Labour’s Bank of England plan is based on ignorance

I am about 99 per cent less politically engaged now than was I was even three years ago, mostly because I think all parties lack true radicalism right now, so I find the endless rehashing of each party’s greatest hits albums tedious in the extreme.

But this week Labour did pop up with an idea that tempted my focus away from the books I’ve been meaning to read, and the friends I’ve been meaning to meet, when they proposed shifting the Bank of England to Birmingham and changing the central bank’s mandate to target productivity.

The first idea is based on the somewhat silly idea that moving the geographical location of the building will somehow make the bank more responsive to the concerns of the real economy.
The central bank has two fucntions, the first is macro prudential regulation, or as politicians call it, financial regulation.

To do this effectively the bank must be in touch with those in financial services, they must be able to hear the gin of the rumours that run through the square mile every day as well as the tonic of official reports and data, as almost all of the financial services sector is located in London, the regulatory function must also be.

If the Labour idea is based on the notion that by being located in Birmingham will somehow make policy making more effective because those setting interest rates will have exposure to the “real economy” and not just the London bubble, then it is an idea based on sound principal, but the central bank already do this.

The economy of London is indeed increasingly distinct from that of the rest of the UK, with the manufacturers and distribution centres of the midlands thriving respectively from the weakness of sterling and the rise of the digital economy. At the same time the London house price bubble has burst and financial services are in retreat. So it is right that this crude rebalancing of the economy is recognised, but moving to Birmigham is less useful in this regard than Andy Haldane, the central bank’s Yorkshire born and state school educated chief economist touring the country, as he has been doing, to assess the true health of the economy, with such a figure and attitude, it doesnt matter where the building is located.

The idea of setting the central bank a productivity target of 3 per cent is astoundingly original, and a perfect middle class gimmick, as it allows folk with little interest in these matters but a desire to sound informed to talk about it, that is very Corbyn Labour.

Productivity is very easy for a government to influence, but very difficult to measure. The productivity of digital economy companies is hard to measure, for example, so until we get evidence that Labour have cured one of the greatest dillemmas of modern economics and shown us how to accurately measure productivity in the modern age, we must put Labours target down as sound bite rather than sound policy.

* David Thorpe was the Liberal Democrat Prospective Parliamentary Candidate for East Ham in the 2015 General Election

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  • Peter Martin 25th Jun '18 - 8:49am

    @ David Thorpe,

    You’re right to some extent. Firstly it doesn’t make much difference where the central bank is located. Except that it should be government policy to move as much ‘government’ as possible outside the capital. If the DVLC can be in Swansea, doing a good job, then the BoE can be in Birmingham or Manchester or wherever.

    Secondly you are right to say “The idea of setting the central bank a productivity target of 3 per cent is astoundingly original, and a perfect middle class gimmick”. It is original and it is a gimmick. You should also have said it is a silly idea that just won’t work! It shows a total lack of understanding of the role of the central bank.

    Just how is the BoE supposed to regulate productivity? All it can do is raise or lower interest rates and adjust regulations on lending levels. It can’t realistically lower interest rates or deregulate any further and raising them will just send the economy into recession. The idea that the BoE can regulate the economy, in any useful way at all, has reached the end of its shelf life. The BoE is owned by the Government and effectively takes its orders from the Government. It is just as much as part of government as the Treasury. But it shouldn’t be responsible for the overall economy anymore than should the Ministry of Defence.

    If Government wants higher productivity then it’s down to it to manage the economy better – rather than trying to pass the buck to the BoE. We can say the same for inflation targets and levels of unemployment etc. The Bank can’t do much to improve the economy now that interest rates are at what some economists call the “zero bound”. It should never have been tasked with controlling these in the first place.

    What’s the point of having a government that doesn’t want to govern?

  • Richard Underhill 25th Jun '18 - 10:54am

    ITV have a program on Sundays presented by Robert Peston, who is numerate and willing to be controversial if there are news values available.
    “The highest award that a television programme can bestow is Geek of the week” which he awarded to Mark Carney, who had been headhunted from Canada at a higher salary then his predecessor. The Chancellor’s decision was supported in the Commons by the then Labour spokesman Ed Balls.
    Peston-on-Sunday has a large screen for graph’s opinion polls and tweets. Carney showed that he knows how it works by giving an impromptu lecture about productivity, which he had been studying in great detail.
    Firstly the display is a touch-screen, so he proceeded to alter the line of the graph, to set an objective of returning from the productivity trend that preceded the financial crash of 2008-2009, which had been upwards.
    Secondly he wiped the floor with Robert Peston, who hurriedly moved onto another subject.
    He did not, at that time, comment on how to measure productivity objectives in the NHS in England nor the unfunded financial commitment the current PM has made.

