I wrote my blog on the objectives of economic policy and the role of the Bank of England within it yesterday for a reason. It contributed to a debate I was having with others.
An economist replied in that debate, saying:
I really do not understand this rejection of the almost universal received wisdom of mainstream economics over the last 40 years. We do have evidence of an extremely successful policy regime when interest rates are not at their lower bound.
In other words, the claim is that opinion does not matter on this issue: we should continue with Bank of England independence because the policy worked, and still will if we do not have interest rates at the lower bound (or near enough 0% in plain English).
I made a four-part response, arguing in summary that:
a) We do not have Bank independence now. What we have instead is a charade of independence, because the Bank of England Act 1998 makes clear that the Chancellor can take back control whenever they wish;
b) Granting control of economic policy within a democracy to an elite is a dangerous thing to do;
c) There is substantial empirical evidence that the system does not work: 2008 was proof of that, and the comments of Alan Greenspan and Adair Turner both provide evidence that the assumptions underpinning the arrangement were found to be at fault at that time;
d) It is now likely that we are living in an era of near-perpetual low-interest rates, and events in the USA do not, for example, prove otherwise: when their 50 year bond rate is lower than the 30 year rate there is some indication that markets are reacting to current circumstances, and that movements are politically, and not economically driven.
I was curious to receive a response suggesting:
1) If it is a charade don't worry about;
2) We grant power to elites throughout society: for example, we expect doctors to set drug policy for the NHS and so an elite should set interest rates as they are better able to do so than politicians who do not have the technical skill to do so;
3) The evidence of the post-2008 era cannot be used to dismiss the evidence of the pre-2008 era because in the post-2008 era monetary policy has not been possible. That does not prove that it isn't a superior policy tool.
4) Fiscal policy is needed when at the zero bound, but we are moving out of that era now and so the argument that it is more useful now falls away.
I summarise of course. But I do think a response is appropriate.
Do charades matter?
I was astonished to be told that charades do not matter. The whole field of political economy looks at the ways in which relationships of power influence the allocation of resources in society, and in the process considers the ways in which those relationships of power are created, including by artifice, subterfuge and charade to achieve results that are inconsistent with the underlying supposed principles on which actions are claimed to be based. We look at these issues because they matter. The whole of offshore is based on games of misrepresentation. If the supposed state of Bank of England independence is as well then the consequences are significant because the real agenda has to be established. The substance of the relationships has to be considered, and not just the form. It is not acceptable for economists to consider form alone.
The role of elites
Experts have a very clear role in society: I hope no one would suggest otherwise. But I have a real problem with the suggestion that elites are experts. And as far as I can see being a banker, or being an economist, is not a qualification for having expertise in making the political judgement on the stimulus or otherwise needed to direct an economy, which is always a political choice. The suggestion that bankers and economists do have such expertise is not just misguided but is closed minded to the possibility that alternative opinion exists to the mainstream economic wisdom of the last 40 years. Such mainstream opinion, which did create the situation that led to the 2008 crash, is a contestable wisdom in that it is based upon assumptions, and so prejudices, that not all might accept and as a result the exercise of judgement within the boundaries it sets is not about the expression of expertise in some impartial fashion but is instead about the operation of power within a particular framework that is pre-disposed to favour certain interests, including those of bankers and mainstream economists, over others. This is not then the exercise of expertise: it is the expression of elite power, which is something very different indeed.
Empirical evidence
I am entirely willing to accept empirical evidence, within the boundaries within which the research took place. Extrapolation beyond those boundaries is always dangerous. It is my contention that the pre-2008 economy has gone for good: there will be no return to the old 'normal'. Most informed opinion seems to think we will face perpetual low-interest rates. That is because it is apparent that the experience of QE has changed the role of central banking and interest rate setting forever, but that use of QE only happens (and this is true despite the new Hammond / Carney agreement, which if anything reinforces my suggestion) within the boundaries of acceptable political consent. And in that case it cannot be argued that what held true in one circumstance pre QE now holds true in another post QE. When the only two instruments of monetary control were
fiscal policy and the interest rate empirical results indicated one thing. Now we have three instruments: fiscal policy, monetary policy and QE, with the latter being capable of use to support either fiscal or monetary policy: it is quite specifically not a pure instrument of monetary policy. To restore the old regime when QE has, to coin a phrase 'changed everything'; makes no sense at all. The empirical evidence is that monetisation via QE is here to stay. But in that case the use of that power to support broadly based economic policy is essential and
central banks quite specifically do not have the expertise to do that.
