Yvette Cooper, Quantitative Easing and the spirit of Keynes.

Sue Konzelmann and Frank Wilkinson

16 August 2015

Tony Blair’s assertion that the Labour Party faces “annihilation” if Jeremy Corbyn is elected leader, is little short of astonishing. Just three months ago in Scotland, Labour actually was annihilated – by the rise of the SNP, a left-of-centre party, opposed to austerity and strongly supported by young people. Currently, the Scottish Labour Party is being rejuvenated by the prospects of Corbyn as leader. It is clearly fanciful to suppose that Labour faces crushing defeat simply because opposing austerity will make it look too left wing.

Nevertheless, Blair’s remarks encouraged Yvette Cooper to speak out in Manchester against Corbyn’s policy proposals, describing them as “not credible” – even though thousands of (mostly young) people think otherwise, and have joined the party to support them. She singled out his “flagship” policy – a major infrastructure investment programme, possibly funded by quantitative easing (QE) – for particular criticism. In its place, Cooper offers universal free child care, but with no indication of how it might be funded. Having an economist at home, with time on his hands, she should have done better than that.

Whilst Corbyn ( and Richard Murphy, Corbyn’s “economic guru” ) made it clear that increasing the money supply to pay for infrastructure development was merely one option for funding it, Cooper took it as read that this would be the chosen option. Even so, it’s worth having a quick look at the numbers likely to be involved.

There’s been much heated debate about the cost of HS2, the only major piece of infrastructure investment, so far, to have gotten remotely near to fruition – especially after its estimated cost was revised upward, to some £40bn. But, the cost of such needed infrastructure investment, with its promised improvement in transport, pales into insignificance when set against the £375bn pumped into the financial system to rescue it from speculative profligacy and to avert a complete monetary and economic disaster.

This QE was designed to bail-out the bankers, who created the crisis in the first place by their reckless speculation. And, it has done no more than refuel asset price inflation and enhance private financial gain. Meanwhile the austerity imposed by the Tory/LibDem Coalition in response to the debt accumulated as a consequence of the financial crisis has shifted the burden to the real economy, which would have been more that 20% larger now if it had grown at the same pace between 2007 and 2015 as it did between 2000 and 2007. Think about the cost of that compared with a high-speed rail line!

Clearly, the effect of QE depends upon what it is designed to do, which makes Cooper’s argument even more peculiar. She said:

“Quantitative easing to pay for infrastructure now the economy is growing is really bad economics. Quantitative easing was a special measure when the economy collapsed, liquidity dried up, interest rates fell as low as they could go. But printing money year after year to pay for things you can’t afford doesn’t work – and no good Keynesian would ever call for it.”

This shows the depth of her economic and historical ignorance of developments during the early 1930s. In 1931, Britain was forced off the Gold Standard and Sterling was left to float. This permitted the Bank Rate (the official interest rate) to be reduced in stages from 6 to 2 percent by June 1932, thereby cutting the government’s debt charges by £30 million. Income tax was cut and the money supply rapidly expanded (what we now term QE). As loans became both plentiful and cheap, a major house building boom developed, leading the economic recovery until it was sustained by re-armament. Keynes certainly approved; and in 1936, he published his General Theory, providing the theoretical justification for the Government’s expansionary macro-economic intervention.

Poor old Keynes; you have to feel sorry for him, given the number of people who’ve tried to put words into his mouth, in an attempt to lend a degree of credibility to otherwise not terribly convincing economic policies. What is beyond doubt here is that – as the experience of the 1930s shows – Keynes would certainly have argued for increased government investment when the economy is bumping along the bottom. And there is no question that it is now – with what little growth there is concentrated in a small part of the country, failing to create better jobs, and still mostly debt-driven.

The one thing that Corbyn and Cooper seem to agree on, is that the way to improve society and deal with the deficit, is to get the economy growing again. Keynes would probably not disagree. But the key to this is having an energetic economy, able to support healthy employment and income levels, sustainable consumption and fair levels of taxation. And that means investing. It is what QE achieves – not what it is – that matters.

The groundswell of support for Corbyn, despite his critics, suggests that he is addressing many of the problems that are all too apparent to those outside the Westminster Bubble. We can’t say for sure that Keynes would have approved – but that’s irrelevant. The world has moved on and he’s left us his legacy. It’s our responsibility to learn what we can from it – and to deal with the problems we face.