen members of the European Parliament have signed an open letter to the Head of the European Central Bank, emphasizing the need to consider “helicopter money” — a proposal to distribute money directly to people as a citizens’ dividend.

Some advocates argue that a basic income should be financed by “helicopter money” — the printing of new money by central banks for direct distribution to individuals. To be sure, the policy is contested, even among basic income supporters. Many suggest redistributive policies to fund a basic income, as opposed to the creation of new money, and some have vocally opposed helicopter money. Continue reading “MEPs call on Mario Draghi to consider helicopter money”

Helicopter money or European Unconditional Citizens Income?

Somewhere in March 2015, the European Central Bank (ECB) launched its long-awaited programme of quantitative easing (or QE), adding lots of public debt to the private kind it has already been buying. Its monthly purchases will rise from around €13 billion ($14 billion) to €60 billion until at least September 2016. The ECB is just the latest central bank to jump on board the QE bandwagon. Most rich-economy central bankers began printing money to buy assets during the Great Recession, and a few, like the Bank of Japan, are still at it. But what exactly is quantitative easing, and how is it supposed to work? Continue reading “Helicopter money or European Unconditional Citizens Income?”

What is helicopter money?

Helicopter money is a reference to an idea made popular by the American economist Milton Friedman in 1969.

In the now famous paper “The Optimum Quantity of Money”, Friedman included the following parable:

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”

The basic principle is that if a central bank wants to raise inflation and output in an economy that is running substantially below potential, one of the most effective tools would be simply to give everyone direct money transfers. In theory, people would see this as a permanent one-off expansion of the amount of money in circulation and would then start to spend more freely, increasing broader economic activity and pushing inflation back up to the central bank’s target. Continue reading “What is helicopter money?”

Van Parijs: An unconditional basic income in Europe will help end the crisis

In an interview given after the conference on the “Unconditional Basic Income” (UBI) organised in the European Economic and Social Committee, Phillippe Van Parijs argued that the EU should put in place such a basic income for all of its citizens, to help it escape the crisis, and to show that it is a community that “cares” for all its members.

Philippe Van Parijs is a Belgian philosopher and professor at the Université Catholique de Louvain (UCL). He talked to EurActiv’s Tanja Milevska. Continue reading “Van Parijs: An unconditional basic income in Europe will help end the crisis”

The Euro Dividend by Philippe van Parijs

Criticizing is easy. Making proposals is harder. Here is one, simple and radical, yet — I shall argue — reasonable and urgent.

Euro-dividend is how I shall call it. It consists of paying a modest basic income to every legal resident of the European Union, or at least of the subset of member states that either have adopted the Euro or are committed to doing so soon. This income provides each resident with a universal and unconditional floor that can be supplemented at will by labour income, capital income and social benefits. Its level can vary from country to country to track the cost of living, and it can be lower for the young and higher for the elderly. It is to be financed by the Value Added Tax. To fund a Euro-dividend averaging 200 Euros per month for all EU residents, one needs to tax the EU’s harmonized VAT base at a rate of about 20%, which amounts to close to 10% of the EU’s GDP. Continue reading “The Euro Dividend by Philippe van Parijs”