I would argue that even if things are changing in the USA, and the evidence of that is ambiguous (The Krugman v Baker debate on full employment is some indication of that, as is that fact that long-term US markets are ignoring short-term interest rate policy as if they see this as a temporary political aberration, which I suggest that it is) they are not changing in the UK, which is my concern. Nor, come to that, are they changing much in Europe. The zero bound is here to stay. Why on earth build an economic policy on a scenario that has been inoperative for a decade and is likely to be so for time to come in that case? What is the point of putting dogma ahead of the requirement for arrangements that have a chance of working? I have no objection to there being arrangements where the Bank can advise on (but not control) future interest rate changes. Such a policy would make sense. But to pretend that monetary policy has any significant likely role for some time to come makes no sense at all: the UK economy simply cannot afford that it might, excepting a response to a crashing out from the EU, when any decision would have to be politically led in any event and is bound to replicate the futility of Black Wednesday, come what may.
I will be sharing my opinions with my correspondent.
Buy me a coffee!
“monetary policy …… a superior policy tool” Superior at what?
There is no empirical evidence that monetary policy is superior. Growth, productivity growth, income growth were all higher during the fiscal era of les trente glorieuses, and economics can show, mathematically, why.
Nearly, all the problems we face now, inequality, unaffordable housing, erosion of public services are the result of an over reliance on monetary policy. The only thing that monetary policy does is transfer more wealth to the asset rich.
The only was to stabilise the distribution is fiscal, and every economist that has actually thought about it knows it.
A request has been made that evidence be supplied that adoption of an independent central bank and monetary policy has resulted in better economic outcomes since 1980.
We know generically that the Keynesian era as a whole delivered better results by some way
But specific contrast in the post-1980 era has to be made to support that claim. If it cannot be supplied the generic comparison with the pre 1980 era can be made
“A request has been made that evidence be supplied that adoption of an independent central bank and monetary policy has resulted in better economic outcomes since 1980.”
I don’t think there is any.
Why would there be?
An economy has a sort of parallel with physiology in so far as movement relies on antagonistic muscle pairs. Muscles contract and relax, like a thing on one string; you can pull it but you can’t push it.
Monetarism does not and cannot work in isolation. Supply and demand are an antagonistic pair; one without the other doesn’t function. The same applies to ‘cash flow’ ; money supply has to be matched (or at least balanced temporally) by extraction which means taxation.
Since 2008 the banks have had more money than they have known what to do with because there is no effective market demand. And taxation policy has not touched the imbalance. if anything it has been the diametric opposite of what has been required.
Why is this puzzling the clever buggers? What can’t they see ?
Should have gone to Specsavers.
A good while back.
Another sane and concise piece. Thank you.
To me there is no debate whatsoever. We have been ill-served by things as they are for far too long so we should just be getting on with changing it. If only!
BTW I can contribute today and previously this week because for the third consecutive morning our outsourced IT (care of CRAPITA) is not working – except the internet of course.
BTW Aeron Davis’ 2017 book ‘Reckless Opportunists’ (based on many year’s of research) suggests that many of the Elite are not actually experts but generalists.
Their only expertise is actually how to get on the gravy train that is corporate leadership. Their lack of expertise over what they manage helps them to not fully understand the consequences of change and become creatures of rentier objectives.
So if bankers and economists don’t have the expertise to direct an economy (not that they do at the moment – they only direct monetary policy), who does? Politicians?
I do also love the idea that we should not use these particular experts and instead use non-mainstream experts. I wonder who that expert would be. And if he lives in Ely.
Did I say that?
What I said is that politicians must decide
And since there is no one answer to the question on economic management, and the decision is always political as the immense number of variables are almost all inherently political, then it is elected politicians who must assess the trade-offs
I am not an elected politician Ny definitiion I rule myself out
But you cannot extend your logic that far, which is deeply disappointing
The question Sarah revolves around who will enable “caregiving” for all a country’s citizens. The balancing mechanism in Nature has resolved it over time in favour of democratically elected governments stumbling those they may have been and continue to be due to wider adverse societal influences:-
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3471369/
Sarah says:
“I do also love the idea that we should not use these particular experts …”
In his OP Richard specifically refers to the advisory role of experts, so you are being silly.
