Tuesday, 11 August 2015
Flawed ideas on peoples’ QE.
There has been an upsurge in interest in the UK in the last week or two in the idea that the state should simply print money and spend it, and/or cut taxes when stimulus is needed, rather than BORROW money and spend it. E.g. see this article by Simon Wren-Lewis (Oxford economics prof). As Thomas Hirst put it in the opening sentence of his article published on 9th August, “Over the past few weeks there has been a lot of discussion on the topic of a People's Quantitative Easing …”
That increased interest is partly down to the fact that Jeremy Corbyn who is running for leadership of the Labour Party has endorsed the idea. Of course Corbyn being on the political left wants “print and spend” rather than “print and cut taxes” which is what a right wing politician might go for. But the basic principles behind the two versions of the idea are much the same.
I have a few quibbles with some of these recent articles, and the purpose of the paragraphs below is to deal with these.
The “print and spend” idea goes back a long way. Keynes advocated it in the 1930s – see 5th paragraph here. That’s the sentence starting “Individuals must be induced…” (2nd half of the 5th para). And Milton Friedman in a paper published in 1948 argued that (at least in peacetime) the only liability that the state should issue should be base money: i.e. he argued that governments should not issue interest yielding debt. See para starting “Under the proposal..”
In short, Friedman’s proposal was more extreme than Corbyn’s: Friedman advocated a total ban on “borrow and spend” and replacing it with “print and spend”, whereas Corby advocates just supplementing “borrow” with “print”.
Thomas Hirst and Tony Yates (economics prof in Birmingham, UK) seem to be worried about the fact that once printing starts, that’s the beginning of what Yates refers to as a “slippery slope” – leading at worst to full blown Mugabe type hyperinflation.
Well the solution to that problem was set by the three authors of this submission to the Vickers commission.
Their solution is to have the TOTAL AMOUNT of printing (i.e. total amount of stimulus) determined by some sort of central bank committee or some other committee of economists independent of government. Meanwhile, strictly POLITICAL matters, like what proportion of GDP is allocated to public spending remain (quite rightly) with politicians and the electorate.
And that’s actually very similar to the EXISTING system in that many central banks already have the final say in the size of any stimulus package: that is, they have to power to counteract any fiscal stimulus which the CB believes to be deficient or excessive. CBs do that by adjusting interest rates, QE, etc.
Of course it’s always possible that politicians would put pressure on CBs (especially just prior to elections) to allow too much printing. But by the same token, politicians can put pressure on CBs under the existing system to keep interest rates too low for too long.
Thus THERE IS NO REASON WHATSOEVER to think that the dangers of excess inflation are any more under “print and spend” than under the existing regime.
Moreover, we’ve actually implemented print and spend over the last few years in that we’ve implemented fiscal stimulus followed by QE. (Fiscal stimulus equals “government borrows £X, spends it back into the private sector and gives £X of bonds to creditors”. And QE equals “the state prints £X and buys the bonds back”. That nets out to “the state prints £X and spends it”.)
Another alleged problem to which Hirst refers is “highly uncertain estimates of the amount of available slack in the economy..”. Well that again is just as much a problem under the existing regime.
Full reserve / 100% reserve banking.
Incidentally, the above Friedman paper had something else in common with the above Vickers submission, namely that both works advocated full reserve banking: a system under which the only form of money is state issued money. That is, private banks are not allowed to create or “print” money.
As Friedman put it, “The particular proposal outlined below involves four main elements . . . . . 1, A reform of the monetary and banking system to eliminate both the private creation or destruction of money and discretionary control of the quantity of money by central bank authority. The private creation of money can perhaps best be eliminated by adopting the 100 per cent reserve proposal, thereby separating the depositary from the lending function of the banking system.”
Friedman repeated his advocacy of 100% reserve banking a decade later in his book “A Program for Monetary Stability” (Ch3, under the heading “How 100% Reserves Would Work”).
Moreover, it’s no coincidence that two works advocate a combination of “print and spend” and 100% reserve banking. Reason is that the two mesh nicely. That is, if (as under print and spend) the main or only form of stimulus is new money created by the state, that type of control of demand is more precise if private money creation is banned or curtailed as is the case with 100% reserve banking. Put another way, if private money creators cannot give us housing bubbles out of the blue, then gyrations in demand should be ameliorated.
The main difference between SW-L’s ideas on print and spend and the above submission’s is that SW-L claims that print and spend should only be used when interest rates are at or near zero (i.e. when interest rates can’t be cut any further). That is, SW-L is saying that interest rate adjustments are fine when rates are above zero.
In contrast, the above submission specifically criticises interest rate adjustments, and I agree with the authors there, i.e. I disagree with SW –L. Strikes me there are two weaknesses with interest rate adjustments. First there is decent empirical evidence that they are not very effective. In the words of Jamie Galbraith, “Firms invest when they can make money, not when interest rates are low”.