Policy preview: monetary policy and the Treasury
Indications of government policy do not always come from ministers briefing journalists or from whispers in Whitehall – occasionally they come via the civil service’s job board. To that effect, earlier this month HM Treasury posted a call for applicants for a new role as the department’s Head of Monetary Policy. While the posting may seem anodyne, it in fact raises serious question about how Prime Minister Boris Johnson and Chancellor of the Exchequer Rishi Sunak view the independence of the Bank of England.
Monetary policy is traditionally the remit of central banks. Economic orthodoxy for most of the last century has held that central banks’ ability to set monetary policy independently of the government is crucial to ensuring the long-term economic stability. The thinking has long been that if governments had the ability to set interest rates, they would be motivated to do so in a myopic manner designed to boost their electoral performances, such as by slashing interest rates to stimulate growth ahead of elections.
The breakdown in the relationship between unemployment, interest rates, and inflation – which has failed to run at an average of 2 percent or higher in developed economies despite over a decade of near-zero interest rates – has left many economists scratching their heads. However, so long as serious deflation is avoided, there are not many political opponents of low inflation. Yet concerns abound about how the poorly understood nature of this relationship is impacting monetary policy, most clearly evidenced by the conclusion issued by the Independent Evaluation Office on 13 January that the Bank of England did not have an explanation for how its quantitative easing policy worked, hindering its ability to build “public understanding and trust” in the programme.
Given the centrality of quantitative easing to not only the UK’s response to the COVID-19 pandemic and its economic impact but that of every other major central bank, renewing research efforts regarding monetary policy is indeed something that the Treasury and other Finance Ministries should prioritise. While the QE that followed the global financial crisis failed to result in inflation, the government has a responsibility to not just assume it will continue to have a non-inflationary impact.
The pandemic portends a crisis driven by a downturn in the real economy, whereas the post-2009 economic impact was demonstrative of the financial economy’s ability to precipitate a crisis in the real economy. Modelling how monetary policy may respond – in the face of renewed inflation or if it continues to remain absent – will be central to developing the government’s decision on whether austerity or continued deficit spending is preferable in the pandemic’s aftermath. The Bank of England’s independence will not go away, but with monetary policy to set to remain the driving tool in shaping the economy, the Treasury official tasked with interpreting its impact will prove extremely influential.
Dollars and sense: trust and the Troika
The global container shipping industry stands in a remarkably healthy position as the rollout of a number of vaccines means there is an end to the COVID-19 pandemic on the horizon. After being caught up in market turbulence as the virus spread across the world in the first quarter of 2020, shipping rates recovered substantially in the second half of 2020. As an billions faced unprecedented lockdowns, one common theme emerged – they still wanted to consume even if they could not venture out or splurge on services.
The resulting demand has proven a boon to the shipping industry, which had faced a torrid decade in the aftermath of the global financial crisis. Global trade peaked as a share of GDP in 2008 and has not recovered even as the world appeared to have put the worst impacts of the global financial crisis behind it before the pandemic and the industry was hampered by overinvestment on extremely large container ships that proved less adaptable to the new economic paradigms that emerged. Dozens of major businesses filed for bankruptcy, leading to industry-wide consolidation.
Some 85 percent of global container shipping is now controlled by three shipping alliances. Maersk and Mediterranean Shipping operate an alliance responsible for roughly one-third of container shipping. China Ocean Shipping Company, France’s CMA CGM and Taiwan’s Evergreen make up another alliance, responsible for nearly another third. The tie-up between Hapag-Lloyd and Ocean Network Express, Yang Min and Hyundai Merchant Marine controls another 20 percent.
If the promise of vaccines bears fruit, these firms stand to benefit further. Little new investment into container shipping has been made from outside these alliances as financing has proven hard to come by and the capacity glut caused by the long time-horizon of ship-construction has only begun to fade away.
Meanwhile the demand for shipping is likely to grow further as manufacturers seek to prioritise optionality, constructing multiple supply chains to hedge against the risk of further trade wars. While such a scenario should spell a return to boon times for the industry, the sector’s consolidation raises the spectre of renewed scrutiny.
In 2017, the US Department of Justice launched an antitrust probe into the global shipping industry. It quietly dropped the investigation in 2019, a result of political pressure and concerns that action could further strain the impact of trade tensions. While such a new probe is not likely until the pandemic is in the rear-view mirror, expect regulators in Washington and elsewhere to re-examine the industry’s competitiveness over the coming years.
Power play: spotlight on the Senate Parliamentarian
The post of US Senate Parliamentarian rarely garners significant attention. The officeholder’s role is to interpret the Senate’s own standing rules as well as its ethics and practices. Only six people have held the post since it was introduced in 1935. The incumbent, Eizabeth MacDonough, has held the post since 2012 when she replaced Alan Frumin, under whom she had previously served as senior assistant parliamentarian. The 50-50 divide between seats held by Republicans and those held by Democrats in the Senate, however, will see the role take on a significance not seen in the 20 years at least until the 2022 midterm elections.
MacDonough is not seen as party-political. Appointed by then-Senate Majority Leader Harry Reid, a Democrat, she was retained in the post by Mitch McConnell after Republicans took the Senate majority in 2014.
MacDonough may have successfully navigated the increasingly poisonous political environment in the Senate in recent years, but her largest challenges are still to come. Perhaps the parliamentarians’ most influential role relates to the interpretation of the so-called Byrd Rule, a longstanding Senate convention that allows certain bills to be approved by a simple majority rather than the 60-vote threshold required to overcome a single senator’s filibuster. Legislation is only eligible for passage under the simple majority if its primary impact is on government outlays, typically over the next ten years, rather than policy.
MacDonough faced a handful of rebukes from those on the Republican party’s right wing in recent years as they sought to repeal the Affordable Care Act through such a simple majority, which she ruled against. However, the ruling that most portends events in the coming Congress was the approval, then denial, of a motion brought by Republican Senator Josh Hawley last June. She initially ruled in favour of a move that he had brought requiring a Senate vote on withdrawing from the World Trade Organzation last June, although it rested on a technicality. Yet two weeks later she reversed her position, after the senior Republican and Democratic Senators on the Senate Finance Committee shared a new analysis of the move.
Hawley has since become a household name in the past month for his vocal endorsement of attempts to stop the certification of Joe Biden’s win in the November 2020 election. He has refused to apologise for his perceived role in fomenting unrest at the Capitol on 6 January, having welcomed the crowd as it gathered outside Congress. Hawley and his allies are likely to further seek to challenge the Senate’s established practices, and potentially seek to politicise the parliamentarian’s role. The fact Democrats lack a substantive majority, relying on incoming Vice President Kamala Harris, to serve as the tie-breaker will only heighten the importance of MacDonough’s interpretations of the Byrd rule and other Senate procedures.