| Editorial |
| “A trend is a trend is a trend...” Your editor is
unsure who originated this econometrician’s parody of Gertrude Stein but
in all three articles in this issue ‘trend’ plays a central role in
their analyses of the state of the economy, its consequences, prospects
and lessons for policy. Of course identifying a trend is a powerful
analytical tool, but perhaps we should be mindful of the next line of
the verse: “the question is will it bend?” It is the outcomes that
define the trend, not the other way round. |
| Our first article, “Spare a Thought for Spare
Capacity”, by George Buckley is the winning entry for this year’s
Rybzynski Prize. Noting that changes to monetary policy will primarily
reflect the prospects for inflation and that the prevailing view assigns
a key role in the inflation process to spare capacity, Buckley subjects
the concept to a searching examination. It is, he says, “essentially
unobservable” and, while not ignoring surveys and unemployment data as
proxies, he focuses on the ‘output gap’ – that is the deviation of
actual output from its trend – as the most widely used measure. He finds
it must be used with care. There is no unique measure of trend, and the
choice can make a significant difference to the gap. Moreover, in the
short term, capacity may be affected by other supply constraints and not
well represented by longer trends. Further, the relationship between
spare capacity and inflation has been weakening. He concludes that
monetary policy will be more difficult, requiring sharper interest rate
adjustments but with less certain signposts. |
| Colin Ellis, whose article “How has the Recession
Changed all our Futures?” was one of those short-listed for the
Rybzcynski Prize (and we shall try to find space in future issues for
others of the short-listed entries which all have much of interest to
offer), makes the gloomy suggestion that UK’s recovery from recession,
while seeing output growing at a similar rate to past trends, seems to
be insufficiently robust to return the level of output to where it might
have been on pre-crisis trends. He goes on to examine the implications
for a range of economic activities of a permanently lower national
income than might have been enjoyed. While his finding that there would
be significantly adverse effects – except for a possible improvement in
the balance of trade – may be unsurprising the analysis is
thought-provoking. And yet one cannot help feeling that his last words
are his truest: that it will happen “probably without most people even
realising.” For we do not, except when dreaming of what we would do if
we won the lottery, measure our situation against what might have been.
If incomes grow only in line with past trends, their level will
eventually be higher than before the crisis and we shall be better off
than we were then. |
| Whether we are going the right way about securing
that recovery is the question posed by Norman Record in his article,
“Recovering from Recession”. He is deeply sceptical that the
government’s plans for fiscal retrenchment will promote recovery,
arguing that they are both more draconian than in most other countries
and that they take too little account of the size of the output gap that
has opened as output fell below trend. He is concerned that the
multiplier effect on the government’s spending cuts will outweigh any
private sector growth and that, in turn, slower growth will largely
offset the retrenchment and government debt will be little less than if
the cuts had not been made – but we will all be worse off. Better, he
suggests, to cancel the Chancellor’s debt-reducing measures. Well and
good, but we should surely think carefully about proposals just to go on
spending for a country that has been living on tick for 27 years; much
of the multiplication might be overseas rather than at home. |
| Echoes of this preoccupation with macroeconomic woes
are heard in Speakers corner, with reports of Geoffrey Dick’s talk about
his experiences in the setting up of the Office for Budget
Responsibility and of the discussion between Danny Gabay and Pam Davies
of inflation prospects. There was a more optimistic note struck in the
report of David Gann’s masterclass on innovation in the service sector,
but echoes of woe again in our Book Reviews many of which are of books
that Ian Harwood, in his review, describes as the “new variety of
‘whodunnit’ literature... dissecting what went wrong and who was to
blame...” for those economic woes. But there are reviews of interesting
books on the teaching of economics, the making of boards and the history
of the Bank of England. |
Jim Hirst
Editor |
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