Corbynomics - meh

There are two common objections to Corbynomics (pdf) which seem to be to be misplaced.

The first is that it is out-of-date. "A howl for the past" says John van Reenen. "Old solutions to old problems" says Yvette Cooper.

I'm not so sure. People's QE is a response to a problem which is perhaps more severe now than in the past - that the UK invests too little. The share of business investment in GDP has been trending downwards for years: complaints about BT's tardiness in rolling out fast broadband are symptomatic of a wider problem. And if fears of secular stagnation are even partly true, it might stay low. Greater public investment is a response to this.

In this sense, it might be Corbyn's critics who are out-of-date. The assumption that the private sector will generate investment, innovation and dynamism if only left alone might have been reasonable in the 90s. But it is in question today - hence, perhaps, a need for greater state activism.

The second objection is that people's QE could undermine the Bank of England's independence because it is, as Tony alleges, "pretty much orthogonal to whether it’s actually needed for monetary policy purposes."

Certainly, Corbynistas have been presenting it that way. But I'm not sure this is right. It's likely that Bank rate would be low in 2020: Mark Carney has warned that rates might peak at less than 3%, and futures markets are pricing in a rate of barely 2%. This means the Bank would have very little orthodox monetary policy ammunition to fight any deflationary shock. And there might will be such a shock not only from ordinary macroeconomic surprises but from Corbynomics itself. He wants big - possibly unachievable - tax rises on companies and the rich. These could well be deflationary. It's quite possible, therefore, that QE would be needed for conventional monetary policy purposes - to get inflation back up to 2%.

In saying all this I don't intend to wholly defend Corbynomics. I'd prefer more emphasis upon decentralized decision-making and worker control than he seems to be offering. And, paradoxically, I don't think he is sufficiently anti-austerity. Talk of people's QE dodges a big fact - that with real interest rates below zero (and expected to remain so) public investment can be easily financed through ordinary borrowing. And in wanting to close the "tax gap", Corbynistas aren't anti-austerity at all; they just think it apply to different people.

All this leaves me in an odd position. I find Corbynomics neither as good as its supporters believe nor as scary as its opponents claim. The strongest case against Corbyn becoming leader might lie outside of economics. 

Comments

[Luis Enrique]

People QE can a counter cyclical tool in the hands of the BoE, or a financing option in the hands of the government to tackle chronic under investment, but it can't be both. This post doesn't seem to be very clear about which it is. Which do you think it is?

[Dinero]

"Peoples QE" would not reduce the cost of the funding. The BoE only paid the market rate for what it bought and its purpose wasn't to channel funds to borrowers who issued the debt instruments purchased , it was to increase funds in the credit market.

[gastro george]

Not the strongest case if you're having to rely on Nick Cohen, Bloodworth et al. Hand-waving about anti-semitism looks a bit desperate.

[Dave Timoney]

People's QE is clever politics because it rebrands traditional debt-financing as a modern and radical policy. Compare and contrast with the strangulated guff that was "predistribution".

Mind you it's not that clever, as it stops short of real "popular QE" (i.e. helicopter money), as Simon Wren-Lewis and others have noted. It also smuggles in the de facto end of BoE operational independence, which, depending on your view, may be a necessary corrective or simply dispensing with an irrelevant fiction.

The left-wing case against Corbyn should focus on the modesty of his economic and social policies (who isn't in favour of housebuilding and better railways?), as well as the statism and lack of autonomy that Chris notes, however I suspect the issues of foreign policy and security will remain the vector of attack because they're easiest for faux-lefties to engage with.

[Witchsmeller Pursuivant]

As gastro george points out, if the strongest arguments against Corbyn are the guilt-by-association character smears of Cohen and Bloodworth, then the AnyoneButCorbyn camp probably need to try a little harder. What's next, an appraisal by Harry's Place?

[Luis Enrique]

fate, for you:

https://longandvariable.wordpress.com/2015/08/14/corbynmaniacs-need-reminding-what-central-bank-independence-is-and-why-its-good/

[chris]

@ Luis - you're right that it could be either. It depends on the circs in which it is introduced. If it comes at a time of low inflation & weak demand, I'd favour it. If at high inflation, not so.

[Dinero]

its not just independence. it would also entail the government's borrowing creating new deposits, usually its borrowing operations are conducted so that it does not do that. Apart from a small amount of governmental bodies such as local authorities borrowing from banks.

[Roy Lonergan]

@Chris @Luis But I think that's a major objection as an example of needless gimmickry. If a national investment bank is a good idea, then it is a good idea for the long-term and it is a good idea on its own merits regardless of any unconventional monetary policy. In which case set it up with a proper mix of debt and equity. Hopefully, interest rates rise at some point & the NIB might still be useful but QE would be a bad way to raise funds then. So why not set it up properly from the start?

