Philip Lane should not be making comments on Irish tax policy

Simon Wren Lewis and Frances Coppola have written two thoughtful pieces about Irish central bank Governor Philip Lane’s public comments about Irish tax policy.

My own view is that he should not be making these remarks.

The reason has to do with the effect that making them will have on the presumed nature of the office and the incumbent holder in the future.

If it becomes normal for central bank governors to comment on matters other than monetary and financial policy, there is a risk that governments will seek to vet future candidates for their other policy views, and not appoint primarily on the basis of monetary and financial policy expertise.  And that future candidates will invest time and energy competing on the basis of political acceptability, rather than their skills operating the central bank policy levers.

The expectation that this will happen will feed back into monetary policy, undermining the original purpose of central bank independence, that there were benefits to be had by creating the impression, and following through on it, that monetary and financial policy would not be continually readjusted to suit political imperatives.

In the Eurozone, the scope for national central banks to bend to national governments’ views is limited by the fact of their vote being diluted on the ECB Governing Council.  But that effect is not zero.   And other central bank governors may be emboldened by Lane’s remarks.

Obviously, in the real world, one must presume that a certain amount of politicking goes on in selecting Governors and courting Governor jobs.  But this is limited by the precedent of generally not speaking out, and the priority such considerations are accorded would increase if the precedent was routinely broken.

These worries are not mere niceties.

Right wing comment in the UK press has often featured the presumption that Mark Carney was selected in part because of his shared political world view with George Osborne and David Cameron, a presumption that was unfortunately fed by Carney himself repeatedly speaking on topics off his patch in a way that they would have approved [on diversity, climate change, the benefits of EU membership, and so on].

Going a little further back, one can speculate that the need to find a governor of the right sort was underlined by Mervyn King’s comments in 2010 on what prudent fiscal policy required at the height of the UK’s financial crisis.


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New Statesman post on Labour’s 3% target for the BoE

A link here to a post explaining a boilerplate view of why Labour’s ideas for reform of the BoE’s mandate [and location] are misguided.

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Times article on capitalism

Here a link to an article with David Miles on capitalism.

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2% wasn’t an ‘arbitrary number’ Neel

FOMC member Neel Kashkari has been doing battle with the crypto gold bugs on Twitter.  In the cut and thrust of this debate, he let fly that the 2% target the Fed had set itself was an ‘arbitrary number’.

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I mostly disagree with this.

2% was a round number that weighed up various factors bearing on the optimal inflation rate for a central bank.

First, the Friedman Rule:  inflation erodes the value of money, forcing people to economise on it, and suffering inconvenience as a result.  [The FR actually implies on its own setting the target at minus the riskless real rate of interest].

Second, the costs of re-posting prices [known as ‘menu costs’ imagining restaurants reprinting their menus].

Third, the fact that inflation measures tend to overstate true inflation [because of inadequately taking account of quality improvements, changes in the goods mix, and changes in the mix of outlets that sell them].

Fourth, how positive inflation helps bring about falls in real wages in some sectors where there might be downward nominal rigidity.  [If you are in a poor performing sector, or managing poor performing workers, you may be able to lower real wages simply by not increasing the wage in £s].

Fifth, the benefit of keeping nominal interest rates [which will tend to rise one for one with the inflation target] above the zero bound, to provide for decent size cuts at the onset of a recession.

This latter benefit we have learned more about.  We know that the risk of hitting the bound is greater than we presumed then in the late 80s and early 90s.  And we now have more experience operating unconventional monetary policy tools which can be used as a substitute for interest rate policy.

I say ‘mostly disagree’ because I doubt that there was any particularly scientific quantification of these things in the determination of the actual number.  A lot of that went on after the event.  But these arguments were common currency among academic and central bank economists, and those at the top of the Fed and other central banks would have known them.

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UK’s MPC vote. Does going from 7-2 to 6-3 mean a hike is coming sooner than we thought?


First, recall that the inveterate hawk McCafferty is about to depart the Committee, to be replaced by Jonathan Haskell.  It’s not possible to parse his views at this stage, but McCafferty’s were at the very hawkish end of the scale, and it’s surely likely that a random new draw for the vacancy would be less inclined to vote for a rate increase than he was.

Second, Chief Economist Andy Haldane’s switch into the camp voting for a rate increase may be less of a bell-weather than you might think from reading press coverage of it.

His views about monetary policy seem to me to be somewhat more changeable than those of others.  [This is not meant as a criticism].

His speech outputs – so one presumes also his time input – seem less engaged with the run of the mill monetary policy work at the Bank, ranging across subjects that extend far beyond the Bank’s core jobs.

And he often seems to relish taking contrarian positions and floating radical thoughts [eg reform of monetary institutions to allow for negative interest rates].

So a fair argument could be made that AGH might very well change his mind again.   Or, even if he doesn’t, be unlikely to take anyone else on the Committee with him that would not already be thinking of doing so in the future.  Or, equivalently, even if persuasion is not part of this process, his own change of heart may be less revealing of currents of thought that are soon to sweep up others in the ‘dove’ camp.

For these reasons, I don’t read much [concerning the likely trajectory of rates] into the change in the balance of votes by itself.

[Is this what happens?  At some point one starts writing stuff with hawks and doves, with no qualification at all necessary?]

