Sir Mervyn King and his troubled legacy

It was a demob-happy Sir Mervyn King who appeared at the Bank of England today for his final ever Inflation Report.

He joked with a Slovenian journalist to “come and join the Sterling area!” He threw in one or two football jokes. He even had time to lob some acid criticism the way of some of his bugbears – the Financial Transactions Tax, the International Monetary Fund and Alistair Darling, to take just three.

And he can, to some extent at least, afford to leave office with a smile on his face. The economy is recovering. The Bank was able to raise its growth forecasts (not to mention its “backcasts” of recent history), projecting that the economy will grow by 0.5% in this quarter. It cut its inflation projections, which lessens the need for more quantitative easing any time soon.

These are two things that, Sir Mervyn pointed out, he hasn’t been able to do since the start of the financial crisis.

He also nodded, briefly, at today’s labour market figures which, despite being headlined as heralding an increase in unemployment, are broadly encouraging. While unemployment is indeed up in comparison with the final three months of last year, it has fallen sharply more recently. Indeed, in the month of March alone, the unemployment rate dropped from 8% to 7.4% (though the Office for National Statistics prefers three-monthly measures).

However, both the jobs figures and Sir Mervyn’s farewell are marred by another more worrying statistic: that of average wage increases. According to the ONS, average wages (excluding bonuses) rose by a mere 0.8% in the past year. This is the lowest level of wage inflation since comparable figures began more than a decade ago, and equates to a fall in real (eg inflation-adjusted) wages of 2% in March – the biggest drop since January of last year.

Now for any policymaker who worked through the 1970s this would hardly sound like bad news: back then the problem was that wages rose at uncontrollably fast rates and unemployment went up as a result. Right now, workers seem willing to accept a cut in their real wages rather than losing their jobs.

But it nonetheless means that the squeeze on families’ disposable incomes is worsening. Households are becoming poorer, their standard of living being squeezed. Nor is it possible to dismiss this as a minor phenomenon. In fact, the median income in Britain is lower today than it was when Sir Mervyn came into office.

In 2003, when he became Governor, the average wage, in real terms (eg in terms of today’s money) was £11.24. By last year, the figure is £11.21, according to the ONS, and it will fal further this year.

But this probably isn’t the phenomenon that will define Sir Mervyn’s legacy. More likely is that he will be remembered for what has happened to the Bank of England’s balance sheet during his tenure: thanks to quantitative easing and other programs aimed at boosting the amount of cash flowing around Britain’s damaged economy, he has increased its size more than any other Governor in history. Consider what’s happened to the monetary base – essentially the amount of cash either in the hands of the public or held by banks in reserve at the Bank of England: since 2007 it has expanded by a factor of five. Not only is that more than in any comparable period in British history, it is more than any other central bank has managed during this period. This may not technically count as printing money, but it’s the closest thing you get in a 21^st century economy.

Sir Mervyn would argue that this was necessary to try to avoid a severe recession – a Great Depression-style one – earlier in the crisis. However, even he betrays some concerns about the implications.

He hands over to his successor a central bank with a balance sheet more precarious than any private bank. Happily, the Bank of England is not any bank, and can rely on the Government’s support. But this precarious situation underlines the problem: Britain has thrown everything (including the kitchen sink) at the economy, putting the Bank into unknown territory, and we are still staring stagnation in the face. One hardly envies his successor, Mark Carney, who takes on the job, and the balance sheet, at the end of next month.