Following-up on my post earlier this week on interest rate policy I see Graham Searjeant has a piece in the Times today arguing that Mervyn King has the balance wrong between fighting inflation and stimulating growth.
In a sense I think that Searjeant is not entirely fair when he says:
Growth has become even more vital to support an ageing population. The Governor may deny responsibility. The rest of us cannot.
Evidently this is the case, but equally I am sure that Mervyn King is well aware of the fact. However since it is long term *sustainable* growth we are talking about here, and since I don’t doubt this is what he (King) is aiming at, even if his efforts, and the reasoning behind them remain obscure (and here I do think we can blame King) I really don’t think Searjeant’s point sticks in the way he wants. The issue is whether short-term growth is being needlessly sacrificed, and if so, to what?
Short-term growth is being sacrificed IMHO to the god of global imbalances, and the campaign to correct them, and it is these, and not inflation, which are King’s real target. (continued).
This being said Searjeant does make some useful points. Among them this one:
“The OECD is being consistent. It has argued that the UK economy is near to capacity and should slow. But the Bank and the MPC thought recently that migrant labour was boosting the economy’s capacity to grow without inflation.”
Here there are two points:
Firstly the debate is in part about how near to capacity the UK economy is running and not simply about inflation per se, but then since growth has slowed, why should capacity suddenly be expanding more slowly? This is a mystery to me, especially since there is no evidence from earnings that a ceiling is being pushed. Capital is in abundant enough supply at present as we all know, and if there is a shortage of labour, well, as the quote suggests, he can always look to immigration. In fact this isn’t strictly necessary (although there may be skill ‘bottlenecks’) since unemployment has been rising in recent months due to the UK’s relatively large younger generations.
Secondly the point is more grist to the mill for those of us who want to argue that others, like for example Polly Toynbee, who fret about the negative economic impacts of immigration on low paid workers are missing an important part of the picture: the growth factor.
Another interesting detail which comes to mind is related to the fact that what are being targeted by the central bankers are inflation expectations (presumeably whether they are well grounded or not). Now as someone who is fascinated by the existence of vicious circularities, I cannot help asking myself whether it isn’t the repeated inflation warning declarations of these very same central bankers, and their insistence on raising (or not cutting) rates, which might just be one of the factors which is fuelling not inflation, but inflation expectations.
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