Saturday, 21 March 2015
With the recession now largely over, discussing stimulatory measures is no longer of any IMMEDIATE practical significance. However, many of the THEORETICAL questions surrounding stimulus are still not settled, and the paragraphs below are concerned with some of those theoretical points.
Printing money and spending it on infrastructure, renewables, etc boosts GDP by more than printing money and buying government debt (conventional QE). That has induced large numbers of less than entirely clued up folk to conclude that the latter is preferable to the former.
There is a flaw in that argument, namely that it assumes there is some sort of limit to the amount of money that can be printed. Therefor we have to choose between the above two options. (Incidentally when I say “printed”, I don’t of course mean literally “printed” as in turning out £10 notes: I mean “create new money” in the way that at least 90% of new money is created nowadays (by central or commercial banks), namely via book keeping entries).
There is actually NO LIMIT to the amount of money that can be printed / created. To take a silly example, if it became fashionable to decorate one’s living room with a modern art exhibit that consisted of £1bn of £10 notes stacked inside a glass cage (the sort of thing that might actually win you the Turner Prize), there’d be no harm in printing trillions of pounds of £10 notes and distributing them to all and sundry so as to satisfy demand for the above modern art. Of course there’d have to be some way of ensuring the £10 notes didn’t actually get spent. But let’s assume that problem can be solved.
The above modern art would have almost no effect on aggregate demand or jobs (though a few more people would be employed making paper and printing £10 notes.)
And something similar applies to conventional QE. That is, conventional QE is widely regarded (I think rightly) as not having a HUGE stimulatory or “job creating” effect. Thus if large amounts of money are printed and used to effect conventional QE, that DOES NOT STOP further amounts being printed and used to fund Green QE or some other form of stimulus which brings more jobs per pound of “printing”. Put another way, the merits of conventional QE and Green QE should be considered SEPARATELY: they should not be seen as alternatives.
In fact I set out some ideas on the pros and cons of conventional QE here recently. And concluded the conventional QE was in fact justified, even though the employment creating effects are not spectacular.
As to Green QE, the fact that the phrase “Green QE” includes the word “green” attracts large numbers of woolly minded individuals, as does any fashionable word.
The truth is that the decision as to whether to implement more green investment is almost ENTIRELY SEPARATE from the question as to whether more stimulus is required.
That is, if a particular investment (green or otherwise) makes sense, it should go ahead even if the economy is at capacity (aka full employment). Of course, assuming an economy IS AT capacity, then demand will have to be restrained in some way (e.g. via tax or borrowing) so as to make room for the investment spending. But is not an argument AGAINST that investment spending.
There’s an awful lot of hot air and twaddle talked about “green QE”. First, advocates of green QE tend not to get the point that green QE and conventional QE are not alternatives: i.e. we can do BOTH.
Second, investment spending (including green investment) has nothing to do with escaping recessions. That’s first because if an investment makes sense (from the economic and environmental perspective) it should go ahead EVEN IF the country is NOT IN recession. Second, investments (particularly infrastructure investments) are a poor way of escaping recessions. Reason is that they normally take YEARS to get going, plus the relevant spending goes on for YEARS, which means that infrastructure spending is as likely to stoke the next boom as to cure the current recession.
Of course I’ve made the latter point dozens of times before, but unfortunately the only way to get a message across to 90% of the human race is to repeat the message ad nausiam.