- Wedded to the Orthodoxy Archived Message
Posted by Keith-264
on July 31, 2023, 5:48 pm
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https://consciousnessofsheep.co.uk/2023/07/29/wedded-to-the-orthodoxy/ You don’t need to pay someone £577,000-per-year to bring down inflation. You just need to generate the biggest economic downturn in a decade. There are several ways of doing this, but the most common – and the easiest politically – is to have an “independent” monetary policy committee jack up interest rates so fast that when millions of business loans and mortgages come up for renewal, the result is a combined recession and housing crisis, with the very real prospect of a banking collapse to follow… that’s the easy bit. The tricky part – which would be worth the salary if it could be achieved – is to lower inflation without permanently collapsing the economy. Unfortunately, a prolonged and enduring collapse is the most likely outcome for a UK economy which lacks any of the prerequisites for further prosperity. Unlike the 1980s, Britain has an increasingly dependent aging population, and so cannot repeat the productive energy of the baby boomers in the 1980s. Worse still, there is no oil revenue from the North Sea to bail us out. Nor do we have billions of pounds of public assets to be flogged off so that we can secure the foreign currency to pay our international bills. And the high inequality in modern Britain rules out a consumer-led recovery. And yet, the Bank of England’s Monetary Policy Committee (MPC) seems not to have taken any of this into account. It is likely that the MPC is taking a Maslow’s Hammer approach to rising prices – if the only tool you have is a hammer, then every problem looks like a nail. And if the only tool you have is the overnight interest rate, then every problem looks like monetary inflation. Although, more worryingly, as with the US Federal Reserve, the MPC is too wedded to the Phillips Curve model which wrongly makes a causal link between inflation and unemployment. Certainly, both the Fed and the Bank of England have drawn attention to the – apparently – strong labour market as evidence that they have not done enough to curb inflation. And so, rates will continue to go up until something breaks. Consider though, what something breaking means in practice. If we were to repeat the depression of the early-1980s, it would mean millions of families being condemned to poverty… social security being far less generous than it had been four decades ago. Even then, a whole generation – so called “Gen-X” was financially scarred, and never fully recovered. The same is likely true for the current Gen-Z, who were already struggling even to find a room to rent before the MPC chose to leave landlords having to raise rents to cover the interest on buy-to-lets, even as banks are tightening lending standards for anyone considering buying a house…long-term rates may have fallen slightly, but just like the joke from the late-1970s, the only people who qualify for a loan are the ones who don’t need one. In this respect, the MPC are guilty of a practice which has become all too common among the residents of Versailles-on-Thames – of pursuing policies whose consequences are experienced by people far less well off than they are. Most recently, we witnessed the Labour Party losing a by-election which should have been a walkover because of the unfair manner in which the London Labour Mayor has sought to – fail to – address air pollution. Indeed, so-called “green” reforms all too often result in eco-austerity for those at the bottom while providing eco-socialist handouts to those at the top. Covid furlough policy too, has favoured the middle classes at the expense of the poor. As Spiros Bougheas explains: “First, the policy is very costly. The average cost of the program is approximately £14 billion a month and we need to also keep in mind that it covers only a fraction of those who lost their incomes because of the current crisis… Second, the policy is financed the wrong way… The job retention scheme should be treated as a welfare (redistributive) policy financed through direct taxation… “Third, the policy endangers the prospects for recovery. It is important to keep in mind that the economy has not been contracting because the incomes of those in employment are low… All workers still in employment have maintained their incomes while their ability to spend has significantly declined. By borrowing in order to maintain the incomes of those directly affected by the crisis the government, dangerously unbalances aggregate income and spending flows. There are two potential dangerous consequences. As others have argued, all the excess liquidity eventually will bring back inflation. Alternatively, taxes may have to be raised exactly at the time when the economy is ready to recover…” The laptop class had a good pandemic, helped by billions of pounds of state handouts, grants and state-backed loans. But it is those on the lowest incomes who have been hit hardest by the rising prices, and who will be hit hardest when the MRC has its way and unemployment increases sharply. By which time, one would hope, some serious questions will be being raised about the role and purpose of an MRC which David Blanchflower (a former member of the MPC) and Andrew Levin writing for the International Monetary Fund have called into question: “Monetary policymaking requires complex real-time judgments. For that reason, in every advanced economy except Canada, monetary policy is delegated to a committee of experts rather than to a single decision-maker. In practice, however, decision-making has been impaired by the pitfalls of groupthink, tokenism, and marginalization of dissenting views… “The pitfalls of groupthink became apparent during the lead-up to the global financial crisis in 2008. The recession started in the US in December 2007 and in Europe in