In February 2022, with the dust of another Covid Christmas settling behind him and the first strains of inflation beginning to show, Andrew Bailey, Governor of the Bank of England, warned workers against asking for a pay rise. Jerome Powell, his US counterpart, went further a month later, saying that the Fed would actively use the monetary tools at its disposal to bring wage increases down to its preferred level. And last month, in Australia, where inflation is tipped to reach 7 per cent by the end of the year, RBA Governor Phillip Lowe joined his trans-Atlantic colleagues in urging workers to do their bit for the economy.
For wage increases, said Lowe, ‘3.5 [per cent] in kind of the anchoring point that I want people to keep in mind’. When asking for a pay rise, that is, Australians should settle for a 3.5 per cent cut in real wages, even after a decade where they have barely grown at all.
The hypocrisy of these messages has not been lost on many. ‘Sick joke’: £575,000-a-year Bank of England governor criticised over pay restraint call snarled Sky News in the days after Andrew Bailey’s comments. Outlets in the US and Australia were similarly quick to juxtapose reserve bank governors on six-figure salaries and the battered workers whom they were imploring to take another hit. Hypocrisy is certainly fun to shout about, while many thoughtful analyses from economists, the blogosphere and policymakers themselves have added critical economic nuance, questioning whether wage reductions will make a meaningful dent in inflation at all. But if we fall back on polemic, or reduce the debate to a technical discussion about whether wages, profits, supply-side shocks or any other macroeconomic feature is the root cause of the current inflationary episode, we risk smothering a critical point that should be front and centre whenever the dry world of central banking is in the limelight.
That it is, always and everywhere, a political phenomenon, with winners and losers at every turn.
Take interest rates. By reducing the cost of debt, and increasing the attractiveness of riskier assets such as shares and real estate relative to ‘risk-free’ assets such as government bonds, low interest rates fuel asset price increases that enrich the few lucky—or wealthy—enough to hold them. It is no coincidence that housing and stock markets in advanced economies reached stratospheric heights during the past decade of record-low interest rates, delivering windfall gains to those who bought in prior to the surge and baking in a structural weight of opposition to policy that might bring prices down, all while locking an entire generation out of the possibility of ownership. In March 2020, at the height of COVID-19, the Bank of England doubled the size of its asset purchase programme to nearly £1 trillion, further supporting equities markets even as the pandemic widened inequality. While certainly serving the objective of financial stability, there can be no doubting that these decisions have real distributional consequences. Inflated asset prices have underpinned soaring inequality in advanced economies, with the latest figures from the World Inequality Database that the wealthiest 10 per cent of Australian households are worth 57 times the bottom 50 per cent—to say nothing of the top 1 per cent, who are worth 240 times as much—echoing increased wealth disparity across much of the Western world.
So too with the stubbornly low inflation that accompanied monetary policy from 2009 to 2022. While conforming with the goal of low and stable inflation codified in almost every major central bank’s governing mandate, to many this reflected a combination of unsavoury economic developments; from austerity and underinvestment to the broken bargaining power and underemployment that has increasingly immiserated workers. Even where central bankers recognised the negative aspects of overly-low inflation, their sole policy tool—monetary easing—was critical in underpinning corporate profits and bolstering the already-wealthy while wages continued to languish well below targets.
And finally, as central banks in advanced economies hike interest rates to combat the new inflationary surge, the resulting increase in borrowing costs hits the most indebted the hardest. This is especially worrying for the less-developed countries that had to borrow to the hilt to support their economies during the pandemic; a crisis not of their making, but to which they were hobbled in responding thanks to a punitive global intellectual property regime and the selfishness of rich, vaccine-hoarding nations. The African Development Bank’s 2022 African Economic Outlook, for instance, puts continent-wide debt-to-GDP over 70 per cent, identifying almost half of African countries as either in or at risk of debt distress as of February 2022. Given a majority of interest repayments on this debt are to international private creditors—payments that, for Ghana, Ethiopia, Cameroon and Malawi already consume between 25 and 45 per cent of government revenue—rapid interest rate rises in the countries in which their creditors are domiciled puts indebted African countries on the very brink of default. In these four countries alone, that means almost 200 million people whose governments will be forced to cut spending on already-bare-boned health, education, infrastructure and social services. Systemic central banks such as the US Federal Reserve and ECB may be constitutionally barred from considering the effects of their policies on less-developed countries, but this doesn’t obscure their impact on the lives of some of the poorest, most vulnerable populations on earth.
The intention here is not to question the economic logic of individual policy decisions. Every central banker I have ever had the privilege of working with has been an intelligent, rigorous, conscientious and analytical thinker, and they certainly haven’t needed me to start arguments for them. Instead, it is to point out the tradeoffs inherent to central bank policies—as they are inherent to all policies—and ask whether the veil of apoliticality should survive an era of drastically intensified distributional conflict.
We’ve been here before. As intimated in a 2020 paper by Paul Wachtel and Mario Blejer, the modern concept of ‘central bank independence’—the existence of a monetary authority empowered to pursue policy objectives independent of politics or government—originated with Milton Friedman in 1962. Friedman, as many know, was not afraid to blend the economic and political; indeed, it was precisely these political convictions—that in a democracy, such an amount of power should not be vested in a body free of direct, effective political control—that made the idea of an independent central bank as he himself defined it intolerable to Friedman. That had to wait decades. Following the stagflationary turmoil and neoclassical economic revolution of the late 1970s and early 1980s, Wachtel and Blejer write, and perhaps more importantly, during the ideological high point of uncontested neoliberalism during the late 1980s and through the 1990s, central bank independence exploded across the world until an idealised notion of central banking—as a technocratic institution totally independent of government influence, with a singular mandate to secure price stability through monetary policy—became the ‘holy grail’ of policymaking.
‘If the freedom of capital movement was the belt, then central bank independence was the buckle on the free-market Washington Consensus of the 1990s’ wrote Adam Tooze in 2020. He points to a series of political economic assumptions underpinning this ‘buckle’; assumptions that feel increasingly ossified. First, there is the trade-off between inflation and unemployment; the so-called ‘Phillips Curve’, whose shape became decidedly flat as soon as worker and union power was broken under the neoliberal assault of the late 20th century. Then there was the belief that global financial markets would punish—rather than profit from—any undue monetary expansion. Finally, there was the explicitly political expectation that voters would reward overspending and high employment, fuelling inflation, and consequently that governments must be roped to the mast. This seemed out-of-date even as it formed, with deficit-cutting parties romping home in 1990s elections, to say nothing of the austerity of the early 2010s or contemporary demands that striking British rail workers should accept job losses and get their selfish backsides back to work. To this we might add the idea that inflation itself is an unambiguous bad, and its minimisation an unambiguous good. A worker whose wage has not grown in a decade, or a recent graduate confronting a million-dollar mortgage, may draw cold comfort from the monetary tranquillity that has allowed investors and speculators to chase ever-greater returns. By enshrining these assumptions in a narrow institutional mandate, however, and empowering a set of economists with the tools to effect enormous distributional changes in pursuit of it—the ECB would do ‘whatever it takes’ to protect the Euro during the 2012 Eurozone debt crisis, said then-president of the Bank, now Prime Minister of Italy, Mario Draghi—outcomes that should be the subject of political contestation, and for which governments should thus be able to be held accountable, have instead been rendered the byproduct of decisions by unelected technocrats applying the dictates of one particular body of knowledge.
To depoliticise is itself a political act. For proof, look no further than the US Supreme Court decision to overturn Roe v. Wade, in which six technicians, empowered by their Madisonian role of ‘reason’ and ‘independence’ from the ‘tumult and conflict of the political process’, delivered the decisive blow in a half-century war against abortion rights waged by a fearful, declining minority of evangelical voters. Millions of people, disproportionately poor, coloured, and disempowered, in more than half of US states, will be the casualties. Yet for all its faults, at least the Court’s politicality is known. In fact, it is embraced. Processes are mobilised for political ends, appointments are bitterly fought, and decisions are open slather for contestation; if not of the judgements themselves, then at least of their policy implications. It’s an ugly process. At times it is downright horrible, and the outcomes often reflect the very worst inequities of American politics. But in its perversity it is also honest.
Central banking is not. While the new Labor government’s openness to appointing a workers’ representative to the board of the RBA hints at a more overtly distributional perspective on central bank policy, such moves are likely to draw significant opposition. Accusations will be forthcoming; of meddling, of power grabs, of a return to the dark days of capital controls and macroeconomic turgidity. No doubt these will be fiercest from the corporations, financiers and asset-rich individuals—both new and established—whose interests have been served by the last four decades’ status quo. But to politicise central banking is not to change anything, really. It is merely to reveal what has always been there, and acknowledge that all policy, whether fought out in public or cloaked in technocracy, creates winners and losers.