The role of politicians is to develop strategy with regard to social (NB not social-ist necessarily) policy with respect of desires expressed through the democratic process. How those policy goals are achieved is then a technical challenge and at that point your experts come in to their own. If indeed they have any expertise. (Some undoubtedly do, and some are seriously lacking)
To succeed it is necessary that there is an understanding of the different roles monetary and fiscal devices play in managing an economy. Four decades of inept bungling indicate that a lot of people have a great deal to learn and understand.
Your own experience may or may not stretch to four decades, but mine does and it was a mess. Both parties badly advised because they don’t understand the advice or simply don’t ask the right questions of the advisors they rely on.
If the “expert” was Feynman and the question was quantum mechanics then you have a point (or ‘mutatis mutandis’ on other fields of physics, or similar rogorously predictive sciences).
This is economics. Survey the evidence. Survey the field of experts…….. especially among the Neoliberal ‘giants’ (speaking relatively)……..
I rest my case.
I have already asked f9r the evidence to the standard you suggest
One of the great untold stories in the Western economics is one I picked up from Adam Curtis’ films.
After the Second World War, the West (through America) negotiated cheap oil with the Arab states and this resource helped to grow economies in the immediate post war period.
All of this changed however with the Arab-Israel war apparently . The West backed Israel apparently and Curtis gives us clips of interviews with Muslim/Arab representatives of oil producing countries where they make clear that oil prices would rise – the deal agreed with them post war was off.
There are other issues with economics at this time (1970’s) – in the UK the Unions were just plain silly and did no favours for any Labour Government doing untold damage to help Thatcher to power. Industrial leadership in the country was poor compared to say Germany and we did little to protect our industry from asset strippers from the USA for example whom took over companies and hollowed out our industrial base (and still do). Because of more expensive oil we had inflation and industrial unrest over wages and the cost of living.
When you look at the neo-liberal account of the troubled 1970’s, its portrayed as being about problems with Keynesian economics and nothing else – we were on the road to serfdom apparently.
Freidman and von Hayek won the day saying that it was about economics. But it wasn’t – it was about bad, self harming geo-political and international policy.
The politicians listened and swallowed it wholesale. After all, it was much easier than telling the public the truth – that they had backed the wrong side and hadn’t thought the consequences through.
The lie endures and we continue to pay the price for it. Curtis’ account is compelling.
Thanks
+ 42.
What was the question?
🙂
“What is the answer to the ultimate question?” 😉 😆
I forget now where I read it but the willingness of the Chinese to manipulate their currency exchange rate (usually to keep it suppressed) has meant they’ve been able to flood the world with low priced goods for a long period now and this in turn has moderated inflation particularly in Western developed economies. The argument seems plausible in the sense that historical data shows that it is oil price movements which have the strongest correlation with inflation and this is simply because developed economies are still heavily dependent upon the use of oil:-
https://mythfighter.com/2018/03/17/what-is-the-complex-relationship-among-inflation-deficits-interest-rates-oil-prices-tax-cuts-and-gdp/
I think the argument is plausible when combined with the low level of consumption in their economy, which permits it to continue
On reflection I think I ought also to add that alongside Chinese currency rigging the Neoliberal mania for austerity policies and even an austerity currency (the Euro) would also appear to have suppressed demand:-
http://www.gregpalast.com/currency-rules-but-its-not-ok/
http://www.imf.org/en/News/Articles/2015/09/28/04/54/vc121399
http://bilbo.economicoutlook.net/blog/?p=18739
Schofield says:
“On reflection I think I ought also to add that alongside Chinese currency rigging….”
Are you sure you’re not accepting a mainstream neoliberal pejorative here, Schofield ?
The Chinese have an economy to run and they do it for their advantage as do other national players. When The FED adjusts interest rates is that not currency rigging ?
If not why not ?
Andy, seriously?
China, with the possible exception of Germany, is foremost among mercantilist nations and no, the adjusting of interest rates (monetary policy) is not analogous to currency rigging with the latter being done by regimes that use foreign reserves to intervene in currency markets.
What’s more the neo-liberals and their beloved WTO have long made a point of overlooking currency manipualtion and all of the other level-playing-field concerns that have been raised in objection to their idea of “free trade”.
A lot of the more recent American objections to Chinese trade abuses may be hypocritical and wise-after-the-fact but that does not mean that the Chinese are off the hook. Both parties are guilty in their own different ways.
There is also some considerable doubt as to whether China’s competitve devaluations are actually still in that nations’ interest. Mercantilism, right or wrong, can be a useful nation-building device but the Chinese are well past that phase and every devaluation now makes their substantial imports more expensive as well as making their exports cheaper. They are effectively giving themselves a pay cut every time. The Chinese themselves have recognised the need for strengthening their domestic market and easing their reliance on exports but there are strong vested interests in the current export-driven system.
