Time and again it seems that the criticism being made of People's QE is that it will be inflationary. I dispute that. So too does Jeremy Corbyn. Let me offer three reasons why.
First, the assumption that there will over the next few years be both growth and the restoration of a steady rate of inflation is just that, i.e. an assumption. There is no reason think it right. If there is an organisation that has got things consistently wrong in growth, in particular, throughout it's entire existence it is the Office for Budget Responsibility.
Second, the fact that we have zero inflation at present is not just the result of an oil price aberration (although I accept it contributed). We have zero inflation because we have a nation where there is unemployment, far too many people on minimum wage and five million self employed people who have seen their average incomes fall by 20% in the last five years. And at the same time we are about twenty per cent less productive than France. That is why we have zero inflation: there are too many under paid people in the UK who don't have a chance to work to best potential and the economy is responding by going nowhere. That's why large-scale investment is needed in the UK economy.
As I showed earlier this week, the government is forecasting that over the next five years business will borrow £300 billion to invest in the UK. The only problem with this forecast is that it requires business to first of all start net borrowing, which it has not done for more than a decade, and secondly to invest at a real rate not seen in the UK since 1980 ( I have not checked data before then, but that's sufficient to prove a point). I cannot see either happening: around the world there is glut of corporate savings, an absence of any indication of an upturn in business investment or any obvious reason for it. It just isn't going to happen. But the important thing is that the government says the economy could absorb this much new cash creation through lending to fund investment without inflation happening.
I am suggesting that PQE might be in slightly smaller sums than £60 billion a year (to be realistic). But I happen to agree with the government on this one: creating investment of that amount using newly created money will not be inflationary.
In that case I suggest hat using the government's own data and realistic economic forecasts on the behaviour that is likely over the next few years People's Quantitative Easing will not create inflation at above the Bank of England target in any circumstance that can be reasonably foreseen.
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OBR. Set up for Osborne by Osborne.
I thought you were taking a breather!
I agree that what you are proposing about PQE is perfectly legal, valid and doable, but it is exploiting what Martin Wolf described as the “great big hole at the heart of our market economies” – the ability of the financial system to create money out of thin air when, in his view, it should be solely the responsibility of the state.
In addition you appear to be remarkably sanguine about the possible reactions of capital market participants and of the other key decision-makers in the capitalist system to Mr. Corbyn’s key economic policies. I have grave doubts about this desire to restore a form of socialism in one country while it is running quite a substantial fiscal deficit, seeking to finance some public infrastructure investment by creating money and working to re-establish public ownership of large swathes of the privately-owned utility sectors.
Paul
I am making money creation at least in part a state function
Reform cannot be put on hold for fear of opposition: that would be absurd. It would be to say let is have neoliberalism forever
I am not sanguine at all: I believe these problems can be overcome
Richard, you are using aggregated macro economic arguments to make your case. But what about micro economic analysis? The argument that money printing is inflationary can be made in two ways. Firstly, on a semantic level, the entire point of printing is to have more money. This makes it literally inflationary, as it is inflating the money supply. That is the point of doing it. Overall the money supply may contract at an aggregate level, but the action itself is still inflationary by this definition (the original definition of inflation btw).
But we generally mean prices will increase when we say inflation. It is certainly possible for the ‘price level’ at an aggregate to fall and at the same time to print more money. That doesn’t mean the money printing hasn’t increased prices. It means overall prices haven’t increased but the money printing may have stopped prices falling further than what they would otherwise have done. That is the entire argument for using monetary measures to prevent deflation. One doesn’t deny the effectiveness of this tactic merely because inflation did not rise above 1%. If inflation would have been -5% without it, the action has ckearly been inflationary. Furthermore, a focus on aggregated statistics really obscures the micro realities underpinning the macro figures. No one lives in macro economic world, they all live in their own micro economic climate. If you were to analyse the costs that individuals face then money printing may increase the prices they pay when compared to what they might otherwise have been. For example, if I am building an extension to my house at the same time the government is using printed money to build houses. What might happen to the price of bricks for my project? They may increase to reflect the additional demand. It may not matter that there are lots of unemployed young people in my town. Those bricks are still going to be bid up in price. And it doesn’t matter that the price of petrol may help me save money elsewhere in my budget. The effect of the printed money is to increase what I must pay for bricks, because the demand for bricks has increased but the number of bricks has yet to increase. So overall the act of money printing, for me in this particular example, has been inflationary compared to if it had not happened. The use of aggregates obscures this reality, because it combines several factors, looks at the net position, and then concludes all the factors must have had the same effect, must have mived in the same direction. It is a bit like saying putting a hot chicken in the fridge won’t increase the temperature of the fridge by checking what the thermometer says an hour later. This is illogical thinking.
