We still need a massive fiscal stimulas

Thank god Ed Miliband has finally got a handle on our economic offer. Today he laid out a new narrative built around a “living standards” message with some good policy detail in the 10p tax pledge. He previewed the new approach at PMQs on Wednesday where he said that come the 2015 election, people will be asking “Am I better off now than I was 5 years ago?”

It’s about time, we really need this new, sharper approach.

On Tuesday night, I was speaking at an event by Pragmatic Radicalism where a number of people presented ideas for Labour economic policy and the audience voted for their favourite. My pitch was this:

“Even though we are right and they are wrong, we acknowledge that the Conservative party have a far more coherent economic policy than Labour. I believe that an economic policy of massive intervention, with massive stimulus, through massive infrastructure spending, should be presented with massive confidence by a leadership who will then stand their ground and defend their policy.”
Whenever I get up to speak at these kinds of events, I naturally imagine that my thoughts will be received with the kind of rapturous joy they deserve. Ahead of this event, my fantasy included the image of Amanda Ramsay in full Grecian toga, sprinkling rose petals in my path, as I stepped down from the podium to a roar of applause.

In fact my pitch provoked the question, “how will we afford it?” I had to patiently explain to these ignoramus’ that the £400 billion of quantitative easing was wasted on government bonds when it could have been spent of building schools and hospitals. We should be campaigning that future QE be spent on tangible investments in the real economy rather than delivered as helicopter cash to the banks and pension funds.

This policy response is difficult because people don’t understand where money comes from. Conversely, the Tory policy response is simple. Reduce the debt.

Contrary to popular belief, money is not created by the Bank of England, but by high street banks, under license to the Bank of England. When you deposit £1,000, Barclays will then lend out £10,000. The £9,000 difference is created out of trust.

The Bank of England stands behind Barclays and provides the guarantee. This is “fiat money” since it is not based on gold coin, or backed by matching deposits in the vaults, it is created out of government fiat.

The high street banks are indispensible to the money supply system because they are expert at measuring the risk of the money being lost. The Bank of England then measures inflation in the wider economy, and influences the supply by increasing or decreasing interest rates.

Following the credit crunch the high street banks stopped lending, and the supply of money dried up. The Bank of England was forced to step in and this was called quantitative easing.

The reason there is so much intellectual thinking and figuring over these issues is that we are in virgin territory. Out of control inflation has always been a part of the problem in the past, so if the banks did stop lending, it wouldn’t have been a problem, it would have been a part of the solution.

This time everything is different. In my opinion, when Mark Carney says he wants to target growth, he means he wants to pursue an inflation target which is higher than the current 2%. A higher moderate inflation rate would help reduce the deficit. The Americans are doing the same and dressing it up the same. So will others.

Adair Turner recently argued that in the future we could do quantitative easing for the purposes of funding government investment. The only reason the £400 billion of QE was spent on buying up gilts was due to convention. No one could imagine doing it any other way. In the future we could spend it wherever we like.

The last time there was a major discussion about economics was during the Thatcher period, when the government were advocating market forces, over intervention. I remember hearing PMQs on the radio, with Margaret Thatcher at the despatch box screaming, “Unprofitable pits will be closed! Unprofitable pits will be closed!”

It was a simple argument, which helped her to win. Right now the Tories are losing the austerity argument to Labour – everyone can see what’s happening on the high street – but they are still winning the central debate about debt.

Keynes is a difficult sell at a time of existing high borrowing.

At the Pragmatic Radicalism event I was wrong to argue that Labour should advocate massive spending as an electoral strategy, but right to be frustrated at Labour’s lack of a clear path.

Ed Miliband’s new narrative and today’s policy proposal are a good start in mapping out that path. They don’t offer a fully worked alternative but they do erode the Tory myth about us and put us in a much better position than we were even a week ago.

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