[Ralph Musgrave]

Louis Enrique,

Good point. To expand on your point, printing money is stimulatory. If that money is concentrated on just one or two areas like infrastructure, then in years when little or no stimulus is need, infrastructure projects will grind to a halt. Barmy!!!!!

Dinero,

Contrary to your suggestions, PQE (or more generally “print and spend”) does cut the cost of funding. What on Earth is the point of borrowing money from the rich and paying them interest when the state can create money at no cost?

Re Tony Yates suggestion that “print and spend” undermines the BoE’s independence, I flatly disagree. Politicians under the EXISTING REGIME can perfectly well put pressure on central banks to up stimulus a bit before elections. It’s no easier (or more difficult) for them to do that when the CB is instructed to implement stimulus via PQE than via interest rate cuts, traditional QE or whatever.

For details on how to implement “print and spend (and/or cut taxes)” while retaining the CB’s independence, see bottom of p.10 to top of p.12 here:

http://b.3cdn.net/nefoundation/3a4f0c195967cb202b_p2m6beqpy.pdf

[Dinero]

The DmO website states clearly that its operations are designed to not disrupt the monetary conditions of the economy. The money in the economy, deposits ,are created by the private sector. Deposits created by and backed by the borrowers obligation and assurance to supply economic resources in the future. A deposit if it were created by government borrowing does not have that obligation and backing, only an obligation to tax, which is not the same thing at all.

[Greg]

Chris. I like this blog, I learn a lot, so I was looking forward to your Corbyn stuff as I'm genuinely interested. You've been helpful on the People's QE, but I have some problems here.

Your last post, you say: "Corbyn's opponents should not hide behind pseudo-technocratic talk of "credibility". This post, you link to the "strong" arguments of:

Paul Anderson - "is [Corbyn] a credible Prime Minister? No."

Martin in the Margins - "I believe we need a credible and electable opposition party – rather than one lost in nostalgia for discredited policies..."

Why is it OK for them to attack Corbyn's credibility? What are they hiding behind this pseudo-technocratic term?

Well, we can guess - because at least Cohen, Bloodworth and Johnson come right out and clearly state it - they think Corbyn is an apologist for (or even a closet supporter of) fascists, dictators, islamic extremists and antisemites.

Here's my view: this is an unhinged, hyperbolic line of attack, based on guilt-by-association bullshit, from war cheerleaders like Cohen, who has already lost any *moral* credibility he may once have had.

Anyway, you're linking to this stuff, rather than saying it yourself. Do you agree with these writers in their assessment of Corbyn? Or do you just think that it's all bad enough to hurt his "credibility"?

[Greg]

Wrong thread, but you get the point :)

[Peter K.]

I would ask Tony Yates and Enrique what has been the larger problem the last 40 years: too much aggregate demand or not enough? Too much inflation or not enough.

Corbynomics looks great to me. The politics are a lot more difficult because the same powers that be that are blocking fiscal policy won't like People's QE either. They don't care that wages have stagnated or that inequality has increased. These are not priorities for them.

Murphy made a good point in the Guardian link. QE for the banks didn't work well. QE for the people - whether helicopter money or money-financed fiscal/investment policy or a combination - will work better next time we hit an aggregate demand shortfall at the zero lower bound and politics is blocking fiscal policy.

Don't let them tell you nothing can be done.

[Dinero]

QE is not "for the banks". QE specifically doesn't buy assets from banks, that what defines the operaton as QE.

[Blissex]

«a problem which is perhaps more severe now than in the past - that the UK invests too little. The share of business investment in GDP has been trending downwards for years:»

Obviously, as investing in most british business ventures is a losing proposition when speculating in british property or funding offshore businesses is so much more profitable and largely tax-free, in law or in practice.

UK voters have made a strategic "cultural" choice for rentierism at the middle and upper class levels.

Even the government investing in british infrastructure does not make much sense on its own, as better infrastructure that does not support new business activity is a nice convenience, but not a productivity booster.

[BCFG]

So according to this blog, the greatest problem with Corbyn is that he is not sufficiently supportive of Israeli oppression against the Palestinians. And according to this blog this fact makes the left case against Corbyn.

Only a middle class city boy could come up with such grotesque notions.

I have found that among the critics of Corbyn are the usual suspects on the pro war left, who think we should be bombing our way to the enlightenment.

You are no leftist, just an arrogant, chauvinistic and privileged white boy.

[Luis Enrique]

Peter K

well inflation has certainly been a problem within the last 40 years.

