Daily Management Review

Does Britain Need People's QE?


Recently, political outsiders have been gotten unprecedented support not only in America (Donald Trump), Greece (SYRIZA party) or France (Marine Le Pen): with great enthusiasm UK greeted Jeremy Corbin (until recently a little-known politician from the Marxist views) that may become the leader of the Labour Party, and hence potentially the next prime minister.

Does Britain Need People's QE?
Attention to Corbin is caused not only by his controversial call to withdraw from NATO and populist economic views. He is very negative about the austerity program and promotes the so-called "people's quantitative easing" (QE).

According to Corbin, the Bank of England should print new money and give it directly to ordinary people (through housing cooperatives, municipal councils, and “green” investment banks) for the construction of houses, schools and hospitals.

Many economists believe that the new QE is inappropriate in the current economic climate. Instead, in their view, the Government should make greater use of the low interest rate for the construction of infrastructure that will ultimately increase productivity.

This can be done without the participation of the central bank, by increasing the fiscal deficit.

Recall that the Bank of England recently completed a three-year program of quantitative easing (the main purpose of which was to support the economy after the crisis), and its managing director, Mark Carney, announced a possible increase in interest rates and the beginning of tightening, rather than easing.

The phrase "QE for the people" was first used in May in an article of Mark Bliss, Eric Lonergan and Simon Wren-Lewis. The authors suggest the following:

- The government should legislate providing the Bank of England the right to make direct payments to the household sector, which can be called QE for the people. With this tool, the central bank will be able to mitigate any sharp slowdown in the economy that has occurred due to internal or external factors, such as a deflationary shock by the recession in the US or China, or continuing decline in the euro area.

Then, the very point:
- Without prejudice to the operational independence of the Bank of England, the size of payments and their timing must be determined exclusively by the central bank, and the program should be coordinated with the inflation target.

All this is quite different from Corbin’s proposal. The politician believes that the Bank of England should soften, not tighten monetary policy. There is no inflation, and the program of quantitative easing would stimulate it, he said.

- Europe type 1 trillion euros as part of QE to restore inflation, since it is the foundation of economic prosperity. People do not invest when the economy is experiencing deflation, - said Richard Murphy, an economic adviser to Corbin, on BBC. - Of course, we can stop this program whenever we want. Any form of folk QE may be terminated as soon as wages rise and more full-time jobs appear on the labor market. Still, we are very far from that. Today, UK needs to deal with low wages and low productivity with new investments.

How easy is it to stop a similar program? If the money spent on the construction of, for example, high-speed railway, the new line will not be finished with the completion of financing; if the funds are used, for example, for solar energy development, the company will not able to function when the funding stops.

The traditional QE program is theoretically possible to reverse: the Bank of England can sell gold or not reinvest the money after the maturity of the bonds. It is hard to imagine how this can be done with the people's QE, since such halts would have a negative impact on the labor market and wages. And, what is the most important - it's hard to imagine how such a program could support independent Bank of England.

Venezuela to mind in connection with this comes, where such a policy (it can be called a national QE) has long been practiced. By the way, Corbin has recently been a fan of Hugo Chavez. Of course, many believe that Corbin will never be able to come to power, but the same thing a year ago was spoken about the Greek party SYRIZA.

source: The Economist