We need a political party that is tough on the causes of Brexit

I fully share the anguish of so many people over the madness of Brexit. All the evidence points to not leaving the EU, and the reasons given for leaving are generally vague or false. The vote on which this crasy policy is based was deeply flawed. As an economist I can clearly see the damage Brexit is doing and will do. While I could see the rationale for Labour’s triangulation strategy over Brexit before and immediately after the 2017 election, during 2018 as public opinion began to move it stopped making sense in electoral terms, and of course their policy often appeared unicorn-lite or, more realistically, close to a policy of Brexit in name only which only gives away control. The new party that will surely follow the formation of the Independent Group, if it continues to promote a People’s Vote, should be quite attractive to people like me.

But I’m in the more uncommon position of having been in the similar place twice before in the last decade. The reason is very simple. I have been all my life a macroeconomist, and for the last twenty odd years an academic. That gave me a perspective on 2010 austerity and the 2015 election which was largely absent from the popular debate. As a result, I can see that Brexit was not an isolated event, the result of one bad decision by Cameron, but part of a pattern suggesting deep problems with how UK politics works.

Understandably, most people are against austerity because of the impact it has had on those in need who depend on the NHS, local authority care and the welfare state. They are also now seeing its impact on schools, on our justice system and much more. But that still leaves open the idea that somehow austerity was necessary for the good of the economy as a whole. As Conservative politicians never tire of saying, they came into office in 2010 with the country on the edge of a crisis created by the previous Labour government. As an academic macroeconomist I know that is completely false.

Pretty well every first year undergraduate textbook tells students why in a recession you need an expansionary monetary and/or fiscal policy and you should ignore the deficit. When interest rates run out of road, as they had in the UK by 2009, then fiscal expansion was vital. One of my own specialist fields is fiscal policy, so I also know that state of the art models also suggest exactly the same thing as the textbooks. The insights of Keynes that have been accepted by most academics ever since remain valid today. It is this received wisdom that the UK followed in 2009 before the Coalition government came into power.

Just as many feel that Brexit makes no sense, I felt that austerity which started in 2010 went against all our knowledge and evidence. The one doubt I had was that an irrational financial market might suddenly stop buying UK government debt, but this was dispelled when I realised the Bank of England’s unconventional monetary policy of buying government debt to keep interest rates low (Quantitative Easing) would quickly kill any panic. That analysis begins my book based on the blog I started as a result of austerity.

Just as both main political parties now support some sort of Brexit, so both at the time supported austerity, with the argument being over how much, how quickly. Neither the Coalition nor the opposition argued for the right policy, which is to delay fiscal consolidation until the recovery was underway and the Bank started raising interest rates. Experts on trade or the EU Brexit negotiations are infrequently heard in the media, but they were almost never seen over austerity.

My point in making these parallels is that evidence based policy making on major issues didn’t end with Brexit, but six years earlier with austerity. In both cases these are policies that create great harm to all, and acute harm to many. I calculate austerity cost the average household £10,000, and NEF using similar methods get an even larger figure. No government since the war, including those of Thatcher, has embarked on prolonged austerity during an economic recovery, and so it is no surprise we had the weakest recovery for centuries.

Brexit is therefore not the exception in a period of otherwise normal government. If you ask why Brexit happened, it was not that David Cameron made one mistake in an otherwise capable period as Prime Minister. There is evidence that austerity encouraged the growth of UKIP and by implication the Brexit vote. I remember often hearing people in areas that are described as ‘left behind’ dismissing the economic impact of Brexit by saying things could not possibly get worse than they are now. But austerity was not the main cause of why Brexit happened.

To see what was we need to look at the second period where I felt similar to how I feel today about Brexit, and that was the run up to the 2015 general election. Political commentators had decided from polling that the economy was the Conservative’s strong point, indeed perhaps their only strong point going into that election. To a macroeconomist that made no sense. Not only had we had the worst recovery for centuries but real wages had suffered their worst fall since records began. The government extolled record employment growth, but given the slow recovery they were in reality just celebrating the flatlining of UK productivity that was a key factor behind falling real wages.

Economists like David Blanchflower, John Van Reenen and myself set out just how bad UK economic performance had been over the previous 5 years, but once again expertise was ignored. As far as the media were concerned reducing the deficit had become the most important priority for the economy, and that was how they judged politicians. You will not find that in any textbook either, but the media had either sold or been sold a narrative and they didn’t want to know any different.

