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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On Brexit, David Cameron knows exactly what he's doing

It's not a dead cat - it's about disarming the Leave campaign. 

If you’re explaining, you’re losing. That’s the calculation behind David Cameron’s latest entry into the In-Out (or Remain-Leave in new money) battle. The Prime Minister has warned that were Britain to leave the European Union, the migrant camp at Calais – popularly known as “the Jungle” – could move to Britain. But Eurosceptic campaigners have angrily denounced the remarks, saying that there’s little chance of it happening either way.  

Who’s right? My colleague Henry Zeffman has written a handy explainer of the ins and outs of the row, but the short version is: the Eurosceptic campaigners are broadly right.

But the remarks are very far from a gaffe by Downing Street or Cameron, and they aren’t a “dead cat” strategy – where you say something offensive, prompting a debate about that instead of another, trickier issue – either.

Campaigners for Remain have long been aware that immigration remains their glass jaw. The line wheeled out by Cameron has been long-planned. Late last year, senior members of the In campaign discussed what they saw as the danger points for the campaign. The first was a renegotiation that managed to roll back workplace rights, imperilling the support of the Labour party and the trade unions was one – happily avoided by Cameron’s piecemeal deal.

That the deal would be raked over in the press is not considered a risk point. Stronger In has long known that its path to victory does not run through a sympathetic media. The expectation has long been that even substantial concessions would doubtless have been denounced by the Mail, Telegraph and Sun – and no-one seriously expected that Cameron would emerge with a transformative deal. Since well before the general election, the Prime Minister has been gradually scaling back his demands. The aim has always been to secure as many concessions as possible in order to get an In vote – but Downing Street’s focus has always been on the “as possible” part rather than the “securing concessions” bit.

Today’s row isn’t about deflecting attention from a less-than-stellar deal, but about defanging another “risk point” for the In campaign: border control.

Campaign strategists believe they can throw the issue into neutral by casting doubt on Leave’s ability to control borders any better. One top aide said: “Our line is this: if we vote to leave, the border moves from Calais to Dover, it’s that simple.” They are also keen to make more of the fact that Norway has equally high levels of migration from the European Union as the United Kingdom. While In will never “own” the issue of immigration, they believe they can make the battle sufficiently murky that voters will turn to the areas that favour a Remain vote – national security, economic stability, and keeping people in their jobs.

What the row exposes, rather than a Prime Minister under pressure is a politician who knows exactly what he’s doing – and just how vulnerable the lack of a serious heavyweight at the top makes the Leave campaign(s). Most people won't make a judgement based on reading up the minutinae of European treaties, but on a "sniff test" of which side they think is more trustworthy. It's not a fight about the facts - it's a fight about who is more trusted by the public: David Cameron, or Iain Duncan Smith, Chris Grayling or Priti Patel? As one minister said to me: "I like Priti, but the idea that she can go against the PM as far as voters are concerned is ridiculous. Most people haven't heard of her." 

Leave finds itself in a position uncomfortably like that of Labour in the run-up to the election: with Cameron able to paint himself as the only option guaranteeing stability, against a chaotic and muddled alternative. Without a politician, a business figure or even a prominent celebrity who can provide credibility on the level of the Prime Minister, any row about whether or not Brexit increases the chances of more migrants on Britain’s doorsteps helps Remain – and Cameron. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.