Banking on unemployment: Why the Bank of England is aiming to destroy 400,000 jobs
After the Bank of England’s quarter-point rise in interest rates earlier this month, its chief Andrew Bailey made unwelcome headlines by implying that he hoped employees would help fight inflation by foregoing compensatory wage and salary increases. Given a cost of living crisis set to intensify as home energy prices jump and national insurance rises kick in, the angry reaction was predictable.
Another response was certainly possible. Bailey could have pointed out that the Bank expects pay rises of about 5% this year and focused instead on emphasising that there is still little reason to think inflation will be sustained. After all, being able to offer believable reassurances of this sort about price rises was supposed to be a key benefit of the Bank of England’s independence, rushed into operation by Labour on its election in 1997. In the world of monetary policy, views of the future play an outsize role. Money itself is based on a self-fulfilling collective prophecy; our scraps of paper or bank deposits have value because we all believe they will have value. Inflation, too, can be a prediction turned to a reality: business that anticipate rising costs will put their prices up; wages set with an eye to looming price rises help bring them about, at least when employers are able to pass the increased costs on to customers. Central banks aspire to shape this process, creating expectations of stable prices and thereby helping to bring them about. The result, supposedly, is a kind of free lunch. Precisely because the central bank can be relied on to tighten the monetary screws when necessary, it will less often actually have to do so. Such ‘credibility’, advocates of central bank independence argue, is not available when politicians directly control monetary policy, as those who feel voters’ immediate pain won’t be able to resist offering the short-term remedy of lower interest rates and easier access to borrowing.
The world these arguments presume is not the one we presently inhabit. Far from representing the self-confirmation of pessimistic predictions, current price rises reflect instead highly unexpected disruptions to markets supplying products not easily foregone, such as food, fuel, and transport. As the Bank’s leadership recognises and indeed emphasises, inflation to date has been largely driven by global forces beyond its control.
Faced with unprecedented circumstances it can do little about, the Bank’s leadership is targeting the so far irrelevant danger of a wage-price spiral that might ensue if employees are consistently successful in winning compensation increases. But their method is not to take advantage of the credibility free lunch their independence purportedly offers. Instead of focusing on moderating wage demands through shaping employees’ predictions about prices, the Bank intends to reduce their bargaining power by engineering a massive rise in unemployment. This intent is spelled out very directly in the Bank’s February Monetary Policy Report. According to the Bank’s estimates, if it were to hold interest rates at their new level of 0.5% for the next three years, unemployment would not increase. However, it expects instead to raise rates by a further percentage point by the middle of next year. This, it predicts, will lead to a 1.2% increase in the unemployment rate: over 400,000 additional people out of work.
The achievements the Bank believes it can purchase at this staggering human cost are shockingly modest. The planned restrictive policies would bring inflation down to 2.1% within two years, and to 1.6% within three. Under the less restrictive policy, inflation would be at 2.6% after two years and 2.1% after three. To shave half a point off the inflation rate, just a tenth of the rise in prices Britain experienced over the past year, 400,000 jobs will be sacrificed. It bears emphasis that these are all the Bank’s own expert assessments of the effects of alternative policies.
Nothing in the Bank of England’s legal remit requires this draconian approach. For instance, its inflation forecast assumes that energy prices will not decline on the schedule market traders presently expect. But if the markets have it right, inflation will be well under target within two years. (In this scenario, the benefits of cheaper energy will eliminate about half the extra unemployment stemming from restrictive monetary policy.) Decisions on how to assess futures markets’ predictions are entirely a matter of Bank internal procedure that it is fully empowered to change. Similarly, although the Bank does have to aim at 2% inflation, for it has been so instructed by the Chancellor, it is authorised to recognise the role of unusual shocks, and nothing mandates that the Bank aim to bring inflation down over two rather than three years. In Bank communication, this time horizon is limply described as ‘conventional’.
Is it really compatible with democracy to give the seven members of the Monetary Policy Committee such massive scope for discretion? It is true that voters chose the politicians who established the rules for the Bank’s operation. And Her Majesty’s Government could, by setting a 3% rather than 2% inflation target, remove even the thin rationale for restriction the Bank has been able to muster. But contrast the continuing ructions set off by Bailey’s inartful comments on pay with the complete absence of attention to whether the benefits of putting hundreds of thousands out of work justify the costs. Democracy’s institutions, including those for central banking, ought to encourage reasoned public deliberation on such crucial issues. Walling the Bank of England off from direct Government control is manifestly failing to do so. In a political culture all too eager to sort ‘strivers’ from ‘skivers’, it is particularly cruel that this missing debate may lead the newly unemployed to see their fate as evidence of personal failings, rather than the predictable, intended result of policy.
Speaking last October, Bailey implied that despite the global roots of inflation, rate rises might be necessary ‘to preserve the huge progress we’ve made in terms of the credibility of monetary policy regimes’. One hopes this is not, as it appears to be, an argument that the Bank should impose largely ineffectual pain now (recall Bank experts believe that any effect of rising unemployment on inflation is likely to be dwarfed by the effect of energy price swings) simply in order to signal that it would be willing to impose effectual pain later. Because if this is the reasoning, if it is necessary sacrifice livelihoods and derail careers on a massive scale in order to uphold a credibility the Bank is either unwilling or unable to deploy in an hour of need, then it is entirely unclear what has been achieved by distancing the Bank from electoral politics.
