Small mercies at the Bank of England

Martin Weale is taking Andrew Sentance's mantle as the Monetary Policy Committee's resident clown.

The minutes of June's Monetary Policy Committee (MPC) meeting were published this morning. They were rather more dovish than the markets had expected and raised the prospect of a further round of quantitative easing. The relevant quote was: "It was possible that further asset purchases might become warranted if the downside risks to medium-term inflation materialised."

Once again, my good friend Adam Posen voted for a further £50bn of asset purchases. It is increasingly looking like he is on the right side of this one. The two misguided inflation hawks -- the chief economist, Spencer Dale, and Martin Weale -- voted for a 25 basis-point increase. They know not what they do, honestly.

The majority on the MPC is right to worry more about growth than inflation right now. This week, there was more evidence that George Osborne's nightmare scenario of zero or even negative growth is unfolding before our eyes. The Confederation of British Industry's Industrial Trends Survey for June, published yesterday, was not encouraging.

The drop in the output expectations index from May's 20 to 13, the lowest figure since December last year, added to other recent evidence suggesting that the previously strong manufacturing recovery is disappearing. The slowing economy is also holding back tax receipts that, according to data released this week, were up only 3 per cent in April and May together.

The monthly public-sector borrowing figure of £17.4bn was a little below last May's figure of £18.5bn. But, in the first two months of the fiscal year together, borrowing totalled £27.4bn, compared to last year's £25.9bn.

Jonathan Loynes at Capital Economics has pointed out that, although it is early days yet, at this rate, borrowing will overshoot the Office for Budget Responsibility's Budget forecast of £122bn by almost £30bn. Loynes argues: "Overall, the public finances figures provide a clear warning that the weakness of the economy could derail the government's deficit-reduction plans and will add fuel to the debate over whether it should scale back the size and speed of the fiscal tightening." Hence, the concern of the majority on the MPC that more stimulus may be needed.

This afternoon's Opposition Day Debate in the House of Commons on the anniversary of Osborne's first Budget makes the case for the government to "adopt a more balanced deficit plan which, alongside tough decisions on tax and spending cuts, puts jobs first and will be a better way to get the deficit down over the longer term and avoid long-term damage to the economy". There is a realistic alternative (Tiara).

Of particular interest was how the MPC's newest addition, Ben Broadbent, voted at his first meeting. It turns out he voted along with the majority: for no change.

While he was at Goldman Sachs, Broadbent was the co-author of an article written with Kevin Daly that advocated the macroeconomic benefits of an "expansionary fiscal contraction". This is the idea that Larry Summers dubbed as "oxymoronic". The empirical evidence suggests that such a policy has never worked without being accompanied by a big loosening of monetary policy. Given that there seems to be a contractionary fiscal contraction going on, Broadbent was always likely to vote for a stimulative monetary policy as his Plan B. Plus, I understand that he is pals with Osborne's chief economist, Rupert Harrison, who would no doubt be most unhappy if he voted for a rate rise.

I gave a speech last week at a conference in London where I said that there are few things that Osborne, Mervyn King, Alistair Darling and Blanchflower would agree on right now other than that interest rates shouldn't rise any time soon. The next speaker after me was Lord Lamont, who kindly came up to me afterwards and said that he agreed on my comments on the need to keep monetary policy loose.

I recall being told by Steve Nickell, whom I replaced on the MPC, that it was a good idea to wait for two or three meetings before doing much, so you could work out which way was up. This was great advice. I remember, though, that Andrew Sentance, in his first meeting in 2006, voted in the minority along with Tim Besley, who was attending his second meeting for a rate rise in a 7-2 decision for no change.

One of my ex-colleagues on the MPC commented to me at the time that it was interesting that the only two members of the MPC who believed the August inflation and growth forecasts were the ones who weren't there when they were being constructed.

Over the past few weeks, there were three speeches by MPC members that were of particular interest. Sir Mervyn's Mansion House speech didn't say much of note, other than that Osborne, who presumably had approved his knighthood, couldn't do anything wrong and should keep on going slashing and burning the economy. His comment on fiscal policy was interesting. "Of course, there can always be differences of judgement about the overall stance of policy but to change the broad policy mix would make little sense." Maybe Merv still doesn't realise that he is the likely fall guy when the coalition's economic ship hits the rocks.

The external MPC member Martin Weale made a speech in London, in which he argued that bank rate should be raised now, even though inflation is likely to fall sharply as the temporary factors drop out. There is no evidence of any second-round effects from wages; consumer confidence is at levels only seen previously in the depths of the great recession and growth is anaemic -- all before austerity hits. Weale argued that:

The case for a rise can be put quite simply. An early increase in bank rate makes it more likely that the inflation target can be met in two to three years time because it allows for greater subsequent flexibility. If inflationary pressures subsequently prove more severe than the central part of our forecast suggests, then it will be a help to have started to raise interest rates earlier. But if they prove less strong then subsequent increases can be slower than would otherwise be the case. Indeed, if the economy is extremely weak, interest rates can be reduced again.

What a load of tosh. An increase now would slow the economy at a time when the economy has stagnated. Raising rates now only to have to reduce them in the future would be a major policy mistake. There is no empirical support whatever for Weale's claim in the June minutes that: "A small increase in bank rate would afford the committee greater subsequent flexibility in responding to possible future developments." Weale is taking over Sentance's mantle as the MPC's resident clown.

Fortunately, there are some sane voices on the MPC. I was much encouraged to read the excellent speech by my old friend and colleague Paul Fisher at the Global Borrowers and Investors Forum in London on 21 June. Paul made it clear that he is especially worried about risks to the downside.

