Whatever Powell says, the Fed can’t avoid taking political considerations into account.

Yesterday, Jerome Powell said, following the Fed’s decision to raise its policy rate:  “political considerations play no role whatsoever in our discussions”.

In some important senses, this cannot or at least should not be true.

Trump has on several occasions commented in public to the effect that he would prefer the Fed not to raise rates.  The reason is an old one, and relates to why central bank independence was thought a good idea in the first place.  Trump has not wanted the Fed to curtail the kick to the economy that intended when pushing through the tax cut earlier this year.

Powell may be telling the truth to the extent that he means ‘we will not moderate rate increases just because you told us you don’t want us to’.  But that does not mean that political considerations don’t come into interest rate discussions.

Trump’s comments could well influence expectations of future policy setting because either markets think that Trump and his advisors are learning something that they will realise the Fed is also learning, or because they think that maybe in these febrile times of strained constitutional relations the Fed will strike a compromise in its interest rate decision-making.

Observers might be forgiven for making this calculation:  we are in a new world after all, with Trump’s GOP.  And although the Democrats now have control over the lower house, the consensus about what central banks should be doing and how they should do it is breaking down, with dissidents on the left and the right.  So surmising that the Fed might conceive of a moderated hiking trajectory as moving down a corridor of least resistance has some logic to it.

To the extent that that happened, the Fed’s actual interest rate decision is unavoidably affected by those political decisions, albeit indirectly.  Moderated expectations of rate hikes lower long rates and the cost of finance, and boost spending.  Other things equal, this will have the effect of leading rates to be higher!

Those who could parse and understand the Fed’s reactions perfectly would know that higher rates was an indirect consequence of ‘political considerations’.  But for anyone else such a reaction could look like deliberate and extra-aggressive counter-inflationary policy designed to make a point to the administration.

So, to recap, while the Powell’s FOMC might not be asking themselves what Trump wants them to do, and whether they should do it.  They will have asked themselves what the effect of Trump’s asking has had on expectations of what they will do, and they will have had to respond to that.  ‘Political considerations played no role whatsoever’… may be the sort of thing that central bank Governors should say at a press conference, but it is not strictly true.

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What is the best Brexit outcome for the SNP?

There are still multiple possible outcomes of the ongoing Brexit process.  The UK could revoke our A50 notice to leave the European Union and remain members.  We could seek a Brexit In Name Only solution, retaining freedom of movement and membership of the single market.  We could ratify the Draft Withdrawal Agreement and negotiate a harder Brexit involving an end to freedom of movement, and a departure from some elements of the single market, depending on efforts to obviate the backstop.  Or we could crash out of the EU with ‘no deal’.

We can presume that the overriding objective of the Scottish National Party [SNP] is to secure independence from the rest of the UK [RoUK].  Despite losing the referendum in 2014, the SNP cannot give up its reason for being.  Which Brexit outcome serves this ultimate aim best?

It strikes me that Brexit In Name Only is best for the Scottish independence campaign.  This would leave the SNP able to amplify the political benefits of leaving the RoUK to join/rejoin the EU and get a ‘seat at the table’ deciding on the rules governing the single market, [rules which the RoUK will have to take].  While at the same time there would be no economic cost caused by erecting trade barriers at the RoUK/Scotland border.

The RoUK remaining the EU deprives the SNP of the opportunity to big up the political benefits of leaving.  A harder Brexit generates a trade-off.  Political benefits ensue from leaving, but, absent unlikely major reconfiguration of trade flows, net economic costs would flow from erecting trade barriers at the RoUK border, despite ensuring frictionless trade with the EU.

I haven’t detected this nuance in SNP interventions in the debate.  But perhaps I have not been listening closely enough, or I have missed some element of the calculation being made.

If the SNP were making more of a push for this outcome, they might find common cause with Labour and Conservative moderates, looking for an outcome that avoids ‘no deal’ and can be presented to some as at least symbolically respecting the 2016 referendum result.

If we enter Galactic brain level strategic calculation, we could note that aside from the issue of what end state Brexit produces, there is the issue of how we get there.

Another attractive proposition for the SNP might be perpetual transition and RoUK internal strife over Brexit.  This would generate political benefits from leaving RoUK and re-designating a Scottish membership of the EU:  Scotland secures its political say in the running of the EU for the future, and insulates itself from the political struggles in the RoUk over EU membership.  There would be no economic costs from new trade frictions with RoUK at the borders [RoUK is perpetually stuck in limbo, in the single market].  And there would be the ability to secure some economic benefits from the certainty over politics and an ability to refocus on domestic problems that are ignored while RoUK fights over Europe.

