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Cable and Hutton on Nominal GDP Targeting

Will Hutton has outed Business Secretary Vince Cable as a supporter of NGDP targeting.  The Guardian have Hutton interviewing Cable this weekend.  Will Hutton frequently advocates for an NGDP target in his Observer/Guardian columns; it was also known that Cable’s Special Advisor, Giles Wilkes, was a reader of Scott Sumner’s blog and supporter of NGDP targeting.  The influence of blogs on policymakers is revealed!

Here’s a transcript of the last four minutes of the video, discussing macro policy:

Hutton: Would you advocate pegging the pound to the Euro, not joining, pegging the pound to the Euro, to kind of lock in the competitive exchange rate we’ve got?

Cable: I don’t think that works.  We’ve had all kind of experience of trying to peg exchange rates, not least what happened under Mrs Thatcher and it was a terrible mess you may remember.  So I don’t think in practice that can be made to work.  But I think you have put your finger on a very very big policy issue that we’ve hardly talked about actually in the last few years.  Which is that the biggest consequence of economic policy since the last three years has been a big devaluation of the currency, it’s about 25% and it has provided a big push, “kick” if you like, to British industry.

It has partially worked, it is one of the reasons why the automobile industry is growing quite rapidly.   I think it will continue to get us growing, but you quite rightly say it hasn’t had the dramatic effects it did have in the mid 1990’s for example.

The big question you raise about the exchange rate is this.  That in the past, I think this has happened now 3 times, whenever the British real economy has started motoring, it’s been crushed by an overvalued exchange rate.  In the Tory years it was done deliberately.  In the Howe budgets, Howe/Thatcher budgets, 1980s, they used a very high exchange rate to crush inflation. And in the process destroyed quite a lot of manufacturing industry.

It happened again in 1990 and it happened in a less deliberate way through the long period of Labour government where the exchange rate was clearly overvalued, we had a big contraction in manufacturing industry.  And under the last government I think it went down from 18% to about 10% of GDP as a result of the fact the exchange rate in real terms was too high.

The challenge you’re posing which I think is exactly the right one, is how we stop that happening again.  Because if it happens again all the stuff I’m doing about promoting industry policy and apprenticeships and so on, it could easily be swept away if this experience is repeated.

Hutton: I have the solution.  You’re going to give a yes or no answer.  If you won’t peg the pound to the euro your other option to keep a competitive exchange rate is this.

That we change, we require, the Bank of England not to target inflation with its inflation target, but instead to target the growth of all goods and services in the economy, so called money…

Cable: Money GDP.  I’m very attracted by that.

Hutton: You are in favour of moving from an inflation target to a money GDP target?

Cable: I’m attracted by that.

Hutton: Because that is the way of doing it.  If you do that, you do two things.  We would guarantee to our banks that their balance sheets would become more manageable over time.   And we would also assure with QE that the exchange rate would remain competitive.

So I mean can I tease you, [are you] not just attracted to it Vince, come on – I’m for it, are you for it?

Cable: Well look, one of the boring things about being a Cabinet Minister, is that the following day the Guardian says Minister instructs Governor of the Bank of England to do X or Y, and I’m not going to write your headlines for you.  But no, look, the economic logic you’ve set out is impeccable, let’s leave it at that.

Hutton: Vince Cable, thanks very much indeed.

[Errors and omissions in the transcript are my own!]

Cable’s comment about the high exchange rate “crushing” the British economy under Labour seems somewhat odd.  Manufacturing output shrunk between 2000 and 2003 but was otherwise growing modestly under Labour up to the beginning of 2008.  Other more productive service industries grew faster, notably finance, so manufacturing as a proportion of GDP shrunk.  That’s what’s supposed to happen in advanced economies.  No big deal.

It’s not clear (to me) exactly why Hutton/Cable think NGDP targeting would benefit manufacturing industry in particular.  Perhaps they envisage active pro-industrial fiscal policy being “enabled” by stable NGDP growth?  NGDP targeting is surely not going to “stabilise” the real exchange rate, nor necessarily involve devaluation, which is what both Cable and Hutton appear to want.

But it is revealing that Cable knows what is coming; he is willing to take a position on NGDP targeting in an public interview, rather than take the easy road and defend the status quo.

H/T to commenter “anonymous” on Scott’s blog.

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Categories: Economics, Monetary Policy
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  1. May 16, 2012 at 10:58
  2. February 22, 2013 at 13:59

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