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Baroness Hogg: My Lords, I shall not go into the calculations of weighting means, but I believe I could pick out some weights that I should like to attribute. I believe I am right in saying that it was Truman who prayed to the Almighty to give him a one-handed economist.
It is essential that the Bank is infused with contrary opinions and new ideas. That can be achieved by a succession of outside appointments, which the Bank has come to accept. My guess is that sooner or later--assuming, of course, that the Bank remains independent of the European Central Bank--the MPC will have to evolve closer to one of the two pure-bred models I described.
Meanwhile, I make one final point. If the Bank is to turn itself into a substantial academic institution with nine monetary economics departments, it is still not at all clear to me that its numbers need to increase. Even though regulatory responsibilities have passed to the FSA, the Bank seems to have retained a curiously large number of staff in the non-monetary area, right up, if I may say so, to a double helping of deputy governors. If it wants to keep the independent element in the MPC lean and mean, it could perhaps lead by example.
Lord Skidelsky: My Lords, I add my congratulations to the noble Lord, Lord Peston, and to his colleagues for producing this important and thought-provoking report. If I may say so, this is the type of thing which our House does particularly well. It brings to important issues of public policy a lucidity and dispassion which are not always the most conspicuous features in the other place. Politicians think politically, and no one can object to that. However, policy is not just about politics; it is about what will work, and that is partly an intellectual question--a question of technique. Nowhere is that more so than in monetary policy.
When I refer to this report as "dispassionate", I do not mean that it is uncontroversial. It shows very clearly that the theory of monetary policy is far from being an exact science. I would put it even more strongly than did the noble Lord, Lord Burns. Here are some of the unsettled questions which seem to emerge from the report. By what channels do changes in interest rates influence the price level--by changing the value of domestic assets or via the exchange rate? Do changes in interest rates have long-term effects on the real economy? What is the appropriate monetary policy target--the inflation rate, the exchange rate or the money supply? What is the right measure of inflation--the retail prices index or something called
Criticism has been made of our relatively high interest rates and their knock-on effects on the exchange rate. I sympathise with all those who have argued that that puts their businesses in jeopardy. But surely our interest rates reflect the higher perceived risk of inflation in this country. Any new system trying to establish its anti-inflationary credentials is bound to be more cautious to start with than it can be later on. That is an important point.
I shall pluck out three issues. I had intended to say something about the way in which the Monetary Policy Committee was set up, especially in the light of the recent complaint by the four independent members that they had too little influence on the Bank's research. I do not need to add to the excellent Leninist joke of my noble friend Lord Saatchi on that point.
However, reinforcing what others have said, I am pleased to note that the report accepts that the independence of the external members of the MPC needs to be fortified, not only inside the Bank but also against the Chancellor. Three-year renewable appointments at high salaries seems to raise the problem of inconsistent incentives. Therefore, I agree with the committee when it says that the appointments, as well as being staggered, ought to be for five years rather than three and in general should be non-renewable.
This discussion demonstrates that there is no guarantee in the Chancellor's system that monetary and fiscal policy will be consistent with each other. Had fiscal policy been tighter in 1997 it is possible that monetary policy could have been looser. That is an example of what can happen when there is a monetary constitution but not a fiscal one to go with it. In place of a fiscal constitution we have the Chancellor's commitment to the golden rule. However, he is at liberty to break that whenever he wants and it is much too vulnerable to creative accounting.
I urge the Government to consider setting up a fiscal policy committee whose job it would be to police the definitions in the public accounts, including what we mean by "capital accounts" and to keep an eye on the Treasury's cyclical forecast. In order to satisfy the criterion of the noble Lord, Lord Barnett, of complete impartiality, that committee could also be given the job of costing Opposition spending plans. There will never be a sure-fire way of dealing with what Keynes once called the "wicked Chancellor problem" or even the wicked Shadow Chancellor problem. A fiscal policy committee of the kind that I have suggested would be in line with the present trend to place macro-economic policies at a further distance from electoral politics.
My final point is more fundamental. We all tacitly accept the assumption that the great reduction in the inflation rate achieved since the 1980s has been due to a more independent monetary policy, a process started by Kenneth Clarke in the previous Government. However, I noticed that Mr Clarke is far from convinced of that himself. In his evidence to the committee he said:
What happens if, as the noble Lord, Lord Desai, and Mr Roger Bootle suggested in their evidence, the natural rate of inflation falls even further and we enter an era of falling prices, as happened in the last quarter of the nineteenth century? All our thinking and policy-making since the war have been geared to the problems of an inflationary economy. We have scarcely begun to think about the consequences of an economy in which prices have a natural tendency to fall. What would be the effect of that on output and employment? What kind of mandate would the Chancellor give to the Bank in those circumstances? Those problems may come upon us sooner than we think. That is a matter for another Select Committee on another occasion.
Today we have heard four excellent maiden speeches. The House is made richer by the arrival of those noble Lords and I look forward to hearing more contributions from them. I am sorry that the noble Lord, Lord Londesborough, will not contribute in future dates, but perhaps we shall see him in another incarnation.
A decade or so ago, the notion of entrusting central bankers with independent operational responsibility for monetary policy would have been unusual. It is testimony to the exceptional changes that have recently taken place in the world of economics that this idea has increasingly become a global reality. As your Lordships know, we too have lived under this new regime for about two-and-a-half years, yet the very newness of this process raises certain fundamental issues.
The Select Committee on which I had the honour to serve was very much aware that it was sailing in uncharted waters. In many ways, the report before the House today reflects that perception. As an ordinary manufacturer, I found sitting in the company of such eminent colleagues a daunting task. I thank the noble Lord, Lord Peston, for his excellent chairmanship which made the work of the committee most enjoyable.
The wisdom of transferring operational responsibility has, I believe, been affirmed by what we have seen of its working. So I would like to pay tribute to the vision of my honourable friend the Chancellor of the Exchequer, who so courageously decided to initiate and implement this effort. Rare is the politician who seeks to depoliticise history. Few things are for ever, but perhaps the new approach will give us the long-term price stability that is so essential for solid and steady economic growth. Policy independence may well liberate us from those cyclical gyrations that are inspired by the temptations of politics. This is certainly something which we all find desirable.
Your Lordships will have noted that the report of the Select Committee raises certain conceptual concerns. Obviously, the franchising of an initially untested mechanism such as the Monetary Policy Committee provokes questions about public scrutiny and parliamentary accountability. That we have thus far had few serious worries about this is more a tribute to those who serve on the Committee than to the viability of existing procedures. This is why I strongly endorse the sentiments of the Select Committee that this House should consider its reconstitution on a permanent basis. Insulation from political pressures does not mean insulation from scrutiny. Indeed, I feel that ongoing scrutiny can significantly contribute to the workings of the Monetary Policy Committee.
My satisfaction with the overall operations of the MPC is somewhat tempered by its impact on the manufacturing industry of this country. I believe that manufacturing is a fundamental part of the economic
This has had an unfortunate impact on the manufacturing sector. Recent reports indicate that the number of companies going into receivership in the third quarter of this year was increased by 13 per cent and that manufacturing businesses accounted for more than one-third of this. The Midlands has been worst afflicted, with receivership rising by 57 per cent over the past year. It is difficult to estimate precisely what proportion of this is due to exchange rate disadvantages. However, it was the view of several witnesses who testified before the Select Committee that exchange rate disadvantages contributed significantly to these problems. Having had some experience in this area, I strongly concur.
Your Lordships will also have seen press reports about how exchange fluctuations cause companies to fix their own artificially adjusted rates in their transactions abroad. My noble friend Lord Barnett asked what the rate should be. One of the companies in Europe has already decided that it should be 2.60 to 2.65 when they purchase products from Britain. These are not healthy developments for British business.
I believe that the Monetary Policy Committee needs to examine this situation with some urgency. Macro-economic stability is a worthy objective, but it would be much more useful also to take into account the sectoral impact of policy. If the MPC is unable to find a satisfactory resolution of this, or if its remit does not embrace exchange consequences or sectoral analyses and adjustments, the Government must evolve some other mechanism to deal with it. As our principal competitors and markets function under a common euro rate, British industrialists are heavily penalised. Such penalties will increasingly be reflected in lower profits and declining investment, to our future detriment. Without continuing investment, it will be impossible to support the advances in research and production that are so essential to meet the challenges that today's competition demands. We simply cannot allow this to happen to British manufacturing.
Perhaps I see the Monetary Policy Committee in too large a context. However, I think that we have in the Committee a very valuable economic instrument. I am anxious that it should be used to make the broadest possible positive impact on our economy. However, as it grows into full maturity, it will need to look more closely at the interconnections and relationships that it engenders. As it does so, it will appreciate that the
Lord Howell of Guildford: My Lords, this undoubtedly is an extremely interesting report, put together under the very skilled and experienced chairmanship of the noble Lord, Lord Peston. I read it very carefully and found it to be full of very wise cautions about the spurious precision and alleged magic properties of economic fine tuning. Indeed, that is what I would expect of a committee that was able to draw on the timeless wisdom of my colleague, the noble Lord, Lord Roll, from whom I have learnt a very great deal over the years and with whom I have had the privilege to work outside your Lordships' House.
I have listened with interest to the debate and in particular to the marvellously illuminating speech of my noble friend Lord Skidelsky. In the light of the questions that he raised, in the light of the onrush of electronic-commerce, the beginning of that vast area of transformation, and in the light of the total capital markets revolution that is now taking place, transforming the entire workings of financial markets world-wide, I could not help but feel that, to borrow a phrase from the late Anthony Crosland,
I begin with the simple theory that is set out very clearly in the report behind the MPC and behind the whole attempt by central monetary authorities to control inflation. The theory is simple. It is that raised interest rates in the short term will reduce demand and so drain out inflationary pressures which it is feared will develop in the future. That is what the simple mechanism demands. That is what lies behind the activities of bodies such as the MPC or central monetary short-term economic fine-tuning around the world. However, this report highlights very clearly that, in practice, the transmission mechanism is infinitely more complex. I suspect that it is even more complex--dare I say it--than the report itself suggests, because no more are price levels chiefly determined by demand levels; nor is demand, even if that can be influenced or determined by fine-tuning interest rates. We have to accept that; we heard it in some of the speeches from your Lordships this afternoon.
Other factors which probably lie not only outside economic models, but also outside economics altogether--certainly economic theory--are far more influential in operating on what is likely to be the evolving price level two years on, or whatever the policy goal is. By that I mean of course the amazing advance of competition; transparency throughout the world thanks to the Internet and the rise of e-commerce; the collapsing transaction costs of the kind with which your Lordships are familiar--in the American banks a transaction that once cost 100 dollars now costs one cent, and that is mirrored in
It is interesting that the Cabinet Office Performance and Innovation Unit says in its e-commerce report--an interesting document--that communications technology over the past three years not only contributed 35 per cent of total growth, but also had a significant downward pressure on inflation. It is an anti-inflationary force which lies far outside anything to do with jiggling around with interest rates or peering two years ahead and trying to hit targets. So the Select Committee is totally right to question the great over-simplicity of this relationship and the doctrines and views that lie behind it. That is my first point. But I would go a little further.
My second point is: does the Monetary Policy Committee (this applies to any central monetary authority) really know what the true price inflation rate is? A guess two years ahead is a matter of opinion. Does it really know it now? In Section 3 of this excellent report it is pointed out, as others have, that inflation can be altered at a stroke just by adopting a different index. Even then, those indices may be extremely unreliable because there is great difficulty in getting hold of quality improvements, discounts, sales and all the other realities of the price level. So the question of what inflation is now is really a matter of art and dart-throwing rather than any accurate assessment.
Thirdly, can the MPC, or a similar body, really measure the demand, internal or external, or the output capacity that exists in a knowledge-based economy? I do not believe it can. The output of an economy nowadays is the output of a process; not a fixed system. It is a process of a massive accumulation of intellectual capital and in that atmosphere the output gap, by which the MPC lays considerable store, so it says, is simply an unknowable quantity. There is no static and fixed ceiling to the capacity of an economy like ours. Any short-term pretence to regulate the economy in the belief that one knows what the capacity is, what the demand is and what the gap between them is--all of which are unknowable quantities--is likely to lead not to more stabilisation but to more instability.
Fourthly, does the MPC know what the level of productivity is? In America many economists are now conceding that they have no idea how to measure productivity now that the main economic resource is no longer labour, land or capital, but intellectual capital and knowledge. If all the gains of technology do not show up in output measurement because they are embodied in better quality, larger variety, greater user-friendliness and that sort of thing, then how can one know, from looking at the conventional measures of productivity, what is really happening in the corporate sector?
