When, back in 2010, I first wrote my idea about using quantitative easing as a fiscal policy - which is now known as People's Quantitative Easing - I had no idea what impact that might have on current UK political debate. Or that so many economists would line up to talk about it.
The most recent to discuss such issues (without I would stress, mentioning anything to do with the UK or any thinker based here) is Nobel laureate Pul Krugman. In a New York Times opinion piece he has argued:
Japan needs to make a decisive break with its deflationary past.
And he argues that it is convention that is preventing this. As he puts it:
Respectability, it turns out, can be an economy-killer, and Japan isn't the only place where this happens.
Too true: the UK is also gripped by the paralysis of thinking that is hitting Japan. The convention that is part of the paralysis is, in paul Krugman's view, quantitative easing. That is hardly surprising: as I have noted, it has failed to deliver inflation (as is its intention) anywhere despite $6.5 trillion or so of it. I don't quite agree with Paul Krugman as to why that is. But he does ask the right question:
How, then, can policy fight deflation?
Noting QE has failed he says:
What's remarkable about this record of dubious achievement is that there actually is a surefire way to fight deflation: When you print money, don't use it to buy assets; use it to buy stuff.
Or do what I call People's Quantitative Easing in other words: invest with this new money. But as he says:
But nobody is doing the obvious thing. Instead, all around the advanced world governments are engaged in fiscal austerity, dragging their economies down, even as their central banks are trying to pump them up.
So why are they doing that? Krugman says:
Part of the answer is that demands for austerity serve a political agenda, with panic over the alleged risks of deficits providing an excuse for cuts in social spending. But the biggest reason it's so hard to fight deflation, I contend, is the curse of conventionality. After all, printing money to pay for stuff sounds irresponsible, because in normal times it is. And no matter how many times some of us try to explain that these are not normal times, that in a depressed, deflationary economy conventional fiscal prudence is dangerous folly, very few policy makers are willing to stick their necks out and break with convention. The result is that seven years after the financial crisis, policy is still crippled by caution. Respectability is killing the world economy.
I agree.
And I say that despite knowing that some say the UK is not in this situation and we face no risk of deflation despite the fact we currently have none, we have continuing unemployment, massive underemployment, poor productivity, an economy starved of infrastructure and a world economy at threat of a major global down turn spreading from Chian, the emerging economies and the implications of low oil prices for the Russian economy, which are serious.
People's Quantitative Easing is not the answer in every situation. Surely I have said that enough times by now? But it has a role to play in ensuring we do increase wages, employment, investment, growth and so (vitally - this is after all a key macroeconomic target that George Osborne and the Bank of England have badly failed upon) modest inflation.
And now a Nobel laureate says he agrees.
I'll bank that one.
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Richard
You’ve repeatedly claimed PQE won’t cause inflation. In fact you’ve claimed it cannot be inflationary. Krugman recommends a policy specifically to cause inflation.
Given this I don’t see how you can claim he’s backing your thinking.
I have never said it cannot be inflationary
I have said it can be used to create the right amount of inflation
And that as we do not have inflation we may need it
I have always said (see FT a month ago) there were occasions when it could not be used
You are guilty of selective reasoning
Perhaps I misunderstood this phrase
“First, the PQE financing mechanism cannot be inflationary”
from your post entitled “Increasing the money supply does not create inflation”
Investment can be inflationary
What we are learning the world over is that pure money supply, at least via QE, seems unable to deliver that
Isn’t it just Keynsism?
With a twist
Keynes dies almost 70 years ago. The world has moved on but that so much of what he said, still seems relevant, is a testament to the extent of his genius.
No.
peter-can you expand?
Surely it would stimulate the economy more and recapitalise banks faster if Peoples QE was given directly to the people in cash handouts.
That would just stimulate imports and leave the Bank of England technically insolvent
If there is to be such a stimulus tax is the way to supply it
You just book it as a loan to HM Treasury via whatever convoluted channels are required to make the accounting look right to Europe.
Could even be an equity injection – given HM Treasury owns the infinite offsetting ‘taxpayers equity’ asset. Which is an interesting idea – since Article 123 is about the Bank of England funding HM Treasury. There is no restriction on HM Treasury ‘funding’ the BoE.
There’s no operational difference between ‘Helicopter Money’ and PQE on the funding side. The difference is only in the distribution of the spending.
And where does the Treasury get the funds from?
What is the double entry?
Richard,
How much PQE would you suggest is needed? I wouldn’t expect it to be anyway near the £375 billion to bail out the financial system.
If we called for say £30 billion, which we’d be at pains to point out was less than a tenth of what was created to bail out the banks, to be spent in stages, would you think that was reasonable?
We should also acknowledge that if and when inflation did prove to be an issue, we’d back off from the program.
