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August 12, 2012 9:33 pm
With only a few weeks until he leaves the Bank of England, Adam Posen has little time for suggestions that the Monetary Policy Committee’s record has been poor over the three years spanning his membership.
Sitting in his large office on the third floor of the BoE, Mr Posen, one of the committee’s four external members, dismisses the 0.5 per cent average growth and 3.4 per cent average inflation of his time on the MPC as irrelevant due to the time-lag between setting policy and seeing effects.
But he accepts that a “big disappointment” has been the absence of recovery in the past 18 months.
Unlike Sir Mervyn King – the central bank’s governor, who has blamed stagnation on the chilling effects of the eurozone crisis, the rise in the funding costs of banks, and commodity prices squeezing household incomes – Mr Posen also blames the government.
For him, the main reason that growth has been so feeble has been that austerity has had a larger impact than the BoE or government thought possible.
He is careful not to say that George Osborne should not have embarked on tackling Britain’s largest-ever peacetime deficit, but thinks the central bank should have been more active in its response.
As the lone voter for more quantitative easing for almost a year, before the rest of the MPC joined him last October, Mr Posen feels he understood the economy better than others, but he has no complaints about his treatment on the committee.
His one real regret is that, in April, he briefly became positive about the outlook for Britain’s recovery. He now accepts this was a false dawn. “My decision to stop voting for more stimulus was a reflection of my being humble in the face of data,” he says.
“I am sorry I was wrong: not because it meant I was temporarily wrong on a call – that happens – but because if I had been right, it would have meant the recovery was better.”
But like many economists looking at the contradictory data – reasonable employment figures but against a shrinking economy – he expects that the gross domestic product data will ultimately be revised higher, resolving part of the puzzle of the glaring weakness in productivity data.
At the moment, the data indicate that workers are less productive than they were, but this “productivity puzzle”, he thinks, has been exaggerated. He expects GDP data to be revised higher and, once a recovery starts, measured output in the service sector, particularly in sales jobs, to rise rapidly without employment following suit.
He believes that the BoE risks a self-fulfilling prophesy by worrying so much about weak productivity that it begins to target lower rates of economic output growth.
However, Mr Posen also thinks the real problem is more complex than merely a puzzle over why the data show British employees producing less than they did.
“I come away from these three years on the committee very radicalised in wanting to rethink a lot of macro [economics] and finance, ” he says.
Although he does not have answers yet, he says: “We do have to focus much more on labour markets than on some of the other key variables in the economy when making policy.”
He said low wage growth was very helpful in demonstrating the absence of strong inflationary pressures, while the rise in employment surely demonstrated that the future for the UK economy was not one of unmitigated misery.
“The private sector in Britain does continue to add workers, and there is no conceivable theory to make sense of the private sector employers adding employment . . . if they think that the future is going to be far less productive and if they don’t think there is going to be a recovery.”
In contrast, he worries about the national accounts figures that underpin GDP. These are made up of a mixture of concrete measures, forecasts and imputed, or inferred, figures.
“I think there is an argument for making some triage of macro data both in terms of what’s really measured versus what’s imputed but also what’s more or less meaningful”.
On alternative measures, UK economic performance – though bad – is no worse than that of the US and much better than Spain’s, he says. However, the GDP data put the UK on a par with Spain and far behind the US.
Mr Posen will work on these ideas and others over a two-month break when he leaves the MPC at the start of September. In November, he will begin work as head of the Peterson Institute for International Economics, the Washington-based think-tank. His seat on the MPC will be taken by Ian McCafferty, the former chief economist of the CBI employers’ organisation.
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