I don't always agree with the FT . On this occassion, when they are commenting on Labour's new plan for the Bank of England, I do:
The idea that the BoE, with its limited range of tools, could increase sustainable productivity growth to a rate not seen in modern times is simply not credible.
In fairness, the FT adds:
But it is undoubtedly true that shorter-term movements in productivity, which has been strikingly low over the past decade, have some cyclical component and can be affected by central banks.
To which I would suggest that is nigh on inevitable: the price of credit is meant to impact the level of investment spending so the comment made is a truism.
But what's also true is that you can't set productivity gain as one short term goal and still maintain conventional monetary policy as another goal. They will sometimes run counter to each other with one demanding low rates and the other increases. That conflict is almost inevitable.
Labour will have to decide. It has to put monetary or fiscal goal at the heart of policy making. It can't do both. But if it is a fiscal goal then the Bank has no role to play. And since monetary policy in the U.K. is now entirely secondary because there have been almost no rate changes in a decade, and none are likely unless Carney & Co are trying to bring forward the date of the next downturn, only fiscal policy now makes sense. In which case the Bank should, once more, become just a banking sector regulator.
That's a big job. But it is not core to macroeconomic policy, and nor should the Bank be anywhere near that in the future.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
I have to say that I just do not know what Labour are trying to do at all. They seem to have lost the plot.
I must admit that having read (some of) the relevant report:
http://www.gfceconomics.com/wp-content/uploads/2018/06/Financing-investment-final-report-combined.pdf
I am more than inclined to agree. In fact, I am a seriously bewildered and a little bit horrified.
The report tries to be well-intended and innovative but does so with a mentality that is archaically neo-liberal and its approach to inflation and unemployment alone bear that out (“natural rate of unemployment” “NAIRU” etc. etc.). Conversely it does have a couple positives. For one it recognises the need for “productive investment” and addresses the difference between that and rent-seeking speculation. To that end it is critical of banks and financial markets noting that:
“Private finance cannot always be relied upon to guarantee the optimal allocation of capital.” (p. 85). Indeed.
The part that bewilders and horrifies me however is the way that it addresses and emphasises its “3% productivity growth target.”
Having read the relevant Guardian articles yesterday I cautioned against hasty criticism of this so-called target until we found what form of productivity growth they were talking about. Remarkably the articles didn’t specify this (trust me, it matters) and I was very reluctant to assume that McDonnell and the report’s principal author, Graham Turner, were talking about Labour Productivity because it would have seemed really odd, stupid and unprofessional if they were.
Even more remarkably I found that the report itself doesn’t specify or define what it means by “productivity growth” that is appalling in itself and any 2nd year macroreconomics student’s assignment would have been heavily marked-down for that alone. What’s worse (far worse) I find by way of a footnote on page 4 that they ARE talking about Labour Productivity which is almost bizarre and generally unforgivable. The 2nd year student would probably be failed for that.
To explain: Labour productivity measures output per man-hour. At the academic, bureaucratic and international level the preferred, recognised measure of national progress in productivity is Multi-Factor Productivity (MFP) growth which is the growth in output minus the (overall) growth in inputs?
It is generally recognised that there is no overall benefit to the national economy if the cost of capital substitution (more use of machines) outweighs the gains in labour productivity (man-hours lost). The OECD puts it this way:
“Multifactor productivity (MFP) reflects the overall efficiency with which labour and capital inputs are used together in the production process”
https://data.oecd.org/lprdty/multifactor-productivity.htm
There is an inverse relationship between the growth in labour productivity and that of capital productivity, so MFP growth is always much smaller than labour productivity growth and harder to achieve but MFP is the indicator that matters. Everyone that knows this subject knows that – or so you’d think!
So my big question is why-on-earth is Turner’s report using labour productivity as its key performance indicator? Its not only unconventional. It is ridiculous as well as being pro-capital and anti-labour (as Richard suggested yesterday).
By its own reckoning this report is defining the loss of jobs to automation as an indicator of success regardless of “overall efficiency” and regardless of the fact that the benefit of productivity gains have not been widely shared. In recent decades labour productivity has grown substantially while real wage growth has stagnated. See the 2 charts in this article:
https://rwer.wordpress.com/2014/09/11/the-wage-productivity-gap-in-the-g20-2-graphs/
If I had a platform for doing so I would publish an open letter to McDonnell and Turner and ask them to explain why, against established convention, they are using Labour Productivity growth as a key indicator of progress, why they are not using MFP in that context and what the hell they were thinking.
Richard, I would never normally ask this but if you or someone else that could do that would do so I think it would be well worthwhile.
Marco
Let me see what I can do
Richard
Cheers.
The idea has been mooted
Thank you for looking into this Marco, much appreciated 🙂
By the way, everything I have read conforms Marco’s reading of this