According to reports, the Bank of England may sanction a new £25 billion bout of quantitative easing (QE) this week. QE is the automatic swelling of the balance sheets of banks, pension funds and insurance companies in the hopes that this money creation will be passed onto the rest of the economy. It is colloquially known as “pumping money into the economy”. But it seems to inhabit a strange circular logic all its own – the fact that it never seems to work only justifies trying ever more of it.
QE, which has amounted to £375 billion in Britain and $2.5 trillion in the US, is part of what can be called a stimulus from above. As with the initial bail-out (£1.5 trillion in the UK, $7.7 trillion in the US), the beneficiaries are the richest and most powerful elements in society. As the Bank of England itself admits, QE primarily benefits the richest 5% in Britain. And despite being advertised as ‘pumping money into the economy’, what’s distinctive about QE is that it’s a stimulus that’s not actually a stimulus. Billions and trillions of public money is spent and created with the result that the economy just flat-lines.
If this is a stimulus, it’s one that has been thoroughly decaffeinated. Three cups before bed and you sleep like a log.
In shadow of a looming triple dip recession in Britain, a credit down grade, and US growth turning negative, do we not need a new kind of stimulus, a stimulus from below? A social, not quantitative, easing.
I’m not talking about traditional Keynesian infrastructure projects, like building more roads or airports. The kind that Boris Johnson likes. I’m talking about a stimulus that financially benefits the middle and bottom of the social pyramid, as opposed to the top, and eases their plight.
When the levy takes
In January, the economist Stewart Lansley advocated an emergency revival levy on cash-rich corporations. A £10 billion one-off tax on corporations, he argued, would pay for a direct, no-strings redistribution of £2,000 to those on the lowest wages – people in receipt of tax credits. 5 million people would be better off as a result of this stimulus from below.
“This level of demand injection would help break the current economic deadlock,” he wrote. “By converting idle money into real spending, the dole queues would shorten, the public sector deficit would fall and the incentive to invest would actually rise.”
To Lansley’s demand bolstering plan, one might add a large increase in the minimum wage. Not only would the purchasing power of millions get an instant shot in the arm, but there would be ripple effect of wage increases for people on more than the minimum wage in order to maintain pay differentials.
The first obstacle, quite apart from its feasibility, is that current politics is incapable of appraising a stimulus from below on its merits. It just can’t happen, regardless of the likely effects. I believe one of the underlying reasons behind the Tories’ obsession with punishing benefit claimants, beside the fact that it plays well with their supporters, is that it lays the ideological groundwork for dismissing a stimulus from below out of hand. Giving away £71 a week in Jobseekers Allowance is bad enough, giving away £2,000 in free money to 5 million tax credit recipients would cause multiple cardiac arrests down at the local Tory club. (Giving away hundreds of billions in free money to banks and corporations and requiring benefit claimants to work for free is perfectly acceptable, however)
But let’s consider the broader question – would a stimulus from below actually work? It certainly has a degree of heft compared to the fly-away ideas of predistribution or, as the TUC so persuasively puts it, “encouraging companies to raise average pay”.
But its drawback, and the drawback of all Keynesian solutions in the face of the current Great Recession, is that it’s temporary. As one (maverick) Labour thinker, Maurice Glasman, put it last summer, a Keynesian stimulus is “the economic equivalent of Viagra, so to speak: what happens when the external stimulus wears off?”
Keynes spoke of the importance of effective demand. In times of recession, he famously advocated paying people to dig ditches and fill them in again – because that would get money in circulation and the economy moving again. But the problem now is that the Keynesian demand war-horse is too damaged for one-off stimulants to work. “That's the real crisis in the neoliberal west: a crisis of consumption,” said Guardian columnist Deborah Orr in February. “Too many people are not rich enough for capitalism to function properly.”
If many millions of relatively poor people in Britain received a £2,000 windfall, they would either spend it, as per the plan, or use to pay off debts. And then what? If this is a genuine stimulus, unlike QE, if it really ‘pumps money into the economy’ then the result could easily be inflation because more money is actually put into circulation and thus the initial wealth redistributing effects are negated. And unless you make a permanent, not ephemeral, change in how rich people are, you soon land on a snake and are back to square one. To extend Glasman’s metaphor, a capitalism on Viagra is not good enough. You need, let’s say, capitalism with a more durable potency.
The problem with a stimulus below is that to really stimulate demand you need to address how labour is rewarded. And to do that, you need a radically different form of enterprise organisation. As the mindset of current politics is a million miles from that kind of solution to flagging demand, you have stagnation and paralysis and a frustration that can never find satisfaction.
Then you come up against corporate debt. The UK has, after Japan, the highest ratio of debt to GDP, of any major economy. In October last year, Bank of England governor Mervyn King said the economy wouldn’t recover until banks owned up to yet more bad debt and were recapitalized – presumably through more gifts of taxpayer money. A stimulus from below, though it may lessen personal indebtedness to an extent, wouldn’t touch this problem.
There is no emergency
But the clincher that dooms a stimulus from below is that, to the top echelons of this society, the richest 5% and, the habitués of corporate board-rooms, there is no economic emergency. There was in 2007 and 2008, but since then QE has helped build up bank balance sheets and bolstered share values. We’ve had low or negative growth for five years and the roof hasn’t fallen in. There is growing recognition that zero growth could become the new normal. High unemployment and under-employment means most people are just grateful to keep and get work. It may be true that “life is simply becoming unaffordable and unbearably insecure, and an economic slump that shows no sign of ending is making things immeasurably worse”. But if the result is piles of votes for UKIP, there is no problem and no emergency for the rulers of this society. And if there is no real emergency, you don’t need a real stimulus.