Tuesday, 11 June 2019
Should central banks be socially concerned? – continued.
On 5th June I criticised on this blog a letter (organised by Positive Money) from ninety academics in The Guardian which argued for the Bank of England to do more about climate change and other social issues like inequality.
So it was nice to see an article in the Financial Times the next day (6th June) also criticising the Guardian letter. The article was by Tony Yates (former economics prof in Birmingham, UK and former BoE economist).
Yates’s article was followed by an FT article by Positive Money people defending their Guardian letter. I’ll run thru the Yates and PM article in the paragraphs below, dealing with some but certainly not all the points in those articles.
Yates’s first point is that “Climate change mitigation is to be tackled by a combination of legislation, taxes and subsidies, imposed by an elected central government.” That comes to much the same as my point on 5th June that GOVERNMENT has far more powers to raise the cost of fossil fuels via subsidies (and/or subsidise renewable forms of energy) than central banks.
Positive Money’s response to that is straight out of la-la land, far as I can see. They say “Some of the most important levers which would allow us to address the challenges of our age sit outside the government’s control. For example, the UK will only be able to reach net zero emissions by 2050 by dramatically stemming the flow of finance towards fossil fuels.”
So how is the BoE supposed to “stem that flow”? To illustrate, if a heavy fossil fuel user wants to issue shares or bonds to fund its activities, the BoE has no powers to prevent that. Of course the BoE could clamp down on bank lending to heavy fossil fuel users, but if heavy fossil fuel users’ access to banks is restricted, that isn't much of a problem for them because, as just intimated, heavy fossil fuel users can issue shares or bonds instead.
Yates next point (in his next para) is that financial stability risks emanating from climate change (which the Guardian letter makes much of) are small compared to other financial risks (trade wars, Brexit, etc). I didn’t make that point on 5th June, though I have made the point in earlier articles on this blog.
Yates next point (his next para) is that asking the BoE to do something about climate change is to politicise the BoE. I.e. it would be OK to try to persuade government to get the BoE to do something about climate change, but it’s definitely not OK to try to get the BoE to act independently of government in that regard. I also made that point on 5th June.
Next, Yates deals with the claim in the Guardian letter that monetary policy can influence inequality, thus the BoE should pay more attention to the equality changing effects of its policies. (Perhaps the most popularly cited instance of that is the way that QE has allegedly boosted asset prices, and thus made the rich richer.) Yates answers that by pointing out that inequality in the UK over the last ten years or so has been little different to the 1990s.
Plus I particularly like this para of Yates’s: “Monetary and financial policies probably have consequences for lots of things: the crime rate; public physical and mental health. But we don’t task the Governor with those responsibilities. We have the Department for Health and the Home Office.”
Do Positive Money and the 90 academics understand Pareto Efficiency?
The latter “ignore the side effects” idea is very much what so called “Pareto Efficiency” is all about. PE, to quote the first sentence of a Wikipedia article on the subject reads: “Pareto efficiency or Pareto optimality is a state of allocation of resources from which it is impossible to reallocate so as to make any one individual or preference criterion better off without making at least one individual or preference criterion worse off.”
Essentially that boils down to saying that if GDP or output per head can be improved by some measure, then the fact that that improvement makes a particular set of people worse off is irrelevant, because those worse off individuals can always be compensated out of tax taken from those who have benefited, with the net result that everyone is better off.
E.g. if a central bank thinks an interest rate adjustment will cut unemployment, the CB should go for it. Any inequality increasing effects can easily be dealt with via the existing tax and social security system.
The alternative is for CB committees to get involved in liaising with any number of worthy committees concerned about equality. The bureaucracy there doesn’t bear thinking about.