Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 200-219)

MS KATE BARKER, PROFESSOR DAVID BLANCHFLOWER, DR ANDREW SENTANCE AND PROFESSOR TIM BESLEY

24 APRIL 2007

  Q200  Angela Eagle: I would hope that members of the MPC would be able to analyse the difference between the different methods of measuring but I am thinking in a wider context as well.

  Dr Sentance: There is no doubt, viewed in that wider context, that one would hope now for a stable inflation target going forward because our job would inevitably be made more difficult by the extent to which the target is moved around, either in terms of the way it is measured or in terms of the target itself. So I would say that looking forward I am hoping that there will be stability which will make it more straightforward for the Monetary Policy Committee to do its job of reaching that target. As for the specific episode, it was anticipated, as I understood, and there was a certain amount of analysis done to smooth the transition, so I am sure that was helpful to members of the Committee at the time knowing it was coming and being able to take the necessary steps to make a smooth transition but, as I say, only one of our number knows what it was like to experience such a transition.

  Ms Barker: Because we knew it was coming and the nature of the gap between the two measures at the time, there was not any great difficulty in smoothing the transition between one or the other, but I take it that to some extent your question is about whether in the public mind the CPI commands much attention now. In some sense of course I would argue, as a lot of economists would, that the CPI is a better measure of inflation and the way in which it allows for substitution between goods as their relative prices change makes it a better measure of inflation in that sense. It also covers some products that the RPI did not cover. Nevertheless of course it does not include housing costs which are very significant and there are questions around that, and that means that when people are coming to the wage bargaining, which of course is important to us, they will look at other—

  Q201  Angela Eagle: They use RPI, do they not?

  Ms Barker: They always start off with using RPI.

  Q202  Angela Eagle: They use the highest.

  Ms Barker: But if you look at what has been happening to settlements recently, they have not increased anything like as much as RPI or indeed as RPIX have increased, so the idea that that feeds through mechanically is not right. What it does mean of course is that we have to pay—

  Q203  Angela Eagle: I was not saying it might feed through mechanically. I was saying is it causing confusion? There is no evidence yet that wage bargaining is pushing inflation because RPI is higher than CPI, but is it causing confusion and perhaps should there be a shift in wage bargaining to CPI measures rather than RPI measures?

  Professor Blanchflower: In some sense we are not seeing pay automatically linked to these measures so much as we have in the past. In some sense the settlements themselves are coming out related to what inflation is, I guess, in the longer term, so I do not think there is evidence that lots of pay settlements over time are directly linked to those measures or that because the trend has been up (because I think the trend is generally downwards) there are direct links to those measures. I take the point that Kate made that probably there is more confusion in the public's mind with this multitude of measures and the various ways of calculating your own inflation.

  Q204  Angela Eagle: There is an older person's inflation rate now, is there not, there is a whole burgeoning of inflation rates. You seem to be able to pick your own these days.

  Professor Blanchflower: You can literally, can you not, because you can go to the web sites and do so, so there is some confusion.

  Ms Barker: Can I come back on this question of wage bargaining because in some senses in the long run what you think of as determining wage growth in the economy is of course productivity, not how inflation is measured, and so moving from measuring inflation one particular way to another you would not expect to have had a big impact on wage bargaining. I hate to refer to yet another speech by Steve Nickell but he did give a very good speech setting this out and explaining what you might expect the impact on wage bargaining in the long run to be. I do not think it is particularly important that wage bargainers change their habits but I think it is helpful if, like us, they look at the different measures of inflation and have some understanding of the differences between them.

  Q205  Angela Eagle: Can I ask as independent members is there a tension between the people with business experience and the academic theoreticians?

  Professor Blanchflower: I would object to the term "theoreticians".

  Q206  Angela Eagle: The modellers, the thinkers?

  Professor Blanchflower: No, I will not accept that characterisation but I am happy to answer the question. I think the great strength of this Committee is having a diversity of views and experiences. I think the externals bring that. We each have different backgrounds and experiences. I do not see them as a contradiction. What is the famous phrase "You put six economists together and you get nine opinions". We have put nine economists together—

  Q207  Angela Eagle: At least.