Fifthly, does the MPC have any more idea than the rest of us about the level of employment? The work pattern, as we know, is dissolving. It is not the old measure that our forebears thought they could make of the labour market. It is dissolving into a swirling blur of full and part-time work and self-employment, and the nature of work itself is changing. That is why concepts like NAIRU (non-inflationary rate of unemployment) are now completely meaningless and do not help at all in guiding economic policy.
Sixthly, can the MPC separate manufacturing and services? We go on about the manufacturing sector, but this kind of "sector approach" is completely out of date. Certainly in the financial sector there is no hope of disentangling manufacturing, which is riddled with services, from services which are interwoven with manufacturing. The whole thing is also permeated by information technology which is neither a service nor a manufacture and has no economic categorisation at all. That is not just opinion. We know what happened when the poor Office for National Statistics got into a muddle over this. It did not know what the service industry was. Then, when it felt it did, it tried to measure earnings in it but unfortunately the wrong people replied to its questionnaire and it could not get hold of the bonuses and so forth. It then came out with some figures which completely misled the distinguished MPC, which consequently raised interest rates. Afterwards it admitted it would not have done so if it had known the truth.
Seventhly, even if the MPC could measure the real economy, which I do not believe it can, and the current level of demand, which I doubt, one has to ask the question which is again raised in this report: can it really fine-tune the real economy via short-term interest rates? I doubt that very much indeed. That is partly because it is all a very crude and indirect mechanism; partly because the whole myriad pattern of borrowing and lending rates today and the new financial markets in which we operate, reflecting the needs of millions of participants, are vastly varied, and changing official short-term rates may only affect the shortest of short terms at the very beginning of the term structure and the yield curve, but not beyond that point. Again, that is a point made very well in the report.
So, in our revolutionised capital markets, I feel that one can almost validly assert that command of the whole interest rate structure is actually impossible and attempts to fine-tune it from the short end are completely impossible. One hears people like Alan Greenspan, who is a wise man, admit that central monetary authorities can only have an oversight. They cannot control.
Eighthly, can the MPC operate on the money supply? No, because smart cards and non-bank credit sources are now making the monetary economy decreasingly controllable. There are people in your Lordships' House who doubted whether the supply of money or the quantity of money was ever a realistic concept anyway. I agree with them and so do many professorial experts outside this House. Even if they could control the supply of money or even if interest
Above all, of course, the whole business of the transmission depends, as again this excellent report makes clear, on whether or not people believe that these endless little changes will be long or short lasting. By definition, as they are so frequent, most people take not the slightest notice. They are very short-lasting. It is believed they will be changed again. That is what paragraph 4.16 of the report rightly indicates.
I do not dispute that low inflation is desirable or that sound money is of significant but not of total importance in achieving a low inflation environment; but I question whether we have put this matter in the right perspective. The best recent headline I saw was one from the national institute, which said that the MPC could have left interest rates alone--another noble Lord made this point--and the outcome would have been no different.
That leads me to only one conclusion: that the powers of central bankers, not only the MPC, are nowadays vastly exaggerated. When I was at King's College, Cambridge, 40 years ago, Maynard Keynes' ideas dominated and the Keynesian "demand" fine-tuners were the lords of the earth; now the central banking, monetary fine-tuners are the lords of the earth. They are the high priests of a dying religion, practising arcane rituals while the crowd, which is mainly the bond markets, sway and murmur at every rumour of priestly activity. I suppose the height of mumbo-jumbo is this absurd "Taylor rule" about neutral interest rates, with which I shall not bore your Lordships now. It is the ultimate nonsense in over-scientific economic manipulation.
With the exception of the Austrian school of economists, which I greatly admire, the truth is that modern economists are really artists pretending to be scientists. Like the rest of us, they are amateurs pretending to be professionals. I strongly believe that economic theory today of the modern kind creates a deformity of perception about what is going on in our society and what policy makers should be doing.
We need a much more humble understanding of the very marginal role which monetary fine tuning, like fiscal fine tuning before it, can play in the evolution of our prosperity and in the driving forward of a modern wealth-creating economy. If that sounds heresy today, I forecast that it will be orthodoxy tomorrow. The sooner we understand, as the Austrian school really did understand, what drives the economic processes of growth and employment, the sooner we can stop wasting our time on the spurious and discredited science of economic management.
Lord Bruce of Donington: My Lords, I suspect that I am not unique among your Lordships in being quite surprised when, within a matter of seven or eight days after the general election, the Government, through its Chancellor of the Exchequer, announced that they were renouncing one of the most important controls to affect the British economy--namely, the determination of the rate of interest-- and establishing the Monetary Policy Committee.
I have always been a little suspicious when people talk about becoming "non-party" or "non-political". That always seems to me to indicate that there is some doubt somewhere about one's own cherished political and economic beliefs. That is undoubtedly so because, immediately following the announcement, economists began to take an interest in the whole economy and also to challenge some of the basic assumptions that they had hitherto made. All this is very desirable. If going "non-political"--and I am afraid that that description can never apply to me--produces a tendency to doubt among economists generally, professional economists in particular, so be it.
In fact, I detect a re-examination among economists of all the assumptions on which their publications and their public utterances have been made in the past. That is good. Speaking more philosophically, I think that there is beginning to be--astonishingly enough--an admissibility of a possibility of error. Perish the thought! When people begin to admit the feasibility of error, that is the beginning of wisdom. The Select Committee's report reflects exactly this new and welcome humility among those who are, after all, quite ordinary mortals, despite their economic qualifications.
I should also like to pay tribute to the members of the committee in the questioning of the witnesses. Even in the case of the noble Lord, Lord Ezra, who, as we know, is one of the mildest mannered of people, there was an occasional note of asperity in his questioning. I have looked through the evidence and have read the report. I repeat: I congratulate both the chairman and the committee on their work.
The noble Lord, Lord Skidelsky, admitted this afternoon the extent of the present uncertainties. Practically every part of economic analysis in the noble Lord's mind is now open to question. Of course that should be so. Up until now, economists have based their conclusions largely on the assumption that people behave reasonably. But people do not behave reasonably.
The other reason why there is unease--and this has exhibited itself in the Monetary Policy Committee and the Select Committee--is the tenuous nature of the data upon which those concerned are constrained to work. In determining price stability they have to rely on the RPI and the harmonised index of consumer prices: the first of which operates on the basis of arithmetic means; and the second on the basis of geometric means. Indeed, "means" is the word because they tend to operate on averages. There is no such thing as an average person in the country, except perhaps by accident. The conditions of people vary and the conditions of price vary. They vary not only from town to town but also in terms of time and in terms of coverage, and are very difficult to ascertain.
There was a time--now happily passed--when price data was collected during the spare time of workers in the social security departments. I gather that that practice has now ceased and that there are possibly slightly more authentic means of filling in the forms to send back to headquarters as to how local prices are going. But in point of fact the data, which is at the disposal of the MPC and of the Select Committee, does not rest on a firm basis.
There is a further reason for insecurity in the matter. The effects of actions that are taken in relation to interest rates are known. My noble friend Lord Paul has given some graphic examples of the effects of interest rates on the export industry. We cannot determine effects from data--when it is available and used for that purpose--within a couple of years. That means, in effect, that at this stage we have little idea--the committee of your Lordships' House has little idea of this--of what effect the activities of the Monetary
One view to which the committee committed itself--I understand that the report was unanimous--is that in the long term inflation and unemployment have but little correlation; at least the committee states that that is now the majority view. However, we simply do not know whether that is the case. The other assumption of ruling economic thought has always been that somehow one can identify the large and powerful interests in the City of London as being identical with those of the country as a whole. If the City and institutions prosper, this is automatically assumed to indicate a national recovery. However, that is far from the case.
As a recent report from one of the prominent statistical institutes indicates, there are 2 million people in the country without any assets at all. There are 12 million people in the country who are at or below the accepted poverty line. However, they are part of the economy. I do not speak in the personal sense but they are a factor to be taken into account. Yet the committee has not had in its possession--or, if it has, it has not seen fit to endorse it--the opinion of the Commons Select Committee on the validity of national statistics.
The statistics that are used for unemployment vary according to convenience. One set of statistics which is related to what is called "the claimant count" comprises a figure of 1,200,000 and the other relates to what is euphemistically described as the "Government's preferred index"; that is, the ILO index, which is another half a million more. If one takes into account the real figure of people available and wanting to work, the figure rises to 4 million.
Is, or is not, the state of unemployment in this country and the state of wealth or poverty in the country as a whole, a factor to be taken into account by the MPC, always subordinate, of course, to price stability, as the Chancellor has made quite clear? These are matters to which the MPC should address itself. These are matters moreover which, in my respectful submission, should in future be considered by the committee of your Lordships' House which, in addition to becoming permanent--which I believe it should be--should be given a far wider remit in considering rather larger areas of the economy than the question of interest rates in the light of what it considers to be prevailing economic trends in the country.
These are matters for your Lordships' consideration. I consider that one of the most compelling reasons for the appointment of your Lordships' committee on a more permanent basis, and for the extension of its remit, is the fact that there is a Treasury representative in every Ministry in the United Kingdom. It is the Treasury that ultimately determines the development of social policy. I think that social policy has a relevance to economic policy. Either people are poor and subject to crime, injury, ill health, lower life expectancy and all the rest of it, or
These are the matters which I hope that the committee will be able to address. I hope that it will draw evidence from those in Ministries and from those in the Treasury itself who have representation in individual Ministries, in order to make sure that a sane and reasonable economic and monetary policy is followed in the interests not of one section of the community but of the country as a whole.
But first I would like to use this opportunity to thank the many witnesses who went out of their way, sometimes at considerable personal inconvenience, in order to give evidence to us. I have little doubt that their evidence will be of great benefit to economic policy-makers.
We have travelled over quite a lot of well trod ground already tonight. However, there is little doubt that the remit of our committee, coupled with time constraints, prevented us from looking in sufficient depth at the possible long-term consequences of the new relationship between the Governor of the Bank of England and the Chancellor. Does dual control work? Will it work under adverse conditions? Can the ship of state be satisfactorily steered by two captains?
We did not look in depth to see whether these new arrangements can and will give the appropriate balance between monetary and fiscal policy. We did not examine whether there are alternative arrangements which might help achieve the same goals but with fewer adverse side effects.
Currently all concerned are preening themselves with delight at the apparently successful outcome of the present arrangements, but a number of questions have to be asked. Has their apparent success in controlling inflation been due to the new mechanisms or coincidentally due to these mechanisms operating at a time when we are fortunate to have a particularly benign inflation scenario, helped not least by the dramatic fall in world commodity prices? Coupled with this, of course, has been the exceptional strength of the pound.
This begs the question as to whether the control of inflation, largely through the interest rate mechanism, is the right method, particularly under adverse conditions probably coming soon, when commodity prices start to rise. That was a point well made in the maiden speech of the noble Lord, Lord Lipsey.
So often in the past we have seen governments raise interest rates and all the costs that go with them in order to try to control externalities, but in doing so they have merely exacerbated the very malady they have tried to cure. That point was well made by the noble Lord, Lord Howell.
Interest rates are a very blunt weapon, and it has to be asked: at what cost has inflation currently been controlled? As the noble Lord, Lord Paul, pointed out, manufacturing output has barely grown, our balance of trade has deteriorated and the whole of our export and internationally exposed sectors are having an exceedingly rough time--agriculture in particular. What a paradox, when in practice these very sectors are the least inflationary, and most domestic inflation is generated by the service sector, which largely booms along, thriving on an overvalued pound. Surely there must be a better way of controlling inflation than--to put it crudely--in order to take the heat out of the housing market, we batter the export sector.
Some people may argue that it is desirable to raise the value of the pound in order to control inflation. They have obviously never been in the front line of exporting. Profit margins seldom exceed a few per cent; if the value of currency rises over 10 per cent, as it has done recently, margins disappear. I wonder how many people have suffered the heartbreak of seeing a hard-won export order--won on quality and price--sacrificed by an overvalued pound.
Economic fashions go up and down like hemlines. Currently it may be fashionable to decry the importance of our balance of trade--but at the end of the day we as a trading nation depend on it and we play with its prosperity at our peril. Our economic policy--the noble Lord, Lord Saatchi, referred to this--can hardly be described as successful when these factors are considered.
The problem is that economic policy currently treats symptoms not causes. There are a number of reasons why sterling is so strong, many of them complex. One of them is our high relative level of short-term interest rates compared to others due to our perceived higher levels of inflation. Increasingly it appears that the measurement of inflation consistently overstates the situation. It is good to see that our recommendations questioning the authenticity of the RPI figures have already been put into practice. Steering the economic ship of state on faulty dials has happened too often in the past, greatly to the subsequent detriment of the economy.
