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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6 Comments
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.
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.
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/
In response to David: I think it is fair to say that David ‘Danny’ Blanchflower didn’t simply have a problem with the attention span of the former Chancellor when it came to views that did not accord with his expectations for the UK economy.
Danny Blanchflower was listened to,
politely by most of his MPC colleagues, but they didn’t take him seriously. Unfortunately that set the tone well beyond the MPC.
I agree strongly with you about the condition of the banks. I fear that an under capitalised banking system mired in both intellectual and financial corruption remains a clear and present danger.
In reply to Bruce: I agree. One of my motives for writing a couple of LDV opinion pieces in recent days is that we are at great risk of being distracted by HoC fiddles while our financial system continues to burn to the ground.
I know it is difficult for Liberal Democrats (the responsibility is almost unbearable) but the the LDs are the only serious UK political party that is capable of explaining the radicalism needed to salvage the financial system, advocating electoral reform that avoids simply perpetuating Britain’s conservative and profoundly undemocratic Westminster duopoly, and integrating environmentally intelligent economics into a balanced programme for government.
In reply to George: Please forgive me if I seemed to imply (though I don’t think I did) that the Phillips curve posited a direct relationship between wages and unemployment. It did help provide cover for those whose bastardised economics and politics (remember crude Keynesianism and ‘if it’s not hurting then it’s not working’?) – making ‘the workers’ and their unions the fall guys for economic woes, including inflation.
In fact the Phillips curve has become part of a theoretical apparatus – the ‘expectations-augmented Phillips curve’ – that has been highly influential in academic circles and amongst policy-makers.
Danny Blanchflower’s great strength has been to call on his colleagues to take a look at the ways in which labour markets actually work rather than treating them as simply an appendage of marcoeconomic policy.
The empirical and theoretical problems with the Phillips curve did indeed lead to an increasingly muddled and muddling set of distinctions between short and long-term Phillips curves and to interest rate policies that have undoubtedly contributed to the bubble economies in the US and the UK.
We don’t disagree about the fundamental problems being ‘structural’ but we may differ about the availability of opportunities for profitable investment.
Perhaps the difference is more apparent than real because, as you point out, the lack of opportunities for profitable investment has been a function of two things: ‘an economy dominated by investors’, who only wanted to make a fast buck, and ‘an incentive structure’ (for those investors) that focused ‘on the short term’.
I agree strongly with you on this…and also believe that there is no fundamental lack of opportunities for ecologically, socially and economically rewarding investment. That is why those Liberals Democrats who reject the efficient market hypothesis insist that our golf bag contains more than one club.
In my view we are probably – more or less? – on the same page:
As you posted: “The solution will [focus on] 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.” I most definitely agree.
Tim, Willem Buiter makes it clear that he has no intention of being gracious…and he succeeds when he compares Danny Blanchflower’s repeated calls for interest rate cuts to a
broken clock that’s bound to get it right twice a day.
Unfortunately Willem Buiter combines a lack of graciousness with a lack of something else: attention.
Danny Blanchflower has made no secret of his view that the MPC far too easily and uncritically accepted a ‘one tool, one target’ approach to monetary policy. Blanchflower anticipated economic woes, particularly rapidly rising unemployment, because he was accutely aware of what was happening to the real economy.
What was it that Blanchflower understood about the real economy? He understood that asset price inflation leads to bubbles that can destabilise the whole of an economic system. The damage Blanchflower has been particularly concerned about is done when people, hundreds of thousand of people in the case of the UK, lose their jobs in a recession and others have their prospects of entering employment dashed.
Blanchflower has explained [see: The Future of Monetary Policy at http://tinyurl.com/dx75ox%5D very clearly what was on his mind when he was voting – on his own – for rate cuts. The MPC’s narrow focus on the use of short term interest rates, to fulfil its limited
mandate – price stability – was fundamentally misconceived. The mandate
was dependent on an intellectual conceit.
Economic stability depends on much more than maintaining price stability measured by CPI or RPI. The MPC accepted
an economic brief built on the assumption that financial markets had discovered the means to price risk accurately and allocate credit efficiently. Gordon Brown put it very simply: boom and bust have been abolished. MPC members, with one notable
exception, did not question this assumption about the efficient operation of financial markets, even when there was powerful evidence – and by 2007 it was unmistakeable – that a great asset
price bubble had been created that was about to burst.
Buiter is simply being silly when he suggests that an appropriate test for Blanchflower’s foresight is whether he
publicly anticipated ‘the socialisation of much of the banking’ sector in early 2008 or in 2007. Can you imagine, when Blanchflower was already engaged in a battle with Mervyn King – and acquiring
a reputation as a maverick, him issuing public statements about the likelihood of bank nationalisations in the UK?
Given Buiter’s lack of graciousness I have no inhibitions in suggesting he needs show a little more respect for those with whom he disagrees.
Perhaps there has been some improvement in this regard since his criticisms of Blanchflower were published at FT blogs in October 2008. The criticisms appeared when Buiter was still insisting that the banking system was being badly affected
by a series of unpredictable and highly unlikely events.