Enough central bank jazz hands…
Why Labour should democratise the Bank of England
[I delivered this lecture to a packed hall in Manchester on 20 April 2016 as part of the Labour-sponsored lecture series The New Economics, alongside shadow chancellor John McDonnell MP and Rebecca Long-Bailey MP]
When I agreed to do this lecture I thought Labour had at least three years to work out a new, radical leftwing programme. I was wrong.
The Conservative government has turned into a shambles. Its budget doesn’t add up; its incompetence has put tens of thousands of steel jobs at risk; and then the Panama Papers.
That’s before we even get to the Brexit referendum. It’ll be not so much a Night of the Long Knives as a Night-of-the-Aspinall of London engraved sterling silver letter opening knives, price £125 plus VAT.
It’s tempting to think: get out the popcorn and watch. But the Conservative fiasco means Labour has to get serious about an early election.
And the state of the world economy means it has to design a combined fiscal, monetary and industrial stimulus — not as a good idea if it wins — but as an imperative for now: something the opposition parties are prepared to unite around, and force the government to adopt.
With global growth this year set to be the lowest since Lehman Brothers crashed, we have to explain where the stagnation comes from — and how it can be resolved in the interests of millions of ordinary people who feel powerless, depressed and terrified about the future.
Economic roots of the Conservative crisis
The sudden collapse into bickering, resignations and incompetence of Cameron’s government is rooted in something real and economic.
After eight years of a weak global recovery, driven largely by central banks creating money and buying government debt, this monetary stimulus is running out of steam. Central bankers have become a panic-stricken jazz-hands chorus.
Mark Carney in his Shanghai G20 speech:
“The global economy risks becoming trapped in a low growth, low inflation, low interest rate equilibrium.”
Claudio Borio, chief economist at BIS:
“Debt too high. Productivity growth too low. Policy room for manoeuvre too limited…We need to abandon the debt-fuelled growth model.”
Mario Draghi — has warned Europe risks “disastrous deflation” unless the second round of quantitative easing kicks in.
Central bank base rates have gone negative across the world. They are now openly contemplating helicopter money drops or buying not just the debts of companies but their shares as well.
Mark Carney is right to say: there’s probably one more round of stimulus central banks can do — but after that it is over to policymakers to enact radical structural reform.
The problem is: the structural reform prescribed by neoliberalism is the medicine that kills the patient.
It means: more austerity, more wage cuts, more welfare cuts; more laws that let firms like Uber destroy the established taxi services of cities; more chunks of the NHS handed to their friends in the private sector; later retirement ages, higher student debt. More contracts like the junior doctors’ contract.
Iain Duncan Smith’s resignation was a signal that even the Tories can go no further with their chosen form of austerity — which targets the sick, the disabled, the working mum, the family whose council house is suddenly deemed too big. So George Osborne’s missing £4.5bn is further testimony that austerity does not work.
Labour’s diagnosis must be simple, clear and bold. We got here because we built a freemarket economy where wages stagnate; where all the growth has to come from people borrowing — against their house, on their credit card, on their car, to go to college.
That’s what stimulated three cycles of boom and bust since the late 1990s. The dotcom crash destroyed the company pension system; the subprime crash destroyed large parts of the welfare state and left a debt pile that cannot be paid. The next crash will probably destroy the private saving system — as it will be paid for by bail-ins on the Cyprus model.
The the boom bust cycle is not just something that happens “out there” to finance: it has helped suppress productivity — mis-allocating capital on a vast scale.
If you want to know what misallocation of capital is: walk through Manchester and its satellite towns. Coffee shops for graduates to work in; payday loan stores; employment agencies — and round the corner the food bank; and beyond that the Citizen’s Advice Bureaux to deal with people frantic over their debts.
And even for the big layer of salaried workers and middle class people who have better pay, more secure work: they’re haunted by the constant fear of dropping into this expanded precariat; and that their children will be poorer than they were.
That’s the story of how we got here.
Combined stimulus on four fronts
How do we get out? There is no technocratic fix for everything. When the answer is not “the market” sometimes it’s hard to find. But there are four headings: fiscal policy, industrial policy, monetary policy and some radical and urgent structural reforms that go in the exact opposite direction to those dictated by the IMF.
John McDonnell and his team were right to go early with Labour’s version of a fiscal rule. It’s intelligent, flexible and based on sound research.
I believe that what it would mean, in practice, is that Labour could cancel many of the spending cuts Osborne is committed to in the second term. Even Ed Balls’ plan would have allowed him to cancel most of them.
But we need more: not just less austerity but an actual stimulus to help the economy grow in the right direction.
Demands for fiscal stimulus are coming from everywhere: from the IMF, which said last week in advice to the G20:
“where fiscal space is available, fiscal stimulus should be implemented, focusing on boosting future productive capacity”.
