I noted a report in the Independent yesterday about comments that the shadow chancellor, Chris Leslie, had made about why he called Corbynomics. These are, I presume, the policies announced by Jeremy Corbyn nearly two weeks ago. I spoke at the launch of those policies and since they were heavily influenced by this blog I feel I have a right and duty to defend them.
The key elements of the economic policy, taken from Corbyn's statement are:
One option would be for the Bank of England to be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects: Quantitative easing for people instead of banks. Richard Murphy has been one of many economists making that case.
Another option would be to strip out some of the huge tax reliefs and subsidies on offer to the corporate sector. These amount to £93 billion a year - money which would be better used in direct public investment, which in turn would give a stimulus to private sector supply chains.
The key tax policies are:
But whatever tax laws we pass, we won't get a progressive tax system in reality unless we can enforce it and collect the tax we are owed. A detailed analysis last year produced by Richard Murphy suggests that the government is missing out on nearly £120 billion in tax revenues, per year.
That's enough to double the NHS budget; enough to give every man, woman and child in this country £2,000.
The £120bn figure is made up from:
- about £20bn in tax debt, uncollected by HMRC which continues to suffer budget and staffing cuts (only partially reversed in the last Budget)
- another £20bn in tax avoidance
- and a further £80bn in tax evasion.
This is money taken from us all. And we can address this. Therefore I am announcing today that my fairer tax policies will include:
- The introduction of a proper anti-avoidance rule into UK tax law.
- The aim of country-by-country reporting for multinational corporations.
- Reform of small business taxation to discourage avoidance and tackle tax evasion.
- Enforce proper regulation of companies in the UK to ensure that they file their accounts and tax returns and pay the taxes that they owe.
- Lastly, and most importantly, a reversal of the cuts to staff in HMRC and at Companies House, taking on more staff at both, to ensure that HMRC can collect the taxes the country so badly needs.
And what does Chris Leslie say of all this? Let's start with People's Quantitative Easing. Here the Independent notes:
The shadow Chancellor rounded on Mr Corbyn's proposal for “quantitative easing for people instead of banks.” He said: “Printing money and ending Bank of England independence would push up inflation, lending rates, squeeze out money for schools and hospitals and mean spending more on debt servicing. Higher inflation and a higher cost of living would hit those on the lowest incomes, the poorest people who couldn't afford those goods and services. The very people we should be standing up for would pay the price — the poor and vulnerable.”
This is an absurd analysis in so many ways it is hard to know where to start in addressing it, so let me do so in bites sized chunks.
First, people's quantitative easing is not the same as quantitative easing. Both are, of course, based upon the idea that the Bank of England provides funds to buy back debt that the government or its agencies in their various forms have issued, but the impact is fundamentally different. In the case of quantitative easing of the type used from 2009 until 2012 the money bought government bonds that had already been in existence for some time and the money was available to banks, pension funds and others to reinvest, the hope being that this money would flow into the productive economy. It did not. Instead it flowed into the house price and asset speculation. The gains went almost entirely to bankers who were, in effect, given costless money to speculate, which they did to the benefit of their bonuses and their banks' profitability.
People's quantitative easing is instead a highly directed process where the debt that is repurchased has been deliberately created and issued either by a green investment bank or by local authorities, health trusts and other such agencies for the specific purpose of funding new investment in the economy at the time when big business and financial markets are completely failing to deliver the scale of investment that is needed to get the UK working again and to restore our financial prosperity. There is no chance whatsoever that people's quantitative easing funds will leak into asset speculation, and so generate inflation, precisely because to the greatest extent possible banks will be kept out of this loop for the good reason that they have proved themselves unable to manage this type of socially beneficial investment activity.
Second, people's quantitative easing does not require an end to Bank of England independence, although why Chris Leslie should be so wedded to that idea apart from the fact that it was Ed Balls' suggestion in the first place, I am not sure. If anyone can provides good reason for moving most of economic policy beyond democratic control in the 21st-century I would be pleased to hear it: I can think of no justification for doing so.
Third, printing money is not inflationary when there is a shortage of money in the economy. If Chris Leslie is not aware of it, and I suspect he is not, all money that exists in our economy is created either by bank lending or by the government printing it. Those are the only options that are available. And, when there is too little money we risk getting deflation, which is pretty universally recognised as posing a threat to economic well-being because of the risk that it creates that people will stop spending, whether on business investment, or on household goods. Right across Europe, including in the UK, this is the big risk right now. Many European countries already have deflation whilst we have zero inflation, and quite appropriately the target for inflation is at least 2% per annum. Despite Office for Budget Responsibility forecasts, there is a I, and many other economists, have noted very little prospect of businesses suddenly entering into a period of quite historically exceptional new investment, and barring a massive house price boom there is also very little chance that consumers are going to increase their borrowing to the extent that George Osborne has predicted. In that case in the UK we may well remain in the situation where net loan repayment by business and consumers may actually be destroying more money than is being created by banks making new loans. In that case we are in the same position as many EU states, where there is desperate need of the new money to be injected into the economy to boost economic activity and maintain positive rates of inflation. And even if we cease to be in the same position as some of those EU states we still have a choice, which is an entirely valid one for any government to make, as to whether or not new money should be created by house price bubbles, asset price bubbles, or increased consumer debt, all of which were the precursors of the 2008 crisis, or whether, instead government wishes to themselves create this new money in a focused and directed fashion to ensure that there is new economic activity in the country which creates employment, increased wages, rising tax revenue, long-term prosperity, economic and environmental sustainability and a sense of well-being. I know which I would prefer: it would seem that Chris Leslie prefers the route to a crash.
Fourth, to suggest that people's quantitative easing will increase the government's debt burden is wrong, as it is also wrong to suggest that it will increase its debt servicing obligation. If the government buys its own debt then it cancels it. This, as a matter of fact, is true. It is, of course, technically legally possible to argue that the debt still exists, but if I create a loan to myself, even if it is legally recorded, it has no economic consequence: my repayments of my loan from me to me means that no money actually in net terms leaves my own pocket and that is exactly what happens when, as a consequence of any form of quantitative easing, the government owns its own debt. So, quantitative easing actually cancels government debt and does not increase it. And, in the process, it prints money, and the government does not have to pay interest on the money that it has created itself: Chris Leslie should know this; no interest is paid on the £375 billion of government debt that was repurchased between 2009 and 2012, partly under a Labour government. Technically, therefore, his arguments in this area are all just wrong. There is as a consequence no chance that this form of quantitative easing will push up interest rates, whilst to suggest that it will prevent spending on schools and hospitals, when that is exactly how it will be used, is either naive or deeply disingenuous, as are the claims on debt servicing.
If I am charitable, it is very clear that Chris Leslie has never bothered to acquaint himself with what people's quantitative easing is about. If am more candid, I think is wholly misrepresenting the truth on the issue.
But let me then turn to tax where the Independent report:
Mr Leslie, who is backing Yvette Cooper in Labour's election, warned that Mr Corbyn's plan to raise £120bn by tackling tax avoidance and evasion and reduce the £93bn spent on tax reliefs would not materialise, leaving a black hole in the public finances.
This, again, is simply absurd. No one has said that all the £120 billion in my estimate of the tax gap can be recovered and likewise no one is suggesting to my knowledge that all tax reliefs to business should be removed. But, what Jeremy Corbyn is correctly saying is that substantial action should be taken against tax abuse and that as yet there is no evidence of this because HM RC are not being provided with any real additional resources, legislative change is so far of token nature alone, there is no demand for increased accountability from big business, and there is no willingness to crack down on those who are really abusing. What is more, the failure of the UK to regulate the companies that it incorporates is contributing massively to tax abuse in the UK and abroad. Chris Leslie should be pretty familiar with all these ideas: they will all borrowed by Labour from this blog to form the backbone of its general election manifesto on this issue, and they did, along with the domicile rule changes also heavily influenced by me, provide one of the few cohesive and justifiable successes within its campaign. Now, however, Chris Leslie seeks to denounce them. It would be good to know why. When the option of reviewing all allowances and reliefs to make sure that they provide cost effectiveness for the government in terms of return generated and when opportunities to provide additional resources to crack down on tax avoidance and evasion do now exist, it would be scandalous for the Labour Party to ignore that chance.
The real question is why Chris Leslie would not wish to undertake either activity when the contribution both could make to creating a level playing field for business, large and small needs is obvious and as such they are the basis for the creation of a new, vibrant, business sector within the UK economy. Jeremy Corbyn is promoting this from what is described as the left-wing. The real question is why the supposed right wing would not wish to embrace the same ideas.
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An excellent economic analysis to those who are not deluded by mainstream economic thinking. Leslie merely regurgitates the manifestly failed dogma.
“The real question is why Chris Leslie would not wish to undertake either activity..”.
Chris Leslie, along with the Blairites, thinks he knows what the electorate want, independently of any data to the contrary. More neo-liberalism, of course!.
Because 24% of the electorate voted conservative, this clearly indicates to their finely honed sense of intuition that they must shift more to the right to capture some of those votes. What about the other 76%? – just ignore them, perhaps they’ll go away.
