This is (primarily) for Brits.
1. Suppose I normally buy 10 apples at $1 each. Then the government taxes me $3, buys 3 apples, and gives me those 3 apples. I will now buy 7 apples instead of 10. The net result on my consumption of apples, and everything else, is zero. The only difference is that the government is doing part of my shopping for me.
Fiscal policy won't work in that example, because I offset it 100%. But this post is not about that example; I only used it to help illustrate my second example:
2. Suppose the government of Canada normally buys 10 new Canadian bridges at $1 billion each. Then the Bank of Canada prints $3 billion, and instead of lending it to the government (buying government bonds) like it normally does, it buys 3 new Canadian bridges. The government will now buy 7 new bridges instead of 10. The net result on building of bridges, and everything else, is zero. The only difference is that the Bank of Canada is doing part of the government's shopping for it. [Update for clarification. Printing the $3B will have an effect, but the Bank of Canada buying bridges instead of buying bonds will have no effect.]
Remember that the government of Canada owns the Bank of Canada, so that any revenue the Bank of Canada earns by printing money and buying bridges or bonds ultimately ends up in the government's pocket anyway. So it's exactly like my first example, in terms of who ultimately pays for the apples or bridges.
If you expand the central bank's power to include buying bridges, we should expect to see 100% fiscal offset for any exercise by the central bank of its new power.
My first example isn't very realistic. The sort of things the government buys for us are usually different from the sorts of things that we buy for ourselves. (That doesn't necessarily mean they are less useful, like Christmas gifts where we would have preferred the cash, because some goods are non-rival or non-excludable, which creates micro-public-financy problems if we buy them ourselves.) They won't necessarily be close substitutes, and might even be complements.
My second example is much more realistic. Or it would be realistic if the Bank of Canada actually did buy real newly-produced investment goods. Both the Bank of Canada and government of Canada would presumably choose whether to buy bridges or sewers using much the same sort of criteria. (Though there is that democracy thing, which could perhaps be argued either way.)
If you think the government should build more bridges, then just say so. And if you think you are going to be the next PM, then just say you are going to do it when you are PM. It's really silly to say that when you are PM you will order your central bank to do your shopping for bridges for you. Don't you have a Ministry of Works (or whatever they call it nowadays) that specialises in buying bridges? Because the monetary economists who work at central banks don't normally take courses in buying bridges. And if you are not PM, then it wouldn't work anyhow, because of fiscal offset.
I do regularly read Simon Wren-Lewis' excellent blog, as well as the Daily Telegraph (and sometimes the Manchester Guardian), but I can't claim to be up to date on all the twists and turns of this story. But "silly QE" sounds to me like a more sensible name.
[I was tempted to make a reference to Becker's "Rotten Kid Theorem", which I think is relevant, but was afraid people might take it the wrong way.]
Update: Here are two recent posts that are also relevant:
1. "Interest-free loans from the central bank to the government". (That post was supposed to be about an obscure bunch of Canadian monetary cranks, but it applies equally well to "People's QE".)
2. "The (near) inevitability, and who and when, of Helicopter Money".
Worthwhile Canadian Initiative 
PeterK: “So with quantitative easing (“Bankers’ QE”) it’s also creative accounting and the budget is consolidated? So the central bank doesn’t “create money” out of thin air by printing it?”
I never said that. I would say the opposite. The central bank can and does create money by printing it. (And if we consolidate the balance sheets, then the government/central bank does create money by printing it.) And that is equally true in both regular QE and silly QE.
“What am I missing?”
I have no idea. I do not understand you; and I’m pretty sure you do not understand me.
I see PQE as (potentially) a way around constraints on the central bank and fiscal policy. Whether this makes sense in the UK or Canadian political system I do not know. I’m looking at a system constrained by political limits on the amount of QE that can be done* and political constraints on the amount of investment in NPV greater than zero projects that can get done because politicians think (or at least pretend to think when the other party holds the Presidency) that debt, or increases in debt, or rates of increase in debt are always and everywhere bad.
In that kind of system letting the Fed buy the bonds of a “National Investment Bank” (especially if the Bank is instructed to cost inputs at marginal social cost not market prices) MIGHT be an end run around the constraints on monetary and fiscal policy I see. But if I had one wish it would probably be for ngdp targeting rather than PQE + NIB.
* It is not clear how independent this constraint is from the constraint on having the inflation rate be high enough above 2% for long enough to get the price level back on its pre-crisis trend.
PeterK:
“as analogous to QE”.. “a swifter economy recovery”
Bankers QE and silly QE both have similar monetary effect – and PQE might be better in other ways, no silliness there. So PQE might have a swiftier effect and all. But that is not the point the post made, PQE might still be silly, do you see why?
It is surely silly to send wife to buy a car just because she is able to fund it, wouldn’t it be better to do it yourself (assuming you know more about cars) and ask your wife just to fund it? Wouldn’t it in similar fashion be silly to make the Central bank “to hammer the screw” if we can do the very same PQE without it by using a screwdriver? Nick argues that yes we can do PQE without using (directly) the central bank.
So, in other words, “bankers QE”, buying treasuries is what the Central Bank is setup for. PQE not so much as buying bridges is usually done by an other agency. Yes, it still not silly if the Central Bank buying would create something special which couldn’t be pursued by other means. But as Nick explained that is not the case. The Central Bank doesn’t create anything special by buying directly the bridges comparing the case it buys the bonds funding the bridges and the buying is done by the other agency.
Nick Rowe:
“PeterK: “So with quantitative easing (“Bankers’ QE”) it’s also creative accounting and the budget is consolidated? So the central bank doesn’t “create money” out of thin air by printing it?”
