The Economist endorses NGDP targeting. Well, sort of…

The Economist endorses a bit of NGDP targeting, for a bit, in a bit.

The Economist has an editorial in this week's magazine calling for a form of nominal GDP targeting. The editorial reads:

At the moment the Bank of England’s mission, set by the chancellor of the exchequer, is to focus on an inflation target of 2%. That makes sense in normal circumstances. But with short-term interest rates at almost zero, the economy growing at barely 2% in nominal terms (and not at all if you factor in inflation) and many years of austerity ahead, it is worth temporarily reinterpreting that policy and focusing on nominal GDP. Our suggestion is that the bank, backed by the chancellor, George Osborne, should make clear that it will not tighten policy until nominal GDP, currently £1.5 trillion, gets to a level that is at least 10% higher than today.

The magazine is clearly happy to call what it's suggesting a nominal GDP target, but that's not really the case. Instead, the suggestion is more akin to the US's recent adoption of the so-called Evans Rule, which stated that:

The interest rate is guaranteed to stay at its historic low of 0-0.25 per cent until unemployment is below 6.5 per cent or inflation is above 2.5 per cent.

The American case is different for two key reasons: the first is that the Federal Reserve's Open Market Committee, which sets monetary policy, has a dual mandate, requiring it to keep both inflation and unemployment low. The FOMC had been doing a good job keeping the former down, but not such a good job with the latter. The second is that growth in the State is doing OK; again, the real concern was that, in focusing too heavily on inflation, the Fed might choke off that recovery.

But both the Evans rule and the Economist's rule — let's call it the Micklethwait rule — are more about binding the monetary policy committees' future actions. They are a way of communicating to the markets that the rates will not be raised until good things happen, and that the traditional role of the central banks (to keep inflation under control) will be put to one side in the meantime.

The fact that the Micklethwait rule is described in terms of "nominal GDP" makes it sound like a nominal GDP target, but it's not. The latter, a dreadfully trendy prospect in economics circles at the moment, involves commanding the central bank to target a specific level of nominal GDP (that is, GDP unadjusted for inflation). Its benefits are that it explicitly allows for a burst of inflation to get us out of a depression, and commands central bankers to not just restore growth after a slump, but to increase nominal GDP to the level it would be if that slump hadn't actually happened.

The Micklethwait rule would allow for the first — but only as a one time thing, since it would need to be re-enacted in a future depression — but explicitly prevents the second. It only gets half the benefits of true nominal GDP targeting, but all of the downsides, particularly the big one: before we can target NGDP, we need to be able to measure it. Given the ONS's revisions to real GDP, made over the span of three months, are still subject to enormous revisions, the thought of it having to make them three times as fast, for a new measure of the country's production, and get them right first time seems faintly ludicrous.

That's not to say that the Micklethwait rule might not be better than what we have at the moment. Just that if we're going to go to all that trouble, we may as well leap into the great unknown with both feet, rather than just stumbling off the cliff out of desperation.

The Bank of England. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Getty
Show Hide image

Benn vs McDonnell: how Brexit has exposed the fight over Labour's party machine

In the wake of Brexit, should Labour MPs listen more closely to voters, or their own party members?

Two Labour MPs on primetime TV. Two prominent politicians ruling themselves out of a Labour leadership contest. But that was as far as the similarity went.

Hilary Benn was speaking hours after he resigned - or was sacked - from the Shadow Cabinet. He described Jeremy Corbyn as a "good and decent man" but not a leader.

Framing his overnight removal as a matter of conscience, Benn told the BBC's Andrew Marr: "I no longer have confidence in him [Corbyn] and I think the right thing to do would be for him to take that decision."

In Benn's view, diehard leftie pin ups do not go down well in the real world, or on the ballot papers of middle England. 

But while Benn may be drawing on a New Labour truism, this in turn rests on the assumption that voters matter more than the party members when it comes to winning elections.

That assumption was contested moments later by Shadow Chancellor John McDonnell.

Dismissive of the personal appeal of Shadow Cabinet ministers - "we can replace them" - McDonnell's message was that Labour under Corbyn had rejuvenated its electoral machine.

Pointing to success in by-elections and the London mayoral election, McDonnell warned would-be rebels: "Who is sovereign in our party? The people who are soverign are the party members. 

"I'm saying respect the party members. And in that way we can hold together and win the next election."

Indeed, nearly a year on from Corbyn's surprise election to the Labour leadership, it is worth remembering he captured nearly 60% of the 400,000 votes cast. Momentum, the grassroots organisation formed in the wake of his success, now has more than 50 branches around the country.

Come the next election, it will be these grassroots members who will knock on doors, hand out leaflets and perhaps even threaten to deselect MPs.

The question for wavering Labour MPs will be whether what they trust more - their own connection with voters, or this potentially unbiddable party machine.