Loose Monetary Policy Is Starting to Look Perverse
Mcrae, Hamish, The Independent (London, England)
Today, unless there is some huge upset, the third-quarter GDP figures will show that the UK economy has started to grow again. Actually, if you judge by a series of current activity indicators rather than these official GDP figures, it has been growing all the time. There is a view that eventually these figures will be revised to show some growth - a view reflected in these columns. But it is not very strong growth, perhaps around 1 per cent a year, and that leads to the question: what on earth can we do to boost it?
It was an issue raised by Sir Mervyn King, the outgoing Governor of the Bank of England, in a speech this week. There were two substantive points. One was that while there were further things the Bank could do to ease monetary conditions, there were concerns about the effectiveness of such policies. The other was that extreme measures, such as writing off a chunk of the national debt held by the Bank, were mistaken.
On the first, there is a practical issue as to whether there should be another bout of quantitative easing in November. The Monetary Policy Committee is split and we will have to see which way it jumps. I don't think there is any doubt that the policy was effective in its early stages, for it reversed the collapse of house prices and cut the rate of interest on longer-term bonds, especially gilts.
But now, the balance is more questionable. Has inflation been higher than it otherwise would have been? Well, yes. Are pension funds damaged by the policy, with all the knock-on effect on company balance sheets and the living standards of those nearing retirement? Well, yes.
So while you can justify an extreme policy - underfunding the deficit - in an emergency, it becomes much harder to do so as things return to normal. As for Sir Mervyn's other point, the idea of just writing off part of the national debt, he was referring to a hint dropped by Lord Turner, one of the candidates to succeed him as governor. He warned that this might be seen as a move towards loosening fiscal policy - I suppose the point being that if governments had the freedom to write off debts there would be much less discipline on their spending and taxation decisions.
Frankly, the idea seems so outrageous that it simply is not going to happen. The UK managed to finance the Napoleonic Wars, the First World War and the Second World War without writing off the national debt. To do so now, after what has been, in employment terms, a less serious recession than the 1980s or the 1990s, would be unthinkable. If we ever look like going down that route, head for the hills.
Indeed I think we may be at a stage where loose monetary and fiscal policies have become not just ineffective but perverse. You cannot prove this because there is no comparable data. We have never had this combination of policy before in peacetime, either here or, I think, in any other developed country. But I have been fascinated by some work published this week by the Office for National Statistics on well-being. …