One of my best commenters is called “Britmouse.” He frequently helps me to better understand what’s going on with the UK economy. Now he has a new blog, and came out with both guns blazing in his first post:
The Office for National Statistics’ current data on quarterly UK nominal GDP growth in 2008 is as follows, at Seasonally Adjusted Annual Rates:
- Quarter 1: 4.3%
- Quarter 2: -1.7%
- Quarter 3: -5.2%
- Quarter 4: -3.4%
That collapse in nominal spending has no precedent in the data, and is certainly worse than anything since the 1930s. . . .Let’s review the Bank of England’s base rate decisions during the first three quarters of 2008:
- January: Bank Rate left at 5.5%
- February: Bank Rate lowered to 5.25%
- March: Bank Rate left at 5.25%
- April: Bank Rate lowered to 5%
- May: Bank Rate left at 5%
- June: Bank Rate left at 5%
- July: Bank Rate left at 5%
- August: Bank Rate left at 5%
- September: Bank Rate left at 5%
. . . During September 2008, Lehman Brothers failed. In October, already well behind the curve, the Bank of England dramatically cut the base rate to… 4.5%.
That’s far worse than the Fed. In the US the downturn in NGDP occurred a bit later, and the rates during this period were much lower. The entire post is worth reading.
In another post he points out that both Labour and the Conservatives could have raised the inflation target (or switched to NGDP targeting) whenever they wished.
(A note to those who call for a higher inflation target: HM Treasury, not the Bank, has the legal power to change the specific interpretation of “price stability” at any time; there would be no need even for Parliamentary approval. It is easier to change the inflation target than to change the fiscal budget!)
Some commenters have argued that Bush and Obama shouldn’t be blamed for the recession, as they don’t control Fed policy. The British case suggests this isn’t the real problem; rather the passivity of the executive branch represents either ignorance about monetary policy or fear of being labeled “inflationistas.” If it’s fear of bad publicity, this strongly supports the argument I made in my National Affairs article; the strongest argument against inflation targeting is that the public has no idea what it is, and will resist attempts to intentionally raise the inflation target during adverse supply shocks.
Here he describes the new NGDP data for Britain:
For the year as a whole we have an estimate of 3.1% NGDP growth against a 2.3% deflator:
In my view that means Britain has serious problems on both the supply and demand side. However the inflation numbers are biased by a VAT increase in early 2011.
Britmouse also criticizes Wren-Lewis’s advocacy of fiscal stimulus. Because I went a bit overboard bashing a Wren-Lewis post a few months back, here I’ll say some good things about him. Here is Wren-Lewis:
A rather better argument (see the first comment on this post) is that if fiscal policy had not tightened in 2010, the Monetary Policy Committee (MPC) of the Bank of England would have raised interest rates in 2011. In the Spring of that year, 3 of the 9 members voted for an interest rate rise from the zero bound floor level of 0.5%. If the economy had been stronger because of less austerity, would two or more committee members have switched sides, leading to an increase in UK interest rates?
A think it is far from clear that they would. Inflation was high in part because of the result of those austerity measures. VAT was increased from 17.5% to 20% at the beginning of 2011, which probably added around 1% to inflation in 2011. You could argue that as this was always going to be a temporary influence, it was neither here nor there as far as MPC decisions were concerned. I think this would be a little naive. One of the major concerns of MPC members around that time was the loss of reputation that the MPC might suffer if inflation got too high, and here I think the actual numbers mattered.
I’ve always conceded that fiscal stimulus that shifts SRAS to the right might work under certain conditions. Those conditions would be a central bank that targets inflation out of either stupidity or public pressure. In Britain they call these policymakers “inflation nutters.” Examples of this sort of fiscal stimulus include employer-side payroll tax cuts and VAT cuts. This is a supply-side policy that works through short run wage and price stickiness, and shouldn’t be confused with supply-side policies that work in the long run by changing incentives. Here’s another interesting Wren-Lewis post:
Last and not least, the Chancellor should instigate an immediate investigation into the possibility of replacing the inflation target by a nominal GDP target. There is a significant amount of evidence, from the Great Depression and more recently, that expectations of rising prices can provide a strong stimulus to demand. A nominal GDP target, suitably constructed, could help generate those expectations.
With Britmouse, we have another excellent market monetarist blog. It is gratifying to see all the interest in market monetarism, particularly in the Anglophone and Nordic countries.
Paul Krugman recently had this to say:
On the academic side: look, to a first approximation nobody ever admits being wrong about anything. But my sense is that a lot of younger economists are aware, even if they don’t dare say so, that freshwater macro has been a great embarrassment these past four years, and that liquidity-trap Keynesianism has done very well. This will affect future research; it will, over time, break the stranglehold of decadent Lucasian doctrine on the journals.
I believe that “liquidity-trap Keynesianism” is one of the major causes of the Great Recession—it contributed greatly to the monetary policy passivity. It’s been an abject failure. But I agree with Krugman’s deeper point. This recession will lead younger economists to rethink the conventional wisdom. I’ve recently been doing a lot of speaking at other colleges, and I’m seeing lots of interest in the ideas of market monetarists among grad students. I also get many emails from macroeconomics students all over the world. I’ve recently received two different emails from textbook writers who plan to add market monetarism to their EC101 texts.
In my view the major battle going forward in mainstream macro will be between those who favor monetary policy rules as a demand-side stabilization tool, and those who favor fiscal stimulus. On the fringes you’ll have the MMTers, the Austrians, the RBC-types, etc. But they’ll never have much influence, because they don’t offer (stabilization) policy advice that is taken seriously in the halls of government.
Update: I forget to mention Nicolas Goetzmann’s excellent work in France. Here’s the abstract of a piece he wrote for Atlantico:
Dans son discours du 17 mars, François Hollande annonce son intention de réformer la BCE. Cette dernière devrait selon lui agir selon un double mandat afin de contenir l’inflation tout en soutenant la croissance. Derrière la promesse électorale, quelles implications politiques réelles ?
Google translate: “In his speech on March 17, Francois Hollande announced its intention to reform the ECB. This he said should act according to a dual mandate to contain inflation while sustaining growth. Behind the campaign promise, real policy implications?”