Roll back the Bank of England

All the talk about how the Bank of England should best pursue forward guidance has missed the bigger picture. The ever-greater powers assumed by the Bank in recent years represent an abnegation of democracy. This trend is objectionable in principle and damaging in practice.

The rot had already started to become apparent back in 1997 when the newly elected Labour government announced that the Bank would be made operationally independent. In practice this meant that the Bank’s Monetary Policy Committee would set interest rates albeit unde framework drawn up by politicians.

Back then the move was widely welcomed as insulating the Bank from political pressures. But that was precisely the problem with it. The link between the electorate and the pursuit of monetary policy had been severed. Relatively few observers probably even remember the days when the Treasury, under the direct control of an elected minister, set rates.

However, in recent years the Bank has taken on yet more powers. With the advent of the economic crisis the Bank took on a new range of monetary tools including quantitative easing, funding for lending and, most recently, forward guidance. It has also taken on responsibility for financial stability as well as monetary policy. Vast swathes of economic policy that were once the preserve of politicians are now under the control of technocrats.

Ironically the growing remit of the Bank is not the result of any conspiracy on its part. On the contrary, Bank officials have sometimes seemed reluctant to enter new areas. It is rather the result of the abdication of responsibility by politicians. Elected leaders no longer feel confident in their ability to manage important areas of economic policy. As a result they have handed ever more powers to the Bank.

It should be clear why this trend is undesirable in principle. In a democracy the electorate should have as much control as possible over policy. The role of technocrats, such as officials at the Bank, should simply be to give expert advice.

The fact that the growing power of the Bank has encountered little resistance points to a disturbing development. Even elected politicians tend to take a dim view of the electorate. They assume that the public will always take a narrow and short-termist view on key matters.

But the growing power of the Bank is undesirable in practice as well as principle. That is because truly democratic institutions should provide a transmission mechanism through which politicians glean knowledge of what is happening in the wider world.

Elected politicians can also be held to account by the public. If they are perceived to have made serious mistakes they can be voted out at the next election. That keeps politicians on their toes and ensures the electorate has a stake in participating in the political process.

Better that the most venal politician makes economic policy than the smartest technocrat.

This comment was first published today on Fundweb.