Corbyn’s QE for the people jeopardises the Bank of England’s independence
Jeremy Corbyn’s proposed “People’s QE” has provoked consternation in the academic and central banking world. Even Mark Carney, governor of the Bank of England, has weighed in, despite the perils of central bankers speaking out on matters of political controversy. PQE has divided opinions in the economic commentariat, but it has united all in getting us extremely hot under the collar.
PQE involves the government instructing the Bank of England to print money (or rather, the modern equivalent, creating electronic reserves) to purchase bonds issued by a Corbyn-established National Investment Bank. This NIB would then use the money to fund public infrastructure projects, or, in fact, whatever the government fancied.
On the face of it, this appears to get rid of the nasty business of having to finance worthy stuff by running deficits, and later, even worse, paying back the debt with taxation revenue.
But, in fact, this is not a problem solved at all. It subverts the normal separation of monetary and fiscal policy, currently preserved by the independence of the Bank of England.
So what, Corbyn’s supporters have been saying. In fact, John McDonnell wrote shortly before the last election that he wanted “democratic control” re-asserted over interest rate setting, the implication being that previously, monetary policy had been subservient to the interests of banks.
For this reason, it’s worth spelling out what independence means, and why it serves the “people”: lest the impression arise that independence is just something central bankers try to protect to make their jobs seem more important.
For starters, under current rules, the government sets the mandate for the Bank of England, and in fact the tools which it can use to do its job. Then the Bank’s monetary policy committee is left to figure out how to pull the levers it has been given to do the job that it has been assigned.
So, ultimately, parliament still decides what monetary policy (and, for that matter, financial stability policy) amounts to. The BoE is just left alone to do the job.
The reason that’s helpful is that it insulates day to day decisions from politics. One facet of this is that politicians will always find it hard to resist the temptation to stoke up a boom before an election, only later to slam on the brakes once they are safely re-elected.
For that reason there is now a fairly solid academic and central bank consensus that by ruling out this kind of political interference, independence helps keep inflation low, and less variable, and also helps smooth the booms and busts in the business cycle.
Another clear danger of PQE is, as Carney pointed out, that it removes “fiscal discipline”. Independence of the BoE prevents the government being tempted to finance pet projects with money-printing, thus avoiding the politically tricky decision to borrow.
Without this discipline, there is the risk that politicians will succumb to that temptation again and again. Expecting this, the costs of borrowing will rise, constraining the ability of governments to finance public services even more.
In the worst-case scenario we would end up with very high or hyper-inflation, and the government forced to balance spending and revenues at all times. Austerity on this scale would presumably do to the UK what the equivalent has done to Greece.
One of the elements of the debate I sense is that inflation control is something only the right are supposed to worry about. Explicitly leftist critiques positively relish showing disdain for those that worry about it.
Richard Murphy, Corbyn’s economics guru, has written on the web about his dissatisfaction with the primacy of the BoE’s inflation objective, and McDonnell has suggested adding targets on inequality and unemployment.
But – and as I notice Mark Carney emphasised this at Treasury committee on Wednesday last week – this is completely wrong-headed. High inflation tends to hit the poorest hardest. Because the few assets and cash-flows that they have, tend to be least well-protected from inflation.
The rich and middle classes have inflation-linked portfolios and houses. The poor carry disproportionate amounts of cash, are less likely even to have bank accounts, and even when they do are less likely to take advantage of interest-bearing ways to store their money.
Moreover, the booms and busts that come with a lack of inflation control also hit the poorest hardest. Because it’s they who bear the brunt of the financial and psychological devastation that goes with the spells of unemployment that accompany the busts.
This is one of the reasons why the Balls/Brown decision to give independence to the Bank of England over monetary policy in 1997 was such a masterstroke.
Corbyn and McDonnell clearly see this as part of Labour’s desertion of its historical class interests. But, whatever else Balls and Brown did with other Labour policies, the Bank of England Act was actually something that prioritised the interests of the poor.