All entries for Sunday 27 September 2015

Corbyn's proposed 'quantitative easing' is already being done by Osborne

Jeremy Corbyn’s proposal for ending austerity - using Bank of England money to fund government investment to promote growth - has been greeted with a hostile reaction. Critics have dismissed such ‘people’s quantitative easing’ out of hand saying it will lead to inflation. Some have gone so far as to say it is 'ridiculous' to finance government spending by 'printing money', t will 'crash the economy' or take the UK down a slippery slope making the UK another Zimbabwe or Greece, and so on. But it is not in fact a new idea and is not very dissimilar from what the current chancellor, George Osborne, has been doing for years.

A combined monetary and fiscal stimulus, which is what this is, is just textbook Keynesian economics that any student learns in their first year studying macro economics. When there is spare capacity in the economy due to insufficient demand, government spending financed by either QE or borrowing or both stimulates growth and reduces unemployment. Later when the spare capacity has been used up and resources are fully employed is when inflation takes hold. In the UK at present there is evidence of a lot of spare capacity in the high numbers of unemployed, on zero-hours contracts or who are self-employed but making a very poor living. And no inflation.

Yet 'peoples QE' is not really very different from what is already happening. Chancellor George Osborne has been using quantitative easing since the took office (continuing a policy begun by his predecessor in the Labour government). Since 2009 the Bank of England has been buying government and commercial bonds with newly created money. The chancellor at the time, Alistair Darling, had authoritsed the Bank of England to spend up to £200 billion on this, and it undoubtedly contributed to the growth that was happening up to 2010. This was nothing to do with the banking bailout which had occurred the previous year when the financial crisis hit in 2008. The stated aim was to create inflation by stimulating spending and output in some way, notably through bank lending for private investment.

But the distinction between buying assets and buying goods (what Paul Krugman calls 'buying stuff') - becomes blurred when the government has a large budget deficit and is borrowing by selling gilts at the same time as it has a QE programme. The government finances spending by borrowing from financial institutions by selling gilts and these gilts are then bought up by the Bank of England with new QE money. So in effect QE means using newly created money - indirectly - to pay for government spending and hence stimulate the private sector indirectly through the multiplier. This will not cause inflation if there is enough spare capacity. And this is precisely what we observe.

George Osborne expanded the QE scheme in 2012. When the new government come in in 2010 the amount of QE money that the Bank of England had spent buying gilts was just under £200bn. Since then George Osborne has instructed the Bank of England to increase QE money by another £175bn and used it to buy newly issued gilts to finance the deficit. This fiscal stimulus will have helped the economy back into growth - thereby contributing to Osborne's claimed success - although inflation is still well below target because there is still a lot of spare capacity in the economy.

These comments refer to the short-term Keynesian stimulus of QE. What Corbyn is proposing is that - rather than just buying 'stuff' the QE stimulus take the form of public investment in order to benefit the economy in the long run by increasing productive capacity.

One futher point is worth mentioning:
I should just mention that there has been little discussion of the semantic problem created by QE regarding the definition of government debt. The Bank of England owns £375bn of government debt, resenting about 25percent of the total. But since the Bank is owned by the British state the government is actually borrowing this money from itself and therefore pays no interest on it. Counting the debt to include the QE figure as George Osborn does helps him make the political case for cutting spending in order to 'pay down the debt'. But would it not be a fairer reflection of the real situation to quote the net figure?

Dennis Leech : 27 Sep 2015 12:44 |  Comments (0) |  Close comments |  Report a problem