Throughout, I’ve assumed that the SNP care about the economic costs of corroding trade through trade frictions, or at least cannot neutralise economic analyses of these costs circulating in the media.  These assumptions are both moot, as an intervention by one reader, Lap Leong, prompted me to remind the rest of you!

 

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King’s Bloomberg bloopers

A link to my New Statesman piece, a rejoinder to Mervyn King’s Bloomberg article encouraging the government to drop Theresa May’s deal before the nation ‘rages’.

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Legitimacy somersaults

Have a look at this Tweet by Paul Embery.

Screen Shot 2018-12-15 at 17.33.41

It’s fascinating. It’s not the only one.  Dan Hannan has sent roughly the same message.

1.  The 2016 Referendum result was legitimate.

2.  Any further referendum would not be legitimate, but instead an act of the establishment trying to get its way because it didn’t like the result of the first.  [Notice, no ill intentions of the establishment intended in the first round].

3.  Despite the second referendum – this is hypothetical at present, of course – being organised through regular constitutional processes, it would be legitimate to simply decide to do stuff via social media, to boycott said referendum, in a way that would leave its mark on the trajectory of the nation for all of us.

4.  Although a second referendum is prima facie evidence of an establishment/elite simply ignoring the will of the people and doing what it wants to get its own way, Paul Embery, holder of high Trades Union office, and a considerable social media following [this could be considered to satisfy a working definition of establishment/elite], is acting in good faith and in no way inciting thwarting a constitutional process simply because he does not like the way the debate on EU membership is panning out.

Paul’s timeline, if you hold democracy and enlightened policy making in any regard at all, is one of the darkest and most miserable objects on the internet.  But you have to admire the effortless genius that produces these texts.  So much contradiction and poison packed into so few words.

 

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An optimistic forecast concerning the inconsistent ambitions of Lexiters and Brexiters

David Chivers, [AP in macro at Durham University], wrote today:

Screen Shot 2018-12-13 at 11.28.06

We can debate just where the electorate agree on post Brexit plans.  But they surely do not agree with all of them.   Not least because they are not consistent with each other.

This leads us to the natural observation that an additional barrier for Lexiters and Brexiters is each other.  Lexiters seek a trajectory to socialism.  Right wing Brexiters – as well as former centrist Remainers – will oppose that vehemently.  They are split amongst themselves, of course: one lot focused on the ideological paraphernalia of nationalism, the other on a rather hazily and abstractly sketched ideology of deregulation and free markets.

Neither side seems to fear the strategic success of the other in the post Brexit world.   As a glance at the variation in state size, tax rates, public service quality, across the EU will reveal, the EU permits quite a lot of different compacts with a country’s people.  But it does provide a certain anchor, or insurance against the extremes of socialist interventionism and deregulation.  [Just how effective that insurance is we are seeing tested in Italy, Hungary and Poland.]

Lexiters and right-wing Brexiters rightly see Brexit as a necessary step toward their goals.  But often communicate as though they are deluded about its sufficiency.

If you think we would be better off remaining in the EU, precisely because of the institutional anchor it provides, one might draw comfort from the fact that in a post Brexit world, there is some hope that the many leave forces – Lexiters, nationalist and libertarian Brexiters – will cancel each others’ efforts out, each dragging the country a little way, ineffectually one way, before another gets a turn and reverse course, allowing the average policy combination to remain roughly where it is.

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Why Brexit is so much more problematic than the financial crisis of 2008

An interesting thread by David Hayward [@SimeonStylites] on Twitter today compared the severity of the crisis engulfing us with Brexit to the financial crisis of 2008.  Although the economic damage has been so far less, and more slow-moving, in may ways I think the difficulties we face now have the potential to be much worse.

For starters, during the financial crisis we had governments that were coherent entities and able to respond to events as they unfolded.  At present, both the opposition and the government cleave between more than one set of leave and remain factions.  No faction has supremacy.  Theresa May is to a large extent impotent to respond.  Conceivably, if the economic damage mounts as the end of the Article 50 period approaches, factions will start to unify around a course of action.  But this is by no means clear at present.

Second, during the crisis there was a basic consensus around a problem, and a set of solutions, and a reasonable degree of truth-telling about the issues.  Regulation of the financial sector had been too lax.  Risks had been allowed to build up in the financial system.  Ailing institutions had to be supported or resolved.  In future, regulation had to be tighter and risk monitoring more careful, extensive and intrusive.  We also needed counter-cyclical monetary and fiscal policy.  There were disagreements, and some telling of untruths about the necessary degree of counter-cyclicality of the latter.

