David Blanchflower: Hawks are wrong - QE works and we need it

The last thing our economies need is to worsen the situation for borrowers in order to help savers

Economic Outlook Last week I appeared on The Hays Advantage, which is a national radio show on Bloomberg, hosted by my good friend Kathleen Hays. I debated with the inflation hawk William Ford, ex-president of the Atlanta Federal Reserve and the US's equivalent of Andrew "Death" Sentance, the role of the Fed and its actions to prevent economic meltdown. Ford, who seemed to believe the Fed was the main cause of it, recently signed up as one of 400 economists who support Romney's unbalanced budget plan, which lowers Medicare and Medicaid spending to pay for tax cuts on the rich. Ford currently teaches at Middle Tennessee State University. To put it mildly there was absolutely no meeting of minds: the producer even sounded the bell, as they do in a boxing match, at the start of each section as we returned from adverts.

Twice I blurted out that I didn't agree with a single word Ford said. The most outrageous claims he made included that what is really needed is zero inflation; QE hasn't worked and, in any case, rates have to be raised now and QE reversed because of the possibility of hyperinflation – plus this tightening was justified because of the effect this was having on savers. His justification for destroying the US economy was that unless we tightened now, hyperinflation was coming, just as it did when he was on the Fed with Paul Volcker in the 1970s. Nonsense. Ford also didn't seem to realise that slowing the economy right now would likely push the US economy into deflation, which causes major problems for borrowers. I borrow a million pounds today but the money I have to use to pay it back diminishes in value in a deflationary world so defaults rise, firms close – and here comes the death spiral of decline.

Ford also didn't seem to take well to the point I made that his policy proposals were designed to solve a non-existent problem of inflation – wage growth and core inflation are benign – and would worsen the very real problem that is present right now of high unemployment and especially high long-term unemployment. He didn't take kindly to my point that the world had changed since the 1980s, we are in a global recession, banks aren't lending, and there are major downside risks to the US economy from a potential break-up of the eurozone. Plus, as Simon English noted in his Independent column this week, savers just have to suck it up, as all else is worse. As Simon says, the Saga louts need to put a sock in it. Don't savers, who tend to be older, care about their grandkids? Savers have benefited from asset price increases that occurred as a major goal of the QE as it pushed up other asset prices. Plus many of these very savers likely gained from the house price rises while the young didn't. The last thing the US or UK economies need is to worsen the situation for borrowers to help savers.

Ford's most egregious claim was that QE hadn't worked. He gave no evidence to support his claim; all the empirical evidence is to the contrary. If it worked or not depends on the scale of the counterfactual; that is what the world would have looked like, absent the policy measures. A consensus has emerged among empirical studies that the Fed's QE probably lowered the yield on the 10-year Treasury note, as well as on high-grade corporate bonds, had sizeable impacts on GDP growth, lowered unemployment, raised inflation and eased mortgage-market conditions. The evidence suggests that unconventional monetary stimulus has had broadly similar impacts to conventional monetary stimulus. Ford is full of it.

Evidence on whether QE had worked in the UK or not was provided by the Bank of England in an important report a few days after my radio battle. Without the asset purchases, the Bank estimates credibly, most people in the United Kingdom would have been worse off. Economic growth would have been lower and unemployment would have been higher. Many more companies would have gone out of business. This, the Bank argues, "would have had a significant detrimental impact on savers and pensioners along with every other group in our society". The Bank's asset purchases have increased the prices of a wide range of assets, not just gilts. In fact, the Bank's assessment is that asset purchases have pushed up the price of equities by at least as much as they have pushed up the price of gilts.

The Bank estimates that the £200bn of QE between March 2009 and January 2010 is likely to have raised the level of real GDP by 1½ to 2 per cent relative to what might otherwise have happened, and increased annual CPI inflation by ¾ to 1½ percentage points. Assuming that the additional £125bn of purchases made between October 2011 and May 2012 had the same proportionate impact, this would translate into an impact from the £325bn of completed purchases to date of roughly £500 to £800 per person in aggregate. The Bank estimates a substantial cut in interest rates of between 250 and 500 basis points would have been required to achieve the same effect.

It concludes, though, that the benefits of loose monetary policy have not been shared equally across all individuals. Many households have received lower interest income on their deposits. But changes in interest rates – not asset purchases – have been the dominant influence on the interest households receive on bank deposits and pay on bank loans. By pushing up a range of asset prices, asset purchases have boosted the value of households' financial wealth held outside pension funds, although holdings are heavily skewed with the top 5 per cent of households holding 40 per cent of these assets.

QE has clearly exacerbated inequality at the same time as the fiscal policy is doing the same, being heavily focused on public spending cuts that impact the poor most along with an increase in VAT that is regressive. We never were all in this together.

Sorry Bill: QE did work, and there is likely more of it to come. I dread to think what the world would have looked like if you had been in charge of the Fed. Maybe you are a supporter of the US going back on Gold Standard too?

Start your day with The Independent, sign up for daily news emails
News
i100 In this video, the late actor Leonard Nimoy explains how he decided to use the gesture for his character
Arts and Entertainment
Secrets of JK Rowling's Harry Potter workings have been revealed in a new bibliography
arts + ents
News
Robert De Niro has walked off the set of Edge of Darkness
news The Godfather Part II actor has an estimated wealth of over $200m
Arts and Entertainment
Fearne Cotton is leaving Radio 1 after a decade
radio The popular DJ is leaving for 'family and new adventures'
Sport
Robbie Savage will not face a driving ban
football'Mr Marmite' faced the possibility of a 28-day ban
Voices
voices
Life and Style
Nearly half of all young people in middle and high income countries were putting themselves at risk of tinnitus and, in extreme cases, irreversible hearing loss
health
News
It was only when he left his post Tony Blair's director of communications that Alastair Campbell has published books
people The most notorious spin doctor in UK politics has reinvented himself
ebooks
ebooksA special investigation by Andy McSmith
Life and Style
The new model would be a “pedal assist” bike in which the rider’s strength is augmented by the engine on hills and when they want to go fast
tech
Arts and Entertainment
arts + ents
Life and Style
fashion
Arts and Entertainment
James Franco and Zachary Quinto in ‘I Am Michael’
filmJustin Kelly's latest film tells the story of a man who 'healed' his homosexuality and turned to God
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower