Central Banks are inhibiting growth

Last night (10/01/2012) I went to a lecture given by the Governor of the Bank of Japan, Masaaki Shirakawa, at the LSE. The subject was entitled: “Deleveraging and Growth: is the developed world following Japan’s long and winding road?” In short, the simple answer is “yes, based on current trends and without any change of course.”

Mr. Shirakawa delivered a very interesting lecture the centred around, among other things including his love of the Beatles, how central banks should play a role as a guarantor of financial system stability. I have not touched the role of central banks in the past, but my opinion on the role of central banks differs from Mr. Shirakawa and probably from a lot of central bankers too.

My opinion is that the role of central banks should not extend beyond price stability. Why? Because the adoption of a extra-governmental role in guaranteeing financial system stability: a) reduces independence of a central bank; and b) aids in the depression of growth.

The independence of a central bank is undermined when it engages in a role outside price stability because, ultimately, the mechanisms and controls of a central bank are given over to the whims of politicians. For example, Quantitative Easing is a monetary mechanism to produce demand. Whether this actually works is another matter.

The crux of this argument revolves around the depression of growth.

The Bank of England’s base rate dramatically fell from 5% in September 2008 to 0.5% in March 2009, where it has stayed since. UK CPI trend since 2008 has been upward, largely encouraged by low interest rates. The same can be said of the Federal Reserve. QE itself is, arguably, a depressor of growth as the practical results would indicate an entrenchment of non-investment. Lender of last resort encourages the risky banking practices of the pre-2008 crash which aids in financial instability and depressing confidence. Unintended consequences of a policy often extolled by politicians.

By acting in an extra-governmental role, central banks maintain the status quo of “government spending is best”. This, to most economists is crass. Government spending, at best, does little to encourage innovation and enterprise because it is too busy propping up businesses that would otherwise have gone bust.

So, instead of an invigorated and dynamic economy, government spending and central bank intervention in its extra-governmental role is inhibiting growth.

Don’t be fooled by Eurosceptic ‘libertarians’…

…as they are just xenophobes.

This applies aptly to the Tory right and UKIP. Some might be theoretically libertarians but by calling for a withdrawal from the EU they cannot call themselves libertarians in practice.

The EU guarantees free trade, the basis for a free market, across member states. Freedom of movement for goods, capital and, most importantly, people.

Any renegotiation of Britain’s membership would precede the removal of these important contributing factors to the British economy.  Britain would become an isolated island with an increasingly discriminatory immigration system.

The EU is not perfect. Any one who says otherwise is deluded. However, it does lay an important foundation for the liberalisation of a global economy. The future of make-up of the world economy will likely be based on political and economic blocs – like the EU is. Like the USA technically is.

Once this shift has occurred free trade can take place between the blocs. It won’t happen in for a long time, but it will happen based on ongoing political and economic trends of co-operation at a supra-national level.

The right wing wish to prohibit this trend. A protectionist measure in the name of freedom.

 

Infrastructure Investment: Privatisation

George Osborne, ahead of Tuesday’s Autumn statement on the economy, has announced that there will be a £30bn investment in UK infrastructure. £25bn to come from pension funds and the China Investment Corporation and the remaining £5bn to be provided by central government funded by cuts elsewhere in the budget.

As a Keynesian, I favour a demand led approach but I also recognise that there is also a shortfall in the supply side, such as re-skilling of the unemployed. As Sam Bowman tweeted earlier: “Ha ha. £30 bn of infrastructure spending. Good one. That will help people to reskill for the future, won’t it? #jesuswept” I also recognise that the two are symbiotic, but that’s for another blogpost.

Investment in the UK infrastructure could be handled much better and it could also draw in more short-term capital for the Treasury. I’m referring to privatisation. Fixed Phone Lines, made of copper, need to be replaced by fibre optics to cope with increased demand on bandwidths due to a recent surge in people and products using and requiring broadband. BT currently has a de facto monopoly on this aspect of telecommunications infrastructure, with Virgin offering a cable based alternative in limited areas. The liberalisation that often comes with privatisation will provide more choice to the consumer, remove BT’s Universal Service Obligation as it has, in my opinion, failed in its obligation to provide access to advanced communications (broadband) across the nation, and create a more efficient broadband service thus aiding in growth.

Motorways could be sold off and made toll roads based on a Vignette. This would increase the immediate short-term access to capital that the UK government needs to reduce deficit and debt, remove its obligation for maintenance of the system and collect a revenue stream through a tax on the toll charges.

The attraction to these types of investment would be that the return of investment would be almost immediate and it would be of benefit to most of the citizens of this country. If the Chinese are looking to invest in the west, then the UK must be open to investment. With $410bn, that is a lot of capital to invest and the UK could do with all of it.