As the Guardian and other papers have reported:
Interest rates in the UK could be cut further from their record low level, the Bank of England's chief economist has warned, as he highlighted signs that the global financial crisis is entering a third phase of turmoil.
The signal is that we could have an official negative interest rate soon.
Why's that:
Andy Haldane used a speech entitled “How low can you go?” to flag signs of a slowdown in the UK and discuss events in China, where an economic downturn has coincided with a stock market rout and sent jitters through global markets.
As the paper notes:
His comments appear to be at variance with the Bank's governor, Mark Carney, who has indicated that rates might rise from 0.5% early next year.
Andy Haldane, one of the Bank's nine interest rate setters, made the case for the "radical" option of supporting the economy with negative interest rates, and even suggested that cash could have to be abolished.
Why abolish cash? That's so that people would have no choice but leave their money in the bank at deteriorating rates.
Haldane did not stop there. He said:
The balance of risks to UK growth, and to UK inflation at the two-year horizon, is skewed squarely and significantly to the downside
And made clear that:
he [sees] the case for raising the UK's inflation target to 4pc from the current level of 2pc. Mr Haldane said that a trend towards low interest rates across the globe has made it increasingly difficult to fight off recessions.
In the past, central banks have helped stimulate economies by slashing interest rates. But with rates at rock bottom in many parts of the world, many have found their ammunition depleted.
How long then until we have People's Quantitative Easing? I designed it to address this issue, after all. Mark Carney says he does not approve of it. What if he has to do it? And what will the naysayers say then?
PQE is an idea whose time is coming, soon, I suspect. And of the options available it might well seem amongst the least radical on the table.
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Even “shovel ready” projects would take 5 years to get started though wouldn’t they? By then it’s too late. There’s simply not enough trained people available to use those shovels in short order at the required levels to make any difference whatsoever. And that supposes all the planning is already sorted and the raw materials are available. I’m all for more public infrastructure but you simply can’t turn the taps on (or off) quickly enough, can you?
Of course not!
Let’s get real
How long does it take to get a double glazing programme going?
Or the laying or more broadband?
Or investing in SMEs?
Or necessary repairs?
I’m sorry: I simply do not buy the argument that we have no under-used skills in this country
“I’m sorry: I simply do not buy the argument that we have no under-used skills in this country”
Not just this country. We have the whole of the EU to pull skills from.
23 million unemployed that have the right to live and work here. That’s a hell of a surplus that somebody needs to spend.
Richard,
The conclusion you make about the existance of under used skills is totally reasonable and congruent with reality, in a general sense. There will be some areas in which there will be a large surfeit of appropriate skills and, just as importantly, experience and other areas which will prove more problematic. As with all things the devil is in the detail.
I cannot comment with any degree of confidence with three of the items on your list however, I can make a reasonable observation in regard to Broadband as I worked for 35 years for the former nationalised organisation which owns and has sole responsibility for maintaining and expanding the network.
Apart from Virgin, the rural community broadband and possibly a small smattering of legacy network from the old cable companies the vast bulk of the communications network, both copper and fibre “broadband”, is an asset owned, rented out to other telecoms, and maintained by the arms length company Openreach which is a BT company.
The problem here is that for the past 20 odd years or so BT have sweated its legacy copper network. For sure, it has put a great deal of fibre in the ground and made a big public song and dance about it. However, the fact that so many rural areas have had to go it alone in putting their own fibre in the ground is instructive. Whilst it is true that sporadic periods of engineer recruitment has taken place since 27,000 engineers took voluntary redundancy in July 1992 it really has been insufficient for the task required to fulfill Blair’s never delivered promise of a UK wide Broadband Network of the future at the 1996 Conference.
The fact is that the necessary level and numbers of skills and experience has been reduced too far for quick results in this vital area of infrastructure, even with those working for the contractors.
Noted
This is a response to Mr Hansell, who said “the fact that so many rural areas have had to go it alone in putting their own fibre in the ground is instructive” – OK so laying fibre is not a highly skilled job – because there are a number of people that take the DIY route.
He then went on to say: “the necessary level and numbers of skills and experience has been reduced too far for quick results in this vital area of infrastructure” – and yet a bunch of DIYers can lay the stuff? The backbone is already there – what is lacking is “fibre to the home” – the only reason BT uses ADSL is …. you tell me Mr Hansell.
