In 2015 Jeremy Corbyn adopted the policy of People's Quantitative Easing when seeking to be leader of the Labour Party. He borrowed the idea from me. Since being elected he and John McDonnell have little used the idea. This is hard to understand since it was probably the most distinctive part of his whole economic appeal in 2015, letting him suggest that the funding to build the new infrastructure this country required would always be available if the physical resources to deliver it on the ground existed.
There's another reason why it's surprising that he has ignored this though. And that is because Labour actually authorised its use in 2009. When Alastair Darling authorised quantitative easing that year he wrote this letter (of which I reproduce part):
I stress, this authorisation was later repeated by George Osborne and is still in force.
So, let's cut to the quick. First, what this letter says is that there was no reason why QE had to buy gilts. In fact £1 billion was used for other assets, and then Mervyn King brought a halt to that (I understand). But quite specifically, that was the Bank not following the Treasury guidelines provided by Alistair Darling. It is quite reasonable to argue that quantitative easing as delivered is not what Labour ever intended it to be.
Second, despite the claim that QE is a policy for the Bank of England to manage the Treasury was firmly in command of this process when it was created, authorising what could be purchased. The Bank could merely suggest alternatives. The policy did not then devolve decision making powers to the Bank for them to exercise. They were merely the operating agent.
Third, the Bank was indemnified for losses: that makes very clear who was meant to be running this policy.
Fourth, the condition was that the assets had to be capable of sale at investment grade in normal times (which we still do not have).
So, first of all, unless you can argue that the bonds issued by a new National Investment Bank would not carry investment-grade status I now think we can say three further things.
First, People's Quantitative Easing is not only legal, it has already (subject to a new National Investment Bank's bonds being sold by tender into the market in the first instance) already been authorised.
Second, the idea that the Bank of England already had any independence on this issue is a total fiction.
Third, when and if the market returns to whatever normal might now be defined to be because these bonds would still exist on the Bank's balance sheet if they had been funded by QE then they could still, at least technically, be sold, which is the Treasury requirement for acceptability.
So, in other words, all the legal and structural arguments against People's Quantitative Easing fall away: it has already been authorised and is already legal. Labour could say so and they would be entirely right in doing so.
The question then is why aren't they doing so? After all, we are still not living in 'normal economic times', whatever that might mean now. And there is not a shadow of a doubt that we are suffering underemployment that is resulting in low productivity and so under-usage of capacity which only needs the availability of credit (which is, note, the reason for QE) to bring it into use. This is exactly what a National Investment Bank could deliver. That Bank could, of course, offer its bonds to the market, most especially as a form of National Savings, I suggest. But the backstop for its funding could and should still be People's QE.
The result would be that in every constituency those 'shovel ready' jobs that we know need to be done could be funded. If we just put out the appeal to local authorities and health authorities I think we can be sure that they could come up with:
- Extensions that are needed
- Repairs needing doing
- Insulation projects
- Small road schemes
- Local transport infrastructure improvements
- Bandwidth improvements
- Houses needing building
- PFI projects they would love to drop
- New schools that are required
- GP surgeries that could be improved
And then ask universities and you'd get:
- Capital for research projects and joint ventures
- New applied research e.g. on renewables
And if you want to be really broad-minded:
- Create a small business venture capital fund.
The question for Labour is why not say all this now when the funding for it is already approved, is legal and authorised and it could be managed by a new National Investment Bank under existing BoE authority from the Treasury right now.
I wish I knew why it isn't being explicit about it. Because it should be.
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The reason has to be that our politicians are just a little bit dim.
Possibly it’s because the whole idea of “printing money” has been relentlessly demonised by successive Chancellors and PMs banging on about balancing the books and comparing our national economy to a family budget.
The idea of the economy as a zero sum game is so thoroughly baked into the national consciousness that anyone daring to think outside that box can’t get taken seriously. No one can think beyond “Where is the money going to come from?” Which is a standard question pitched at shadow Chancellors whenever they try to advocate a little bit of extra spending. Claiming it can be just spent into existence seems so counter intuitive and contrary to received wisdom that maybe it’s not surprising McConnell and Corbyn content to mention it
Except it’s what happens….
As I have come to understand from reading this blog
But it seems that everyone in government and most of the mainstream media, pretends that it doesn’t, SAYS that spending has to be funded out of taxation and recoils in horror at the idea of topping up the liquidity.
