QE, or printing money, is capitalism’s cunning plan to overcome economic and financial crises. In the massive economic crisis of the 1930s, the US state financed public works with money it hadn’t ‘earned’ from taxes. The economies of the US and Europe have practised it since to avoid the worst disasters of the 2007/8 financial crash (and the money went to the banks in difficulty). And now the government has found the money to pay for the Coronavirus crisis. The money goes to individuals (furlough) and employers. This becomes ‘people’s QE’ as opposed to QE as such. The difference is in the use to which the created money is put.
Nobody likes this: the capitalists don’t like to admit state intervention keeps the system afloat, and the left think QE makes the rich richer, banks don’t work for the common interest, and some don’t think capitalism should be kept afloat at all. Nobody is sure if QE should be a temporary measure to deal with emergencies, or if it can be a long term policy, or even the normal state of affairs. There is no shirking the question. Labour will always be accused of being irresponsible if it can’t come up with answers to ‘how they will pay for it’.
These are the questions the Lords Economic Affairs Committee has been debating since January this year. In their own words:
“The committee is examining Quantitative Easing in the context of the Bank of England’s operational independence, its accountability and the transparency of its decision-making. It is also considering the economic effects of Quantitative Easing, what risks are entailed, its distributional impacts and the future of the programme.”
Sessions were held on February 2, March 23, April 13, 20, 22, 27. A report will be issued.
We intend to give extracts from all the sessions and we begin with session 2, with witnesses Adair Turner and Charles Goodhart, both saying very interesting things.
The full text of that session can be found here: https://labouraffairs.com/lords-qe-report-discussion-2/
Lords Economic Affairs Committee enquiry on QE
Session 2, March 23
[Usefulness of QE]
Adair Turner (Lord Turner of Ecchinswell)
… what QE is doing now is what it has been doing for many years in Japan. It is lubricating a fiscal expansion and making it easy for the Government to run large fiscal deficits without the danger of setting a rise in interest rates. The direct impetus to stimulating the economy is coming through the fiscal deficit and QE is lubricating it.
It is essentially doing what the monetary policy of the Fed did between 1942 and 1951….
[QE and Covid. QE is acceptable in certain circumstances.]
We are also in the very particular and strange circumstance of Covid‑19. We have the additional strange feature of a whole load of people earning income and accumulating money balances who cannot spend them in the hospitality and leisure sector, with the Government running large fiscal deficits on furlough to support the hospitality and leisure sector. This is a specific circumstance that we did not anticipate, but in that specific circumstance it is also appropriate to run very large fiscal deficits and quite reasonable for the Bank to buy those bonds to lubricate that.
[The question is whether] bond purchases are permanent and for ever, rather than an exercise that you intend to reverse at some time.
… My expectation is that central bankers will go on saying that at some time they will reverse QE—but when?…
[Question: does QE increase inequality?] it does not increase income inequality, it increases wealth inequality [because it increases the price of assets, including housing; it creates a brake on geographical mobility, as people can’t afford housing in richer areas of the country]
[on the question of whether inflation will rise, he says that inflation won’t rise because of automation] We have effectively a kind of reserve army of robots rather than a reserve army of labour [in other words, the unemployed are no longer seen as a reserve army of labour].
[quick history of the labour movement since Thatcher and reason for low inflation]
Charles Goodhart: … the world saw the most enormous positive supply shock of labour and a huge shift of manufacturing, particularly from high-wage to low-wage economies with globalisation, and this is now rapidly reversing. Therefore, the underlying context in which central banks will have to operate over the next few decades will shift from deflationary to inflationary
… this massive upsurge in the availability of labour to anyone who could move production to low-wage economies so weakened trade unions that private sector trade union membership declined very sharply in virtually all countries, and labour is much harder to organise in the service sector than in manufacturing. The bargaining power of labour really got trashed and was sharply reduced, and it will be a time before this turns around.
[consequence (not mentioned directly) is low wages, and therefore low inflation]. [This could change, with around 1 m workers returning to their home countries in Europe.]
[On helicopter money and MMT]:
Charles Goodhart: Under the Biden stimulus programme, every family will be sent a cheque for $1,400. If that is not helicopter money, I do not know what is.
The Fed is now arguing that it will not raise interest rates effectively until it sees inflation occurring. If that is not modern monetary theory, I do not know what is.
We are in a very weird world where we are actually undertaking helicopter money; we are following exactly the precepts of modern monetary theory, otherwise known as the magic money tree; and at the same time we are claiming that we are not doing it. We are doing what we claim we are not doing. I find this situation absolutely weird.
[Adair Turner disagrees slightly]:
Lord Turner of Ecchinswell: I do not entirely agree with Charles that you know from the fact that there is a distribution of a cheque that that is helicopter money. If that was a cheque that had been financed by the Treasury in the perfectly normal fashion of the issue of government debt without a simultaneous purchase of that government debt by the Federal Reserve, that is just a particular form of fiscal expansion.
[Britain is following the example of Japan]
It is undoubtedly true that the Bank of Japan is doing permanent overt monetary finance and post facto we will realise that we have done an element of it here.
… The Bank of England has done close to £800 billion of QE.