This argument is often made by right wingers. The same right wingers that place such store in entrepreneurial spirit. The same right wingers that are rightly proud of Great Britain’s history and its ability to rise to a challenge.
When we are given the opportunity to build the social homes we need, to lead the green revolution and to upgrade our infrastructure, I’m certain we’ll find a way.
@Neil Wilson: We do have under used resource in this country. Just not enough skilled resource in the medium term – to make a meaningful difference – for the list of the projects Richard outlines sbove. Without significant surplus skilled resource that will drive up costs and inflation. I also don’t think you’ll win too many votes in the current climate by suggesting about 500,000 economic migrants should arrive in the next few months.
Mary,
You claim the UK has insufficient numbers of skilled workers for public works programs. With over six million disemployed what evidence is there that providing them with work would generate unacceptable inflation? To the contrary PQE as envisioned would act counter-cyclically to stabilize employment and reduce labor capacity constraints. There’s every reason to think inflation would be better regulated as thr program expands in downturns and contracts in booms.
A surplus in workers is unnecessary: what matters in terms of Inflation I (spending induced) is total potential output. In the event wages eventually rise to a point of effecrive demand exceeding productive capacity you can simply raise taxes at the top and compress the income spread.
@Mary Snell,
I don’t believe that Neil was suggesting that. Rather he’s highlighting the problem of the present and future net inward migration into the UK.
Free movement of labour is a fine ideal if there’s a two way flow. I’d quite fancy working in France or Spain for a few years! The food is good, and the weather is much more to my liking. But, sad to say, the chances of my being offered anything there aren’t too good!
Employment prospects in the UK aren’t great right now but they are much much worse elsewhere in the EU. Naturally there will always be a flow of workers from areas of high unemployment to areas of lower unemployment. So, I’d say Neil is asking the question of what would happen if we did improve employment prospects in the UK? Suppose we really put our foot down on the fiscal accelerator to create the extra aggregate demand we need?
How would we cope with millions wanting to come to the UK to take up those jobs?
If they’re 5 years off then they can’t be shovel ready! The whole of WW2 was completed in about 6 years, so if there’s a will to do things quickly they can done.
But having said that, there can be a delay of a year or so to get things ready. I don’t believe programs of ‘cash for clunkers’ or double glazing is a good use of resources. They create a bubble in the industries which sucks in the cowboys, shoddy work gets done at inflated prices, and needs to be redone later. The Australian govt had a program of subsidising loft and roof insulations after 2008. Several inexperienced workers died from electrocution when the metal foiled insulation panels became live after staple guns pieced electrical cable in the roof spaces. Workers were also forced to work in conditions of searing heat. We need to beware of those problems.
If the economy needs a quick fix, much better to reduce VAT temporarily as was done after the 2008 crash. It should still be at 15% . IMO.
PQE is not a quick fix. It’s about financing a sustained programme of public investment both to counter prolonged recessionary tendencies (25 years and counting for Japan) and to resolve major social and economic problems. This is why I have been worrying about how to keep it going once we start.
@PeterMartin2001: aren’t we making the same point only you say a year and I said 5 years? It’s the bubble in certain industries as you say (and Richard noted re broadband) but I’d say construction is the same. It needs skilled resource which isn’t available in short order as those industries need experienced trades people and there’s not thousands of those on the bench. Supply and demand means inflation in those industries. Some of these projects are also fairly long term and no one knows what the level of inflation will be in the future so how do you predict when to use it?
So would you be happy for Gideon to take up PQE and take the glory for its undoubted success (if you are to be believed)?
If it met the need of the country that’s a price worth paying, of course
I just want the nay-sayers about PQE to explain why it is a worse solution than for example negative interest rates.
The worst they can say is it might be inflationary. Well don’t we want a bit of inflation in the global economy?
As far as I can see we can create new money for infrastructure spending or we can try and force people to spend by punishing the holding of money. One results in new housing, schools and hospitals, the other in short term spending on services.
Give people a choice and I know which they’d prefer.
I feel a blog coming on…
“One results in new housing, schools and hospitals, the other in short term spending on services”
Services which are backed by investment spending in the private sector to provide those services, and improvements in productivity of those services on the ‘learn by doing’ principle.
