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.