The Phillips Curve comes under fire

Central bankers make their decisions in a calm manner and sucking up criticism is part of the job. If they act or opt not to, they seldom receive any thanks. Traditionally, central bankers prefer practice to theory, but they do rationalize their decisions with recourse to ideas.

Experienced journalist Larry Elliott has suggested that the Monetary Policy Committee might have overestimated inflationary pressures in the UK economy. He has contended that this is the consequence of a reliance on the Phillips Curve. The wage increases that could boost inflation do not seem to be developing from his perspective. He has highlighted that the Phillips Curve has a ‘hit and miss’ history. The curve has worked to different degrees during diverse eras of capitalism.

Capitalism does not have immutable laws of motion. Central banks cannot read off the ‘right’ thing to do by looking at history. The Phillips Curve is best seen as a rough interpretation of the past which might give a policy clue. It is foolish to give it excessive significance, but it would be an error to ignore it. The point is that a central bank needs to preserve its credibility. If it hints it will do something, it can cause consternation if it does not follow through.

Elliott has engaged in the debate about the Phillips Curve, but he would do well to remember his earlier work on the “reserve army of labour” and zero-hours contracts. Wage rises may not be strong in the UK because the relationship between employers and employees has changed since the Great Recession. Weak unions mean that inflation is not coming from the bargaining of workers. The Phillips Curve might come more strongly into play if the political situation alters in favour of ordinary people. Nevertheless, the Bank of England wanted to call time on the ultra-low interest rate because delay could have exacerbated  problems down  the road. In the absence of a strong economic policy from the Government, the Governor of the Bank of England, Mark Carney might have viewed this as a dereliction of duty.

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Shrinking chocolates and the Phillips Curve

If the Bank of England moves the interest rate today, commentators will focus on the official level of inflation. However, some inflation is hidden. Manufacturers can keep the price of a product the same whilst reducing its quality or its quantity. Consumers of chocolates may be outraged by this type of corporate behaviour.

The Phillips Curve suggests that there is a trade-off between inflation and unemployment. In the modern British labour market, we have concealed unemployment. This is where the official measures of unemployment do not capture the true extent of underemployment in the economy. People capable of work if they received support might be on sickness-related benefit, while self-employed workers may be unable to access benefits when demand for their labour is limited. If contemporary inflation statistics and unemployment statistics lack rigour then the Bank of England could be tempted to take action which is inappropriate for the long-term health of the economy.

It is hard to discern whether hidden inflation or concealed unemployment is the more significant problem. The answer may well vary on a regional basis. When the Government does not have a credible regional economic strategy, the Bank of England can only hope for the best. The Northern Powerhouse has not given much concrete support to manufacturing so far and it must be hoped that any interest rate rise does not impact adversely on the performance of the peripheral regions. Fortunately, any adjustment to interest rates will be small so the impact on unemployment should be limited.

 

 

Inflation: the basket case

The Office for National Statistics regularly adjusts the composition of the basket of goods which is used to assess inflation in the UK. This can be a controversial process because consumers buy such different items. While artisan gin may be really popular in some circles, other social groups could be more concerned with the price of iced buns.

Class and gender may impact on what we purchase. Our perception of inflation is thereby influenced by the position we occupy in society. When inflation is above the two per cent target, our emotions about it might be structured by more than our income.

This matters when interest rates are the subject of elite discussion. The Bank of England may cite inflation if it nudges up the interest rate this week. But people know that the central bank is also concerned with its credibility. Any decision of the Monetary Policy Committee will be evaluated by citizens with different spending patterns. This suggests that a broader economic debate is needed. Minor interest rate adjustment may be deemed to be tinkering if enough people think that the unbalanced UK economy requires the implementation of a robust democratic strategy.

Interest rates are officially interesting in the UK but why?

The arguments for a rise in British interest rates have now received an abundance of media attention. It is widely anticipated that the Bank of England will nudge the rate up slightly. The recent growth figure and the length of time the rate has been low suggest that a gesture to normality is probable. At the same time, the institution may want to cement its credibility by acting on its earlier hint. With inflation up, the perceived need for a decision is clear.

