In the wake of the recent Brexit vote, the outlook for the UK economy is more uncertain than at any time since 2008. Mark Carney has promised that the Bank of England will do “whatever it takes” to support growth. But with interest rates already at historic lows, and questions being raised over the viability of additional quantitative easing (QE), it is unclear that the Bank has the necessary tools to meet the challenges ahead. The new government’s promised economic policy “reset” should involve a new collaborative relationship with the Bank of England, whereby the Treasury supports the design of alternative monetary policy tools.
The Monetary Policy Committee has cut base rates to an unprecedented 0.25% and expanded its QE programme by a further £70 billion, bringing the total to £445 billion.
However, the past seven years of easier monetary policy has not yielded its desired effects. It’s often forgotten that before 2009, interest rates had never fallen below 2%. Since then they have not increased above 0.5%. Any further cuts in interest rates will not benefit the UK’s economy.
Similarly, the expansion of the Bank of England’s QE programme is the wrong solution for today’s economic problems. QE was arguably required in 2009 to provide the banking sector with liquidity in the face of a frozen interbank lending market. The risks facing our economy have little to do with the availability of liquidity in the financial sector, and all to do with businesses and households cutting spending due to an increasingly uncertain economic outlook.
As well as being of limited effectiveness, ultra-loose monetary policy has come with harmful side-effects. Indeed, both Prime Minister Theresa May and former Chancellor George Osborne recognise that lower interest rates and QE have increased inequality by inflating asset prices. Moreover, the success of both of these policies is dependent on the private sector taking on even more debt. These policies are being implemented despite the Bank of England itself identifying household debt as one of the most significant risks to our economy. Responding to a potential recession by risking financial stability with more private debt hardly seems like a viable policy solution.
As the new government looks to ‘reset’ economic policy, new ways of conducting monetary policy should be considered. Instead of policies designed to fuel asset price bubbles and increase household debt, the Treasury and the Bank of England should co-operate to directly stimulate aggregate demand in the real economy.
A fiscal stimulus financed by central bank money creation could be used to fund essential investment in infrastructure projects – boosting the incomes of businesses and households, potentially assisting the UK’s green economic transition, and increasing the public sector’s productive assets in the process. Alternatively, the money could be used to fund either a tax cut or direct cash transfers to households, resulting in an immediate increase of household disposable incomes.
In any of these policy scenarios, new money will be directly introduced into the real economy, directly stimulating aggregate demand and boosting employment, investment, and spending. While it is a job for the Treasury to set up the framework for these policies to be deployed, it would remain a decision for the Monetary Policy Committee as to the timing and size of any future stimulus.
After seven years of ineffective unorthodox monetary policy – which has created risks and adverse side effects – we urge the new government to consider alternative policy approaches which will directly increase spending and investment in the real economy without burdening households with yet more debt.
Andrew Watt, Macroeconomic Policy Institute, Hans-Böckler-Foundation
Avner Offer, University of Oxford
Biagio Bossone, Chairman of the Group of Lecce
Christian Marazzi, University of Applied Sciences and Arts of Southern Switzerland
Constantin Gurdgiev, Trinity College Dublin
David Boyle, Radix
David Graeber, London School of Economics
Ellen Brown, Pubic Banking Institute
Eric Lonergan, Economist & Writer
Fran Boait, Positive Money
Fulvio Corsi, City University of London
Guy Standing, School of Oriental and African Studies, University of London
Helge Peukert, University of Erfurt
Herman Daly, University of Maryland
Iqbal Asaria, CASS Business School
Jason Hickel, London School of Economics
Jem Bendell, University of Cumbria
Jeremy Beckwith, Economist & Investment Professional
John Weeks, School of Oriental and African Studies, University of London
Johnna Montgomerie, Goldsmiths University
Joseph Huber, Martin Luther University of Halle-Wittenberg
Josh Ryan-Collins, New Economics Foundation
Kaoru Yamaguchi, Doshisha Business School
Kees van der Pijl, University of Sussex
Ladislau Dowbor, Pontifical Catholic University
Laurence, Seidman, University of Delaware
Luca Ciarrocca, macroeconomic author
Livio Di Matteo, Lakehead University
Mark Blyth, Brown University
Mary Mellor, University of Northumbria
Matthias Kroll, World Futures Council
Nigel Dodd, London School of Economics
Ole Bjerg, Copenhagen Business School
Philip Haynes, University of Brighton
Lord Robert Skidelsky, Warwick University
Steve Keen, Kingston University
Thomas Fazi, Social Europe
Tim Jackson, University of Surrey
Victoria Chick, University College London