Mark Carney’s "forward guidance" announcement yesterday was a new departure for the Bank of England. A publicly announced unemployment target will now help guide interest rates. Many had anticipated that Carney might introduce unorthodox policy measures, and in plumping for an unemployment target he has followed the lead of Ben Bernanke at the Federal Reserve. The measure is intended to assure markets that borrowing costs will remain low going forward, with the hope that this will spur further spending and investment in order to drive Britain’s fragile recovery.
It’s important not to place too much emphasis on the novelty of this announcement though. The Bank has not abandoned, or significantly relaxed, its commitment to price stability. The unemployment target will be jettisoned if there is a significant rise in inflation, or if continued loose monetary policy threatens financial stability. This is by no means a revolution in monetary policy.
The fact that so much attention has been lavished upon the appointment of Carney and his early policy announcements, demonstrates the overemphasis placed upon monetary policy as the only viable escape route from recession. In fact, the overdependence upon monetary policy has been a defining feature of the neoliberal era as a whole.
Ever since the anti-inflationary policies implemented by the Bank and the Fed in the early 1980s, monetary policy, coordinated by increasingly independent central banks, has been expected to play a larger role in steering economic growth. Under the high interest rate regimes of the early 1980s it was the money supply figures that were supposed to guide interest rates and provide a benchmark for market expectations, whereas now, in the context of zero-bound monetary policy, the unemployment rate is supposed to play a similar role.
As long as fiscal policy remains shackled by austerity, then the wider benefits of a looser monetary policy are likely to be meagre. Quantitative Easing has so far done much more for wealthy assets holders and share prices than it has for ordinary wages. Channelling the proactive element of the policy response to the crisis exclusively through monetary policy actually deepens our dependence upon financial markets as the engine for recovery. Doing so without redirecting credit into long-term infrastructural investment and export-led industries will reproduce the same deficiencies that have plagued the British economy.
Cheap money is likely to be funnelled into the property market, reinvigorating the speculation that led to the crisis in the first place and further concentrating wealth inequalities. Britain’s high levels of household debt will likely be aggravated, rather than alleviated, by the prolongation of cheaper credit in the context of falling or stagnant wages.
We should be talking about a proactive industrial strategy, expansionary fiscal policy and green jobs, rather than hanging on the every word of Britain’s new "superstar" central banker.
The flip side of Britain’s proactive monetary policy has been the talking-down of the potential for an expansionary fiscal policy. Quantitative Easing and fiscal austerity are the lead actors in a damaging double-act at the heart of the Coalition’s plan to restore British growth. But the key ingredients to getting out of the crisis, and providing more and better quality jobs in the process, are not austerity and cheaper consumer credit. We should be expanding fiscal stimulus and targeted investment through increased spending and taxation – tapping into the huge corporate surpluses in Britain as a source of strategically directed investment. Supply-side measures alone are entirely inadequate.
At a more fundamental level, the power and influence of an unelected and independent central banker should be a concern for all of us. In a democracy like ours, key economic decisions should be taken within a strong mandate of public accountability, not the shadowy and esoteric world of central bank policy making. The more faith we place in central banking to lead us out of the crisis, the less we place in the policy programmes of our elected politicians.