Search Result for quantitative easing — 456 articles

Doing something right

Posted on

The Tories have launched a new think tank, called 'Onwards'. They have featured in an interview in The New Statesman.

My first reaction was to wonder what they were marching towards apart from oblivion.

My second reaction was amusement. When the think-tank's creator, MP Neil O'Brien, was asked about Labour The New Statesman reports :

How did he respond to opinion polls showing widespread support for Labour policies such as the renationalisation of the privatised utilities? “You’re promising loads of free stuff to people, of course it’s popular!” O’Brien said.

And then noted:

But did Labour’s 2017 manifesto not owe more to social democracy than Marxism? “It’s not in the social democratic mainstream to borrow £250bn through people’s quantitative easing – it’s totally crackers,” O’Brien said, referencing Corbyn’s 2015 proposal for banks to print money to finance state investment.

The New Statesman then pointed out that:

The £250bn, it should be noted, would be spread over a decade and Labour does not currently support people’s QE.

It could, of course, have added that the Tories had done substantially more QE to support banks.

But let me just note that I still seem to have contributed the Labour policy the Tories most dislike. That's got to be considered doing something right.

Only a new currency could set Scotland free

Posted on

The Scottish Growth Commission of the SNP is, I am told, reporting this coming Friday.

One of the key issues for the Commission will be the central one of which currency Scotland should use if it were to be independent. I hear rumour that it will not be the euro. Equally, I hear rumour that it will be the pound, before transitioning to a Scottish currency. But, I stress, rumours can be wrong.

My own position on this is clear, and is reflected in my White Paper on Scottish Taxation after independence written for Common Weal last year. In the summary of that paper I said:

If Scotland is to have a sound tax system then it must be based on economic reality. It is widely believed that tax is necessary to pay for government provided services. It has, however, recently been realised that this is not the case. This is because all government services can in principle be paid for either by a central bank creating new money or by quantitative easing (‘QE’) operations (which amount to much the same thing).

This understanding is critical to the design of a Scottish tax system. What it demands is that Scotland must have its own currency from the day it becomes independent. This is because of another critical consequence of the understanding of tax and money, which is that a country with its own central bank and currency cannot go bankrupt.

What should also be clear is that a Scottish currency is also essential for the creation of an effective tax policy for an independent Scotland. This is because if a country has its own currency then there is technically no limit to what a government can achieve. There are, however, two practical constraints. The first is that the government does not try to create more economic activity than the economy can deliver. And the second is that they must tax sufficiently to cancel enough of the money that the government has created through its spending to ensure that its inflation targets are met.

The implications of this understanding are profound. First, a policy based on this understanding does not require that the Scottish Government balance its budgets. Secondly, this understanding means that the Scottish Government does not need to think itself beholden to bond markets or their interest rate whims. Third, in this scenario tax entirely ceases to be a mechanism that raises money to pay for government spending. Tax is, instead, a means of reclaiming the money that the government has spent into the economy as a result of that spending.

I am pleased to say that leading independence campaigner Robin McAlpine adopts a similar position in his recent book, ‘How to make a country’.

Scotland could be half-hearted and go for a gradual transition, but if it does three things follow on.

First, it will not be economically independent.

Second, it will have to balance its books, which will be desperate for a new nation needing to invest for its future.

Third, the new social settlement that a Scottish tax system should deliver will not be capable of delivery.

And perhaps as bad, who knows how long the transition will last?

The Commission has to go for an independent currency. Anything less sells the people of  Scotland short and would reveal a lack of understanding of tax and money that would be deeply worrying in a party that will seek power as the government of a new country.

Courage is required. It will pay handsome rewards. Scotland would be free.

Macroeconomic modelling,endogenous money and Modern Monetary Theory (MMT)

Posted on

I am pleased to repost this comment piece by my colleague Hector Pollitt from the blog of Cambridge Econometrics Limited, of which company I am a director. The post has a simple goal, which is to explain that macroeconomic modelling  can break out of the confines of its normal constraints and add value in the real world:

Unlike most other macroeconomic models, Cambridge Econometrics E3ME model includes endogenous money as a core feature (including borrowing by government). This difference is important because it allows us to best predict outcomes that might be encountered by our clients.  Find out how…

We get a lot of questions about treatment of the financial system in our macroeconomic modelling – and rightly so, because it is both a key determinant of model results and different to most of the other models out there.

One of the reasons for such interest is that treatment of the financial system in models was brought to the fore following the financial crisis (see my previous blog).

Virtually all of the economic models failed to predict it. The model builders decided that the financial sector was unnecessary and missed a crucial aspect of what they should have been analysing.

