Here is the relevant section of the 1998 Bank of England Act:

11 Objectives

In relation to monetary policy, the objectives of the Bank of England shall be –

(a) to maintain price stability, and
(b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment.

12 Specifications of matters relevant to objectives

(1) The Treasury may by notice in writing to the Bank specify for the purposes of section 11 –

(a) what price stability is to be taken to consist of, or
(b) what the economic policy of Her Majesty’s Government is to be taken to be

The Treasury can, were George Osborne to be interested in re-election, switch to a nominal GDP targeting regime by only resorting to legislation which is already on the books. Defining the objective of the Bank of England as “to maintain price stability…including its objectives for growth and employment” is almost an exact layman’s description of NGDP level targeting.

If Britmouse means merely  that this decision would not be final, I agree, but no decision made by parliament is ever final. No Parliament may bind its successor. There is no way to forever adopt NGDP targeting, because no parliament can bind its successor. Mervyn King himself has written  (in a paper I will discuss when I get round it) that it doing so is likely impossible:

The core of the monetary policy problem is the uncertainty about future social decisions resulting from the impossibility and the undesirability of committing our successors to any given monetary policy strategy. The impossibility stems from the  observation that collective decisions cannot be enforced so that it is impossible to commit to future collective decisions. The undesirability reflects the fact that we cannot articulate all possible future states of the world.

There would be parliamentary fulminations were Osborne to announce an immediate change of policy, but a steep economic recovery would put pay to those. The British legal system is flexible, and by the time a legal challenge were mounted, if it ever were mounted, it would be easy to pass the Bill to formalise an already successful policy.

I don’t like Tory government, but I dislike this depression even more. The Tory have an almost foolproof re-election tool at their disposal, they should use it.

Via.

Rebekah Brooks and her husband, Charlie, are being charged with conspiracy to pervert the course of justice over the phone hacking inquiry…

She is charged – along with her husband, personal assistant Cheryl Carter, chauffeur Paul Edwards, security man Daryl Jorsling, and News International head of security Mr Hanna – with conspiring to “conceal material” from police between 6 and 19 July.

In a second charge, she and Ms Carter are accused of conspiring to remove seven boxes of material from the News International archive between 6 and 9 July.

And in a third charge, Mr and Mrs Brooks, Mr Hanna, Mr Edwards and Mr Jorsling are accused of conspiring to conceal documents, computers and other electronic equipment from police officers between 15 and 19 July.

Some semblance of justice at last. Apropos of nothing in particular, anyone else remember this?

The Evening Standard yesterday interviewed Chris Bryant about his tireless efforts to investigate phone-hacking. This, understandably, annoyed Rebekah Brooks (nee Wade). Here’s Bryant’s version of his last meeting with Rupert Murdoch’s favourite seemingly Teflon-coated, flame-haired executive:

“She came up to me and said, ‘Oh, Mr Bryant, it’s after dark — shouldn’t you be on Clapham Common?”

“At which point Ross Kemp [the ex-EastEnders actor and her then husband] said, ‘Shut up, you homophobic cow’.”

By the way, here is how the gracious Ms Brooks responded to today’s charges.

We have this morning been informed by the Office of the Department of Public Prosecutions that we are to be charged with perverting the course of justice.

We deplore this weak and unjust decision.

After the further unprecedented posturing of the CPS we will respond later today after our return from the police station.

All together now: Aw, diddums!

European stocks were in the black but off earlier highs Tuesday, as investors weighed strong German growth figures against the possibility of a Greek exit from the euro… [M]arket participants pointed to the fact that Tuesday’s GDP releases merely highlight the growing disparity between Germany’s strong performance and the weakness seen in Southern European members. Italy’s economy contracted by 0.8% in the first quarter, while Spain’s economy shrank 0.3% and Portugal remained in recession. In Greece, GDP contracted by an annual rate of 6.2% in the first quarter.

We have a balance of payments crisis; the continuance of this crisis is not good news, even if Germany keeps the Eurozone from entering a “technical recession.” The periphery is still exporting too little and importing too much, Germany vice versa.

Unless the periphery of the Eurozone is given somewhere to export to they will not recover. I’m not asking for any sacrifice from the Germans aside from the psychic cost of no longer being able to tell yourself how virtuous you are. I’m asking for the Germans to consume more! They should have more stuff themselves instead of selling it to Italians, Spaniards, Portuguese, Greeks etc. for bits of paper which might end up being worthless.

