Examination of Witnesses (Questions 100-119)|
20 MARCH 2007
Q100 Chairman: Not to mention long-term
capital management and the Russian defaults?
Lord George: Yes. I put those
in the category of the Asian crisis.
Q101 Chairman: The appointments process
has been described by Stephen Nickell as opaque. Many
others have made the same point. Do you think it is necessary
to have such secrecy surrounding the appointment process? From
your point of view as governor at that time, how did the selection
process work? Did you feel fully informed? Would you have liked
more influence in the selection of members?
Lord George: I was certainly never
shut out of it. The Bank suggested to the Treasury a list of potential
outside appointees. We would discuss it with Treasury officials.
An appointment with which I was not comfortable was never made.
I was given the opportunity to say that I could not stand a particular
bloke or that I thought he was hopeless. I never felt particularly
uncomfortable with the appointments process. There were occasions
when appointments were made pretty much at the last minute and
I believe that as much as anything else that was because the Chancellor
had an awful lot of other things to do. It might not have been
perfect, but I did not think there was anything fundamentally
wrong with it.
Q102 Chairman: In terms of the Treasury
Committee itself, what role do you think it could have? Could
it have an enhanced role? Could it be given the power of veto
over appointments? Could there be more prior public discussion
as to who should sit on the MPC?
Lord George: What you are talking
about is the appointment of technicians. One needs people who
know about the technical competence of the potential pool of people
coming onto the MPC. You will judge whether you believe that the
Treasury Committee has that kind of competence. In principle I
am all in favour of public debate, but we are talking about something
that is essentially technical rather than just democratic in a
broader way. I do not know that public debate will be particularly
helpful. It could discourage some people from participating because
there is newspaper discussion saying this chap is better than
that chap or this chap is no good. I do not know that that is
terribly helpful in the kind of process with which we are concerned.
Q103 Chairman: The changes would
be significant and the implications quite profound as a result?
Lord George: Absolutely. The last
thing we want is to introduce a political element into that decision.
Q104 Chairman: You have been coming
to the Treasury Select Committee for a number of years and putting
forward the views of the MPC. How important are meetings such
as this in terms of communicating with Parliament and the public
Lord George: Without flattering,
I think they are terribly important. The opportunity for us to
explain to the Treasury Committee what we were doing, and for
individual MPC members to explain their thinking, was a very positive
dimension. To have the technical job that the MPC is doing understood
is terrific. When I was at the BankI imagine it continues
todaywe had regular meetings with groups of parliamentarians.
That occurred probably four or five times a year. Those meetings
at the Bank were precisely in order to explain to Members of Parliament
how the Bank worked and open ourselves to questions from parliamentarians
in order to try to understand it. We do it publicly through the
inflation reports, publication of the minutes and so on, but that
is a terrifically important process which creates understanding,
and I believe that on the whole it has proceeded fairly well;
and it has helped to strengthen the consensus that I described
at the beginning. If people feel they can understand it and it
seems to be working reasonably well that is helpful.
Q105 Mr Todd: Do you think that inflation
expectations have been anchored by the actions of the MPC either
in the more technical financial community or the public at large?
Lord George: I think that "anchored"
is a strong word, but there is an understandingthis has
been happening to varying degrees from different starting points
globally, not just in the UKthat people who manage economic
policy now realise that the boom-and-bust approach is a dead end
and very damaging. I believe that that has been accepted by the
public at large. It implies that they do not expect to see inflation
reach 27% in a single year in the United Kingdom. I cannot believe
that that was ever true but it was. In that sense inflationary
expectations are much lower because people really understand that
what government and the bank are trying to do in managing the
economy is to produce greater stability. In that sense I agree.
As to whether it is precisely 3%, 2½% or 2%, I do not believe
that one will ever succeed in anchoring that, but it is certainly
down at that level rather than in double digits.
Q106 Mr Todd: Would it surprise you
that Citigroup carried out a public opinion survey which showed
widespread ignorance of the precise target, or even who set it,
whether it had changed recently and so on? That reinforces your
point that in broad terms people understand it, but in precise
terms they do not. Do you believe that there is more to be done
to educate the public on the various components of inflation,
for example linking it to concepts of asset price inflation with
which people are often quite familiar in terms of the values of
their properties? Is there more to be done to explain what these
things are and how they relate to, say, one's next wage demand?
Lord George: As I hope I made
clear, I believe that public explanation is absolutely critical
and it is an ongoing process. I do not think we will ever get
to a situation where everyone in the country knows about the MPC
and the details of the target and all that. It is the broader
understanding that we have to keep reinforcing.
