Rishi Sunak’s ‘summer statement’ perhaps said more about the chancellor’s own leadership ambitions – personalised branding, gimmicky handouts – than the Conservatives’ long-term plans for the economy.
If Number 10’s preference for big interventions, ‘levelling up’ and close attention to the so-called ‘red wall’ seats of the north and midlands is currently winning out, there is a minority tendency inside the Conservative party that is pushing for spending cuts, with former chancellor Sajid Javid as a standard-bearer. But there are three sides to this argument in and around Britain’s governing institutions. And the third sits on Threadneedle Street, where the Bank of England appears to be making up its own mind about where we should be going.
Andrew Bailey, the rather hands-off former chief executive of the Financial Conduct Authority who became the governor of the Bank of England in March, had been Javid’s preferred choice for the role against Andrew Haldane, the Bank’s more adventurous chief economist who was reportedly being pushed for the job by Dominic Cummings.
Javid is co-host of Sky News’s The World Tomorrow podcast in which Bailey last month staged an extraordinary intervention, telling economics editor Ed Conway that had the Bank not moved quickly to support the government earlier this year – expanding quantitative easing (QE) and offering to issue money to pay for spending – then the government would have been “unable to fund itself”, or – as it was reported – effectively bankrupt. Cue front page headlines to that effect.
This was nonsense, as financial commentator Frances Coppolla has argued: if there were difficulties in raising money of any sort for the government, they were present in the short term because money markets themselves were dysfunctional – not because the government had serious long-term difficulties, or was perceived to have them. The British government, which ultimately can issue its own currency, cannot in any case become insolvent, but, short of that, there was no sign of any significant or persistent difficulties in raising its funding at the time of the Bank’s interventions in early April. This is, as Coppolla points out, what Bailey actually says in the interview; but what Bailey said was spun rather differently, in a way that certainly appears calculated to undermine those arguing for significant intervention in the future.
Recall at this point the peculiar dance the Bank of England did with the government over the last decade. Every time former chancellor George Osborne took another macroeconomic decision to squeeze demand out of the economy, the Bank was there to compensate for it. If the Treasury, in all its wisdom, decided to slash away at public spending just as the economy was recovering from the near-terminal shock of the 2008-9 crisis, the Bank was always there to keep interest rates as low as possible, and to keep the QE money printer rattling away. Osborne could pursue his vindictive austerity policy with the obvious macroeconomic consequences somewhat dampened: for every pound he removed from the economy with cuts, the Bank was there trying to put at least a part of a pound back in. By buying government bonds, the Bank put new money into the hands of financial institutions who, in turn, were able to carry on buying assets like property, driving prices ever higher.
This had some impact on growth, but, as we have seen, the result was to bend economic activity in Britain even more tightly around the demands of the rentier class. There was little restoration of what we might think of as productive investment, and the functions of the state itself became hollowed out, as the pandemic has ably demonstrated. The dance between the Treasury’s cuts and the Bank’s loose money was one of the contributors to the economic twilight zone we’ve been wandering around in for the last decade. Every major developed country since the crash has gone through some version of this, indicating a more general problem in capitalism, with low reported productivity, weak wage growth, and low investment. Britain, however, has had the worst instance of it amongst major developed economies.
Throughout all this, the Bank of England’s former governor, Mark Carney, remained tight-lipped on government policy – which is precisely what those running central banks are expected to do, under the normal rules of the game. Almost the primary purpose of a central bank governor is to say as little as they can get away with, and in doing so avoid causing any market panic with an ill-considered quip or thoughtless aside. Some previous governors were reported to merely twitch their eyebrows to communicate their intention; others adopted a gnomic style, like interwar governor Montagu Norman – gnomic inscrutability perhaps being advisable if you are, for instance, organising the transfer of Czechoslovak gold, held by the Bank of England, into Nazi hands. Carney, slightly more talkative as befits our social media age, had the only-grown-up-in-the-room pose down to a fine art, but still spent a great deal of his time gesticulating at what might happen (so-called ‘forward guidance’), rather than what was happening or had happened.
