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

Voting history

Autumn Statement & Charter for Budgetary Responsibility

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Question 1: The Chancellor forecasts a cyclically adjusted fiscal surplus by 2017-18 and in cash terms by 2019-20. Do you agree that this planned path of fiscal consolidation is appropriate?

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Answer:
Strongly Agree
Confidence level:
Extremely confident
Comment:
So far the UK has taken about six years to eliminate 60% of its original deficit in 2009-10. This slow and deliberate elimination was wise, given the extreme disruption to the UK economy and is to be contrasted with the mistaken and dangerously fast elimination in southern euro-zone countries due to the faults in the euro construction. However the world is now moving towards a normalisation of interest rates and there will also be a continuation of global recovery which will strengthen the rise in real rates. The cost of servicing public debt will sharply increase; no longer will the government be able to enjoy the financial repression we have seen to date. Furthermore there will be a resumption of much stronger credit growth as banks both regain their confidence and governments retreat from the draconian and mistaken bank regulations post-crisis; this resumption will compel the liquidation of the massive QE programme which has landed central banks with large quantities of government debt (about a third in the UK). In summary markets will be moving against government debt in the coming half decade- yields will be rising, possibly sharply. UK government debt is set to peak at just over 80% of GDP, It makes sense to bring it down towards around 50% or less in the next decade or so. Getting back to a surplus makes sense for this period as it will bring debt down quite rapidly as a share of GDP, and away from the danger zone above 60% where crises would be hard to manage..

China’s growth slowdown: likely persistence and effects

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Question 2:

Do you agree that if the Chinese slowdown turns out to be persistent, it will have a significant impact on UK growth (say, in the order of a few tenths of a percentage point) and/or it will justify a material change in monetary policy (for example, in terms of the timing and speed of a return to ‘normal’ interest rates) and fiscal policy (for example, in terms of the timing and speed of fiscal contraction).

Answer:
Strongly Disagree
Confidence level:
Very confident
Comment:
China has of course been a major contributor to world growth over the last decade and even now is a material contributor. However it is wrong to view the world economy in terms of country 'growth drivers' (locomotives). The world has a 'supply side' or a 'natural rate' of output and growth. In the noughties world growth was exceptionally fast (close to 5% for much of the time) up to the crisis and the crisis itself was closely related to the disappearance of the world output gap, indeed very likely it went strongly negative, with manic demands for raw materials and consequent massive price spikes in these. I strongly welcome the more moderate growth rates that now are occurring, because they are generating a more normal output gap worldwide. There probably is a world positive output gap currently but through improving growth in the western world it is being eliminated. If China slows more than being forecast, then the loss of demand will be replaced by increased demand elsewhere. Will this require more stimulative monetary or fiscal policies? Possibly but there is no need yet. The low raw material prices of today are providing a large stimulus through a terms of trade transfer to western consumers and accompanying incentives for western businesses to invest. Meanwhile the zero interest rate policies and heavy-handed bank regulation are indirectly creating financial repression, subsidising governments and large corporates at the expense of savers and small firms. 'Normalising' interest rates and reliberalising bank regulation is needed for micro reasons, to eliminate these distortions.

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Question 1:

Do you agree that the Chinese economy is likely (say more than 50% probability) to maintain in the medium term (say, for at least ten years) a rate of annual growth exceeding 6%.

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Answer:
Agree
Confidence level:
Not confident
Comment:
There is substantial uncertainty about this forecast because the Chinese leadership under Xi Jingping is attempting simultaneously to do a lot of things: liberalise markets, constrain regional authorities from investing in their local champions, stop corruption, prevent rebellion by general detentions, stop a banking collapse while also enforcing tough budget constraints on borrowers, promote an aggressive foreign policy but remain a good member of the WTO, and so on. This multi-dimensional balancing act is risky and while Chinese politicians command respect - if not love- because of their past ability to coordinate action in China through the Party, they are in the end just politicians and could fall from the sky. The main factor creating belief in the forecast is that the Chinese will rally around because they fear disorder more than injustice and incompetence. China has, as Coase's recent book and work by Lardy has shown, become a decentralised economy driven by the usual capitalist private sector forces. It has shown huge powers of adaptation towards a viable capitalist structure. Therefore it will probably adapt into an innovation-driven modern economy.

ECB's quantitative easing

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Question 2:

Do you agree that the structure of the ECB's QE programme makes the Eurozone more fragile and increases the risk of one country leaving the euro?

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Answer:
Disagree
Confidence level:
Confident
Comment:
Comparisons with the US get us nowhere. The euro is a creation totally dependent on the commitment of the participating governments. Its 'fragility' consists purely in that. The dollar does not suffer from this because the US is one country. As I argued above on Q1 all this talk of who has the credit risk is arcane; if a country leaves the euro and goes bankrupt, other countries will wind up with large unpaid debts, thus inevitably the risks of the enterprise- whether OMT, Target-2 balances or QE- are shared. However the curious thing about the euro is that it has been given overriding priority by participating governments in spite of the economic disasters it has provoked. The criticisms of it that were widely made by sceptical economists have turned out to be totally and tragically accurate. Yet still it ploughs on. As long as politicians do not deviate from this priority, it will remain and avoid its fragility. Only if a new generation of politicians should somehow come on the scene and rethink this commitment, would the structure die. One can look at it this way: the euro is not fragile and the ECB policies not at risk provided euro politicians remain quite irrationally attached to its existence. There is no sign of any end to this irrationality.

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Question 1:

Do you agree that the design of the ECB's QE programme reduces its effectiveness? 

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Answer:
Disagree
Confidence level:
Confident
Comment:
This argument about credit risk neglects political commitment. Under M. Draghi the ECB has committed itself to keeping down the yields of government bonds via 'OMT'. Furthermore politicians of all relevant countries have shown clear aversion to leaving the euro- even in countries most likely to, such as Greece. It is true that a country could go bankrupt within the euro and if so its government bonds held by its national central bank would be worthless; yet we are also to believe that the ECB is made up of its national central banks (there is nothing else after all) and so this means the ECB loses some of its capital, thus effectively sharing the risk. Since even the most hopeless euro-zone countries, notably Greece, have not been allowed to go bankrupt, this seems an arcane consideration. In fact the whole notion that credit risk in buying national government bonds is *not* shared by the ECB seems far-fetched. As has been widely noted, the ECB has extended a mass of credit to private banks in particular countries, using facilities from other member countries' central banks- the Target-2 balances. Yet the credit risk associated with this is shared as long as all countries continue in the euro. So under the proviso of commitment to continuation of the euro and the avoidance of threatening country bankruptcy or departures from the euro, there is no problem with the QE programme's effectiveness. I interpret the total unwillingness to allow departures in this sense; once countries leave, the commitment here unravels and ECB policy is undermined from many directions. Thus credit risk attaches to national central banks, the OMT programme comes under pressure as governments become risky again, and the ECB's viability itself comes into question. The truth is that the ECB is the sole euro-zone governmental institution. Its power to govern- stimulate money and activity- depends on the assent of the national governments. If that commitment went, the ECB could not fulfil its functions. But as long as it stays the ECB's wrigglings to satisfy reluctant participants are just seen as effective manoeuvres to get QE done.

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