Tuesday, 25 August 2015

This work deserves a Nobel Prize.

To see why, let’s compare the basic ideas in the above work to similar and competing ideas which have subsequently appeared, and which are nonsense by comparison. One of those competing ideas is the Corbyn / Murphy “peoples’ QE” idea, namely that the state should print money and spend it on infrastructure. For more on the latter idea, see for example here, here or here.

The basic ideas in the work pictured above are thus.

1.  In a recession, the state should create or “print” extra money (i.e. base money) and spend it, and/or cut taxes. That idea incidentally also seems to be favored by most advocates of Modern Monetary Theory. Plus Keynes advocated the idea in the 1930s, as did Milton Friedman after WWII.

2. As to WHO DECIDES how much new money to create, that’s decided by some committee of independent economists. In the case of the UK, the existing Bank of England Monetary Policy Committee would do. Indeed, the BoE MPC already takes very much that sort of decision: that is, it periodically decides how much stimulus is suitable.

3. As to how that new money is allocated, that is an obviously POLITICAL decision, and should be left to politicians and the electorate.

4. The above work also advocates full reserve banking. But that can be ignored because it's a separate issue. That is, the latter three points could perfectly well be put into effect without full reserve banking.

Peoples’ QE.

Now let’s compare that to PQE. Under PQE, the state creates new money and spends the money mainly on infrastructure. And that’s it.

Well the first blatantly obvious flaw there is that the amount of new money that should be created and spent depends on whether stimulus is actually needed!!!! That is, if the economy is booming, then little or no stimulus is needed.

However, Jeremy Corbyn and  Richard Murphy, the main advocates of PQE, seem to be oblivious of that point.

Second, “print and spend” is stimulatory. Now if P&S is concentrated on infrastructure, then relevant infrastructure projects will contract dramatically, or even grind to a complete halt in years when little or no stimulus is needed. Barmy.

Conclusion: Corbyn and Murphy are intellectual pygmies compared to the authors of the work pictured above. Put another way “peoples’ QE” is nonsense.

Another competing idea.

This idea is that the central bank should have the power to distribute new money to every adult in the country with a view to dealing with recessions. That idea is advocated by Simon Wren-Lewis (Oxford economics prof) and Mark Blyth (professor of international political economy at Brown University).

Well the problem with that idea is that it ASSUMES that stimulus should take the form of extra PRIVATE spending, which clashes with the fact that a left of centre government would probably want to a decent chunk of any stimulus devoted to extra PUBLIC spending.

Moreover, if that “distribute to every adult” idea was implemented, a left of centre government could easily collar the extra money for public spending purposes, if it so choose. All such a government would need to do is announce loud and clear that it intended taxing the extra money away from households and spending it on infrastructure, education or whatever.

And finally….

The only real problem with the ideas in the work pictured above is that it probably wouldn’t work in the US. Reason is that as soon as Congress is allowed to spend more money net of tax, it would spend a full 12 months quarreling over how to spend it, or whether to cut taxes. In contrast in the UK, VAT was adjusted at the flick of a switch during the recent crisis.

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