David Blanchflower: The Bank needs a governor who grasps the real world
Economic Outlook: The economists failed. It is time for the practitioners to take over
Monday 23 April 2012
The economic fog shows little signs of clearing. The latest labour market release had some good news in it that David Cameron trumpeted at Prime Minister's Questions. Employment increased by 50,000 and unemployment fell by 35,000, which resulted in a drop in the jobless rate from 8.4 per cent to 8.3 per cent. The Prime Minister hasn't had that much good news to report for a while.
But a closer examination showed the good news was tempered by not such good news. The claimant count increased by 4,000. Plus all of the job increase was in part-time employment, which grew by 80,000, while the number of full-time jobs dropped by 27,000. The story was also very different by gender. Male employment rose by 50,000 and male unemployment fell by 43,000, whereas female employment rose by only 2,000 and female unemployment increased by 8,000. Wages in both the public and private sectors grew by only 1.1 per cent. The number of vacancies remained unchanged.
The Bank of England's agents also reported last week on economic conditions on the same day the official minutes of the last Monetary Policy Committee meeting were released. The agents didn't bring much good news. They reported that consumer demand growth remained modest, while investment intentions were essentially flat. Importantly, the agents found that there had been some tightening in credit conditions, primarily in terms of the cost of finance. Most worrying was the finding that private sector employment intentions were likely to be broadly flat over the next six months.
The chart above presents the agents' scores in relation to employment intentions over the next six months for both manufacturing and services. The series for services is especially concerning given that the last time it was in negative territory was at the start of the Great Recession in March 2008. The good news on the labour market is unlikely to continue for long.
Last week's positive retail sales numbers were likely driven by the good weather and petrol panic. But this good news seems unlikely to continue, given rapidly falling real wages.
The minutes of the MPC's April meeting warned that the committee could not rule out the possibility that GDP growth was likely to show the UK is in a double-dip recession, as I have been warning for some time. Here is the relevant quote: "Indeed, it was possible that the ONS's preliminary estimate for GDP could record a fall in aggregate output." Recall of course that recently OECD also forecast that GDP growth in 2012 Q1 in the UK would be minus 0.1 per cent.
The first estimate of GDP growth for Q1 2012 is due to be published by the ONS on Wednesday, and I will report back on that number in this column next week. Admittedly, the positive retail sales data do reduce the prospect that the number will be negative.
It was something of a surprise to find that Adam Posen did note vote for further QE at this meeting, even though David Miles did. He made it clear in an op-ed article in The Independent that he was never an automatic vote for more QE. The most telling line was this one: "The latest data convinced me that for now an additional £25bn could be unnecessary." At least we know he is ready to act if the data worsens, as it may well.
Incidentally, Adam is my top candidate for the job of deputy governor for monetary policy in 2013. He has made the right calls over the last few years and would ensure that a more credible approach is brought to economic forecasting and research than has occurred under the current failed regime.
There has been some speculation about who should replace Mervyn King, whose term is up in June 2013. It has been reported that the Government has been exploring the possibility that the governor of the Canadian central bank, Mark Carney (who in a recent speech in New York made it clear he is a big fan of flexible inflation targeting), had been sounded out about the job. Mr Carney looks exactly like the clone candidate Mr King would pick if the choice was simply his to make. Fortunately it isn't. What is needed is the not-King candidate, a practitioner who understands the real world, not the made-up world of an economic theorist. Someone who has run a major organisation with skill – perhaps even a bank – and shown they can motivate and inspire their staff, would be perfect. The economists failed. It is time for the practitioners, such as Stephen Green, John Varley or perhaps Gus O'Donnell, to take over.
In May 2007 I gave a speech in which I argued that economic policymakers should look at the data carefully and sniff the air. I argued that it was appropriate to adopt a more investigative approach, if you like, to put the data before the theory. I called this the "economics of walking about", which has been a strong tradition in my field of labour economics. I had in mind Clark Kerr's 1988 statement that "labour economics will contribute more by helping to make a sense of reality than by building more castles in the air".
The chart above is especially relevant given that as early as March 2008 the services series went into negative territory for the first time in its history. It was clearly telling us something important, but Mr King failed to spot it. Other series had all been saying the same thing for months. In the light of these data, how come, for example, Paul Tucker and Mervyn King didn't vote for policy loosening until October 2008? Had we had a governor with practical experience of the walking about, rather than of the made-up world of an economic theorist, I am convinced the British economy would be in better shape now than it is.
David Blanchflower is professor of economics at Dartmouth College, New Hampshire, and a former member of the Bank of England's Monetary Policy Committee
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