Advice for the new Governor of the Bank of England

The quarterly journal of the Institute for Public Policy Research, Juncture, has published an article entitled “Dear Mr Carney….Memos to the Bank of England Governor.” (subscription).  It has brief contributions from Dean Baker, France Coppola, Brad Delong, Izabella Kaminska, Dan Corry, Ann Pettifor, Tim Allan, and Bruce Banner (aka ECONOMISTHULK).

Here’s mine:

“The economic history of the UK over the past 30 years is one of successful microeconomic reform, interspersed with episodes of disastrous macroeconomic mismanagement. Unfortunately, we are living through such an episode at present. What can you do to help?

 This is the slowest recovery in the UK’s recorded economic history.  This reflects both the aftermath of the global financial crisis and a mistaken policy response. David Cameron called that response ‘fiscal conservatism and monetary activism’. The ‘fiscal conservatism’ side of it clearly had a substantial and negative impact on growth. The halving of public sector net investment especially is now almost universally recognised as a major policy error. But the impact of ‘monetary activism’ is far less clear. Although the Bank of England did indeed expand its quantitative easing programme, this has become subject to diminishing marginal returns. Many members of the Monetary Policy Committee seem to have lost faith that more QE will achieve much. Meanwhile, the financial sector remains dysfunctional. It is manifestly failing to fulfil its primary function of channelling credit to the real economy.

 Up to now, the response of the policymaking establishment has been to pass the buck. Your predecessor, Mervyn King, blames the supply side of the economy, and says ‘generalised monetary stimulus’ is not the answer, while the chancellor has encouraged a view that your arrival will somehow transform the impact of monetary policy.  We know that you will be more willing than your predecessor to consider changing either the remit given to the Bank, or the way the Bank implements policy, perhaps by not just keeping interest rates low but committing in advance to keeping them low, as the US Federal Reserve has done.  But such changes are no panacea. There is a case for changing the remit – but then the Bank (rightly) has not made hitting the inflation target a short-term priority over the past few years anyway. Markets already expect interest rates to stay low, so for the Bank simply to promise that this will continue might not change much in the real world.

The point is that the changes currently being mooted are not about policy – they are about communications, expectations and targets.  But if we want things to be different, then we will have to do something different, not just talk about it. And the current governor is right about one thing – monetary policy alone is highly unlikely to be enough to put us back on track for sustainable and balanced growth.  This will require you and the chancellor to work together, not to try to shuffle responsibility on to each other. You could both start by taking the advice of others, such as Adam Posen, who has called for aggressive action to boost both private and public investment; Angus Armstrong, here at the NIESR, who has put forward radical proposals for reform of the UK mortgage market; and the London School of Economics’ Growth Commission, which has pointed to years of inadequate investment in skills, infrastructure and innovation.

All these measures would be good for the economy both in the short term – boosting demand, and hence output and jobs – and in the longer term, by helping to address the UK’s chronic problem of underinvestment in both the private and public sectors. With your arrival, as well as the IMF’s belated but welcome recognition of the need for fiscal stimulus and the almost-complete consensus among economists that the UK needs more investment, there is now an opportunity for the policymaking establishment to change course.  We would all be better off if you took that opportunity.”

I recommend reading the others as well, of course: there’s considerable, but far from complete, overlap.