Home > Fiscal Policy, Monetary Policy > Lost Decade Watch, Labour Backs Churchill not Keynes

Lost Decade Watch, Labour Backs Churchill not Keynes

Here is Winston Churchill discussing the “cost of living” in Parliamant, as recorded in Hansard in 1925 (via a paper by Susan Wolcott via Bob Hetzel), attacking the ideas of one Professor Keynes:

The hon. Member for Keighley was deploring a fall in prices, but what does a rise in prices mean? It means a rise in the cost of living, and what does that mean? It means a diminution, in exact mathematical ratio, of the real wages which are received by the working classes.

The Labour party echoes those words by choosing to campaign in 2013… on… wait for it… rising prices and falling real wages, the “cost of living crisis“.  Somebody in the Labour party should read Nick Rowe, if not Keynes on the economic consequences of (thinking like) Mr. Churchill.

Simon says I should hold Osborne responsible for the UK’s macro policy failure.  Did Keynes hold Churchill responsible for returning the UK to gold at a level which required a great deflation?  Keynes wrote, on Churchill’s decision:

Why did he do such a silly thing?

Partly, perhaps, because he has no instinctive judgment to prevent him from making mistakes; partly because, lacking this instinctive judgment, he was deafened by the clamorous voices of conventional finance; and, most of all, because he was gravely misled by his experts.

My emphasis.  That perfectly captures how I feel about Osborne: yes, failing to change the MPC remit is awful and stupid, but is not terribly surprising given the advice he’s had.

The Bank of England has mounted a lobbying campaign to keep the 2% inflation target over the last nine months.  Mervyn King’s choice of words for those who consider a departure from 2% CPI was downright vicious; “unrealistic”, “painful experience”, “illusion”, “terrible price”, “wishful thinking”, “the dreamers”.  And that’s before I start on Spencer Dale or Martin Weale.  If I were to summarize the MPC consensus it would be that they could target anything other than 2% CPI but it would be a very, very bad idea.

Macroeconomists outside the Bank are broadly split into two groups.  The “fiscalists” think our demand-side [edit: problems] can only be solved using fiscal policy, because monetary policy is interest rates and we ran out of interest rates.  And there’s the supply-siders who think our problems are mostly supply-side because of the CPI data (or political bias, take your pick).

There are others (like Simon) who cannot be so narrowly categorized, and have more nuanced views.  But why should HM Treasury listen to Simon Wren-Lewis and Scott Sumner and ignore Mervyn King and Charles Goodhart (who is cited twice in the remit review discussion of NGDP targeting)?  It is not credible to crucify Osborne on a cross marked “ignorant of basic economics“, when he is following the advice of experts like King and Goodhart.

I think Osborne went somewhat beyond the consensus view of modern-day “experts” in asking the Bank to do forward guidance, and he deserves quiet applause for that.  I believe a range of policy options was available to the MPC under the guise of “forward guidance” and MPC members should be held to account both for the policy choices they make, and for the policy advice they give HM Treasury.

I also think the Labour party are also being “gravely misled” by today’s experts who have convinced them that UK demand-side problems are purely fiscal “because ZLB”.  That is not what New Keynesians should say about optimal macro policy at the ZLB.  Here’s New Keynesian Lars Svensson in 2006:

Japan has certainly tried an expansionary fiscal policy. This has not led to an escape from the liquidity trap, but it has certainly led to a dramatic deterioration of Japan’s public finances.

That is the kind of thing the Labour party should be hearing from macro experts.  Oh, and drop the “cost of living” nonsense.

  1. August 14, 2013 at 15:00

    In the preface of her new book – Remembering Inflation, Princeton U Press, Brigitte Granville – a professor of international economics and economic policy at Queen Mary University of London – reminisces an undergrad professor of hers who said: “Economists advise, politicians decide” and continues with “And the decisions of politicians often ignore the warnings they receive”.
    I don´t think that´s right. What they usually do is discriminate among the advice they receive, likely choosing to follow the one that is most politically expedient.

    Brit, I think the interesting question now is “Why do central bankers everywhere cling to the IT dogma if inflation has been tamed (brought to ‘target’) almost everywhere?”

    • August 14, 2013 at 19:52

      You’re right Marcus, and I know should give up on the politics.

      Are there any good answers to that question other than the mistake of “fighting the last war”? Or simply denial.

  2. August 14, 2013 at 15:07

    I agree about Bank of England advice, which would have been similar to most advice from central bankers. But I doubt that was critical for Osborne. For Osborne, what would be critical is how any change would play politically. And what the Chancellor would not want is to be seen as the one who encouraged higher inflation.

    Think about the Help to Buy scheme. I have not found a single economist who has said that was a good idea: Frances Coppola’s reaction in her latest post is typical. I am sure he got similar reactions from economists in the Treasury. But that did not stop him introducing the scheme. So if he was prepared to go against established opinion there, why not on monetary policy?

    • August 14, 2013 at 17:11

      He *has* gone “against” established opinion on monetary policy, that was exactly my point – yet you give him no credit for this despite it being the “right thing” to do (and economists being “wrong” about keeping 2% IT).

      I think UK monetary policy is significantly looser today than it was this time last year because Osborne hired Carney and got him to do forward guidance.

      Defending Osborne’s idiotic fiscal stimulus against the bizarre attacks of New Keynesians who have spent the last three years arguing Osborne should do fiscal stimulus – that’s an intellectual challenge I’ll be very happy to embrace. I’ll need a few days and some hard drugs to prepare myself though.

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