Q107 Mr Todd: You are aware of the
debate about whether the precise inflation measures being used
are the right ones and whether they include the correct components
and so on. Therefore, there is a public dimension to that process.
Lord George: I believe that whilst
they are important questions they are second-order compared with
the overall understanding of the way macro-economic management
is proceeding in a broad sense. The fact is that any technical
subject is not widely understood. There is great debate about
climate change. If one carried out a survey to find out how many
members of the public knew whether it was due to solar energy
or was manmade one would find a complete void. I am very keen
that there should be greater understanding of that, but the mass
of the population will never understand the technical details.
I believe that the same is true of macro-economic policy.
Q108 Mr Todd: Should one be satisfied
that if asked people would think that inflation was around 2½%
or 3% and would not rise dramatically above that level?
Lord George: Yesand that
interest rates would be 5% or, at the higher points, at 6% or
even 7%, or that at the low point it would be 3% or 4%. I do not
believe that the mass of the population will ever understand those
things, but I believe that the broad direction, which is the important
matter, is fairly well understood.
Q109 Mr Todd: The banks sponsored
a competition among schools which focused on the inflation target
and the various levels that could be applied to achieve it. Do
you think that more could be done there?
Lord George: I believe that that
was a fantastic idea on the part of Mervyn King. That focuses
on economics teachers and students of economics at the school
level. Part of what they are doing is to study the technicalities
of this kind of thing.
Q110 Mr Todd: Perhaps there should
be more emphasis on lower level awareness?
Lord George: It is an ongoing
task and we must keep on doing it. I do not believe that there
are particular initiatives, but perhaps I do not have the imagination
Q111 Mr Todd: It has been suggested
from time to time that the MPC should have responsibility for
bursting asset bubbles. Do you think it desirable that its brief
should enable it to deal with house price inflation and specifically
adopt measures to assist with that? I merely pose that question
because it is put to us from time to time.
Lord George: For years I used
to quote the Chinese proverb "the man who tries to juggle
with too many balls ends up in heap on the floor". I believe
that that is extremely relevant to that question. The inflation
target is really a form, but what it is talking about is aggregate
demand in relation to the potential underlying supply capacity
of the economy. The inflation target is really the barometer of
success or failure in achieving that. Asset prices can be driven
by all manner of outside considerations. It is tremendously important
that the Monetary Policy Committee monitors, follows and studies
what is happening to different asset prices, financial assets,
housing and so on, as it does. Those subjects are studied extremely
carefully within the bank and are discussed by the MPC. But if
one decided to set a target for house prices and equity prices
one would end up in "heap on floor". One just cannot
focus on more than one objective. To focus on inflation is not
a narrow objective; that is the form of it, but it has broader
significance than that.
Q112 Ms Keeble: Do you believe that
the CPI is still a credible target for inflation in the UK or
should it be modified?
Lord George: Do not misunderstand
me when I say I believe that to be a second-order question. I
was not particularly keen to modify it from the RPIX which we
had for some considerable time. There were pros and cons in that
respect given that it was going to be 2% rather than 2½%
which helped possibly to reduce inflationary expectations. I would
be fairly reluctant to jump about with it because inevitably people
will say that the goal posts are being changed and it is being
done for this or that particular reason. I honestly do not believe
that it makes a fundamental difference. A 2% target for CPI is
a good benchmark for the kind of broad balance and stability that
is the big picture here.
Q113 Ms Keeble: But do you not think
there is an issue about the credibility of the MPC? You say that
the general public will never understand it, but I think they
do. You said that you were an inflation nut. Inflation is a matter
of public debate now whereas it was not for a long time. I think
people understand the difference between inflation as they experience
it and inflation as the MPC defines it because of the impact of
house prices. Do you believe it would be helpful if there was
a slightly modified target, or do you think it does not matter
if the MPC has a target that is not really credible to the general
Lord George: I would question
the statement that it is not credible to the general public. I
believe that the general public knows that the objective is to
maintain stability over time and that will be reflected in relatively
low inflation on whatever measure over time. As to the precise
target that is set I do not believe that you will ever get people
at large to agree that this is the right thing as distinct from
that. I was amazed the other day to see that the Office for National
Statistics was enabling individuals to calculate their own inflation
index. The implication is that somehow one can target individual
inflation concerns with different sectors or individuals members
of the public, which is barmy. It is a broader concept than that
and it must be one that is across the board and reflects the balance
between demand and supply.
Q114 Ms Keeble: Do you not think
that in a sense the MPC has been a victim of its own success?
