§ 3.40 p.m.
§ Lord Peston
My Lords, I beg to move the Motion standing in my name on the Order Paper.
It is with a certain amount of pride and a great deal of pleasure that I introduce today's debate. I am sure that I speak for all noble Lords in saying how delighted we are that no fewer than four new colleagues will make their maiden speeches today. We look forward with great interest to hearing what they have to say.
At the outset, I thank our clerk, David Batt, without whose administrative skills little would have been accomplished and certainly the report would not have been published on the due date. Our thanks are also extended to our special adviser, Professor Wickens of York University. Having been one of the first, if not the first, economist to advise a parliamentary committee, I am aware of how difficult and frustrating such a task can be. Perhaps I can use a form of words that is often placed in the first footnote of an academic article: we are indebted to Professor Wickens for removing so many mistakes from our report, but he is not responsible for those that remain.
I shall make three general propositions. First, the committee was determined to avoid party political matters in all its deliberations and in its conclusions. We succeeded in that aim and I have no intention of making any party points today at all. I hope other noble Lords will follow my example.
Secondly, although the membership of your Lordships' committee, as one journalist put it, is exceedingly high-powered and knowledgeable on matters of economics, finance and industry, we did not allow our personal views to come between us and the witnesses. Our recommendations followed from what we heard, not from what we had decided beforehand.
Thirdly, although I have remarked only half jokingly that your Lordships' committee could run monetary policy at least as well as the Monetary Policy Committee, we were at pains not to second-guess those who have responsibility for such matters. At no time did we comment on any individual decision and I do not propose to do so today, tempting though it may be to tell your Lordships what I think of the recent increase in the rate of interest that has just been announced.
I am convinced that we have succeeded in our remit and have met the standards that we set ourselves. More to the point, we have met the standards that your Lordships have set for other committees. That is most important, as the committee was a new departure for the House of Lords. I am convinced that the experiment was necessary so that this House can make a full contribution to the scrutiny of economic policy 994 in its new form. If your Lordships accept the view that we have been successful, at the beginning of the new Session noble Lords can place the committee on a permanent basis. Let me add with my usual modesty that I put in no claim for myself or my colleagues in regard to membership of the committee.
Our purpose was strategic. It was to take an overall view of the policy-making process, interpret what was happening and subject it to critical scrutiny. Monetary policy now has a statutory basis which in British terms is somewhat unusual. As the aims of policy and, to some extent, the means were set out in an Act of Parliament, we have been concerned with textual exegesis.
Not surprisingly, the remit of the Monetary Policy Committee has been interpreted in more than one way. We have noted that our witnesses have not been in full agreement as to what the remit is, let alone what it should be. I admit that I was more confused at the end of our inquiry about what the expression "subject to that" meant than I was at the beginning. I am coming to the conclusion that Section 11(b) of the Act is meaningless. That will need further investigation and explanation in the future.
Similarly, as the dynamics of the economy are such that monetary policy works with a complicated set of time-lags, present events are relevant only in so far as they are good indicators for the future. A simple example is that one does not control today's housing boom by tightening policy today. It is a commonplace of the theory of economic policy that if a boom were about to end anyway, tightening policy now would exacerbate the downturn rather than mitigate it. Policy making that ignores the dynamics can destabilise the economy. That is hard for the public to understand.
Therefore, I agree with the Bank of England that if low inflation is the remit—my purpose today is not to argue about that—we cannot relax if the current rate of inflation is at the right level. We must always look at where we are going and not where we are. The MPC keeps on telling us that, but a careful scrutiny of its minutes plus the evidence of its activism suggests that it sometimes forgets its own avowed doctrine. Even an unreconstructed Keynesian like myself cannot help but raise an eyebrow at the frequency of interest rate changes.
The committee has seen its task as one of critical interpretation. We say in terms, and I repeat in terms, that we support giving operational independence to the Bank of England for monetary policy and that the policy so far has been a success. That was agreed on a non-party basis. It is hoped that such a view is more widely accepted across the political parties. If it is of any help, I see the new approach as evolutionary and not a radical break from the past.
