This is a follow up to my last post on Corbyn and central bank
independence (CBI). No apologies for returning to this topic: not
often do you get to talk about policies that are in the process of
being formulated. One of the influences that is said to be important
for John McDonnell (the new shadow Chancellor) and his advisors is
Modern
Monetary
Theory
(MMT).
A comment I sometimes get on my posts is that my arguments are
similar to those put forward by followers of MMT. I have not read
much MMT literature, but in what I have read I have normally not
found anything I take great exception to. On some issues, like the
way monetary policy continues to be presented
in textbooks, they definitely have good reason to complain about the
mainstream. However their account of the way monetary and fiscal
policy work seems quite a close match to what many mainstream
economists think, which I guess is why my arguments can be similar to
theirs.
One area of apparent difference, however, is CBI. You will sometimes
hear
MMT people talk about CBI being a ‘sham’, whereas mainstream
macro attaches great importance to CBI. So which is right? Part of
the problem here is that CBI in the UK (where the government decides
the goal the Bank has to achieve) is rather different from that in
the US (where the Fed has much more discretion over the choice of
targets) and the Eurozone (where the ECB is largely unaccountable and
has huge power). I’m just going to talk about the UK set up. (For a
MMT perspective on the US, see here.)
CBI in the UK, established by Gordon Brown and Ed Balls in 1997, is
no sham. The Monetary Policy Committee (MPC) decides when and by how
much to change interest rates, and government has no influence on the
MPC. How do I know this? From observation and from a huge number of
conversations with MPC members. Since 2009 the MPC has decided when
and by how much to do QE. Any Treasury authorisation to do QE
was a formalisation that essentially followed Bank wishes, but it
never specified when and how much QE should happen. So a fair
description of the UK set up is that the government defines the goals
and instruments of policy, and the MPC decides how to use those
instruments to best meet those goals.
I would agree with the comment that this set up leaves the government
taking big strategic decisions, like what the target should be. But
CBI as defined in the UK still has two major advantages over the
pre-1997 alternative
-
party political motives for changing interest rates are ruled out. I know such motives influenced at least the timing of rate changes before 1997. (How do I know - same answer as before.)
-
it forces governments to be explicit about their goals, and the relative priorities among these. I personally believe this has an important role in conditioning (but not determining) expectations, which is very useful. (Yes you can call me a New Keynesian for this reason.)
You could add time inconsistency and credibility issues in there as
well if you like. (Giving this to secondary importance perhaps makes
me less of a New Keynesian.)
Are there any negatives to set against this? One argument you often
hear is that CBI is anti-democratic, but I really think this is just
nonsense in the UK context. Government delegates technical decisions
all the time, and as long as there is strong accountability (which in
the UK there is), the right people are on the MPC and they are truly
independent (from government or the financial sector) this works
well. When governments only face elections every 5 years and
elections are won or lost over a whole range of issues, quite why a
Chancellor deciding when to change rates following secret advice is
more democratic is unclear. It also improves democracy because, as Chris points out, the Chancellor is not held to account for the technical mistakes of his advisors.
A more important argument against CBI is that it makes money financed
fiscal expansion much more difficult. A government that is obsessed
by the size of its deficit might not undertake a bond financed fiscal
expansion when a fiscal expansion is needed. It might have undertaken
a money financed fiscal expansion, but CBI prevents it doing this
because the central bank controls money creation. However this
problem can be easily avoided by (a) taking a more sensible view of
government deficits and debt, as MMT would also advocate, or (b)
allowing helicopter money.
It is (a) that makes the debate over Corbyn’s QE particularly
ironic. A National Investment Bank can be set up perfectly well based
on borrowing from the market, and you can ensure it gets the funds it
needs by a government guarantee. The only reason you would avoid trying
to do that is because the NIB debt would count as part of the
government’s deficit, and you were worried about the size of the
deficit. The last people who should be worried in this way are
followers of MMT.
Scott Fullwiler has an elaborate
discussion
of why Corbyn’s QE does not interfere with CBI, but concludes: “As
such, government guaranteed debt of the NIB would be effectively the
same thing as plain vanilla deficits, which as shown above is not
different in a macroeconomically significant way from Overt Monetary
Financing of Government via People's QE.” Which begs the question,
why not go with plain vanilla deficits to fund the NIB. If it is
because you are worried about the political costs of higher deficits,
that will be as nothing compared to the political costs of
instructing the Bank to finance a NIB.
So
where does this apparent antagonism for CBI come from? Perhaps it
comes from a tendency of some from the mainstream to make too much of
CBI. To imply that the more independent a central bank is the better,
regardless of who determines goals, whether there is accountability
and who makes the decisions. Proof that independence is not all that
matters is provided by the ECB. But we should not let the bad drive
out the good. If Labour abandons the innovations made by Brown and
Balls, I think it will be a classic example of the triumph of
ideology over both good economics and self interest.
