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The loneliness of monetary technocrats

“In the 1980s, most politicians in advanced economies were free market enthusiasts and pushed for deregulation, financialization, and hyper-globalization. This resulted in emerging market countries transferring the lion’s share of their export proceeds to the City of London and Wall Street.”

Despite the loud crowds of mainstream economists, technocrats and the gurus of central banking visiting the annual symposium in Jackson Hole (Wyoming, USA), it seems that the engagement of this community with public life is close to zero. Such a conclusion can be drawn from the political loneliness experienced by these top-officials in their home countries. This is not surprising, given that left-wing thinkers and academics claim that the “unelected power” wielded by central bankers is responsible for a sort of class war. This may be partly explained by the wealth redistribution toward top asset holders caused by the different forms of Quantitative Easing (“Socialism for bankers, capitalism for the rest”). Nevertheless, prominent right-wing figures are also confused by finding themselves in the present crisis point of monetary and economic development. For example, Prince Michael of Liechtenstein, the President of the Think Tank ECAEF (European Centre of Austrian Economics Foundation) claims that the years of easy money “had no effect on growth. Instead, it has led to asset bubbles, damaged savings…”.

Yanis Varoufakis, a well-known economist, figured out the clear cause of this delicate situation clearly. In the 1980s, most politicians in advanced economies were free market enthusiasts and pushed for deregulation, financialization, and hyper-globalization. This resulted in emerging market countries transferring the lion’s share of their export proceeds to the City of London and Wall Street. So, a huge volume of capital was at the disposal of financiers to fund the corporations building up ports, ships, warehouses, etc., while searching for higher returns. The crash of 2007–2008 burned down the financial mechanisms underlying this labyrinth of just-in-time supply chains (let us call it “the first episode of the supply chain crisis”).

At this point, central bankers stepped in to replace the private funding with public money by pouring in a tremendous amount of money via different forms of so-called “Quantitative Easing”. Among the repercussions of this process was the skyrocketing prices of assets purchased by wealth, which caused not only financial market “bubbles”, but also a new type of social conflict: a widening generational divide, where asset-rich older people benefit at the expense of the asset-poor youth. Thus, after 2008 the world faced a “new normality”, an economic regime characterized by the combination of low investment (money demand), plentiful central-bank liquidity (money supply), interest rates kept close to zero and productive capacity on the wane.

Against the background of COVID-19, the channelling of public money aimed at smoothing the pandemic shock pushed up aggregate demand, while the depleted productive capacities of the struggling economies failed to provide the required supplies. Given the exploitation of their immense market power to set higher prices for manufactured goods, corporations with great paper wealth — created with the assistance of central bankers — contributed to the current inflation surge across the globe. From this point of view, determining the ways in which the monetary policy toolkit can fill this gap between demand and supply in goods and services remains an enigma for the experts.

This issue may be resolved via structural changes in the real economy sector that relies on production capacity rather than on financial speculation. This action is desperately needed to saturate the market with scarce products and services, while also guaranteeing a decent and predictable margin of profit for capital owners. Unfortunately, according to the observations made by Michael Roberts, a well-known economic blogger, the decreasing productivity of labour — which has been slowing towards zero in the major economies for over two decades — tends to be a serious barrier to achieving this goal. The long-term decline in the profitability of such investment compared to investing in financial assets and property is working behind the scene in this process. This decline has been considerable, for example, over the whole post-war period up to 2019 there was a secular fall in the US rate of profit by 33 %.

So, not surprisingly, the owners of capital are in no hurry to channel their money into the productive sectors of the economy. According to Martin Sandbu in the Financial Times, the global economy suffered from the investment drought over the past two decades: France and the US have invested nearly two percentage points of GDP less this century than they did in the 1970s and 1980s; Germany and Italy about 4.5 points less; the UK and Japan 6 and 10 percentage points less respectively. Thus, it is possible to conclude that the latest monetary injections don’t have an expected “trickle-down effect” on the real economy, while also failing to deliver a comfortable macroeconomic environment for the wider public across the globe.

Such impotence of monetary technocrats makes their potential partners from across the political spectrum wary and angry. The rentier class, previously struggling to find yields on their investments in the low-rate economic environment, and other right-wing policy supporters, are afraid their assets losing value after the cycle of monetary policy tightening. On the opposing, left-wing political flank, the dominant inclination is to counter the inflation that eats into labour incomes, and safeguard jobs against recession and unemployment, which is thought to be caused by the hiking of interest rates by central banks worldwide.

This dysfunctionality may be eradicated via reorientation toward an economic policy framework that is rooted in production, work and localism, instead of finance, consumerism, and globalism. It is possible to agree with Dani Rodrik, a well-known economist that a new multipartisan consensus may be emerging around “The new productivism paradigm”, which emphasizes the dissemination of productive economic opportunities throughout all regions and all segments of the labor force. Unlike neoliberalism, productivism gives governments and civil society a significant role in achieving this goal, a move that is aimed at putting less faith in markets. This doctrine is more suspicious of large corporations, emphasizes production and investment over finance, and prioritizes revitalizing local communities over globalization. It is worth leaving it for expert discussions and subsequent road-maps for political decision-makers to determine whether such economic transformations should be based more on traditional industrial policy or on innovative market-based mechanisms.

To sum up, it is unlikely that technocrats from central banks will succeed in the resolution of the current challenges in the macroeconomic and monetary realm without close cooperation with political actors and the representatives of public society. Given this fact, the concept of central-bank independence, generally accepted from the neoliberal agenda perspective, needs to get a more social-friendly meaning. Otherwise, top decision makers won’t be able to fix the broken mechanism of monetary policy transmission and re-establish the productive basis of our economies.

Note: This article was originally published on the Monetary Policy Institute Blog:


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