Our monetary technocrats are still living in a bygone age

Andrew Bailey, Governor of the Bank of England, may have to target higher inflation in order to get us through this crisis
Andrew Bailey, Governor of the Bank of England, may have to target higher inflation in order to get us through this crisis

It is indicative of just how quickly the world has changed that little more than three months ago when the Bank of England gave its last quarterly update, there was only a passing reference to the outbreak of a new strain of coronavirus, then still just a niggling worry on the distant horizon. 

The UK economy was already stagnating back then, but that softness was put down to Brexit uncertainty and other matters that at the time seemed frightfully important but now look to be as trivial as a minor marital tiff on what’s the best route to the supermarket.

Fast forward to now and the Bank of England is modelling a 30 per cent peak to trough collapse in GDP, and a 14 per cent decline for the year as a whole, the biggest such fall since the War of Spanish Succession (1701-14).

So far, so run of the mill. It might seem odd to dismiss such an apparently calamitous prediction as unremarkable, but numbers like these have become par for the course. Almost everywhere, the economy is in lockdown-induced free fall.

Yet here’s where it gets interesting. The Bank then assumes a rapid rebound as the social distancing measures are eased, with growth next year of 15 per cent and the year after of 3 per cent. Unemployment too is assumed to return to its pre-pandemic low of 4 per cent the year after next. 

The Bank describes this outlook not as a forecast but as “a plausible illustrative economic scenario”. Others might reasonably think it cloud-cuckoo land.

Governments may or may not have succeeded in “flattening the curve”, but they have also flattened the global economy; we can but hope for a bounce back, I suppose, but realistically major and lasting consequences seem the much surer bet.

The Bank of England was similarly optimistic about the chances of rapid recovery after the global financial crisis, but with each passing quarter would repeatedly have to eat its words, pushing the point of return to normality ever further out into the future. It became like waiting for Godot. 

This time around, the Bank has given itself plenty of ladders to climb down, and is more than willing to admit that there are lots of other “plausible”, but more pessimistic, scenarios that can be modelled.  The biggest worry must be that Britain’s army of 6 million furloughed workers are not really furloughed at all, but merely in the waiting lounge to real life unemployment.

Many of these jobs won’t come back. Even those companies that can reasonably expect to return to former levels of income are taking the opportunity to rethink business models, shedding staff accordingly. 

It is anyone's guess where the new jobs to replace the old ones are going to come from. Perhaps it is the Government’s suggestion that 50,000 workers will be needed to fill out customs paperwork for post-Brexit trade with the EU that gives the Bank of England such cause for comfort. Unfortunately these are a mere drop in the ocean, and in any case can scarcely be regarded as productive, wealth creating employment.

British Airways is only one of many established companies that envisages a permanently smaller workforce as a result of the crisis. It is not clear where the new jobs to get the UK back to full employment are going to come from

It’s generally good to be optimistic, but it can also make policymakers blind to the reality of what needs to be done. On multiple fronts, the economy faces a giant reset which is going to change established ways of looking at the world and what makes for responsible policy.

In their hurry to return to the old “normality”, the Bank of England and its masters in government first need to ask themselves whether this is a desirable goal in the first place. 

There is nothing like a crisis to expose the flaws that we  knew were always there, but were inertly ignored because they were politically too difficult to face up to.

To take one example, we’ve now had nearly 30 years of inflation targeting. This has delivered price stability, and a semblance of full employment, but it’s also helped drive a boom in asset prices together with a world awash with debt, which has in turn been used as a lazy substitute for the lack of productivity led growth in real wages. Capital has unsustainably gained at the expense of labour.

Is this really the sort of “normality” we want? I’m not suggesting that inflation targeting is abandoned altogether, to be replaced by indefinite monetary financing of fiscal deficits. That way lies the destruction of money. 

But we may have to get used to rather higher levels of inflation, and possibly a more protectionist economy, if we are to use this crisis as a way of creating jobs by reshoring production and working off excessive debt in the least painful manner.

A more resilient economy means a less efficient one, what Andrew Hilton, director of the Centre for the Study of Financial Innovation refers to as “a just in case rather than a just in time economy”. The City will scream blue murder, but will be powerless before the flood. 

These are ultimately decisions for the politicians, not the Bank of England, but as the Bank’s monetary technocrats are about to find out, the worm has turned as much for them as everyone else.