I never said that. I would say the opposite. The central bank can and does create money by printing it. (And if we consolidate the balance sheets, then the government/central bank does create money by printing it.) And that is equally true in both regular QE and silly QE.”
Okay I think I know what you’re saying. For both Bankers’ QE and Silly QE, the consolidated government/central bank balance sheets are constrained.
But by what are they constrained? Inflation? Too much debt? What would help illustrate the case is to compare two scenarios: one with QE and one with People’s QE and describe how the consolidated government/central bank balance sheets differ and how the balance sheet differ separately.
Jussi, proponents of People’s QE have said that the Central Bank would help finance a National investment bank which would know what to do.
“The Central Bank doesn’t create anything special by buying directly the bridges comparing the case it buys the bonds funding the bridges and the buying is done by the other agency.”
In one case, the governments’ budget deficit increases. It will need to raise taxes after the recession is over to pay for the bridges. In the other case the central bank funded the buying of the bridges so the budget deficit wouldn’t go up. Nick insists the consolidated central bank/government budget is still constrained so it doesn’t matter that the government budget deficit doesn’t go up.
But it does matter because of politics. Maybe Nick is saying they could just get the same recovery by doing a larger QE without PQE and no one is disputing that. But with a PQE, projects and jobs and income are created directly instead of indirectly by the banks.
If the U.S. had done “Silly QE” instead of Bankers’ QE, I bet the recovery would have been much quicker and it would have cost the “consolidated budget” less. There would have been less fiscal austerity forced on the economy, because the budget deficit would have been smaller.
I’m pretty smart and if Rowe can’t explain why PQ is silly in simple terms then I believe the problem is with his explanation and his conception of the issue.
Peter K: “Okay I think I know what you’re saying. For both Bankers’ QE and Silly QE, the consolidated government/central bank balance sheets are constrained.”
Not quite. For both Regular QE and Silly QE, the consolidated government/central bank balance sheets are exactly the same.
“Maybe Nick is saying they could just get the same recovery by doing a larger QE without PQE ….”
No, that is not what I’m saying. Since regular QE and silly QE are exactly the same, and will lead to exactly the same change in G (if any), you will get exactly the same recovery in both cases.
Nick,
I haven’t read all of the above comments, so maybe this is old news. But, I think here is what is confusing people.
1) By calling it “Silly QE,” you are making it sound like QE has no effect on real output. And since your readers know plenty of models where QE has real effects, they are saying you must be doing something fishy.
2) But in reality, you are saying that having the central bank directly buy publicly needed goods has no effect on real output relative to a standard QE program where the central bank buys bonds and the government runs a deficit to invest in the public goods.
Is that right?
Supposing my first comment is correct, Nick, then the way someone might justify “People’s QE” is like this:
“Sure Rowe, I agree with you that there is no significant difference between normal QE + bigger fiscal deficit versus People’s QE + smaller deficit. However, the public is stupid. They get worried when the government issues another $500 billion in bonds, even if they are absorbed by the central bank. So that’s why we can push through People’s QE more easily than what is, I grant you, an equivalent program.”
Bob: you are right. But I am saying more than that. I am saying that silly QE, relative to regular QE, will not cause G to be higher.
And someone might try that counterargument, but if so, silly QE only works because it fools people into doing something they would not want to do. Simply lying about the deficit numbers would have the same effect.
Calling silly QE QE is silly. The CB is actually doing the same thing in both cases. What’s different is that with an NIB, fiscal policy decisions are being partly outsourced to another (possibly more competent) entity, with the side effect that they also don’t show up on government books.
But, as rsj rightly points out, seeing as fiscal policy is considered bad while monetary policy is good, maybe keeping the public eye on a non-existent monetary distinction to obfuscate from the actual accounting gimmick might not be so silly after all. Also an NIB could be partly equity financed and more easily dissolved if its investments go belly up. An NIB would make the distinction between government investment and transfer payments clearer.
And whether G is higher vs. the current arrangement seems to me less of a function of whose books the investments show up on as of whether or not the investments are made or not. Presumably (I haven’t read the proposal) the NIB would be mandated to invest some percentage of GDP, whereas with ordinary QE, commercial banks are not mandated to lend out the reserves they obtain.
In all, an NIB arrangement seems a sensible way to marry classical banking with non-cyclical / long term government investment goals while shielding it a: from day to day politics but b: also from the commercial banking system. And with that, the functions of the CB as government (investment) banker and of manager of the private banking system become easier to distinguish, too.
PQE may not actually be distinguishable from ordinary QE – from the CB’s point of view, it’s rearranging the deck chairs. But it is a sensible rearrangement nonetheless, at least on paper (and assuming you’re not idiologically wedded to free markets).
Nick, let’s put aside economic logic for a moment. Cameron is trying to run away from austerity but the Brits now believe the lies of austerity (because he kept repeating them.)
Therefore Cameron is looking for a way to have a more expansive government while keeping a fig leaf that he is still all about austerity.
The mess is surely all about Cameron not having the guts to say ‘Gordon Brown was right all along.’
Chris: If we want to draw a line in the sand, to protect us against our own profligacy, then a debt/GDP target would be a sensible line to draw, even though any particular line would be arbitrary, to some extent. “Flexible debt/GDP targeting” (budget to bring the debt/GDP to x% over h years) would be the counterpart to flexible price level path targeting. If Gordon Brown had brought the debt/GDP ratio down below target in the good years, it would have been much easier to defend looser fiscal policy in the bad years. Drunks daren’t touch a drop, for fear they will fall off the wagon again.