Friday, 7 August 2015
Peoples’ QE and mistakes by the chattering classes.
Apart from interest rate cuts, budget deficits and the usual forms of stimulus, there is another possible form of stimulus that hasn’t been put into effect to date (at least not in an explicit and overt way), and that’s to simply have the state print money and spend it in a recession. One currently fashionable name for that policy is “peoples’ QE” (PQE).
Unbeknown to most economists (far as I know) that idea is not new: Keynes said in the 1930s that “print and spend” would be a perfectly viable form of stimulus. However, the idea has gained additional attention in the UK of late because one of the runners for the Labour Party leadership, Jeremy Corbyn and his adviser, Richard Murphy advocate the idea.
That idea, or something very similar, was also advocated by Positive Money, the New Economics Foundation and Prof Richard Werner in their submission to the Vickers commission a few years ago. Incidentally, the authors of that submission now claim the ideas in it are a bit dated. Actually I beg to differ: that submission strikes me as a brilliant piece of work, and while the authors have doubtless updated their ideas in some ways, the submission basically has stood the test of time.
One slight difference between PQE Corbyn style and PM & Co’s equivalent is that being on the political left, Corbyn presumably rules out using extra money to cut taxes, whereas PM & Co aim to be politically neutral: that is they accept that a right of centre government might want to implement stimulus via tax cuts rather than via extra public spending.
Unfortunately the above “Johnny come latelies” (Corbyn, Murphy, etc) make a couple of mistakes in connection with PQE which PM & Co’s submission warned against and managed to avoid, and the purpose of this article is to deal with those mistakes.
Gyrations in public spending.
One mistake by Corbyn, Murphy & Co is one I’ve pointed out several times, but to little avail. It’s thus.
“Print and spend” is a form of stimulus, and the amount of stimulus needed varies greatly from one year to the next. Indeed, occasionally no stimulus is needed at all. That means that if infrastructure spending is tied to the amount of print and spend implemented, then the amount spent on infrastructure (or other types of public spending) will gyrate from year to year by far more than makes sense. Indeed, specific infrastructure projects might come to a halt in years when no stimulus is needed, which would be absurd.
In short, PQE in that it consists of printing money and spending it on one area like infrastructure makes no sense. Thus all forms of public spending should be funded basically in the normal way, that is via tax and government borrowing. While in years when a decent dollop of stimulus is needed, MOST FORMS OF public spending, not just infrastructure, should be given a boost from “print and spend” – that’s assuming the government of the day prefers extra public spending to tax cuts.
Unfortunately the latter very simple point seems to be beyond the comprehension of Richard Murphy. As Tim Worstall has repeatedly pointed out, Murphy’s mouth is considerably bigger than his brain. E.g. see here and here.
Helicopter drops should boost just private, not public spending?
One variation on PQE is to print money and simply hand it out to households, a policy advocated by Eric Lonergan. As he puts it, “The smart version of “helicopter drops” involves equal cash transfers from the central bank to the household sector subject to its inflation target.”
I have doubts about that, and for the following reasons.
The decision to boost just private spending and not public spending in a recession contains a blatantly POLITICAL element: that decision boosts private spending as a proportion of GDP. And it is very definitely not the job of the central bank to change the proportion of GDP going to public and private sectors.
PM & Co’s submission didn’t make that mistake. That is, under their system, a central bank committee (or some similar committee of economists) decides on the overall SIZE of a stimulus package, while politicians and the electorate decide how that stimulus is allocated (to public versus private sector, and if it’s to the public sector, which government departments etc get the money).
As for Eric Lonergan’s REASONS for favoring households rather than public spending, I’m not impressed. One of his reasons (set out in an article by Eric Lonergan and Mark Blyth) is that it allegedly takes too much time for politicians to decide how to implement stimulus.
Well that idea was flatly contradicted by what happened in the recent recession in the UK where VAT was cut and then raised all without the express approval of parliament. In other words as long as parliament gives PRIOR CONSENT TO presidents, prime ministers and other senior politicians having some leeway in dealing with a recession, then those senior politicians can implement a boost to sundry forms of government spending (or adjust taxes) at the drop of a hat.
Lonergan and Blyth’s point about politicians being an obstacle to spending and tax decisions may well be a problem at the moment in the US, where Congress resembles a monkey house with two gangs of monkeys fighting for supremacy. But in most European countries, the above “prior consent” would be no problem at all for 95% of politicians once the logic is explained to them.
Moreover, in view of the above mentioned need to avoid excessive gyrations in the amounts spent on particular areas of public sector activity, the above prior consent would simply be consent to adjusting more or less ALL FORMS of public spending (and possibly tax as well) by about the same amount. And that ipso facto does not amount to a dramatic change to the shape of the economy.
Positive Money and PM’s above mentioned co-authors got this peoples’ QE stuff right first time. In contrast, the “Johnny come latelies” are making a mess of it .