People have been used to low inflationat about the rate
of 2%for a long time but now it is increasing. If you look
at the discussion in the area of public sector pay bargaining,
the main issue of debate is the fact that public experience of
inflation is well above official versions. Do you believe that
that matters, or should the MPC perhaps recognise where the public
Lord George: What you are saying
is that they should target house prices, to which I say: absolutely
not. They look at what is happening to house prices and take account
of the impact of that on wage bargaining and everything else.
The increase in household debt was certainly a subject that we
focused on in my day job, and that will be and should be continuously
focused upon. But if one suddenly says that one must look at this
or that there is no end to where it can lead. I am very happy
with where we are.
Q115 Ms Keeble: How do you explain
to the public whose experience is that prices are going up considerablyall
of us as MPs hear thatthat inflation is at whatever level
the MPC thinks it is, which is about 2%?
Lord George: It is not what the
MPC thinks it is. That measure of inflation is calculated by the
Office for National Statistics and that will anchor inflation.
It may not do so to the same level but it will fluctuate around
that and other measures of inflation, but it will anchor the general
level of price increases. One can have endless debate about precisely
what one should and should not include. I just think that the
overall objective will be undermined if too much attention is
paid to particular measures which reflect the expressed opinions
of particular groups of people in society.
Q116 Mr Newmark: As a supplementary,
you are setting the terms of reference. By definition you are
saying that inflation is x because you have set those terms
of reference by which to measure inflation, but I echo a lot of
what Ms Keeble says. Either at the doorstep or in my surgery people
say to me that they read in the papers what inflation is but their
experience tells them otherwise. It is a big problem particularly
for pensioners who say that for them inflation is running at 7%,
8% and 9%, not 2%. That is problematic. We need to do some thinking
as to what the terms of reference necessarily are.
Lord George: I think you should
look at what would be the implications for the economy as a whole
if you targeted pensioner inflation
Mr Newmark: I understand the point you
make about targeting individuals, but if you ask the 646 MPs they
will say that when they get onto the doorstep the feedback is
that these may well be the facts that people read in the papers,
namely that inflation is 2%, but it bears no resemblance to real
life experiences. It may beI am not saying that we shouldwe
need to think about what those terms of reference are for the
inputs into whatever inflation index we are using, whether it
is CPI, RPI or whatever.
Q117 Ms Keeble: What makes it worse
is that the one tool that the MPC has is interest rates and that
filters through to our constituents in the form of higher mortgages.
That makes them complain even more; it becomes cyclical.
Lord George: Yes, if house prices
are going up. But one has to step back and recogniseI referred
to it earlierthat when we were in an environment of global
economic weakness at the beginning of the decade it meant that
external demand was declining. Related to that, business investment
was declining. One had only two alternatives in sustaining demand
and keeping the economy moving forward: one was public spending
and the other was consumption. It is true that taxation and public
spending can influence the demand climate and consumer spending,
but confronted with what we saw we knew that we had to stimulate
consumer spending. We knew that we had pushed it up to levels
that could not possibly be sustained in the medium and longer
term, but for the time being if we had not done that the UK economy
would have gone into recession, just like the economies of the
United States, Germany and other major industrial countries. That
pushed up house prices and increased household debt. That problem
has been a legacy to my successors; they have to sort it out,
but we really did not have much of a choice about what we did
unless we accepted that we would yank it back or give up stability
altogether. That is the point I am trying to make in answer to
Mr Newmark. There are some peoplemaybe lotswho say
that house prices is the biggest problem, that the mortgage rate
is going up, housing is not affordable and so on.
Q118 Mr Newmark: There are a whole
host of other issues including council tax.
Lord George: There are always
things that one can bring into this kind of pot and within that
there would be social judgments which are not for the MPC; they
are for government. But my concern is that if it is said inflation
or RPIX is so much that is one measure. If one looks at pensions
a lot of pensioners will say that inflation is at 8% or 9%. If
one really wants to target that measure of inflation, or include
it within the inflation target, one will be giving up low inflation
and accommodating those people. The only way in which we could
bring down inflation would be to clamp down on the economy which
would mean rising unemployment and falling output. Of course I
understand when employees in the health service and schools say
that it is not good for them, but one must look at it over time.
If one focuses on that too much at the moment one will either
inspire action that causes the economy as a whole to weaken or
undermine the commitment to stability in the broad sense which
has been so successful for us over the past 15 years.
Q119 Mr Newmark: For the past four
or five months in a row effectively earnings, excluding bonuses,
have not kept pace with inflation. Do you see that as a problematic
trend? Is there an issue about which we should be concerned?
Lord George: I believe it is something
that we should all applaud because if it had kept pace with inflation
then underlying inflation would have been higher looking forward.
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