Sunday, 13 April 2008

The end of depoliticisation?

One of the dominant academic orthoxies in the discussion of British politics in the last ten years has been the notion of 'depoliticisation'. Its not just an academic debate as leading Labour figures have insisted that many decisions are best left to technocrats and experts.

I have always had some normative reservations about depoliticisation as a doctrine as it could reinforce the distance of the 'political class' from the median voter, leading to even more disillusionment with the democratic process. From an analytical point of view, it seemed to me that depoliticisation faced two limitations:

1. As far as the main depoliticisation was concerned, the transfer of the setting of interest rates to the Bank of England, its political success (as distinct from its economic success) was always dependent on a benign economic environment.
2. The use of depoliticisation as a device to reduce voter expectations to a realistic level (which is a real and necessary challenge) has not worked at all well in the case of the National Institute of Clinical Excellence (NICE). The press is still full of emotive stories demanding that patients with terminal illnesses receive expensive drugs - regardless of very low success rates and the fact that prescribing such drugs on the NHS involves a substantial opportunity cost elsewhere given that the budget is in principle finite.

What I particularly want to focus on in this posting is the MPC. The quarter per cent reduction last week is unlikely to have much effect on the plight of mortgage borrowers, given the way in which the Bank of England rate and the inter-bank rate have drifted apart.

The 'solution' there may be, as the banks insist, for the Bank to lend more money to them on the security of more marginal assets. This point has been made by two former members of the MPC, Sushil Wadhwani who said the bank was too concerned about inflation and needed to focus on the 'substantial downside growth risks' while De Anne Julius was critical of the slow reaction to the Northern Rock affair.

The underlying issue here is the way in which the British consumer economy is structured around debt based on housing. People generally perceive their house as an investment as well as a comfortable and conveninet place to live. However, that perception is not going to change any time soon.

What is evident is that the Bank is facing general political pressure, e.g., the warning from retailers last week to cut rates, otherwise jobs might be lost. There has been some criticism for commentators for a failure to make a bigger cut. However, the primary task of the MPC is to seek to control inflation, not to boost the level of economic activity.

Indeed, Mervyn King has recently hinted that unemployment may need to go in order to bring inflation under control, although he also noted that it could not be allowed to slow too sharply. As he acknowledged in his speech in Israel, this was a 'difficult balancing act.'


Justin Greaves said...

As I understand it, the Bank of England can engage in 'open market operations' to try and bring market interest rates down? How exactly does this work? Is it a feasible option?

It has been suggested that the inflation target should be modified to include assets and house prices - thereby, helping to achieve stability in the housing and asset market over time and not just in retail/consumer prices. Do you think this is a practical option? An economist on Newsnight last week made the point that targeting retail prices is out of date as there hasn't been an inflation/wage spiral in Britain for a very long time and, therefore, we need a modified target for today's world.

Wyn Grant said...

The first question certainly needs a specialist in financial markets to answer it. In broad terms, whether such efforts are successful or not depends on the context in which they take place which, I would suggest, is currently volatile and somewhat unpredictable.

One can construct a variety of alternative indices of inflation. I think the question is more one of desirability than feasibility. My own personal view is that house prices play too great a role in the UK economy, particularly in terms of influencing consumer demand. On more technical grounds, the idea of an inflation index that measures movements in (presumably all) capital assets sound challenging to me. Only an economist specialising in the area could advise on feasibility, but I would question its desirability.