The right wing doesn’t do what you or I want, they do what their corporate and finance sector masters want. It was always thus.
This worked fine up to the 70’s, when the 99% got at least some share of the wealth. There was enough noblesse oblige and common sense going around among the 1% to make it work. But since Thatcher, raw greed has trumped any kind of common sense, so the financial parasites and oligarchs started feeding on the host without any moral or rational restraint. This results in the host waking up to the fact that its being eaten alive…
Times have changed, Mr. Leslie and Labour Blairites, and not for that better as far as you are concerned. It is you lot who are ‘un-electable’ now.
It’s not really about being “deluded by mainstream economic thinking”; what is exposed in this article – or in Cobryn’s policies, as far as I can see, does not go against mainstream economic thinking.
Of course that effectively “people’s QE” does in fact raise inflation. However, since the UK inflation is at a 20-odd year low and is skirting on deflation (which conventional economic wisdom holds to be very damaging) it’s not a valid argument against a reasonable use of “people’s QE” policy at all.
Branko Dodig:
The FACT is that it is impossible to have inflation in the middle of a depression because money used to expand the economy would fund the spare capacity that is available, inflation would only arise if the economy was growing faster than the means to produce. With all the spare capacity we have at present that is not the case.
This video makes that point in question.
https://www.youtube.com/watch?v=YnyDRwSqp2E
Thanks
Accepting Jeremy’s QE proposals are sound in theory, if it is used like a drunk sailor on shore leave like PASOK or Chavez than surely its theoretically possible that the points Leslie makes about inflation and even insolvency will be the end result of this policy? I like the ideas Jeremy has put forward on QE but to deny it has consequences if used unwisely does not sound convincing.
Oh for heaven’s sake: all policy badly used goes off the rails
Is that reason for not using it well?
No it becomes a question of whether you trust Corbyn’s judgement rather than empirical bean counting. Jeremy is a decent man who believes saying No is betrayal, if this or that union wants a 30% go and see Jeremy, he doesn’t let the workers down. And he knows how to pay for it, as PASOK did.
If this is the level of your argument it is not worth engaging with
Are you an economist. If not, I’d suggest trying to pretend you are one. If you are then I’d trying reading the blog again. Then you might just ‘get it’. I’m not but I do get it.
Cracking post, Richard. I was open-mouthed reading the Guardian article on Leslie’s ‘thoughts’ this morning; because a) it was so painfully apparent that he is a clueless imbecile and b) he is supposed to be on the same side as Corbyn.
I find it astonishing how frankly piss-weak Labour’s efforts have been to debunk the whole austerity madness. Here we are, with one of their few clear-sighted and honest members trying to get this stuff across, and some idiot comes up with this.
I really think the next election is going to be fought on one issue, and one alone: do you believe austerity is the right thing, or not? Corbyn’s (mammoth) task will be to convince the nation, in the face of a shitstorm of rightwing propaganda the equal of which hasn’t been seen in my lifetime (if ever), that they have been played for fools by greedy speculators facilitated by liars and spivs for 40 years. I also think his best weapon is going to be social media, since no amount of Barclay Brothers/Dacre/Murdoch influence can stop that.
But what is he going to do about arseholes like Leslie? If a Tory came up with this sort of guff you expect it, as it’s the Great Lie that they are supposed to peddle. But Labour? They are supposed to pick apart lies like this, or at the very least have an understanding of the economics to unpick the lies.
Well, not taking Tom to task over his unnecessary rudeness serves to highlight your character and those who endorse you.
Might I ask that you at least state that there is no evidence that Leslie is an “a**ehole” as Tom so eloquently and intelligently puts it, just in the interests of trying to demonstrate that you and your ilk are not as yobbish as you come across.
I think the term is in common usage
I would not use it, but there are many words regularly printed in the mainstream press I would not also use
I suggest you are being either over sensitive or deliberately provocative
In either case I think Tom is entitled to his view
Much worse is said about me, often
Mmm…that is an interesting perspective you have. Neither actually (oversensitive or provocative). I suspect Tom (and possibly you) may not appreciate that using such language undermines his credibility and makes him appear like a schoolchild lost for proper adjectives to make his arguments. Just because you do not like someone’s point of view, there is no need to go into the gutter to put across your point of view. If you have good arguments to support a position, I think you will find that you never need to descend into personal insults to strengthen your argument. Perhaps that shows that Tom does not have good arguments. It’s also called decency and manners, and if it’s all the same by you I’d rather not have to put up with it in what is otherwise a reasonable blog that you produce.
Fair play, Graham: that was written in the heat of a particularly enraged moment. I am entirely willing to apologise and to accept that you have a point as to my manner of expression.
As to its substance, however: consider that rather than a-hole I put “dismal careerist member of the SPADocracy with experience neither of life outside the Westminster bubble, nor of the world of work”. You will see that this would have been quite a footnote.
By way of evidence, look at CL’s career:
– politics degree
– masters in ‘Industrial and Labour Studies’ (!)
Then, without a break:
– political researcher
– MP (1997).
Lost in 2005; re-elected in 2010. In between times campaign manager for Brown during the Leadership Election That Never Was; then for Balls in 2010.
In short:
– he has no economic qualifications
– he has no practical experience of how economics operates in the real world
– even if elected, he has no experience of how to make theory and practice match up and so would have no clue as to how to implement anything.
He is where he is solely because of kissing up the Blairites when they ruled the roost; and consequently he is reluctant to depart from their outdated (and indeed, plain wrong) worldview.
All of which leaves him, on the basis of what he no doubt considers his sharp political analysis (viz. “I’d better do what Uncle Tony said”), loudly proclaiming that Osborne’s economic illiteracy (see Krugman, Stiglitz, Sen, Wren-Lewis etc etc ad nauseam) and social vandalism over the last five years are a better way to help people than the genuine alternative that a member of his own party with evidently massive support is putting forward. Not only that, but he’s also failed utterly to engage with the detail of it, and has thus misunderstood it completely.
All in all, that this dismal second-rater is within miles of Labour’s front bench speaks volumes about what the Blairites have done to Labour. I can’t imagine that the shades of Crosland, Wilson, Bevin and Cripps are terribly impressed, either.
Ah, now that’s a proper argument Tom. Much better! And now I can see your perspective.
Extremely (are we still allowed to use that word?) valid questions.
Understanding the economic argument is not exactly rocket science. If I can understand it anyone can. Yet we have here someone aspiring to be Chancellor who apparently has not got a clue. So WTF is going on?
I’d suggest that the old adage about it being impossible to get someone to understand something when their salary depends on them not understanding it is at play here.
I don’t know a single thing about this aspiring economic guru who has currently reached the dizzy heights of Shadow Chancellor. Yet I’ll wager a week of my meagre pension that, like so many others within the Labour Party over the past sixty or seventy years, he has “benefited” from one of the many educational programmes run and sponsored by THE US State Department or similar think tank type operation run either directly or indirectly through a local UK franchise. The purpose of which is to control the official and loyal opposition to ensure it toes the neo liberal line from which no deviation is permitted, otherwise the mardy arses throw their rattle out of the pram.
Which is what Leslie is doing here on behalf of his sponsors.
If Corbyn wins the first thing he needs to do is get rid of these cuckoos if they don’t have th Cojohn’s or decency to bail out. As Dave Ward accurately points out, echoing Rothchild’s paper from a few years back on the economic parasitism of fractional reserve banking, they are nothing but parasites.
” I also think his best weapon is going to be social media, since no amount of Barclay Brothers/Dacre/Murdoch influence can stop that”
Of course, Richard has no trouble at all from “trolls”
other left-leaning blogs/sites, such as AnotherAngryVoice, have considerable problems with the trolling community.
I have no doubt at all that the government, any government, would drastically curtail social media if it gave them serious problems. Just a quick search brought up:
http://www.independent.co.uk/news/uk/home-news/gchq-head-demands-internet-firms-open-up-to-intelligence-services-claiming-privacy-is-not-an-absolute-right-9837169.html
Part one of control: Terrorism.
Of course, no government would use any sort of pervasive monitoring/spying on ordinary citizens (oh, wait….GCHQ carries out very extensive monitoring of citizens private communications, and has done for decades)(in fact Maggie used them to defeat the flying pickets)
http://www.theregister.co.uk/2015/08/03/gchq_duncan_campbell/
What you are doing, is ignoring that the government is much less worried about terorrists than it is about its own people. Terrorists mainly kill nobodies, rarely do they kill somebodies!
I may have missed it, have not seen anywhere in the press the REAL reason that the Tories are so anxious to keep to austerity.
– It provides the ideal smokescreen for them to push their agenda – Smaller Government.
And it is working…
No one will tell me that Osborne does not know how creating ‘Sovereign’ or ‘Fiat’ Money creation works – the basis of the People’s QE as per Richard Murthy.
The massive reduction of the public sector workforce and the outsourcing of its functions is mainstream Conservative Policy.
Mark my words, Osborne will continue with this until after 2018 and then in effect do his own People’s QE to stimulate the economy as the effects of austerity are flattening growth.
