In a democratic society, I would argue that decisions regarding interest rates, both long and short term, should be made by the elected government. They used to be. However, for nearly 20 years, short term rates in the UK have been set by the BoE. The level of short term interest rates is important and it can be adjusted to stimulate a slowing economy or slow an overstimulated economy. But there are other adjustments that can be made too.
Just as a pilot has all the control levers at his disposal when he’s flying a plane (if he, or she, does hand over to the co-pilot it would be all the controls not just one) then all the controls need to be either in the hands of government or the hands of the central bank.
But just who has the controls when it comes to controversial policy decisions like QE? Does an independent Bank of England decide, all on its own, to buy up £375 billion of government securities from the private financial sector? I don’t think so!
QE is no big deal. That’s not a common view, I’ll agree, but from a scientific perspective, there seems to be no reason why the issue of government , or the BoE if you prefer, IOUs in the form of cash should be any more or less inflationary to the economic system than the issue of IOUs in the form of gilts (treasury bonds). If it is necessary to buy back gilts from the private sector to control longer term interest rates then that’s what needs to happen.
So why not give control of the fiscal deficit to the BoE too? The BoE could calculate the best combination of fiscal and monetary policy, including whatever level of QE is needed, and tell the government what it needs to do. Arguably the government could decide to raise income tax a bit here or reduce VAT a bit there , etc, but it would not have complete control of fiscal policy as it now does.
This is not my favoured option BTW. But, if the pilot is going to hand over the (macroeconomic) controls to his or her co-pilot it should be all the controls and not just one.
Modern Monetary Theory: Real Economics 
I thought that should be obvious.
Firstly the idea that the Bank of England sets interest rates or has any ‘independence’ is a total illusion. Go read the legislation and you’ll find that the Bank of England sets interest rates as long as the Treasury allows them to. (Treasury reserve powers).
So it’s more like a learner driver in a dual control car. They appear to be driving the car but if they do anything you don’t like – drive towards a brick wall for example – then you can reassert the de facto control and change direction before there is a disaster.
It would be the same with any fiscal position – an elaborate political illusion designed to fool most of the people most of the time.
Those that want to degrade the power of the democratic state even further love that sort of thing. They even call it a ‘Noble Lie’.
The key is the word ‘Noble’ – as in Lord. It always comes from those who believe they have a God given right to lord over the people while being largely unanswerable to them.
This slow drip, drip leakage of democracy away from the people towards unelected institutions needs to stop. Otherwise we are heading back to the days of Kings and Barons and a new form of feudalism.
Thank you Neil. I like the analogy of the dual control car!
Nice the see the usual drivel from Neil on this subject.
Let’s start with his claim that “the idea that the Bank of England sets interest rates or has any ‘independence’ is a total illusion.”
The average mentally retarded ten year old has worked out that NO ARM of government is “TOTALLY” INDEPENDENT. That applies to the central bank, the foreign office, the ministry of agriculture, local authorities, schools, the health service. I can provide more examples if Neil doesn’t understand that point, which he probably doesn’t.
I’ll repeat that point using different words for Neil’s benefit: the prime minister / president etc can (if he or she really wants) overrule the decision of any arm of government.
Put that another way, Neil’s car crash analogy is just as applicable to the independence (or lack of) enjoyed by EVERY ARM of government. But no one quarrels, for that reason, with various decisions being delegated to various arms of government.
“Central bank independence” (or independence for any other arm of government) means that IN NORMAL CIRCUMSTANCES, that arm does not consult with higher political authorities when taking the decisions delegated to it.
As for Neil’s claim that the proposal in the above article would “degrade the power of the democratic state”, that’s not true. All the above article proposes is giving the central bank power over stimulus. But most central banks ALREADY HAVE THAT POWER in that they can overule (via interest rate adjustments) any fiscal stimulus that politicians have implemented. Indeed that’s what market monetarists refer to as “monetary offset”.
But I don’t expect Neil to understand the latter point.
Ralph, you like the bureaucracy??
“that they can overule (via interest rate adjustments) any fiscal stimulus that politicians have implemented. ”
Thanks to Gordon Brown.
The key thing, IMO is to have strong automatic stabiliser like the JG so there is less need for stimulus and that can respond in real time to stabilise the economy.
Giving power over fiscal policy seems a step too far. People who vote like to say cut this or lower that tax or increase spending on NHS, much more than interest rates. Maybe they should have that power taken away from them. They screwed up badly in 2008.
“Giving power over fiscal policy seems a step too far”
Yes I would agree. The tone of this article was somewhat tongue-in-cheek.
Although there’s nothing to stop the BoE giving a recommendation. If it were seriously being proposed that they should have some actual power, we should have elections for the top posts in the BoE too!
And the other thing is that monetary policy via interest rates is much less effective.