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The Bank is the migration ministry Samuel Brittan Financial Times 06/10/06 Happy days are here again. A group of monetarist economists has written to the Financial Times complaining of an excessive growth of money in both the UK and the eurozone and saying that much higher interest rates will be required to prevent inflation taking off. At the same time, Professor David Blanchflower, the latest recruit to the Bank of England's monetary policy committee, who voted against the August interest rate increase, has given a lecture to the Bank's Welsh agency differing from the consensus in the opposite direction. He focuses on the rise in unemployment, which he believes is a sign of growing slack in the economy. Yesterday's meeting of the MPC, which decided on no change, was never meant to do more than mark time. But one can look forward to more two-way or even three-way splits in the MPC. There is, however, one crucial difference between the arguments of the 1980s and today's disputes. Few of the supporters of the Bank of England's independence expected that the Bank would play a dominant role in immigration policy. In my article two weeks ago, I mentioned that excess demand was more likely to stimulate inward migration than domestic prices; and so it has happened, at least in the UK, which has extended an open door to the new members of the European Union. Bank monetary policy may have more influence on immigration than John Reid, the home secretary. The dominating factor of the British economic scene has been the arrival since the spring of 2004 of more than 450,000 people from the new members of the EU – about 20 times the official forecast. The direct effect of immigration on living standards is much less than commonly supposed. At a first approximation it is zero. A bigger workforce permits a faster rise in gross domestic product. But the extra output has to be shared among a greater number of people. The effects on the operation of economic policy are greater. The faster growth rate should bring more revenue to the exchequer and make it more likely that Gordon Brown's fiscal rules will be at least approximately met by the next election. The new role played by immigration means, however, that most of the discussion about whether the economy is growing too fast or too slowly will have to be jettisoned. The recent increase in immigration could have added 1 percentage point to the underlying growth rate. But it is anyone's guess what immigration will do in the future. I have always distrusted the attempts to measure the so-called output gap which indicates whether the economy is above or below trend. Now the trend itself is called into question. The logical result ought to be a shift from excessive reliance on forecasts to something more like “suck it and see”. Policymakers will have to pay more attention to financial data and to commodity and oil prices, which have recently suffered from what is probably a temporary dip. The broadly defined money supply has its main effect on inflation over a period of more than the two years that central banks are inclined to look ahead. But at the very least the monetary numbers should give the benefit of the doubt to those arguing for tighter policies. The European Central Bank has been quite justified in sticking to its monetary objectives as at least a reference point. There are numerous other signs of inflationary pressure. The housing boom has restarted. Forward indicators of output expectations have risen even in manufacturing. Corporate profitability is at its highest for more than 40 years. All these may, of course, change very quickly if the US suffers a severe slowdown as its own housing bubble is pricked. At the very least, the Bank should try to get itself in a neutral mode – as the ECB and the Fed are trying to do – so that it is applying neither a stimulus nor a tourniquet to the economy. This might mean 5 per cent nominal short-term interest rates that could be adjusted in the light of experience. British interest rates would then continue be one or two percentage points above the Group of Seven norm. The gap is a measure of the average annual depreciation of sterling expected by the market. There are two more technical points. First, the annual increase in the cash value of GDP – known in the trade as nominal GDP – has been revised downwards from 6 per cent to 4.8 per cent. But on closer examination this hardly provides much comfort for the doves. Nominal domestic expenditure, which is a better measure of home demand, has still been rising by an annual 6 per cent, which is on the high side. Second, some observers have expressed surprise that both employment and unemployment have been rising. But it is hardly surprising that not quite all of the recent immigrants have found instant employment nor that some of the native British workers displaced may still be searching for jobs. These population movements are hardly a sign of deflationary pressure on the economy. Rather the opposite.
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