Carney and the case for monetary policy

You may have seen details of Mark Carney’s speech earlier in the week reported in the press. The headline story was Carney’s claim that we’re experiencing our first “lost decade” in terms of income growth since the 1860s.

There was a lot more to the speech than that. Carney actually made some much broader arguments defending the role of monetary policy in general. The speech was called “The Spectre of Monetarism”.

An alternative title might have been “The Case for Monetary Policy”. I suppose that’s logical: with the established political order crumbling around him, you’d expect someone in Carney’s position to defend himself.

Here are a handful of things he said I thought were particularly interesting. Emphasis added is mine. (If you want to watch or read the full speech, just follow this link.)

This evening I want to discuss the role of monetary policy in this time of great disruption. But first I will focus on the underlying causes and consequences of weak real income growth and inequality across the advanced world.

That’s because any doctor knows that the importance of diagnosing the underlying causes of the patient’s symptoms before administering the cure. Monetary policy has been keeping the patient alive, creating the possibility of a lasting cure through fiscal and structural operations. It has averted depression and helped advanced economies live to fight another day, so that measures to restore vitality can be taken.

All monetary policy has distributional effects, but it is rightly the role of elected governments to take measures to offset them if they so choose.

In that context, has monetary policy worsened income distributions, made savers poorer, inflated asset prices, or exacerbated wealth inequalities?

Have low interest rates meant the rich get richer at the expense of everyone else? Again, no. The data show that the poorest 20% of households have actually seen the largest proportional increases in their net wealth since 2006 (Chart 14), though a large part of this is due to a painful deleveraging (via lower mortgage debt). The data do not support the idea that the period of low rates has benefitted the wealthiest at the expense of the least wealthy. In actual fact, all wealth quintiles have experienced wealth increases.

Firstly, it’s interesting Carney talks about monetary policy as a way of “keeping the patient alive”, especially since we’ve talked about those same policies being a form of “iatrogenic” medicine: that which makes the patient worse, not better.

But it’s Carney’s discussion of inequality that I found most interesting.

Equality is a slippery concept. Is the world an equal place? My argument would be no. In no way. I wish I could write like David Foster Wallace. I can’t. Our talents (such as they are in my case) aren’t equal. I wish I was as smart as Stephen Hawking and could ride a bike like a Tour de France rider. Can I? Nope.

We all have different talents, ambitions, skills and work rates. There’s inequality everywhere you look in the world. Trying to make everyone equal is a futile as trying to make everyone the same height.

That might sound more controversial an idea than it actually is. It’s not something you hear politicians talk about. But when you boil it down, I think it’s right.

Trying to make everyone equal is impossible. Trying to treat everyone equally is both possible and moral.

That’s my big problem with monetary policy, particularly the stimulus, money printing, low and negative interest rates we’ve seen in recent years. By definition it doesn’t treat everyone equally. It rewards those who’ve borrowed more money than they could pay back were interest rates at their long-term average, at the expense of those who’ve saved.

It rewards the feckless and the financially incontinent (for instance, a government that borrows vast sums of money with no real plan for how to pay it back) over the prudent (savers and retirees who made sacrifices in order to put money aside for the future).

You can argue that central bankers like Mark Carney aren’t setting out to make the world more unequal. I’m sure some of them have good intentions. But to talk about inequality while your own actions fundamentally favour one group of people over another is the height of hypocrisy.

As Carney put it, “all monetary policy has distributional effects”. It is always going to distribute wealth from one place to another. And it’ll do so for the good of the state, not the good of the people.

I sometimes wonder if Carney is a reader of Capital & Conflict. I think it’s unlikely. My email is [email protected] if you’re out there! You have the right of reply!

After all that… remember to be an optimist!

Thank you to everyone who came along to the launch of The Exponentialist last night. I enjoyed the evening. There was one point I made in my short speech I thought is particularly relevant.

It’s a simple, but counter-intuitive point. And that’s the fact that there’s a strange connection between economic downturns and hard times… and huge, profitable bursts of innovation that bring about world-changing technology. We should remember that when someone like Carney talks about a “lost decade”.

As I put it last night:

Why do bad times lead to major breakthroughs? Necessity. The mother of invention. The force that drives us to look at new ways of doing things, new ways of creating wealth and improving our lot.

It’s Schumpeter’s waves of creative destruction all over again: just as the old way of doing things fails, people develop new ways that sweep the old away and remake the world. 

Perhaps when people look back on the years following the financial crisis not as a time of financial repression, debt and extraordinarily low interest rates…

But as the time we figured out how to edit people’s genes using CRISPR… or when we created artificial intelligence for the first time – or several other key innovations that perhaps would not have existed were it not for the downturn.

On that level, we should all be optimists about the future. Because no matter how bad things seem… there’s always a new innovation on the horizon that will make the world a richer, healthier, freer place to live.

Until tomorrow,

Nick O'Connor's Signature

Nick O’Connor
Associate Publisher, Capital & Conflict

Category: Central Banks

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