To be clear, E3ME is not a tool that can predict financial crises and it quite likely never will be. But it is different from most other models in that endogenous money is a core feature, including borrowing by government.

In this way Modern Monetary Theory and E3ME can be aligned. In this blog I explore how and why that alignment is important.

What is endogenous money?

First, some brief explanations for non-economists. The key principle of endogenous money is that the quantity of money is not fixed and is not determined by the central bank. Every time a commercial bank makes a loan, it provides money that may be spent in the real economy.

Crucially, commercial banks do not need to have all the deposits for which to make the loans (every time someone gets a new $100,000 mortgage there is not someone depositing a similar amount). The central bank provides the necessary reserves, as the Bank of England acknowledges.

Endogenous money is core to post-Keynesian economics; Marc Lavoie’s recent textbook discusses money before the real economy. The issue is prominent in nearly all of Steve Keen’swork and there are many further examples. Without considering money endogenously, it is not possible to consider potential economic stimulus effects.

Any boost to spending would instead ‘crowd out’ other expenditure, usually leading to negative impacts and running counter to the observed reality.

This paper by Jean-Francois Mercure and me explains further why the issue is so important in modelling.

What is Modern Monetary Theory?

Modern monetary theory (MMT) extends the concept of endogenous money to the government sector but with one important difference. That is – if debts are issued in its own currency, a government need never default. The level of public debt does not matter (outside the eurozone), as the central bank can always provide new money to cover the debts.

The idea that the UK could have, for example, gone bust in 2010 which was widely promoted at the time was simply wrong; technically it is impossible for the UK to do that because almost all its national debt is in sterling.

What is widely agreed is that when a government spends more than it taxes, it stimulates demand in the real economy. MMT argues that this is beneficial to the point of economic capacity (e.g. full employment), at which point further expenditure will cause inflation.

This means that the level of government spending can (and many would say should) be adjusted to account for the economic cycle and that public sector austerity is only necessary in a booming economy.

For further discussion see this blog post by Richard Murphy (a non-executive director at Cambridge Econometrics).

So how is this modelled?

In the E3ME model there is no constraint that matches bank loans to deposits. In other words, it is assumed (as is true in the real world) that investment can be funded by new credit and that savings are not required to create that credit.

Investment (which could also be financed retained profits) is determined by expected production levels and the cost of investment goods.

Savings are determined as the residual between incomes and consumption and usually increase when there is lower job security (as e.g. purchases of new cars and other large purchases are pushed back).

Interest rates do change in the model but using a Taylor rule that mimics central bank behaviour based on the real economy rather than trying to balance loans and deposits, which is not what happens in the real world of banking.

The result in E3ME is that when the economy is in an upturn, investment increases while savings decrease, providing further economic stimulus (i.e. multiplier effects) – because banks are willing to lend more across the economy. So, the quantity of money increases and this has real economic impacts.

This result contrasts starkly with equilibrium-based approaches where interest rates adjust automatically so that no stimulus or change in the money supply occurs.

That said, the government sector is mostly treated as exogenous in E3ME, both in terms of tax rates and spending (tax revenues are semi-endogenous as they are determined by activity rates in the tax base as well as the exogenous tax rates).

This, however, is deliberate: it is up to the model user to determine whether the government maintains a consistent balance or provides stimulus/contraction to the economy. There is no constraint in the model that government budgets must balance, either in the short run or the long run.

Different scenarios can then be tested, which we think is important.

Do we model ever-increasing debts?

Discussions of endogenous money inevitably lead to questions about how much debt it is possible for an economy to sustain. MMT tells us that for central government there is no limit, as the central bank can always provide more money, which is also what happens in E3ME. But private sector debt levels may be much more serious.

The key question of interest is: when does a shock convince banks that they may not get their money back? Once the banks stop lending (or even call in outstanding loans) the supply of money can contract sharply, impacting the real economy sharply.

This is what can create downturns and is one reason why quantitative easing was necessary from 2009 onwards: the government had to create the liquidity that commercial banks were withdrawing from the economy by injecting new money using what it described as unconventional monetary policy.

The point at which banks stop lending is often described as a ‘Minsky’ moment after the economist Hyman Minsky. No one, and certainly not the E3ME model, can identify when this moment might occur, but there are indicators (most obviously private debt levels in relation to output) that can give a good indication of problems coming.

Estimating these types of indicators at sectoral level is difficult given the absence of current data, but this is an area that we are working to improve the available metrics in the model.

In summary, endogenous money is a core feature of the E3ME model. E3ME’s philosophy is consistent with MMT in that it is possible to assess the effects of stimulus packages or austerity on the wider economy; this is mainly a question of how the scenarios are designed. That said, when it comes to tracking private debt and the potential for financial collapse, there is much work still to be done.

