When Will We Learn?

No less than fiscal policy, monetary policy needs to be under democratic political control, as it used to be, and as no Government was ever elected with a mandate for it not to be. We now see the alternative, if it can be so described, as identified by Richard Murphy:

The Bank of England has raised interest rates to 4%, supposedly to tackle inflation. There is just one problem with this decision. The Bank knows that much of the inflation we are suffering is being driven by rising oil and energy prices, largely resulting from conflict in the Middle East. It also knows that raising interest rates cannot reduce those prices.

So why is it doing this? The answer is that the Bank believes it must suppress demand elsewhere in the economy to compensate for rising energy costs. In other words, it is deliberately making mortgages more expensive, increasing business borrowing costs, discouraging investment and reducing household spending power. And all this when people are already struggling with higher energy bills. That is problem number one.

There is, however, another problem. Higher interest rates increase costs for businesses, which can then feed through into higher prices. They can, in that case, add to inflation rather than reduce it. The Bank is imposing economic pain to address a problem its chosen policy cannot directly solve. That is not sound economic management. It is the consequence of an economic dogma that refuses to recognise the difference between inflation caused by excessive demand and inflation caused by supply shocks. When will we learn?

Instead of this, anyone wishing to emulate Nigel Lawson, who never did it, should be calling for the taxation of wealth at the same rate as earnings, which he restored in 1988. But in 1998, Tony Blair and Gordon Brown put the clock back to the Chancellor of the Exchequer who had gone on, as First Lord of the Treasury, to introduce monetarism to Britain 50 years ago next month. On that as on Bank of England “independence”, Blair and Brown were much less social democratic than Lawson or, therefore, than Margaret Thatcher. Must the same be said of Andy Burnham and John Healey?