The government is committed to doing the exact opposite and it will — unless we persuade them to change their minds — drive the UK economy into a ditch as the world economy slows.
So let’s be clear: Labour’s fiscal policy, which would allow more borrowing now to fund long-term spending, and is flexible in the face of a global slowdown, is exactly in tune with the IMF; and exactly in tune with economists at Chatham House who this week called on the G20, under China’s presidency, to launch a co-ordinated fiscal stimulus.
On industrial policy, based on the work done by Marianna Mazzuccato and others, Labour is at the stage of having a coherent method. The thing now is to begin to spell out the policy itself. That is, to state, in broad terms, what sectors a Labour government would support; where the synergies would be; what the long-term infrastructure plan is; what the desired mix of energy production is.
But fiscal stimulus and co-ordinated state direction of the private sector are not enough.
The next phase of monetary stimulus will be critical.
When central bankers warn “we can’t do much more” they mean: of this raw money printing. They know it could tear the world economy apart, in competitive devaluations, and that as currently practiced it is dragging all indicators — growth, inflation, closer towards zero.
So it’s time for Labour to address a historic weakness and a major opportunity when it comes to monetary policy.
Labour’s historic weakness on monetary policy
In 1931 the Labour government fell because it couldn’t stomach the level of austerity needed to keep Britain’s currency pegged to other currencies via the Gold Standard.
Labour split, Macdonald formed a National Government with the Tories and then — as a result of pay cuts demanded by the Treasury — the Royal Navy mutinied.
There was a run on the pound, forcing Britain to ditch the Gold Standard, devalue sterling and reverse the pay cut. The austerity Labour had split over was partially reversed by a right-wing government.
If the acronym “WTF” had been invented back then, you can bet Labour MPs would have been using it. In the event one Labour MP said simply: “We didn’t know you could do that”.
From then to now, failure to understand what you can do with a central bank in a crisis has been a weakness in Labour economic thinking.
Let’s understand why. The whole experience of Labour as a party of the unions and the working class makes the idea of messing about with the value and supply of money seem strange.
If you want to promote equality, tax is what you use to redistribute wealth. And if you know anything about economics, you know that the 1930s a bloke called Keynes advocated the government spending, running up a deficit in order to pump prime growth.
Everything points to fiscal policy being something useful — while monetary policy is neutral, technocratic and boring. And didn’t Ed Balls and Gordon Brown go out of their way to make the Bank of England independent in 1997?
Well in this, the third leg of the global crisis, monetary policy is going to be crucial. As Bank of England chief economist Andy Haldane points out — once you print trillions of dollars of money and start buying government debt, you effectively dissolve the walls between fiscal and monetary policy.
The UK Treasury gets an annual windfall from the profits on the government bonds the Bank of England holds — but its treated as accidental.
And more strategically, if the Bank of England holds all the bonds it has bought until maturity, distorting the bond market for 20–30 years, it makes it much easier for the government to borrow in future. Again, treated as a happy accident.
Under the Conservatives, monetary easing has been used simpy to offset the hit to the economy caused by fiscal tightening. Labour should, in future, use monetary policy to create fiscal space.
But if we need another round of quantitative easing the positive spillovers from printing money to buy debt are going to be overt — and not just from the central bank to the Treasury but from the central bank to businesses, commercial banks and consumers.
If you buy company debts, as the ECB is doing, you are part-nationalising their risks. If you buy government debts on such a massive scale that government’s cost of borrowing turns negative, you are effectively financing the state. If you buy company shares, or simply pour money into people’s bank accounts in a so-called helicopter money operation, you are directly supporting some households more than others — because £10k to somebody who only earns £10k is not the same as for somebody on four times the money.
Labour’s starting point should be: to stave off deflation one more round of monetary stimulus should happen — globally and here.
But this time it has to be designed to work in synergy with a fiscal stimulus to do all the things neoliberal governments don’t want to do: boost wages, boost investment, boost welfare provision and the social wage, enhance the skills base.
To make this happen we have to change our mindset.
When monetary policy supports specific parts of the private sector, and when it’s being used to finance the state — then whatever the instruments the central bank buys — the policy should come under democratic control.
This is because central banks can do things that, as in the 1930s, “nobody knows you can do”.
In Britain, for example you could print £64 billion and buy all the outstanding student loans with it; and simply hold them to maturity, giving the borrowers a 30 year re-payment holiday. People who’d taken a risk — 3 years at college on borrowed money — would be rewarded by the sudden disappearance of the “student loan repayment” line from their pay cheque.
Didn’t know you could do that? Now you do. With a democratic monetary policy you can do this and more.