That narrative said that the Coalition had brought down the deficit that the previous government had allowed to grow out of control. Of course in reality the worst recession since the Great Depression of the 1930s caused by a Global Financial Crisis had pushed up the deficit, but the media had pushed, or accepted, the idea that the Coalition was clearing up the mess that a profligate Labour government had left. I had written a paper on fiscal policy under the Labour government and there was no way they were profligate, but because Labour didn’t challenge the accusation the media accepted something as true that was obviously false.

To the media the fact that the Conservatives were thought to be strong on the economy only confirmed their narrative. In reality the causality was the other way. There is a growing literature identifying the power the media has to influence elections and shape popular narratives. The 2015 election was a precursor for Brexit in three important ways. First, and most obviously, the media helped elect a Conservative government that was committed to an EU referendum. Second it showed that politicians could tell huge lies and get away with it. Finally it showed the power the media had to influence a popular vote.

Brexit would not have been possible without the UK media. A large part of the press pushed anti-EU propaganda, and the broadcast media balanced the view of the overwhelming majority of experts against the lies of a few. Viewers desperately wanted information, and the broadcast media gave them politicians rather than experts and balance rather than facts. Fear of immigration was important in deciding how many people voted, and it was the right wing press that had since the beginning of the century pushed countless negative stories about immigrants. Although austerity may have played a role, it was the media that played the major part in giving us Bexit.

Although the Independent Group (IG) may have a more attractive policy on Brexit, and they will talk the talk on a broken politics, the group is made up of politicians who either believe their government did the right thing over austerity, or who in opposition urged accepting Osborne’s policy. Deficit obsession is damaging to the economy, but it also shuts the gate to so much else that needs to be done. It means the IG will be unable to undertake the far reaching and radical industrial policy that is needed to tackle the huge regional inequalities within the UK, and help those left behind that voted for Brexit. It means no Green New Deal. Although so far policy light, they have pledged to keep our current ‘free media’, which will mean they would do nothing to mend much of our dysfunctional press that acts as a propaganda vehicle for their owners, or a broadcast media that balances truth with lies and is largely expert free.

Brexit was not an aberration in an otherwise well functioning UK democracy, any more than Trump was in the US. They are symptoms of a deeper malaise. I cannot put it better than Anthony Barnett when he says if all you want to do is stop Brexit and Trump and go back to what you regard as normal, you miss that what was normal led to Brexit and Trump. Unless we have politicians in power who understand the need for radical change, the snake oil sellers who sold us Brexit and US voters Trump will happily carry on plying their wares.

Another lesson of the GFC unlearnt: the Consensus Assignment is dead

Martin Sandbu recently responded to critics of an earlier piece of his arguing that central bankers could and should have done more to tackle the aftermath of the Global Financial Crisis. I stress aftermath here, because I have no doubt that central banks (including the Bank of England) were culpable in both ignoring warning signs before the crisis, and in the UK and Eurozone not reacting quickly enough to the consequent recession. (It is extraordinary that on the MPC only Danny Blanchflower understood what was going on, and I would argue that part of the reason for this was the primacy of the inflation target.)

It is also obvious that the ECB were wrong to raise rates in 2011 and not to introduce QE much earlier. That the UK almost raised rates in 2011 is not reassuring, and suggests they did take their foot off the peddle over that period. I would also argue that the ECB were very wrong to wait until September 2012 to introduce OMT.

In the UK and US I do not buy the argument that no further stimulus was needed.

UK unemployment rose from around 5% to around 8% in 2008/9, and stayed at that level until it began coming down in 2013. US unemployment was also above 8% until 2013. Both economies needed more stimulus in 2009, and in its absence in 2010 and so on. To think otherwise means you are placing too high a weight on temporary changes in inflation and too low a weight on the costs of the recession. 

Where I think I might disagree with Martin is that this stimulus could have reliably come from monetary policy. A good policy instrument is one that has a reliable impact on demand, and the only reliable monetary policy instrument that fulfills that criteria is short interest rates. Central banks could have done more QE, or they could have reduced rates below the Effective Lower Bound (ELB), but they wouldn’t have known how much to do. They might have got there in the end, but extra years of unemployment and probably a permanent hit to output through hysteresis were an avoidable cost.

The biggest mistake central banks made was not to recognise this and be honest with the public. They should have said, clearly and repeatedly, that once rates hit the ELB monetary policy was no longer the most reliable instrument to stabilise the economy, and fiscal policy should be used. This does not break any implicit concordat about not commenting on fiscal policy (which most central banks break anyway), because the statement is about a delegated authority being honest with the public about whether it can reliably do its job..

