We have recently announced our plan to start a new campaign (codename “QE for jobs”) which would ask for £50 billion to be created by the Bank of England and spent by government with the aim of increasing employment and doing some of the long-term things that are essential for this country. Instead of seeing more Quantitative Easing money flooding the financial markets, we want to see the power to create money be used for something useful.
It’s an idea that’s already been mentioned by leading economic commentators in all the mainstream papers. And now even the Treasury is interested – in their latest review of monetary policy, they included a section on Adair Turner’s suggestions.
The idea of ‘QE for jobs’ can naturally raise concerns. Of course we’ve given them a lot of thought and we’ll be writing up a paper/proposal document in which we’ll address them in detail (and warn of the potential risks that need to be managed). Below we’d just like to highlight some of the most common concerns:
1. Doesn’t it legitimise inflation?
If the money goes into houses or financial markets, as it has done for the last few decades (and through QE), then it will cause inflation. But if it goes into building infrastructure and the ‘productive capacity’ of the country, it can actually be deflationary. There’s a huge section on this in the book Modernising Money (chapter 4) for anyone interested in details, but in short, whether money creation causes inflation or not depends mainly on how it is used.
2. Once you legitimise QE it opens the door for the politicians to regard it as the new ‘must have’ tool to buy votes at elections.
We’ve always been very clear that you should never give politicians the power to print money. The power to create money should be managed by a transparent and accountable process that would be independent of George Osborne et al and sheltered from short-term political controls. They would be under strict controls so that if inflation starts rising significantly as a result of excessive money creation, they would need to limit any future money creation. The decision about how much money to create is about what the economy needs, not what politicians need.
3. Does anyone think the government can hand actually out £50 bn in a manner that is efficient and fair and the result of which can later be measured for effectiveness?
The Treasury already manages £700 billion a year, which they receive from tax revenue and borrowing, so £50bn is not a huge amount in relation to this. But the money doesn’t all need to be spent in the space of a year, and it doesn’t all have to go through government; part of it could be distributed directly to citizens. The point is that the money is needed in the real economy, and it won’t get there through bank lending or the current form of QE (which puts the money into financial markets). So there needs to be an alternative.
4. Inflation erodes peoples savings and artificially raises prices of imports and assets such as housing – making those with a home feel richer (though they aren’t in real terms) and those without homes further away from affording one with their new job take home pay.
Again, this happens if the money goes into property (as it does when banks create money and lend it into property). We’re proposing that the money goes into the real economy instead.
Regarding people’s savings, QE has harmed pensioners. If the QE money had been spent into the economy, the companies that pension are invested in would have done more business, delivered better dividends, and would have benefitted pensioners.
5. It detracts from your main campaign as it does not bring it nearer its goal.
We’ve considered this at length too. The reality is that no government/state will prevent banks creating money and take over that responsibility in one clean step. They first need to see a precedent for money to be created, responsibly and under control, and spent into the economy debt-free. Once they see the benefits of this, it becomes easier to win the argument that money creation by banks does more harm than good, and that they should be prevented from creating money in the future.
So having some money creation by the state, in the form we’re suggesting, is the first realistic step towards fixing the money system.