There is a lot we could learn here from recent models built by Steve Keen, Yannis Dafermos and Gaël Giraud among others. Some of the insights from these tools could potentially be integrated to a model such as E3ME; others may take the modelling at Cambridge Econometrics in a new direction.

The critical point is, however, that we are embracing both the world as we see it and best theory that reflects that world as we and our clients see it with the aim of creating models likely to best predict outcomes that we and our clients might really encounter.  And this, we think, is core to our work.

Hector Pollitt 
Director, Head of Modelling 
Cambridge Econometrics

The Green New Deal and automation

Posted on

From the Guardian this morning:

John Harris is right to say the left has articulated no comprehensive answer to the existing and future threats posed to employment by automation. Key to this must be prioritising labour-intensive sectors that are difficult to automate, such as health, education and elderly care. Equally key is a climate-friendly infrastructure programme. Crucial to this will be to make the UK’s 30m buildings super-energy efficient, thus dramatically reducing energy bills, fuel poverty and greenhouse gas emissions. The housing crisis should be tackled by building affordable, highly insulated new homes, predominantly on brown field sites, and local public transport links need to be rebuilt.

This massive work programme would provide a secure career structure for decades, and would involve a large number of apprenticeships and professional jobs, as well as opportunities for the self-employed and local small businesses. It can be paid for by “people’s quantitative easing”, from fairer taxes, local authority bonds and green ISAs. Since such savers are likely to be predominantly older, this would also be a necessary exercise in intergenerational solidarity.

Colin Hines

Convenor, Green New Deal Group

Of course, this would apply just as easily to the Job Guarantee.

Tackling the intergenerational crisis requires fundamental economic reform and not just some taxes on wealth

Posted on

Intergenerational justice is in the news this morning, and rightly so. As the Observer notes, The Resolution Foundation has a report coming soon on the issue.  Their research has found that the number of households headed by a 25 to 34 year old that own their own home (even with the help of a mortgage) has more than halved in some areas over the last 35 years. The hint is that they are going to suggest tax reform to address this issue.

Let me be clear: I have no problems with having wealth taxes, land value taxes, and higher rates of income tax on rental income to tackle the fact that this income source is not subject to NIC. In fact, I would welcome them all, most especially if used to reduce taxes that are an impediment to stable and fair employment prospects. But, they are not the solution to this problem. The intergenerational problem is about the failure of society to create a model for pensions that reflects both the sheer number of baby boomers and the fact that there is a fundamental pension contract that our whole model of private sector based pension provision simply fails to recognise.

I explained the essence of this in a short publication I wrote in 2010 called  ‘Making Pensions Work'. A lot of what I wrote then does, I think, remain completely relevant today. At the heart of my concern was the failure of what I called the ‘fundamental pension contract':

This is that one generation, the older one, will through its own efforts create capital assets and infrastructure in both the state and private sectors which the following younger generation can use in the course of their work. In exchange for their subsequent use of these assets for their own benefit that succeeding younger generation will, in effect, meet the income needs of the older generation when they are in retirement. Unless this fundamental compact that underpins all pensions is honoured any pension system will fail.

As I then argued of private pensions:

This compact is ignored in the existing pension system that does not even recognise that it exists. Our state subsidised saving for pensions makes no link between that activity and the necessary investment in new capital goods, infrastructure, job creation and skills that we need as a country. As a result state subsidy is being given with no return to the state appearing to arise as a consequence, precisely because this is a subsidy for saving which does not generate any new wealth. This is the fundamental economic problem and malaise in our current pension arrangement.

If anything matters are now worse than I envisaged at the time. George Osborne’s pension reforms are turning what was meant to be a pension system into a tax subsidised short-term savings arrangement for those already well off. As the Telegraph has reported this weekend:

The number of people making use of the “pension freedoms” soared to record levels in the first few months of 2018, according to figures released today.

A total of 222,000 pensioners made half a million withdrawals from their pots in the first three months of the year – 20,000 more than the previous quarter. The total amount withdrawn in the 2017-18 financial year was £6.7bn, the highest figure since the reforms were introduced in 2015.

And remember. this is a "freedom" that comes at a considerable price. This is the latest estimated data on the cost of pension tax relief from HMRC:



In 2016/17 the income tax cost was £38.6 billion and the NIC cost £16.2 billion, or £54.8 billion in all.  In 2016/17 total government spending was about £770 billion. And let me be clear, the taxes on past pensions would have been received in that year in almost exactly the amount noted above if no new tax relief had been given. So, the net effect was that a subsidy was given to the pension sector equivalent to 7.2% of all public spending. To put this in context, defence spending in the year was £46 billion, housing and environment spending was £34 billion and public order and safety also cost £34 billion. We are spending more on subsidising pensions than we are many things most people would think a lot more important.

