Corbynomics needn’t be your cup of tea, but QE for the People is a good idea

It is no secret that right wing media correspondents take significant issue with Jeremy Corbyn’s proposals for economic reform. However, because People’s QE is actually an apolitical monetary policy proposal, one of the Telegraph’s leading economic commentators endorses it.

In a recent article, titled “Jeremy Corbyn’s QE for the people is exactly what the world may soon need” Ambrose Evans-Pritchard writes: “There are many good reasons to gasp at Jeremy’s Corbyn’s planned assault on capital, but his enthusiasm for “People’s QE” is not one of them.”

Indeed, Evans-Pritchard advocated a form of People’s QE well before anyone had even heard of Corbynomics. The fact that such a high calibre economist on the completely opposite side of the political spectrum to Corbyn is in favour of People’s QE, not only shows that it is a good idea, but that it is a good idea regardless of your political disposition.

People’s QE is actually rooted in the theories and ideas put forward by one of the so-called fathers of the free-market, Milton Friedman. Accordingly, Evans-Pritchards writes:

“Mr Corbyn’s ideas are a variant of “helicopter money”, the term coined by Milton Friedman, the doyen of monetary orthodoxy, lest we forget.

Friedman did not, of course, mean that banknotes should be dropped from the sky, though they could be in extremis, but rather that central banks have the means to create money to fund tax cuts, or to cover state spending, until the economy comes back to life.”

 

Evans-Pritchard correctly points out that if an economic slump were to come about, primarily due to current issues in East Asia, we have no tools at our disposal:

“Overt monetary financing of deficits – the technical term – is exactly what the world will need if the global economy tips into another recession with interest rates already at zero and debt ratios stretched to historic extremes.

Governments that do not have such a contingency plan in place to combat a potential deflationary shock from East Asia should be hauled before their respective parliaments to account for their complacency.”

Traditional QE is also not a possibility, not only because it increases inequality and financial instability:

“We cannot revert to plain vanilla forms of quantitative easing at this stage. The various rounds of QE by the US Federal Reserve and the Bank of England after the Lehman crisis were assuredly better than nothing. They averted a depression.

 

But little more can be extracted from pulling down long-term interest rates by a few more basis points. The trade-off between risk and reward has, in any case, turned negative.

 

Much of the money has leaked into asset booms, greatly enriching the “haves”, with a painfully slow trickle-down to the rest of society.”

 

This is not to criticise former central banks, he writes:

“This is not a criticism of the Anglo-Saxon central banks. The public would not have accepted avant-garde QE or helicopter money at the time. The Fed’s Ben Bernanke faced impeachment calls by hard-liners in Congress even as it was. He did what was humanly possible.

 

Yet if we have to do QE again – and right now the US and the UK are preparing to tighten, so it is not imminent – it would surely be better to inject the money directly into the veins of the real economy.”

 

Next Pritchard writes that:

“The scale is small, but the principle is much the same as Mr Corbyn’s plans to harness QE from the Bank of England to fund a British “National Investment Bank”

He also points out that Corbyn’s Shadow chancellor made a mistake in the past by suggesting that the Bank of England’s independence should be removed:

“His firebrand shadow chancellor, John McDonnell, muddied the waters by writing three years ago that the Bank would be stripped of its independence “in the first week of a Labour government…

Mr McDonnell would be well-advised to withdraw this hot-headed rhetoric immediately, now that the credibility of the Labour Party rests in his shaky hands. The Bank of England was not responsible for the global financial crisis…”

Of course this is something we at Positive Money completely agree with. It is crucial that the Bank of England continues to be able to operate independently:

“Lord Turner, the former head of the Financial Services Authority, says it is perfectly possible to create a new regime in which the Bank’s Monetary Policy Committee decides how much fiscal funding to permit, calibrating the dosage in exactly the same way that it now regulates bond purchases or sets interest rates…”

But as we have always suggested, People’s QE should not be used as the sole form of public financing, it should only be used when demand is falling and the economy requires stimulus:

“Needless to say, it should be a last resort only in the face of deflation or a chronic lack of demand. No central bank wishes to cross the Rubicon to “fiscal dominance”, fearing that it will come under pressure to open the flood-gates…”

Many critics of People’s QE make reference to the Weimar Republic. Evans-Pritchard points out why it is an inapplicable case study:

“Some invoke the spectre of Weimar, but Germany’s hyperinflation of 1923 followed the breakdown of the Wilhelmine state after the First World War. The German people saw it as their patriotic duty not to pay taxes that would be siphoned off for Versailles reparations.