Have your cake and eat it Germans, better yet, eat a cake made by some Italians and  Spaniards and Portuguese and Greeks and Frenchmen! You’ve earned it.

LONDON (Dow Jones)–European stocks are expected to open slightly higher Tuesday, in a reversal from earlier opening calls, after German gross domestic product figures came in significantly better than expected.

 Good news…or is it?

Amid all the doom and gloom, strong German GDP figures just out may give investors something to cheer about Tuesday. Data show Germany’s economy, the largest in Europe, grew much more than expected in the first quarter, driven by a surge in net exports.

It looks like Europe is getting further away from a necessary rebalancing in which Germany consumes more. Without Germany consuming more and exporting less/importing more there is almost no conceivable way for the Eurozone to survive. There are still no silver linings in Europe.

Looks like we are all still way below trend. The demand shock starting in 2007/8 has not been corrected and although total spending has recovered to above its precrisis levels that masks wide variation in rates of recovery. Canada’s doing great, Spain, not so much.

During the worst of the crisis the fundamentals of developing world helped to drag global growth back up. In fact the late 00s were good for large parts of the world. China, Brazil, many African countries all performed strongly through to 2012, despite a set back in 2008. In fact global GDP per capita has never been higher.

The bad news is that serious problems appear to be developing all around the world. The Eurozone is still in a permacrisis, industrial production is stagnant in India, China has been fighting deflationary pressures for some time and appears to be beginning to lose, Brazilian industrial production has turned negative. The US is facing huge budget cuts in the autumn which will be broadly contractionary through its economy.

The insane European Central Bank‘s policy rate is at 1%. That’s right, despite the Eurozone imploding the insane ECB is has steadfastly refused to ease policy despite even Germany heading towards recession. Other central banks around the world have all done good jobs avoiding anything as horrific as America’s Great Depression, but they all remain wary of using unconventional tools to expand demand.

In 1999, what Ben Bernanke argued was needed in times of great crisis is the willingness to be aggressive and experiment, to show Rooseveltian Resolve to get the economy moving again:

Needed: Rooseveltian Resolve

Franklin D. Roosevelt was elected President of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take—-namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—-in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done.

This is the real meaning of Francois Hollande. He needs to say “non!” to more or less everything Merkel and the insane ECB put forward.  Hard money and austerity have been a disaster in a benign international environment, if demand for European and American exports dries up and deflationary pressures go global we will see a recession inside a depression scarily reminiscent of the 1930s. We need a Roosevelt.

Chancellor Angela Merkel’s conservatives have suffered heavy losses in an election in Germany’s most populous state, exit polls suggest.

Support for the Christian Democrats dropped from 35% to 26% in North Rhine-Westphalia, with the Social Democrats set to return to power with the Greens.

It is almost as though the public are sick of self-defeating austerity.

New Labour spent a lot of money on infrastructure, education and healthcare. Lots of money, I think we can all agree on that. A lot of people think a lot of this money was wasted. Some also think Labour damaged the productive part of our economy by burdening it with too much red tape and taxation.

But UK’s unemployment is currently lower than you would expect given a nasty, steep recession. Perhaps some of New Labour’s spending is having measurable effect in reducing the non-inflationary level of unemployment, even if we couldn’t work out was while they were in office what was Labour’s return on  investment.

Despite extra burdens on employers introduced by New Labour we still have a very flexible employment market. This is especially true for the young and the newly employed. The National Minimum Wage is lower for the young and those in a job for under a year have few employment rights.

If you strip out VAT and import prices (that is, if you cheat a bit but for easily rationalisable reasons) inflation has been rather low of late. Compared to the normal employment/output dynamic unemployment has also been low.

This leads me to argue that the UK may have seen some sort of positive supply shock in the late 2000s which has improved our unemployment rate today. If true this would mean that the natural rate of unemployment has decreased and the cyclical component is higher than most people realise.

EDIT 19:05 11/05/2012: Second paragraph edited. Unemployment no longer “very” low just “lower than you would expect.”

And, regarding his policy programme, it is difficult to see Hollande being a pragmatist in government. For example, take this declaration from a January speech:

“My enemy is not another candidate, it is not a person, it has no face, it is the world of finance.”

All very well, I suppose, down with capitalism: hurrah. But, whatever additional regulation the financial sector may need, is it a good idea, on any level, to emote about it being the “enemy”? In any event, this is an approach that Miliband would be wise not to try to emulate; in a country like ours, where one-fifth of GDP derives from the City, it would have very deep implications for government credibility, for borrowing and for investment. It is easy for France to talk about a financial transaction tax when it has a tiny financial sector compared with the mighty City; everyone wants higher taxes for the other guy.