I doubt that he will use it for public works and infrastructure as this is too slow to create the ‘feel good’ factor that he needs to win the 2020 election.
He will probably lower taxes for all instead or just give away the money for an immediate rush for growth and then bask in his triumph.
Quite frankly, I do not blame him – I would do the same in his shoes.
Given that Osborne steals a lot of other policies the risk is real
Amusingly his own CLP has backed Corbyn for the leadership!
I make no comment!
Great pity Humphries didn’t point that out!
Great pity Humphries didn’t point that out this morning!
“No one has said that all the £120 billion in my estimate of the tax gap can be recovered and likewise no one is suggesting to my knowledge that all tax reliefs to business should be removed.”
Listening to what Corbyn has been saying, it is clear that he is suggesting that the overwhelming majority of these fantasist figures of £120bn for the tax gap and £93bn for the corporate welfare bill will ever materialise.
By the way, the myth of the £93bn “corporate welfare” has been brilliantly shattered by Jolyon Maugham in a recent blog post.
Jolyon shattered nothing: he argued we should have capital allowances. It is moot point
And I can see not a hint of evidence that you are any more correct on what Jeremy is saying
But dream on if you wish
“Jolyon shattered nothing: he argued we should have capital allowances”
Given that the £93bn is in large part based on not giving capital allowances, I think it’s a very important point.
I’d be very interested to find out what the impact is of all the capex that doesn’t get capital allowances, to be honest. Even if you restricted CAs to trading buildings, there must be a huge amount of unrelieved expenditure out there.
Which rather proves the point they are an option, doesn’t it?
Sorry to come a bit late to this, but if capital allowances were withdrawn then the effective tax rate on plant-heavy business would be much higher than in plant-heavy businesses. So, we’d tax a microchip manufacturer’s profit more heavily than an advertising agencies. Why is that a good idea?
How about green policy?
Green technology requires equipment to manufacture it. For example the photovoltaic cells that I have on my roof. Why should the PV cell manufacturer have a higher tax rate than an advertising agency (or a neo-liberal boutique business promoting aggressive tax avoidance?).
Fred
So the policy can be selective
I am not arguing for the withdrawal of all CAs
I am saying they need not be given as of right
Is it because The Tories have successfully (well to those who know little about how money really works, to some degree) framed the economic argument as ‘we must not spend more than we can afford on our credit card’ thus comparing sovereign state currency to household debt financing? Leslie appears to have swallowed it and regurgitated a straw man argument which his opposing party constructed!! the blind leading the blind springs to mind…
Hi Richard, do see a way in which people’s quantitative easing might be the first stage in a transition away from money creation by banks to money creation by government?
It is just that
There’s nothing wrong with money creation by banks correctly regulated.
It’s just an outsourced operation that gets money where it is needed in a distributed fashion.
But it has to be correctly regulated, and the central bank has to accept that it is, effectively, the main investor in all the banks with a reserve account.
The mistake we’ve made is to make the commercial banks the sole mechanism by which money is injected and tried to turn government into ‘just another borrower’.
Time to realise that approach is as much of a mistake as making government create *all* the money.
Yes I think “correctly regulated” is key because it is arguably not the amount of money being created that is the problem (at least when the economic engine is running i.e. pre 2008) but where the money goes (the pull rather than the push). And even with government created money, once it’s spent into the economy then commercial banks will control is redistribution?
That said commercial lending accrues interest so the economy must continually expand so does this introduce an instability that is not there if government creates money and banks just redistribute it?
I think that need for growth needs to be constrained by more government created money
The problem here is that as far as households and businesses are concerned, banks do not create asset money, they create money as a debt. That means that if this is 97% of the money supply, you end up beggaring your neighbour, because for one person to have savings another must be in debt. This creates inequality.
Businesses do better when they get government grants rather than relying on bank loans for everything. It used to help with staff training and day release for instance. Ha Yoon Chang mentioned in his “23 things they do not tell you about capitalism” that the world class Microsoft got 70% subsidies which made it world class.
Government input into health and education is as good as citizens income, an asset which helps people and businesses indirectly. Council housing and public sector jobs have the same effect.
At the moment too much government asset money is directed at the rich, banks, private health companies, railways etc. It is hoped that it will trickle down, but of course it never does, and is the main reason for gross inequalities.
Sandra
Your logic comes dangerously close to the logic that borrowings require savings
They don’t. They require banks and that is who owns the debt
But I think you know that
Richard
Don’t forget (like everyone else seems to) that it was Thatcher & co who deregulated the banks in the first place & laid the foundations for all this mess.
(One of) The biggest mistakes Blair & Brown made was not re-regulating them in 1997, when they could have done virtually anything. Which they did by introducing student loans even though that wasn’t in the manifesto. And waging a supremely expensive war in Iraq & Afghanistan. Funny how they can always find money for that but not building houses, supporting the NHS / local government & other public services.
Support Jeremy – he’s on the side of the 80% not the rich 20%.
The Bank of England states in one of it’s Bulletins about money creation, that 97% of all money in circulation was created in debt.
That means for every £1 in your pocket 97p was issued as debt by the banks, I personally feel it’s high time we created money free of debt and imbue the economy with real dynamism; instead of waiting for some philanthropic billionaires to decide they can make even more profit out of us, by setting up businesses for their needs not ours.
Indeed, Mervyn.
And that is the basis of the whole sovereign created money discussion – as espoused here and by positivemoney.net.
If I’ve followed this correctly (and I might not have- I am neither an economist nor an accountant) the form of QE proposed is cost-less and risk-less. It would be interesting, if that is correct, to understand why it has not been done.
It doesn’t sound from the account here like it would harm private investment or private banks because it seems to be clearly targeted at forms of investment and economic activity which private investors are already not interested in undertaking either for public good or private profit. So, on that basis, fear of market reaction, or a venal wish on the part of a Tory chancellor to feather the nests of chums in the City would not seem plausible.
Is it possible that there are unexplored downsides which it is neither in the interests of the author or his critics to discuss? I’m thinking here of a parallel to the use of PFI by the Blair governments – while the cost of doing this was already known prior to it being the major economic policy underpinning Labour’s promise of infrastructure investment and the downsides being ones which one might have expected the Tories to be keen on (in particular the handing over of large amounts of derisked money and infrastructure to the private sector!) this never took hold as either a change in Major’s policy (he could have promised exactly what Blair did re hospitals and schools) or a rebuttal to Blair’s promises. That is, there was in fact a very good reason why the politically attractive option of embracing PFI was not taken by Major and Clarke even though the consequences of not doing so contributed towards being destroyed in General Elections.
Can there possibly be good reasons for neither Osborne nor Leslie doing this? They’re not complete idiots, nor are they (I believe) out to do badly for the country, so what is it that doesn’t make these arguments persuasive?
It is not costless or riskless
There is a risk of inflation if it is over done. But that is always true of all government spending
And it has a cost if over done when it could over expand state spending
BUT we are miles from either right now
It is a not a universal panacea but is a fundamentally useful tool at the right moment
Which is true of just about all economic policy
Thanks for taking the time to respond – I can see it has been a busy day for you!
So it comes down to respective opinions on how great the risk of inflation is and whether it would be realistic to judge the point at which to stop in practice? Might it therefore be possible that at the scale you and Mr Corbyn propose, the risks are higher than you think and that at lower levels, the impact of the QE would be too low to be worthwhile or give rise to an expectation of further tranches which would, possibly irrationally, increase anticipation of inflation?
Given then that it is a matter of judgement it is disappointing if Labour would dismiss it as a policy option without proper consideration when it would at least allow it to provide an alternative to the policies of the government.
That said, Osborne is political and rather a magpie when it comes to “nicking” policies. It would not necessarily surprise if he took up the policy himself if Labour ends up being too frit to do so or is not trusted by the electorate to do so!
What level is proposed? Give me a number
And have you seen the need? £50 billion a year to create the necessary changes to tackle climate change alone?
I am happy whoever uses this if it works for the policy outcomes I wish for
And even a few billion is better than nothing – but not nearly enough
On the subject of inflation, it is both interesting and revealing that those like Leslie and his fellow travellers, who are more than willing for everyone else to die in a ditch to defend their faith based and evidence free belief in the dogma of the one true neo liberal cult, do not and will not criticise the inflationary consequences of QE for the TBTF banks and similar financial institutions.
The position is comically tragic and pathetic. In this fantasy world printing money to give to private banks so they can pay out massive bonuses, speculate and build another property or other bubble (we are currently on our third massive bubble in fifteen years – a historical event without precedent) is not inflationary; but printing money to invest in the infrastructure and services the majority of the population is going to be inflationary Armagedden .
The level economic here illiteracy is off the scale.
Just to remind ourselves of the level of tax/accounting knowledge behind the £93 billion corporate welfare number:
“In their contemporary usage, capital allowances do not simply provide an allowance for depreciation, they are used in order to encourage, and ‘socialise’ the costs of, new investment……………………….The current UK scheme allows companies to write off 110 per cent of the costs of investment within the first year of the investment. Thus, taxpayers not only effectively pay the costs of the entire investment, the government provides an additional ‘bonus’ equivalent to 10 per cent of the total cost of the outlay”
The researcher behind this number actually thinks that if you allow a company to offset the cost of machinery against profit, then this results in the taxpayer “paying the cost of the entire investment”. Companies can thus buy trucks for £100 and get £110 back from the Government!
