Select Committee on Treasury Minutes of Evidence

Examination of Witness (Questions 40-59)


24 MAY 2006

  Q40  Mr Todd: Just to turn to rather concrete thinking on that, there is a conventional view that we are interested in high-skilled migration into this country, people with particular skills to offer; whereas the evidence of living, say, in the city that you are speaking in now is that people with relatively low skills migrating here have very significant contributions to make to the local economy. Where do you place this part of your analysis?

  Professor Blanchflower: I think obviously that is important. You asked me about my experience in the US. There has been a huge debate about, first of all, if you have immigrants, how many do you have, and then what kind of policy do you have in the sense of matching skills. I have done some work, actually I worked for Microsoft on some of these questions, trying to advise them about how you acquire workers with the particular skills that you need to match your demand, so I have some expertise in the consulting world on those kinds of questions. It is a tough question; matching skills shortages is particularly important in an expanding, growing labour market, but I have worked on those questions.

  Q41  Mr Breed: To ask a slightly different question, do you believe that the £1.1 trillion of personal debt, which is now amassed in this country, is vulnerable to any modest rise in interest rates?

  Professor Blanchflower: I am a person who has worked on capital constraints. In some sense, I think the developments that have occurred in the UK economy actually are lifting some of those constraints, so individuals who take on debt, on the one hand, you might think this is of concern, but, on the other hand, you might think this is a freer access to capital, it frees up people to do as they wish. Obviously the mortgage debt has risen, but I think of that as part of the move to freer capital markets and allowing people to do what they want to do. The concern has to do more with unsecured debt and has to do with some evidence of growing insolvencies, and perhaps that debt has affected the low-income groups I think you have to be concerned about, but my view is that the opening of the capital markets is probably a good thing. You have to be cautious, in some sense, and obviously we need to be concerned about people taking on perhaps too high mortgages, and if there were to be a fall in house prices negative equity might have consequences. I do not see the change in debt as a fundamental problem, if you see capital markets working properly, and I have written several things about fully-functioning capital markets.

  Q42  Jim Cousins: The last meeting of the Monetary Policy Committee did not see any significant pressure on wages, which is your special field; on the other hand, of course, in the public sector, wage bargaining is national. What is your feeling about that; do you think that national pay bargaining is damping down inflationary pressures or increasing them?

  Professor Blanchflower: There are arguments, one might think, there is literature which should suggest that national pay bargaining may have dampening effects, in the sense that possibly union leaders are more aware of macro pressures and consequences. I do not see particular evidence strongly supporting that one way or the other. I have done some work here on how pay should be set in the public sector. My view is, in some sense, if the pay in the public sector follows the pay in the private sector then we   are going to be less concerned about its consequences. I think you have seen a decline in unionisation, you have seen a decline in national bargains and closed shops, and I think what you end up seeing is that pay tends to be rather more flexible to changes in macro conditions and that gives the economy more flexibility and more bounce to absorb shocks. Pay settlements which reflect macro conditions seem to me to be important. There is some difference between the UK and the US. In the US I am involved with discussions about three- and four-year-long contracts, which seem to be complicated, particularly when there are benefits in there, but national pay bargains are on the decline. There are issues within the public sector and there are issues about acquiring staff in the south, when you have national pay bargains, but I have tried to answer the question.

  Q43  Jim Cousins: Interestingly, the Chancellor himself has questioned national pay bargaining in the public sector and has been seeking higher levels of flexibility, and, as I understand your answer, you would be supportive of that?

  Professor Blanchflower: I have written several things and done quite a lot on how probably you should set pay in the public sector across regions, and my view is—I say it in the US and I say it in the UK—it is hard to think that you need to compare directly to the public sector. The right thing to do probably is to see what happens in the private sector, because the private sector will reflect out the workings of the market, and try to reflect that. I think the problem you have seen in the UK has to do with payment to public sector workers in this great city, and that is something which clearly is an issue.

  Q44  Jim Cousins: Yes; but just thinking about it, because your academic colleagues in the UK at the moment are engaged in a significant national pay bargaining issue, do you think that national pay bargaining in the public sector, in the UK, has the potential to be inflationary?

  Professor Blanchflower: Honestly, I think it depends really upon whether it is connected to the GDP growth in the economy and how it reflects the private wage-setting. The public sector is not independent of the private sector, and if the public sector is underpaying it is not going to be able to get the quality of workers that it needs. I do not believe per se that it is going to be inflationary necessarily, I have not thought hugely about that question, but there are adjustments both in quality and price that are made, and in quantity. My view is, as long as the national pay settlements reflect what is really going on in the private sector and what the economy can afford then not necessarily; but pay settlements that are way beyond productivity are not sustainable.