I suspect some people have the idea that if there is significant unemployment then aggregate demand must be too low (as opposed to low AD *might* be the problem). Trying to raise employment by money-financed government expenditure is the classic inflation spiral scenario - once inflation gets going, the government has to print ever more money merely to maintain real purchases.

if People's QE is about the regular use of money printing to finance govt expenditure, then all those people worrying about its inflationary consequences have a point

[Bob]

"I suspect some people have the idea that if there is significant unemployment then aggregate demand must be too low (as opposed to low AD *might* be the problem). Trying to raise employment by money-financed government expenditure is the classic inflation spiral scenario - once inflation gets going, the government has to print ever more money merely to maintain real purchases.

if People's QE is about the regular use of money printing to finance govt expenditure, then all those people worrying about its inflationary consequences have a point"
Crock of shit Luis. Any evidence? Look at Japan for the past several decades.
The appeal to "money printing" does not help. All government spending works by crediting bank accounts. There is a certain amount of money printed but that is separate from the spending.
If you accept there is a wealth effect (which bonds are) and there are extra interest payments then this will have the effect of increasing spending, not decreasing it and leading to more inflation than if done by "printing money."

[Luis Enrique]

Bob - well I could be wrong but I think Japan financed its deficit with borrowing, not money printing. Are you denying that it is meaningful to talk of direct monetary financing (as opposed to debt financed) govt spending? Details of how govt spending works are neither here nor there.

[Bob]

Govt spending always works by printing money! The spending is not "financed." A pound going to the government makes no sense when they have an unlimited number.
Gilts are interest bearing IOUs. The government always spends by crediting bank accounts (money printing) and then borrows back AFTER.
All spending is "money financed"
Japan did and has done huge amounts of QE and it has had no effect on inflation.

[Luis Enrique]

yes but Bob if you want to say "govt spending always works by printing money" and deny it is meaningful to talk about money printing, then you have left yourself with no way to distinguish between governments whose net debt issuance covers their deficit and those who, in some cases literally, order the central bank to print notes and deliver truck loads of the stuff to the government (I happen to be reading a history of Mobutu's DRC at the moment). There is a difference. QE is not the same thing either.

[Bob]

"(I happen to be reading a history of Mobutu's DRC at the moment)."
WTF does this have to do with anything?
"Details of how govt spending works are neither here nor there."
Yeah, who cares how things actually work?

[Bob]

Luis, you are the one who brought up "printing money." What do you mean specifically by that? Explain to me now.

[Bob]

With everybody worried about inflation how can rational expectations generate any? As usual they get tied up in their own internal logic.
Inflation comes from spending. If government spending is an issue then *private bank lending* is similarly an issue. Are they suggesting mortgage lending should be stopped?
As our friend Dinero is saying the government having a money printer is no big deal as we can all get a loan from the bank. Actually it is a huge deal but nevermind.

[Luis Enrique]

Bob, cool it. Mobutu used to get the central bank to truck over bundles of freshly printed notes, that's only why I mentioned him. His was not the only African government to do that - if you really want to know about the inflationary consequences of money financing, talk to somebody with experience of certain African Ministry of Finance in the eighties. Fellow who often occupies desk next to me at work used to produce budgets for Uganda, where they'd pretty much forecast the deficit then ring up the central bank.

I care about how things actually work, but in this case the mechanics of how governments implement expenditure do not obviate the distinction between direct monetary financing of government expenditure and other routes.

[Bob]

There is no difference between "borrowing" and "printing." You just print interest bearing IOUs gilts. Tax is there to free up real resources and you can view the govt as spending taxpayers money or burning it and printing new money.
Luis says:
"if People's QE is about the regular use of money printing to finance govt expenditure, then all those people worrying about its inflationary consequences have a point"
Except it does not *literally* involve printing money.
As to your African experience, I have no idea but developing nations have far more real constraints on spending and more mismanaged generally.

[gastro george]

Shouldn't we be talking more about types of inflation? Monetary inflation will only occur when there is a supply constraint - the trivial example being that the price of Windows 10 is not going to go up because we can pay for and download another trillion copies of it. But surely "printing money" would run the risk of exchange rate inflation first, which is a different kettle entirely.

[Luis Enrique]

gg

but there is always a supply constraint, the productive capacity of the economy, and whilst it may be possible to raise this by some distance, it is easy to increase nominal demand faster than productive capacity is increasing.

I don't think exchange rate moves are so different - I mean if the domestic price level rises (inflation) then the real purchasing power of each unit of foreign exchange at given rate changes, so you'd expect exchange rate to adjust, all part of same thing.

Bob, I think you're wrong, but I am not going to convince you here.

