In a recent BBC Newsnight interview Evan Davies listened in shock as Jeremy Corbyn, now no longer a fringe outsider but a potential future Prime Minister, dismantled the received wisdom about what is and what is not economically possible. The official version of crisis and recession that has been studiously constructed by the right-wing media and Tory politicians is now no longer the only game in town so hurrah for Corbyn in making the political space to debunk these myths.
A large proportion of his economic platform is standard Keynesianism: public spending cuts withdraw demand from the economy and cause recession; one million jobs lost in the public sector over the past five years have been replaced by jobs that are lower-paid and so endow considerably reduced spending power; the demand we have seen has been fostered by monetary manipulation that creates future risks, such as the massive injection created by the transfer of pension savings from the future to the present, as well as the stimulated house-price boom. All well and good in so far as it goes, but from a Green perspective I am concerned that Corbyn takes no account of future risks from a Keynesian approach, which aims to cheerfully stimulate growth regardless of planetary limits.
The more unusual aspect of Corbyn's economic platform is what he calls 'People's Quantitative Easing' (QE), the idea that a Corbyn government would worry less about the deficit because it would use its power to create money directly; what his opponents have inaccurately labelled 'printing money'.
So is Corbyn right that we can use the power of QE to create the money we need for investment? As so often in an economic discussion the answer is yes and no. It is possible for governments with a sovereign currency like the pound to issue it to serve their political ends; I recently made a proposal for the European Central Bank (ECB) to do just this with the €60bn per month it is currently issuing through a QE process. Such Green QE is gaining wider support as a means of creating the necessary investment for green sectors of the economy such as, for example, renewable energy sources and providing home insulation. The Green Party also adopted a policy of reclaiming the power of money creation from the private banks two years ago. Such a policy now has some mainstream advocates including Martin Wolf at the FT and former FSA boss Adair Turner.
What makes me nervous is the way Corbyn and his allies are flourishing QE as though it solves all economic problems at a stroke. Using the power of money creation is not something that can be done irresponsibly; it must be subject to two important constraints.
The first constraint is an internal one: there must be a strict separation of the power to create money from the power to decide how newly created money is spent. The Green Party suggests an independent National Monetary Authority which could decide how much money would be appropriate to be created based on assessment of key indicators such as unemployment, interest rates, inflation and so on. Crucially, only the strategic decision about how to direct that money to achieve the best social and ecological outcome would be vested in the Government and Parliament. Without such a separation of powers there would be a conflict of interest and high risk of abuse of the power to create money. This, arguably, caused the 2008 financial crisis when private banks created excessive amounts of credit to fund their reckless mortgage lending. We have also seen past tragedies when governments have used their power over monetary policy for their own political advantage.
Secondly, there will always be the external constraint of the loss of value and confidence in a currency if too much of it is created. What ultimately supports a currency is the skills and resources of the national state whose government issues it. That is the very real public guarantee that connects us unavoidably to the pound sterling. If we were to create more money than the country was in this abstract sense 'good for' we would see speculative attack against the pound which might lead to a sterling crisis like that of the 1970s. A responsible Chancellor would be mindful of this wider restraint.
I am grateful to Jeremy Corbyn for challenging conventional economic orthodoxy and hurling the issue of money creation into the public debate. This offers the opportunity for monetary emancipation and challenges the myth that we are all in this together when it is clear that austerity is serving the rich at the expense of the poor. But I would urge him to proceed with care: while free lunches are at times available, an economy is always constrained and prime ministers as well as their chancellors should not treat those constraints lightly.