The are a confused bunch over at The Economist. They have a feature this week that says things like:
IT IS hard to exaggerate the decrepitude of infrastructure in much of the rich world. One in three railway bridges in Germany is over 100 years old, as are half of London's water mains. In America the average bridge is 42 years old and the average dam 52. The American Society of Civil Engineers rates around 14,000 of the country's dams as “high hazard” and 151,238 of its bridges as “deficient”. This crumbling infrastructure is both dangerous and expensive: traffic jams on urban highways cost America over $100 billion in wasted time and fuel each year; congestion at airports costs $22 billion and another $150 billion is lost to power outages.
And as they note:
In 2013 in the euro zone, general government investment–of which infrastructure constitutes a large part–was around 15% below its pre-crisis peak of €3 trillion ($4 trillion), according to the European Commission, with drops as high as 25% in Italy, 39% in Ireland and 64% in Greece. In the same year government spending on infrastructure in America, at 1.7% of GDP, was at a 20-year low.
This is a missed opportunity. Over the past six years, the cost of repairing old infrastructure or building new projects has been much cheaper than normal, thanks both to rock-bottom interest rates and ample spare capacity in the construction industry.
And:
Investment in infrastructure can provide a tremendous boost to an economy. Standard & Poor's, a rating agency, reckons that the activity spurred by increasing government spending on infrastructure by 1% of GDP would leave the economy 1.7% bigger after three years in America, 2.5% bigger in Britain and 1.4% in the euro zone.
All of which, I should say, I agree with.
And then there was that other article by them on Corbynomocs in which they said:
[A]nother of Mr Corbyn's ideas is dangerous. He promises “people's quantitative easing”, a radical twist on a policy that the Bank of England has pursued since 2009. Instead of using newly created money to buy government bonds, as happens under ordinary QE, Mr Corbyn seems to want the Bank of England to use that cash for more productive purposes, by buying bonds from the national investment bank.
In the short term people's QE might gee up economic activity without increasing the stock of government debt–currently 80% of GDP–since the Bank of England could write off the bonds it had bought.
So, they say that the infrastructure that they think desperately needed, and which they think has an enormously positive return, could be funded as I have suggested (and I note they have made no suggestion at all as to how they think cash should be found) but they refuse to consider my option because:
[I]t is a risky proposal. At present the bank looks unlikely to embark on a fresh round of QE (instead it is mulling monetary tightening). If Prime Minister Corbyn were to rely on QE to fund public investment, he might be tempted to cajole the bank into prescribing more of it. At the mercy of politicians, the bank would lose its credibility, and confidence would drain from the economy, forcing interest rates up and crimping investment–again, just the opposite of what was intended.
Or to put it another way, they say that a central bank that can't find a way to create inflation (and so is failing in its core task) should not be used instead to fund infrastructure investment that the government knows is sorely needed and pays a fantastic rate of return.
Why, oh why, oh why do we have to be slaves to a failed dogma?
It's a question those opposing PQE need to answer.
And for the record, they cannot suggest borrowing should be used instead. That is because borrowing, like tax, withdraws private sector money from the economy, but if you want to encourage growth you don't want to encourage that unproductive savings exercise: you want to keep private sector money, as far as is possible in productive use. So this is not an alternative.
PQE is the best option.
Hat tip: Paul Hunt
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Indeed. The Economist would do well to ponder what FDR had to say on the perils of dogma and a refusal to think more widely:
“Men are not prisoners of fate, but only prisoners of their own minds.”
Thank you for the hat-tip.
I suspect The Economist is not suggesting borrowing because it has the common, but totally weird and unjustified, hang-up about the debt/GDP ratio and believes the current ratio (at 80%) is too high – even though much of the debt is borrowing to fund capital expenditure and is matched by the resulting assets on the asset side of the government’s balance sheet. On the other hand, you don’t want to extract private sector savings and use them to finance investment that could be financed ultimately by BoE money creation at a negligible cost.
But the reality is that there are mountains of cash (or near cash) sitting in the private sector with the owners of this cash unwilling to use it to finance investment unless they get over-the-top returns and either a cast-iron investment recovery guarantee or a no-penalty exit guarantee. And while inflation is effectively at or close to zero there is no penalty for simply holding these funds.
My preference would be to “encourage” the use of these funds to finance badly needed infrastructure investment at a low cost of capital. And, as I’ve mentioned previously, the “encouragement” would be a clear intent to use BoE money creation if sufficient financing were not forthcoming after a defined period of time. But, of course this fetish about deficits and the debt/GDP ratio would have to be abandoned and proper government accounts would have to be drawn up.
