Should Mark Carney be weighing in over Corbynomics?

In the past, I’ve written that Carney and other senior BoE officials have been speaking out of turn, on subjects like ‘inclusive capitalism’, the economics of volunteering, and whether we have the right model of corporate governance.  The complaints were that these are outside the BoE’s already large mandate, and encroach on territory reserved for directly elected politicians.

Were Carney’s comments also out of order when he said, as quoted by Peter Spence in the Telegraph, “The reason why one doesn’t even start on this conversation is the removal of any discipline on fiscal policy that comes from that”?  Fiscal policy is, after all, a matter for government.

Actually, I think Carney was right on this occasion.

Commenting on fiscal policy in general should be considered out of bounds.  But if fiscal policy is conducted in a manner that threatens the BoE’s ability to do the job entrusted to it, central bank officials are within their rights to point this out.  Financing public expenditure through money-printing would likely lead to higher expected inflation, as observers consider the probability that, whatever Richard Murphy says by way of later qualification, a Rubicon once crossed will be much more easily crossed again.  And that higher expected inflation will raise the costs – in terms of unemployment and real activity – of delivering inflation on target, if not become entirely self-fulfilling.

In circumstances like this, Carney’s dismissive tone was just right.  Taken to the limit, the interference in the conduct of monetary policy that would be entailed by occasional monetary financing amounts to making central bank independence a sham.  Better to point that out, and thereby clarify why current arrangements are not a sham.

I might point out, thought, that in the same spirit, it would also have been fine to explain how contractionary fiscal policy while interest rates were at or close to their effective lower bound also made it harder for the BoE to deliver inflation on target.  Carney and others took the [in my opinion Panglossian] view that ‘they have the tools’ to compensate, so the issue for them was an academic one.  But one could envisage a different MPC intervening in the debate about austerity in this fashion.

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18 Responses to Should Mark Carney be weighing in over Corbynomics?

  1. Donald says:

    If we give Corbyn the benefit of the doubt, and assume a best case PQE where responsibility’s delegated to the BoE, is there really a problem with fiscal discipline?

    • Tony Yates says:

      Yes, for reasons already covered; that it’s not credible to finance an acyclical project with hypothetical and cyclical funds; and the slippery slope argument.

      • Donald says:

        Both seem to be things that can be mitigated to some extent depending on how you implement PQE, so it seems a bit strange to use them as an argument for not having a conversation.

  2. Lyn Eynon says:

    On the slippery slope argument, once unelected officials start using their position to intervene in the internal democracy of political parties, where does that end?

    • I’ve seen that point made about fifty times. The answer is thus.

      What makes you think that because the CB decides on the TOTAL AMOUNT of money to be printed and spent, that it therefor ALSO decides HOW that money is spent? It’s perfectly possible to have a system under which the CB decides the total amount to be printed, while politicians and the electorate decide exactly HOW that money is spent. Indeed that’s exactly the system advocated by Prof Richard Werner and co-authors in their submission to Vickers. See bottom of p.10 to top of p.12 here:

      Click to access 3a4f0c195967cb202b_p2m6beqpy.pdf

      Indeed, it would be completely wrong, as you rightly suggest, for the CB to take any sort of political decision, like what proportion of GDP is allocated to public spending, or how much goes to education versus health etc.

  3. Lyn Eynon says:

    Financing public expenditure through ‘money printing’ need not be inflationary. It depends on the quantity and context.

    Compare two scenarios. 1) Government creates £10bn debt which it sells to the market; the BoE subsequently purchases this debt in the market; result: the BoE’s balance sheet has swollen by £10bn with a new liability of increased reserves balancing the increased assets it now owns. 2) Government creates £10bn debt which it sells directly to the BoE; result: the BoE’s balance sheet has swollen by £10bn with a new liability of increased reserves balancing the increased assets it now owns. Direct purchase creates no more money than indirect purchase.

    The difference between the two cases is that direct purchase by-passes the financial markets, who cannot then profit from either interest payments or increased asset values. Funding government has always been a profitable exercise for the wealthy from classical civilisations to modern economies. But why should financiers be subsidised by taxpayers, at least by those of us who cannot avoid or evade payment?

  4. If politicians are likely to put pressure on central banks to implement excess stimulus before elections under a “print and spend” regime, what’s to stop them doing the same under the existing regime where stimulus is effected via interest rate cuts, budget deficits or QE? Absolutely nothing!

    Indeed, it can well be argued that where print and spend is the only form of stimulus, CBs are MORE INSULATED from politicians than under the existing regime. Certainly Simon Wren-Lewis seems to argue that Osborne managed to organise a bit of a boom before the recent election, and that’s because under the existing regime, politicians can borrow and spend. In contrast, if print and spend is the only allowable form of stimulus, then there is no form of stimulus in the hands of politicians.

  5. metatone says:

    Should the BoE be given any credence given that we remain bumping along at 0% inflation, according to latest forecasts?

    Indeed, should BoE independence be lionised when it has led us to this point?

  6. mrkemail2 says:

    “Financing public expenditure through money-printing would likely lead to higher expected inflation, ”
    This is a howler. All govt spending is “money financed” and works by crediting bank accounts. Govt spends on a buffer and then backfills the buffer.
    The government then borrows AFTER to refill the (arbritary) buffer via the DMO. The extra reserves only stay in the system on an intraday basis.
    Because of interest payments, bond issuance may actually create more inflation.

  7. Donald says:


    Apparently Murphy said this PQE would only be exercised if there was a recession. (He thinks there will almost certainly be one.) He’s also said that the BoE would remain independent. Taking these statements together, it sounds like the bank would be directed to print money for government spending in the event of a recession and when rates are low.

    One objection to this is your cyclical money versus a cyclical spending commitments argument. Maybe, though, that doesn’t matter. The printed money reduces debt when printed and allows more debt the rest of the time. What if they’re is no recession? Well then we’ll be growing which reduces (proportionate) debt as well.

    Given the above, it seems to me that the only arguments against PQE are slippery slope and spending plans that seem more concrete than government revenue. I’m not sure how slippery that slope really is though, and the latter point might just be politics – maybe in practice they would take future revenue uncertainty sensibly into account (much like Osborne easing off on austerity). Perhaps if pushed on the subject they’d be honest about it and acknowledge the uncertainty.

    Anyway, it would be good if you did a post where you gave them the benefit of the doubt. “IF they mean this best possible version of PQE then….”

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