Labour demands economic recession

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In the light of the latest figures for inflation and the consequent rise in interest rates, the Bank of England has come under criticism from one of the contenders for the Tory leadership, who is making vague threats to ‘review the Bank’s mandate’. This is being interpreted as a threat to the so-called ‘independence’ of the BoE which has allegedly operated free of government interference since being granted said ‘independence’ by Gordon Brown in 1997. But, as anyone familiar with devolution will be only too well aware, ‘independence’ to operate in accordance with a mandate laid down by government – a mandate which can be changed at any time – isn’t really ‘independence’ at all. And given that the Bank is wholly owned by the UK Government and that the Governor, Deputy Governors, and External Members of the Monetary Policy Committee are all appointed either by the UK government or else by the monarch on the recommendation of the government, that ‘independence’ is illusory.

Insofar as the one tool (raising or lowering interest rates) that they have been given in order to achieve the stated objective of managing inflation is the right tool for the job at all, it’s one which is predicated on an assumption that inflation is always the result of an internal wage-price spiral which can be broken by reducing the living standards of the comparatively less well-off. How that same tool is supposed to bear down on inflation caused by a sequence of international shocks, whether self-inflicted such as Brexit, or whether entirely outside the control of any UK Government such as the war in Ukraine or a pandemic involving a novel pathogen, is a question which the government seems reluctant to ask, let alone answer, and the Bank itself can only wield its hammer with increasing frequency and severity, whether it has any effect or not.

The mandate given to the Bank by the government – to use interest rates to maintain inflation at or around 2% per annum – is, and always has been, entirely arbitrary. The idea that 2% is the ‘right’ amount of inflation is little more than the considered opinion of Gordon Brown in 1997, and the idea that it’s the ‘right’ number for all times and in all circumstances is a very peculiar one, to say the least. But the issue goes further than that – whether the objective of monetary policy should be entirely based on controlling inflation is merely another considered opinion; there are alternative views. The government could, for example, give the Bank a mandate which also seeks to ensure full employment instead of merely using its blunt hammer to attempt to manage inflation. In short, there are good reasons for considering, from time to time, whether the mandate under which the Bank operates is the best one, given the circumstances at the time, rather than assuming that what might have looked ‘right’ in 1997 is always going to be so.

In that context, it was pretty depressing to read that Labour’s Shadow Chancellor is one of those criticising the idea that the Bank’s mandate could or should be reviewed at present, arguing that it's the wrong time because the UK is on the brink of a recession. Given that that recession is at least partly a result of the Bank blindly following a mandate which gives it little choice but to cause said recession, this is precisely the time to be questioning whether it’s been given the most appropriate mandate. Instead of which, the unquestioning support for financial orthodoxy from Her Majesty's Loyal Opposition amounts to a demand from Labour that the Bank of England must be allowed to cause a recession without interference. Vote Labour for an economic recession doesn’t strike me as being the most appealing message to be giving out.