Paul Tucker was Deputy Governor of the Bank of England (2009-2013) and sat on its monetary policy, financial stability, and prudential policy committees.
This interview was conducted on 28 May 2023.
Q: Can you start by telling us in what ways you have been engaged in UK growth policy over the last 40 years?
I was a central banker between 1980 and late 2013. The Bank of England is not involved directly in policy to improve long-term growth. Nor is it involved in policy to improve or change regional distributional effects. I was involved in policy to ensure that the economy is stable, particularly its monetary system, broadly defined, and that involved tapping into the Bank of England’s network of regional agents who track what’s going on in the local economy. If you’re setting interest rates, or, before independence, advising on the setting of interest rates for the economy as a whole, it actually matters what’s going on across the whole of the United Kingdom: because although London and the South East are big, it is not the only part of the rest of the United Kingdom, and so one wants information from everywhere.
Q: How would you describe the UK’s regional growth productivity challenge?
I think it deeply matters – any system of government depends on the acquiescence of the people, that they accept the structures of government. This is what my own work is now about. A country or a federal nation like the United States, or a confederal, system like the Euro area, is shaky in terms of political legitimacy if some areas persistently do better than others, both in terms of incomes and in terms of social services and cultural opportunities as well as educational opportunities. Mapping that into a description of the UK is quite important. Having an account of why regional disparities in the UK are as great as they are both really important and really difficult. I’m from the middle of the country, from a large village between, the West Midlands and the Welsh Borders, the Staffordshire-Shropshire border. The only observation I would make is that this problem is often framed in terms of North-South. First of all, this tends to leave out the Midlands, which, as a child and teenager, just seemed a bit odd. But as an adult, as somebody who made trips around the country, I learnt there are plenty of parts of the South East coastal towns that also aren’t in the best of prosperity. I think although the North-South dimension matters enormously, it’s a kind of broader problem about some communities really not doing very well, and other communities doing spectacularly well.
Q: During that period, the Bank of England was made independent, and early on in the autumn of 1998, the first independent Bank of England governor, Eddie George, went to the TUC Conference to reassure delegates that the Bank cared about unemployment in every part of the country and that there wasn’t a conflict between meeting the inflation target and caring about all of the United Kingdom. Is that the point where bank independence and place first come together?
Well, it’s not the first point when monetary stability and the issues that you’re focusing on come together. It’s the first time under the legislation that the Labour government passed and the remit that the Treasury set for the Bank of England. This mandate is for the UK in aggregate, it’s not for specific sectors, it’s not for specific regions. And that’s valuable because, of course, the UK economy is joined up. It isn’t segmented into a series of economies. This isn’t just a worthy point, although it might be that in some respects – because I have absolutely no doubt that when Eddie went to the TUC, he was completely sincere. This wasn’t a ruse. But even if one had kind of bonkers preferences where one believed in regional disparities, as a central banker you wouldn’t be able to segment the economy because capital moves around and people move around and technology moves around and supply chains are joined up, and there are roads and trains that deliver goods and services and all of that. There’s just one economy.
Going back further, a big part of the story is in the early 1970s, starting a little before Mrs Thatcher’s government in 1979 but accelerating thereafter. The brakes go on, both fiscal brakes and monetary brakes simultaneously, which pushes sterling up a lot. That bashes the external competitiveness of manufacturing and accelerates the decline of manufacturing and its penumbra industries. That was concentrated in certain parts of the country.
I’m definitely not now speaking as a central banker, but I think one of the great political economy issues in the Western world for the last 50 or 60 years is the following imponderable: had the Carter government in the United States or the Wilson-Callaghan government in the United Kingdom got on top of inflation in the 1970s, would the Volcker Shock and the Thatcher macro-shock have been avoided? A political way of framing this is, in the labels people like, is would the advent of neoliberalism have been weaker and less long-lived? Would social democracy have made a comeback more quickly if social democratic governments hadn’t happened to be in charge in the 1970s when inflation got out of control on both sides of the Atlantic (with the exception of Germany and Switzerland)?