April 2008. At the Bank of England, one author of this article was the lone dissenter warning of the coming crisis (Blanchflower 2008); in contrast, the UK Monetary Policy Committee (MPC) inflation report issued in August 2008 made no reference to recession risks. In September 2008, shortly after the Lehman failure, the US Federal Open Market Committee (FOMC) concluded that upside risks to inflation and downside risks to economic growth remained roughly balanced and voted unanimously to maintain an unchanged policy stance. By early October, however, major central banks engaged in an unprecedented coordinated interest rate cut.” Blanchflower’s proposed solution is more “diversity” – something the Bank of England claimed they had achieved when they appointed two women to the MPC prior to the pandemic: “The Treasury has appointed two women to senior roles at the Bank of England following criticism over a lack of diversity among its top ranks. “The former Virgin Money chief executive Jayne-Anne Gadhia and the Banking Standards Board chair, Colette Bowe, will each serve three-year terms as external members of the Bank’s financial policy committee, which is responsible for spotting risks to UK financial stability. This though, highlights a pitfall to simplistic versions of diversity. If the problem is groupthink, then appointing banking insiders – irrespective of their race, gender, colour or toothpaste preference – serves only to perpetuate the problem. Indeed, fast forward to July 2023, and the MPC consists of six old white men – all either banking insiders or professors of (neoclassical – i.e., wrong) economics – and three women, one of which happens not to be white, but all of whom are professors of economics. Blanchflower suggests that regional diversity is needed too, and proposes that the devolved administrations in Wales, Scotland and Northern Ireland – along with the English regions – nominate MPC members. But again, if the result is merely a larger committee of bankers and economists, then groupthink will persist. As the campaign group Positive Money argued in 2017: “What is needed on the MPC is a broad range of perspectives – not nine people using the same, bankrupt models built on economic and financial orthodoxy. That includes appointing figures from non-financial business backgrounds such as manufacturing, as well as from civil society and trade unions. These experts would be better placed to assess the many facets of modern monetary policy and communicate its consequences more clearly to government. In turn, the government must take account of monetary policy’s social and environmental impact and ensure the optimal design of the monetary policy framework. “For too long, groupthink has held us back from a better form of monetary policy. Greater diversity would unlock its true potential.” A genuinely diverse MPC would have the advantage of defusing the power afforded to – usually wrong – econometric modelling by drawing upon real-time indicators of what is occurring in the real economy. For example, insofar as central banks are attempting to generate higher unemployment, prior experience shows that they always overshoot – causing far deeper recessions and far higher unemployment than is necessary. This is simply because of the long delay between creating the economic conditions for a recession, and the recession finally arriving. So that, all too often, central banks are still raising rates when the proverbial hits the fan. When big companies have to lay-off workers, they don’t do so overnight. They must first give notice of redundancies. It might be six months before workers are sacked. And even then, those who receive severance packages might not show up in unemployment claims data for another three to six months. And so, while the conditions for recession and unemployment may already exist, it could be next year before the reality shows up in the data used by the MPC. Giving less weight to the models and more to real world indicators such as the strip club index – middle-aged men have less spare cash to throw around – or the sharp oversupply of cardboard containers in the USA – people are buying less goods online – would at least prevent a repeat of the 2006-08 crisis, when they jacked-up rates too high and too quickly, causing the worst crisis since 1929… and this time around, they have raised rates even faster, making a severe depression highly likely. The same need for more diverse viewpoints in order to break down the groupthink, could also apply to economic policy more broadly. It is only during the neoliberal period that politicians have declared themselves too incompetent to determine economic policy – most often handing responsibility to bodies like the MPC or to unaccountable think-tanks and private corporations who are largely responsible for the mess we now find ourselves in. The continued pursuit of narrow policy which favours London and the archipelago of top-tier university towns at the expense of ex-industrial, rundown seaside and smalltown Britain was already causing political instability – Brexit and the collapse of Labour’s “red wall” being the obvious manifestations – even before the current cost-of-living crisis began. Continuing along this insular and elitist path as the living standards of the majority collapse under the weight of an MPC-generated depression does not bode well for the future. In modern history, the British people have proved remarkably tolerant and stoic in the face of adversity. But we must always remember that – once the politically-applied froth is wiped away – the one factor common to upheaval and revolution is rumbling bellies. And while the establishment media and the neoliberal political parties have preferred to look the other way, in thousands of already depressed communities across Britain, bellies are rumbling ever louder. |
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