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

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Jeremy Corbyn's speech on terrorism will do him more good than harm

The Labour leader's criticism of police cuts and western foreign policy will resonate with voters.

The election campaign, if there was any doubt, has resumed. In his speech responding to the Manchester attack, Jeremy Corbyn did not limit himself to expressions of sympathy and solidarity. He squarely targeted Theresa May on her home turf: policing and security.

The Conservatives' repeated warning is that Corbyn is a "threat" to his country. But the Labour leader countered that only he could keep it "safe". Austerity, he declared, "has to stop at the A&E ward and at the police station door. We cannot be protected and cared for on the cheap." May, having been warned by the Police Federation while home secretary of the danger of cuts, is undoubtedly vulnerable on this front. Under Labour, Corbyn vowed, "there will be more police on the streets" (despite Diane Abbott's erroneous arithmetic), while the security services would receive whatever resources they need.

Corbyn swiftly progressed to foreign policy, the great passion of his political life. Though it is facile to reduce terrorism to a "blowback" against western interventionism (as if jihadists were Pavlovian dogs, rather than moral agents), it is blinkered to dismiss any connection. As Corbyn noted: "Many experts, including professionals in our intelligence and security services have pointed to the connections between wars our government has supported or fought in other countries, such as Libya, and terrorism here at home" (the Tory-led Foreign Affairs Select Committee is among those who agree).That the former Stop the War chair has long taken this view absolves him of the charge of crude political opportunism.

Corbyn was also more careful than his pre-briefed remarks suggested to caveat his criticisms. He emphasised: "Those causes certainly cannot be reduced to foreign policy decisions alone. Over the past fifteen years or so, a sub-culture of often suicidal violence has developed amongst a tiny minority of, mainly young, men, falsely drawing authority from Islamic beliefs and often nurtured in a prison system in urgent need of resources and reform.

"And no rationale based on the actions of any government can remotely excuse, or even adequately explain, outrages like this week’s massacre."

But he maintained his central charge: western intervention has made the world more dangerous, not less. "We must be brave enough to admit the war on terror is simply not working," he said. "We need a smarter way to reduce the threat from countries that nurture terrorists and generate terrorism."

Though Corbyn's arguments have appalled Conservatives (and some in Labour), they are ones that will likely find favour among the public. Polls have consistently shown that most voters oppose western adventurism and believe it has endangered the UK. Corbyn's words will resonate among both the anti-interventionist left and the isolationist right (this is, after all, a country which has just voted to retreat from even its closest neighbours).

The speech, given at 1 Great George Street (in the room where Ed Miliband gave his resignation address), was marred by Corbyn's refusal to take questions. But it was unarguably well-delivered. "Let’s have our arguments without impugning anyone’s patriotism and without diluting the unity with which we stand against terror," he warned in a pre-emptive strike against the Conservatives.

Corbyn's decision to give an overtly political speech four days after the Manchester attack is being widely described as a "gamble" or even a profound error. But the election will now rightly focus more closely on the issue of security - nothing should be beyond democratic debate.

Many of Corbyn's life-long stances, such as unilateral disarmament, do not find favour with the electorate. But there was little in his speech today that the average voter would contest. The Conservatives will hope to turn the heightened security debate to their advantage, ruthlessly quoting Corbyn against himself. But on this front, as on others, the Labour leader is proving a tougher opponent than they anticipated.

George Eaton is political editor of the New Statesman.

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