The latest reliable data I can find on the allocation of these sums comes, somewhat surprisngly, from the ONS in Pension Trends – Chapter 9: Pension Scheme Funding and Investment, 2013 Edition. They report that the mix of assets invested in the largest category of pension funds is as follows:Screen Shot 2015-08-25 at 15.11.02

There was a flattening in corporate exposure post 2009, and this figure includes bonds and equity with overseas holdings growing significantly over time:

Screen Shot 2015-08-25 at 15.26.57

This is a trend seemingly associated with a growing use of mutual fund investment:

Screen Shot 2015-08-25 at 15.29.44

Now I stress that I know that this is not the whole picture on pension fund investment, but what  seems to be fairly obvious is that the trends that are occurring are broadly towards increasing financialisation, less direct engagement with UK corporates and an increasing international diversification to the point that the obvious question has to be asked, which is what is in this for the UK government and what now justifies its massive spending on pension subsidies? More recent data for the pension and insurance sectors as a whole confirms that the value of much of this tax relief leaks from the UK, although I stress that this chart is for more than pension assets:

In essence, however looked at, the question has to be asked as to why are we willing to spend £54 billion a year subsidising the financial services sector in the UK and abroad when doing so is not resulting in funds being used to, in almost any way, fulfil that fundamental pension contract that I outline above because the majority of funds are being used to invest in financial assets and not those tangible assets that might induce the next generation to forego their income to look after us in old age. Whilst we're at it we might also ask why we are also tolerating the use of those funds to a) support the increasing financialisation of our society b) support activity largely based in the south-east of England c) increase wealth divides in society, which is what this process, inevitably, does?

If the answer was 'because it works' it may just be worth putting up with this situation. But what we also know is it does not. The return on pensions is paltry, and not just because of low-interest rates and other low investment yields: the UKL pensions system makes half the rate of return of the Dutch system because it eats away returns with massive charges. And pensioners now know that. And that's why they are buying property. It's rational to do so as far as they are concerned. But as Keynes long ago pointed out, what is rational for an individual can, when aggregated, result in wholly irrational behaviour for society as a whole, and that is what is happening with pensions.

Let me name the basic problem. It is exactly the same one that plagues our macroeconomic management as a whole. We think about pensions in the macro sense as if we are a household, but as a nation we're not. Because this is what we do we think we can save our way as a natio0n into pension prosperity. And that is as wrong as thinking cuts could balance the government's budget. Only spending could balance the government's budget. And it's only investment, and not saving, that can solve the pension problem. And for the sake of the record (and getting back to the theme of national income accounting that has bugged my blogging this weekend) S ≠ I. which means savings do not equal investment in any shape or form.

The fact is that as a result of the failure of governments to, yet again, understand the difference between micro and macroeconomics a massive game of deception has been played on millions of people and the consequences are becoming clear: the pretence that we were providing for anything with our savings was just that, a pretence. And it all happened to ensure that the financial services sector got rich in real time.

It was for this reason that I suggested People's Pensions along with Colin Hines and Alan Simpson (then an MP) in 2003. The idea was simple. The government would create a pension fund, or funds, in which people could invest. This fund would then fund the creation of the assets that the nation needs to ensure that the fundamental pension contract was fulfilled. So, it would finance the building of hospitals, schools, broadband for rural locations, insulated properties and invest in small business and high tech and so much more. The fund would attract tax reliefs: an ISA wrapper may work for investments in it. Alternatively, capital gains and income received from it, to a limit, could be considered tax free. And the fund would then work in partnership with (let's call it) a National Investment Bank, whose bonds it would buy and who would actually deliver the projects. The same National Investment Bank would also issue those bonds into the broader market for those who wanted to buy them: they would also be available for the purposes of People's Quantitative Easing when the government, via the Bank of England, believed it needed to stimulate the economy by increasing investment in these assets.

How would returns be paid? Three ways. First, by way of interest payment: that's hardly surprising. The government is used to paying interest on its borrowing.

Second, there would be a real current return on the investment: I think it would be entirely appropriate to designate local funds or sector funds so people could see that the money they were investing was linked to a real economic output. Nothing could make investment more comprehensible than that.

Third, there is, of course, in the long term a return to be paid as a state-backed pension based on contributions. The mechanisms would need refinement, but given that government bonds have for decades underpinned the annuities used by private pension funds such an arrangement is completely normal. The important point to make though is that this pension could be economically justified precisely because the assets underpinning it would still be in use: this is a pension contract that reflects the inter-generational agreement that must underpin such arrangements with real assets.

