What is QE for the people?
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'?
In his campaign presentationon the economy a few weeks ago, Corbynsuggested giving the BoE "a new mandateto upgrade our economy to invest in newlarge-scale housing, energy, transport anddigital projects: QE for people instead ofbanks". The plan is based on proposalsfrom Corbyn's main economic adviser,tax campaigner Richard Murphy.
It would involve setting up a newnational investment bank, which would issue debt that the BoEwould buy using printed money. Other bodies, such as a greeninvestment bank, local authorities, health trusts and similaragencies, would also create and issue debt in a similar manner.
Who's in favour?
"People's QE" which some object tobecause it amounts to the government using the central bank tofinance its spending would do nothing to undermine centralbank independence, as this independence is just a polite fiction.
So why hasn't it been tried before?
By contrast, mostother economists, commentators andpoliticians Labour and Conservative view people's QE as having obviouslydangerous inflationary consequences.
Why is that?
If markets believe the BoE isno longer exercising judicious restraint in its creation of newmoney, and is instead the de-facto vehicle for funding politicallypopular projects, sterling would weaken and inflation rise.
By how much?
The cost of finance would rise along with inflation, withthe perverse result that Corbyn's aim of boosting infrastructureinvestment would be harder to achieve. As Peston concludes,the people's QE only makes sense if you disregard significantmacro-risks and believe that a state investment bank wouldmake 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 deficitfinancing... will wreck monetary policy". That's because "thenext time the government fancies winning an election bypromising grand public works schemes, it will be expectedthat the BoE will print money to finance that" leading to aninflationary spiral. "Corbyn's QE is the first step along the roadto undermining the social usefulness of money."
Could "QE for the people" actually work?
Corbynomics isn't just about QE. Higher taxes might holdinflation in check, as might disinflation in the euro area.
The pace of investment could be adjusted according to thecondition of the economy as needed.
If the government wants to spend more on infrastructure, it cando so by issuing debt in the normal way. QE is not necessary.
"QE for the people" is just populist sloganising, built on falsepremises about the nature, purpose and impact of "ordinary" QE.