Labour leadership hopeful Jeremy Corbyn has a controversial plan to boost the economy by printing money to pay for infrastructure. Would it work? Simon Wilson investigates.
What is the ‘people’s QE’?
It’s a plan for the next Labour government to reactivate the Bank of England’s (BoE) electronic printing presses (which pumped £375bn into the UK between 2009 and 2012 via quantitative easing, or QE) and boost the economy by creating money to invest in infrastructure. It’s part of what the likely next Labour leader, Jeremy Corbyn, sees as a necessary “rebalancing away from finance towards the high-growth, sustainable sectors of the future”.
In his campaign presentation on the economy a few weeks ago, Corbyn suggested giving the BoE “a new mandate to upgrade our economy to invest in new large-scale housing, energy, transport and digital projects: QE for people instead of banks”. The plan is based on proposals from Corbyn’s main economic adviser, tax campaigner Richard Murphy.
It would involve setting up a new national investment bank, which would issue debt that the BoE would buy using printed money. Other bodies, such as a green investment bank, local authorities, health trusts and similar agencies, would also create and issue debt in a similar manner.
Who’s in favour?
The Financial Times’ Matthew C Klein has written a blog arguing, with caveats, that the core idea is sound. Klein argues that to date QE hasn’t proved inflationary, and that even the BoE admits most of the benefits have accrued to the wealthy, rather than wider society.
“People’s QE” – which some object to because it amounts to the government using the central bank to finance its spending – would do nothing to undermine central bank independence, as this independence is just a polite fiction.
So why hasn’t it been tried before?
Murphy suggests that this form of QE is only now being considered because “money has only recently been properly understood for the first time”. He seems to believe that advances made in the subfield of economics known as “modern monetary theory” (MMT) make people’s QE feasible. (Crudely, adherents of MMT hold that governments with the power to issue their own currencies will always be solvent, and that inflation is caused primarily by resource constraints, rather than monetary growth.)
By contrast, most other economists, commentators and politicians – Labour and Conservative – view people’s QE as having obviously dangerous inflationary consequences.
Why is that?
It would fatally compromise the BoE’s standing on global credit markets. As Robert Peston put it in his BBC blog, “the lore of central banks – which, rightly or wrongly is almost universally accepted by investors – says that central banks should only look at whether there is too much or too little money in the economy… and not at narrower questions, such as whether there are enough roads or houses being built in Britain”.
If markets believe the BoE is no longer exercising judicious restraint in its creation of new money, and is instead the de-facto vehicle for funding politically popular projects, sterling would weaken and inflation rise.
By how much?
That’s impossible to say. But even if we are not talking about Weimar Germany, there is little doubt that investors would conclude that the risk of investing in sterling and the UK had grown.
The cost of finance would rise along with inflation, with the perverse result that Corbyn’s aim of boosting infrastructure investment would be harder to achieve. As Peston concludes, the people’s QE only makes sense if you disregard significant macro-risks and believe that a state investment bank would make viable investments overlooked by the private sector.
As ex-BoE economist Tony Yates puts it, less temperately: “Any attempt to hijack the printing presses for general deficit financing… will wreck monetary policy”. That’s because “the next time the government fancies winning an election by promising grand public works schemes, it will be expected that the BoE will print money to finance that” – leading to an inflationary spiral. “Corbyn’s QE is the first step along the road to undermining the social usefulness of money.”
Could “QE for the people” actually work?
• QE since 2009 has not so far proved inflationary in the UK or other nations that have tried it. QE for the people wouldn’t either.
• Corbynomics isn’t just about QE. Higher taxes might hold inflation in check, as might disinflation in the euro area.
• The pace of investment could be adjusted according to the condition of the economy as needed.
• Corbyn’s idea is illegal under EU law, because it risks runaway inflation, debauching the currency, and crashing the economy.
• If the government wants to spend more on infrastructure, it can do so by issuing debt in the normal way. QE is not necessary.
• “QE for the people” is just populist sloganising, built on false premises about the nature, purpose and impact of “ordinary” QE.