  Professor Blanchflower: So I do not think there is a tension. It is a discussion amongst nine people. I value the discussion. Personally I do not find it a tension, I find it is something I have been used to over the years and there are many different ways to skin a cat. I personally do not see it as a tension. I cannot tell you what the others say but I find their contributions valuable.

  Q208  Angela Eagle: What do the business experts say?

  Dr Sentance: Kate has more experience than me but what I have observed on the Committee is that differences of judgment that emerge are not so much associated with pigeonholing someone into a category, whether it is academic versus business or internal versus external—

  Q209  Angela Eagle: —I was going to ask about that next.

  Dr Sentance: —But more differences of judgement in looking at the whole experience that people have had in their careers. I agree with the general observation that it is good to have a diverse range of experience. I do think that people with a business background bring something to the Committee in terms of both understanding how businesses are reacting to things and also looking at some of the survey indicators that are actually quite important in tracking the economy.

  Q210  Angela Eagle: Is there an obvious difference between internal and external appointments? I will ask them too so that we get an asymmetrical or symmetrical view.

  Professor Besley: At some level that has already been brought out. There is as much diversity of opinion about where things have been going in the recent past on this panel—as you would find on any similar panel. If you look at the debates that we have and the discussions and the different positions people take, I do not think they correlate at all well at the moment with internal and external.

  Q211  Angela Eagle: Kate Barker, you have probably been the longest serving of the people before us at the moment, how long do you think it takes the external members to get institutionalised by the process? Is it in danger of happening to you?

  Ms Barker: I wondered when you asked that question whether you were going to ask how long it took people to get up to speed because a different comment I would make is that when you start on the Committee there is a great deal to think about and, as it were, to catch up on. There is an acquis in Bank thinking which people need to know about and perhaps this comes back to the question of how much time people should spend on Committee work. I am pretty confident I have not become institutionalised. I do not feel like a long-term Bank employee. I continue to do some things outside the Bank. I am at the moment a board member of the Housing Corporation for example and I hope that enables me to continue to bring something into the Bank. I think all of us as a Committee try quite hard to fight against institutionalisation more generally. We have in fact over the last few months been doing some thinking about how we could improve the way in which we tackle the forecast process. That is absolutely vital. It is true that when you get new people on they help you to think about that because they say, "Why are you doing this?" A level of turnover on the Committee alongside some continuity is very useful. I am not sure anybody is particularly institutionalised, even the Bank people.

  Q212  Angela Eagle: The system has worked very well to date in terms of its outcomes. Do any of you think it needs to be changed at all or are you pretty happy with the way that it is panning out in practice?

  Professor Blanchflower: We have pondered long and hard on a number of possible alternatives. I suppose my response would be that I think we have done pretty well. The system ain't broke and there is probably not much fixing to be done, except perhaps at the edges and we can think about a number of issues, but in general I think the framework is a very good one. If change is going to come it may come at the edges, but fundamentally I think it has been very successful. That is my view but I would be interested to hear what others have to say.

  Q213  Angela Eagle: So that is a tweak rather than anything radical. Is that the general view, perhaps a bit of tweaking at the edges but nothing radical.

  Dr Sentance: The thing that has struck me on regional visits that I have done as an MPC member and through the process of joining the Committee is that there is a lot of credibility around the Committee in terms of the inflation performance being achieved, and if you go out and meet business people generally they are satisfied that the arrangements put in place have worked reasonably well. I think that should create a predisposition against changing unless real changes are seen to be needed. We are not necessarily the best people to judge but you are hearing a range of evidence from different people and I do not think the Committee should rule out recommending changes. In a sense we have to work with the existing arrangements because they are in place and we adapt to them and from my point of view they are quite workable.