The perceived rate has great influence on wage negotiations, the source of much inflationary pressure. I hope we can move to the HICUP index, which not only appears to indicate a lower rate of inflation than the RPI but would enable--at a glance--the unsophisticated to compare our rate of inflation with others. Experts may be able to make the mental adjustments between HICUP and RPI, but a wide perception exists that our rate of inflation is substantially higher than elsewhere when, on strictly comparative terms, often it is not. I believe that the perceived rate of inflation has been responsible for keeping our interest rates at a much higher level than they would be and that, as a consequence, sterling is propped up by such rates.
This brings me back to the central theme of my argument; namely, that policies often address symptoms, not causes. Interest rates are raised to take the heat out of the housing market. If you ration any commodity, prices rise; and if you ration land, house prices rise. We are effectively trying to use monetary policy to control the effects of land rationing. House prices in any normal market would not rise if demand could be met by supply. By excessively rationing land through the planning system, we introduce a factor into our economic management which makes distortions all along the line, currently greatly to the detriment of the internationally exposed sectors of our economy through which, ultimately, we have to earn our keep as a trading nation.
However, I think I see the glimmerings of a recognition of this problem through the suggestion leaked from the Government last week that VAT should be applied to housing. This is the sort of fiscal measure that should be used instead of raising interest rates.
Much of what I wished to cover has been said already; it would be tedious to repeat it. In conclusion, I believe that there are a number of areas of unfinished business by our committee, not least the current relationship between the application of fiscal and monetary management and whether there are better ways of achieving the desired ends by other means.
It was indeed a signal honour to work with my companions on the committee under the clear eyed leadership of our chairman. But the task is only half fulfilled. Meanwhile, the apparent advantages of the current relationship between the Chancellor and the Bank of England remain unproven. We have yet to see how two captains on the same bridge can cope in a storm.
Viscount Trenchard: My Lords, I should like to congratulate the noble Lord, Lord Peston, on introducing the debate. I should also like to congratulate him and all the other noble Lords who served on his Select Committee on all their hard work in producing this interesting and useful report.
The Government's decision to give the Bank of England operational independence for monetary policy had not been widely anticipated. The Labour Party's manifesto said that they would reform the Bank of England to ensure that decision making on monetary policy was more effective, open, accountable and free from short-term political
In principle, independence for the Bank of England was a sensible move. Perhaps one of the reasons why the Government decided to move so fast was that they wanted quickly to establish their credentials with the City and give the impression of pursuing sound economic and monetary policies. Having successfully established their credentials, it was of course easier for them to introduce stealth taxes, such as the unjustified, unwarranted and unfair raid on pension funds, which is already yielding some £5 billion per year to the Chancellor's war chest.
As your Lordships are aware, the Government are developing a reputation for saying one thing and doing another. They said they would reform your Lordships' House to make it more democratic; they said they valued the independent element of the House. Without doing anything to make it democratic, they are decimating its independent element and neutralising the only effective check and balance which has--until now--restrained the power of the Executive in this country.
I can understand that, if you think that the Bank of England's functions are likely to be subsumed into the European Central Bank in the relatively near future, it may not matter much if the system is less than perfect. But if you believe that the Bank of England will continue to have responsibility for monetary policy in the United Kingdom, then it is essential to get it right. Perhaps it is more than mere coincidence that the Chancellor's letter to the governor in May 1997--which was referred to in the report and by my noble friend Lord Saatchi today--used very similar wording to that used in the Maastricht Treaty.
The decision to include four external or independent members among the nine members of the Monetary Policy Committee was basically a good one. But the fact that they are appointed by the Chancellor and serve for a term of only three years, calls into question the extent to which they can be considered independent. I strongly agree with those noble Lords who have suggested that their term should be at least five years.
The Select Committee's report rightly draws attention to the paradox that the only full-time members of the MPC are the outsiders. Only one of the four external members--Professor Goodhart--has an outside job. He works for the Bank on two days a week. Since the other external members are paid to work for five days a week, why are they not given other jobs to do within the Bank of England?
Alternatively, why do they not take outside positions as has Professor Goodhart? Surely the point of having so-called "external members" is that, in forming their views on how the MPC should pursue its objectives, they should be able to rely on their diverse experience and their knowledge and understanding of the circumstances prevailing in various sectors of the economy. The noble Lord, Lord Peston, said that he thought the membership of the MPC might be biased too much in a southerly direction. I believe geography is perhaps less important than breadth of experience in that regard.
I agree very much with the words of the noble Lord, Lord Burns, and my noble friends Lady O'Cathain and Lady Hogg on that point. The four external members of the MPC are either academics or economists, or both. I do not understand why the Chancellor did not choose someone from manufacturing industry or commerce who would have brought valuable experience and a different viewpoint to the MPC's deliberations. While I understand that it would be difficult to be both a member of the MPC and a director of a financial institution, I believe that the conflict of interests for an external member who might also hold a senior position in a non-financial organisation is not so serious and has possibly been exaggerated.
It is regrettable that recently a dispute has arisen between the external and internal members over the inadequate support and restricted access to research and analytical staff provided for the former. Noble Lords will have seen Martin Wolf's excellent article in last Monday's Financial Times in which he quoted from the Chancellor's Mais lecture of 19th October:
Of course with any new system there may be teething problems. Can the Minister explain what action the Government will take to improve the imperfections inherent in a system which was prepared too hastily and without adequate forethought? I hope that he will agree that some action is absolutely necessary in order to restore full confidence in the Bank. The noble Lord, Lord Peston, said that he did not think the system needed changing immediately, but that, if it did need to be changed in the future, changes should be made. Unfortunately it is already clear that something must be done sooner rather than later.
The Bank of England is perhaps not yet quite as independent as the Government say. Seven of the nine members of the MPC are chosen by, or on the advice of, the Chancellor. The MPC is not properly accountable to Parliament in the same way as is the Federal Reserve to Congress in the United States.
We should also question the quality of information made available to the members of the MPC. Co-ordination of monetary and fiscal policy is clearly of the utmost importance, especially since they are now the responsibilities of two different bodies. My noble friend Lord Weir emphasised very clearly the need for such co-ordination. The Select Committee recommended that the Court of Directors should play a stronger role in connection with the quality of data made available to the MPC. However, doubts about the quality of data help to explain the unhappiness of the external members at their lack of involvement in the determination of what material should be prepared, and on what basis. The external members are all experts and can see through the Government's fallacious claims that taxes are going down when they are in fact going up. Against that background, no doubt noble Lords will be looking forward with interest to the publication of the minutes of today's meeting of the MPC, at which the decision was taken to raise interest rates by one-quarter of 1 per cent.
Noble Lords will be aware that my right honourable friend Mr Francis Maude has set up a commission to establish the relationships between Government, Parliament and the MPC. I trust that the commission will also have an opportunity to examine the role of the Bank's Court of Directors, especially as the Bank has lost its regulatory responsibilities to the Financial Services Authority.
I shall not detain your Lordships by repeating any more of the many other excellent points made in the debate by other noble Lords. However, I wish to congratulate the noble Lords, Lord Londesborough, Lord Lipsey, Lord Goldsmith and Lord Woolmer, on their excellent maiden speeches. I regret that it is unlikely that your Lordships' House will hear again, at least in the short term, from the noble Lord, Lord Londesborough. His experience and the potential contribution he could make are typical of what has helped to make your Lordships' House independent and highly regarded both at home and abroad.
I apologise if I have disappointed the noble Lords, Lord Peston and Lord Barnett, or other noble Lords in being unable, on this particular occasion, to restrain myself from making some party political points. I much regret that in the future your Lordships' House is likely to become rather more party political than it has been in the past.
I have enjoyed greatly and look forward to hearing the speeches of other noble Lords much better qualified than I to speak on this subject. I much regret that, with your Lordships' leave, I may need to withdraw before the end of the debate to attend the celebration of my brother-in-law's marriage. I offer my sincere apologies to the House if I do leave before the Minister replies. I assure him that I shall read the Official Report assiduously tomorrow morning.
It has been my great privilege to participate in today's debate, and to make what is in all probability my valedictory speech. Once again, I should like to express my appreciation to the noble Lord, Lord Peston, for introducing this interesting and valuable debate.
Lord Roll of Ipsden: My Lords, if one has been unlucky in the draw and appears at No. 20 in a long debate, it is inevitable that you run the risk that much, if not all, of what you wish to say has already been said by others. I am afraid I must ask your Lordships to accept this state of affairs and to show your customary indulgence to the present speaker.
I begin by adding my thanks to the noble Lord, Lord Peston, and congratulating him not only on initiating the debate but also on introducing it in a particularly brilliant manner. The noble Lord's speech was both concise and comprehensive, and those are not easy qualities to combine. He referred not only to the positive points listed in the report of the Select Committee but to a whole list of unfinished business and pointed to the fact that the report is only the beginning. I should like to support that view most strongly; both the noble Lord and other speakers--for example, the noble Lord, Lord Skidelsky--listed a whole series of questions that will require further clarification and inquiry.
As the Monetary Policy Committee develops both in its techniques and understanding, if that is feasible, of the subject matter of monetary policy, and as outside circumstances change, there will be plenty of material for a continuing scrutiny. Towards the end of my remarks I should like to address a related subject which has not been much touched upon so far in the debate.
The noble Lord, Lord Peston, deserves to be congratulated on another score. I make so bold as to say that of all the subjects in economics, the theory and practice of monetary policy has the longest and most intense history of controversy. I hope that those economists present tonight would agree with me. Certainly the present phase of monetary policy can easily be traced back to over 200 years ago in the 1796 report of the Bullion Committee and the subsequent debates that ended in the suspension of gold payments in the 19th century. Shortly thereafter came the debate between the so-called banking school and the currency school, to which that great administrator, Sir Robert Peel, temporarily put an end with the Bank of England Charter Act 1844. That Act gave the Bank of England a monopoly over note issue, at any rate in England and Wales. But the subject has continued to occupy politicians, public men of all kinds, economists and other academics right through the 19th century and through the present century.
I want to divide what else I have to say into two parts. I want to talk about the work of the Monetary Policy Committee and the Select Committee's report on it within what I might call the present context. I should then like to go on to other wider issues. First, the committee thoroughly approved of the Chancellor's decision, one of his earliest on taking office, to give the Bank of England operational independence. I thoroughly approve of that. Six years ago I had the privilege of chairing a committee of independent experts--former heads of Treasuries, former governors or deputy governors of central banks, both in this country and abroad, lawyers and economists, including Professor Charles Goodhart who is now a member of the Monetary Policy Committee. We came to the unanimous conclusion that this independence should be granted. Obviously, there were some slight differences in techniques, as that was six years ago, but we were all naturally very gratified when one of the first things the Chancellor did was to do precisely what we had recommended.
That decision is still misunderstood outside a relatively narrow circle of people who are preoccupied with these matters. Very often one hears the criticism--how appalling it is that a matter of this importance, which affects the livelihoods and existence of everyone in this country, should have been handed over to an unelected body. That is total nonsense. The Chancellor of the Exchequer still has ultimate responsibility, as do the Government as a whole, to Parliament, to the public and to the electorate for economic management, including monetary management. The operational independence of the Bank of England is strictly circumscribed in the Bank of England Act and in the fact that the Chancellor sets the inflation target. He is very keen, as we all know, on the symmetry of the 2½ per cent--1 per cent up or 1 per cent down--and so on. He appoints the independent members of the committee. So we can take that for granted.
However, there remains the very different question, which has been frequently referred to in this debate, about the famous "subject to". That is terrible drafting. I agree profoundly with those noble Lords, including particularly the noble Lord, Lord Barnett, who raised this point many times in the committee, who believe that that is very unfortunate. It quite deliberately sets up the possibility of a conflict between monetary policy and economic management that is generally designed to produce growth and employment. There may be such a conflict, but if there is, that has to be resolved precisely by, in the end, the Chancellor of the Exchequer. Deliberately to set this out is to my mind a grave error. In fact many critics of the present situation would argue that it should be
Of the many other subjects that have been listed, including by the noble Lord, Lord Skidelsky, by the noble Lord, Lord Peston, himself, and others, I want to refer particularly to the question of the membership of the Monetary Policy Committee. That has often been criticised because it contains too many economists. Indeed, six out of nine are economists--four independent members, the deputy governor of the Bank of England, who is a very distinguished economist, and the chief economist of the Bank itself. Is six out of nine too many? I have no objection to economists as such--some of my best friends are economists--but there is something to this argument. I say that because, unfortunately--I have never quite understood why in all the years I have been thinking about this--economists are more prone than most people to develop a high-tensioned self-consciousness about their views and to indulge in intensive and sometimes very aggressive controversy with each other. I am not saying for a moment that that "proneness" has shown itself in the deliberations of the Monetary Policy Committee but it is inherent somehow or other in economists.
