Towards the beginning of the lecture Annaliese Dodds states that the toolkit of monetary policy has dramatically expanded over the last twelve years when in fact it has not. It still consists of a combination of interest rates and monetary flow and QE is one particular variant. She also, as has become the fashion of late, emphasized the significance of central bank independence introduced by Gordon Brown as his first act. Brown's motivation was not as Annaliese Dodds states, as being,
and referring to Mark Carney's summation that the UK’s monetary policy regime is both
Brown's main motivation was to avoid having house repossessions pinned on a Labour government as had been the case of the Thatcher regime. Otherwise the rest of the justifications will be understood to be less convincing by anyone who studied economics before bank independence who will have had to answer examinations questions, probably on several occasions, along the lines of,
It is worth adding that having answered this question in various exams and discussed the matter with professors and lecturers, the general opinion was always that there was no decisive conclusion on the matter. The supreme justification for bank independence is keep this main interest group, the financial services sector, happy. Of course monetary policy track records are a sound guide on this question. It is, however, more than apparent to most that, in spite of the advantages listed by Dodds, the last 12 years of an independent Bank of England making use of its "dramatically expanded monetary policy toolkit" had landed the country, before Covid-19 appeared on the scene, in a state of decline, falling productivity, hollowed out public services, falling real income and rising income disparity. On the other hand this same policy has created a massive speculative inflation and wealth creation for the tiny interest group operating in encapsulated asset markets or offshore investment and most of whom, naturally, support Bank of England independence. Carney's reference to democratic legitimacy and effectiveness and Dodd's reference to a coherent policy framework for a resilient economy just do not square with events and the current state of the economy.
In terms of democratic legitimacy we need to register the fact that central banking and taxation are institutions created many centuries ago to conform with the decision preferences of the ruling class long before there had been any consideration, let alone acceptance, that the people of this country should have any say in any policy decisions emanating from this system. Our constitutional structure only slowly and painfully, facing resistance all the time, evolved into a "democracy" but never reaching that status of a participatory democracy where public choice can affect monetary policy. Carney's reference to "democratic legitimacy" is bizarre when the facts remain that monetary policy decisions remain out of reach of public discourse and therefore are never subject to the approval of the people. It is the vast majority of the British constituency that have almost no savings and whose real wages have been ravaged by monetary policy. Dodds' needs to explain why she seems to agree with Carney's position.
Dodds is on cue in airing the current concern of the central banker's club members with respect to cryptocurrencies. Miraculously coinciding with the recent statements emanating from the BoE and now ECB, she refers to remaining risks of financial crisis possibly arising from the "dark corners" of the global economy (spooky), perhaps from developing economies running into acute debt difficulties, a dead certainty, or arising from the development of innovations such as digital currencies, and,
Because of this, Dodd points to the prudential regulation of the Bank and its monetary policy role to be essential and she repeated the mantra and her "insistence" that this role must continue to be exercised "independently". Annaliese Dodds clearly qualifies herself to be a full member of the banker's club a lá Brownian conversion on his pligrimage to the Threadneedle Street Temple. Brown has never been able to square his "socialism" with this position and Dodds is teetering on the edge of ending up with a similar predicament.
This because having qualified herself to become a member of the club she then makes a range of thoroughly rational statements linked to the failure of monetarism. From this some club members might come to the conclusion that she is a potential whistle blower.
So, under QE she notes that with debt reduction a major driver of government policy in reality increased from £1 trillion to £1.8 trillion between May 2010 and February 2020, and since then has risen to £2.1 trillion. There is here a confusion in that the ideologically-driven austerity ans depletion of public services was intensified by the impacts of QE.
Annaliese Dodds is quite right to call for a responsible approach to the public finances that must also include consideration of the quality and effectiveness of public spending. She cites the FT November headline, "UK's high spending delivers worse outcomes than peers" and the NAO chairman's statement, paraphrased here, as while we are a nation of ideas there is weak delivery wasting financial resources on ineffective "projects" while the most disadvantaged remain without support. Again, she refers to the concentration in control over assets, and increasing returns in "unproductive" as opposed to returns to labour and capital invested in the supply side productive sectors. Again a glorious result of the impact of QE.
