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.

Photo: Getty
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Love him or loathe him, Britain needs more Alan Sugar

Big business is driving down wages, failing to invest, and funnelling rewards to the richest.  Entrepreneurs - and the state - need to fill the gap. 

The business baron who loves a bust-up has just been hired by Her Majesty’s Government to tour the country inspiring the next generation of apprentices. And he’s got his work cut out for him.  

Britain is loads more enterprising than it used to be - but the truth is, we’re miles behind our rivals. The good news is that Britain boasts nearly two million more firms than at the turn of the century. Over 40 per cent of Europe’s “unicorns” (new firms worth over $1 billion) are UK based. And by the next election, there will be more self-employed people than public service workers. 

But, here’s the bad news. Globally, we’re only 48th out of 60 in the global enterprise league table - and of the top 300 companies created in the last thirty years, only a handful are British. The only two British websites in the global 100 were actually founded in America - google.co.uk and amazon.co.uk. Worst of all, according to new House of Commons library figures which I commissioned this week, over a million people have left entrepreneurial activity in the last three years. 

Yet in my new history of British capitalism, Dragons, published today, I show how we’re a nation built by some of the greatest entrepreneurs on the planet. They were the buccaneers like Robert Rich, who built the trading companies and colonies of north America. The traders like Thomas Diamond Pitt who built old multi-nationals like the East India Company. They were industrial revolutionaries like Matthew Boulton who perfected the steam engines, and capitalists like Nathan Rothschild who built the bond market. Down the ages, there were of course great rogues and fraudsters, slavers, opium dealers and imperialists, like George Hudson, William Jardine and Cecil Rhodes. And through the centuries, women were in particular, were frozen out of the power structures of the market. 

But, throughout our past, great visionaries like George Cadbury, William Lever and John Spedan Lewis not only created new wealth but invented new ways to share it, from Port Sunlight to Bournville, to the board rooms of the John Lewis Partnership. 

Theirs is the entrepreneurial spirit we are going to need to rebuild Britain. Why? Because we can no longer leave the task to big business. Big business is driving down wages, failing to invest, and funnelling rewards to the richest. Today, UK firms are sitting on an extraordinary £522 billion in cash. And that’s after they lavished out £100 billion in share buy-backs in 2014. According to Larry Fink, the head of Black Rock which is the world’s biggest investment manager, the gargantuans of the global economy are simply failing to invest in the new jobs and industries of the future. 

So we’re depending on our entrepreneurs to turn new ideas into new industries and new industries into new jobs - whether it is in big data, cyber-security, driverless cars, the internet of things, or genetic medicine. It’s not just good for progress. It’s good for jobs. In fact, if our young people today were as entrepreneurial as their counterparts in Germany or America, its estimated they would create an extra 100,000 jobs. 

The big lesson from 600 years of the history of capitalism is simple: entrepreneurs make history - by inventing the future. So we need the government to start doing an awful lot more for the enterprise economy; spreading enterprise education, investing more in science, shifting government contracts to small high growth firms, and sorting out the banking system. But if we want a better future for Britain, we need an awful lot more entrepreneurs to do well. And so we need AlanSugar to succeed.  

Dragons: Ten Entrepreneurs Who Built Britain is published by Head of Zeus today

Liam Byrne is Labour MP for Birmingham Hodge Hill, cofounder of the UK-China Young Leaders Roundtable and author of Turning to Face the East: How Britain Prospers in the Asian Century.