Derek Wall is former Principal Speaker of the Green Party. He keeps a regular blog from an eco-socialist perspective at Another Green World whilst regularly contributing to the Morning Star.
Monetary policy is essential. Since 1997 the UK economy has been run primarily not by the government but by the Monetary Policy Committee of the Bank of England. Nine men and even sometimes a women meet monthly and vote whether to put interest rates up, down or on hold. It is never revealed what kind of coffee they drink but it is no secret that their grail is the inflation target. They have to achieve an inflation rate measured by the Consumer Price Index of 2% plus or minus 1, i.e they have to keep inflation within a band between 1 and 3%. If they fuck up, they must write a letter of grovelling apology to the Chancellor of the Exchequer. This was quite scary when the incumbent was Gordon Brown, I suspect he would have taken out his glass eye and thrown it out them in rage, when the letter was delivered. It is doubtful perhaps whether George Osbourne or his likely Labour successor would get stressed when it was delivered.
Nonetheless, they have been writing a lot of letters of apology, virtually every month they miss the target and January’s figures of 3.7% were unexpectedly high. Their policy tool the interest rate no longer works. The golden age of monetary policy from 1997 to 2008 saw them stay on target virtually every month, they would nudge the interest rate up a letter to discourage spending by the public. Lower spending means lower demand for goods and services and pushes inflation down. Likewise if inflation looked to be too low, with a dangers of recession they would push interest rates down, we would collectively spend a little more and inflation would stay on target.
There are many criticism that can be made of the MPC, is it democratic that something as important as economic management via monetary policy is decided not by elected politicians but selected bureaucrats. Why is inflation more important than unemployment (answer it isn’t). However for eleven years by its own standards the MPC delivered but it isn’t delivering even according to its own criteria any longer.
The MPC didn’t spot the financial crisis and subsequent chaos. But now they are in perhaps even deeper trouble and if they want to sort things out, I believe that they should invite evidence or even direct instruction from Caroline Lucas, Britain’s Green Party MP.
If they push up interest rates they will almost certainly crash the economy (they seemed to have worked this out, unlike George Osbourne who is likely to drive the vehicle into reverse with spending cuts). Interest rates though are virtually irrelevant because this isn’t demand driven inflation but supply side. Oil prices are rising, food prices are accelerating, clothes are going up dramatically in price. Yes this caused in part by a falling exchange rate that makes imports into the UK more expensive and the earlier rise in VAT has affected the figures.
Mainly its oil and chaotic weather patterns. Unless we become less dependent on fossil fuels, rising oil prices are going to cause sharp rises inflation. Climate change is going to lead to more crop failures, more fires like the ones in Russia that have pushed up wheat prices, more floods like those in Pakistan that have pushed up cotton prices. More climate chaos, less supply of cheap commodities, result inflation and negative growth, stagflation (stagnant economy + hyper inflation, it hasn’t got anything to do with deer).
We need to produce more of a food sustainably in the UK and we need green energy. Such policies are outside the remit of the MPC but unless we green the economy the economy will wither and die.
So Mervyn King, pick up the phone, call Caroline and ask her how a Green New Deal can be used to fight inflation.