Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The Bank of England’s failure to forestall the post-pandemic surge in inflation was the result of collective amnesia in the economics profession about the role of money supply, according to a former governor.Lord Mervyn King, who led the UK’s central bank between 2003 and 2013, said on Thursday it was “troubling” that when prices began to rise in 2020 and 2021, there had been “no dissenting voices to challenge the view that inflation was transitory” among policymakers on either side of the Atlantic.King, speaking in a debate in the House of Lords, said the BoE had “tarnished” its record by keeping interest rates low even when it became apparent that price pressures were intensifying. Inflation rose to a peak of 11.1 per cent in late 2022, King said, because policymakers had ignored the likely impact of a “very substantial” monetary and fiscal expansion boosting demand, even as lockdown curbs restricted supply — a mistake made by other central banks and academics.“Too much money chasing too few goods is and always has been a recipe for inflation,” he said, calling it “foolish” for central banks to rely on forecasting models that ignored the role of money entirely.“The academic economics profession has essentially jettisoned the idea that one might ask what the growth of broad money [a measure of the amount of money circulating in the economy] was telling us,” King said, adding that this consensus had “led to the problems we are now too familiar with”.  The BoE’s Monetary Policy Committee is expected to keep interest rates at a 16-year high of 5.25 per cent next week, although some members have suggested they are ready to vote for a cut, with inflation likely to fall close to their 2 per cent target in the near term. King, who as governor led the BoE’s response to the 2008-09 financial crisis and shaped much of its current approach to communication, also struck back at recent criticism of its methods from Ben Bernanke. He cited in particular the call by the former US Federal Reserve chair for the BoE to scrap the “fan charts” it uses to depict uncertainty around its forecasts.“The mistakes of 2020 and 2021 were not the result of presentation. The Bank might have used fan charts, the Fed used dot plots. It didn’t make any difference. They both made the same misjudgement,” said King. “What really matters are judgments about the state of the economy and the way monetary policy works.”King’s arguments were echoed by other members of the House of Lords economic affairs committee — including former chancellor Lord Norman Lamont, who first introduced an inflation target for the BoE in 1992, at a time when regimes targeting measures of money supply were widely discredited.  BoE governor Andrew Bailey told the committee this year that the central bank looked at money supply as part of its modelling process “and always [had] done” but that “on its own, it is not as good a forecasting tool as some of the commentary sometimes makes out”.The UK pursued a policy of money supply targeting in the 1970s and 1980s but abandoned it during the chancellorship of Nigel Lawson. It went on to pursue policies focused on exchange rate pegs that culminated in the country’s exit from the Exchange Rate Mechanism in 1992, before adopting the price growth target. But Lamont said that even after introducing this framework, the inflation target had been accompanied by “target ranges for monetary aggregates”. More

CARACAS (Reuters) – The Venezuelan government is aiming to make up for the return of U.S. oil sanctions by raising tax revenues so it can increase spending on public workers and secure their support in July’s elections, public and private sector sources said.Washington reimposed broad oil sanctions in April in response to what it said was President Nicolas Maduro’s failure to meet electoral commitments inked last year with the opposition.The renewed restrictions mean companies must seek individual licenses from the U.S. to operate in Venezuela, slowing efforts to increase crude production and hitting government coffers ahead of the July 28 contest, where Maduro is seeking his third re-election.The government is seeking to make up the shortfall via fresh tax revenue efforts, three sources with knowledge of the matter told Reuters. The sources said the Maduro administration wants to slightly increase social spending and boost bonuses for public employees, who earn significantly less than private employees and have not had a pay raise for two years.Some opinion polls have shown strong voter support for the opposition, which named Edmundo Gonzalez as its unity candidate after first-choice Maria Corina Machado was barred from public office.”We must insist on reaching the goal of doubling income from taxes and we will achieve it,” Maduro told business people in an April speech.A public sector source who asked to remain anonymous said the government was “looking to cover the difference created by less oil income with more tax revenue.”Spending was being evaluated at a level that would not stoke inflation, which remains “the worry” of the government, the source said.Neither the communications or finance ministry responded to a request for comment.Maduro’s government this year has intensified efforts to bring inflation down to two digits, holding the exchange rate steady and weighing how to spend on social programs without stoking consumer price rises.EARLY TAXESIn order to raise the tax take, the Maduro government has been conducting frequent audits of private sector companies, reviewing receipts and sometimes applying fines, business and official sources said.Officials are also asking businesses to pay some taxes earlier than planned and looking to expand the number of contributors, the sources added. Tax agency Seniat did not respond to a request for comment.”We must be more efficient in tax collection and more meticulous with our audits,” said ruling party lawmaker Jose Vielma, a member of the government-allied national assembly’s finance committee.Maduro said on Wednesday his government would also propose a law to increase pension contributions by businesses.Tax take was up to $2.2 billion in the first quarter, according to official figures, a 57% increase over the same period last year, growing in tandem with increased oil income. Total year-to-date tax take rose to $3.1 billion through April, Maduro said on Wednesday.But oil income – around $1.7 billion per month between January and April – will fall by some $370 million per month now the oil sanctions are back in place, according to estimates by independent analyst firm Sintesis Financiera.Government officials have told business leaders that tax revenue must reach $8 billion this year, one private sector source said, up from a $5.87 billion estimate in this year’s budget.”Spending has begun to increase and it’s possible (the government) will sacrifice exchange rate and inflation stability in the next three months,” said Asdrubal Oliveros of analyst firm Ecoanalitica.Annual inflation was 67.75% through March, according to the central bank. