Martin Weale on NGDP Targeting
This is a fantastic interview; Ben has asked all the right questions. I think it’s really important that we have this kind of discussion from the MPC on the public record; MPC members deserve credit for openly engaging in the debate, and the British press corps deserves credit for holding their feet to the fire. I like to imagine a future Friedman and Schwartz writing the account of UK monetary policy 2008-20xx and finding this kind of transcript invaluable for insights into what policymakers are thinking.
This interview covers a lot of ground; what I think what is most illuminating is what Weale doesn’t say. What he doesn’t say – and certainly not for lack of prompting – is this:
Yes, the UK obviously has insufficient aggregate demand. Yes, we want to be doing more to boost UK aggregate demand. But we can’t because of the damned inflation target! Please, somebody change the target so we can do more.
You might reasonably argue that central bankers never say anything so explicit; certainly correct. But they are masters of nuance. And the “nuance” that MPC members choose to express rarely comes anywhere close to the above sentiment.
Since Carney’s speech, we’ve had views on the record about UK monetary policy from five serving MPC members – Mervyn King, David Miles, Spencer Dale, Ian McCafferty and now Martin Weale. The reception to the idea of targeting NGDP – or even the idea that targeting 2% inflation is not optimal policy – is distinctly lukewarm. Miles – the only remaining MPC “dove” by voting intent – is the only one who is positive on balance about targeting NGDP.
Back to the Weale interview. When asked specifically about targeting NGDP, the responses are as following:
a) Measurement is a problem.
b) It might raise inflation expectations, which would be bad – we should remember the 1970s!
c) If the MPC did provide faster demand growth it might just mean higher inflation anyway.
Again, measurement is a problem for “inflation” too. We know that because we have umpteen different UK price indices and they are all saying different things. And we know that methodology changes happen with the CPI, and they are not retrospectively applied to existing indices. So this is a bad argument. Weale is on the CPAC so he surely knows the CPI is fallible.
I find the 1970s references from King and now Weale little better than puerile scaremongering. NGDP level targeting is not going to create inflation outcomes like the 1970s. This is a straw man. Nobody is arguing for ten years of 10-30% annual NGDP growth like the 1970s. Nobody at all. Get over it.
Finally, Weale is worried that faster demand growth might mean higher inflation. This is rehashing an old theme; the central bank should not care about the inflation/output split, that is a matter for the supply side, and for supply-side reform if necessary.
Ben Chu nails him on exactly this point, and Weale’s response is totally pathetic. He first says productivity growth may never return to previous rates. Sometimes you have got to laugh at these guys. It’s like they heard about “self-induced paralysis” but thought it was good advice. Even if he’s correct about productivity, you then must argue why a 4% inflation/1% output split is worse (see also David Glasner on Goodhart) than what we have now; 2-3% NGDP and maybe output bumping along 0% at best. Obviously it’s not.
Then Martin Weale takes up the loaded shotgun which Ben Chu has conveniently handed him, points it directly at his own feet, and fires both barrels:
As with any other form of monetary policy it [NGDP target] does have distributive effects, it does transfer resources from one part of the population to another part. The traditional argument with monetary policy is that it’s cyclical so you do get swings and roundabout. But if we were to have faster inflation in the way you describe we would be hearing quite a lot from people on fixed incomes and we would probably also see the market drive up yields on government debt which could be something that would pose a burden for the taxpayer even if inflation did eventually come down.
This is pathetically weak. “Optimal” monetary policy is not designed to protect special interest[s in some part] of society over others. It should be “neutral” for the whole economy.
And the idea that steady growth of NGDP would “pose a burden for the taxpayer”… it beggars belief that serious professional macroeconomists can say stuff like this. What “burden” is posed on the taxpayer when the MPC sends NGDP 15% below trend, Mr Weale? Oh, that’s right, we’ve taken public sector net debt from 35% to 70% of GDP – and rising fast. In just four years. Give me a break.
There is much more of interest in the interview but I’m out of time. Weale refuses to put a number on the “output gap” (very convenient!); he says the fiscal multiplier debate is wrong to presume monetary policy is impotent; and he attempts a feeble justification for calling for interest rate hikes in early 2011.
I must close by saying again what a superb interview that was; fantastic journalism from Ben Chu. The questions are much smarter than the answers.