I have, over the last few days, posted a series of blogs all of which ultimately lead to this one. What I have been seeking to establish is the political economic logic of what I once called green quantitative easing but which is now vastly better known as People's Quantitative Easing (PQE).
In the process I have established that this is legal. Mario Draghi and Mark Carney have both made clear this is the case.
It has also been widely acknowledged that it would work.
At the same time it's clear that large numbers of economists say it is not needed. Their argument in saying so is usually that PQE is not needed now. I find this odd, not least because this is a pretty strange case to make since no government likely to implement it is likely to be elected before 2020, at which time I argue that it very definitely will be needed. They either appear to be unable to project that far or seem to accept that all George Osborne predicts will turn out to be true; I know not which. The wider consequences of their argument I explore further, below.
Secondly, a few have tried to claim that it is inflationary, but the tendency appears to be almost entirely amongst the political commentariat and not from those with any real economic understanding. Most accept that in the current era of ultra-low inflation any tendency to create inflation it could possibly create might be welcome. Those, including some Labour politicians, who describe this as a money printing exercise to stoke inflation fears do in the process fail to note that it has the exact same inflationary impact as any other deficit, and that Keynes would undoubtedly argue that in the current economic environment we should definitely be stoking the economy. Their arguments are disingenuous in that case, or they are explicitly saying they think now is the time to withdraw all expansionary activity despite the state of the UK economy at present. Again, I know not which.
Third, critics argue that PQE would threaten Bank of England independence, but as I and others have argued, that so-called independence is just a facade in any case.
Fourth, the critics say any required funding could be paid for with gilts. The trouble is, in an era where ultra-low interest rates are likely for quite some time to come this means that borrowing costs are much higher than they need to be: PQE as a charge on reserves is cheaper than gilts. Why would they want to incur billions of additional costs?
And when it comes down to it, all that is offered is rhetoric: it is said 'we must preserve the appearance of central bank independence' when that is a myth, or 'we must not monestise debt' because of either a misunderstanding of the true nature banking or paranoia the need for central bank involvement in currency issuance, or 'central bankers should not be involved with investment decisions in the real economy' when no one has said they would be or 'the central bank should not take risk on investments' when again it is glaringly obvious they will not in the PQE hat I have proposed.
But what is more interesting is not that all these arguments are so obviously capable of being refuted, but what is not being said because in the gaps between the arguments. There it is possible to find many of the real reasons why so many people have lined up to oppose People's Quantitative Easing.
The first, and obvious issue to address here is implicit in the claim that PQE is not needed because issuing new debt could achieve the same goal. The first point to make is that many of those making this point will also have fuelled the paranoia about government spending, deficits and debt and will have argued that Osborne is right to impose austerity to achieve this goal - including by slashing public investment. So their argument is duplicitous: they say borrowing could be used to fund investment but then they argue against borrowing. I do not accept their narrative.
Second, implicit in that same argument is that that they do not want discussion of the deficit and what it means. I am certain (as is Zoe Williams) that a debate on the narrative of the deficit is essential. As I have already argued, the first issue to be addressed here is the mis-statement of the extent of government borrowing. The second is the fact that when the deficit is appropriately understood and analysed it is clear that the part of it relating to capital investment has already been subject to QE (setting a precedent for PQE in the future) whilst almost all the rest has been created to meet the demand for sterling savings from money coming from abroad. Taking those two factors into account, coupled with a proper understanding of sectoral balances, the remaining deficit is not an issue (partly because it has overall been a surplus over a period of more than decade).
Third, and perhaps most importantly, is the fact implicit in almost all the arguments offered is that we fundamentally have the direction of UK economic policy and decision making right. So, for example, it is said that we do not need a stimulus. But this is absurd. That is only true if it is accepted that having 1.8 million unemployed is acceptable. And if having 5 million or more, largely involuntary, self employed on steadily declining earnings is acceptable. And if having millions more on minimum wage is acceptable. And having many under 40 locked out of security in their living accommodation for a lifetime is acceptable. I do not accept any of those suggestions, any more than I accept the plausibility of Osborne's plan for the UK, which almost all commentators seem to do without having apparently cast a critical eye over the absurd assumptions that underpin it.
Instead the logic that we do not need a stimulus now because we have 'growth' fuelled largely by a house price boom and extended consumer credit seems to me to say that the sole criteria of economic plausibility that those rejecting PQE apply is that of GDP growth, from wherever it comes and whatever the distributional elements to it. What they do not, of course, mention is the fact that they are tacitly accepting that this acceptance in their part has the consequence of condoning increasing inequality, any more than they say that their implicit support for an independent Bank of England implies they have limited faith in democracy and instead believe bankers and economists who are very largely wholly uncritical devotees of neoliberalism always know best.
