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5.51 p.m.

Lord Kingsdown: My Lords, it is an honour to be able to follow the noble Lord, Lord Nickson, after such an excellent maiden speech and to congratulate him on behalf of the whole House. The noble Lord, as we have seen, is a man of wide experience in industry, commerce and in many other important national and voluntary activities and organisations. As we have also seen, he adds eloquence and wit to this wealth of experience. I am sure that the House will hope to see and hear him frequently.

I wish to continue perhaps with his theme--that of wealth creation--but to concentrate particularly on the influence of low inflation on our economic life and our wealth creation. As the noble Earl, Lord Ferrers, told us earlier on, the rate of inflation in the United Kingdom now is the lowest for 27 years and the prospects look better than they have ever been within the adult memory of most of the population. I see this as something to be welcomed and as one of this Government's great achievements. They have set themselves stringent inflation targets and they are hitting them. The new openness flowing from the Bank of England quarterly inflation report and published minutes of the monthly meetings between the Chancellor and the Governor, has done much to strengthen the credibility of our monetary policy in the eyes of the public and above all in the eyes of the markets. Yet I think it is interesting to contemplate how widely all this is approved or recognised as welcome by people at large.

Clearly, it is pleasing that basic prices are not going up but I am not sure how many people believe it, so deep is the cynicism about inflation in this country, no doubt on account of continuous experience. I fancy there are still people with savings who would like to see their deposits once again earning double digit interest rates but who overlook that their present real rate of return may now be better than it was at those high nominal rates. There will also be house owners who would clearly like to see a rise in house prices, albeit nominal, to escape from negative equity. I have to say that I have great sympathy with them, although I believe that a stable market in house prices is a very important element in a stable economy.

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I know of some industrialists who have pleaded with me that surely a little inflation has never done any harm and that price rises, perhaps modest but regular, are a great help in running a business. The repayment of debt in devalued currency is not such a harsh experience as true real repayment. Exports are easier, surely, when sterling is not held at a level to check inflation. Finally, can it really be right that in the name of low inflation so many people should be out of work?

It is when the plaintive tone reaches that question that the advocate, indeed the implementor, of stable monetary policy is confronted with his greatest challenge and his most serious argument. It is this problem that I wish to address as best I can. It may be ambitious of me, I acknowledge, because I believe it to be the major policy issue currently facing developed countries, and it is likely to remain so for the rest of the decade. It is from this issue that the greatest pressure will come on economic, financial and monetary policy makers.

If, very generally, inflation was the problem of the '70s and the '80s, the comparable problem of the early '90s has been and is the level of Government deficits. This is now being addressed, at least in our country. Yet for so many countries these deficits are connected with the level of unemployment and the cost of benefit payments that flow from it. I know that we can hope to see, and indeed do see, some respite here as economies once again resume growth. If so, why not be more vigorous in pushing economic growth? Why not indeed? But past experience suggests that it is at this point that we have to be very careful.

The rate of unemployment in the United Kingdom has increased markedly and steadily over the past 30 years. In the '60s the unemployment rate averaged 2¾ per cent.; in the '70s it was 3¼ per cent. and in the '80s it was 9 per cent., and this is where the rate currently stands, although mercifully it is falling. We need not torment ourselves that this experience is a problem specific to the United Kingdom, indeed our record is better than many of our European partners. In the European Union, unemployment has almost quadrupled in the past 20 years from 2.7 per cent. to 10.7 per cent., while in that period the rate in the OECD countries has more than doubled from 3.5 per cent. to 7.8 per cent. In the United States the increase has been considerably smaller--from 4.8 per cent. to 6.7 per cent.

We need also to bear in mind that the experience of unemployment is unevenly spread across a population. For many, the spells of unemployment are long. Of those unemployed in Europe, almost half have been unemployed for a year or more; that is, are long-term unemployed. The comparable figure in the United Kingdom is 35 per cent. and that in the United States for long-term unemployed is 7.2 per cent. That is a sharp contrast and I will return to this difference later.

