There are rare moments in life when you read something that approaches what you think genius. Scott Fullwiler provided one on the Naked Capitalism website this morning. The article in question, entitled Corbynomics 101: A Guide to People's QE argues that:
The controversy, beyond the typical concerns with greater government spending of austerians, are fairly predictable for anyone who has taken a standard macroeconomics course (usually with a textbook written by someone who didn’t see the financial crisis coming)—
- first, the often heard QE = “printing money” = massive inflation argument is pervasive here with regard to PQE, as well;
- second, there are substantial concerns being voiced that “forcing” the BoE to finance the NIB will undermine the “independence” of the central bank and monetary policy;
- third, PQE gives the government free reign to spend by eliminating the need to fund its deficits in the financial markets.
So, here I want to look at the accounting and some basic operational realities of this proposal in order to understand how PQE does or does not do what the naysayers say it will.
So, in the end, all three arguments against PQE are incorrect.
- Is PQE inherently inflationary? PQE is only as inflationary as the spending itself.
- Does PQE limit central bank “independence? The BoE’s ability to set rates is not affected, and if it sets IOR = target rate, it can target the quantity of reserve balances and/or carry out non-traditional operations like QE, etc., just as without PQE.
- Does PQE encourage profligate government spending? A monetarily sovereign government spends and taxes as it chooses through the political process (i.e., Parliament/Congress, Prime Minister/President) laid out in the nation’s laws, and this is so whether it deficit spends via PVDs or OMFGs via PQE. The central bank for such a government sets an interest rate policy that effectively determines the interest rate on the national debt; again, this is so whether government deficits are of the PVD or OMFG variety.
In other words, PQE via OMFG changes very little, if anything, operationally. That is, PQE is not significantly different from PVD once we consider accounting and operational realities. The key is thus not that PQE or OMFG creates “money” directly relative to PVD, but that PVD, PQE, and OMFG all directly create spending and net worth for the private sector—this is what fiscal policy in any of these forms brings to macroeconomic policy that monetary policy alone via interest rate changes or QE operations cannot.
While PQE does not change the nature of fiscal policy, it does change the framing of the debate about fiscal policy, or attempts to do so, to show that the government doesn’t have to finance itself, ever. If it works, it would be a tremendous improvement on the more standard discussions we see regarding fiscal policy. Unfortunately, the economics establishment’s understanding of monetary operations is so poor that we are inundated by objections to PQE based on the more standard framing shown here to be incorrect
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What incremental growth rate do you think PQE could deliver and would it be sustainable? Current growth rates for the UK seem to average out at 2.5% but that’s before PQE.
If you understood macroeconomics the. You would know the chance of sustained 2.5% is remote
So I do not accept the premise of your argument
It may be that when it is used 100% of growth may be due to PQE
Remember I have said this will be used in downturns in the main – so the last pint may be right
@Richard @ Mary,
It depends what you mean by sustained. The limits to growth advocates would say that growth isn’t possible for ever and sooner or later we’ll run into resources constraints.
We aren’t there yet though. So just as it was possible to have a growth rate of 3% or so in the 00s, which was largely driven by an increase in private lending, it will be possible again as soon as we realise that increased private lending is no longer an option, and that an export led boom just won’t happen given world trading conditions. The only option left is for govt to make growth happen using whatever methods (including PQE) it has at its disposal.
The only potential problem is inflation. We may need to back off a bit with the spending, and settle for lower growth than we’d like, if and when that becomes unacceptably high.
It’s about time we had a sovereign money policy. Cash is printed by the government with no comment whatsoever by the powers-that-be, yet for the BoE to create money directly, rather than loaning all of it from buyers of government bonds, somehow that way madness lies.
Yet PQE can be a virtually costless way of government funding of the economy. The siren calls for us to keep the status quo are those who are going to benefit most from government debt, that is banks, insurance companies, pension funds and the rich.
The country can fund spending with effectively no deficit. Why should a government go into huge debt when it has no need to?
I really hope Corbyn does not back down from this policy. It is certainly the most exciting development in years. It would be a pity to see the nay-sayers get their own way once again.
Who would decide how much government spending would be financed by PQE and how would they make that decisions?
I suggest the macro decision is in the Treasury
The operating detail is at BoE
And it depends on need for stimulus / credit at the time
So there is no one answer
The government can borrow whatever it likes by issuing gilts. It, or the BoE if we consider it to be a different entity, can easily control the short term interest rate by setting an ‘overnight rate’ on bank reserves . Longer term rates are less straightforward. Treasury Gilts are sold at auction. Lower prices equate to higher longer term interest rates. The BoE can intervene in the market to buy those gilts (QE or PQE) and so force up prices and reduce longer interest rates.
So the proportion of spending to be ‘funded’ by PQE will be determined by interest rate considerations. More QE or PQE = lower long term interest rates.
What do you mean by macro decision?
Sorry – when I see these comments I cannot see the thread so genuinely can’t recall
You are not the only one to be grateful – it is great to see the PQE argument being honed by others.