So I think in that case I need to spell out explicitly the political economy of People's Quantitative Easing, as I see it.
First, this is a policy that starts from the assumption that it is the role of government to explicitly meet need when markets do not or cannot, including the need for education, housing, health, transport, justice, energy, defence, and so much more.
Second, it assumes that those engaged in meeting such needs must be appropriately rewarded. This is a policy about fair pay, secure employment, regionally spread, and with appropriate training.
Third, it is a policy about saying that the government has to prevent market excesses that are harmful. Banks have clearly indicated their ability to cause harm. One way in which they secure their position in the economy is by retaining significant control over policy making and a supposed essential role in funding government deficits. Neither are necessary or can be justified: PQE helps balance power on such issues for the good of society as a whole.
Fourth, it is about value for money: People's Quantitative Easing is cheaper than other funding options. The question has to be asked why more should be paid than is necessary to secure the investment the economy needs that must be paid for by the state. We have suffered decades of PFI now that is a massive transfer of value from the state to private sectors that increases inequality. PQE challenges the prevailing logic in the financial world that the state will always do this: it won't because PQE shows it has no need to do so.
Fifth, PQE is about saying inflation is not the only economic priority: this may be a priority for the country's debtors to whom money is paid but they have no right to dictate the sole economic priority of the government. Others such as full employment, real wage growth, reducing inequality, sustainability and more are just as important and inflation may play a role in achieving them.
Sixth, PQE is about saying that what the state does is not a residual that fills in the gaps when the market does not operate at full capacity when, as Robert Peston implied, the state undertakes white elephant projects to keep things ticking over until the market gets its act together again. Instead this policy implies that what the state does is fundamental, most especially when business has no clue what to spend its money on. In fact, it is a government saying that the needs now unmet by the market may be at last as important as anything the market can deliver. Shockingly, to some, the suggestion is that modern markets, that are as far from the free markets that suggest optimal resource allocation can be delivered by free enterprise as it is about possible to get, engage a few people to make sub-optimal decisions on how to meet the needs of a minority in society whilst PQE would, through democratic control, empower decision making on how to meet the needs of a majority.
Seventh, in that case PQE is not just a funding tool, it is indicative of a whole new way of thinking about political economy. Many may not like that. After all, it seems that there is a comfortable part of the UK that has no concern for those, mainly younger than those enjoying the comfort, many who cannot now have secure homes, do not know how to make ends meet and still provide for their children, and who suffer services that are crumbling because the state has decided that meeting their needs is no longer a matter of concern. PQE is part of the rejection of that philosophy and is a way of providing the infrastructure needed to build a firmer foundation for a new, fairer, UK where political decision making is undertaken by confident (maybe, even, courageous) politicians who know that serving the electorate openly, transparently and accountably, including by explaining how much they are spending on what, is key to what they must do.
Restricting a consideration of PQE solely to the issue of economics is, in that case, akin to asking almost all the wrong questions about it. Political economy extends that scope, and its in that context that it is important.
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Good post.
Ultimately, comes down to a political choice, surely – who are we going to help by spending money?
If it’s a choice between the bankers and the rest of the population, it’s no contest.
I suppose this is rather like the idea raised by Tony Benn many years back – “if we can afford to kill people, we can afford to help people”. He was right then, and the same principle still applies now.
In a nutshell that is it
Excellent post. Going beyond the narrow canon of neoclassical economics is essential. This relies on excessively narrow (and unrealistic) assumptions about structural, institutional and procedural arrangements that have to be addressed in the realm of political economy. It parallels the complaint made by JK Galbraith many years ago:
“Let’s begin with capitalism, a word that has gone largely out of fashion. The approved reference now is to the market system. This shift minimizes – indeed, deletes – the role of wealth in the economic and social system. And it sheds the adverse connotation going back to Marx. Instead of the owners of capital or their attendants in control, we have the admirably impersonal role of market forces. It would be hard to think of a change in terminology more in the interest of those to whom money accords power. They have now a functional anonymity.”
There is now a sense that more and more people are fed up with the lies, hyprocrisy, dishonesty, duplicity and disingenuousness peddled by those who enjoy undeserved power, wealth and privilege and by those whom they retain to preserve their positions. The ability to ‘name one’s world’ is liberating and empowering. Jeremy Corbyn is facilitating this.
