Qualitative Easing

The economic crises of 2008 and now Covid-19 have been met by waves of quantitative easing – central bank injection of money into the economy through purchase of government bonds or other financial assets. As an anti-recessionary form of monetary stimulus the policy has only been partially effective, and has had some undesirable side-effects. Principal among these have been unsustainable bubbles in asset prices, notably in the stock market and housing market. Mariana Mazzucato: “…we will simply be solving problems in one place while creating new ones elsewhere. That is what happened with the 2008 financial crisis. Policymakers flooded the world with liquidity without directing it toward good investment opportunities. As a result, the money ended up back in a financial sector that was (and remains) unfit for purpose.” I am arguing here for an alternative form of stimulus, namely in the form of direct investment in infrastructure – with special attention to the quality (or type) of investment rather than the quantity.

[Important Disclaimer: what I will be advocating here has nothing at all to do with the term qualitative easing as coined by Willem Buiter. Quite the reverse.]

Economists tend to place a lot of faith in quantitative analysis – seeing the world in terms of big numbers and their large-scale fiscal and monetary drivers. So we measure success by looking at growth rates and become obsessive about interest rates, debt and taxation levels. We should look at things rather differently. To quote Stephanie Kelton: “Imagine what opportunities would be available, if we let go of the ‘How will we pay for it?’ question and focused on how to use our resources to serve the public good.” (The quotation is from here at 51:47. But I would recommend viewing the entire lecture as an excellent overview of how MMT-inspired thinking offers a way out of regarding public debt as the limiting constraint on expansionary fiscal policy.)

There is a notable precedent for this approach. Franklin Roosevelt’s ‘New Deal’ is widely reputed with dragging the USA out of the Great Depression, and the New Deal phrase has been referred to repeatedly in recent times – both in terms of green investment and broader recovery-spending contexts. I would suggest a rather different slant on this. Firstly it was the new economic activity around WW2 that really pulled America out of recession, but it was the expenditure on infrastructure in the 1930s that enabled America’s post-war economic dominance from the 1950s onwards. The engine ran on tracks that Roosevelt had built.

An important lesson can be learned from this. Long-term economic recovery and success does not necessarily depend on the quantity of stimulus, but rather on the type. This is not to say that the quantity of stimulus is irrelevant. What is important for the success of any given stimulus is where and how it is directed. Following my suggested path entails jettisoning some destructive shibboleths: relying on ‘the market’ to direct investment toward the most productive projects; accepting that governments are ‘unable to pick winners’; and ‘we can’t invest because we can’t afford it.’

So how should the UK proceed? The key starting point is setting up an institutional framework capable of effective management of a process of investment in infrastructure, combining this with a structure of ownership that both stimulates the economy and delivers a return to the public purse. A National Investment Bank and Sovereign Wealth Fund are central to this structure. With the right framework in place and an emphasis on projects that might be most important for global competitiveness five, ten and fifteen years from now, here is an unapologetically prescriptive list of investment and stimulus targets for qualitative easing:

