Who's running the show? George Osborne or the Bank of England?
Isn't it the job of our elected representatives to steer the economy, rather than unaccountable bank officials?
THEY ARE burning the midnight oil at the Treasury as George Osborne and his aides prepare for his fourth budget next month. The stakes are high, and not just because last year's effort degenerated into the notorious 'omnishambles' from which both the Chancellor's own reputation, and that of his party, has yet to recover.
The problem Osborne is grappling with is, to put it in a nutshell, that nothing he does or says seems capable of getting the economy growing again. Nor is there much optimism that this dismal state of affairs is likely to change, at least not any time soon.
Back in 2010, when he first laid out his plans, the expectation was that by now things would be firmly on the mend. They are not.
Osborne, of course, is not the first chancellor to run into difficulties with targets set in happier days. But, in his case, it is not just one or two that he has missed. With the economy flat-lining, public spending and the deficit both rising instead of falling, and the national debt creeping ever upwards, he has pretty much missed them all.
Paradoxically this makes it more difficult for him to change course and for growth, not less. With the deficit still rising remorselessly he is hardly in a position to cut taxes. And with growth proving so stubbornly elusive, speeding up the pace of spending cuts would risk pushing the economy back into outright recession.
If Osborne can't get us growing again, though, who can? Labour is almost certainly stuck in opposition for at least another two years, which perhaps explains why its contribution to the debate so far has amounted to little more than party posturing. Instead, faced with a political vacuum on all sides, we seem to be turning increasingly to the Bank of England.
Since the financial crisis hit five years ago, the Bank has seen its role develop by leaps and bounds. Without its massive programme of quantitative easing, the government by now would have been forced into the sort of drastic economies seen in Greece. And without its policy of ultra low interest rates a lot more firms would have gone to the wall, and many more householders would have lost their homes.
But not everything has gone to plan for the Bank. By holding down sterling when world commodity prices have been rising, QE and low interest rates have pushed up inflation. That, in turn, has choked off much of the growth its policies were meant to encourage.
The Bank's outgoing Governor, Sir Mervyn King, recently suggested that monetary policy had reached its limits, and it was now up to the government to spur growth with a more energetic programme of supply side reform. Among economists, however, support is growing for even more unconventional measures than QE.
If the Bank can print money to buy government debt, the argument goes, why can't it do the same to recapitalise ailing commercial banks or support investment in new infrastructure? It is a seductive argument, but potentially a dangerous one too.
In the markets, sterling is falling as traders bet that the incoming Governor, the Canadian Mark Carney, will loosen policy still further. But whether he does or doesn't, it is a sign of the times that the big question in British politics and economics is not so much what will the Chancellor of the Exchequer do next, but what will the Bank do?
Until about 20 years ago, central bankers were generally subservient to government. Then, as the need to fight inflation took centre stage, they became independent. Now, faced with apparently endless recession, they are becoming increasingly dominant.
With their unlimited power to create money, perhaps the central banks are the only institutions still capable of pulling us out of the hole we have fallen into. But can the Old Lady of Threadneedle Street really succeed where the government has failed? And even if she could, is that her proper role? Isn't it the job of our elected representatives to steer the economy, rather than unaccountable bank officials?
So far what little debate there has been on such questions has been conducted almost sotto voce, as if the whole topic is too delicate to mention in public. But the Bank of England is not infallible, whatever its merits, and these are big issues with significant constitutional as well as economic implications. Before we go any further down this road, we should at least think them through.