Treasury Committee Questionnaire ahead
of appointment hearing for Professor David Blanchflower
A. PERSONAL AND
PROFESSIONAL BACKGROUND
1. Do you have any business or financial
connections or other commitments which might give rise to a conflict
of interest in carrying out your duties as a member of the MPC?
Are there any relevant personal or other factors of which the
Treasury Committee should be aware in considering your appointment?
No. I will continue to keep an office at Dartmouth
College but will have no teaching duties and will be on "leave
on own charges". I will also have a part-time visiting appointment
at the University of Stirling and will give a few classes a year
to graduate students in the Scottish Graduate Programme in Economics.
I will continue with my consulting practice in the United States
which involves work as an expert witness in public sector wage
setting and as a consulting expert for a variety of public entities
on the operation of programs for Disadvantaged Business Enterprises
in the construction industry.
2. Do you intend to serve out the full term
for which you are appointed?
Yes.
3. Please explain how your experience to
date has equipped you to fulfil your responsibilities as a member
of the MPC?
My PhD at Queen Mary College, University of
London was funded by an ESRC Collaborative Award in the Social
Sciences (CASS) and co-sponsored by the Department of Employment
who provided me with invaluable access to data and expertise.
That provided me with "hands-on" training in the collection
of data, including survey data, at both the level of the individual
and the workplace as well as useful insights into the workings
of the UK labour market and public policy. Since that time I have
worked as an applied empirical economist interested in the workings
of international labour markets with emphasis on the UK. My particular
expertise involves the analysis of macroeconomic problems from
their microeconomic foundations with special concerns for aggregation
and missing variable biases. My knowledge of the workings of the
US economy is likely to be particularly helpful and different.
I have chaired the Economics Department and
acted as Associate Dean of the Social Sciences at Dartmouth. I
have consulted for many public and private organisations around
the world. I have acted as an expert witness in many legal cases
in the US which has included significant amounts of trial testimony.
I have been involved in wage setting for groups of public sector
workers in the US, including economists, bankers, judges, police
and teachers as well as private sector firms in both the UK and
the US. Further, I have advised a number of UK public sector organisations
on the operation of the Area Cost Adjustment (ACA) and the Market
Forces Factor (MFF), which sets budgets for local authorities
and health authorities respectively. In the mid 1990s I acted
as advisor to the Elliott Commission which examined the operation
of the ACA.[1]
4. To what extent will membership of the
MPC require a different approach from that required in academic
research, with regard to the discharge of the duties and responsibilities
involved?
I don't believe my membership of the MPC will
require a very different approach than that required from my academic
research, which is applied rather than theoretical in nature.
At the simplest level the focus of the work on the MPC is on a
single issue, how to set interest rates to keep inflation in a
narrow band. My academic research, on the other hand, has been
wide ranging across a host of different economic and social questions.
However, a considerable part of my work has focussed on understanding
one single issuehow wage dynamics and unemployment are
related, which is clearly central to the work of the MPC.
My work is highly practical and related to questions
of the daythe role of profit sharing; the impact of unions;
the causes and consequences of growing wage inequality; the causes
of unemployment, how to set public sector wages and so on. I have
a broad range of experience outside academia. My consulting work
has involved applying much of my academic work to the real world.
For example, a large part of this work has involved examining
wage setting in the public sector, especially for police, including
the NYPD. Further, I have consulted for the Board of Governors
of the Federal Reserve and the Farm Credit Administration on the
setting of pay of economists and other executives. I have also
advised approximately twenty state and local governments in the
US on the adoption of policies toward small businesses, another
area of focus of my academic work.
5. Which of your publications or papers are
of most relevance to your future work on the MPC?
The publications of most relevance to my future
work on the MPC relate to the workings of the UK labour market
in general and wage inequality, wage setting, wage dynamics and
wage inflation in particular. The work on the wage curvethe
relation between wages and unemploymentis of special interest.
The wage curve work emphasises the importance of using microeconomic
data in macroeconomics in contrast to aggregated time series methods.
The wage curve has now been documented as existing in similar
form in over forty countries. I have recently been doing further
work on the relation between wages, unemployment and the housing
market.
Of relevance also is the work I have done on
youth unemployment, trade unions, job creation, employment growth,
the housing market, self-employment and small businesses plus
the role of capital and liquidity constraints. In recent years
I have published several papers on well being and happiness with
the aim of understanding why, despite rising GDP, time series
measures of wellbeing are remarkably flat in both the UK and the
US.
B. ACCOUNTABILITY
6. How important do you think it is for MPC
members to be subject to ex post parliamentary accountability?
