Saturday, 15 August 2015

Can Corbynomics Work?

"People's Quantitative Easing" may sound like a form of stern Maoist muscle therapy, but according to its many critics this economic proposal of the Corbyn campaign is extremely dangerous. At least this is an attack on actual policy, rather than Corbyn's beard or his supposedly deep affection for Hamas. However, is the policy, as Labour rivals allege, "economically illiterate?"

The chances are that it is not. The notion of a People's QE has also been floated by respectable Keynesians like Mark Blyth, Eric Lonergan and Simon Wren-Lewis at the Guardian. They had different ideas about how it would work, but it still would involve printing money for investment. The tax campaigner who advised Corbyn to include People's QE in his campaign document, Britain 2020, is Richard Murphy, who has done a respectable job of defending it around the media.

Two attacks on the policy are particularly stinging as they come not from the monetarist fringes of the Tory party, but from perceived Labour moderates with strong economic credentials. Both fellow leadership candidate Yvette Cooper and her supporter and current Shadow Chancellor Chris Leslie have alleged "massive inflation" would result from the policy. They don't deign to explain why or how, and the media largely doesn't ask them. In a classic case of what Simon Wren-Lewis calls "media-macro", the questionable economic wisdom of officials is reported verbatim, without analysis or an alternative view.

What is People's QE? And why would it be so disastrous for inflation when normal QE was not? First, we need to summarise in very vulgar terms what QE is.

Quantitative easing involves the creation of electronic money by a central bank, by various means and for various ends and with various strings attached. QE involves the central bank using those funds to buy up debt and sit on it - typically, but not always, government debt. The new funds can be used by financial institutions who have now got rid of some of their debt. Those who are pro-QE say this turns into new investment. Those anti- say the banks use the funds just to deleverage (that is, dispose of other debt). A Keynesian like the Warwick university professor and author Robert Skidelsky will argue that, psychologically, QE can't be wholly effective unless the right investment environment exists - that is, unless monetary expansion is supported by government activity to create renewed confidence. That confidence then allows the rate of investment to increase and aggregate demand to rise. Moreover the low interest on government debt encourages investors to take bigger risks. It supposedly forces investors out of safe government debt and towards financing new, growth inducing projects. So far, so private-sector led. 

Here's the Chicago economist Robert Lucas on why he likes QE: "[It] entails no new government enterprises, no government equity positions in private enterprises, no price fixing or other controls in the operation of individual businesses, and no government role in the allocation of capital...These seem to me important virtues."

Corbyn's version of People's QE fills the gap in normal QE by creating an investment bank under government control. The Bank of England will buy bonds off the government-backed bank and the money will be allocated to finance infrastructure projects and other worthy causes. Basically, people's QE puts power over investing new money into the hands of the government and not into the hands of ailing private banks. It also dodges the perceived risks of government borrowing by placing the newly issued government bonds in the hands of the central bank, not the private sector. However, to the chagrin of monetary purists, it flies in the face of orthodoxies about central bank independence.

Why then the accusations that People's QE will produce inflation? The theory is that, if implemented in a growing economy, People's QE will stoke unsustainable, rapid increases in aggregate demand as per the 1970s. According to Yvette Cooper, “Quantitive easing to pay for infrastructure now the economy is growing is really bad economics." Her argument amounts to bad Keynesianism, however, as the policy is only intended for use in an economy operating at below full capacity (growth in 2015 so far has been a weak 0.3%; unemployment 5.4%; underemployment worse than any comparable EU country).

Of course, if a full blown economic recovery takes place between now and 2020 the policy will be ditched. But outside of property prices, financial services, and low paid employment this remains unlikely. Nevertheless the policy is a major affront to anyone who believes inflation is the central threat to economic stability.

Why does inflation, in the eyes of critics, result from stimulus? Demand-pull inflation is brought about by rising demand pushing up prices - but only as the economy reaches full employment. Cost-push inflation results from higher prices, presumably relevant in this case because a fall in the exchange rate of the pound would increase the cost of imports. 