Weimar tells us absolutely nothing about the merits or demerits of monetary financing in stable democratic societies with fully-functioning institutions that face a deflation crisis.”

Another criticism to People’s QE is once it did its job of stimulating the economy, it would be too difficult to reverse. However, Evans-Pritchard correctly point out:

“The technical objection to People’s QE is that infrastructure spending takes time – perhaps kicking in when it is no longer needed – and cannot easily be reversed once inflation starts to take off again.

 

That is why the Fed and the Bank of England have stuck to buying debt. Bonds are liquid. They can be sold again easily. It is much harder to unwind any of Mr Corbyn’s QE wish-list of “large scale housing, energy, transport and digital projects”

But ultimately, these objections are a canard. The two central banks are already sitting on a vast stock of bonds that could be sold off in order to calibrate the level of stimulus.

 

Interest rates can be raised before QE is unwound, and that is in fact what the Fed is planning to do. The reserve requirement for banks can be raised. There are plenty of tools.”

A number of economists of Keynesian descent take issue with People’s QE and suggest that governments can continue deficit spending. So Evans-Pritchards writes:

“Some Keynesians dismiss helicopter money as a needless complication when governments can rely on old-fashioned fiscal policy, and borrow the money instead. But fiscal stimulus and monetary stimulus are not equivalent. “There are limits out there on how much debt the markets will accept,” said Lord Turner.

Overt monetary financing raises the growth rate of nominal GDP, eroding the real burden of the debt stock. The US Treasury used a variant of this trick in the late 1940s and early 1950s to whittle down the legacy debts from the Second World War.

 

Japan pursued the opposite course after the Nikkei bubble burst in 1990, relying almost entirely on fiscal spending until Shinzo Abe ordered the central bank to start meaningful QE in 2013. As a result, its public debt has spiralled to 250pc of GDP. As the International Monetary Fund has warned, Japan is at the mercy of a bond crisis at any moment.”

While Evans-Pritchard is definitely in favour of a People’s QE when aggregate demand is dwindling, he is also clear that he does not endorse a number of other economic policies put forward by the Corbyn camp:

“To be clear, Mr Corbyn’s economic vision is not my cup of tea. His claim that £93bn can be bled each year from business by cutting tax relief and subsidies is preposterous, and if he has any sense he will soon toss these wild proposals into the dustbin.

As a contented user of state-owned railways in Switzerland and France, I cannot work myself into a lather by threats to nationalise Britain’s railways, but a wholesale attack on swathes of industry and the City of London would be futile.

 

From what we have seen so far, it would be courting fate to let Mr Corbyn and his Jacobins get their hands on central bank financing. It would be safer if such a high-risk experiment – should it prove necessary – were entrusted to a blue-chip reactionary, and were discretely slipped through under a different guise. We could call it “nominal GDP management” to avoid frightening the horses.

 

One suspects that Mr Corbyn’s visceral hostility to market capitalism runs so deeply through his political make-up that he may never be able to overcome his Proudhonist urges and mount a credible economic challenge.”

Yet Evans-Pritchard ends the article by reiterating his support for People’s QE:

“But he [Corbyn] is right that investment levels in Britain are woefully low by the standards of OECD peers, an underlying cause of our chronic account deficit, now the worst in the developed world at 6pc of GDP.

 

If the private sector will not rise to the challenge, it is up to the state to take on the responsibility, a duty advocated by none other than Adam Smith.

 

And his instincts on monetary policy are essentially correct. QE as we know it is dead. It is an urgent national imperative to craft a radically new form before the next crisis hits.”