View is better from the ivory tower

A SILLY and dangerous bandwagon has been gathering speed. It is the suggestion that the Bank of England's Monetary Policy Committee (MPC) is too academic and needs more members who have worked in industry if it is to do its job properly.

It is not just manufacturers who favour this work-creation scheme for their own ranks, but also many members of the economics commentariat who ought to know better. The objection to appointing people who supposedly have more real-world experience than the out-of-touch egg-heads in Threadneedle Street goes beyond the obvious one that you should not let the drunks run the brewery. After all, industry loves a boom; it is the busts they object to.

Rather, it is a question of how to form judgments on the state of the economy, present and future. The objection from the Bank's critics in the "real world" is that the MPC has set interest rates too high given the strength of the pound. They argue that the nine experts - save for their new heroine DeAnne Julius - are over-estimating both the current strength of the economy and the inflationary dangers. The cost of borrowing should be on its way down by now, say employers, unions and plenty of City pundits. With so many critics, whose objections have dominated the reporting of the Committee's decisions, it would be easy to believe that Gordon Brown has appointed too many mad professors and should replace some with straight-thinking business folk, pronto.

No wonder the Bank has commissioned some opinion pollsters to find out exactly what popular misconceptions it is up against. For the easy conclusion is utterly wrong. The practical experience of people in industry is a terrible guide to the level of interest rates needed for the economy as a whole to grow at a pace consistent with the inflation target. For one thing, manufacturers naturally want to see rates set at a level to suit their businesses. This level is lower for manufacturing than for the whole economy because industry is the weakest sector. The policy decision has to weigh manufacturing, services and construction together.

For another, non-experts are more likely to misread the available evidence on the economy. While there is no doubt growth is slowing markedly now, the official figures are nothing like as gloomy as the comment. "Real world" people place far too much emphasis on anecdote on the grounds that it is a more up-to-date economic thermometer. Well maybe, but the timely anecdotal evidence is usually wildly inaccurate. It is no advantage to take the temperature faster if the reading is wrong.

The past week has provided an excellent example of this. The loss of jobs, for various reasons, at Siemens, BOC and elsewhere has been used widely as proof of the imminence of recession. Yet the creation of 500 jobs by the Pru got scarcely a mention. As a rule of thumb, it takes 1,000 new jobs to generate the same attention as 100 job losses. The only way to assess the true net effect of all the corporate decisions on the level of employment is to wait for the official statistics, and these show that unemployment is still falling despite redundancies in manufacturing.

Similarly, many of the Bank's critics quarrel with its inflation forecast on the grounds of the unworldliness of the team of economists who crank through the numbers each quarter. The update in Wednesday's Inflation Report again predicted that inflation would be threatening to bust target next year - the result of a combination of monetary policy that was too lax up to about a year ago and the likelihood that the pound will fall much lower. Many of the "real world" critics simply refuse to believe inflation will go up at all, extrapolating from current conditions where the strong pound is making imports cheap and competition on the high street is keeping a lid on the prices of certain goods.

Most industrialists will have no truck with fancy computer models of the economy that attempt to forecast the future, but there is absolutely no reason to believe their experience in a particular business would make them any better than the Bank's profs at economic forecasting. The future is simply not the same as the past.

These pitfalls are identified in a new book* by Alan Blinder, an American professor of economics who served as vice-chairman of the US Federal Reserve Board. He writes: "You can get your information about the economy from admittedly fallible statistical relationships, or you can ask your uncle. ... I fear there may be altogether too much uncle-asking."

There is no better way to make interest-rate judgements than to rely on a combination of official figures - always more reliable than the alternative - and on theoretical models of the economy. No matter how flawed, they are better than anybody's gut instincts.

Professor Blinder adds that a good central bank will always set people grumbling precisely because it is trying to influence the future and not the present. It is too late to do anything about today's inflation rate. Today's job is keeping inflation on course over an 18-month to two-year horizon because that is how long it takes inflation to respond to changes in the pace of activity. This is why inflation rises as growth slows as every cycle peaks, and why inflation is low even as growth belts away after every trough. For the more excitable, the economy lurches from miracle to stagflation, but it is the normal pattern. A good central bank will end up seeming too hawkish and then too doveish. "A successful stabilisation policy based on pre-emptive strikes will appear to be misguided and may therefore leave the central bank open to severe criticism," writes Professor Blinder.

He warns that few central banks actually find themselves in the happy position of being criticised for the right reasons. "Decision-making by committee may contribute to systematic policy errors ... by inducing the central bank to maintain its policy stance too long." But, equally, committees guard against horrendous mistakes. If they are wrong, they are usually not too far wrong.

This is the case in the UK now. The Bank's critics are fooling themselves if they believe that any sensible method of setting interest rates - even the former method of leaving it up to good old Ken Clarke - would have produced a level very different from today's 7.5 per cent. Likewise, the last quarter-point increase, or even the next, will not turn out to have been a matter of life or death for manufacturing. Such small steps simply do not have a big impact on the economy; it takes the whole series of small steps to make a difference.

The critics are not fools; these are pretty obvious points. Rather, they are lobbyists for their own interests, which in the short run would be better served by an economy growing too fast for the MPC to be confident of hitting the inflation target. The payback of low and stable inflation is too far away for exporters currently in the stranglehold of a strong exchange rate. But this is precisely why the MPC should consist of experts rather than representatives of sectors of the economy. The view is far better from the ivory tower.

