Resurrecting the world’s first economic policy idea

The Old Testament gives specific instructions to the Israelites as to how they should organise their society. One of the most intriguing from a modern-day economist’s perspective is that of the Jubilee. Every 50th year, all debts between Israelites were to be wiped clean, all land returned to the families that owned it 50 years previously and slaves freed. In today’s parlance, it was pushing the Reset button and starting afresh. There is little evidence that the Israelites followed this revolutionary idea, most probably because those who would benefit most were the poor and downtrodden and those who would benefit least were the rich and powerful!

Recently some economists such as Stephen Green have been proposing the idea of a Modern Debt Jubilee (http://moderndebtjubilee.blogspot.co.uk/p/modern-debt-jubilee.html) as having merit for solving today’s economic problems. The world is currently experiencing a balance-sheet recession rather than a standard cyclical recession. This is where individuals, governments and especially banks believe themselves to be over-indebted and seek to reduce their liabilities (debts) – there is a much reduced desire both to borrow and to lend. This inhibits overall demand in the economy, leading to slower growth which in turn holds back confidence in companies who defer investment.

The policy of Quantitative Easing (QE) is the printing of money to make banks balance sheets more liquid and thus encourage them to lend once more. An alternative Modern Debt Jubilee policy would be to print money and use it to repay some of the debt outstanding which is inhibiting economic growth – so returning to the concept of Jubilee. For example the government could decide to give every adult in the country £10,000 in a special account, which could at first only be used for the repayment of their debts. In this way, individuals could repay their most expensive debts (typically consumer credit), and banks would become both more liquid and have smaller balance sheets. For those who do not have debts use of the money could be restricted to paying for tertiary education, for buying a home for them to live in or providing a pension – all of which can be regarded as personal long term investment.

At the cost of a large amount of money, £450bn for the UK – (compared with the £375 billion of QE so far approved by the Bank of England) this Modern Debt Jubilee policy would significantly reduce consumer debts, provide better-funded pensions and boost the amount of equity in people’s homes. Though the use of this money would be restricted to “worthy” areas, there would certainly be a consumer wealth effect both from consumers just feeling less indebted and from the boost to disposable income from reduced interest payments. Demand in the economy would pick up and if the Bank of England feared inflation then they could easily reverse the QE as banks would not need the extra liquidity as consumers repaid debts. A little inflation, however, would be rather welcome as it would break the economy out of the deflationary mindset that it has fallen into currently.

If we do need to print more money to boost the economy, then this idea is a far more powerful way of ensuring it happens than replacing government bonds with cash in the banks’ balance sheets, the current QE policy.

Jubilee – the oldest and least used economic policy idea in history is definitely worth considering today in a modern form. For those at the bottom end of the income distribution, it would rid them of debts that burden their lives thereby pushing the Reset button on their personal finances. For the middle classes it is a way of either ridding themselves of expensive debt or encouraging long term savings.

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