Labour must have the courage to adopt an active monetary policy; it must urge the government to do so too and support George Osborne if he does.
In fact as Richard Murphy has warned, once the slowdown gathers pace the risk is they do it before you’ve even mentioned it. And without any democratic control — indeed any political debate — it will be designed once again to benefit only asset holders, and the opportunity to use QE to reshape the economy will be lost.
Of course you can’t do this off the cuff. But you must begin to assemble the expertise to do active monetary policy. Above all because the institutions Labour set up 1997 — which were the right institutions then — have become inadequate for controlling monetary policy now.
Labour should keep the central bank independent of government. But it should set a much tighter remit for the governor. Unlike Osborne, who lets Carney “look through” his targets, the government would demand concrete action to hit the target.
The MPC as a body can only manage the economy to a single target if that economy is stable. And in a period high volatility and unorthodox policy the target alone is not enough to guide action.
Trying to do unorthodox monetary policy against a single 2% inflation target is like having your car veering towards the crash barrier, with a herd of antelopes leaping in front of you, and your enture family trying to grab the wheel and asking: “the rule dictates I must be going at 65mph in the middle lane therefore what action must I take now?”
Amid near deflation, with a consistent undershoot of the inflation target, the Bank says: we can’t do any more stimulus because there’s a risk of overshooting the target. I would argue that is wrong — that the Bank and the Treasury are today conniving to ignore their own inflation targets.
But there’s a solution: to raise the target to 4% — in a move co-ordinated with other central banks globally. That’s been advocated by analyst Nick Kounis of ABN AMRO, and by Johns Hopkins University professor Laurence Ball, among others.
A 4% target would force the Bank of England to take stimulus measures immediately, and ones that spilled directly over into benign effects on the government finances.
The Bank’s experts would, of course, offer the government of the day a range of unorthodox monetary policies to reach that goal. But once you’re in to picking and choosing assets to buy, or people to help, it’s got to be a political decision.
I’m against helicopter money. I’m in favour of people’s QE as originally outlined by Richard Murphy — and a controlled monetisation of the debt. All these things are being discussed — but behind the closed doors of central banks.
That’s why we need democratic control, not the mystery play that is the quarterly inflation report press conference.
What will the markets do in response to an outburst of monetary stimulus?
It depends what the other major central banks are doing. If nobody else does it, it’s likely sterling will fall. But that could have a benign impact if your aim is to rebalance, bring jobs back onshore, boost the competitiveness of exporters. In any case, the likelihood is other central banks will do it — either in concert or in competition.
You’d also get a lot of rhetoric about a bond-market strike: that investors will refuse to buy bonds, as they did with certain Eurozone countries in 2011, or as they threatened under Gordon Brown. The remedy for that is for the central bank to commit — as the ECB did — to do “whatever it takes”: to make sure that anybody betting on a UK gilt crisis loses their money bigtime. That’s one of the few positive lessons we can take from the ECB.
Now you may be thinking — given we’re already regarded as revolutionary Trotskyists just for wanting social justice — “why risk this foray into a policy area that’s been depoliticised; why not stick to our knitting with a mildly expansionary fiscal policy”.
This was the argument put against the original “people’s QE” policy by Simon Wren Lewis.
My answer is:
a) fiscal policy has limits unless supported by monetary expansion. This was something Keynes recognised during the Great Contraction of the early 1930s in the USA; and
b) the stagnation and contraction that could be coming at us will hit economies already too heavily in debt for fiscal stimulus to do all the work.
c) a steady, benign inflation, combined with restrictions that force people to save in their own currency, is the way we managed to reduce global debts from 90% of GDP after World War Two to 20% in just over two decades. If you want to avoid traumatic debt restructuring, then monetary stimulus is the weapon of choice.
I welcomed John McDonnell’s fiscal rule because it signals to Labour’s own supporters the limits of what fiscal policy can do.
There’s a school of thought among Labour supporters, and some academics, that the deficit is irrelevant, that “taxing the rich” solves all your problems.
It does not. In a central-bank run capitalism, setting clear democratic paramaters when it comes to asset purchases, and new higher inflation targets for the central bank, can be a better instrument of stimulus.
And in a highly marketised economy, targeted money drops into the private sector can actually shape the structural reforms we need better than targeted changes in state spending.
The challenge for the North of England
I want to end with a consideration of something I hope is at the front of Labour leadership’s mind: what can economics deliver?
What’s happened inside Labour is a symptom of something worldwide: it’s the understanding among an entire generation that freemarket capitalism is broken; that they are the victims; that they will be poorer than their parents; that mainstream politics has been captured by a heredetary elite.
Economic policy, in this situation, has to be first of all demonstrative: it must show you are determined to break with the old model.
