I regretted calling Guido innumerate.  And still do.  And I like the way he is holding up lib dem tax policy as an example to all here.  But his calling QE a ‘cost’ that can be compared to a tax cut is extremely confusing, in the light of his financial expertise. He writes:

Imagine, and this will take some imagination, Nick Clegg in No. 10 and Vince Cable in No. 11 the day after the election. They implement their manifesto pledge to raise the tax threshold to £10,000 reducing the Treasury’s take by circa £100 £20 billion.  It would cost about one-tenth as much as quantitative easing and be a far greater stimulus.  That would be £100 £20 billion into the real economy rather than foreign bond investors, benefiting the lowest paid the most.

QE has involved swapping 200bn of reserves for 200bn of gilts.  It may lose money, but not 200bn.  And if it did lose money, it’s a one-off loss.  The 20bn cost of the Lib Dem plans recurs every year.  The tax cut is a flow, the QE is a stock.

I agree the tax would be a far greater stimulus.  But Fink is right; it can’t be afforded right now.


6 thoughts on “I break resolutions quickly

  1. I don’t see why it can’t be afforded? Also, even better stimulus than tax cuts would be tax credits or other spending. Perhaps supply councils who seem to be cutting with more money.

    Also, the Lib Dems position as I understand it is to pay for the threshold raise by increasing capital gains tax, and the mansion tax. Dunno whether the maths is right (you’re the economist, you tell me!) or not, this is politics after all.

    1. Not wishing to sound sarky but we have a £175bn defiict. Anything that gives away £20bn every year cannot be afforded on day one. When things are ‘paid for’, the bond market might just say, instead: “That’s nice. Pay for me with that part”.

      I am not a fiscal hawk – I would happily sign a counter-letter to the Tim Besley one. But we have to start raising revenues at some stage.

      I wish you were right, of course, and hope we can do it within a few years…. I guess my only certain point is that QE is not a cost that means, if we undid QE we would suddenly have £200bn for other goodies…. we should redirect it, sure, but that is different – and if we did, inflation might climb beyond where people on the right wanted it.

  2. The Bank hasn’t swapped 200 billion of reserves for 200 billion of gilts. It has created 200 billion out of thin air. That 200 billion in gilt issuance will have to be paid for with interest. It is a very real cost that will be borne by our children in higher taxes.

    1. So they create reserves, and exchange them for gilts. This changes the maturity profile of their debts, and briefly boosts base money. It is still in no way a ‘cost’. And it is also a stock (a one off, not an annual event) compared to the tax cut which is a flow. Whether you can rhetorically move on to saying the debt issuance (not the cost) will ‘cost’ us is nothing to do with that logic error.

      If you want to criticize the gilt issuance, you could perhaps specify which taxes and which spending you would have altered in order to avoid having to do it. And then perhaps move onto what you think would happen in the macroeconomy as a consequence. No doubt a million flowers would bloom?



      Or if you think the issuance of £200bn of gilts at record low rates is so dangerous you can say “don’t issue gilts – just monetize the debt because we are in a deflation trap”. But, um, that’s QE.

      Very decent of you to return to such an old post BTW
      probably not …

  3. If it is cost free, as you maintain, why not do even more?

    Not sure what relevance the maturity profile has to this discussion. They are creating more government debt, debt that can’t be absorbed by the market at these yields, so they created the money to buy it. A policy that has never in all history worked.

    These record low rates are not a sign of economic strength, are they?

    My views on government spending are well known and don’t need to be rehearsed for the purposes of this point.

    1. I agree that the low rates are not a sign of strength. But they would be even lower if the government tried to stop borrowing by inititating a 10% spending squeeze. THAT is something that has never worked in a depression. As for whether devaluation/inflation has ever worked, what about the countries leaving the gold standard? The fastest growth the US ever recorded was 1933-6 after Roosevelt did it.

      My point was a much milder one that this. Sure, there are limits to QE, but they are not fiscal limits, like the limits to how much you can cut tax. Your original formulation was the logical equivalent to a company saying “since we can issue £200bn of equity we can afford to lose £20bn of sales”. Apples, pears.

      And yeah, we can afford more, sure. it has only stopped because the Bank as you know thinks inflation might be returning to where they want it.

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