The fact that central banks in the UK and Eurozone didn’t do that may reflect dishonesty or it may reflect negligent ignorance. The fact that options like QE existed may have allowed central banks to convince themselves that they could still do the job assigned to them, and it discouraged them from being honest with the public. I say negligent ignorance, because instrument reliability is pretty basic stuff.

Martin writes

“Besides, there was broadly shared understanding among macroeconomists and central bankers of the best division of labour. Fiscal and budgetary policy should be set to achieve microeconomic and distributive goals, and the desired share of the state in the economy; while monetary policy should take care of stabilising aggregate demand.”

This is what I call the Consensus Assignment, and as the name implies it was certainly the consensus among mainstream macroeconomists before the 1990s. But the experience of Japan’s lost decade where they also had interest rates stuck at the ELB began a process of rethinking. By the time the GFC came around many macroeconomists had realised that there was an Achilles Heel in the Consensus Assignment. Fiscal stabilisation was still required when interest rates hit their ELB. That is why we had fiscal stimulus in 2009.

The importance of this cannot be overstated. The policy consensus in 2009 was that fiscal stimulus was required, because monetary policy was not enough. This consensus didn’t evaporate in 2010. What overrode it was mainly politics - what I call deficit deceit. There was also a bit of panic in some quarters caused by the Eurozone crisis. However a majority of academic macroeconomists continued to believe that further fiscal stimulus was required, and that majority got steadily larger as time went on.

Which means that the Consensus Assignment that Martin talks about is dead, or at least dead until monetary policy makers can agree some form of fiscal delegation (e.g. helicopter money) with governments. As this paper from the Boston Fed points out, downturns where interest rates hit their ELB are likely to become the new normal, but policymakers have not adjusted to this. (The exception is Labour’s fiscal credibility rule.) Quite simply, most policymakers have not learnt a major lesson of the Global Financial Crisis.

Did macroeconomics give up on explaining recent economic history?

The debate that continues about whether a Phillips curve still exists partly reflects the situation in various countries where unemployment has fallen to levels that had previously led to rising inflation but this time wage inflation seems pretty static. In all probability this reflects two things: the existence of hidden unemployment, and that the NAIRU has fallen. See Bell and Blanchflower on both for the UK.

The idea that the NAIRU can move gradually over time leads many to argue that the Phillips curve itself becomes suspect. In this post I tried to argue this is a mistake. It is also a mistake to think that estimating the position of the NAIRU is a mugs game. It is what central banks have to do if they take a structural approach to modelling inflation (and what other reasonable approaches are there?). Which raises the question as to why analysis of how the NAIRU moves is not a more prominent part of macro.

The following account may be way off, but I want to set it down because I am not aware of seeing it outlined elsewhere. I want to start with my account of why modern macro left the financial sector out of their models before the crisis. To cut a long story short, a focus on business cycle dynamics meant that medium term shifts in the relationship between consumption and income were largely ignored. Those who did study these shifts convincingly related them to changes in financial sector behaviour. Had more attention been paid to this, we might have seen much more analysis and more understanding of finance to real linkages.

Could the same story be told about the NAIRU? As with medium term trends in consumption, there is a literature on medium term movements in the NAIRU (or structural unemployment), but it does not tend to get into the top journals. One of the reasons, as with consumption, is that such analysis tends to be what modern macroeconomists would call ad hoc: it uses lots of theoretical ideas, none of which are carefully microfounded within the same paper. That is not a choice by those who do this kind of empirical work, but a necessity.

Much the same could apply to other key macro aggregates like investment. When economists ask whether investment is currently unusually high or low, they typically draw graphs and calculate trends and averages. We should be able to do much better than that. We should instead be looking at the equation that best captures the past 30 odd years of investment data, and asking whether it currently over or under predicts. The same is true for equilibrium exchange rates.

It was not just the New Classical Counter Revolution in macro that led to this downgrading of what we might call structural time series analysis of key macro relationships. Equally responsible was Sims famous paper 1980 ‘Macroeconomics and Reality’, that attacked the type of identification restrictions used in time series analysis and which proposed instead VAR methods. This perfect storm relegated the time series analysis that had been the bread and butter of macroeconomics to the minor journals.

I do not think it is too grandiose to claim that as a consequence macroeconomics gave up on trying to explain recent macroeconomic history: what could be called the medium term behaviour of macroeconomic aggregates, or why the economy did what it did over the last 30 or 40 years. Macro focused on the details of how business cycles worked, instead of how business cycles linked together.

