Blip, blip, beeeeeeep

January 20, 2010

David Blanchflower, right again on the Bank of England’s ‘independence’:

The claim was that [central bank independence] would help bring macroeconomic stability and it seemed to have worked for a while, because inflation remained low for most of the next decade. But that was driven by cheap imports from China. When Tony Blair was asked recently in an interview at Columbia University what had driven the Great Moderation [ie the decade-long boom] he replied, “Luck”, and that seems about right.

It turns out that countries without an inflation target did just as well as those with one. And it didn’t protect us from the greatest economic shock of our lifetimes.

It’s not been clear, over the last year or so, that the Bank has exercised any meaningful ‘independence’ in any case. The Bank, and the Monetary Policy Committee, certainly gave the impression of being brought under the Treasury’s thumb. Not in itself a bad thing: the monomaniacal inflation-hunters on the MPC needed a sharp kick up the backside. It’s pity it had to be the nice people at HMT to do it; well, them and a recession so big that even the most myopic of latter-day monetarists managed to spot something was up.

The merest whiff of a glimmer of a faint hope of a recovery has, however, given at least one Committee member the excuse he needed to get straight back onto the inflation mainline, threatening interest rate hikes ahead of any meaningful improvement in the state of the economy. It’s not just as if the Great Depression never happened. It’s as if the last two years never happened.

The blip in prices upwards this month is likely to be nothing more than that: a blip, caused particularly by the reversal of the VAT cut. The biggest single risk to the UK economy remains that of deflation, with falling prices dragging down economic activity and pushing up the real burden of debts. But at least some of the MPC remain oblivious. Markets panic about inflation. And the MPC follows the markets.

Time to clip their wings. Close down the MPC, and put the Bank of England under democratic control; and, whilst you’re at it, why not do the same for the other nationalised banks?



  1. steady on. Next you’ll be demanding that HMT be put under democratic control.

  2. I don’t buy that it was just cheap Chinese imports. One of the key functions of central banks was to make money dearer and manufacture unemployment when the economy was at the top of a cycle, so that the workforce wouldn’t get ideas and start asking for more money, and that has been a pretty effective tool (although: during a crash it’s hard to even remember what that felt like). Alister Barry’s doco on the New Right and unemployment in New Zealand, In a Land of Plenty, illustrates the point very well.

  3. (And I meant independent central banks as per the current model, not central banks per se obviously.)

  4. That’s kind of Blanchflower’s point: independent central banks have a massive bias towards chasing inflation above all else (that’s pretty much the point of them). The evidence we now have (cited in passing by Blanchflower) finds no discernible difference in inflation between economies with independent central banks, and those without, meaning it is far to say, as a result, that the real reasons inflation was low are to do with factors in the real economy, relating to globalisation – like the falling price of manufactured goods.

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