Wednesday, 28 September 2011

...or you could just cut taxes? A comment on 'green quantitative easing'.


A kind soul (well my sister actually) sent me a copy of Richard Murphy and Colin Hines masterpiece entitled “Green Quantitative Easing”. I am troubled by it since it makes very little sense.

First let me be clear that I’m not an economist – anymore than Richard and Colin are economists – and shan’t be talking about what is or isn’t quantitative easing. Or indeed whether or not such easing actually does any good. In general terms, I take the view that printing extra money without it actually being derived from the creation of value in the real world is inflationary. And I do not believe that the UK economy was ever really at risk of deflation.

But, for what follows I am accepting Richard and Colin’s view that:

“The need to reflate the UK economy has not gone away...”

My problem is with their proposals – or rather the proposals they’ve borrowed from the New Economics Foundation’s “Green New Deal”:

  1.  Direct government investment in infrastructure
  2. A National Investment Bank
  3. Local authority bonds for the “green economy”

Underneath these arguments sits NEF’s (and our authors) unquestioning belief in the effectiveness of the Keynesian multiplier – in this case as a means of raising tax revenues. Sadly, the authors don’t even seem to know what the Keynsian multiplier is:

The multiplier is a central concept in economics and especially regional studies where it is widely used to assess the long term impact on employment and output from different forms of investment. As such it represents a significant part of the Keynesian aggregate demand model of the economy and can be described as the impact of the marginal propensity to consume (mpc) on a given investment or expenditure where the higher the level of mpc the bigger the multiplier (Heertje & Robinson, 1979).

The problem is that our authors’ assumption – that creating jobs through infrastructure will resolve the government’s revenue problem is rather misplaced. For two reasons – 

  1.  It is misleading to take the view that public spending decisions are optimal – we cannot assume that our spending isn’t at the expense of private investment simply because it has multiplier effects
  2. Taxation – the thing at the heart of Murphy & Hines’ proposals – has an opportunity cost. If you take something in tax, even deferred taxation in the form of public borrowing, that comes at the expense of private activity and private spending

Even if we accept the multiplier effect as true, the model proposed here assumes that building infrastructure drives growth when there is little evidence that this is the case. And, worse, the proposals for a ‘national investment bank’ represent a return to that old socialist obsession with picking winners.

However, it is good that our authors provide a worked through (well sort of) example demonstrating just why this sort of spending doesn’t work – they propose repurchasing £56 billion in public finance initiative (PFI) debt with the “green quantitative easing”.

Now it may be a good idea to buy out this debt – although the contract holders might see it a little differently if Murphy & Hines’ figures are correct – but it won’t help the economy one iota. And – I find this quite remarkable – our authors are proposing to print over fifty billion in crisp fivers so as to hand it to the banks and financial institutions. Who do they think holds all that PFI debt?

There won’t be any multiplier effect from this “investment” (and if they really think they’ll get a deal at £56 billion Richard and Colin really are stupid) since no extra money will go into the real economy, no stimulus will have taken place. Those schools and hospitals will be employing the same number of people on the same wages as they were before the ‘green quantitative easing’ – it will be just like the QE our authors criticise, we won’t know where the money has gone or whether it has done anything to help the economy.
Our authors seem wholly wedded to the idea that only government can direct investment and stimulate growth. Perhaps if they hesitated in their obsession with setting ever higher taxes and borrowing ever larger sums to build this mythical “green economy” they might see a clearer, simpler alternative strategy. One that would provide an immediate boost to the economy, which would create jobs and would be popular.

That £56 billion could be used to cut taxes – either by raising thresholds further and taking less well off people out of tax or by a 10% cut in the basic rate of income tax. Rather than the great and good deciding how that vast mound of cash should be spent, ordinary people would decide on the basis of what they want. But then I suspect Richard and Colin would never countenance actually cutting taxes!


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