The wild euphoria attending the appointment of Mark Carney as the new Governor of the Bank of England will soon be put to the test. In principle his ‘big idea’ of targeting nominal gross domestic product (i.e. real growth on top of inflation rather than inflation alone) is good insofar as it gets away from the inflation fetish which has dogged monetary policy for the last 30 years and introduces, at long last, a focus on growth. Something similar is happening in the US where Ben Bernanke, president of the Fed, has announced that he will keep interest rates at rock-bottom levels till unemployment falls to at least 6.5% ( it is currently 7.9%). The converse problem however is that keeping the cost of borrowing low for a prolonged period strongly incentivises the markets into another round of excessive risk-taking, precisely what happened in the dot com, credit and mortgage bubbles of the 2000s.
But the real scepticism over the Carney policy must be about exactly how the growth is intended to be generated. It cannot be said strongly enough that the fundamental problem with the British economy over the last two years has been a lack of aggregate demand. When interest rates are on the floor and FTSE-100 companies are sitting on unused cash surpluses of £0.8 trillion, the problem is not on the supply side – complaints about planning requirements or red tape are utterly marginal to the main issue. Yet, astonishingly, the official agenda remains fixated on tweaking monetary policy whilst continuing to neglect the management of demand. How Carney believes he can inject a new concern for jobs and growth when Osborne is still dedicated to intensifying fiscal austerity even when local authority leaders are now as reported today warning about social unrest and riots in the streets in 2013, remains a mystery.
If Carney is really serious about his nominal GDP idea, the really big confrontation in this next year will be whether he can modify the so far unbending rigidity of Coalition economic policy in denying any direct role to the public sector in reinvigorating the economy. The obvious policy, which the markets would unquestionably welcome, would be the steady rolling out of a major programme of public investment in infrastructure, housebuilding, energy and transport, and laying the foundations of the coming green economy. The catch is, the private sector won’t do it because in a flat or contracting economy there’s no prospect of profit in it. The question is, against the background of a rapidly deteriorating political and economic situation, will Carney be able to muster the political influence to circumvent Osborne’s dogma and even perhaps save his face in the event of a U-turn?