With regard to a ‘new understanding’ it is really important that Corbyn’s cabinet gets stuff like this.
On last night’s Channel 4 News, Corbyn’s new Shadow chancellor did not argue with Jon Snow when he mentioned that Labour had ‘left the country with a huge deficit’ – indeed I’m sure Jim McDonnell nodded in agreement!!!
Labour needs to focus on another ‘new under standing’ that it did NOT leave the country bankrupt. That lie needs to be dealt with once and for all.
So, we don’t just need a
Scott (and his fellow MMTers) always ‘nail it’. Simply because MMT has nailed how the system actually works.
The problem is Corbyn & co. are too scared to go the whole hog and are advocating two conflicting policies at the same time (namely PQE & balancing the budget). Result: Confused voters and the supply of ammunition for George Osborne to shoot them down.
Bill Mitchell, as ever, is spot on when he says “Jeremy Corbyn’s ‘New Politics’ must not include lying about fiscal deficits”…
http://bilbo.economicoutlook.net/blog/?p=31867
Oops – sorry about the unfinished line above – the perils of using a lap top with a small monitor during your lunch break!!
BTW – Fullwiler seems to explain in more detail what Warren Mosler mentions in his ‘7 Deadly Frauds’ publication – that money released into the economy by Government helps to provide healthy finances in the private sector. Money hoarded by the Government or just not produced at all promotes money created as debt or the avoidance of investment in order to avoid debt.
I think.
What do we do about all those students who are still being fed discredited stuff by people like Hayek? Despite all the evidence to the contrary and a move amongst economics students to challenge ‘business as usual’ thinking, Keith Burnett, VC of The University of Sheffield, has just put this on the University’s webpage. “The open democratic process has historically prevented us from creating a completely free market for the NHS, for schools and universities and for our defence capabilities. Government is forced by public opinion to move away from a free market and to speak disingenuously instead of ‘consumer choice’ mixed with huge doses of regulation — state intervention by another name.
Politicians are left trying to control the speed of the car by hanging on to the needle, in Hayek’s words. So begins the descent into control, endangering freedoms and security of the nation.
Governments cannot govern by regulation and continue to claim that they are serving the consumers’ free choice.
But let’s expand on that; in some instances, governments can only serve consumers’ free choice by committing to major projects through central planning. What we can learn from China is that economic growth and civil prosperity cannot be delivered without tasking private companies with major infrastructure projects.
In order to achieve this, we need to be fearless. As Hayek noted, the security and happiness of our nation and its peace with our neighbours hangs in the balance.” I once knew an economics ‘A’ grade Russian economics student at The University Of Sheffield who didn’t even know why ‘austerity’ was being implemented, didn’t know it was being implementd on the back of the myth that the ‘deficit’ was caused by spending on the people. She just knew it was causing some ‘economic growth’, so it must ‘be right’… Note also that Keith Burnett has recently had a massive pay increase, has sacked droves of lecturers and refuses to put workers on a living wage. http://www.sheffield.ac.uk/news/nr/the-low-road-to-serfdo-1.505781
Hayek’s “Road to Serdom” (we prefer “Road to Smurfdom”) is of its time (1930s/early 1940s) it’s dated & has about as much relevance now as an alchemists cook book does to modern chemistry. Given this, one can only conclude that Burnett & co live in a strange fantasy land – The Thatcher monetarist experiment decimated Uk industry in the 1980s – & it is amazing that the Hayek Smurfs still want to keep it going. I can recommend reading the Road to Smurfdom – it has some excellent comedy in it.
Them smurfing bankers are still wrecking attempts at industry in the form and shape of SMEs today. There’s recently been a symposium at Jesus College, Cambridge on Economic Crime which was well attended by said SMEs, they being in a position to know a lot about it having been on the wrong end of loads courtesy of said smurfing bankers. Read all about it in this blog from former City cop Rowan Bosworth-Davies https://www.linkedin.com/pulse/banking-criminals-exposed-rowan-bosworth-davies and then read the follow-up, where response to the first blog astounded even seasoned observers by revealing the depth and range of banking outright and overt and unpunished criminality is far, far more widespread in the UK than anyone had imagined hitherto http://rowans-blog.blogspot.co.uk/2015/09/banking-crime-blog-goes-viral-bank.html?spref=tw seriously, everyone on this thread should read these and be appalled. Here in a nutshell is why the economy’s tanking; no new business is ever allowed to get off the ground. Where are the cops? Where are the people in charge of the cops?
You are being a little shy here Richard it is your idea and there it is you that is the genius!
Keep up the great work and let’s hope Professor Richard finally gets you the standing you deserve in the media.
No – that article is in another league
Shocking character assassination in The *spit* Sun today, especially denegrating your alma mater. I bet you either got a first due to skill or a third as a renegade rejecting everything the neoliberal infested education system told you was the way the world is!
