(Bloomberg Opinion) -- The U.K. Labour Party’s plan to set the Bank of England a productivity target must rank among the worst ideas ever conceived for a central bank.
It runs against pretty much everything economists believe should be the role of a monetary authority. And it would amount to an outright admission of defeat by elected politicians, whose task it is to raise efficiency and prosperity rather than delegating this task to technocrats.
The plan, unveiled last week by shadow chancellor John McDonnell, is based on a report on the U.K. financial system authored by Graham Turner at GFC Economics. The basic idea is that the Bank of England should pair its 2 percent inflation target with a new 3 percent target for yearly productivity growth (which would be a joint aim with the government). The Bank would then report annually on progress.
This all ignores a basic principle that economists have agreed upon for decades: Central banks exist to keep inflation in check and to smooth economic fluctuations, but they can do little to change the long-run rate of any economy’s expansion. That depends on factors primarily within the domain of the state and individuals. How fast does a population grow? What technological improvements occur? Is there enough investment in education and physical capital?
Of course, recessions can do long-lasting damage. That is why it’s essential for central banks to intervene promptly when demand disappears. But most central bankers understand this, as was shown by their remarkable intervention during the sovereign debt crisis.
It’s perfectly reasonable that Labour leader Jeremy Corbyn — should he ever win power — might ask the Bank of England to do more to prioritize employment. But there are more straightforward ways to do this. At the moment, governor Mark Carney’s primary mandate is to keep yearly inflation at 2 per cent over the medium term. Promoting growth and employment is secondary. Yet the U.S. Federal Reserve has an outright dual mandate, which targets “both stable prices and maximum sustainable employment.” Labour could copy that.
A productivity target would leave policymakers in a bind. Labor productivity is most often measured as output divided by the total number of hours worked in an economy. But a central bank only really has the levers to boost output and raise employment together. Improving efficiency is out of its hands because that tends to come from advances in technology or management. So the risk is that the central bank would have to keep pressing on the monetary accelerator forever to inflate output and create more and more jobs. Meanwhile, inflation would spike and the productivity goal would still never be achieved.
The specific 3 percent aim is even more puzzling. Britain has an entrenched productivity problem. Output per hour worked in the last quarter of 2017 was only marginally above where it was 10 years ago. The Bank of England would have to set monetary policy on the basis of an impossible-looking target. The inflationary implications of such a plan might spook the markets.
There’s no doubt that British governments have to do more to boost the economy’s efficiency. Improvements in living standards and wages depend ultimately on workers producing more in a given space of time. But governments can only stimulate this themselves. Central banks are there to provide stability.
For Carney and co. to properly address productivity, they’d have to range far beyond their areas of expertise and responsibility. Would we be happy for central bankers to decide what subjects should be taught at school, how workers are trained or whether government money is spent on a railway line or a telecoms network?
Were central bankers to do this, voters would accuse them of overreach. So it’s not clear why Labour would want to pursue it. Productivity growth is crucial. That’s why governments should work on it — not look for someone else to carry the can.
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