  • Mark Carney is an impressive economist and he comes from a country (Canada) where the central bank buys government bonds directly on the primary issue market – a practice prohibited in the USA and EU. I would be interested to hear what he has to say on the issue of productivity.

  • Peter Martin 25th Jun '18 - 1:13pm

    @ David Raw,

    What’s odd about it? I’m not a party hack who toes the line on anything and everything.

    A bad policy is bad policy. Lib Dem, Labour and Tory alike. Period .

  • William Fowler 25th Jun '18 - 2:36pm

    When Labour say they want the BOE to improve productivity surely it is in the context of the State owning the means of production and therefore makes more sense than it might…

  • Innocent Bystander 25th Jun '18 - 4:00pm

    How Carney or any other economist can make any suggestion to improve productivity is beyond me. The problems of productivity lie in the real world far from their cosy offices and studies. Britain is actually on a path of worsening productivity.
    A way to improve it, mind, would be to round up all ecoomists, including Carney, and put them to work assembling cars and picking fruit with the added advantage that the rest of us would be spared their endless lectures.

  • Peter Martin 25th Jun '18 - 4:22pm

    As Richard Underhill points out productivity improved consistently up until the 2008 GFC. Then the economy seemed to be ticking along nicely both here and in the EU with a regular rise in real wages. Net immigration levels and unemployment levels were relatively low.

    So what can we deduce from this? How about that productivity will only improve if wages in the economy are relatively high and unemployment and immigration levels are relatively low. In other words there has to be a labour shortage – which there isn’t at the moment. How about it isn’t that an increase in productivity which drives an increase in real incomes, but the other way around?

    There is now less incentive to install equipment to mechanise production and more incentive to offer low productivity jobs at low wages.

    If you Google the words “productivity” and “puzzle” it is easy to find articles from seemingly well qualified people who are scratching their heads on this one. The only puzzle is why they can’t figure it out for themselves.

  • Peter Martin 25th Jun '18 - 4:30pm

    @ David Raw,

    OK sorry! I think I may have misunderstood what you were driving at the first time!

  • John Littler 25th Jun '18 - 10:17pm

    I was expecting to see QE for the people mentioned. So instead of giving what is electronically created money to the banks to lend as they see fit ( or not) , you just let the Chancellor allocate it to spend.
    Sooner or later that is likely to increase inflation and pressure on interest rates, as well as lower the UK’S own credit rating, already reduced to single “A” from AAA.

  • Peter Martin 26th Jun '18 - 7:21am

    @ John Littler,

    You might like to ask yourself where ££ come from in the first instance before anyone has them in their possession and can use them to pay their taxes. It is , as you say, just created electronically by the central bank and Govts then spend them into the economy. The commercial banks get in on the act later but you can’t use commercial bank money to pay your taxes!

    You are correct to say that it could have inflationary consequences. If Government overdoes the spending and underdoes the taxation, it will. But you aren’t correct about interest rates. The Govt/BoE can set these at any level they please. QE has the effect of lowering interest rates as we saw when the QE program was at its height, and as we see in the eurozone just now. It’s a way of ensuring that Greece and others don’t have to pay sky high interest rates on their government bonds. The ECB kindly buys them up. Providing they toe the EU line of course! And the ECB can never run out of euros.

    The idea of a credit rating ( AAA, AA+ or whatever) for a currency issuing country like the UK is a nonsense. If we buy Premium bonds, for example, there is never going to be any possibility that the Government can’t redeem them or they can’t give us our prize money. True, there is an inflation risk but that’s nothing new and we’ve had both higher inflation and higher credit ratings in the past.

    The so-called ratings can’t be arrived at in any other way than by some very out of touch people either liking what the Govt is doing and marking us up, or disliking and marking us down!

    It’s best just to ignore them.

  • Ignore the credit ratings?

    Try saying that to the CFOs in local government who got caught out with balance reserves in the Icelandic meltdown ten years ago.

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