Saturday, 21 May 2022

Hammers and nails


They say that when the only tool you have is a hammer, every problem looks like a nail. The Bank of England is demonstrating the consequences of that. It’s easy enough for the UK Government to repeat ad infinitum that the BoE has sole responsibility for controlling inflation, but the only tool that they’ve allowed the Bank to have is the very blunt instrument of interest rate rises, a tool which the Bank is using with abandon despite the fact that the problem with which they are dealing bears little more than a passing resemblance to a nail.

The theory behind interest rate rises is simple enough: if the cost of money increases, people will borrow less and spend less, and if less money is chasing goods and services, the price of the latter will stabilise. Like most theories in economics, however, it’s only as valid as the assumptions underpinning it, and in this case, the assumption is that inflation is caused by too much money chasing too small a supply of goods and services, the classic cause of inflation. If that assumption were true, making money more expensive might well work, albeit at a cost. However, in this case, the problem isn’t an excess of money in the UK economy, it is a price shock caused by events – some of them, such as Brexit, caused directly by inept government actions, and others, such as war and the pandemic, completely outside the control of the government, let alone the Bank. The Bank’s governor has himself admitted to feeling “helpless” in this situation, although that hasn’t stopped him wielding the hammer with gusto against the imaginary nail.

In response to an external price shock, interest rate increases don’t stop the poorest needing to buy essentials, they simply pile more financial pressure onto people. Continuing to hit the non-nail with the hammer can only make things worse, potentially leading a government which claims to be promoting growth to preside over a recession instead. In response to the level of price shock that we are experiencing, only government can take action; blaming the Bank, as some Tories have done, is simply abrogating responsibility. And even the government, with all the resources at its command, cannot prevent the sort of price shocks we are seeing; but what it can do (and is refusing to do) is to mitigate the effect on the most vulnerable in our society. If there’s one clear lesson from the pandemic, it is that the government is not, in practice, constrained by a lack of money, a point which they are demonstrating yet again with the huge costs of supporting Ukraine in its defence against the Russian attack. They could equally deploy sufficient resources to help people through the current crisis, but have taken a conscious decision not to do so. They are, instead, fiddling around the edges of the problem, leaving those who can’t cope to their own devices. They’ve probably assumed (and its not an assumption which I’d challenge) that the people bearing the brunt of the crisis aren’t, and never will be, Tory voters. It’s just another demonstration of a complete lack of care for any citizen who isn’t one of them.

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