Monday, 9 February 2015

The Monetary Policy Committee

The Chancellor's announcement of the extension of pensioner bonds should remind us that the UK's Monetary Policy Committee is now a triumvirate of George Osborne, David Cameron and Lynton Crosby. The meetings chaired by Mark Carney at Threadneedle Street are a masquerade.

One of the key neoliberal reforms of New Labour was granting the Bank of England operational independence in 1997, which meant the ability to set interest rates. But this hasn't removed the pressure on politicians to ensure adequate returns for savers. Instead, it has led to a displacement whereby government seeks to pull other policy levers to produce the same effect. Given that many of these levers target specific electoral blocs, rather than the economy as a whole, there is an obvious risk of bad policy due to preferential treatment. In this sense, Osborne's commitment on pensioner bonds is consistent with his reform of pension and annuity rules and the continuing constraint on housebuilding.

Unconventional monetary policies - such as QE and negative deposit rates - give the impression that central bankers have been actively managing the economy, but the macroeconomic impact has been slight because these measures don't address the shortfall in aggregate demand. Dramatic monetary interventions announced by central bankers serve as a distraction from the continuation of fiscal policies that favour the rich and penalise public investment. Though most people recognise that what the global economy needs is higher wages in the West, lower profits (to stimulate productivity growth), and increased infrastructure investment (outside China), governments remain committed to austerity and the preservation of existing wealth. QE is better than sitting on your hands, but not much.

Ageing populations mean that more and more people expect to live off the income of savings, in the form of pensions, equities or property assets. But long-term interest rates have been trending down from 6% in the early 80s to near-zero now. This, together with the growing surplus of capital over the same period, has inflated bubbles in property and commodities as savers have sought alternatives to declining deposit rates. The problem is that the property and commodity markets are now either flat or out of the reach of modest savers, while deposit rates look likely to remain near zero for the foreseeable future. The extension of pensioner bonds is not merely a pre-election giveaway, it's an admission that adequate returns for savers can only be achieved by selective government intervention. It is this intervention, rather than concerns over increased public debt or vote-buying, that really bothers the free-market right.

The central fallacy of public debate in the UK is that the national economy is equivalent to a self-reliant household. This is obviously absurd on many levels - if we all followed the maxim "neither a borrower nor a lender be", the economy would collapse - but the persistence of the metaphor in government speeches is not due to a lack of imagination but rather its ideological value in emphasising the ideal of wealth preservation. The salience of inheritance and the "mansion tax" serve the same purpose. But the paradox is that the majority of people to whom this moral fable appeals do not own any real wealth, let alone a mansion. What most of them are concerned about are low returns on modest savings and pensions, hence the attraction of pensioner bonds. Logically, modest savers should be in favour of high public debt - i.e. a low-risk buyer of their loanable funds, such as a government that can print its own money - which again does much to explain the testiness of the right on this issue.

The fact that public debt is high but interest rates are low suggests that the former is not having a negative impact on the economy, so we should not make debt reduction a priority, regardless of the "fix the roof when the sun is shining" nonsense. If low interest rates are fundamentally due to the combined effects of a worldwide savings glut and a lack of demand for capital, then it isn't going to rain any time soon.  The wealthy are not bothered by low rates for savers or low aggregate investment as they are focused on arbitrage between different asset classes - i.e. getting an above-average return due to market privilege, which can be further amplified through tax avoidance. What they don't want is confiscatory taxation, hence the antipathy to public spending and the insistence on austerity. Though it may upset the purists at the IEA, the pensioner bond is a small price to pay if it buys enough votes to maintain the stranglehold of the wealthy on the monetary policy committee.


  1. You have to give Osborne some credit. He is a political professional. I can't remember a Labour election give away to a key consitituency that matches pensioner bonds.

    A noisey presense on the web are the proponents of MMT (Modern Monetary Theory) who (I think) would deny that the BofE is in any way independent. One of the problems for the left from an economic standpoint is the wide array of heterodox approaches which are arrayed against a relatively unitied neo liberal front, an old story perhaps.

    One thing I used to give the BofE credit for was it's network of regional offices and agents. It seemed if any institution could get a handle on the UK economy it would be the BofE. The comments of Tony Yates showed me that I was sadly completely mistaken.

    People often compare economics with the weather. Weather forecasts have improved with technology. If enough money were spent on things like weather radar I would expect a smart phone app to send me a message when in the garden "90% chance of rain in 10 minutes". The collection of more economic statistics together with better models, particularly stock flow consistent models rather than DSGE, might help get a better understanding of the UK economy, or at least key parts of it. A real time dashboard display showing 10 billion pounds of potential UK spending leaking out into pensioner bonds might make a chancellor think twice. A drive to improve monitoring/modelling of the economy would be entirely inconsistent with the free market ideology and so it doesn't happen.

    Working on the principle that content stays on the web forever, a few more basic links in your posts may be useful. You sometimes link to academic articles, but books less often. Maybe some of your material will be core A level stuff in 10 or 20 years. Your posts on Arsenel could become the basis of an A level in Arsenel Studies or at least a module in A level Premier League Studies.