What are the strongest and weakest parts of the current procedures
in the UK? How favourably do you believe the UK system compares
with the US system?
I believe it is vital that members of the MPC
are accountable to Parliament for their actions. The MPC does
this in a number of ways including issuing minutes of each meeting;
publishing a quarterly Inflation Report; writing an open letter
to the Chancellor if inflation deviates by more than one percentage
point from target; giving speeches and interviews; writing academic
articles and technical papers plus appearances before the Select
Committee.
The greatest strength of the current procedures,
I believe is (a) its transparency (b) the fact that there is a
single symmetric target (c) that there is majority voting rather
than the need for a consensus. The procedures in the UK seem to
me favourable to the US system where there is no single target
and the lack of majority voting sometimes makes it difficult for
the Fed to convey a clear message. The current procedures appear
to have worked very well.
7. If you were to make yourself available
for reappointment to the MPC at the end of your term, what criteria
should be used to assess your individual record as an MPC member?
The main criteria must surely be how well the
MPC had been able to hit its inflation targets. I would hope to
be judged on my voting record, my ability to communicate my decisions
as well as my ability to work with other members of the MPC and
my contribution to internal discussions.
C. OTHER PROFESSIONAL
ACTIVITIES
8. What other professional activities do
you expect to undertake in addition to your position on the MPC
and how do you intend reconciling these activities with your position
as a MPC member?
I will give a few lectures to graduate students
in the Scottish Economics Graduate Program. I will continue to
do some consulting work in areas I have traditionally worked in,
including wage setting of public sector workers, goal setting
for programmes in public sector purchasing, primarily in construction
and desegregation of Chicago public schools. I intend to keep
this work entirely separate from my work on the MPC. I will also
continue as a research associate at (a) the National Bureau of
Economic Research, (b) CESifo and (c) IZA. I have been associated
with these research organisations for a number of years.
9. Outside of MPC meetings, what activities
do you intend undertaking in order to add to the public's understanding
of the role and decisions of the MPC?
I intend to undertake regional visits, speak
with businesses, academics and the media and make speeches regarding
my interest rate decisions and other matters. I plan to continue
to write technical papers on a variety of economic issues as well
as attending and presenting papers at academic conferences and
seminars.
D. MONETARY AND
ECONOMIC POLICY
10. How might the system of control over
monetary policy in the UK, in place since 1998 be improved? Is
the framework of an explicit symmetrical inflation target the
best within which to conduct policy?
It is early days for me as I have not yet been
involved in any vote and have not seen the process working in
its full complexity, but it appears that the current system is
working well and is contributing to economic stability. The existence
of an inflationary target appears to be particularly helpful in
impacting inflationary expectations. I support the existence of
a symmetric target because it means that risk of an excessively
tight policy is treated by the MPC in the same way as the risk
of too loose a policy. Majority voting also appears to have had
a calming impact on inflationary expectations. The current framework
seems to have worked well. I hope the MPC is as successful during
my term as it has been over the last few years in reaching its
inflation target with steady growth and low unemployment.
11. How great is the risk to UK growth and
inflation posed by high nominal oil prices? How should monetary
policy react to higher inflation caused by increased oil prices?
The current episode of high oil prices has,
so far, only had modest effects on UK growth and inflation. Why
has this been the case? The general view seems to be that the
economy is now less reliant on oil relative to the 70s, and that
in the current episode oil prices have increased more gradually.
In addition the current monetary regime has helped to anchor medium-term
inflation expectations. In some ways this has been surprising
to me as I had expected to see somewhat larger effects on both
prices and unemployment.
On monetary policy, I think that the current
received wisdom is that lags in the transmission mechanism mean
that monetary policy is unable to affect the direct impact (or
first round effects) of oil prices on consumer prices. So central
banks have to tolerate these. But central banks need to carefully
monitor the potential second round effects. For example, it is
possible that increased consumer price inflation resulting from
the higher price of oil can dislodge inflation expectations. My
worry would be that increased oil prices might feed through to
unemployment; although the very recent downward movement in oil
prices below $70 is encouraging. The concern would be if there
were to be a significant further increase in oil prices which
drove up inflation and inflationary expectations and had major
effects on employment and unemployment. The February 2006 Bank
of England Survey of Inflation Attitudes suggests that inflationary
expectations are on the rise. The MPC will clearly have to monitor
the future impact of oil prices very carefully.
12. What consideration should be given to
the exchange rate and to asset prices, including house prices,
within the framework for inflation targeting? In particular, how
should monetary policy react to asset price bubbles?
