The MPC Exists to Make “Difficult” Decisions
Now I’m forced to defend Cameron against the Keynesians… it’s a joyless task being a monetarist blogger this week.
Simon says that Cameron’s comments yesterday were rather… audacious. I wouldn’t disagree with the thrust of the argument, that Cameron is taking liberties in claiming explicit support from Carney. A defence of Cameron would be Carney’s specific choice of wording in the press conference in response to a question from Philip Aldrick:
“There’s also obviously the rebalancing that’s necessary on the fiscal side, which is in train.”
He did not say “The government’s foolish, reckless, and unnecessary fiscal consolidation.” He did not go the Bernanke route and openly call for more fiscal stimulus, or perhaps just less fiscal austerity. Instead, he said “the rebalancing that’s necessary on the fiscal side.” – my emphasis, but his choice of words.
Now we have the transcript, I can also quote Carney’s response to Bill Keegan, which is most interesting on this topic.
William Keegan, The Observer: Mr Carney, the MPC is responsible for monetary policy. To what extent do you think the government’s fiscal policy is inhibiting the reduction in unemployment that you so clearly seek?
Carney: Well, a couple of things. First, what we seek is price stability as defined by the 2% inflation target. And the challenge for the MPC is to chart the best path back to that 2% inflation target, given the weakness in activity, given the slack in the labour market and given the initial conditions – given that we’re starting with inflation at 2.9%. And we fully recognise that there has been a prolonged period where inflation has been above target.
So we’re balancing the need to get inflation back, and our primary responsibility of getting inflation back to the 2% target, with due consideration for output and employment. So, just to be absolutely clear, this is about us fulfilling our primary objective, which is inflation, and given the circumstances, doing it in a balanced way.
Carney continues talking about thresholds after that. Eagle-eyed readers might pick up on which macro variable (hint: starts with “2%”, ends in “inflation”) Carney wants to talk about in response to a question about fiscal policy.
This clearly support’s Simon’s argument that fiscal policy has made monetary policy “difficult” insofar as fiscal policy changes have pushed up the CPI. But I really, really dislike that framing. The whole reason we have nine uber-smart macroeconomists running UK monetary policy is that they are supposed to make “difficult but correct” decisions about UK monetary policy. “Politically unpopular” decisions, if you like.
We did not have Gordon Brown, Alistair Darling and George Osborne running UK monetary policy for the last fifteen years because economists thought that people like Gordon Brown, Alistair Darling and George Osborne would make “easy and incorrect” decisions about UK monetary policy, and politicians were co-opted into that view.
So I am wholly unsympathetic to seeing economists criticise politicians for making life “difficult” for the MPC. (As an aside, Mervyn King was clearly sensitive to this issue. That is why he sat through the 2011 Inflation Report press conferences with a smug look on his face, facing down the press time and time again as they implored him to raise rates and get inflation down. He knew that in 2011 he had an acid test of the MPC’s ability to make “difficult but correct” decisions.)
Simon is clearly right when he says:
In the UK, however, it appears that it is inflation rather than (maybe?) the (perceived?) inadequacy of monetary policy instruments which is restraining further monetary stimulus.
But this does not go far enough. We have had an absolutely clear opportunity for the MPC to decide the extent to which inflation restrains further monetary stimulus. I do not expect they will get such an opportunity again for a long time. And the economists on the MPC have decided that it is absolutely correct to place low inflation above all else in steering a course for UK aggregate demand. That is the “difficult decision” our uber-smart macroeconomists have taken, and the rest of us must now suffer from.