The recently published Bank of England (BoE) update on its secondary objectives: a secondary competition objective (SCO and a secondary competitiveness and growth objective (SCGO), both delivered via the Bank’s Prudential Regulatory Authority (PRA) role is a significant annual event (BoE 2023). This is also the week when the Bank has announced its decision on the official interest rate, happily leaving the interest at 5.25%.
Ironically, these events have occurred at a moment when Liz Truss has made a non mea culpa speech arguing that, though she might have tried to push her lower tax , agenda too fast, the broad thrust of her policy was correct. I have previously argued that the notion that she and Kwarteng “crashed the economy” is misleading (Lloyd 2022), though I certainly reject her “late neoliberal”[1] advocacy of trying to achieve economic growth by reducing taxes (but fancifully maintaining the tax-take) and cutting benefits.
Where one might agree is that the economic conventional wisdom of the Treasury and the Bank of England (BoE) should be challenged. However, the issues raised by the role of the Bank, primary (macro-economic policy via inflation control) and secondary (competitiveness and growth of the financial sector), and by the role of the Treasury (essentially now balancing the public accounts) certainly need to be viewed in the light of how economic policy is now pursued in the UK.
Essentially, if we add the role of the Competition and Markets Authority (CMA) and the multiplicity of industry regulators to the roles of the Bank and the Treasury then what should be public policy run by democratically elected governments is now in the hands of technocrats.
As one myself I am not opposed to technocrats. However, there are two problems. First, the danger of “group-think” and complacency on the part of technocrats. Second, as with all elite cadres in the context of the running of societies, there is a need for democratic accountability and control, and not simply via political elections.
Issues
The main complaint as far as UK macro-economic policy is concerned is exemplified by the stance of the government in supporting the BoE policy prescription of the need to squeeze aggregate demand – even to the extent of creating a potential recession, to seek to reduce inflation to the target 2% rate – while itself avoiding contributing to suppressing demand by increasing taxes (for instance by increasing VAT). Such a macro-economic intervention would reduce aggregate demand far more rapidly than simply using the blunt, unfocused, and delayed impact policy of increasing interest rates. Instead, the government restricts itself to the accountant’s role of balancing the public expenditure/taxation books.
It will, of course, be argued that such an interventionist policy is reverting to a failed fiscal activism which led, gradually, to an acceptance that monetary policy and the policy response to inflation should be allocated to an independent central bank. New Zealand’s central bank was the first to adopt the policy of inflation rate targeting, though the German Bundesbank was the first to gain institutional independence, in 1951. It should be noted that since 1997, when the BoE became independent, aside from the immediately following years of the “Great Moderation” – when there was only modest inflation and modest growth – from 2010 to 2021, generally, there was low inflation and accompanied by very low growth (the era of QE) and the inflation targets often fell below the target rate. During the recent period from 2021 to 2023 again the inflation has so far been well above the target rate, despite 14 successive increases in the interest rate since December 2021, now paused. The GPI view is that inflation targeting should be replaced by the level of nominal GDP as the target, thus allowing some flexibility on the data on contemporaneous inflation before any interest rate rise is implemented and to use fiscal policy in combination with monetary policy. (GPI 2020)
Notwithstanding the above criticism, there are both economic and political arguments sustaining the view that by “outsourcing” monetary and financial policy, including a formal exchange rate policy, to a technocratic elite and abnegating responsibility for an active fiscal policy, is economically misconceived. Moreover, it is also undemocratic by surrendering legislator’s ability to scrutinize the actions of an effectively autonomous technocratic elite and persuade the executive (government) to take decisions on behalf of the electorate. (GPI 2020).
More specifically, on inflation, undue reliance is placed by the BoE on the official nominal interest rate to control inflation, latterly being driven by contemporary data and financial market expectations, aimed nonetheless at a 2% target rate set to be achieved in a period around 18 months following the interest rate adjustment. Inevitably, using such a blunt instrument there are substantial impacts of relatively unknown impacts on, for instance, SMEs business behaviour, and on the exchange rate.
It will be argued that as the aim of the raising interest rates to curb inflation is to drive down overall aggregate demand these specific impacts do not matter. However, to prevent economic growth from being damaged it would be preferable to protect SMEs and business generally from damage. The deployment of fiscal policy measures, by definition more selective, would be able to avoid damage to business confidence and spending, as opposed to some elements of consumer spending. But fiscal policy remains unused.