The mind boggles.
I have not endorsed that report
I have said a review of allowances is appropriate
“I have not endorsed that report”
But do you endorse the £93bn?
I think it plausible that there is support to business of up to that amount
I do think capital allowances are optional: tax policy changes make that clear
I would not wish to withdraw it all
“I think it plausible that there is support to business of up to that amount.”
Are you counting capital allowances as “support for business”, then?
What would you say is the policy rationale for not recognising real economic costs (of capital assets) when calculating taxable profit?
Do you have any clue of the reason for the capital / revenue split?
The austerity agenda relies heavily on the repeated use of simplistic language until the mesaage becomes accepted fact, as in “we’ve maxed out the credit cards”. Perhaps the way to fight that most effectively is to use equally simplistic language, for example: “If I offered you a 20 year, interest only mortgage at a fixed rate of 1%, to buy a home, and you could afford the interest payments (which will be a fraction of a market rent), why would you not accept my offer?”.
Excellent example
The way to deal with that is to point out that unlimited credit cards exist for ordinary mortals. So why do you think the government doesn’t have a Platinum unlimited credit card?
Then you point out that you can pay off the credit card with the same credit card, and that it has the best cash back deal in existence – since it doesn’t just get cash back from any direct spending, but any indirect spending in the economy no matter how it came about.
Just imagine what you could do with one of those in your wallet? And then remember that the government has!
Richard,
One of your better blogs, quite frankly. I think this does indeed boil down to who is controlling the money supply and, also, monitoring said money supply. Those stuffed with neoliberal dogma have, obviously, had their chance, and failed. Anyone suggesting otherwise needs to have a deep search of their soul, or have someone else do it from them.
What would really work is a combination of many things discussed on these pages previously. Of course, Green/People’s QE, hands down, a cornerstone of a true people’s recovery. Item B, taking the control of the money supply out of the hands of the unelected banking cartels and placing it in the people’s hands, via Parliament …….. a Parliament properly advised by civil society. And thirdly, a true National System of Deposits and Payments. NSDAP is truly the only thing that will keep these fat cat oligarchs and other internationalists in place. By having them, under penalty of law, place all of there accounts under a single roof, monitored by the government, can inflows and outflows be transparent and accountable to society. Richard has endorsed the NSDAP approach in the past and I, certainly, hope he has Jeremy’s ear on this item too.
In my view, Corbyn should go further; the money supply should be arranged mostly by government and the private fractional reserve system should be gradually reduced to 1:1. But the problem with reforming the money supply and making it more democratic is that the ratings agencies are extraordinarily right wing in their thinking and are really political tools – any reform that takes power away from private banking is likely to downgrade a country to ‘junk’ even if the economy is sound. Of course, if loans to the government were from itself the ‘junk’ status would not matter inasmuch as internal finances were concerned. So the question is, how can a country transition out of the private sector money supply without being hammered by interest rates during the transition? Or should a government buy up all it’s debt in one fell swoop?
You have put your case more forcefully than usual, and I am glad to see it.
I note that you are being uncharacteristically blunt in confronting the deliberate mendacity of those who defend reckless neoliberalism in the language of economic prudence: when the arguments are a smokescreen, rebutting them is a futile exercise in handwaving the smoke away; and the effective answer is a well-directed bucket of cold water.
One point for you to consider in your arguments: why is there a shortage of money in the economy?
I have my own ideas on that, and I can see at least one way in which Green QE or Peoples QE will address the problem indirectly (and very forcefully); but it might be time to invite comments from an incisive economist – and not an overly ‘respectable’ one with a profitable line in neoliberal apologia.
…And not, I hasten to add, a bar-room economist with a habit of dropping lengthy comments on other people’s blogs.
Throughout the EU there is a shortage of money
There is less in the Uk by some way now than in 2008
We are at risk if having too little – I just said so on Radio 4
We are indeed at risk of having too little.
Consider the things that benefit from the availability of money: production and consumption.
Consider the things that reduce the availability of money: hoarding abd rent-seeking. Both are characteristic of and integral to the concentration of wealth; both of them suppress production and consumption.
Both of them are promoted by anti-inflationary policy, which always seems to benefit wealthy rent-seekers.
The shortage of money, the inequality of wealth, and the shift from production to rent-seeking are the same thing: they should be recognised as such, and targeted explicitly by policy.
…And the bucket of water for a conservative’s smokescreen of arguments against this is not a policy-by-policy rebuttal: it is the simple point that current economic policy is targeting these things, to great effect, in a direction that profits the Conservative.
Excelent piece, Richard!
I just wish this was more widely publicised; alas, none of the mainstream media will go anywhere near it.
After hearing the defence of Chris Leslie’s position by John Woodcock on World at One it was he that was coming across as delivering the unconvincing flim-flam. If that’s the best they can do I will warm to Jeremy. As long as he gets a suit for the Cenotaph in November.
I share Bill Mitchell’s anxiety that Jeremy May not have all of the technical tools to deal with Chris Leslie. He knows enough to realise that austerity is wrong but may not be able to kill off the neoliberals in public with a powerful technocratic argument, such as sectorial balances, government spending being the only real asset to businesses and households etc., and bank money being the reason for inflated unsustainable debt.
Bill Mitchell says “That is the challenge for Corbyn. He has to first educate himself on these matters. I am looking at ways to meet within him later in August when I will be in London”. http://bilbo.economicoutlook.net/blog/?p=31457#more-31457
That could not come soon enough for me.
He needs to meet Jeremy’s team
But I would add that there are people there who do understand these issues
That said, multiple heads are often welcome
Jeremy needs to be planning how to handle the right wing putsch if he gets elected: it will come hard and fast.
Trog:
We must all understand that Jeremy can’t do this alone, we all have to play our part in rebutting the lies of the right wing, their attitude is win by fair means or foul, honesty and integrity play no part.
Cameron, “There will be no top down re-organisation of the NHS”, before the election promised “he would match Labour’s spending on public services”, why didn’t New Labour and people like Yvette cooper jump on those promises as vindication of government spending levels.
Like all these Neo-Liberals is all part of the game they play, SPIN.
In lieu of a meeting, how about emailing his people a long bullet pointed list of facts, and a crib sheet with likely arguments he will encounter, and how to rebut them.
They have read this, I can assure you
As Sandra says above – people like Bill Mitchell, Randall Wray, Warren Mosler and Michael Hudson can give Jeremy the right language to smash the neo-lib myths until then there is a risk that inarticulate oafs like Chris LesLIE will keep parroting the same rubbish. I suspect that, at least subconsciously, Leslie and his ilk are an endangered, oafish species yet they still won’t acknowledge the reality of the groundswell against the neo-lib narrative.
Although Ed Balls was singing the same neoliberal mantra I always found him engaging – he treated me with respect and good humour when I got the chance to speak to him about LVT at the Labour Party Conference. Chris Leslie on the other hand is a nasty bit of work. I hope that JC will appoint Andy Burnham as Chancellor – he gets LVT.
I gather Chris Leslie is ruling himself out of a Corbyn cabinet
Ouch!
Let’s hope at the next by election the proper candidate is put forward. Richard Murphy, MP in cabinet has a certain ring to it, shall we say.
I have to advise you that such a possibility is very, very remote
I am niot a member of any political party for a start
Never say never my friend.
We may have to draft you as an independent candidate!
With a combination of public works, putting the plutocrats in their place and the Courageous State, you would no doubt be topping the voters in no time.
🙂
“I have to advise you that such a possibility is very, very remote”
Technically, in the UK, you don’t need to be elected to serve in the government.
It would be entertaining to have a Chancellor who sent a deputy to the Commons.
And of course members of the House of Lords can be members of government and even Prime Minister. How do you think you’d look in Ermine?
Not my style!
I have met Chris Leslie twice. The first time was at a Progress seminar about the financial crash in the autumn of 2008 (unbelievable in retrospect that Progress invited me to speak at an event but there we have it) where Chris was chairing. He seemed all right, if somewhat bland. At that time he was director of the New Local Government Network. The second time was at a conference organised by the New Economics Foundation in December 2013 where he was speaking about Labour’s policies to reduce inequality, and he gave the most anodyne and right-wing speech I have ever heard from a Labour politician (and that includes Tony Blair). Complete and total capitulation to George Osborne’s economic agenda on every level, and complete acceptance of austerity economics. It was feeble rubbish, and I am very very pleased that he has said he won’t serve in the shadow cabinet if Jeremy Corbyn is elected leader, because frankly Chris is not up to serving drinks from a cabinet, let alone holding any kind of ministerial position. The man is a disgrace to the Labour party.
I remember sitting next to you at that event in December 2013
I seem to recall we were of one mind!
Wow – I think you may be even less impressed by him than I am, Howard (see post above)!
