They discuss four ways in which newly created money could be spent into the economy
- Increasing government spending. This would allow the government to increase the provision or quality of public services such as education, heath care or public transport, without increasing the tax burden on the public.
- Cutting taxes. This could be done in three different ways - (a) giving rebates on tax payments, (b) reducing the rates on taxes such as income tax, VAT, corporation tax, national insurance etc, or (c) abolishing taxes.
- Making direct payments to citizens. This would be effectively the "helicopter money" idea. It would mean that the new money would be shared equally between all citizens (or all adults, or all registered taxpayers).
- Paying down the national debt.
Jackson and Dyson don't express strong opinions either way, but they do argue that paying off the national debt should not be the highest priority. They suggest that it would mean "that the newly created money would go first to holders of government bonds and would tend to stay circulating within the financial markets rather than reaching the real economy". And there is a whole section in Appendix II that argues that since the government pays lower interest rates on national debt than the public pays, the highest priority should be to get private debt levels down.
I don't agree. The fact is that the very existence of a system where commercial banks can create money that gets used to buy government bonds and which earn interest for those bond holders is clearly wrong. It is this anomaly that needs fixing above all.
I discovered that the UK's Office for Budget Responsibility has a data area where you can download several excel files, including one called "Economic and fiscal outlook supplementary fiscal tables". In that file you can find the following table showing a breakdown of where the OBR thinks the government's future interest payments will go for the period 2011-18.
I just added up the numbers (as I like to do!) to show that on the current arrangement, the UK government will hand over roughly £380 billion of taxpayers money to bond holders over that period. Now remember that those bond-holders (UK government bonds are called "gilts") are taking essentially zero risk. Even with the UK government's credit rating dropping below Triple A status, they are still taking no risk at all.
Why should UK taxpayers be paying these people anything if it is perfectly possible for the proposed Money Creation Committee to create the money supply interest free and allow the government to pay off those debts?
Jackson and Dyson worry that if the investors money was freed up by the government paying off its debts, this could flood the markets with massive amounts of money and that this could lead to assett bubbles. But maybe, if the investors didn't have the soft option of having riskfree interest paid by the taxpayer, they might invest their money in something useful - like financing businesses!
And more to the point, a large percentage of those gilts are indirectly held by the banks that created the "money" used to buy them out of thin air. In that case, paying off those loans should actually cancel out the loans - meaning that the banks "money" would disappear in a puff of smoke. That sort of money couldn't fuel inflation or assett bubbles.
Anyway, it's an interesting debating point. I look forward to the day when the Money Creation Committee gets to create the money supply. Deciding what to do with all that interest free public money is one of those tasks that I'm sure will be much more pleasant that deciding where austerity's axe should fall next....