Jupiter Merlin Weekly: A difficult Pill to swallow on inflation
As the Bank of England chief economist says Britons must accept they are poorer, the Jupiter Merlin team discuss the predicament facing central banks.
But the Bank has form here; after all, it was only last year that Pill’s hapless boss, Governor Andrew Bailey (a man who simply oozes a lack of confidence), made a memorably lame and ineffectual plea to the Great British Public: please, pretty please, not to ask your boss for a pay rise because it’s unhelpful. We all know what he meant. But given the decline in real earnings over a prolonged period going back to the Great Financial Crisis, and the public faced with a runaway cost of living, his sentiments were simply not grounded either in sense or reality. As it happens, given that private sector wage growth currently averages 7% and the public sector, beset with widespread industrial action, is averaging 5.3%, his exhortation fell on deaf ears.
If this seems like a statement of the obvious, it needs making because there was a time, not so very long ago, when central bankers really believed that they actually controlled inflation. Former Governor of the Bank of England, Mark Carney, said so in a symposium hosted by the Financial Times and attended by the author.
The virtual extinction of Darwinian monetarist economics in which markets set the cost of capital rather than the central bank manipulating it through QE is a prime factor. Badly run companies should be allowed to go bust. Their labour and capital can be recycled into better run operations. It maintains a healthy, match-fit, competitive economy, essential to expanding national economic growth and wealth. In today’s investment world, exacerbated in the aftermath of the pandemic by the societal shift towards stakeholders’ interests over shareholders’ (the shareholder is merely one stakeholder and rapidly dropping down the pecking order), the ability of poorly run businesses to refinance without any great incentive to improve their practices leads to the build-up of surplus capacity, including labour and capital. It increases inefficiency and frictional costs; it drives down real wages; it undermines productivity and it creates an enduring and corrosive fiscal drag on the overall economy.
Governments suffer the same self-inflicted problems. Ours are a microcosm of a broader geographical malaise. As seen through increasing levels of state intervention, governments see themselves as better capital allocators than markets. Using accountants’ language, if the private sector is a ‘profit centre’, public services are seen as a ‘cost centre’. There is still an obligation placed on governments to demonstrate value for money for the taxpayer, but the emphasis is on less precise cost/benefit analysis rather than the private sector imperative of profits and returns on investment. It is all too easy for governments to fall into the trap of thinking that more money will improve services, and to borrow it on the never-never (or when borrowing is constrained, to raise the revenue by taxation), when often what is needed is fundamental operational reform. Spending money is easy; root-and-branch reform is exceedingly difficult, too often relying on that tiny minority of the politically safe or brave to implement it and see it through. But without that discipline, public spending runs away while the services it supports seldom improve. That too is enduringly corrosive. The whole economy suffers: sub-par growth rates (what the International Monetary Fund accurately describes as “feeble”) become the norm; the tax burden increases; competitiveness against international peers risks declining.
The upper limit for interest rates, as we have discussed before, is the indefinable tipping point at which the cost of servicing the debt in circulation itself becomes so much of a financial and economic burden that systemic cracks begin to open again, as seen in March in the banking sector.
Huw Pill says we are all poor. The IMF sees long-term growth as “feeble”. It is a desperate message. It is as though both imply that that is our lot. That absolutely should not be the case! Whatever your political persuasion, at least with a monetarist alternative to challenge the all-pervading Keynesian consensus there would be a full and frank debate. You would be offered a genuine choice to make, which can hardly be said of the current runners and riders. Who’s up for the challenge? Anyone…?
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