PQE a good idea, but keep it away from Labour!

About three weeks ago I attended the Making Money Work event organised by Positive Money. Three economists were present, Adair Turner (former chairman of the Financial Services Authority), Chris Giles (economics editor of the Financial Times) and Steve Keen (Professor of Economics at Kingston University).


Steve Keen, Chris Giles, Fran Boait (Positive Money) and Adair Turner.

Picture: Positive Money

Now, the benefit of seeing economists all together, it is often very surprising how much they agree with each other. For example, a question from the audience came up, suggesting that inflation rates should reflect the increase in property values. I am sure I saw all economists nodding in agreement at that suggestion, which is a good one.

However, this gets never discussed, including property prices in the measure of inflation; and hence the official inflation rate only reflects consumer prices, leaving property markets to its cycle of boom and subsequent crash. So even though economists agree, it does not become policy.

So, I was equally surprised how much all economists seemed to be in agreement with the main topic of the evening, Overt Monetary Financing.

The main presentation was by Adair Turner on how Britain was stuck with either increasing its already excessive private debts, or use overt monetary financing to get back into a sustainable growth cycle or, more likely, help in a recession. Turner did not see any technical difficulties with overt monetary financing, if done to a very limited amount, say £10bn a year, and the others agreed. However, Chris Giles said he had reservations about Corbyn’s People’s Quantitative Easing, and I am sure he was very critical of PQE in the Financial Times.

Now, here we come to the crux of the matter. I have previously mentioned that Ambrose Evans Pritchard in the Daily Telegraph supports the idea. However, in the same article you will find Jacobins, and Proudhonists mentioned, the implication being that revolutionaries or anarchists (Labour) should not be trusted with PQE. In fact, he suggests that the Conservatives are best placed to use these tools responsibly.

The same with Adair Turner again, who was interviewed by the IPPR about his ideas. a couple of days ago That is what he said.

JG: One proposal for fiat money that’s received a lot of recent attention among UK commentators is new Labour leader Jeremy Corbyn’s ‘People’s QE’. Do you support his proposal?

AT: I have to admit I haven’t looked at it in great detail. But the challenge facing Jeremy Corbyn in proposing any form of monetary finance is clear: whether he can credibly address the hugely important political economy risks.

As I said earlier, the technical case for treating overt money finance as an available tool to stimulate nominal demand – if and when the conditions make such stimulus appropriate – is incontrovertible. But the politicalrisks of its misuse are huge.

So the legitimate concern is that if monetary finance is proposed by people who come from a strongly socialist tradition – a tradition which has tended to reject the idea of any disciplines on public expenditure – there is a danger in practice that it would be used to excess. That is the concern which Corbyn would have to address.

Paradoxically, the governments best placed to use overt money finance without generating legitimate concerns about its misuse, and without therefore generating harmful market reactions, would be those whose overall commitment to a capitalist market economy is unquestioned. This mirrors the interesting reality that some of the most compelling arguments for using overt money finance of fiscal deficits were put forward by economists – such as Milton Friedman – whose commitment to sound money and low inflation were undoubted.

And, here again, the messages is clear: give Overt Monetary Financing to Tories, which have an “unquestioned commitment to a capitalist market economy”. Keep it away from socialists.

Now, these are clearly political points, which have no reflection in reality. As Prime Economics (the think-tank which Ann Pettifor works for, one of the new Magnificent Seven Economists to advice Labour) has pointed out, Labour has shown more financial rectitude than the Conservatives in the last 25 years. Here is Prime Economics Jeremy Smith’s analysis, showing that the deficit under the Tories was much worse over the last 25 years, than it was under Labour:

Source: Prime Economics

So this is only spin, that Labour cannot be trusted.  Based on the Prime Economics’ analysis the Labour government borrows less. If that is the measure of responsibility, Labour should be trusted with PQE, not the Conservatives.


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