How much could be spent a year on new investments? Well, let's start with most of that £54 billion, shall we?

The gains are obvious. The fundamental pension contract would be recognised and be the basis for pension provision, for maybe the first time ever. And the savings mechanism would be readily comprehensible, have low risk and be secure. Whilst at the same time a mechanism for increasing the flow of funds into the productive economy and away from the financial services sector - an essential part of rebalancing the economy - would have been created.

What's not to like? Ask the City. But for the rest of us this is all gain.

First this is a programme to deliver real investment.

Second, it redirects pension subsidy to public gain.

Third, it rebalances the economy.

Fourth it creates jobs in every constituency in the UK.

Fifth it creates an understandable savings mechanism.

Sixth, that mechanism reflects the fundamental pension contract that must exist in the macro economy.

Seventh, this provides a mechanism for enduring quantitative easing (call it PQE or otherwise; as I have now shown they're really the same thing) when it is needed.

Eighth, this is clear economic narrative that is straightforward to explain both as to the reason for its creation and as to its long term benefit.

This is how to tackle the inter-generational crisis. On this occassion tax plays second fiddle.

The government does not spend taxpayers’ money: that clears the government’s debt to the Bank of England

Posted on

A reader of this blog, who I do not think I have met, secured the following Freedom of Information answer from HM Revenue this week:

It would, of course, be possible to say ‘So what?’ and leave it at that. HMRC raises money and pays it to the Bank of England.

But that’s not a ‘So what?’ suggestion, in my opinion. That’s a big deal. What this answer says is that tax collected goes to the Bank of England, which is no great surprise. HMRC bank there. Admittedly, it then rather bizarrely says the funds get moved to the Treasury. That, of course, is not true, because the Treasury also bank with the Bank of England.  Instead what the answer clearly means is that the funds go from the HMRC account at the Bank of England to the Treasury’s account, also at the Bank of England.

This does matter. What, of course, it in effect confirms is that tax revenue does not fund government spending. We know that is true: as I noted a couple of days ago, whenever the government spends it does not use your taxes. Instead it tells the Bank of England to make payments for it. In effect, it borrows. That is why we’ve had a UK government debt since 1694. Literally, the Bank of England creates the money the government spends, which is a process that doesn’t involve a printing press. All the Bank does is some double entry bookkeeping. It debits the government’s loan account with the amount to be spent, and it credits the government's current account. And the government then spends the money, just as anyone can when they have a current account in credit. And then what HMRC do is pay whatever they collect into the Treasury loan account at the Bank of England to help clear it. The leftover balance in that loan account is then cleared by the issue of bonds (or gilts) or quantitative easing funding.

In other words (for my second lesson in national income accounting this morning) the relationship can be formally summarised as:

G = T + ∆B + ∆M


G = Government spending

T = Net tax receipts

B = Borrowing (and so ∆B is the change in borrowing in a period)

M = Government created money (and so ∆M is the change in that sum during a period).

There is then no direct relationship at all between government spending and tax, which is exactly what HMRC have now confirmed. All they do is help clear the Treasury loan account at the Bank of England, just as government borrowing and quantitative easing funding do as well.

But what that means is that the next time the government say they are spending taxpayers' money you know that's not true because there is, quite literally, no way they can say that given the economic reality of what is going on. They're always spending the Bank of England's money, which is then cleared by taxes, borrowing or QE (which is, in effect, an alternative form of Bank of England created money).

That's not to deny that taxpayers fit into the equation: they do, but not in the way the government says. They fit in in the way the modern monetary theory and I say. That's because what tax actually does is clear the government's debt at the Bank of England, as HMRC says. This is done to limit the amount of new money government spending creates. The aim is to control inflation. But that's a very different purpose to taxes funding government spending, which as HMRC has confirmed, is not what they do.

So thanks to Lee Carnihan for a well placed FoI request. The answer was, maybe, more telling than HMRC realise.

IPPR’s new macroeconomic report: in need of revision

Posted on

IPPR issued a new report on macroeconomic management yesterday. It's one of a series of reports link to their Commission on Economic Justice. To save time these are their recommendations:

In this context, we propose three areas of structural reform to UK macroeconomic policymaking.

1. We propose new fiscal rules to guide government policy, mitigating against both deficit bias and surplus bias. These include the separation of borrowing for current spending from borrowing for investment. Borrowing for current spending should be balanced over a rolling five-year period. Public investment (which supports long-term growth) should have a separate target as a percentage of GDP. Overall debt should be determined on the basis of its long-term impact on the economy. The proposed rules would provide stronger protection of government investment during recessions and increased flexibility to increase overall spending temporarily if interest rates are at the effective lower bound.