The point of all of that, in terms of your project, is to say something that I both believe in a careful sense but also believe in a conviction sense: that instability in the value of money, and instability in the private part of the monetary system, banking, does nobody any good at all apart from a few random winners – it’s bad for more or less everything. It’s bad for confidence in the political system, and it’s bad in this case, because the costs of restoring price stability were, in some senses, visited most heavily on parts of the country that were struggling to be competitive.
I think one can tell an alternative story where people try to protect those industries and one protection leads you to try to subsidise coal from Britain against coal coming in from Poland, which I think was a fairly big issue in the 1980s. Well, actually, some businesses are going to want to move to the Continent so that they can access cheaper Polish coal rather than relying on coal dug out of the ground at home. Then, if government responds by not allowing capital to move from Britain to the Continent, so then you’ve got capital controls and you’re relying eventually on homegrown technical progress, which is all just a way of saying that some of the regional issues we face are rooted in macroeconomic difficulties in the past which were massive, and to some extent we’re seeing how difficult they are again today.
Q: To what extent are these regional divides the overhang of the 1980s macro-shock rather than the industrial composition?
The first thing to say is that if you think of three episodes where Britain is hit by nasty shocks, in the late 1980s/the early 1990s, including the domestic credit boom and busts; then the late 1990s/early ‘00s, with tech boom and bust; and, more seriously, the 2007-2009 global financial crisis. The very striking thing is that in each case the metropolis and surrounding area take a pretty bad hit and bounce back pretty quickly. One area for exploration amongst microeconomists and policymakers in government is: what is it about the broader Greater London area that seems to give it the flexibility to bounce back quickly. It wouldn’t just be one thing, but whatever that ‘X’ is, is that something that is special to, as well as endogenous to, the makeup of the economy in the broader London area? Or is it something that could be translated to other parts of the country and how? I mean a really interesting question, for example, did Edinburgh take a nasty hit and also bounce back quickly?
Q: Are there other things going on which has been opening these divides?
I think a really important question is whether the success of London has made it a wonderful melting pot for skills, that not only creams off talent but that people who are especially flexible go there. A few years ago, this is completely anecdotal, I was talking to a young friend of a friend, and they were just leaving Harvard Business School to go to – they were German – back to work in Germany. They mentioned which firm they were going to work for, which was in an advisory-type business, not finance. I guessed they would be going to Berlin or Frankfurt. I was wrong. They were going to Munich. I do slightly wonder whether the history of dispersed power and metropolitan centers in places like Germany and Italy favor that kind of polity at certain points of economic history, given the nature of technology, and at other points, that centralization is better for success. But I don’t know. I think the comparison that people sometimes make with the Italian city states is completely mistaken.
Q: Did you have any reflections while you were working for the Bank around the degree to which markets were adjusting spatially within the UK?
Given the process which drove up London-esque property prices relative to other parts of the country, I was surprised that there wasn’t an endogenous process that reversed that. That younger people or slightly older people not doing as well as they’d hoped would move out to save themselves the very high level of London rents. That just seemed not to happen very much as net mobility towards London seemed to increase. Whereas what I’d been positing is that there would be adjustment both ways, Get out of London because it’s so expensive. In that respect, you read these stories of people living in smaller and smaller places in London. And that’s a choice in some sense, it probably doesn’t feel like a choice, but it’s a choice to be there rather than be somewhere else, which I assume means that people think that the returns to being there, even renting a smaller space than my generation was able to afford, is worthwhile. I think getting to the bottom of that is important. Is this an illusion that everyone thinks that this is the only place where you can hunt a crock of gold. That the probability may not be very high, but it’s not zero and everybody wants to be on that race. Then they make their lives there, and then you certainly have hysteresis of course, in lives, because that’s where you have your friends and the places you go and the places that mean something to you emotionally, so you don’t move away.
