Delegation as a reaction to the politicisation of advice

In my last post I used the example of Brexit to show that politicians, even when their ideas are seen as seriously harmful by most experts, will still find policy entrepreneurs to give them enough information to sound knowledgeable when they appear on the media. But this may be an extreme example of a more general phenomenon, which I would describe as the breakdown of the way expertise is utilised by government: a breakdown of what I call the Knowledge Transmission Mechanism.

It is nothing new, of course. The first example I ever had experience of was as an economist at the Treasury when Mrs. Thatcher became Prime Minister. As far as her new Treasury team were concerned, most Treasury civil servants were not ‘one of us’, and they had little time for their advice. When Treasury economists predicted a recession in 1980, they were ignored. (There was a recession.) As the young Treasury economist I was then, the contrast with the ever curious Denis Healey was quite shocking.

Even back then, Conservative ministers tended to seek advice from City economists rather than academic economists, which may be one reason why the record of Conservative Chancellors in running the economy from Thatcher onward is so much worse than the 13 years of Labour government. Part of the role of right wing think tanks is to hide that fact, which they do very successfully. It is why the 364 academic economists in 1981 who attacked Conservative macro policy are generally thought to have been wrong, when in reality they were broadly right. This was perhaps the beginning of the Conservative party’s disdain of experts who interfered with their ideological projects.

The use of partisan think tanks and experts by the political right is now well established in both the US and UK. In contrast the last Labour government was much more open in its use of at least economic advice, but its biggest mistake was in ignoring expert advice on Iraq. There may be some on the left that would like to replicate the way the political right works for Labour under its new leadership, by suggesting for example that conventional economists are inherently hostile to its policies.

But this is not how the Knowledge Transmission Mechanism (KTM) is supposed to work. Good ideas and good evidence do not have to come with a left, right or centre political label attached. When I have advised political parties or governments or economic institutions I have not given them advice which is only appropriate if the recipient wears a particular political colour. A good understanding of how the economy works does not require a particular political allegiance.

I wonder how much the trend towards the delegation of decisions to independent bodies, and suggestions to do more of that, is a reaction to this growing politicisation of expert advice. I was listening to an interesting Resolution Foundation podcast based on a new book from Paul Tucker, which was all about the conditions for successful delegation. One of the participants, Kate Barker, gave an example where she thought proposals for delegation went too far: the LSE’s Growth Commission.

I turned quickly to the Growth Commission’s 2017 report to see what Kate had in mind. I suspect it could be this.

“The ultimate objective is a long term industrial strategy that is isolated from political cycles. An independent body should strive to overcome fragmentation across different levels of government.”

Now there may be a case for delegating the implementation of an industrial body to an independent body, just as the implementation of monetary policy is delegated to the Bank in the UK. Just as Chancellors may alter the timing of interest rate changes for political ends, ministers may also skew the distribution of industrial policy to favour some constituencies over others. To a considerable extent this is what the Growth Commission proposes. But I suspect saying that you want industrial policy “isolated from political cycles” portrays an underlying deep discontent with how the Knowledge Transmission Mechanism has broken down.

This is not a post about the merits or otherwise of delegation (on which Paul Tucker has sensible things to say), but an attempt to describe one reason why experts or civil servants may be increasingly inclined to suggest delegation. Put simply, if politicians base policy on an ideology that requires shutting expertise out, independent bodies that let expertise back in become increasingly attractive.

People's QE and Corbyn’s QE

Politicians can be adept at co-opting attractive sounding terms to their own cause, even when they distort their meaning while doing so. Osborne announced what was in reality a partial but large increase in the minimum wage, but he called it a ‘living wage’. This was especially devious, as calculations of the actual living wage take into account the tax credits that Osborne was at the same time cutting.

Is Labour leadership contender Jeremy Corbyn’s ‘Peoples QE’ an example of the same thing? It is certainly true that the way that some macroeconomists, including myself, have used the term is different from Corbyn’s idea. For us Peoples QE is just another term for helicopter money. Helicopter money was a term first used by that well known radical Milton Friedman. It involves the central bank creating money, and distributing it directly to the people by some means. It is a sure fire way [1] for the central bank to boost demand: what economists sometimes call a money financed fiscal stimulus.