2. We propose that the Treasury considers revising the Bank of England monetary policy mandate. The Bank’s Monetary Policy Committee (MPC) should be asked to target one or both of unemployment and the level of nominal GDP, either alongside inflation or as intermediate guides to a primary inflation target. This would reduce the risk of monetary policy being over-tightened during a recession when inflation was the result of an external price shock.

3. We propose a significant institutional reform of the UK’s macroeconomic framework in order to provide an alternative means of delivering a spending stimulus when interest rates are very low. This would be superior to QE in terms of economic reliability and democratic accountability. We recommend the creation of an NIB, which under normal circumstances can help to provide countercyclical lending to support socially and economically productive investment in line with the priorities of the elected government. In addition, and to reduce reliance on QE, we recommend that the Bank of England is given the power to ‘delegate’ an economic stimulus to the new NIB when interest rates are at the effective lower bound and government fiscal policy is believed to be overly restrictive. This stimulus could take the form of increased lending for business growth, housing, innovation, and social and physical infrastructure. To ensure the extra lending can always be funded, we propose that the Bank of England is able to coordinate any delegated stimulus with additional purchases of NIB bonds from private investors.

Together, these proposed reforms to the UK’s macroeconomic framework would significantly increase the chances of effective policymaking in response to the next recession, while also retaining – and in some cases improving on – the balance between democratic accountability and economic effectiveness.

There are real issues here. Not with the third recommendation of course: that's people's quantitative easing (or green QE as it was once known) by any other name, pretty much exactly as I proposed it in various forms (I even summarised the 2003 origins of this idea on the blog yesterday afternoon, by chance). I am, of course, pleased that people are now realising that this really will be the only game in town when the next crash happens.

My problems are with the first and second proposals. To summarise the concern, I cannot fit either with economic justice. Let me explain.

Problem 1 - the commitment to the status quo

The IPPR paper explains the problems with monetary policy. It uses this graph to assist the explanation:

The reality is that interest is dying: rates are declining and there is no evidence that this is going to change. What that means is that there is no chance that monetary policy can now play the role it did in the economy in the past: the headroom that was required for it to do so cannot be recreated.

Nor is it desirable that it should be. The report notes that base rates of around 5% would be required now if monetary policy were to be effective in a future recession. But such rates would induce a recession. What this means that whatever merit monetary policy once had  (and that's open to question) has gone and is not likely to be returning to the political scene for a very long time to come.

But in that case the assumption in the report that the Bank of England should continue to have a fundamental role in managing the economy is, in my opinion, just wrong. The influence here appears to be Simon Wren-Lewis. For the record I have nothing against Simon: he writes a lot of sense on occasion. Bill Mitchell's treatment of him is absurd, in my opinion, and unhelpful. But I do remain baffled by much of Simon's economic reasoning. Although, as the report notes, he wrote in 2009 recognising the power of a hegemonic consensus in economics that mandated an orthodoxy that was not necessarily helpful, and he has also acknowledged MMT (unlike many other economists) he remains committed to the two fundamental harmful ideas that underpin this IPPR report.

The first is Bank of England independence. Leaving aside the fact that the effective demise of monetary policy removes any fig leaf of cover for this policy that it once had, there are major reasons why this policy is wrong.

The first is that it is a sham. As I have written in the past, the Bank of England Act of 1998 makes it quite clear that a Chancellor can always take back control if they want to: no Governor would ever ignore that reality. The veneer of independence does then have a different role as it does not actually exist.

Second, that different role is to remove power from central government because, as the IPPR report says it is believed that:

[O]ne of the key observations of the UK’s present macroeconomic framework is that elected Chancellors are prone to ‘deficit bias’. This insight was key to the design of Bank of England independence and the current macroeconomic assignment as a whole.

In  other words, the Bank of England is meant to stop government spending, even when there is need, so that monetary stability is mainatianed for the sake of financial markets.

This, I suggest, is not the route to economic or social justice. Nor is it democratic. The belief that the Bank of England should, despite this, stay in charge that runs through the report is wrong, but is always there, to the extent that it is said that:

We propose that in such circumstances [a downturn] the MPC be given the power to ask the National Investment Bank to expand lending in the real economy – for example, either by expanding existing projects or bringing planned projects forward – at a volume estimated to equate to all or part of the interest rate cut that the MPC would otherwise have wished to make.

In other words, in this plan it would not be for government to decide if additional spending was required in the economy, but for the Bank of England.