I have made clear that the UK economy is unlikely to have capacity at present for more than £50 billion of state investment at present
The amount subject to PQE would depend on circumstances at the time
Investment decisions must always come first and financing second
Richard, you blogged on 26th August about Alex Salmond’s proposal for £300 bn investment in “shovel ready” projects in Scotland. It included a very interesting list of local, distributed infrastructure projects. I feel sure there is a list of similar projects across the UK that might qualify for PQE.
Should obviously read £300 MILLION!
I agree that £50bn a year is the right magnitude and I’d like to work through some of its implications, as it puts what is being proposed into a perspective which many commentators have lost sight of.
£50bn is a substantial sum. At close to 3% of GDP it is as you say about as much as the UK economy could handle, particularly as multiplier effects will increase its impact. It would suffice to fund many desirable objectives, with my own preference being to split it roughly evenly across housing, infrastructure and skills/research (with environment as a theme across all of these). To illustrate the benefits, 1% of GDP would go a long way to filling the UK’s housing gap.
It’s also worth remembering that spending such sums productively is not something that can be done simply by adding it into a budget. Projects need to be identified and planned, capacity bottlenecks tackled and so on, so getting to the full £50bn is unlikely to be achieved in the first year.
Now I want to consider its funding implications. A substantial proportion could be covered by increased taxes, not just by raising some rates but more importantly by tackling avoidance or evasion and reviewing tax codes to remove unjustifiable or outdated exemptions. Each of these could raise several billion. Revenues would increase through economic growth and in some cases through direct returns on investment (e.g. housing rent). If interest rates remain low, there will also be a place for long-term borrowing.
So any monetary expansion (PQE) would need to cover only part of this £50bn, let’s say an upper limit of half or £25bn a year. Over the life of a Parliament it would not exceed £125bn or just a third of earlier QE rounds totalling £375bn. Another way of looking at this is that it amounts at most to just under 1.5% of GDP (just over £1.7 trillion) or a little over 1% of UK broad money (M3 is around £2.4 trillion). Any monetary theory I can think of recognises that raising and sustaining growth will need an increased money supply and these PQE requirements are small enough to allow private money creation also to grow without excessive inflationary pressures on resources.
I thought it was worth going through these numbers as much of the critical commentary even from academics has not bothered to do so, instead raising the spectre from its own imagination of unrestrained monetary growth and uncontrolled inflation. What is proposed is actually quite modest.
PS We did previously discuss the difficulty of targetting spending towards the regions in connection with NI.
Would this be a difficulty? We should aim to spend any extra money where it will have the least effect on overall inflation.
Definitely one to keep, particularly the sentence “When you print money, don’t use it to buy assets; use it to buy stuff.” If you haven’t yet brought this to John McDonnell’s attention, please do so when you congratulate him on his new role.
Just one word of caution. We should avoid tightly coupling the need for expanded public investment to tackle long-term problems (such as productivity, climate change, infrastructure and housing) with current risks of inflation or deflation, although – as with Japan – the ‘short term’ here can actually be very long. I think you recognise this with your acknowledgement that ‘PQE is not the answer in every situation’.
Today economic and monetary conditions mean public investment and pushing back the risk of recession/deflation go hand in hand but they might not do so by 2020 and I do not want to see proposals such as a National Investment Bank made dependent on the appropriateness of QE at any given time. I am also aware that an NIB has much broader support than does the proposal of financing it through PQE and I want to maximise the backing for this.
The NIB is first
The funding is second
A lifelong rule with me
Get the reality right and then sort the funding
Of course we get this garbage from Krugman:
“After all, printing money to pay for stuff sounds irresponsible, because in normal times it is.”
This is just absurdly stupid and goes to show that Krugman hasnt learned anything since 2008. bank lending is not reserve constrained, there is no money multiplier or loanable funds. And because of that, the ratio of type of outstanding Govt IOUs (reserves vs securities) is largely irrelevant to anything. Its nothing but mainstream mythology that reserves are considered “money” and securities are “debt”. Even though term deposits at commercial banks are counted as part of the money supply (M2), term deposits at the Govt’s bank are not. Why is a 12-mo CD at RBS “money” and a 12-mo Cd at the BofE “debt”, only because of ideology and propaganda by incompetent mainstreamers like Krugman.
Perhaps we could use a PQE lottery. People wouldn’t buy a ticket but rather make
a submission. The ‘winners’ would be randomly picked and not win money but a portfolio.
They would have to take some amount of business/economics training ( we can now do that via internet )and would have the option, based on their interests, of several investments.
They would not be able to sell these but could take profits received as income.
At a certain level of return they would have to sponsor a new person in the PQE
lottery. As a number of wealthy folk would like to give more back to society
maybe this could be started thru a crowdfunding mechanism.