Anthony Barnett (London, OK): There is a very long and interesting post by Andrew Lilico over on Conservative Home which attacks the idea of an independent Bank of England. This is the point where the famous 'pound in your pocket' comes slam bang up against the constitution.
Lilico wants the next Conservative government to reverse this and bring back interest rates decisions under the direct control of the Chancellor of the Exchequer. The Tories are to be congratulated for having this discussion. If they debate and think through their policy on the framework of the UK’s economic government in a principled way like this they will in fact be off to a much better start than Labour was in 1997. It may sound odd for me to say this, as I was one of the few on the left (along with Will Hutton) who supported Bank of England independence at the time. While afterwards the decision was hailed as a political and economic triumph. Lilico has forced me to look back and re-assess. I am not going to try and talk about the economic arguments, however, the issue that most concerns me is the political one: what is the best democratic way of deciding the base rate with respect to trying to influence the rate of inflation?
Lilico’s history is foreshortened. Originally, independence for the Bank was a Tory policy, one developed by Nigel Lawson when he was Chancellor. He forced reluctant officials to draw up a secret plan in 1988 which he presented to Margaret Thatcher as an inflation buster. He describes the whole episode in his memoir The View from No 11 (where he reprints the memo in an appendix). He writes,
“I amazed and horrified my officials by asking them to devise a concrete proposal for an independent but accountable Bank of England…. The purpose of my proposal was to entrench the use of monetary policy to fight inflation and secure price stability. This would be a far more useful constitutional reform than any advocated by Charter 88 and other constitution mongers.”
Lawson describes how Thatcher ruled out any possible diminution of her ability to “pull the levers of power”. But with a pedigree like this it is easy to imagine that both labour and the left opposed the idea and saw it as handing over what should be parliament’s democratic responsibility to the lackeys of global capitalism in the City.
This is not exactly Andrew Lilico’s argument but it is close. He says that supporters of BofE independence are friends of the “benign dictatorship argument”.
“Having an independent central bank removes the ability of government to trade off short-term output rises for long-term inflation. But this is a genuine political choice. I do not favour having higher output today in exchange for inflation tomorrow and the next day, but that is my political philosophy. Other people might prefer to be able to make this trade. Removing democratic control over monetary policy may prevent people from making short-sighted errors. But democracy is all about letting people make their mistakes for themselves…. the failings of democracy compared with rule by experts are well-known, and have been discussed for thousands of years. The fact is that in mature political societies we have decided that it is best if we can elect and reject our rulers, particularly those who have control over our money. Control of monetary policy carried out by central bankers that turn out not to be good at it, or who decide to pursue goals thought undesirable by everyone else, could be extremely damaging. We need to be able to exercise democratic constraint.”
What is wrong with this argument? Answer: the assumption that giving control over interest rates to the Chancellor is democratic. It is a politician’s vanity to think that just because they are elected what they do is, if not the will of the people then for the benefit of the people. There is no need for us to share this misconception. What actually happened when this “lever of power” was in the hands of the Lords of the Treasury was personalised politics. Rate cuts were made for electoral advantage and short-term manipulation, then this was denied. There was no effective examination of the decision in the Commons, announcements were treated to the usual ya-boo cheers and derision. The argument here is similar to the one for fixed-terms parliaments where OK is campaigning alongside Iain Dale. A transparent rule-based structure within which politicians have to work can be more democratic not less.
The positive aspects of the actual Brown announced policy are that the bank has only operational independence, the policy outcome (inflation between 2 and 2.5 %) is decided by the Chancellor, and thus the line of strategy remains under political control. Second, the bank is not given a free hand in the way the European Central bank is, or allowed to keep inflation as low as possible. It is forbidden to conduct a deflationary approach that bankers might indeed prefer. On the contrary the bank is obliged to ensure that there is inflation of at least 2% to ensure growth. The decision is voted on by the independent committee and the minutes of its debate published promptly, so that the process is transparent and the argument is one that can be shaped by an intelligent public. All this seems to me to be hugely more democratic than the tricksterism we got from the old way of doing things – which benefited prerogative power and media sensationalism not democracy.
Indeed, the fact that a select committee has a role in questioning members of the Bank’s means that the Commons’ influence is greater than it was and I’d favour strengthening this further by giving the committee the right to approve or reject proposed appointments (as Lawson also suggested).
So far, then, I am unmoved in my support for the principle of Bank of England Independence and the way it works with respect to setting the base rate (the argument about supervision of the banking system is a different matter). I set out the democratic case defending Labour’s decision at some length in This Time and I quote Brown’s own defence which is worth noting:
“A few weeks ago interest rate decisions were made by the Chancellor when he chose, announced when he and the Governor of the bank of England chose, without any constitutional requirement for information or for explanation… Our reforms from the ad hoc and the personalised to the formal and constitutional… There is now openness and public accountability where once there was secrecy and personalised decision making”
I don’t see how anyone can advocate returning to the old way of doing things.
But Lilico’s argument has made me think again about two things, one immediate and one historical but very significant about New Labour.
The immediate issue he raises is that the Bank has given the finger to government and has decided to set its own goals.
“over the past eighteen months, the Bank of England's Monetary Policy Committee has decided that it did not need to abide by the inflation target set by the Chancellor, and when it has gone outside its target it basically said that that didn't much matter and the Chancellor didn't do anything about it. The MPC has now said, in its latest inflation report, that it would be undesirable for it to try to get inflation to target in 2009. That is all very well, but under operational independence it wasn't supposed to be up to the MPC to decide what was or was not a desirable goal for its policy. Operational independence has largely collapsed. The Bank of England is now, essentially, goal-independent: it sets its own goals as well as decides how to get them.”
This is a very powerful criticism indeed. Why hasn’t the opposition, or indeed any back-benchers, tabled a motion demanding a debate on what has happened? It shows the uselessness of our system and the democratic weakness of parliament. Does Conservative Home have influence? If so, this should be a matter for PMQ’s: who sets our inflation rate targets? Of course, the Bank has the right to give its opinion to the Chancellor, but the government must make it clear that it will decide what policy actually is. If this is indeed surrendered then the arguments against Bank of England independence take on a new seriousness.
Second, Lilico got me thinking about the way in which Labour took the decision in the first place. I don’t recall any in depth Labour debate beforehand (was there a Fabian pamphlet demanding it, was there a counter-response?) setting out the issues in the way Lilico has. I hope it leads to a significant Conservative response which, with all due respect to his sharpness, goes beyond John Redwood.
For the fact is that how it was done was a travesty of democracy. There was a coded pledge in the 1997 Manifesto, but it was so hidden between the lines as to be invisible and no one spotted it and certainly the leadership made sure there was no public argument beforehand. One of the high points of the largely dreadful Aronovitch TV films on Blair was its coverage of what happened then. The cabinet Secretary and head of the civil service Sir Robin Butler suggested that there should be a Cabinet discussion of the proposal before the announcement was made, “after all, we are supposed to have Cabinet government”. Blair ruled this out on the grounds that there might be disagreement! Brown made the announcement not to the Commons but to a press conference. Butler’s conclusion was that he had witnessed “a coup”. Both Cabinet and the Commons had been cast aside. We can now see that it was secretive and personalised decision making of an even higher order!
Can constitutionalising and democratic reforms ever be successfully introduced by such methods?
PS: I forget to link to Tony Curzon Price's analysis of responsibility and recession in oD where he argues, and Conservative Home should like this: " Central banks should not be depoliticised, turned into mere administrators of a rule... because the judgments that they must make - do we give a shock to a failing economy? do we dampen exuberance? - need to be part of the social compact."
