Give Blanchflower a gong
Extraordinary intervention by David Blanchflower. I’ve been thinking what to say about his comments but he pretty much says it all.
Blanchflower is often described as an inflation “dove” by reporters suggesting that he thinks growth is more important than rising prices. He rejects that arguing that the Bank’s remit is to prevent inflation falling below the 2% target as well as preventing it overshooting. He has argued consistently that the UK economy is heading for such tough times that we face a deflationary not an inflationary threat next year and given that interest rate changes take months to have their full impact the Monetary Policy Committee (MPC) should be focused on that threat.
He’s been a lone voice on the MPC in recent months but with a slew of very bad news yesterday and today, the views of the other members may begin to shift his way. If they don’t, the credibility of the MPC in its current form will be severely strained.
There is a fundamental problem with the MPC remit which is often overlooked. Yes, it is clever that it is designed to prevent both an overshoot and undershoot of the inflation target of 2% – this allows it in theory to counter threats of inflation and economic slowdown. But this remit is thrown into confusion at a time of stagflation as we have at the moment with slowing growth and rising inflation. Under these conditions, when you raise or hold interest rates to prevent inflation, you also exacerbate the growth problems. In the theory underpinning the Bank’s remit, we should actually be facing deflation now as businesses cut prices to meet slowing demand allowing the Bank to cut rates and boost the economy.
The remit clearly requires the Bank to prioritise inflation over growth, so the MPC have followed that. But I don’t think that was what was really intended when Gordon Brown took his much lauded decision to give the Bank independence back in 1997. In short, it’s time to rethink the remit.
Some evidence in support of this from the States yesterday where the economy actually bounced back a bit in the face of dire predictions. The US Federal Bank has a much looser remit allowing it to balance growth and inflation while Bush introduced a fiscal stimulus through tax cuts earlier this year. Something, interestingly, Blanchflower also called for in his intervention. Maybe, its paradigm shift time – Blanchflower says that as well. Forget the gong – just make him Prime Minister!