Should Labour adopt the four per cent inflation policy?

Controversial ideas of the past are becoming consensus of the present.

A 1998 proposal by Paul Krugman that the western world should target inflation at four per cent rather than two per cent, has got the backing of the IMF (pdf). The intention would be to erode government debt, and to give policy makers a more flexible tool in the future, rather than resorting to quantitative easing (QE).

In our battle to combat inflation, we fought for it to be as close to zero as it can be without grinding growth out. Two per cent seemed to be that point. However, now that we’ve got that control, we don’t have to keep it so low.

In 2007, if inflation had been at four per cent instead of two per cent, then interest rates would have been seven per cent rather than five per cent, and the Bank of England would have had more room to cut when crisis struck. In other words, they wouldn’t have needed to go beyond zero to engage QE.

Some people might say that since we’ve finally beaten inflation, it’s not wise to bring it back? But it’s not inflation that causes problems, it’s unpredictable inflation that we fear. If we had a high rate of say 10 per cent, but steady, year in year out, then companies and people would be able to plan around it. But if we didn’t know whether inflation will be 5 per cent or 15 per cent, then how much should a bank charge for a loan? Can a company calculate the profit they’ll make, if they don’t know how much the money will be worth. So four per cent is fine, as long as it’s steady.

The other benefit of running a higher inflation rate is that we would erode our debt much faster. If the interest on a gilt is four per cent, then two per cent inflation would cancel it out. If your mortgage were two per cent, then four per cent inflation would leave you with a negative real interest rate of minus two per cent.

Krugman accepts that this would be rewarding debtors for their past excesses, but argues that “economics is not a morality play.” Is he right to dismiss morality so easily? Surely modern day politicians make their living from telling bankers they are not good citizens. Is it appropriate to dismiss investors with the refrain of caveat emptor, buyer beware?

It’s worth remembering that no investor complained when QE was buying up that same debt for higher than it’s real value. Besides, if investors had feared inflation, they could have bought index linked gilts. These track inflation and rise in value proportionately. They make up only about 10 per cent of gilts. So when it comes to the other 90 per cent, I contend that ethical arguments are insufficient to reject the policy.

The big question is whether policy could easily switch inflation from two to four. Much of the cause of inflation is expectation. In the '70s, inflation was high because trade unions made demands for wage rises on the expected future inflation rate. These rises then caused inflation to rise to the same level, and unions would demand a rise again. It was self-perpetuating.

Conversely, when Gordon Brown made the Bank of England independent, inflation markedly dropped off and stayed low. This wasn’t due to a policy of the bank, but due to the confidence inspired by it’s independence.

Should a policy of increased inflation be kept a secret? My experience of politics is that if you have something controversial to say, then be confident, say it forcefully, then stick around to face down your critics. The public aren’t experts on economics. They will make judgements on the confidence of the advocate and the reaction of pundits.

On the question of whether the markets will react badly to such a policy, I think that depends on the timing. Right now, with no demand in the economy, the market wouldn’t react badly because they have nowhere else to go. These days most savers keep their money on deposit with an interest rate lower than inflation. They are losing money in preference to the uncertainty elsewhere.

There are few safe havens in today’s investment world, partly due to the bad policy imposed by politicians such as David Cameron and Angela Merkel. When considering our economic policy for a future government, we must recognise that controversial ideas of the past are becoming consensus of the present, and deserve our serious consideration as policy for the future.

The Bank of England. Photograph: Getty Images

Dan McCurry  is a photographer in east London and a Labour activist. He is a former chair of the Bow Labour Party.

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Banishing safe seats, and other proposals to bridge the democratic divide

How to improve key areas of democracy.

Labour’s election train is finally pulling into the station, with its new leader announced in just over a fortnight. However, a summer absorbed in the party’s internal democracy has obscured a deeper truth confronting the country: the general election confirmed that unequal political participation rates in the UK – by age, class, ethnicity and region– have become increasingly hardwired into how our democracy operates.

IPPR’s new report underscores the scale of the democratic divide.  For example, less than half of 18-24 year olds voted, compared to nearly four-fifths of the over-65s, while three-quarters of "AB" individuals cast a ballot, against just over half of "DE" registered voters. Critically, this marks a sharp rise in turnout inequality over time. In 1987, for example, turnout rates by class were almost identical but have steadily diverged since.

Similarly, age-based differences have got significantly worse over time. In 1964 turnout for 18-24 year olds was 76.4 per cent, almost matching the 76.7 per cent turnout rate of those aged 65 or over. By 2005 only 38.2 per cent of 18-24 year olds voted against 74.3 per cent of 65+ year olds, with only a very slight improvement this year.

