There are those who seem to have little time for People's Quantitative Easing. Many, it seems, are in the Labour Party. Now, I stress (and will keep stressing) that I am not a member of any political party, but I find this curious. That's not for political reasons: those are for Labour to sort out, but because of what the arguments used imply.
Andrew Harrop, the secretary of the Fabian Society, is one such opponent. He has written recently that:
Poorer families would be the first to suffer if Corbynomics were to lead to fewer jobs and affordable homes. They might also be victims of his proposals for monetary policy, which are likely to fuel inflation. During the leadership election, Corbyn proposed that the Bank of England should create money for public investment, seemingly on an ongoing basis. While some variant of this scheme might have been a sensible option in the depths of the financial crisis, as a permanent policy it is not. If pursued on a sufficient scale this ‘people's quantitative easing' would inevitably drive up prices. Corbyn is right that the UK needs a permanent, structural increase in investment, but printing money to spend on infrastructure can only be a temporary, cyclical intervention before it triggers inflation.
Corbyn should instead have called for the government to significantly increase borrowing (especially while it is so cheap) in order to create new assets, an entirely orthodox position for macroeconomists and accountants.
John Mann MP has not been wholly dissimilar in his critique in Progress magazine:
‘People's quantitative easing' sounds like a dose of medicine that must be for good for the health of the nation. In fact it has the opposite effect. Its origins stem from monetarism and is a variant of concepts developed from the philosophies of Milton Friedman and the Chicago school of economics.
It is an emergency option in a period of financial meltdown, but it is a rightwing answer for today.
He then goes a little further:
‘People's QE' works by boosting the private sector. This will most likely be through infrastructure expenditure, but will be at the expense of higher inflation. As the governor of the Bank of England said last month, the losers from ‘people's QE' are the poor, the elderly and the vulnerable.
‘People's QE' is therefore a misnomer that needs correctly labelling. It would be more accurate to describe it as ‘large private sector multinational QE,' for these are the direct beneficiaries.
Before adding:
Some are taking it a dangerous step further by questioning the need for an independent Bank of England and recommending a huge devaluation.
Printing money in this way will always damage the immediate standard of living of those who are on fixed incomes and those with an occupational pension. Postal workers, local government workers, the NHS, teachers and the mineworkers' pension fund will all be the automatic losers.
And then saying:
But there is another option which has already been proposed by Paul Krugman, Danny Blanchflower and others: use simple Keynesian economics to provide an alternative to austerity. With our current record low interest rates they argue that we can afford to simply pay off the deficit at our leisure, not by making drastic cuts today, but by growing the economy and using this growth to pay off the national debt over a longer period of time. Like the mortgages that many of us are tied to, we have to be able as a country to service the debt, but that is considerably easier in a period of continued low interest rates. Simple Keynesian economics works where monetarism and its simplistic panaceas fail.
Before asking:
So are we to be a monetarist party, inspired by the Chicago school, or a Keynesian party inspired by and responding to the real economy?
‘People's QE' is the use of monetarism to boost the economy, paid for by the poorest in society. Simplistic, nationalistic solutions have not worked before, are not working today and will not work tomorrow. Let's not be blinded by the same old medicine being fed to us in a different-shaped bottle.
It is passionate stuff. And boith Andrew and John are, I think, wrong.
I have to admit I do not wish to take part in their political hyperbole. I would really rather deal with facts, such as what has actually been said. Take this from the Guardian this morning:
Murphy himself disputed an allegation made by Cooper during the campaign that “people's QE” would provide false hope while stoking inflation and increasing debt. “At this moment, I'm not saying I would actually do a People's QE programme. I would do a borrowing programme today to fund infrastructure investment. We have low interest rates and so I agree with those people who have said to me, why can't we borrow? But, I am anticipating a recession, the importing of deflation from China and the risk that we're going to have a serious downturn — not a 2008 crash but a recession ... The chance we get to 2020 without a recession given all these circumstances is very low. George Osborne is going to discover what it feels like to be running a recession on his watch and created on his patch. I have a very strong feeling he is not going to enjoy that, but that's what's going to happen. Therefore the job of responsible opposition is to say this is a problem that it can sort out.”
This does, pretty much, destroy what Harrop and Mann are saying and is exactly what I said to the FT in early August where it was noted:
Richard Murphy, a prominent advocate of people's QE, told the Financial Times the idea works only if the current government's plan fails badly. “People's QE is necessary only if George Osborne's plan comes off the rails pretty fast, which it almost certainly will,” he said. “There is a significant risk of another recession.”
