Despite the proletarian name tag, the effects of PQE would lead to irreconcilable damage in U.K monetary policy and price stability. Scarcity is the lynchpin concept of economics, but it’s abolished in the domain of PQE. Richard Murphy, the architect of Corbynomics, plainly admits who pays for the additional investment under PQE:“The investment is paid for with money created out of thin air. I stress there is nothing unusual about this: all bank loans are created out of thin air in exactly the same way...”
He’s right to the extent that standard QE did utilise ‘money created out of thin air’, but the Bank of England (BOE) financed QE by purchasing government debt from the private sector. PQE, as reported by Peter Spence, is illegal under Article 123 of the Lisbon Treaty, by which we are bound, as states cannot finance deficit spending through central bank monetisation. Irrespectively, Mark Carney said he “could not envision any circumstance” where an advanced economy central bank should finance government deficit. Pushing against this statute, in the European Court of Justice, would lead to lengthy court costs, eventual rejection and needless European antagonism.
In the realm of Corbyn, the BOE’s independence would vanish. If it was given the remit to invest into infrastructure and housing projects, investors would see a central bank not focused on price stability but on financing popular political projects. Richard Murphy asserts central bank independence is illusory anyway as monetary policy is often shaped by government fiscal policy and the domestic political situation. Thus, he implies, there’s no difference in the current QE system and Jeremy Corbyn’s manifesto plan. But there is.
Every PQE investment would immediately be politicised with no regard for macroeconomic stability. Under PQE, as Chris Giles notes, the state would have to be smart enough to pre-empt the correct level of spending in a demand-deficient or demand-heavy economy, otherwise deflation or inflation could ensue. Especially as the money supply under PQE is permanent. If anything, central bank independence would be illusory under PQE than conventional QE as a national investment bank would be a middle man between the BOE and Treasury.
Milton Friedman once said “inflation is taxation without legislation” and this would be the precise effect of PQE. Poorer families would be hit hardest with the least spare capacity to absorb increased costs. Money is an I.O.U, therefore increasing the money supply without stimulating production reduces purchasing power.
A possible counter-balance offered by Corbyn, in response to inflationary dangers, is higher taxes on big corporations and the wealthiest. Theoretically, this would reduce aggregate demand and bear down on inflation. However, it’s dangerous to assume higher taxes yields higher tax revenues.
Robert Peston rightly acknowledged PQE only makes sense if you think the national bank would allocate to sectors of the economy where the private sector “refuses” to invest. This brings about a Hayekian scepticism questioning the ability of central authorities to be able to judge where resources ought to be allocated. Unfortunately, PQE simply has no redeeming features.