So the intervention by Andrew Bailey, and the circumstances under which it was made – sitting down, for reasons unknown, to chat with former chancellor and would-be prince of the Tory free-marketeers, Sajid Javid – is somewhat unusual: it’s weird for a Bank of England governor to comment on recent events in quite this manner; it’s weird for him to do so in a clearly political setting – Javid’s presence assured that it was political; and it’s weird to make such an unguarded claim whilst doing so.
The most likely consequence would seem to be the undermining of future monetary interventions by the Bank, at least those at scale and intended to boost economic activity, since every intervention could now be read as indicating (incorrectly) that the government was about to go ‘bust’, or at the very least that difficulties were rather more serious than was being admitted to. The result, in other words, would be to make future monetary policy loosening harder – and tightening rather easier.
This is speculation. But the Bank of International Settlement’s annual report this year perhaps joins a few of the dots. BIS is often described as ‘the central bankers’ central bank’: it was established by a group of central banks in 1930 to try to help coordinate their actions and its research department has, at least since the 2008-9 crisis, tended to say the things that national central bankers often can’t.
Their 2020 report has an extended commentary on the pandemic, noting – as do many economists – that the current risks to the economy are not from inflation, but rather deflation (falling prices) and potentially a major debt crisis. But looking further ahead, they forecast something quite different, which is worth quoting in full:
“But as we peer further into the future, a quite different picture could emerge. In this case, we would be speaking not of inflation evolving within the current policy regime, but of a more fundamental change. Here the economic landscape would, in some respects, look like the one that materialised immediately after the second world war. This scenario could come into being if a lengthy pandemic were to leave a much larger imprint on the economy and the political sphere. In this world, public sector debt would be much higher and the public sector’s grip on the economy much greater, while globalisation would be forced into a major retreat. As a result, labour and firms would gain much more pricing power. And governments could be tempted to keep financing costs artificially low, allowing the inflation tax to reduce the real value of their debt, possibly supported by forms of financial repression. At that point, it would be critical that central banks should be able to operate independently to pursue their mandate in order to resist any possible pressures not to increase interest rates.”
This is close to the same point I began making in March: a plausible side-effect of a world in which the pandemic has imposed new costs and risks is a shift in the balance of power back towards labour, whilst governments expand their role in the economy. What BIS is arguing here is that, if this materialises – or even ahead of it – central banks should be prepared to reassert their independence against both governments and workers, driving up interest rates to induce unemployment and suppress wage demands, in the hope of squashing inflation. This is a programme, in effect, to reassert market control of the economy, with central banks leading the way.
Which brings us back to Andrew Bailey’s second intervention with a Tory MP audience – his (again, unusual) appearance before the Conservatives’ 1922 Committee of backbench MPs. In a closed-door session, reports afterwards have Bailey warning of a ‘prolonged recession’ occurring if we fail to adopt a ‘three-point plan’: get more people on public transport, remove remaining restrictions on social distancing ‘as quickly as possible’, and get people back into work.
This is, it should be clear, an economic programme far closer to the backbench Tory right and the free-market ultras than it is to the medical advice or, for that matter, the balance of opinion amongst economists. And yet here is the governor of the Bank of England setting up a meeting – reportedly the first such meeting in decades – to tell backbench Conservative MPs this is where we should be heading.
Whatever the intention, the effect of both these interventions, a month or so apart, is to begin boxing-in future government interventions into the economy. The Sky News interview undermines the credibility of future Bank of England monetary interventions, should they be needed, while the intervention with the Tory backbenchers gives cover to those arguing for the ‘take it on the chin’ approach. And both, rather subtly, start to put the Bank in a place where it would no longer be following the government, but leading it.
James Meadway is an economist and Novara Media columnist.