Anthony Hilton: Back-tracking over Unemployment rate makes a mockery of forward guidance

 

The recession of 2008 was the first internet recession.

Before the world wide web came to dominate commerce a global economic slowdown would roll around the world at a measured and predictable pace, linked to the lead times for imports and exports and the time it took for companies to notice a fall in sales and cancel orders. Starting usually in America, it would get to Europe six to nine months later and take the same time again to reach Japan. By the time Asia was in recession, the US was normally beginning the climb back.

But the internet changed that because it allowed companies to shorten supply chains and to delay or cancel an order by pressing a key. When Lehman collapsed in 2008 it caused global panic and everyone hit the cancel button at once, and economic activity plunged across the globe. Never in modern times had a recession struck so swiftly or been so severe. What used to take 18 months now took 18 hours.

But economists do not seem to have learned this lesson – that in the internet age if something is going to happen it will happen much faster than it ever did before. The world is now driven by perceptions and emotions – it no longer waits to establish the facts. These perceptions, or feelings, are transmitted instantly by technology and communications. The result is that economies are now as subject to unpredictable mood swings as a teenager – and they come on just as fast.

Had the Bank of England understood this, Mark Carney might not have linked his thinking on the timing of an interest rate rise so closely to a fall in the level of unemployment. He has been caught out because a decline in joblessness which the Bank had obviously thought might take three years has happened in six months. So this week has seen furious back-tracking in speeches by members of the Monetary Policy Committee and the Governor himself, saying that we should forget unemployment after all because the economy is still not ready for a rate rise.

It makes nonsense of forward guidance, of course, but at least it is a nice problem to have – the economy doing better and growing faster than anticipated. However, lest they are tempted to find another indicator to track, the MPC would do well to remember Goodhart’s Law – framed by Charles Goodhart decades before the internet became a global force.

He saw at first-hand the repeated Thatcher era failures when the money supply failed to hit its designated target, and came to the conclusion that the moment an economic variable was adopted for policy purposes it started to misbehave. It therefore quickly became useless as a guide to policy.

Mr Carney cannot say he wasn’t warned.

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