Leading macroeconomists involved in policy see the same gaps, but express this dissatisfaction in a different way (with the important exception of Olivier Blanchard). For example John Williams, who has just been appointed to run the New York Fed, calls here for the next generation of DSGE models to focus on three areas. First they need to have a greater focus on modelling the labour market and the degree of slack, which I think amounts to the same thing as how the NAIRU changes over time. Second, he talks about a greater focus on medium- or long- run developments to both the ‘supply’ and ‘demand’ sides of the economy. The third of course involves incorporating the financial sector.

Perhaps one day DSGE models will do all this, although I suspect the macroeconomy is so complex that there will always be important gaps in what can be microfounded. But if it does happen, it will not come anytime soon. It is time that macroeconomics revisited the decisions it made around 1980, and realise that the deficiencies with traditional time series analysis that it highlighted were not as great as future generations have subsequently imagined. Macroeconomics needs to start trying to explain recent macroeconomic history once again.

Left and Right in 2016

Before the Christmas break David Blanchflower asked me a question on twitter: “why do you think we have seen the move to right-wing rather than left-wing populism?” This is my reply. I’ll just talk about the US and UK because I do not know enough about other countries. (Here is an interesting analysis of populists in Eastern Europe.) I’ll take it as read that there are currently well understood reasons for people to want to reject established politicians, and the Blanchflower question is really about why that rejection went right rather than left.

In my answer I want to distinguish between two types of people. The first are those that are not that interested in politics, and are therefore not well informed. They depend on just a few parts of the MSM for their information. The second are those that are interested in politics and are well informed, using multiple sources which are not just confined to the mainstream media (MSM). I want to argue that this distinction is crucial in helping us understand what happened in 2016.

I also want to use the term populist for policies in its most simple form, as policies that are likely to be immediately popular with the public, without the negative connotations that I discussed here. Populist policies on the left would focus on measures to curb financialisation and the power of finance (‘bashing bankers’), and measures to reduce inequality (which are popular if expressed in terms of the 1%, or CEO pay). Right wing populist policies include of course controls on immigration, combined with constant references to national identity. The need to control international trade can be invoked by left and right.

Among those who are well informed, there is no evidence that dissatisfaction with existing elites broke right rather than left. Indeed membership of political parties in the UK suggests the opposite is true. Party members in the UK are almost by definition likely to be much more interested in politics than the average citizen, and will not be dependent on one or two elements of the MSM for information. As the Labour party leadership has shifted left and adopted some of the left wing populism I’ve described, its membership has exploded. The figures are remarkable. The Labour party currently has a membership of over half a million. This is probably [1] at least three times the membership of the Conservative party. UKIP, the populist party of the right, has a membership of only 39,000, which is below the membership of the Greens.

The Sanders campaign indicates both the popularity of left wing populism among political activists in the US, but also that left wing populist policies can be as popular with voters as those from the right when they get a national platform. Sanders put greater taxes on the rich and additional Wall Street regulation at the centre of his platform, as well as opposition to trade agreements. The campaign was largely funded by individual donations, in contrast to the other campaigns. With the exposure that an extended election process gave him, Sanders’ brand of left wing rhetoric got national coverage and proved pretty popular. Sanders claimed, with some justification, that he actually polled better against Trump than Clinton, and it remains an open question whether a populist from the left might have done better against Trump than Clinton, who epitomised the establishment.

During the Sanders campaign left wing populist ideas did get wide coverage in the MSM, but this is the exception rather than the rule. After the financial crisis there was a brief period of about a year when these more left wing themes were a major media focus, but since then they appear only occasionally in the MSM. In contrast parts of the MSM in both countries has for many years produced propaganda that supports right wing populism, and the non-partisan elements of the MSM have done very little to contest this propaganda, and on many occasions simply follow it.

Let me put these points in a slightly different way. For the few of us that do attach great importance to the media in understanding recent events, it would be a major problem if on occasions where alternative ideas were given considerable coverage in the media they were ignored by voters. It would also be a major problem if those who were much less dependent on one or two MSM sources for information behaved in the same way as the average voter. But fortunately for us both the Sanders campaign and UK party membership suggest neither problem arises, but instead these pieces of evidence provide support for our ideas.

