Select Committee on Treasury Minutes of Evidence

Examination of Witness (Questions 60-79)


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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