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Social care funding, inheritance tax and hypothecation

Social care funding is as pressing now as when the issue blew up Theresa May’s 2017 attempt to decimate the Labour Party and assert control over the Brexit process.  A consensus of sorts seemed to emerge from that discussion that it was right to expect those who would otherwise pass on large estates to pay for their social care either partly or wholly through taxes on those estates, levied after death or not.

I blogged at the time that I didn’t think this was ‘fair’.  My reasoning was that you can view unexpected longevity combined with ill-health – which requires a lot of money spending on social care – as getting a bad draw in the lottery of life.  It wasn’t fair that one’s financial resources, and what one could pass on to the next generation, should be dependent on what draw one gets in the longevity and ill health lottery.  As a result, social care funding should be offered out of general taxation.

The debates about the appropriate level of inheritance tax and social care funding are separate, conceptually, although because social care funding – or its shortfall – constitutes such a large line item in public finances there is bound to be a practical link between the two:  finding so much more money is likely to mean looking across the whole range of taxes.  But the issues are no more linked than are the debates about the level and progressivity of income tax and the level of funding for state education.

The appropriate level and schedule of inheritance tax depends on weighing political desires to eradicate/perpetuate inequality on inheritance, economic evidence about the ability to collect and enforce without taxes being avoided or evaded, and economic evidence on the harmful effects of that inequality, or the harmful effects on incentives of taxing accumulated wealth away.  The economic evidence is uncertain on all accounts [as always], and different people will have different ethical positions on equality.

To illustrate the conceptual separateness of social care and inheritance, two thought experiments.

First, imagine an economy in which there was an overriding social norm that old people commit suicide at the first sign of irreversible dependency, so that there was no social care expenditure, private or public.  [For clarity, I’m not advocating this:  it’s a thought experiment to make a point].  In such an economy, there would still be a legitimate and important debate to be had about the appropriate level and schedule of inheritance tax.  The euthanasia of otherwise-about-to-be-dependent old people would leave open the question of what to do about those bequests, which could create harm through next generation inequality, or, if taxed away, reduce incentives in the future too.  In this extreme case, social care funding levels and inheritance taxes are seen to be entirely separate because there is no social care funding, and yet inheritance is a live possibility, there to do its harm [or not, depending on your perspective].

Now consider the opposite case.  An economy with no bequests.  Imagine that there was an overriding social or religious norm such that on death there was a ceremonial bonfire of all the recently deceased assets.  Who knows why:   perhaps there is a belief that they will be transmitted to the old person in the afterlife, or a belief in self-sufficiency of the next generation.  [Again, for clarity, I’m not advocating such a norm:  this is a thought experiment to continue making a point].  In such an economy, despite the fact that there were no bequests, there would still be a legitimate question as to how to fund social care, and an argument for using taxation [note here there is no inheritance to tax] to avoid that life satisfaction through extended end of life dependency does not depend on the lottery of life [ie how much end of life ill-health has to be endured].  The absence of a potential inheritance tax base would not negate the case for public funding when there are other – eg income, spending and profit – taxes to dip into.

The conflation of social care and inheritance is part of an increasingly popular idea that taxes should be hypothecated to fund particular items of public spending.

Hypothecation might have a basis in terms of offering a way to sustain public support for spending taxes on public services.   But it is conceptually flawed.  The examples described here are extreme case illustrations of why.  If hypothecation between inheritance tax and social care spending were the rule, in one of our economies we would have no inheritance tax [because there was no social care funding] even though it could do good;  and in another there would be no social care spending [because there were no inheritances to tax] even though it could do good.

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Interest rate forecasts, again

I hope someone can correct me here, but I dimly remember a Stanley Fischer chapter in the old Handbook of Monetary Economics, on central bank independence, that carried an entertaining footnote.  In it, Fischer reports that he showed a draft of the chapter to Milton Friedman, who retorted something like ‘central bankers only have 2 objectives, maximising discretion and avoiding public scrutiny’.

Recent discussions about whether the Bank of England should publish interest rate forecasts are going to seem to many like evidence in favour of this Friedman comment [assuming I remembered it properly].

Supposing that the MPC do privately concoct such forecasts, so that monetary policy is coherent, concealing it does have some advantages.  Frequently, MPC members are going to make mistakes interpreting the data, or its significance for policy.  If you don’t disclose your full interest rate forecast, then of course you can quietly change it when you realise your mistake.  Concealing mistakes that even competent analysts would make will seem like a route to enhancing your reputation.

Further, not disclosing a forecast amounts to not laying out all your conclusions for policy open to scrutiny.   This makes it less likely that any conclusions that are contestable or wrong can be shown to be such from the reasoning behind an interest rate vote set out in the public record.   If you don’t tell me that today’s vote for an interest rate rise is part of a crazy plan to get rates up to 7% by 2020, then I can’t detect the full extent of your craziness now.

Developing this thought further takes us back to the premise at the start that there are indeed interest rate forecasts constructed that are not being disclosed.  Perhaps internal discussions are loose enough that MPC members are not forced to arrive at coherent interest rate plans.  There is nothing in the public domain that would contradict surmising that there is simply staff analysis of the data, a collective inflation forecast based on expectations of rates derived from the yield curve, and a free-for-all to pluck interest rate votes and plans out of thin air.  An advantage of not publishing an interest rate forecast, and emphasizing in worried tones the deleterious consequences for communication if you did, is one way to avoid revealing that there are currently no satisfactory procedures for arriving at such forecasts that would look good if exposed to public scrutiny.


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