Could People’s Quantitative Easing cut government debt by two thirds?
Let us be clear here, the term “People’s Quantitative Easing” has not been fully defined yet. It is a policy still to be determined by the Labour party and its leader, Jeremy Corbyn. But, as defined by Richard Murphy, its usefulness would come in mainly in times of an economic crisis.
So, everybody who has looked in detail at the proposals seems to be in agreement that it would be a good idea at times of high unemployment, in a depression, when there are plenty of resources lying idle in the economy. This is certainly true for “Overt Monetary Financing”, a general term used to describe spending money into the economy through the central bank. Which is colloquially known as “printing money”.
Everybody also is in agreement that the QE undertaken by the Bank of England in the years after 2009 was not a “People’s QE”, but mainly benefited the rich and the banks. To what extent it benefited the banks especially is unclear, and the Financial Times has called for an audit by the National Audit Office to determine who actually gained from the unprecedented expenditure by the Central Bank, pumping £375bn (about 20% of GDP) into just one asset market mainly controlled by the commercial banks!
That means that PQE (and not more QE) should be the tool of choice in the next downturn. The disagreement would be about how much should PQE there should be, whether other overt financing tools (helicopter money) are possibly more effective and what the role of the central bank should be, which is deemed to have an “independent mandate” to look after inflation.
Now, that is a shame, because PQE, or “overt monetary financing,” could be equally used to finance every government expenditure, ever. No more borrowing, just PQE!
This is not some loony left-wing idea, but comes from one of the most prominent influential economists of the second half of last century, an avid defender of free market principles and an economic guru to both Ronald Reagan and Margaret Thatcher. Milton Friedman!
In 1948, just after the Second World War, Friedman wrote the following:
Under the proposal, government expenditures would be financed entirely by either tax revenues or the creation of money, that is, the issue of non-interest-bearing securities. Government would not issue interest-bearing securities to the public; the Federal Reserve System would not operate in the open market. This restriction of the sources of government funds seems reasonable for peacetime.
The chief valid ground for paying interest to the public on government debt is to offset the inflationary pressure of abnormally high government expenditures when, for one reason or another, it is not feasible or desirable to levy sufficient taxes to do so. This was the justification for wartime issuance of interest-bearing securities, though, perversely, the rate of interest on these securities was pegged at a low level. It seems inapplicable in peacetime, especially if, as suggested, the volume of government expenditures on goods and services is kept relatively stable. Another reason sometimes given for issuing interest-bearing securities is that in a period of unemployment it is less deflationary to issue securities than to levy taxes. This is true. But it is still less deflationary to issue money
How could the UK have looked after 1951 if it had just issued money by the Central Bank? What if Milton Friedman’s recommendations had been taken and implemented?
Looking back and doing a “what if” analysis is always a bit tricky, but here it should be fairly easy.
If the government borrows, it takes money out of circulation from the real economy. The money available by the private sector to invest and consume must fall. Now if the government does not borrow the money from the private sector, would the private sector spend it? Unlikely, the private sector would keep it in the banking system, and save it there. Again, it is not available for investment in the real economy.
So whether the government spends money by borrowing it first from the private sector, or it just issues (“prints”) money, the same real investment and consumption activities by the government (and the private sector) will happen. That will be the ones the government chooses to undertake. That would have been, in the UK after the war: money to build up the NHS, build the motorways, invest in social housing, and set up a welfare state. More recently free nursery places and tax credits were additional innovations. All Labour policies, we might add.
The amount of inflation is exactly the same as if the government borrowed the money, as the same amount of money is chasing goods and services, whether it was borrowed or just spent into the economy. The main determining factor for inflation is private credit growth rate, which will in times of a boom, exceed increased government spending growth significantly. The rate of growth of private sector credit will determine the amount of money in an economy much more than government spending, and therefore will be the determining factor in asset and consumer price inflation.
That is worth saying again:
No increase in inflation arises if the same amount of increased money is in the real economy. It does not matter if the increase comes from government borrowing or just government spending by the Central Bank. Inflation (in both assets and consumer prices) is mainly determined by private sector money growth.