Thanks
Good quote
“Let’s begin with capitalism, a word that has gone largely out of fashion. The approved reference now is to the market system. This shift minimizes – indeed, deletes – the role of wealth in the economic and social system.”
It’s time to put on the sun glasses and see what the the real narrative behind neoliberalism is 😉
https://www.youtube.com/watch?v=inZUDMGJsKo
Hi Richard I am genuinely ignorant on this subject but am reading all I can. I think I read that QE was frowned upon by the IMF and even contrary to some Maastrict agreement? I believe QE did achieve some of its objectives in stopping the run on banks, but that underpinning did not have the desired trickle-down benefit for businesses and individuals. As I understand PQE will be used for infrastructure projects. I have a nasty feeling that once again this will benefit big business but not SMEs or individuals. My own logic also suggests that it is something of a one-off, to be used very sparingly. So, what will it actually achieve and what does the cost / benefit analysis look like? PS thanks for the blog!
I think I have already addressed all these issues
And so, sorry, I cannot reiterate them
Ah but “Yvette Cooper today accused Jeremy Corbyn of peddling “old solutions to old problems” and seeking to hand more power to “white middle aged men in Whitehall” rather than empowering ordinary people to transform their own lives.”
http://labourlist.org/2015/08/offering-old-solutions-to-old-problems-yvette-cooper-takes-fight-to-corbyn/
The only bit I can agree with is that Richard Murphy appears to be middle aged and white. Is there a prize for the most wrong statements in the fewest words?
I am amused
Is “monestise” a typo?
Yes
Monetise
Sorry!
Proof reading is not my strength
It deserves to be taken so seriously and given a chance to thrive. Change is not easy and persuading people of the benefits will no doubt meet strong resistance. Ripples spread and spread. Boldly on Mr Murphy, your optimism will be infectious I hope.
I hope so too
It is interesting that critics are suggesting funding infrastructure investment by issuing more gilts (which would be a bit more expensive than PQE), and not by expanding PFI (which would be collosally more expensive than either gilts or PQE). Does this imply that PFI has finally been discredited? Of course, the critics’ sincerity may be judged by whether they are also advocating the end of PFI, as well as arguing for more public investment.
If we only sent PFI into oblivion that would be a start
In the re-phrased but now for me immortal words of Robert Peston:-
“Can the the country really not afford to fund and build “white elephants” like affordable homes?”
Really excellent article by the way Richard!
Political economy. Sounds like the antithesis of a bankers economy.
Putting money to work for people, and not the other way round.
I suspect the need for this has been felt for some time, but the insight into any concrete, workable proposal has been lacking.
At the very least, it deserves some serious scrutiny.
I am 95 per cent with you. The only issue I have, and bear in mind I am not a political animal, is that by saying the charge on reserves option is cheaper than the charge on gilts option you are, like John McDonnell, falling down the rabbit hole into the neo-liberal paradigm of deficit reduction being a somehow prudent objective. It is clearly not. As you have stated yourself it is an outcome that depends on saving and spending decisions in non-government. Surely this paradigm has to be directly challenged in the public’s mind before you can gain any traction with your growth policies.
I know the idea of printing money is a sign of the cross issue for most politicans but we know that the Government sector (inclusive of the central bank) has to credit bank accounts before it can collect taxes or ‘borrow’ that currency back (swap it for a bond) so surely when it comes to reframing the deficit, the way to do it is to get across into peoples’ minds how the monetary system actually works rather than trying to find a way to reassure them that government is behaving prudently like a user of the currency rather than the issuer. I would have thought this is the perfect time to do that given Corbyn’s appeal with a new energised electorate.
I think it is a combination of the two
Given Jeremy Corbyn’s ability to win respect with his terse comments particularly in respect to avoiding mud-slinging I think that perhaps his economic platform for an up-coming general election could simply be to play the broken record repeatedly that he will follow his predecessors methods to regulate the proportion of state involvement in the economy but he must be allowed the flexibility to judge the two proportions, state and private, in order to respond to circumstances and what he finds on gaining office in regard to the economy’s infrastructure needs. Of course, it will be helpful to educate the members of his party on the theory under-lying People’s QE.
1) QE is de facto proof that PQE would work and would be legal. The cat is out of the bag;
2) The argument that it is not needed is an argument for the continuation of austerity, a continuation of the housing crisis and a truncated public sector;
3)Argunments surrounding inflation relate to the quantity and circulation of money. No-one could ever measure these: PQE would be a further tool in the box, it’s use could be controlled in the light of economic performance.