The City probably adds about 4% to UK GDP not a fifth, that number is from 2003 and The City probably added a little more than that between 2003 and  2007 and a lot less (perhaps negative?) since then. [1] It’s contribution to GDP is still about half that of UK manufacturing (!) and about a fifth of the total 20% added by all finance, insurance and professional services combined. Data from the ONS. This is where I presume Rob Marchant got his one fifth figure from by adding K48, K57 of page 19.4 and deriving a percentage from cell K77.

Discussion of high and low finance should be separated, something which I suppose Hollande needs to take on board as well. I should perhaps tentatively suggest three things: that most finance is dull, should be dull and most of it takes place outside The City. It consists either of taking short term deposits and lending that money out at a rate slightly higher rates or taking payments from large numbers of people and paying a small subsection of them large sums when something bad happens. It is very dull, very worthwhile and  it adds a lot of value but it is a world apart from what occurs in The City.

____

[1] Remember that many firms in The City receive a huge hidden subsidy each year too.

For UK banks, the average annual subsidy for the top five banks over these years was over £50 billion – roughly equal to UK banks’ annual profits prior to the crisis. At the height of the crisis, the subsidy was larger still. For the sample of global banks, the average annual subsidy for the top five banks was just less than $60 billion per year. These are not small sums.

Not small sums at all, and I recommend you read Haldane’s speech in full. The City’s contribution to GDP is modest, although its contribution to exports is larger.

I don’t fully understand what critics of NGDP targeting mean when they say they suspect the policy would fail. I think the language NGDP targeting is something of a handicap, because once you start thinking in this language you begin to translate people’s statements and in the process they cease to make sense.

Chris Dillow says…

I fear, though, that economists who invoke “expectations” and “credibility” are making the error of mistaking the tidy maps of models for the messy terrain of reality.

Unlearning Economics says…

This is a clear example of confusing correlation and causation. When looking at two correlated variables, a good question to ask is which one moves first – here, the drop in RGDP clearly precedes the drop in NGDP. This suggests that the decline in RGDP is not a result of the decline in NGDP; rather, its the opposite.

So what happened in 2008? Obviously, the conventional story is true: a large drop in asset prices made many households and firms realise they were less wealthy than they thought; this caused firms to lay off workers; real production decreased; nominal income followed; expectations dropped; this created a spiral. The NGDP-driven story doesn’t withstand scrutiny, else we’d expect the NGDP drop to come first.

First of all, I agree with Chris that relying on expectations is a weak lever. But, if you are powerful enough to not have to rely on expectations, the market should anticipate that and you will be able to rely on expectations. To he that hath shall be given, and we hath in abundance. I think a Bank with a fairly doveish reputation with the printing press combined with the supremacy of parliament, the Royal prerogative and a government intent on re-election is more than powerful enough for the above to hold true.

Secondly, I disagree with UE. In 2007/8 asset prices fell because expectations of future NGDP fell which was priced into current asset prices. This lead to a fall in real GDP contemporaneous with a fall in NGDP, but both were caused by fall in expectations of future NGDP as is argued by adherents (cultists?) of NGDP targeting. Asset prices are forward looking and money is an asset, hence you have to look at expectations of future NGDP rather than looking at which moved first by a few months, RGDP or NGDP.

So what I don’t understand is what non-NGDP monomaniacs think will happen were a central bank to adopt a NGDP targeting regime. Say the treasury ask the Bank of England to adopt NGDP targeting and to catch up entirely to trend from 2008. What does failure look like?

1. NGDP does not reach trend because the bank lacks credibility and the policy is abandoned.
2. NGDP fails to reach trend for a long time, and so has little effect on anything important.
3. NGDP reaches trend but nominal growth consists (almost) entirely of price changes.
4. NGDP over shoots target massively and cannot be contained because  inflation expectations become unmorred and accelerate upwards: the price level spirals out of control.
5. NGDP targeting is effective and a la Kalecki capitalists stage some sort of investment strike and must be abandoned for political reasons.
6. NGDP targeting is effective and workers/voters realise it is a way of moderating their wage demands and must be abandoned for political reasons.
7. NGDP targeting is effective and we realise we’ve seen a series of unsustainable booms rather than real growth because of a slow down in innovation and all economic growth ends up accruing to land and rents and must be abandoned for political reasons.
8. NGDP targeting is effective and some combination of 5,6 and 7 occur.
9. Other?

Can anyone fill me in?