The committee also says that such a new departure inevitably implies that all relevant bodies learn from experience and adjust what they do from time to time. It would be a disaster for our country if, in due course, necessary changes were not made to monetary policy institutions and techniques on the grounds that that would imply that the original set-up was imperfect. By 995 the nature of things, human institutions are imperfect and need adjusting from time to time. If it turns out that economic experience leads to the conclusion that the remit needs changing, let it be done without concern for the Treasury's amour propre. Equally, if the mode of operation of the MPC needs to be changed, it must be changed without concern for the feelings of the powers that be. I hasten to add that it is not my view that such changes are needed immediately. I simply make a general point on the rational approach to economic policy.
I must now emphasise one or two technical points arising from the report. The committee was concerned about the level of inflation, and it hopes that priority will be given to further examination of that topic. It is especially alive to the difficulties that arise if the inflation index to be aimed at differs from that which is used for index linking in a wide range of contracts.
Secondly, the exchange rate remains a difficult problem. It is part of the transmission mechanism and cannot be ignored. However, the economics and econometrics of the exchange rate are fraught with difficulty. We seem to be told that the exchange rate is inevitably unpredictable, but we are also told that there is such a thing as the correct rate for the pound. That too is a subject to which we must return.
Thirdly, we must look more carefully at the real side of the economy and its connection with inflation. On the one hand, the employment consequences of policy are worthy of further scrutiny, especially the question of the restoration of full employment. On the other hand, there is the problem of the underlying or sustainable growth rate of the economy.
I was intrigued to read in a newspaper the other day that it may be that the underlying rate of growth of the economy has risen from 2.2 per cent to something nearer 3 per cent. I would dearly like to believe that. However, with my usual pessimism, I must note that we have regularly experienced such false dawns for the past four decades. If, however, the Treasury has some new hard evidence on that, the sooner we hear it the better.
More generally, important though that is, I do not believe that hitting our inflation objective will automatically lead to full employment and maximum real growth. It may be a necessary precursor, but a precursor to what? Improving the way in which markets work, including labour markets, is a help, but there remains a gap which fiscal policy should fill.
I do not insult your Lordships. I take it for granted that all noble Lords have read every part of the report and every page of the evidence and, therefore, do not require me to summarise it today. Nonetheless, I need to make a couple of remarks on topics that we touched upon but need to examine more deeply in the future.
Macro-economic policy varies in its impact on different sectors and regions of the economy. There is the obvious problem of the tradable goods sector hit by a high exchange rate, but not all firms within it suffer in the same way. It also should not be forgotten that the service sector can suffer too, if not directly, 996 then indirectly because of the adverse effects on its manufacturing customers. I believe that the manufacturing service distinction is a good deal more difficult to make than is sometimes thought by other people. There is the equally serious problem that controlling the boom in the south may make it harder for other regions to experience boom conditions at all. I remain unrepentant in my view that the membership of the MPC is far too biased in a southerly direction.
There is also the rather technical question of the nature of policy itself. The Bank intervenes via short term interest rates. I am not at all clear quite what role the money supply in any form plays. It is, therefore, very difficult to compare our policy making with that of the European Central Bank. The Federal Reserve Bank also seems to operate in much wider terms and with regard to a broader range of financial assets. A new inquiry must take account in particular of the United States experience.
A topic which it is now possible to explore concerns precisely what causes members of the MPC to differ in their votes for or against a particular policy initiative. I have no interest in the analysis ad hominem, only in the general nature of the differences. In particular, we need to know whether differences in voting arise because of different assessments of likely future developments of inflation, different attitudes to risks with regard to deviations from the set target due to unpredictable shocks, or different assessments of the way in which policy works, i.e. the transmission mechanism. Of course, what should not occur at all is that the members should differ because one or other of them wishes to reduce the emphasis placed on the inflation target itself. Any member of the MPC who did that would be breaking the law and infringing an Act of Parliament—one of the stranger consequences, for an economist, of this whole matter having a statutory basis.