Much has been said about the possible reform of the membership, particularly by the noble Baronesses, Lady O'Cathain and Lady Hogg, by the noble Lord, Lord Goldsmith, in a remarkable maiden speech, and by the noble Lord, Lord Burns. I very much agree with what has been said and with what the committee recommended about greater openness of these appointments. Having listened to the debate and having reflected on the deliberations of our committee, it suddenly struck me that, leaving aside the fact that it is a House of Lords committee and therefore consists of Peers, male and female, the committee is a remarkable collection of people of all kinds of provenance and experience--from business, the noble Viscount, Lord Weir, the noble Lord, Lord Paul, and several other noble Lords; the noble Lord, Lord Barnett, with his experience of government; the noble Lord, Lord Burns, the noble Lord, Lord Peston, and I, economists by origin but with experience in public affairs, and so on.
If it is possible to set up a committee of that kind, which has shown itself capable of thorough, objective and detailed study at a high intellectual level and without any trace of partisanship--certainly nothing very obvious--why cannot that be done for the Monetary Policy Committee itself? Surely it is not necessary to restrict it to the present pattern of five people from the hierarchy of the Bank of England, including two economists, and four outside academic economists. Why does it have to be so? I hope that that
Having said that, I should like to come to a wider issue. There is a small cloud on the distant horizon. It was referred to by the noble Lord, Lord Howell--outside the Chamber I would certainly refer to him as my noble friend-- in a very remarkable and thoughtful speech. I refer to the changes that are taking place in the financial environment with which the Monetary Policy Committee of the Bank of England and the Select Committee have to deal. It has been known for quite some time that the recourse to direct financing, particularly in the capital market, and the increasingly sophisticated devices of the capital market have bypassed the banking system and have considerably changed the total monetary environment and the ability to control it.
That tendency has been brought to the fore recently, since we prepared our report, by the work of Professor Ben Friedman, of Harvard, whose work was brought to wider notice in one of Sam Brittan's particularly thoughtful articles a short while ago entitled, "The End of Money". I had the opportunity less than two months ago at Harvard to have a long discussion with Professor Friedman. He has drawn attention not only to the points to which the noble Lord, Lord Howell, referred--namely, the growth of credit cards, bank cards, smart cards and so forth--but also to the growth in mergers: the creation of large units with many subsidiaries, which inevitably settle their liabilities among themselves. The increasing integration of the world economy has created a high degree of direct clearing which totally by-passes the banking system. That has led Professor Friedman, perhaps in a moment of exuberance, to speak of the end of monetary policy. Sam Brittan certainly referred in his article to the end of monetary policy, and the noble Lord, Lord Howell, hinted at that. However distant that time may be--it may be 10 years or more--if that tendency continues, and there is no reason whatever to think that it will not, the facts, circumstances, institutions, monetary policy, control agency, whatever the institution may be, with which the Monetary Policy Committee of the Bank of England or any other central bank has to deal will change profoundly. That will greatly change the possibility of monetary control and the prospects of its having any effect, which is already under some doubt, as a number of speakers have pointed out.
As I say, that is a distant cloud. But even today we must recognise that monetary management is a many-splendoured thing. What is happening here is very different from what is happening in the United States with the Fed. It is not only the old, somewhat scholastic argument between monetary supply targeting or inflation targeting. There is very little in that any more. If one reads the minutes of the Monetary Policy Committee, one sees that it has increasingly enlarged the scope of the circumstances that it takes into account. That is very much to the committee's credit. But in the United States the oracular pronouncements of Alan Greenspan have an
I have just returned from a brief visit to Japan. The situation there is totally different. Short-term interest rates practically do not exist. In many respects the system is awash with money. If the Japanese policy were to be applied in our country now, or even in circumstances when the economy was not quite so buoyant as it appears to be now, there would almost immediately be raging inflation. Yet in Japan the old adage applies: "You can take a horse to water, but you cannot necessarily make him drink". That is what is delaying the recovery of the Japanese economy.
I want to indicate, including reference to the more distant possibilities, that it is absolutely essential that this subject should not be regarded as closed; that the MPC should carry on just as it is doing now; and that there should be no further scrutiny, except possibly from time to time by the House of Commons Select Committee on the Treasury and the Civil Service to which the noble Lord, Lord Barnett, has referred.
Viscount Mackintosh of Halifax: My Lords, this has been an extremely interesting debate. At this hour, and after so much has already been said, I do not intend to detain your Lordships for long. I join with other noble Lords, in thanking the noble Lord, Lord Peston, for introducing the debate. I congratulate him and all the members of his committee on producing such an excellent report. It is well-constructed, and it produces a good analysis of the operation of the Monetary Policy Committee. It examines how the committee conducts itself and relationships between the committee and related bodies and addresses the problems faced by the committee.
However, it is clearly possible to have a successful anti-inflationary policy without the imposition of an independent central bank. Before the last election, the then Chancellor, Ken Clarke, kept inflation below 4 per cent for four years--the longest period of low inflation for nearly 50 years. That was achieved without an independent central bank.
Also, if it is felt that an independent central bank is the right way to control inflation, does the Monetary Policy Committee of the Bank of England as constructed actually fill the role of an independent central bank? As many noble Lords have pointed out, members of the Monetary Policy Committee are mostly appointed by the Government for a very short period. In Germany, Central Bank members are appointed for eight years and Federal Reserve governors in the US are appointed for 15 years. The Monetary Policy Committee members have only a three-year term. Of the nine members of the committee, seven are chosen directly by or on the advice of the Chancellor. Is that really independence? It is certainly very different from what happens in other countries, such as the US. We seem to have moved to a halfway house where a Chancellor can stand back if things go wrong and say that the Monetary Policy Committee has operational independence but can claim credit when things go well because of his influence over the committee. If an independent bank is needed, should it not be truly independent? I agree with several speakers who have advocated a longer period for the members to serve and a move towards greater independence.
If we are to have any form of independent central bank, it is important that it is democratically accountable. Again in comparison with the United States, the Monetary Policy Committee is not as accountable to Parliament as the Federal Reserve is to Congress. The report concludes that the Monetary Policy Committee must make its decision procedure clearer so as to aid public scrutiny; and also that appointments of the independent members must be made in a more open fashion. We may need to go further in attempting to establish greater accountability to Parliament.
That is less of an issue if interest rates are stable or falling, because there is less public interest in how those rates are set. However, in times when interest rates are rising, there will be much more interest in how the level of interest rates are reached and whether the level is appropriate. There will be much greater focus on the Monetary Policy Committee. The level of interest rates has a great impact on the lives of many people and, when interest rates are rising, there needs to be public confidence that the person or organisation which is setting the level of interest rates is properly accounted for.
If one believes in a truly independent central bank, having the Monetary Policy Committee properly accountable to Parliament will be very helpful in protecting it from pressure and intervention from the government of the day.
Since the formation of the Monetary Policy Committee, there has been low and stable inflation in this country. However, we cannot conclude from that that the establishment of this committee was responsible for this favourable situation. What would have happened without the Monetary Policy Committee? The Monetary Policy Committee inherited low and stable inflation from the last government and world inflationary conditions have been low and stable since its inception. There have been no major short term inflationary shocks with which it had to deal. We will not really be able to tell how effective the Monetary Policy Committee is until we have a real inflationary test.
It has often been said that independent central banks in, for example, America and Germany have been responsible for the relatively low inflation in those countries over the long term and therefore cited this as a reason for why we should move to an independent central bank in this country. However, it could be that those countries which have a natural tendency to low inflation as a result of other aspects in their economy are those economies which can accommodate an independent central bank. Countries which have a tendency for higher inflation may find operating with an independent central bank more difficult.
In conclusion, I still have an open mind as to whether it was right to give operational independence for monetary policy to the Bank of England. I believe that we need more time to judge and, in particular, to see how the Monetary Policy Committee operates in periods of inflationary pressure before a definitive conclusion can be reached.
Viscount Eccles: My Lords, I too welcome the committee's report. I support the idea that the committee continues and will suggest an agenda around the measurement of inflation which the noble Lord, Lord Peston, raised as a matter of concern. It was also raised by my noble friends Lord Howell and Lord Vinson. While the prospects of the RPIX are central to the Monetary Policy Committee's decision, nevertheless the Office for National Statistics stated in
In the pursuit of trust and consistency, there are two quite separate aspects within the retail prices index methodology. The first is process, consisting of the collection of data by accurate sampling and then the statistical approach to that data. These mathematical procedures can be tested by peer group analysis and by comparison with other leading statistical practitioners. The professional areas of judgment are circumscribed by acceptable mathematical limits. Although this issue took up part of the time spent by the committee and the office, it does not need to detain us long.
The second set of issues poses much greater problems of consistency and judgment. To begin with, 4 per cent of the population, those with the highest incomes, are excluded from the sampling, as are those who live mainly on the state pension, although not those who live mainly on state benefits. Here choice is being exercised in the search for typical patterns of expenditure. We are entering the real world but exercising qualitative and not entirely unpolitical judgment. Not a statistician's function I would suggest. Indeed, this is the Chancellor of the Exchequer's province as was stated in response to the Commons Treasury sub-committee which reported on the Office for National Statistics in December last year. Recommendation M of that report stated,
While it would be wrong to claim that the Chancellor sets both the 2.5 per cent inflation target and, to a considerable extent, influences the outcome of the RPIX, it is clear that he has some of the problems identified by your Lordships' committee on his mind. He made reference to issues of scope and definition in his evidence to the committee, a reference which was not followed up at the time.
What are these issues? Academic work principally in the United States has identified a number of issues of which four are of the greatest importance in the rapidly evolving economic and social scene of today. They all influence choice and consumers' behaviour.
The first is product substitution. An example would be switching between gas and electricity and perhaps back again. The second is change of shopping outlet. An example would be moving from a department store to a discounter. The third is quality changes. Are the batteries of today (hearing aid batteries perhaps) easily compared with those of yesterday? The fourth is new goods and services, as with personal computers and internet services. All these will affect accurate real life sampling and the weightings within any index.
A somewhat more detailed comment on clothing, an industry in which I am involved, is relevant. Consumers' spending on clothing as a percentage of their total spending has been falling for some years, thus affecting weightings used in the retail prices index. Clothing prices have been falling in both real and recently in nominal terms with discounters gaining share. The introduction of Lycra, an elastomeric fibre, has brought easier care and sometimes longer life--a quality change. Lifestyle changes are taking the industry rapidly away from formal wear towards a more casual style of dressing with new products.
In response to all this rapid change, we may do well to avoid arguments about whether one index would be better than another or whether one statistical approach is marginally to be preferred to another, and instead to concentrate on the real world of the cost of living as experienced by household managers. The response of the Office for National Statistics, whether in Select Committee or in publications, seems somewhat muted. Perhaps it is all too aware of the limitations imposed on its study on the scope and definition of the retail prices index; yet without professional freedom and independent advice, it must be doubtful whether public confidence will be maintained. There is an available source of independent advice--the RPI advisory committee--but the Government do not seem keen to use it. It is likely that the conclusion reached by your Lordships'
Lord Currie of Marylebone: My Lords, I start by thanking my noble friend Lord Peston for his committee's crucial and insightful report. I owe my noble friend a considerable debt because he appointed me to my first academic job more than 25 years ago. He may have regretted it when he discovered that two years in the City did not mean that I knew monetary economics, which he wanted me to teach to his Masters students. It was at the height of the Barber boom and I do not think that my noble friend had a lot of choice about who to appoint. Nonetheless, he may have regretted it. I discovered that my noble friend is a fast teacher, if I may put it that way. Indeed, looking at the minutes of the evidence, it appears that members of his committee may also have discovered that. I learnt quickly many of the elements of macro-economics. Indeed, not only does the report demonstrate my noble friend's insights, but also the possibility of life-long learning.
I remember my noble friend teaching me two big lessons, which I think are relevant to this debate. The first is that the uncertainty about the economy and our understanding of how economies work means that there are strict limits about what macro-economic policy and monetary policy in particular can achieve. One cannot fine-tune economies. The points made on that by, among others, the noble Lord, Lord Howell of Guildford, were well made. We should not overestimate what we can expect from monetary policy.
