Should Labour adopt the four per cent inflation policy?

Controversial ideas of the past are becoming consensus of the present.

A 1998 proposal by Paul Krugman that the western world should target inflation at four per cent rather than two per cent, has got the backing of the IMF (pdf). The intention would be to erode government debt, and to give policy makers a more flexible tool in the future, rather than resorting to quantitative easing (QE).

In our battle to combat inflation, we fought for it to be as close to zero as it can be without grinding growth out. Two per cent seemed to be that point. However, now that we’ve got that control, we don’t have to keep it so low.

In 2007, if inflation had been at four per cent instead of two per cent, then interest rates would have been seven per cent rather than five per cent, and the Bank of England would have had more room to cut when crisis struck. In other words, they wouldn’t have needed to go beyond zero to engage QE.

Some people might say that since we’ve finally beaten inflation, it’s not wise to bring it back? But it’s not inflation that causes problems, it’s unpredictable inflation that we fear. If we had a high rate of say 10 per cent, but steady, year in year out, then companies and people would be able to plan around it. But if we didn’t know whether inflation will be 5 per cent or 15 per cent, then how much should a bank charge for a loan? Can a company calculate the profit they’ll make, if they don’t know how much the money will be worth. So four per cent is fine, as long as it’s steady.

The other benefit of running a higher inflation rate is that we would erode our debt much faster. If the interest on a gilt is four per cent, then two per cent inflation would cancel it out. If your mortgage were two per cent, then four per cent inflation would leave you with a negative real interest rate of minus two per cent.

Krugman accepts that this would be rewarding debtors for their past excesses, but argues that “economics is not a morality play.” Is he right to dismiss morality so easily? Surely modern day politicians make their living from telling bankers they are not good citizens. Is it appropriate to dismiss investors with the refrain of caveat emptor, buyer beware?

It’s worth remembering that no investor complained when QE was buying up that same debt for higher than it’s real value. Besides, if investors had feared inflation, they could have bought index linked gilts. These track inflation and rise in value proportionately. They make up only about 10 per cent of gilts. So when it comes to the other 90 per cent, I contend that ethical arguments are insufficient to reject the policy.

The big question is whether policy could easily switch inflation from two to four. Much of the cause of inflation is expectation. In the '70s, inflation was high because trade unions made demands for wage rises on the expected future inflation rate. These rises then caused inflation to rise to the same level, and unions would demand a rise again. It was self-perpetuating.

Conversely, when Gordon Brown made the Bank of England independent, inflation markedly dropped off and stayed low. This wasn’t due to a policy of the bank, but due to the confidence inspired by it’s independence.

Should a policy of increased inflation be kept a secret? My experience of politics is that if you have something controversial to say, then be confident, say it forcefully, then stick around to face down your critics. The public aren’t experts on economics. They will make judgements on the confidence of the advocate and the reaction of pundits.

On the question of whether the markets will react badly to such a policy, I think that depends on the timing. Right now, with no demand in the economy, the market wouldn’t react badly because they have nowhere else to go. These days most savers keep their money on deposit with an interest rate lower than inflation. They are losing money in preference to the uncertainty elsewhere.

There are few safe havens in today’s investment world, partly due to the bad policy imposed by politicians such as David Cameron and Angela Merkel. When considering our economic policy for a future government, we must recognise that controversial ideas of the past are becoming consensus of the present, and deserve our serious consideration as policy for the future.

The Bank of England. Photograph: Getty Images

Dan McCurry  is a photographer in east London and a Labour activist. He is a former chair of the Bow Labour Party.

Photo: Getty
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UnHerd's rejection of the new isn't as groundbreaking as it seems to think

Tim Montgomerie's new venture has some promise, but it's trying to solve an old problem.

Information overload is oft-cited as one of the main drawbacks of the modern age. There is simply too much to take in, especially when it comes to news. Hourly radio bulletins, rolling news channels and the constant stream of updates available from the internet – there is just more than any one person can consume. 

Luckily Tim Montgomerie, the founder of ConservativeHome and former Times comment editor, is here to help. Montgomerie is launching UnHerd, a new media venture that promises to pull back and focus on "the important things rather than the latest things". 

According to Montgomerie the site has a "package of investment", at least some of which comes from Paul Marshall. He is co-founder of one of Europe's largest hedge funds, Marshall Wace, formerly a longstanding Lib Dem, and also one of the main backers and chair of Ark Schools, an academy chain. The money behind the project is on display in UnHerd's swish (if slightly overwhelming) site, Google ads promoting the homepage, and article commissions worth up to $5,000. The selection of articles at launch includes an entertaining piece by Lionel Shriver on being a "news-aholic", though currently most of the bylines belong to Montgomerie himself. 

Guidelines for contributors, also meant to reflect the site's "values", contain some sensible advice. This includes breaking down ideas into bullet points, thinking about who is likely to read and promote articles, and footnoting facts. 

The guidelines also suggest focusing on what people will "still want to read in six, 12 or 24 months" and that will "be of interest to someone in Cincinnati or Perth as well as Vancouver or St Petersburg and Cape Town and Edinburgh" – though it's not quite clear how one of Montgomerie's early contributions, a defence of George Osborne's editorship of the Evening Standard, quite fits that global criteria. I'm sure it has nothing to do with the full page comment piece Montgomerie got in Osborne's paper to bemoan the deficiencies of modern media on the day UnHerd launched. 

UnHerd's mascot  – a cow – has also created some confusion, compounded by another line in the writing tips describing it as "a cow, who like our target readers, tends to avoid herds and behave in unmissable ways as a result". At least Montgomerie only picked the second-most famous poster animal for herding behaviour. It could have been a sheep. In any case, the line has since disappeared from the post – suggesting the zoological inadequacy of the metaphor may have been recognised. 

There is one way in which UnHerd perfectly embodies its stated aim of avoiding the new – the idea that we need to address the frenetic nature of modern news has been around for years.

"Slow news" – a more considered approach to what's going on in the world that takes in the bigger picture – has been talked about since at least the beginning of this decade.

In fact, it's been around so long that it has become positively mainstream. That pusher of rolling coverage the BBC has been talking about using slow news to counteract fake news, and Montgomerie's old employers, the Times decided last year to move to publishing digital editions at set points during the day, rather than constantly updating as stories break. Even the Guardian – which has most enthusiastically embraced the crack-cocaine of rolling web coverage, the live blog – also publishes regular long reads taking a deep dive into a weighty subject. 

UnHerd may well find an audience particularly attuned to its approach and values. It intends to introduce paid services – an especially good idea given the perverse incentives to chase traffic that come with relying on digital advertising. The ethos it is pitching may well help persuade people to pay, and I don't doubt Montgomerie will be able to find good writers who will deal with big ideas in interesting ways. 

But the idea UnHerd is offering a groundbreaking solution to information overload is faintly ludicrous. There are plenty of ways for people to disengage from the news cycle – and plenty of sources of information and good writing that allow people to do it while staying informed. It's just that given so many opportunities to stay up to date with what has just happened, few people decide they would rather not know.