  • Digital infrastructure. In the runup to the 2019 election Labour promised free universal broadband. The move was greeted with widespread derision. Covid has now resulted in a massive upsurge in home working, while apps like Zoom have become the standard means of holding meetings, both business and otherwise. Time spent commuting is generally wasteful and unproductive. It is difficult to see a return to the pre-Covid status quo as organisations are forced to move to a lower cost base and find new efficiencies. The Labour promise now looks prescient, viewing broadband as an element of public infrastructure as vital as water, transport and electricity. Money that had been earmarked for road and rail development should now be radically reviewed: funds re-routed to free universal broadband provision, while road and rail investment should be reconsidered and re-purposed in the light of emergent new patterns of working. Digital infrastructure will delineate the key ‘highways’ of the 21st century, and major investment now should be made a priority.
  • Education and training. An advanced economy requires a highly educated and well-trained workforce. For decades now immigration has acted as a stealth incomes policy while masking inadequate investment in E&T. Looking to the medium term future the UK needs a major investment in E&T. This needs to start from the bottom up in adult literacy and numeracy. Fortunately we have the physical infrastructure in place (schools and colleges) to accomplish this. Many schools need to become ‘E&T centres’ in order to accomplish two things: firstly a better educated adult workforce; secondly, a positive and motivating example to children of the importance of education (if children see their parents engaged in E&T processes, then their attitudes will be shaped accordingly). Delivery of ambitious E&T objectives will be enabled by aggressive investment in digital infrastructure.
  • R&D. Already an area where the UK has a fairly strong position, but much more needs to be done. In particular, support from a National Investment Bank leading to investment from a Sovereign Wealth Fund. Creating the future while owning a significant part of it is the watchword.
  • Artificial Intelligence and Quantum Computing. We know that these things are of rapidly increasing economic importance The danger is that the UK will be left behind as major players as bigger economies dominate progress. Focused investment at scale in R&D and new business support are therefore vital.
  • Green New Deal. The New Economics Foundation published its Green New Deal blueprint in 2008, and this informed Labour’s commitment in its 2019 manifesto. Both offer a combination of green high ideals and specific policy prescriptions. My view is that it might be most appropriate to separate the ideals (and I don’t mean abandon them) from the policy prescriptions and to prioritise the latter with an emphasis on finding the most economically productive paths for the medium to long term future. It is possible to generate 100% of UK energy requirements from a combination of wind and solar. The opportunity should be taken to achieve zero importation of energy while creating both jobs and new export opportunities by establishing leadership positions in an industry that can only grow. This principle, viewing the green revolution as a major economic opportunity rather than a moral crusade, should be prioritised: get the economics right and the ethics will take care of themselves. Mazzucato again: “A killer virus has exposed major weaknesses within Western capitalist economies. Now that governments are on a war footing, we have an opportunity to fix the system. If we don’t, we will stand no chance against the third major crisis – an increasingly uninhabitable planet – and all the smaller crises that will come with it in the years and decades ahead.”
  • 3-D Printing. Britain was the epicentre of the Industrial Revolution and a world-leader in manufacturing. This all fell by the wayside as a financialised economy and globalisation changed the game. Poor investment and even poorer management killed of the UK economy as a manufacturing force. 3-D printing represents a radical future change in the manufacturing process, and a remarkable new opportunity to regain a lost initiative. Sustained investment in research coupled with the creation of flexible production hubs is the obvious starting point. From there, investment (yet another role for a National Investment Bank) in new small businesses represents the next phase. Two types of new business can be created: software based operations that are an essential part of 3-D printing infrastructure, and retail oriented production businesses that feed of this infrastructure. Public libraries and disused retail space (typically, former department stores re-purposed into small business units) represent an existing real estate infrastructure for supporting this initiative.
  • Ending the housing shortage. I have written in greater detail about this issue and the type of investment needed to resolve it. For now, it is most appropriate to focus on the benefits that will accrue. An aggressive programme to remove the the shortage will reduce the cost of housing and will in turn increase disposable income. The benefits of this are obvious. If housing is no longer considered a valuable asset class, then capital is released to find more productive uses, expanding the domestic market for goods and services. Finally, and most obviously, the jobs and business opportunities created by an aggressive building programme will provide a significant near-term and continuing economic stimulus.

This is not an exhaustive list of qualitative prescriptions. There are many other potential paths like these. The common factor is that they all, in different ways, represent two vitally important elements: firstly, they offer a direct stimulus creating jobs and new economic activity; secondly, they offer a transformative impact on the infrastructure required for future economic success. Perhaps R&D is the core activity that drives most of the others. We can take a strong, informed guess as to the areas of most importance in future decades, but it will be investment in R&D that underpins any attempt to take these future opportunities. At the same time, ending the housing shortage offers an immediate impact on job creation, while encouraging investment in new business growth by gradually diminishing the status of real estate as a financial asset.

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