Growth must be the focus as the world economy slows

Andrew Sentance has a list of questions for Mervyn King. Here are my answers.

Andrew Sentance on his website has posed ten questions that he wants answered by Mervyn King. So I decided to answer them myself.

1. The Monetary Policy Committee (MPC) resisted arguments for a rise in interest rates in the second half of 2010 and earlier this year. And yet it has moved very quickly to mobilise more quantitative easing (QE) based on short-term worries about economic growth, despite the fact that inflation is now over 5 per cent. Is this not evidence that the MPC is targeting growth, not inflation?

I guess you never did realise that monetary policy can only impact inflation 18 months to two years ahead. As it is being driven by temporary factors and they are about to drop out, inflation is going to be below target at the forecast horizon. This would be even more obvious if the CPI included falling house prices. In any case, behavioural economics shows that people care much more about unemployment than they do about inflation.

2. The Bank's analysis of the original round of QE showed that it raised inflation. How can a new round of QE be justified when inflation is at 5.2 per cent, the highest rate we have seen since the early 1990s?

The Bank's analysis showed that it raised inflation, which was a good thing, because we were headed to deflation. A new round of QE is justified, because the economic data in the UK and especially in the eurozone is slowing. Perhaps you didn't notice.

3. MPC forecasts have seriously underestimated inflation since the onset of the financial crisis. How can the committee be so confident that inflation is set to fall below target when its previous forecasts have been so inaccurate?

You mean the forecasts that you signed up to? The MPC also was too optimistic about growth. All forecasts are based upon the data that there is to hand. If another shock comes along in either direction than all bets are off. How could the MPC be expected to forecast, say, a hurricane that disrupts oil production and then pushes up both oil prices and inflation?

4. The MPC has taken a decision to reactivate QE without the support of a quarterly forecast. How can the committee then assert so confidently that inflation will fall below the 2 per cent target without a further injection of QE, when it has not carried out a forecast exercise to support this judgement?

The shock to output is so large that they had to move. Contrary to what you claimed in a number of your speeches, growth was revised downwards, not up, which meant it was obvious that inflation was going to be well below the target. The Greek referendum means that risks are even greater to the downside. Every time, you have called it wrong, so you have no credibility, sorry.

5. Some economists have argued that QE will depress sterling and add to inflation directly through that route. Given that the weakness of sterling and rising import prices have added to UK inflation in the past 2/3 years, is this not a very legitimate concern?

You know very well that depreciation of the currency helps to increase stimulus in the economy, not least because it raises the cost of imported goods and thus encourages import substitution. This has been rather slow to happen to this point, because of the mistaken austerity programme that cuts too deep and too fast. What you're not acknowledging is that the alternative was for the economy to go over the cliff, which would create very high levels of unemployment. Economists have to consider the outcome for people across society.

6. The MPC minutes suggest that the committee believes that QE will be as effective in the current environment as in 2009. Yet a key channel of influence for QE is the downward impact on long-term interest rates, which are now much lower than in 2009. Does this not suggest MPC will now be less effective?

The MPC has performed its own Operation Twist with its new form of QE, which emphasises the long end of the curve. In contrast to the stock of data, a third of the purchases will be of 25 years duration and over compared with 11 per cent of the stock. The economy needs stimulus.

7. The first round of QE in 2009 probably boosted business and consumer confidence because the Bank of England appeared to be "pulling out all the stops" to stabilise the economy. Is there any evidence that the confidence effect of this current round of QE will be so positive, particularly when there are major worries about high inflation at present?

Maybe not, but that simply is an argument for doing a lot more QE, rather than less. Hence some economists' expectations that QE will move to at least £500bn. Doing nothing, as you seem to be proposing, would push the economy over the cliff.

8. If QE is effective, it brings forward future growth into the present. But that means growth may be weaker in the future -- and the governor acknowledged this problem in his Liverpool speech. Why does the Bank/MPC think that we will be better placed to cope with weaker growth in the future than now?

There is no evidence from anywhere that more growth now means less growth later -- look at China. In the case of Japan, less growth now means less growth later. The economy is subject to severe headwinds and if action hadn't been taken, inflation would be below the target and perhaps even negative

9. A big concern for the public and business is pensions. By depressing long-term investment returns, QE makes the pension funding problem more difficult. Has the MPC taken this into account in its decision on QE and how does it respond to these criticisms?

As Mervyn King said, raising rates now to help savers is nonsensical, as it would drive up unemployment and lower growth.

10. The broader public will find it hard to understand why the MPC has not taken any steps to counter high inflation and yet seems very ready to inject more stimulus, which might add to inflation over the longer term. Surely the actions of the MPC are undermining confidence in price stability and the inflation target?

I am afraid it is you that has confused the public, by claiming that interest rates should have been raised in the depths of a recession. Just think what would have happened to the economy if you had had your way -- mortgage payments would have risen, consumer spending and house prices would have fallen and unemployment would have risen and growth fallen. It is quite clear now that what you were arguing for was totally mistaken.

You failed to call the recession and wrongly suggested that the risk to the economy was inflation. The danger remains of deflation, not inflation. Note the statement made by the MPC when it moved to doing more QE.

The pace of global expansion has slackened, especially in the United Kingdom's main export markets. Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery.