Building physical capital doesn’t necessarily lead to anything – particularly if they are roads to nowhere.
In fact in toto the only investment that makes any long term sense is in the education and training of the workforce so that they can produce more with less. Something you can’t do with a capitalisation restriction on your excess spending.
This denigration of consumption needs to stop. Without anybody using services there is no reason to build them in the first place.
Both can, and should, happen.
Agreed that we focus too much on physical infrastructure and not enough on skills or education, and I’d add science and research to that. Let’s also remember that services are not just the largest part of a modern economy but also greener that building stuff.
Agreed we should not denigrate consumption but it should raise living standards for the majority, not just indulge luxury. I’m also wary of the resurgence of private debt stimulating consumption growth.
I stress: PQE is only part of a broader policy
@neilwilson is just about right. We have a skills deficit. We also have a budget deficit. We also have a deficit of imagination if we can’t see that the real infrastructure we need is a civic one. One that takes underfunded but critically important community centres and turns them into community enterprise hubs that manage local resources in a more effective way.
Stewardship as a skill to be learned and be taught, in other words.
Targeting investment in interventions that support the growth of the local economy can reduce budgets due to increased personal self-reliance.
Stewardship could become an ‘enterprise-skill’ that unemployed people could learn about — how to ‘care’ for your place / your neighbours / yourself
An Opportunity?
Re-frame the debate around aspiration.
Community groups become ‘community enterprise hubs’ – their stewardship work creates healthy individuals, families and communities.
“A business-in-a-box enterprise solution”.
A digital civic infrastructure. A community of communities.
Tap local talent – people become ‘enterprising individuals’, or ‘social entrepreneurs’, not volunteers or benefit claimants.
Helping people to become more enterprising then becomes a health outcome.
Advances in technology mean that the digital platform becomes a coherent whole place approach to enterprise, health & social care.
The trouble with the prevailing political narrative is that it doesn’t include tech.
#Bonkers
Banning cash would hit the poor really hard-I can’t see that helping the inequality that rages here-though if the rich started spending and raising wages it would offset it-but if you are on benefits, keeping the odd tenner on the mantelpiece for emergencies is a big deal.
“Banning cash” Oh yes what a brilliant idea. And tell me how do small trades people in areas without full internet coverage get paid?
And this muppet is one of those in charge God help us. I think there is something more sinister behind a comment like that, as once cash is banned why would it ever be reinstated.
End result Banks win again.
Banning cash would. effectively, end the [anonymous] black economy.
Knowing who gets what, and from whom, and where they spend it, would lead to a considerable increase in revenue.
And other side effects, with a “barter-for-drugs” economy starting….after all, drug dealers only have bank accounts if they are mega-dealers (yes, looking at The City and its drug-dealer-launderers). And, of course, the “free banking” would end very quickly…..so the banksters would get very much richer…
As for the skills shortage….It’s rather more a “not gonna work for that money” driven shortage. There are a load of self-employed doing work [and lots cash-in-hand], claiming working benefits, instead of being “on the books”, because the jobs do not pay very much (what is the pay rate now….back at the start of the 21st still?)
There is certainly enough skills and cash around for prestige work: http://www.constructionenquirer.com/2015/09/16/bouygues-tipped-for-600m-battersea-station-phase-3/
Not much social housing provision in that I expect.
Not much skill shortage expected for: http://www.constructionenquirer.com/2015/09/16/hs2-to-create-25000-construction-jobs/
Or: http://www.constructionenquirer.com/2015/09/17/lincolnshire-1-8gw-gas-fired-power-station-approved/
So, if we move onto the necessary skills…looking at what skills people need to actually get access into this country (which, basically, is a list of “most needed”):
http://www.1stcontact.com/pdf/shortageoccupationlistnov11.pdf
If there is enough MONEY to be made, the skills shortage is not a problem. As history shows, we can import most of what we need, while keeping control via unemployment (etc)
John m; with the greatest respect yes we are all aware of the “black ecconomy” but not everyone is on the fiddle. The black ecconomy has thrived mainly due to HMRC cut backs.
