The Prospector had an in-depth chat with leading economist and author George Magnus on a wide range of domestic and global economic issues. This is the final part of the interview, which considers the extent to which Mark Carney, the Governor of the Bank of England, can be seen as occupying a political role. Carney's speech yesterday in Scotland on the subject of the monetary consequences of Scottish independence indicated strongly that, unlike his predecessor, he is willing to adopt highly politicised positions. Carney insisted that his speech was "technocratic," but its political implications were more than clear.
The interview concludes with remarks on the matter of British membership of the EU, an especially germane subject on this, the day that the government is facing a back bench rebellion over the Immigration Bill: a rebellion intended to raise the prospect of Britain's departure from the EU, an outcome that Magnus makes clear would not be in the interests of British business.
Jay Elwes: On the subject of Central Bank governors and their politics—Greenspan was reflexively a Republican; Volcker was strongly associated with the Democratic side. But Bernanke was confronted with such a terrible situation that there was not quite the time for his politics to manifest. It seems the Bank of England how has a quite political Governor—much more so than Mervyn King. I wonder whether you see any problem with that.
George Magnus: Well just as a supplementary, Bernanke is a Republican too and yet I don’t think one could say that he allowed his politics to interfere with his professional conduct or behaviour. My guess is that he could have been more assertive about budgetary restraint over the last three years, particularly in 2012-13 when the automatic spending cuts took effect. But I guess he would have been very conscious as well about being over-critical of Congress, given that large part of Congress were also very critical about the Federal Reserve’s conduct from 2008 onwards, so presumably there was kind of a trade off that he had to play. I think we could forgive him for not taking his position against Congress in a stronger way.
As far as Carney is concerned, in a sense he is political. Not in a sense that he has any affiliations to any of our political parties, but his appointment was political from the very beginning. In one of the pieces I wrote for Prospect when he took office, I referred to the real test of Carney’s governorship, which was how he would behave or what his conduct would be at the first point at which there may be some kind of trouble between the government and the Bank of England, in terms of monetary policy or macro-prudential policy and so on.
I think, as yet, we don’t really know the answer to that question. At the moment, he seems to be playing his cards pretty close to his chest, and certainly the only hostage to fortune that he’s given us has been slightly involuntary, in a sense that the unemployment rate has fallen much faster than anybody thought it would. But I think we will find out during the next few months which side his bread is buttered on, because the issue of interest rate policy and the issue of how you deal with the housing market, whether you deal with it through monetary policy or through regulatory constraints on lenders—these things are going to become more important this year to be sure. I hope that he will be more central banker than politician.
JE: Is he likely to come into disagreement with Osborne?
GM: I think that on monetary policy, I don’t think so, not that I can foresee at the moment. I don’t think that he or the MPC feel that it is appropriate for interest rates to go up and I’m pretty sure that the government would be very—not shocked—but be very cautious about the knock-on effects of a rise, or rising interest rates. I mean a one-off rise, no one would lose any sleep about. But if the MPC took the view that interest rates need to go up in a series of moves, I think before the election the government would feel very uncomfortable about that because of its economic and probably its political impact too. But at the moment that doesn’t seem to be a problem. It’s more likely to be a problem in terms of financial stability issues, particularly as regards the housing market.
So if house prices were just to stop rising, across London and stabilise in the country, perhaps this problem will become brushed under the carpet. But if these trends that we’ve seen, of late, continued, they could quite conceivably become a bone of contention, as to how you will deal with it. And it may be that Carney would feel, particularly given what’s happened to the Canadian housing market in his country of origin since he left, that it would be appropriate to act sooner than this government might prefer.
JE: So in conclusion, are you pessimistic or optimistic about Britain? We have not had time to touch on the Eurozone and all of that. But allowing yourself to observe the broadest canvass, how do you see Britain’s prospects?
JE: If you ask me whether I optimistic about Britain recording a more than respectable rate of economic growth in 2014-15, I would say that I’m optimistic that we will. But that’s really just the kind of a tip of the iceberg. Underneath that question, really is a wealth of detail that really needs to be diagnosed and understood, which is why are we growing? And how are we growing? And what are the implications of economic growth, or the type of economic growth that we’re going to have? Here I’m not quite so optimistic to be honest, I think the foundations of the recovery are not sound and [whether] we can expect to grow by 2 per cent or so a year for the next five to eight years at the moment—I don’t think that is very likely.
I think we could have a burst of economic growth, and then we could quite easily fall back and stagnate, maybe even go back into recession in 2016-17, because a lot of the legacy effects from the financial crisis from the last few years, we’re still living with them, they haven’t really been addressed, we’re haven’t rebalanced the economy and you can’t see an end to austerity, because a lot of the government’s plans for austerity of course are what we call in the “out years”. They take place after the General Election,
But that’s not to nail the government to a cross, because all countries have the same problem with welfare spending, cost of ageing and so on. But I just think that our economic policy, I think is still far too political and not real long-term enough. I hope that will change in the future but clearly it’s not changing now and we have other problems to deal with like the Scottish independence vote, which could be a bit of a shock if it’s for independence, it could have significant implications to the British—the English economy. Then there’s the issue about whether we actually stay in Europe. The referendum is a few years away but companies may act with their feet long before that, if they felt there was a risk we might pull out.
