The plan of the Labour party to give the Bank of England a new target of increasing productivity by 3 percent per year has been rejected by economists. They even described the said plan as “crazy” and “absurd.”
A survey that was conducted by Chicago Booth with over 50 academics discovered none who supported the said idea.
The proposal came from a report that was launched last month by John McDonnell, the shadow chancellor. It argued that productivity growth is essential to boosting wages while also maintaining a lid on inflation, helping the Bank of England maintain its 2 percent price target.
The proposal comes as productivity has hardly grown at all during the past decade, contributing to poor wage increases and weak economic growth.
However, the economists do not see how the Bank can effectively target productivity.
London School of Economics’ Professor Christopher Pissarides stated: “monetary policy has nothing to do with it [productivity].”
“Productivity growth depends on technology, infrastructure and the like,” he added.
Jan Pieter Krahnen, a professor at Goethe University, Frankfurt, said that the proposal is “quite an absurd suggestion, vastly overestimating what monetary policy can achieve – in the end frustrating central bankers and the public.”
A professor of economics that works at the CEMFI in Madrid, Rafael Repullo, stated: “What a crazy idea.”
Olivier Blanchard, a former chief economist at the International Monetary Fund, agreed that it would not work. He stated: “Why not ask for 10pc productivity growth?”
The most supportive comments came from economists who believed that the Bank of England may be able to achieve a short-term, but not long-term, boost to productivity, or that there could be some indirect link between productivity and interest rates.
Chicago Booth’s Christian Leuz stated: “Traditional central banking tools don’t directly affect productivity.”
He added: “Indirect effects via demand [are] conceivable, but [it is] not clear how large and persistent [they may be].”
Chicago Booth’s survey asked various economists to consider the proposed 3 percent target of the Labour Party and asked if they agree with the statement that says: “Central banks cannot significantly increase productivity growth over a ten year horizon, except perhaps by promoting macroeconomic stability.”
The survey discovered that 46 percent strongly agree, 27 percent agree, 4 percent were uncertain and 2 percent had no opinion – with none supporting the plan of the Labour Party.