  Q45  Mr Gauke: You mentioned in the response to the Treasury Committee questionnaire that you felt  the UK monetary policy procedures were favourable compared with the US system. Could you outline briefly why you think that is the case?

  Professor Blanchflower: One of the things I have done quite a lot in the last three or four weeks is try to think more about that exact question and try to read some of the literature. I have talked to Tim Geitner, I think currently he is the Vice Chairman of FOMC, and also to Alan Blinder, who was one of the previous ones, and tried to think about the benefits of this system compared with the US one and think about what has happened given the transition from Greenspan to Bernanke. I think actually there are very strong benefits, and the literature seems to be going in the direction of benefits of this system here, with a declared target and with majority voting. I think the evidence is that Bernanke himself is pushing—whether he will go there or not is another thing—more towards that. In some sense, there is a sort of informal statement of the target. The other issue which I think is very strongly in favour of this system is the principle of majority voting, in the sense that it gives less surprise to the markets. I think a vote of five to four gives the markets some information. Vice Chairman Geitner was telling me that what happened in FOMC has been that Greenspan spoke for the Committee and then, of some 80 or so votes, there were only seven times when any individual voted "No," so it was unanimous all but seven times. Under Greenspan, I think Greenspan talked to the markets well; with the transition to a new Chairman it is much harder, as we have seen over the last few days. I think the system here, with my appointment, the transition to me I do not think has quite the implications perhaps that Bernanke has. The literature, I think, if you read Blinder's work, is supportive of set targets, majority voting and being clear about people's views.

  Q46  Mr Gauke: Can I raise also the issue of accountability to Parliament and in particular the fact that MPC members come to this Committee regularly and give evidence: how important do you think that is?

  Professor Blanchflower: I think that is incredibly important. The democratic process working, as in this hearing here, is important, important to come and communicate to Parliament and to the people and to the markets what the thinking is, how the process is moving forward. My view is that this system works well in that it tries to avoid giving the market surprises. I think the accountability is what we should be doing, speaking to Parliament but also making it clear that there is not a surprise coming: "This is our thinking; this is how we're moving forward." That is the judgment that I have.

  Q47  Mr Gauke: Can I ask about the procedure as far as appointments are concerned, given that you are in the middle of it, and I appreciate it is a slightly difficult one, but you will be aware that there has been some controversy, as much about the procedure as anything else. The Guardian reported that Threadneedle Street had been deeply irked by the lack of transparency in the process of making appointments and the Chancellor's habit of leaving decisions until the last minute. As someone in the middle of it, how do you feel about the process? You are here a week before you start; do you think there is sufficient scrutiny for appointments of new members?

  Professor Blanchflower: It is a matter for Parliament and it is a matter for the Chancellor.

  Q48  Chairman: We are going to have a review of the MPC appointments next year; it has already been projected.

  Professor Blanchflower: I have an idea which I think might be helpful. One of the differences you see is that appointees come to the Senate in the US and usually the week before their hearing they go and meet the members of the committee. I am suggesting that actually it might have been quite useful to have come and met you folks, perhaps a week or so before, come and have lunch with you. I think the process, in some sense, is a shock.

  Q49  Mr Gauke: Have you felt it has been a bit rushed?

  Professor Blanchflower: Perhaps.

  Q50  John Thurso: Can I ask you about your answer to Colin Breed about personal debt; you made the very correct point that a lot of borrowing is simply an efficient use of capital, whether it be corporate balance-sheet, whether it be a mortgage against an asset, but in this country there is a growing amount of unsecured debt. Could I ask you therefore to focus on that? There have been recent reports in Scotland of some worrying trends of bankruptcies and the amount of unsecured credit card debt; there was a report the other day that virtually everybody over 50 has got an overdraft, they are probably not lucky enough to be unsecured. Are you concerned at the rise in unsecured debt and the fact that people are therefore very susceptible to rises in interest rates?

  Professor Blanchflower: Yes, absolutely, I am very conscious of the rise in unsecured debt, especially as it tends to fall on the lowest income groups and may well have particular consequences; so, yes, I am worried about it. In fact, the paper I wrote about Scotland actually has some evidence about what has happened at the very low end. In some sense, the benefit of a micro person, who does the micro foundations of macro, is that they look, I look to these kinds of issues and I am concerned about them, on a regional basis and on a skill basis and on particular income groups. Some of the work that I have done has to do with "Let's look at the less-skilled; let's look at the lower groups," if you like, and it is those groups, and there was a question earlier about migration and so on, unskilled immigrants coming into a particular area might well impact those particular groups, so the impact across the distribution is going to grow. I am concerned about that and I have thought about it and I have seen the data on insolvencies, and so on, and obviously that is a concern. I share your first statement, which is that we want to free up capital markets, we want to free up product markets and the labour market essentially might think they will follow.

