Monday, 3 August 2015

Horrors: British politician writes article about economics.

And it’s not just any old politician: it’s Chris Leslie, the Labour Party’s economics spokesman or “shadow chancellor”. His article is in the New Statesman.

After some introductory waffle, he says, “Take, for example, the proposal for a ‘People’s Quantitative Easing’ where the Bank of England is instructed to use QE to directly finance infrastructure and public service projects. At one level it sounds so easy – if there’s a shortage of money, just print some more! But ending the Bank of England’s independence…”

Hang on. Why does giving the central bank the right to print money and let government spend it constitute “ending the BoE’s independence”? It doesn’t!!!!!

Indeed some of the of keenest proponents of the above “print and spend” idea, (e.g. Positive Money and the New Economics Foundation) SPECIFICALLY advocate that the if the above print and spend policy is implemented, the central bank should REMAIN independent.

That’s not to say the central bank should have the right to make obviously political decisions, like how much is spent on health, roads or education. But it SHOULD be independent in the sense of deciding how much stimulus is suitable. But central banks already have a dominant say on the latter point, so the likes of PM and the NEF are not advocating anything the slightest bit revolutionary there.

Chris Leslie continues, “But ending the Bank of England’s independence and reversing one of Labour’s most enduringly successful reforms would risk a major hike in lending rates, taking money away from schools and hospitals as debt servicing becomes more expensive.”

Now why on Earth does “print and spend” necessarily result in higher interest rates? Obviously if the amount of print and spend was excessive, then one way of countering that excess would be to raise interest rates. But it’s a bit daft to implement EXCESSIVE stimulus via print and spend and than counter that with higher interest rates.

Assuming the central bank is half competent, it won’t do that.

Next, Chris Leslie says, “And resorting to the printing press to artificially create money for public expenditure purposes would be a major distortion for the economy. Such a new monetarism would spark higher inflation and make it harder for those on lower incomes to afford goods and services…”.

First, who said that new money necessarily goes to extra “public expenditure”? As PM and NEF make clear, it’s up to the government of the day whether it wants to spend extra money on more public expenditure items, or whether it wants to spend it on tax cuts: which would result in more PRIVATE spending.

Second, there’s Leslie’s idea that money printing is “distortionary”. Quite the reverse: what IS DISTORTIONARY is the alternative method of adjusting stimulus, i.e. interest rate changes. Reason is that those changes affect only a limited proportion of the economy: those households and firms which are significantly dependent on variable rate loans. In contrast, those with no loans at all, or with loans where the rate of interest is fixed for several years hence, are not affected.

You might as well boost the economy by doing helicopter drops just on households where the head of household has red or blonde hair.

As for the rest of Chris Leslie’s article, I can’t be bothered with it. He obviously hasn’t a clue.


  1. Your post seems to make one initial assumption: A helicopter drop of money, properly focused, will solve many of the problems of any economy.

    I notice that you are speaking of only ONE helicopter drop.

    In a similar way, the BofE article seems spring from an assumed base of balanced spending where all entities have balanced budgets. I think we can all agree that from a balanced budget beginning, a helicopter drop would increase spending and likely increase inflation.

    On the other hand, what if we begin our analysis from 40 years of consecutive helicopter drops? I think this is a more realistic starting assumption for the current world.

    Springing from a 40 year base of stimulation, our world economic problem is that we have ADJUSTED to annual helicopter drops. Now the old, routine, drop is simply not enough. You are calling for MUCH LARGER annual routine drops.

    1. I agree with the basic Positive Money stance which is that stimulus when needed should come in the form of “print and spend” or “print and cut taxes” in the case of a right of centre government. If the amount needed is on an unprecedented scale, as it was at the height of the recent crisis, so be it. Conversely, there will be the odd year in which the private sector gets too confident and spends too much, in which case the state will need to run a surplus, i.e. raise taxes and “unprint” the money collected.

      MMTers seem to think much the same.

      Re your last para, I don’t see how the private sector will ever “adjust” to print and spend. Print and spend increases the amount of money in household bank accounts (and firm’s bank accounts). Those entities are not going to simply let that stock of money accumulate for ever. At some point, each household will spot that it has more cash than it really needs and will blow some of it.


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