You will have woken this morning to news that Vince Cable has launched a Plan C or Plan Cable featuring a ‘Keynesian’ stimulus centred around borrowing (at the current low rates that the Government can borrow) to fund infrastructure projects. But as usual the media is doing the country a grave disservice.
It is an historic day filled with possibility, but to understand the full pregnancy of the position you will need to go beyond the crude headlines of crude Keynsianism and read Cable’s full article When the Facts Change, Should I Change My Mind.
But you will also need to read what the Chancellor has announced today in the Financial Times on both the day of Cable’s statements (coincidental) and the day that the Monetary Policy Committee meets (surely no coincidence). Both statements have been signed off by their Coalition partners. Yes, George signed off on Vince and ‘we’ signed off George’s. Provided the two sides don’t fall out about caravans and pasties in the days leading up to the Budget, the instructions to the Bank of England will change this Spring.
The MPC meets once a month and has the ability to counter the effects it perceives of any changes in fiscal policy. So, if you do want to introduce any fiscal easing, the Quad must first change its instructions to the Bank of England and it can do so conveniently every spring (as I pointed out last year).
Members of the MPC have been saying publicly that until they are told otherwise by the Chancellor, their target must remain the same. The next Governor of the Bank of England has been saying that the debate on those instructions must be settled before he takes office in July. And, privately, the Quad has been debating the pros and cons since before Christmas.
So, the bigger of the two stories is the Chancellor’s. But with a new target in place the argument will shift to ask, ‘will that be enough?’
Cable’s superb paper sets out the full extent of the problems:
A variety of approaches is relevant. Worryingly, few economists beyond Hyman Minsky and Charles Kindleberger have really addressed the phenomenon of financial mania and banking collapses (although Ben Bernanke, the chairman of the Federal Reserve, produced important work on how the banking crisis worsened the Great Depression in the US). Another defining feature of the present crisis has been the accumulation of a large volume of household debt, mostly linked to mortgages, which, as Irving Fisher argued a century ago, leads to “debt deflation”, with a downward spiral of depressed demand, unserviceable debt and weak confidence. Then Milton Friedman understood the importance of money supply in the interwar slump, which has played out in the current crisis in activist, unorthodox monetary policy. And largely ignored in our parochial policy squabbles has been the impact of the rapidly shifting centre of gravity of the world economy towards emerging markets and the impact of this change on capital flows and demand, shifting the terms of trade – mainly through oil – against commodity importers. None of these issues makes Keynes irrelevant, but they suggest the need for a more complex and eclectic framework for analysis.
We need, and can expect, action on all these fronts. But it looks as if the first big step has been taken by facilitating looser monetary policy.
And the recent story from Japan, where in mid-November the then leader of the opposition declared that when elected (and it was a certainty) he would force the Bank of Japan to change its target to a growth in NGDP of 3% with the threat that if it did not do so voluntarily, the new Prime Minister would remove its independence. The Nikkei 225 has risen close on 50% since then.
Eastleigh was a great victory, but our electoral fortunes remain bound up with the performance of the UK economy. An understanding of the central role of monetary stimulus, now acknowledged by Osborne thanks to the influence of the Liberal Democrats and Cable’s office in particular, and the license given to the incoming Governor of the Bank of England and the MPC (meeting today) is a turning point of immense significance.
We are set to remove the foot of the Bank of England from the throat of the UK economy.
* Bill le Breton is a former Chair and President of ALDC and a member of the 1997 and 2001 General Election teams