Do you really think that allowing financial intitutions to have a rake off “EVERY” time money changes hands is the way forward? I take it you don’t do things like shopping for an elderly neighbour etc.
Allowing banks to infiltrate everything is not going to cure the low employment low wage ecconomy far from it, in the long term it is more likely to make things worse.
Money detoriating while left in the bank?! Do you mean I will actually see a smaller number at the end of the month(or some other time period) if negative interest rates are put?! That’s a terrible idea surely??
It’s Haldane’s secret plan to make PQE look really good (bit don’t say that too loudly)
Ha! By the way what do you think of this? A pulitzer prize winner on Corbyn – http://www.slate.com/articles/news_and_politics/foreigners/2015/09/jeremy_corbyn_s_dangerous_fantasies_british_labour_party_s_new_leader_doesn.html
Each to their own
I like to fast-backward to the comments section…..
“Ha this sort of high-pitched fantastical hyperventilating is a crack up. Is Corbyn coming to eat everyone’s children? Judging by the panicked hysterics the election of Corbyn has provoked I’d say the Brits have made a wise decision in choosing him. Clearly his opposition are not much more than petulant children and shouldn’t be anywhere near the levers of power. I am glad an adult is back in the room”
“Well shut my mouth, Anne Applebaum is not pleased with a populist politician! And one from a country where she has no say in politics anyway! Foolish me, I was anticipating a fair and balanced assessment of Corbyn’s plans to fight off the austerity dragons, or of the politics of authenticity. But nope, Anne Applebaum is just plain against. Good to know”
“As usual with Applebaum’s pieces – what a load of right wing cr*p”
Haldane’s comments are interesting. Reducing interest rates would put his boss in an impossible situation, I suppose George’s golden boy is sh1tting himself.
I like the way PQE has morphed ( or should that be murphed? ) from something that was created by a team of people ( the multiple authors of the original Green QE paper ) into something that was designed by one person.
Let me let you into a secret
I wrote it
Colin did edit me
Where is the paper explaining exactly what PQE is?
It would allow analysis against Chicago Plan / MMT / Chartalism / Yap variants.
Thanks in advance for the link. No rush, you understand.
If and when a summary of a body of developing work is written I will draw attention to it
But I know others are working on it too
Negative interest rates, in a cashless society would throw up some interesting conceptual challenges for everyone. For example, instead of companies wanting their customers to pay their bills promptly it will be in their interest to have them pay as late as possible especially if there’s no credit risk involved. Instead of a penalty for late payment there may even be a reward.
We could even have legal disputes about bills being paid too early according to the terms and conditions of the contract.
In prices are generally falling too, the topic of conversation at social gatherings could be how little houses have depreciated. It may be the ultimate boast to claim no depreciation at all!
Our bosses might tell us they thought we’d performed well in the last year and so we were only going to get our pay cut by 2% as a reward!
“John m; with the greatest respect yes we are all aware of the “black economy” but not everyone is on the fiddle. The black economy has thrived mainly due to HMRC cut backs. Do you really think that allowing financial institutions to have a rake off “EVERY” time money changes hands is the way forward? I take it you don’t do things like shopping for an elderly neighbour etc. Allowing banks to infiltrate everything is not going to cure the low employment low wage economy far from it, in the long term it is more likely to make things worse”
The “back economy” (shadow economy) is much more than the self-employed fiddling a few quid here and there.
Try reading my comments from a “devils advocate” viewpoint.
I class “tax evasion and avoidance” as part of the shadow/black economy.
The banks have already infiltrated everything, from the GOVERNMENTS point of view, cashless would be good: for them. Not necessarily US.
http://www.iea.org.uk/sites/default/files/publications/files/IEA%20Shadow%20Economy%20web%20rev%207.6.13.pdf
http://moneyweek.com/merryns-blog/the-rise-of-britains-un-taxed-economy/
http://www.theguardian.com/money/2015/sep/15/half-uk-banknotes-used-to-fund-shadow-economy
IMF staff have been floating the idea of moving inflation targets to 4% for the last 18 months or more, mainly with a view to the Euro zone, so as to give the ECB more room for easing (18 months ago) and so as to reduce the value of debt in some euro zone countries.
http://iorj.hse.ru/data/2014/12/28/1103785194/3.pdf
I have four questions:
1. Going to 4% in the UK would seem to me to be ineffective, because there is consistent undershooting of a 2% target. Consequently how would this deal with immobilised monetary policy? It seems to me it doesn’t, but going to 4% maybe something you want to do in the medium term, but it does not immediately increase the policy armoury? Can anyone explain Haldane’s thinking, it looks to me like a fairly desperate attempt to defend inflation targeting over the medium term, which doesn’t really get to the root of the problem?
