by Drew J Jones
Thu Nov 10th, 2005 at 05:59:04 PM EST
Chancellor of the Exchequor Gordon Brown, that son of a bitch, is going to leave me picking my intellectual teeth up off the ground. I just know it. I've criticized his deficit spending in recent months, citing it as unnecessary, since the Bank of England (BoE) is plenty capable of dealing with stimulus through monetary policy.
(All charts on the UK economy can be found at the BBC's site, here.)
But, right under our noses, Labour and the Bank of England may have pulled off what we in America failed to do: Stop the housing bubble by raising interest rates, without killing the economy.
In February of 2003, housing prices in Britain were rising at a rate of 26% per year. So, being good little inflation-targeters, the newly-independent BoE began raising interest rates to stop it. Prices are now rising at less than 10% per year, and, when you consider the inflation rate and the strong rise in wages every year (thanks, in part, to very low unemployment), this is actually very mild.
Interest rates in Britain are now at 4.75% -- pretty high by American standards. But the Treasury is projecting growth to pick up to 3.5% for 2005 and roughly 3% for 2006 (see charts), which are okay numbers for America and very strong for Britain. (Some of that difference in performance is due to the fact that Britain's population growth rate is about one percentage point slower than ours, I think.) How the hell are they pulling this off?
Here's what I think may be happening: Since the BoE stopped the bubble by boosting rates, Brown recognized that this could shock the economy, a la the Volcker Contraction in a less-severe form. (Remember, the Brits were recovering from the dot-dom bubble, too, though they weathered it much easier, as the unemployment and GDP growth charts above show. The unemployment rate never exceeded 5.3%.) Had rates stayed low, the increased money supply would've simply gone into the housing bubble. That's what happened here in the US, as bonddad, from Daily Kos, has pointed out consistently, along with, I believe, some diaries by Jerome. So, when the BoE began raising rates, Brown began running deficits by starting programs to boost output and keep unemployment low. And it looks to me like it worked, and, as the economy picks up, with housing prices under control, the deficit will gradually be reduced. The BBC points out that job vacancies are increasing dramatically, and unemployment claims are at 30-year lows.
In other words, Brown shifted the money-supply increases around, and away from, the housing bubble.
We'll see if he was right. And, if that is indeed what is happening, Gordon Brown is brilliant, and Alan Greenspan needs to give his PhD back.
Update: I should probably add the important fact that Brown did have to downgrade his forecasts for growth this year to 2.0-2.5%. (Still not horrible.) But I don't buy The Ernst & Young Item Club's pessimistic projections for years to come.