The people’s public institution bonfire

A quick post to tease out more clearly the issue of whether or not Corbyn’s proposed ‘People’s QE’ would be inflationary or not.

The reason it would be is because it sets a precedent for using money creation to finance public expenditure, a precedent that those thinking of buying government bonds, or negotiating wage contracts, would expect would be repeated.  That expectation of inflation would be to some extent self-fulfilling.  And if the precedent were followed, more money would surely mean more prices.

Yet the policy has been proposed at a time when interest rates are at their practical floor of zero, alluded to in a comment by Richard Murphy – Corbyn’s cheerleading advisor on this matter – who asserts that there is ‘a shortage of money’.

This doesn’t provide room for PQE.  For starters, the current Bank of England Monetary Policy Committee don’t think there should be any further asset purchases, or any further monetary loosening, for that matter.  They judge that the current stance of policy is sufficient to bring inflation back to target.  From their perspective, there is no ‘shortage’.  Reasonable people can disagree about this, of course, but it would require subversion of the MPC’s judgement on shortages to implement any PQE right now.

Failing that immediate subversion, what is being proposed is really a hypothetical monetary financing, one that may never happen.  Or even if it were to happen, one that might be expected to be curtailed once monetary policy goals were achieved again.  Such cyclically mandated monetary expansions can’t provide for sustained public infrastructure investment.  And, indeed, the very fact that such things imply sustained flows of finance would inevitably engender the expectation that what is supposed to be cyclical monetary policy in fact won’t be.

Chris Dillow alludes to the point that there is no reason to stick to the current inflation target.  In fact, I have argued before that we should, at an opportune moment, raise the target to 4 per cent as a preventative measure so that future business cycles lead us to spend less time at the floor to interest rates.

Could a Corbyn’s PQE not be part of a means of achieving that?

A couple of points.  First, the higher inflation target, once met, would not itself produce much extra government revenue from the faster rate of money creation.  Seigniorage is not a great earner.

Second, the risks entailed in monkeying around with the inflation target, which brought hard-won price stability after a terrible few decades, mean that this ought to be undertaken in as regular and conservative way as possible.  For me that means waiting until a period has elapsed where we are at the current target, interest rates have climbed back to their resting point, and then a new interest rate stimulus can be applied, probably after the BoE has unwound the portion of its asset purchases that it judges it should.

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Would not print money for a Corbyn cabinet.

The chatosphere seemed ablaze today about UK Labour Party leadership contender Jeremy Corbyn’s plans for a ‘People’s QE’.  Richard Murphy was reported as being on World At One defending it, based on its resemblance, I presume, to a ‘green QE’ plan he wrote about some time before.  [For a comprehensive demolition of that, see Frances Coppola’s blog].

There is lots wrong with Corbyn’s plan, and I don’t think shadow Chancellor Chris Leslie’s attempt to counter it really works either.

First, I dislike the populism behind the label ‘People’s QE’.  It implies there was something elitist about the QE the BoE conducted.  For sure, QE had distributional impacts.  But the counterfactual, if it had any effect at all, would have been life much worse for those that would experience the deeper recession, which, historically, has always been the poor, since it’s they who disporportionately suffer unemployment.  If we can wave a QE wand for ‘the people’, why not proclaim a ‘People’s Interest Rate Policy’ too?

Second, and more importantly, Corbyn’s plans are not being presented on monetary policy grounds only.  Any attempt to hijack the printing presses for general deficit financing, when loose money is not necessary to achieve the BoE’s mandate, will wreck monetary policy for a long time to come.  Simon Wren Lewis, who actually favours helicopter money transfers for monetary policy purposes, made this same point on Twitter [at least I read him that way].

The reason for the wreckage will be that the next time the Government fancies winning an an election by promising grand public works schemes, it will be expected that the BoE will print money to finance that too, and this will lead to more inflation, and, because this will be expected, will make it ever harder to finance expenditure this way.

Corbyn’s QE is the first step along the road to undermining the social usefulness of money, and would ultimately impoverish us.

If we were in a state of monetary policy crisis, then QE-financed something is at least worth considering, and Wren-Lewis, Lonergan and I think Portes have all supported the idea.  But that something should be as politically neutral as possible, and not a matter for the BoE.

At any rate, even in such a state, I would consider this an almost last resort.  [The very last resort being altering the institutions of money to permit substantially negative nominal interest rates].

The first resort, which Corbyn and others should be considering, is simply a slightly looser and conventionally bond-financed fiscal stance.  Together with, as I and others have urged, some institutional device to make assistance of monetary policy semi-automatic at the zero bound to interest rates.

The fact that Corbyn has not simply gone for what I describe as the first resort, even in a more accentuated and therefore left-appealing fashion, is striking, and betrays a lack of basic understanding, or a Magpie-like attraction for the radical-sounding, or both.

To amplify a point made earlier, all this is not to say that there is not a perfectly arguable case for looser fiscal policy, directed now in pursuit of public infrastructure projects.  The linchpin of that case is the fact that current real financing rates for such projects might be argued to be fortuitously low now, and future generations would lament that we did not take advantage of them.  At the same time, current public infrastructure is argued to be ailing in many respects [power generation and rail being the most obvious cases], and so social returns are high.