[Bob]

There is no difference.
In both cases the government emits paper that people hold as savings. All that differs is the interest rate and the holding period. Which is just a way of calculating and paying state benefits to people that hold paper, as opposed to paying state benefits to people who happen to have one leg.

[Bob]

Luis and Castro re exchange rates. Issuing bonds increases the supply of money via second and third order effects. Increasing interest rates to try to strengthen the currency just does not work. See:
http://www.3spoken.co.uk/2014/12/russian-roulette.html?m=1
Re supply constraints yes government spending is limited by real resources. I totally agree with that. But there is no reduced inflation risk with issuing bonds than issuing money.
Re exchange rates if you get up to full capacity and inflation starts it may weaken the currency. But to weaken a currency you have to strengthen someone else's currency and they are likely to respond with fiscal stimulus or by weakening their currency deliberately if they are export led e.g. China.

[Bob]

Explain the mechanism by which that comes about including where you get the Sterling from to settle the FX trades in a market with no market maker. If it's "but surely"

And again the state creating money is precisely the same mechanism as a bank advancing a loan. So why don't you get 'exchange rate inflation' when people take out mortgages?

[Luis Enrique]

Bob there is empirical evidence that money creation is tied to inflation rates in long-run (example: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1027.pdf ) I cannot find evidence that bond issuance has a similar relationship with inflation, do you have any?

[Dinero]

Bob

Issuing Bonds it not the same as printing money as you say.

When someone buys bonds they lend deposits to the government, and temporarily forgo the use of those deposits. Bonds are not used to consume economic resources, unlike deposits.

Government borrowing ,if it hypothetically did create deposits, would not be the same as private sector borrowing from banks. When a private sector borrower, borrows and consumes economic resources in the present they , unlike the government, also issue a corresponding asset, a commitment to supply economic resources in the future.

The money in the economy, deposits , is created by the private sector. Deposits created by and backed by the borrowers obligation and assurance to supply economic resources in the future. A deposit created by government borrowing would not have that commitment to supply economic resources in the future. The government taxes or borrows these claims on future supply of economic resources, to fund its spending.

[Bob]

"When someone buys bonds they lend deposits to the government, and temporarily forgo the use of those deposits. "

Loanable funds myth.

[Bob]

Dinero, to expand a little more on what I am saying. OK you think govt is revenue constrained. Let's play with that and see what happens. When the govt borrows and then spends the deposits stay in the banking system. The govt has just transferred things, it doesn't disappear.
And the money printing was the gilt.

[Dinero]

Bob
Its not "loadable funds myth" The bond seller does temporarily forgo the use of the deposits.

Yes that correct when the government borrows the deposits it immediately spends them, and so they may well end up once again being lent to the government , but once again that lender will also be forgoing the use of a deposit as well. And so the government is not creating new demand when it sells gilts. Unlike when a private sector borrower creates deposits by issuing a loan contract to a bank.

[Blissex]

"Bob"'s arguments seem on the usual delusionary wing of the MMT, who often wilfully misunderstand MMT, which is not a theory, but a simple (and ancient) description of the mechanics of a chartalist money ("temple money") system.

Being a description MMT is irrelevant to the question of whether creating chartalist money never or sometimes or always results in some kind of "inflation".

And the mechanics described by MMT make clear that of course government spending in *real* resource terms is revenue constrained: the government can only "spend" the *real* resources that it can acquire, one way or another.

As Minsky wrote, anybody can create as much money (chartalist or not) as they want, the problem is getting it accepted by vendors.

And that's a problem that MMT, being a description of a mechanism, cannot solve.

What Corbynomics is about is getting government bonds used to fund infrastructure spending to be bought by the BoE, and the real question there is whether this would continues to be balanced by the same level of relative fiscal tightness.

That is whether Corbynomics is a continuation of the osbornian «fiscally conservative but monetarily active» with the «monetarily active» targeted at infrastructure investment instead of handout to property speculators and pensioners.

[Blissex]

«When someone buys bonds they lend deposits to the government, and temporarily forgo the use of those deposits.»

That may have been true in the 19th century when bond buyers paid for the government bonds with actual banknotes and then took delivery of a printed government bond and put it in a safebox and periodically just clipped and cashed the interest coupons.

Today government bonds are held as deposit at banks, and they are as fungible and liquid as "money" (by the same government).

Plus depository banks "rehypothecate" them. Look it up, it is lots of fun :-).

[Dinero]

> Blissex

That's not clear what you mean there as "held as deposits". As for the purchase of gilts by commercial banks its quite small of the total issuance.

If someone. a non bank, buys a gilt they don't buy something else. As QE demonstrated the amount of money tied up in gilts reduces the price of other assets, which is consistent with spending from bond issuance being the use of pre existing deposits, and not increasing the money supply.