THE ECONOMY
Professor Goodhart's sermon to the happy couple
JOCK BRUCE-GARDYNE
So my old friend and co-author Nigel Lawson is to soldier on. If there were any justice in this world colleagues and erst- while critics of his stewardship from Mr Christopher Patten MP to Mr Tony Beaumont-Dark MP should be queuing up to nominate him for an Oscar, since his was the skill that steered them safely back to Westminster. But, as he knows well, grati- tude is in short supply in the House of Commons. If there are honeymoons about, whether for him or for his mistress, they are liable to be brief. How are they to make best use of them? It doesn't help that their choice of destinations would be different. With the voters safely gathered in the Chancellor is impatient to join the Euro-monetary sys- tem. The stumbling-block had been the fear that the pound would be swamped by waves of speculation in the election cam- paign, leading to high-profile devaluation almost as the electors prepared to perform their civic duty. In retrospect it never looked that way. In any case it's all past history now. If ever the time was 'ripe' to join the club, this must be it. The hazards of the hustings are behind us: the crucial Pound-deutschemark exchange rate is widely perceived to be at an ideal 'competi- tive' level. Exchange rate targetry is all the rage; the eagerness of the CBI, the Bank, the City, and the Treasury is unabated. Even the official Opposition — little though they matter for the moment made noises on the hustings which would not make it easy for them to complain. So it's a shame about Margaret. Her remarks about our European partners wanting to have 'the flesh off our bones' uttered, admittedly, in the shadow of the hustings — hardly suggest that the Prime Minister's distaste for club membership is one whit abated. She's going to take an awful lot of persuading. Both she and her Chancellor could do a great deal worse than read, mark, learn and inwardly digest Professor Goodhart's comments in Monday's Times. Charles Goodhart spent long years under Gov- ernor Richardson as monetary adviser to the Bank of England, where he was a noted sceptic. He earned immortality as the architect of `Goodhart's law', accord- ing to which — I paraphrase — the choice of a monetary aggregate as a policy target indicator ndicator sufficed to guarantee that it would be distorted. So you can accuse him of nameless crimes: but not of monetary bigotry.
The capacity of the Conservative Gov- ernment, and of the Treasury,' he wrote on Monday, 'to move from an (invalid) view- point that the growth of broad money is an exact determinant of the growth of nomin- al incomes to the (invalid) viewpoint that the growth of broad money has no rela- tionship at all with the growth of nominal incomes is staggering with respect both to its speed and the comprehensive nature of the intellectual somersault involved.' Well to hell with 'intellectual somersaults': if politicians and Whitehall mandarins have not learnt gymnastics they are in the wrong trade. The serious part of Professor Goodhart's indictment is the part which suggests that if it was injudicious to assume — as perhaps the Treasury was wont to do eight years ago — that when the monetary barometer read 'storm' we would all be soaked by nightfall, it is at least equally injudicious nowadays to read 'storm' on the barometer and then to venture forth in shirtsleeves and bikinis.
His verdict — and again I paraphrase is that the PM will be overruled, and that we shall be borne into full EMS mem- bership on a tidal wave of contradictory enthusiasms. The enthusiasm of 'dries' (of whom my old crony is one) who believe that tying sterling to the deutschemark would discipline the Cabinet; and the enthusiasm of 'wets' who believe that the immediate consequence of membership would be cuts in interest rates, and that if thereafter sterling got the shivers — as Professor Goodhart thinks it would — why then we'd just devalue. His analysis seems to me just about faultless. Except that I think he underestimates the lady. I suspect that — not unusually — while her reason- ing may be dubious, her instinct's not far wrong. She won't have it. That's not going to resolve her Chancel- 'I see vast riches. Tie Rack shares and a job at TV-am.' lor's dilemmas. Not by a long chalk. It begins to look as though some of our expectations of that tidal wave of Japanese investment thundering into London as soon as the electoral uncertainties had been disposed of were rather overdone. Not least because — as I suggested in these columns some months ago — it also begins to look as though President Reagan's tax reform may be coming to the rescue of the US Federal deficit. The sceptics may be right that the dollar is only taking a breather before resuming its giddy plunge into the abyss. But they may be wrong; and if they are then British Gas and British Telecom may not be perceived as the only safe resting place for Japan's surplus sav- ings.
Nevertheless, something's going to have to give. Either Mr Lawson's going to continue to try and `shadow' the EMS convoy, which may involve requiring the Bank of England to sell pounds and accumulate reserves, and cutting interest rates if need be, regardless of domestic monetary conditions. Or he's going to take the credit boom in hand, even if that means allowing sterling to appreciate past DM3, and sending the CBI suicidal. Professor Goodhart has no doubt what he ought to do: follow the second course. His old friends at the Bank of England fairly evidently agree with him (hence some signs of dwindling enthusiasm for the EMS in Threadneedle Street). They must surely be right. What's the point of winning an election if you can't lock up the drink cupboard having done so?
Mr Lawson may well have his mind on higher things: and understandably so. He's a genuine radical (more so, in truth, than his leader). If he doesn't seize the chance of next year's Budget to make a major advance toward 'fiscal neutrality', sweep- ing away a lot of those tax allowances from company car perks to mortgage in- terest relief — so beloved and exploited by us middle classes, and consolidating tax rates on a lower base, he never will.
All the same, I think he ought to heed the advice of Professor Goodhart in the meantime. A lot of things can happen in nine months. It would be a pity if, come Budget '88, any brave ambitions he may nurture in his bosom to go down to history as a fiscal reformer had been overtaken by the consequences of what Denis Healey used to call 'monetary incontinence'.
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