Slowly but surely, the economic orthodoxy of the past 40 years is crumbling. There was, of course, much that was wrong with the old way of thinking: the past few decades were characterised by a series of massive booms and busts, financial crises, intense macroeconomic volatility and huge global economic distortions and misallocation of resources, among many other ailments. Productivity has ground to a halt, median wages haven’t performed well in the West and the economy has been beset by a plethora of microeconomic problems.
But for all the many flaws in the received wisdom, it wasn’t all bad. Far from it, in fact: the world is immensely richer than it was and billions of people have been lifted out of poverty. Reasons for this include our wonderful embrace of globalisation and free trade, the privatisation and partial deregulation programmes of the 1980s and 1990s, cuts to marginal tax rates and the pursuit of sound money. The consensus wasn’t all right – but wasn’t all wrong either. We should be trying to rescue the good bits while jettisoning the bad bits. Tragically, we appear intent on doing the exact opposite.
Many of our leading figures are preparing to give up on sound money. The intervention I’m most concerned about is Bank of England chief economist Andrew Haldane’s call for a 4pc inflation target, as well as his desire to abolish cash, embrace a purely electronic currency and thus make it easier for the Bank to impose substantially negative interest rates, if needed.
I don’t want to over-simplify Haldane’s lengthy speech: he is a complex and brilliant thinker, albeit one with whom I often disagree. But the bottom line is that he wants higher inflation now as a cushion against future deflation: he is concerned by the possibility of a massive shock to global demand at some point soon, and wants to reduce the risk of prices plunging too far into deflation. Crucially, Haldane’s assumption is that the authorities would be stuck: they would not be able to respond to this looming shock in an appropriate way.
Conventional theory – and the lesson that was learnt in the 1930s, and again after 2008 – is that central banks must make sure the money supply doesn’t collapse during a downturn. That means QE at the right time and in the right amount.
But Haldane believes that this time the scale of the QE that would be required, and the way it would have to be conducted, would be politically impossible. Hence why he believes in higher inflation now, and why, in the long run, he wants to abolish cash, force everybody to hold all their money digitally and give the Bank the tools to impose negative interest rates. This, he believes, would be the only practical way for central banks to loosen monetary policy in a world of very low rates and useless QE.
Imagine that banks imposed -4pc interest rates on savings today: everybody would pull cash out and stuff it under their mattresses. But if all cash were digital, they would be trapped and forced to hand over their money. Why Haldane believes this would be more politically acceptable than extreme QE is a mystery; all spending would become subject to the surveillance state, dramatically eroding individual liberty. Many would start using rival currencies such as the dollar or euro, or resort to barter; sterling’s monopoly over the UK would soon end.
Money is already too loose – turning on the taps would merely further fuel bubbles at home and abroad. In any case, I don’t buy the idea that QE is now ineffective (though Corbyn-style government spending monetisation would be a disaster). And we haven’t even tried Milton Friedman’s helicopter money idea.
Haldane downplays the costs of higher inflation, especially for the poor and those on fixed incomes, and forgets that price rises have a nasty habit of becoming self-fulfilling. Calling for higher inflation also implies that the state is not serious about maintaining the integrity of the currency, which undermines property rights and the rule of law and guarantees random, extra-legal redistributions of wealth. Haldane is right to be thinking the unthinkable – but his solutions could hardly be any more wrong.