I think it would be intriguing if people thought that there was a Dick Whittington effect. That you go to London to make your fortune even though the probability is low of you making a fortune. I think, more broadly, when I was young, some major changes happened in Britain. My father thought it was a big moment when The Guardian moved to London, and I think when people have policies to push things out of London to the provinces, I both applaud and worry: in many respects, I’d like to see that reversed, but I don’t think it’s so easy. The Statistics Authority discovered that when they moved to Wales, which I was worried about at the time – there was later a report on why it hadn’t worked and what should be done.
Q: When you look at the fiscal and supply side policies pursued by governments over the past 30 to 40 years, do you see much evidence of an effective policy response to any of these challenges?
I want to say something about America here. It has made me feel that the cultural capital of urban areas makes a difference. A few years ago, not long after I’d arrived in Harvard and I was writing my first book, I went to Pittsburgh to see a particular political scientist there. I’m thinking, ‘Oh, Pittsburgh, an old steel town or something like that and it’s going to be really depressing in the way that parts of Detroit are quite depressed after the motor industry shrank’. It wasn’t especially like that at all, and I asked, ‘Why?’ This man very nicely gave me a tour around Pittsburgh, and he said, ‘You’re right and it’s because we’ve got two universities here and we’ve got a Carnegie Museum arts complex, and that meant that companies like Heinz have put their headquarters here. Then that creates a different kind of environment.’
After spending time in America, I’ve been struck that in late 20th century, early 21st century, America, university towns are to America what market towns were to England in a much earlier age. This slight, loose way of thinking has left me thinking that a regional policy that somehow tries to make more of the advantages of strong universities in the North would be tremendous. If I had one policy that policymakers, politicians could stick at over 50 years, it would be to invest in the development of world-class university in the North and by world-class, I mean world-class across the different faculties. There are all sorts of university departments across the whole of the United Kingdom that are extraordinary. But I don’t mean that. I mean taking all of the disciplines, Are you in the top 20? I think that would make a difference.
It will seem parochial, but if you compare Oxford and Cambridge as towns, or cities now, compared with 40-50 years ago. Oxford was the more prosperous town. Cambridge was a much less prosperous, very much a market town dominated by its university. The science park in Cambridge, and everything that has grown around that with research centres for biotech and pharmaceuticals, goes back to seed finance from one of the colleges at Cambridge in the 1960s. Goodness knows what the payoff period for them was directly. It must have been certainly 30 years before it was worth anything to them. But now it’s completely transformed the place. They’ve had a problem like Stanford in terms of the cost of housing for junior professors. I believe some colleges have helped finance the building of a village outside of Cambridge. Meanwhile, in Oxford, the car sector – Mr Morris, Mr Nuffield – that industry has declined, and Oxford is visibly less prosperous than it was. But the point is not about the decline of the car industry, that is just the kind of thing that happens in a market economy. The point is that the very long-term vision required is to put seed finance into the science park, the social payoffs, never mind the payoffs to Trinity, the social payoffs for that region, have been decades in the making, but it’s now a visibly prosperous place.
Q: Of the different drivers of growth – skills, innovation, public innovation, transport, the availability of finance – which ones are the more important now?
Skills and transport and innovation spend, yes, if it means things like helping support ambitions for really world-class universities in other parts of Britain; a bit less so in terms of identifying particular sectors, which ones would be excellent. Perhaps I just retain my generation’s nervousness about spotting winners, even at the level of sectors. I think transport, when you hear people calmly complaining about transport between one side of the Pennines and the other, you just think, ‘Yes, that should be fixed’. Infrastructure plainly matters a lot.
There’s a really interesting question about whether devolution to municipal government matters a lot. There was certainly a centralisation of municipal government during the 1980s, and in the short run, that was political, because Mrs Thatcher found herself with a large majority in the Westminster Parliament and a whole bunch of Labour councils around the place. I do think that there were long-term costs to that. But there’s a deeper point behind it. In our country, given not only the institutions of our politics, but the history of our politics, Westminster giving municipal governments or regional governments the power to borrow and spend is quite a big deal, given that if they borrow too much and go bust, the Westminster government will bail them out. It’s just not like a normal federal country. The kind of shenanigans in the United States in the 1970s when New York City went bust, where there were all sorts of rows in Congress before there was a rescue, that’s just not how Britain works.
