Examination of witnesses (Questions 180-187)|
TUESDAY 6 FEBRUARY 2001
180. Do you agree, Sir Alan, that we could have
had lower unemployment?
(Mr Flemming) It is indisputable, but the important
thing is the reference to the hindsight. The record essentially
reveals that. If there is any kind of trade-off between unemployment
and inflation, and all of us believe that there is, of some kind
or another, then the fact that we have been low on the inflation
side means that we could conceivably have had more employment.
But all of us, I think, have shared responsibility and have not
used hindsight to criticise.
181. Did no-one say that at the time, Mr Flemming?
(Mr Flemming) No.
182. Did no-one say it?
(Mr Flemming) Let me just explain why. None of us
have said that the Monetary Policy Committee made a mistake other
than with hindsight. The resilience of the over-high exchange
rate is something that has surprised us all, and it is that sequence
of surprises which has given rise to this track record when, if
you read it backwards, you say it could have been otherwise. But
none of us here would have advocated a significantly different
policy, because we all shared the mistake.
183. You are saying that it was a mistake with
hindsight, that unemployment could have been lower, and no-one
saw that at the time? No-one?
(Mr Flemming) I am not sure about seeing it. There
are almost invariably differences of opinion, and there may have
been someone. I do not think I know of anybody, and certainly
the consensus was very strong, because the strength of sterling
was a mystery, and it remains to some extent a mystery even now.
It was seen by everybody as being higher than they expected it
to be, and therefore they were expecting a correction to come
in, and they were expecting the exchange rate to come down, and
that meant that they were expecting a source of upward pressure
on inflation to enter the picture, and for that reason they would
all have gone along with the Monetary Policy Committee's decisions.
(Mr Barrell) I think we have had remarkably close
control over the things we can control. Macroeconomic aggregates
are very hard to control. That we would say we might have had
a little bit more employment if monetary policy had been slightly
looser must be true, but, to the degree we can control things,
nobody would say that the gains would be significant. The Monetary
Policy Committee is living in a new environment where it is not
meant to be fine-tuning the economy to get us to full employment
and get another 10,000 people in jobs, or get 10,000 people out
of jobs. The new framework is supposed to be part of long-term
stability. Here I think monetary policy does have a role in the
growth process. The thing that might slow down our growth is if
interest rates are very variable and if inflation rates are very
variable. An over-active Monetary Policy Committee, trying to
hit exactly, period by period, full employment, might destabilise
the economy and reduce long-term prospects for growth by discouraging
investment. The new framework is meant to be forward-looking and
184. Of course, I understand the new framework,
but it would be a perfectly proper thing for somebody to be worried
about the level of unemployment in the economy, and to want it
to be lower, and to be concerned about the level of employment
within the economy and to want it to be higher.
(Professor Buiter) Temporarily.
185. That is a perfectly proper thing. Who in
this systemclearly it is not the Monetary Policy Committeehas
the duty of being concerned about that?
(Mr Barrell) That is relatively clear. First, in some
sense, the Chancellor, but secondly, in some sense, the whole
Cabinet through its policies for employment and growth. No one
department controls employment and no one department controls
growth. The policy is to encourage participation, and that is
much more important than anything the Monetary Policy Committee
can do. So what I think the Government is doing is focusing on
using the right tools for the problems it faces. I hope I am not
sounding like an advocate of government policy. I am saying they
seem to be aiming the policies in the right way. Monetary policy
is a medium term thing. Persuading people they might like a job
or enabling them with the skills that they need to get a job,
that is a different problem. We can do a lot with microeconomic
policies for unemployment. We cannot do much in the medium term,
especially with monetary policy, if anything.
(Professor Buiter) We must be in danger of over-estimating
what anybody can do about employment or unemployment. Even the
government as a whole, with its massed departments, has only a
very limited lasting effect on employment. The one thing we have
learned, whether you talk about monetary policy, conventional
fiscal demand management or active labour market policiesnew
deal, old deal; it does not make any differenceis that
it has very little effect. Economic processes in a very limited
way are influenceable and steerable by economic policy. Yes, monetary
policy can have a temporary effect on employment. Probably, in
most people's view, we could have had, with the benefit of hindsight,
a very small and temporary positive effect on employment. Basically,
we are driving the natural rate below its equilibrium level temporarily,
getting inflation back up to target, and then letting unemployment
go up again. We are talking about something temporary and something
small. What is really surprising is the degree of precision with
which the target has been met, through a combination of luck and
wisdom, and how this target has, over a number of years now, been
consistent with this very high level of employment and low levels
of unemployment. I think that is much more important than trying
to micro-manage the employment rate, because we cannot do that
reliably, and by actively trying to do so, we could get back into
the old game of promising or pursuing things that we know we cannot
186. I take your point that we have been through
a very fortunate period, but thinking about it in the longer term,
and taking into account periods that may be less fortunate than
the ones we are in, who would you see, Professor Buiter, in the
system of monetary policy-making, fiscal policy-making that we
now have in this country, as having the duty of being concerned
about levels of unemployment and levels of employment?
(Professor Buiter) I do not know what "being
concerned" means. I am concerned about unemployment. Everybody
is concerned. The question is: what can you do about it? Who has
the instrument? Who has the tools? There are no tools, fiscal,
monetary or regulatory, that have major, predictable effects,
except that it is very easy to come up with things that will really
screw things up. You could regulate the economy out of existence.
It is easy to think of extreme negatives. But in an economy that
is basically reasonably well managed on average, there is very
little you can do to have a significant effect on the equilibrium
unemployment rate. You can try to influence and stimulate the
efficiency of which labour market makes matches between what employers
need and worker supply. In the long term you can try through educational
policy to get a better match of skills and demand. But to over-estimate
what anybody can do about employment and unemployment is just
not helpful. It comes out of the economy as a whole. Governments
are bit players in this.
(Mr Flemming) Coming back to the question that Mr
Cousins put, putting it in terms of who in the macro arena should
do it, I believe that as much of it as possible should be done
automatically. That is done in the case of the Monetary Policy
Committee because of the influence . . .
187. It is done automatically?
(Mr Flemming) Yes, and in the case of fiscal policy,
it should be done largely through automatic stabilisers. Historically,
it is the case that automatic stabilisers, the tendency of the
budget to go into deficit when there is recession, have owed quite
a lot to redistributive policies, progressivity of income tax,
level of benefits to the unemployed and so on. It is possible
that if those policies now deliver less stabilisation than they
used to or less stabilisation then we would like, it might be
appropriate to build in an element of discretionary supplementation
of diminished stabilisation coming from the so-called built-in
stabilisers, in which case, it would be a Treasury job. But it
would be highly desirable to make it as little discretionary as
possible and as automatic as possible, and then one is left outside
the macroeconomic complex with the active labour market policies
designed to try and reduce the non-accelerating inflation rate
of unemployment, make the labour market work better and so on.
Chairman: Thank you very much indeed.