Wednesday, 24 September 2014

Positive Money’s Money Creation Committee solves a dilemma.

As Tejvan Pettinger righly points out in an article entitled “Budget Deficit Targets”, the main advantage of budget deficit reduction targets is that they help stop politicians behaving irresponsibly. (He lists various forms of irresponsibility under his heading “Benefits of budget deficit targets”). And for the benefit of any readers not sure what types of irresponsibility I’m referring to, a classic one is borrowing so as to fund public spending rather than collecting taxes to fund such expenditure. The latter wheeze (as David Hume pointed out over 200 years ago) helps incumbent politicians ingratiate themselves with voters.

But as Pettinger also correctly points out, the main disadvantage of strict targets is that they can result in tax increases / spending cuts at a time that may not appropriate for the economy. A dilemma.

Well there’s a simple solution to that dilemma: take all decisions on stimulus out of the hands of politicians while leaving LEGITIMATE POLITICAL decisions in the hands of the electorate and politicians – that’s “political decisions” like what proportion of GDP should be allocated to public spending and how that should be split between education, defence, etc.

And that’s exactly what Positive Money’s Money Creation Committee achieves.
Moreover, taking all decisions on stimulus out of the hands of politicians actually just enhances or extends the advantages that are gained from giving the central bank a measure of independence (which amounts to removing from politicians some of their say over stimulus). That is, bond markets always lend at a lower rate to a country with a relatively independent central bank than to one with a central bank substantially under the control of politicians.

When the Bank of England gained independence in 1997, there was an instant fall in the rate at which the UK could borrow, plus the pound immediately rose relative to the Dollar and Euro which meant an instant standard of living increase for Brits.


  1. 1. In a democracy we don't need a committee of experts to "help stop politicians behaving irresponsibly".
    What is needed is sound persuasive arguments and political will. Are central bank economic "experts" well endowed with these qualities?

    2. How does money creation stimulate the economy if it is just QE piling up bank reserves at the central bank?
    It seems that you want a Fiscal Policy Committee rather than Money Creation Committee. Or maybe you prefer the term "Budget Deficit Committee"?
    So it is strange that you propose that the committee should this be located at the central bank. The job of the cb is to advise on and implement monetary policy, not fiscal policy. Fiscal policy is formulated at the Treasury, not at the cb.

    Happily there are already various expert committees who advise the Government on fiscal policy.
    So we don't need a new committee. And certainly not Positive Money.

    3. I agree with you that there is a strong case for Full Reserve banking. Positive Money didn't originate this idea and their version is very inferior, as Ralphanomics has often pointed out. However, this is a quite separate issue. There is no need for any new macroeconomics committee for Full Reserve banking to be introduced.

    1. Hi KK,

      Re your No.1, assuming politicians actually abide by “sound persuasive arguments”, then obviously we don’t need the committee of experts. But history shows that politicians often go for whatever makes them popular with voters in the short term, rather than what is sound. As to whether central bank economists are anywhere near omniscient, obviously they aren’t. But at least they’ve got decent qualifications in economics in contrast to which about 90% of politicians haven’t got past Ch 1 of an introductory economics text book.

      Re your No.2, I quite agree the Money Creation Committee should do some fiscal as well as monetary policy: that’s exactly what it does under PM’s proposals. That is, when the committee decides that £X of stimulus is needed over the next 6 months or whatever, it informs government of that decision, and it’s then up to politicians to spend that extra money on whatever they want (and/or cut taxes).

      Re the “location” of the committee, that is unimportant, as PM makes clear. It’s members can reside in and meet in the Shetland Islands for all I care. If the committee WERE LOCATED in the CB, then it would be taking decisions that a part fiscal and part monetary which would be a change from the purely monetary decisions taken by CB committees at the moment.

      I realise we already have a committee that advises on fiscal matters (the OBR). But having two quite separate organisations (the OBR and BOE MPC) doing the same job (deciding on stimulus) makes as much sense as having a car with two steering wheels each controlled by a husband and wife in the middle of marital breakdown. Put another way, I don’t see the point of separating fiscal and monetary. Put a third way, I favour merging the BoE MPC and OBR into one committee: the MCC.

      Re your No.3, you’re right: full reserve and the question as to whether to merge fiscal and monetary policy are separate issues. I’m not sure I got that point right in my book (top of left hand column), so I’ll put that right in the 2nd edition if there is one.

      Re PM not “originating” the full reserve idea, they’re actually well aware of that and are quite open about that point.


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