Home > Bank of England, Monetary Policy > Odds and Sods

Odds and Sods

A few things worth linking to, about which I have little to say:

1.  Martin Weale’s speech from last week, “Slack and the labour market” is excellent.  Weale estimates a 1.1% shortfall in total hours worked, accounting for over- and under-employment.  This translates to a 0.8% shortfall in real GDP due to labour market slack.  I would like to see some serious responses to this from supply-side optimists.  One possible line of inquiry is on self-employment, which Weale only addresses briefly.

2. Tony Yates has a very interesting post on “One big hubristic consultancy jargon firework display” as he describes the BoE review.  Worth a read if you are interested in BoE politics, as is Tony’s blog.

3. The John Mills/Civitas “There is an alternative” paper is out, and is very strange.  Mills wants to devalue the pound, and sees that being an “alternative” to “monetary policy”.  He doesn’t say how we should devalue the pound, though he favourably references the Yen devaluation under Abenomics.  Mills does (implicitly) want faster NGDP growth and accepts that 3% CPI is a necessary consequence, but believes none of that has anything to do with monetary (or indeed fiscal) policy.  The paper also exhibits a very, very bad fetish for manufacturing.  Ben Southwood already provided a very good critique of the Mills proposal last year.


  1. jamesxinxlondon
    March 27, 2014 at 20:56

    The BoE blog looks all too horribly true an interpretation. Image over substance.

    Martin Weale should have addressed the impact of 500,000 per annum gross immigration, 200,000 net immigration. Prices are set by the marginal transaction. Gross and net additions to the employed labour force of 20-25mn could be a factor in setting wage levels. Slack can be imported. For me it is no bad thing, but Nigel Farage might not like it.

    I saw Paul Mills on a panel at the IEA in a debate about MPC targets. The inflation target nutters all sounded quasi-religious and had zero rationale for worship of the magic “2%”. Mills was very refreshingly relaxed about having higher inflation, not a problem for his business. He even defended higher inflation as a good thing, essentially on the “musical chairs” argument. He was the only original thinker. Don’t knock him.

    • March 27, 2014 at 22:12

      200K is one good quarter of employment growth in the UK if the pace of 2012/3 can be continued! I think Weale’s paper is very well argued, we can easily disagree about the parameters he uses in the model. The Bank’s estimate of “equilibrium|” unemployment is hopefully too high at 6-6.5% for example.

      Mills is certainly unorthodox, and it is a welcome departure from the 2%-ers, but I cannot see that he will win many converts with that paper. The quote you give on inflation is good too.

  2. jamesxinxlondon
    March 27, 2014 at 21:35

    Mills: “Nevertheless, historical experience shows that inflation does tend to be rather higher in fast-growing economies – largely because of an averaging effect between sectors of the economy where productivity increases fast and where this is not possible – so making provision for some increases in the CPI above two per cent would be prudent.”
    Page19, para 3c

    I agree that a lot of what he says is confusing. But I do like the idea of inflation “prudently” above 2% for the reasons he outlines.

  3. jamesxinxlondon
    March 27, 2014 at 22:41

    What does Weale mean by this in the conclusion:
    “I think the (MPC) forecast is broadly consistent with slack being used up over the next two to three years while the collective judgement of the committee was that slack would remain at the end of that period.”

    If you get this you are far smarter than me.

    • March 27, 2014 at 23:06

      I think he is saying that he is more hawkish about the estimate of labour market slack than the MPC consensus, that he believes current policy is sufficient to use up all the labour market slack, but the MPC does not. I may well be wrong.

      • jamesxinxlondon
        March 28, 2014 at 07:54

        I am not sure is a very interesting debate. We want slack to be used up so the game of “musical chairs” can begin. The sooner it is used up the better but, crucially, we need to make sure there is no early tightening once the game begins in earnest. Does Weale understand this much more important point? Probably not. Mills does.

  4. SK
    March 28, 2014 at 11:37

    Was “musical chairs” relevant only for recessions or is it relevant for growth periods as well?

    What kind of policy do you want to see from BoE?

  5. james in london
    March 28, 2014 at 15:17

    It’s not my blog, of course, but I think “musical chairs” is BAU. It’s when it breaks down in low nominal growth periods like recessions that problems occur – and it needs to be re-started.

    I would like to see the BoE recognise that the labour market needs decent wage growth to operate efficiently, due to the sticky wages problem. By decent, I think 5% per annum. If it’s all “bad” wage growth with no productivity growth, no big harm is done. If it’s all productivity growth, then great. More normal is somewhere inbetween but hard to identify until years later. Just target nominal wage growth in a disciplined way and we will be OK. And we should target expectations of wage growth, so we all know where we are headed, rather than getting overworried about what the actual number is at any one time. The market is good at arriving at the best guess.

    Nominal GDI is a good proxy for wage growth, but not many people have heard of nominal GDI. It is just one of three ways to calculate NGDP which people have increasingly heard of. (The other two ways are via expenditure and via output, the latter is the way the ONS does it).

    The ONS did say they were starting a project to more quickly calculate NGDP, in order to help inform policymaking, but they’ve gone a bit quiet on that recently. Bizarrely, you should calculate NGDP first and then deflate it to get to GDP, but things ain’t that simple, apparently.

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