Alternatives to Quantitative Easing

The Fed and the United States government have chosen the Quantitative Easing (QE) policy as the best policy to overcome the 2008 crisis. This means that there were other policies in consideration. These policies were alternatives to Quantitative Easing (QE) policy and were capable of providing a similar effect. However, the average person is not even aware of most of these policies. In this article, we have therefore decided to discuss some of these policies and their advantages and disadvantages relative to Quantitative Easing (QE). Some of the alternative policies are as follows:

Helicopter Drop

One of the alternatives to Quantitative Easing (QE) suggested by many critics is the “helicopter drop” policy. This policy is a fictional policy that was made popular by Milton Friedman. The policy is based on the assumption that a helicopter flies across various neighborhoods in the city and drops money to the people. Simply put this means that the government creates more money and distributes it to the people. This policy would also have a similar effect as Quantitative Easing (QE). This is because as and when people get their hands on the newly created money, they would start to spend it. As a result, the demands for goods and services will increase and the economy as a whole will be stimulated.

Critics argue that this policy is much better than Quantitative Easing (QE) and that the government should simply give away money to the people. This is because the helicopter drop would create a somewhat equitable distribution of money in the economy and everyone receiving the money would be better or worse off to a similar extent. However, in the case of Quantitative Easing (QE), the banks are the ones that receive the money first. As a result, they get maximum advantage out of the money which is then lent out to the people much later and by the time the average person gets their hand on the money, inflation has already caught up!

Tax Rebates

Many economists believe that tax rebates would be a much better alternative to Quantitative Easing (QE). This is because Quantitative Easing (QE) emphasizes on creating more borrowing in the economy. The borrowing maybe for a productive purpose, such as setting up an industry. Alternatively it could be for consumption driven purpose. Quantitative Easing (QE) does not distinguish between these two types of lending. Hence, the policy of Quantitative Easing (QE) is faulty to these economists.

Tax rebates on the other hand can be used to control, exactly who gets the additional money. For instance, the United States government could cut tax on productive purposes. This would leave more money in the hands of the entrepreneurs who would then want to invest this money to grow their business and stimulate the economy in the process. The personal income taxes can be dropped at a lower rate to fuel consumption of these additional goods. Tax rebates, therefore have the power of directing the newly created money to its appropriate destination.

Lower Borrowing Rates

The Quantitative Easing (QE) policy is aimed at stimulating borrowing and lending in the economy. The central bank provides the banks with excess reserves based on which they can create more loans in the open market. Theoretically, therefore a lowered interest rate would work in the same way as a Quantitative Easing (QE) policy would. However, in reality, lower interest rates do not work as well. This is because lower interest rates and other lax lending standards attract borrowers that the banks do not want to lend money to. The borrowers that banks are in fact interested in lending money to are often disinterested in these interest rate gimmicks.

Deficit Spending

Another popular measure commonly used by Central Banks and governments worldwide in lieu of austerity is deficit spending. Under this policy, the government is advised to undertake long term infrastructure projects in the economy. Since the government does not have the money to finance these projects, they are advised to create this money or use debt financing. In either case, the money supply of the local economy increases and the overall effect is like that of Quantitative Easing (QE). This policy has been widely used by many governments across the world. This is because it gives governments the power to redirect the resources strategically as and when required. Deficit spending, however creates the problem of huge interest burdens if the policy is not implemented carefully. Deficit spending programs gone awry have been the cause of many bailouts around the world.

Austerity

One of the most painful alternatives to Quantitative Easing (QE) is austerity. Quantitative Easing (QE) and all the other policies listed above are aimed at providing temporary relief to the economy and the people. Long term relief can only be achieved by undoing the wrongs of the past. As a result, austerity is the ideal solution. Sooner or later, any economy that is using Quantitative Easing (QE) will have to use austerity as well. However, most economies want to avoid that day till as long as possible. However, it must be noted that austerity is the only real solution, one that solves the problem from its root cause. It is unlike other quick fix band-aids that are usually used by the Central Banks and governments as populist measures.

Many critics believe that Quantitative Easing (QE) was not the best choice for any of the developed nations to come out of the crisis. However, all the nations have made a unanimous choice. The results of this choice will be visible over the next few years.


❮   Previous  Article Next  Article   ❯

Authorship/Referencing - About the Author(s)

MSG team comprises experienced faculty and professionals who develop the content for the portal. We collectively refer to our team as - “MSG Experts”. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.