People's QE: no big deal

There's been much debate and, I fear, confusion, about "people's quantitative easing". Personally, I suspect the case for it all depends on the circumstances.

Let's start from a fact - that if it has any effect at all, PQE is inflationary. Whether this is a good thing or not depends upon the conditions in which it is introduced.

If PQE is undertaken when inflation and economic activity are high, then Tony is right - it would be incompatible with the Bank's mandate to keep inflation at 2%. If, however, we face the risk of deflation and/or weak activity then PQE would be entirely consistent with that mandate. In such circumstances, there is nothing radical whatsoever in the Bank buying the bonds of a National Investment Bank: the Fed's QE involved buying the bonds of government agencies such as Fannie Mae and Freddie Mac, so why shouldn't the Bank do the same?

Doing this would not require any breach of Bank independence. Any expansion of QE would require authorization by the Treasury, and as part of this the Treasury could authorize the Bank to buy NIB bonds.

Undertaken in the appropriate conditions, therefore, there is nothing radical or unusual about PQE*.

In fact, it could be that the problem with PQE is that - if undertaken at a time of recession - it would not be radical enough. I say so for three reasons:

1. The QE element might not be very stimulative. Let's say, for concreteness, that the government announces £50bn of investment via the NIB. This would represent an increase in aggregate demand of around 3%. This itself would tend to be inflationary: how much so depends upon how much spare capacity there will be. If this is financed by the Bank buying NIB bonds there might be an additional boost to inflation through the same mechanisms that orthodox QE added to inflation: by raising inflation expectations;by boosting asset prices as investors who get the cash reinvest it; and perhaps by weakening sterling. These mechanisms, though, might be weak. The Bank estimates (pdf) that the first £200bn of conventional QE raised inflation by 0.75-1.5%, so £50bn of QE might have a quarter of that impact. That's 0.2-0.4%, which isn't much.

2. PQE concedes too much to deficit financing. In saying that NIB bonds should be bought by the Bank, PQE fails to address the fact that there is massive demand for safeish assets and so a NIB can be financed at negative real rates through ordinary bond issuance.

3.There are more radical fiscal/monetary alternatives. The Bank could simply write everyone a cheque. It could, as Andrew McNally has argued, print money to allow households to buy shares. Or a mix of QE and conventional bond finance could be used to finance the creation of a sovereign wealth fund whose dividends would eventually form part of a citizens' basic income. Relative to these ideas, PQE - if introduced when monetary/fiscal stimulus is necessary - is a remarkably conservative idea.

Which poses the question: why do its advocates give us the opposite impression? One reason is that some seem to have been confused about when it would be introduced: would it be implemented in normal times or reserved for when inflation has to be raised?

Another reason is that some of them have conflated the case for PQE with attacks upon mainstream economics and, often, arguments for modern monetary theory**. These, though, are separate matters. PQE, under the right circumstances, would be a mainstream conservative policy.

* There is another issue here. One could argue that the 2% inflation target is too restrictive and that it should be lifted to, say, 4%. This would create more room for PQE. But this too is not a radical idea: it was suggested by Andy Haldane yesterday.

** It seems to me that MMT is mostly a wholly reasonable idea, undermined by the dogmatism, obscurantism and longwindedness of its advocates.

Comments

[Bob]

To have inflation you have to have people chasing the same resource *at the same time*. That means you need to have time sensitive projects.

PQE projects are 'shovel ready'. So you set the price for the job and await bids. If there are no bids (because there is a boom on) then the project stays on the shelf. They are 'time insensitive' and therefore operate in a countercyclical manner providing a rudimentary limited Job Guarantee.

Serialise projets by any mechanism and you won't get inflation. Price competition is just the most primitive mechanism. Delays or planning rules can similarly serialise things and avoid price pressures.

