I recently read a piece in the New York Times Magazine titled "God Save the British Economy" which profiled Adam Posen, an American economist who until recently was a member of the Bank of England's Monetary Policy Committee.
The article details Mr. Posen's training and career, but spends a significant amount of time discussing the differing opinions on how to bring major economies out of the recession. Mr. Posen, during his tenure at the B of E, grew increasingly frustrated with the approach of piling austerity on austerity following the financial crisis, especially when it seemed the pain was not in fact benefiting the economy, given that the British unemployment rate has stubbornly hovered at approximetely 7.9% for the last 3 1/2 years. He argues that the experience of the US, which chose stimulus over austerity, has produced a better outcome: an unemployment rate that dropped from 10.0 to 7.7% in the same time frame, albeit at a frustratingly slow pace.
One of the interesting points in the article is the discussion of why Mr. Posen believes the B of E was so unwilling to diverge from its austerity program: he makes the connection to the ruling government's ideology taking precedence over what he views to be prudent economic policy.
While I certainly recognize the challenges of the political ideology interfering with good policy decisions, what struck me as particularly interesting in the article was the lack of discussion of the political and economic consequences of implementing Mr. Posen's policy choice.
As a thought experiment, let us suppose that tomorrow the B of E has a change of heart and immediately ceases all budget cutting, instead printing and circulating more money into the economy in a similar manner to what has happened in the United States. Let us further suppose that this course of action indeed has the effects that Mr. Posen predicts: a decrease in the unemployment rate and a gradual return to the economy functioning at full capacity.
Let us now look a few years down the road to an economically more healthy Britain; an unemployment rate closer to its pre-recession level of 5.2%, and a steadily growing GDP. From an economic perspective, assuming the economy is now on reasonably solid footing, now would be the time to start withdrawing some of the excess supply of money in the system in part through a gradual raising of interest rates, paying off the government debt incurred during the recession, and generally moving back to a state of balance between government revenues and expenditures. My question is, would the B of E at this time suddenly have the political will to make these prudent economic decisions, even if they are unpopular? Is it truly politically easier to reduce the excessive size of government during good economic times to pay for the stimulus in bad times?
Conventionally it has been seen as a virtue to have central banks separated from the political process. It is intended to allow them to look further afield than the next election cycle and make prudent decisions for the long term, rather than what is politically expedient at a particular moment. While I heartily agree with this sentiment and reasoning, it seems to me the lack of consideration of the political repercussions, in addition to the economic, can sometimes bias policy makers towards a particular course of action that might have unwanted repercussions.
I do not pretend to understand the intricacies of Keynesian interventionism, nor am I arguing that Mr. Posen's prescription is the wrong choice economically speaking. However, I do wonder, in Britain, the United States, and other major economies, are the choices of political expediency over prudent policy going to be any less likely to occur in the future than they seem to at present?
