David V. Blanchflower is a British-American labor economist, and a longtime tenured economics professor at Darthmouth College who served on the Bank of England’s Monetary Policy Committe from 2006 to 2009 where he is said to have made his mark as someone who voted frequently for interest rate cuts well ahead of the other members of the committee. Why? Because he saw rising prices and wages as temporary and wanted to prevent a deeper cutting rates later to avoid economic collapse and prevent dangerously low inflation.
I have always known him as Danny, as everyone does. And yes as someone who tends to prioritize the path for the BOE’s monetary policy more with a focus on the outlook for a weakening labor market and rising rising unemployment as a force that can work against rising inflation forces.
This is why it struck me as significant that when the BOE held its September meeting, and its governor Andrew Bailey both opened the door to another rate cut as the labor market weakened and acknowledged that the inflation rate was on its way to to hit 4%, well above the its 2% target. Danny was also quick to note that this puts the central bank is in a tough spot.
”They have two things that are really pretty strange, or a worrying backdrop,” he waid. “One, they have very high inflation, 3.8% on CPI, which is supposed to be at 2%. And, two, they have wage growth, which is really pretty darn strong, in a way that it hasn't been for a really long time.”
Of course, there is another side to the U.K.’s policy predicament and that’s the fiscal challenges, the government budget issues that will come to the fore in November when the Chancellur of thehe Exchequer Rachel Reeves has to present a budget to Parliament that is sure to include billions of pounds of tax increase to offset higher borrowing costs and expected growth downgrades.
So dive in and hear what Danny has to say as he takes an indepth, and historical look at the challenges facing not only the BOE but central banks around the world who face slowing growth as inflation keeps rising, and budgets that may need austerity when their economies can least afford it.
A tough environment for policy 00:01:46.030
it's a pretty tough one. I mean, the world of uncertainty…You should mention that actually there's all kinds of issues about the data, not least the data on the labour market, where the ONS, as in some sense there is true in the United States, they haven't… they haven't fired the head of the Office of National Statistics, but they did a while ago, and so the… so the head of the Office of National Statistics retired.
A puzzle but labor market is softening 00:02:14.550
So the backdrop of the statistics are a puzzle, but here you have… I think there's pretty good evidence now that the labor market is softening, but they have two things that are really pretty strange, or a worrying backdrop. <1> They have very high inflation, 3.8% on CPI, which is supposed to be at 2%. And, <2> they have wage growth, which is really pretty darn strong, in a way that it hasn't been for a really long time. So there you have the backdrop.
The decision to ‘Hold’ may be misunderstood 00:02:45.890
The decision today is to hold, and people's headline is to say, oh, then they're signaling a rate cut's going to come. But if you read deep into the weeds, they also voted to carry on basically doing quantitative tightening. And there was a vote on the quantitative tightening. And here's the… here's how it's so tough to read. The chief economist voted for more tightening, and the biggest dove… the biggest hawk of them all, Catherine Mann, voted for less. And so you read it, and you think, goodness, only me.
Uncertainty is huge 00:03:22.830
What is going on? I mean, I think, in a sense, that the uncertainty is a big deal, and essentially what they're doing is they're trying to sort of hold water, and worrying that something really horrible Will appear, but the backdrop still is in those folks' minds. 3.8% inflation, but of course, what solves your problem if, hey, if you go into a recession, that's going to pull… that's going to pull your inflation down, but do you want to kind of work on getting that inflation down by causing a recession? And there you are, there's the dilemma that you really don't want.
QE: more of a roll of the dice than science 00:05:06.530
Do you know what I think the answer is? I mean, I was one of the few people in the world who voted for this stuff. I mean, I voted for quantitative easing, and I can tell you, basically, the story, and the story was… We had no idea what units to do. So, what's 50 billion of quantitative easing equivalent to? We had no idea, first of all. Secondly, we had no idea what to buy.
For QT as in QE- there is no program 00:05:56.630
And then the question is, what economics tells you how to do quantitative tightening? So even though there's no model to tell you what to do on quantitative easing, there is no model to tell you what to do on quantitative… it's not like there's a rule book, and it tells you what to do. So they are sort of struggling around in the dark, hoping that the quantitative tightening isn't really going to make the economy make… make… drive it into recession. So I think the answer is there is no real backdrop. Because secretly, they don't know what they're doing. in the sense that they have no idea. For example, you vote for 50 billion pounds a month. Well, why not 30 billion or 70 billion? Where's the economics to tell us?
