In the Financial Times a few days ago, 55 economists criticised the potentially new leader of the UK Labour Party Jeremy Corbyn (results due in a week) for his proposals regarding People’s Quantitative Easing. The idea is that a yet to be set up National Investment Bank sells bonds to the central bank, the Bank of England, and uses these funds to pay for much needed infrastructure investment in the UK.
That is what the economists, led by Professor Tony Yates from Birmingham University had to say:
Peoples’s QE would be a highly damaging threat to fiscal credibility, and unnecessary, since at this time of very low interest rates and tolerable debt/GDP public investment — in many areas much needed — can be financed conventionally.
Everything can always be financed conventionally through more government borrowing, but the Labour party lost the election, it is thought, because more deficits leading to higher debt were seen by the electorate as too risky and hence voted for the Tory Party, which promised more austerity. For the second time in a row, after 2010.
Now, PQE will actually allow the UK government to finance expenditure for free. The National Investment Bank would have to pay interest on the bonds to the Bank of England, but both are government agencies, and therefore the financing of any investment would be free. This radical idea is part of the appeal of Corbyn, and will contribute to his win as Labour leader, if he actually does win. It also neatly provides a method of not increasing the deficit, or government debt.
Still, the economists believe it would threaten the “fiscal credibility” of the UK to finance things for free. They do not define fiscal credibility, but I would interpret it as the ability to raise taxes and spend money in a credible way. I would think it depends on the size of PQE, compared to the rest of the economy, whether there is a reputational risk, as a tiny £10bn PQE per year programme in a huge £1,800bn GDP economy as the UK would hugely limit any reputational risk. The risk would in fact be non-existent. But £10bn would enough to finance around 80 hospitals, or more than 50,000 new homes for social housing. So tiny risk, huge reward.
Now the challenge:
Below you find a picture of a US supercar, currently on sale in the UK for just under £100,000. It is a 2010 model of the Mosler MT900S. (Further details here)
I would like to offer it to the 55 economists. There are three financing options:
- You can have the car for free. This is PQEE, People’s Quantitative Easing for Economists.
- You can pay for the car in instalments. These are £3,000 per year. Forever. So your kids, grandchildren, and great-grandchildren will need to pay. Long after the car will have stopped working. The payments never stop, so over 100 years you or your heirs will have paid £300,000 for the car. But payments continue. Your partner and bank manager might warn you against that option as you have enough debt already.
- It will be financed like the last Labour government paid for the hospitals it built through the Private Finance Initiative (PFI). For the next 30 years you will pay 12,000 per year for the car. You will have a maintenance contract for the car, and it means that over 30 years you will pay £360,000. Then the car is yours.
If the economists followed the advice they give the Labour candidate, they would of course reject the offer of a free £100,000 car. The PQEE option would clearly damage their professional reputation They would advocate free money! So that is what they are teaching at university these days, that a potential risk to reputation should always come first, rather than the goods and services which meet the population’s needs at the lowest possible price. It seems.
The economists would prefer the second option, being indebted. That is in fact what happens if a government borrows. It will start paying interest on its debt for ever and ever. Government debt is never repaid (apart from tiny amounts when times are good) and interest will continue to accrue and need to be paid forever. By the heirs of the people who took out the debt.
The third option I have included because another Labour candidate for leadership, Yvette Cooper (husband of former Labour Shadow chancellor Ed Balls) keeps going on about People’s Quantitative Easing being “the private finance initiative on steroids”. I think the PFI financed projects are examples of the great financial scandals of the last 20 years in Britain, where the unscrupulous financial service industry has ripped off unsophisticated clients. In this case Ed Balls, who worked in the UK Treasury at the time of PFI. Yvette Cooper is closely associated with that disaster, which undoubtedly was due to other economists recommending it as a way forward then. If I were her, I would not mention PFI at all, as it just shows that Labour was diddled by the finance sector.
Now, unfortunately the offer of the Mosler car is only hypothetical, should the economists, despite their recommendation what Labour should do, do a U-turn themselves and take stuff for free.
In reality, of course, quite a few, if not all economists, would have chosen the free car, and dealt with the potential reputational damage later. Or perhaps they would have said that the risk of reputational damage through PQE is quite small, if the PQE amount is quite small. and we should therefore go ahead with a trial version of small PQE.
I would be interested in their response.
Now, if they do not like Mosler’s car, or cannot afford it, they could always read his stuff on economics. I would start with that: “Seven deadly innocent frauds in economic policy“.
That is really free, a free download.