2:1 for the record
There were no firsts in the whole faculty in my year
Or several I think before that
Things have changed
I do not buy the Sun
The Randy Wray article Scott Fullwiler references on a proposal in the US Congress in 1999 for the Federal Reserve central bank to provide interest-free loans for state and local government infrastructure projects is interesting. The laim and lamentable objections to the proposals by the Federal Reserve Board of Governors reveals how lazy and ultimately venial Neoliberal ideological thinking truly is:-
http://www.cfeps.org/pubs/sr-pdf/SpecialReport2001-3.pdf
The main problem for me regards PQE is the one highlighted by Simon Wren Lewis and Chris Dillow to name but two. It’s fine when we’re talking about the depths of a recession where prices are trending toward zero and unemployment is rising fast but why now so late in the cycle? When we can borrow at negative real rates of interest? And if fiscal policy from borrowing is expansionary because it’s being used for capital investments we don’t need PQE.
Surely if the government can alter the BoE’s targets [ie 2% inflation target could be temporarily raised to 3% and/or we could ask that the bank consider other metrics rather than primarily the inflation target one]PQE becomes an unnecessary distraction even if unemployment is rising somewhat.
I have not suggested it now
You are fighting a straw man
For the record Jeremy Corbyn has not said now either
I have a strong beleif that we will have a down turn between now and 2020
PQE is a plan for downturns. In up turns you can sell bonds for the same Infrastrxuture investment goal
It is hard to argue with what I have not said
I think 3% is a sensible inflation goal, but I stress, that is personal opinion
But have you noticed nothing is delivering inflation and Krugman says PQE might do it
But so assume everything is about the present is just wrong. responsible thinking anticipates need. PQE does
I don’t think paulc156 fights a straw man. I think a valid point has been raised.
MMT is perfect in it’s description of modern money theory.
The key issue, which is not answered, is what gives that money any credibility?
Why not use another currency as a means of trade?
Ultimately, MMT reinforces itself as a theory of why money is not credible.
Only the government’s insistence on it’s value makes it so.
Which is what FIAT currency means.
That said, there are clear economic reasons in mainstream economics for fiscal stimulus when interest rates are near zero.
By definition, demand is low, so “helicopter money” stimulates demand.
Another way of looking at it is the creditworthy don’t want credit, and the “uncreditworthy” want things for which they have nothing to exchange.
Piketty suggests a better way is a global wealth tax, to redistribute the means of demand to meet supply, but that is likely to produce more political “goose hissing” than a straightforward fiscal stimulus, such as helicopter.
A peoples bank is another aspect.
At some point it would be moot to articulate exactly what is meant by PQE, so that it can be rigorously debated amongst a number of economists who understand money production/destruction is merely a subset of economic activity.
Support for Corbynomics from an unexpected quarter:
http://www.standard.co.uk/business/anthony-hilton-corbynomics-are-not-as-crazy-as-critics-suggest-a2948081.html
Just in passing your suggestion that “In up turns you can sell bonds for the same infrastructure investment goals” will upset the MMTers. You may be accused of heresy. The MMTers see no need for the sovereign bond market. probably like you, I see some value in a sovereign bond market – but only when democratically elected governments maintain effective governance of its participats and are not intimidated by them.
In addition, you seem to switch between viewing PQE as valid only in downturns and possibly being necessary when inflation is on the floor – as it currently is.
In any event, focusing excessively on the minutiae of Corbynomics is probably futile. Jeremy Corbyn’s lack of support from the PLP and the party machinery and the lack of a professional presentational and communications capability – together with the incessant monstering by the plutocrat-owned media – appears to have created a first impression among the public that he and his small band of supporters (irrespective of the numbers of Labour party members and “supporters” that have been enthused) are just not up to the job of providing a credible government-in-waiting.
The task always was to arrest the increasing drift to a centre-right hegemony and to shift the terms of the economic policy debate a few notches in a more left-wing/progressive direction. Jeremy Corbyn has performed the first part of this task. We can’t avoid the reality that we have a parliamentary democracy – even it is accompanied by a voting system that is totally inappropriate currently. Citizens devolve their ultimate authority to the MPs they elect for a limited period of time. It is now the responsibility of the majority of the PLP to take on board and to build on what Jeremy Corbyn has achieved and demonstrated.
Professor
I think that it was Keynes who said “When the facts change Sir, I change my mind”? A simple statement but also a blueprint for managing economics in the real world?
My view is that the opponents of PQE labour under the assumption that it will become orthodox in its own right – that is that it becomes the ONLY way to run the economy forever and a day.
This is perhaps because monetarism also became THE orthodoxy in running the economy (although we do know that successive governments – even Thatcher’s – did not strictly adhere to it when they realised that their ‘monetarist’ policies had actually caused damage).
I think that this adherence by human beings to only one particular model or a universal law is known as being nomothetic. Also known as TINA?
All the people criticising PQE seem to be doing so based on its long run effects, rather than looking at the short/medium term benefits it will generate.
