8 Sep 2013

How to distribute money from the European Central Bank

I've recently been arguing that a really good way to get debt-free money into the economy would be to simply get the Central Banks to create an electronic account for each citizen, and then add a number to that account. Yes, that is how banks create money - by typing numbers into a computer terminal.

In the case of the European Central Bank, this would mean creating accounts for the 333 million Eurozone citizens. A decision would have to be made about what to do for children. Each citizen would then be able to link their ECB account to the bank account of their choice, and would be able to transfer money so they could then spend the money into the economy. They could also use the ECB account as a 100% guaranteed safe place to keep their money, thus removing the need for government guarantees for the banking sector.

My original proposal was that the money created by the ECB should be distributed in a totally neutral way - each citizen would get the same amount irrespective of where they lived within the Eurozone.

However, some people have reacted by saying that such a scheme would be unfair. The cost of living varies between different Eurozone countries, and therefore the money should be distributed in a way that favours those people living in more expensive countries.

How might this work? Well, there are various numbers used by economists that allow the Purchasing Power in different countries to be compared. In principle, these numbers could be used to vary the ECB contributions for each country. 

I downloaded the Purchasing Power Parity numbers from the Eurostat website, and have put them in the table below. It turns out that there are five different sets of numbers that are available. In each case, there is a number for each of the 17 Eurozone countries that measures the local value relative to the average for the 28 EU countries (set at 1).

The first option uses Gross Domestic Product. Using this as a base for distribution would mean that citizens in Finland would get the most.  Indeed they would get 78% more each then people in Slovakia (who incidentally get the worst deal whatever the choice).

The second option uses actual individual consumption - in other words, how much people actually spend. With this scheme, people in Luxembourg would do really well, raking in more than twice the amount paid to those in Slovakia.

The third option would use the cost of food and non-alcoholic beverages. This would be a great deal for people in Austria, wwho would get 38% more that the Slovakians.

Or you could use the fourth option, the cost of just food, which would again see the Austrians getting most - 41.6% more than the Slovakians.

Finally, you could just use the cost of Bread and Cereals (fifth column). Again the Austrians do best, with  nearly 64% per head more than those in Slovakia.

Of course, there are an infinite number of columns that you could invent. What about taking into account the cost of rented accomodation? Or the cost of unviversity education? Or the cost of public transport? Or the cost of water, electricity and gas??

My personal opinion is that none of these is any good. As soon as you fix the rules so that the ECB has to provide more money per citizen in one country than another, then this will immediately give incentives to governments in each country to increase their local costs to increase their share. Suppose that it was bread and cereals that was the key index. Increasing the cost of bread in Slovakia would be a fantastic deal for the Slovakian government, and if the amounts of money being distributed by the ECB started to become very significant, then the incentive to artificially distort the numbers to get a larger slice of the cake would be very strong.

Imagine the effect of including the cost of public transport. Why would governments not immediately decide to increase transport costs to get more ECB money?

Or the cost of university eduction? Do we really want to encourage governments  to push up eduction costs?

No, there is no way to get this to work except a totally transparent scheme where the money is distributed directly on the basis of the number of citizens in each country. In that case, only increasing the local population would have any effect on the amount that the ECB pays to a given country. Indeed, this would be good in that it means that there would be some automatic compensation for people migrating between different Eurozone countries - something that many would find normal.

Even if you do think that it would be nice to try and find a "fairer" way of distributing Central Bank money between citizens, there are other reasons why I think that it would be a bad idea. With a flat system where Greeks get the same amount as Germans, this is not necessarilly a bad thing for Germany. Injecting more money into the Greek economy would mean that there would be more money around for importing German manufactured goods. That ECB money would still tend to accumulate in the places where the manufacturing was being done, so I see no reason to believe that the German economy would suffer at all be a truly uniform distribution system.

Finally, I have to admit that if I was living in Austria, I would be positively embarrassed to receive far more from the ECB than those living in the poorer parts of Europe. If bread and cereals really are cheaper in Slovakia, Estonia and the Netherlands, then I believe the Austrians should arrange to buy their cereals there, rather than expecting the ECB to subsidise their excessively expensive locally produced cereals.

So, if anyone wants to defend a distribution mechanism that involves anything other that providing the same amount for each citizen, please feel free to comment below.

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