The idea has been recently revived, most prominently in the UK by Adair Turner, because of the failure of conventional monetary policy (changing interest rates) to bring a quick end to the Great Recession, which in turn is because governments were undertaking fiscal austerity (a bond financed fiscal contraction) rather than fiscal stimulus. In contrast central banks in Japan, the US and UK, and now the Eurozone, have been creating money to buy financial assets (mainly government debt), which is called Quantitative Easing (QE). Hence the term People’s QE for helicopter money: instead of the central bank creating money to buy assets, it creates money and gives it to the people.

The genesis of Corbyn’s QE seems rather different. Corbyn adviser Richard Murphy had previously suggested what he called a Green Infrastructure QE, which is that a “new [QE] programme should buy the new debt that will be issued in the form of bonds by the Green Investment Bank to fund sustainable energy, local authorities to pay for new houses, NHS trusts to build new hospitals and education authorities to build schools.” This in turn is related to two ideas: first a near universal view among macroeconomists that public sector investment in infrastructure should be rising not falling when interest rates are low and labour is cheap, and second that a National Investment Bank (NIB) might be useful in helping to encourage private sector investment. (See, for example, the recommendations of the LSE growth commission.)

The main difference between helicopter money and Corbyn’s QE therefore seems to be where the money created by the central bank goes: to individuals in the form of a cheque from the central bank, or to financing investment projects. I think that is wrong, and to see why we need to ask an obvious question: what is this policy innovation designed to achieve. I think it is here that confusion has arisen.

As I noted above, the idea behind helicopter money is to provide a tool for the central bank to use when interest rate changes are no longer possible or effective. With an independent central bank, that means that they, not the government, get to decide when helicopter money happens. In contrast, if your goal is to increase either public or private investment (or both) for a prolonged period, then its timing and amount should be something the government decides. While QE is hopefully going to be something that is unusual and rare, the goal of an investment bank is generally thought to be more long term, and not something that only happens in severe recessions.

For that reason, Corbyn’s QE looks like one of those ideas that is superficially attractive because it seems to kill two birds with one stone, but on reflection turns out to be a bad idea. If we want to keep an independent central bank we do not want the government putting the bank under pressure to do QE because the government wants more investment, and if that does not happen we do not want the central bank deciding whether extra investment happens. Indeed some of those who dislike the idea of helicopter money have already been using Corbyn’s QE to say ‘I told you helicopter money was a slippery slope that would lead to the end of central bank independence’.

However I think it is unfair and unproductive to leave it there. Suppose that a NIB is created, not on the back of QE but using more conventional forms of finance. (If the government wants to encourage it, just directly subsidise that finance with conventional borrowing. Don’t be put off doing so by deficit fetishism.) Suppose we also like the concept of helicopter money - not for now, but for the next time interest rates hit their lower bound and the central bank wants more stimulus. In those circumstances, it might well make sense for helicopter money to be used not only to send cheques to individuals, but also to bring forward investment financed by the NIB, or public sector investment financed directly by the state. If those investment projects could get off the ground quickly, and crucially would not have happened for some time otherwise, then what I have elsewhere described as ‘democratic helicopter money’ would make sense. [2] This is because investment that also boosts the supply side is likely to be a far more effective form of stimulus than cheques posted to individuals.

So one day, this form of Corbyn’s QE could happen. But we need to get the idea of helicopter money, and the need for public investment and a National Investment Bank, accepted in their own right first. Putting the two ideas together right now is misconceived, and is in danger of discrediting two potentially good ideas.

[1] Unless you believe in complete Ricardian Equivalence

[2] When I put forward the idea of ‘democratic helicopter money’ here to Tim Harford, Tim responded that he thought it was probably the most radical and politically infeasible idea of those he had canvassed. If Corbyn wins, I will have pleasure in reminding him of that!