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
Show Hide image

No, William Hague, there's nothing anti-democratic about opposing Brexit

The former Tory leader appears to be suffering from a bout of amnesia. 

William Hague just made an eyecatching claim in the House of Lords during the debate over Article 50. He attacked those Remainers still seeking to restore Britain’s European Union membership in general and Tony Blair in particular, saying that if he had called on voters to “rise up” against New Labour after he lost the election, Blair would have told him to listen to the voters.

To be fair to Hague, it has been sixteen years since he went down to crushing defeat to Blair, so he may have forgotten some of the details. Happily, the full text of his resignation speech the morning after is still online.

Here’s Hague, 2001:

"The people have spoken. And just as it is vital to encourage everyone to participate in our democracy, so it is important to understand and respect the result. The Labour party have won the election and I have already congratulated them on doing so. But they have done so without great public enthusiasm….It is therefore a vital task for the Conservative party in the coming parliament to hold the government to account for the promises they have made and the trust people have placed in it.”

And here’s Blair, 2017:

“I want to be explicit. Yes, the British people voted to leave Europe. And I agree the will of the people should prevail. I accept right now there is no widespread appetite to re-think. But the people voted without knowledge of the terms of Brexit. As these terms become clear, it is their right to change their mind. Our mission is to persuade them to do so.”

And here’s Blair’s last line which has so offended William Hague:

“This is not the time for retreat, indifference or despair; but the time to rise up in defence of what we believe – calmly, patiently, winning the argument by the force of argument; but without fear and with the conviction we act in the true interests of Britain.”

This is funny, because here’s William Hague’s last line in 2001:

"I wish I could have led you to victory but now we must all work for our victories in the future.”

 Here’s what the “you lost, get over it” crowd have to explain: what is the difference between these two speeches? Both acknowledge a defeat, acknowledge the mountain to climb for the defeated side, but resolve to work harder to secure a better result next time.

It’s particularly galling when you remember that taking Britain back in would not require a second referendum but a third: because the Brexiteers, far from losing in 1975 and getting over it, spent four decades gearing up to take Britain out of the European Union.

There’s a more valid criticism to be had of the value of a continuity Remain campaign which appears to hold many of the people who voted to Leave in distaste. Certainly, at present, the various pro-Remain forces look more like the unattractive fringe that lost in 1975 than the well-disciplined machine that won the replay in 2016. But the fact there was a replay in the first place shows that there’s nothing anti-democratic about continuing to hold on to your beliefs after a defeat. What is anti-democratic is trying to claim that the result of any electoral contest, however narrow or how large, means that everyone who disagreed with you has to shut up and pretend you were right all along. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.