‘Quantitative Easing for the People’ is one of the cornerstones of Jeremy Corbyn’s leadership platform. The basic idea is simple: a hypothetical Corbyn government would instruct the Bank of England to create new electronic money (the modern equivalent of printing it) to fund public investment projects. The vehicle for doing this would be the ‘National Investment Bank’, which would be charged with funding public investment. The NIB would issue bonds that the BoE would be commanded to buy.
You can see what the architects inside Corbyn’s camp were thinking. They believe Labour lost the election because it was not seen to have a sound policy on the deficit. So, instead, they have based an anti-austerity policy on money-financing, not deficit financing. Simple! Why did we not think of this before, you can hear them muttering.
But almost everything about ‘QE for the people’ is silly — and it’s a telling insight into the bodged nature of the Corbyn insurgency. For a start, even the name: ‘…for the people’ — this is meant to signal that the Bank of England’s regular quantitative easing has been for the benefit of the rich. In fact, to the extent it’s helped curb the recession, it will have mostly benefited the poor who bear the brunt of contractions through unemployment and the associated financial devastation.
Chris Leslie and Yvette Cooper both pointed out that QEP would be inflationary. @ToryTreasury has made the same point on Twitter. They are all right. Ultimately, this policy would create more money, chasing after the same amount of goods. And the result would of course be higher prices.
On some occasions, proponents have pointed out that QEP would only be instigated when the economy was in recession and inflation was welcome. But this idea doesn’t stand up to scrutiny. For starters, urging QEP right now contradicts the judgement of the BoE’s Monetary Policy Committee, who decide the right amount of stimulus to get inflation back to target. We can guess that the Corbyn camp don’t much care about that. John McDonnell, the new shadow chancellor, has previously called for ‘democratic control’ over interest rate setting to be retaken by the government. And Richard Murphy, seemingly Corbyn’s chief source of advice, has described BoE independence as ‘an illusion’ and made it clear that it’s not welcome.
There is another contradiction in announcing that ongoing public investment needs occasional money injections as the business cycle dictates. The reality is that once it has become acceptable to money-finance like this, the temptation to resist doing more pervasively will be harder to resist. Worse still, financial markets will sense this and demand higher interest rates on conventional borrowing, aggravating the government’s fiscal straits further.
In the worst-case scenario, vicious cycles like this can become self-fulfilling, leading to ruinously high inflation and, ultimately, ‘austerity’ that would make what the UK endured since 2010 look like a picnic.
Tony Yates is Professor of Economics at the University of Birmingham and a former Bank of England macroeconomist.