She notes that the current crisis has reduced wages even further through furlough scheme and reduced hours linked to closures reducing demand and fie and rehiring used to reduce the wage bill even further. She also points to issues all related to QE which at the head of her lecture she was praising, but then states,
"Recent developments follow a decade-long squeeze on wages, the longest in the UK since Napoleonic times. During that decade, the returns to assets from land to art, other luxury goods and property have all outstripped wage growth."
She correctly refers to poor wage performance being linked to lack of embedded skills provision. But then suggests this is also due to failing employment programmes and declines in the effectiveness of "coordinating institutions" that she suggests could underpin sustainable wage growth.
Dodds then gets into some of the critical factors which sum up the incredible confusion amongst economists concerning the notion of wage-push inflation causing high inflation and weakness in wage growth reducing aggregate demand and therefore demotivating workplace investment. It is not clear why she states that,
"If we assume that the primary drivers of inflation are the public’s self-fulfilling expectations of price rises, and the health of the labour market ..."
But she is correct in pointing to the crisis-induced increase in spare capacity combined with additional cost pressures leading to squeezed margins, lower pay deals and in many cases pay freezes. This cost-push element has been building up for at least the last 30 years leading up to the 2008 crisis and the "solution" of QE just made things a lot worse.
I would not be surprised if most who listened to this lecture did not grasp the significance of Annaliese Dodds final statement,
"... the immediate risk we should be concerned about is not the inflationary risk of pay being too high, but the impact of low pay on our individual, societal and broader economic resilience. The rise of more precarious work – often on zero-hours contracts and linked to the delivery- and internet-based economy – will only make the problem of low returns to labour worse, if we do not seek to address it. That in turn will risk rising inequality."
Given that the track record establishes that current policy instruments and a feeble fiscal compact have failed abysmally, Dodds states
"If we are to deliver a resilient, jobs-rich recovery from this crisis and a stronger, better future for the 2020s and beyond, we must make effective use of all economic policy making levers at our disposal. That means an independent Bank of England setting monetary policy; a responsible government using fiscal policy to ensure public money is spent effectively and wisely; and action to improve resilience, including in the face of the climate crisis, and to deal with challenges to our economic competitiveness."
Annaliese Dodds is a well qualified economist and like most formally-trained economists following or teaching university macroeconomics, she clearly has an enormous faith in ability of existing fund of economic theory to provide a foundation for providing insights to fashion better policy frameworks. However, currently the work undertaken by the real income approach has established that the accepted macroeconomic economic theories remain without any coherence with applied policy needs as amply illustrated by outcomes. The virtually empty policy instrument toolbox has been proven, repetitively, to be completely inadequate in its generation of a small number of winners but always a majority of losers.
Paradoxically, the model Dodds refers to correctly, concerning the significance of higher wages and productivity being the core of consumption, or what monetarists call "demand", is a real incomes model which, in the real incomes world, is often referred to as a Say Model of the economy. This relies on endogenous funds to invest in raised productivity and wages leading to real incomes growth. This is also the Production, Accessibility and Consumption Model (PACM) which should substitute the monetarist and Keynesian Aggregate Demand Model (ADM). Monetarism and Keynesianism consider the insertion of exogenous funds into the economy can be used to "manage" demand. Between 1945-1965 the UK boomed with very low unemployment and living standards for the majority rising. This was a unique post-war period when Keynesian policies were not in fact applied. This period approximated a Say Model but after the 1970s with the international petroleum price crisis and slumpflation, financialization and the growth in exogenous finance substituted this model with increasingly major players targeting assets values in grey markets beyond the control of any monetary or fiscal policies and initiating a progressive marginalization of wage earners. Globalization also exported many jobs to offshore locations.
Somewhat along the lines of the conclusions to Mark Carney's Reith Lectures, Annaliese Dodds' Mais Lecture, while pointing out more clearly the main problems requiring solutions, asserts that the current status of economic theory and existing policy framework constructs are the foundation for constructive solutions. There is no evidence to support this leap of faith.
After all, Dodds herself pointed out that the NAO chairman stated that the UK was great on ideas but weak on delivery. Much economic theory can be put into this "ideas" box, and this is why our delivery has been so wanting. We need a different common sense approach to economics, more constitutional, by starting with a concern with the primary objective of the wellbeing of the majority of the people of this country and especially those with lower incomes and the working poor, which can leads to a disciplined and practical resolution of the dilemma of conscience facing economics and economists2.
1 McNeill, H. W.,"Economics, the dilemma of conscience"