We need to try to understand this phenomenon of high, even growing unemployment. What might constitute a cure? Policy makers across the developed world are addressing themselves to this matter at the Detroit jobs summit, through an OECD study, a European Union White Paper and follow-up work to it for ECOFIN. We have here in the United Kingdom a

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process of policy reforms that has been continuing since the '70s. I think for policy makers a necessary distinction is the degree to which unemployment is cyclical against that which is structural; and the difference crudely is that part of unemployment, the structural part, which is not reversed by a subsequent economic upturn. The structural part has attracted the idea of "the natural rate of unemployment", the rate of unemployment which follows when inflation is stable. This concept is much embedded in the literature on unemployment and has inspired much work and disputation among learned economists. I hope I shall not offend them too much if I simply say that the value of the concept is to emphasise that attempts to reduce unemployment below its natural rate by monetary or macro-economic means are unstable and probably ineffective in the medium and long term and potentially explosive for inflation.

Fluctuations in unemployment round the natural rate in response to aggregate demand can be seen as cyclical only: fluctuations, and above all reductions, in structural unemployment are the result of movements in the natural rate itself--changes in labour market institutions, demographic effects, advances in technology, growth in international trade, and so on.

No doubt issue can be taken over that distinction between cyclical and structural unemployment, and above all over estimates of what the natural rate either is or could be. However, there is one painful conclusion to be observed from the United Kingdom experience. There was a time when many people took the view--and some things that I have heard suggest that the view lingers on--that unemployment is essentially the result of inadequate demand and that it could be reduced by pursuing expansionary fiscal and monetary policies. It could indeed, up to a point and for a time. However, what has emerged in past years in practice, clearly in our country but not uniquely, is that there were limits to that approach. Those limits were repeatedly exceeded, inducing growth beyond capacity constraints which spilled over into higher and accelerating inflation with the inevitable ultimate tightening of policy and its concomitant short-term rise in unemployment.

However, the problem seems to have gone deeper than merely the ups and downs of each cycle. The ups and downs over time did cumulative damage. The top of the ups and the bottom of the downs were each lower with each cycle, resulting in lower average growth, employment and rate of investment and finally a lower potential rate of growth over the medium and long term. In other words, a cyclical process cumulatively produces a structural result.

Can we separate out the cyclical component of unemployment and deal with that as a start? The answer is in the affirmative to the extent that we can flatten out the ups and downs of the cycle. I doubt if we can ever eliminate the economic cycle itself, but sound macro-economic policy over a sustained period can go a long way towards that flattening.

Here it is appropriate to emphasise that stable money and low inflation are not simply totem poles, a source of professional self-satisfaction for finance Ministers or central bankers, an objective in themselves, but only

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essential ingredients of the real objective of economic policy, a means to the end of sustainable economic growth with all that that contributes to sustainable employment, low government deficits and rising prosperity.

What about the deeper problem of structural unemployment? Here the experience in the United States can tell us something. I said earlier that the figure for US long-term unemployment is 7.2 per cent. of the unemployed in contrast with the UK figure of 35 per cent. and that for Europe of nearly 50 per cent. The explanation for that sharp difference appears to be crudely that, while the prospects of losing your job in the United States are higher than in Europe, the chances of finding another one quickly are also much higher. The US labour market is the freest and most mobile in the world. The figures that I have just given are a consequence of that. There may be social elements in that which are not likeable, but we need at least to understand the phenomenon. By contrast, in Europe you have a better chance of holding on to your job, partly because employment protection is greater, but, if you have the misfortune to lose the job, your chances of finding another one quickly are more remote.

I believe that, as we move more and more from the concept of a job for life, whatever the colour of your collar--blue or white--to the need for skills for life in various jobs during a working career, we shall have to be prepared for a pattern of change and mobility more akin to that obtaining now in the United States. That preparation will involve increasing policy concentration on education, training, retraining, anything to improve qualifications and skills, greater mobility, housing policies to facilitate that mobility--all those moves with which we are familiar but where progress still needs to be made in both policy and its implementation.

Where progress has been made, and well made, is in that other field of monetary stability and the essential contribution that that makes. Let us hold on to that with conviction without failing to put our backs behind the structural changes which are still necessary and still incomplete.

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