Saturday, 22 August 2015

The best form of peoples’ QE.

“Peoples’ QE” is a currently fashionable term being used in the UK for a system under which the state prints money and spends it on infrastructure, and perhaps one or two other items.

The reason for the recent interest in PQE is that Jeremy Corbyn who is running for the leadership of the UK’s Labour Party has suggested the idea.

The best form of PQE was actually thought up a few years ago in a submission to Vickers by Prof Richard Werner, the New Economics Foundation and Positive Money. See p.10-12 of the submission. That system is superior to the Corbyn version for the following four reasons. (The latter three authors’ work will henceforth be referred to as the “submission”).

1. “Print and spend” (P&S) whether it is directed at infrastructure or anything else is stimulatory. Thus if infrastructure spending is tied to P&S, then in years when little or no stimulus is needed, infrastructure projects will grind to a halt or near halt. Barmy. And if Corbyn can’t see that he’s not fit to be prime minister, or even run a whelk stall. In contrast, PQE as proposed by the above submission does not envisage CONCENTRATING spending on any particular government department.

Incidentally Richard Murphy, Corbyn’s economic adviser also seems to be incapable of understanding the latter point. What the problem is, I don’t know. It’s a simple enough point.

2. Corbyn is on the political left, if not the far left, and as such he understandably wants to see stimulus money concentrated on more public spending rather than tax cuts. In fact the decision between public spending and tax cuts is purely POLITICAL: that is a right of centre government might prefer tax cuts, and there’s nothing wrong with that as long as the relevant government is democratically elected. PQE as proposed by the above submission allows for that “right wing” type of stimulus, whereas Corbyn’s system does not.

3. Under the submission, P&S isn't just used when interest rates are near zero: it REPLACES interest rate adjustments as the main method of adjusting aggregate demand. That’s for the very good reason that the empirical evidence is that interest rate adjustments just don’t work very well. Second, they are distortionary: initially (i.e before "trickle down" has an effect) they boost only households and firms with significant variable rate loans, not those with fixed rate loans or no loans at all. That’s also barmy.

And there is a third reason for abandoning interest rate adjustments (or perhaps just using them in emergencies). This point is perhaps debatable. But for what it’s worth, it is as follows.

In order to get interest rates up to a level where they can be periodically adjusted, the private sector (aka the rich) have to be supplied with an excess stock of state liabilities to the extent that the rich have to be paid interest in order to dissuade them from spending that stock. I.e. having taxpayers subsidise the rich is an inherent part of an interest rate adjustment system. Also barmy.

4. There are obvious “Mugabe” type risks involved in having the state print money and spend it. Under the system advocated in the above submission, those risks are no more than under the EXISTING system. Reason is that the existing Bank of England Monetary Policy Committee (or some similar committee of independent economists) would decide the AMOUNT of extra money to be printed, while politicians would decide on the way to allocate that money.

That’s no different to the EXISTING system in that under the existing system, the BoE MPC has the final say on stimulus: i.e. it can override what it sees as excess of deficient fiscal stimulus put into effect by the Treasury. In short, the submission sets out a very clear and robust system for avoiding the Mugabe problem. In contrast, Corbyn has not set out similar measure, far as I know.

Finally, note that while the above submission advocates full reserve banking, that’s not a reason to reject the author’s PQE system (if you don’t like full reserve). That is, the authors’ version of PQE can perfectly well be implemented under the EXISTING bank system (sometimes called “fractional reserve”).


  1. Surely Positive Money's proposals do depend on full reserve banking? Their plan supposes that MPC directly controls the money supply. That wouldn't be possible if banks were still able to create new money by making new loans (of money they don't have, i.e. what happens with fractional reserve banking). For the MPC to directly and accurately control the money supply, they would need to be the only body able to create new money, so full reserve banking would appear to be an integral part of these proposals, not just an optional add-on.

    1. I agree that “Positive Money's proposals do depend on full reserve banking”. But that doesn’t mean it’s impossible to implement parts of PM policy without other parts. In particular, I don’t see any big problems in implementing stimulus PQE style (i.e. having the state print money and spend it, and/or cut taxes) without at the same time implementing full reserve banking.


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