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Sunday, 19 August 2012

Is it such a bad idea to give the fiscal stimulus direct to the consumer?

As you read this, I am safely ensconced on holiday several hundred miles away, in some way insulated  from the abuse that shortly may be heading in my direction.

Here's my thought. Let's do a George W Bush, and give future fiscal stimulus direct to the consumer in the form of a cheque.

OK. Deep breath.

Here's my back of an envelope logic.

So far we have seen £375 billion of quantitative easing. This has gone directly to the banks. Of that sum, some 58% is estimated to be...in the banks. They've kept it to shore up their tattered balance sheets. Hence the need for wholesale banking reform and a compulsion to lend.

But here's an alternative thought.

£375 bn equates to around £5500 for every person in the UK.

How much better would it have been had this money gone directly to the consumer (we can argue the toss over whether everyone gets it, just taxpayers, just adults etc - its the principle I'm pursuing).

Sure, many people will use it to pay off debt, or save it. If that's 58% of people, or less, then more money will be piled into the economy than quantitative easing has managed. This article points out how  folk are very reluctant to borrow - so why not give them the money more directly?

This is not a perfect answer. It doesn't for example, solve the problem businesses have in getting hold of loans - although if the money spent by consumers benefits those businesses directly, they shouldn't need so many loans as their net cashflow will be hugely improved. And it is a more creative idea than the QE route, which doesn't exactly seem that effective to date...

Now, George W (and before that, his dad) tried this before with very mixed results. But there are reasons why it wasn't so effective then  - partly timing, partly that government defecit went up hugely at the same time leading to inflation.

And anyway, forget the Bushes. There's another President who advocates exactly this route. This blogs favourite US President.

If it's good enough for him....

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