For me one of the most important lessons for British economic policymakers over the last six years should be to fear the interaction of micro with macro, supply-side policies with demand-side policies.
I do not think it is a merely a co-incidence that the worst fall in nominal demand since the 1920s occurred at the same time as a supply-side shock (collapse) in 2008. All recessions in British history have been driven by tight money aimed at lowering inflation. Was this time different? It’s not obvious why… CPI rate, September 2008? 5.2%.
And I do not think it is merely a co-incidence that the worst recovery in demand on record has occurred at the same time as inflation has sometimes hovered, sometimes soared above the inflation target. CPI rate, September 2011? This is during the time when the Darling/Osborne austerity drive “sucked demand out of the economy.” That CPI rate in September 2011 was, again, 5.2%.
Here is MPC hawk Martin Weale writing this week:
If wage growth picks up more rapidly than I expect, it will be an indication of inflationary pressure in the economy and Bank rate will need to rise sooner. If wage growth remains subdued, Bank rate should rise more slowly. Because the future is uncertain, we cannot make any promises about where Bank rate will be in a year or two years.
Raising the minimum wage by 3% at a time when hourly wage inflation is 1-2% at best, and is one of the indicators preventing the Bank from screwing up the demand side again… that would surely be an incredibly foolish gamble.
What, exactly, have policymakers learnt from six years of negative supply shocks and disastrous demand-side outcomes? Have we even learnt anything about wages, nominal shocks and employment? It does not appear so.
So sure, let’s try another supply shock. Maybe we’ll get “lucky” and the labour market tightens enough this year that hourly wages pick up, so that a 3% NMW raise doesn’t hurt many more people. Maybe.
Here is the Low Employment Commission report for 2008 (before the recession):
3.18 The decline in the labour market position of young people has been general across the UK. The proportion of young people not in FTE aged 16–21 who were in employment fell in almost all regions between 1998 and 2007, unlike those aged 22 and over who saw their employment share increase in all areas of the UK except London. However, by European standards, young people’s labour market position in the UK is relatively strong.
Good one! Our labour market may be doing badly, but just look at Spain! Those guys are really screwed. They continue:
Given that employment in the UK has been at record levels, it is difficult to explain why young people have not done better in the labour market. Two significant developments in the labour market in recent years have been the increase in the number of people of pension age becoming economically active and the arrival of predominantly young migrant workers from the European Union accession countries.
It’s “difficult to explain”… right. A total mystery. I can’t think what might have caused it, so let’s blame immigrants and old people, those are surely the most “significant developments” in the British labour market in the years to 2008. If anybody does have any better ideas about what happened, be sure to write to Card, Krueger, Dube, etc.
Paul Tucker is leaving the MPC later in the year. That’s the good news. Here’s a quote from his speech today which I cannot resist ridiculing:
It is sometimes suggested that independent central bankers are more averse to inflation than to periods of low growth and increased unemployment.
Gee whiz, Paul, really? Why could that be?
I hope the past few years have demonstrated that, in fact, it is the credibility of the Bank of England’s commitment to price stability that enabled us to provide such exceptional monetary support to help the recovery.
Oh. So… during a period with the worst real GDP growth on record, and high unemployment, what you’re saying… as you and your colleagues have done in speech after speech… is that what really matters is the Bank’s “commitment to price stability”?
It is unimaginable that, prior to Bank independence in 1997, any government would have been able to hold the policy rate at effectively zero and make a further monetary injection of £375bn without inflationary expectations – and government financing costs – spiralling out of control.
Inflationary expectations… hmmm… wait. For some reason I am getting the impression that independent central bankers are more averse to inflation than to periods of low growth and increased unemployment. But it must be the voices in my head.
(Those three sentences really are placed together in that order in his speech, I’m not making this up. Tucker also has a delicious reference to his definition of the phrase “escape velocity”, with a footnote referencing his remarks in 2011 to the TSC. It’s hard to know what he is getting at.)
