A Failure of the Economists, not the Economics
I can read Scott Sumner and he makes sense. Scott is saying the same things that Lars Svensson was writing about back in 1996, after all. It can hardly be controversial if the New Keynesians were saying the same thing sixteen years ago.
Back when Svensson was writing that paper on inflation targeting, UK politicians ran UK monetary policy. When they screwed up, they got fired. The Thatcher governments – whatever else you think about them – ran pretty decent monetary policy in the 1980s, after a few “minor hiccups”. They secured repeated electoral success, in part surely on the basis of that success.
In the early 1990s, the politicians screwed up again and tried importing German monetary policy to the UK. Doh! The Major government did not get re-elected after that experiment failed. Maybe that’s just co-incidence; politicians screw up in lots of other ways too and get fired for those failures.
By this point the economists were really pissed off with the politicians. They convinced the politicians that it would be better if economists ran monetary policy directly. So one of the first major reforms of the new Blair government in 1997 was to let the economists run monetary policy directly. I’m pretty sure that reform was supported right across the political spectrum at the time.
So monetary policy was one step removed from direct democratic accountability. This shouldn’t have been a problem though. Svensson gave us a simple method by which to judge the performance of the independent central bankers: look at the forecasts. The economists at the Bank followed Svensson’s methods, and did so exceedingly well for ten years. Everybody was happy.
Yet in 2008, the economists at the Bank screwed up. We know they screwed up, because we can apply Svensson’s method for judging whether the Bank are screwing up, and see the glaring error.
And yet. It is the conventional wisdom for economists – both inside and outside of the Bank – that the economists at the Bank have been doing a pretty good job.
In fact, the economists have now gone even further than that. They’ve decided that the persistent stagnation of the UK economy is not the fault of economists at the Bank. It’s the fault of the politicians in Westminster.
This just isn’t cricket. If economists outside the Bank will not hold the economists inside the Bank to account by their own metrics, why the flippin’ ‘eck should we listen to them about anything else?
UK monetary policy is not “doing fine”. The Bank of England has been running tight money since late 2008 on conventional New Keynesian metric a la Svensson of 1996. There is obviously a large output gap. The Bank should set their instruments to target inflation well above the 2% target. That’s what Svensson says. The Bank aren’t doing it. This is surely what the history books will say; it is a failure of the economists, not a failure of the economics.