Monday, 30 November 2015

OMG: now it’s climate change QE.

Richard Murphy has thought of a new form of QE: yes – yet another.

First there was conventional QE (printing money and buying private sector assets, mainly government debt held by the private sector).

Then there was “Green Infrastructure QE”. Then there was Peoples’ QE.

And now – roll of drums – there’s “Climate QE for Paree”.  That’s a cute name: guaranteed to fool most people.

The first important point to note is that printing money and increasing public spending was first advocated (far as I know) by Keynes in the early 1930s. It would be nice if Murphy gave credit where credit is due and gave himself correspondingly less credit.

As for the idea that we should spend more on infrastructure and/or climate change related stuff, I’m all for that.  I’d like to see the price of petrol and diesel doubled tomorrow.

However, the idea that we should print money and spend that on infrastructure and/or global warming reduction confuses two issues as follows.

1. “Print and spend” is a method of imparting stimulus: desirable if the economy is at less than capacity, or put another way, if we don’t have full employment. Or put a third way, print and spend is desirable if unemployment is above NAIRU, but not otherwise.

Also, THERE ARE other ways of imparting stimulus, for example interest rate cuts, or (as proposed by market monetarists) buying up even more privately held assets, like stock exchange quoted shares. I don’t favour that market monetarist idea, but it’s a possibility, and if for some reason someone proves that method of imparting stimulus OTHER THAN print and spend are the best ones, then that’s the end of Peoples’ QE or Climate QE for Paree.

2. There’s the question as to how much we ought to spend on infrastructure and global warming reduction measures. Now there’s absolutely no reason to think the optimum amount to spend on those two will necessarily equal the optimum amount of “print and spend” that’s needed for stimulus purposes.

To put all that another way, it’s always possible that households and/or businesses go into a fit of irrational exuberance, and demand rises dramatically, in which case no stimulus would be needed at all – in QE form or any other form. What then happens to anti global warming expenditure?

To summarise, the logical procedure is to decide first how much to spend on infrastructure, global warming reduction, and then fund that out of tax, borrowing or “print and spend”: it really doesn’t matter which.   Second, decide every month or so whether stimulus needs adjusting (something the BoE MPC already does).

Economists have a specific term (which I’ve forgotten) for funding particular forms of spending from particular forms of tax (e.g. funding the Navy just from income tax) and that idea is widely regarded by economists as nonsense. However that idea can sometimes be politically expedient, because it appeals to the untutored.

As for funding a type of spending (e.g. global warming reduction stuff) from print and spend, that’s even worse because in some years no stimulus is needed, in which case the source of funding for global warming reduction expenditure dries up altogether.

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