Quantitative easing and housing investment

One of the issues opened up by the Labour leadership debate is whether and how to boost investment through a new version of quantitative easing. It’s a debate that began in 2012 and to which Red Brick added its voice. Jeremy Corbyn has called for a people’s quantitative easing to be used for infrastructure investment, including housing, while Yvette Cooper has said it would be the wrong time to do it. As in other areas, Corbyn has provoked a lively debate. The FT doesn’t like his policy but has at least looked at it in some detail. (Its assessment concludes with an unfavourable comparison with Venezuela: Corbyn might wish he had that country’s oil revenues, even if they have recently fallen off sharply.)

A form of QE for the people was put forward by three economists in May: their idea is for the Bank of England literally to release money to households. There is a near-precedent for this in the US where tax rebates have been used as an economic stimulus. This isn’t quite what former Federal Reserve chairman Ben Bernanke once suggested – dropping money from helicopters – but it isn’t far short.

As Paul Mason points out, Yvette Cooper’s criticism of Corbyn actually included two advantages of the policy: higher inflation and a weaker pound. In a situation where Britain has a worryingly large trade gap (or at least people used to worry about it, before the media decided that the real economic problem was the deficit), a weak pound would be beneficial. And as Mason says, while inflation may also have been regarded historically as a key economic problem, having none of it at all is actually quite problematic: the value of debt doesn’t decline over time, it stays annoyingly at the value at which you incurred it. Given Britain’s sovereign debt and especially its far more serious levels of personal debt, the fact that debt is not being eroded adds to the economic risks.

Mason also says that a low inflation/low interest rate economy deprives governments or central banks of one of their tools – cutting interest rates – which is probably why Mark Carney is so keen on raising them (so they can be cut if things get more difficult). Mason quotes another economist, Stephen King, as saying that after six years of glacially slow recovery the world economy is like the Titanic with no lifeboats: when it hits the inevitable iceberg, what policy instruments will be available? China has created a lifeboat – devaluing its currency – to stimulate growth, and as Mason points out the effects are not unlike those of QE (but may be more effective than the very large but in the end almost toothless QE created by the Bank of England under the coalition government).

This writer is no economist, but it seems to me that Corbynomics has some distinct advantages. In contrast to dropping fivers from a helicopter, it would lead to long-term assets being created, including housing as well as transport infrastructure. Given that we have a clear investment deficit in housing – whether in building new ones or in bringing the existing ones up to the standards we need to achieve in order to tackle fuel poverty and meet our carbon targets – directing QE into this sector appears to make sound economic sense. The argument looks even stronger if you consider that (unlike consumer spending) building houses doesn’t suck in huge imports and is labour-intensive, so it creates UK jobs and has beneficial effects on the wider economy. In fact, the case has just been set out in the excellent report by Capital Economics for SHOUT and the National Federation of ALMOs. It’s true that there may currently be problems of shortages of labour and building materials, but these obstacles have been faced and dealt with in the past.

Perhaps the biggest advantage of Corbynomics is that it takes the argument onto the Tories’ own ground. They’ve successfully convinced much of Britain that the economy is like a household’s finances, and has to be reined in when times are bad. Doing as Osborne wants, aiming to run a budget surplus, might be sound practice when considering family finances but in a national economy will effectively mean there is less money for people to spend themselves. Corbyn’s case that we need to get the economy moving by investing for the future not only makes far greater economic sense, it starts to look like a plausible argument to convince the man and woman in the street and to challenge Osborne’s self-serving homilies.

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2 Responses to Quantitative easing and housing investment

  1. Dan Filson says:

    (Re-posted without typos, I hope!)
    Would a change in interest rates help the housing market? At first glance an upward movement in interest rates might seem to harm property construction, whether public or private, by making borrowing more expensive at a time when government is unwiling to subsidise borrow-to-build.in the public sector at least.

    But what a rise in interest rates might do is move investor hot money away from land and property speculation into risk equity in other areas. That, in turn, might cool down the rampaging land and property bubble back to a more customary steady but slower movement. This wouldn’t necessarily stop buying a home being the wisest investment for anyone able to afford to do so. But it might dampen the ardour of those who, at the margin, over-extend themselves, and thus are pouring petrol on the flames.

    Property developers need a degree of certainty in the future. It’s uncertsinty which is a cause of land-banking. If normalcy returns to the property market, we might end the stop-start pattern of home-building by the private sector. The virtue of public sector home-building, if only the government (and it’s not just Tory governments that miss this point) would realise this, is that a steady flow of public sector home-building evens out the ups and downs of the private sector and enables longer-term investment strategy to be adopted. No more boom and bust, as it were.

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