Your suggestion in effect seems to be that currency manipulation and competitive devaluations are fair go. History seems to indicate that they are something that is ultimately self-defeating and that paves the way to trade wars.
I think you may be missing something here. This is from the FT (ig-legacy.ft.com/content/23fa681c-fe73-11e4-be9f-00144feabdc0#slide0), 20th May, 2015:
“‘Six global banks will pay more than $5.6bn to settle allegations that they rigged foreign exchange markets, in a scandal the FBI said involved criminality ‘on a massive scale”. Four banks also agreed to plead guilty to conspiring to fix prices and rig bids in the $5.3tn a day forex market, in what they hope will draw a line under one of the biggest cases of misconduct in banking since the global financial crisis.
Announcing the settlement, the US Department of Justice said that between December 2007 and January 2013, traders at Citigroup, JPMorgan Chase, Barclays and Royal Bank of Scotland who described themselves as ‘The Cartel’ used an exclusive chatroom and coded language to manipulate benchmark exchange rates, ‘in an effort to increase their profits’.
One Barclays trader wrote in a November 5, 2010 chat: ‘If you aint cheating, you aint trying’, according to the New York Department of Financial Services (DFS), which was part of the settlement.'”
Need I go on? Appearances do not very often represent the nature of reality; period.
Well thanks John,
The Forex market is a separate (thought related) topic. Nonetheless, that was interesting anyway. I wasn’t aware of it until now. It should’ve been more widely publicised.
“Related”. Yes. It is, in my view worse than that which was being discussed on the thread. Why? This was the US Department of Justice. Two of the four banks were British.
The aggressive ideological value system of Neoliberalism is always pushing the margins of what is possible. It leads to a conventional wisdom that sees ‘open for business’ as meaning ‘no regulation’ (or close to it; self-regulation is offered as a sticking plaster). I do not mean that Neoliberals necessarily or deliberately court this irresponsibility, but it is at least a highly probable outcome for authorities overcommitted to Neoliberalism, typically as an unacknowledged article of faith, disguised as ‘rationalism’.
I mean by this, that there is a complete lack of psychological imagination or insight in Neoliberal microeconomics. It depends on a rather crude and limited psychology of marginal utility (largely unchanged for generations), that inherently relies on an aged descriptive psychological theory, providing inadequate motivational insight in the formation of ‘preferences’; nor does it offer a rigorous or well-founded quantification methodology (observationally or experimentally) for the unquantified (unquantifiable?) psychological phenomena it seeks to describe and quantify: or that can even identify the existence of the causal psychological relations on which it depends (it fails to account for unconscious processes that are not subject to observation, nor does it provide a convincing, perhaps any conceptual understanding of the nature of the problem).
At the same time Neoliberalism does not sufficiently account for other psychological motivations (or difficult pressures) which may produce widespread, unscrupulous results that are simply unacceptable, dangerous and totally destructive of both ‘value’, and of the financial system. We need regulation not as a convenience, but because without it we are inviting the unscrupulous to explore the opportunities that will present themselves, unhindered. Their priorities will come to threaten the system (over sincere self-regulators) precisely because the unscrupulous are regulatory, boundary-pushing risk-takers, are highly motivated by greed, and are ruthless.
At best Neoliberalism is naive; fundamentally simple-minded. Behind the inflated value of an over-simplified, over-sold, abstract theory of douce, genteel, conjectural competition, sits a psychologically-banal, merely ornamental mathematics.
John S. Warren,
Generally agreed. At the academic level Behavioural Finance corrects the record quite nicely. At the establishment level its only the pauns that actually beleive in neo-liberalism, or so it seems to me. For the real elite it has been litttle more than an ideology of convenience
Off topic. Brexit affected derivatives now revealed to be a concern of BoE helping cast further light on Hammond’s recent action in connection with BoE.
https://www.theguardian.com/politics/2018/jun/27/brexit-bank-contracts-worth-trillions-at-risk-says-finance-watchdog
Another fine mess they’ve got us into, at all sorts of levels
Nice link Schofield,
Interesting story. It casts some new light on the money and effort that Goldman Sachs et al. put into the Remain campaign. But as Boris Johnson would say, “F*** Business” (just kidding).
