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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Richmond is a victory for hope - now let's bring change across the country

The regressives are building their armies. 

Last night a regressive alliance was toppled. Despite being backed by both Ukip and the Conservative Party, Zac Goldsmith was rejected by the voters of Richmond Park.

Make no mistake, this result will rock the Conservative party – and in particularly dent their plans for a hard and painful Brexit. They may shrug off this vote in public, but their majority is thin and their management of the post-referendum process is becoming more chaotic by the day. This is a real moment, and those of us opposing their post-truth plans must seize it.

I’m really proud of the role that the Green party played in this election. Our local parties decided to show leadership by not standing this time and urging supporters to vote instead for the candidate that stood the best chance of winning for those of us that oppose Brexit. Greens’ votes could very well be "what made the difference" in this election (we received just over 3,500 votes in 2015 and Sarah Olney’s majority is 1,872) - though we’ll never know exactly where they went. Just as importantly though, I believe that the brave decision by the local Green party fundamentally changed the tone of the election.

When I went to Richmond last weekend, I met scores of people motivated to campaign for a "progressive alliance" because they recognised that something bigger than just one by election is at stake. We made a decision to demonstrate you can do politics differently, and I think we can fairly say that was vindicated. 

There are some already attacking me for helping get one more Liberal Democrat into Parliament. Let me be very clear: the Lib Dems' role in the Coalition was appalling – propping up a Conservative government hell bent on attacking our public services and overseeing a hike in child poverty. But Labour’s record of their last time in office isn't immune from criticism either – not just because of the illegal war in Iraq but also their introduction of tuition fees, privatisation of our health service and slavish worship of the City of London. They, like the Liberal Democrats, stood at the last election on an austerity manifesto. There is a reason that we remain different parties, but that doesn’t mean we shouldn't also seize opportunities like this to unite behind what we have in common. Olney is no perfect candidate but she has pledged to fight a hard Brexit, campaign against airport expansion and push for a fair voting system – surely progressives can agree that her win takes us forward rather than backwards?

Ultimately, last night was not just defeat of a regressive alliance but a victory for hope - a victory that's sorely needed on the back of of the division, loss and insecurity that seems to have marked much of the rest of this year. The truth is that getting to this point hasn’t been an easy process – and some people, including local Green party members have had criticisms which, as a democrat, I certainly take seriously. The old politics dies hard, and a new politics is not easy to forge in the short time we have. But standing still is not an option, nor is repeating the same mistakes of the past. The regressives are building their armies and we either make our alternative work or risk the left being out of power for a generation. 

With our NHS under sustained attack, our climate change laws threatened and the increasing risk of us becoming a tax haven floating on the edge of the Atlantic, the urgent need to think differently about how we win has never been greater. 

An anti-establishment wave is washing over Britain. History teaches us that can go one of two ways. For the many people who are utterly sick of politics as usual, perhaps the idea of politicians occasionally putting aside their differences for the good of the country is likely to appeal, and might help us rebuild trust among those who feel abandoned. So it's vital that we use this moment not just to talk among ourselves about how to work together but also as another spark to start doing things differently, in every community in Britain. That means listening to people, especially those who voted for Britain to leave the EU, hearing what they’re saying and working with them to affect change. Giving people real power, not just the illusion of it.

It means looking at ways to redistribute power and money in this country like never before, and knowing that a by-election in a leafy London suburb changes nothing for the vast majority of our country.

Today let us celebrate that the government's majority is smaller, and that people have voted for a candidate who used her victory speech to say that she would "stand up for an open, tolerant, united Britain".  But tomorrow let’s get started on something far bigger - because the new politics is not just about moments it's about movements, and it will only work if nobody is left behind.

 

Caroline Lucas is the MP for Brighton Pavilion.