You ignore the fact that money is also continually destroyed: by bank loan repayment and also (following the principles of Modern Monetary Theory) by taxation
You make the mistake of thinking there is some fixed lump sum of money. There is not.
No, I accept that point, and made it in my post. You are thinking only in aggregate terms. If money is being destroyed in one area which has the effect of forcing down prices, and in addition there is money printing in another area, and prices overall remain unchanged, what is the effect of the money printing? If you had said we can print money and the overall price level will still not increase, I could agree with this. But you are saying something different to that. You are saying printing money does not have the effect of increasing prices, which I am arguing against. These are different statements.
I am saying government has a role in money creation
So perhaps PQE will ward off deflation. So much the better!
Will additional house-building increase the price of bricks? Only if the supply of bricks can’t be ramped up to meet the higher demand. I.e. the same principle applies at the micro level as at the macro level: you only get inflation if total demand exceeds the available capacity. Though I have no special knowledge of bricks, I doubt there’s any problem there. If there were, that would be addressed by not rolling out PQE too quickly, and (supposing, for the sake of argument, that this is necessary) first investing in increasing the country’s brick-making capacity.
Or maybe building with other materials that are at least or more energy efficient
The reason I mention bricks is because it happened to me. I paid much more for some bricks because there was a shortage. And I needed those bricks. I could not wait. I could not redesign my project with some other materials. One type of brick or scrap the project. That is real life, the spare capacity in the economy does not neatly and instaneously fill the gaps that you might want it to. And that is why it frustrates me that anyone can take seriously economic models that imply this. Because faced with real life, micro economic factors of supply and demand it just doesn’t work like that. There will always be scarcity. I could not replace my need for bricks with an unemployed person. Would never have passed building regs!
No one is making any such assumption
The range of activity to be undertakebpn would be deliberately very wide
But oddly, no one is worried business could not resource £60 billion of investment a year
No one is worried because scarce resources would be bid away from other potential projects. Money can always be spent.
Good to see you in Norwich on Thursday, Richard. I went partly because the attacks on Jeremy Corbyn are so astonishing and so inconsistent that I wanted to see for myself. It continues: I read an account (in VICE) of the Norwich meeting which described the audience as hard-left, UKIPpy, elderly, born since 1983, and his campaign as too earnest and too frivolous. So there’s obviously something going on here which is worrying a lot of people.
The productivity thing is interesting, isn’t it? Lots of people apparently back in work (or off the unemployment figures at any rate: not the same thing, of course) but productivity so low and not improving.
What’s behind it? Lack of investment? Dodgy figures about who is in work and who just isn’t on the books any more?
I’d have liked to have heard Jeremy’s views on electoral reform, as the democratic deficit in this country is pretty stunning. Also on Green investment: I know there’s a policy document coming out soon.
Sarah
On green investment I think Jeremy and I are pretty close
On electoral reform, not so much
I am in favour of reform, I am not sure where Jeremy is
Richard
Sarah
For some time now Job centre staff have been under intense pressure to get people off JSA. The general answer has been to encourage people to describe themselves as self-employed, even if, in reality, they have little, if any, outside income.
The point made to the unfortunate jobseeker was that s/he could claim working tax credits & would be no worse, & often better, off than on JSA. In one particular respect you are much better off: claiming childcare.
This lies behind the “miraculous” falls in unemployment that are trumpeted by Fleet St as indicative of what a great job Osborne is doing.
It seems, however, that Osborne himself hasn’t understood this because he is now talking about sharply restricting working tax credits. If he does that, obviously, a lot of “cleaners” or “gardeners” who work for 2 hours a week are going to realise it would be better to go back to admitting the truth &, once agin, claim JSA.
If you don’t believe me, & I appreciate it isn’t a particularly pleasant message to digest, read that bastion of far-left radicalism, accounting-web.
A radical bastion indeed
They have shortlisted me for accountant of the year
It makes me laugh to hear serried ranks of economists in radio studios scratching their heads as they admit that they can’t understand why UK productivity is so poor compared to (say) France.
The concept of “false” self-employment seems to have eluded them.
A lot of economists need to spend a bit less time immersed in their textbooks & more time going out to a cafe or pub & having a drink with people. Then they might learn something.
The UK has a slightly bigger GDP than France, but a slightly smaller population.
Source http://www.tradingeconomics.com/
Yet other statistics tell us that the French are more productive than the British.
Some may not like it, but we are all different, and there are people whose limited intelligence and skills mean that they are only capable of let’s say 8k of productive work per year. In order for that person to have a decent life though he might need 15k of income. It is better that the taxation and benefit system works so he actually does that 8k worth of work that he or she is capable of, but gets a package of benefits worth some of the difference, than that person does no productive work at all.
And until now the UK tax and benefit system is working better than the French one to achieve outcomes like this, and has lower unemployment as a result.
