People's QE and Corbyn’s QE
Politicians can be adept at co-opting attractive sounding terms to
their own cause, even when they distort their meaning while doing so.
Osborne announced what was in reality a partial but large increase in
the minimum wage, but he called it a ‘living wage’. This was
especially devious, as calculations of the actual
living
wage
take into account the tax credits that Osborne was at the same time
cutting.
Is Labour leadership contender Jeremy Corbyn’s ‘Peoples
QE’
an example of the same thing? It is certainly true that the way that
some
macroeconomists,
including
myself,
have used the term is different from Corbyn’s idea. For us Peoples
QE is just another term for helicopter money. Helicopter money was a
term first used by that well known radical Milton Friedman. It
involves
the central bank creating money, and distributing it directly to the
people by some means. It is a sure fire way [1] for the central bank to
boost demand: what economists sometimes call a money financed fiscal
stimulus.
The idea has been recently revived, most prominently
in the UK by Adair
Turner,
because of the failure of conventional monetary policy (changing
interest rates) to bring a quick end to the Great Recession, which in
turn is because governments were undertaking fiscal austerity (a bond
financed fiscal contraction) rather than fiscal stimulus. In contrast central banks in Japan, the
US and UK, and now the Eurozone, have been creating money to buy
financial assets (mainly government debt), which is called
Quantitative Easing (QE). Hence the term People’s QE for helicopter
money: instead of the central bank creating money to buy assets, it
creates money and gives it to the people.
The genesis
of Corbyn’s QE seems rather different. Corbyn adviser Richard
Murphy had previously suggested
what he called a Green Infrastructure QE, which is that a “new [QE]
programme should buy the new debt that will be issued in the form of
bonds by the Green Investment Bank to fund sustainable energy, local
authorities to pay for new houses, NHS trusts to build new hospitals
and education authorities to build schools.”
This in turn is related to two ideas: first a near universal view
among macroeconomists that public sector investment in infrastructure
should be rising not falling when interest rates are low and labour
is cheap, and second that a National Investment Bank (NIB) might be useful
in helping to encourage private sector investment. (See, for example,
the recommendations
of the LSE growth commission.)
The main difference between helicopter money and Corbyn’s QE
therefore seems to be where the money created by the central bank
goes: to individuals in the form of a cheque from the central bank,
or to financing investment projects. I think that is wrong, and to
see why we need to ask an obvious question: what is this policy
innovation designed to achieve. I think it is here that confusion has
arisen.
As I noted above, the idea behind helicopter money is to provide a
tool for the central bank to use when interest rate changes are no
longer possible or effective. With an independent central bank, that
means that they, not the government, get to decide when helicopter
money happens. In contrast, if your goal is to increase either
public or private investment (or both) for a prolonged period, then
its timing and amount should be something the government decides.
While QE is hopefully going to be something that is unusual and rare,
the goal of an investment bank is generally thought to be more long
term, and not something that only happens in severe recessions.
For that reason, Corbyn’s QE looks like one of those ideas that is
superficially attractive because it seems to kill two birds with one
stone, but on reflection turns out to be a bad idea. If we want to
keep an independent central bank we do not want the government
putting the bank under pressure to do QE because the government wants
more investment, and if that does not happen we do not want the
central bank deciding whether extra investment happens. Indeed some
of those who dislike the idea of helicopter money have already been
using
Corbyn’s QE to say ‘I told you helicopter money was a slippery
slope that would lead to the end of central bank independence’.
However I think it is unfair and unproductive to leave it there. Suppose that a NIB is created, not on the back of QE but
using more conventional forms of finance. (If the government wants to
encourage it, just directly subsidise that finance with conventional
borrowing. Don’t be put off doing so by deficit fetishism.) Suppose
we also like the concept of helicopter money - not for now, but for
the next time interest rates hit their lower bound and the central
bank wants more stimulus. In those circumstances, it might well make
sense for helicopter money to be used not only to send cheques to
individuals, but also to bring forward investment financed by
the NIB, or public sector investment financed directly by the state.
If those investment projects could get off the ground quickly, and
crucially would not have happened for some time otherwise, then what
I have elsewhere described
as ‘democratic helicopter money’ would make sense. [2] This is
because investment that also boosts the supply side is likely to be a
far more effective form of stimulus than cheques posted to
individuals.
So one day, this form of Corbyn’s QE could happen. But we need to
get the idea of helicopter money, and the need for public investment
and a National Investment Bank, accepted in their own right
first. Putting the two ideas together right now is misconceived, and
is in danger of discrediting two potentially good ideas.
