So the Bank of England has revived that old chestnut of making fabulously rich people richer than before by increasing the value of their shares and property. This is allied to dropping interest rates to below their lowest ever level in history in the hope of sparking borrowing and spending.
Given that these are precisely the same policies employed in the wake of the 2008 economic crash and have resulted the slowest ever recovery from an economic downturn since the 1930s, and seen 2/3rds of households in rich countries endure lower living standards than a decade ago, I wouldn’t hold out much hope of them working a miracle this time around.
The question is, will the alternative?
On the eve of the Bank of England’s decision, 35 ‘progressive’ economists (Steve Keen, Robert Skidelsky, Herman Daly, John Weeks and David Graeber among them), wrote a letter to the Guardian newspaper, urging different monetary policies to merely inflating asset bubbles and increasing household debt. The alternatives they recommended were a definite case of hedging your bets but are worth considering. Because if they don’t work, nothing will.
1 Giving everyone some money
I can’t help but find it amusing that a major plank of an alternative economic strategy, supported by eminent PhDs across the globe and at least one famous ex-Central Banker, looks, at first glance, like it’s been dreamt up by a five year old. Let’s give everyone some money, the theory (?) goes, and they’ll spend it and the economy will get better. Or in the words of the 35, ‘a fiscal stimulus’ could ‘fund either a tax cut or direct cash transfers to households, resulting in an immediate increase of household disposable incomes.’
Famous Pinochet-backing right-wing economist Milton Friedman dubbed this idea ‘helicopter money’, likening it to a helicopter (presumably with a big smiley face on the front) dropping money on people below (which they then scramble to pick up before their neighbours thus causing outbreak of mass brawling; possibly a metaphor for the right-wing view of human nature). Helicopter money, though, has some august advocates. Adair Turner, former chairman of the UK Financial Services Authority and director-general of the CBI, supports helicopter money. As does Ben Bernanke who was chairman of the US Federal Reserve at the time of the 2008 crash (so definitely ask him what to do).
The advantage of helicopter money (and I’m damning with faint praise here) is that, unlike Quantitative Easing, it is actually a stimulus. The flaw (one of the many) with QE was that this putative multi-billion pound stimulus got stuck with its banking intermediaries and didn’t make it out into the real economy. The BoE has augmented its latest batch of QE with an extra £10 billion which will buy the debt of companies it likes. By contrast helicopter money goes direct to flesh and blood people who are likely to spend it and, should they be inclined to save it or keep it under the mattress, another economist has said helicopter money should take the form of ‘shopping coupons’.
But helicopter money’s status as a genuine stimulus is also its drawback. Many pundits have wondered why QE, by pumping money into the economy, didn’t cause inflation. The reason seems to be that it didn’t pump money into the economy. Helicopter money, however, will. More, artificially created, money will be chasing the same amount of goods, which is the classic recipe for inflation. You might say we need some inflation as it currently just above zero. But if Brexit precipitates inflation by increasing the cost of imported goods, and this is compounded by helicopter money, then the results might go beyond the benign. And if the real incomes of people do not keep up with inflation, then the effect of helicopter money is negated in the first place.
The other problem with helicopter money is that even if its effects are not counteracted by inflation, they are ephemeral. The thinking behind helicopter money seems to be that, like a dying patient miraculously revived by the right medication, the economy will be kick started into steady growth. But helicopter money does not deal, or even try to, with any of the deep structural problems that caused economic stagnation in the first place. So, why, when its effects wear off, will the economy not descend back into the same torpor?
The argument made by its supporters is that helicopter money can be used to ride out a temporary shock such as Brexit. But the world economy, aside from Brexit (which hasn’t even happened yet), is slowing. In the last quarter, the US grew by an annualised rate of 1.2%. The EU has reduced is growth forecasts and Italian banks may need a huge bailout. Brazil and Russia are in recession.
2 Public Investment
But helicopter money was not the only prescription advanced by the 35 economists. They also argue that a fiscal stimulus ‘could be used to fund essential investment in infrastructure projects – boosting the income of businesses and households, and increasing the public sector’s productive assets in the first place’.
