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 .


  1. As you mention, "Keynes said in the 1930s that “print and spend” would be a perfectly viable form of stimulus".
    So Positive Money and Co are merely “Johnny come latelies” in this respect.

    Proposals for Full Reserve Banking are even older.
    So again Positive Money and Co are merely “Johnny come latelies” in this respect.

    The only new idea of PM and Co is their proposal that the budget deficit should be decided by an unelected committee of economic "experts" at the Central Bank.
    However, the budget deficit is a partly political issue.
    And it is unclear why Central Bank "experts" would be more competent than a democratically accountable ministers advised by civil servants.
    Do you have crush on Janet Yellen? Or Alan Greenspan or Ben Bernanke?

    Even worse, the controversy about this PM proposal for an expansion in the powers of the Central Bank detracts from the merits of Full Reserve banking without PM's Central Bank committee.
    So it seems that Positive Money is one of the “Johnny come latelies” who are making a mess of it .

    1. Re full reserve, PM are very open about the fact that that idea was first thought up decades ago. As to whether PM literature refers to Keynes’s advocacy of “print and spend” in the 1930s, I’m not so sure.

      Re your claim that the deficit is partially a political issue, what are your reasons? The sole purpose of the deficit is to impart stimulus, and the question as to what the right amount of stimulus is, is PURELY TECHNICAL, far as I can see. That is why under both the existing system, and PM’s system, a central bank committee, or some similar committee of economists has the final say on the size of stimulus packages: that is, under the existing system if the CB thinks the deficit is excessive, it can counter that with an interest rate rise.

      In contrast, the question as to what proportion of GDP should be take by public spending is an obviously political one, as is the question as to how that total is split between governmnt departments. Under both PM’s system and the existing system, that decision is, quite rightly, in the hands of politicians.

      Next, you say “And it is unclear why Central Bank "experts" would be more competent than a democratically accountable ministers advised by civil servants.” The answer to that is that if the economics qualifications of the latter “civil servants” and CB experts are of the same standard, then there’s obviously no difference in “competence”. But there is a crucial difference between those two scenarios, namely that in one of them a POLITICIAN has a say on the size of the deficit, and we all know what politicians do with deficits / stimulus just before elections. In effect, that gives politicians access to the printing press, and it is widely accepted that that is dodgy.

      Finally, you say “the controversy about this PM proposal for an expansion in the powers of the Central Bank detracts from the merits of Full Reserve banking..”. To repeat what I said above, there is no real expansion of CB powers in that under both the existing system and PM’s, the CB has the final say on the size of stimulus packages. All the PM system does in effect is to dispose of a daft element in the existing system, namely that the Treasury has say on stimulus, but that can be overruled by the CB. As I’ve pointed out a dozen times on this blog, having two separate arms of government take the same decision makes as much sense as having a car with two steering wheels.

      Finally, please note I am not an official spokesperson for PM: indeed I think PM does go wrong on some points.

  2. Ralphonomics is by far the best and most vigorous blog in favour of Full Reserve Banking. Unfortunately the peculiar ideas of Positive Money sometimes intrude.
    However, I do appreciate that Ralphonomics is not an official mouthpiece for Positive Money.

    Regarding your response to my comment, let me make two points:
    1. Approaching full employment there is likely be a trade-off between more deficit stimulus and the risk of inflationary pressures.
    This choice is far from being " PURELY TECHNICAL" as you claim.
    Judgements regarding the risks and consequences of inflation versus the risks and miseries of unemployment are partly political matters, which are far well outside the competence of Central Bank economists .

    2. You misunderstand the existing relationships between the CB and Government in the UK and elsewhere.
    It is wildly incorrect to say "the CB has the final say on the size of stimulus packages".
    See Bill Mitchell: "The sham of central bank independence"

  3. Hi KK,

    Re your first point, I agree that how inflation is traded off against unemployment is a partially political question, but politicians have had their say on that, and what they’ve said is, “the Bank of England will aim for 2% inflation, though it will have leeway to go above and below that target when it thinks appropriate”. Thus politicians would contradict themselves if when inflation rises in year or two’s time that all of a sudden and on political grounds the UK will aim for 4% inflation.

    Re my claim that "the CB has the final say on the size of stimulus packages", I’m sticking to that claim. Reason is that politicians in the UK, US and elsewhere have quite clearly and explicitly given CBs that “final say”. Politicians DON’T HAVE TO give CBs that power or independence because ultimately power always lies with politicians. But the fact is that politicians have given CBs the ultimate responsibility for controlling inflation.


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