Economic Challenge for the MPC
April 10, 2011It is easy to mutter about the dithering MPC, but the hand of cards they hold is not easy to play.
There is a clamour from some quarters (including this Blog) to increase interest rates to combat inflation. There is an equally loud, maybe louder, cry to keep the record low bank rate on hold. The mostly Keynesian eonomists aruing for no change, declare the recovery will be put at risk if any rise is made now; the opposite view is that inflation, left unchecked, can take root and require not modest rises, but penal rates to control it.
Beneath these positions, evidence is contradictory, hence the uncertainty. Wages and house prices remain static or falling, so the traditional inflationary pressures are not there. Commodity, energy and raw material prices have risen, partly but not wholly because of sterling’s fall and VAT has gone up. The hope is that when these pressures work through the books, inflation will fall.
The problem is that inflation in the UK is now nearly double that of the EU and the US. These economies have similar pressures, which tells us that their underlying inflation is a good deal less. The issue for the UK is that with inflation at double the rate of its two main export markets, any export led recovery will soon be in trouble. This will hit manufacturing and suck in cheaper goods from overseas. That will be a disaster not only for so called recovery, but for the whole future of the economy.
At the heart of our crisis lies the fact that we do not make light bulbs, washing machines, televisions, computers, smart phones, tablets, game consoles, shoes, clothes; the list goes on and on. Keynes was a demand economist. His disciples need to wake up to the fact that when he talked of stimulating demand, he meant stimulating under producing factories in an industrial economy. Like fools we told ourselves that we had become a service economy energised by waiters and shoppers. Stimulate demand of that set up and you suck in imports, only to make matters worse. Because our balance of payments is in a record deficit as well, although too often overlooked in favour of the budget deficit. We have, in fact, a double crisis.
Both will have to be fixed to make any recovery real. This cannot be done by robbing Peter to pay Paul. The fundamentals have to be dealt with. The MPC has a busy time ahead.
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