Examination of Witness (Questions 60-79)
PROFESSOR DAVID
BLANCHFLOWER
24 MAY 2006
Q60 Mr Newmark: Professor, do you
think giving regular speeches by MPC members adds to the public's
understanding of the role of the MPC and also transparency around
their thinking?
Professor Blanchflower: Absolutely,
I believe that. I think I said so in my written responses, and
in some sense in the response to Mr Gauke's question. I think
it is very important to do that, and obviously it continues the
tradition that I have done. I do lots of academic things, but
the tradition is, if you look in my work, I have done a lot of
things trying to make it amenable to the public to understand
what I do. Absolutely I share that view, I think it is crucial
to what we do, and I think it is one of the great benefits that
compares here with the United States, in that we do not know what
Geitner's view or Blinder's view on a particular decision was,
and in some sense that makes it harder for the markets to understand
and to be signalled as to what is going on. I think it is important
in transparency terms, but I think it is important in terms of
the operation of the setting of interest rates, so I think it
is absolutely crucial that one should do that.
Q61 Mr Newmark: That brings me on
to my next question, the setting of interest rates. Again, just
to get a better understanding of the way that you think, what
red flags will you be looking for in the economy which will trigger
your decision whether to move interest rates up or down?
Professor Blanchflower: I think
of it as sort of lexicographic.
Q62 Mr Newmark: What is behind it?
I am trying to figure out whether you are a hawk or a dove when
it comes to that sort of thing.
Professor Blanchflower: Certainly
I have not labelled myself and I do not think one could label
me in any way there. The lexicographic preferences are we need
to focus on inflation, so when you have a target of inflation,
I think I said the word `band' but a 2% target of inflation in
the longer term, there is going to be random noise in that number.
I am going to focus on that.
Q63 Mr Newmark: Standing behind that
inflation figure and getting just a little bit more granularity
to what you are thinking, what will you be looking for in that
index of inflation figures that will make you think, "Gosh,
we must be thinking about raising interest rates," or lowering
them?
Professor Blanchflower: I think,
first of all, you are going to look at the figures on the CPI,
you are going to look at the source of them, because you do not
get just an aggregate number, you get to see what is driving that
change.
Q64 Mr Newmark: It is those drivers
that I am trying to elicit from you.
Professor Blanchflower: Yes. I
think we need to get to the disaggregated drivers and try to think
what is causing that to increase and then look to other markets.
I would be looking obviously at what is happening in the labour
market, is there evidence of wage changes, is there evidence that
there is tightening in particular labour markets, where, in which
sectors, so in which sectors do we see these changes. This is
the disaggregated experience that I have, this is what is driving
the change; is this to do with an external thing, like oil prices,
that in a sense the Monetary Policy Committee cannot control,
or is it something to do with a tightening of the London labour
market.
Q65 Mr Newmark: You would still be
able to respond to it by raising or lowering interest rates?
Professor Blanchflower: Exactly.
I think the crucial thing is, what you do depends upon the source,
which in some sense goes back to my earlier discussion. You need
to have a full microscope at the source of the change and the
source of the push, if you like, and then you think of the remedy.
Q66 Mr Newmark: On this question
of transparency, because you kept raising it and Colin raised
the issue of personal debt, which is over a trillion, looking
at public sector net debt, there is a headline figure which I
think is around £435/£450 billion, but it just seems
there is a trend of putting more and more debt off balance-sheet,
with PFI, looking at public sector pension liabilities, and so
on. There is some analysis which says there is almost two pounds
off balance-sheet for every one pound on balance-sheets. Do you
think there should be far more transparency, as you have alluded
to, when it comes to giving out to the public the true state of
the public debt which is out there today?
Professor Blanchflower: I do not
really know the answer to that question, about how much transparency
there has or has not been.
Q67 Mr Newmark: We always hear the
headline figure, which is what is on balance-sheet, but it just
seems to me the Government is putting more and more off balance-sheet.
I am not criticising the technical reasons for doing that; my
question is should there be greater transparency with respect
to how much debt is actually off balance-sheet versus on balance-sheets,
because there does not seem to be any today?
Professor Blanchflower: I am not
an expert at all in that area. In general, my principle is, transparency
is better.
Q68 Ms Keeble: I want to ask just
a bit more about inflation again. In the response to our questionnaire,
you noted that in February 2006 the Bank of England Survey
of Inflation suggests that inflationary expectations are on the
rise. How concerned are you about that, or do you see it as just
a sort of blip?
Professor Blanchflower: I am concerned
enough about it that I have started to work on the data. These
are so-called micro-surveys and I have started to look at those
data, for the reason that it looks like a blip; there is a sudden
jump in February 2006 in the proportion of people who say, "In
the next year I think price rises are going to be above 5%."
I was sufficiently concerned about that to start to try to look
at the data and understand what is going on.
Q69 Ms Keeble: Do you think that
is people's expectations, which are not always reality, or do
you think that it reflects some sort of underlying reality of
upward pressure?
Professor Blanchflower: That is
obviously the question. In fact, I was talking to the Governor
yesterday about this, because I am quite interested in what people
say, so this is an area I am going to work on. The whole idea
of working on well-being, if you think that people say how happy
they are, the question is do you believe that; they say certain
things. I have an expertise in trying to think of that so I have
been trying to look at who said it, why they said it, and just
one piece of information is that it is not just people who think
that price rises in the current period are high, it is others
as well, and that is a concern to me that I am trying to understand.
