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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Recess confidential: Labour's liquid party

Sniffing out the best stories from Westminster, including Showsec, soames, and Smith-side splits.

If you are celebrating in a brewery, don’t ask Labour to provide the drinks. Because of the party’s continuing failure to secure a security contractor for its Liverpool conference, it is still uncertain whether the gathering will take place at all. Since boycotting G4S, the usual supplier, over its links with Israeli prisons, Labour has struggled to find an alternative. Of the five firms approached, only one – Showsec – offered its services. But the company’s non-union-recognition policy is inhibiting an agreement. The GMB, the firm’s antagonist, has threatened to picket the conference if Showsec is awarded the contract. In lieu of a breakthrough, sources suggest two alternatives: the police (at a cost of £59.65 per constable per hour), or the suspension of the G4S boycott. “We’ll soon find out which the Corbynites dislike the least,” an MP jested. Another feared that the Tories’ attack lines will write themselves: “How can Labour be trusted with national security if it can’t organise its own?”

Farewell, then, to Respect. The left-wing party founded in 2004 and joined by George Galloway after his expulsion from Labour has officially deregistered itself.

“We support Corbyn’s Labour Party,” the former MP explained, urging his 522,000 Facebook followers to sign up. “The Labour Party does not belong to one man,” replied Jess Phillips MP, who also pointed out in the same tweet that Respect had “massively failed”. Galloway, who won 1.4 per cent of the vote in this year’s London mayoral election, insists that he is not seeking to return to Labour. But he would surely be welcomed by Jeremy Corbyn’s director of communications, Seumas Milne, whom he once described as his “closest friend”. “We have spoken almost daily for 30 years,” Galloway boasted.

After Young Labour’s national committee voted to endorse Corbyn, its members were aggrieved to learn that they would not be permitted to promote his candidacy unless Owen Smith was given equal treatment. The leader’s supporters curse more “dirty tricks” from the Smith-sympathetic party machine.

Word reaches your mole of a Smith-side split between the ex-shadow cabinet ministers Lisa Nandy and Lucy Powell. The former is said to be encouraging the challenger’s left-wing platform, while the latter believes that he should make a more centrist pitch. If, as expected, Smith is beaten by Corbyn, it’s not only the divisions between the leader and his opponents that will be worth watching.

Nicholas Soames, the Tory grandee, has been slimming down – so much so, that he was congratulated by Tom Watson, Labour’s deputy leader, on his weight loss. “Soon I’ll be able to give you my old suits!” Soames told the similarly rotund Watson. 

Kevin Maguire is away

I'm a mole, innit.

This article first appeared in the 25 August 2016 issue of the New Statesman, Cameron: the legacy of a loser