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.