Central bank independence: the orthodoxy's under attack

Have we handed the foxes the keys to the hen house?

Japan's central bank and treasury are discussing co-operating more on economic policy — news which has sent the Nikkei soaring, opening around 2 per cent higher than it closed yesterday, and rising further throughout today.

We've already had previews of this news. After all, new Prime Minister Shinzo Abe was elected on a promise (or threat?) to force the Bank of Japan to do more monetary easing, and has already made other unconventional moves like "nationalising" industrial stock to encourage private-sector investment.

Nonetheless, it was unclear that Abe would actually pull it off. Business Insider describes it as "one of the most taboo concepts in modern economics", noting that "the Treasury is supposed to do fiscal policy. The central bank is supposed to do monetary policy. And that's that".

But, as with so many orthodoxies of economics, the idea of central bank independence has come under attack since the global financial crisis.

Central banks are supposed to be independent to remove the risk that politicians will use monetary policy the same way they all-too-frequently use fiscal policy: to engineer temporary booms, gain brief popularity, and win elections. By removing control of policy from people who stand to gain if they favour the short- over the long-term, monetary policy ought to be "better run".

Monetary policy is worse for this sort of thing because it depends far more on ideas of credibility and restraint than fiscal does. Much of the job of a central bank involves saying the right things, rather than doing them. There's a thousand ways to hold interest rates low, but doing so while explicitly saying they will be low for the next two years (as with the Evans Rule) is very different from doing so while saying they may rise at any time.

But it's important to remember that an "independent" central bank may be no such thing. If principal-agent problems apply to banks run by democratically elected politicians, they apply just as effectively to banks run by technocratic ex-financiers. Frequently, this works well. As Tyler Cowen wrote in 2009:

The default selection mechanism favors bankers, i.e. lenders, people whose interests make them more favorable towards lower inflation.

Given the trend in monetary policy for most of the last thirty years was a desire to reduce then suppress inflation, that convergence of interests was beneficial. But there's no particular reason to expect the convergence of interests between the economy as a whole and one subsection of it to be a long-term thing.

If nothing else, we get the downsides of "independent" central banks when their policy turns to whether to backstop banks and bankers. As a lengthy Atlantic piece by Simon Johnson from May 2009 describes, too many of those decisions were actively favouring the interests of the finance industry when those interests were in direct opposition to the rest of the nation.

And as we've faced an increasing number of unprecedented situations, even the old truth has come under attack. As Joseph Stiglitz said in India earlier this year:

In the crisis, countries with less independent central banks-China, India, and Brazil-did far, far better than countries with more independent central banks, Europe and the United States. There is no such thing as truly independent institutions. All public institutions are accountable, and the only question is to whom.

Obviously the independence, or not, of the central banks is unlikely to have been the deciding factor between whether China or Europe came out of the crisis intact. But more and more people are starting to realise that concepts of independence need to be re-examined, as technocratic rulers are demonstrated to be just as beholden to their own interests as democratic ones, and as those interests continue to diverge from those of the nation as a whole.

So if Japan is about to break a taboo, maybe it has picked the right time to do it.

Pedestrians walk past a stock quotation board in Tokyo on January 11, 2013. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Labour is condemned to watch helplessly as Theresa May consolidates power

The Zombie Party is too weak to win and too strong to die. 

Labour’s defeat to the Tories in the Copeland by-election in Cumbria, which the party had held for more than 80 years, is a humiliation for Jeremy Corbyn and his moribund party. This is the first time a governing party had gained a seat in a by-election since Margaret Thatcher’s Conservatives won Mitchum and Morden in 1982. 
 
The victorious candidate Trudy Harrison, who increased the Tories’ share of the vote in this former Labour “stronghold" by more than 8 percentage points, hailed the victory as “truly historic”, while Labour MP John Woodcock called it a “disaster”, and even the shadow chancellor and Corbyn ally, John McDonnell, conceded it was a “profound disappointment”. 
 
At a time in the electoral cycle when a credible opposition should be winning by-elections and riding high in the polls, Labour is in disarray: rejected, humiliated, ridiculed. It has all but collapsed in Scotland, where the Tory leader Ruth Davidson has emerged as the popular, unapologetic leader of Unionism. And in England the danger now is not that it will lose seats to Ukip — whose leader Paul Nuttall was rejected yesterday in the Stoke-on-Trent Central by-election, which Labour held on a low turn-out after a dispiriting campaign — but to Theresa May’s Conservatives. 
 
