The Bank of England, Economic Orthodoxy and the Starmer government: CBs Part 2

Technocrats, political power & economists ‘adjusting pocket watches in the digital age'

My recent Guardian article on Labour’s austerity policies caused a stir and led the prominent Oxford economist, Professor Simon Wren-Lewis to rise to the defence of technocratic institutions, and to argue ( I paraphrase) that ’technocrats are best’.

But first, before I get going… a quick thank you and an apology to my loyal readers for a period of silence. It has been a hectic time, with interest in my new book rising before publication and with it increased demand from both media and others for public speaking events, articles and commentary. If the new book, The Global Casino: How Wall Street Gambles with People and Planet is of interest, I encourage you to pre-order it from Verso. For those who read this newsletter free, it’s a great way to support my work.

The Starmer government, orthodox economists and the Bank

The Guardian recently commissioned an article by John Harris, Simon Woolley and yours truly on a subject titled: Labour is in a mess. Is there anything Starmer can do to turn things around?

In my contribution I chose to address the Rt. Hon. Rachel Reeves, Britain’s Finance Minister, partly because her early austerity policies helped cause Labour’s “mess”’. But also because she could, if she chose to use the power of a huge parliamentary majority, transform the economy away from one governed by technocrats in the interests of private wealth, to a more democratic Big Green State - deploying power over both monetary and fiscal policy to end austerity and manage the transition away from fossil fuels.

My article challenged the idea of central bank independence, and argued that the Bank of England uses its power against the interests of the government, and to protect and bailout global financial markets. Take inflation. As argued in The Global Casino, prices are inflated by speculators in global, not home markets. The Bank of England has only one single tool to deploy against inflation in the home market - higher interest rates. High rates serve the interests and power of creditors, while hurting debtors - and there are millions of debtors. Unsurprisingly the Bank’s only tool has not lowered Britain’s globally-induced inflation, which has remained stubbornly high. In fact the OECD forecasts the UK is to have the highest rate of inflation of the G7 advanced economies this year, with food inflation still rising. But higher rates have depressed both private and public investment and, more broadly, the nation’s income. Andrew Bailey, governor of the Bank of England agrees that the Bank is powerless when it comes to inflation. In an appearance before British parliamentarians, Bailey said:

It’s a very, very difficult place to be: to forecast 10 per cent inflation and to say there isn’t a lot we can do about it is an extremely difficult place to be.

If this well-paid technocrat thinks its “an extremely difficult place to be” - how hard it must be for entrepreneurs or governments wanting to borrow to invest; and for the millions of debtors and mortgage holders struggling to repay at high, real rates of interest.

The prominent Oxford economist, Professor Simon Wren-Lewis rose to the defence of technocratic institutions, and writes that

what the government has done is delegate to experts a task that requires a high degree of technical skill, in an area where that skill could easily be overridden by short term, party political or personal advantage.

… The Bank of England is tasked with meeting an inflation target set by the Chancellor, over a period that is roughly set by the Chancellor/Treasury. The interest rate required to achieve this target is largely a technical macroeconomic question, and as such does not create any significant democratic deficit. (My emphasis).

He then cuts to the quick and gives the game away:

Forecasts involve an assessment of how society will behave in macroeconomic terms over the next few years. When I was a lot younger I did a good deal of macro forecasting, and at no point can I recall politics coming into it. (Emphasis added)

Politics is about power. The power of one class vs that of another; the power of Wall St and the City vs government; the power of creditors over debtors. Professor Wren-Lewis does not regard power - financial and political power - as a necessary element in forecasting. He is one of a large cohort of orthodox economists that rely on increasingly discredited, largely mathematical economic models to make forecasts. Most fail because they refuse to take power, history and ’society’ into account. In the US, the orthodox economic consensus has just been plain wrong since President Trump was elected. Many assumed the US economy would have slowed down by now, and yet that is not the case. Here in the UK the Office for Budget Responsibility frequently overestimates Britain’s productivity and as Robert Cuffe notes:

Ten of its 15 pre-pandemic forecasts for growth have been within two percentage points of the economy’s eventual growth.

That is slightly better than the margin of error the OBR provides with its forecasts, but two percentage points is still tens of billions of pounds for an economy the size of the UK’s.

The failure of forecasts to correctly predict the impact of the Trump administration’s policies for both the US and UK has caused the banker, Tahir Farooq to argue that economic forecasts are “nothing better than a coin toss” and that “economics remains so often detached from reality.”

While the world wrestles with complex networks, bubbles and crashes, academic economists continue polishing their calculus-based models, like Victorian gentlemen adjusting pocket watches in the digital age. From financial crises to asset bubbles, these elegant mathematical constructs consistently fail to predict in a timely fashion.

That comment allows me to segue into the role of the orthodox economics profession in promoting austerity and the construction and performance of Britain’s most important institutions in upholding austerity; and the impact on the Labour government. What follows is my article in full, without Guardian edits.

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Keir Starmer’s Labour is in a mess: what can he do to turn things around?

You have my sympathy. Your government confronts a national political revolt and a climate crisis while big institutions of the state – the Bank of England (BoE) the Treasury (HMT) and Office for Budget Responsibility (OBR) – work against you and the interests of the British people. Hence the rise of REFORM.

My advice is to restore the government as a transformative, democratic Big Green State, rather than a technocratic, managerial one serving private wealth. To ‘kick-start’ the economy and restore ecological stability use the power of Labour’s majority to rewire & restructure powerful institutions.

The Treasury is wedded to ‘market fundamentalism’and austerity, its staff incapable of understanding government debt will only fall when investment and economic activity recovers from recent crises. You need a national economic & environmental strategy like those that guide China and Singapore. Public, green infrastructure investment to revive private investment in a weakened, risk-averse economy is a task for a Department for National Strategy. HMT’s role should be limited to revenue maximisation and ‘leakage’ prevention, as business strategist Mark E. Thomas argues.

The BoE uses ‘independence’ to protect and bailout private, global financial markets. Quantitative Tightening undermines your government’s fiscal policy. The MPC’s high rates at a time of economic weakness serves the interests of wealth, increases the cost of private and public borrowing while failing to quell inflation.

The Bank lacks tools and legitimacy to tackle inflation. Transfer that role to a new Inflation Control Office to use taxes, price controls and even rationing to lower inflation. Then change the Bank’s mandate, radically: to support the economic policy of the government, not the City.

The OBR reflects George Osborne’s attack on the democratic legitimacy of the state. Today one man – a market-friendly technocrat – determines fiscal policy. Even the Financial Times is alarmed at his power. With a new remit the OBR must become the Office of Fiscal Transparency subordinated to the new Department of National Strategy.

You and elected successors must alone be its mouthpiece.

All this is necessary to restore economic prosperity, ecological stability and democratic legitimacy - and prevent the election of Nigel Farage as the next Prime Minister.