Hmmm. If in GIQE a local authority borrows from a private bank, that creates an asset and liability that balance out on the bank’s books, but when the BoE buys the asset (the debt) it wipes out the private bank’s liability leaving it with a cash asset. The Local authority has cash assets, but still has a liability, but to the BoE now, even if that liability is effectively a write-off. All that’s going on here is the private banks get the actual gain to their balance books, surely.
The local authority issues a loan and gets cash
The bank buys it
The bank sells it to the BoE
The local authority now owes the BoE
The bank makes a margin on buying and selling – effectively an under-writing fee imposed by EU regulation
The BoE can charge interest or not – it’s circular then
You forgot the bank has to but the debt
To those who fret about the inflationary effects of QE or government spending, why are they not equally concerned about the inflationary effects of private bank lending, which has no effective control whatever?
Both pump money into the economy in the short term. Oh, I forgot – private good, public bad…..dogma.
Precisely
And one is much easier to control than the other
The risk of money printing and spending is not just inflation. It is that productive resources get diverted from profitable projects to non profitable ones and are thus squandered.
That would be true if there was an economy at or near full employment / full productivity equilibrium
But we are a million miles from that so let’s not make up silly arguments for a situation that does not exist
And your point would be true if capital was homogeneous, but it is not. Why would unemployed factors of production be employed first? Think about it. If I gave you £100,000 to build a house. How much of that would be spent on labour which would otherwise be employed?
You cannot extrapolate micro logic to macro reality
Standard economic error
At what point does the logic of micro stop applying to the macro? Or, in this case, at what point does capital become homogeneous? Just because macro economics assumes capital homogeneity doesn’t mean that the world suddenly becomes that way. What it means is the assumptions in the macro model are wrong.
Or that the micro assumptions are wrong
Why is productive resource squandered if it is used on something which does not turn a profit? I’m pretty damn sure that we’re not going to crawl out from under global warming by engaging in profit-seeking behaviour for the remainder of the time we have left on this planet. Get your head out from the requirement for profits – most capitalist firms that have ever been created have gone bust with their debts written off in bankruptcy. The people that worked for them, however, stayed alive and continued to work and spend, even if it was merely their dole. Amazing, isn’t it? Unprofitability everywhere and yet new activity springs up. It’s only money. It grows in computers.
I’ve been wondering for the past 5 years why Labour haven’t rebutted the Tory myth that they left an economic mess; why they never put the positive case for running a deficit during the global downturn; and why they never attacked the Tory austerity measures. Now, I think I see why. Ed Balls, presumably his wife, and certainly Chris Leslie appear to have turned their backs on Keynesian economic strategies. All Jeremy Corbyn is doing is updating Keynesianism to focus on people rather than banks. I’m sure Keynes would have done the same had he lived to witness the banking debacle of recent years. At the very least he’s flushed out the central economic differences within the party, painful though that is to me.
This might help you see how we have been duped in the past by these charlatans.
An extract from Gordon Brown’s 2006 Mansion House Speech:
I am grateful to many of you here tonight, including the Lord Mayor, who has agreed to serve on the new City advisory group.
Ed Balls, our new City Minister, will work with you to develop publish and then promote a long term strategy for the development of London’s financial services and promoting our unique advantages and assets. We will set a clear ambition to make Britain the location of choice for headquarters and services, including R&D, for even more of the world’s leading companies.
And just as two years ago we promoted the action plan for liberalising financial services across Europe, I can tell you that the Treasury is now working with Charles McCreevy and with you to ensure that the forthcoming European financial services white paper signals a new wave of liberalisation.
It was the biggest own goal of all time. Cameron carried the “sorry there is no money left” note around with him during the election. How could labour rebut their own note?
The note said “sorry there is no money”, not “sorry there is no money left” There’s a subtle but important difference and it’s only the Tory rendering of it that suggests profligacy as the root cause.
I’ll tell you why it makes sense for an institution to be removed from democratic control, though I doubt you’ll actually take the time to read this given all the TV and radio interviews you’re enjoying.
Monetary policy needs to be removed from democratic control insofar as it needs to be removed from governmental control. Why? Because government’s tend to have an expansionary economic bias – it’s politically easier to stimulate demand than to stifle it. Taking away such an important part of economic policy from the hands of election-greedy politicians makes perfect sense. Let’s be clear, though; the BoE doesn’t have completely free rein – it can set its own policies, but it does so to meet the decided inflation rate of 2% and other desirable aspects of the economy.
I read it as I do all comments here
Since your comment is internally inconsistent I am not sure how to answer it
Internally inconsistent? How?
Read it
Oh sorry, I forgot to read it the first and second time round.
Please don’t dodge the question.
I didn’t
For a man whose output on an internet blog is about to form the foundations of the Leader of the Opposition’s taxation strategy, you’re very unwilling to try and help out those who can’t quite understand argument.
I’ve given my criticism. You’ve said it’s internally inconsistent. I’ve asked where this is so. You’ve told me to read it again. I’ve read it and asked again. You’ve repeated your answer. It feels like being in a Kafka novel.
So, I ask again: How is it internally inconsistent?
as I now recall it you offered tow inconsistent arguments
So I could not engage with your point
I know that
(i) You think my post has internal inconsistencies and;
(ii) You think you cannot, therefore, respond to my post.
I know that because you’ve said that before. Now please, either engage with my argument or point out what the inconsistencies are.
Respectfully, unlike on most blogs I try to answer comments here
But I also have a life and those who hassle for the sake of it prevent me doing what I consider more useful things
And I will in the light of your approach get on with the rest of my life
but if you look at the conservative government before blair they had an inflation target and inflation did not drop anywhere near that target due to inflation expectations. the government committing to a certain level of inflation was just not credible- hence you need an independent central bank to get the credibility and transparency needed for monetary policy to be an effective tool.
And you think independence changed all that?
And do you also think inflation is all that matters?
I think neither
I must confess Richard that I also cannot see where is the internal inconsistency you state forcefully has been made by John Appleseed in his post.
He seems to say:
1. Governments tend to wish to expand the money supply as it is politically easier to stimulate demand than to stifle it, especially pre-election.
So, control of the money supply needs to be taken from government control.
2. The BoE is not completely independent as it has inter alia to meet the set inflation range around 2%
What is inconsistent about the above?
Point 1 is short term and can be susceptible to political expediency
Point 2 is on-going but long term (until the set rate is changed)
If I am confused, then others will be.
I can;t even be bothered to go back and look at it
But you repeat the internal inconsistency: the claim is that the BoE must be independent. The acceptance is it is not, and that is considered desirable
What am I meant to say?
Richard,
Forgive my pedantry.
The stated need for the BoE to be ‘independent’ of Government control is not absolute.
The parameters under which it must operate are set occasionally and openly by Government, and have not changed hardly at all from the set range of around 2%.
Therefore, Government control is of the BoE is at arms length, and politically the Government would not be able to change the operating parameters without a huge amount of explanation to the electorate.
To that extent, the BoE in this regard can be seen as ‘independent’.
If you believe that the MPC should have politicians imposed upon it, or indeed the MPC Chair (i.e. the BoE Governor)should be able to be called in to be instructed what to do with inflation rates, then I agree with John Appleseed that this would be a dreadful backward step.
I have no time for an independent BoE and think it
a) a threat to democracy
b) neo-feudal
c) a threat to economic policy for the 99%
Apart from that it has everything going for it
As far as I can ascertain from what has been written down in the original post here the argument being presented is that Monetary policy needs to be outside of democratic and Government control ( assuming both represent one and the same thing) on the grounds that Government tendancies towards expansionary economic policy is inflationary.
Although inflation is not explicitly stated in the argument being presented it seems reasonable, in the absence of any statement to the contrary, to surmise this is what is actually meant by the use of the term expansionary economic bias.
This being the case; for the moment anyway, as the assumption I have made needs to be verified or rejected by the author of the comment; the problem arises that the argument explicitly states that whilst the BOE doe set its own policies it does so within a wider context of meeting a (quote) decided inflation rate of 2% and other desirable aspects of the economy (unquote).
Who sets those requirements and that context? Who lays down those policy (for that is what the 2% inflation rate target and other desirable aspects of the economy are -policy) contexts. By the writers own definition it is not the BOE.
It is certainly not the TUC, the CBI or the WI. It is in fact the Government of the day sitting in Parliament who sets those policies which are, by definition, monetary poicies. The same Government which cannot be trusted with democratic control of Monetary policy according to the previous sentence in the same paragraph.
It would seem reasonable to conclude that this represents an internal inconsistency.
Seeing as I’m on a pension and only charge £20 an hour that’s £5 of my time the original poster owes me.
Thanks in advance.
Thanks
Yet Mr Murphy finds it hard to justify why such a huge creator of economic policy (this is rubbish by the way – the government controls fiscal policy and supply-side policy, with the BoE only controlling monetary policy) is unelected. The status quo is inconsistent – the Bank works monetary policy to an inflation aim set by the government; though this aim is not often changed, and it still provides a degree of separation. Yet Murphy’s position is consistent in the wrong way. He wants the MPC etc. to be comprised of democratically elected politicians. Does he not agree that this will inevitably tend to lead to expansionary bias?