The Copeland result was a vindication for Theresa May. When recently I interviewed her in Downing Street she had a simple message for Labour: we are coming after your voters – and she is. 
 
Because of its embrace of the radical left and internal divisions, May accused Labour of abandoning many of its traditional supporters. The party was not responding to their concerns on issues such as “the impact of immigration on lower income levels”.
 
True enough: Corbyn favours mass immigration and open borders yet is an economic protectionist – a classic Marxist position but electoral suicide in our new emerging post-liberal era in which populist movements are rising across Europe and an America First nationalist is in the White House.
 
“I hope there are Labour voters,” Theresa May told me, “out there who will now look at us afresh and say, ‘Labour hasn’t responded to our concerns, it hasn’t recognised what matters to us, but the Conservatives have seen that and are responding to it. I want our greater prosperity not to be confined to particular groups of people or a single part of the country.”
 
The polls suggest that more than simply disaffected Labour voters are looking at the Tories afresh, as we embark on the epic challenge of negotiating the Brexit settlement.
  
May believes that Brexit was not only a vote to leave the European Union but a demand for change from those people – many of them in places such as Copeland - who felt ignored and excluded from prosperity and greater opportunity.
 
Her vision is for a “Great Meritocracy” (whereas Corbyn’s is for a socialist republic) combining greater social justice with enhanced social mobility. It’s an intellectually fascinating and ambitious project and, if successful (and many doubt her, not least her own right wing), it has the potential to condemn Labour to electoral oblivion.
    
The collapse of the Labour party as a stable and credible political force is dismaying. Many of the party’s problems precede Corbyn, who is sincere and determined but is not a national leader. But then neither was Ed Miliband, who misunderstood the financial crisis, which he believed had created a “social democratic moment”, and misread the country he sought to govern. Miliband treated politics like an elevated Oxbridge PPE seminar and introduced the new rules by which the party elected its leader, disempowering MPs.
 
The distinguished Cambridge historian Robert Tombs has called the European Union a system of “managed discontents”. Something similar could be said of Corbyn’s Labour, except that its discontents are scarcely managed at all.

Most Labour MPs despise or are embarrassed by their leader. The MPs are divided and demoralised, with some pondering whether to follow Tristram Hunt and Jamie Reed (whose resignations created respectively the Stoke Central and Copeland by-elections) out of politics. The Corbynites are breaking up into factions (one hears talk of “hard” and “soft” Corbynites), and Corbyn himself is incapable of appealing to those who do not share his ideological convictions.
 
For now, the Labour leader retains the support of activists and members and, crucially, of Unite, Britain’s biggest union and the party’s paymaster. But even his friends must accept that he is leading the party in only one direction – into the abyss.
 
On the eve of the two by-elections, Corbyn posted a message on Facebook: “Whatever the results, the Labour Party – and our mass membership – must go further to break the failed political consensus, and win power to rebuild and transform Britain.”
 
The statement was received with derision on social media. The idea that Labour can win power any time soon (notwithstanding some black swan event) is magical thinking. Corbyn’s personal ratings among traditional working class semi-skilled and unskilled Labour voters are catastrophically poor. He appeals to students, affluent metropolitans with degrees, and minority groups. As for the majority of the electorate, forget it.
 
MPs are reluctant to challenge Jeremy Corbyn because they know any leadership contest would revitalize his leadership, as happened last summer when the Welsh MP Owen Smith mounted an ill-considered and doomed “coup”. Nor is there a pre-eminent candidate waiting in the shadows to strike, as Michael Heseltine was in the last years of the Thatcher administration.
 
So Labour will continue to be the Zombie Party: too weak to win but too strong to die. Its founding mission was to defend the labour interest and to create a fairer, more ethical society. But Labour has lost its role, its confidence and sense of purpose. Obsessed by identity liberalism, bewildered by Brexit and led by a radical socialist, Labour can only look on helplessly as the Tories start to win seats in its former heartlands and hunker down for another decade or more in power.

This column was originally published in the London Evening Standard.

Jason Cowley is editor of the New Statesman. He has been the editor of Granta, a senior editor at the Observer and a staff writer at the Times.