Monetary policy and one-off shocks 00:08:37.760
This… this inflation shock we've just seen is a once-off, and it will drop out. That's not what happened after COVID, but that's a big… I hope the listeners understand that. So a once-off shock that just rises the price level today, inflation rises, and then in 12 months' time, it drops out of the calculation, and it goes away. So the central banks basically shouldn't respond to that once-off shock, unless it impacts expectations, unless it has all kinds of other effects.
So, in some sense, they're back to where they were after COVID, and they got it wrong. The once-off shock was not a once-off shock. So that's the sort of way to think through this. I know it's complicated for people to understand, but that is actually correct, if you think. Your job is to target inflation two years ahead. It's not to target inflation today, it's to make a policy. It takes a while for that to have an effect, and you should… I always used to think to myself, I'm trying to get inflation to 2% in a year's time. The data that comes in today, it's only relevant if it changed the view that I had a month ago. Does it alter my view about what inflation's going to be in two years?
Unions no longer shield people from inflation inflation shocks 00:12:10.730
<Unions and COLA clauses…>that's what Volcker had to deal with, and Thatcher and others decided, we've got to go after these, for whatever reason, whether you agree with it or you don't, that's why the inflation then was much more embedded than potentially it is today, and maybe you can treat this tariff thing as a once-off shock, as long as it doesn't kind of keep on rebounding. Kind of lots and lots and lots of one-off shocks, because eventually… and that's what happened after COVID. But I hope people understand that really is the reason. And obviously, the question is, do people think a 1% shock to inflation. is worse than a 1% shock to unemployment, then that's a question we're going to think about. And clearly, what's happened in the last couple of years is people clearly did not like the 1% shock to inflation.
New economic advisor can’t help Starmer as BOE can’t come to fiscal rescue economy looks “horrid” …. 00:15:17.410
And they've got to do something. And so the answer is you probably should scrap the fiscal rules. We know that, they have a new… they have a new… Starmer has a new chief economic advisor. No one… in the UK, the British Prime Minister hasn't ever really had a chief economic advisor. Because the Chancellor has done that role. So now what you have is… a chief economic advisor in the… in Downing Street, down the… next door to who used to be the chief… so now you have this conflict going on. This is Manoush, who was… who was… president of Colombia, and is now… so now they… they clearly are aware there's an issue. But there's… there's two now centers of power, because they're both aware that the economics ain't working, the central bank isn't coming to their rescue, the economy's looking horrid, and politically, they are being beaten up by Nigel Farage and the Reform Party. So the politics and the economics now are deeply intruding. What do governments normally do?
A lot we do not know…00:25:42.490
But we, like I was saying about the quantitative tightening and easing, we don't really have a great set of economic plans. We don't really have a set of views about how things are connected together. If you do this, how will this market respond? If you do this, will it move other parts of the curve? What will happen to the exchange rate? Will these be politically unacceptable moves? And if they go wrong, then that puts the whole independence of the institution under threat. So would… would these people be prepared to do that? Would Lisa Cook be prepared to go down that road?
So I think we're in a… we're in a world which is… we've not… economics has failed on this front, we've not prepared ourselves for it, but the central banks themselves didn't do the work. The Fed hasn't done enough of the work, the Bank of England hasn't done enough of the work. And so, my answer to you is, Maybe, but they're flying blind, again. And the best thing, in a way, is to minimize the potential errors you're going to cause. That would be my view, and my view would be, well, unless you really know what you're going to do, and you've really understood it and thought it through, perhaps best not.
Meanwhile…in the US…Miran could learn from Danny’s own mistakes 00:28:11.929
So Stephen Miran was there, didn't hear any of the commentary, didn't have any of the briefings, didn't do anything, and basically voted against everybody else, and so he's made it absolutely clear no one will listen to him, he'll have no impact on the rest of the committee, because he should have kept his irons in the fire, and he shouldn't have… I just think you have to have credibility, you have to be able to persuade your colleagues, and I was… I basically wasn't able to persuade my colleagues enough.
David Graham Blanchflower, CBE (born 2 March 1952), sometimes called Danny Blanchflower,[2][3][4][5] is a British-American labour economist and academic. He is currently a tenured economics professor at Dartmouth College, Hanover, New Hampshire. He is also a research associate at the National Bureau of Economic Research, part-time professor at the University of Glasgow and a Bloomberg TV contributing editor. He was an external member of the Bank of England's interest rate-setting Monetary Policy Committee (MPC) from June 2006 to June 2009.
