It is uncanny how some institutions become enduring crucibles for nurturing future significant office holders. Among British Prime Ministers, Eton and Balliol College Oxford spring to mind; in the Army where once it used to be the Brigade of Guards largely populating the general staff’s upper echelons, now it is more likely to be The Rifles (and their forerunner, the Royal Green Jackets); in the pandemic, the dominant scientific opinion formers have typically been found from Imperial College and Oxford.
In the financial and economic world and with an increasingly political influence, the unrivalled global incubator for future leaders is Goldman Sachs, the US investment bank. Through its alumni its tentacles spread far and wide. In the US, it is an almost inexhaustible list: US Treasury Secretaries (Steve Mnuchin, Hank Paulson, Larry Summers, and a deputy, James Donovan); Federal Reserve Board members including William Dudley and Steve Friedman; Donald Trump’s former chief policy adviser Steve Bannon. Abroad, two Italian prime ministers feature (Mario Draghi and Romano Prodi) and a former deputy Prime Minister of Egypt, several ex-finance secretaries (Nigeria, Spain and Sweden) as well as a number of central bank heads (Draghi formerly at the European Central Bank; also former governors of the central banks of Greece and Australia). Here, Chancellor Rishi Sunak is an alumnus; former Governor of the Bank of England (and before that Canada, and now UN Climate Change Ambassador) Mark Carney another; also on the Court of the Bank of England is ex-GS Ben Broadbent the Deputy Governor, and last week Huw Pill, another Goldman alumnus, joined the Bank of England as chief economist to replace Andy Haldane. Add to that, almost ten-a-penny the number of former Goldman Sachs employees or partners who now run, or have run, major institutions (including the BBC), quoted corporations, or who are regulators and within a world of wheels within wheels, it is an enviable position of considerable global influence.
The Chancellor’s conundrum: quarts don’t fit in to a pint pot
But relevant to today, and the specific problems being faced up to as we approach COP 26 in November, and as life with the pandemic continues to dominate both monetary and central bank policy, three ex-Goldman bankers encapsulate many of the pivotal arguments as to how we progress.
First, Rishi Sunak is in the front line politically, ideologically and financially to sell the perceived need for tax rises to repair the UK’s bloated finances in the aftermath of the pandemic (including splurging yet more billions on an unreconstructed, intractable NHS, a voracious bottomless pit when it comes to making cash disappear rapidly for minimal net benefit) while simultaneously attempting to pull off the political graveyard trick of reforming care for the elderly and all the while needing to meet the fiscal incontinence of Boris’s largesse on projects such as HS2 and ‘Levelling Up’. The elastic does not stretch far enough. Hence the addition of 2.5% (1.25% each for both employee’s and employer’s contributions) to National Insurance, as well as suspending the Triple Lock on state pensions, both breaking manifesto pledges, increasing the dividend tax and introducing NI to the pension income of those still in employment, all alongside the already announced hike in corporation tax rates from 2023; the kite-flying exercise to harmonise CGT with marginal income tax rates has been shelved but may yet make another unwelcome appearance. Nothing is off the table. Nursing a 97% debt/GDP ratio (£2 trillion of nominal debt, a third of which is immediately sensitive to changes in inflation) and a 2020/2021 budget deficit which ended up nearly ten times bigger than planned immediately defines the problem.
Unless anyone is still labouring under any misapprehensions about the pandemic state aid and employment lifeboat support schemes, like it or not we all now have a debt to society; and we will pay. Those who argue the empirically-supported monetarist case that reducing taxation rates stimulates investment and growth and in the medium term produces a much healthier, sustainably-growing, vibrant, innovative, productive economy with a higher level of nominal tax income (a win-win: in the debt/GDP calculation, you reduce the nominator and increase the denominator at the same time and the ratio rapidly improves), seem to be whistling inconsequentially in the wind, their arguments falling on barren, unreceptive ground. We observed in earlier columns that Tory economic policy increasingly had the hallmarks of a 1970s Labour Party manifesto; with these latest policies this is now beyond doubt. The Lady must be spinning in her grave.
The Bank makes a provocative appointment
Huw Pill, the new Bank of England Chief Economist, reminds us of Bill Dudley (another ex-GS, former President of the New York Fed and former Vice Chairman of the Federal Reserve), a thinking banker who ‘gets’ the broader implications of more than a decade’s worth of quantitative easing (QE) and virtually zero interest rate policy (ZIRP). Dudley has long argued forcibly that prolonged QE/ZIRP, the type of which has led all asset prices higher since the Global Financial Crisis, unwittingly or not creates significant societal imbalances, not only accentuating but accelerating the divide between the asset rich who go on getting richer and the asset poor who are increasingly left behind and marginalised. Further, in terms of incomes, while the resulting zombie economy helps preserve jobs that might otherwise have been lost (though some would argue that Darwinian economics leads to more productive employment by encouraging entrepreneurs to take risks creating new businesses), the resulting reduction in productivity gives rise to falling real incomes. The reaction is populism and political polarisation both to the left and right, which has palpable effects. Pill develops the argument further: the unelected technocrats, the Grey Suits (including the current Italian Prime Minister, Mario Draghi, leading an appointed technocrat government, such is the democratic deficit common in Italy’s dysfunctional political system), those who wield real power but who are unaccountable to their national electorates, are “inconsistent with liberal, democrat values”. He also argues that the need for QE and fiscal policy to be part of a symmetrical, homogenous system blurs the lines between the two, raising the likelihood of political interference. As the western central banks shoot the breeze about tapering QE (Canada, New Zealand and Sweden have already stopped it and the Bank of England intends to), it remains to be seen whether the points made by the likes of Pill and Dudley overcome the short-term anxieties among the banks that really matter (i.e. the Federal Reserve and the European Central Bank) of needing to avoid a mass asset sell-off; if a decade ago QE was ‘unorthodox’, indeed in the eyes of many conservative economists it was not just unorthodox but heretical, it may be that it is now so embedded in the global economic system and financial fabric that in reality it is now the ‘new normal’.
Expansion of central bank mandates beyond inflation
Which leads neatly to the last point, encapsulated in Mark Carney. Under his Governorship the Bank of England led its peers in the charge to recognise the threat to financial stability from climate change; it remains a moot point as to how objective he was being, given his own preconceptions on the subject. However, with the Bank of Japan having been the last adopter last month, it joins the Federal Reserve, the Bank of England and the European Central Bank as having climate change as a core part of its mandate alongside inflation. But many too are now also focusing on employment as a key target. Both climate change and employment policy, potentially sitting uneasily alongside the inflation target, are largely the preserve of politicians. This again raises questions about the future independence of central banks from political interference, but also to Pill’s point, the unaccountability of technocrats to the electorate over two key policy areas which affect every single one of us directly. It remains to be seen if these are circles which can be squared.
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