Ben Broadbent gets it

Britmouse sent me a very interesting Q&A with Ben Broadbent, who’s being appointed to the Bank of England.  He says many of the same things I’d say, but far more articulately:

Q31 Mr Umunna: If growth slows and is anaemic, inflation is as per central projection, and you have said a rate reduction is not on the agenda and QE, in the circumstances where inflation is as per the central projection, is also wrong””off the agenda””then what other things, what other levers, would need to be pulled in order to simulate demand?

Dr Broadbent: You have to be careful here. Suppose that were the case, and you are right to worry about it because I think one of the most surprising things about the recovery””and there has been a recovery””is that nominal growth has been fine and nominal GDP is growing quite strongly, but the split between real growth and inflation has been very disappointing. The supply side has looked very bad and on the face of it productivity growth is appalling, quite honestly; we haven’t had any for 18 months if you look at output per hour. Very, very, very unusual. Maybe it is not accurate; maybe the numbers will be revised, maybe they won’t be. The reason I begin with that is because the state of affairs in which that continues, in which inflation doesn’t come down materially below target and, therefore, we can’t ease monetary policy””and we shouldn’t””yet growth is weak, can only be one in which underlying productivity growth is also weak, roughly speaking. We don’t produce any more output gap. The trend rate of growth in the economy would be weak in that scenario and the normal prescription is to do stuff about productivity, and that is a long-term problem. I am not sure it is the job of cyclical macro-economic policy, whether monetary or fiscal, to do anything about that.

Q32 Mr Umunna: Policy makers, both on the monetary and the fiscal side, should just sit on their hands while my constituents get hammered by low growth?

Dr Broadbent: At the end of the day, our income is determined by our output. That is the function of our productivity. That is inescapably the case. It is also a function, unfortunately at that moment, of what we import; the price of what we import going up faster than the price of what we export. That too has been true. In actual fact, for all these various reasons, we have had weak income growth for years””even before we went into the recession; I think I am right in saying that. If I look at the five years from 2003 to 2008, the five-year period up until the beginning of 2008, average real income per household barely grew.

I’ve been so frustrated with all the misleading discussion of growth, inflation, fiscal austerity, and the BOE.  Broadbent gets it.  Both fiscal and monetary stimuli determine NGDP growth.  They don’t determine the split between growth and inflation.

Q37 John Thurso: In another article in the Financial Times, in February of this year, which was basically talking about the objectives of various members of the MPC, you are quoted as saying, “Some MPC members place sufficient risks on deleveraging in the banking system, but at the margin they are more concerned that nominal income should grow than on finding the appropriate balance between growth and inflation.” Who did you mean and what did you mean?

Dr Broadbent: It is hard to say who, because I was genuinely thinking of some arguments . . . I think the perception has been sometimes that because of the weight of this contraction in banks’ balance sheets, and because of the potential costs of that in an economy with a large balance sheet, were nominal income to contract, the priority early on, in 2009 say, was just to get nominal income growing. You could make any reasonable assumption about productivity after that, which kind of determines how that nominal income is split between real growth and inflation. You would have said, “Okay, I am going to loosen policy a lot. I am going to get nominal income growing and I will be able to meet the inflation target”.

What happened subsequently, as we know””partly because of commodity prices, partly because of VAT, partly because, apparently, our productivity performance was much less good than we had hoped or expected””is that a lot of that nominal income growth turned out to be inflation rather than real. What I was surmising, or trying to suggest, is that even if they hadn’t wanted it in advance, some policy makers might think, “These price effects are temporary. A more important consideration, given what is going on with the banks, is just to keep nominal income growing”. I don’t know if that is still the case or not. I certainly think in 2009 and in early 2010, effectively, that may have been true of some people.

Q38 John Thurso: You would characterise it as an unintended consequence but, with hindsight, reasonably benign.

Dr Broadbent: It is not necessarily hindsight, but in early 2009 we were in an economy in which nominal incomes were declining. I can’t remember when that had previously been the case but probably certainly before the Second World War. Both sides of the household balance sheets were big. Some people forget the asset side. That is also very big. If you have large gross debts in the economy and nominal income suddenly starts falling, that is quite dangerous; that sort of debt deflation very dangerous. So at that time, when our nominal GDP was falling, I think it was perfectly reasonable to say, “Well, our first priority is to turn that around”.

When you are doing that, you might also think, “We probably will have inflation well below target if not negative as well, so let’s do this”. Later on, what I was suggesting is that as inflation turned up people may have clung to this additional de facto target to keep nominal demand in the economy going up, even though the split between growth and inflation was not turning out to be very favourable.

Unlike Broadbent, I’d like to see a bit higher NGDP growth (forecasts), to get a bit closer to the old trend line (but not all the way back.)  But they also have structural problems, which are attributable to Gordon Brown, just as George Bush damaged the structural side of the US economy.  (And Brown was even worse than Bush.)



4 Responses to “Ben Broadbent gets it”

  1. Gravatar of marcus nunes marcus nunes
    7. July 2011 at 14:24

    In the US, on the other hand, since mid 09 productivity has been growing on average a bit above 4% YoY. Just the sort of environment where increasing nominal spending would mostly translate in RGDP growth.

  2. Gravatar of Scott Sumner Scott Sumner
    7. July 2011 at 16:09

    Marcus, Exactly.

  3. Gravatar of Luis Enrique Luis Enrique
    8. July 2011 at 00:36

    I love the chair’s cricketing summation: “We have noted the very straight bat with which you have attempted to play every question, only scoring runs when you absolutely had to. We will discuss with colleagues whether any inadvertent snicks were taken, but thank you very much for coming before us.”

  4. Gravatar of Scott Sumner Scott Sumner
    8. July 2011 at 16:56

    Luis, They make our Congress seem so boring by comparison. I couldn’t even imagine a discussion this intelligent in DC.

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