However, that said, this is not something that should be done in a way that involves the Bank of England directly, and nor need it be done this way.

Whether the ‘People’s QE’ will prove an electoral liability, who knows.  In my experience, QE is hard to fathom, even for senior central bankers, so it might prove catchy in the wider public debate.  But, if Mr Corbyn could be made to see that it’s unnecessary and silly, the electoral downside risk for his party, of coming to seem like financially inexpert cranks, would be avoided.

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Insufficiently conservative central bankers



Simon Wren Lewis writes thoughtfully about my post arguing that Andrew Haldane should keep his views on matters outside the BoE’s remit to himself.  It’s socially wasteful to clip the wings of visionary thinkers, he points out.

However, a few points.

First, a hypothetical, ruthlessly-remit-focused Haldane isn’t all waste.  It frees him [and the groups of the best analysts picked to support him] up to focus on… stuff that is within the BoE remit.  And for which he’s paid circa £250k a year in total compensation.

Second, visionary thinkers command many outside options, and they are free to take up posts whose remit isn’t so narrow, in academia, think tanks, or some other policy institution.   There’s no reason all those thoughts should go to waste even if the Bank chose not to fund them.

Third, remember that the reason for wind-clipping has its roots in the principal-agent problem in monetary policy.  That was the issue that governments could not be trusted to keep interest rate decisions untainted from considerations about what would win the next General Election.  Delegating to the central bank, a bunch of people with no stake in politics, and hired only to crank the tedious handle of monetary policy, was the solution.  For everyone to be convinced that this separation is being stuck to requires that it is stuck to.  So the central bankers have to be evidently without any stake in politics.  And the government has to be seen to have no reason to select on the basis of political favour.

The central banker not having any stake in politics is not consistent with them speaking out on matters that are political.   And neither is a politically-intrusive central banker consistent with the government having no interest in that central banker’s politics.  It’s possible that there was no problem in the first place, so wing-clipping is just bad.  However, there’s a fair amount of historical and theoretical experience that suggests that politics does make for worse monetary policy.  And even if this is not conclusive, I would prefer to err on the side of caution.

 

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Haldane on how to get firms to do what we want them to do

Andrew Haldane, BoE chief economist, was interviewed by Newsnight’s Duncan Weldon, and he makes many interesting remarks.  Including comments that firms are too short-termist, are not spending enough on investment, are returning far too much money to  shareholders [this is presumably bad], and that we should consider alternative forms of corporate governance to make sure that the wider social good is served.

Such an occasion cannot pass without the customary reflex reaction pointing out that Mr Haldane is again talking on topics a long way from an already wide-ranging BoE remit.  Unless he can draw a connection between the BoE’s ability to hit its monetary policy and financial stability goals, and corporate governance, I don’t think he should be making these comments, however intriguing an antidote they are to run of the mill argument that businesses are best left to run themselves.

AGH does attempt to draw a connection, when Duncan reminds him of the Bank’s remit.  But it doesn’t work.  Paraphrasing the response, it’s that short-termism and speculation was the cause of the financial crisis.  That’s fine as a part-diagnosis of the problems with banks, which the BoE is charged with regulating but not as a description of the role of non-banks in the crisis. It also implies that the current toolkit to deal with bank shareholder mischief are not adequate, somewhat at odds with the official line coming from the Bank.  To the extent we can take this argument at face value it’s also self contradicting.  The crisis was caused in part by the private sector over-extending itself, failing to price risk properly and therefore undertaking projects that should not be undertaken.  Yet at the same time, collectively, according to Mr H, it under-invested.

Many might complain that restricting a free-thinking mind such as his to the pedestrian matters for which he was appointed means missing out, and wasting talent.  But, to those I would say the following.

First, off-remit freelancing carries with it risks.  In particular, risks that the next round of appointments will be vetted to make sure that the candidate’s off-remit opinions, [read, essentially, ‘politics’], are acceptable.  Personally, I don’t want senior BoE staff selected on the basis of whether they share the government’s current inclinations regarding interventionism.

But if the Treasury come to expect that new appointments will assume the role of informal economic commissar, with a brief to reflect on pretty much anything, they are going to have an interest in making sure that those reflections don’t complicate the general business of economic policy-making.

Second, the remit the BoE has is already extremely large, and the tools it has to pursue them are powerful and invasive.  Especially in the early phase of sitting atop such a powerful remit, the BoE has to be sensitive to the risk of becoming suspected of regulatory overreach or empire and influence-seeking.

All this is without getting much into the substance of this issue, which is, to say the least, controversial.

To paraphrase Nigel Lawson, the governance of business IS the business of government, and not the central bank.

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Short post on fiscal short-termism

Paul Krugman complains at the harmful focus on the long-term in US fiscal policy, fighting to solve problems that are too distant to matter, while the need for short-term stimulus is neglected.

Just a conjecture, but I wonder if the longer term issues had been transparently sorted out, and in a way that was likely to hold, politically, perhaps the amount of stimulus that could have been squeezed out of Congress would have been greater.