I would love to see a new government manage the economy using a number of ‘tools’ responsibly over the life time of its stay in power. I (along with others) see PQE as being the right tool at the right time NOW but as you say you then use other means when the economy has picked up.
So, perhaps the next step for Corbyn is to make that clear or clearer – that he will provide and use a mixed culture of tools to run the economy – not a mono-culture – heterogeneity NOT orthodoxy?
I am inclined to share that view
“why now so late in the cycle?”
Because of the coming downturn which Richard, I believe, is quite right about. There’s far too much private debt in the economy for there not to be. You might want to read Steve Keen’s blog for another opinion on that point. So spending now will help alleviate that downturn. As always the only risk is higher inflation. But as we are running well below our inflation target anyway then that’s really no risk at all.
Even if there isn’t another crash we could be in for years of eurozone style no-growth without government intervention to prevent it.
In the past, politicians have said that unemployment is the price we have to pay for certain economic benefits; now maybe we can begin to say that a certain amount of inflation is the price we pay for a different set of economic thinking and its benefits? Benefits that may actually help the people, rather than just the financial system.
I’d certainly prefer the latter. And it would be nice to see a certain amount of wage inflation to keep up. Wages that enable people to meet their living costs, plus being able to save as well is the desired state of affairs for me.
And all this banging on about inflation when in fact it is credit that is pushing up house prices (inflation) – not necessarily just a lack of supply.
The silence around how house prices and rents (housing costs) push up living costs seems like a conspiracy to me.
I suspect the collective silence here means we’re all quite happy to take Scott’s word for it 🙂
On August 16th 2015 Richard Murphy provided a link to Stephanie Kelton’s Financial Times article which runs on much the same lines:-
http://www.taxresearch.org.uk/Blog/2015/08/16/pqe-gilts-and-the-cost-of-borrowing/
http://www.taxresearch.org.uk/Blog/wp-content/uploads/2015/08/Kelton_QE.pdf
Looks like the second one you’ve linked to was co-authored by Fullwiler, actually.
Upon further review, let me fix that. The Financial Times article Murphy discussed and linked to was co-authored by Fullwiler.
Yes-it takes time to digest those graph’s and acronyms -I’ll need to read it a good few times! How to represent it to the general public in a not so technical way will also take genius! Actually it is not really complex, just that you need to be good at combinatorial thinking (which I’m not).
“without limiting central bank independence”
Although it would be useful to merge the Bank of England into the DMO so that it is crystal clear what the pecking order is.
That doesn’t alter the operational independence of the BoE one bit, any more than the operational independence of the DWP is compromised by being a government department.
But it would mean there is one department that is managing the debt profile all the way up the yield curve, and there would be then be no need for these behind hand stock lending programmes between the DMO and the BoE.
Clarity of policy would be improved for all.
Thanks very much for posting this article extract – I will spend some time reading the full article. At the risk of repeating myself: when governments spend on infrasturcture there is a need to extract maximum value for money – not just in terms of the end result (built up to a desired level of quality – not down to a cost) but also in terms of industrial benefit. When the Spanish built their high speed train network, it was made plain to Alstom (supplier of the initial trains) that there would be tech transfer to the indigenous player Talgo (who then supplied subsequent orders). Oddly, things “like that” never seem to happen in the UK, there seems to be no “self interest” – with the result as I noted elsewheer, that UK industrial companies of any size are absent from large parts of what passes for the UK economy. The UK used to make trains, now we have the likes of Hitachi build assembly sheds to assemble kits, from Japan. sic transit gloria mundi. We need investment, it must be linked to an industrial policy – which has been resisted by various elements in UK gov’ since the 1950s.
“built up to a desired level of quality — not down to a cost)” This is a fundamental point-as pour quality is future cost-something austerity does not recognise.
There are also very strong arguments environmentally and socially for ‘keeping it indigious’.
Just a note on the many acronyms for any new readers!
QE Quantitative Easing
PQE Peoples QE
BoE Bank of England
IOR Interest on Reserve Balances
OMFG Overt Monetary Financing of Government (we might need to think of something different!)
PVD Plain Vanilla Deficit ( I had to search for this) An ordinary deficit.
NIB National Investment Bank (yet to be created)
I really do hope to see a NIB created in my life time.
thank you Peter OMFG had me worried.
Indeed-I had to smile at that one! Though i think it might represent what the Tories were feeling after Corbyn’s election!
Bless you Sir for the acronym buster!
I suspect the collective silence here means we’re all quite happy to take Scott’s word for it
No it means we either don’t understand what Scott is saying or we agree with him.
My thoughts on the three arguments:
1) This is self evident. If Government creates money by PQE and does nothing with it then it has no effect on the economy. If it borrows money from the Chinese (who aren’t going to spend it anyway) and spends the money borrowed it will have some effect on the economy. If it just creates that money instead and spends it the effect will be exactly the same. If it pays money in interest to the Chinese, that has no effect either unless they spend it which they almost certainly won’t.
