Shockingly, I find myself agreeing more with the most recent output from firebrand communist John McDonnell than committed free marketeer Liam Fox. In an FT article, McDonnell clarifies his views on the Bank of England: calling Bank independence "sacrosanct" (in contrast to his earlier utterances); arguing for QE to include purchases not just of gilts but a wider range of private assets; arguing for a higher inflation target to avoid the Zero Lower Bound (ZLB) problem; reaffirming the case for 'people's QE'; and considering nominal GDP targeting.
Let me say that people's QE has been tried, and it failed utterly. This shouldn't be surprising. Markets are better at investing than government bureaucrats, whether by 'investing' we mean 'buying financial instruments' or 'investing in physical and human capital'.
We don't need a higher inflation target to beat the ZLB on nominal interest rates because the central bank has tools other than interest rate manipulation (which I've argued it should get out of entirely).
We don't need to buy a range of assets because portfolio balancing works just fine—again, let the market choose where to put newly-created money, at least until we run out of gilts—then buy foreign currency, not any particular asset.
But I think nominal GDP targeting is a very interesting idea, at least if you target levels, especially market forecasts of levels, and especially if you reduce the discretion the rate-setting monetary policy committee has in reaching it. It is as close as you can get to a neutral monetary policy while you still have a central bank, and mimicks what you'd see with a free banking system.
By contrast I think that Liam Fox's speech to the Institute of Economic Affairs labours under a huge number of misapprehensions and offers few interesting steps forward for monetary policy.
Among Fox's claims that don't add up:
- That higher inflation leads to lower real pay—false. This is obviously true for a given level of nominal pay, but nominal pay is not fixed any more than any other price is, so if price inflation rises, wage inflation does too. Real wages move towards real productivity—both logically (otherwise firms could poach each others' workers and make easy profits), and in the data.
- That higher inflation hurts savers or investors—again false. While there may be nominal rigidities in labour markets ("sticky wages") there are few in capital markets. Fund managers and banks are not fooled by nominal values—they move their money around to get real returns. Thus we get the Fisher Equation—extra inflation is simply added to savers' and investors' returns.
- "Central banks have been the government's lender of first resort"—this is simply not true, central banks buy bonds on the after market at the market rate, not from government directly. What's more, central banks don't hold particular high shares of the stock of government debt right now—there is a lot more out there to hold.
- More government scrutiny should be applied to central bank actions—does Fox really have faith in committees, the executive, or worse, elected representatives, to do better? The suggestion is essentially to politicise monetary policy.
- QE only boosts asset prices—false.
- It's bad if QE (considered alone) led to wider wealth inequality—a strange view to take.
- That low real interest rates have anything to do with central bank policy—Fox might want to take a look at the trend of risk-free rates over time and across the world. He might also want to look what happens to market rates (i.e. the rates at which 99.9% of capital is lent at) when central banks loosen policy.
What's shocking about all this is that Fox and I share a huge range of views, whereas McDonnell and I agree on almost nothing.
Fox and I are both free marketeers who want a stable macro policy that leaves markets and the price system as free as possible to determine the important micro goings-on in the economy. Fox points to Friedrich Hayek for inspiration, but I think Hayek's views would be closer to mine, as would those of Milton Friedman. This is not to say that others wouldn't share Fox's perspective—Murray Rothbard and Ludwig von Mises come to mind—but I hope he will consider my alternative free market view.