Is Jeremy Corbyn's policy of 'quantitative easing for people' feasible?

Jeremy Corbyn, the frontrunner in the Labour leadership election, has proposed “people’s QE” to fund extra infrastructure spending, build homes and invest in green industries.

The policy of “quantitative easing for people” has been attacked by fellow candidate Yvette Cooper, who said it would lead to higher inflation and a weaker pound.

Corbyn outlined his policy last month, saying: “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.”

QE has been used by a number of central banks around the world – including the Bank of England and the US Federal Reserve – as a response to the financial crisis of 2007-09. As commercial banks reduced their lending and credit dried up, the central banks created new electronic money by buying bonds. The Bank of England bought £375bn of assets this way, with the intention of channelling those billions of pounds into the economy.

Corbyn’s argument is that it had little impact on the real economy and instead led to higher share and property prices. His idea would involve a new national investment bank issuing debt that would be bought by the Bank of England.

Cooper said: “Quantitive easing to pay for infrastructure now the economy is growing is really bad economics. History shows it hits your currency, hits investment, pushes up inflation and makes it harder, not easier, to get the sustainable growth in a global economy we need to tackle poverty and support our public services.”

Cooper’s point is not that QE is always bad economics. She could not possibly say that since she was a member of the Labour government that first adopted the policy in 2009. Her argument is that QE was a response to a dire emergency and that the economy does not need more of it at this time.

The Bank’s monetary policy committee agrees. None of its nine members is currently backing the idea of more QE. Indeed, the MPC is toying with the idea of tightening policy by raising interest rates rather than adding to the amount of stimulus.

People’s QE in the current circumstances would therefore have to rest on the argument that it will provide a way of tackling a dearth of infrastructure spending and, by modernising the public realm, lead to higher productivity. But QE is not needed to do this. The same could be achieved by the government borrowing money at historically low interest rates.

The case for people’s QE would be much stronger in the event that a fresh financial crisis pushes the economy back into recession between now and the 2020 election. With little scope to cut interest rates, policymakers would inevitably have to fall back on so-called unconventional measures.

One option would be to expand the existing QE programme, even though studies suggest it was not especially effective. Another would be to instigate “helicopter” drops of money, in which the Bank would print money to finance cash transfers to consumers. A third would be for the government to pinpoint specific sectors that it wanted to finance through QE.

This would involve the Treasury giving political directions to the Bank, something that is feasible in an emergency but has its risks – including giving the impression that the government is indifferent to inflation – if deployed at other times.

So Corbyn is right when he says People’s QE should be an option if times get tough. Cooper is right when she questions its use as a day-to-day tool of economic policy or as a backdoor way of financing higher public spending.