As you point in in this morning’s other entry
Should be “are reluctant to mention it”
Roy Gillett
The “recoil in horror” reaction has to be at root the human endless striving for certainty particularly in regard to the future. Much of Classical and Neo-Classical economic theory seems to be preoccupied with finding fairly simple to grasp formulae which largely says everything will balance out, reach equilibrium, if you just allow the capitalist leaders of society get on with it and reduce the activities of politicians to the minimum. Nearly 80 years ago in 1936 John Maynard Keynes blew a massive hole in these simplistic nostrums with the publication of his book “The General Theory.” In this book his big central argument was that private enterprise rarely, except in periods of boom times, equilibrises the economy in terms of employment and therefore demand because of the uncertainty involved in risking an investment. Keynes gave his theory the unfortunate name of “Effective Demand” whereas it would have been more to the point to call it “Investment Uncertainty” theory. Here’s a relatively simple explanation of it:-
https://www.srcf.ucam.org/marshall/documents/KeynesGeneralTheoryLecture.pdf
The main take-away from Keynes’s radical economic insight is there are only two ways to maximise employment and therefore demand. The first is for government to play an intervening role in which its spending can create jobs, or it can reduce taxation or inject money into the economy by mailing citizens cheques or electronically crediting their bank accounts. The other way is to run a very good surplus on your global trading account through the sale of goods and services. Of course, for the latter to happen there have to be nation’s willing to run a deficit on their global trading account and all the potential problems incurred in doing so such as declining currency value and consequently possible higher levels of inflation because the nation continues to be dependent on a fairly high level of imports.
You might think after nearly 80 years politicians would have got their heads around Keynes’s break through insight especially in the UK after the Second World War when even women suddenly found themselves in large quantities encouraged to venture out beyond their traditional culture role of home-maker to help the war effort. Full employment after the depression periods of the 1920’s and 1930’s suddenly became the new normal thanks to colossal government spending. The insight was utilised for two years of the Labour government 1945 to 1947 when Hugh Dalton was Chancellor and then it was back to the tired old Neo-Classical dogma under Labour with Stafford Cripps and his austerity programme.
What can one say the laissez-faire attitude that anyone can become an MP and not have much understanding of economics or money creation has to go!
Roy Gillett says: “it’s not surprising McConnell and Corbyn are reluctant to mention it” – if they’ve co-opted Baron McConnell of Glenscorrodale (whose Scottish Executive handed back £1.5 bn to the Treasury because they couldn’t think what to spend it on https://wingsoverscotland.com/probably-a-robbery/) then I’m not surprised they’re reluctant. (smiley thingy)
However, as was argued by some yesterday they are afraid of being crucified by the oligarchic press, the right wing “think tanks” (like the IFS), the BBC, 99% of politicians and anyone else who can be dragged in off the street. But these people are bullies. They threaten & exercise character assassination instead of constructive, informed debate. If you keep running away then they’ll keep on bullying.
Time for some brave politicians to stand up and be counted and keep plugging away with good arguments.
I think you can reduce it down to the very simple fact that neither McDonnell or Corbyn properly understand how the UK monetary system works and in particular probably don’t understand the purposes of the reserves or how it operates. Drilling down even further on the subject of reserves they most likely don’t have the key understanding the government’s central bank, the Bank of England (nationalised in 1946), has a logical monopoly over creating reserves from nothing. They then fail to take the next logical step which is to say to themselves if the BoE can create reserves from nothing, and as the BoE tells us in their 2014 publication so can non-government sector clearing banks, then why on earth should the government also not be able to create its spending money from nothing!
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en&hash=9A8788FD44A62D8BB927123544205CE476E01654
I’m afraid to say much economic and monetary system ignorance exists in the UK (as elsewhere in the world) and this has produced negligent politicians who in their negligence very much undermine the potential of the Parliamentary democratic system.
In response to G Hewitt’s point if Corbyn and McDonnell are scared of losing the chance of office because of right-wing bullying over the “money creation issue” they can simply make clear because the countries reserves are created out of nothing on a logical monopoly basis by the Bank of England and in its 2014 First Quarter Bulletin publication the BoE also clarified that the clearing banks create bank loan money out of nothing there is need for further clarity how the government creates its spending money. They should further state such clarity is required because of public unease over austerity cuts. Accordingly they will declare when elected to office they will establish a Publish Commission or Committee to finally clarify whether government spending is also subject to the same creation mechanism as reserves and private sector bank loans and what government’s role must be in supervising all three methods of money creation. In such a move the Labour Party cannot be accused of pre-empting any deliberation on the money creation subject.
Agreed
The establishment are happy for government spending when it benefits them but not when it benefits normal people if it will in any way reduce the elite’s relative power. Therefore they will use any strategy necessary to ensure government does what they want. This includes inconsistent and illogical arguments – all that matters is that the majority of voters continue to back politicians and policies that benefit the established power elite.