I can see no justification for this. IPPR has to place its confidence in democracy and not in power elites. The whole policy of supposedly independent central banks is about giving power elites control. That is not what economic justice does. IPPR have this policy wrong.

Problem 2 - A fiscal rule

The IPPR report slavishly adopts the current Portes and Wren-Lewis fiscal rule that Labour made policy in 2016. This is amother serious mistake. There are two reasons.

First, we have no need for a fiscal rule. We have our own central bank. We have our own currency. As Gavyn Davies says in the FT this morning:

Any country with a conventional central bank can ultimately create all of the money it needs to remain technically solvent on domestic debt.

Second, the reality is that QE can prevent debt escalation. There is then no need for a fiscal rule.

Indeed, this is apparent in the formulation of the Portes and Wren-Lewis rule, as adopted by IPPR, which provides that:

[F]iscal rules should be allowed to be temporarily suspended at the request of the Bank of England when its MPC judges that monetary policy is constrained by the effective lower bound. This would free fiscal policy for discretionary demand management when monetary policy is less reliable.

As noted above, this will always be true now: interest rates will be at or so close to the effective lower bound in the UK for all foreseeable time to come meaning that, using the noted logic, there is no case for a fiscal rule. So why have one except to pretend that the government cannot spend and so to provide cover for austerity? I cannot see another reason. This then brings me to my core concern.

Problem 3 -picking the wrong priorities 

My biggest problem wih the IPPR report is that it picks the  wrong priorities. This is apparent from its suggested priority for the new Bank of England mandate that it proposes, where it says the priority should be unemployment and the level of nominal GDP. Apart from hinting at an unhealthy concern with the Phillips Curve, these priorities are just wrong.

Nominal GDP growth has not delivered economic justice. Indeed, the possibility that growth might cause harm in the future has to be acknowledged because of its environmental impact. But there are issues too with picking on unemployment.

This implies that any job will do. It won’t. That’s what we have now, and serious social and economic injustice exists as a consequence. It is not just jobs that we need. We need good jobs, with high productivity, requiring solid training, and so rising median wages.

The IPPR targets imply trickle down can relied upon to transform growth into wage increases. We now know that is not true. IPPR should not be supporting such a mandate in that case. The goal of  economic policy, in which the Bank should have a secondary role, should be full employment with rising median pay. That is a mechanism to deliver social justice. The IPPR goals are not. They need to be revised.


IPPR is right to tackle macro. And they have got People's QE right. But social and economic justice requires that we break the hegemony that has created the injustice we are suffering. This report does not do that. As such it fails in its goal. I hope it might be revised.

There are few upsides to Brexit: people’s quantitative easing could be one of them

Posted on

The Guardian has something decidedly right in its editorial today, saying:

When running for the Labour leadership, Jeremy Corbyn wanted a “people’s quantitative easing” to boost the economy. It was frostily dismissed in 2015 as being forbidden by provisions in the Lisbon treaty. If we leave the European Union, those strictures will no longer apply. This is not to agitate on the side of Brexiters but to observe that the quiver of the argument against printing money might lose an arrow or two if we leave the EU. In fact, the Bank of England, while the UK was in the EU, did print hundreds of billions of pounds to avoid economic disaster. At the push of a button, the Bank conjured up £435bn to buy up gilts – government bonds – and exchange them for bank deposits. On the national balance sheet this sum is listed as debt, but it is not in the strictest sense because it is not owed to anyone. Turns out there is a magic money tree.

The first link is to my work on people's quantitative easing, written before Jeremy Corbyn borrowed the idea.

As the editorial then noted, the great failing of quantitative easing was that the £435 billion printed by QE (which they correctly note cancels national debt) was used to effectively create asset price inflation in the financial services sector. The editorial has a specific target: it is to say that Andy Haldane's claim for the Bank of England that this has been of benefit is just wrong. But what the Guardian says next is just as useful:

Government spending, however it is financed, needs to be the main agent of recovery. In that sense Conservative ministers are responsible for the costs of the rescue being dumped on to the blameless public in the form of falling living standards and public-service cuts. The lesson from the monetary side of the equation is that low rates and QE succeeded in staving off disaster; but was insufficient to regenerate a buoyant and fair economy. This could have been achieved by a redistributive, expansionary fiscal policy which ministers were ideologically resistant to.

And ideology was key here: I hate to say it, but that exactly proves Howard Reed's point on economics. So what can be done? This is the Guardian's view:

Mr Corbyn’s proposal became a national investment bank, financed by government bond issues, to invest in new job-creating industries. But Labour could have been more imaginative.