The second lesson is also worth bearing in mind. It is that there are good, robust monetary and macro-economic policies--and there are bad ones, and we must ensure that the institutions that we put in place are good ones which are robust in the face of this uncertainty. If we doubt that proposition, we need only consider the past history of our economy: three major booms followed by three major recessions, all as a result of the poor conduct of monetary and macro-economic policy. Indeed, we need only look at Japan, which has suffered the effects of poor policies in the past and, I believe, at the present.
Perhaps I may present the lesson by way of an analogy. In stormy weather, it is certainly not possible to steer a straight and smooth course, but we can clearly distinguish between good and bad helming, particularly in bad weather, and especially if the bad helming leads to the boat going out of control. Let us not expect too much of our monetary institutions, but also let us not underestimate the major contributions that have been made. I believe that the independence
I shall not detain your Lordships long with a consideration of the technical criticisms that have been made. The National Institute of Economic and Social Research has been mentioned. It said that the Monetary Policy Committee would have done better to leave interest rates unchanged. I caution that such a conclusion is extremely difficult to draw from the types of analysis carried out on the large macro-econometric models on which some of our policy experts work.
Equally, a report from the London Business School argued that the present arrangements were subject to failures of co-ordination between monetary and fiscal policy. I think that that report was deficient because it did not distinguish between independence of targets and independence of instruments. Some references have been made to that tonight. In particular, I do not think that the co-ordination of monetary and fiscal policy is an issue. There are plenty of mechanisms for ensuring that the monetary authorities are well informed about the Government's fiscal plans to ensure that there is co-ordination in appropriate circumstances.
The key point is that if fiscal policy is inappropriate or wrong-headed, we do not want to have monetary and fiscal policy co-ordinated; precisely the opposite. One thinks of the experience of Germany. On a number of occasions, through its monetary actions the Bundesbank was able to forestall ill considered actions by the government which would otherwise have lead the economy into difficulty. In the early 1980s when President Reagan expanded the federal deficit considerably, would it have been better if Volcker had gone along with that by not raising interest rates? I do not think so. The US economy would have suffered major inflation.
The argument for Bank independence is not the co-ordination of monetary and fiscal policy; it is to ensure that when a Chancellor has wrong-headed policies, the effects are not as damaging. In the past, it has been dangerous when a Chancellor has gone hell for leather for macro-economic expansion. It is rather like a modern-day Mr Toad driving a twin-engine Ferrari with both feet firmly down on both accelerators, the monetary accelerator and the fiscal accelerator. In those circumstances, we want monetary and fiscal policies to pull in different directions. If we had had that in the past, I do not believe that we would have had the volatility that we have had in the British economy.
I should like to touch briefly on the question of the independent members of the Bank, to which a number of noble Lords have referred. The model of the corporate board is the right way to think of the Monetary Policy Committee. In parenthesis, perhaps I may mention that the energy regulator is moving the model of regulation in that area in that direction--to good effect, I think. If one thinks of a corporate board, one should think of the independents as the equivalent of non-executive directors. Therefore, in my view, it is
I strongly urge against the option of allowing the independent members to start engaging in major research. That is for the simple reason that in my experience the best researchers are zealots who really believe in what they find and who pursue ideas obsessively. Those are all admirable characteristics in researchers, but they do not sit comfortably with the broader perspective that we need for the Monetary Policy Committee which needs to step back, weigh and assess a broad body of analysis and information. That is not always the characteristic of the effective researcher.
There is another danger in having full-time appointments: we would confine selection to the body of academic economists. Of course, as your Lordships will infer, I have nothing against academic economists, but I do not think that we should have only those. One extra difficulty will arise that has not been referred to in the debate so far. If we confine the choice to academic economists, inevitably we shall reproduce on the Monetary Policy Committee the present severe gender imbalance in the economics profession at senior level that is of such concern to the Royal Economic Society and others. It may be dangerous to quote what the French do as an exemplar. However, they are able to bring in experts from industry and commerce.
I agree with my noble friend Lord Goldsmith in his excellent maiden speech that we are overstating the conflicts of interest in this matter. We should be able to find distinguished individuals who can put aside their business interests in setting interest rates in the national interest and maintain Chinese walls when they go back to their commercial work. That should be feasible, and it is the way forward. It is dangerous to follow the route of full-time appointments. I suspect that the argument about resources flagged up in the press is less an issue of efficiency of resources and more an issue of excess time.
This report is a valuable contribution to the debate. I am sure that many will continue to use it in years to come. Yesterday, it was suggested that perhaps we should devise a way in which the fruits of these reports can find a more popular outlet to inform the public so that they can be debated more widely than at the moment.
I wish the Monetary Policy Committee and your Lordships' committee well. I hope that both will have a long life. However, I should like to see the UK join the euro in a timely way and, if that happens, both committees will lose many of their current functions. I urge your Lordships' House to accept the recommendation that this committee might be established on a semi-permanent basis.
Lord Selsdon: My Lords, it is a remarkable privilege to be able to listen to your Lordships today. In these debates I feel that I am a perpetual student. Today, we have 10 eminent professors well briefed in economics and all in agreement, which is extraordinary. There are four visiting professors, or new professors, one of whom is perhaps on a short stay. They have made remarkable contributions which in the past hours have made me think a good deal.
I have read many reports like this one. I believe that I can understand these reports. However, page 57 of this report gave me hiccups. I could not understand the Egyptian hieroglyphs. Since I did not understand even half of them, perhaps some in the outside world would understand none. I then realised that what we had among us was a group of amateur head-hunters who felt that somehow they could select the right people to make monumental decisions far too often and without much basis.
One of my old friends, who was also a head hunter, said that to get something done three types of people were required: a trapper, a skinner and a cook. No individual can be all three; some can be two, but one must always have an economist to do the washing up. The economist thinks he knows what he will have to wash up, but more often than not he gets it wrong.
At the beginning of my remarks I want to go back 50 years, and at the end perhaps I shall go forward 50 years. Just over 50 years ago I had my first lesson in economics without knowing it. I had been given a Welsh pony by my mother which, to the knowledge of everyone but me, had never been broken in. I was told that I had to ride it, come hell or high water. I jumped off and hid round a corner. One day my great uncle Sir Stafford Cripps, who came to stay regularly, asked me, "Do you have a problem, young Malcolm?" I said, "No, uncle Stafford; the horse has a problem". He took me on the leading rein and the pony was calm. He explained to me what he had done. He used to dress up as Father Christmas, sometimes at No. 11 Downing Street, and invite all the family. I was very fond of him. He explained to me that there had been a war and in order to pay for it lots of pounds had to be used, which meant that the pound had to be devalued. That was my first introduction to the importance of the exchange rate.
Later, I found myself working in Germany. I recall that then there were over 11 deutschmarks to the pound, 17 French francs to the pound and 17 Swiss francs to the pound. A great Swiss friend recently celebrated his 40th wedding anniversary. He is married to a lovely girl from Leeds. To digress, it costs more to travel to Leeds to watch a football match and return to London than to travel to the south of France and back. I cannot work that out. I digress again. We have North Sea oil but we have the most expensive petrol in the world with tax and the cheapest without it. It makes me wonder whether there are some tax increases of which I am not aware. My Swiss friend said that when he first married his lovely English bride there were
These matters are now past concerns. We do not have to worry about the exchange rate. One wonders why in the past we worried so much about sterling being a reserve currency. Many of us learnt that the last thing in the world we wanted was for the pound to be a reserve currency.
Interesting changes have taken place. I turn to the euro. I am amazed how, in a relatively short period, the euro has managed to develop on the Continent. I chair a very small bank in eastern Europe which does almost everything in euros. In general, we regard one dollar as one euro in round terms. The euro seems to be taking over as somebody else's reserve currency. There is stability in currencies, which means that the exchange rate does not seem to matter any more.
One turns to what might be described as the great decimator. A decimator was someone who took things away from you, but not every tenth like the taxman who took the tithes. I have always regarded someone who takes things away from you as a decimator. There were three types of decimator within the control of government. The worst one, which took away the greatest amount for a long period, was inflation. That now seems to be under control. The second, which effectively destroyed all initiative, was legislation and bureaucracy. One was not allowed to do the things one wanted. The third one was taxation itself. I have worries about the last one. There is no doubt that the level of taxation imposed on our people, whether by stealth or openly, is greater than it should be.
But when the decimator takes things away he creates a bit of deflation. It is not inflationary to take things away from people. Originally, government could tax, spend and legislate. It was possibly privatisation that effectively reduced the ability of government to spend too much. Therefore, we do not have inflation or a problem with exchange rates. However, we have a worry about too much growth in taxation, but in itself that is not a problem.
I do not understand why, when we have a stable situation, interest rates are put up today. We have put them up by 25 points and the European Central Bank has put them up by 50 points. The difference between the two is 150. That does not seem to be related to the differences between the economies, exchange rates or anything else. But in the back of my mind there is a hidden factor that I do not fully understand and believe that I shall never fully understand. It is: where is the money in the world and what is money? I was once told by many friends in eastern Europe that when, I think, Anthony Barber floated our currency the objective was to destroy socialist economies because they depend upon fixed parities. I have heard again and again that that was a clever Conservative plot.
However, the shift in parities between eastern and western Europe is interesting and one may ask why. If one takes all the countries in that quarter of the world, moving on into Asia, and realise that anything with
It is not necessarily hot money, but it is money which moves about. It comes into a bank and is placed on deposit, for example. Against that, a loan is taken out and it is lent back to the countries in eastern Europe at 20 or 25 per cent because no one is interested in investing when there is exchange risk.
I cannot say what will happen next, but having gone back 50 years and said to myself that the exchange rate does not matter any more and that taxation and inflation are reasonably all right, I wonder why we spend our time tinkering around too much with interest rates. I sit down with a paraphrase of the old Heinrich Heine saying that when the world is coming to an end try to become an economist because everything happens 50 years later.
Viscount Chandos: My Lords, the contributions today from all sides of the House have generally comprised an exceptional combination of quality and, considering the many issues raised by the report, brevity. As the penultimate speaker from the Back Benches, I shall do my best at least to maintain the latter virtue and detain your Lordships, and in particular my noble friend the Minister, for as short a time as possible.
I warmly welcome the report of the Select Committee, chaired by my noble friend Lord Peston, and, like other noble Lords, believe that it will become both a standard text for his fellow members of the academic community and essential reading for practising businessmen, politicians and people from every walk of life for whom, as my noble friend Lord Goldsmith said in his excellent maiden speech, the achievement of consistent, stable and non-inflationary growth is literally a vital issue.
In mentioning one maiden speaker, it would be invidious not to say that both my other maiden noble friends and the noble Lord, Lord Londesborough, were in no way overshadowed: truly an Amadeus quartet of maiden speakers.
Just as I welcome this report and the debate which it has stimulated, so I warmly welcome the decision of my right honourable friend the Chancellor to grant independence in this respect to the Bank of England and the consequent establishment of the MPC.
I am not sorry that the noble Lord, Lord Saatchi, introduced a little party political edge to his remarks, because, unlike my noble friend Lord Peston, I am not myself good at remaining unpartisan for very long.
I believe that our experience during the past two and a half years, with all the caveats of it being early days, is a vindication of the decisive action of my right honourable friend the Chancellor. Of course, thankfully, the new arrangement has not been subjected to any significant supply-side shock. But the economic legacy from the previous government was not by any means as golden as the noble Lord, Lord Saatchi, and his colleagues have claimed--something which my noble friend Lord Desai cogently expounded in his evidence to the committee.
The MPC can take credit for the soft landing of the economy achieved from the hot-air balloon fuelled by the previous Government's pre-election stoking of demand. Without being complacent about the formidable burden of the high exchange rate faced by all companies competing at home and in export markets with overseas-based rivals, unlike my noble friend Lord Desai, I am not sure that a much better balance of fiscal and monetary policy could have been effected.
A number of noble Lords drew the comparison between the frequency of interest rate changes in the UK during this period and those which applied in the USA and Germany of the euro zone. I do not believe that it is unreasonable to make some allowance for the MPC finding its feet; a newly qualified driver may correct a car's steering more nervously than an old hand, but should quickly learn to chart as steady a path as the road allows.
That goes to the heart of the evolutionary approach which my noble friend Lord Peston has advocated for the MPC and the new system. The balance between independence and accountability, which the noble Baroness, Lady O'Cathain, seemed to regret as an unhappy compromise, in my view is an ideal starting point from which, no doubt, evolution over the next few years will produce worthwhile refinements in areas highlighted by the report and today's debate, such as the geographical and industrial orientation and length of tenure of MPC members. In the words of one of the MPC's independent members, Professor Willem Buiter, when comparing the constitution of the UK's new monetary control system with that of the ECB, we benefit from,
Professor Buiter's comparison is, in passing, an important issue for anyone like myself who believes that, in principle, the UK's adoption of the euro within the next few years will be in the national interest and
Nonetheless, I wondered whether, when the noble Lord, Lord Saatchi, among others pointed to the infrequency of interest rate changes for the euro in comparison with the unhelpful frequency of UK interest rate changes, he was struck by the irony of that in the context of his party's hostility to British membership of EMU for, in effect, the foreseeable future.
