Direct Money Transfers to Households: The Bank of England’s Response to COVID-19 and the End of Orthodoxy



With the Bank of England likely to soon announce an additional £ 200bn of monetary economic stimulus to tackle the economic impact of the coronavirus crisis, Caroline bentham argues that they should think carefully about what to do with the money. She argues for a different conception of the central bank’s monetary stimulus – direct money transfers to households – and explains how it would work.

The coronavirus crisis has been a time of unprecedented change and upheaval that has left few people untouched. While the immediate impact was devastating for many, with change comes opportunities for review and progress. Those looking for silver liners cite the renewed value of what really matters: spending time with loved ones, a more relaxed pace of life, supporting our community.

As the UK government’s new finance chancellor, Rishi Sunak, said: “Now is not the time for ideology and orthodoxy, this is the time to be bold – a time to be bold. courage.” Economic orthodoxies are dissolving in the face of the challenge posed by the physical health emergency and its direct and indirect economic impacts. Governments around the world have defied their own spending rules to tackle the pandemic and the current economic downturn – the same rules that demanded austerity measures that have ravaged the UK for the past decade .

I’ve written before about where the money to fight the virus comes from and how that money could be repaid – there is no magic tree, tax expenditures will eventually have to be paid, and now is the time to try the alternatives to austerity.

The other major tool of macroeconomic policy that receives less public attention is monetary policy. The independent Bank of England controls monetary policy on the grounds that technical experts are the best people to make decisions about the plumbing of the financial system, rather than politicians. This philosophy perhaps makes a lot of sense if we think of the role of the central bank as that of a plumber – tinkering with the practical operational parts to ensure that finances can flow freely. However, this makes less sense when you consider the unconventional quantitative easing funding programs adopted by the central banks of many of the largest economies since 2009.

From 2009, Britain’s so-called temporary quantitative easing program grew and was never stopped, reaching £ 445 billion. Yes, billion – around 30% of the UK’s total GDP. The Bank of England generates loans like any other bank, so they created this huge pot of cash and used it to buy mostly government bonds. Some say that quantitative easing is almost tantamount to directly financing budget spending, as central banks indirectly buy a lot of government bonds anyway, and some central banks even offer short-term direct overdraft facilities to governments. The main difference is that central banks keep strict control over quantity, duration, timing, etc. : they are the ones who decide, not the government. This is to avoid the threat of spiraling price inflation that can occur when a government controls the ability to create new finance.

Quantitative easing was originally aimed at pulling the economy out of the recession caused by the global financial crisis. But the deliberate effects of this stimulus policy since 2009 have included the enrichment of the rich and have had questionable benefits in how it supported everyone else’s finances. There is evidence that this has increased intergenerational and wealth inequalities through effects such as rising house prices.

Figure 1: Effects of changes in monetary policy since 2007 on net wealth by wealth decile in monetary terms

Note: Graph produced by Bank of England staff.

The Bank of England insists that it is not its job to prevent the social side effects of monetary policy – its only job is to control price inflation by stimulating the economy when necessary, and the government must implement policies to compensate for social inequalities caused by central bank policies. .

A potential different view of central bank monetary stimulus is direct cash transfers to households. The Bank of England’s own research shows that cash transfers to households could be just as effective as quantitative easing in stimulating the economy. Studies of universal household payment programs show the endless potential benefits. Pilot studies of basic income payments to households have found benefits for a wide range of social well-being factors: a recent one-year study in Finland found improved levels of mental, physical and social well-being. financial for beneficiaries; a similar study in Namibia found positive results in areas such as reducing community poverty and crime rates and improving school attendance. Researchers in Canada have proposed a Basic Income pilot project based on evidence that it could reduce domestic violence, as greater financial independence helps victims of abuse withdraw from abusive relationships.

A recent study on how Basic Income could be implemented in the UK reveals that the fundamental issues are affordability and how to sufficiently support the incomes of those in need. But this policy proposal would never be conceived of as a universal basic income. This is the Bank of England which is easing its monetary policy to stimulate the economy. If the Bank of England is going to pump that amount of money into the economy anyway, the affordability issue has already been ruled out (see here for arguments against that). Payments would not be designed to provide full income: it would be a more equitable distribution of funds that might otherwise be accumulated by the financial sector, as the Bank of England recognizes during easing cycles quantitative over the past decade.

The coronavirus crisis has caused a set of circumstances where a cash boost to households could be exactly what can best support both social welfare and economic recovery: the US Treasury recently announced that it would give everyone, except the highest earners, $ 1,200 per person. A thriving financial sector is not viable if the lives of masses of normal people collapse.

The Bank of England announced additional quantitative easing of £ 200 billion in March and said it was possible it could announce more in the near future, possibly at its next meeting on June 18. In this time when established economic orthodoxies are being swept away, it is time to accept that the social impact of economic policies matters. The policy design of the central bank is important. Other rounds of monetary stimulus must examine how effectively they are supporting the economy and society amid the COVID-19 crisis, especially if they are never repaid, as the Bank of England plans much of its previous rounds of quantitative easing never to be repaid.

If the Bank announces a further £ 200 billion monetary policy stimulus, that equates to £ 3,000 for every person in the UK. This could be paid to individuals as a lump sum, or it could be paid as an income support grant of £ 250 per month per person for one year. This is not meant to replace Social Security income assistance, but to be a one-off coronavirus crisis policy in addition to budget spending. Conceptually at least, this represents somewhat fair treatment considering that a person earning £ 100,000 would receive 3% of their income while someone earning £ 6,000 would receive a 50% increase in their income. returned. A universal rate also lowers cost and bureaucratic barriers for all who receive it, but leaves room for the government to reap a portion of it through taxation of the highest incomes.

This type of policy proposal has long been considered taboo, so little direct academic research has been done on it, although there is new interest in the coronavirus context. Related examples of short-term stimulus payout programs such as Basic Income pilots, one-time tax cuts, and petty lottery wins may provide clues as to what the design and outcome might be. Quantitative easing and other unconventional uses of central bank money were also considered taboo before 2008.

As Rishi Sunak urged, now is the time to act boldly. Policymakers must decide whether to maintain orthodox paradigms for which the evidence falters, or have the courage to consider alternative policies in this time of change.


About the Author

Caroline bentham is a PhD candidate in Economics at the University of Leeds, funded by a Stell Fellowship for Social and Political Science Research. Previously, she worked for several years in the field of economic policy, notably at the Bank of England, at Ernst and Young Financial Services Advisory, and ended as Deputy Director in the Department for Business, before returning to the world. university.

All articles published on this blog represent the point of view of the author (s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science. Featured Image Credit: By Sandy Millar on Unsplash.

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