23 Rethinking Monetary Policy – Can We Do Better?

For decades, we’ve been told that the economy is like a finely tuned machine, with central banks at the controls, adjusting interest rates to keep everything running smoothly. When the economy slows down, they lower rates to encourage borrowing and spending. When inflation picks up, they raise rates to cool things down. This idea, monetary policy as the ultimate stabilizer, has been the foundation of modern economic management.

But as we’ve seen, this theory doesn’t always hold up in reality. The global economy has been through crisis after crisis – Japan’s stagnation since the 1990s, the financial meltdown of 2008, the Eurozone debt crisis, and most recently, the COVID-19 pandemic. And in each case, central banks did what they were expected to do: cut interest rates, launch quantitative easing, and even experiment with negative rates. Yet economic growth remained weak, inequality widened, and many people found themselves worse off despite all the financial engineering.

This raises an uncomfortable question: if monetary policy alone is not enough, what else should we be doing?

For Post-Keynesian economists, the answer is clear: rather than relying solely on central banks and interest rates, governments need to take a more active role in shaping the economy. This means using fiscal policy (government spending and taxation) to directly influence economic activity.

To understand why fiscal policy matters, let’s go back to the Great Depression of the 1930s. When the stock market crashed in 1929, the global economy collapsed. Banks failed, businesses shut down, and unemployment soared. The response at the time? Governments tried to balance their budgets, cutting spending at the worst possible moment. The result was economic disaster.

It wasn’t until the New Deal in the United States, where the government began actively investing in public works, that things started to turn around. Bridges, roads, and dams were built, creating jobs and putting money directly into people’s hands. In Europe, the economic recovery was even more dramatic, although, unfortunately, it came through wartime spending.

The lesson was clear: when private sector demand collapses, the government must step in and spend. This is precisely what many countries did after the COVID-19 pandemic, massive stimulus programs, wage subsidies, and direct payments to households. And it worked. Countries that spent aggressively saw faster recoveries than those that relied solely on monetary policy.

The key difference is direct impact. When a government spends money, whether on infrastructure, social programs, or direct transfers, it puts money immediately into the real economy. In contrast, when a central bank lowers interest rates, it only influences the conditions for borrowing, hoping that businesses and consumers will take the bait.

Take the United States’ response to the 2008 financial crisis. The Federal Reserve lowered interest rates and pumped money into financial markets through QE. But it was not until the government launched major spending programs – the American Recovery and Reinvestment Act, the auto industry bailout, and later stimulus checks – that the economy started to heal.

Compare this with Europe’s response, where austerity policies were imposed on struggling economies like Greece, Spain, and Portugal. The results? High unemployment, slow recovery, and widespread economic pain. Instead of boosting demand, governments cut spending, making the crisis worse.

This is why pluralist economists argue that fiscal policy should not just be a last resort, it should be central to economic management.

One of the more radical ideas to emerge from recent debates is People’s QE. There’s an uncomfortable truth we need to confront. In many countries, political power has fallen into the hands of people who are skilled at talking, wealthy enough to fund flashy election campaigns, but completely incapable of governing. These are individuals with limited knowledge, minimal education, and no real understanding of how to run a country. And yet, they lead entire nations as if they have all the answers. They speak with confidence on every topic, as if expertise were something they simply inherit with the office. But that’s not how leadership works.

What happens when people with no capacity for statecraft take control? They hand over public resources, like the easy money from quantitative easing (QE), to their wealthy backers in the financial sector. These funds, meant to stimulate the economy, are instead funnelled into the hands of greedy financial institutions. And when the inevitable consequence arrives, rising inflation, what do they say? Certainly not, “We got it wrong.” They don’t admit they’ve mismanaged things or acknowledge their failure.

Instead, they send the bill to ordinary people. In recent years, the average household across Europe has had to pay at least £300 more every month on their mortgage. That’s the price of leadership failure. It’s always easier, isn’t it, to make others pay for your mistakes? They raise interest rates, digging deeper into people’s pockets, all while pretending this is a necessary solution.

When the economy grows, the benefits are handed out to the elite. When the economy needs fixing, the burden is dumped on the shoulders of everyday families. That’s the pattern. It’s unjust, and worse, it’s deliberately repeated.

The idea is simple: instead of using QE to buy financial assets and inflate stock markets, central banks could inject money directly into the real economy.

Imagine if, instead of spending trillions buying government bonds, central banks used that money to:

• Fund public infrastructure projects – building schools, hospitals, and green energy.
• Give direct cash transfers to households, boosting spending and demand.
• Cancel or restructure household debt, freeing up money for consumption and investment.

This approach would ensure that new money actually reaches the people who need it the most, rather than sitting in the balance sheets of banks and corporations.

Another idea gaining traction is Universal Basic Income (UBI) – a policy where every citizen receives a fixed amount of money regularly, regardless of employment status. The idea is controversial, but experiments have shown promising results.

For years, economic debates have been dominated by technical jargon and abstract models that seem distant from real life. But in reality, these policies shape our daily lives.

• High interest rates? Expect more expensive mortgages, slower job growth, and lower wage increases.
• Low interest rates? Good for borrowers, but risky if it leads to asset bubbles that make housing unaffordable.
• QE that inflates stock markets? Great for the wealthy, but it doesn’t put food on the table for the average person.
• Fiscal policy that prioritises public investment? That could mean better healthcare, infrastructure, and job security for millions.

The stakes are real. And as the world faces climate change, automation, and rising inequality, the debate over monetary vs. fiscal policy is not just academic, it is deeply political.

Monetary policy has played a crucial role in economic management, but it is not a magic bullet. Interest rate cuts and QE cannot create demand where it doesn’t exist, nor can they solve deep structural issues like inequality, climate change, and unstable financial markets.

If the lessons of Japan, 2008, and COVID-19 have taught us anything, it is that relying solely on central banks is not enough. A more balanced approach, one that combines monetary and strong fiscal policies, is needed to create a more resilient, inclusive, and fair economy.

This means moving beyond old ideas and embracing new possibilities:

• Fiscal policies that prioritise people over markets.
• Investment in real economic activity instead of financial speculation.
• Monetary systems that serve the public interest, not just financial elites.

The economy is not a machine that can be fine-tuned by central bankers alone. It is a system shaped by policies, power, and choices.