[Bob]

"Let's start from a fact - that if it has any effect at all, PQE is inflationary. "
The whole piece follows from this. But it is not a fact.
"There are more radical fiscal/monetary alternatives. The Bank could simply write everyone a cheque. It could, as Andrew McNally has argued, print money to allow households to buy shares. Or a mix of QE and conventional bond finance could be used to finance the creation of a sovereign wealth fund whose dividends would eventually form part of a citizens' basic income."
No-one "prints money." It is created on a computer in the 21st century. There is a certain amount of money printed but it separate from spending.
But CI is inflationary and there is no reason for stock market bubbles.

[Peter K.]

Simon Wren-Lewis has had a good discussion about this. He was advocating helicopter money as an alternative to QE at the Zero Lower Bound during a recovery, because he was afraid that because QE was unpopular and didn't work very well, the central bank wouldn't have any tools left if they didn't pursue QE. And if normal fiscal stimulus was blocked again because of austerity policies.

A People's QE would be another possible alternative to a helicopter drop.

What's different about a People's QE is that the government would be choosing where to invest and which sectors would be getting newly printed money.

Conservatives are very much against doing this kind of thing which they see as "central planning." Wren-Lewis say why it might work better than helicopter money:

"In those circumstances, it might well make sense for helicopter money to be used not only to send cheques to individuals, but also to bring forward investment financed by the NIB, or public sector investment financed directly by the state. If those investment projects could get off the ground quickly, and crucially would not have happened for some time otherwise, then what I have elsewhere described as ‘democratic helicopter money’ would make sense. [2] This is because investment that also boosts the supply side is likely to be a far more effective form of stimulus than cheques posted to individuals."

But Wren-Lewis is wary about the central bank's independence, but I don't fully understand why.

It would be up to the central bank to decide when QE (bank, people's, or helicopter drop) is necessary and when it should be ended.

Of course as many people agree, it would be better if the government just spent money during a recovery to boost the economy rather than engage in austerity and worry about deficits. The nice thing about QE though is that it side-steps the deficit fetishists.

All they can warn about is inflation. But what about Banker's QE? Does it cause inflation? Personally I don't think the QEs they did were very large given the size of the bond market. They did as little as possible to keep inflation expectations up.

[nick ford]

The use of the language 'Peoples QE' reveals that Corbyn/McDonnell are confusing various separable issues, and I think that Chris is acting as something of an apologist for them instead of clarifying their muddle, of which I believe he is well aware.
When you hear Corbyn et al talk about 'ordinary QE' they talk as if it was all done to bail out the banks and help well paid employees of the financial services industry. Thus, the first 'confusion' that needs to be clarified is to recognise that the bailing out of the banks, done by the Treasury, not the BOE, was an entirely different exercise to QE, and should not be muddled with it. Corbyn et al may have a reasonable point that the bank bailouts could have been done in a way that reduced payments to bankers, and partially state owned banks could now be run in a way that involves lower payments to senior employees. But don't muddle this with QE.
The second issue worthy of discussion is whether the state should indeed be investing in real assets, such as building council housing, in order to make a profit, as it could cut its housing benefit bill while borrowing at negative real rares. Financially, it is irrelevant whether this is done by a National Investment Bank or is simply done by normal government borrowing, but using the former could ensure other non-capital spending do not creep up as well, and might help distinguish between state investment spending and current spending.
A third issue is whether the state should attempt to undertake such spending counter cyclically, as discussed by Bob above.
The final issue to discuss is how effective QE is, as Chris and Peter K discuss. It seems to me its powers are limited, and is little different to Treasury simply borrowing at the overnight rate, instead of issuing long dated bonds. As Chris points out, Andy Haldane already seems to know this, and realises some better method of achieving negative real rates is necessary, such as negative nominal rates.

[Bob]

Peter, helicopter mon
is just basic income.
Why is less targeted spending more effective and less inflationary?
As to the rest of the stuff Wren Lewis worries about "credibility" and so forth is just circular reasoning.

[Bob]

Nick you are the one who seems confused. Let's recap.

