Lower terminal central bank rates doesn’t mean it will be time for PQE.

That’s the conclusion of Richard Murphy’s latest blog.  He has latched onto the latest of dozens of speeches by central bankers pointing out that for one reason or another, they don’t expect the resting point of central bank rates to be as high as in the pre-crisis period.  And concluded that this means we should be adopting People’s QE – the periodic funding of public investment through the creation of new central bank money.

Actually, aside from the problems with that policy that I have explained in previous posts, there’s no reason to conclude that.

For one thing, we can contemplate raising the inflation target.  I’ve proposed 4%, falling into line with a suggestion by Blanchard in 2010, to be reviewed every 5-10 years as evidence about long run equilibrium real rates shifts.  Raising the inflation target will raise the terminal point for central bank rates one for one, and make more room for nominal rate cuts.

Second, we can contemplate more active use of conventionally financed fiscal stimulus policy.  Simon Wren Lewis, Jonathan Portes and others have proposed just that, under the auspices of an independent fiscal council.

Third, we should remember the battery of new unconventional tools that the BoE has already availed itself of;  vanilla quantitative easing;  funding for lending;  macro-prudential tools;  and purchases of private sector assets [‘credit easing’].

Fourth, recall the solution proposed by Miles Kimball, Willem Buiter and others – to reform the institutions of money so that negative nominal rates are possible.

Fifth, we have the possibility of more concerted and coherent forward guidance, articulated as both lower interest rates for longer (than historical policy rules would suggest), and as a corresponding, conscious overshoot of the inflation target.

Sixth, there is the possibility of adopting, temporarily, in a crisis, levels-based targets, either a price level target, or a nominal GDP target, as a device to make the lower interest rates for longer, and inflation overshoot in the above solution more credible.

Seventh, in extremis, we have the possibility of helicopter drops of money direct to consumers, an old idea urged on us recently by Wren Lewis, Eric Lonergan, Mark Blyth, and others.

So there are plenty of other – to my mind far more attractive – options to consider.  So far Mr Murphy has said nothing about these other options, which is curious.

If the motive is to solve a monetary policy problem, we need to know why these other seven options are less appealing to the Corbyn team.

More likely, the omission stems from the fact that they are reasoning from a financing problem [‘how can we get more stuff without borrowing to make us look crazy?’].  That there are better ways to solve a monetary policy problem is not relevant if those options don’t solve a financing problem.

[Needless to say, I don’t think there really is a serious financing problem].

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8 Responses to Lower terminal central bank rates doesn’t mean it will be time for PQE.

  1. mrkemail2 says:

    I think Mr Murphy wants to introduce MMT without explaining to the public.
    “, in extremis, we have the possibility of helicopter drops of money direct to consumers, an old idea urged on us recently by Wren Lewis, Eric Lonergan, Mark Blyth, and others.”
    This is just basic income by the backdoor.
    Seems like every man and his dog want to use the central bank to implement his/her fiscal policies.
    “stems from the fact that they are reasoning from a financing problem [‘how can we get more stuff without borrowing to make us look crazy?’]. ”
    I disagree, all govt spending works by “money creation” or “money financed.” The question is – are there the real resources there?
    I would disagree for a different reason – PQE won’t work because we are in the middle of a building boom! They really have not thought it through.

    • Lyn Eynon says:

      On your argument that ‘PQE won’t work because we are in the middle of a building boom’, it’s true that as the construction industry recovers from its slump it faces a skills shortage worsened by austerity induced hysteresis effects. But that need not block public investment.

      First, this reinforces that it is not just a matter of picking projects. Public investment in rebuilding and extending Britain’s skills base will be as important as building infrastructure. Such skills development will take time, one reason why it will take a full parliament (perhaps longer) to raise investment to the level we need. So the sooner we start, the better.

      Second, public expenditure will impact not just the level of investment but also its composition. Consider housing: with the same resources, we could construct a much larger number of basic units instead of the luxury units absorbing much input today. Alongside PQE, measures such as the ‘mansion tax’ could promote and fund such a shift, to the benefit of the many people living today in over-crowded, over-priced, sub-standard accommodation.

      We are thinking this through.

      • Well if the PQE brigade have finally realized we can’t fire ahead with PQE for another five years, that’s good news. Correct me if I’m wrong, but I’ve never seen Richard Murphy say anything about that five year delay on his blog or elsewhere. Far as I can see he claims we can fire straight ahead with PQE.

        As regards housing, there is a huge amount of debate as to exactly why we have a housing shortage, and the issue seems to be very complicated. One of the main reasons seems to be that nimbies are putting very effective pressure on local authorities to deny most applications for planning permission on agricultural land. To the extent that that’s the explanation, simply training more bricklayers etc won’t solve the problem. As to a mansion tax, that’s largely irrelevant. Reason is that if anyone applies to a bank for a loan to buy a house and the borrower looks creditworthy, the bank will lend the money. And if the price of houses declines as a result of more land being made available, then more people become credit worthy.

