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Greater Expectations

A blow-out 60.2 on the July Services PMI cements the case for a UK recovery, but I still can’t agree with Tyler Cowen that we should be somehow content with the current rates of AD growth.  Maybe Cowen’s point is merely that the UK no longer has a “problem” with very tight AD policy, but there is a world of difference between perma-recession and optimal policy.

Let’s at least get the facts right:

1) Unemployment is not falling.  Employment has been rising fast enough to keep the unemployment rate roughly stable.  Most forecasters are expecting the unemployment rate to stay at around 8% for this year and next.

2) The 4.2% PPI inflation figure Cowen quotes is producer input prices; the far more interesting figure is producer output price inflation, which is running at around 1-2%.

The UK has a history of deep recessions from which we never attempt to “make up” lost growth, accepting a new lower trend path of RGDP, and generally a very slow recovery in employment.  Are these demand-side policy errors, or inevitably slow supply-side adjustments?  I don’t know for sure, probably some of both.

In my view monetary policy should be aimed at providing around 8% nominal GDP growth for the next two years, returning to the NGDP trend started in mid-2009, and then sticking to a c.5% level path.  This would hold the CPI rate up at 3-5% for the next two years.  It would involve a “boom”, there will be “bubbles”, there will be… hold your breath… increases in debt!

For all those reasons I don’t expect the MPC to aim for 8% NGDP growth.  I hope we will get at least 5% NGDP growth, and that will be better than the 2-3% growth we see currently.  But I hate the idea that we should resign ourselves to a recovery which is constrained by the politics of a high CPI rate, that we should live in fear of “bubbles”, or that we should accept rule by policymakers who think they can tell the difference between “sustainable” and “unsustainable” growth.

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Categories: Monetary Policy
  1. SK
    August 5, 2013 at 14:54

    You might be not worried about bubbles/CPI but do you happen to own your house?

    I am a tenant and I am worried about bubbles because this means that we will never be able to get away from paying rent and it also means that as house prices increase the rent will increase as well.
    Rent is already 40% of our income. How much more can we afford to blow bubbles without pricing out segments of our society?

    • August 5, 2013 at 15:23

      That’s a weak ad hominem, SK.

      I am strong supporter of relaxing or removing planning law and reducing the real cost of UK housing.

      I am a strong opponent of tightening monetary policy, which is basically the only wait to lower short-run real asset prices using AD policy – and it would work only for those who get lucky and keep their jobs and current nominal income, at the expense of those who get dumped into the benefits system.

  2. SK
    August 5, 2013 at 16:22

    Apologies, I wanted to highlight that sometimes homeowners ignore what tenants have been going through the last 4-5 years with the high rents/ fees, essentials inflation and low savings rates.
    If it sounded differently, please accept my apologies.

    • August 5, 2013 at 16:32

      No problem, I completely agree that policy (particularly fiscal) often seems to be stacked against renters, but monetary policy is precisely the wrong way to address this kind of problem.

      The best kind of “bubble” we could have, in my view, would be a house-building “bubble”. We didn’t actually do enough housebuilding in the pre-2008 boom to keep up with population growth, tragically, despite soaring house prices and readily available finance; and the houses that did get built tend to be relatively small and cramped.

      Fixing these problems requires real supply-side reform; Nick Boles talks a good talk here but I remain moderately sceptical about effective reform.

  3. August 5, 2013 at 18:03

    I’ve taken issue with you here http://wonkery.co.uk/blog/2013/8/5/not-so-fast

    Your objections on the unemployment and PPI data are all fine, but only go so far…

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