Note the scary word "threaten". Growth must be the focus right now, as the world economy slows.

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

Photo: Getty
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The Tories play Game of Thrones while the White Walkers from Brussels advance

The whole premise of the show is a pretty good metaphor for the current state of British politics.

If you’re a fan of asking “who’s that, then?” and “is that the one who killed the other one’s brother?”, I bring great news. Game of Thrones is back for a seventh series. Its vast assortment of characters was hard enough to keep track of before half of them got makeovers. But now the new Queen Cersei has reacted to the arrival of the long winter by investing heavily in the kind of leather ball gowns sold by goth shops in Camden, and Euron Greyjoy, once a fairly bland sailor, has come back as a Halloween costume version of Pacey from Dawson’s Creek, all eyeliner and epaulettes.

The show’s reliance on British character actors is the only thing keeping me vaguely on top of the cast list: what’s Diana Rigg up to these days in Highgarden? And what about that guy who was in Downton Abbey that time, who now has the scaly arms? (Luckily, the next thing I watched after the Game of Thrones series premiere was the first two episodes of the revived Twin Peaks, which put my confusion into perspective. There, Agent Cooper spent most of his time talking to a pulsating bladder attached to one of those fake trees you get from Ikea when your landlord won’t let you have real plants.)

The day-to-day business of Game of Thrones has always been power – answering the question of who will sit on the Iron Throne, forged by Aegon the Conqueror from the swords of his defeated enemies. But its backdrop is a far bigger threat: the arrival of a winter that will last many years, and the invasion of an army of the undead.

That might seem like an unkind way to think about Michel Barnier and his fellow Brexit negotiators – inexorably marching towards us, briefing papers in hand, while Liam Fox frantically rings a bell at the entrance to the Channel Tunnel – but nonetheless, the whole premise of Game of Thrones is a pretty good metaphor for the current state of British politics.

The current internal Conservative struggle for power might be vicious but it is at least familiar to its contestants; they know which weapons to deploy, which alliances are vital, who owes them a favour. Meanwhile, the true challenge facing every one of them is too frightening to contemplate.

In 2013, this magazine celebrated the early success of the show with a cover depicting one of our terrifying painted mash-ups: “The Tory Game of Thrones.” Our casting has been strangely vindicated. George Osborne was our Jaime Lannister – once the kind of uncomplicated bastard who would push a child out of a window but now largely the purveyor of waspish remarks about other, worse characters. Our Cersei was Theresa May, who spent the early seasons of The Cameron Era in a highly visible but underwritten role. Now, she has just seized power, only to discover herself beset by enemies on all sides. (Plus, Jeremy Corbyn as the High Sparrow would quite like her to walk penitently through the streets while onlookers cry “shame!”)

Michael Gove was our Tyrion Lannister, the kind of man who would shoot his own father while the guy was on the loo (or run a rival’s leadership campaign only to detonate it at the last minute). Jeremy Hunt was Jon Snow, slain by the brotherhood of the Night Shift at A&E, only in this case still waiting for resurrection.

The comparison falls down a bit at Boris Johnson as Daenerys Targaryen, as the former London mayor has not, to my knowledge, ever married a horse lord or hired an army of eunuchs, but it feels like the kind of thing he might do.

We didn’t have David Davis on there – hated by the old king, David Camareon, he was at the time banished to the back benches. Let’s retrospectively appoint him Euron Greyjoy, making a suspiciously seductive offer to Queen Cersei. (Philip Hammond is Gendry, in that most of the country can’t remember who he is but feel he might turn out to be important later.)

That lengthy list shows how Conservative infighting suffers from the same problem that the Game of Thrones screenwriters wrestle with: there are so many characters, and moving the pieces round the board takes up so much time and energy, that we’re in danger of forgetting why it matters who wins. In the books, there is more space to expound on the politics. George R R Martin once said that he came away from The Lord of The Rings asking: “What was Aragorn’s tax policy?” (The author added: “And what about all these orcs? By the end of the war, Sauron is gone but all of the orcs aren’t gone – they’re in the mountains. Did Aragorn pursue a policy of systematic genocide and kill them? Even the little baby orcs, in their little orc cradles?”)

Martin’s fantasy vision also feels relevant to the Tories because its power struggles aren’t about an “endless series of dark lords and their evil minions who are all very ugly and wear black clothes”. Instead, everyone is flawed. In Westeros, as in the Conservative Party, it can be difficult to decide who you want to triumph. Sure, Daenerys might seem enlightened, but she watched her brother have molten gold poured down his throat; plucky Arya Stark might tip over from adorable assassin into full-blown psychopath. Similarly, it’s hard to get worked up about the accusation that Philip Hammond said that driving a train was so easy “even a woman” could do it, when David Davis marked his last leadership campaign by posing alongside women in tight T-shirts reading “It’s DD for me”.

The only big difference from the show is that in real life I have sympathy for Barnier and the White Walkers of Brussels. Still, maybe it will turn out that the undead of Game of Thrones are tired of the Seven Kingdoms throwing their weight around and are only marching south to demand money before negotiating a trade deal? That’s the kind of plot twist we’re all waiting for.

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.

This article first appeared in the 20 July 2017 issue of the New Statesman, The new world disorder