No, non, nein, όχι: Not good enough

I’ve heard some push back that we shouldn’t blame the Tories for this…

…or this…

…because we are facing a global recession because of this lot…

…Bullshit.

As Britmouse points out – in ever more virulent, desperate appeals to sanity – we have had exactly the recovery you would expect if aggregate demand had been very weak. Under Brown nominal demand grew only 1.3% a year versus a 5% trend growth rate. Under  Cameron and chuckles Osborne nominal demand has grown at a still anaemic 2.8% a year.

The Bank of England is in charge of demand in this country and it has used the Eurozone pursue a disinflationary policy which has seen inflation collapse even more quickly than the Bank expected. The Bank of England could do more, and they underline this fact at their regular meetings, but they are choosing not to do more.

So in a way yes, the weak recovery is a result of the Eurozone, but only because the Bank of England and central government have used the crisis to depress demand growth. Rather than push against the crisis with more expansionary policy the Bank has used these deflationary tailwinds to keep unemployment elevated and prices subdued.

The policy which is producing weak growth is also producing low bond yields. The low interest rates Cameron is paying is a vote of no confidence in his government from the bond market, they don’t believe growth will return for a very, very long time.

Something is rotten in the city, the Bank of England is not democratically accountable, people do not understand its remit well or the damage it is doing in the name of price stability. This is why the London Stock Exchange gets occupied, not Threadneedle street.

Osborne to the rescue?

Britmouse, otherwise a very informed commenter, makes the mistake of saying Britain would need a new parliamentary act to switch to a nominal GDP level targeting regime. Not so.

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.