What about the interest on the government bonds?
Clearly, if the government just issues money rather than borrows it, it saves any interest payments. These interest payments will go to the lenders of the money to the government, the people who had enough money to lend it to the government in the first place. These people are, in the main, just the very rich, who are net lenders to the government. The top 10% of the population, in terms of wealth or income.
Now, the very wealthy which lent their money to the government are, as a group, very likely to lend the interest they receive onto the government again. They did not need the money in the first place, remember, so it is unlike that they need the interest. So it is them who would have lost out on the interest paid to the government had the UK decided not to borrow in 1950.
So, let us just add up the interest which the very wealth would have lost out on. Luckily, the Office of Budget responsibility has detailed the interest the government has paid since 1951. In 1951 it came to £0.5bn for that year. Now, in 2015, it is about 100 times bigger, at almost £50bn.
In total, if you add all the numbers up, for all the years, the UK has paid out the staggering amount of £940bn in interest to the very rich of its population in the last 65 years. Not because it needed to, but because it chose to.
If it had not done that, we would have government debt in the UK which was £940bn smaller. Not almost £1,500bn, but more like £560bn.
If the UK had followed Milton Friedman’s adviceand though its Central Bank had just spend the money instead borrowed it, the UK debt would have been a bit about one third of the size it is now.
But as it is, almost a trillion pounds has been spent on interest since 1951. Interest accounts for two thirds of the UK debt!
So, same growth, same inflation, same goods and services in the economy. The UK economy would be very similar, if no borrowing had taken place since 1951. If you looked out of the window today, Britain would look perhaps exactly the same, as roughly the same investment decisions would have been made, by the state and the private sector.
The wealthy would still be wealthy, there would be no perceivable difference. But still, the UK would be a more equitable society. The wealthy would have £940 billion less, and the UK debt (which has to be serviced by all of us) would be £940 billion less.
The government debt to GDP ratio would now be something like 30% rather than 80%. The “government debt” would, of course, not be real debt, but just a summary of all the government spending ever. The annual government spending in excess of taxation (the “deficit”) could be half of what it is now, if we did not need to pay interest. All without austerity.
Now, clearly, that just describes the dynamics of the situation over a 65 year period, had we started in 1951 and followed Milton Friedman’s advice.
To get to a situation in the future, where the UK, perhaps in 30 years time, does not have any debt any more, it would have to be slowly replaced by government spending, instead of borrowing.
So how would the government know how much it should spend into the economy? Well, as now, the government will have to decide which roles in the economy it will want to take responsibility for. That would differ, clearly, depending on a Conservative or Labour government. Then it would have to fund these activities.
To pay for these activities would still come mainly from taxation, as now. Perhaps 2%-4% of GDP should be paid for by additional government spending into the economy. More in the beginning to repay outstanding debt and pay interest; less, as government borrowing falls. More in times of recession, less in times of a boom.
However, it should be made clear, that taxation is mainly there to (a) avoid inflation, and (b) redistribute money from the wealthy and fortunate to the less wealthy and less fortunate, according to the mandate received at the last election.
More crucially, unemployment has to be avoided. Should there be unemployment in the economy, the government’s role should be to make work more attractive. It could, for example, reduce the tax on work (National Insurance, income tax) and increase the tax on assets. And become an employer of last resort, should employment fall.
Inflation on goods and services, but also on assets (housing) would need to be assessed and watched. There should probably be an independent economic commission. It would have a dual mandate, as the Federal Reserve in the US, to ensure unemployment and inflation is low. It would produce a range of recommendations to ensure that these parameters stay on a pre-determined path. That could be 3% unemployment, 3% consumer price inflation, and 3% asset inflation, for example.
Government spending, taxes and interest rates should be the three tools which the government should use, as recommended by the independent economic commission, to ensure that the inflation targets are met in the long term.
I think it is time we follow Milton Friedman’s advice, with the government just spending money into the economy.
Then, over time, we would try to cut the government debt to one third, focus on unemployment, introduce a more egalitarian society, control asset and consumer price inflation.
And use PQE to finance every bit of government spending!