I should like to end by venturing into what the noble Lord, Lord Roll, correctly identified as dangerous waters, particularly for a very rusty economics student. Like my noble friend Lord Peston, I regard myself as an unreconstructed Keynesian, although I am always wary of describing myself in those terms within earshot of the biographer of the great man, the noble Lord, Lord Skidelsky.
I do not believe that inflation is either purely or predominantly a monetary phenomenon. I believe that good monetary policy is a necessary but not sufficient condition for non-inflationary growth--a firm but mildly flexible framework within which the real economy can operate.
It is surely indisputable that deregulation, enhanced competition and innovation--in technological and other spheres--have contributed vitally to the creation of a lower inflationary environment world-wide over the past 10 years.
The extraordinary record of the US economy during this period does Alan Greenspan and the Fed great credit; but the US markets risk spooking themselves unnecessarily at the prospect of Dr Greenspan's eventual retirement, if in analysing this success disproportionate weight is given to monetary policy and the contribution of competition and innovation underestimated. The consequences of competition and innovation for many companies are not comfortable, but those influences lie at the heart of sustainable, non-inflationary growth in the economy within a stable monetary framework. I believe that that is the virtuous circle encompassing low inflation, growth and full employment.
For those reasons, which are the essential limitations of monetary policy, I join the noble Lord, Lord Roll--somewhat to my surprise--in favouring clarification of the MPC's remit, which, if anything, narrows its scope, rather than moving towards the dual mandate advocated by Dr Gerard Lyons and others who gave evidence to the committee.
I commend the report to your Lordship's House. I can conclude only by suggesting that if there were any doubts in your Lordships' minds as to whether the Select Committee should be perpetuated, the truly remarkable speech of the noble Lord, Lord Roll, should have dispelled them, as well as providing a compelling argument for its unchanged membership.
Lord Sudeley: My Lords, there are three submissions in this report opposed to usury in its old sense of "lending money at no risk". Drawing on those submissions and on other sources--there is a large literature on the subject--perhaps I may paint with a broad brush what is wrong with usury and the banks creating money out of nothing, and what we should do about it.
There is no doubt that banks should not finance business enterprises with loans where they charge interest. Instead, they should enter into partnership agreements, where, as in Islamic banking, the business risk is shared equally between entrepreneurs and financiers.
The use of bank credit consists--as I shall explain in a moment--not only of loans but of the creation of additional money. Money is cut loose from the real economy where goods and services are exchanged. Treated in that way as a commodity, money loses its value and stability as a medium of exchange. Money should therefore be a record of transactions for real goods and services. The fact that the medium-of-exchange function of money is not adequately met is indicated by the growing emergence of local, LETS, private, Air Miles, and barter trade credit currencies.
How has money been cut loose from the real economy where goods and services are exchanged? The ancestors of the present banking industry in Tudor times were the goldsmiths, who realised that not all the gold plate and bullion deposited with them would be withdrawn at the same time. They therefore invented the audacious and fraudulent trick of issuing promissory notes, which are the origin of our present bank notes, to represent an excess of what they really had.
That policy of lending out more than one has was continued by the banks with their system of fractional reserve, sometimes given as a proportion of 10 to one, but hedge funding is really far higher. We see that at two levels: national and private debt. The mechanism of national debt is quite simple. It involved the assumption of debt by the Government to obtain additional revenue to cover annual shortfall in taxation. Therefore, to pay for the war against Louis XIV, the Bank of England was chartered in 1694 and started out in the business of lending out several times over the money that it held in reserves, all at interest.
Such lending at a prudent rate took a quantum leap with World War I. It was extended further to pay for World War II, and in the United States of America it took an even greater quantum leap to pay for the Vietnam War. Therefore, by 1971, it became unbridgeable, and at a rate of growth beyond control. President Nixon had no choice but to cancel the right of the Government to exchange dollars for gold, which removed the gap altogether.
What are the bad effects of all this? There is no doubt that usury intensifies business cycles. Bank lending enabled share prices to rise to unsustainable levels in 1929; the Depression followed. Over-availability of credit caused a massive increase in house prices, followed by a dramatic fall in the late 1980s and early 1990s. In recession, interest acts as a fixed cost outside the company's control, unlike share dividends. The higher its debt-equity ratio, the worse are the implications.
The basic cause of inflation, then, must be the banks' use of fractional reserve in lending out more than they have. To reduce inflation, governments put up interest rates, which increases the profits made by the banks and encourages them to lend out more. Meanwhile, the high interest rates lead to a decline of economic activity because they increase production costs.
What is the way to curb the evils of usury which I have just described? The only way in particular to stop inflation is to stop banks from creating credit. The supply of money should be removed from banks and should be assumed by governments, who should issue it on a debt-free basis. Such a view is supported by five disparate quarters: the noble Lord, Lord Beswick, in the debate which he introduced to this House in 1985, Disraeli, the Vatican under Pope Pius XI in his Encyclical Quadragesimo Anno in 1931, the Tsars of Russia in the last century, who prevented the setting up of a privately owned central bank, and, above all, Abraham Lincoln, who said that governments should create, issue, and circulate all currency and credits needed to satisfy the spending power of governments and the buying power of consumers.
By adopting those principles, the taxpayer would be saved immense sums of interest. Lincoln's greenbacks were generally popular, and their existence let the genie out of the bottle with the public becoming accustomed to government-issued, debt-free money. The year after Lincoln's assassination, Congress set to work at the bidding of the European central banking interests to retire the greenbacks from circulation and to ensure the reinstitution of a privately owned central bank under the usurers' control.
During the history of the United States, the money power has gone back and forth between Congress and some privately owned central bank. The American people fought off four privately owned central banks before succumbing to a fifth privately owned central bank, at that time essential, owing to the period of weakness during the Civil War.
The founding fathers of the United States knew the evils of a privately owned central bank. They had seen how the Bank of England ran up the British national debt to such an extent that Parliament was forced to place unfair taxes on the American colonies, leading to their loss following the American Revolution.
I now conclude. Once the fundamental decision is taken to prevent sterling from being debt-based, the Commonwealth could act as the right monetary union to use sterling debt-free as a genuine alternative to the dollar and the euro.
Lord Newby: My Lords, it is a privilege for me to speak in this debate, as it was indeed to serve on the committee. I join other noble Lords in the tributes that they have paid to the noble Lord, Lord Peston, for keeping what started off as a relatively unruly crew in extremely good order. The concept of guided democracy may be dead in eastern Europe, but it is not dead in your Lordships' House. We are extremely grateful to the noble Lord, Lord Peston, for all his efforts on our collective behalf.
I congratulate all the maiden speakers. I was extremely sorry, however, that the noble Lord, Lord Lipsey, did not dilate on the difference between the arithmetic and geometric mean, not least because it constitutes about half a per cent difference in the rate of inflation. Although we had to grapple with the way in which he reached that conclusion, it was a conclusion with which we all agreed, and it is very significant, as I am sure the noble Lord, Lord Vinson, would agree.
I was also particularly delighted to hear the speech of the noble Lord, Lord Woolmer, because until this evening, I believed--perhaps incorrectly--that I was the only Leeds United supporter in your Lordships' House. Although consensus was arrived at on many issues in our committee, we were riven regularly on matters concerning football. It is a great relief to me to know that I will have such a heavyweight reinforcement in battles no doubt to come on that front.
I return to the report. I believe that it serves two principal useful functions. First, it describes in great detail, and for the first time, a major institutional and constitutional change within this country. I hope that it is widely disseminated and read. I am not sure that as an institution ourselves we are very good at making the outside world aware of what we do. Given that there is a huge amount of academic and amateur input into this report, I hope that effort will be made to ensure that those who might benefit from reading it have the opportunity to realise both that it exists and then to read it.
I hope that the second benefit of the report is that shining such a strong and detailed spotlight on to the MPC has shown up both its strengths and its weaknesses. I start with the strengths. It is worth repeating that our basic contention was that the Government were right to set up a committee. When measured against its key remit to hit an inflation target, the committee has achieved that with a considerable measure of success. As many noble Lords have said, we all agree that it has done so during a benign period of economic activity. But that is not the fault of the committee, and the truth is that it has achieved its target for the first two years, and for that it is to be congratulated.
Equally, we all accept that there are many influences on inflation other than the interest rate. Arguably, some of them are more important from time to time than the interest rate. However, we would all accept that over the medium to long term, the interest rate is
In my view, rather than in any particular decision that it has made, arguably the key success of the MPC has been in its effect on inflationary expectations. Despite the problems that the noble Lord, Lord Howell, correctly described about measurement, in an imperfect world one wants institutions to bear down on inflation. I believe that by making clear that it would act firmly if it thought that inflation was taking off, the MPC has had a significant impact on inflationary expectations, both in respect of the impact on wage bargaining and more generally. I believe that that is a considerable achievement and one that will serve us well in the medium to longer term.
For a major British institution, the MPC is also an extremely open and transparent body. I also believe that it is independent and accountable. I think that the criticisms by the noble Lord, Lord Saatchi, and the noble Viscount, Lord Trenchard, emanate rather more from a political view than from any evidence. Speaking from, I hope, a non-political view, all the evidence is that the independent members behave independently. There is no evidence that they are dancing to the Chancellor's tune. Equally, they have regularly attended our committee and the equivalent committee in another place to account for their actions. I believe that to argue that they are not accountable is, frankly, not borne out by the evidence.
However, we did not conclude that all was perfect. At the macro level, we were concerned with the relationship of monetary and fiscal policy. The noble Lord, Lord Vinson, has touched on that. The Chancellor was keen to reassure us that the mechanisms for co-ordinating the two worked well. But there is no doubt that if the two are partners, the Chancellor is the lead partner. As the noble Lord, Lord Currie, said, it may be a good thing that the Bank can respond to the Chancellor's lead. However, it is undoubtedly the case that the lead is on fiscal policy and the Bank adjusts to that, rather than vice versa.
Secondly, there are measurement issues to which both the noble Lords, Lord Vinson and Lord Howell, referred. There are outstanding questions about price indices in particular. We spent some time talking about those and there is more work to be done in that area. Clearly, there are some issues in relation to appointment and composition. Those which particularly concerned us related to the transparency of the appointment system and also the need--as, I believe, the majority of us saw it--to try to attain a greater geographic spread among the members.
The role of the independent members, which has generated so much press interest over the past week or two, was one at which we began to look. However, it did not seem to be quite the issue that it has become. I believe--indeed, I am sure--that we were surprised at our first meeting to discover that at that stage one member, Dr Julius, was a full-time, independent member. With the passage of time, more of them have been working full time. That surprised us.
I believe that the demand for greater resources is also a demand for greater influence. Also, it is a response to the fact that they have more time than, as my mother would say, they know what to do with. I doubt whether that is a positive development. I have considerable sympathy with the powerful speeches made on that subject by, among others, the noble Lords, Lord Burns, Lord Currie, Lord Goldsmith and Lord Roll, and the noble Baronesses, Lady Hogg and Lady O'Cathain.
In his evidence to us, the Governor made it clear that choosing an interest rate was more of an art than a science. From all that I have heard in the past year I increasingly agree. I do not believe that beyond a certain point there is any correlation between the volume of research and the quality of the decision making. I cannot get out of my mind the extremely old joke that the definition of an expert is someone who knows more and more about less and less until he knows everything about nothing. I do not believe that we have reached that point, but ways must be found for the independent members to combine their role in the Bank with a role outside the Bank so that they are in a better position to exercise the art of monetary policy-making, rather than concentrating totally on an inexact science. As a number of noble Lords have said, I believe that if the French Government have been able to do that without the apparent conflicts of interest which have worried us here, that is something that is worth looking at again.
The final problem with which we grappled is the major economic problem which has concerned many of our witnesses and noble Lords this evening, particularly the noble Lords, Lord Londesborough and Lord Paul; namely, the high level of the pound. Again, it was very clear to us that there were many influences on the exchange rate beyond the interest rate. I believe that it is fair to say that we did not have a completely convincing description from anyone who appeared before us as to why the exchange rate moved in quite the way that it did. However, we were agreed that a low level of inflation was an important contribution to sustainable economic growth. We did not want to take a risk with inflation in pursuit of what could be illusory other economic goals, including a lower exchange rate.
