I cannot have been alone and being appalled at comments made by former Bank of England employee and Monetary Policy Committee member Adam Posen, who said over the weekend in advance of the Bank of England's decision on interest rate changes to be made this week:
The central bank has no choice but to cause a recession when a broad range of prices are rising at such a strong pace.
He added:
It is duty bound to bring inflation down after more than a year when it has been more than 2 percentage points above its 2% target level during a period of full employment.
Not only is this typical of the callous indifference of most of those making these decisions - which will have no impact on their own wellbeing unless by improving it as wealth flows upwards and in their own direction - but it is also wrong.
Posen argues the UK is short of labour. There is little evidence of that. People have simply left the workforce. That is something quite different.
He also seems to think it is wages driving inflation. No data shows that. Energy price profiteering; supply chain profiteering and simple supply chain shortages all suggest otherwise, as do interest rate rises, all of which are reflected in new excess profits being reported by those involved. But wages are falling well behind, especially for most on low pay. So Posen is offering a reason for inflation he must either know to be untrue or because he probably knows no other, and has not been taught to look for it.
And what he proposes is that wages must be crushed to reduce demand when demand is already being crushed, as all available evidence shows. Energy and other price increases are already doing that. Increasing interest rates will only make poverty much worse than it is already going to be.
But, although this should be glaringly obvious Posen argues the Bank has a moral duty to eliminate inflation by creating recession, pushing down real incomes and destroying jobs when that will not solve any of the inflationary problems created by energy price profiteering; supply chain profiteering and simple supply chain shortages. It will only add another cause of inflationary pressure by increasing the price of money.
Posen does not seem to get that. Nor does he see anything immoral in making children starve, old people die of cold or in forcing people from their homes, all because of his inability to understand inflation, appraise data, and work out an appropriate economic response.
What is that appropriate response? Danny Blanchflower and I have already outlined it:
1) Admit there is a problem;
2) Correctly diagnose the cause;
3) Cut taxes on consumption on essential items now;
4) Cut taxes for those on low pay, but increase them significantly on those with high pay and wealth where the inflationary pressure exists and is significant;
5) Do a windfall tax;
6) Invest in job creation now as many jobs are already at risk;
7) Align rules with the EU to reduce inflation pressure there;
8) Be prepared to use QE and changes to tax rules on saving to fund new programmes of investment.
Doing this is the moral imperative. Posen's morality comes from the 1840 approach to Ireland so indifferent to suffering is it, and so wrong in its analysis is it also.
I fear though that the likes of Posen will get their way on interest rates this week. We are in for torrid times. And like Martin Lewis, I fail to see how civil unrest will not follow, so inappropriate and harsh are the prescriptions of the likes of Posen.
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In some sense he is correct.
The MPC has an inflation mandate. If reducing inflation right now is the overarching priority of the MPC then it must raise rates and cause recession…. because that is the only tool in the toolbox.
But this is to take an absurdly mechanistic narrow view of the world – he would do well to read the Daily Mirror (from a few days ago).
🙂
I’m glad you had something to say about this Richard, and hope you are feeling a bit better.
I don’t know if it’s my poor memory, but didn’t recessions used to be a bad thing? In post-brexit Britain, apparently it is fine if we try to deliberately cause one.
I do agree with one thing Posen said though – there has been excessive wage growth in some people’s wages. His for a start, and other City of London bankers.
He could start be cutting his own pay packet down to that of the average British worker before he starts to prescribe “solutions” that he has no conception or experience of.
The higher echelons of our society are now acting like the final throws of the Roman Empire – excess and greed, and handing down tax rises and servitude to the rest of society.
Hence my suggestion that tax is an answer for some….
Right at the end of the 80’s not long after I’d started sensible work I attended a function at an RBL club in north London (North London?). The place was pretty run down and thick with smoke and the smell of the fortunate ones staying in the pink with ciggies and drink.
After the formal function there was a fund raising raffle, the prizes for which were laid out on a trestle table. Quite frankly I was astonished. One prize was a dozen eggs. Further up the prize ladder was a string of sausages. Third place was a selection of tinned goods. Second place was a half bottle of whiskey. First prize was a Sunday joint sized piece of beef. What was even more astonishing to me was the reaction of those winning the prizes, all of whom were past retirement age, extreme pleasure wouldn’t be understating it. Being a callow idiot twentysomething the fact that some people were so poor that winning a string of sausages would be a big deal had passed me by. Until then, the idea of people of their age being so poor hadn’t sunk in. Pensions paid, mostly, by order book, many without bank accounts and no credit cards. In other words very little scope for relief. I seen and experienced poverty as a student but it always felt transiatory, the possibility of escape was there, but what I saw in this club was different and inescapable.
I’d honestly thought that as a nation we’d mostly moved past all that (accepting that serious work still need to be done for those on the margins) and yet it looks like its all coming back. I wonder if, in some ways, this is going to be worse. There are so many add-ons to people’s financial commitments these days, things that are seen not as luxuries but near necessities. Mobile phones, subscriptions to satellite tv, streaming services, broadband, Oyster cards (or the local equivalent and so on. Many of these might be viewed as non-essential but chasing jobs will require three of those listed. What happens when significant numbers are unable to pay not only for their homes but also for the other rent services?
We are in dire straits, travelling the Telegraph Road.
A great track, which always speaks to me.
Deacon Blue also sang of financial struggles in 80s Glasgow (it was decimated by Thatcherism)
I agree. The underlying problem, though, is ‘monetarism’ which has changed in meaning from when it first started to be commonly used in the days of Thatcher and Joseph. Then it was about the quantity of money in the economy. Now it is about the level of interest rates.
