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.

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How to end the Gulf stand off? The West should tell Qatar to reform its foreign policy

Former defence secretary Geoff Hoon on the unfolding crisis in the Gulf. 

Only one group stands to benefit from a continuation of the crisis in Gulf: The Quartet, as they are now being called. Last week, The United Arab Emirates foreign minister tweeted that Qatar and its Gulf Cooperation Council neighbours are heading for a "long estrangement". We should take him at his word.

The European political establishment has been quick to dismiss the boycott by Saudi Arabia, the UAE, Bahrain and Egypt as naïve, and a strategic mistake. The received wisdom now is that they have acted impulsively, and that any payoff will be inescapably pyrrhic. I’m not so sure.

Another view: Qatar is determined to stand up to its Gulf neighbours

Jean-Yves Le Drian, France's foreign minister, was in the region over the weekend to see if he could relay some of his boss’s diplomatic momentum. He has offered to help mediate with Kuwait, clearly in the belief that this is the perfect opportunity to elevate France back to the top table. But if President Emmanuel Macron thinks this one will be as straightforward as a Donald Trump handshake, he should know that European charm doesn’t function as well in the 45 degree desert heat (even if some people call him the Sun King).

Western mediation has so far proceeded on the assumption that both sides privately know they will suffer if this conflict drags on. The US secretary of state Rex Tillerson judged that a Qatari commitment to further counter-terrorism measures might provide sufficient justification for a noble reversal. But he perhaps underestimates the seriousness of the challenge being made to Qatar. This is not some poorly-judged attempt to steal a quick diplomatic win over an inferior neighbour.

Qatar’s foreign policy is of direct and existential concern to the other governments in the Gulf. They will not let Qatar off the hook. And even more than that, why should they? Qatar has enormous diplomatic and commercial clout for its size, but that would evaporate in an instant if companies and governments were forced to choose between Doha and the Quartet, whose combined GDP is almost ten times that of their former ally. Iran, Turkey and Russia might stay on side. But Qatar would lose the US and Europe, where most of its soft power has been developed. Qatar’s success has been dependent on its ability to play both sides. If it loses that privilege, as it would in the event of an interminable cold war in the Gulf, then the curtains could come down.

Which is why, if they wanted to badly enough, Le Drian and Tillerson could end this conflict tomorrow. Qatar’s foreign policy has been concerning for the past decade. It has backed virtually every losing side in the Arab world, and caused a significant amount of destruction in the process. In Syria, Libya, Egypt and Yemen, Qatar has turned a blind eye to the funding of Islamic revolutionaries with the financial muscle to topple incumbent regimes. Its motives are clear; influence over the emergent republics, as it had in Egypt for a year under Mohamed Morsi. But as we review the success of this policy from the perspective of 2017, it seems clear that all that has been achieved is a combination of civil unrest and civil war. The experiment has failed.

Moreover, the Coalition is not going to lift sanctions until Doha suspends its support for the Muslim Brotherhood. When Western leaders survey the Gulf and consider who they should support, they observe two things: firstly, that the foreign policy of the Quartet is much more aligned with their own (it doesn’t seem likely to me that any European or American company would prefer to see a revolution in Dubai instead of a continuation of the present arrangement), and secondly, that Qatar would fold immediately if they applied any significant pressure. The Al Thani ruling family has bet its fortune and power on trans-Atlantic support; it is simply not credible that they would turn to the West’s enemies in the event that an ultimatum was issued. Doha might even welcome an excuse to pause its costly and ineffective programmes. Even if that involves some short term embarrassment. It is hardly going to lose support at home, with the highest GDP per capita in the world.

It would be necessary to make sure that the Coalition understands that it will have to pay a price for decisive Western intervention. The world will be a more dangerous place if our allies get the impression they can freely bully any smaller rival, knowing that the West will always come down on their side. That is however no great hurdle to action; it might even be a positive thing if we can at the same time negotiate greater contributions to counter-terrorism or refugee funding.

Unfortunately the reason why none of this is likely to happen is partly that the West has lost a lot of confidence in its ability to resolve issues in the Middle East since 2003, and partly because it fears for its interests in Doha and the handsome Qatari contributions in Western capitals. This cautious assessment is wrong and will be more harmful to Qatar and the aforementioned interests. The Quartet has no incentive to relent, it can’t afford to and will profit from commercial uncertainty in Doha the longer this drags on. If the West really wants this to end now, it must tell Qatar to reform its foreign policy or face sanctions from a more threatening ally.

Geoffrey Hoon was the UK defence secretary from 1999 to 2005.