And when I mean expansionary bias, I, of course am referring to inflation being created. Loose monetary policy affects aggregate demand, which changes the price levels in the economy (pushing them up). As this was an omitted premise in my argument (that I thought was perfectly reasonable to make seeing as the link between expansionary monetary policy (to increase AD) and inflation is pretty obvious) there was no huge assumption to make.
What the heck is wrong with expansionary bias if that is what people elect their politicians to deliver?”
Do you have a deep seated problem with democracy?
I’m sorry to have rumbled you, but I find it quite interesting that having decided me unworthy of your time, you’ve now weighed back into the discussion, asking me ‘why the heck’a government’s expansionary bias is wrong. The pursuit of economic growth can have damaging consequences; inflation is one if the cause of the growth is demand-side (which both fiscal and monetary policy are), and environmental consequences are another. But because economic growth (along with inflation) is essentially one of the only economic metrics known to the average Joe, it is pursued above most things in order to win elections. Do not, however, take away from this that I’m against growth – I simply note the dangers in pursuing it relentlessly. The best interest of the people is not always known to the majority of the people. You should understand this – austerity was successfully sold by the Tories in 2010 and 2015 as a simple and necessary belt-tightening as if the country were a shop-a-holic who needed to calm down a bit. A Keyensian response may well have been better for the country in 2010, but the Tories’ appeal to the rather economically naive electorate with a very simple proposal (that any household could identify with) was what triumphed. So no, I don’t have a deep-seated problem with democracy – I am, however, aware of its pitfalls; as you must also be.
Sorry John but I have to part company with you in your basic argument because I don’t see it coinciding with reality.
As far as I can tell the argument you are putting clearly implies that the negative elements you have described are driven chiefly by Government expansionary policies and therefore the only way to avoid this is to take the relevant decision making policy away from democratic control and give it to the BOE on the grounds that it is “independent.”
The first question here is independen from what? Certainly independent from democratic control but not I’m afraid independent to the extent that this would by definition result in the avoidance of the negative elements you are seeking to avoid.
This is because of a fundamental error in believing as a matter of faith that the key driving force of those negative elements you are seeking to avoid are exclusive to Government/democratic control only.
This is the basic error of the standard neo liberal model. It ignores the role of “independent” private/non Government/ non democratic controlled banks in the creation of negative elements such as expansionary policies because the model ignores the much higher level of private debt which drives such boom and bust expansionary policy cycles, along with the role of those same non government private agencies in creating the expansionary debt bubbles. Expansionary bubbles which are largely outside of Government control and Government spending policies by political choice.
Even the BOE has recognised this process in the paper it released on May 29 that banks are not mere intermediaries of loanable funds and that the fictional ponzi scheme fiat money they create is a far larger factor in the creation of the negative elements you are concerned about than public debt levels, which are but a fraction of the private debt levels created in this way with little in the way of democratic regulation.
And this includes the level QE for TBTF banks and financial institutions which has failed spectacularly to stimulate the economy because it has been given to the same masters of the universe who caused the Crisis in the first place to stick in the black hole of the casino roulette table to create an even bigger expansionary asset bubble rather than responsible investment that could occur with proper democratic control and sensible public policy.
Essentially, the argument about taking this outside democratic control is simply a rehash of the standard NL model argument of public bad, private good, which states that QE and creating money for the private banks and financial institutions to waste on speculative bubbles is OK but QE as proposed here is Armageddon.
An economist called Steve Keen gives an interesting talk which is online (Will we crash again? FT/ Alpha ville Presentation) which develops some of these points about the weakness of the standard NL model and it’s spurious analysis.
In essence, the proposed solution you are arguing for is a key causal part of the actual negative elements you are seeking to avoid. This is not to understate the dangers of too much Government expansionary policy for electoral gain. As has pointed out, however, we are a long long way from that position and someone, as was the case following the 1929 Crisis, has to provide the necessary stimulus. And it sure as hell ‘ ain’t anything outside of democratic control.
John Appleseed. Your question conflicts by stating Governments are pro expansionary which you seem to imply is bad but it’s good that ‘greedy politicians’ should be removed from the equation?
The Boe is effectively run by appointed civil servants and is therefore the most democratic option on the table. They would not be allowed to be influenced by politicised Westminster economics if tightly regulated? Better than trying to regulate private banks at such a massive expense and myriad of compliance, which has not worked up to now.
I hope you mean ‘should be run by appointed civil servants’ because that is not the case right now. The claim is that they are independent and that is dangerous
Steve. Many thanks for engaging. I see no inconsistency here whatsoever. Governments tend to have an expansionary bias as it’s politically easier – this means they will favour fiscal profligacy over fiscal restraint, and they will favour loose monetary policy over tight monetary policy. We worship metrics like growth rates in our world – a government will do all available to it to bring high economic growth. In light of this politicisation of economic policy, I don’t see it makes sense for politicians, who always have the next elections in their minds, to set interest rates. If they farm out this responsibility to a third institution and tell them what their job is (2% inflation), then at least it is not them who directly control the levers of interest rates.
I agree
Strange how printing money is OK when it goes to banks, along with rock bottom rates of interest of lending to banks that use the money to buy unproductive assets like property.
Yet let anyone suggest using printed money to create socially useful assets and you are deafened by the screams of “HYPERINFLATION!!”
With the possible levels of production we have today, when is there ever likely to be more demand (money) than supply (goods)? Printing money without limit is of course a bad idea that is asking for trouble, but as long as the money is being used up on productivity, then there should be no risk of inflation.
The likes of Chris Leslie probably never asks himself where central banks et their money from? They create it! The fact that they apparently create it against assets of equal value doesn’t change that fact. When the government wants to expand lending, the BoE buys bonds from the banks. Where does the BoE get the money from to buy these assets? They create it. Banks effectively print money by creating credit against your promise to pay the money back (principal and interest).
Money creation or money printing is a fact of financial life that occurs every day. As someone pointed out earlier, the banks can create inflation just as much as government money creation. As more of the money created by banks is drawn back out again as the banks do not create enough money to pay the interest on loans (despite their claims) money creation must always be ahead of money “destruction” otherwise deflation will almost certainly occur.
The more people who cut through the disinformation and blatant propaganda about money printing and creation, the better.
Just to clarify Richard, I wasn’t being facetious with my earlier questions but gauging your response to the kind of questions Andrew Neil or Evan Davies will be asking Jeremy in the next five years if he wins. You and I know what Cameron and Osborne said about the last Labour government’s deficit was mumbo-jumbo but politics is about perception. And the public believed the Tories’s version of events rather than Miliband or Balls. Voters do not come to decisions on economic competence by studying graphs in the FT. This might not be your job but Corbyn needs to develop a political strategy to woo voters’ trust. This is why Osborne set up the OBR or Brown gave the Bank of England a degree of independence, they are practically meaningless in economic terms but they send a signal to the public that you are a responsible politician who is prepared to defer to the clever neutral experts. For Jeremy to put forward a similar proposal will go a long way to gain credibility among the voters. Because if you found me frustrating daring to compare Jeremy to PASOK or Chavez you are not going to enjoy the next five years once Osborne, Lynton Crosby and the Tory press start work on Corbynomics. And listening to the flim-flam from the other candidates and Chris Leslie, Jeremy has the wind in his sails. It would be a shame for him to blow it.
So, start with an Office for Tax Responsibility
Do you have a link to this idea for such a department?
If you search my blog you will find many references to it and a whole dedicated category
This may be a bit technical and picky, but I don’t think your description of QE is entirely accurate, specifically the concept that because the govt owes the money to itself then this effectively rights off the debt.
As I understand it, the BoE created an Asset Purchase Facility (APF) and through QE loaned it the funds to buy bonds. Some people have assumed that if the govt owns BoE and BoE owns the APF, then the govt owes money to itself and therefore the debt is written off. From an accounting point of view, this is not correct. When QE was first initiated, the govt still had an obligation make coupon payments to the APF, which in turn had to pay interest on its loan from BoE (which the coupon payments enabled it to do). When the bonds mature, the govt will pay off the bond to the APF and QE will end, unless a new round of QE is initiated. So in that sense, the govt still has a debt, which it has to service and pay off at the end of term, unless a change to the terms is made.
And one change has been made. Because interest rates are so low, the coupon payments exceeded the interest payments and the APF was making a profit. In 2012 it was agreed that this profit would be returned to the exchequer, and the govt would stop making coupon payments (bringing it in line with other countries with QE). However, if interest rates rise, and the APF is no longer able to make its interest payment, the govt would have to transfer funds to the APF. In that sense, the govt still has a debt that it could potentially have to service. See https://www.gov.uk/government/news/changes-to-cash-management-operations
In addition, I assume that when the bonds mature the govt has to pay their value to the APF. If this is incorrect I would be very grateful for a reference on this point. Many thanks
All so technical
And all so wrong
The government is paying itself. And if consolidated accounting was used the debt would disappear
You use the logic of the accountant in a large group of companies seeking to claim the debt owing to a tax haven subsidiary is real and should count for tax purposes when in reality it is no more than internal money shuffling
That’s what you are trying to justify
I’m not trying to justify anything – I’m trying to be specific and accurate on how the process of QE actually works in reality.