UK Labour party leader, Jeremy Corbyn, has promised £500 billion spending over the next ten years on infrastructure, manufacturing and new industries through a National Investment Bank (by comparison, the Bank of England spent £170 billion on Thursday alone). Shadow Chancellor, John McDonnell, says, ‘when you reach some limits of monetary policy, you reach for fiscal policy’.
But the turn from ultra-loose monetary policy to an infrastructure stimulus is not solely the preserve of the Left or ‘progressive’ economists. In the US, Donald Trump, when he is not pledging to repeal bank regulations or institute tax cuts for the rich, advocates repairing the country’s crumbling infrastructure - bridges, roads and the power grid – in an effort he compares to Roosevelt’s New Deal of the 1930s. He claims it could create 13 million jobs.
Commentators suggest this ‘could end up moving him left on the political spectrum because of the massive amount of government spending his plan would entail’. But this shouldn’t come as a shock. The Nazis, who were quite right-wing all told, were implacably hostile to austerity’s 1930s vintage and in favour of public works. “Hitler had already found how to cure unemployment before Keynes had finished explaining why it occurred,” said 20th century economist, Joan Robinson.
The question now is: can infrastructure spending revive an economy in the doldrums in a way that conservative economics cannot and evidently doesn’t want to?
Public investment has fallen precipitously in both the UK and US since the crisis. The argument in its favour is that it can substitute for private investment which itself plummeted before 2008, never really recovered and is falling again. Corporations are currently sitting on trillions of dollars and pounds they are not investing. Declining private investment such as this is a sign that another recession is on the cards.
There are undoubtedly things that need doing. Aside from crumbling American bridges, there is crying need for more public housing in the UK. Corbyn promises to build a million new houses, half of them council homes (by contrast New Labour built a princely 7,870 council houses in 13 years). Public investment would create jobs and bolster private sector supply chains.
But in an era of huge superfluity of private capital seeking investment opportunities, there is also a real danger that public investment will merely subsidise the private sector to do things that are not needed. One economist, Harry Shutt, calls this ‘Capitalist Luddism’, manifested in ‘white elephants’ such as ‘the building of roads and bridges to nowhere in Japan, “ghost cities” of empty apartment blocks in China and airports in Spain that have never opened’. In this sense, the use of taxation to manufacture profit opportunities for the private sector, which has grown massively over the last quarter of a century, will expand even more. This is otherwise called ‘corporate welfare’.
Because a turn to public investment does not answer one glaring question – why is the private sector on an investment strike in the first place? A Marxist answer is that profit has a tendency to decline over time and that investment opportunities are not currently profitable enough, so corporations are sitting on their profits. Another explanation has that, as a result of technological change, the need for investment capital has been drastically reduced, so capital has shifted into financial speculation and away from ‘organic growth’. A Left Keynesian/Marxist perspective says that, as a result of capitalists grabbing a larger and larger share of GDP growth, the distribution of wealth has been become skewed so new investment is put on hold because there is no expectation that people will buy new products.
One Marxist economist, Michael Roberts, follows this situation to its logical conclusion - the only way to restore profitability is through a mass destruction of existing capital value. “Of course, this will be at the expense of everybody’s jobs and livelihoods, because we’re talking about human beings losing their jobs as a result of the closing down factories and businesses, mergers, selling off the assets, displacing workers and reducing the overall level of production to reach higher profitability,” he says. “A slump, maybe a series of slumps, can do that. Until then, we’ll continue with this depression.”
The 2008 crash, had it followed its natural course, would have resulted in such a mass destruction of capital value. However, it was arrested with huge bail-outs, followed by the flooding of the world economy with masses of confected money in the form of Quantitative Easing. George W Bush got his wish - the sucker did not go down.
There are many things to like in Corbynism, most obviously a strange humanitarian insistence that public policy should aim at benefiting ordinary people, not just at safeguarding the health of elites. But in its reliance of public investment, it does not have a solution to what really ails 21st century capitalism.