There were two big stories today relating to external members of the MPC. The first was by Andrew Sentance who, in an interview with the Flintshire Leader, argued that, “If you have interest rates too low for too long, the problem we have is it becomes more difficult to raise interest rates more sharply in the future.” There is no basis for such claims. Why would it be harder to raise rates in the future because you had lower rates in the past?
Sentance’s presence on the committee has apparently made it much harder for others to get their views across. He has been a damaging influence on the MPC. He failed to see the recession in the first place and has repeatedly suggested that it was all over when it wasn’t. He seems to have little concern for unemployment and is hung up with some economic theory of the past that nobody takes seriously any longer, according to which all that matters is inflation. The main economic problem is not inflation and what happens in manufacturing isn’t a good guideline to what happens in the rest of the economy. Even his boss, Mervyn King, thinks that, with the fiscal contraction going on, raising rates now would be a “futile gesture” that would have to be quickly reversed. Thank goodness that Sentance has only two more meetings left.
The second story was by my good friend Adam Posen, who has been voting for more QE because of his fears that inflation will be below the target in 2012. He is a Japan expert and knows about these things and needs to be taken seriously. Just because he is in a minority of one, it doesn’t mean he isn’t right; in all likelihood he is. In a Guardian story, he reports having had sleepless nights over his decision to break with the consensus. “I would take it deeply and personally, which is why I have laid awake at night thinking about it.” My own experience at the MPC suggests that it is really hard to plough a different furrow from the tyranny of the consensus.
He has even gone as far as to say that he would not seek a second term if it turns out that he isn’t right. I don’t think there is much chance of that.
“If I have made the wrong call, not only will I switch my vote, I would not pursue a second term. They should have somebody who gets it right and not me. I am accountable for my performance. I’m holding my nerve because it is the right thing to do.”
Posen was also sceptical about the suggestion that the government’s deficit reduction plan could help growth by boosting confidence in financial markets, leading to a fall in long-term interest rates and higher investment. That hasn’t happened, as consumer confidence has collapsed, UK growth has slowed and unemployment and inflation have risen. Adam is a man worth listening to. I suspect that, in a year or so, we will find his comments to be prophetic.
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