Lord Robert Skidelsky, an economist who I have never met but whose work on Keynes I would thoroughly recommend to anyone, had an article in the Guardian yesterday in which he said:
Fiscal austerity has become such a staple of conventional wisdom in the UK that anyone in public life who challenges it is written off as a dangerous leftist. Jeremy Corbyn, the current favourite to become the next leader of Britain's Labour party, is the latest victim of this chorus of disparagement. Some of his positions are untenable, but his remarks on economic policy are not foolish and they deserve proper scrutiny.
Corbyn has proposed two alternatives to the UK's current policy of austerity: a national investment bank, to be capitalised by cancelling private-sector tax relief and subsidies; and what he calls “people's quantitative easing” — in a nutshell, an infrastructure programme that the government finances by borrowing money from the Bank of England.
And, as he notes:
The first idea is neither extreme nor new. There is a European Investment Bank, a Nordic Investment Bank and many others, all capitalised by states or groups of states for the purpose of financing mandated projects by borrowing in the capital markets. The rationale for this type of institution derives from what the great socialist theorist Adam Smith called the state's responsibility for the “erection and maintenance” of those “public works and institutions” that, while of great advantage to society, would not profit private enterprise.
In other words, the state should always have an investment function. Delegating that function to a dedicated institution may have advantages for the presentation of the public accounts.
I am grateful for that comment. And for this too:
“People's quantitative easing” is a more unorthodox — and a more interesting — version of this idea. Under conventional QE, the central bank buys government securities from banks or corporations and relies on the extra cash that it “prints” to stimulate private spending. Studies suggest, however, that much of this money goes into speculative activity, risking asset bubbles, rather than being channeled into productive investment.
An alternative would be to distribute the central bank's newly issued money directly to housing associations, local councils and national or regional investment banks — any organisation that could carry out infrastructure projects. This is what Corbyn proposes.
As he adds:
This idea of monetary financing of fiscal deficits -borrowing from the central bank, rather than from the bond markets - has a reputable pedigree. In a lecture to the Cass business school in February 2012, Adair Turner, the former chair of the UK Financial Services Authority, proposed it as an option if further borrowing from the markets were politically or financially impossible.
Robert Skidelsky also endorses a key argument of mine:
Corbyn's proposal, unlike orthodox monetary financing, would not add to the national debt — a major advantage. Orthodox QE — let's call it “monetisation one” — is intended to be reversed, with taxation used to raise the money to redeem the government bonds held by the central bank. The expectation of future tax hikes could drive people to save part of the new money, rather than spend it. Unorthodox QE - “monetisation two” - avoids this problem, because the central bank's borrowing will not be repaid. Its assets net out against government liabilities. That is why it should not be excluded a priori.
But he does not buy everything, I admit, saying:
There is a strong case for monetisation two in the eurozone, which faces zero growth and deflation.
It is hardly the case, however, that the UK economy, currently growing at close to 3% a year, needs a further QE programme of any kind right now. The government can borrow all it wants from the bond markets at near-zero interest rates. Outsourcing such borrowing power to a national investment bank is merely a way to signal that any additional borrowing will be used for investment, not for current spending.
I think that this misses the point: bonds are only one way of withdrawing cash from an economy. If that economy is growing but not in the way desired then tax is another, and in combination with PQE the necessary reshaping could then be achieved. As I have long argued, tax is really about the way we shape the society we want. But I happy to disagree on this point. As Robert says, the argument still has merit:
There are two solid arguments for activating such an institution in the UK today. First, the share of private investment in GDP is still below its pre-crash level of around 11%. This suggests that investors lack confidence in the durability of the recovery.
Second, depending on the institution's mandate, a state-led investment programme offers a way to rebalance the British economy away from private speculative activity to long-term investment in sustainable growth, and away from the south-east to the Midlands and northern England. In short, it offers a way to address the problem of “private affluence and public squalor” that John Kenneth Galbraith identified in the 1950s.
This conclusion is especially important:
Corbyn should be praised, not castigated, for bringing to public attention these serious issues concerning the role of the state and the best ways to finance its activities. The fact that he is dismissed for doing so illustrates the dangerous complacency of today's political elites. Millions in Europe rightly feel that the current economic order fails to serve their interests. What will they do if their protests are simply ignored?
That's a very good question. The whole point of the economics I have discussed in recent years has been to suggest that there is an alternative to the neoliberal hegemony that has deliberately ignored those needs. People's Quantitative Easing is a part of that alternative. If it's creating an essential debate, and it seems that it is, then it's achieving the first part of its objective already. Delivering the programme of investment that this country really needs is when, however, it will have the chance to radically transform this country.
What the economy will be like in 2020 cannot, of course, be appraised as yet, but the simple fact is that if Osbornomics fails as badly as I have always suggested it might this country will be in need of an investment programme delivering hundreds of billions of new economic stimulus, jobs and infrastructure. If and when PQE does that then its merits will really be seen.
But there's a long way to go and a lot of hurdles for many to cross before that might happen.
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I think the doubt about the need for PQE expressed by Prof. Skidelsky reflects the difficulty of communicating politically the difference between funding public current and capital expenditure because of the crappy accounts governments use and the perversity of the Tories’ use of them. Kemal Dervis tackles this issue here:
http://www.project-syndicate.org/commentary/fiscal-policy-balance-sheet-public-investment-by-kemal-dervi-2015-08
There is something seriously fishy about the UK’s “3% growth” that Skidelsky mentions. It just isn’t consistent with zero inflation “private investment at 11% of GDP” & a variety of other indicators.