Dr. Martin Weale is concerned about market sector Unit Labour Costs. OK. Here is what happened to market sector Unit Labour Costs going in to Summer 2011:
They have just tipped out of outright deflation. To be fair, this is current data; possibly the Bank had data saying something different back in 2011. But let’s presume that if Dr. Martin Weale was looking at even vaguely similar data, he must have been arguing for looser monetary policy at the time? Here’s what he was saying in June 2011:
I have, of course, been pleasantly surprised that wage settlements in the private sector have remained low and that private sector regular weekly earnings are rising by less than 2 1⁄2 per cent per annum.
(Yes, Dr. Weale! Like you, people all round the country are celebrating their low pay rises! Hooray for low pay rises, they say! Hooray, hooray! He continues…)
But a more general picture of unit domestic costs excluding taxes can be obtained by looking at the gross value added deflator. This rose by 1 per cent in the first quarter of the year and by 2.4 per cent compared with the first quarter of 2010. So it is consistent with the view that, even after excluding import costs and taxes, there are at present substantial cost pressures in the economy.
Can you see what he’s done there? He did not mention unit labour costs! In 2011, the GVA deflator was a good reason to… well, what did Dr. Martin Weale want to do in 2011? Just check the title of the spech: “Why the Bank Rate should increase now“.
Coming back to 2012, Unit Labour Costs have been rising, and what is happening to the GVA deflator? It rose just 1.2% in the four quarters to 2012 Q4 and has been below 2% for most of the last four years. So is that a “substantial” level of cost pressure, Dr. Weale, or a “pathetically weak” level of cost pressure? What would you say? Or do you in fact cherry-pick the statistics which fit your narrative and ignore the rest?
[Update: I meant to note that the GVA deflator reading which Weale mentioned, of 2.4% over the four quarters to 2011Q1, has since been revised down to 1.0%.]
I am honestly disgusted by this. This is not policy. This is not how the UK’s most powerful technocrats should behave, lurching from arbitrary decision to arbitrary decision. We deserve much, much better than this. Re-appointing the hawks to the MPC is looking like a catastrophically bad decision, absent a tighter (less discretionary) policy mandate to keep them on a tight leash.
… get inflation down. He presents the graph of nominal wages. I’ll put the figure here for the annual rate of change in average weekly earnings, looking at private sector regular pay:
0.7% in the year to March 2013
Weale decides instead that private sector unit labour costs are a clear and present threat to the sacred inflation target, and concludes:
So my own judgement is that a further easing of the rate of growth of cost pressures is necessary before I feel we are in danger of undershooting the inflation target.
Do you like that? “easing of the rate of growth of cost pressures”? Nominal wages are rising, let’s say it again ZERO POINT SEVEN PERCENT, and Weale wants to see an “easing of the rate of growth of cost pressures” before he’d consider easing monetary policy.
George Parker and Chris Giles report that Osborne’s economic adviser Rupert Harrison has failed to find enlightenment:
During his tour of Boston, New York and Washington, Mr Harrison is understood to have ruled out the radical option of changing the BoE’s remit to include a growth target based on nominal GDP – cash spending in the economy.
[The Treasury is] considering whether the existing 2 per cent inflation target gives sufficient flexibility or whether the Treasury could tell the Bank to target that rate over a longer horizon to help growth.
Game over? It looks that way. “Sufficient flexibility“? Give me a break. The cult of the central banker lives on, our chosen experts carefully seeking the right path to nominal salvation. In other FT news:
BoE governor says currency is now ‘properly valued’
Good luck, everybody. Blogging will be light for a while.
‘It is certainly not self-evident to me in the light of the apparent stickiness of inflation that substantial extra support for the economy would be compatible with the inflation target,’ he explains. ‘I am concerned about the stickiness of inflation.’
He adds: ‘The persistent worry we have is that if people get used to the idea of high inflation, if they take the view that the Bank of England isn’t bothered about the inflation target, it can lead to increased inflation risks and can affect the way in which people negotiate wages and set prices.’
Weale also warns that Britain could suffer an unprecedented ‘triple-dip’ – meaning the economy slides back into recession later this year after the briefest of revivals.
‘I certainly would not say there is no risk of that happening,’ he says. ‘What we have learned over the last four or five years is the capacity of the economy to surprise in ways people might not have thought possible.’
So. We’ve had a “double-dip”, we might even have a “triple-dip”, and it is not “self-evident” to Martin Weale that the economy needs more “support”. Because all that matters is price stability!