There are commentators who suggest that the predicted rate rise is premature. They look beyond the headline employment figures and stress the relative overall performance of the British economy.  Keeping interest rates flat for a long period would mean that policy could be made on a comprehensive assessment of the complex situation. As Brexit negotiations carry on, the central bank might develop a clearer picture of the likely outcome.

The main reason why the debate about interest rates is so prominent may not be the worrying amount of personal debt in the UK. It might well be the case that the next budget is likely to be a safety-first event. In the absence of a compelling economic strategy from the beleaguered Government, it is understandable that journalists have become preoccupied with the minor details of economic management.

Britain and Palestine 1917-2017: a century of broken promises?

In the midst of the First World War, the imperialist power of Britain made a significant intervention for the Middle East. The Balfour Declaration of 1917 has aroused much controversy and a recent conference in Liverpool was held to debate the sensitive issues. The discourse of anti-Zionism has featured in discussions about possible racism within the current British Labour Party, but many of those who attended were unafraid to consider a troubling history.

Without assessing what is going on in the modern Labour Party, it is possible to think about what happened nearly a hundred years ago. The Balfour Declaration was typical of the imperialist mindset. European powers were unafraid of pursuing divide and rule policies around the globe, often acting in a seemingly arbitrary fashion.

For Lenin, imperialism was driven by economic imperatives. Cultural factors might have influenced specific decisions, but it was a capitalist logic which formed the basis for the majority of the territorial acquisitions and so on. While some contemporary activists are passionate about the impact of the Balfour Declaration, others may agree with the intellectual Edward Said who once wrote:

“There is not much use today in lamenting such a statement as the Balfour Declaration. It seems more valuable to see it as part of a history, of a style and set of characteristics centrally constituting the question of Palestine as it can be discussed even today.”

Journalistic errors can reveal as much as journalistic accuracy

“So a delay of five weeks or more in paying the credit is an atrocious design fault. Charging up to 55p a minute for calls to the helpline was simply stupid, as ministers have belatedly realised.”

Andrew Rawnsley.

The built in delay associated with Universal Credit is currently a minimum of six weeks. When Rawnsley of The Observer suggests it could be five weeks, it is indicative of a problem with the mainstream media. Many UK commentators have expertise in discussing politics as a horse race between the parties. Too few of them have experience of dealing with the tragic remnants of the British welfare state.

This gap is partly responsible for an inability to understand recent electoral behaviour. However, it has wider significance. If it is fun to be part of the establishment, it is hard for its members to appreciate the complexity of the lives of people who may not have much fun at all.

It seems that the Government may alter the delay connected with the first proper payment of Universal Credit. Establishment commentators will have the skills to explain what this retreat means to the parties. However, it is unlikely that privileged journalists will ever quite comprehend what the delay means to the people.

 

Should Labour learn from the SNP?

“Lesson-drawing addresses the question: Under what circumstances and to what extent can a programme that is effective in one place transfer to another. Searching for fresh knowledge is not normal; the…stimulus to search…[is]dissatisfaction with the status quo.”

Richard Rose

The academic literature on policy transfer is a mixed bag. It highlights the difficulties of basing programmes on what seems to work elsewhere. There may be cultural barriers to success. Even in adjacent territories which seem similar, institutional disparities might make implementation problematic. Despite these telling points, the temptation to imitate popular measures is always present.

The electoral achievements of the SNP means that the Labour Party should monitor their policies closely. Labour will require an updated manifesto if it is to improve on its recent general election result. When the time comes, some inspiration could flow south. Nevertheless, Freud’s “narcissism of small differences” might inhibit Labour as it puts its policy package together.

Corbyn was attacked from the left at the SNP conference. But nationalism is not a leftist ideology. His team could consider the effectiveness of the left policies which the SNP advocates, without being sucked into a populist competition. Ultimately, it is the hegemony of the Conservative Party which must be contested, throughout the UK.