Ken v Mandy, ‘it’s mostly monetary” and the gift of the Gabay

So we now know that Lord Mandelson occasionally refers to himself in the third person, and that Ken Clarke would have been cutting spending last year, but that there’ll be “no starving policeman or nurses”.

Pardon my bias, but there was important light as well as heat from last night’s 20 minute Big Beast Battle even as I travel on the snowtrain to Davos.

Clearly, the government’s strategists see some opportunity to skewer George Osborne’s deficit reduction fetish as a threat to a wobbly recovery.

Yesterday’s figures offered the opposition the perfect chance to tone down the cuts rhetoric. But their briefings and the #kenvmandy debate showed a courageous and complete holding of their line, even by the more deficit dovish Ken Clarke.

Re-watching the debate, Clarke clearly believes the job of stimulating the economy, and the credit for what little growth we have seen, lies squarely with the Bank of England.

Ultra-low interest rates and quantitative easing have ended the recession, stabilised the jobs and housing markets.

The mantra for Tory macro-policy is it seems: “It’s Mostly Monetary”.

Neil, my producer, astutely points out that the Conservatives clearly don’t believe in the possibility that monetary policy is not working very well at all. They appear to believe that there is no chance that, in the poetic jargon of Keynes himself, we are in, or will soon be in, the famous “liquidity trap”.

At that point monetary policy becomes ineffective.

This is not a matter of political ideology, of left and right. It is a matter of finely-honed technical economic judgement. And frankly no-one, not least the collective confusion of economists, knows the answer to this.

Vince Cable of the Lib Dems is siding with the government: that there’s every reason to hold off on aggressive deficit reduction until the recovery is “bedded down”, which Tuesday’s figures show not to be the case.

Of course, if the chancellor really believed this argument he’d be preparing, not a year long delay in necessary deficit-reducing tax rises and spending cuts, but instead a further fiscal stimulus. That would involve, as Richard Koo puts it “taking on” the credit ratings agencies.

And that really would be a beastly battle.

Danny Gabay is thrashing Goldman Sachs in the battle of the super-economists. Not only was he the only economist to predict yesterday’s paltry 0.1 per cent number. He also went against the grain in predicting a negative number for Q3.

Goldman’s and a host of economic commentators rejoiced in announcing how “wrong” the lowball ONS preliminary numbers have been.

Gabay defended them, and pointed out why the other economists are getting it wrong. Too much predictive weight is being put on one survey measure of the economy, the service sector PMI (purchasing managers’ index).

The PMI, based on a few thousand survey results, is now proving a poor predictor of the official GDP numbers which is drawn from much more information.

Moreover, Gabay points out that the PMI has not been through a recession before, so of course its mathematical correlation with GDP will be somewhat shaky.

This is yet another example of why not to trust economists or anybody who tells you definitively what is going to happen in this economy.

We have never been to this economic place before, we are using tools for which there is no precedent. House prices and unemployment are doing bizarre things.

I sincerely doubt that the Bank of England’s own model can handle all this. So of course the traditional economic relationships with the PMI should be treated cautiously.

By the way, Gabay, for what it’s worth, is closer to the Tory approach to sharp deficit reduction. He believes in the concept of “expansionary fiscal contraction”.

Perhaps I should interview him at length for an explanation…