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’?

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?

Yes

• 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.

No

• 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.

  • The basic flaw in PQE is as follows.

    “Print and spend” is a form of stimulus. But in some years little or no stimulus is needed. Ergo if P&S is tied to infrastructure spending, then that spending will grind to a halt or near halt in years when little or no stimulus is needed. Daft. Ridiculous. Raving bonkers. Add your own expletives to taste.

    That point has been explained to Richard Murphy several times, but seems he doesn’t have the brain to get it.

    In contrast, if P&S money is spent more widely (perhaps even spent on tax cuts which is what a right of centre government would want to do) that would be more MMT compliant, and I have no objections to that. That would also comply with a submission to the Vickers Commission made by Prof Richard Werner, Positive Money and the New Economics Foundation. See:

    https://b.3cdn.net/nefoundation/3a4f0c195967cb202b_p2m6beqpy.pdf

    As for Peston’s claim that PQE would undermine the BoE’s standing, doubtless Corbyn and Murphy’s versions of PQE would indeed bring chaos and undermine the BoE and the pound sterling. However the version of PQE in the latter submission deals with that problem (quite rightly) by having the BoE (or some similar committee of economists) determine the AMOUNT printed and spent, while politicians decide how much goes who which government departments. That would control inflation.

  • Paul Garden

    I agree with Mr Musgrave that granting any government a licence to print money irrespective of the status of the broader money supply would be most unwise. The proposals put forward by Prof Werner, Positive Money, and the New Economics Foundation offer a much more considered solution to our economic woes.

    The key element of these proposals, however, is the reformation of the monetary system as a whole. At present, banks create new money when they make loans (and it is destroyed when loans are paid off). It is proposed that the right of banks to create money in this way be removed, effectively ending fractional reserve banking, and that government alone should have the right to create money. The general course of the economy would therefore no longer be determined by the banks’ self-interested lending decisions (leading to, among other things, unsustainable house price inflation), but would be guided instead by government in the broader interests of the people. Moreover, any new money created by government under this new regime would be entirely free of any associated debt, ending the enslavement of the real productive economy to the vampiric and largely unproductive banking sector.

    The implications of such a brave new world are explained in some detail in the link already provided by Mr Musgrave and copied here for convenience:

    https://b.3cdn.net/nefoundation/3a4f0c195967cb202b_p2m6beqpy.pdf

  • Richard Duncan

    QE Is Debt Cancellation: Watch Free Video explaining why.

    When a central bank creates money and buys a government bond, it is the same thing as cancelling that bond – so long as the central bank does not sell the bond and so long as it rolls it over when the bond matures. That means the United States, the UK, Japan and now the Eurozone have far less government debt than is generally understood. The more QE, the less government debt. This has important policy implications that the world cannot afford to ignore.

    Click on the link below to watch the Macro Watch video, QE Is Debt Cancellation:

    https://www.richardduncaneconomics.com/rd/wp-admin/post.php?post=3198&action=edit

  • Horiboyable .

    Labour have found the answer, we are going to print ourselves rich. Labour supporters will love it because they normally vote themselves rich. He is on a winner.

    • TheImprover

      I don’t think this policy is populist enough: they should also propose giving everyone a daily dose of amphetamines to keep us all happy, energetic and slim. All EXCELLENT policies – for a short period of time…

      • Horiboyable .

        It makes you wonder if he has ever read a history book in his life. These socialist must sit round all day reading Karl Marx material.

        • Oliver Thornton

          Oh no but its different this time…………

  • John Daulby

    How on earth would you pay for imported goods? Who would trade with an economy sustained by a printing press?