Banks are always fully funded. When a loan is non-performing it is written off against the capital of the bank. If this proves inadequate it is written off against the uninsured deposits of the bank.

The capital however is of shorter duration than the loans, so it matures. What was happening is that the capital matured and RBS couldn't raise any more. Those funds paid back by RBS ended up as deposits elsewhere in the banking system, while RBS became ever more insolvent.

What the government did is issue Gilts to extract those extra deposits from the rest of the banking system, and then gave those deposits to RBS in return for new shares.

The result is that RBS gets additional central bank reserves as assets and a liability of the new shares which balanced out the remaining deposits at RBS.

Previous investors in RBS capital ended up with new government Gilts instead. Which subsequently they sold to the Bank of England under QE.

Bad loans are then written out which reduces the value of the equity held by the government vs the reserves they injected. The size of RBS balance sheet shrinks a bit and it can get back to lending again as its ratios improve.

So when you net it all off, the Bank of England bit of the Government gave RBS some reserve assets, the HM Treasury bit got the corresponding equity liabilities and a balancing 'inter group loan' between the BoE and HM Treasury popped up in the form of QE holdings of a load of Gilts.

Now the shares have been sold, those reserve assets have been given to the government, and the shares given to the private sector. Rather than issuing Gilts this quarter to cover the deficit HM Treasury have 'issued' RBS shares instead. So in aggregate there will be less Gilts issued on a net basis in this time period.

The net effect of all of this, once the dust settles, is an increase in the 'Other Assets' part of the Bank of England which corresponds to the bad loan losses written out by RBS. This corresponds to deposit savings in the banking system that were protected. All as should be under an insured banking system,

Plus a load of unnecessary obfuscation to make it look like something else is happening.

[Bob]

"And if normal fiscal stimulus was blocked again because of austerity policies."
This is a very worrying antidemocratic attitude among the left getting stronger now.
Have you not seen what happened in Greece?
If you dislike austerity policies you vote for Corbyn in 2020.
Parliament must remain sovereign. Remember even the House of Lords cannot
What the left needs to do is *explain* why austerity is nonsense.
The descriptive part of MMT (excl JG) is FACT (despite Chris' "good idea" nonsense and his slandering of proponents) and myths should be debunked and buried.

[Bob]

*block a Finance Bill
Of course the House of Lords is just a Court, like the Bank Of England. Lefties hate one but love the others for whatever reason.
You will find the lefties calling for fascism hate the Monarchy and House of Lords ;)

[Bob]

By introducing negative interest rates, the BoE would introduce a monetary policy which is very much like a fiscal policy. The government could always introduce a tax on deposits, which would have the same effect.

It is really the job of government to decide how to tax deposits, rather than letting the BoE and individual banks decide which negative rate they will charge on deposits. It is a form of wealth tax, and governments, rather than central banks should decide that.

[e]

This left agenda item may be conceding too much to deficit financing, but is this a point of concern really? Everyone’s talking about alternative economic possibilities/real economic problems, today’s problems; ideas are being discussed openly among the serious ones across our MSM screens. The left, in cahoots with ordinary voters, created the momentum; important I think. Even in the economic sphere.

[aragon]

Fannie Mae and Freddie Mac
ROFL!

Re: Negative Interest rates.

It would not work, people would just store their wealth in a liquid asset like Foreign Currency, Stock market, Gilts etc.

Of course there is always precious metals especially Gold and Silver, Jewellery.

Hair cuts are so European Union...

[Peter K.]

"Why is less targeted spending more effective and less inflationary?"

Bob, it depends on how good a job the government does in investing and spending them money. Clearly there are infrastructure needs like roads and bridges. Schools? Health care? Clean energy? High-speed Internet?

The government invented the Internet and put a man on the moon. It can do good work.

The private sector took the new money the central banks were printing and built a bunch of houses in the desert nobody wanted which led to an epic housing bubble and financial crisis. Surely the government could do better.