Q98 Lord Skidelsky: …
We have become terribly involved in people’s QE and helicopter money. That issue has been very extensively explored, so I want to phrase my question slightly differently. To what extent does the use of the Bank to finance government spending, which is really what has been happening, undermine the accountability of the central bank as an independent actor?
It seems to me that what has happened—I do not know whether the witnesses agree—is that Governments have been so scared of fiscal policy that when the crunch has come and they have needed to use it they have simply outsourced it to an institution supposedly independent of political pressure.
Lord Turner, perhaps you could start the answer to this. You have said that you want central banks to decide how much government spending they are prepared to finance by monetary policy and that Governments should then decide how to spend it, but is that not another way of simply passing the buck? Surely, you cannot do that if you have a Government who are accountable to Parliament for their spending. You cannot tell the Bank, “This is how much we are prepared to finance”. The Bank will have to finance whatever the Government want.
Lord Turner of Ecchinswell: I think it is both desirable and possible to use whatever you call it—people’s QE, helicopter money or, using my preferred and more precise phrase, permanent explicit monetary finance—and still preserve the appropriate distinction between the role of elected officials and the fiscal function and the role of the Bank of England. I think that we have preserved it so far. The QE that we are seeing is de facto financing the fiscal deficits that the Government are running, but the decision to do that QE was made by the MPC [Monetary Policy Committee] in its independent judgment that, given that the Government would run this larger fiscal deficit, it would be more stimulative if it also did a QE operation to finance it, and that without that QE operation inflation would have fallen further below target.
I think that the MPC was completely appropriately following its inflation mandate when it made that decision. I do not think that there was a phone call from Rishi Sunak to Andrew Bailey of the sort that you undoubtedly get in Argentina and other places like that. I do not think that the MPC said, “We have to have a whole load of fiscal spending”. It said, “Given the fact that the Government are running this large fiscal deficit, what is the action we will take that is most likely to bring us closer to the inflation target?”
I think that this is also true even if you go as far as making an element of it permanent and explicit. The proposals for that were explicitly set out by Ben Bernanke in his April 2016 paper and by Fischer and Hildebrand in their November 2019 paper, in which they described a process by which monetary policy, or FOMC [Federal Open Market Committee], would have within its complete discretion the ability, if it believed it necessary, to say, “We think it would be a good idea now to spend more money, not in order to achieve some social purposes but to stimulate aggregate nominal demand. We therefore authorise £X billion, which the Treasury can spend if it wants and in the fashion it wants, and we will finance this tranche of fiscal expenditure with zero interest rate reserves in a permanent fashion”.
[Adair Turner said there was an important distinction between overt monetary finance (using pure central bank money) versus a purely monetary transmission mechanism, a distinction which he developed as follows:]
Lord Turner of Ecchinswell: First, it is important to define terms: whether you are talking about the way in which a stimulus is delivered or how you finance it. Some people using the expression “helicopter money” think that literally it has to mean sending a cheque to every individual, so it is the nearest equivalent of Milton Friedman’s scattering of money from a helicopter and people picking it up and spending it.
That is a subset of a more general case, which is: should you ever have an element of overt monetary finance? Should you ever run a fiscal deficit? The Government issue debt; the bank buys it and the bank makes it plain that that is permanent and, indeed, that in its purest form it intends in future to finance it with reserves that are not remunerated, remembering that it is possible to have a policy for the future remuneration of reserves that distinguishes tiers between an element that is remunerated at zero rate and an element that is remunerated at the marginal policy interest rate.
That is what we mean when we talk about overt monetary finance. The benefits of that versus a purely monetary transmission mechanism go back to what I said earlier, which is that when interest rates are already close to zero or lower bound, you are helping to finance a fiscal stimulus that produces a direct stimulus through to the economy where the purely monetary mechanism will not work.
The benefit versus a straightforward funded fiscal deficit, if there is a benefit, is that it overcomes what is called a Ricardian equivalence effect. It overcomes the fact that when you issue a whole load of debt people might worry about the fact that they will have to pay back in future, so it might not be as stimulative as it would otherwise be.
It is because people are worried that there might be constraints on the amount of fiscal deficits that Governments are willing to run, which therefore might leave us in a liquidity trap, that a number of central bankers have argued that under certain circumstances we should have overt money finance. That was what Ben Bernanke, Stanley Fischer and Philipp Hildebrand argued should happen under certain circumstances. It is also a possibility that has been extensively discussed theoretically. It is essentially what Michael Woodford said in his Jackson Hole paper of 2012 and what Christopher Sims said in his Jackson Hole paper of 2016.
That is what it is. Is it required today? If what you are trying to do is to overcome the danger of Ricardian equivalence, you have to ask: is there any Ricardian equivalence? The alternative strategy is to get rid of the Ricardian equivalence by a commitment to continue buying bonds to keep the yield at a zero rate for ever. Therefore, you end up, in the case of the Bank of Japan, with no real difference between a permanent commitment to yield curve management at a zero rate and overt monetary finance that is permanent. I do believe that there are some circumstances in which it is possible to get stuck in a liquidity trap so deep that the ultimate instrument—which, Willem Buiter wrote in an article, is the one that will always work and should be deployed—is to run a fiscal deficit and finance it with pure central bank money.
[To be continued]