Monetary policy has a similar function to goalkeepers. Central banks are the last line of defence and their primary task is to avoid making mistakes. Goalkeepers will rarely win you a match, but they can prevent you from losing one. The Bank of England would like to think of itself as solid and reliable, but it has recently committed a couple of howlers. It was slow off the mark when the money supply took a nosedive, and scored an own goal in its botched implementation of quantitative easing. Even more importantly, its erratic behaviour has generated uncertainty, meaning other players have lost confidence. Instead of focusing on the opponent, it is second-guessing its own team.
The sorry reality is that goalkeepers can’t redeem their mistakes, they can only try to avoid making future ones. We can’t rely on central banks to secure the recovery – the best we can hope for is that they begin to restore confidence and keep us in the game.
What about fiscal policy? Some think that when GDP is below potential, there is scope for government spending to save the day. Spending is supposed to act like an impact substitute, someone you turn to when things aren’t going your way. However, fiscal policy is actually like the controversial Italian striker Mario Balotelli.
While impact substitution is meant to work in theory, there is little evidence of it working in practice. We are routinely told that Balotelli is one of the world’s best players, and textbooks are full of discussion about stimulus. But it’s all talk.
The implicit assumption is that there’s nothing to lose. But even when you’re losing a football match, you have options. And even in a recession, there’s an opportunity cost in not taking a better option. While Balotelli has the theoretical potential to make things better, he could also make things worse. And a stimulus could restore confidence, but it could also damage it. In short, Balotelli and fiscal policy are a liability. There is entertainment value, but it is a distraction from the task in hand.
Sadly, this footballing analogy falls short because the economy isn’t a team, and households and firms have a myriad of conflicting goals. But whatever the analogy, the main problem is government intervening as a player, rather than concentrating on its proper function – setting the rules (this is different from being a referee, who merely enforces those rules).
UK businesses are no longer sure what game they are playing. We need consistency from those in power.
Anthony J. Evans is Associate Professor of Economics at ESCP Europe Business School. www.anthonyjevans.com