As a 54-year-old, Mr Fisher jokes he is old enough to recall when inflation was a far bigger problem — hitting 25 PER CENT in the Seventies.“What people have experienced over the last year or so shows why inflation is such a bad thing — and why the bank’s Monetary Policy Committee was set up with dedicated powers to keep it closer to target.”
Their emphasis. Inflation is “such a bad thing”! Get the message?
OK, it is more than likely the Sun have mangled Mr Fisher’s original words beyond recognition. So over to MPC member Paul Tucker, speaking to Euroweek:
A provision in our mandate that we have used actively is that we aim to achieve 2% inflation in the medium term, but if inflation gets pushed away from target by, say, oil price movements, we don’t have to get inflation back to target immediately because that would risk undesirable volatility in output and unemployment. We don’t have to create recessions to get inflation back to target quickly in the event of an oil price hike.
EUROWEEK: How much fuel is there left in the QE tank?
Tucker: Technically we could do more. It’s just a question of what we think the risk to inflation would be.
There is – finally – a warning on the strengthening of Sterling:
4. Sterling had appreciated further, particularly relative to the euro. In trade-weighted terms, sterling had risen by almost 1% since the Committee’s July meeting and was 3.5% higher than at the start of the year. Although sterling remained over 15% lower than it had been five years earlier, it was around 5% higher than its average in 2011. A continuing appreciation could have a material influence on the outlook for growth and inflation in the United Kingdom.
Overall the MPC are stuck in “wait and see” mode again. This comment scared me:
38. The Committee discussed whether it was appropriate to expand or continue with the programme of asset purchases it had agreed at its previous meeting. Inflation was still slightly above 2% but likely to remain close to the target in the coming months. The level of underlying activity was perhaps not as weak as the GDP data for the second quarter had suggested and, with the squeeze on real incomes beginning to ease, some recovery in spending was probable. The FLS had the potential to improve funding conditions for banks materially and to encourage lending, thus providing some support to both demand and supply. These effects might be particularly marked if the FLS allowed some households and companies to borrow who had previously been unable to obtain bank credit. Set against that, the FLS might prove less effective if uncertainty and risk aversion among households and businesses were the dominant factors holding back spending in the current environment. These same factors might also limit the effectiveness of additional asset purchases.
My emphasis on the “central bank impotence” view. There is so much uncertainty that asset purchases might not be effective.
And this beauty from the resident hawks:
For some members the decision [on more QE] was nevertheless more finely balanced, since a good case could be made at this meeting for more asset purchases. For those members [Ben Broadbent and Spencer Dale] who had voted against the expansion of the programme at the previous meeting, there were potentially costs to reversing the previous month’s decision.
What the hell? Doing more QE this month is “reversing” the decision to do some QE last month? And that risks what exactly? That the central bank looks really stupid? Our central bankers would rather not be seen reacting to “events” and changing course, month by month?
I think somebody should remind Messrs Broadbent and Dale that their comments in the MPC meetings are a matter of public record. And if they are worried about the central bank looking stupid, it might be better for them to shut up and, preferably, resign their positions.
- UK Manufacturing PMI at 45.9 in May, from 50.2 in April
- New orders drop at fastest pace since March 2009
- Manufacturers cut back output, employment, purchasing and inventories
Never mind folks, MPC member Spencer Dale is on the case:
“At the moment, our view is that … inflation should slow to around the target at the back end of 2013 and as a result the current stance of policy looks about broadly right,” Dale said in a television interview with CNBC.
Spencer Dale shall henceforth be known as “Crazy Loon, Spencer Dale”.
“Crazy Central Banker Neuters Growth With Weird Obsession Over Inflation”
“More asset purchases by the Bank of England may not be warranted even if Britain’s economy continues to struggle, and the bank should keep its focus on bringing down inflation, its chief economist said on Wednesday.”
Warning: Watching this CNBC video interview (headline: “UK Economy on the Mend”) with the Bank of England Chief
Inflation Nutter Economist may seriously damage your health.
Fiscal stimulus? Good luck with that. A high and stable level of employment? Good luck with that. The lunatics are running the asylum.