The problem with PQE might be it is too successful

Posted on August 24 2015

Simon Jack, interviewing me on the BBC Radio 4 Today programme this morning, said he had discussed People's Quantitative Easing with a range of economists, most of them right wing, and their real fear about it was that the multiplier effect it might have would be too strong.

Let me explain this. The multiplier effect is the impact that £1 of government spending has on growth. A pound of spending by the government always adds to growth by that sum unless (as in time of war) it is so great that it is intended to stop private sector activity: we are nowhere near that situation now. But it also adds additional growth too because the person being paid by the government does then, of course, go on to spend what they get, and the person they spend it with then spends some of what they get, and so on. Duncan Weldon wrote about this rather well when he was still with the TUC.

The size of these multiplier effects is subject to dispute. So, for example, the Office for Budget Responsibility says £1 of government spending on capital may create another £1 of economic activity as well. The IMF says that could be £1.70 extra. But what was really worrying the economists that Simon Jack spoke to was that PQE spending might have too high a multiplier: the impact of the spend would be higher than other types of spending, they said. Or, to put it another way, there might be no better way to stimulate the economy at lower cost than PQE in their opinion. And that is why they did not like it.

Try to work out the logic of that.

You won't be able to unless you realise that change of the sort PQE would deliver is not what the markets and these commentators want. Remember, after all, that Robert Peston said last week that:

there would be widespread concerns that the Bank of England would be indirectly financing white elephants via this investment bank

What sort of white elephants? He named:

housing, transport, and so on.

And we wouldn't want that to happen, would we?

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18 Responses

  1. John Doole says:
    August 24 2015 at 7:16 am

    Since when were housing and transport “white elephants”? Why have so many people been seemingly hypnotised into thinking that neoliberal economics is the only way, when it has so palpably failed time and again?

    • JohnM says:
      August 24 2015 at 7:51 am

      “Why have so many people been seemingly hypnotised into thinking that neoliberal economics is the only way”

      That would depend upon the size of their bank account.
      NeoLiberalism always looks better when viewed from the top of a mountain of money.

    • James says:
      August 24 2015 at 8:05 am

      I suppose, at a pinch and if you were looking to play devil’s advocate, you might call some of the council housing projects of the 1960s white elephants: after all, the number of tower blocks built in a hurry, badly maintained and subsequently pulled down is not insignificant.

      Mind you, if you did that you’d also have to admit that most of what the private sector has built in the last 30 years (too small, wasteful and ecologically unsustainable) would be white elephants too…

    • BenM says:
      August 24 2015 at 11:39 am

      I think you answer your own question there. The problem is neo-liberal economics hasn’t “palpably” failed. We need to realise that the concept actually muddles through, which suits to the ground those within higher income brackets.

      Most ordinary people and families focussed on the day-to-day therefore don’t notice (hypnotised if you wish) that their own prospects might be better served under a slightly different economic model (with higher government spending we’d still be a market economy with people able to create businesses just like scandinavia is).

      So, ally a muddling through neo-liberal economic vision with rampant partisan media reporting and opposition to any tweak, you get what amounts to an unquestioning consensus for the status quo.

      And that is a thoroughly bad thing.

  2. JohnM says:
    August 24 2015 at 7:53 am

    noticed on twatter this morning, via Rick: http://blogs.ft.com/the-exchange/2015/08/24/peoples-qe-scheme-misses-the-point/

  3. JohnM says:
    August 24 2015 at 8:17 am

    Duncan Weldon on twitter this morning…..

    https://twitter.com/DuncanWeldon/status/635701657964310528

  4. Atul Shah says:
    August 24 2015 at 8:42 am

    Hi Richard I heard you live and you spoke very eloquently. This is a very innovative concept and right for our time and crisis. We desperately need a Peoples Investment Bank. Well done for developing and articulating such policies.

  5. Neil Wilson says:
    August 24 2015 at 9:37 am

    “and their real fear about it was that the multiplier effect it might have would be too strong. ”

    With 23 million unemployed across the EU, it’d have to be very strong indeed.

    With that level of slack in the EU to draw from, any inflation issues in any markets really should be referred to the Competition Commission.

  6. Sylvia Dobson says:
    August 24 2015 at 10:15 am

    Surely competent people in charge of a new bank such as a long term investment bank for the good of a country would use a kind if sliding scale to give when necessary, ease off when necessary. It must feel like pushing a boulder up hill Richard. I was just about to go out with the dog when there you were in my living room.

  7. Richard Thrale says:
    August 24 2015 at 12:33 pm

    What sort of white elephants? He named:housing, transport, and so on.

    So look at Spain. Plenty of examples there of airports built but not used, blocks of apartments standing empty. It is possible to build the wrong things…