Central banks should continue to keep rates low to stimulate growth because workers’ wages aren’t rising, damping any increase in inflation, according to David Blanchflower, a former policy maker at the Bank of England.
“We see no evidence of wage growth in Europe, in the U.K., or in the U.S.,” Blanchflower, now an economics professor at Dartmouth College, said in an interview today on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “If we do, then it will be appropriate to raise rates. Right now, you have to keep rates low, keep QE going, and if the situation worsens, no growth, we do more QE.”
Blanchflower and Keene spoke on the Dartmouth campus in Hanover, New Hampshire, as a Federal Reserve program to spur economic growth by purchasing U.S. debt in a strategy called quantitative easing approaches its scheduled end in June. The Fed next meets June 22.
The lack of wage growth means central banks do not need to clamp down on inflation generated by higher oil prices because the cost of energy is not spurring higher worker pay, Blanchflower said.
The unemployment rate in the U.S. rose to a peak of 10.1 percent in October 2009 from a six-year-low of 4.4 percent in May 2007 before the start of the financial crisis. That has led to a decline in wages of about 8.5 percent, Blanchflower said.
The lower compensation has given central bankers, including Fed Chairman Ben S. Bernanke, the latitude to hold borrowing costs near zero and stimulate the economy through measures such as the plan to buy $600 billion of Treasuries.
Policy makers should also consider additional tax cuts to boost employment and revive the economy, Blanchflower said.
“We need to give private-sector firms tax cuts, investment incentives and incentives to hire people,” Blanchflower said. “The economy on its own is not going to deliver the jobs that we need. So we really have to help firms and stimulate hiring.”
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