People's QE and Corbyn’s QE

Politicians can be adept at co-opting attractive sounding terms to their own cause, even when they distort their meaning while doing so. Osborne announced what was in reality a partial but large increase in the minimum wage, but he called it a ‘living wage’. This was especially devious, as calculations of the actual living wage take into account the tax credits that Osborne was at the same time cutting.

Is Labour leadership contender Jeremy Corbyn’s ‘Peoples QE’ an example of the same thing? It is certainly true that the way that some macroeconomists, including myself, have used the term is different from Corbyn’s idea. For us Peoples QE is just another term for helicopter money. Helicopter money was a term first used by that well known radical Milton Friedman. It involves the central bank creating money, and distributing it directly to the people by some means. It is a sure fire way [1] for the central bank to boost demand: what economists sometimes call a money financed fiscal stimulus.

The idea has been recently revived, most prominently in the UK by Adair Turner, because of the failure of conventional monetary policy (changing interest rates) to bring a quick end to the Great Recession, which in turn is because governments were undertaking fiscal austerity (a bond financed fiscal contraction) rather than fiscal stimulus. In contrast central banks in Japan, the US and UK, and now the Eurozone, have been creating money to buy financial assets (mainly government debt), which is called Quantitative Easing (QE). Hence the term People’s QE for helicopter money: instead of the central bank creating money to buy assets, it creates money and gives it to the people.

The genesis of Corbyn’s QE seems rather different. Corbyn adviser Richard Murphy had previously suggested what he called a Green Infrastructure QE, which is that a “new [QE] programme should buy the new debt that will be issued in the form of bonds by the Green Investment Bank to fund sustainable energy, local authorities to pay for new houses, NHS trusts to build new hospitals and education authorities to build schools.” This in turn is related to two ideas: first a near universal view among macroeconomists that public sector investment in infrastructure should be rising not falling when interest rates are low and labour is cheap, and second that a National Investment Bank (NIB) might be useful in helping to encourage private sector investment. (See, for example, the recommendations of the LSE growth commission.)

The main difference between helicopter money and Corbyn’s QE therefore seems to be where the money created by the central bank goes: to individuals in the form of a cheque from the central bank, or to financing investment projects. I think that is wrong, and to see why we need to ask an obvious question: what is this policy innovation designed to achieve. I think it is here that confusion has arisen.

As I noted above, the idea behind helicopter money is to provide a tool for the central bank to use when interest rate changes are no longer possible or effective. With an independent central bank, that means that they, not the government, get to decide when helicopter money happens. In contrast, if your goal is to increase either public or private investment (or both) for a prolonged period, then its timing and amount should be something the government decides. While QE is hopefully going to be something that is unusual and rare, the goal of an investment bank is generally thought to be more long term, and not something that only happens in severe recessions.

For that reason, Corbyn’s QE looks like one of those ideas that is superficially attractive because it seems to kill two birds with one stone, but on reflection turns out to be a bad idea. If we want to keep an independent central bank we do not want the government putting the bank under pressure to do QE because the government wants more investment, and if that does not happen we do not want the central bank deciding whether extra investment happens. Indeed some of those who dislike the idea of helicopter money have already been using Corbyn’s QE to say ‘I told you helicopter money was a slippery slope that would lead to the end of central bank independence’.

However I think it is unfair and unproductive to leave it there. Suppose that a NIB is created, not on the back of QE but using more conventional forms of finance. (If the government wants to encourage it, just directly subsidise that finance with conventional borrowing. Don’t be put off doing so by deficit fetishism.) Suppose we also like the concept of helicopter money - not for now, but for the next time interest rates hit their lower bound and the central bank wants more stimulus. In those circumstances, it might well make sense for helicopter money to be used not only to send cheques to individuals, but also to bring forward investment financed by the NIB, or public sector investment financed directly by the state. If those investment projects could get off the ground quickly, and crucially would not have happened for some time otherwise, then what I have elsewhere described as ‘democratic helicopter money’ would make sense. [2] This is because investment that also boosts the supply side is likely to be a far more effective form of stimulus than cheques posted to individuals.

So one day, this form of Corbyn’s QE could happen. But we need to get the idea of helicopter money, and the need for public investment and a National Investment Bank, accepted in their own right first. Putting the two ideas together right now is misconceived, and is in danger of discrediting two potentially good ideas.

[1] Unless you believe in complete Ricardian Equivalence

[2] When I put forward the idea of ‘democratic helicopter money’ here to Tim Harford, Tim responded that he thought it was probably the most radical and politically infeasible idea of those he had canvassed. If Corbyn wins, I will have pleasure in reminding him of that!