This takes us on to another difficult policy question. Economic theory tells us that, in a dynamic world, policy itself must be dynamic. By that I mean that the correct decision is to be formulated in dynamic terms. In ordinary language, it means that the Monetary Policy Committee must have in mind a time path for interest rates and not merely a level for any one month. As I understand it, it has set its heart against doing much, if anything, more than announcing its monthly decision, as it has done today. This is presumably connected with the effects that saying more may have on the stability of financial markets. I believe that the MPC needs to be very carefully scrutinised in these respects. In particular, it is my belief that, since most financial markets are largely a means and the real economy is the end which determines human wellbeing, the uncertainty surrounding the path of interest rates cannot be ignored.
Finally, we refer in our report to the need for the Bank to monitor how the MPC works and, more generally, for the Treasury to monitor how macroeconomic policy works overall. We stress that all such monitoring must be placed in the public domain. We would press the authorities most strongly in that regard. In this connection, I was interested to read the 997 Treasury's latest effort, The New Monetary Policy Framework. This document too is worthy of tough, critical scrutiny. However, the chief task confronting your Lordships in the next couple of years is to concentrate on how policy evolves and, reverting to our central philosophy, to advise on how we learn from experience.
I end as I began. Without boasting, I believe that we did a good job and did not let your Lordships down. The job is inevitably incomplete. I believe that we can continue to make a contribution in the future. For the moment, however, I commend this report to your Lordships.
Moved, That this House take note of the report of the Select Committee on the Monetary Policy Committee of the Bank of England (HL Paper 96).—(Lord Peston.)
§ 3.55 p.m.
§ Lord Saatchi
My Lords, first, I take this opportunity to congratulate all the members of the Select Committee, especially their chairman, the noble Lord, Lord Peston, on producing an impeccable and timely report. The standard of the report comes as no surprise, considering what an exceedingly distinguished economist Lord Peston is. It would be a shame to let this moment pass without also thanking in particular my noble friends Lord Poole and Lord Weir, whose expertise may be lost to this House as a result of the reforms. How sad that would be.
The Select Committee system is one of the most respected aspects of our parliamentary procedures. Readers of this report will quickly see why that is so. The noble Lord, Lord Desai said last night that Select Committee reports were indeed educational documents and should be distributed widely to schools and universities. Having read this report, I concur.
I am looking forward greatly to this debate, not only because so many of the country's most distinguished economic experts are in your Lordships' House to debate it, but also, as the noble Lord said, because we shall have the pleasure of four maiden speeches.
The Bank of England was once likened to,a giant iron flywheel set in motion years ago that it would take a determined madman years to stop".The question posed by this report concerns what effect the new MPC system will have on that great wheel.
It is widely agreed that, so far, the MPC has done well to sustain inflation at the optimum rate. However, there are very difficult explanations as to why this is so. First, some say that the wheel was made of pure gold when the MPC took over. I refer, of course, to the golden economic legacy of the previous administration.
Proponents of this view point to the fact that between 1993 and 1997 inflation was less than 4 per cent, the longest period of low inflation for 50 years. Roger Bootle, for example, said that the closeness of 998 the inflation rate to target in the first period of the MPC was,a tribute to the previous regime of decision-makingby the Conservative government. Others, however, say that the MPC's apparent success is pure luck. This was the version provided by Professor Goodhart in his IEA lecture entitled, "Luck for the MPC".
So is it luck, or is it the miraculous workings of "the new paradigm", in which technological changes are reducing business costs to the point where old-style inflation no longer exists? Or is it because the MPC has been, as the noble Lord, Lord Peston said, "activist" and has, since it was set up, made 14 changes to interest rates—15 including today's—compared to four times in the same period for the US Federal Reserve and only twice for the ECB and its predecessor central banks?
Behind all these different versions of events lies a nagging question: what is the true legitimacy of the MPC? This question, like all questions of legitimacy, is related to the circumstances of birth. During the debates in your Lordships' House about the reform of this House, the Government consistently relied for the legitimacy of its proposals on its firm manifesto commitment. But what is the status of a Government action for which there is no manifesto commitment? What then? The fact is that the Government suddenly announced their intention to make the Bank of England independent and to form the MPC on 6th May 1997, five days after being elected on 1st May. This haste, this lack of prior consultation, this manifesto silence, must raise concerns about the independence and accountability of the MPC.