2) PQE will have no more or less effect on BoE independence than the previous QE.
3) Again this seems to be fairly self evident. Govts can spend more or less as they wish. They can pay out what interest they like to set interest rates in the short term. They can control longer term rates through QE if they wish. They can’t though directly control the inflation rate, the unemployment rate or the exchange rate. All policies (including PQE) will have an indirect bearing on these.
Peter
A Job guarantee scheme could control the unemployment rate and act as a counter cyclical buffer to inflation if not giving it control over it. You know this.
Yes I suppose that’s true in the sense that a JG would just about abolish unemployment. In those circumstances we’d still have to look at the numbers on a JG. The “JG rate” maybe?
Scott is one of the really smart MMT guys.
As usual he makes total sense.
How about a microeconomic analysis of the effects of printing and spending money?
You are desperately keen for the government to print money
You really like them doing so
The note in your pocket is government printed money given value butty it being government debt and plenty of people will take it from you if you do not want it
That’s because private wealth is created by government debt
That is the double entry
Not sure I follow. Are you suggesting a Zimbabwean given a 100 trillion zim note is being given additional wealth by the government by printing it? I suppose this is true technically, but what’s the other side of the double entry from an economic perspective? Isn’t the other side that anyone not receiving the printed money is losing out? The benefit is really only achieved at their expense? And so from a societal point of view does it really matter how many zeros are on the note? How does more zeros help overall?
The moment you mention Zimbabwe you lose credibility in this debate
I think you are wasting my time
If you continue to do so you know what will happen
James-Zimbabwe had a civil war; the economy collapsed completely; it had large debt denoted in a foreign currency-under those circumstances printing money will create inflation.
Zimbabwe has nothing to do with my point. I just used it to help someone visualise someone being given printed money and what this means. I can make the same point using a printed $100 bill. I wasn’t aware how carefully one must tread in making points around here.
Quoting Zimbabwe is not chance
Final warning
Simon/James – I understand what’s more Zimbabwe never thought to back the currency issued with any form of production. It couldn’t therefore be said to be backed by anything = confetti
Ok, ignoring the place I’m not allowed to mention (which as I say is not important to my point), surely the micro analysis of printing money is that it merely transfers purchasing power from one person to another? It doesn’t create purchasing power from thin air. And tgat’s precisely because currency is based on real production.
Please go and learn about what money is
Ok, I will do. But I note you don’t have a response to my point. And until someone explains to me why my point is wrong I’m sticking with it.
I said go and learn about money
I am not rewriting it here
JamesG
I don’t think a microeconomic analysis of printing and spending money has any meaning unless, perhaps, the process was illegal.
The operations of the currency issuer have to be understood using macroeconomic concepts.
Seen this Richard? – Maybe a blog post from you in this regard would be helpful towards this – http://www.ianwelsh.net/so-you-supported-corbyn-here-is-what-you-must-do-if-he-is-to-survive-and-win/
I see no need for such behaviour
A bit aggressive, I agree but there is a case for being a bit more demonstrative, isn’t there, but with an educative goal?
In regard to the necessity of BoE independence we would do well to reflect on the statement of the 1959 report of the very independent “Committee on the Working of the Monetary System” (Radcliffe Committee) which on page 337 of its conclusion stated the following:-
“Monetary measures are aimed at the level of demand, but by their nature they are incapable by themselves of having an effect sufficiently prompt and far-reaching for their purpose, unless applied with a vigour that itself creates a major emergency.”
No senior Western politician to my knowledge, despite the serious recessionary effects stemming from the Volcker inflation breaking initiative, has ever bitten the bullet to resolve the implications of the above statement. This in part reflects the failure to grasp the nettle on the part of the Radcliffe Committee because of a preference for unanimity as Nicholas Kaldor a witness to the Committee argues:-
https://tmypfunam.files.wordpress.com/2014/02/kaldor-the-radcliffe-report.pdf
It’s not as though PQE has been tried and found wanting it just hasn’t been tried and we all know why that is don’t we . It makes me laugh out loud when I read some of these comments with their references to ‘ yield curve ‘ and all the rest of the jargon. The fact is macroeconomics was invented almost single handedly by Keynes eighty years ago and since then it has been part of the sherry trifle that is economics . The only constant over those eighty years has been that it’s all trial and error and now in the era of crony capitalism par excellence both the trials and the errors are being magnified as never before . But hey lots of people earn not insubstantial livings from peddling all this pseudo science so who can blame them for their delusions.
Here’s Phillip Pilkington calling in July 2012 for a new “Radcliffe Commission”:-
http://www.nakedcapitalism.com/2012/07/philip-pilkington-the-new-monetarism-part-iii-critique-of-economic-reason.html
Perhaps Jeremy Corbyn and John McDonnell with their call for a participative democracy approach make take heed in regard to determining the most effective relationship of the UK’s central bank and the Treasury Department for Britain’s economic needs. This time the Commission’s members must have a brief to determine a precise policy direction including deciding on the need for maintaining central bank quasi-independence on rate setting and QE matters, etc.
