Transparency at the Bank of England
Today, Conservative Shadow Chancellor George Osborne announced his party’s plans for reforming state economic governance. In a wide-ranging speech, he called for, amongst other changes, a dramatic shake-up of how the Bank of England’s hierarchy, including limiting the Governor to one term, and making Monetary Policy Committee member selection a transparent process.
There are very good arguments for the state to have no say in monetary issues whatsoever. A central bank is a monopoly supplier of fiat money, forcing upon the people (à la Kublai Khan) a financial regime that may, or may not, be in their interests; in particular, a state that is indebted may force the people to accept a monetary regime that devalues money (à la the Weimar Republic), hurting the individual’s interests. However, if one assumes that it should control the supply of money, it is of paramount importance for the process to be an open and fair one, incorporating the best economic minds the world has to offer.
In that respect, the reforms that the Tories propose are a mixed bag. The idea that the state has any right to operate behind a cloak of secrecy, whilst forcing its will upon the people, is an absurd idea, and, hence, Osborne is right to support open MPC selection. However, there is absolutely no reason to limit the Governor to a single non-renewable term, except for political reasons.
Alan Greenspan (who is, incidentally, now an unpaid advisor to the Bank of England) did a fantastic job at the USA’s central bank, the Federal Reserve, over a period of nineteen years. However, had he been limited to a single term, rather than been allowed to be reappointed by three successive Presidents, the United States economy would be in far worse shape than it is today.
In effect, term limits work in the opposite direction, to transparency; they force upon the citizens a sub-premium choice by limiting their options. At least, if we are to be governed by a statist monetary regime, let it be transparent. But, above all, let it maximise its efficacy by not forcing itself to choose an second-rate greenhorn over a first-rate Greenspan. One of the Shadow Chancellor’s proposals is in that vein, but the other, sadly, is not.
Categories: Conservative Party, monetary policy, George Osborne, Alan Greenspan
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Stuart Davenport said,
June 15, 2007 @ 11:18 am
This is an intelligent blog entry Oliver. I will pick up on 2 points:
1) “However, if one assumes that it should control the supply of money, it is of paramount importance for the process to be an open and fair one, incorporating the best economic minds the world has to offer.” - Agreed, unfortunately even if the process is open and fair, because this process of monetary policy has been decoupled from democracy, the citizens that are affected by this do not have a chance to directly influence decisions and hold those responsible to account. I have no great enthusiasm for politicians meddling in monetary policy. Unfortunately, if we are to have a “statist monetary regime” I would prefer that representative democracy is the method for holding it to account rather than convoluted rules invovling the Chairman of the MPC writing to the papers after certain measures are implemented.
2) The benign economic conditions seen worldwide after 1997 have created a myth regarding the supposedly inspired decision by the Chancellor to make the Bank of England independent. As the economy heats up the real test will come. I hope it was as intelligent an idea as he keeps telling us.
Oli Cooper said,
June 17, 2007 @ 7:49 pm
Thanks for your comments (and your compliment), Stuart. I’ll address each of your points in turn:
1) Democratic determination is probably the only way forward in times when the brief of a public official is a wide-ranging one; I don’t think that anyone really suggests that the government not be accountable to the House of Commons, for example (except in cases of hung parliaments, war-time, and other unusual circumstances).
However, accountability wielded by the ballot box is widely seen as a panacea that it is not. There are many other forms of accountability (professional accountability, financial accountability, revolutionary accountability etc) that have been postulated and effected. Who says that hospitals are inefficient because doctors aren’t elected? Or that generals are inferior because the army doesn’t hold elections? Unlike the government’s itself, their brief is so narrow and so esoteric that professional expertise is required to determine who is best-placed. Frankly, it is the civil servants (in this case, economists) that are therefore in the best place, rather than the Chancellor or Parliament.
For a more complete critique of the ‘over-use’ democracy from a libertarian point of view, see Hoppe’s ‘Democracy: The God That Failed’. I don’t agree with his final position (that anarchy is the “perfect” solution). Nonetheless, he does compare monarchies with republics, and makes a very forceful argument for saying that only the unelected are truly independent, in that they cannot be beholden to vested interests.
2) On this point, you are broadly correct. The mythology surrounding Gordon Brown’s decision is two-fold:
First, as I assume you are implying, it is the expansion of globalisation, and particularly the expanding output of cheap exports from emerging economies (PR China and India especially), that has kept goods prices down. In the meantime, the costs of services provision (which are harder to offshore) and housing (which is impossible to offshore) have increased at very fast rates. This suggests that, actually, the most part of the recent low inflation is a result of external consequences, not internal mechanisms.
Second, it is claimed that it was the first step towards independence. This is patently false; the most important part of monetary independence is the targeting of inflation, which actually began in 1993. In effect, if the inflation target is taken seriously, it doesn’t matter who’s sitting on the MPC: all competent economists would come to the same conclusions. Having said that, we certainly have to make sure that the economists that make the decision *are* competent ones, and the employment of term limits and behind-the-scenes hiring could hinder that.