Thursday, 17 September 2015

“The Week” article on Peoples’ QE.



PQE is normally taken to be the idea that we print money and spend it on infrastructure, or mainly on infrastructure. (Though the extent to which the money is concentrated on infrastructure is unclear: the architect of PQE, Richard Murphy suggested recently on his blog that the money be spent on a relatively wide variety of items)

Compared to some of the wind and hot air exuded about PQE recently, this article in The Week by Ryan Cooper is concise and it gets several points about PQE right.

In particular this criticism of PQE is spot on:

“Corbyn's plan has a big disadvantage, however: There's no reason to think that infrastructure needs will match particularly well with economic downturns. Big projects usually take at least a year to plan, approve, and get started, while recessions can gather to full force over a few months.”

However, the article is wrong to argue that because infrastructure spending can’t suddenly be increased come a recession that therefor it’s necessarily better to simply print money and dish it out to households. There are three flaws in that argument as follows.

1. The fact that infrastructure spending can’t suddenly be increased is not a reason to assume other types of government spending can’t be increased fairly quickly. E.g. assuming there is a good availability of relevant sills, advertising for and hiring extra bureaucrats is something that can be done within six weeks at a rough guess. Ditto teachers and nurses. And a recession by definition is a situation where there tends to be a good availability of most (but not all) skills.

Also, as distinct from CAPITAL items like infrastructure, there’s nothing to stop government spending more on CURRENT consumption items (in addition to the above labour).

2. The decision as to whether to boost PUBLIC or PRIVATE spending is a  POLITICAL decision. Central banks should not take that decision. It’s appropriate for CBs to decide on the TOTAL AMOUNT of a stimulus package (whether it takes the form of printing money or not). CBs have committees of well qualified economists to do that job, so that “total amount” decision is a suitable one for CBs to take. (Not that they always get that decision right).

And what d’yer know? That split between political and “total amount” decisions is what’s involved in the system advocated by Positive Money and the New Economics Foundation. See p.10-12 here. (Note that while that work advocates full reserve banking, the decision as to whether to implement full reserve is actually SEPARATE from the above “political / total amount” split of responsibilities.

3. Simply dishing out money to households involves relying JUST ON a monetary effect. That is, there’s no fiscal effect. By that I mean that if government hires more bureaucrats, the simple fact of hiring those people creates jobs and that’s the fiscal effect. In contrast, a result of hiring them is that those bureaucrats then find more money in their bank accounts and are likely to spend some of it  - that’s a monetary effect.

And there is a fair amount of disagreement amongst economists as to which is the more powerful effect. So: it’s possible the monetary effect is relatively feeble, in which case relying on it would be unproductive. In short, when it comes to dealing with recessions, there’s much to be said for COMBINING the monetary and fiscal effect: i.e. print money and hire bureaucrats for example. That way, if either the monetary or the fiscal effect is relatively feeble, it doesn’t matter.


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