You said “if” consolidated accounting is used the debt would disappear – well is it being used, and do you have a reference to back that up? The reference I provided from the BoE (albeit only a press release) would seem to indicate that the description of the process I provided was correct. But what I cannot be definitive about is whether the govt does have to repay the value of the bond on maturity to the APF or not. What I’ve read in the past states that under current accounting rules it does, but those authors themselves may have made a mistake. I’d be quite interested in a solid reference that gives a definitive statement on this.
As I recall, under the Maastricht Treaty the government cannot simply create new broad money to pay off its debt (what is loosely and inaccurately termed “printing money”), which is why the BoE had to create the APF and loan it the money to buy the bonds. It’s a long time since I read this, and may simply be remembering this incorrectly, but I could try and dig up the reference if you want. If Corbyn wins the leadership campaign and you continue to advise him, you might want to make sure your advice is based on how the system is actually working at present.
Systems and rules can be changed – and in my view need to be – but therefore we need to understand this if we are to make the necessary changes. What is vital, as your blog post correctly identifies, is that the government creates new broad money that isn’t based on debt. In fact, I ended up on your blog because I was pointing out to a Labour party member (and voter in the upcoming selection) the virtues of Corbyn’s economic policy. I was just checking that what he was proposing did indeed involve debt-free broad money, and having read your post, I’m not being rude (as you seem to be to everyone who disagrees with you), but I don’t think you’ve properly understood the mechanics of how QE works.
Bill
Mario Draghi and Mark Carney have both said Green or People’s QE is legal and possible
They should know
I have done my homework
And I have done the same on QE so that what I propose is the closest to debt free money that we can currently get
Richard
Have you got a reference for Carney’s or Draghi’s comments, and what specifically are they saying is legal/possible? Are you talking about a process of monetising the debt – creating new broad money and using that to pay the debt off? This is generally regarded as being in breach of the Maastricht treaty (which is a complication, rather than a cut and dried reason not to do it). Or would “People’s QE” still work through the BoE loaning the funds to the APF? And would the government have to pay the value of the bond off to the APF at maturity?
The friend I’m referring to is actually the constituency manager for a serving Labour MP, who is left-leaning but not currently a Corbyn supporter, so I think there’s a degree of benefit in persuading him that this can work.
The links are in the piece
The specific reference by both is to Green QE and that it is technically possible as suggested by me
Mark Carney’s reply is simply saying that QE can be used to buy specific forms of assets – I remember reading this at the time now.
But the key question is, when the bonds mature, does the govt have to repay them? And the answer is yes – see the paragraph crossing pages 203 and 204 in the 2011 Q3 quarterly bulletin: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb110301.pdf
This means that the debt has not been written off.
This paragraph also refers to interest payments being due. This was changed in 2012, as the press release from BoE I posted earlier states. However, the BoE’s statement is clear and explicit that if interest rates rise and the APF owes interest payments to BoE, the govt would then have to transfer funds across to the APF. The govt still has a liability – in effect QE has simply reduced the interest it is repaying on its debt. But most critically, the principal is still owed on maturity and the debt is not written off.
Don’t get me wrong, I absolutely support the policy that Jeremy Corbyn is promoting, as advised by you – but you have to get the technical details right.
I am sorry Bill but i have to take issue: I have got the technical issues right in total, and it’s there that most people get them wrong.
So what if interest was paid? The Treasury would pay the APF which would pay the Bank of England which would pay the Treasury. Net consequence? To use a technical term, zilch
And as for repayment, suppose a 25 year bond comes to repayment day. The day before the borrower issues a new bond to a bank which then sells it to the Bank of England for almost the same price, and then the next day it uses the proceeds to repay the Bank of England the original loan. Net consequence? Zilch. No effective repayment. And the new interest rate is irrelevant: it is still circular
I have got the technical details right I think
I see your point on the interest payments to BoE: these represent BoE profits, which are ultimately returned to HM Treasury (thought it’s not as simple as a circular transfer as your post suggests – the Bank of England Act 1998 requires the bank to pay just 25% of its pre-tax profits to HM Treasury, or such sum as the Treasury and BoE agree). My point about interest payments is that it demonstrates that there is still a liability on the govt’s books.
Your second point I think I’m not getting – when you say the borrower issues a new bond – the borrower in this case is the govt. And yes they issue a new bond so that they can pay off the principal to the BoE (or more accuratley, the APF) – so now that bond exists on the govt books as a liability. No? Even if the BoE ultimately buys that bond, there is still a liability on the govt’s books, with a need to issue a new bond in the future when this new bond reaches maturity.
In the big scheme of things, it’s not so important a point – I was just looking to understand the details of Corbyn’s proposals so I could persuade my friend of their virtue. I’m not convinced People’s QE does create debt-free money (which is, I believe, what you claim ,and what I agree needs to happen). But even if doesn’t, what you propose is still an excellent policy compared to any other policy on offer, and a vast improvement on QE as previously implemented.
Two things
a) re interest ‘or such sum as agreed’ answers that point
b) The borrower is the national investment bank, or whatever. The BoE is the owner of the debt. And sure it is a liability that matches the asset in its BoE subsidiary so the two match out on consolidation and so cancel re third parties ergo there is no debt so there can be no real need to repay, just a requirement to technically recalibrate every now and again
Best
Richard
I was going to leave you in peace, but actually I think I see where we’re at cross purposes, and that actually we agree with each other if one assumption is made explicit.
I take it your policy is based on the BoE buying the new bonds that have to be issued to fund the payment of principal on bonds owned by the APF that reach maturity. If this happens indefinitely, then effectively there is no debt. The liability would remain on the government books, but there wouldn’t in reality be a debt. Because the liability remains on the books, this method does not put us in breach of the Maastricht Treaty.
Current BoE literature talks of the bank having the option to buy further bonds when bonds owned by the APF mature – it is its current policy that it will do so, but this is in the context of inflation continuing to fall below its target level. Indeed, they are explicit that they could even choose to sell bonds back into the market, reversing QE, if inflation exceeds its target. So I’ve never seen it as a given that the BoE will continue to buy bonds to maintain the level of QE – and indeed the possibility that the APF could sell its bonds back into the market illustrates that the govt debt has not automatically been removed through QE.
However, it could be made policy that the BoE will continue to fund the purchase of bonds necessary to maintain QE indefinitely. If we assume this is going to happen, then I don’t disagree with anything you are saying at any fundamental level.
I think they will keep the fund topped up indefinitely
Sop does Adair Turner
And I think martin Wolf does too
Practically there is almost no risk of them doing otherwise
Hi Richard,
Frances Coppola has recently published a blog presenting a criticism of your proposals. I would be interested, if possible, to know what would be your response to Coppola’s criticisms.
Regards
Frances said the Scottish government could not use QE without Westminster consent
I entirely agree
That is all she took issue with at the end of the day
Many thanks for this post. I know nothing about economics (I mean nothing) and was wondering where to start reading around the subject of quantitative easing in the context of the past and proposed Corbynomics. This was really helpful.
I am glad that Corbyn has suggested the possibility of Quantitative Easing en direct into the Economy. However, my evolving project of Transfinancial Economics goes beyond all that to something akin to “real” Economics…
I wonder if it would be an efficient use of the sovereign money created by the people’s QE concept to use it to pay off all the PFI contracts around that drain so many of our NHS Trusts.
I think it would be
Richard,
I read your blog regularly. I am grateful of your analysis which has opened my mind to a different way of thinking. I do exist in the corporate world as an accountant and it is often clear to me that most of my colleagues have been brainwashed into one view of the world. I think there is an attempt by elements of our society to erradicate any vision of our society except that which large corporations and the elite wish. I have a problem with that view because it will always be short-term, driven for the gain of a few and fail on every front in terms of delivering a workable society and ensuring our survival on this planet. I know I am off point but I thought I would send a thank you for encouraging me to question what I am being fed.
Thanks
It’s bloody hard sometimes!
Pob,
Yes, I agree.
There appears to be no proper analysis allowed on the media of Modern Monetary Theory as espoused by Richard, so full marks to him for his efforts.
Even now that Corbynomics is in the news with its People’s QE there is not any independent critique of its tenets.
You would think that instead of ad hominem shouting and other dismissals there would be a proper sober set of objections with the evidence to back them up whereby each objection can be answered, again with any evidence or logical explanation appropriate.
Thus, the populace will be able to make their judgement.
I do agree that there is a suspicious silence from the financial world as to why the ‘new’ thinking is wrong (of course the ‘new’ economics has some history from the last century, but hey!).
Fractional Reserve Banking has pernicious effects on its creating a debt-laden National Debt upon which the banking industry can make so much money in interest payments. On this the gaff is on its way to being blown…
So, I endorse your ‘well done’ to Richard.
I followed the link across from FT Alphaville.