At least part of the reason for the fiscal hesitancy in the UK in the early phases of the crisis was the burden of a history that the authorities felt bequeathed them with low credibility.   Even if you don’t subscribe to this, you might sign up to the idea that this was an argument that provided political cover for inadequate stimulus, while the state was surreptitiously shrunk.  Cover that if removed would have forced better policy.

Likewise, harping about structural reform – Krugman’s second complaint about long-termism – is not a distraction.  If the fiscal stimulus is being done by one polity in favour of another, it’s what persuades them to unzip the wallet, since they are thereby convinced that the money is going to a better cause, and not to pay for benefits that the electorate in the polity with the deeper pocket don’t get at home.  These issues may not be  something a benign social planner might prioritise, if such an entity were likely to face policy implementation bottlenecks.  But so what?

Given the way the world is, perhaps we should see addressing long-term problems as a way to generate economic and political flexibility to more vigorously respond to short-term needs.

 

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The global surplus bogeyman recycling mechanism

It’s becoming almost a standard narrative that actually the crisis was not caused by the Greek’s overborrowing, but instead by inadequate demand in Germany, needing involuntary demand for Germany’s exports to stabilise Germany, a demand that later wreaks havoc.

Before this takes hold too tightly, I think it’s worth remembering basic open economy models of trade, in which current account surpluses arise naturally, and improve everyone’s lot, if they are related to the relative demands and supplies for future consumption, and relative returns.

Thus, as a mature economy, with scope for future income growth limited, and an aging one, with demand for saving higher to provide for old age, it would be natural for capital to flow to countries engaged in a process of catching up levels of average factor productivity in Germany, where marginal returns are higher.  Like Greece for instance.

In such a world, policy could shut off this intertemporal trade, but at great cost to both parties.

Part of the standard narrative is that this pernicious German saving was aggravated and helped along by the creation of the Euro, which, because of the weakness of the other countries, meant that German exports were overvalued.

The counterpoint to this is that nominal exchange rate regimes should not matter for anything much, intertemporal trade included, beyond horizons of 5 years or so.  Certainly not at the frequency of 2 decades, which is what some of the versions of the evil savings hypothesis deploy.

All is not quite so simple, of course, in the real world.  For the welfare improvements long- term current account surpluses and deficits to be there for the having requires that parties on either side of the trade understood the relative income profiles correctly, and also correctly understood the risks around them.

In the case of Greece and the other catch-up countries, it’s plausible to think that there ought to have been great uncertainty about just how far, given existing institutions, or plausible assumptions about how they would evolve, Greece’s income per head would catch up.  And that it was easy, in the early phases of that catch up, to guess the end point wrongly.  And we know now that there is much evidence, not least hindsight, that risks were not correctly priced in, or, if they were understood, were understood to be the business of someone else [in the case of mysteriously narrow spreads on EZ peripheral sovereign bonds].

Seen this way, the appropriate response is not radical and far-reaching intervention to prevent countries that want to save from saving, but mechanisms to tackle market failure in risk bearing and risk pricing.  Which is what, slowly and clumsily, is going on.

All that said, there are lots of problems with and puzzles for the basic toolkit on which those insights [they aren’t mine] are built.  But it should take more to displace it than simply the assertion and global recycling of the story of an evil capitalist saving bogeyman.

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Charles Wyplosz urges Syriza to get ready for Grexit

Amusing:  just after blogging about why I think making a plan ready for Grexit would have been self-fulfilling, and sabotaging of plan A, Charles Wyplosz writes on VoxEU that they should indeed be doing that now.

His argument is – echoing Krugman, who is mystified this plan wasn’t executed earlier – that by planning for it carefully, the risk of hardship and chaos associated with a currency interregnum can be reduced, and this makes Grexit a more attractive option.

However, as I stated last time, I’d guess that by planning, openly, Syriza would make any other option extremely unlikely.

It would accentuate the current bank run.  While Greece’s future finances were dependent on Eurozone generosity it would also preclude there being any return of the vast sums of money that escaped Greece before capital controls were imposed from returning.

It would also surely harden the creditors’ stance.  For a start, it would strain to the limit the ECB’s preparedness to extend ELA to Greek banks.  It would act as a counter-signal about the government’s preparedness to implement the conditionality associated with a bail-out.   It would make it more likely that the creditors would judge Grexit as the eventual outcome, and thus make them less likely to fund Greece in what would, in that eventuality, be a futile attempt to keep them in the Euro.  Full readiness might cost several hundred million euros.  Are the Eurozone going to want to see their funding used for that?

From the creditors’ point of view, if such a plan were allowed to be pursued, what kind of precedent would that set for other troubled sovereigns?  Imagine how it would change the characteristics of the euro for its holders to know there were vast locked warehouses of many other currencies dotted around the territory.  A typical euro holder would be much more reluctant to leave wealth in the form of deposits domiciled close to one of those warehouses.  Knowing that the local polity could simply unlock the doors at the slightest whiff of a public financing problem would make a local deposit holder fear re-denomination.  Taking into account all this, the creditors will strain to make sure that such warehouses of alternative money are not built, nor the equally important operational ‘warehouses’ of battleplans for currency law change.

 

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