Mr Blanchflower, Your Country Needs You
Chris Giles at the FT and the peripatetic David Blanchflower, currently writing for the Independent, are probably the Bank of England’s most effective critics in the mainstream media.
Blanchflower has an excellent article from Monday damning the MPC’s behaviour:
The MPC focused on targeting inflation, expecting that would bring stability, and look what happened. Now is the time to consider switching to a dual mandate that would includes growth, which would give much needed flexibility.
What is the best way to incorporate output and inflation into a single nominal target for monetary policy? Targeting nominal GDP. Blanchflower continues:
I am now of the view that the Treasury would probably have done a better job setting interest rates than the MPC achieved. Between 1997 and 2007, the path of rates would have been approximately the same. Whichever of the two bodies had set rates would have been driven by market discipline.
Interest rates would probably have been higher in 2007 as the housing boom was raging and house price to earnings ratios approached unsustainable levels. Alistair Darling has made it clear he would have cut rates earlier in 2008 if it had been left to him, and there is no reason to disbelieve him. I suspect if Osborne was making the decision right now, he would – correctly in my view – have done more QE.
I agree completely that Osborne would be easing right now if he held the levers of monetary policy. Cameron and Osborne paint themselves as “fiscal conservatives and monetary activists“, and Osborne was openly begging for more QE in the Autumn of 2011 before the MPC grudgingly obliged in October.
Blanchflower has also been a persistent critic of the Bank’s forecasting failures. Nominal GDP level targeting solves this problem too, by ensuring the Bank must correct any under- or over-shooting of the level target due to forecasting error.
The UK needs a monetary revolution to escape the follies of inflation targeting. We cannot have that revolution without more high-profile advocates for NGDP targeting. We’ve already got Samuel Brittan, Will Hutton and Vince Cable. Can we add David Blanchflower to that list?