Employees outside of the Bank of England
In early September, the election of Jeremy Corbyn as Leader of the Labour Party dramatically altered Great Britain’s political landscape. The accession of a staunch democratic socialist marks an ideological shift in the nation’s Official Opposition Party, particularly with respect to its economic platform. Indeed, “Corbynomics” and its flagship proposal, “quantitative easing for the people,” depart drastically from recent Party orthodoxy. Unfortunately, they are also based on questionable economic theory.
With Tony Blair’s election to Leadership in 1994 and the beginning of the “New Labour” movement, the Labour Party began to eschew its traditional socialist economic policies in favor of free market ideals. This capitalist shift marked a transition towards a centrist platform, appealing to the general electorate. As a result, the Labour Party won a landslide majority in the 1997 Parliamentary elections. However, the Conservative-Liberal Democrat Coalition’s victory in 2010, along with the election of Ed Miliband as Leader of the Labour Party, presaged a modest return to leftist economic policies. This trend is poised to accelerate dramatically with the recent election of Corbyn as Labour Leader.
Corbyn’s economic views are strikingly similar to those maintained by the Labour Party prior to its “New Labour” transformation. He advocates nationalization of public utilities and railroads, tax reform to facilitate wealth redistribution, and support for trade unions and collective bargaining. Of particular note is his proposal of “quantitative easing for the people,” or “people’s QE.” This program would involve the creation of a “National Investment Bank” chartered to fund improvements in transportation infrastructure, technology, housing, and green energy. “People’s QE” would essentially provide fiscal stimulus, bolstering economic growth and enhancing British productivity. However, direct spending on this scale would also considerably increase the government’s budget deficit, which at 5.7% of GDP is among the highest in the European Union. In order to avoid an expansion of this deficit, Corbyn and his economic advisors propose an unusual policy: forcing the Bank of England to capitalize the National Investment Bank.
Under Corbyn’s plan, the National Investment Bank would issue government-secured debt which the Bank of England (the “BOE”) would be required to purchase. From a technical standpoint, this process would be similar to the actual quantitative easing programs implemented after the 2008 financial crisis. Through these programs, the BOE purchased privately-held gilts (government bonds) by crediting the bank accounts of sellers with electronically created money. The BOE increased the money supply by nearly £375 billion in this manner, intending for purchases to drive down interest rates and foster private investment. Likewise, Corbyn’s program would have the BOE credit the National Investment Bank with money in return for debt, funding new government spending. However, a key difference between the BOE’s QE and “people’s QE” involves the management of the BOE’s new debt assets. In “conventional” QE programs, the debt remains on the BOE’s balance sheet and may be sold back to investors at a later date. Sale of these assets would reverse the original expansion of the money supply. Corbyn, on the other hand, proposes that the BOE cancel the debt purchased from the National Investment Bank, making the expansion permanent. As a result, the government would not incur new debt from National Investment Bank spending. The deficit would not be affected.
The allure of “people’s QE” is undeniable. In 2010, the Conservative government implemented an austerity program intended to trim soaring budget deficits and record government debt. Austerity continues to reduce government investment in the economy, prompting criticism in regard to its impact on growth. In a sense, “people’s QE” represents a reaction to austerity. It promises investment that will have a tangible effect on the lives of Britons. Indeed, the economic benefits of government spending on infrastructure are potentially significant. “People’s QE” could provide a boon to growth and alleviate deflation concerns in the short-term. These effects are certainly desirable during economic downturns, and the BOE’s QE programs were intended to encourage many of these outcomes. As such, a variation of “people’s QE” may prove a viable tool of expansionary monetary policy during times of crisis.
Nonetheless, Corbyn’s flagship economic policy has considerable drawbacks that discourage its use in all but the direst of circumstances. Most significant is Corbyn’s proposed direction of the BOE. “People’s QE” requires that the government exercise control over the BOE regarding the purchase and management of National Investment Bank debt. This clear violation of BOE independence (established by the Labour Party in 1998) runs counter to accepted economic theory.
Should the BOE be forced to submit to political pressures concerning “people’s QE?” Britain’s elected government may seek to manipulate the program — and thus monetary policy — for political gain. This would likely involve imprudent stimulative policy and exacerbations of cyclical economic expansions and contractions. In the long run, the uncertainty resulting from this poor monetary stewardship would induce rising interest rates, hindering private investment and economic growth. These repercussions provide a persuasive argument against “people’s QE.”
Implementation of “people’s QE” during economic expansions (or even modest downturns) carries other risks as well. The permanent expansion of the money supply entailed by Corbyn’s program could prompt an uncontrollable rise in inflation. Demand-induced expansions are naturally accompanied by rising prices, and an acceleration of inflation from “people’s QE” could prove detrimental to long-term growth. High inflation rates would motivate a disproportionate rise in interest rates as lenders seek compensation for uncertainty and diminished purchasing power. Politicization of monetary policy would impede the BOE’s ability to constrain inflation and influence interest rates. Economic contraction would result.
At present, there is little reason to pursue “people’s QE” or any kind of monetary easing in Britain. The U.K. is enjoying robust economic growth and an improving labor market. As a result, the BOE is actually poised to tighten monetary policy in the short-term, not loosen it. “People’s QE,” however, would prompt monetary easing via unchecked money creation. This presents substantial risks to the British economy with comparatively few benefits. Britain would be wise to avoid “Corbynomics” and remain on its present path toward fiscal responsibility and healthy growth. The Conservative Party’s strong showing in the 2015 Parliamentary elections portends a continuation of these policies, and Britain’s economy will likely be stronger for it.
Todd Lensman is a freshman in the College of Arts & Sciences at Cornell University, majoring in Mathematics and Economics.