Economists are like babies at a birthday party; get one wailing, and you’ll soon have them all going.
Right now what’s set them off is ‘Corbynomics’, which stands for the proposals Jeremy Corbyn made in his campaign speech on the economy, mislabelled as something that sounds like a discipline of study. A centrepiece of Corbynomics is ‘People’s QE’ – the proposal that the Bank of England lends, more or less directly, to a National Investment Bank to fund infrastructure projects.
If you want to read something actually sensible on People’s QE, try this, from Scott Fullwiler.
*UPDATE: Or, for something outside of MMT, this from Simon Wren-Lewis*
But what the economists are all wailing about, one way or another, is the threat People’s QE poses to central bank independence.
Does it pose a threat? No. Can these economists justify their concern? No, not really. So what’s got them going? Well one started up, and now we’ve got the chorus. A cow mooing loudly on the TV doesn’t pose a threat either, but try explaining that to a room full of screaming one-year-olds. Now the tantrum wave has swallowed up David Cameron, who warns that ‘the Labour party is now a threat to … our economic security’. Suddenly becoming aware that this might sound a bit hysterical, he swiftly moderates the tone by adding that the Labour party is also a threat to your family’s security.
What’s emerging as the consensus view on Corbynomics, as I said, is that it threatens central bank independence. Or something like that. Here’s The Economist:
At present the bank [of England] looks unlikely to embark on a fresh round of QE (instead it is mulling monetary tightening). If Prime Minister Corbyn were to rely on QE to fund public investment, he might be tempted to cajole the bank into prescribing more of it. At the mercy of politicians, the bank would lose its credibility, and confidence would drain from the economy, forcing interest rates up and crimping investment—again, just the opposite of what was intended.
Really? Why? If the BoE were ‘cajoled’ into buying bonds issued by the National Investment Bank, then interest rates would presumably move down, not up, since the interbank market would be flush with reserves. But if the BoE wanted to drain those excess reserves, it would still have all its existing instruments for doing so, from Open Market Operations, to reverse repos, to offering time deposit accounts in the reserves facility, to issuing its own bonds. Notice the second-to-last sentence here, from the BoE Redbook:
The Economist seems to have been misled by the ‘QE’ label into thinking that Corbynomics forces a certain monetary policy onto the BoE. But it doesn’t. It’s just a way of funding some infrastructure projects. The BoE can sustain its monetary policy around this by doing reserve adds and drains using all its normal instruments. And if it really worried that the market was being flooded with liquidity despite all its best efforts, it could just raise the interest paid on reserves (the support rate) to its target Bank Rate. Problem solved. Settle, petal.
Then there’s Martin Sanbdu in the Financial Times:
The problem … is that there is little reason to think the rate of money creation required to stabilise the economic cycle generally corresponds to the investment needs the country faces (which are not just cyclical but depend on secular socio-economic forces such as demographic change). Trying to achieve both with the same tool means one or the other will have to give.
What does he mean, ‘same tool’? Again, People’s QE is just a way of financing some infrastructure projects. The BoE can buy the bonds for that, then it can do whatever else it likes to ‘stabilise the economic cycle’ (if you still believe that monetary policy has that power). It can never lose its control over the Bank Rate, since, again, in the worst-case scenario it could just set the support rate to its target. It can add and drain reserves in all its ordinary ways, compensating for the purchase of bonds from the National Investment Bank if it chooses to do so. There’s no new constraint on the BoE’s operations here. It can fund the infrastructure projects, then decide what monetary policy it wants to pursue. Take a chill pill, Martin.
Or take Anatole Kaletsky in Prospect:
But if QE is used to finance infrastructure investment or permanent social programmes, as proposed by Corbyn, the printing of money is bound to continue indefinitely, even when a tightening of monetary policy is required—and the outcome is bound to be severe inflation.
Again, why? I don’t personally believe that a tightening of monetary policy would do much against inflation; it could even encourage it, but never mind that. The point is that the BoE is perfectly capable of tightening monetary policy, with or without People’s QE. At the risk of sounding like a broken record: if you can add reserves, you can drain reserves too. And even if you can’t, you can just set the support rate to your target. What’s your caper, Anatole?
I repeat: if you want to read something actually sensible on People’s QE, try this.