Policy has to become the anchor for a story. The policy in itself does not win elections, nor does it mobilise the investors, the technologists, the entrepreneurs to take part in the project; signal to students what to study; signal to workers to re-train for different skills.
If you read Keynes in the early 1930s the work is mostly about how a clear government commitment to stimulating growth changes the psychology of all the actors. It’s about the story not the policy itself.
With that in mind, it’s worth asking — what would a combined monetary and fiscal stimulus do for the North of England.
Let’s be clear about the essential deal the Conservatives have offered the North: obey our economic diktats, help us destroy the NHS through privatisation, marketise local services and you can have a semblance of local control and a hollow catch-phrase. And some people fell for it.
For all the talk, most of the infrastructure money is focused on the south. They were prepared to let steel die: Redcar’s closed; Scunthorpe sold off. And when Chorley closed its A&E last week I strongly suspect that, before Jeremy Hunt asked “why”, he had to ask “where is Chorley?”
If you think it’s bad now, the North of England has to be prepared for an even bigger challenge.
Either through independence, or through a much more radical form of home rule — a proposal gaining ground in the Scottish Labour Party — Scotland will govern its own fiscal affairs. It will control its own tax system and sooner or later it will play the same game all the other small nations play: of competition for inward investment.
Even if they do that fairly — not in the way Ireland does by designing offshore tax loopholes into its offer — that will squash the North of England geographically between Ireland and Scotland both competing for growth.
For Labour to govern Britain, our grandfathers always knew there had to be an alliance: of the Scottish working class, Wales, the industrial areas of northern England and the urban working class of the large cities.
Today Labour has to construct a new alliance. To the young city dweller its clear what a Labour vote gets you: a mayor or a council who will more likely represent you, the hard pressed renter and commuter, than the interests of property developers and landlords.
To people in Scotland and Wales I think Labour will have to offer a much more radical form of fiscal independence. And incidentally, democratic control of the UK’s central bank would allow you to underpin, potentially, four fiscal regimes in the UK with a single democratic monetary policy.
But what about the North of England? It has three times the population of Scotland; there’s been no popular cultural renaissance of the kind driving Scottish independence; no cohesive professional class clustered around separate legal, education and health systems; no version of the BBC Six O’Clock news to tell our version of the story; no special TV programmes to help our language survive — unless you count Coronation Street and Emmerdale; and at times, we are not even sure what the story is.
The North of England needs a massive dose of all the things only a Labour government can offer:
- Fiscal stimulus focused on infrastructure and skills;
- State intervention to save industries in towns the Conservatives have never heard of;
- Labour market reforms the opposite of the what the IMF dictates — to boost unionisation, boost pay, boost job security; and
- Monetary stimulus specifically designed to synergise with all the above.
A Labour would also have to take fiscal measures designed to boost the attractiveness of Northern England to global investment.
Here again, a reminder that it can under some circumstances be left wing to cut business tax rather than raise it — because you want the private sector and the skills here, and not somewhere else. That can apply to English regions as much as small Eurozone countries.
And therefore you need monetary, industrial and structural policies to work together, and not to become addicted to the idea fiscal policy is your only weapon.
Whether with borrowed money or printed money we can build all the ports, high-speed rail tracks and tram systems we want — but we need businesses to provide the high value work, without which these things will be left high and dry.
Let’s be honest about the private sector in the North. It’s brilliant — I could take you to world class aircraft design companies; to cutting edge research labs in materials and pharmaceuticals; to small tech startups spun off in textbook manner from universities. But it’s too small. That’s why, though we have pockets of affluence, they are too small as well.
To make them bigger, the north of England needs: at least one regional investment bank; an integrated transport plan; a comprehensive industrial policy; universities mandated to collaborate on a regional scale instead of pointlessly competing for the same resources; and massive investment in the skills needed to attract new businesses.
If there are engineering PhDs driving taxis because the one year of training they need to bridge the gap between academia and high-spec billable work is too expensive, you find the money. You impose a training levy and you match it with taxpayer’s money.
Whichever member of the Bullingdon Club weilds the letter knife gainst Cameron, all they can offer the North is: more closed A&Es, a few, late road and rail routes, benign neglect as to whether steel is produced in Scunthorpe or Shenzhen. And a PR slogan.
It may be that the Scottish people decide their safest route out of a Britain run for the 1% is to leave.
When they see the British press call Labour a “threat to national security” just for electing a leader who is honest and not in the pocket of Rupert Murdoch, I wouldn’t blame people in Scotland for thinking that.
But the North of England doesn’t have that option. The North’s only option is the one our grandfathers designed, in the pits, the furnaces, the spinning mills and the railways sheds whose ruins litter our landscape: the Labour Party.
The north of England needs Labour to be left wing, radical and brave.