  2. Re the first para above, Murphy does not strictly speaking advocate PQE in his post. What he actually says is (to quote): “this means that fiscal policy is now the only tool in town. Call it People’s Quantitative Easing if you like.”

    So what exactly does that mean? Well he could have been much clearer. But if he is saying we have fiscal stimulus funded by new money, then that’s the same as PQE except that EVERY FORM of government spending is funded by new money, as opposed to just infrastructure as per conventional PQE. And in fact that broader version of PQE is advocated by Richard Werner, Positive Money and the NEF in their submission to Vickers, and I agree with it.

    Next, Tony’s post above lists seven other methods of implementing stimulus which are apparently “far more attractive”. The first is going for a 4% inflation target. Well the problem there is that it’s widely agreed that 2% is about the optimum. So on that basis there’s definitely a price paid in going for 4%. And good luck with getting Germans to accept 4%.

    The second proposal above is “more active use of conventionally financed fiscal stimulus”, i.e. expanding the national debt. Now I don’t see anything very clever in borrowing money from the wealthy and paying them interest in order to fund stimulus when the state can create money itself for free. Indeed Milton Friedman and Warren Mosler advocated that the state should issue no interest yielding liabilities at all: they argued the only liability should be base money. I.e. Friedman and Mosler appear to agree with Murphy.

    Re three, “macro-prudential tools” are designed to stop another credit crunch. They have nothing to do with stimulus. As to the “purchase of private sector assets” there is presumably some optimum distribution of assets as between public and private sector and that optimum should not be disturbed. E.g. if GDP is maximised by having assets X, Y and Z in the private sector then they should stay there, else GDP declines.

    Put another way, do I want the state purchasing my house and then renting it back to me? No thankyou. Those who want to be owner occupiers should have that option.

    Re four, negative interest rates can (in theory) lead to negative output, i.e. GDP reducing activities. That’s a nonsense.

    Fifth item is interest rate forward guidance. The empirical evidence is that interest rate adjustments don’t work very well, plus they are distortionary: they affect just households and businesses with significant variable rate loans, not those with fixed rate loans or no loans. We might as well do heli drops on just households headed by those with red or blonde hair. (Also the above mentioned submission to Vickers goes into more detail on the weaknesses in interest rate adjustment).

    Item six is pretty much a repetition of item five.

    Item seven is helicopter drops. Well if you’re opposed to the state printing and spending money into the private sector, it’s a bit hard to see how you can favour having the state “print and spend money” and then give it away. Moreover, there’s a whole host of types of government spending which already consist of giving money away: the entire social security system (state pensions and other benefits). I.e. if a country goes for fiscal stimulus funded by new money, then that COMES TO THE SAME THING as helicopter drops, except that the drops are confined to those on social security. I.e. those two are so similar that I don’t see how anyone can back one while having big objections to the other.

    • Lyn Eynon says:

      Like you, ‘I don’t see anything very clever in borrowing money from the wealthy and paying them interest in order to fund stimulus when the state can create money itself for free’. To reinforce this, even at today’s low rates interest payments add nearly 50% to the cost of a 30-year loan and as rates increase this will rise rapidly. We can make much better use of that money.

  3. Lyn Eynon says:

    You are probably right that Corbyn’s team are reasoning from a financing problem. If so, they are right to do so.

    First, monetary policy in isolation has shown itself to be of limited effect in the years since the financial crash in critical areas such as living standards, investment and productivity. The current recovery has more to do with easing the pace of fiscal austerity and the working through of the economic cycle. That doesn’t mean that measures such as you propose would not be useful but their effect would be greatest in support of fiscal expansion, rather than as an alternative.

    Second, the monetary/fiscal policy balance has important distributional and growth impacts. Standard QE has been highly advantageous to the owners of financial wealth but its ‘trickle down’ effects have been small. Private investment has responded slowly as corporations hoard cash and the wealthy prefer speculation and conspicuous consumption. Public investment has to fill the gap both to meet basic needs and stimulate sustainable growth through investment in infrastructure and skills. People’s QE and tax justice can fund this.

  4. Lyn Eynon says:

    Reply to Ralph Musgrave on ‘waiting 5 years for PQE’. That’s not what I said. I was refuting the claim that ‘PQE won’t work because we are in the middle of a building boom’. It’s obvious that where there are shortages in skills or other inputs needed for housing or infrastructure, then those will need to be addressed. Corbyn has proposed a National Education Service to address skill gaps. This is not an argument for investing less, just that the focus of investment should be driven by need, cost and benefit, PQE or not.

    Yes, planning permission needs to be reformed to release more building land but we are not using well the land that is available. A recent example is the Olympic Village, where the opportunity to construct high density housing in an area of desperate need was foregone in favour of fewer higher value properties, unaffordable to most local people. Property taxes offer potential for raising revenue in a manner that is less distortionary that some alternatives.

    • Lyn Eynon says:

      Just to clarify: any acceleration of public investment will take time to implement but that’s no reason to stay in first gear.

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