An Interview with Sir Paul Tucker, former Deputy Governor of the Bank of England
Sir Paul Tucker served as Deputy Governor of the Bank of England from 2009 to 2013 and was a member of the Bank’s Monetary Policy Committee from 2002 to 2013. Currently a senior fellow at the Harvard Kennedy School and the Harvard Business School, he spoke with The Politic about the current global macroeconomic climate and the role of central banks.
The Politic: Let me start with a question about austerity, which has been hotly debated in both the US and Europe. Policymakers in Europe focused on cutting spending to reign in deficits after the financial crisis of 2008-09, but austerity measures received significant flack, not least from Keynesian economists in the U.S. who urged greater government spending to boost demand in a recessionary environment. The U.S. had relatively less austerity and has bounced back faster than most of Europe. What’s your take on this issue?
I think it’s really hard to know the effects of austerity, which probably vary according to how it’s done and a country’s starting position. The costs of the financial crisis were high, and we are, to put it bluntly, poorer for it. Here’s the rub: a good case could be made for greater stimulus in the short-run in countries like the U.S., but even the U.S. will have to cut spending or raise taxes in the long-run. That said, there are certainly opportunities for infrastructure spending, especially if that would raise the sustainable rate of growth. Things are different in those European countries that have more debt than they can pay off. The problem there is how to reduce the debt burden in the short to medium term while assuring creditors that these countries won’t do it again—so ‘austerity’ isn’t a monolith.
The Politic: Speaking of those crisis countries, which include much of southern Europe and especially Greece, how effective and important do you think unconventional monetary policy, like quantitative easing, has been in improving economic conditions? Far from seeing inflation, as might be expected as a result of dramatically looser monetary policy, there have been recent fears of deflation, something we haven’t seen in decades.
If people expect prices to continue falling, the economy can go to a very bad place indeed. People then put off spending, and the burden of outstanding debt can become crushing. Reducing the risk of embedded deflation is why the European Central Bank has put so much into quantitative easing, and I’m glad they’ve done so. I actually don’t think quantitative easing is as radical as people think. Whether in the U.S., the UK or the euro-area, it was rather the circumstances that were extraordinary. I think it’s been pretty effective in the U.S. and UK, and it signaled that central banks still had options at the zero lower bound [where interest rates are close to or at zero]. The boosts to asset prices [(stocks, etc.)] caused by quantitative easing do flow through to the real economy, albeit with uncertain lags. That said, many of the countries in continental Europe still need to pursue structural reforms. That’s easy to say, though, as living standards in much of Europe are still very high. The average person in France or Northern Italy may not appreciate the need for structural reforms, unlike in, say, Great Britain in the 1970s when it was obvious.
The Politic: Does it matter if most people don’t know much at all about these policies, such as quantitative easing, that will have significant effects on their lives and livelihoods?
It matters that central bankers are very powerful and appointed, rather than elected. It is incumbent on these unelected officials to explain to the people what was done on their behalf. This is something we took very seriously when I was in office and why our reports to Parliament were so important.
The Politic: After the financial crisis of 2008-09, what steps were taken to stabilize the financial system and prevent such an event from happening again?
In the buildup to the crisis, banks were much too leveraged [(leverage refers to a firm’s debt to equity ratio)], perhaps 100 to 200 times if properly measured, rather than one, two or three times like normal businesses. Policymakers have tried to limit that to around 25 times. Bankers don’t really like the limits because they cut into profits, although they also make profit streams less risky. When the banks went bust, the burden fell on the taxpayers, which is dangerous both in terms of hurting taxpayers and moral hazard, the risk that incentives to take excessive risk remain. The plan now is to hit bondholders after exhausting equity rather than hitting taxpayers, which should change the incentives of bond managers and force them to weigh firms’ stability more heavily. In that sense, it is a market-based policy. Before, banks were effectively a part of the socialized economy, and people like me who believe in capitalism want to put banks and bankers back into the market rather than have the state subsidize them.
The Politic: One recent worry has been “secular stagnation”—the idea that the current low levels of GDP growth are the new normal. Do you believe this a valid fear?
There are different ways of looking at the issue of secular stagnation. One view says it’s largely a demand-side problem that will require low interest rates for a very long time. Another view, which includes [Northwestern University Professor of the Social Sciences] Bob Gordon, says the problem is that the rate of technological progress affecting growth has slowed. This basically means that current inventions will have less impact on growth than, say, the railroad or electricity. On the other hand, slow recovery could just reflect our working through a big debt overhang. No one can be sure. Central bankers don’t know where economies will end up, and have to proceed acknowledging that big uncertainty. Meanwhile, away from monetary policy, things can be done to make economies more flexible. A lot of the debate in Europe is about that, just as it’s partly about infrastructure investment in the U.S.
The Politic: Looking toward the future, many projections show China’s GDP equaling that of the Unites States within the next decade, if not sooner. This poses potential challenges to the post-war “Washington Consensus” of international economic governance. Already, China has move to create indigenous competitors to American- and European-dominated institutions like the World Bank and International Monetary Fund. How should we respond to these changes?
We’re heading into a world where the global top table will be the U.S., China and—I very much hope—Europe. The big question is whether countries like India, Brazil, and Indonesia will be up there. Do we want to live in a world with two superpowers facing off, or will there be other powers to help balance out the tensions? We, the democratic ‘West,’ shouldn’t be despondent at all. Market economics combined with democratic governance have been the most flexible and effective systems in human history, and we should stick with that model. In addition, we have the advantage of soft power, including in our universities. The advantage of Yale, Harvard, and Stanford as well as Oxford and Cambridge in my country is that they are amazing, multinational institutions of higher learning as well as key sources of the West’s soft power. We should embrace this exciting new world, though certainly with a greater focus on education at all levels of skills.
*Bracketed comments are the interviewer’s own additions for clarity.