4)There is no current distinction in the national debt between borrowing for capital investment and borrowing for revenue purposes. The cumulative capital account of government is not transparent, the realisable value of the assets created is muted. £375 billion of the gilts sold by government to fund past current / capital spend have been repurchased by the state bank. Any arguments about increasing debt levels must be seen wihin a clearer understanding of the above.
5)The historical use of PFI to keep government borrowing down in the short term either increases borrowing in the longer term as additional funding is required to fund income streams due to the PFI financier or results in funding crises within important public sector bodies. The question for anti PQE pundits is why this form of finance was not even considered in the past.
Still do not understand Peston’s point about “white elephants”. After the banking crash I cannot believe he thinks that all the investments made through bank created money or those contained within annual public spending were sound. Standard risk profiles attach to all capital projects, the issue is one of management of those risks and not the source of the finance.
As I’ve mentioned before printing money used to be a suicide note. So personally I find PQE often difficult to grasp! I would agree that getting across the new system is b difficult. Steve Keen’s helicopter money to pay the banks unless you have a loan is easy to grasp. I’m still wondering is there a fairly simple way to impart PQE and why it is good?
Personally I feel this is of major importance for PQE’s success and we have to think of a paradigm – not helicopter but…!
I suspect you are right
The difference is easy though: one gives cash away tat will be spent on imports
The other creates jobs and assets with long term value
I know which I would prefer
I’m still slightly unclear on what happens in 2020.
You say that it’s a policy for after the 2020 election and that you’re sure the economy will be in the doldrums at that point and so will need more money printing as a stimulant.
That may well be the case. But:
(a) What if it isn’t? What if the economy is chugging along nicely or even edging towards overheating? Do you still go ahead with PQE?
(b) What if the BoE has just done another huge conventional QE programme?
(c) Who decides whether the state of the economy in 2020 justifies more money printing? The government or the BoE? What if the BoE disagrees? What if the BoE responds to a PQE programme it opposes with a significant interest rate rise?
(d) Is PQE intended to be an ongoing programme after 2020, funding more infrastructure each year in the long term? Or a short term measure to stimulate the economy?
I think PQE would have been a great policy in 2009. I would also enthusiastically support it in the future if it’s the Bank of England which decides whether to push the print button. I agree that central bank independence is imperfect today but I think that’s a bad reason to abandon it altogether.
I am highly skeptical about the government printing money against the advice of the Bank of England.
a) Osborne wins the election in all likelihood
b) (i) It won’t have done if the economy is chugging along nicely and (ii) if the economy is in trouble, so what?
c) The government. The BoE has no right to over-rule a government
d) To be used as long as fiscal policy suggests it wise
We differ on the role of a central bank:L it is part of government and has to behave as such
Are you also proposing that the government should go back to setting interest rates again? If not, are you relaxed about the BoE raising interests to offset the stimulative impact of PQE? I’m not saying you shouldn’t be, just trying to understand the policy fully.
It’s still not at all clear to me whether you think PQE should happen irrespective of economic conditions in 2020. It’s a pretty fundamental point. Whether the Tories win if things are going well is a different question.
The government gives clear steers on where it wants interest rates to be
Within those parameters the MPC decides
I think the gov’t does set rates, in other words
And it should. We elect them to make decisions. The MPC should advise
If you accept the bivalence of human nature and its constant struggle to balance individualism and mutualism I think we need to pay more attention to how this affects human beings deployment of power. I think the ability to become and maintain the world’s reserve currency is not completely unrelated to military clout since such clout enables stability. Indeed Modern Monetary Theory’s argument that taxes drive money can only be made in the context of an ability to coercively collect taxes. Accordingly, the argument can be made that Britain’s closeness to the United States and the level of its military preparedness to act coercively to impose stability in the world makes it a supplementary reserve currency. This linkage argument needs to be addressed I believe through a logical form of inductive analysis before Jeremy Corbyn makes the abandonment of Britain’s nuclear deterrent a key part of his election platform.
http://theweek.com/articles/455261/americas-greatest-export-debt
The vast majority of taxes are paid voluntarily
People vote for them
I do not buy the argument
Richard, PQE is a huge step forward, but why not go the whole hog and adopt Functional Finance?
