King anointed to run economy

In: Uncategorized

20 Jun 2011

This is my latest comment for Fund Strategy.

The debate about whether British politicians need a Plan B for the economy is nonsensical: they do not even have a Plan A. Offloading as much responsibility as possible on to the Bank of England is the closest any party gets to a coherent idea.

None of Britain’s main political parties has a plan in the sense of a vision of the economy they would like to see created. Their greatest ambition is to stave off economic collapse.

The noisy debates between politicians are essentially about the exact timing and scale of cuts. Both sides row over small matters of detail as if they were points of principle.

Occasionally they refer to the desirability of growth but they have no idea how to achieve it. Every step they take is hobbled by their acute anxiety over the potential for instability that economic expansion could bring.

Rather than taking decisions itself, the political elite is handing over significant powers to the Bank of England. The trend was already clear back in 1997 when the first New Labour government gave the Bank independence over monetary policy.

The Liberal Democrat-Conservative coalition has taken this further by establishing a body within the Bank, the Financial Policy Committee (FPC), responsible for “macro-prudential regulation” – a broad concept which refers to creating the conditions for financial stability. Even though the legislation is not in place, an interim version of the FPC had its first meeting last week.

Handing over such power to technocrats is undesirable for at least two related reasons. First, it is profoundly undemocratic. It means that unelected bureaucrats are making decisions that should be in the realm of democratic politicians.

Ironically, Mervyn King, the governor of the Bank of England, seems more aware of this possibility than the politicians themselves. In his Mansion House speech last week he argued that appearing before the Commons Treasury Committee would keep the Bank accountable to parliament and the public.

But this betrays an extremely limited conception of accountability. Public figures must be capable of being voted out by the electorate if they are to be truly accountable.

A second and related problem is the inherently ­narrow vision of technocrats. They may be good at issuing and following rules but they are insulated from the popular desire for a more widely prosperous and free society.