I am not quite sure what you are seeking to say here
Except, of course, the people of limited intelligence & skills who happened to come from a wealthy family, who will tend to end up as Directors of top companies
Andrew Carey
The sentiment may do you some credit but it doesn’t fit reality. The fall in unemployment has little to do with low-skilled people being encouraged into work but rather people that can’t find work being bullied into claiming, entirely falsely, to be self-employed.
If you seriously think we’re managing this better than the French, I’d love to know how badly they’re managing it.That might also cover why they have such a massively greater productivity
This article is an interesting look at the differences between productivity in the UK and France: http://www.primeeconomics.org/articles/o91sdlu312b90filbobylfincxj5sb
Very similar populations, very similar GDP, many more hours worked in the UK to produce the same output, hence lower productivity in the UK. France has higher unemployment; the UK has more disguised unemployment and underemployment.
Which is better? I don’t know; I’m more concerned with what wrong with both of them: insufficient demand, hence unemployment (in whatever form) is too high. PQE would improve matters by increasing demand.
Is it good for people to be working, as I think you’re suggesting? It is if it’s good work. Bad (insecure, stressful) work can be as bad for people as not working.
I’m not sure what your point is about differences in individual productivity. These will always exist. Productivity across a whole population can be affected by labour market rules, investment, etc. Individual abilities are not the only factor, and abilities can be developed.
Richard,
As I understand it, Andrew Carey’s point is actually a good one and it goes to the heart of why “productivity” is an often over-rated and misunderstood concept.
In terms of labour productivity alone, his point indirectly addresses the difference between output per hours worked (which is the dubious but accepted measure) and output per available hours.
To explain by way of hypothetical example: a 5% improvement in output per hours worked would be of little consolation in an economy with 40% unemployment. In that case, as with all unemployment, there are not enough hours worked – so the productivity per available hours would actually be very low and the economy (or labour force, at least)would be operating at a level that is well below potential.
Andrew Carey appears to be suggesting that the French productivity figures tend to represent the output of full-time employees. He also appears to be suggesting that the British system allows for a certain degree of under-employment or ‘low-productivity’ work, where full-time jobs are not available.
Given that is so, the French arrangements would effectively be increasing ‘labour productivity'(output per hours worked)with a hidden cost of higher unemployment. If (if!) that is the case I would also note that output per available hours may be lower in France, in which case their ‘higher productivity’ figures may not be a good indicator of economic well-being.
Eriugenus’ blog replies observe the flip-side of Andrew’s comment by suggesting that the UK’s ‘low productivity’ figures reveal an effective deception where under-employment in the UK is being hidden under the guise of self-employment.
I suspect that he may be on to something. The official unemployment rate of 5.5% is surprisingly low for an economy with 0.1% inflation.
For my part, I don’t think that Andrew Carey’s reference to “limited intelligence and skills” is of any particular relevance and I’m not sure that his comparison of the French & British systems holds true.
Higher unemployment figures in France may also be the result of differences in statistical measures and/or the disinflationary policies that have long been at work in the Eurozone.
My main point in this case is simply to note that higher labour productivity (hours worked) is of limited value in an economy with high and seemingly permanent unemployment.
Its value, moreover, is further diminished when it is offset by the falling rate of capital productivity that is a result of excess capacity.
Unemployment, all things considered, is an excess capacity of labour.
Bearing all that in mind I am pleased to see that you have rejected the Office for Budget Responsibility’s remarkable claim that spare capacity in the UK is in the order of 1-2%(The Guardian 4/8/15). Even the most orthodox of economists would be aware that their claim is completely inconsistent with zero inflation, persistent unemployment (and – that ain’t the half of it).
M. Fante
Sydney, Australia
But if you are self employed does anyone know how many hours you work? I suggest not (I don’t), and I doubt the self employed French peasant farmer is submitting his hours of work to any statistical authority.
So I would suggest that productivity is in fact a measure of the production of the country’s employees. If France has a productivity 20% greater than the UK, I suggest it is partly because they work harder. Sounds a laugh but it isn’t — there is much more rigidity and seriousness in the workplace, and a bigger dividing line between work and play than in the UK. Since the working time is limited by statute it also means that working in big business is rather ‘controlled’ whilst small business working hours are, in order to survive, not necessarily as they seem. (An additional consequence is that small hotels and eating out are rarely cheap and not as numerous as they once were, and now France is McDonald’s largest European market.)
If you believe in some form of distributist system which tries to give everyone a stake in the country and so a belief in their belonging to it, then having a job, even a low paid one that isn’t terribly productive, is still important.
The trick must be to get the pay up without abolishing the job. This is clearly difficult, but, apart from flattening pay structures by law, the same effect is a very gradual consequence of the rise in the minimum wage.
And other incentives must be found to give more people a stake and encouragement to be more productive.
