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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2 Responses to The people’s public institution bonfire

  1. Luis Enrique says:

    “Such cyclically mandated monetary expansions can’t provide for sustained public infrastructure investment.”

    no – and I am perhaps entering the realms of fantasy here – but it might mean that next time a recession hits the monetary policy response has a direct channel to public investment so we might not experience the foolish collapse of public investment that was allowed to happen this time around.

    I agree with you that the big risk is giving politicians control of the monetary tap with the instructions: use this to boost investment and promote employment. I find it hard to see how that will end well. I am not sure why more people are not bringing up the history of countries who have used seigniorage to fund public expenditure (finance deficits) – I don’t have good references to hand, my impression is that both the political temptation and the inflationary consequences are well evidenced.

    my (fantastical) hope would be for a national development bank / ministry of works that constantly has a pipeline of projects and a mandate to accelerate the implementation of these in times of recession, combined with a BoE mandated to provide direct monetary financing of this effort. We could even capitalise this entity with a one-off bought of QE now, whilst the economy is still weak and inflation not much of a concern. This scheme would require independence from politicians and the decision to press the button on ‘people’s QE’ would be in the hands of the MPC – really it would just be giving them another channel to implement monetary policy. We don’t have to accept that the current architecture for implementing monetary policy is the best we can manage, do we?

  2. Nick Edmonds says:

    “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.”

    To what extent, do you think this could be mitigated by suitable statements by the BoE to the effect that the inflation target was unchanged, and that there would be no relaxation in the use of monetary policy tools to achieve that target? Including reversing out the bond purchase leg of a PQE operation, at a later date, if necessary.

    I would say, that I tend to agree with you, that conventional debt finance is better, but I’m not sure I see the money financed route as hugely different, when whichever way you go today, the monetary authority retains the option to end up with the same money / debt balance at some future point.

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