What is it, then, that Harrop and Mann are engaged in?
Andrew Harrop, rather disappointingly, appears to be guilty of not checking his facts, and he knows where I am. A man who cannot be bothered to find out what has been proposed is really not making useful comment or is playing at politics and neither is beneficial here.
John Mann is in another place. But he, like Harrop, seems to have some real difficulties with economics.
Both seem to think inflation the great evil. This is really rather strange. First, it is (and was under Labour) policy to promote inflation. We need it. Badly. In periods of deflation (and we will be back in it next month, I can predict pretty confidently) there is little incentive to invest, the cost of borrowing goes up in real terms and there is no chance of significant real wage increases to ensure that the deterioration of the overall reward to labour in the economy is addressed. The argument that inflation is bad for those on wages is just wrong: it writes off debt, increases real earnings, and if there is an impact on those on fixed income then it is up to the state to adjust for it and not for left wing commentators to simply wring their hands. Let's be blunt, inflation always pays borrowers and costs lenders and so is a powerful tool for economic redistribution and I despair of the left when they cannot see that.
Moving on from this Mann seems to have become a caricature of an SWP member: nothing that can in any way benefit the private sector must happen. What can I say? Is he serious? Does he believe in a mixed economy?
But most of all, does he, like Harrop, think that Osborne has cracked the economic problem and we will never face a downturn again? And do neither of them think it is the job of Labour to think and talk about what might happen if Osborne's plans cannot be fulfilled if that is, as I am sure, the case? If so, what do they think responsible opposition is about? Right now it appears to be it's about a little tweaking of Osborne's plan. I suggest that will not do: that plan is so flawed that labour has, surely, to plan for its failure? If not, why, is the question?
The PQE deniers really do need to open their eyes. When the Bank of England are signalling we're in for considerable stress why are they suggesting that the economy is doing just fine?
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‘Printing’ and spending £100 would have no effect on inflation. Printing and spending £100 Trillion would, almost certainly lead to hyperinflation. Somewhere inbetween is a figure that will lead to higher spending on infrastructure (good), higher incomes and spending (good) and a modest increase in inflation (good). All without increasing debt (and probably decreasing it).
A piecemeal approach to accomodate time lags would ensure that it’s a successful and sensible policy.
The approach to take is functional finance, which is that you focus on the policy outcomes and let the budget take care of itself.
If Mann thinks PQE is going to cause inflation, then what he is saying in actual fact is that the Bank of England are incapable of doing their job properly – which is to slow down the private sector if it is running too hot.
Neil, I’m not with John Mann on this but if I have a worry about QE (P or otherwise) it would indeed be about the ability of the Bank to manage any inflationary impacts with its existing tools without unwinding the benefits. Both raising bank rate and selling debt back to the market would have damaging fiscal consequences through increasing interest payments made by government.
I have been exploring additional tools and rules that might help here and any thoughts you have on this would be welcome.
QE will never be repaid
Every one knows it
Some like to pretend otherwise
Nicely put, Boochiwawa.
Future historians will look back upon this era as one where technologies of convenience and media saturation had not only managed to destroy our attention span but our sense of proportion as well.
Public figures now seem to be willing to make any wildly disproportionate or unmeasured claim on the presumed assumption that it will be somehow forgotten later on or that it won’t held to account.
I therefore believe that it is high time to reintroduce an element of professionalism, ruthlessness and fear back into politics – on a cruel to be kind basis. At the very least someone needs to keep a register of outrageous claims so that the claimants can be reminded when their words are proved hopelessly false by subsequent events. A sufficient number of reminders will be sure to encourage more circumspect behaviour.
This man’s ignorance of monetarism and the Chicago School is every bit as obvious as his insincerity and his fondness for bond markets.
So McDonnell is saying he wants to balance the current budget. It is completely unnecessary. This approach was first suggested by Keynes (for pragmatic reasons) until he came out in support of Abba Lerner’s functional finance.
We have an outstanding opportunity to change the narrative in non-technical ways. Following MMT for some time, I’ve seen understanding by ordinary people, and more importantly economists, move ever closer to the chartalist view.