Most of us thought that fiscal policy could play a significant role in dealing with the sectoral and geographical difficulties which were described earlier, not least by the noble Viscount, Lord Weir. Personally, I believe that we should argue for a bigger role for fiscal policy in this respect within the UK. Certainly, that is an essential requirement within the euro zone. That point was borne in on us when we visited the Bundesbank on a day which was, incidentally, particularly stressful because of events later in the day on the football pitch which caused a certain amount of stress to a number of noble Lords. When we talked to the Bundesbank about fiscal policy, Dr Ko nig, its Chief Economist, stressed the importance of fiscal flexibility at La nder level. Dr Remseperger, a member of the bank's directorate, reinforced this view in respect of the Euro zone. His
That brings me to the future. What are the main elephant traps facing the MPC? There are a number of possible external shocks, but by their very nature they are unpredictable. However, there are two more predictable and fundamental challenges for the MPC over the next period. First, the question of joining the EMU. We do not know what the timetable is. However, the likelihood is that there will be a referendum in the next five years. There are a number of issues there--not least the one to which I have already referred, about the optimal or, at least, a sensible exchange rate at which we might join. A number of options were set out in some of the evidence we received, not least from Martin Weale from the national institute. As the noble Lord, Lord Barnett, said earlier, there are ways in which the exchange rate could be affected simply by the policy utterances of the Government. That is a major area and one to which I believe we should return.
In the longer term the wider issues of the demise of money, the end of money and the by-passing of the banking system in making payments were raised by the noble Lords, Lord Howell and Lord Roll. At least the Bank is aware of the problem and, as noble Lords will no doubt have read, a couple of months ago in Wyoming, Mervyn King made a speech on that issue. There is no doubt that the combination of the banking changes and the digital payment systems that were discussed raise a whole raft of new issues about how the money supply is controlled, how taxes are raised and how to measure what is going on. In concluding his lecture, Mervyn King said that societies have managed without central banks in the past and they may well do so in the future.
I commend the report to the House, but I do so with the sure conviction that it chronicles only one episode in a saga which has many twists and turns yet to come. Therefore, I share the view, already widely expressed, that the committee should have a continuing role.
Lord Kingsland: My Lords, first, I congratulate the noble Lord, Lord Peston, on his chairmanship of the committee and on the committee's production of this excellent report. Your Lordships' House is fortunate to have an economist of such eminence to undertake this important task. Indeed, I feel that the noble Lord, Lord Peston, was rather overcome by the seriousness of the occasion; because his normal exuberance and striking sense of humour were kept under iron control during his delivery this afternoon. As a self-confessed Keynesian, I thought his self-restraint all the more remarkable.
Having listened to the noble Lord, I believe that he is just the kind of chap we need in your Lordships' House. I shall write a letter to that effect to the Government Chief Whip. I believe that the youth and insight of the noble Lord, Lord Londesborough, would prove of great value to your Lordships' House in the years to come. I for one am extremely sorry that he will probably no longer be permitted to serve in your Lordships' House.
The easy manner of the noble Lord, Lord Lipsey, betrayed much familiarity with your Lordships' proceedings, gleaned--as we know--from his experience both as a political adviser and a journalist. Noble Lords will agree that his speech was both engaging and full of interesting insight.
The noble Lord, Lord Goldsmith, brings to your Lordships' House his reputation as an outstanding advocate. I am sure that noble Lords will agree that he more than lived up to that reputation. The only mistake made by the noble Lord was to say something with which I wholeheartedly agree--that there are important and interesting parallels to make between the appointments of members of the committee and the appointments of members of the judiciary.
The noble Lord, Lord Woolmer, also made a speech of great charm, with a number of important observations about the exchange rate. I hope that he will agree with me that, attractive though it is to watch Leeds United at its best, there is nothing like listening to a speech from the noble Lord, Lord Roll of Ipsden. I am sure that the noble Lord, Lord Woolmer, feels that on this occasion Leeds United were well worth missing.
I believe it was the noble Lord, Lord Barnett, who said that the story of the development of the relationship between the Treasury and the Bank of England over the past 30 years is one of evolution. Your Lordships will have heard the entertaining speech by the noble Viscount, Lord Weir, who served on the Court of the Bank of England for many years. Your Lordships will recall him describing an exchange between the Governor of the Bank of England and the Chancellor of the Exchequer. The Governor said something like, "I have been having a spot of bother on the other side of town", which the noble Viscount interpreted as a euphemism for the fact that there had been a heroic row between the Chancellor of the Exchequer and the Governor of the Bank of England. In those days that was the way in which things were done.
Then we went through the period described by the noble Lord, Lord Barnett, as the "Ken and Eddie show", and we have now arrived at the new arrangements which were announced by the Government six days after the election. Her Majesty's Opposition, as your Lordships have already heard from my noble friend Lord Saatchi, have a new initiative in this area because my right honourable
I am sure that the conclusions of that commission--I cannot anticipate exactly what they will be--will provide a further stage in the evolution of the positions of the Bank and the Treasury. I hope that they will underline the importance of the independence of the Bank from the Treasury--that there should be real independence, not just the appearance of independence.
The economic philosophy that lies behind the Government's initiative is that price stability is an essential precondition for stable growth and full employment. That philosophy is well expressed in a letter from the Chancellor of the Exchequer to the Bank dated 6th May 1997 which states:
The Opposition Benches wholly endorse that approach to economic policy. Indeed, it reflects an insight that my noble friend Lady Thatcher had about the running of the economy in 1975 when she became Leader of the Opposition. I am delighted to see her views now confirmed by the Government.
The new policy of the Government is now enshrined, as the noble Lord, Lord Barnett, said, in statute. In the great sweep of our history, that is almost unprecedented; but in the context of the activities of Her Majesty's Government, during the last two-and-a-half years, it has become routine. With the Scotland Act, the Wales Act, the Northern Ireland Act and the incorporation of the Convention on Human Rights into our legal framework we have seen the substitution of our unwritten constitution by a series of statutory measures.
In a few years we may find the noble Lord, Lord Goldsmith, instructed in a case judicially to review the decisions of the monetary committee on the grounds that some level of interest rate that it has chosen is so unreasonable that no reasonable committee could have come to that conclusion. That is the logical outcome of incorporating such matters in a statutory framework.
The principle of the independence of the Bank of England from the Treasury is one that I wholly endorse. If your Lordships look at the most successful post-war economies--the most striking examples must be Japan and the United States--you must inevitably be struck by the fact that there the central banks are independent of the political process. I accept that the causal relationship in these cases is somewhat opaque. However, the coincidence of the phenomena is nevertheless striking.
I accept entirely, of course, that fiscal matters should be subject to rigorous parliamentary control. My noble friend Lord Skidelsky made an extremely good point when he said that the parliamentary control of fiscal matters in this country is inadequate. He proposed to your Lordships the establishment of a parliamentary committee expressly tasked with trying to unravel the tangled web to which my noble friend Lord Saatchi referred. I hope that one of the developments of today's work will be that your Lordships' House will give this matter further, careful consideration.
The separation of powers between the Bank of England and the Treasury of itself adds nothing to our grasp of the science of monetary control. However, as my noble friend Lord Poole indicated, it has a profound effect on the psychology of markets. Because market operators know that governments can no longer resort to the printing press, they respect the decisions made by an institution which is independent of the political process. It is one way of achieving a certain degree of control over the animal spirits of entrepreneurs and speculators.
But if that independence is to have that beneficial effect, it must be real. The question that we need to ask ourselves is whether or not the arrangements that have been established by the Government since they came into office have created a situation whereby the Bank is genuinely independent of government influence.
I begin by looking at something in the report which puzzled me. Perhaps the noble Lord, Lord Peston, will have an answer to this, or indeed the Minister, when he comes to reply to the debate. In paragraph 2.23 of the report, we find the Chancellor defining the MPC's accountability in his remit for the committee as follows:
What are we looking for in a successful relationship between the Treasury and the Bank of England? I suggest that we are looking for two things. On the one hand, we are looking for genuine independence. At the
That has been the stuff of the debate in your Lordships' House this afternoon. The greater the integrity that the committee is seen to have in the eyes of the country, the greater will be its legitimacy. In that regard, I believe that the process of selection is crucial, and I wish to make two remarks about that.
First, any term of years fewer than the life of a government--three or even four years--is too short. I was particularly struck by the remark made by the noble Lord, Lord Burns, who said that questions of political influence are not in the initial selection of the members of the committee but at the moment of re-selection. The members of the Bundesbank Committee serve for a term of eight years; the members of the Federal Reserve in the United States serve for a term of 14 years. I suggest that one term in the United Kingdom which is at least longer than the electoral term of a government is highly desirable if the members of the MPC are to have real credibility.
I also submit--and here I find myself entirely in tune with the remarks made by the noble Lord, Lord Goldsmith--that these positions ought to be advertised so that the Chancellor of the Exchequer will have the widest possible catchment area from which to choose.
In my view, the other ingredient which is central is accountability to Parliament. That is a necessary ingredient if the Bank is to be independent of the Government. If the Bank is to be independent of the Government, it must nevertheless be accountable to Parliament. Here we have to look very carefully at the powers of both the committee in another place and the committee in your Lordships' House. I do not advocate that the committee should have a veto over the appointments of members of the committee. However, I certainly believe that there should be a degree of scrutiny by members of the committee during the appointment process, and that, thereafter, the committee should have powers, similar to those of committees in the United States Senate, to supervise the work of the monetary committee. With all those ingredients, we would have a blend of independence on the one hand and legitimacy on the other which would serve this nation well.
Of course, I accept that in the penetrating speeches of the noble Lord, Lord Roll of Ipsden, and my noble friend Lord Howell there are real question marks over the effectiveness of the short-term interest rates in influencing the supply of money, in particular, and economic activity in general. But that is a limitation which applies to the application of monetary policy whether it is entirely in the hands of the Treasury or in the hands of an independent bank. From time to time, no doubt, the committee will falter in exactly the same way as the Chancellor of the Exchequer would have faltered had he kept the position entirely under his own control. But at least I hope your Lordships will agree,
Lord McIntosh of Haringey: My Lords, I am sorely tempted to stand up and say: "Well done committee; well done Chancellor; well done Monetary Policy Committee. It is all working well. What is the problem?", and then sit down. But my contract of employment, if I had one, would be breached by that. I feel I am obliged to detain your Lordships for some time.
It is a splendid report. We all agree on that. It has been an interesting debate. We will all agree on that. And it had four remarkable maiden speeches. The noble Lord, Lord Londesborough, described his 15 years setting up a business. I spent 30 years setting up and running my own business and of course I experienced the same problems as he did with a strong pound and high interest rates. But what I found to be the most difficult problem--for me at any rate--was the uncertainty, the variability in interest rates, the variability in exchange rates and the variability in demand in the economy. I hope that the thrust of what I am going to say will be on the side of stability, which is the prime objective of this Government.
My noble friend Lord Lipsey made a speech which was an example to all future maiden speakers. It was seven minutes in length without notes, but also cogent, coherent and without a single hesitation; it was an amazing speech. My noble friend Lord Goldsmith has something to learn yet. He says that he is not under instructions any more. When he gets his pager he will find that he is under instructions and that new Labour has its own ways of ensuring that the message is properly transmitted. But we will let him off for a few days, possibly even until the next Session. And my noble friend Lord Woolmer made valid points about exchange rates and the inability of economists, politicians or the Monetary Policy Committee to control exchange rates, which are in fact controlled by the market and, I was told, are therefore true.
If anybody complains that there is a lack of transparency in the way in which we operate our monetary policy framework, the evidence of this debate, which has been well informed and perceptive in many cases, has shown that we could not have achieved this quality without the degree of transparency on which I shall attempt to enlarge. I shall not go quite as far as at one stage I thought the noble Lord, Lord Roll, was going to go. I thought he was going to argue that the committee was so well qualified that it should take over the functions of the Monetary Policy Committee itself. He stopped just short of that.
In closing this debate I should like briefly to summarise the Government's view of the rationale and benefits of the new monetary policy framework and to respond, as far as I can, to points made in the debate.
A new framework was needed because the old ways of conducting monetary policy were simply not delivering. That can be seen in the UK's inflation and output performance over the past 30 years. I accept what the noble Lord, Lord Burns, says--that we might have done some of this earlier had there not been real doubts, not about inflation targets, but about the lags within which they operate. That is of course true. Nevertheless, the fact is that that did not happen and a whole series of different targets, of different criteria, were used over the period of 30 years. I am taking the period of 30 years in order not to be thought to be party political.