Perhaps any share buyback by the company, which is a technique that, for CEOs, is currently an easy win as inevitably the share price goes up and their pay is — of course – linked to this, should in future mean compulsory ‘partial partnership’ with equivalent/equal shares going for free to all employees?
That might help Partnership to be more widespread and thought about — that is partnership working à la John Lewis where the CEO is paid in real money unlike the Co-op where he is paid in telephone numbers — and was even before their difficulties.
CEO and board pay increases above that of other employees could also trigger compulsory share issues to employees – with free dealing for employees.
This is not just a vaguely distributist agenda but an idea to get people a bit more motivated within the company and so – it is to be hoped – improve productivity, because it would more obviously be in the employees’ interest. Rather than, as currently, job changing amongst low paid employees (didn’t I read that it was 50%+ per annum in J Sainsbury) seems endemic — presumably because there is little incentive to stay.
I think it would be much more advantageous for Corbynomics to promote Partnership than Nationalisation by the way!
I have a feeling that “Andrew Carey””s post is significant. This has hit a raw nerve.
Those within Torydom know Osborne never delivered low unemployment at all, he just bribed the JSA claimants to get off JSA & onto entirely false self-employment. This is a fact that, correctly stated, could’ve swung the election but, er, didn’t. Poor old Ed Milliband was left like a Steven Gerrard without a Sturridge or a Suarez. Neither Balls or Umunna made the slightest effort to highlight the point in the run-up to the election. Why?
I agree with what I think is your main point eriugenus that the claimant count in the UK has been massaged, and there is a lot of underemployment here.
The tax credits system has been operating along broadly similar lines since 2003, although the post 2016 changes are the most radical yet with the income disregard changes. And throughout this period it has made sense to do or pretend to do 30 or 24 or 16 hours ( depending on your family ) than not to do any work at all. If in reality the claim is fraudulent based on remunerative hours worked which is part of the suggestion here, it is still better for the economy that the work occurs than it not happen at all. And a bit like children cycling on pavements which is illegal, it is probably best that we not ask too many questions about it, because the outcome is beneficial.
Britain is a more productive economy than France based on GDP per head, but France has more productivity on declared output per worker hour.
That’s a bit of a conundrum but I think Britain is doing better. Even a little work can be satisfying. Suicide rate is one measure of happiness, and the French rate is twice that in the UK.
One of my fundamental differences with this blog owner is that I think Britain is pretty good already but could be better in specific areas, but he seems to think Britain is in crisis and on the edge of another 2008 catastrophe.
Britain may well be in crisis and on the edge of another 2008 catastrophe. If your zero inflation becomes deflation, as it easily could with a relatively minor (or major) turn of events, your debtors will find that the pound buys more than it did when prices were steady (or rising). In other words the “real value” of their debts will rise.
A typical (& logical) response to this is to “deleverage” – pay down debt. Consumers that are paying down debt spend less, consumer demand falls relative to supply and prices fall further. With greater deflation, business income falls, employment falls as a consequence, lower employment leads to lower demand and lower prices.
When confronted with an alarming rise in real debt, business debtors will seek to deleverage quickly, falling demand makes this harder and many will slash prices in order to increase sales. The fire sale response pushes prices and incomes lower in what becomes a self- perpetuating deflationary spiral characterised by lower prices, lower incomes, higher unemployment and higher real debt — a classic depression.
Richard Murphy’s perception of crisis might also be reinforced by the fact that the conditions responsible for the GFC have not been substantially reformed. Its effects were alleviated through a combination of fiscal stimulus, quantitative easing and bailouts — then largely squandered in a bout of self-defeating, anti-growth austerity (more so in Europe than Britain). The excesses of the financial sector continue along a similar path to that which created the 2008 crisis.
Richard,
Last year I was deciding between a list of ideas to put forward for my B.Ec(Hons)thesis. One prospect involved the idea that public investment could be monetised on the proviso that deflationary (or near-deflationary) conditions prevailed. This seemed to be apt because:
1.Bubble & burst financial crises tend to create deflationary conditions & debt-deflation can be disastrous.
2.Monetising the stimulus (or infrastructure)spending eases the govt debt burden.
3. Regular Quantitative Easing seems to relieve financial markets while having a relatively modest effect on the real economy (a “trickle-down” problem of sorts).
I was quietly amazed that no one else(to my knowledge)had already thought of this and that few among the progressive or conservative elements at Uni seemed to fully appreciate the obvious value of the idea.
In any case I’m glad that I didn’t go with that idea as it seems that you have already articulated it. I am also very glad that you have done so and raised it to the highest level of political discussion in Britain and Europe.
I might also note that you have shown admirable restraint in rebuffing Chris Leslie’s absurd criticisms. His fear of inflation at a point where you have official zero inflation (probable deflation)could scarcely be more inappropriate.
M. Fante
Sydney Australia.