I suspect that the alleged ‘growth’ might have more to do with redistribution(non-productive speculation) and growth in the(produce nothing) financial sector. Beyond that it just doesn’t seem to add up.
Look I am not a fan of the current QE – to give banks access to money at 0% and let them lend it back to the ultimate lender (UK) at 2% seems a rather shabby way of letting shareholders that should have taken losses steal their balance sheet back from savers.
So I can see the appeal of “Peoples QE”, but can an injection of M0 into government departments or quangos really be expected to improve an economy given inflation risks?
Also the historical precedent library of large budget splurges to public bodies is large and well documented, but almost always is a story of good intentions, very poorly executed, with sometimes major unforeseen consequences.
If you have to take the risk of M0 in (and I can’t really see other way given the debt pile and our current apparent proximity to the Laffer peak, along with general deprivation than needs dealing with), would it not be better to have a proper people’s QE? ie distribute the injection pro rata to the population, and let people decide how to spend it? If there were concerns about the area of spend (e.g. imports, holidays) I imagine it could be vouchered pretty easily.
Not to say the NIB is a bad idea, but probably that should be funded by general taxation. And probably you’ll find if you freed up some land, people would build pretty quickly. A 1000sqf modular home with an agreed design, land and planning permission could cost 30-40k to build with modern techniques – the problem is then not affordability, it’s planning policy surely?
Helicopter money is like a cocaine rush for a junky – a quick hike to GDP, mainly of imported goods – and then a big hangover
What I am suggesting creates jobs and a lasting legacy
If you want bigger flat screen TVs rather than the houses to put them in go for your version
And as for inflation – have you noticed we don’t have it?
Notwithstanding the debate on QE there is another possibility which would produce socially useful economic activity – debt-write-off. Local Authorities have debts totaling £51 billion with the Public Works Loans Board. This includes Council housing ‘debt’ which is largely the product of creative accountancy on the part of the Treasury. If this ‘debt’ was written off then local authorities would be able to spend more of their income, that part currently consumed by debt and interest payments, on socially useful things. This would mean, in the case of Council housing, that local authorities would be able to keep all the rental income from their tenants and spend it on the upkeep of their homes and some new build. This would enable them to spend possibly someone in the region of an extra £1 billion a year.
The cost would be central government foregoing annual debt and interest payments. Of course, the additional economic activity would have knock-on effect of additional work, additional jobs and so on.
I would also suggest that there should be an audit of government debt, similar to the one carried out in Greece by the President of the Parliament (though ignored by the government).
The Staggers has nailed its colours to Cooper’s mast and is urinating copiously on key elements of Jeremy Corbyn’s proposed economic policies:
“As for Mr Corbyn’s economic programme, the policy of a “people’s quantitative easing” would risk rampant inflation and is not a sustainable means of financing infrastructure programmes. We believe that a 7 per cent rise in National Insurance for those earning £50,000 or above to fund a return of the student grant is the wrong policy, and would not win support in those marginal seats Labour must win in the south of England if it is ever to form another government. The proposed renationalisation of the energy sector rests on tax Âprojections that have been shown to be heroically optimistic. For these reasons and others, though we recognise his qualities as a principled campaigner, we cannot support Mr Corbyn’s candidacy. Labour’s next leader must be drawn from the party’s mainstream and must command the loyalty and respect of his or her MPs.”
Some of this criticism might be justified due to the curate’s egg nature of his policy proposals, but it includes assertions that need to be rebutted robustly.
Not worth it
Does anyone really read it?
You’re probably right. It’s just that this stuff gets picked up by the mainstream media and adds to the background drum-beat that PQE will lead to out of control inflation and is a crazy way to finance infrastructure investment. And it also adds to the nonsense that’s fed to backbench Labour MPs by these so-called Very Sensible People.
The irony is that it would take a lot of PQE to get inflation up to the BOE’s 2% target and that even the limited use of PQE starting to lift inflation would be an effective way of forcing corporations and wealthy individuals sitting on mountains of cash to start investing. Near zero inflation means there’s no penalty for holding cash. But even a small amount of inflation would force them to seek some return. That’s the power and the beauty of PQE.
Indeed
Richard-worth quoting (I assume he won’t mind as it’s in public domain) Neil Wilson on Skidelsky’s bond argument:
“What Robert doesn’t explain, as usual from the Neo-Keynesian mob, is that the alternative use for the ‘bond markets’ money is to leave it on deposit – which ends up at the Bank of England.
So essentially the Bank of England can lend it directly – at no net cost to the government. Or you can go to the Bond Markets and pay the wealthy some more benefits in the form of interest.
Which do you think is best value for money?
It’s time that we cut the state benefits paid to the bond market. Let them go invest in some businesses instead.”
Is the Government Bond as we understand it a ‘barbarous relic’
PQE achieves that overdraft effect
That respected individualists are giving credence to PQE of which you are, such an exponent or even the architect, I don’t know must give you a little glow. That hope of something besides the jam tomorrow, think yourself lucky you have a job doctrine is so heartening. The jam will never come if follow Osbornomics, they are totally addicted and driven by this ideology.
May your calm courage continue. May the rainbow touch your shoulder.
Thank you