In the FT recently, ‘superstar’ economist Adam Posen, US co-chair of the High-Level Japan-US Working Group on Common Economic Challenges, considered that Japanese prime minister Shinzo Abe’s new fiscal stimulus package offers the prospect of a better way forward. Abe aims to increase public spending and lower taxation, giving a positive jolt to economic activity.
Figures presented by the Market Mogul suggest that quantitative easing has been successful in injecting liquidity into the financial sector via central banks, causing ‘an unreasonable euphoria in the financial markets’ but has had, in practice, little or no effect on the real economy due to a lack of buyers and borrowers – a lack of ‘of effective demand’.
Posen reminds us that the first rounds of Abenomics showed the power of spending to increase the availability of public childcare places and cuts to taxes that penalised families’ second earners. This contributed to a substantial rise in women joining the labour force and Posen notes that Mr Abe’s latest stimulus package promises further action on labour market reforms: “The lasting increase in labour supply has enhanced Japan’s long-term fiscal sustainability. We can expect that part of the new package that further promotes participation in the labour force and eases the burden on those caring for family members to have a similarly large pay-off”.
Posen sees another promising aspect of Mr Abe’s package: his proposal to raise the minimum wage and public sector wages for teachers and others. He says that encouraging an upward spiral of wages into prices and back is the best path to nominal GDP growth
Jeremy Corbyn addresses the UK’s ‘broken’ economic model at a leadership election campaign meeting in Dagenham, attended by members of the public, councillors, businesses and the mayor on the 4th of August
An informal shot taken at the meeting
The BBC quoted from his speech which may be heard here: “We need a Labour government that rebuilds and transforms Britain,” Mr Corbyn said, committing to the creation of one million new jobs through investing £500bn in infrastructure, manufacturing and new industries.
He detailed 10 areas which Labour would seek to reform, including promises to create full employment, at least half a million new council homes, a new “National Education Service”, providing universal public childcare, and ending private-sector involvement in the NHS. The money would be raised through an expanding economy and driving down tax evasion.
“A campaign for the entire public to be involved in”
And ended: “This is a preparation for a general election when we can win that general election and produce decency and real opportunity for everyone in our society”.
The title reference is to an article by Matthew C Klein, a contributor to the FT’s Alphaville: ‘daily news and commentary service giving finance professionals the information they need, when they need it’ – retweeted by Paul Gosling.
Klein (right) says that if Jeremy Corbyn becomes leader of the UK Labour Party, one positive consequence will be ‘the ensuing discussion of the monetary policy transmission mechanism’:
The existing monetary policy tools have the ‘unseemly property’ of appearing to work mainly by making the rich richer and hoping that some of the extra wealth gets spent.
To rebalance the economy, “moving towards the high-growth, sustainable sectors of the future, the Bank of England could be given a new mandate to upgrade the economy to invest in new large scale housing, energy, transport and digital projects”.
Quantitative easing for people instead of banks? The bulk of the British economics commentariat erupted but Klein deems the core idea sound, possessing ‘an impressive intellectual pedigree’.
Corbyn’s plan to have the Bank of England fund government-directed investment in infrastructure could work – in 2011, American economist Adam Posen (left) supported something similar when he was on the Monetary Policy Committee of the Bank of England, except that he focused on small businesses.
Posen thought that private lenders weren’t providing credit where he believed it was needed and recommended creating new public investment banks that could originate and secure loans into bonds that could then be purchased by the Bank of England, thereby funding new business investment.
Corbyn wants specialised “green” investment banks, housing authorities, and local governments to be able to finance infrastructure investment with funding support provided by the Bank of England. Klein comments on the Posen/Corbyn proposals: “We fail to see a significant difference”.
Nicholas Watts in the Guardian reports that Richard Murphy, Tax Research UK, who drew up the people’s quantitative easing plan for the Corbyn campaign, points out that we will get near the Bank of England’s inflation target of 2% only when we have established people with higher wages and increased productivity and the economy is “humming along nicely”. He adds that once you have people back in work on decent wages, you have to turn QE off because continuing at that point would be inflationary.
Quantitative easing for people instead of banks?
Klein agrees that if Corbyn’s preferred investments prove to be productive, they would help to restore some lost ground and lead to higher real wages for Britons and goes further, predicting that the expanded capacity due to extra investment spending may avoid inflation.
Corbyn, also quoted in the Guardian article, “It is in the long-term interest of the UK to rebuild a resilient industrial base . . . with its people, energy, land and water . . . ”.