BTW that £29 trillion is notional and contingent (not really real). Its like when you insure something for £ 1million. It doesn’t actually mean that you paid a million for the insurance or that the insurance company are ever likely to pay all that to you. Mind you, £29 trillion is still a very large notional contigency.
Richard,
Regarding this claim:
” We do have evidence of an extremely successful policy regime when interest rates are not at their lower bound.”
Obviously, as you say, they are at their lower bound and have been, more or less, for about 10 years so what we have there is one of those cases of diehard denialism that just leaves one such as myself startled and scratching their head in bewilderment.
I am amazed at your patience and politeness in responding to this in such detail.
I know who made the comment and why it was important to deal with it
I (too) am amazed at your patience and politeness in responding to this in such detail.
Good opportunity well used, though.
Despite many rumours to the contrary, I can be a very patient man
Sometimes change demands it
Richard – a general question not specifically related to this particular topic.
For the past several years, your overall analysis of the various component parts of the UK economy (and from other informed contributors) has been highly critical, and rightfully so. Pretty much all the indicators are relentlessly heading in the wrong direction. So how long do you think this can continue before we experience a total melt-down?
The government will of course take short-term measures in an attempt to maintain a semblance of stability but, as it appears to have no in-depth understanding of the underlying fault-lines, the wheels should start falling off the cart sooner rather than later – accelerated by the rocky road to Brexit. If the analyses articulated here are in the main correct, then logically and inevitably the house of cards will collapse any time soon (apologies for the mixed metaphors).
Yet, similar to the run-up to the last GFC, the markets are fairly buoyant, oil prices are rising, unemployment is ‘relatively’ stable (albeit the official stats are misleading) and there’s effectively zero inflation, etc.
Taking into account the myriad variables against a back-drop of international political uncertainty, with the possible exception of China, one wonders how long this scenario can be sustained? It seems to be defying the law of gravity.
And if so, the next question is – what can the general population do to protect itself? One’s general observation suggests that most people (i.e. those fortunate enough to be in work and/or with some savings/assets) aren’t the least bit concerned and continue to go about their daily business as if everything is hunky-dory. Are they sleep-walking into a nightmare scenario?
Just asking!
Now a blog post has been provided as an answer
1) You could tell your errant economist friend to read Minsky’s ‘Financial Instability Hypothesis’.
2) Also to read Mariana Mazzucato ‘The Value of Everything’.
3) Or cut to the chase: an Economist who believes in “an extremely successful policy regime when interest rates are not at their lower bound” must be an equilibriumist; who has noticed we have had a long period after the Crash when rates are at a lower bound. This period provides what is technically termed “evidence”. If he believes you can bottle equilibrium (if he believes equilibrium actually exists, either as permanently accessible, or as some kind of constant), he is chasing moonbeams. Economists of that kind (equilibrium microeconomists who believe all problems can be solved by resort to the calculus, and are essentially Platonists), typically have confused economics with physics. They wish; but it isn’t so. Physicists’ theories live and die by their predictions. The discipline of Economics isn’t capable of predictions, it builds fairly low-value models, with a slightly shaky claim to being (even a low-rigour) science right now (because of the last 40+ years of bad economic science).
Economics does ‘forecasts’, not predictions; usually badly. On the basis even of its ‘forecasting’ the conventional wisdom of economics (as a serious predictave science), and of Neoliberalism as the established text; is ‘dead in the water’ (albeit suspended there in a toxic, viscous, solution of professional denial, party political cowardice and media incompetence).
Tell him (or her) this news, but very gently.
“Predictive”. Predictive Text? Sheesh!
I rather hope they are reading this
“Physicists’ theories live and die by their predictions. The discipline of Economics isn’t capable of predictions, it builds fairly low-value models, with a slightly shaky claim to being (even a low-rigour) science right now (because of the last 40+ years of bad economic science).”
This, I love. Thank you.
“I really do not understand this rejection of the almost universal received wisdom of mainstream economics over the last 40 years. We do have evidence of an extremely successful policy regime when interest rates are not at their lower bound.”
Does your mystery correspondent give any clues as to where this ‘evidence of an extremely successful policy regime ‘ was observed ?
I’d be interested to see for myself. Even a shred of evidence would be welcome.
Obviously we are not going to mention the 2008 debacle because that was ….
…….well WTF was it ?
A quirk ? I don’t think so.
A random act of God? I don’t think so.
A ‘one-off’ ? I don’t think so.
Better just pretend it didn’t happen, eh?
Chatham House rules my back passage. !