[JKH]

"It seems to me that MMT is mostly a wholly reasonable idea, undermined by the dogmatism, obscurantism and longwindedness of its advocates."

ouch**

[David Kent]

The only way for Governments to effectively control inflation is by the control of free cash in the hands of consumers, and the only way to control that is through tax. Because Governments wish to stay in power (variations to income tax and VAT are maybe the most unpopular actions of Government) they have developed a convoluted subsidy to the rich (and tax of the poor) called the bank interest rate. It is totally ineffective as Government no longer holds the cash and so no longer controls real interest rates.

[BCFG]

I know you think Liz Kendall represents the advanced guard of the working class and Jeremy Corbyn is some pseudo radical being carried on the wind of demented optimism.

However the real truth, as the entire establishment understand, is that Corbyn is a radical threat to the interests of the ruling class. Every media lackey of the establishment knows this and knows equally that Kendall is nothing but the representative of the status quo. Compare and contrast how the establishment treat Corbyn and Kendall!!!

You are wrong, and you are every bit as wedded to the status quo as Kendall.

I have seen more radicalism from Bobby Davro than from you.

[Bob]

David, but various to NI are not. For whatever reason ??

[Sanjay Mittal]

The three criticisms of PQE in the above article are a bit feeble. The first was that PQE might not provide enough stimulus. The first and obvious answer to that is: do twice as much PQE. And if relevant skills aren’t available, then supplement PQE with other forms of stimulus: interest rate cuts or whatever.

The second criticism seems to be that PQE does not provide the private sector with safe assets. Yes it does. If the state prints money and spends on whatever, that money ends up in private sector pockets.

The third criticism is that PQE is not “radical”. Well I know that not being “radical” is a cardinal sin with lefties. But (silly me) I judge policies purely in old fashioned criteria like value for money and “does it solve the problem it claims to solve”.

[jonathan]

Chris

The argument about PQE being inflationary is a bit more substantive then your presentation.

Of course the whole point of any QE is that it is inflationary. In itself that isn't really the objection. The point is that, for the following reasons, PQE is likely to lead to more, and less controllable, inflation that the alternatives.

1. Although a number of economists are keen to focus on the Zero Bound case for PQE, in truth that isn’t what is really being argued for. Do you really believe that Corbyn and Murphy are making a narrow Zero Bound argument? This is good old fashioned national investment policy through the back door - except without any of the discipline of the fiscal system or capital markets. Equally, it’s hardly a secret the architects see the expansion of the State (particularly in its “courageous” form) as being absolutely essential and that the state needs to be weaponised so as to provide this. The presses would be expected to run (yeah I know, I know) long after inflation hits 2%. I don’t think you can separate the politics of PQE from the economics.
2. Even if you want to take the Zero Bound argument at face value, as proposed, PQE is the policy equivalent of trying to drive a lorry flat out down the M1 with your steering inputs on a 20 minute delay. As long as infrastructure spending is being targeted, its hard to see how it can be responsive to a particular inflation rate. Hell, it’s hard to see how it can be responsive to a particular economic cycle. That seems a recipe for uncontrollable inflation. The fact that such an obviously lousy policy tool is being promoted so heavily tells you about the importance of point 1.

By the way, I'm not sure about your point 2 above. If there really was sufficient demand for these assets already, then chances are they would exist. One of the more egregious parts of the argument for the NIB is that its supporters envisage pushing its bonds at pension savers. The whole "long term investment" guff is just an excuse to off load shit on the uninformed.

Jonathan

[gastro george]

"Of course the whole point of any QE is that it is inflationary."

Which is, of course, why we're seeing such high inflation right now ...

[jonathan]

""Of course the whole point of any QE is that it is inflationary."

Which is, of course, why we're seeing such high inflation right now ..."

I think what you meant to say was " Which is, of course, why we're seeing higher inflation right now ..."

Christ knows what the rate of inflation would be w/out QE.