2. This raises the question of how 2% became more or less the norm around the world. It always struck me this was a very loose and intuitive figure. And once it became established it was about signalling credibility by conforming to the norm. I am not aware of research showing how this was an optimum level for society as a whole in terms of its distributional effects. If we accept the basic premise that high inflation hits those at the bottom of the income stream, with least disposable income most, can anyone point me to research that shows that 2% was optimum for low income groups? I’m not aware of any, and I suggest no such research was conducted, because the justifications for CBI were all about symbolic credibility and not optimum distribution and collective societal welfare. Happy to be shown to be wrong if anyone can point to research showing the distributional benefits of 2%? I suspect 2% was like the 3% of GDP for fiscal deficits in the Maastricht criteria, – it was a back of the envelope calculation that was literally plucked out of the air – and became the norm, and therefore ‘credible’ and the definition of ‘credibility’.
3. Surely the analysis has to begin with diagnosis – what is the primary macroeconomic problem and then you ask – what monetary policy can do to tackle that – for example if you define this as a short fall of demand together with depleted infrastructure (broadly defined) that is neglected by private sector funds, than you ask how monetary policy can be adjusted and experimented with to help – in relation to those problems. Haldane seems to be suggesting deflation/ disinflation is the problem. The question surely is whether this is a symptom of something more fundamental? If you moved to full on long term deflation that would be a problem no doubt, but it is not cause, – you need to identify the cause. He seems to be hinting at prolonged stagnation – so you surely ask what is the root cause of that?
4. Haldane’s main concern seems to be to defend CBI. Fair enough I accept a central bank should have a price stability mandate and latitude to deliver that through interest rates. But why is it a problem to acknowledge reality and say you having one mandate/ target/ policy rule that applies all of the time is unrealistic? The nature of capitalism over the long run is that strange things happen that confound conventional expectations every 40 years, or so. Surely if you are going to do institutional design for central banks you need to distinguish between normal and non-normal times (when inflation is very low and unemployment quite high), and in those circumstance you need to build in experimental and contingent clauses, – that ask the central bank (to do extra stuff QE of different forms) – we’ve already been doing it informally. Is the suggestion that this destroys anti-inflationary ‘credibility’? This seems to me to be nonsense. The greater danger is informal instruction. Having contingencies were the central bank accepts treasury instructions under specified circumstances while still retaining some autonomy, actually seems to me to be a way of maintaining a more nuanced, and sophisticated modified form of CBI. If your position is CBI in its current terms is a sacred cow and a box that must not be opened, it seems to be to a completely untenable position in the current circumstances. So what am I missing here, from those so reluctant to put this issue of CBI on the table?
The purpose of all of the above was to say when you begin to analyse CBI it starts to look like a social construction, based on certain accepted ‘norms’, where following the ‘norms’ signals ‘credibility’.
But ‘norms’ cannot stay the same forever, because circumstances and context can and do change. If the norms and the policy rules they give rise to become redundant and cease to act as a reliable guide for policy (for nearly a decade), – where is the ‘credibility’? At that point you have to redesign them and come up with a more sophisticated and contingent institutional design. This seems too big a mental block/ hurdle for some to jump over. I’m trying to work out why. And the best I can come up with is the fear that if you start to change and tamper with central bank institutional design you will lose everything and anti-inflationary credibility will suddenly evaporate. I don’t think that is a fully thought through tenable or entirely rationale position. There is a mental block based on fear, out there on the subject of central bank institutional design. Very damaging – because we really need a sensible debate about this.
I think you are absolutely right here Andrew. Any suggestion that involves tampering with the institutional design of the central banks – or the design of the money system – is going to rub the people and institutions that depend on the status quo for their livelihoods, up the wrong way. PQE is a clever idea but not clever enough. Try a complementary approach instead maybe.