What are the problems with assuming monetary stimulus will increase inflation (disregarding the fact we have already had a lot of monetary stimulus and no major inflation)? Against the quantity theory of money, Keynes argued that new money would only create inflation where the economy conforms to the classical model, in which there is no under utilisation of capacity and the labour market is always at its peak or tending that way. In other words, if there is no theory of a shortage of aggregate demand, prices will theoretically rise immediately with the printing of any new money. However, where new money is introduced in conditions of under utilisation, it can be directed towards investment and can stimulate the economy. If an amenable environment for investment exists, and there is sufficient direction by authorities, at least part of the new money will go towards increasing output. A depressed or under performing economy is one that is waiting for the chance to start doing more. Rising prices, when they come, are a sign of recovery - not that something has already gone disastrously wrong. As Richard Murphy has argued, People's QE will be phased out if inflation starts to rise above target levels.

Should we be concerned about a weakening currency? A greater quantity of money should weaken the value of the pound relative to other currencies. A depreciating currency is bad for those who need to finance imports, which the UK is heavily reliant upon. It can also make foreign debt obligations harder to meet. A counter-argument is that depreciation is good for cost-competitive exports. It can also prompt local firms to meet some of those import needs themselves. 

However, these were precisely the risks of flooding banks with liquidity from 2008 on, which is what normal QE has done. The risks here are the same. That is why many in the economics profession may not like People's QE, but don't think it's a crackpot lefty plot to tank the economy. The reason they don't like the policy is that it replaces a central bank-controlled policy with a public one. For public choice theorists this is unacceptable because democratic government is always and everywhere a bad monetary manager suffering from a permanent inflationary bias. 

The strict theoretical feasibility of the policy is not the real issue then. The objection among economists boils down to an issue of control - that of the government or the central bank. Labour politicians have been taking the political objection of economists and intensifying it. Buried within the concerns about runaway inflation lurks the folk memory of a "run on the pound." That phantom is supposed to rear its head when governments do silly things that scare the markets and prompt investors to ditch the pound. It is a constant threat to over-spending Labour governments (despite the fact currency runs normally take place when the government tries to maintain a fixed currency peg against depreciating trends, for example, in 1992, when Britain famously "crashed out" of the European Exchange Rate Mechanism because of speculation against the pound, that time under a Conservative government). At the moment the pound is very strong and is floating freely against its weaker rivals. The likelihood is not that speculators will crash the pound simply because spending gives them jitters about inflation.

The point here is not to deny that speculation against the pound will take place under a left-leaning government. As Michal Kalecki, the Polish economist, observed, the objections to Keynesian style demand management are not purely economic. The boost to demand by a government deficit or an investment bank can raise profits. Public debt becomes private wealth. If the central bank holds the debt that finances infrastructure, a currency run is made even less probable. Here, however, we are not dealing with individual, self-interested, rational actors but with class power. Finance capital objects to Keynesianism on class grounds because Keynesian policies create a more equitable distribution of wealth, empower the public through greater employment and income, and - via inflation - erode the value of existing debt. In other words Keynesian policies threaten to heavily restrict the power of capital, embedding it in a social framework built around equitable outcomes. The contemporary result is not Keynes's "euthanasia of the rentier" but the effective handcuffing of the financier.

For what it's worth, I believe our economic woes run much deeper than the need for Keynesian stimulus. I also believe that, the moment inflation or other vulnerabilities kick in, finance capital will restrain activity and choke off a demand-centred growth path. This is not about the fundamental mechanics of a capitalist system but about this particular capitalist era, labelled "financialisation" by the economist Costas Lapavitsas. The great power of finance in contemporary capitalist society will have to be reduced. Ultimately, if wealth is to be effectively redistributed, the financial sector will have to be placed under public control and serious moves towards a meaningful redistribution of skilled work will have to he made, perhaps involving a universal basic income and limits to the length of the working week. These cannot be achieved in the framework of a "minimum program" or over the course of a single parliament by a lone government. Concrete measures to increase social welfare and the social wage can come first. But a serious anti-capitalist alternative will have to consider ways of defeating both capital's stranglehold on investment and its stranglehold on labour in the long run. It will take more than a left leaning government to achieve these things. In fact, it will take lengthy and dedicated popular mobilisation.

No comments:

Post a Comment