[gastro george]

ROFL. QE isn't inflationary.

[Ralph Musgrave]

Jonathan,

Your No.1 argument just above is extremely dodgy: that’s the claim that PQE is backdoor way of bring a big increase in public spending.

I don’t support Corbyn, but I don’t believe in attributing lies to people before they’ve actually lied. I.e. I assume that if Corbyn wants an X% increase in public spending he’d say as much, and fund it in the usual ways: tax, borrowing and perhaps some PQE thrown in.

Re your point No.2 (which you say you aren’t sure of), I agree: the point is nonsense. (That’s the claim that PQE can’t be responsive to changes in inflation.)

It’s true that getting infrastructure projects GOING can take time. So you’re right there (apart from shovel ready projects). As to stopping them in their tracks, that’s not difficult. But of course it’s daft to start an infrastructure project and then stop it in its tracks.

Thus the crucial flaw in PQE is that results in excessive gyration in infrastructure spending as I’ve been pointing out on my own blog since PQE was first suggested. Incidentally, looks like anyone making that point on Richard Murphy’s blog gets banned from his blog).

But the lastest news is that it’s not clear that PQE would be concentrated on infrastructure. Murphy said on his blog a week or so ago that the spending would be “broad based”. In short he’s all over the place.

And indeed broad based PQE is what Positive Money and the NEF have advocated for some time. Thus Murphy and Corbyn have added nothing to the debate.

[jonathan]

That old chestnut.

For what its worth, I think it is. You may want to dance on the pin of whether it's limited to asset prices or can ever reach the high street but I'll pass.

[gastro george]

Sure, asset prices are up, and that might bleed a little into general expenditure, but that's not what most people would identify as inflation in the general sense - certainly not in the Weimar/Zimbabwe/world-is-going-to-end sense.

[jonathan]

Ralph

I think we are going to have to disagree on point 1. One of the frustrations of Murphy’s appearance on the Politics show was how easily he was able to shift the discussion without answering Andrew Neil’s request to confirm that PQE was meant only to deal with the inability to hit 2% at or near the Zero Bound. Being familiar with the great man, I’m pretty sure I know what his thoughts are on that one. Equally Corbyn has made it crystal clear that he sees PQE as being the means to upgrade the UK’s infrastructure. He was absolutely explicit that the BoE will have “a new mandate to upgrade our economy to invest in new large-scale housing, energy, transport and digital projects: QE for people instead of banks”.

I think you misread my comment. I’m pretty sure about my point no.2. I was unsure about Chris’s point no.2.

Equally, I was quite careful to say that “, as proposed, PQE is the policy equivalent of trying…”. If Murphy is now advocating “helicopter dumps” and the like then (a) that is a new development; and (b) very different from what Corbyn is promoting (see above). But yes, like Uncle Milt, I can see how that would be more responsive.

By the way, it’s actually very hard to turn off an infrastructure project. Not being complete idiots, prime contractors tend to have strong views about entering contracts that can be cancelled at will. Equally, I remain to be convinced that there is such a thing as a “shovel ready” project.

[jonathan]

Gastro

Sure. And frankly that is the great virtue of QE over printing money.

But I just can't see how QE isn't definitionally inflationary - even if it is only in the limited sense of avoiding deflation.

[gastro george]

Mechanism? Evidence?

[Bob]

"And frankly that is the great virtue of QE over printing money."
All government spending and bank lending is creating money.

[jonathan]

Gastro

Even if QE never makes it out of M0 into M4, it still has to be inherently inflationary because it offsets the deleveraging effect that goes on in a recession and which would otherwise be deflationary.

[jonathan]

"And frankly that is the great virtue of QE over printing money."
All government spending and bank lending is creating money.

Hmmm. Maybe for a given value of "printing money". But the point is that QE is reversible in a way that really printing money isn't.

[Bob]

Jonathan, please read:
http://bilbo.economicoutlook.net/blog/?p=1623