We have to keep pushing this regardless of Labour. I would prefer Angela Eagle as shadow chancellor (I think), because she complains whenever interviewers keep talking about money and not real resources.
Chartalism and functional finance is about governments focusing on the availability of real resources for both the private and public sectors, and in so doing inflation stays low and fiscal deficits can be left to take care of themselves.
Spot on Charles.
To my mind Mann and Harrop appear to be deluded zealots!
Nice one,Richard.
I’ve waited 71yrs for this.
They don’t like it up’em.
Many thanks for all your hard work
May the truth prevail.
Regards,
Peter Wigan
Slightly off-topic Richard, but will we be seeing you here in Brighton for the Conference?
It would be nice to pick up a copy of your book and get it singed by the author!
I am book signing on Monday afternoon at 4pm
‘So are we to be a monetarist party, inspired by the Chicago school, or a Keynesian party inspired by and responding to the real economy?’
John Mann frequently justifies the right wing option with faux outrage at his opponent’s political incorrectness – either too right wing/loony left wing, sexism, racism, disable-ism, gender-ism, ageism etc. It is an extremely successful strategy which leaves the other confused and on the defensive. However, his views on PQE may be safely ignored… they are unhampered by any understanding of economics. For John Mann, the fact that Jeremy Corbyn supports PQE would be completely and totally sufficient to guarantee his opposition.
It made me smile to think that John Mann now appears to be backing a Keynesian solution. Anyone who knew him from the days when he was employed by Tom Sawyer to break the Union links with the LP, would understand the irony.
“‘People’s QE’ works by boosting the private sector.”
Does he mean by this that the resulting assets are owned by the private sector rather than the Government?
he might have a point here-in that we don’t want any further encouragement of economic rent on any infrastructure results.
In 1945 et seq-private companies were very much involved in that actual work in buiding housing etc but not asset ownership.
We need to cut through the PQE debate. This is about optimising benefits by co-ordinating monetary and fiscal policies. Creating money won’t grow the economy without government spending (‘buy stuff not assets’). Public investment needs monetary management to control prices and interest (‘pay workers not bankers’). Let’s keep this simple.
You are spot on
Richard, I feel that confusion prevails; please can you agree or comment on my analysis:
QE The government, through its own central bank, borrows from commercial banks in order to buy back some of its previously issued government bonds (Gilts). The end result is that:
1. The government has replaced some of its debt due to bondholders with debt due to banks. The National debt is unchanged because the borrowing from banks is offset by the reduction in the private and foreign sectors’ holding of Gilts.
2. Investors who previously held Gilts now have newly created money in their bank accounts with which they can buy further stocks and shares.
PQE The government, through its own central bank, borrows from commercial banks in order to increase its spending. The end result is that:
1. The National Debt increases by virtue of this borrowing from banks.
2. The combination of public employees and the firms that supply the government receive newly created bank money which they can spend in the real economy.
“Helicopter Money” The government, through its own central bank, prints new banknotes and distributes these to households (hopefully more needy ones) which they can spend in the real economy. When these banknotes are spent and subsequently banked, the commercial banks will gain balances due to them by the government’s central bank. The final result is that:
1. The National Debt increases by virtue of this borrowing from banks.
2. The recipients of the expenditure of this cash (largely retailers) receive newly created bank money which they can spend in the real economy (largely to buy further goods to replace that which they sold)
The end result of “Helicopter Drops” appears very similar to that of PQE but the government loses the opportunity to increase spending as it sees fit (hopefully to invest). I suggest that because both PQE and Helicopter Money increase spending in the real economy, there would be some increase in the rate of inflation but then that, surely, is the purpose. I also suggest that QE was only a public gift to bankers in that it boosted the stock market and provided the banks with huge surplus reserves.
QE and PQE are technically the same
So your analysis on debt is wrong
And the fact bank reserves increase at BOE is not necessarily bad news: the rate on them can be set at zero
PQE directs new spend into wages etc via infrastructure building ie investment
QE directs it to portfolio rebalancing
That is the difference
Helicopter money directs it to consumption
Again, that is the difference
Thank you very much Richard. I understand your point about my analysis of the debt involved. I presume that you refer to your proposal to issue new bonds to finance the increased public investment and then have the central bank buy those bonds in further QE.
I agree with you entirely about bank reserves; not so much because of the ability to set the interest rate on them, but because they will prove extremely useful in the inevitable restructure of our failed monetary system.
Agreed re the latter