Sometimes Paul Krugman can be very annoying. On a number of occasions I have written a draft of a post, and while in the process of
admiring editing it, have found that PK has just
written something rather better. So I bin my post on why Corbyn’s
resounding victory is partly the product of Labour’s failure to
oppose austerity rhetoric: read this
In any case it may be more useful to look forward to what Labour’s macroeconomic policy might become under Corbyn and the shadow Chancellor John McDonnell. There has been some suggestion, encouraged by what I insist on calling Corbyn’s QE, that Labour are contemplating getting rid of an independent Bank of England. I think in macroeconomic terms this would be a bad idea, and in political terms a terrible idea. It is best to say this sooner rather than later, before commitments are made.
In essence all the Bank of England normally does is decide how to change interest rates to hit a target decided by government. Whether it is an inflation target or some other target(s) is for the government to decide. There are plenty of macroeconomists who would favour a higher inflation target, or targeting a different measure, so there is a great deal of scope for change here. But once that target has been chosen, why are politicians better at trying to hit it than a bunch of technocrats some of whom have spent their lives studying this one task?
It is vital to appreciate how different the UK set up is from the Eurozone. Many years ago I was very suspicious of central bank independence (CBI), because I thought it might lead to just the kind of deflationary bias that we see today in the Eurozone. Partly because of decisions made by Ed Balls and Gordon Brown, the Monetary Policy Committee (MPC) in the UK is quite different. The target is symmetrical, and the MPC has independent members and is very transparent and accountable. So what is there not to like which the government cannot already change?
I fear the situation has become confused because of austerity at the Zero Lower Bound. What CBI prevents either the government or the central bank doing is a money financed fiscal stimulus: a fiscal stimulus paid for by creating money rather than issuing government debt. The central bank can create money, and has done, but cannot force the government to spend more or cut taxes. The government cannot force the central bank to permanently create money to finance these things.
But this is only a problem if you have a government committed to deficit fetishism. It would be ironic indeed that a Labour party now pledged to fight austerity decided it needed to print money because they were reluctant to borrow more. It would be the ultimate triumph of austerity, and also just daft.
It would also be a gift horse to those currently implementing austerity. It would allow them to say that the only alternative to austerity was printing money which would lead to inflation. They have already begun to say it. It is spin that can be fatally undercut as long as CBI is preserved. But if that independence is ended, then you will create an army of mainstream academic economists who will say that high inflation is now more likely.
There will be some of those who advise Corbyn and McDonnell who might be tempted to say what have mainstream economists ever done for us. But if Paul Krugman is right, and I think he is, one of the reasons that Corbyn got elected is that Labour party members could see that the government was pursuing a policy that went against mainstream, as well as some heterodox, economics. Corbyn and McDonnell will have enough enemies in the media and the City as it is. It seems just stupid to create enemies elsewhere by foolishly ending the Bank’s independence.