Obviously that is a cheap shot. Central bank governors have to explain themselves. Their decisions include an assessment of what the government is likely to do. So it is inevitable that they will be caught saying dangerous things about tax and spend. But should it include saying what the government should do? In a world of QE, with the Bank owning 25% of the debt, what Mervyn says, goes.
To get out of this mess, we may need more explicit coordination of fiscal and monetary policy. An economist called Eggertsson aparently claims that this working-together is what changed expectations at the end of the Great Depresssion.* But Mervyn King opining on fiscal unsustainability is not what they mean. It means mixing the two policies together so that people know that nominal growth is going to rise, because between the state using it and the Bank printing it, they can make it happen.
Robert Frank in the US is urging for more fiscal policy, laughing off the idea that our grandchildren will be cross.
None of David Smith’s Shadow MPC would agree with this recipe – which does not stop the SMPC being essential monthly reading. In fact, much of the SMPC would not agree with each other. Comparing Congdon’s monetarism with that of Lilico or Minford is a real lesson; both in varied theory and in how economics has been scattered by this crisis. Lilico thinks we have a boom in prospect even larger than the Bank is predicting:
I believe policy-makers should simply accept that there will be inflation in 2011/2 on a scale the UK has not seen for at least twenty years, and perhaps thirty. That is not to say that RPI inflation in double digits will be desirable (a position urged by some commentators). It is that what we would have to do to avoid it would create such danger of worsening deflation, in a highly-leveraged economy in which high deflation would be disastrous, that we should not try. Aim off in the inflationary direction. That’s all there is to do.
whereas others (Pepper) are worried about asset booms, and yet others believe we are stuck and need far more stimulus. Some think money has made all the difference, some that it makes no difference at all. Descriptive analysis is far apart – normative even more so.
*American Economic Review 2008, “Great Expectations and the end of the Depression”, here. Not read it, yet.