Technically this may be appropriate
Politically I am not sure it works
Thank you. I take your point. Given the damaging economic nonsense that characterises much of the current orthodoxy, I’m always on the lookout for feasible remedies.
On another front, the Competition and Markets Authority (CMA) has finally published 64 responses to its provisional findings and proposed remedies as aprt of its energy markey investigation:
https://www.gov.uk/cma-cases/energy-market-investigation
Interestingly the responses of the Big 6 are not included. They, of course, are adamant that they’re not ripping off “inactive” and “disengaged” consumers and are firmly opposed to the ‘regulated safeguard tariff’ (RST) proposed by the CMA. I expect the reason that will be advanced for the non-publication of the Big 6’s responses is that have provided allegedly commercially confidential data to counter the CMA’s findings on their price-gouging. Still one would expect that redacted versions could be generated and published.
Most of the other 64 responses published generate little that’s surprising. The statutory or quasi-statutory bodies are generally supportive of what the CMA is proposing. Most of the academics (and the former regulators) are opposed to the RST. It appears I’m the only person proposing a statutory collective buyer on behalf of disengaged customers with the supplier bidding to supply this collective buyer. This would be an effective and efficient means of discovering and enforcing the appropriate RST. But I realise it’s probably far too ‘Corbynesque’. It would also provide a means of confirming the almost indefinite commitment of final consumers to pay for energy services and of re-establishing the effective assurance of investment recovery this provides.
It’ll be interesting to see how the CMA will retreat from its proposed RST in the face of concerted opposition from the Big 6. They don’t want anything to get in the way of their ability to rip off effectively captive consumers. And they’ll get their way. They’ve already captured Ofgem and the Goverment.
There should be scope here to refine and develop Jeremy Corbyn’s initial proposals about renationalising the energy gas and electricity industries.
The Economist is under the influence of the Neoliberal model or paradigm of money which fails to understand the MMT argument that the purchase of government bonds is the direct consequence of the Bank of England creating money from nothing both in the past and the present.
The Economist: “At the mercy of politicians, the bank would lose its credibility, and confidence would drain from the economy, forcing interest rates up and crimping investment–again, just the opposite of what was intended.”
This sentence, of course, does not make any sense at all.
…the bank would lose its credibility…
The addition of a small amount of PQE will not make the BoE lose its credibility, its inability to meet its inflation target would. But experience suggests, both undershooting and over-shooting the inflation target does not seem to harm the BoE credibility.
… confidence would drain from the economy….
Confidence has not drained from the economy when the inflation target over-shot last time, in fact confidence tends to be really high (aka economic boom) when inflation higher than target, due to high economic activity (2007).
But let us just say that business confidence was low, economic activity was low as in 2008-2012, but (imported) inflation high (to continue the Economists strained train of thought):
…forcing interest rates up….
Surely, if confidence was low, rates would come down? And they did.
….crimping investment again…
Low rates would then be better for investment.
So that sentence, even though it seems to make sense, is just nonsense.
The argument which the Economist also states, is that Mr Corbyn might be tempted to increase PQE is true. However, he might only be tempted to do that if a little PQE is successful.
But if a little PQE were successful, then that would lead to higher growth without inflation. Which we all want. It would then be silly not to increase PQE.
So PQE is not dangerous, it does not leave the BoE at the mercy of politicians, the proposal is not risky, it does not undermine the credibility of the BoE, it does not destroy confidence.
If confidence was gone, it would lead to a decline in interest rates, which might lead to higher investments.
The whole argument is. I agree, nonsense
Roosevelt’s massive investment in the real economy after one of the worst depressions in history yielded the biggest GDP growth the US ever attained in their history.
As soon as they yielded to demands to cut spending, growth dropped lie a stone. Only world war II pulled them out of that deflation.
If we can print £375 billion to prop up the banking system and set a rate where they can borrow money at almost no cost in order to speculate on the stock market, we can print money to get the real economy going again and start to put people, rather than banks, first.
“borrowing, like tax, withdraws private sector money from the economy”
There’s that “crowding out” argument again a.k.a. “the Treasury view” in Churchill’s time.
Keynes rejected it because it represents a zero-sum game analogy that only applies in a full employment economy at full capacity. You’ve repeated this idea in 2 consecutive posts. I’m surprised.
Mr Murphy,
I wonder if you have had the chance to look at a recent report on infrastructure investment published by the IMF in June http://www.imf.org/external/np/pp/eng/2015/061115.pdf
It’s not about how it’s financed and focuses on the best way of delivering it. It is quite rightly sceptical about PPP/PFI.
You are of course right: the world’s being underinvesting in basic infrastructure for decades and the consequences for low-income countries is horrible. There has to be a better way and the market won’t do it.
All true
I noted the report when it came out
Richard