That is the sort of question that has really annoyed me in the past, but I think the way the Resolution Foundation puts it in their important new report, it may be the question to ask.
If you don’t have the time for a 77 page report on such a sunny day, Gavin’s NS blog captures the gist of it. He says that the absolute aggregate numbers are not necessarily scary, and I agree. While he talks about how a gentle increase in house prices will help deal with the higher debt levels, I would say it is also a gentle increase in incomes that should do so. In aggregate.
The reason the question has annoyed me* in the past is that whoever decides the level of demand in the economy presumably factors debt interest in. They have a model, and that model will have all the various actors who lose or gain from changes in rates. What matters is what they are targeting. If it equates roughly to 4.5-5% NGDP growth (or nominal income growth if you like), then they will only be reducing the monetary stimulus if they think this is consistent with that continuing level.
Suppose a car is determined to stick at 50mph over a hilly road (see Nick Rowe’s post); the question in this blog post would be the logical equivalent of saying “I am not sure whether you can ease off the accelerator right now”. If the driver is competent, you are not worrying about that. All you need to know is what speed he is aiming for.
So when Carney says (it’s in the FT today):
“History shows that the British people do everything they can to pay their mortgages,” Mr Carney said. “That means cutting back deeply on expenditures when the unexpected happens. If a lot of people are highly indebted, that could tip the economy into recession.”
Well, that would mean Carney has failed in his job; if he has tightened policy, forced spending down, and then watched as RGDP growth fell below zero, that would be like the driver failing utterly to see that what looked like a downhill stretch was in fact uphill. What he is saying (as the article clarifies) is that the economy is right now very sensitive to rates; they are not quite sure what the delta on this change would be.
But the reason I don’t find this irritating is that the RF has found that the problem is distributional. There is a risk that whatever rule the MPC is following will cause it to tighten policy and hurt really vulnerable people stranded on variable rate mortgages, and that this will be perfectly consistent with them hitting their target. You would normally at this point expect me to start ranting about how the Bank is targeting the wrong thing. Well, they might be, but what the Resolution Foundation has shown is that this would even happen under a perfect monetary regime.
If it were credibly aiming for NGDP growth of 6%, you might expect earlier rate movements if the market fully believed it (if you doubt this, imagine a 100% NGDP growth target). But given the way some pockets of the economy don’t see their incomes respond so quickly to economic good times – these are the people the RF are set up to help – you could still see really bad pockets of distress.
This has happened before, I am sure, in the 1990s, when money did ease up a lot after Sep 1992, but the distress went on and on.
We will have a very differently shaped recovery, but the Resolution Foundation has found that it might produce serious pockets of unhappiness. Insolvencies and repossessions can rise in a recovery.
As they identify, the solution is not necessarily with the Bank – although they have suggestions for how to improve its model. The answer instead for distributional issues lies in their fiscal/regulatory ideas. I like “help not to be repossessed”. Help to Buy is the biggest fiscal stimulus this Government attempted – funny that they don’t describe it as such. And I can see the case for the state to get heavy handed in regulating the banks to be reasonable here.
But there are no easy answers. Recoveries can have as many victims as recessions.
*(Obviously, I also find seeing things through the point of view of low rates stimulating the economy irritating too: I doubt very much you can find much strong data suggesting the corporate Britain starts investing like crazy when rates are low: eeerr, look at 2012. And look at the investment booms in 1988 and at other times. I also doubt that low rates correlate well with consumer booms. Look at the 1980s again. Booming money growth, high rates, consumer boom …)