Friday, 14 August 2015

Tony Yates thinks “print and spend” would be inflationary.

Tony Yates (economics prof in Birmingham, UK) thinks “print and spend” (e.g. a la Corbyn / Murphy) would be inflationary.

Let’s examine his reasons.

The first major weakness in the idea that “print and spend” is necessarily inflationary is that we’ve actually implemented print and spend BIG TIME over the last few years, and excess inflation is nowhere to be seen.

That is, we’ve implemented fiscal stimulus and followed that with QE. And that all nets out to “the state prints money and spends it”. (Fiscal stimulus equals “government borrows £X and spends it and gives £X of bonds to creditors. QE = “the state prints £X and buys back the bonds”. That all nets out to “the state prints £X and spends it”.)

Politicians and the printing press.

One reason Yates gives for thinking print and spend would be inflationary is that politicians would be tempted to spend too much with a view to ingratiating themselves with voters particularly just before elections. As he puts it here:

“One of the reasons I am against using helicopter money as a counter-cyclical monetary policy tool is that, once society gets a taste for it used in these circumstances, there will be pressure to use it for acyclical purposes, financing whatever might win an election.”

Well the simple answer to that point is that there is just as much temptation for politicians to use EXISTING or OTHER forms of stimulus to organise a pre-election boom. By “other forms of stimulus” I mean interest rate cuts, budget deficits, QE, etc.

But we manage to keep the latter problem under control, don’t we children? And how do we do it? Well one way is to give the central bank a big say or the final say on the size of any stimulus package, which is exactly the arrangement in the US, and UK and various other countries. That is, the central bank has control of interest rates, which is a not bad tool to raising or lowering demand (though I’m not WILDLY in favour of it). That is, the central bank has the power to counteract, if not totally nullify what it sees as excess or deficient demand brought about by the fiscal authorities, i.e. politicians.

And as long as the central bank has that power, then the  pre-election boom problem is ameliorated if not totally abolished.

Now EXACTLY AND PRECISELY THE SAME arrangement can be implemented in a regime where print and spend is the main stimulatory tool. That is, the central bank can be given the job of determining the amount of extra money to be printed. And where that’s the case, there shouldn’t be any pre-election booms.

And what do you know? That arrangement (i.e. where it’s a central bank committee or some similar committee that determines the amount to be printed) is exactly the arrangement advocated by Positive Money, the New Economics Foundation and
Prof Richard Werner in their submission to Vickers.

Note that the fact that a CB committee determines the TOTAL AMOUNT of stimulus does not, repeat not, mean that that committee decides strictly political matters, like how printed money is allocated to different government departments. That distinction between economics and politics is clearly set out in the above submission to Vickers.

Incidentally another relevant and strictly political point is the question as to what proportion of GDP should be allocated to public spending. Again, the above submission to Vickers leaves that strictly to politicians and the electorate. And that means (as the submission points out) that a right wing government might choose to “print and cut taxes” rather than “print and spend” on infrastructure or whatever.

And finally, the above is not to suggest that Corbyn and Murphy are totally clued up on this issue: they're both new to the subject and haven't got a good grasp of it yet.

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