The Labour Party cannot propose anything that will fall foul of the electorate’s erroneous views of what is economically prudent. They could contribute to the gradual modification of those views, as they are with broader views on nationalisation of natural monopolies, the NHS, education etc. However, I think at the moment they are taking the short term view that it is best to push popular policies in order to win power ASAP.
Additionally the majority of Labour activists just don’t understand the reality of or existing money system. This means that even if the leadership chose to push people’s QE or even go further towards a fully MMT consistent manifesto, they would suffer a backlash from their own membership. I’ve seen this myself repeatedly when MMTers have been ridiculed for expressing their views within the party.
Even if Labour activists could be made to accept these heterodox economic views and promote them on the doorstep and in the street they would have to understand them thoroughly enough to condense them into digestible soubdbites to communicate to the public. A party wide education program would take time to organise and bear fruit. An official program us not even a possibility right now though some of us are attempting to establish an unofficial economics education program.
The mainstream media will not cooperate in educating the public on economic reality as they are paid to do exactly the opposite.
Mainstream academia will not help because they are still wedded to neoclassical or new-Keynsian economic paradigms, which they are paid handsomely to uphold.
The more politically radical Green Party is an ineffective campaigning organisation by comparison to Labour but also does not understand our modern money system. As far as I know the Greens are officially signed up to a Positive Money approach which, while heterodox, is undemocratic and based on a fundamental misunderstanding of reality. So not much help there.
We do have a small band of UK academics shouting sensible stuff as loud as they can but remaining largely ignored and mostly separate voices in the wilderness.
We also have an eclectic and largely disorganised group of activists and bloggers who are still learning MMT at the same time as trying to spread the word.
It’s like David and Goliath’s fight but with an infant David and full grown Goliath!
In my opinion we currently stand no chance of success in the immediate future. All we can do is build our knowledge and campaigning capacity so that we grow to become a bigger David with at least an outside chance of felling the neoliberal Goliath some time in the future.
Labour might go further than declaring it will set up a Public Commission/Committee to clarify money creation mechanisms available to the UK it could also declare it will abolish the OBR (Office for Budget Responsibility) and establish an Office for Monitoring and Anticipation of Inflation (OMAI) given the following:-
– OBR has consistently failed to understand the dangers of the nation basing so much of the UK’s economic growth on a substantial increase in consumer debt
– public concern in regard to inflationary effects of private and public money creation.
I fear that you are right Adam. Despite following this blog and background reading, I’d admit to not fully grasping MMT though recognising its significance and intuitively buying the arguments. Like others here I suspect, I’ve tried to explain to fairly educated people some of basics such as how banks create money (and I’ve a reasonable knowledge of banking, both central and commercial) and seen the blank looks and incomprehension. It’s deeply counter-intuitive
Persuading the wider public is going to be a long haul. The arguments are going to have to be made a lot more succinct and in terms that people can relate to their lived experience and concerns. That Thatcher household budget metaphor is going to take a lot of shifting.
It is a long haul only if we are not radical enough – I suggest. That is why we have to say it like it is!
We don’t need to fall for the idea that the money factory actually belongs to somebody else. As I suggest here:
http://www.progressivepulse.org/economics/welcome-to-the-money-factory
I agree
Pussy footing will not help
“We have nothing to fear…etc” For as long as politicians who think they are enlightened continue to play by the neoliberal rule book and don’t point out that, like the king, they are actually “in the altogether” then we’ll get nowhere. It needs leaders to do some leading.
Adam Sawyer says: “they are taking the short term view that it is best to push popular policies in order to win power ASAP”. I think we’ve been here before…..
(P.S. Progressive Pulse is always a stimulating read)
if it’s “legal and authorised” why do they need to mention it rather than just use it?
people are scared of “magic money” (except when it’s for going to war, bribe the DUP etc etc), it’s a vote loser, but if the facility is there, why wouldn’t they use it?
I may have prompted this blog by suggesting that McDonnell has good reason to try to frame economic policies without using MMT but that the example of QE could help to provide a narrative to change track. However, I now see the fallacy of this argument because it will be easily countered by MSM talking about the debt we’re in danger of passing down to youth – and we’re bring down the debt (but they aren’t). I’ve gone back to my original position at this point that, like LVT, you say one thing and do another when you get into office. You can’t do any good until you get into office. That’s politics. To keep rubbishing McDonnell and Corbyn is futile. I wait to be proven wrong.