Larry Elliott on HM Treasury and NGDP Targeting
The Guardian’s economics editor, Larry Elliott, produced an interesting column over the weekend, “Why George Osborne believes everything is going to plan“, which ends with a discussion of nominal GDP targeting.
Assumption No5, therefore, is that the Bank of England will do the heavy lifting when it comes to stimulating the economy. Even though Threadneedle Street has already bought up a third of UK gilts (government bonds) through its quantitative easing programme, Osborne does not think monetary policy is now “pushing on a piece of string”. The mix of policy will continue to be fiscal conservatism and monetary activism, which raises the question of whether the Treasury will grant the Bank powers to buy up a wider range of assets, including corporate bonds.
Sir Mervyn King has always said that this is a political decision since it would involve deciding which companies should benefit from actions designed to drive down borrowing costs, but that if Osborne wants to sanction such a move the Bank would act as the Treasury’s agent.
Would the chancellor be prepared to take this step? Well, attention is being paid to the debate raging in the economics profession about the merits of replacing inflation targets with nominal GDP targets. This sounds esoteric but actually has big implications for the conduct of monetary policy, with its supporters saying it provides a way of recovering the output lost since the start of the crisis and its opponents warning that it will lead to inflation raging unchecked.
That choice of words in the last paragraph is very specific, “attention is being paid”, in the passive voice. Surely, that can only be journalist-code for “I happen to know the Treasury is paying attention but they won’t put it on the record”? We have already heard noise from the top of the Coalition (particularly recently) about needing loose monetary policy to offset tight fiscal policy, but there has been nothing public from the Treasury about NGDP targeting. Even if this is only a trial balloon, it would be encouraging to know that the Treasury is at least thinking about it.
Elliott’s analysis seems plausible. Osborne is supposed to be the “master tactician” of the Tory party, his every move calculated to secure a majority in 2015. Right now that looks like a pipe dream. A robust economic recovery without being seen to accept the necessity for a “Plan B” is the only way forward for Osborne, and NGDP targeting is the obvious answer. (Lars Svensson’s Foolproof Way would work fine too, but that is perhaps politically even harder since it invokes the false image of “competitive devaluation”).
I am left wondering:
a) Can it really be true?
b) How could Osborne achieve a switch to an NGDP target without making it obvious “Plan A” has failed?
c) What could be the method of introducing the target?
For (a), maybe (and most probably) I am over-analysing with a large dollop of wishful thinking. Why would the Treasury be dropping hints to Larry Elliot at the Guardian in particular? Elliott is hardly Osborne’s strongest supporter.
For (b), an “event” from Europe could give an “excuse” for a major policy change. But waiting for such an event would be unwise, since it might never happen. Waiting for the new Bank Governor after Mervyn King’s term expires in 2013 may be too late. So can Osborne switch course without appearing to switch course? Any bright ideas? Maybe he’ll just rely on voters having short memories and/or the “blame Gordon Brown” strategy.
For (c), as Left Outside has shown [edit: fixed link], the Treasury already has the legal flexibility to introduce an NGDP target by clarifying the definition of “price stability” which the Bank of England must follow. If the Treasury intends to allow the Bank much wider flexibility over the range of assets it can buy, that could be done at the same time, or even used as motivation for the change. “Buy whatever you like to keep NGDP rising at a 5% rate”.
Vince Cable, and now, possibly, HM Treasury. Are we inching towards a UK NGDP target? I’m cautiously optimistic.