Shadow Chancellor should look again at the case for strategic QE

The Labour Shadow Chancellor Chris Leslie has been making waves this morning with his criticism of leadership contender Jeremy Corbyn’s plan for ‘quantitative easing for the people’. His intervention provides a good opportunity to address some common myths about the proposal.

First and foremost, it’s important to realise that this idea has the backing of many mainstream economists. Among those calling for a different form of quantitative easing is Ben Bernanke, former Chairman of the US Federal Reserve and Lord Adair Turner, former Chairman of the UK’s Financial Services Authority.

In an interview with the Independent, Leslie said:

 “Printing money and ending Bank of England independence would push up inflation, lending rates, squeeze out money for schools and hospitals and mean spending more on debt servicing. Higher inflation and a higher cost of living would hit those on the lowest incomes, the poorest people who couldn’t afford those goods and services.”

Of course, he’s right that out-of-control inflation is harmful for those on low incomes. But this is not an inevitable consequence of a more strategic form of quantitative easing. Here’s why:

1. Bank of England independence could be maintained

As Chris Leslie correctly states, it’s important that politicians are not directly given control over money creation because of the risk that political pressures would lead to abuse of this power. But government control of the money supply is not what proponents of ‘People’s QE’ are calling for. Instead, the Bank of England’s Monetary Policy Committee would still decide how much money to create; it’s just that instead of putting this money into financial markets, it would be allocated to government, or other public institutions, to decide how to spend it. The Bank of England’s remit would still be to target inflation, so if the rate of inflation was persistently above target, the Bank of England would take that as a sign to stop the ‘People’s QE’ programme.

1. ‘Classic’ quantitative easing has artificially inflated asset prices and driven up inequality

The Bank of England’s programme of quantitative easing was intended to increase lending by increasing the stock of central bank reserves held by commercial banks. But because the money created through QE was used to buy government bonds from the financial markets, its primary effect was to inflate bond and stock markets to nearly their highest level in history.

Because ownership in the stock market is heavily skewed towards the wealthy, QE made the richest 5% of households an average of £128,000 better off according to research by the New Economics Foundation. Most families saw no benefit, and very little of the newly-created money boosted the real economy. The Bank of England has estimated that the £375 billion of QE led to a growth in GDP of just 1.5 – 2%.

1. Those on low incomes are at the greatest risk from the boom in household debt

Right now, the government is relying on lending by the private banking sector to create money. But most new lending by banks goes into house price bubbles and financial markets, while less than 15% ends up in the real economy. This means that while the cost of mortgages and rents continue to rise, businesses struggle to get the credit they need to expand and increase wages. This dynamic is forcing a boom in household and consumer debt. Eventually, some of the debt becomes unpayable and people will default.

By spending new money directly into productive areas of the economy such as infrastructure and innovation, the government could ensure that new money boosts jobs and wages instead of inflating asset prices.

Positive Money has set out a detailed plan for ‘Sovereign Money Creation’ as an alternative to quantitative easing. This proposal would put money into the real economy rather than the financial markets. The New Economics Foundation has also produced a report on how the money created through the existing QE scheme can be redirected into something more socially useful.