Often, one hears stories from the United States that, amidst all of the stories about dysfunctional federal government or state government, one hears pretty impressive stories about municipal governments in the US and the local prestige that accrues to being in municipal government. In Britain, I think that’s changed in my lifetime. I care awfully about this because I think a healthy society has multiple sources of prestige. I think that over the last 40 years, there hasn’t been enough prestige attaching to people that are leaders in local government. One of the things I like about the mayoral system is that it pushes some prestige and public standing and public visibility back to people in those positions.
The point about spending and borrowing is only a problem if you can’t tax. I think that the debates about devolution in the UK, including debates about devolution in Scotland and in Wales and in Northern Ireland in different degrees, didn’t quite start in the right place. I think the principal place to start with is: do we want to release some taxing powers to lower levels of government and subject to what constraints or no constraints at all? Just the bankruptcy constraint? What are the relevant units for doing that? It’s very, it’s harder to delegate taxing power to communities that don’t think of themselves as a regional or local community with some sense of identity.
There is a deeper, empirical question about whether all the tinkering with the boundaries of local government and the systems of local government over the past many decades, going back before I was born, have fractured the sense of belonging to a local community that one might regret now. But it’s done, and the cost is that it would be hard to legitimize taxing powers there. You hear this when you talk to top military people about regiments and merging regiments across different parts of the country and the top military people understand something about local loyalties. What the people ultimately fight for in real fights is the comrades alongside them. The local identity can forge that in ways that are not to be just cast aside lightly. It’s not that I want to go back to some kind of rural world of rural shires, but I think a question for people that would quite like to delegate taxing power is whether that’s a completely crazy idea in modern Britain, especially in modern England.
Q: How effective do you think that the UK central state has been at recognising the effectiveness of industrial strategy balanced against the need for long-term investments in a bet for a place?
Our central state is where representative democracy gives the leadership usually to one party of government, with safe seats and marginal seats and hyper-marginal seats. And they have electoral tactics: the more certain seats are safe for one side, and others are completely safe for the other side – and there’s nothing to be done to change that – then the less governments of one colour or the other will have incentives to do anything about the prosperity of their completely safe seats with their marginal pound. I think that empirical political science in the United States has exposed that regional logrolling, as well as sectoral logrolling, rather more ruthlessly than is the case in the United Kingdom. I think you’re not going to get a cross-party consensus that the government of the day should help the other side win. And whilst that’s completely understandable in the short run, it’s pretty disastrous in the long run. Which goes back to where I began. The thing that bothers me is that – lots of things bother me, but the thing that bothers me most – is this feeling, ‘Well, we’re no longer being served by this system’. Which is, economics meets the politics. So even if I thought that the state couldn’t actually improve underlying productivity growth, which actually isn’t a position I hold, but even if I thought that that were the case, I would still want to solve the political problem of distribution, and where the two meet is you ideally want to solve the regional distribution problem in ways that help alleviate it in a more basic sense over the medium to long run. But the paybacks on these things are, in my intuition, 20 or 30 years. They’re just not shorter than that.
Q: How important has the role of the Treasury been?
The Treasury is nervous about local government finance because it has the power to tax, and it will have to tax more if local government borrows lots and goes bust. And if everybody moved around in roles and people in municipal government were sitting in the Treasury instead, and the people in the Treasury were sitting in municipal government, I suspect the Treasury would hold the same views. This is a structural point.
But I want to make another point about the distribution of power to municipal governments. I really do think that’s partly about prestige. There was a chart that came out the other day that I saw that that shaded different regions of the UK in terms of above average productivity and below average productivity. What was interesting about it was that there was a region of above average productivity growth in the North West, it looked to me like Cheshire. I think we should take that really seriously. Rather than thinking about, ‘How can one make somewhere in the Midlands and somewhere in the North more like Kensington?’ It’s, ‘What have Cheshire and roundabouts north of Manchester been doing that’s a success and for how long and why?’