*"Central Banking in Theory and Practice", Alan Blinder, MIT Press, $14.95

News
scienceExcitement from alien hunters at 'evidence' of extraterrestrial life
Life and Style
Customers can get their caffeine fix on the move
food + drink
News
newsRyan Crighton goes in search of the capo dei capi
Extras
indybest

PROMOTED VIDEO
Arts and Entertainment
Actors front row from left, Jared Leto, Jennifer Lawrence, Meryl Streep, Ellen DeGeneres, Bradley Cooper, Peter Nyongío Jr., and, second row, from left, Channing Tatum, Julia Roberts, Kevin Spacey, Brad Pitt, Lupita Nyongío and Angelina Jolie as they pose for a
film
Sport
sport
Life and Style
techCould new invention save millions in healthcare bills?
Sport
David Moyes gets soaked
sport Moyes becomes latest manager to take part in the ALS challenge
Voices
A meteor streaks across the sky during the Perseid Meteor Shower at a wind farm near Bogdanci, south of Skopje, Macedonia, in the early hours of 13 August
voicesHagel and Dempsey were pure Hollywood. They only needed Tom Cruise, says Robert Fisk
News
peopleEnglishman managed quintessential Hollywood restaurant Chasen's
Life and Style
food + drinkHarrods launches gourmet food qualification for staff
Arts and Entertainment
Michael Flatley prepares to bid farewell to the West End stage
danceMichael Flatley hits West End for last time alongside Team GB World champion Alice Upcott
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Life and Style
Horst P Horst mid-fashion shoot in New York, 1949
fashionFar-reaching retrospective to celebrate Horst P Horst's six decades of creativity
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
i100
Life and Style
Black Ivory Coffee is made using beans plucked from elephants' waste after ingested by the animals
food + drinkFirm says it has created the "rarest" coffee in the world
Life and Style
news

As Voltaire once said, “Ice cream is exquisite. What a pity it isn’t illegal”

Life and Style
food + drinkThese simple recipes will have you refreshed within minutes
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Network Engineer - CCNP, Hedge Fund, London

£50000 - £60000 per annum: Harrington Starr: Network Engineer - CCNP, Hedge Fu...

Senior Network Engineer-CCIE, Multicast, Low Latency

£60000 - £70000 per annum: Harrington Starr: Senior Network Engineer-CCIE, Mul...

Network Infrastructure Engineer

£30000 - £50000 per annum: Harrington Starr: Network Infrastructure Engineer (...

Network Engineer (CCNP, BGP, Multicast)

£35000 - £45000 per annum: Harrington Starr: Network Engineer (CCNP, BGP, Mult...

Day In a Page

All this talk of an ‘apocalyptic’ threat is simply childish

Robert Fisk: All this talk of an ‘apocalyptic’ threat is simply childish

Chuck Hagel and Martin Dempsey were pure Hollywood. They only needed Tom Cruise
Mafia Dons: is the Camorra in control of the Granite City?

Mafia Dons: is the Camorra in control of the Granite City?

So claims an EU report which points to the Italian Mob’s alleged grip on everything from public works to property
Emmys look set to overhaul the Oscars as Hollywood’s prize draw

Emmys look set to overhaul the Oscars as Hollywood’s prize draw

Once the poor relation, the awards show now has the top stars and boasts the best drama
What happens to African migrants once they land in Italy during the summer?

What happens to migrants once they land in Italy?

Memphis Barker follows their trail through southern Europe
French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

The ugly causeway is being dismantled, an elegant connection erected in its place. So everyone’s happy, right?
Frank Mugisha: Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked

Frank Mugisha: 'Coming out was a gradual process '

Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked
Radio 1 to hire 'YouTube-famous' vloggers to broadcast online

Radio 1’s new top ten

The ‘vloggers’ signed up to find twentysomething audience
David Abraham: Big ideas for the small screen

David Abraham: Big ideas for the small screen

A blistering attack on US influence on British television has lifted the savvy head of Channel 4 out of the shadows
Florence Knight's perfect picnic: Make the most of summer's last Bank Holiday weekend

Florence Knight's perfect picnic

Polpetto's head chef shares her favourite recipes from Iced Earl Grey tea to baked peaches, mascarpone & brown sugar meringues...
Horst P Horst: The fashion photography genius who inspired Madonna comes to the V&A

Horst P Horst comes to the V&A

The London's museum has delved into its archives to stage a far-reaching retrospective celebrating the photographer's six decades of creativity
Mark Hix recipes: Try our chef's summery soups for a real seasonal refresher

Mark Hix's summery soups

Soup isn’t just about comforting broths and steaming hot bowls...
Tim Sherwood column: 'It started as a three-horse race but turned into the Grand National'

Tim Sherwood column

I would have taken the Crystal Palace job if I’d been offered it soon after my interview... but the whole process dragged on so I had to pull out
Eden Hazard: Young, gifted... not yet perfect

Eden Hazard: Young, gifted... not yet perfect

Eden Hazard admits he is still below the level of Ronaldo and Messi but, after a breakthrough season, is ready to thrill Chelsea’s fans
Tim Howard: I’m an old dog. I don’t get too excited

Tim Howard: I’m an old dog. I don’t get too excited

The Everton and US goalkeeper was such a star at the World Cup that the President phoned to congratulate him... not that he knows what the fuss is all about
Match of the Day at 50: Show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition

Tom Peck on Match of the Day at 50

The show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition