On Tuesday, George Osborne and Ed Balls sat before the House of Lords economic affairs committee to discuss the UK’s monetary and fiscal framework. Since the former was the Chancellor who originated the Office for Budget Responsibility, and the latter helped Gordon Brown’s launch the Bank of England’s independence, they were naturally keen to defend their handiwork.
That they were doing so was down to recent attacks on the institutions by what Osborne described as “political vandals”: Liz Truss and Kwasi Kwarteng, to you or me. For “the first time in 25 years”, the ex-Chancellor argued, we had a government not-so-long ago that was not committed to our central bank’s independence (and saw the OBR as an unnecessary straitjacket).
When Andrew and I interviewed Truss last summer, she told us she wanted to “look again” at the Bank of England’s mandate. Not to accuse the former Prime Minister of muddled thinking, but what that seemed to mean, in her imagining, was to both force the Bank to be harder on inflation, and to ask it to the target nominal GDP – something which would likely entail the opposite.
Nonetheless, what is important now is not what Truss necessarily intended by challenging the Bank, but the reaction to it. The high priests of finance condemned her suggestion. Members of the Bank’s Monetary Policy Committee criticized her directly. Truss was soon rowing back on her comments. Unfortunately, that wasn’t enough to stop Andrew Bailey later leaving her in the lurch.
The fuss over Truss’s comments was hardly surprising. Similar grumbling had emerged both when Jeremy Corbyn’s out-riders suggested he might sack the Bank of England’s Governor, and when Theresa May suggested in her 2016 conference speech that there had been “bad side effects” to “super-low interest rates and quantitative easing”.
The common thread is clear: criticizing the Bank of England’s independence is a no-go-area for politicians. As Balls put it, the current framework has survived a “whole series of shocks” even when “politics” threw into doubt its proper operation. The answer, for Osborne, is to further enshrine the Bank and the OBR’s independence, lest we face Truss 2: Barber Boom Boogaloo.
One cannot judge the Chuckle Brothers too harshly for defending their political legacies. But suggesting the Bank’s performance should be beyond political reproach is nonsense. Two decades of its independence have brought: a financial crisis, stagnant incomes, spiraling asset prices, and our current post-Covid and post-Ukraine inflation surge. Something is rotten in the state of monetary policy.
Are politicians just supposed to ignore this? Across the Atlantic, both Ron DeSantis and Donald Trump are attacking the Federal Reserve’s record on the campaign trail – and America’s inflation rate is only half of ours. In any reasonable universe, Bailey and the rest of the Monetary Policy Committee should have long since been sacked for maintaining inflation was “transitory” long after it had become clear it was not.
But that would be to compromise the Bank’s sainted independence. Or would it? After all, what do we mean by the Bank of England’s independence? We cling to the idea that in 1997 Gordon Brown cut Threadneedle Street free of the dead hand of the Treasury. Is that really the case?
The Bank is still owned by the Government. The Treasury still underwrites its QE programs and oversees the appointment of members of the MPC. The Chancellor appoints the Bank’s Governor, sets his mandate, and, in extremis, can overrule his decisions. The movement of staff back and forth between Whitehall and the City is a well-trodden path.
The zeal with which political criticism of the Bank is shouted down is thus an attempt to cover that its “independence” may be less than it seems. Tacitly, Osborne acknowledged this on Tuesday. He told the Lords he regularly met with the Governor to float plans – something made all the easier by appointing, in Mark Carney, a Governor in his own image.
Is this not a return to the Ken and Eddie show, but without the public scrutiny? Sajid Javid certainly aimed for a similar harmony in his brief turn as Chancellor. Over-ruling Dominic Cummings and appointing Andrew Bailey over Andy Haldane was his only major decision in the role. In hindsight, that was an utter disaster, since Haldane was one of the few raising the inflation spectre just as Bailey pretended everything was fine.
What all this shows is that the Bank’s independence exists only in so far as everyone is willing to deny the Emperor could do with covering up a bit. Don’t get me wrong: this is a useful fiction. The idea that the Bank is calmly pursuing economic stability whilst the Westminster dumpster fire burns is a necessary tonic for investors and businesses, however true it may actually be, and keeps interest rates out of the direct hands of the Labour Party.
But when the Government is seeking to claim credit for falling inflation, despite it being under the Bank’s purview, there is some merit in Rishi Sunak and Jeremy Hunt asking how they can actually improve the Bank’s performance. Here the other lesson of Tuesday’s testimonies stand out: that personalities matter.
The major problem the Bank has, and which explains why it has failed so miserably in taming the tiger, is groupthink. Threadneedle Street houses many talented people, with admirable records in banking, the Treasury, or academia. But the crucial decision-makers are all of one mind. An institution patting itself on the back for its gender diversity has forgotten that a variety of ideas is what really matters.
Readers, amongst the Bank’s leadership, one will not find a single monetarist. This is why, in their public statements, Bailey, his Deputy Governors, and the MPC all cling to the idea that inflation is solely down to post-Covid shortages of capacity, or Russia’s invasion. Suggesting it might also have something to do with the Bank having printed more money in 2020 than in the previous decade seems something one can only acknowledge once you’ve retired.
Introducing an “all-monetarist shortlist” for MPC appointments in the near future would not sure all the Bank’s ills. But it would be a start. In the 1970s, the Bank housed the economists Christopher Dow, who dismissed the money supply’s importance, and Charles Goodhart, who was willing to kick against the consensus and suggested it played a role. Bailey is not facing that clash of ideas today.
Would that have spared us the horror show of the last few years? Perhaps not, but it would be an improvement of the current approach of the Government ignoring the Bank’s failures whilst claiming credit for its successes. If we do want to protect the Bank’s independence (add scare quotes as applicable) from political vandalism, we should first save it from itself.