I want to reinforce this point about the importance of information from around the country for the Bank of England. The story I alluded to is in the early 2000s and the economy’s growing quite rapidly and some of us, including me, thought we’re moving towards a position where we would need to raise interest rates. And although it wasn’t in the data, the regional agents, particularly in the north of England but also the Midlands, and actually, to his credit, Mervyn King, the Governor, from his own visits around the country, came back and said, ‘Well, actually, a lot of people are arriving from Poland and Romania, and so the aggregate supply capacity of the economy may be larger than we think, and therefore we may not be headed to inflationary conditions’. That raises all sorts of issues – it’s about migration, but I don’t want to get into that, important though it is. It’s that we would have made policy mistakes had we not had information from outside London. I think the Bank of England during my time there, both as a staffer and as a policymaker, was an institution that emphatically was not especially London-centric, especially after independence. Of course, it was always a bit London-centric in terms of the financial markets but, even then, there were visits to Edinburgh and Glasgow and places. But once monetary policy was in the Bank of England’s hands, the rest of the UK adds up to a lot. And the Bank of England absolutely cannot do its job without having people rooted in those regions knowing thousands of people in those regions, all of which leads to this point. Occasionally, people would say – and by occasionally, I don’t mean very occasionally – people would say, ‘Oh, the Bank of England’s got a better network out in our way than those other people in central government’. It’s a bit like my story about the Cambridge Science Park, it’s very long-term and patient investment in those regional networks with the people having pretty high status within the Bank of England.
But something else was important. The Bank of England very obviously isn’t part of Whitehall, but people running really serious businesses would say, ‘When you get back to London, could you talk to such and such about some problem, some really significant problem?’ And often I had never met the cabinet minister concerned. And I mention this because there’s a perception about what London is like and how we’re governed, and that’s to do with two things: this feeling that things are decided in London rather than up here; but also that London must be like up here or down here in the sense that everybody involved in government will know each other in the same way that everybody involved in some municipal government will largely know each other. I think London has an image problem at just about every single level, frankly.
Q: When you look back on the last 40 years, what are the key successes and missed opportunities in tackling regional inequalities?
I think it was just neglect, it never featured strongly enough in the calculations of the two main political parties for it to make a huge difference. And that’s because of a more careful version of the safe seats point. Where this came together was the Brexit vote. I wasn’t at all surprised by the Brexit vote and, putting aside one’s own normative views, this was a moment where people around England especially weren’t faced with a choice of ‘Do I want Labour or Conservative?’ It was, ‘Is there a problem that we’re facing, and could there be some big change that would help address the problem of neglect?’ The whole Brexit thing has loads of other elements. But I thought there was great utility in that because our standard system of elections, which actually I like, is one that didn’t allow that message to be delivered.
The only thing I would add about my own direct experience as a policymaker is you can’t have monetary stability in the economy without it being stability across the whole of the economy – the whole of the economy matters. But I don’t think the Bank of England has instruments that can do anything about that. And I don’t think the Bank of England should substitute for a vacuum in government policy. A lot of people would say, ‘Oh, the Bank of England can steer credit, which it plainly has the capacity to do and therefore it should, because the government of any colour won’t.’ I was in discussions with one set of people since I left office about credit policy and they said, ‘Oh, the Bank of England should do this, and it should do that’. And I said, ‘Well, why shouldn’t the Treasury do it?’ And the answer came back, ‘Because the Bank of England’s better’. But actually, if you put more powers in the Treasury, you’ll find that they will atract the better people, and that’s the same story structurally as the point about municipal government. People will work where they think they gain rewards and prestige, and we have a system of very concentrated power in Britain, in all sorts of respects, not just regionally, that may not be great for addressing the regional disparities that we have – not least, given the legacy of asymmetric economic shocks.
ENDS