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
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
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

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

Day In a Page

Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there