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Five years ago Reda Cherif and Fuad Hasanov, two economists at the IMF, wrote a paper with the (slightly) sarcastic title: “The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy”.This pointed out that while strategic policy intervention was widely viewed as a key reason for the east Asian economic miracle, it had a “bad reputation among policymakers and academics” — so much so that, from the 1970s onwards, the phrase was rarely mentioned in polite company, or by the IMF. No longer. Last month the fund reported that it had observed no less than 2,500 industrial policy actions around the world in the last year alone, of which “more than two-thirds were trade-distorting as they likely discriminated against foreign commercial interests”.More striking still, industrial policies used to be far “more prevalent in emerging economies” than developed ones; between 2009 and 2022, there were cumulatively 7,000 subsidies tracked in developing countries, and fewer than 6,000 in developed ones. But last year’s surge was “driven by large economies, with China, the EU and the US accounting for almost half of all new [industrial policy] measures”.That shift can be seen not just in data, but rhetoric too. Last month, Mario Draghi, former head of the European Central Bank, lamented that Europe “lack[s] a strategy for how to shield our traditional industries from an unlevel global playing field caused by asymmetries in regulations, subsidies and trade policies”. He called for the EU to fight back with industrial policy. In the UK, the opposition Labour party is echoing these themes, calling for a “New Deal” and touting what it calls “securonomics”. In the US, Donald Trump wants huge trade tariffs, while Joe Biden has called for tariffs in sectors such as steel. The president’s Inflation Reduction Act is yet more industrial policy.But anyone pondering that striking number in the IMF report should remember a crucial point that ought to be obvious but is often overlooked: “industrial policy” can mean many different things. As Cherif and Hasanov told a seminar at Cambridge’s Bennett Institute this week, there is an important difference between policies that try to create growth by shielding domestic companies from foreign competition and those which help those companies compete more effectively on the world stage. The former “import substitution” strategy was pursued by many developing countries in recent years, including India. It is also the variant favoured by Trump and the one being considered by some European politicians, for instance in the case of Chinese solar panels.But it is this latter approach that has given industrial policy a bad name. On the basis of copious data, Cherif and Hasanov argue that import substitution models undermine growth in the long term since they create excessively coddled, inefficient industries. By contrast, the second variant of industrial policy aims instead to make industries more competitive externally in an export-oriented model, while worrying less about imports. This approach is what drove the east Asian miracle, and is what creates sustained growth, the data suggests. The difference in approach is embodied by the contrasting fortunes of Malaysian automaker Proton car and South Korea’s Hyundai. The former was developed amid import substitution policies, and never soared; the latter flourished on the back of an export-oriented strategy. A cynic might retort that policy is rarely so clear cut as these contrasting car tales might suggest. It is hard for any company to fly on the world stage if its key competitors are excessively subsidised in closed markets — as evidenced by the woes of EU solar-panel makers trying to compete with their Chinese rivals. It is also tough to tell countries to aim for export-driven growth in a world where trade is fragmenting and protectionism rising.In any case, while export-oriented strategies work for small or medium-sized countries such as South Korea, they may seem less relevant for a giant such as America. Then there is a more fundamental question around economic change. As a thoughtful paper published last year by the economists Réka Juhász, Nathan Lane and Dani Rodrik notes, while “industrial policy has traditionally focused on manufacturing”, it is the service sector that now dominates. Thus “governments are likely to look beyond manufacturing as they consider productivity-enhancing ‘industrial’ policies in the future”. Cherif and Hasanov think institutions such as America’s Darpa give one clue to innovation-boosting measures in this space; Juhász, Lane and Rodrik cite worker training and export credit. But this needs holistic policy, which America, say, lacks.Either way, the key point is that insofar as western politicians are now increasingly happy to utter the once forbidden words “industrial policy”, they need to define what they mean. Is the goal to exclude competitors from the domestic stage, via tariffs? Or to make domestic producers more competitive and innovative in a global sense and better able to compete? Or is it something else? Investors and markets need clear answers. So, more importantly, do [email protected] More

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Nonfarm productivity, which measures hourly output per worker, increased at a 0.3% annualized rate last quarter after rising at a 3.5% pace in the October-December period, the Labor Department’s Bureau of Labor Statistics said on Thursday.The government on Friday corrected productivity data from 2019 through 2023 due to a computation error.Economists polled by Reuters had forecast productivity would increase at a 0.8% rate. Productivity advanced at a 2.9% pace from a year ago. Economists are keeping an eye on productivity to gauge how quickly labor costs can rise without re-igniting inflation. Labor costs and inflation surged in the first quarter. The Federal Reserve on Wednesday kept its benchmark overnight interest rate unchanged in the current 5.25%-5.50% range, where it has been since July. Fed Chair Jerome Powell told reporters that “in recent months, inflation has shown a lack of further progress toward our 2% objective.” Since March 2022 the U.S. central bank has raised its policy rate by 525 basis points.Unit labor costs – the price of labor per single unit of output – jumped to a 4.7% rate in the January-March quarter after being unchanged in the prior quarter. Labor costs increased at a 1.8% pace from a year ago. Compensation shot up at a 5.0% rate last quarter after rising at a 3.5% pace in the October-December quarter. It increased at 4.7% rate from a year ago. More