1. elevate fiscal policy to its rightful place of managing aggregate demand, spending where the private sector declines to do so
2. Bring the BoE back into a debt management role, using yield caps to neutralise any bond vigilante threat
3. Use commodity buffer stocks and public sector procurement (notably via a job guarantee) to keep inflation under control
This can coexist with much of the policy prescriptions you outline above. But it would have the advantage that you would jettison the painfully mainstream position of worrying about arbitrary deficit and debt percentages of GDP.
Anders
Three reasons
a) It’s illegal
b) That abolishes the role of baks, and I think they still have a role
c) I cannot see anyone voting for it as yet
Richard
Richard – Functional Finance is only illegal in the sense that it would require formal revocation of BoE independence. Given the increasing mutterings that CB independence is a sham anyway, this doesn’t seem that radical.
I don’t think Functional Finance does abolish the role of banks. Private credit can continue as today. We just tweak the roles of fiscal and monetary policy.
I agree that it is a minority view – but so is PQE, and that isn’t stopping you!
“That abolishes the role of baks, and I think they still have a role”
It doesn’t. Far from it. The role of banks in a functional finance system is to fund the capital development of the economy, and they are given access to a Bank of England overdraft to provide liquidity funding for that process. The discipline moves from the liability side, where it has comprehensively failed, to the asset side where you can regulate what purposes loans are for.
In other words they do the same as they do now, but without half the inter bank lending nonsense , the investment banking separated and with the bowler hats firmly planted on their heads by regulation!
Functional finance is just the name for relying mainly on the auto-stabiliser system – enhanced to provide better counter stabilisation. It is precisely the same as the counter cyclical parts of the PQE/Green QE system except that it doesn’t restrict itself to jobs on the capital budget (because there is no economic reason to).
I remain unconvinced
Changing the entire nature if bankings is abolishing banks and creating new institutions doing a totally different task
I know that many ion MMT do not agree – but putting the word Bank in the title does not make it a bank
Never mind the politics, a whole new round of QE may be needed anyway – have you seen what’s happening to broad money growth? It’s no sin to print money to support its overall level, only this time it might be prudent to get the money to ordinary people rather than lying in idle balances. As Keynes pointed out its not enough to print money, you’ve got to get the bloody stuff spent!
And what better way but to invest it in much needed house building schemes? We need more homes and the work would provide jobs in the construction sector.
Agreed on all counts
Hear hear!!
The following quote from an interview with the evolutionary biologist David Sloan Wilson seems to fit in very well with the importance of making use of the macro tool ‘Sectoral Balances Accounting’ wisely:-
“The bottom line: Spontaneous order worth wanting is possible, but it must be selected. That sounds contradictory, but it makes perfect sense, evolutionarily.”
http://bigthink.com/errors-we-live-by/self-organization-in-biology-vs-economics-darwin-vs-smith
More commentary on Corbynomics that might interest you. I don’t think I’d go as far as saying that it amounts to analysis. This is from John Van Reenen who is Director of the Centre for Economic Performance at the London School of Economics.
http://www.democraticaudit.com/?p=15392
One old canard reappears; that Corbyn is claiming £120 billion more tax will be collected. He strongly objects to ‘political interference’ with the Bank of England’s role in PQE and confusingly (to me) suggests that the National Investment Bank would be funded from reduced tax avoidance.
Although he makes a surprising claim that Tax Justice is equivalent to soaking the rich, there are still one or two points in the article on which you may agree.
I hope I have already addressed all those points
Richard,
Thanks for the article. I have one question, if you have a minute:
Under PQE the central bank creates money (liability) to buy bonds (asset). What happens at maturity of the bonds? Does the central bank recoup the principal (asset) and ‘destroy’ the money (liability), or something else? And who repays the central bank i.e. taxpayers?
Many thanks,
John
a) Bond is long – up to 50 years
b) Can be rolled over on redemption date is needed – easy to do
c) If want to redeem – go to market for replacement and use proceeds to pay BoE
d) Or, you could build up redemption reserve out of revenues generated / taxpayer if you really wanted
But all easy to do
Paul Mason on JC & PQE https://youtu.be/vKv48n4MzII
Good one
On blog now
Thanks
“That is only true if it is accepted that having 1.8 million unemployed is acceptable”
Very important in UK terms to remember that we have open borders with the EU. So the true pool of unemployed is 23 million across the entire EU.
Anybody saying the economy is ‘full’ really does need to explain how their ‘full’ calculation can leave 23 million people on the scrapheap, and therefore why anybody should take it even remotely seriously.
There is no shortage of real resources. There is a shortage of vision.
Agree with that