Underlying growing disparities of electoral voice are striking divergences in perceptions of the fairness and effectiveness of our democracy. For example, IPPR/YouGov polling suggests a striking 63 per cent of "DE" individuals think that our democratic system serves their interests badly, while "AB" voters are evenly split.

Given these signs of democratic distress, there remains a strong case for establishing a wide-ranging constitutional convention to reset how our democracy operates. Yet Westminster shows no appetite for such constitutional reformation, and there would only be so much a civil society-led convention could achieve in terms of practical change.

In our report we therefore propose a series of achievable reforms that could update the civic, institutional and technological architecture of our democracy in the here and now, with the explicit goal of ensuring that all voices are better heard in the political process.

On electoral reform, while we reiterate our support for proportional representation for national elections, we know this simply isn’t going to happen this Parliament. We had a referendum on change in 2011 and it was heavily lost. The energies of electoral reformers should therefore focus on extending PR in local government, where it is more obviously in the self-interest of the major parties, as a means of extending their geographical reach.

In addition, the reduction in the number of MPs provides an opportunity to chip away at the number of safe seats. More than half of seats are "safe", a number that has grown over time, even allowing for the electoral earthquake in Scotland. Safe seats typically have lower levels of participation, lower turnout rates, and less electorally powerful voters. While safe seats will always be with us in a first-past-the-post system, too many can be damaging to democracy.

Given this, we have recommended that the various Boundary Commissions of the UK be given a new duty to consider the electoral competitiveness of seats – ie. to tilt against the creation of safe seats – when boundaries are redrawn. The priority would be to meet their current duties of ensuring the geographic coherence of a seat and roughly equal electorates.

However, where these duties can be met we suggest that the Commissions should consider revising boundaries to reduce the number of safe seats, as a step to increasing participation and the voting power of the average elector. Of course, this will clearly not "abolish" all safe seats – nor should it  but it could help re-empower millions of voters currently with little meaningful say over the outcome of elections and force political parties to up their game in safe seats.

At the same time, the transition to the individual electoral registration process risks excluding millions from the franchise, people who are disproportionately younger, poorer or from an ethnic minority. For example, there are clear inequalities by age and ethnicity in terms of who is registered to vote: in the 2010 general election, for which figures are most accurate, 90 per cent of people aged 55-64 were registered, compared to 55 per cent of those aged 18-24, while nearly 20 per cent of BME individuals were not registered to vote, compared to only 7 per cent of the "white British" population.

There are simple steps the government could take to ensure all who are eligible are able to vote: extending the registration deadline to December 2016, and making support available to local authorities to assist registration efforts, weighted towards authorities with higher levels of under-registration, could help reduce inequalities.  In the longer term, electoral registration officers should be given new duties, and the Electoral Commission more powers, to drive up registration rates, with a particular focus on presently under-registered demographics. 

Finally, we recommend introducing a Democracy Commission. At present, the Electoral Commission effectively regulates elections and party funding. Democracy, however, is far richer and broader than electoral processes. It is about formal representation, but also about participation and deliberation, in what Marc Stears has called "everyday democracy".

A statutorily independent Democracy Commission could give institutional ballast to the latter and help reinvigorate democratic life by providing research, resources and capacity-building to facilitate local, civil society-led initiatives that aim to increase broad-based levels of powerful democratic participation or deliberation in collective decision-making processes.

For example, a Democracy Commission could work with the GLA to introduce participatory budgeting in London, assist the Greater Manchester Combined Authority in instituting a public deliberative body with real teeth over how to integrate health and social care in the area, help the Scottish government conduct citizens’ juries on the future constitutional shape of the country, or support civil-society experiments to bring people closer to collective political decision-making processes in their locality.

We are living in a paradoxical political era, where growing political inequality is accompanied by ongoing social and technological change that has the capacity to collapse unnecessary political and economic hierarchies and build a more inclusive, participatory and responsive democracy. However, there is no guarantee that the age of the network will necessarily lead to democratic revival. The institutions and technologies of our political system, products of the 19th century, are struggling in the fluidity and fracture of the 21st century, inhibiting democratic renewal.

With our economy post-industrial, our ways of communicating increasingly digital and more networked, our identities and relationships ever more variegated and complex, it is therefore critical public policy seeks to update the democratic infrastructure of the UK, and, in so doing, help reverse entrenched political inequality.

Such an agenda is vital. If we simply accept the current institutional arrangements of our political system as the limits of our ambition, we must also content ourselves to live in a divided – and therefore inherently partial – democracy. Yet our democracy is not immutable but malleable, and capable of being reformed for the better; reform today can make democratic life more equal. After all, the story of British democracy’s evolution is one of yesterday’s impossible becoming today’s ordinary.

Mathew Lawrence is a research fellow at IPPR and the co-author of "The Democracy Commission: Reforming democracy to combat political inequality". He tweets at @dantonshead.