During the Brexit process, by contrast, there has been a shortage of truth-telling, both about the costs and benefits of Brexit, and about important procedural matters [like what could and could not be renegotiated now;  conflation of the substantive aspects of the withdrawal agreement and the political declaration;  the ‘bollocks’ of Labour’s ‘six tests’;  what ‘No Deal’ means].  Technocratic assessments of the ways forward have been successfully tainted as, in Lord King’s words, a ‘project’ ‘designed to scare the country into voting Remain.’

Even absent the strategic incoherence caused by the factional struggle ongoing, therefore, the lack of truth-telling bodes ill for arriving at rational decisions to take us forward and improve matters from here on.

Part of the difficulty rests with the subject matter.  Although I caricature somewhat, during the financial crisis, there seemed a basic acceptance of the idea that although the authorities had failed us in managing the financial system, this was a subject that the authorities’ delegated experts were best placed to fix.  When the solution of tighter regulation was proposed, there was no disputing it.  Not so now.  Economic and technocratic aspects of the costs and benefits of leaving the EU have been relegated relative to other features, like national and cultural identity, on which it is not appropriate to delegate to decision-making elites.  And since the nation at large is divided on these questions, this adds to the paralysis.

As many others have remarked, furthermore, the financial crisis was not a constitutional one, even if it may ultimately have been implicated in today’s difficulties, which are constitutional.  Back then, given the issues at hand, the processes for decided were settled.  Not so now.

A final aspect aggravating the situation is the fact that, unlike during the financial crisis, there is another strategic entity [in this case the EU] greatly limiting our choice set.  The necessity of keeping open the border between Ireland and Northern Ireland, under current and foreseeable technology, pins us in a customs union with the EU, and in large degree pins us in circumstances of regulatory alignment with them.  The alternative to acceding to this is a potentially disorderly exit to very disadvantageous trading arrangements.   During the financial crisis the government was freer to choose.  It might have found itself similarly paralysed if some unstoppable external force had dictated that the UK either choose narrow banks or entirely unregulated banks, with no intermediate solutions allowed.

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If you can’t beat them, join them: Remainers try their hand at attacks on the civil service.

Anthony Adonis tweeted this yesterday:  Screen Shot 2018-10-24 at 18.55.54

Civil servants do not need this unsolicited advice, foghorned over Twitter.  The tweet comes out of nowhere, prompted by nothing in particular, and insinuates in a way full of foreboding by omitting reference to anything specific.  Presumably, if there were some specific allegation, it would have been made?

It is the mirror image of the accusations by the Brexit Ultras that the civil service is run by ‘Remoaner Saboteurs’, of which the latest example in the genre was this:

Screen Shot 2018-10-24 at 21.05.00

‘Don’t do anything ethically dodgy’ we are intended to read thus: ‘As someone in the know I have good reason to suspect that ethically dodgy things are being done or may be done if I do not broadcast my warning.’  There is an explicit code of conduct for civil servants.  And a management and whistleblowing structure for enforcing it.  But for some reason we need a tweet from Lord Adonis to set things straight?

It ought not require saying, but Brexit is the official government policy [unless you believe some of the most extreme Brexit conspiracists’ explanation for why things have gone so badly].  And so civil servants should embrace it with the same enthusiasm and energy and initiative that they would bring to the evaluation and implementation of any other government policy.  Even if Brexit is, as I have often emphasized in these pages, a bad policy.  [At least in terms of economics].

Civil servants also have a right to look after their own careers, and try to exert as much influence on what they work on as they can, if their rewards from work depend on that.  But inciting a boycott – ‘have nothing to do with Brexit’ Adonis advises – will do nothing to help them do this and will probably poison the atmosphere, making it harder to manage work choices.

This intervention also harms the cause of those trying to halt or soften Brexit, by allowing the cause of unlawful [and therefore unpatriotic] sabotage to be laid.  So from Adonis’ perspective – he being a leading anti-Brexit campaigner – his comments are self-defeating.  It could also be regarded as somewhat ironic that a proponent of conservatism in the face of the Brexit revolutionaries – someone who wants to restore the pre-referendum status quo in the UK – should be trying to undermine the institution of the civil service that was a part of what made that status quo work.

We are not that many steps away from demands that civil servants be vetted for political fealty.  The UK is going to place very great demands on its civil service in the years ahead, however Brexit turns out; and a convulsion caused by a significant loss of faith in its impartiality would be very damaging.

 

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