One of slight pitfalls of PQE could be that it will be used to fund capital spending only. The National INVESTMENT Bank doesn’t have quite the right name. IMO. So for example if we create £100 million, in new money, to build a bridge, we can value the bridge at £100 million and everything comes up all square on the balance sheet.
That may work fine with a bridge, except for the non-capital costs of maintaining it, but we could end up empty hospitals, empty schools, unused airports etc, because we think “can’t afford” the doctors, nurses, teachers, and other staff required to run them. We can’t own other people, in the same sense, so the costs of educating and training them and then paying their salaries can’t appear on the balance sheet.
I suppose its out of the question to bring back slavery so we can count all education spending as an investment? 🙂
I do not see the reason why any government has to run a surplus
But an NIB is about capital investment
There is no way I envisage the Chinese situation you suggest possible arising
Any government would only have to run a surplus if it was a net exporter and the domestic sector wasn’t saving enough. That’s theoretically possible but extremely unlikely in the near future.
I’m not sure what you mean by “chinese” but, but it wouldn’t be the first time a govt has built a hospital or an airport and kept it empty because it thought it couldn’t afford to run it.
I am referring to Chinese over investment – see Wolf in FT this morning
Within the comments section of the NakedCapitalism link :
“What a nation can afford is only constrained by its natural resources and human capital, unless it cedes its sovereignty to a foreign currency or central bank”.
Money is a gas.
It’s good to see you all talking to one another and getting along so well in the link, he! he!. Interesting debate though.
https://twitter.com/AnnPettifor/status/643810807583780864
I have a point I wish to make on PQE, central bank independence and ‘contingency’ arrangements.
It is clearly not an all or nothing set of affairs. If the last 7-8 years have proved anything have one single rule – an inflation target is useless for both central banks themselves and for governments. So suppose you want the central bank to retain some modified price stability mandate in the setting of monetary policy in normal times, you also need an institutional framework for non normal times, that may indeed become the new normal. So when there is a clear and sustained undershoot – such as now, then the price stability mandate would become secondary . So you could say if inflation is below a certain level and unemployment above a certain level and the two intersect, then the central bank (The Bank of England) has to accept orders from the government on a PQE programme. The size should be decided by a consultation between HMT and the BOE, the Bank should be given some get out, but the aim should be agreement on size and scope. BOE then looks after the detail. Clearly a lot of detail needs to be filled out, but why would some such institutional design not be possible and could not be worked up further?
I like that
A lot
PS Ann was referring to a Danny Blanchflower reference to the quality of MP C members
I know, but there is a very interesting mature/ adult conversation about CBI above and below, with Wren Lewis, Eric Lonegan, Danny B, yourself – all participating. Something very interesting could emerge from this. That has been my hope all along (it may yet be forlorn). Hopefully, I’ve played a very small part in prodding the respective parties together from a safe distance, but I do think you kind of need one another and this is the kind of debate/ creative and productive exchange we need. Twitter is a start.
I think Wren Lewis and co have half a point – about how you do PQE institutionally, functionally, politically – and about a role for issuing gilts for infrastructure, but all of this is wrapped up in contingencies – and I could say something cryptic about equestrian altitude at this point, and hopefully they would take it in good humour. I guess I’m saying I think a synthesis of the two position is probably possible and that it would be a good robust position. Getting there is the challenge.
Indeed, to the last point
If the conclusion of this analysis is, to quote the Naked Capitalism article, that “PQE via OMFG (outright monetary financing of government) changes very little, if anything, operationally. That is, PQE is not significantly different from PVD (plain vanilla deficits) once we consider accounting and operational realities.” then I have to wonder what is the point.
Yes, the article argues that PQE can “change the frame of the debate about fiscal policy” but if the evidence of the last several weeks is anything to go by that can divert the debate around proposals such as a National Investment Bank, urgently needed to boost investment and stimulate growth. If we are to win the 2020 election, then proposals have to offer real benefits not just re-frame a debate. Paul Krugman’s simple statement “When you print money, don’t use it to buy assets; use it to buy stuff.” has more resonance. I can take that to the doorstep.
I’m not rejecting PQE but the article shows why we have to be more radical here. Let’s think about the scenario described where “the BoE wants fewer reserve balances to circulate than PQE has created”. As the article explains, the BoE can retain its independence by offsetting the impact of PQE by various means, including reverse repos or asset sales. I made the same point in a comment on this site several blogs back but later realised that while this was possible it would also offset a major benefit promised by PQE, its reduction in funding costs. As the article puts it, “the debt service … is essentially the same”.
That’s not good enough. If PQE cannot provide long-term tangible material benefits, then it’s not worth spending precious political energy arguing about it.
