The consensus that has prevailed for the past 40 years told us that monetary policy must be depoliticised, so that central banks can independently pursue the goal of price stability in the economy without catering to politicians, private finance or corporations. Andrew Bailey, the governor of the Bank of England, threw that impression aside last week when he suggested that workers should not demand higher wages in order to contain the inflationary pressures confronting the British economy in 2022.
“I’m not saying nobody gets a pay rise” he said. But “we do need to see restraint in pay bargaining, otherwise it will get out of control”.
When central banks call for workers to yet again shoulder the pain, their role as guardians of the distributional status quo – the struggle over the distribution of national income between labour and capital – becomes clear for everyone to see. It is a misjudged call, tearing off the veil of carefully curated neutrality, and showing whose interests the Bank really protects.
Bailey’s reasoning is clear. The 1970s left central banks scared of the prospect of wage-price spirals, when powerful unions obtained worker pay rises that kept pace with higher living costs, and in turn companies transferred those higher labour costs into higher prices, triggering renewed wage demands.
Covid-related labour shortages, global supply bottlenecks and renewed appetite for striking threaten to reignite these cycles. But Bailey did not explain that wage-price spirals only occur if firms dump wage increases into prices, instead of simply reducing their profits. It was not, he implied, up to capital to moderate profit expectations to address inflation. Rather, workers must take (another) one for capital.
Yet the Bank is aware of how bad the post-2008 decade has been for British workers. In 2017, its then chief economist, Andy Haldane, explained that the “weak wage puzzle” – surprisingly weak wage growth even during periods of booming labour markets – was not just about slow productivity growth, or slack in the labour market, but also the power of capital to “divide and conquer” workers. Decreasing unionisation eroded workers’ power to negotiate better wages and defend, let alone increase, their share of national income.
The Bank’s clear stance here raises key questions about its future.
First, are we seeing the limits of the institutional arrangement that put central banks in charge of targeting inflation in the first place? After all, outsourcing inflation control to workers smacks of monetary impotence. If interest rate increases, however painful to mortgage holders, cannot deliver price stability, perhaps it is time for another approach, learning from experiments of the postwar era.
While these are typically dismissed as the failed wage policies of the 1970s, the National Board for Prices and Incomes, created by a Labour government in 1965 and dismantled by a Conservative one in 1970, offers a better starting point. In the words of its chairman, the Conservative MP Aubrey Jones, the NBPI sought to restrain both powerful employers and unions.
In more than 160 reports on various industries, public and private, it asked whether firms could absorb higher wage and other costs by lowering profits, particularly if those profits arose from excessive market power. And rather prescient for today’s British economy, it warned that allowing firms to pass wage increases off into higher prices reduces their incentives to seek productivity gains.
While the board had no powers to enforce its findings, it made a clear case for governments to engage in strategic price controls where firms could not justify price increases. Today, it would probably ask if instead of raising interest rates and removing existing caps on gas prices, the response to energy-related inflationary pressures should maintain caps, introduce a windfall tax on gas producers’ record earnings and an overdue structural reform, including public ownership, to align the energy sector with the ambitions of a low-carbon economy. The Bank, alas, is not asking these questions.
Second, can we rely on the Bank to discipline fossil capital, as required by its March 2021 environmental mandate? Then, the Bank had raised expectations that it would pioneer an ambitious strategy to make private finance greener, the first among high-income countries. Shortly after this, it outlined an innovative “proof of concept” plan to decarbonise its portfolio of corporate bonds, by first lowering the carbon intensity by 25% until 2025.
While its gradualism fell short of expectations, the plan ignited constructive debates about how to reduce the Bank’s subsidies to fossil capital. But in its rudderless fight against inflation, the Bank threw that plan out of the window when it announced in February that it would get rid of its corporate bond holdings entirely by the end of next year. Rather too keen, you suspect, to absolve itself from the task of penalising dirty finance, a task for which its governor seems ideologically ill-suited.
Third, the Bank of England has the power to obstruct governments intent on assuming greater responsibility for price stability or climate policy. Its inflation-targeting framework dictates that it should unwind its massive purchases of government bonds undertaken to support Covid-19 fiscal measures. This would push borrowing costs higher just as governments come under increasing pressure to shield citizens from eye-watering increases in living costs and support the low-carbon transition via public investments.
A central bank that is proving remarkably unwilling to discipline capital has at its disposal tools to discipline governments, all in the name of a policy framework that, by its own admission, is rather ineffective. It should instead develop new mechanisms to coordinate with fiscal authorities such as the Treasury to tackle the twin challenges of inflation and climate.
If Alan Greenspan was long worshipped as the central banker who always made the right call, Andrew Bailey is now in danger of always making the wrong one – on interest rate increases, wage restraint, government debt or climate. But these times demand more credible leadership and openness to institutional change. Otherwise, to quote Ariana Grande, thank you, next.
Daniela Gabor is professor of economics and macrofinance at UWE Bristol