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David Blanchflower, the man who knew too much

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Goodhart’s Law states that if you rely on a single measure to set economic policy, it will mislead you. Charles Goodhart coined it in 1975 when he was senior adviser to the Bank of England it was targetting growth in the money supply. It’s taken longer for the law to apply to the Bank’s targetting of inflation through interest rates set by the Monetary Policy Committee, but it’s arrived now.

The MPC’s brief is simple; the committee must set Bank Rate at a level to keep inflation, measured by the Consumer Price Index, as close to 2 percent as it can. The acceptable range is one per cent either side. By and large, helped by a decade when the cost of goods was constantly falling, it had managed to do what it’s supposed to do. Today’s decision to leave Bank Rate at the nominal level fof 0.5 percent reinforces the expectation that the CPI will stay inside its range.

Unfortunately, it’s all gone horribly wrong, and David Blanchflower, who served for three years until May 2009, is savage in his criticism of his fellow-members. Writing in the New Statesman, he accuses them of being victims of  “group think”, under “the old iron fist” of Mervyn King, the governor of the Bank of England. Starting in October 2007, Blanchflower voted for lower interest rates every month until Bank Rate finally hit 0.5 percent in March this year. He was frequently alone.

With hindsight, he has every right to his told-you-so, but it’s worth recalling how different conditions were two years ago.  When he first voted for a cut, the CPI was just over the 2 percent target, and clearly headed upwards. Experience of previous inflationary surges in the UK economy suggested (at least) that if the genie of expectations gets out of the bottle, putting it back is a long and painful process, and the MPC’s projections looked ominous.

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