In the 1970s, inflation averaged 13 per cent, peaking at almost 27 per cent in 1975. In the 1980s it averaged 7 per cent, while in the early 1990s inflation peaked at over 9 per cent. It was not only high over that period, but it was also very volatile. If I may say so, I was fascinated by the dissertation of the noble Viscount, Lord Eccles, on the nature of definitions of inflation. However, I do not have the time to follow him into the detail that, as a statistician, I should like.
As a result, growth in the economy was volatile. Indeed, over the period 1980 to mid-1998 the UK's GDP growth was more volatile than any other G7 country apart from Canada. We feel that that volatility helps to explain why, in terms of GDP per capita, the UK ranks equal lowest in G7 and only ninth in the European Union. The noble Lord, Lord Poole, in a generally antagonistic speech, acknowledged that the economy was more stable than it used to be. Coming from him, I take that as a genuine compliment.
After the departure from the ERM in 1992 there was a downward shift in average inflation. The most important factor behind that was the severe recession that had taken place in the early 1990s. It created a large degree of spare capacity in the economy which helped to prevent a build-up of inflationary pressure for several years. By the start of 1997 that situation was coming to an end. The UK was starting to expand at an unsustainable rate and threatening to send inflation up again.
The fall in inflation was also partly the result of some improvements in the monetary policy framework that were introduced around that time. Again I hope I am not being party political about this. In particular, an inflation target was set for the first time while reporting arrangements were improved. But those were piecemeal and were not enough to restore credibility in the Government's ability to maintain low inflation. That was reflected in the fact that inflation expectations were consistently well above the Government's inflation target throughout the period between 1992 and 1997; in other words, there was a large credibility gap between what the Government were genuinely aiming for and what markets were expecting to happen.
So it is a poor record. One of the most important reasons for that is that poor institutional arrangements were in place over that period. There were shortcomings both in the design and the conduct of monetary policy, and that meant that policy-makers frequently made mistakes. As a result, inflation was higher and more volatile than it would otherwise have been. With inflation set to rise again, it was necessary for the Government quickly to put monetary policy on a sound footing, which is what the Chancellor did on 6th May. How did we do this? We did so by introducing a fundamental and radical reform of the monetary policy framework based on a coherent set of principles to deliver low and stable inflation and the platform of economic stability necessary for long-term economic success.
First, the new framework introduced clear and sensible objectives for monetary policy. The framework explicitly aims to achieve low and stable inflation, recognising that this is essential to meet the Government's central economic objective of high and stable levels of growth and employment. There was a great deal of discussion both this afternoon and this evening about this and about the wording of Section 11 of the Bank of England Act 1998. My noble friend Lord Barnett and the noble Lord, Lord Roll, together with others, objected to the phrase "subject to", which appears in that section. Indeed, that was argued at length by my noble friend and by my noble friend Lord Peston during the passage of the Act.
However, I do not find the committee's report quite as antagonistic as the views which were expressed at that time. As the noble Lord, Lord Burns, mentioned, the Chancellor of the Exchequer has sent a memorandum, which is an interpretation of Section 11 of the Bank of England Act. The important point here is that the committee is charged to aim for the highest level of growth and employment which is consistent with the 2½ per cent target. That is not what the Act says; that is what the Chancellor's memorandum says. The Act does not say that in so many words but, in effect, that it what it means. On that basis, both the committee and the experience of the past 30 months confirm that that is a sound policy. The fact that it is a symmetrical policy on either side of the target means that monetary policy is neither unnecessarily loose nor unnecessarily tight.
In addition to clear objectives, the new framework also set out clear roles and responsibilities. The Government retain overall responsibility for designing the framework, setting the inflation target and monitoring the performance of the Monetary Policy Committee. The committee is responsible for setting interest rates to hit the Government's inflation target. This means that the MPC--I say this to the noble Lord, Lord Kingsland, who found what he thought to be contradictory references in the report--has operational responsibility for interest rates. Therefore, the Chancellor of the Exchequer is not responsible for individual interest rate decisions. It is noticeable that neither he nor any government spokesman has ever commented on individual interest rate decisions.
I acknowledge that a very considerable part of the debate today has been about the way in which the MPC operates and the way that its members are chosen. The way in which the committee operates in detail is not a responsibility of this Government, so I shall not comment on that. I am certainly not going to comment on issues like research facilities for non-executive members. That is a matter for them, for the Bank of England and for the Court.
I listened with great care to what was said about the transparency of appointment of the non-executive members; indeed, what the noble Baroness, Lady O'Cathain, called a "cloak and dagger" method of appointment, which I thought was exaggerating the situation just a little. I also listened to what was said about the terms of appointment. Clearly, the Government will read very carefully in Hansard what has been said. I do not want to argue with noble Lords who have strong and very often expert views on the subject. I do not even want to argue with those noble Lords, including some of my noble friends, who talked about the "Southern bias" of the members of the MPC, although I believe that the fundamental criterion should be who is best for the job, wherever he or she comes from.
The clue to all of this must be what my noble friend Lord Goldsmith said; namely, that you must adopt the system of appointment--in particular, by advertisement--which will attract the best candidate. That must be the criterion. There is at least a suggestion that a long period of office might deter some better candidates. I agree with the noble Lord, Lord Selsdon: we should not be amateur head-hunters. There has been a little too much of that this afternoon. I think that I should be restrained in my comment in that respect.
The new framework incorporates a range of measures designed to ensure that monetary policy is as transparent and as accountable as possible. For example, the minutes of the meetings and the quarterly inflation report provide a comprehensive and open account of the factors behind monetary policy decisions. The framework also makes it clear that the Monetary Policy Committee is responsible for its performance to the Bank's Court of Directors, the Government, Parliament and, ultimately, the public. The noble Lord, Lord Saatchi, said that it was accountable only to the Chancellor. It is appointed by the Chancellor but that is distinct from its wide range of accountability.
I turn to the new framework's performance. When it was introduced, some people, including Members of this House, were sceptical about whether it would deliver the necessary economic stability. Indeed at all stages between then and now there have been fears expressed in this House, notably from Members of the Opposition Front Bench, that we were heading for disaster and would be in a recession by this time. I remember all that. I could no doubt get out the quotations if I needed them.
Of course after two and a half years with the lags that arise as regards the application and effect of monetary policy, it is not possible to draw firm conclusions about how well the new monetary policy framework has performed, but it is possible to draw some conclusions. We welcome the conclusion of the committee that the Government were right to give operational independence to the Bank of England and place it on a statutory basis. Last month we published a paper entitled The New Monetary Policy Framework, which is available free from the Treasury and which I commend to those of your Lordships who have not seen it. It mentions the benefits of the new framework.
First, how has it performed in relation to the target? Since the introduction of the new framework, inflation has been low, stable and close to target. Between May 1997 and September 1999, RPIX inflation averaged 2.6 per cent, moving in a narrow band between 2.1 per cent and 3.2 per cent. The noble Lord, Lord Ezra, was right to say that that has happened in other countries. The noble Lord, Lord Burns, was right too to say that it will not always work. But I think that it is a bit much for the National Institute of Economic and Social Research, quoted by the noble Lord, Lord Howell, to say that we would have achieved the same effect by a flat 6 per cent interest rate. Of course it is possible to say that with hindsight. But would the NIESR or the noble Lord, Lord Howell, have been able to say that at any of the intervening periods between then and now?
The MPC has also been able to act in a proactive and forward looking manner. It has been able to act quickly and decisively. It has been able to avoid the need for large changes in interest rates. The maximum was only 7.5 per cent for four months in this cycle, compared with 15 per cent for a year in the previous cycle. My noble friend Lord Peston and others complained about too many changes, but he did so as an unreconstructed Keynesian, of course. We have to listen to his views with that in mind. I do not see what is wrong with a lot of small changes rather than large changes. I think that from the point of view of the economy it is better to do it that way round.
The other point concerns the symmetric nature of the inflation target. When it was introduced, there were some who thought that policy makers could have an incentive to drive inflation as low as possible. The Opposition said that when we considered the Bank of England Bill. But it has not worked that way. The symmetric inflation target has meant that deviations below the target are treated in the same way as deviations above the target. The Governor pointed out that,
Therefore the MPC has done a good job of supporting the Government's objectives for output and employment. Over the first two and a half years it has had to deal with considerable instability in the global economy. In 1997 many commentators were forecasting a boom, while at this time last year there was much talk of a recession. But the UK economy has
Not only has the new framework delivered good outcomes over the past two and a half years, it is also clear that the process is working well, which bodes well for future outcomes. The decision to grant operational independence has been commended by many other people, not just your Lordships' committee. This openness and transparency has helped to improve dramatically the credibility of monetary policy by a very straightforward measure. People now have a clearer idea of what policy makers are trying to achieve and what they are doing to meet their objectives. A whole range of survey and financial market data exist which indicate that people are increasingly expecting that price stability will be maintained. I am glad that the noble Lord, Lord Ezra, recognised that point.
Inflation expectations 10 years ahead, as derived from the gilts market, have fallen from more than 4 per cent in April 1997 to just under 2.5 per cent now. We have a long way to go. The general public have not yet been convinced, and we need to convince them. The change in long-term expectations is of enormous importance.
There was a criticism of co-ordination. During the debate we heard from those who thought that there was a lack of co-ordination and from those who thought there should be less co-ordination; that there should be a distinction between the responsibilities of the MPC and the Chancellor. On the whole, the Government take that view. In their evidence to the Committee, both the Chancellor and the Governor gave the clear impression that the separation of powers is working; that there is enough co-ordination--with, for example, the presence of a Treasury representative at the Committee's meetings--to achieve the objective that we all want.
This means that the fiscal policy has been able to support monetary policy while continuing to meet the strict fiscal rules set by the Government. Over the period 1996-1997 to 1998-1999 there was a substantial fiscal tightening of £30 billion pounds. This helped to contain the inflationary pressures which were emerging when the economy was above trend.
The success that the new framework has had to date is very encouraging. However, we are not complacent. As I said, we need to tackle the inflation expectations of the general public, which, in turn, have a significant economic effect. They remain well above the inflation target and the public have still to be convinced that low inflation is here to stay.
I do not underestimate the importance of what was said by many noble Lords about the dangers for industry and commerce of high interest rates and a high pound. It is probably no good my saying again--although I will--that much of the appreciation in sterling occurred under the previous Government before the Monetary Policy Committee came into effect. It is worth repeating what I said about the
I say to the noble Viscount, Lord Weir, and my noble friend Lord Paul, that manufacturing is up in the second quarter of this year and in the three months to August, which are the latest figures. Exports are up 5.8 per cent in the past three months. The trend is in the right direction.
I am not capable of following the noble Lord, Lord Roll, to envisage the end of money; I am not even capable of following the noble Lord, Lord Selsdon, when he looks 50 years ahead. The noble Lord, Lord Burns said--and he is right--that it is still early days. That was echoed by my noble friend Lord Bruce.
When the noble Lord, Lord Roll, talks about the Bullion Committee at the end of the 18th century, I am reminded of the Oxford fellow who criticised the investment policy of his college by saying that the past 200 years had been wholly exceptional. Let us continue to raise our sights--not to infinity but as far ahead as we can see.
In concluding, I confirm that the Government welcome the report. They believe that this kind of scrutiny is an essential element of the new monetary policy framework and of our policy framework more generally.
I shall not rise to all the flies that have been dangled in front of me, but in response to the noble Lords, Lord Roll and Lord Howell, and one or two others who have spoken of fundamental changes in the economic world and who have expressed doubt as to whether the old economic verities still apply, I shall say that one of the reasons that I am one of the few genuine conservatives in the House is that I am not in the least convinced by the latest version of why the whole world has changed. That has been going on throughout my career. However, I welcome the chance to debate the subject in your Lordships' House.
I, too, should like to echo the remarks that have been made on the four maiden speeches today. They all had a quality that I prize above any other when listening to speeches in your Lordships' House; namely, they made me think again about matters on which I thought I had finally made up my mind. As a reflection of my present benign mood, I shall even include in that remark my new noble friend Lord Woolmer. I did not think that I would ever offer a congratulatory remark to a supporter of Leeds United Football Club, let alone a director. I must say to the noble Lord, Lord Newby, after having told many
Since the events of last Wednesday night I have been in an extremely black mood. For the past eight days I have wondered why I spend time on economic matters and whether the debate would be worthwhile. However, having listened to every speech, as has my noble friend Lord McIntosh, I must say that this has been a very good debate indeed. There is a tendency in your Lordships' House for noble Lords to declare all such debates to be very good, along with all maiden speeches. However, in this case that is the truth. This has been a remarkably interesting debate and I cannot wait for the next debate on economics. Having said that, once again I thank all noble Lords for having taken part, and I shall now sit down.