The role of asset prices in the conduct of monetary
policy remains a controversial issue. The majority view is that
monetary policy makers should only react to asset price movements
in so far as they affect forecasts of inflationary pressures.
The alternative view suggests that monetary policy makers can
do more. Namely, by reacting to asset price bubbles, over and
above considerations of their impact on inflation, monetary authorities
can improve macroeconomic performance.
It doesn't seem to me that monetary policy can
act to minimize the likelihood of macroeconomic instability arising
from large movements in asset prices, including house prices.
This is because it is nearly impossible to identify an asset price
"bubble". How does one know if the rise in asset prices
has occurred because of fundamental factors, non-fundamental factors,
or both? In addition, there are a number of practical concerns
that have been raised. For example, the appropriate timing of
a proactive monetary policy response is difficult to determine,
the size of the interest rate rise needed could lead to a significant
downturn and there is the historically relevant risk that a bubble
once "pricked" could degenerate into a panic. Exchange
rate movements can feed into inflation, but then the inflation-targeting
policy would need to kick in.
13. How would you describe the state of the
UK labour market at present? In particular, how has net migration
impacted on growth and inflation in the UK?
The UK labour market remains historically tight.
Employment levels have been rising and unemployment has remained
at low levels for several years at or slightly above the natural
rate. Recently the participation rate has started to increase.
Wage settlements have held steady between three and four percent
although there has been a recent spike due to bonuses. There is,
however, some evidence of softening since the middle of 2005 with
small increases in the claimant count and in ILO unemployment.
There have also been declines in the number of vacancies although
most recently there has been a levelling off. The cause of this
recent softening and whether it is a start of a new trend remains
uncertain.
The overall impact of higher net migration on
inflation and growth in the medium term are not clear-cut. This
is because there are two offsetting effects. On the one hand,
a rise in net migration will raise the potential supply of the
economy. But on the other hand, migrants are consumers too, and
their spending will raise aggregate demand. These two effects
may cancel each other out, but even if they do not the impact
is likely to be modest at the level of the economy. At a disaggregated
level such effects may be more discernible. For example, if immigrants
help to ease skills shortages in particular areas, it is likely
that the wages and prices of that sector will grow less quickly
that they would have otherwise done. The trouble is, of course,
that one will never observe that counterfactual, so it is very
hard to measure the effect. The bulk of the academic literature
in the US and UK has focussed on the labour market effects of
immigration. Economic models suggest that net migration is likely
to temper wage growth. But most economists have struggled to find
any significant empirical evidence to support these models.
14. Do you believe
that the natural rate of unemployment is a useful concept? On
your assessment, where is unemployment currently relative to the
natural rate?
I believe the natural rate of unemployment is
a useful theoretical way to think about equilibrium in the labour
market. A good way to think of it is the normal rate of unemployment
around which the unemployment rate fluctuates. It is difficult
to measure empirically, and there are a number of procedures one
might use. It seems that the natural rate in the UK fell during
the 1990s, likely because of improvements in productivity but
has remained relatively flat since then. I calculate that the
natural rate is slightly less than 5% which is just below prevailing
unemployment levels.
15. How would you describe, and account for,
the recent performance of business investment growth in the UK
and the USA?
Investment growth is generally pro-cyclical
and more volatile than GDP and, like profits, very difficult to
model. The investment recoveries in the UK and the euro area appear
weak relative to previous cycles. US business investment appears
to have been a little stronger than that observed in the UK most
recently. There is no single, clear explanation for this observation;
rather it is likely to be a combination of several, quite complicated
inter-relationships. First, there may not actually be a puzzle,
since investment, particularly recent investment is subject to
a significant degree of measurement error. It is perfectly feasible
that the recent path of business investment will eventually be
revised upwards. Second, if there is a divergence, it seems likely
that cyclical factors can explain some of the difference, such
as greater corporate debt in the UK, or less clearly, because
of stronger business confidence in the US. But it may also be
the result of structural differences, with US producers having
potentially anticipated an increase in productivity not expected
in the UK. Recent concerns about rising oil prices and worries
about pension fund deficits may also have impacted business investment
in the UK.
16. To what extent should fiscal policy play
a demand management role alongside monetary policy in the short
run?
I don't believe that fiscal policy can successfully
play a short run demand management role. I believe that demand
management should be left to monetary policy. In my view government
spending and borrowing is about having a good health service,
schools and public services generally, not principally about trying
to "fine tune" the economic cycle itself.
May 2006
1 Elliott, R F, McDonald, D, R MacIver. July 1996.
Review of the Area Cost Adjustment, Waverley Press, University
of Aberdeen and the Department of Environment. Back
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