The interview concludes with remarks on the matter of British membership of the EU, an especially germane subject on this, the day that the government is facing a back bench rebellion over the Immigration Bill: a rebellion intended to raise the prospect of Britain's departure from the EU, an outcome that Magnus makes clear would not be in the interests of British business.
Jay Elwes: On the subject of Central Bank governors and their politics—Greenspan was reflexively a Republican; Volcker was strongly associated with the Democratic side. But Bernanke was confronted with such a terrible situation that there was not quite the time for his politics to manifest. It seems the Bank of England how has a quite political Governor—much more so than Mervyn King. I wonder whether you see any problem with that.
George Magnus: Well just as a supplementary, Bernanke is a Republican too and yet I don’t think one could say that he allowed his politics to interfere with his professional conduct or behaviour. My guess is that he could have been more assertive about budgetary restraint over the last three years, particularly in 2012-13 when the automatic spending cuts took effect. But I guess he would have been very conscious as well about being over-critical of Congress, given that large part of Congress were also very critical about the Federal Reserve’s conduct from 2008 onwards, so presumably there was kind of a trade off that he had to play. I think we could forgive him for not taking his position against Congress in a stronger way.
As far as Carney is concerned, in a sense he is political. Not in a sense that he has any affiliations to any of our political parties, but his appointment was political from the very beginning. In one of the pieces I wrote for Prospect when he took office, I referred to the real test of Carney’s governorship, which was how he would behave or what his conduct would be at the first point at which there may be some kind of trouble between the government and the Bank of England, in terms of monetary policy or macro-prudential policy and so on.
I think, as yet, we don’t really know the answer to that question. At the moment, he seems to be playing his cards pretty close to his chest, and certainly the only hostage to fortune that he’s given us has been slightly involuntary, in a sense that the unemployment rate has fallen much faster than anybody thought it would. But I think we will find out during the next few months which side his bread is buttered on, because the issue of interest rate policy and the issue of how you deal with the housing market, whether you deal with it through monetary policy or through regulatory constraints on lenders—these things are going to become more important this year to be sure. I hope that he will be more central banker than politician.
JE: Is he likely to come into disagreement with Osborne?
GM: I think that on monetary policy, I don’t think so, not that I can foresee at the moment. I don’t think that he or the MPC feel that it is appropriate for interest rates to go up and I’m pretty sure that the government would be very—not shocked—but be very cautious about the knock-on effects of a rise, or rising interest rates. I mean a one-off rise, no one would lose any sleep about. But if the MPC took the view that interest rates need to go up in a series of moves, I think before the election the government would feel very uncomfortable about that because of its economic and probably its political impact too. But at the moment that doesn’t seem to be a problem. It’s more likely to be a problem in terms of financial stability issues, particularly as regards the housing market.
So if house prices were just to stop rising, across London and stabilise in the country, perhaps this problem will become brushed under the carpet. But if these trends that we’ve seen, of late, continued, they could quite conceivably become a bone of contention, as to how you will deal with it. And it may be that Carney would feel, particularly given what’s happened to the Canadian housing market in his country of origin since he left, that it would be appropriate to act sooner than this government might prefer.
JE: So in conclusion, are you pessimistic or optimistic about Britain? We have not had time to touch on the Eurozone and all of that. But allowing yourself to observe the broadest canvass, how do you see Britain’s prospects?
JE: If you ask me whether I optimistic about Britain recording a more than respectable rate of economic growth in 2014-15, I would say that I’m optimistic that we will. But that’s really just the kind of a tip of the iceberg. Underneath that question, really is a wealth of detail that really needs to be diagnosed and understood, which is why are we growing? And how are we growing? And what are the implications of economic growth, or the type of economic growth that we’re going to have? Here I’m not quite so optimistic to be honest, I think the foundations of the recovery are not sound and [whether] we can expect to grow by 2 per cent or so a year for the next five to eight years at the moment—I don’t think that is very likely.
I think we could have a burst of economic growth, and then we could quite easily fall back and stagnate, maybe even go back into recession in 2016-17, because a lot of the legacy effects from the financial crisis from the last few years, we’re still living with them, they haven’t really been addressed, we’re haven’t rebalanced the economy and you can’t see an end to austerity, because a lot of the government’s plans for austerity of course are what we call in the “out years”. They take place after the General Election,
But that’s not to nail the government to a cross, because all countries have the same problem with welfare spending, cost of ageing and so on. But I just think that our economic policy, I think is still far too political and not real long-term enough. I hope that will change in the future but clearly it’s not changing now and we have other problems to deal with like the Scottish independence vote, which could be a bit of a shock if it’s for independence, it could have significant implications to the British—the English economy. Then there’s the issue about whether we actually stay in Europe. The referendum is a few years away but companies may act with their feet long before that, if they felt there was a risk we might pull out.
