Patrick Minford's picture
Affiliation: 
Cardiff Business School
Credentials: 
Professor of economics

Voting history

Euro Area Deflation and Risk for UK Economy May 2014

Question 2

Do you agree that a deflation in the Euro area (as defined in Question 1) would pose a considerable risk to the UK recovery?

Answer:
Disagree
Confidence level:
Confident
Comment:
If the euro-zone were to experience deflation the Japanese experience suggests that this becomes embedded in the economy in the form of very low long term interest rates and a high demand for money, together with an appreciating exchange rate. Low growth in Japan has its origin in a weak 'supply side'. Having exited from a long period of fast growth in manufacturing, Japan has found it difficult to liberalise its service and agricultural sectors. 'Deflation' has been blamed for Japan's low growth but the evidence for this is hard to find; the evidence of low productivity growth is plain however. If the euro-zone entered deflation I would expect similar behaviour to Japan (interest rates would be low, the exchange rate strong); but low growth in the zone would only occur if systematically low productivity growth policies were adopted. This would be a worrying prospect; but it is a separate issue from deflation. It is often forgotten that under long periods during the gold standard growth was robust.

Question 1

Do you agree that there is a significant risk of a sustained deflation across the Euro Area in the coming two years?

Answer:
Disagree
Confidence level:
Confident
Comment:
Sustained deflation is highly unlikely because of the robustness of inflation expectations. We have learnt from wide experience of western countries with accepted inflation targets that these have enormous credibility and lead to a considerable stabilising of actual inflation around these targets. This was tested recently by the Bank of England's decision to let inflation in the UK diverge for a few years markedly upwards from the target. In the euro-zone the ECB has a widely understood and accepted target and has suggested that it would take unspecified measures to ensure that the target is hit in the medium term. These measures could include Quantitative Easing as in the US and UK; but other easing measures are available including paying lower or even negative interest on bank balances.

Prospects for Economic Growth in the UK April 2014

Question 2

Do you agree that, in the wake of the financial crisis, any downward adjustment to the expected average annual long-term growth rate of the UK economy is likely to be by less than 0.25 percentage points?

Answer:
Agree
Confidence level:
Confident
Comment:
In line with my previous answer about the output gap, I think the long term growth rate can be maintained at the previous recent (fairly solid) rate provided that policy is altered in a liberal market direction. The reaction to the crisis has been in the form of a 'regulative backlash' which has had highly damaging effects, especially visible in the collapse of lending to the vital SME sector. The reaction has overlapped with a general associated movement to regulation in other areas, especially energy. As usual this is also related to EU initiatives; thus EU policy too needs to move in a liberal reform direction. My assessment is that this is likely.

Question 1

The long period of slow or negative growth might imply that there is a substantial output gap in the UK economy.  Do you agree that there is currently a larger output gap than the OBR estimate to the extent that the shortfall in output relative to capacity is 3% or greater?  

Answer:
Strongly Disagree
Confidence level:
Confident
Comment:
The situation is complex. The crisis has generated genuine reductions in 'capacity' ie ability to produce with available capital stock, labour supply willing to work and current technology. Thus simple 'demand stimulus' would be largely ineffective. Thus OBS-style output gap measures seem about right, reflecting mainly ease of employing more labour. However, policy is capable of restoring much capacity/productivity growth so that in the longer term the growth rate could be higher for a long period to come. Such policy includes cutting back aspects of the new bank regulative system that is both too burdensome on small banks, and weighted heavily against lending to SMEs; restoring competition in energy and cutting back misdirected renewable subsidies and associated taxes/regulation; other general supply-side reforms of a standard pro-business type.

Responsible long-term fiscal policy (pilot survey)

Second question:

To help ensure that advanced country governments pursue responsible fiscal policies, countries should adopt formal rules for limiting structural deficits, which are supported by primary legislation or constitutional reform.

Answer:
Disagree
Confidence level:
Confident
Comment:
Budget deficits are needed in times of emergency. Yet commitment to responsible fiscal behaviour (ie at present to getting debt down again as % of GDP) is also necessary. Constitutional rules will simply obstruct the former while not adding to commitment; indeed their necessary breaking would create noise. I prefer the current experiment with a 'Fiscal Advisory Authority in the UK ('Office of Budget Responsibility'). Here commitment is maintained via the need to demonstrate soundness; but ability to respond to events is preserved.

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