Opinion: Pay close attention to an independent voice on UK economic policy

Departing Monetary Policy Committee David Blanchflower has given an interview in which he warns of false dawns and expresses serious reservations about the economic predictions emanating from the Treasury.

Blanchflower was born in the UK but now holds a Chair in Economics at Dartmouth College in the US. His scepticism about the Monetary Policy Committee’s narrow focus on the Consumer Price Index has been a consistent theme in what the most independent and thoughtful member of the MPC has said about its work. That independence and scepticism chimes in with his research interests and broader vision of his academic discipline.

Blanchflower made his academic reputation by arguing that there was a wage curve, linking real wages with unemployment rates in local labour markets, and casting doubt upon the economic relevance and utility of the Phillips curve. Phillips posited a strong relationship between wages and inflation. Blanchflower’s empirical work challenged a sacred cow, which he believes seriously misled economic policy makers.

David Blanchflower consistently warned his fellow MPC members that there was a powerful (even unanswerable) case for aggressively reducing interest rates last year. Despite rumours that he had repeatedly clashed with Mervyn King, Blanchflower urged dramatic reductions in interest rates to help
limit the damage he correctly anticipated would be done in the UK by recession.

In the interview he has given Blanchflower has told Gary Duncan, economics editor of the Times, that Alistair Darling’s expectation of an end of year recovery probably won’t be fulfilled and that any economic growth that does occur in the UK at the end of 2009 is likely to be very disappointing.

Liberal Democrats should not only be aware of Blanchflower’s gloomy prognostications and his scepticism about the accuracy of Treasury forecasts. They should be pressing Government ministers and Labour Party
spokesmen to explain why they continue to tell the British people that the UK economy is on the mend when expert opinion, especially the MPC expert with the most impressive record of forecasting the rapid deterioration in UK economic performance in 2008 and 2009, continues to be ignored.

Britain’s economic predicament is far more serious than ministers are prepared to say and much more needs to be done to aid economic recovery and combat mounting unemployment. Funny money in the Palace of Westminster is entertaining but not half as important as funny money at the Treasury.

Blanchflower does not anticipate that new jobs in the UK will come from a recovery of the financial sector, or self-employment or an expansion of the public sector. Although he does not say so Liberal Democrats must surely recognise that some of the best prospects for employment growth lie in developing new domestic means for producing energy and making the UK more efficient at using the energy it consumes.

Creating the right kind of fiscal environment for expanding such employment is one of the pre-eminent
tasks for Liberal Democrats who want to change Britain’s economics as well as its politics.

* Ed Randall was a Liberal Democrat councillor in the London Borough of Greenwich from 1982 to 1998, he edited the Dictionary of Liberal Thought jointly with Duncan Brack and lectures on Politics at Goldsmiths University of London.

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  • David Heigham 31st May '09 - 4:25pm

    In fairness, I think Gordon Brown was probably the only person who completly ignored what Danny Blanchflower was saying during his time on the MPC. Everyone else (me included)listened, but was only part persuaded.

    As to where we will be up to a year hence, it would be surprising if things were still getting worse then. The best guess, to which Blanchflower might agree with reservations, is that the UK economy will have bottomed; but will scarcely be bottoming-out and up. Production and unemployment levels are likely to be worse than they are today.

    My reservation on that is that banks here and in the USA still have not recapitalised as fully as is desirable; and there are question marks over some of the big banks in the rest of Europe. Last year, this same problem was there much more acutely before the September panic. Brown never likes hearing bad news. That summer, he was also distracted from paying attention to what Treasury officials would have been saying about the banks by his concentration on hanging on to his leadership. We just might be in for a partial re-run this September.

  • Bruce Wilson 31st May '09 - 7:19pm

    I find this the most annoying aspect of the present Commons scandal. Namely, that the dire state of the economy is being ignored. If I recall correctly, the government plans to borrow £179bn this year. What I don’t see is when and how this debt is going to be repaid. There is no plan, simply a ‘let’s cross our finger and hope for the best’ attitude. The damage has unfortunately been done. Manufacturing is moving east, the financial sector has shrunk and, if Mr Blanchflower is to believed, will not be part of the solution. The challenge and opportunity presented by the rise of China was never taken seriously. A lot of handshaking, little action.

    The New Labour legacy: A grim war, a crippled economy and big debts for your children. Talk of morally bankrupt.

    But while there is a bit of juicy gossip and a general election within a year, who cares?

    Excuse me while my blood boils.

  • George Turner 31st May '09 - 10:21pm

    Although I agree that Energy is an important in restructuring our economy, I am unconvinced by Blanchflower or the argument presented here.

    Firstly, the Phillips curve does not posit a relationship between wages and unemployment but wage growth or inflation and unemployment. It was also an observed phenomenon and not a theoretical proposition.

    The problem with the Phillips curve was that it was short term, a government could increase inflation in order to boost employment, but in order to maintain those levels it would need to continue increasing inflation, leading to an inflationary spiral.

    It was for this reason that in the late 70’s and early 80’s the US and the UK abandoned this type of monetary policy, rapidly raised interest rates to stop spiraling inflation, causing widespread unemployment.

    Today’s economic crisis has similar roots, historically low interest rates led to an inflationary bubble, although in this case instead of wages being inflated housing and asset prices were.

    Cutting interest rates therefore would have only had the effect prolonging this and perhaps putting off the crunch, although given the global nature of the stock market crash I doubt this.

    The real problems, were structural, that there was a lack of profitable investment opportunities in an economy dominated by investors. This situation, coupled with an incentive structure that focused investors minds on the short term meant that investors tried anything to get a return on their money even if that return was in clearly unsustainable investments.

    The solution will attack this, how to structure an economy that prioritises sustainable long term investments, over the need to see day to day profits, and to create sustainable investment opportunities. In this case energy clearly plays a role.

  • A skeptical view of DB’s prescience can be found here: http://blogs.ft.com/maverecon/2008/10/better-to-be-wise-than-lucky/

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