So in both the US and UK, among those who are exposed to left wing populism or who access a much broader range of information than that provided by the MSM, there is no puzzle of asymmetry. Left wing populism continues to appeal. The asymmetry at the level of the popular vote, that gave us Brexit and Trump, can be explained by asymmetry in the media. Right wing populist ideas not only get much more coverage than left wing populist ideas, but sections of the MSM actively promote these ideas. Given that this focus on the importance of the providers of information is intuitive, it is really up to those who think otherwise to provide both theory and evidence to support their view that the MSM is unimportant.

[1] I say probably because the latest data we have for Conservative party membership is 2013. However I think it is reasonable to speculate that lack of publication means numbers have been going down, not up.  

Blanchflower on the Economic Advisory Committee

David Blanchflower has an article in today’s Guardian about his experience on Labour’s Economic Advisory Committee (EAC) which was chaired by John McDonnell. I agree with a lot of what he has to say in the article, but not with the picture painted of how the committee was used. He ignores the formation of Labour’s fiscal credibility rule which is an important and tangible consequence of the committee’s advice, and Mariana Mazzucato’s work featured strongly in John’s speeches. (More details here.) By ignoring these things he allows some critics to conclude that we were being used just for our reputations: that is simply false.

He also fails to mention the groups John McDonnell established to look at particular economic policy areas: groups that were quite independent of the EAC and the Labour party. The one on the Treasury chaired by Bob Kerslake (details here) will probably report at the end of this year, and if our discussions are anything to go by it should be of great interest to anyone concerned about this key part of the UK’s machinery of government. David himself was chair of a similar group on monetary policy (of which I, Adam Posen on John McFall were also members), and again preliminary discussions were very positive, so personally I regret David ended that at the same time as he resigned from the EAC.

I have seen so much nonsense written about how we only met twice (largely our choice), and about who attended (the only person not to attend either meeting was Thomas Piketty, and he resigned before David Blanchflower because of the pressure of other commitments). I and other members did not resign from the EAC: see the joint statement from 5 of us here. That statement was critical of Labour’s inability to prevent Brexit: I give my own reasons for making this criticism here. As David notes in the article, I feel strongly that for Jeremy Corbyn to continue after 172 MPs voted no confidence in him as leader would be disastrous for the Labour party. However I also believe John McDonnell should be praised for openly involving academic economists in policymaking, and in being prepared to use their advice.   

Are DSGE models distorting policy? - a test case

The debate about the current state of academic macroeconomics continues, but it has reached a kind of equilibrium. Heterodox economists, some microeconomists and many others are actively hostile to the currently dominant macro methodology. Regardless, academic macroeconomists in the papers they write carry on using, almost exclusively, microfounded DSGE models. [1] Critics say this methodology was crucial in missing the financial crisis, but academic macroeconomists respond by highlighting all the work currently being done on financial frictions. I personally think missing the crisis was down to failings of a different kind, but that DSGE did hold back our ability to understand the impact of the crisis. However what I want to suggest here is a forward looking test.

Many of the difficult choices in conducting monetary (and sometimes fiscal) policy involve trade-offs between inflation and unemployment. We saw this in the UK particularly after the crisis, with inflation going well above target during the depth of the recession. What you do in those circumstances depends critically on the costs of excess inflation compared to the costs of higher unemployment. Is 1% higher unemployment worth more or less than 1% higher inflation to society as a whole?

What do New Keynesian DSGE models say about this trade-off? They do not normally model unemployment, but they do model the output gap, which we can relate to unemployment. Their answer is that inflation is much the more important variable, by a factor of ten or more. One reason they do this is that they implicitly assume the unemployed enjoy all the extra leisure time at their disposal. I have discussed other reasons here.

Empirical evidence, and frankly common sense, suggests this is the wrong answer. Thanks to the emergence of a literature that looks at empirical measures of wellbeing, we now have clear evidence that unemployment matters more than inflation. Sometimes, as in this study by Blanchflower et al, it matters much more. Another recent study by economists at the CEP shows that “life satisfaction of individuals is between two and eight times more sensitive to periods when the economy is shrinking than at times of growth”, which as well as being related to the unemployment/inflation trade-off raises additional issues around asymmetry.

So the DSGE models appear to be dead wrong. Furthermore the reasons why they are wrong are not deeply mysterious, and certainly not mysterious enough to make us question the evidence. For example prolonged spells of unemployment have well documented scarring effects (in part because employers cannot tell if unemployment was the result of bad luck or bad performance), which may even affect the children of the unemployed. So it is not as if economists cannot understand the empirical evidence.

