I was asked by someone, who is definitely not an economist, why I had problems with an independent central bank last week. I explained it like this.
Suppose that instead of running the economy the government was running a restaurant. And that it decided that the most important thing when doing so was that the ovens should never go above 180C. This was the rigid rule, and it worked: the best heeled customers had always ordered roast beef browned right through to the middle and since that could be done at 180C (or less) then why on earth was there a need for anything else?
In that case, to make sure that this rule was enforced, the government decided to appoint a committee of experts, although they weren't cooks with real experience of kitchens. They were instead cooker engineers and if ever there was any risk of temperature variation they would not think of varying the recipe for the dish of the day but would instead tinker with the mechanics of the control system, subject to one priviso. This was that if anyone tried to turn the temperature in the oven up then they would just turn the whole thing off.
But this had two serious consequences. First the chef realised that, much as a small part of the potential clientele liked roast beef cooked until there was not a hint of flavour or texture left, there were also available a whole range of ideas that required experimentation, risk taking and investment in new skills, and all these things would be necessary to satisfy those beyond the the restuartant's usual range of patrons, whose numbers were small. She just wanted to, at least once, cook the joint really rare, but this required (as an old friend once advised me, and she was right) just 12 minutes at 250C. This was never going to happen under the current regime.
Second, both the the government in the role of restaurant owner and the cooking engineers in the role of the Montetary Policy Committee had altogether forgotten that there was a hob on top of the oven, which also got turned off if the 180C rule was broken: their on/off threat was a might blunt instrument in a world where finesse was required if demand was to be met.
Would that be the way to run a restaurant, I asked My friend? It might keep a few happy, but what about most? And in the event of a crisis what options would be available? The answer was, of course, precious few because the person I was talking too can, I know, cook rather well.
So why then, I asked, do we insist on running the economy at a low temperature (which is the equivalent of the inflation target) and without real use of the hob (otherwise called fiscal policy), with rules enforced by a technical committee with remarkably little real world experience between them (the Bank of England's Monetary Policy Committee), and all because the government think the economy must serve the interests of a few (the wealthy who want low inflation, and who eat overdone roast beef) at cost to the rest of society who now know the real food potential of the country is enormous, and utterly constrained by rules that make no sense?
I think my friend got the point.
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You’re a very naughty boy Richard making your readers hungry for Sunday dinner this early in the morning.
The analogy in the article does rather undermine the case for government committees of experts though.
Get that oven on
A good way of putting things I say Richard.
This year – after hovering near it for some time – my wages fell BELOW the median for the first time since I finished university in 2000. And there are others who have been affected too. A lowering of spending and saving power is not good.
A sure sign to me that something is far from right about the economy.
Well, at least you’ve noticed: everybody in your class of ’00 knows that houses are way more expensive than they were for the last generation; and some of you have given up on the possibility of ever owning a house…
…But everyone’s tip-toeing around the ‘elephant in the room’ – the unmentionable fact that it isn’t just housing. Everything about your life that can be compared directly to the class of 1990, 1980, and 1970 shows a heartbreaking drop in your standard of living. You have nothing *like* the security and savings and opportunity and freedom that your predecessors took for granted; and the class of 2010 have even less.
Something is indeed wrong with society: living standards have fallen dramatically and *expectations* have fallen.
Feel free to tell me which is worse.
What is worse is that like me, you have incurred some debt to go back to Uni – got a degree and then whilst at work have done a post grad course which is a big drain on family life but meant to be an investment and you have even rotated into another new job in order to keep one and all that has happened is that you have seen the value of your labour decline.
As far as I am concerned I have done everything that I was supposed to do: not have children until I could afford it; tried to better myself; saved money for what we need and kept credit as low as possible and I’ve never received any benefits for unemployment etc., so far.
And then some stupid US president deregulates his mortgage and financial industry which causes a global crash which gives a nasty, callous British Government the opportunity to bring in austerity and strip the economy of its cash and makes things even worse for the people like me (God knows what it must be like for those who never got as far as I did).
The whole thing smacks of injustice.
But a central bank cannot be independent if it is central. It can only be independent if it is detached or tangential. But if it is those it cannot fulfill the duties that it is supposed to undertake. So what we call “independent” in the UK means the degree of removal from direct Treasury or political control that is counterbalanced by increased influences by other sectors, whoever or whatever they may be.
This is probably what happens when you let a central bank be independent. They become too disconnected from reality – http://www.nakedcapitalism.com/2016/09/what-else-can-central-banks-do.html
“all because the government think the economy must serve the interests of a few (the wealthy who want low inflation…)
You’ve lost me there. The 1% don’t mind inflation, as they can move their cash to low-inflation jurisdictions, while their fixed assets appreciate with inflation. The heavily leveraged – eg young professional couples with mega-mortgages – benefit from inflation, but mainly inflation harms the low waged and those on fixed incomes.
Wrong: the wealthy own debt, and a great deal of it
They lose out from inflation just as creditors win
Don’t you mean debtors win from inflation? It’s the wealthy that are the creditors, presumably. Interesting slip up from an accountant.
I was referring to the wealthy as the owners of debt