I hadn’t even gotten out of my scratcher yesterday morning when I looked at my mobile and the BBC news web site to see what was happening in the world, only to see yet another attack on Jeremy Corbyn’s campaign for Labour party leader. This time the Brlairite was Blair himself, looking skull-like and definitely not very well – all that chasing after money mustn’t be good for his health. “Labour must come to its senses” he apparently said. I didn’t read any more.
Corbyn has been criticised in just about every way imaginable, from the Mail prophesying a return to the “dark ages”, riots and intervention by international peace keepers, to the oh so condescending approach of Janen Ganesh of the ‘Financial Times’: that Corbyn’s policies, “eccentric” and a “joke” as they are, are not really the problem, it’s the “soft left” and Andy Burnham and Yvette Cooper who are the ultimate problem. Poor Jeremy, he’s either responsible for a new dark ages or he’s such a joke he doesn’t deserve consideration, even as a problem.
At the centre of all this dismissal is contempt and ridicule of Corbyn’s economic proposals for “quantitative easing for people instead of banks.” Our local biggest daily ‘The Irish News’ had its own columnist to hurl his own critique, this time mixing both dire prediction and condescending ridicule.
The author, Newton Emerson, thinks that fewer than 1% of the population will understand “why Corbynomics is ridiculous” even though “it takes little more than an A-level to understand why.”
Emerson is normally an acute commentator on politics in the North of Ireland, frequently exposing the hypocrisy of political culture here and the rottenness of the political arrangements. Unfortunately he has two problems. First, when it comes down to it he actually supports the rotten political arrangements, and secondly, he gives every indication of having been educated in the dismal science of economics as taught in the universities.
He is undoubtedly correct that the general population is seriously under-educated in economics and this is a real problem for them identifying their interests in any debate. On the other hand I don’t believe that Corbyn’s ideas are very radical and certainly not ridiculous, so going to university or doing an A-level really isn’t the answer.
So let’s see if we can understand what the issues are in this case.
Quantitative easing as practiced by the Bank of England involves the bank loaning newly created money (created as an electronic entry in the bank’s accounts) to a fund which has to pay it back, so theoretically it’s a loan and not just giving away newly created money. This fund then uses these loans to buy government issued bonds (IOUs payable by the Government) that are held by pension funds. These pension funds now have money instead of these bonds.
The theory is that these pension funds will then want to use the money to buy other assets from banks such as bonds to replace the ones just sold back to the government or buy other sorts of securities such as private debt instruments (IOUs issued by private corporations to raise money for investment).
The end result is that money has been created electronically by the Bank of England and it now rests in the banks which, it is hoped, will use the new money to buy debt issued by private firms that will in turn help them invest directly through the money just received. This investment will create jobs and economic growth. That’s roughly the theory anyway.
However, once the banks have the money they can do what they want with it. They could buy bonds or securities issued by other countries; they could buy existing shares or securities which would give no more money to firms to invest but simply increase the price of these pieces of paper; they could buy commodities or property and cause inflation in these assets or they could simply sit on the cash. In each case there would be no increased employment or contribution to economic growth.
Even if they bought newly issued debt from private companies, these too could decide not to invest the money in new factories, offices or equipment and instead do any of the above and join in the great speculative boom in property or share prices etc. Many banks and companies appear to have done just this, which has made them richer but not helped economic growth.
In other words the ‘money printing’ that has been carried out has helped the banks and made the rich who hold financial assets richer by increasing their price.
Hence the alternative proposed by Jeremy Corbyn in which the newly created money, which is also in the form of a loan, is given to a State investment bank who then loan it out to state agencies which would invest in state-owned infrastructure such as “housing, transport , digital and energy networks.” The objective would not only be to create jobs in the short term and promote economic growth, so reducing the debt burden, but also contribute to the longer term productivity of the economy, which is recognised as going through something of a productivity crisis.
To be continued.