So we have to think more deeply about how to minimise the long-term costs of PQE entailed in raising interest rates on reserves or selling back debt to the financial markets. Rather than showing how PQE fits into the existing monetary policy framework (which is what the article does) we have to challenge that framework itself. I’ll make a couple of suggestions here, both designed to ensure that any offsetting or long-term ‘unwinding’ of PQE would not damage public finances.
First, we need to remember that paying interest on reserves is a policy choice, initiated by the BoE in 2006 and extended in 2009. It is intended to provide a ‘floor’ for market interest rates so will rise when the BoE wishes to increase those rates. That is expensive. Even at 0.5%, it costs £1.6bn against existing reserves swollen by QE and will be several times that amount when rates rise. So we need an alternative. One might be to levy a fee on inter-bank reserve loans, with a similar effect on market rates but reversing the financial flow towards the BoE rather than away from it.
Second, as Martin Wolf and others have observed, private money creation appropriates the seigniorage that rightly belongs to the state. I don’t want to ban this as it can be more flexible and responsive than a state monopoly but it would be entirely legitimate to levy a licence fee on it, at a negligible level when the economy needs money injected but rising steeply when we don’t. This would raise revenue and reduce the need for the BoE to sell assets back to the market.
Other suggestions please. If the P in PQE means anything then it has to bring real benefits to people.
Krugman is suggesting PQE
The same thing that you are not sure about
He just reframed it
What you are not sure about
Private money creation till quite recently was flexible and responsive as it was carried out, albeit unknowingly, by the now departed bank manager network. As I’ve suggested before in these columns, we need something similar to replace it, made up of empowered money creators on the ground where they’re needed.
“That is, PQE is not significantly different from PVD (plain vanilla deficits) once we consider accounting and operational realities.” then I have to wonder what is the point.”
The point is to generate sufficient popular support to mobilize the country’s real resources in pursuit of employment and wage goals.
“Yes, the article argues that PQE can “change the frame of the debate about fiscal policy” but if the evidence of the last several weeks is anything to go by that can divert the debate around proposals such as a National Investment Bank, urgently needed to boost investment and stimulate growth.”
You cannot get the investment without disarming the right’s scaremongering tactics used for generations to stop thought. No matter what argument you make regarding growth the reflexive fear of deficits will always prevail unless the thinking is changed.
“If we are to win the 2020 election, then proposals have to offer real benefits not just re-frame a debate.”
How does PQE not do this?
“I’m not rejecting PQE but the article shows why we have to be more radical here. Let’s think about the scenario described where “the BoE wants fewer reserve balances to circulate than PQE has created”. As the article explains, the BoE can retain its independence by offsetting the impact of PQE by various means, including reverse repos or asset sales. I made the same point in a comment on this site several blogs back but later realised that while this was possible it would also offset a major benefit promised by PQE, its reduction in funding costs. As the article puts it, “the debt service … is essentially the same”.”
The debt service is paid to the central bank and from there to Her Majesty’s Government.
“That’s not good enough. If PQE cannot provide long-term tangible material benefits, then it’s not worth spending precious political energy arguing about it.”
What evidence do you have that investment via PQE can’t provide material benefits?
“So we have to think more deeply about how to minimise the long-term costs of PQE entailed in raising interest rates on reserves or selling back debt to the financial markets. Rather than showing how PQE fits into the existing monetary policy framework (which is what the article does) we have to challenge that framework itself.”
Rather than enact policies that can help people now you wish to wait till the ideal moment.
“First, we need to remember that paying interest on reserves is a policy choice, initiated by the BoE in 2006 and extended in 2009. It is intended to provide a ‘floor’ for market interest rates so will rise when the BoE wishes to increase those rates. That is expensive. Even at 0.5%, it costs £1.6bn against existing reserves swollen by QE and will be several times that amount when rates rise. So we need an alternative. One might be to levy a fee on inter-bank reserve loans, with a similar effect on market rates but reversing the financial flow towards the BoE rather than away from it.”
And the central bank loses control of the interest rate.
“Second, as Martin Wolf and others have observed, private money creation appropriates the seigniorage that rightly belongs to the state.”
There is no right of government to be the sole producer of money.
“I don’t want to ban this as it can be more flexible and responsive than a state monopoly but it would be entirely legitimate to levy a licence fee on it, at a negligible level when the economy needs money injected but rising steeply when we don’t.”
The Government does not need to raise revenues. The sole purpose of doing so is to act as a brake against spending inflation (Inflation I) or to achieve some social goal.
“This would raise revenue and reduce the need for the BoE to sell assets back to the market.”
The BoE does not need to sell off its assets. It can engage in unlimited expansion of its balance sheet regarding any assets denominated in British Pounds.
Thanks
Good fisking
Ben, my comments were not intended as an attack on PQE but an attempt to defend it against a line of attack — its potential long-term costs and risks — that has featured prominently in the Labour Party leadership debates and some other economics blogs. For the record, I strongly supported Jeremy Corbyn’s leadership campaign, have defended his ‘The Economy in 2020’ on many occasions and have rejoined the Labour Party to follow through on that. The Naked Capitalism article provides a very useful description of how PQE would work but did not deal with this point.
