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

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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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How searching for a "new economic model" is a threat to all our futures

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I make no apologies for returning to the theme of economic policy and to the ongoing search for a new economic model. Sometimes – as appears, I hope, to be the case with George Osborne’s recent Mais Lecture – this search is driven by the requirements of rhetoric. Osborne is really talking about economic policy rather than the model of the economy:

"Britain has been failed by the economic policy framework of the last decade. It promised stability, prudence and an end to the cycle - it delivered instability, imprudence and the biggest boom followed by the deepest bust.

We need to head in a completely new direction. We have to move away from an economic model that was based on unsustainable private and public debt. And we have to move to a new model of economic growth that is rooted in more investment, more savings and higher exports. This will require new policies and new institutions."

Now while there is a reference to “a new model of economic growth” the context is about things the Government can influence. Things like higher rates of business investment, more savings and manufacturing that must be predicated on having a much smaller government, less regulation and more trust in the citizen.

But a lot of other people seem to think that prior to 1776, there weren’t any free markets and that Adam Smith designed the “economic model” that has driven the unprecedented growth in human wealth and happiness since that time! These people are stupid and live in the same box as the (overlapping) group who want us all to live on smallholdings, grow our own spuds and keep goats. So let’s look at one of the worst offenders:

The New Economics Foundation:

“There is nothing ‘natural’ about our current economic arrangements. They have been consciously designed to achieve a simple objective: growth. But growth is not making us happier, it is creating dysfunctional and unequal societies, and if it continues will make large parts of the planet unfit for human habitation.”

Did you guys actually read “The Wealth of Nations” before you started saying that our economic arrangements were “designed”? Maybe you can point to the time and place of that design, the people involved and how it was implemented? You can’t, can you because what you’re saying is a lie. Our economic arrangements are the consequence of human ingenuity, the triumph of exchange and the wonder that is the free market.

Oh and the answer to this question you pose:

“At nef, we want to break that vicious cycle by building a new macro-economic model that is geared not towards growth, but towards achieving the outcomes that are important to society and that can be sustained by the planet's finite carrying capacity.”

Is really simple too – it’s called “the price mechanism” and you appear to have forgotten how it works (maybe because it was a long time ago in lesson two of GCSE Economics). The price mechanism is a:

“System of interdependence between supply of a good or service and its price. It generally sends the price up when supply is below demand, and down when supply exceeds demand. Price mechanism also restricts supply when suppliers leave the market due to low prevailing prices, and increases it when more suppliers enter the market due to high obtainable prices.”

If you allow environmental and social goods to be owned and traded – rather than carrying on with the myth of “public goods” – the price mechanism will meet all NEF’s needs. Without us having a “new economic model”.

The problem is that NEF are not really interested in individual initiative, innovation or even in any allowance for private action. What NEF wants is a state-directed and mandated programme aimed at breaking the free market model. Despite the rhetoric of sustainability, social justice and well-being, NEF’s agenda (and that of others involved in “green” economics) is philosophically indistinguishable from this:

"In the social production of their existence, men inevitably enter into definite relations, which are independent of their will, namely relations of production appropriate to a given stage in the development of their material forces of production. The totality of these relations of production constitutes the economic structure of society, the real foundation, on which arises a legal and political superstructure and to which correspond definite forms of social consciousness. The mode of production of material life conditions the general process of social, political and intellectual life. It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness."

A “progressive” government must take command of the economy and direct it to the benefit of all – as determined by the leaders of that progressive government. Now that worked very well here and here and especially here:

“We do not wish to copy anyone; we shall use the experience gained in the course of the liberation struggle. There are no schools, faculties or universities in the traditional sense, although they did exist in our country prior to liberation, because we wish to do away with all vestiges of the past. There is no money, no commerce, as the state takes care of provisioning all its citizens.”

The green economic model threatens not just the wealth and happiness we enjoy but worse it threatens the future opportunities for millions who do not yet have the pleasures of a free market civilization. And all the “sustainability strategy”, “social outcome measures”, “local multipliers” and “zero growth” that NEF and others talk about do not change the truth that the risks associated with a move away from a free system are too great for us to countenance allowing such people lose on our economy.

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