    1. “The collection of more economic statistics together with better models, particularly stock flow consistent models rather than DSGE, might help get a better understanding of the UK economy, or at least key parts of it. “

      One dashboard could be the wealth distribution in the UK. Ok, the dashboard tells us that wealth is heavily accumulated among very few people. So the question becomes, what are we going to do about it? Your dashboards fundamentally don’t address the issues, they will still be with us.

      It should also be pointed out that dashboards are only as good as the database design behind it. Rather than telling us a story they could be painting a totally false picture. You may have a dashboard showing 10 billion pounds of potential UK spending leaking out into pensioner bonds but that dashboard won’t take into account all of the other pertinent variables. Put it this way, i wouldn't want to be writing the SQL for all that! Oh and BTW I write SQL for a living!

    2. A dashboard is a great example of neoliberal ideology in practice. It suggests that the health of an organisation can be gauged by an abstraction. This stems from the belief in the primacy of shareholder value: look after the share price and everything else will be fine.

      Over time, dashboards have become more multi-dimensional (the "balanced scorecard"), but this is less a case of greater sophistication than the extension of the managerialist paradigm to all aspects of the organisation (including things that cannot be reliably measured, such as staff morale or CSR).

      Dashboards entail value-judgements - i.e. your choice of KPIs is an expression of what you consider important, and their internal publication is a form of propaganda. They're also hierarchical - you often have operational dashboards feeding into to an enterprise dashboard. Access to certain KPIs becomes a marker of status.

      The reality is that dashboards are rarely realtime because of the need for consolidation between transaction databases and datawarehouses (the final SQL is actually simple because you're running against a summary table or materialised view).

      Just as the share price tells you more about sentiment in the market for equities than it does about actual company performance, so most dashboards tend to be vanity publishing: a focus on metrics that flatter executives and reinforce the corporate orthodoxy. If you keep staring at the dashboard, you crash the car.

    3. The dashboard itself doesn't require the SQL, what requires the SQL is how the tables are joined together in the data warehouse etc. But to create the dashboards you need the data in a way that conveys the required message or provides the final report.

      While I agree with some of your points I would argue that these modern reporting techniques allow an organisation quick and easy access to information it considers important (wherein often lies the problem). In my experience it is not as top down a process as you imply, the identification of what the business needs to report on comes from various levels within the organisation and the future development of the data warehouse is often dictated from the bottom up. I.e. someone asks the question can I compare x with y.

      Also the information is usually running a day behind, i.e. the warehouse is updated overnight with the information inout into the source system for the previous day. So nit real time but close to it! Also some organisations do run real time and you can now run jobs that are more efficient and allow certain parts of the warehouse to run in effectively real time (though this is an emerging development in many ways).

      I guess an hierarchical firm will probably build some hierarchy into the information. For example, a manger monitors overtime. But in a worker co-op you can use the same technology but in a less hierarchical way. Your criticism of dashboards should really be a criticism of capitalist firms. The technology is a progressive development. For example you can set alerts that inform people when certain conditions have been met, for example, an invoice has been over receipted. This saves time all round and increases efficiency within the business.

      I would argue that within a capitalist system these developments can be very destructive and deployed erratically, in a more conscious led system this technology can improve society.

    4. Dean,

      My point is that the technical design of dashboards (and business intelligence systems more generally) inescapably embodies capitalist norms. Worker co-ops have always had dashboards, in the sense of a mechanism for highlighting progress and flagging alerts. It's called a standup meeting, aka workplace democracy.

      One of the features of neoliberalism, which privileges senior managers and "strips out" lower layers of management, is the valorisation of empowerment and self-managed teams. In software development, this has led to agile practices such as scrums (i.e. standup meetings). This produces the irony of a group of developers having a short face-to-face meeting every morning to discuss progress on an executive dashboard that will report metrics that are in some cases a week old.

    5. "One of the features of neoliberalism, which privileges senior managers and "strips out" lower layers of management"

      In my experience it isn't the senior managers who use business intelligence but a combination of finance staff and lower level managers. I know of a couple of places where very senior managers have had their licences revoked because they simply don't log into the system.

      "This produces the irony of a group of developers having a short face-to-face meeting every morning to discuss progress on an executive dashboard that will report metrics that are in some cases a week old."

      I have never come across this.

      The only meetings that I have attended which involve senior managers are things like 'project board meetings' which discuss very high level issues, progress on data passes, server issues, warehouse design issues etc.

      I can't imagine developers getting their hands too dirty with specific reports, this would be an internal organisational issue between the managers and the report writers.

  2. The BoE has always been a political institution, and thus a battleground between The City and Westminster as well as different sections of capital (I recommend David Kynaston's condensed City of London for the background on this).

    I think the shortcomings that Tony Yates notes owe a lot to the valorisation of "business sentiment", i.e. the Kaleckian idea that expressions of confidence by business leaders directly influence the economy, which you can see lurking behind the reporting of Stefano Pessina's recent comments.

    In reality, "the economy" is a construct. It is what we chose to believe it is, rather than some objective truth. You saw this with the recent decision to recalibrate GDP to include drug-dealing and prostitution. At best, macroeconomics is a useful approximation, while microeconomics is a collection of ideologically-loaded parables.