  Professor Besley: A couple of comments on this, one is I think the process has been a dynamically evolving process from the start. I do not think it would be fair to call it a static process. We hear as members of the Committee and I am sure you have heard of the variety of changes that have already been implemented over the life of the Committee. It may now have reached a steady state. Right now we are re-thinking the forecast process because we wonder whether that needs a new lease of life, so the Committee does have a natural dynamic within it. The other thing I would mention of course where I get a sense of most public disquiet is around the appointments process. It is clear that that is something which by popular acclamation in a way has been raised as an issue that people are concerned about. Obviously if there is one issue that comes out of what we hear it is that there is a concern about that issue.

  Q214  Mr Fallon: Kate Barker, there was a lot of advance spin about the letter writing that this should not be seen as any kind of admission of failure but rather as more of a routine event that is bound to happen from time to time. If the letter writing is routine what is the point of it?

  Ms Barker: I think the point of letter writing—and of course in a sense it is a question for the Treasury who devised the system—is that obviously when inflation has moved quite a long way away from target there must be a question that comes up in people's mind about credibility and about whether or not the Committee has been behaving in an appropriate way. The letter writing offers an opportunity for the Committee (and although the letters are written by the Governor as we have already said the whole Committee talks about them) to set out on the day that the inflation rate comes out, and we would repeat it if the inflation rate stayed away from target for a period, exactly what the rationale is for the decisions it has taken, the way in which perhaps things have not evolved quite as expected when those decisions were taken and in some general sense how we would propose to tackle it. That then affords the Treasury an opportunity to write back and of course in that sense it could raise any concerns. It is quite right if there were going to be any concerns raised they should be raised in a public way rather than privately. That I think is the function. It is to ensure that there is some sort of public accountability to the population that when things have moved away from target we discuss them openly.

  Q215  Mr Fallon: So it is an attempt to restore credibility that has somehow been damaged?

  Ms Barker: I do not think it is an attempt to restore credibility. I would not think if you look at the way in which inflation expectations have been developing over the past year or so that there has been any great change in credibility and I think the reason for that, as I set out in one of the earlier answers, is that of course one of the key reasons behind the upward move of inflation is the rise in energy prices. If you look back at the remit and the reason that this was discussed in advance, and I think rightly discussed in advance to try and give it some context, it is very clear from the remit of the Committee that one of the things the Treasury is worried about is that if you stuck too hard to keeping inflation at target at all times and you had a shock such as the energy price shock and very rapid rises in inflation rates, to cut out the first round effects of that would have caused unnecessary output volatility, and of course the letter is the opportunity to set that kind of argument out.

  Q216  Mr Fallon: You are suggesting you have been too good at meeting the target over the last 10 years; is that right?

  Ms Barker: No, I am suggesting that over the last 10 years we were perhaps fortunate in that we did not have an external shock of the size that led us to have to think actively about that kind of trade-off, and as everybody generally has said in commenting on the letter, given the experience of the previous 10 years, frankly that has been somewhat of a surprise.

  Q217  Mr Fallon: You said in your first answer that it was an opportunity for the Chancellor to comment on your explanation. However, Ed Balls in his Oxford lecture in June 2001 said the open letter system allowed the approach to be explained by the MPC and "allows the Chancellor publicly to endorse it". That is not quite what you said, is it?

  Ms Barker: No it is not, but I would have to say the Chancellor did indeed endorse it. However, I would stick to the point I made that it would also allow him the opportunity to say something slightly different if he felt it was appropriate.

  Q218  Mr Fallon: Because the obvious question is what would have happened if the Chancellor in his reply had disagreed with the MPC's assessment?

  Ms Barker: You are raising here a very hypothetical question. I would hope that the Chancellor would never have occasion to disagree with the assessments that we have made, but we are always conscious that we are accountable to you in terms of our decisions and we are accountable to government and if it was thought appropriate for the Chancellor to make a comment perhaps he would do that.

  Q219  Mr Fallon: I am just trying to confirm the purpose of a letter writing exercise where you expect the Chancellor simply to agree with you.

  Ms Barker: I think that is why I have suggested it would not necessarily strike me as the case that he would on all occasions agree. I think the purpose of the letter writing exercise should not just be seen as something that happens between us and the Treasury, it is also part of our public accountability, so our accountability to you and as I say to the wider public.


 
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