I do not understand it yet. I have just started to think about
it, but the Bank is concerned about it and we are trying to think
about it.
Q70 Ms Keeble: You have talked about
the need to disaggregate some of the measures, in particular on
earnings growth that you have talked about previously, the link
between that and inflation, because earnings growth is still being
subdued, and also energy costs and the extent to which that will
carry through?
Professor Blanchflower: I think
it is important to look at the disaggregated nature of things.
A good example might be, let us think about, we have seen a spike
in wages just because of, in the recent period, bonuses in the
City; you might think that is less of a concern, you might think
of this as productivity-driven bonuses. In a sense, we want to
look at, sector by sector, what is driving this wage increase
in the sectors where productivity has risen; that is less of a
concern than in sectors where it has not. I do not see particular
concerns about the blip in wage growth because the City brokers,
and so on, have been more efficient; that seems to me rather different
from non-productivity-based increases. I think one needs to look
at what the source of the wage increase is.
Q71 Ms Keeble: Do you think that
interest rates have been kept at a slightly higher rate in anticipation
of continuing upward pressure from energy prices?
Professor Blanchflower: I do not
think there is a great deal of evidence for that. The Bank has
held interest rates fairly constant for quite a time. In the US
it has been rising. We have seen interest rates remaining relatively
flat here. We have not seen a push on inflation, and I think it
is a surprise. If I had been sitting in front of you in, say,
2002 and said, "Suddenly what is going to happen is a doubling
of oil prices," I do not think I would have predicted what
we have actually seen, but that is good. What we have seen is
much more muted a response than perhaps this Committee might have
expected, or I might have expected, a couple of years ago.
Q72 Ms Keeble: Can I come back on
your one point, which right the way through you have said "I'm
working on that; I'm working on that; I'm working on that,"
and you have talked a lot about being a data reader. I think one
of the things behind a lot of Kerry's questions was, obviously,
there is a difference between that and actually seeing it for
real, as it were. How do you intend to structure or go about familiarising
yourself with the regional differences in the UK economy and the
different sectoral pressures, including, for example, manufacturing?
Professor Blanchflower: I think
it is a very good question. I have tried, obviously, in my work,
to think about these regional questions. A great deal of my work
has to do with what is going on in regional areas. I have written
stuff about the South East, I have written about Scotland, but
I think it is crucial to talk to people, to talk to the agents,
listen to that and go out and speak to people.
Q73 Ms Keeble: There is a big bit
of the north of England between the South East and Scotland; it
has got very clear dynamics?
Professor Blanchflower: I did
not mean in any way to suggest that those are the only regions;
those are just the ones I have looked at. My intention would be
to look at each of them and to focus on other ones. I am sorry.
I did not mean to imply that; it just happens that I have worked
on those two. The pressures from each of the areas and their different
industry structures and the different pressures that they are
under are crucial. In a sense, I am starting at the beginning
and I am crossing off, these are the first two and there are more
coming; it is in alphabetical order.
Q74 Chairman: You are going to visit
everywhere?
Professor Blanchflower: That is
my intention.
Q75 Chairman: You are going to get
your Hitchhiker's Guide to the MPC; right?
Professor Blanchflower: I hope,
not all before Christmas, not to get a Hitchhiker's Guide.
Q76 Chairman: Can I just finalise
the questions. Over the past few days, some of the major global
equities markets, including the London Stock Exchange, have shown
unusually high volatility. What do you think are the main factors
causing this volatility and to what extent was the volatility
caused by concerns over future inflation in the United States?
Professor Blanchflower: Certainly
it seems, in the last week or so, that there has been quite a
lot of volatility in the US. The reports from the G7 about unacceptable
balances in the US have been a problem. The latest CPI data suggests
jumps in the inflation rate. There are some uncertainties about
what the position of Bernanke is, in terms of monetary policy.
I am not able to understand, in the very short run, exactly what
is going on. An example would be, in the UK the dollar exchange
rate has changed by about 8% in the last three weeks. It is hard
to understand exactly what the source of that is. Certainly I
think that a lot of the instability has to do with pressures in
the US economy. It is very hard, as a modeller and an economist,
exactly to understand the source of that, but it does seem that
the imbalances, if you like, and instability in the US, is sort
of tumbling over to other places.
Q77 Chairman: Do you believe the
volatility signals the end of the bull market, or is it merely
just a short-term adjustment?
Professor Blanchflower: Really
I do not know. It is very short-term. I think we are going to
have to wait and see. In some sense, you might think of it as
noise; noise occurs, but every fundamental change is probably
going to start this way. It might be just noise; I do not know.
Q78 Chairman: Given your arrangements,
you can have one ear in the US market and the other ear in the
UK market, will it not be helpful?
Professor Blanchflower: I think
we need just to watch and take a longer-run view. I always tell
my students, two data points, you can draw a line between them,
it does not tell you anything.
Q79 Chairman: The labour market representative
on the MPC has been seen traditionally as being a dove, for example,
Steve Nickell; is that connected to the appropriateness of a microeconomist?
Professor Blanchflower: I think
so. In some sense, you might say, some of the big issues that
the MPC is going to face have to do with labour markets, housing
markets, these issues seem to be important, and the growing areas
in these things are micro-based, so I think it is important to
have that view. Increasingly, in labour, people do the kind of
work that I do, and Steve Nickell does that sort of work and I
follow in his tradition.
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