If Only

The Bank of England has for a long time been hanging policy on one economic indicator and hoping for the best

Counterpoints Economy

The latest in if-only economics comes from Japan. The central bank’s new governor, Haruhiki Kuroda, plans to print more yen until the rate of inflation reaches 2 per cent — on its way up, that is. There, with any luck, it will meet our own rate of inflation, coming down. Then we can all relax.

It is to Sir Kit McMahon, who was deputy governor of the Bank of England, that we owe the concept of if-only economics. This consisted (he said) of picking one economic indicator and hanging policy on it like a hat-peg, or using it as a target, in the belief that if only we could hit it, everything would be all right. If only.

Not for a long time has the Bank hit the target Gordon Brown set for it: inflation at 2 per cent, as measured by an index of his own choosing. A series of boilerplate letters from the governor — the last one was in February — purport to explain why the target was missed. These letters cannot quite say that, with the economy in its present state, something had to give, and this was it.

We have had quite a run of if-only targets: first for the money supply (Sir Kit was a sceptic) and then for the pound — if only we could join the European exchange rate mechanism. Moral: be careful what you wish for. Inflation targeting seemed to work better, thanks to cheap Chinese imports and an index that excluded housing. So house prices could and did rocket, but that did not count as inflation.

Now the illusions have worn off and the search is on for a target that the Bank can hit. Perhaps this one can be tweaked — or perhaps everything will be all right when Mark Carney, the new governor from Canada, takes over in July. Even so, Charles Goodhart may take some persuading. He is the sage who laid down, a generation ago, that if you hitch policy to a single indicator, it will cease to tell you the truth. Goodhart’s Law has been borne out by events.

Alan Greenspan at the US Federal Reserve once suggested another approach to inflation. People, he said, should not need to take it into account in making their decisions. That ambition proved elusive, but at least he did not claim that it was an if-only.