Over the past couple of years, the challenge has been dealing with a succession of real changes in relative prices (via negative supply side shocks) which have pushed up on prices whilst depressing demand and output. That is extremely uncomfortable for everybody. But there was, and is, no easy way for monetary policy to deal with the impact of such shocks. In our current projections there are very major risks to either side of the central case. On one side, higher inflation expectations could become entrenched making it very costly for the MPC to subsequently bring inflation back to target. On the other side, the economy could be much weaker than we expect pushing down on inflation and risking deflation. Recovering to the target from that could be even harder (at least in my personal view).

Phew, Fisher gets it but Weale and Dale sadly don't. At least Sir Mervyn continues to vote the right way (along with Posen, Broadbent Tucker, Bean, Fisher and Miles). I am grateful for small mercies.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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The 4 questions to ask any politician waffling on about immigration

Like - if you're really worried about overcrowding, why don't you ban Brits from moving to London? 

As the general election campaigns kick off, Theresa May signalled that she intends to recommit herself to the Conservatives’ target to reduce net migration to the “tens of thousands.” It is a target that many – including some of her own colleagues - view as unattainable, undesirable or both. It is no substitute for a policy. And, in contrast to previous elections, where politicians made sweeping pledges, but in practice implemented fairly modest changes to the existing system, Brexit means that radical reform of the UK immigration system is not just possible but inevitable.

The government has refused to say more than it is “looking at a range of options”. Meanwhile, the Labour Party appears hopelessly divided. So here are four key questions for all the parties:

1. What's the point of a migration target?

Essentially scribbled on the back of an envelope, with no serious analysis of either its feasibility or desirability, this target has distorted UK immigration policy since 2010. From either an economic or social point of view, it is almost impossible to justify. If the concern is overall population levels or pressure on public services, then why not target population growth, including births and deaths? (after all, it is children and old people who account for most spending on public services and benefits, not migrant workers). In any case, given the positive fiscal impact of migration, these pressures are mostly a local phenomenon – Scotland is not overcrowded and there is no shortage of school places in Durham. Banning people from moving to London would be much better targeted.

And if the concern is social or cultural – the pace of change – it is bizarre to look at net migration, to include British citizens in the target, and indeed to choose a measure that makes it more attractive to substitute short-term, transient and temporary migrants for permanent ones who are more likely to settle and integrate. Beyond this, there are the practical issues, like the inclusion of students, and the difficulty of managing a target where many of the drivers are not directly under government control. Perhaps most importantly, actually hitting the target would have a substantial economic cost. The Office for Budget Responsibility’s estimates imply that hitting the target by 2021 – towards the end of the next Parliament – would cost about £6bn a year, compared to its current forecasts.

So the first question is, whether the target stays? If so, what are the specific policy measures that will ensure that, in contrast to the past, it is met? And what taxes will be increased, or what public services cut to fill the fiscal gap?

2. How and when will you end free movement? 

The government has made clear that Brexit means an end to free movement. Its white paper states:

“We will design our immigration system to ensure that we are able to control the numbers of people who come here from the EU. In future, therefore, the Free Movement Directive will no longer apply and the migration of EU nationals will be subject to UK law.”

But it hasn’t said when this will happen – and it has also stated there is likely to be an “implementation period” for the UK’s future economic and trading relationship with the remaining EU. The EU’s position on this is not hard to guess – if we want to avoid a damaging “cliff edge Brexit”, the easiest and simplest option would be for the UK to adopt, de facto or de jure, some version of the “Norway model”, or membership of the European Economic Area. But that would involve keeping free movement more or less as now (including, for example, the payment of in-work benefits to EU citizens here, since of course David Cameron’s renegotiation is now irrelevant).

So the second question is this – are you committed to ending free movement immediately after Brexit? Or do you accept that it might well be in the UK’s economic interest for it to continue for much or all of the next Parliament?

3. Will we still have a system that gives priority to other Europeans?

During the referendum campaign, Vote Leave argued for a “non-discriminatory” system, under which non-UK nationals seeking to migrate to the UK would be treated the same, regardless of their country of origin (with a few relatively minor exceptions, non-EEA/Swiss nationals all currently face the same rules). And if we are indeed going to leave the single market, the broader economic and political rationale for very different immigration arrangements for EU and non-EU migrants to the UK (and UK migrants to the rest of the EU) will in part disappear. But the Immigration Minister recently said “I hope that the negotiations will result in a bespoke system between ourselves and the European Union.”

So the third question is whether, post-Brexit, our immigration system could and should give preferential access to EU citizens? If so, why?

4. What do you actually mean by reducing "low-skilled" migration? 

One issue on which the polling evidence appears clear is that the British public approves of skilled migration – indeed, wants more of it- but not of migration for unskilled jobs. However, as I point out here, most migrants – like most Brits – are neither in high or low skilled jobs. So politicians should not be allowed to get away with saying that they want to reduce low-skilled migration while still attracting the “best and the brightest”.

Do we still want nurses? Teachers? Care workers? Butchers? Plumbers and skilled construction workers? Technicians? If so, do you accept that this means continuing high levels of economic migration? If not, do you accept the negative consequences for business and public services? 

Politicians and commentators have been saying for years "you can't talk about immigration" and "we need an honest debate." Now is the time for all the parties to stop waffling and give us some straight answers; and for the public to actually have a choice over what sort of immigration policy – and by implication, what sort of economy and society – we really want.

 

 

Jonathan Portes is director of the National Institute of Economic and Social Research and former chief economist at the Cabinet Office.

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