Does that mean that the DSGE models are deeply flawed? No, it means they are much too simple. Does that mean that the work behind them (deriving social welfare functions from individual utility) is a waste of time? I would again say no. I have done a little work of this kind, and I understood some things much better by doing so. Will these models ever get close to the data? I do not know, but I think we will learn more interesting and useful things in the attempt. The microfoundations methodology is, in my view, a progressive research strategy.

So academics are right to carry on working with these models. But many academic macroeconomists go further than this. They argue that only microfounded DSGE models can provide a sound basis for policy advice. If you press them they will say that maybe it is OK for policymakers to use more ‘ad hoc’ models, but there is no place for these in the academic journals. In my view this is absolutely wrong for at least two reasons.

First, models that are clearly still at the early development stage should not be used to guide policy when we can clearly do better. In this particular case we can easily do better just by using ad hoc social welfare functions on top of an existing DSGE model. (The Lucas critique does not apply, which is why I like this example.) Yes these hybrid models will be ‘internally inconsistent’, but they are clearly better! Second, to confine academics to just doing development work on prototype experimental models is stupid: academic economists can have many useful things to say starting with aggregate models (as here, for example), and this is not something that policymakers alone have the resources (or sometimes the inclination) to do. (We also know that academics will give policy advice, whatever models they use!) Analysis using these more ad hoc but realistic models should be scrutinised in high quality academic journals.

Let’s be even more concrete. Take the debate over whether we should have a higher (than 2%) inflation target (or some other kind of target), because of the risks of hitting the zero lower bound. If this debate just involves micofounded DSGE models which clearly overweight inflation relative to unemployment, then these models will be guilty of distorting policy. This is not a matter of running some variants away from microfounded parameters (as in this comprehensive analysis, for example), but adopting realistic parameters as the base case. If this is not done, then microfounded DSGE models will be guilty of distorting this policy discussion.

[1] A few elderly bloggers, who use both DSGE and more ‘ad hoc’ models and think the critics have a point, are regarded by at least some academics as simply past their sell-by date.

Targeting wage inflation

I was pleased to see that David Blanchflower and Adam Posen have advocated using wage inflation as an intermediate target in their analysis of labour market slack in the US. Specifically they say

“Our results also point towards using wage inflation as an additional intermediate target for monetary policy by the FOMC, paralleling on the real activity side the de facto inflation targets on the price stability side.”

I have periodically argued for wage inflation targets in the case of the UK, but both their and my arguments are universal.

My own argument for targeting wage inflation has been a combination of theory and practicality. As I have often pointed out, there are good theoretical arguments for targeting alternative measures of inflation besides consumer prices. The way macroeconomists usually measure the cost of inflation nowadays is to score the distortion to relative prices created by the combination of general inflation and the fact that different prices are set at different times. The ‘ideal’ price index to target would be one that gave a higher weight to prices that changed infrequently, and a low weight to those that were changed often. Wages are just another price in this context, and they are changed infrequently.

The practical argument is that if we had been targeting wage inflation over the last few years, monetary policy would have worried less about the temporary inflation induced by shocks such as commodity price increases or sales taxes. Here is a chart of recent and expected wage inflation (compensation per employee) from the OECD. 

In normal times we would expect 2% price inflation to be associated with something like 4% wage inflation because of productivity growth. Wage inflation has not come close to that number in recent years in the UK, US or the Eurozone. It is difficult to see how the ECB could have raised interest rates in 2011 - as they did - if they had had wage inflation as an intermediate target.

The argument put forward by Blanchflower and Posen is rather different, because they associate wage inflation with the real side of the dual mandate in the US. To quote:

“wage inflation should be considered as the primary target of FOMC policy with respect to the employment stabilization side of the Fed’s dual mandate, at least for now. Unlike unemployment, the rate of wage inflation requires less judgment and is subject to less distortion by such factors as inactivity. At least four of the labor markets measures that Yellen cites as worth monitoring- unemployment, under-employment of part-timers, long-term unemployment, and participation rate- reveal their non-structural component by their influence on wage growth. And that is what the Fed should be trying to stabilize along with prices.”

To paraphrase, unemployment (or anything similar) can become distorted as a measure of labour market slack, but wage inflation is a good indicator of the true state of the labour market.

I would add one final point. The spectre that seems to haunt central bankers is the inflation of the 1970s. That has to be avoided at all costs. Yet the 1970s was associated with what was called a wage-price spiral: both price inflation and wage inflation rising rapidly, and a feeling that this was a contest between workers and firms that neither could win, but where society was a loser. If we want to avoid a wage-price spiral happening again, it is only logical that we look at wages as well as prices.