This is a perfectly sensible objective - after all, one of the most potent criticisms of both Whitehall and the Bank in the past has been that the atmosphere in the corridors of power has been more than a touch inbred. This is much less true now than it was a decade or two ago (mainly because so many middle-ranking economists have left the Treasury and Bank to work in the City) , but it is still a relevant complaint. More two- way traffic between the inside and the outside world would undoubtedly be a good thing for all concerned.
The Brown plan for the Treasury is to replace the existing Panel of Independent Forecasters with a new Council of Economic Advisers. The Shadow Chancellor believes that the panel of "wise persons" has run its course, and he says they have not been used properly as a source of advice for the Chancellor and have been left to disagree in public. In place of the panel, the new council will draw on a wider range of economic expertise, and will be asked to give advice on monetary policy, to present a pre-Budget briefing report, and to advise on other (presumably micro-economic) areas where the Treasury has a direct interest.
Writing as one of the two members of the panel which has survived its entire life (Tim Congdon is the other), I suppose I should feel duty-bound to defend the institution, and indeed I think that it did some useful work. For example, it was a factor in pushing both the Chancellors of 1993 towards the two-stage fiscal tightening that was crucial at that time, and its reports made it a fraction harder to undo this fiscal tightening in the run-up to the 1997 election. There were also good and thoughtful reports on the output gap and on European monetary union, among others.
But it is hard to deny that the overwhelming public impression of the panel was formed during the unseemly dog-fights which some members indulged in during its early days, and it was hard to shake off this image. Actually, there is a lesson here for the future. Since members of the panel spent only a tiny amount of their time on the panel's work, they never "bought into" the institution as an entity, and never felt any duty to protect its image. Instead, the incentive structure for panelists, fuelled by the predilection of our economic media for conflict (perhaps we should call it "the cut and thrust of debate"), encouraged members to gain attention by courting controversy. Being good economists, they reacted rationally to the incentives before them. They called each other names. And sometimes they resorted to calling the Chancellor names instead, which was even worse. The lesson is that either such outfits should be given something important to do, in which case they will hopefully see the need to impose discipline on themselves, or they should be told that they must give up their role in the public arena. If this limits the number of applicants for such positions in future, so be it.
Several questions have not yet been clarified about the new Council of Economic Advisers. Will it consist of full-timers within the Treasury, or part-time outsiders like the old panel? Will members, or indeed the chairman, be allowed to speak in public? How will the council relate to the existing Treasury officials, especially to Alan Budd, the chief economic adviser? What precise role will the council be given so that it adds to, rather than does battle with, other Whitehall institutions like the No 10 policy unit, which Tony Blair reportedly intends to turn into a "policy powerhouse" at the heart of government?
In an earlier speech, prior to last week, Mr Brown hinted that the Council will be particularly concerned with policy areas that might be relevant to the economy's long-term growth rate, which is a neglected area in the Treasury. The best way of doing this would be to work in private inside Whitehall, with council members being appointed to focus on this as their main job. If the council attended to the economy's supply potential, while the Budd group concerned itself with how to keep output close to that potential by managing fiscal and monetary policy, the new unit could play a useful role.
The Brown proposals also cover the reform of the Bank, where the prospect of greater independence in the setting of interest rates is dangled tantalisingly in front of the Governor if he successfully implements the new structure. According to press reports, one probable change is to divide Howard Davies's job in two, so that there would be one deputy governor for monetary policy and a second for banking supervision. Although this was not formally included in the Brown speech, it would clearly prepare for the day when the Bank might lose its regulatory function, leaving it to focus solely on the specialist task of setting monetary policy. Also with this in mind, a monetary policy committee (MPC) would be rapidly established, with three or four outside experts joining the existing staff to determine the Bank's position on monetary conditions. Finally, the Court of the Bank would be reformed to reflect a wider range of views, including both sides of industry and the regions.
These changes could be somewhat cumbersome in the near term, and it will not necessarily be easy to get high-calibre people to sit on the MPC in the period before operational independence is granted. Since they would not have any other managerial responsibilities within the Bank, and since they would be (hopefully) gagged from public speaking, it is not entirely clear how they would fill their time. Advising the Governor on how to advise the Chancellor might be one remove too far from the levers of power, though Labour seems genuinely to intend to move to greater independence for the Bank reasonably quickly. Once this is done, the MPC would play a necessary role (at least until the UK joins EMU, when it would presumably cease to exist altogether).
But of course we cannot shelve desirable reforms just in case we join EMU one distant day. The fact is that if the Bank is to win the electorate's trust in the setting of interest rates, then it needs to become the central bank of the entire nation, and not the central bank of the City's narrow interests, as it has been for much of its history. This important change cannot be accomplished without making the reforms that Gordon Brown has proposed and which, to his credit, the Governor has readily accepted.Reuse content