In 1997, after the election of the Labour government under Tony Blair’s leadership, Chancellor of the Exchequer Gordon Brown committed to making the Bank of England independent of the government. The policy came out of a broader set of ideas known as “stakeholder democracy” which promised to empower various organisations of people to make policy choices independent of the centralised government. In the case of the Bank of England these people were professional economists who would be allowed set interest rates in line with economic science rather than at the whim of whatever government was serving at the time.
Stakeholder democracy has, for all intents and purposes, turned out to be rule by experts. Nowhere is this rule by experts more obvious than at the Bank of England, where debates around important economic matters are shrouded in the mysterious language of economics. If you do not have a PhD in the topic and are not widely respected in the profession, do not expect to be counted as a stakeholder or get in a vote.
The problem for the Bank of England’s stakeholder model, however, is that it lives or dies on the performance of the experts in question. These experts are implicitly making big promises: “hand power to us and we will use our knowledge to make the economic machine run at optimal speed”. But economics is a language of ceteris paribus – “all else being equal” – and if the economy underperforms under the stakeholder regime, as it undoubtedly has, the experts can expertly come up with reasons as to why this is that exculpates them from any blame.
It is not clear, however, that the language tricks can continue to work if the experts start to bankrupt the country. This now appears to be a very real risk. In a recent report published by Macroprudential Matters economists Stephen Cecchetti and Jens Hilscher calculate that losses from unwinding the Bank of England’s Quantitative Easing (QE) programme will amount to some £191 billion between now and 2031. That amounts to around 7.5 per cent of GDP.
The problem here is that the experts miscalculated. When the QE programmes were undertaken the experts had become transfixed with the idea that Western economies were entering a period of perpetual deflation – this became known as “turning Japanese” after Japan’s experience with deflation since the early-1990s. The QE programmes were designed in such a way that no one ever really asked what would happen if they were ever unwound. “After all,” the experts reasoned, “why would we have to unwind the programmes if deflation was ever over the horizon from here to eternity?”
You need not be an expert to know that making present calculations based on the idea that you know what will happen from here to eternity is unwise. Now that inflation has returned as a clear and present danger – it may have come down to 3.4 per cent in the latest set of data but it was below 1 per cent in 2020 – the chickens are coming home to roost. Yet at the time of writing, it looks like it will be the public that will foot the bill, not the experts. Thanks to an agreement between HM Treasury and the Bank of England all the losses that accrue to the Bank will be immediately transferred to the Treasury and, via the Treasury, onto the taxpayer.
It is probably worth reminding readers that these are losses from the same Bank of England that chastised Liz Truss for her tax cuts when she was Prime Minister. In November 2022, Governor of the Bank of England Andrew Bailey said that Truss’ government had damaged the country’s reputation. Yet while Truss’s tax cuts were set to cost the Treasury £30 billion in 2023 alone the losses from the Bank’s QE programme cost £40 billion and will cost £40 billion again this year.
What on earth is going on here? Why was the Truss administration pilloried when she tried to cut taxes, but the losses the Bank of England is passing on to the Treasury are politely ignored? Money lost is money lost, after all. The simple answer is that this is a consequence of the stakeholder democracy model. Rule by experts becomes posterior protection the moment said experts get it terribly wrong. Meanwhile the rest of us are obliged to not simply foot the bill but also to pretend that the emperor is fully clothed as he rides his horse naked through the streets.