  Q51  John Thurso: You talked earlier about voting. Stephen Nickell said to us in oral evidence earlier this year that one of the keys to the success of the Committee was that it was composed of individuals who came to an individual view and then used majority voting to arrive at a decision. He went on to say that would be reinforced if there was a section of the minutes that was owned by each member of the Committee. Do you think that would be a valuable contribution and would help in the process of transparency?

  Professor Blanchflower: I have heard Steve has said that. In some sense, this is more towards transparency and I am in favour of that. Obviously, I have not been to a vote yet, I have not sat down and thought about how the minutes are going to be written. I think it is something worth looking into. I do not know exactly the answer to that. It might delay the processing of the minutes. I am all in favour of transparency. I do not know what my view is yet. Perhaps the next time I come and speak to you I can talk about whether it is feasible. I share your view that transparency is good; whether it is practically possible I do not know.

  Q52  John Thurso: I will ask you again in a year's time.

  Professor Blanchflower: Ask me again; that is fine, we can put that one on hold.

  Q53  Kerry McCarthy: You have mentioned, throughout the dialogue we have had, that you need to do a bit more reading on this, or you have gone away and done some reading on that; what would you say are the main gaps in your knowledge of the UK economy at the moment?

  Professor Blanchflower: The main gaps. I think probably the financial markets is probably the area that I need to think rather more about; the financial and money markets probably, although I have written some things. Particularly we talked earlier about the capital constraints, I have written things about credit cards and so on. I would say probably the operation of the financial markets and, particularly in the context of being a member of the MPC, trying to learn about how the model works and how the forecasts work. I have a full set of briefing meetings already organised. I am going to get briefed by all the individual sets of people in there, so how the Bank works, how the markets interact together. I think the benefit I have is that my interests have been broad-ranging, but there are some areas that I need to fill, so I have a full set of briefings going on to fill that. Probably it is more about the financial markets but I think I have quite a broad interest and knowledge.

  Q54  Kerry McCarthy: In terms of the regional visits, does London count as a region and does the City count as a region?

  Professor Blanchflower: Absolutely. That is one of the areas that I need to think about. I need to try to understand the market for derivatives and I do not really know very much about it. I need to start to think about those things. Absolutely, thinking about what the City is doing is important, and I think it is the economics of walking about, it is an honourable tradition, there are lots of things to learn. The surveys of businessmen's expectations are important and interesting; talking to business folk is important. Obviously, modelling what people say is what I do, so I come from that great tradition, you are pushing against a swing door.

  Q55  Kerry McCarthy: What sort of input do you have; when you talked about the regional visits that you are going to undertake, to Scotland and Wales, it sounded almost like the programme had already been drawn up and you would just fill in the slot to go there? What sort of input do you have in deciding which sectors you will go to visit, what sorts of companies you will go to visit?

  Professor Blanchflower: The Scottish one happened because I am interested in it. I have just been writing about it and it seemed to me a sensible thing to do, and there were personal reasons.

  Q56  Kerry McCarthy: Was the programme already, you are the person who decides where you are going?

  Professor Blanchflower: No. I just said "I think I would like to start . . ." just because I had been thinking about Scotland. As I had been thinking about Scotland, I thought I would like to start with Wales, and they said there were vacancies to go and do that, and I thought, "Right; that's for me." That does not preclude anything else. It is just that is what I am going to start with.

  Q57  Kerry McCarthy: I am just interested to find out more about which sectors you feel that there is a need to go and visit, rather than geographical locations, and what input you have in actually drawing up the programme, or is this something on which somebody else is advising you?

  Professor Blanchflower: I do not know yet. Maybe again I will have to ask. I just said, "Please could I go and do that?" and we are going to work out the details. I do not know quite. I am the wrong person to ask, but next time perhaps I can help, once I have been there.

  Q58  Kerry McCarthy: Are there any particular sectors, other than the City, where you think it will be useful for you to start visiting companies operating in that sector?

  Professor Blanchflower: I was thinking about that the other day and I thought, obviously, going to Scotland, actually I am quite interested in the oil sector, it seemed like a sensible sector to go and think about, so I am going to suggest perhaps that when I go to Scotland maybe I should go to Aberdeen. I have broad-ranging interests and I want to hear what the regional agents have to say and make suggestions; and hopefully it will be a dialogue rather than them telling me where to go to.

  Q59  Kerry McCarthy: There are three relatively new members on the MPC. What impact do you think that will have on the dynamics of decision-making and do you think that, as somebody who has been based outside the UK for a long time, you are going to be able to hold your own in discussions, particularly with the Governor and people who are not external appointees?

  Professor Blanchflower: Obviously, I have not been involved in the dynamics. The contacts I have had so far with the members of the Bank and other members of the MPC, I have met all of them apart from Paul Tucker, we have got on extremely well. I would say, my reputation is I am not a shrinking violet.

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