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25 July 2018updated 29 Jul 2021 11:46am

There are a couple of problems with Labour’s plans for the Bank of England

What do we want?  Three per cent!  Who do we want to deliver it?  The same lot who are doing almost everything else!

By Tony Yates

The final draft of a report by the previously little known ‘GFC Economics’ has been published, having been commissioned by Labour.  It leads us to infer that Labour is considering involving the Bank of England in delivering a long run target for productivity growth of three per cent, as well as moving all or some of the institution to Birmingham.

None of this makes for welcome reading, and I doubt that there are many mainstream economists who would welcome it. This is probably why the report was commissioned from GFC, as Labour will have reckoned from their previous interactions with the now disbanded academic panel that it would be hard to get these recommendations out in any recognisable form that they could control. Better to go with the trusted partner model than recognized frontier expertise.

This policy formulation process isn’t without merit. The financial crisis has opened a window for harsh criticisms of mainstream economics.   And Labour can distance themselves from the report if proves expedient to do so, or they gain insight later into why the ideas are not so great.  Corbyn and McDonnel’s flirtation with Richard Murphy’s ‘People’s Quantitative Easing’ during the 2015 campaign trod the path of floating a radical [and bad] idea and later dumping it when it suited them.

The new mandate for the Bank seeks to ensure that monetary policy is directed at long run growth.  Yet monetary policy is already doing what it can in this regard. The Government currently charges the Bank with delivering a low and predictable inflation rate [the target is two per cent]. And it also asks the Bank to make sure that in delivering the target so it does not generate ‘undesirable’ volatility in output and employment. This code already allows the Bank’s Monetary Policy Committee to avoid recessions that might leave long or permanent scars on the UK’s productive potential, perhaps the most plausible means through which monetary policy might have long run effects.  With the caveat that loose policy in these times has to be made up for with tighter policy later to return inflation to target.  The danger of changing the mandate in the way that Labour suggest is that it signals a return to pre-independence beliefs that systematically looser monetary policy can, in the long run, buy lower unemployment and higher growth.  The effect of this might – if the ex post analysis of that period is correct – simply imply we operate at higher inflation,

The case of financial policy – which Labour also want to strain towards productivity improvements – is a little different. There is an argument to be made – as Labour’s report attempts – that the state could get involved in allocating credit. At least conceptually, we can think of the market refusing to finance projects that would benefit us all. [Large scale transformational public infrastructure is the most persuasive case].

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But Labour intends to do ‘grand projets’ of this kind anyway.  This report is about getting the Bank of England involved in tilting credit across sectors towards those that are deemed likely to make the most contribution to productivity. 

This is ill-advised.  First, there is no convincing explanation as to how the state should go about ‘picking winners’ as the old 1970s scepticism termed it, other than Wikipedia-like text reminiscent of the government’s recent Brexit studies displaying superficial knowledge of the existence of digital and scientific industries. 

Second, even if there were a method of picking winners, giving that job to the institution also charged with delivering financial stability through prudential standards is bad management.  The Bank’s Financial Policy Committee are already asked to deliver financial stability in a manner that has regard for the government’s economic objectives of growth and employment.  Asking them to do weigh this trade-off differently will be counter-productive. 

It risks institutional failures too.  The institution that currently has to supervise banks, and will inevitably be staffed in part by people who have come from banks, or will move to them, will face conflicts of interest and accusations of cronyism if they get involved in allocating credit itself.

Recalling that the BoE already has two big jobs to do – the inflation target, and financial stability – it has to be questionable whether it is wise to extend its powers any further. Requiring an injection of new expertise might weaken its current competencies.  GFC’s report even envisages the Bank making detailed comments about the detail of tax and spending policy and how it will affect productivity.  If someone is to do that, why not the Office for Budget Responsibility? 

Delegating too many responsibilities to one institution like the Bank is dangerous. A failure in one job can undermine the credibility with which another is pursued. And invite the charge that the Bank is an empire unto itself.  For example, the BoE delegated to itself the task of evaluating EU membership in its report of October 2015.  This allowed pro-Brexit members of the Treasury Committee to criticise the BoE’s monetary policy response to the Referendum vote of 2016 as showing that it was in cahoots with the Cameron/Osborne government.

What about the quantified target of 3 per cent?

Publicising the number three per cent is evocative of the Trump proposal for four per cent growth in the US. Take an aspiration, and make it sound technocratic and thought through by putting a number on it.  In reality, there is no evidence from recent UK past history that a three per cent target is either feasible or desirable.  What other state capacities would be diverted from attempting such a goal?   What would the consequences be for the environment and for welfare?

A debate could be had about the merits of moving the BoE to Birmingham as part of an attempt to use government functions to cultivate new prosperity clusters.  But it’s a mistake to think that relocation would improve policy itself.

Monetary and financial stability are whole-economy concepts. Both require knowing what is going on in the economy and finance, both sectorally and regionally.  Also, the Bank already has regional intelligence gathering networks.  [The first draft of the report amusingly suggested opening offices in Glasgow, Cardiff, Newcastle and Belfast…. where they already exist].  Rather than moving core BoE functions, better value would be had by professionalising what are still somewhat amateurish and old-fashioned agents’ surveys.

If the government was to instigate a targeted effort to raise productivity growth, this would best be coordinated from central government.  That is the location of the most direct electoral mandate for the invasive policies required.  It is also where you can most effectively pull the levers governments have over productivity: spending on infrastructure, education and health; the tax system and how it bears on entrepreneurship, research and development; corporate law; and, lest we forget, the frictions in the movement of goods and people between the UK and its most important trading partners.

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