Chasing inflationary ghosts?

Andrew Sentance, of what his former Monetary Policy Committee colleague Danny Blanchflower rather cruelly referred to as the ‘feeble six’ of MPC members, appears to have learned very little from the last 18 months:

A Bank of England policy maker has said that Threadneedle Street has done enough to lift Britain out of its deepest post-war slump and will need to consider raising interest rates this year if a recovering economy poses a threat to inflation.

…he warned that while the early stages of the recovery would feel “fragile and uncertain”, the MPC needed to be vigilant about the risks of igniting inflation.

“There will be quite a lot of spare capacity and slack to take up [as the economy recovers] but that is not the only influence on inflation. There are global influences such as oil and commodity prices and the impact of the exchange rate which can lead to speed limits for the rate of growth. The inflation outlook is not entirely driven by the level of the output gap.”

Formally, he is correct: the ‘inflation outlook’ is not entirely driven by the amount of spare capacity in the economy. It can be imported through a falling value of the pound, pushing up the price of imports. Or it could come in through rising prices of raw materials, like gas, oil and steel.

This is all true. But it severely understates three factors: first, the truly colossal, global scale of the deflationary pressures unleashed by the credit crunch. The losses for the banks were so huge that, even with the eye-watering dimensions of the government bailouts offered, they couldn’t have anything other than a major depressive effect on the economy. It is simply too optimistic to assume that this drag on the economy has now been overcome; banks are still essentially sitting on their bailouts, with US lending depressed and liable to choke off further in the UK.

Second, whilst there has been much hurrahing of late about an improvement in UK manufacturing orders from their depressed level, and some return, in some places, to growth in the housing market, the services sector – accounting for over 80 per cent of UK employment – remains depressed. The picture, at best, is too murky to make chirpy pronouncements like Sentance’s.

Third, and perhaps most fundamentally, the characteristic monetary feature of the last decade has been – away from asset prices, like the housing market, and some raw materials – not inflationary pressures on economies, but deflationary, as a transport and communications costs slumped, and the price of manufactured goods crashed through the floor. Central bankers, like Sentance, have persistently underestimated this, chasing inflationary chimeras – until, as in Sentance’s case, the debacle was upon them.

Inflation may yet return: we are in uncharted economic waters; the twin effects (amongst others) of quantitative easing and the appearance of China as an economic superpower are deeply uncertain. But a rerun of the bad old days, of central banks paranoiacally lurching after the ghosts of past inflation, will do little to help.

‘Chris Harman: a life in struggle’

Ian Birchall has penned a tribute to Chris Harman, longstanding editor of Socialist Worker and, latterly, International Socialism Journal, who died late last year. Here’s a sample:

Just after his remarkable appearance before a committee of the US Senate in 2005, George Galloway addressed a packed rally in the Friends Meeting House in London where he was, quite justifiably, greeted with enormous enthusiasm. In the course of his account Galloway mentioned that while waiting to appear he had smoked a Cuban cigar. This produced a spontaneous wave of applause. I felt no obligation to endorse Fidel Castro’s export trade; glancing around the hall I saw that Chris too was sitting with his hands calmly folded. A principled gesture or a reversion to the sectarian habits of our 1960s youth?

Revolutionaries have a double duty: to encourage the maximum possible unity in struggle and to seek the greatest possible clarity in understanding the situation. Did Chris always achieve the correct balance? Perhaps not. But he had absolutely nothing in common with those whose only response to new initiatives is to stand back and predict failure—the ultimate soft option. Right up to his death Chris remained an indispensable figure in the SWP leadership.

(Birchall’s forthcoming biography of Tony Cliff is awaited with bated breath.) Largely as a result of Harman’s untimely death, I’d gone back to have a read of his excellent 1991 essay The State and capitalism today. It’s one of his best single papers. Its power comes from Harman’s nuanced consideration of globalisation as a phenomenon of the state, as much as of the market.

Rather than globalisation occurring through a simple state-market opposition, the latter ‘rolling back the former’ – as the ideologues of globalisation would have us believe occurs – the two are fused in new and innovative ways, transforming both. By viewing the process in this way, Harman indicates with great clarity the twin errors open to other analysts of global capitalism: of either privileging the market above the state, or seeing the state as largely unchanged and still superior to the market.

It’s a better essay, for my money, than his more explicit 1996 paper on Globalisation: a critique of the new orthodoxy, which tends – as some of his later work did also – towards too much of a view that the state remains largely unchanged in a globalised world, able to intervene in much the same and with much the same form as it always did. Nonetheless, the paper repays reading as a corrective to the more loopy flat-earth views out there. (If I get the time, I’ll return to Harman’s treatment of globalisation at greater length.)