British-born, Blanchflower is now both a British and an American citizen, having moved to the United States in 1989. He was appointed Commander of the Order of the British Empire (CBE) in the 2009 Birthday Honours.[6]
Education
Blanchflower attended Varndean Grammar School for Boys in Brighton and Cantonian High School in Cardiff. He went on to earn a B.A. in Social Sciences (Economics) at the University of Leicester in 1973 and a Postgraduate Certificate in Education at the University of Birmingham in 1975. He received an MSc (Economics) at the University of Wales in 1981 and his PhD in 1985 at Queen Mary, University of London.
Work in economics
Blanchflower served as a Research Officer at the Institute for Employment Research at University of Warwick from 1984 to 1986, when he became a lecturer at the Department of Economics at the University of Surrey, a post he held until 1989 when he moved to the United States.
He has been a member of the editorial board of Small Business Economics, Scottish Journal of Political Economy, and Industrial and Labor Relations Review.
He has also been a research associate at the Centre for Economic Performance at the London School of Economics and at the Canadian International Labour Network.[7]
The Wage Curve
Blanchflower's The Wage Curve (with Andrew Oswald), with eight years of data from 4 million people in 16 countries, argued that the wage curve, which plots wages against unemployment, is negatively sloping, reversing generations of macroeconomic theory. "The Phillips Curve is wrong, it's as fundamental as that," said Blanchflower.[8] The Guardian praised the findings as "one of the most devastating findings of contemporary economics".[9] The implications, that wages are highest when unemployment is lowest and that increased unemployment drives down wages, have been suggested periodically in economics since the publication of Karl Marx's Wage-Labour and Capital.
Happiness
Much of Blanchflower's work has focused on the economics of happiness.[10] He has posited a correlation between age and happiness, declining through the 20s, 30s, and 40s before increasing in retirement.[11] He has been labelled a "happiness guru" for his ability to quantify the increase in happiness for individuals who are married or have sex frequently, work which has applications in divorce law and pharmaceutical advertising.[12]
Monetary Policy Committee
Blanchflower joined the Bank of England's Monetary Policy Committee in June 2006, replacing Stephen Nickell.[16] Before his appointment, Michael Fallon questioned his non-residency at the parliamentary Select committee on Treasury.[17] Blanchflower attended a number of meetings by conference call.[18] During his tenure, he voted in the minority in eighteen of thirty six meetings. He voted to maintain the interest rate in his first nine meetings, but to reduce interest rates in March 2007 and in every meeting from October 2007 through March 2009.[19]
Six other members of the MPC have served during Blanchflower's time on the MPC. Blanchflower continually voted for rate cuts.[19] At the September 2008 MPC meeting, Blanchflower distanced himself further from consensus by voting for a 0.5% 'cut' against the other eight members' 'hold'.[20]
In the Autumn of 2008, the worldwide economic situation began to deteriorate dramatically, most clearly evidenced by dramatic falls in the values of shares worldwide. On 8 October 2008, the BOE took part in a set of simultaneously announced cuts in the policy rate of a number of major Central Banks. The MPC eventually came around to Blanchflower's view and subsequently lowered rates to levels never before seen in the Bank of England's existence and moved to do unprecedented levels of quantitative easing.
In March 2009, it was announced that Blanchflower would be replaced by David Miles at the end of his term, 31 May 2009.[1]
Current work
David Blanchflower is the Bruce V Rauner professor of economics at Dartmouth College, New Hampshire, part-time professor at the University of Stirling, a research associate at the National Bureau of Economic Research, and a contributing editor for Bloomberg TV.[21] On 27 September 2015, it was announced that he had been appointed to the British Labour Party's Economic Advisory Committee, convened by the then Shadow Chancellor John McDonnell and reporting to the then Labour Party Leader Jeremy Corbyn,[22] for whom he is undertaking an independent review of the Bank of England, although he has stated that he is not a Corbyn supporter and has never spoken to him.[23] Blanchflower quit the panel and said he would also wind up his review of the role of the Bank of England on 28 June 2016 following the mass resignations of the Shadow Cabinet, joining them in calling for Corbyn to step down.
