This morning former Shadow Chancellor and Strictly star Ed Balls waded into the current controversy about the role of an independent Bank of England. Along with Gordon Brown, Balls was the man who pulled the rabbit of central bank independence out of the hat the day after the 1997 election that brought Labour to power. Today Balls argued that:
‘If in the end when things start to go wrong, everything is concentrated in the Bank of England only, that is politically dangerous for the Bank. So in order to protect independence, the Bank needs more political support and accountability’
Balls’ intervention comes after Theresa May’s criticism of quantitative easing in the Tory party conference speech in October, and then a series of more direct attacks by senior Tory politicians on Mark Carney, the Bank’s Governor, most recently by Jacob Rees-Mogg. There have also been attacks on the US’s Federal Bank by Donald Trump.
The theory behind delegating political authority to set interest rates to independent central banks has been described as
‘straightforward and appears ironclad in its logic: the preference of politicians chasing votes in the next election will be to manipulate the economy in ways that make the populace happy in the short term, disregarding the potential for their monetary policies to produce economic trouble in the long run.’
In particular, economists have argued that politicians will be tempted to reduce interest rates prior to elections, leading to cheap credit and a boom, but that this will create excess demand and lead to inflation in the longer run. Anticipating this, workers will press for higher wage settlements, and inflation becomes a self-fulfilling prophecy. Governments can say that they will commit themselves to not cutting interest rates ahead of an election, but if everyone thinks that they have an incentive to renege on that problem, it has no credibility. In the jargon, there is what is called a problem of credible commitment because of time-inconsistency in stated plans. Central bank independence solves this problem by having interest rates set by a group of technocrats who don’t have to worry about being re-elected and so are protected by political pressures.
However, as has been demonstrated in recent weeks, in reality things are not so clear cut. Central bankers can come under political pressure. Most crucially, the decision to make central banks independent is itself a political decision, and can be reversed. This point is emphasised by economist Adam Posen, who himself has been on the Monetary Policy Committee of the Bank of England. Echoing the comments made by Balls, Posen argues that
“the only way that central banks can credibly commit to price stability over the long term is to maintain a political constituency in civil society supportive of such a policy regime. That support from civil society, not any legal statute, is what protects central banks when they make a hard decision that angers politicians. Absent that support, laws regarding central banks can be changed or threatened to be changed until monetary policy is changed. Central bank independence is endogenous to that support and it will be curtailed when such support is lost.”
In normal times, that constituency in the UK is the City, which has historically been supportive of high interest rates. Now the politics is more about quantitative easing and low interest rates, which are hurting middle class savers and are therefore now unpopular with Conservative politicians.
What has any of this to do with climate change? The answer is that delegation of authority to a non-political body is the principle that also lies behind the creation of the Committee on Climate Change (CCC), in the 2008 Climate Change Act. The Act empowers the CCC to propose carbon budgets and to review and suggest policies for meeting those budgets, on the same logic that they will be less influenced by short-term considerations that elected politicians would be. The CCC has less power than the Bank of England, as it can’t determine policy itself, but it still has a lot of authority, at least in principle.
However, as I argued back in 2013, the attempt to delegate authority over climate policy does not in fact remove the politics. The possibility that the authority of the CCC will be over turned, or more likely, be eroded in practice, remains ever present. The CCC recommendation for the Fifth Carbon Budget (covering the period 2028 to 2032) was agreed by the government earlier this year. However, a recent report by ClientEarth suggests that the problem of erosion is a real one, with evidence that government departments are not meeting their obligations under the Act fully, and not able to respond fully to the demands of the CCC.
As with monetary policy, delegated authority always relies on political support from an external societal constituency. In a sense, this was always the intention with the Climate Change Act; it was partly meant as a tool for environmental campaign organisations, the Green Party and others to keep climate policy on track for the long term. The problem then is that the Act and the Committee are only as strong and as effective as their constituency, especially relative to countervailing forces.
The relative strengths of supporters and opponents of the CCA and CCC change over time for all sorts of reasons, not least the political salience of climate change as an issue. However, it is clear that, despite the Paris Agreement, there are all sorts of concerns that environmental goals have been challenged over the last few years by economic depression, and increasingly by right-wing political populism in UKIP and parts of the Conservative party. Moreover, since the European Union provided a different kind of delegated authority for climate and especially renewable energy policy, the referendum result means that after Brexit, the weight of political challenge will fall more heavily on the Act and the CCC.
What can be done? I have argued elsewhere that changes in climate policy become most secure where it has effects that actually help create greater political support for that change, in a process of what has been called positive policy feedback. This can be seen, for example, in the way that support for renewable energy in Germany created its own support constituencies by mass investment by households and businesses in wind and solar, and in support from industries and workers in national supply chains for wind turbines and solar panels. In the UK, policy design and institutions have been different, and these effects have been weak. Policy makers (at least in England and Wales) have thought about the political effects of climate policies mainly in terms of total costs, and less about distributional effects. They have also not encouraged the emergence of new, organised constituencies of support; indeed, in areas such as community energy, they have actively discouraged them.
Overall, Mark Carney’s travails under recent weeks serve as a sharp reminder that despite the Climate Change Act and the CCC, climate policy in the UK remains firmly in the political domain.