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

Nicola Sturgeon and Tony Blair. Photo: Getty
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Nicola Sturgeon's SNP, like Tony Blair's New Labour, is heading for a crash landing

The fall of Tony Blair should be a set text for anyone wishing to know what happens next to the SNP.

If there was one thing the SNP and New Labour had in common, it was the hope. Both offered themselves as a burning torch of optimism to publics that had become tired of the same old gang running things in the same old way. Both promised a fairer, more equal society and a fearless embrace of the modern world with an appealing freshness and energy. The voters bought it: both won big, repeatedly.

The thing is, if you’re elected on a mandate to be different, you’d better be different. In many areas, for a long time, New Labour managed to be just that. The smiling PM with the huge majority pushed through radical policies, some of which even worked. Tony Blair’s methodology was so successful and so convincing that the Conservatives and the Lib Dems reshaped themselves in his likeness. Arguably, a form of New Labour won in 2010 and 2015.

But, as they say, it’s the hope that kills you. When the inevitable attritional realities of governing start to weigh, when you make, as you will, bad decisions, when the list of enemies grows long, when you’ve just had your time, you’ll fall like all the rest – only, when you’ve soared so close to the sun, you have that much further to plummet.

The fall of Blair and of Labour should be a set text for anyone wishing to know what happens next to the SNP. Sunday night’s debate between the Scottish party leaders was, I think, a foretaste of what’s coming – a public that until recently was politically and emotionally invested in the Nats is growing restive. In time, this will turn to disenchantment, then anger, then revenge at the ballot box. This is the unbreakable cycle of democratic politics.

Some of us have warned since the start that the SNP had over-promised and could only under-deliver. Its raison d’etre is independence; everything else - literally everything else - is just another brick to build the path. And so education reform cannot be either radical or unpopular, even if it needs to be so to work, because the SNP cannot afford to alienate teachers or the teaching unions or parents. Bricks, you see. Same with the NHS and doctors and health unions and patients. All the separatists have done – all they could have done, given their nature - is deploy the rhetoric of the radical while in reality body-swerving hard choices and conflict at any cost. And where they have found themselves taking flak, they’ve pointed south to Westminster: "it’s no’ our fault, it’s theirs".

But voters show signs of wearying of the predictable blame game and waking up to the time-limited strategy of show-over-substance. Middle Scotland is either ignored or maligned by the middle-class socialists who drive the nation’s political debate, but it is where elections are won. The SNP has secured the support of enough of these people to win every recent election in style, but somewhere along the way the party seems to have forgotten this was a mandate not for independence, but for good government. Ten years in to SNP rule, each new audit of public services seems to wail like a warning siren – things aren’t just not improving, they’re getting worse. The SNP is not keeping its part of the deal.

So, during Sunday night’s debate it was Nicola Sturgeon, not Ruth Davidson or Kezia Dugdale, who found herself in the audience’s cross-hairs. It will have been a strange experience for a woman more used to public adulation and a clamour for selfies. There were the teachers, who complained about the damp squib that is the Curriculum for Excellence, the SNP’s flagship education policy; who pointed out that a fifth of primary pupils are leaving without basic literacy and numeracy skills; and who warned that lowering the standard of exams in order to push up the pass rate was not a mark of success.

Then there was the nurse who said she had been forced to use a food bank (the existence of which has been used repeatedly by the SNP as a stick with which to beat the Conservatives and Westminster): ‘I can’t manage on the salary I have [which is set by the Scottish Government]. You have no idea how demoralising it is to work in the NHS. Don’t come on your announced visits, come in in the middle of any day to any ward, any A&E department and see what we’re up against.’ She delivered the evening’s killer line: ‘Do you think your perceived obsession with independence might actually cost you… in this election?’

The list of reasonable criticisms is growing and will grow further. The ideological obsession with free university tuition for Scottish students is increasingly seen as a sop to the better-off, while in England the fee-charging regime has seen the number of students coming from poorer families climb. Ms Sturgeon’s demand for a quick second independence referendum, when a worried middle Scotland was focused on what Brexit might mean for its future, was tone deaf.

The SNP has another problem (one that New Labour, for all its flaws, didn’t face): its doctrine of infallibility. The Nats’ constitution explicitly prohibits its elected members from criticising the party, its policies or each other. While total unity is useful when you’re on the climb, it starts to look bonkers when the cracks are showing. Allowing public self-criticism, far from being a sign of weakness, is a necessary vent for inner tensions and a sign to voters that a political party is something more than a cult.

That ‘cult’ word has long dogged the SNP and its supporters. The party has tried hard to normalise its electoral appeal while keeping the flame of independence burning bright, but it has been a difficult balancing act. The pro-independence mob is an ugly thing when it is unleashed (and it has suited the leadership to open the cage at times). Claire Austin, the nurse who criticised the First Minister on Sunday, has found herself at its mercy. Immediately after the debate, the Nats briefed (wrongly) that she was the wife of a Tory councilor. The SNP branch in Stirling said Tebbitishly that if she was having to use food banks "maybe she needs to tighten her belt a bit more?" Joanna Cherry, a QC, MP and the SNP’s Home Affairs spokesperson, was forced to publicly apologise for spreading "Twitter rumours" about Ms Austin.

The ravening horde has largely kept its head down since the 2014 independence referendum, but we now see it hasn’t gone away - it is not enough for the SNP’s critics to be debated, they must be destroyed. This isn’t the behaviour of a normal political party: it’s the behaviour of a cult.

I might be wrong, but I have a feeling that when the SNP does fall it will fall quite quickly. Its belief in its infallibility, its inability or unwillingness to do self-deprecation or apology, will increasingly aggravate voters. There is nothing to suggest the current public policy failings will be addressed, and plenty of signs that things will get worse. How, then, do you arrest your fall?

The SNP offered hope and promised it was different, and the voters believed. The sense of betrayal could make for a very hard landing indeed.

Chris Deerin is the New Statesman's contributing editor (Scotland). 

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