Friday, 9 February 2018
Silly arguments against People’s QE.
Let’s start with an argument put by Nick Rowe, associate professor of economics at Carleton University, Ottawa. His claim that Peoples’ QE (PQE) doesn’t work is in this article at the “Canadian Worthwhile Initiative” blog entitled “Fiscal Offset of Silly QE”. The crucial part of his argument is this (his item No.2):
“Suppose the government of Canada normally buys 10 new Canadian bridges at $1 billion each. Then the Bank of Canada prints $3 billion, and instead of lending it to the government (buying government bonds) like it normally does, it buys 3 new Canadian bridges. The government will now buy 7 new bridges instead of 10. The net result on building of bridges, and everything else, is zero. The only difference is that the Bank of Canada is doing part of the government's shopping for it.”
Well now, it just ain’t true to say that the Bank of Canada (or any other central bank) “normally prints $3billion and buys government bonds”. The latter exercise is known as “QE” which is a stimulatory measure only implemented in a recession, i.e. when a large increase in demand is required. So Rowe is not doing the correct comparison, i.e. he is not comparing a “no stimulus” scenario to an “allegedly stimulatory scenario thanks to PQE”. That is, he is comparing two methods of effecting stimulus. His “discovery” that there is not much difference between the two is thus hardly surprising.
Second, (and perhaps I’m just repeating the latter point) Rowe assumes a total spend of $10bn in each case. Well the whole point of PQE is that relevant spending is additional to what would normally have taken place. I.e. come a recession, government says “Instead of building ten bridges, let’s build eleven, plus we’ll spend more on a range of other items, and/or we’ll cut taxes, and that will all be funded with freshly printed money.”
A second anti-PQE argument appears in a Guardian article by Tony Yates (economics prof at Birmingham University). The article is entitled: “Corbyn's QE for the people jeopardises the Bank of England's independence.”
The first answer to his “jeopardises the BoE’s independence” is: “what if it does?” The BoE was not independent before Gordon Brown gave it independence in 1997. Was the sky constantly falling in prior to 1997? Not that I remember.
I do actually favour central bank independence (or should I say “nominal independence”, because the exact extent of so called “central bank independence” is always debatable). But as intimated above, an independent central bank regime and a non-independent central bank regime do not seem to be Earth shatteringly different.
Second (as explained by Positive Money and co-authors) if keeping politicians away from the printing press is seen as desirable, an independent central bank is not the only way of doing that. An alternative is some sort of independent committee of economists (which may or may not be based at the central bank) who determine the AMOUNT of stimulus (e.g. PQE).
There is plenty more nonsense in Yates’s article and I don’t have time for all of it. But here’s one more bit of nonsense.
Yates’s third paragraph reads “On the face of it, this (i.e. PQE) appears to get rid of the nasty business of having to finance worthy stuff by running deficits, and later, even worse, paying back the debt with taxation revenue.” Now wait a moment: having the central bank print money with the government then spending that money (or in the Corbyn version, using that money to buy bonds) IS A DEFICIT!!!!!!! I.e. Yates’s claim that PQE Corbyn style might dispose of the deficit is nonsense.
A third anti-PQE argument appears in a Forbes article by Tim Worstall entitled “Peoples' QE Is Also Silly QE And Won't Work”.
Worstall cites an argument which Scott Sumner trots out ad nausiam. Sumner is an economist who teaches at Bentley University in Waltham, Massachusetts. Sumner’s argument is that fiscal stimulus (and PQE is at least to some extent a form of fiscal stimulus) is no use because a central bank will just negate that (with interest rate rises) if it thinks the effects are too inflationary.
Well the simple answer to that is that if the central bank DOESN’T think a dose of fiscal stimulus is excessive, then it won’t negate it! Doh!
I.e. Sumner’s argument is a bit like saying that a following wind won’t help an airliner cross the Atlantic because airliners normally aim for very precisely timed landing slots at their destination airport, so a following wind will just cause the pilot to power down the engines a bit.
For more on the nonsense that is monetary offset, see my article “Monetary offset is a joke”.
The moral is that economists often know lots about economics, but that is useless without a firm grasp of common sense.