Policy Research in Macroeconomics

Debt, deficits and the role of central banks: Corbyn’s win opens up key new debates

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By Jeremy Smith and Ann Pettifor

We welcome the election of Jeremy Corbyn above all for the fact that – for the first time in over a generation – it opens up space between the main political parties for a true debate on and contest over economic policy and philosophy in which the basic tenets of neoliberalism and its more localised contemporary manifestation, Osbornomics, are challenged.  

Our new series on debt, deficits and the role of central banks aims to contribute to these debates as the new team’s economic policy is developed.

Back in early August, we [JS] quoted and contrasted the main economic policies of the four candidates, including on what we may call “deficit fetishism”, and concluded that 

True, we were critical of some later comments from Corbyn’s team that appeared to concede some ground on deficits to Osbornomics – “deficit denial is a non-starter for anyone to have any economic credibility with the electorate” – but remain hopeful that this was simply a passing nod in that direction.

Corbyn rightly emphasizes the need to upgrade our infrastructure via a major investment programme. One idea put forward by him in “the Economy in 2020” is that of “People’s QE”:

The ‘rebalancing’ I have talked about here today means rebalancing away from finance towards the high-growth, sustainable sectors of the future. How do we do this? One option would be for the Bank of England to be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects: Quantitative easing for people instead of banks.

This “option” has given rise to controversy concerning the role of the central bank, and whether it should (as a matter of principle) be expanded into this new domain, and whether PQE would in practice be an effective vehicle for attaining the desired investment financing goal.

In the spirit of openness proposed by Jeremy Corbyn on economic issues, we in PRIME are keen to take all these debates forward, and in the coming weeks we will be posting a series of articles looking at issues of debt, deficits, and the role of central banks.

In the first of this series, Frances Coppola takes the debt/deficit argument head-on in “Rethinking government debt”. She underlines: 

For many…(and I admit I am one) deficit phobia is economically illiterate and failing to invest when interest rates are on the floor is irresponsible management of the economy.

Prime would be happy to consider articles, including responses, for this series.  You can contact us at info[at]primeeconomics.org

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2 Responses

  1. The role of the central bank is indeed something the new opposition leader and shadow government should focus on. It could start with the following question?

    Why does the Bank of England subsidise the banking sector with £1.5bn a year?

    My blog:

    https://radicaleconomicthought.wordpress.com/2015/09/13/why-does-the-bank-of-england-waste-1-5bn-a-year/

    That is not unique to the Bank of England, though.

    Have a look at this NYT article:

    http://www.nytimes.com/2015/09/13/business/economy/the-feds-policy-mechanics-retool-for-a-rise-in-interest-rates.html?_r=0

    Here is what the NYT is saying about the impact of interest rate rises:

    "This is not a cheap trick. Since the crisis, the Fed has paid banks a token annual rate of 0.25 percent on reserves. Last year alone, that cost $6.7 billion that the Fed would have otherwise handed over to the Treasury. Paying 1 percent interest would cost four times as much. "

    So if there is a rise in interest rates, that would mean that the government ( Bank of England, Federal Reserve) would start paying the private sector commercial banks more interest on the money these banks have on deposit with the central bank.

    So raising interest rate = more money for private sector banks from taxpayer!

    It is a scandal, that is proposed by the Bank of England, which should be stripped of its role to steer monetary policy!

    So really, at the moment any interest rate rises would

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