Even within the narrow monetary policy context, it would be possible for the BoE to restrict the payment of interest on bank reserves lodged with the Bank, ostensibly to provide liquidity. Such a policy action would enable commercial banks to select which client segments to restrict the offer of credit, as a less centralised and blunt instrument of credit restriction. It is possible that such a policy measure may have been considered, but we may never know as there is no public or even parliamentary prospective discussion of the Bank’s policy actions.
Financial Stability
It may be recalled (Lloyd 2022) that during the Truss/Kwarteng political crisis the BoE Financial Policy Committee (FPC), intervened in the bond market to protect final salary pension funds from going into liquidation, the Liquidity Driven Investment (LDI) approach adopted by the pension funds. The LDI problem was a failure of macro-prudential policy by the BoE/FCA. Again, an instance of a tendency for technocrats to not be sufficiently interrogated by the public or parliament. It should also be noted that the initial significant fall in bond prices resulted substantially from the rapid, large increase in the US Federal Reserve rate of interest, and only partly because of the, admittedly maladroit, announcement of proposed actions by Kwarteng.
There is no doubt that the financial stability remit of the Bank of England is equally as important as its monetary policy, rather than being classified as a “ secondary” set of objectives. It also requires considerable pre- and post-decision-making scrutiny by the UK parliament.
Political Implications
No-one is suggesting that in a modern, complex, technocratic economy that there is not a requirement for a well-qualified technocracy to aid the political elites in the economic governance of the UK. However, having a technocratic elite, as with political elites, should not mean untrammelled technocratic governance, The complex nature of modern society and a nominally modern democratic polity should take care not to hand over governance to technocratic organisations without some substantial form of accountability and scrutiny being retained.
This scrutiny is likely to require the embedding of counter technocratic representatives who are to challenge the group-think and complacency that is an inherent problem of technocratic groups.
It will be argued that this structure of scrutiny is the process followed by UK parliamentary select committees. However, too often the recruitment of academics to advise the committees is drawn from a relatively narrow grouping of academics, with their own group-think tendency. More importantly, the UK parliamentary select committees may only produce recommendations at the end of their reporting stage and the recommendations may or may not be accepted by the UK government, or by the devolved administrations who have similar advisory scrutiny systems. Congressional committee structures in the US have a more powerful influence on US administration policy.
It may also be suggested that the Bank of England Monetary Policy Committee also serves as a constraint on monetary policy-making. However, perusal of the minutes of the MPC indicates that there is rarely a major challenge to the anticipated advice on decisions made by the Bank. Usually, there are perhaps a couple of dissenting voices on the MPC, where majority decisions are required. It appears unlikely that orthodox policy will be seriously challenged. Last Thursday’s decision was tight, a five to four decision to leave the rate unchanged.
Conclusion
In modern, complex economies political economic decisions need to be based on high quality technocratic analysis and advice. This much is clear. There are two issues. Technocratic analysis is subject to group-think and needs to be constantly challenged by counter-technocratic analysis. To ensure that the best possible decisions are taken institutional technocracy, isolated from political democratic scrutiny should be avoided. Central bank independence appeared a benign, and even positive, innovation during the late 1990s and the first years of the 21st century, especially given the equally benign economic conditions of the “great moderation”. However, the global financial crisis, its long aftermath, and the more recent inflationary surge, have cast doubt on the competence of independent central banks and to attempt to manage the economy. The willingness of government to abjure the use of active fiscal policies, and hence achieve greater specificity in targeting economic variables, is a major error of political economy. The Labour Party’s proposal to give legal authority to the judgement of the Office of Budget Responsibility (OBR) on future Labour governments’ budget would drive further the primacy of a technocratic organization to usurp the democratic role of elected politicians.
References
Bank of England (2023) “Our Secondary Objectives”,
https://www.bankofengland.co.uk/prudential-regulation/secondary-competition-objective
GPI (2020) “The ECB’s Mandate: Wider Perspectives on European Union Monetary Policies”, Global Policy Institute, Policy Paper, 27 November, https://gpilondon.com/people/posts-viara-bojkova/the-ecbs-mandate-wider-perspectives-on-european-union-monetary-policies
Lloyd, M. (2022) ”Tweedledum and Tweedledee: An Assessment of Conservative Party Economics”, Global Policy Institute, Policy Paper, 5 February, https://gpilondon.com/publications/tweedledum-tweedledee-as-assessment-of-conservative-party-economics
Early Hayekian neoliberalism concentrated on the use of markets to allocate resources efficiently and hence ensure political freedom. It did not entail abandoning a welfare state and social security spending.