I’ll try to respond to a few of your points but please treat this as clarification rather than ‘fisking’.
“… the reflexive fear of deficits will always prevail unless the thinking is changed”. I admit to being wary of deficits, for two good reasons: interest payments are costly and debt gives power to creditors. One of the attractions of PQE is that it reduces these costs and risks by keeping bonds within the public sector.
“The debt service is paid to the central bank and from there to Her Majesty’s Government.” Yes but only as long as the debt is held by the bank and not sold back to the market. There’s no public gain if the bank buys NIB bonds but sells other assets to offset the impact on interest rates. Interest payments on reserves go to banks not to HMG. My suggestions seek to reduce these costs and hence allow PQE to be sustained.
“Rather than enact policies that can help people now you wish to wait till the ideal moment.” If I had the power I would implement PQE today but I would also take steps to ensure we did not pay for it later.
“And the central bank loses control of the interest rate.” You seem to be implying that rates can only be managed through paying interest on reserves. Is that your intention? It could become very expensive and as Richard has observed the BoE is under no legal obligation to do so. My proposed fee could be an alternative as any bank lending excessively would face higher reserve borrowing costs. I haven’t yet worked through the mechanics of this and other alternatives such as tighter regulation might prove more effective in managing rates but in any case we need an alternative to paying billions to the banks.
“The BoE does not need to sell off its assets. It can engage in unlimited expansion of its balance sheet regarding any assets denominated in British Pounds.” Yes the BoE could do this but it might not be wise to do so. There is a limit to how much additional public expenditure the economy can absorb without inflationary pressures (Richard recently suggested £50bn a year). Excessive growth in privately created money would compete for resources with that created through PQE and to offset that the BoE might choose to sell assets, cancelling the benefits of PQE. My suggested “licence to print money” fee aims to restrain that growth to allow a PQE programme to be sustained for longer. Alternatives are possible but again I’m trying to protect PQE not attack it.
Hope this helps clarify my position.
Coo, so many economics experts, isn’t our country so lucky.
And so much time to comment (whoops I must get back to work!)
Richard, with slow growth and the risks of recession and deflation, the immediate benefits of PQE are clear. I just want to ensure that we don’t end up with a long-term bill.
If the only tools available for managing money growth entail payments to financial institutions through interest on reserves or on debt sold back to the market, then that bill could be large, even though investment-driven growth will help pay it. This has been one of the criticisms raised against PQE but we can address it through additional monetary and fiscal tools.
The BoE is under no legal obligation to pay interest on reserves
Isn’t that precisely the point I was making? Hence the need for alternative tools for managing interest rates that will be less costly for public finances.
‘less costly for public finances’
What does that mean ?
I think that the cost of interest on reserves created will be less than gilt rate
Surely all criticisms of PQE would apply equally to QE; QE is now of some age and (1) we have not seen an increase in inflation (in fact the reverse) and (2) the BoE has not lost it’s “independence” (whatever that means).
It is evident that BBC journalists do not understand the concept and therefore any time that it is mentioned it promotes comments about inflation or loss of control completely ignoring the fact that it already exists.
The only thing that is new is the purpose to which the electronic money is applied.
Also there would be no need to increase the quantity of money, that is the £375 billion, since the bank could simply apply the maturation receipts to the capital investment programme.
Agreed
PQE increases net financial assets
QE doesn’t
The inflation risk may or may not be significant but it’s different.
As a relative amateur in this field, learning fast…
Might it be argued that QE as previously executed fed though the banks into asset price inflation, notably housing and perhaps equities. However, as conventional inflation measures (as I understand it) ignore housing, there would seem (perhaps misleadingly) to have been no inflation effect. It has of course massively benefited those holding such assets.
Clearly PQE is a very different mechanism with different outcomes. But I’d welcome comments/explanations of my question
You seem to have worked it out Robin
Thanks Richard
Then it feels like a point I’ve not heard made elsewhere. And one that might be an insight that the less well informed might grasp, and help with their understanding of why PQE (investing in infra etc, creating jobs, feeding through to demand for goods and services) is very different to QE (feeding straight through to asset price inflation)
As others keep noting, educating the wider public, not to mention most of the media and the political class, is crucial. Which means using easy to grasp points wherever possible.
Agreed
“educating the wider public, not to mention most of the media and the political class, is crucial. Which means using easy to grasp points wherever possible.”
Absolutely vital. Corbyn has to get on top of this (despite the non-comprehension of the austerians in his party)-he’s got five years but there needs to be a reframing the narrative plan.
A brief thank you to Richard for hosting and to all others who have contributed to this blog. A benchmark for what blogging can be rather than the ill informed ranting that is so common
I’ve found it hugely thought provoking and informative and keep forwarding it others to help them understand that there is a real alternative out there. It’s a sort of FAQ on PQE!
Thanks Robin