Prof Danny Blanchflower and I issued a press release yesterday calling for radical reform of the Bank of England’s Monetary Policy Committee (BoE MPC). We think this is really important to protect people from economic harm in the recession to come.
The MPC has set BoE interest rates and made all the vital decisions on quantitative easing (QE) since the BoE was made independent of central government in 1998. However, there are real reasons to be concerned about its current membership.
First, the governor is a bank insider, having worked there all his life. The four deputy governors have all worked at HM Treasury, hardly making them independent, whilst of the so-called ‘external’ members, three are professors of economics and the other is a former banker.
Second, without exception all these people are London-based, with mostly having incredibly close ties to the City of London.
Third, all of them are banking orientated, have a focus on economics and finance and so are likely to know little of the real world beyond the walls of the City of London.
Unsurprisingly, this group of people with similar backgrounds, life experiences and comfortable incomes suffer from ‘group think’.
Dissent on the Monetary Policy Committee is rare. In these extremely uncertain times, it is hard to think that there are no dissenting voices on this committee, but there seem to be none.
It is our argument that as a result the British people are worse off. When inflation is not being caused by anything that can be addressed by increasing interest rates all the members of this committee seem to think increased rates are required.
This wholly inappropriate approach to tackling inflation will add crushing new financial burdens onto households and businesses alike and is likely to deliver a severe recession for the UK.
In our opinion, if the MPC had a more diverse, regionally representative and much more accountable membership this problem of groupthink in the interests of the banking community in London could be overcome.
Our suggestion to tackle this is that the Governor of the Bank of England should be appointed by the government. The Deputy Governor should then be appointed by the Mayor of London to represent the city where the bank is based, as a whole.
After that, of the remaining members three should be appointed by the devolved governments of Scotland, Wales, and Northern Ireland and the last four should be appointed by regional committees of MPs to represent the diversity of opinion and needs across the rest of England.
These members should be elected for fixed terms, not be allowed to serve for more than one term, and should be supported by strong regional offices of the Bank that are intended to inform the decision-making of these members based on local need throughout the UK.
This would necessarily mean staff, including forecasting staff, should be moved from Threadneedle Street to various parts of the economy, where their focus would be on both the regional and national economies.
Vitally, these regional members would represent and seek for the interests of people in their areas. They would be well-paid and the jobs would be full-time. Each region would get to decide the background and experience of the person it appoints to represent its interest.
This way five goals are achieved. First, the committee will become very much more democratic.
Second, groupthink could be overcome.
Third, the committee is bound to be more diverse.
Fourth, the range of professional interests reflected upon it will increase, which is important given the massive impact of monetary policy on all aspects of UK life.
Fifth, there will be a clear opportunity to remove from office those who fail in their duties.
Danny Blanchflower said
“There is a role for a monetary policy committee, but it must be accountable, and it must be representative.
“Vitally, our proposal diversifies the professional and regional experience of those on the committee in a way that is bound to ensure that the interests of ordinary people are better reflected in the Bank of England’s decision-making processes.
“We need to encourage diversity of views to stop the groupthink that has dominated the MPC since its inception.”
“The current MPC brings together people with deep experience of economics rather than a wide range of lived economic experience that might be of greater benefit when making decisions with massive real-world implications for the people of this country.
“We don’t need theoretical answers to the current crisis: we need real ones. Only by changing the composition of the MPC can that be delivered.”
It is time for the UK’s monetary policy to be set in the interests of the woman on the Mile End Road omnibus and not for the City banker.