Raising and lowering interest rates doesn’t have the effect the neoliberals claim. Lowering rates stimulates the economy in the short term but deflates it in the longer term as the level of private debt increases. We then have to have another reduction in rates to make up for the deflation caused by the previous reduction. We’ll always end up where we are now with rates close to zero.
Increasing rates is very problematic especially when the level of private debt is high. It will simply create a high level of bad private debt. In the worst case bad debts create more bad debts in a kind of avalanche effect. As we saw in the 2008 GFC there is no telling where it will lead. Inevitably Governments will panic and use public money to bail out the system.
The natural interest rate now is zero
Banks are fighting it
The reality is this cannonky be temporary
And the winners will be those who resist it, like Japan, who will get the economic boost from doing so. We are too stupid to do that.
I was one who saw this article and was surprised you hadn’t blogged immediately. Now explained, I hope your infection gets better very soon.
In my naive economic view, interest rate rises can bring down inflation when it is caused by demand driven by credit. Currently the majority of inflation has other causes which won’t respond to interest rates, and indeed there is part of the population that is already financially squeezed with no capacity to adjust. In this situation interest rises could lead to longer term damage to the economy which is much worse.
But there is at least a chance that a well thought out scheme of taxation and subsidies (grants or benefits) will lessen the pain now and enable recovery later. The sort of thing governments have the power to do. We just need to avoid scaring the Conservatives by using the word “redistribution” for it.
https://www.theguardian.com/business/2022/may/02/uk-shareholder-dividends-wage-increases-inequality-report
Highlights an issue behind many of the problems we have with both the cost of living crisis and certainn forms of inflation.
No suggestion though of dividend controls
Indeed
MPC =
Monetary
Policy
Capitulation
In other words, typical.
I bet Posen ain’t worrying about his heating bills.
Thinking about it, what is it about some economists that is entirley devoid of any sort of humanity, its the mindset that regards the end of the world as bad news for shareholder value.
Does the profession attract Moral Defectives or does it make them?
Research has suggested it makes them in their undergraduate years
Seriously
My son studied at LSE – Philosophy and Economics. Thankfully, he got out relatively unscathed.
“Philosophy got me thinking, accounting module was useful, the rest was b*****ks”… I think he saw the ball reasonably clearly.
The REAL problem is that the economics he learned makes him uniquely well placed to wind me up….. and he is very good at it!!
I have one like that – finishing very soon
But he has done politics, and it turns out is very good at the theory but not much inclined to do the practice given what is in offer in the UK right now
https://www.psychologytoday.com/us/blog/give-and-take/201310/does-studying-economics-breed-greed
Thanks
There’s an interesting recent paper that discusses previous work on the effects of education on political attitudes and behaviours, and then does a comprehensive analysis of three hypotheses –
H1 achieving a university degree leads to a reduction in racial prejudice.
H2 achieving a university degree leads to a reduction in authoritarianism.
H3 achieving a university degree makes an individual more economically right-wing (my emphasis).
Seems to be a fairly robust analysis, using British data.
The author finds strong evidence for all three hypotheses, not quite so strong for H3.
So it seems that university improves your outlook, except with respect to economics. It would be interesting to focus the analysis on those who attend so-called elite universities, and on those who study economics or PPE.
The author points out out that the effects are likely to increase with time as “the participation rate in higher education continues to grow among under-30s in Britain (now being well in excess of 50 per cent of that population”.
http://www.sciencedirect.com/science/article/pii/S0261379422000312
Many years ago I had an interesting conversation with a Physiatrist about Northern Irish Politics, something that in my opinion was, to put it in a way that may be acceptable on this blog, I found not very endearing.
He made an interesting comment that life in The Province offered so little for anyone with any kind of a brain that they left or didnt get involved.
Certainly in the past people seem to have got involved at various times with both The Conservatives and Labour because that was, at the time where the action was.
I fear that at the moment anyone with half a brain might stay well away from UK politics because it is so awful leaving us ruled by a Mafia of the Mediocre
The monetary policy committee is made up of the same privileged spoilt brats as parliament. The extra revenue banks receive by raising interest rates further adds to the already gross profits greedy bankers enjoy. There is no logic to Posen’s thinking. The committee always follow the same path as they are not capable of a different thought process, just following on like sheep from those that went before them. For the record there is no shortage of unemployed people. Current figures state 1.39 million unemployed adults in the uk. This is probably below the true figure.
Liars and tricksters, wanting joe public to believe their lies to justify their stupid and harsh decisions. What about David Frost’s latest nonsense propaganda? “We are too dependent on the state” he says. The state gives back the least possible currently in all areas. He is right about the highest tax burden on people for 50 years, but we don’t get any return on our investment! How he can have the audacity to say “we are too reliant on the state to sort out our problems?” It is astounding. They want our money but then resent it when people want to see a doctor, or have health care or treatment, or our kids want a good standard of education, or those on benefits want enough money to live on, or students don’t want to be in debt till their 60, or workers ask for a fair day’s pay, or we want our rubbish picked up and the streets cleaned etc. How dare privately educated Frost who has been lucky enough to live a privileged life, without financial worries, accuse those that pay his wages of expecting too much when they want something back and to have access to services and see improvements in living standards etc? Posen and Frost are obviously without empathy and conscience and would most likely advocate human slavery if they could get away with it. Truly lacking in any understanding of the reality of life for those unfortunate enough to be poor. Truly awful people.