A Plea for Neutral Money
Cameron and Osborne like to describe themselves as “fiscal conservatives and monetary activists” – as political rhetoric, I find this preferable to the rhetoric of those who long for a return to using fiscal policy to target full employment, but it still grates.
Ex-MPC hawk Andrew Sentance writes in City AM that the Chancellor should “tighten” the Bank’s remit, and I agree completely… though not with Sentance’s choice of nominal anchor.
It is very hard to defend UK monetary policy against accusations of failure from either the hawks or the fiscalists. The actions of the Bank have not been consistent or logical since 2008. Sometimes they call for inflation to come down. Sometimes they find excuses to embrace inflation. Sometimes they call for more to be done demand-side; sometimes they call for supply-side reform. Sometimes they buy gilts; other times corporate bonds. Sometimes they construct complicated, insane, and quasi-fiscal subsidies for the banking sector. They want to “rebalance” the UK economy; they “talk down” the pound. Sometimes they are impotent – sometimes they are all-powerful. They say the Bank offsets fiscal policy, except when they say fiscal policy is a drag on growth. They want liquidation of capital – but not too much. They start QE. They stop QE! Then they start again, and so on, and so on.
It is a mess, it is not predictable, it is not a policy. It looks like a “central planner” gone mad; an arbitrary jumble of actions, maybe some are defensible; most are not. It is almost impossible to hold the Bank to account after the fact. They bought corporate bonds in 2009 – why not in 2011? What informs their views of the demand and supply-side? Does Funding for Lending “work”? Should they have raised rates in 2011… or done more QE?
At every step we’ll get assured how much worse things could be if it were not for FLS, if it were not for just the right amount of QE, or if it were not for the Bank’s precious inflation-fighting credibility. The counterfactual is always disastrous even if the observed data looks more or less like a Depression writ small but oh so long.
The Bank’s failure since 2008 is not for lack of flexibility or discretion. We need a “neutral” monetary policy, a monetary constitution; policy should not rely on measuring the unmeasurable (the elusive “output gap”); it should provide nominal certainty rather than embracing uncertainty. A monetary policy is a policy for money – it should concern itself only with the supply of and demand for base money. Monetary policy should not subsidize banks, nor business, nor the young, nor the old, nor the rich, nor the poor, nor any special interest or favoured sector of the economy. [Update: Duncan Brown notes that I omitted “nor creditors, nor debtors” from this list; stricter inflation targeting as envisaged by Sentance insures creditors against supply-side/productivity shocks.]
This post is a long-winded way to say the following: if the patient is hyperactive, do not prescribe steroids.