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Bank of England ignored alarm bells

Tim Congdon was a member of the Treasury Panel of Independent Forecasters (the so-called wise men) which advised the last Conservative government between 1992 and 1997. He writes

“In evidence to the House of Commons in February last year I warned that by the spring of 2008 the Bank of England would be “in quite serious trouble… Why was I so worried in early 2007? And what had the Bank of England got wrong “since mid-2004″? The answer is that from mid-2004 to early 2007 the Bank of England had allowed too rapid growth of the quantity of money. In the balanced and stable Nice years — that is, the decade to 2004 — the growth rate of the M4 money measure averaged slightly more than 7.5% a year. But in the three years from mid-2004 this figure jumped to over 12%.”
Read the full Sunday Times article

It is easy to be wise after the event. A tightening of the money supply in 2004  – for example, by raising taxes and interest rates – would have hit the economy outside the prosperous parts of Britain, mostly in London and the South East.

The policy that was actually followed kept the economy across the country as a whole in better shape but fed the housing land price boom. There is no one fiscal policy that is right for the whole country.

The real weakness is that the goverment has left itself with just one mechanism for regulating the economy – interest rates. Of course, in reality, the goverment’s tax and spending policies can also have a stimulatory or dampening effect. But there is something wrong with the entire way that the economy is conceived. Economists and politicians work primarily on the basis of statistics. But statistics can and often do aggregate that which should not be aggregated. An example is the difference in productivity in different regions. The figures are normally collected and set out in a table, perhaps in alphabetical order. Such a presentation reveals little. If, however, they are overlaid on a map, then a pattern emerges which shows that productivity tends to be lower away from centres of population. No doubt if the information were more fine-grained and presented in a geographical way, more would be revealed, such as the disadvantages of poor local infrastructure. But this is a different discipline – we have moved out from the economics department and into the geography department. This is one part of the problem of understanding what is happening in the economy – it is a multidimensional entity that cannot be captured entirely by the methods of a single discipline.

Modern economics could nevertheless do much better. Ricardo’s Law, for instance, is an expression of the spatial dimension of economics, and the nineteenth century economist Henry George went further in providing economic theory with its essential geographical component. It is from this geographic dimension of economic theory that the concept of land value taxation emerges as a logical conclusion. Land value taxation is a powerful economic tool which allows government to address the problems of poor location without causing property booms in the better placed parts of the country. But it does not fit well into the structure of modern economics theory.