IMAGINE your task is to fly a plane. Hard enough, you might say. But this plane has no windscreen or forward view, only a rear view. And that rear view is not in pictures but in data.
Data that only reports after the fact and is often later revised. And data that is often contradictory about the path the plane is on.
There is much turbulence in the sky and the passengers are very nervous and shout a lot. The passengers are also commenting on your performance as a pilot almost every moment. There are also some of the cleverest analysts in the world – paid much more than you – criticising and prodding your performance from a sedentary position.
Moreover billions of pounds of money is traded each day on the basis of expectations of how you will do and what you will do. You are a pilot with more than the average bear’s responsibility to bear.
You’ll have to land the plane at some point but only once you are sure you can get through the turbulence.
And there is more: every time you touch the lever it takes between a year to 18 months for the plane to fully react to your nudge. But you are criticised in real time for your decisions taken on the back of data about months and years that have passed. You are criticised when you act and criticised when you don’t. Even worse, you don’t have sole control of the lever but you are one of a committee of nine that decide on whether, when and by how much to nudge that lever.
Seatbelts on and enjoy the flight. Oh, and the catering trolley is bust.
I describe, of course, the task of the Monetary Policy Committee of the Bank of England. They are stewards of the stability of our economy, with stable low inflation the landing strip they must steer towards.
It is no easy task in good times but it is an extraordinarily difficult one in exceptional times such as these. The economy is slowly dragging itself up from its greatest crisis since the Great Depression. It is on unprecedented monetary steroids and we can only guess at what is truly going on in its body. Will it stand robustly on its own feet when they are all withdrawn, or collapse again into torpor and coma?
This is one of the greatest policy responsibilities of the age. It affects the living standards and life chances of us all.
So snigger not at the red faces at the Bank of England as their inability to predict a significant drop in unemployment to 7.1 per cent forces them to abandon their guidance to the market that rates would rise from 0.5 per cent when it reached 7 per cent. The labour market numbers all point to a quickening recovery but its fragility and variable distribution by geography and sector is a grave concern.
Their worry will be that while more people are getting jobs, average productivity – the output each worker produces – remains stubbornly muted having fallen substantially in the financial crisis. It is a core indicator of the underlying strength and competitiveness of the economy.
The Bank had expected it to recover, raising the capacity of the economy to grow. It has not, and the worry is that it has been permanently damaged. This would mean judging inflation risk against longer-term trend growth is even more difficult than it normally is.
And that is just at a “macro” level, looking at the UK economy as a whole. What policy-makers also have to weigh is the reality that many companies and individuals are struggling to cope with debt servicing, with interest rates at historic lows. What the domino effect on the economy will be from their normalising remains unclear. It is potentially so destructive that killing the demon of inflation could thwart nascent growth and send us back into recession again.
The pressure on economic policy-makers in the Bank, the Treasury and across government at all levels is severe. We should understand this and raise the content and tone of the debate about what requires to be done. Bank of England governor Mark Carney comes to Scotland for the first time this week. We should collectively smile and welcome him and put our hand on his back because his task on our behalf is colossal.
I suggest more needs to be done to understand the inequalities of the distribution of growth in the UK and the consequential impact of inevitable one-size-fits-all monetary policy.
I don’t for a minute suggest we shouldn’t have one-size-fits-all-monetary policy. But I firmly believe we have not even entered the foothills of how policy can and should respond to allow the areas of the country being left behind to strengthen.
Old-fashioned regional policy threw money at the problem to little permanent effect. We don’t have public finances flush enough to entertain that solution even if we wanted to.
Part of the answer has to lie in driving more power closer to the people impacted and for the centralised policy hand of Whitehall and Westminster having the courage to let go and experiment and vary it to suit local conditions. Doing nothing and standing still in a storm is no solution.