I am afraid you do not understand how this works, Richard. As Bill explained to you above, QE does not involve the government paying itself. Instead of gilts coupons, the flow of interest from the government to the private sector is via the interest paid on reserves. The mistake you made in your post was to state that “And, in the process, it prints money, and the government does not have to pay interest on the money that it has created itself”. The BEAPFF pays the BoE the repo rate (presently ½%) and the BoE in turn pays this to the banks holding reserves. QE is really a state floating for fixed debt swap, and the government could find this very expensive if floating interest rates begin to rise.
That is QE
That is not People’s QE
I understand exactly what I am saying
But QE still cancels debt. Reserves are something else entirely
Reserves are the funding for QE or peoples’ QE, and they are most certainly public sector debt. Since the BoE remits its profits to HMT, any money paid out on interest on reserves reduces the money available for government spending.
The bottom line is that what you are proposing is a state fund investing in “housing, energy, transport and digital projects”, funded by floating rate state debt. Fair enough, but why not just be straightforward about it, rather than getting it mixed up with the BoE. Note also that, at a time when gilts yields are at historic lows, floating rate funding could be missing an opportunity.
Respectfully, I have made clear the differences
There is no private sector bank involvement (barring an odd moment) in PQE
In that case what you and others are claiming is simply wrong
Why not read what I have written?
Kindly tell me what you have written that answers my question, then.
You say above “Both are, of course, based upon the idea that the Bank of England provides funds”. Those funds are reserves, that is, commercial banks’ current account balances at the BoE. There is your private sector bank involvement. And unless the BoE or the government borrow money in some other way (which you have not said above – and if that is what you intend, why use the term “QE”, or even involve the BoE at all?), that private sector bank involvement remains.
I really don’t need to rewrite all I have said on demand
And won’t be doing so
You misunderstand me. I mean, refer me to something that describes your proposal in more detail than in the post above. Because reading the above post leads me to the conclusion that your proposal does not include issuing any debt to drain the reserves paid out by the BoE, and that, therefore, the funding for the investment fund IS reserves.
Save me and any other readers following this from thinking that you are evading my question because you do not have an answer to it.
There is no new debt
There is new money
The BoE is, always has been, and always will be allowed to create money, out of thin air
Next?
So my understanding is correct. The investment fund is funded out of base money, which in practice means reserves (by far the largest part of base money, and in practice of course the BoE does not make large payments in banknotes). And reserves pay interest at the BoE repo rate.
This means that the scheme is, as I said, an investment fund funded from floating rate state debt. Why not keep it simple and just make that the plan, instead of involving the BoE?
That cannot be the plan: EU law does not permit it
And tell me who is this interest to be paid to?
I’d be interested to hear
Tim – your first post corrects a mistake I made earlier.
Initially, I was arguing that bonds bought by the APF still represent govt debt because, even though the govt doesn’t currently have to pay the coupon on these bonds, it could in future have to make payments to the APF if the base rate rises, to enable the APF to make its interest payments on its loan from the BoE (this is explicit in the BoE press release to which I posted a link).
Richard pointed out that these interest payments are profits for BoE, which potentially can be returned to HMT – and I said, fair point, you’ve got me there.
What you’ve pointed out is that because the new Central Bank Reserve created to fund QE is now sitting in a private bank’s reserve account somewhere attracting interest, there is no profit to the BoE. So payments that may have to be made by the govt to the APF should interest rates rise in the future do represent a net cost to the govt arising from the fact this debt still exists.
I don’t think Richard’s point that there is minimal private bank involvement in People’s QE addresses the point you are making – the fact that new CBR is created means that it will sit in the system somewhere (i.e. in a private bank’s reserve account with BoE) attracting interest.
Why would a private bank get a reserve in PQE?
I genuinely wan to know
I am told it will, but how is a reserve created by an in/ou transaction with related government agencies? What remains for the private bank to place on reserve. I can'[t spot it. Where are you finding it from? Please tell me
The interest on reserves is paid to the banks.
Under QE, the BoE has tried to target their purchases on non-bank private sector holders of gilts, like pension funds and insurance companies, and in payment for their gilts, the BoE pays reserves into each seller’s bank which in turn credits their current accounts. Presumably, if the gilt-sellers wish to continue holding those funds at their banks, they put them on time-deposit, to earn some interest, so the ultimate recipients of the interest paid by the BoE are the gilt sellers. And since the BoE remits its profits to HMT, the ultimate payer of the interest is the taxpayer.
From your earlier comments, it occurs to me that you may not regard bank reserves as debt. On that I would disagree, but that is semantic. The point is that they bear interest.
It is interesting to learn that EU law would prevent a national government running an investment fund; I suppose it derives from competition policy. Anyway, in that case, it would make sense for UK government to do its own investment in, say, infrastructure, funded from gilt sales, but that of course would amount to overtly borrowing to spend on the government’s balance sheet, which would be, as Sir Humphrey would say, a “brave” decision!
Thanks for engaging, Richard. I note that you have published some later blog posts than this, so I will take a look at those, and continue our discussion there perhaps.
I accept all you say re QE Tim
But where is the bank deposit with a private sector bank created in PQE?
I am genuinely interested to know: their only role is as a temporary intermediary so how is the interest bearing reserve created?
Wouldn’t a rise an interests rates be the mechanism that tells the government to slow down or put the breaks on QE? As Richard pointed out to the obvious to me, any policy can run into trouble if you overuse it.
Richard- I’m interested to know how Corbynomics feeds into another issue that I’ve heard economists talk about including IMF chief economist Olivier Blanchard, that sustainable high debt is desirable for Western economies especially for Britain that can still control its own monetary policy http://www.telegraph.co.uk/finance/economics/11644471/Britain-can-afford-to-live-with-high-debt-forever-says-IMF.html
Like Japan the new paradigm is low growth due to an ageing population reducing consumption. And Japan is hardly a country that cannot export to the BRICS but this has not solved the fundamental problem of low domestic growth. But instead has adjusted to this new reality for over a decade ago. And I understand Japanese pensioners love the new Maglev railways.
I am not a fan of debt per se
That is why People’s QE behaves like equity, not debt
Glad you said that, Bryan Gould used to call Ken Livingstone a Marxist monetarist but Ken knew voters are highly suspicious of relying on counter-intuitive Keynesian deficit spending to explain your economic spending plans. Which has its merits but sounds like a load of pish when you explain on the doorsteps.
You think PFI sounds better?
Come on……
People aren’t daft
I am impressed by your interest in QE! This is a very important subject, and it is good to have a pioneer like yourself who sees it as a possible “credible” economic alternative especially for the people….
http://www.taxresearch.org.uk/Blog/?s=Quantitative+Easing&searchsubmit=
There is just one other question. What other “high profile” “mainstream” economists are interested in QE if you can name some?
Keep up the good work on your Blog….
In varying forms quite a number comment in the theme
Not all are keen though…
Bill Mitchell, professor at Newcastle University Australia explains in detail why public expenditure is not a problem and that we have an infinite supply of money available to resource it.
Extinguished members of the elite also understand this, Henry Ford once spoke to Business men after the crash, “that if ordinary Americans understood how the Banks made their money, there would be a revolution before the morning.” the problem is most still don’t know about it.
https://www.youtube.com/watch?v=YnyDRwSqp2E
In truth QE is a term to explain how we could put money into public services without having to borrow it from else where, but in reality the government could just sanction the Bank of England to spend money directly into the NHS or local government as required, without limit. The sole constraints being Human or Raw Material resources. Beyond those constraints would induce inflation.
You had a piece in your blogg today “who pays for People’s quantative easing?”. I reflected on this. Though not clearly as well as you may be able to do. But I did have a query as a result of reading your response to this question.
I realise that this is (as the banks now do) created out of thin air. However, money is a bit of paper or an electronic credit representing finite physical resources of this country/world. With that in mind, I reflected that those currently holding alot of this paper or electronic credits would find with people’s quantative easing that, these holdings no longer have the same value in relation to other currencies or command over physical resources. In effect, there would have been a kind of re-distribution of some of the wealth depending on where the People’s Quantative easy is directed. Is this a correct reasoning or am I completely off track? By the way, I am completely in favour of tackling the huge inequality persisting right now but I wanted to check my reasoning as I thought I would see it as part of your answer.
Money represents nothing
It is money
It has multitudinous uses, one of which is enabling resources to be put to use when they would not otherwise not be so
In that case if PQE was used for that purpose new wealth is created of equal or greater amount to the sum of PQE
Some of that wealth will pass to the Treasury by way of tax
Some will enhance private wealth – not in ways QE did
But there is no reason at all if there are unutilised resources why it should in any way create inflation
Put simply money in itself has no value, it is only a means of exchange, people buying and selling money put a value on it but they are artificial arbiters who create that value, money of itself has no value.
If people sell goods they establish a rate of exchange costed in monetary units, for example a pin produced in a factory might cost in units of currency £1 but when sold on it’s sold for £2 or even possibly £3, but that value was not gained or lost by the value of money, it was a decision process dictated by the seller and purchaser of the goods.