I agree! They could have used my original version and done what the Guardian notes:

Its plans could have seen the central bank instructed to hand over funds to a state body so it could buy services and goods without issuing debt. There are two objections to this: one is the Bank would have to pay interest on excess reserves, which would inevitably build up; or let its target rate fall to zero. Both occur today and are managed.

The second is hyperinflation. Yet all spending – government or private – carries an inflation risk. A future chancellor could commit to using fiscal policy to make sure nominal spending keeps pace with the real capacity of the economy to produce goods and services – and withdraw the stimulus if annualised GDP growth exceeded, say, 2.5%. These are dream figures: UK growth is expected to be 1.5% this year. It’s predicted that there will be no wage growth in inflation-adjusted terms for the next two years.

As they conclude:

The lack of demand in the economy needs urgent attention. Enlarging the economy may need bigger thoughts than politicians have so far entertained.

In other words, people's quantitative easing gets the ball rolling, but the whole issue is much bigger than that.

Now let's get on with it.

Why isn’t Labour still talking People’s Quantitative Easing?

Posted on

In 2015 Jeremy Corbyn adopted the policy of People's Quantitative Easing when seeking to be leader of the Labour Party. He borrowed the idea from me. Since being elected he and John McDonnell have little used the idea. This is hard to understand since it was probably the most distinctive part of his whole economic appeal in 2015, letting him suggest that the funding to build the new infrastructure this country required would always be available if the physical resources to deliver it on the ground existed.

There's another reason why it's surprising that he has ignored this though. And that is because Labour actually authorised its use in 2009. When Alastair Darling authorised quantitative easing that year he wrote this letter (of which I reproduce part):

Screen Shot 2015-08-25 at 16.12.19


Screen Shot 2015-08-25 at 16.13.24

I stress, this authorisation was later repeated by George Osborne and is still in force.

So, let's cut to the quick. First, what this letter says is that there was no reason why QE had to buy gilts. In fact £1 billion was used for other assets, and then Mervyn King brought a halt to that (I understand). But quite specifically, that was the Bank not following the Treasury guidelines provided by Alistair Darling. It is quite reasonable to argue that quantitative easing as delivered is not what Labour ever intended it to be.

Second, despite the claim that QE is a policy for the Bank of England to manage the Treasury was firmly in command of this process when it was created, authorising what could be purchased. The Bank could merely suggest alternatives. The policy did not then devolve decision making powers to the Bank for them to exercise. They were merely the operating agent.

Third, the Bank was indemnified for losses: that makes very clear who was meant to be running this policy.

Fourth, the condition was that the assets had to be capable of sale at investment grade in normal times (which we still do not have).

So, first of all, unless you can argue that the bonds issued by a new National Investment Bank would not carry investment-grade status I now think we can say three further things.

First, People's Quantitative Easing is not only legal, it has already (subject to a new National Investment Bank's bonds being sold by tender into the market in the first instance) already been authorised.

Second, the idea that the Bank of England already had any independence on this issue is a total fiction.

Third, when and if the market returns to whatever normal might now be defined to be because these bonds would still exist on the Bank's balance sheet if they had been funded by QE then they could still, at least technically, be sold, which is the Treasury requirement for acceptability.

So, in other words, all the legal and structural arguments against People's Quantitative Easing fall away: it has already been authorised and is already legal. Labour could say so and they would be entirely right in doing so.

The question then is why aren't they doing so? After all, we are still not living in 'normal economic times', whatever that might mean now. And there is not a shadow of a doubt that we are suffering underemployment that is resulting in low productivity and so under-usage of capacity which only needs the availability of credit (which is, note, the reason for QE) to bring it into use. This is exactly what a National Investment Bank could deliver. That Bank could, of course, offer its bonds to the market, most especially as a form of National Savings, I suggest. But the backstop for its funding could and should still be People's QE.

The result would be that in every constituency those 'shovel ready' jobs that we know need to be done could be funded. If we just put out the appeal to local authorities and health authorities I think we can be sure that they could come up with:

  • Extensions that are needed
  • Repairs needing doing
  • Insulation projects
  • Small road schemes
  • Local transport infrastructure improvements
  • Bandwidth improvements
  • Houses needing building
  • PFI projects they would love to drop
  • New schools that are required
  • GP surgeries that could be improved

And then ask universities and you'd get:

  • Capital for research projects and joint ventures
  • New applied research e.g. on renewables

And if you want to be really broad-minded:

  • Create a small business venture capital fund.

The question for Labour is why not say all this now when the funding for it is already approved, is legal and authorised and it could be managed by a new National Investment Bank under existing BoE authority from the Treasury right now.

I wish I knew why it isn't being explicit about it. Because it should be.