Beware false prophets: Except when they recommend lowering interest rates

The Bank of England

Once deemed "bonkers" by colleagues for his repeated call to cut the Bank of England's base rate, David Blanchflower is now hailed as the prophet of the Monetary Policy Committee.

Yet acting as the Bank's seer is not without its woes, and could explain Blanchflower's decision to resign when his term ends in May. When I met him recently, he admitted that in hindsight, the job wasn't what he'd bargained for:

"Central banking was meant to be kind of absent. Our job was to stay off the front pages, and unfortunately we've had a world financial crisis. It's not been boring, and it certainly wasn't very part-time, but not quite what I expected or hoped for."

The British-born economist resides in the United States where he lectures at Dartmouth University. Every month Prof. Blanchflower flies across the Atlantic to vote during Bank meetings, and his presence is often requested in Europe.

During the trek up to Blanchflower's office, his press officer Gary Hunt revealed how Danny (as he's referred to by everyone but his mum) is always on the move, after having flown from America to a conference in Germany, and then back to the UK. While most people might prefer a more relaxed schedule, the self-proclaimed workaholic says he is just about adjusted.

"Suppose there's an island called Atlantis in the middle of the Atlantic," he explained, "that's approximately where my body clock is. You never really get used to it, but a routine helps."

In fact the jetlag was probably worth it. US residency enabled Prof. Blanchflower to see firsthand how the financial shock tore through the US economy, urging him to vote for lowered interest rates in the UK before inflationary fear was replaced by recessionary reality.

"A lot of the things that happened in the U.S. about nine months earlier were actually occurring here, so it looked to me like there were a lot of similarities between the U.S. and the UK, " he said.

The Bank of England cut interest rates by 1.5 per cent in November and a further 2 per cent since the last Bank meeting in February. The base rate is now at an all-time historic low of one per cent. Blanchflower insists that the Bank is doing what needs to be done, but the outlook seems grim as sterling drops below the euro and banks fail to pass on cuts to SMEs and would-be mortgage buyers.

The head of City University's economics department, Saqib Jafarey, said: "Cutting rates drastically might have been a bad sign for the markets because it was a very big reversal in policy. It could have led to what is happening now, the declining value of the pound."

Yet according to the leading labour economist a more pressing problem is the short to medium-term crisis of unemployment, which he predicts will hit 3 million by 2010.

"I think these numbers are going to rise quickly, how high they're going to go will depend on what we do, what the government does, what other governments do, and what happens to world demand. But obviously unemployment is going to rise."

Prof. Blanchflower is all too familiar with the subject of unemployment as the author of the ground-breaking book The Wage Curve, which tracks the relationship between unemployment and low wage levels. He has also done extensive research into the economics of happiness and the implications of unemployment on well-being.

Known for his controversial belief that happiness is quantifiable, Prof. Blanchflower calculated the unhappiness caused by unemployment to be equivalent to $60,000 in 2004.

Unfortunately for people facing recession-fuelled redundancy, he has also found that unemployment is more devastating to individual happiness than inflation. A one per cent increase in unemployment affects happiness twice as much as a one per cent increase in inflation, as people are directly faced with "income loss and loss of face," he explained.

If there is an upside to all this, at least for economists there is a cornucopia of research opportunities, which will certainly hold appeal for Blanchflower when he resigns. As he mentions thoughtfully, "this is quite a nasty shock, so there's a good set of tools to work with."