Of whom is the MPC independent? To whom is the MPC accountable? Presumably the MPC is intended to be independent of the executive. But it seems from the report that the only person to whom it is accountable is the Chancellor.
How can the MPC be independent of the person to whom it is accountable? Is not that why my right honourable friend the Shadow Chancellor suggested that the legitimacy of the MPC might be improved if it were accountable to Parliament? He takes the view that we currently have the worst of both worlds—a halfway house which is neither independent enough of the executive nor accountable enough to Parliament.
The Labour Party said that its objective with the MPC was that,Decision making on monetary policy is more effective, open, accountable and free from short-term manipulation".But let us consider for a moment the method of selection of MPC members—to which I know my noble friend Lady O'Cathain will return in a moment in more detail—to see how well it fits with that aim. Currently, the Chancellor has the right to hire seven of the nine members. Does he also have the right to fire them? In a way he does because, as their term of office is for only three years, reappointment requires the Chancellor's support. We should remember that members of the Bundesbank serve for eight years, and of the Federal Reserve for 15 years. As the report says, 999 the members of the MPC are the only members of any central bank that serve a shorter term than the government of the country.
It is worth recalling that in his submission on the reform of this House my noble and learned friend Lord Mackay of Clashfern took the view that 15 years was an appropriate period of appointment to overcome the potential for political pressure and ensure true independence. But instead, as the Select Committee said,we have no knowledge of the field that was considered before the latest appointment was made, and we even have difficulty elucidating the procedure that was followed".Then there is the related issue of the composition of the MPC mentioned by the noble Lord, Lord Peston. At the moment MPC members are renowned economists and experts in their field, but some would like to see a more representative group of people, perhaps including some with experience in manufacturing. The Select Committee raised exactly that concern over what it said was,the limited range of experience of the present MPC, both the academics and the Bank's members".But whoever are the members of the MPC, a key point will always be the objectives they are set. In his now famous letter to the Bank Governor, Eddie George, the Chancellor outlined his objectives for the MPC. That letter has now achieved iconic status and is on display in a glass case in the Bank's museum. The Bank of England Act followed later. But is it not slightly baffling that if we look at the contents of the glass case and compare it with the Act, we find that the wording of the two documents is subtly different? That was referred to in the report.
Between 6th May 1997 and 1st June 1998 when the Bank of England Act came into force, a change was made. The Chancellor's letter says:The monetary policy objective of the Bank of England will be to deliver price stability (as defined by the Government's economic policy) and, without prejudice to this objective, to support the Government's economic policy, including its objectives for growth and employment".But when the objective was then formalised by the passage of the Bank of England Act, Section 11 of the Act read as follows:In relation to monetary policy, the objectives of the Bank of England shall be—So while the letter makes clear that the meaning of the term "price stability" will be defined by the Government, the Act is silent on who will do the defining.
- (a) to maintain price stability, and
- (b) subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment".
That opens up two levels of potential difficulty. First, over the correct definition of price stability; secondly, over any possible conflict between the Bank's two objectives. As the CBI said in its submission to the Select Committee,it is not possible to achieve two targets with one instrument".And as the report states,It is a matter of elementary logic that except in rather special cases the number of achievable targets is limited by the number of instruments".1000 Perhaps we have seen some of these difficulties at work in the public disagreements among MPC members about, if your Lordships will allow me a corruption of Comrade Lenin, "who controls the research controls the facts, and who controls the facts controls the policy".
While we are looking at the words in detail, perhaps I can draw your Lordships' attention to another document. I remind your Lordships of the exact words of the Chancellor's letter. It says,The … policy objective of the Bank will be to deliver price stability … and, without prejudice to this objective, to support the Government's economic policy".The document I hold in my hand says,The primary objective of the Bank shall be to maintain price stability. Without prejudice to the objective of price stability it shall support the general economic policies of the Community".The words are strikingly similar, but the document in my hand is the Maastricht Treaty dated 7th February 1992, which I seem to remember the Labour Party opposed.
My final point concerns the issue of co-ordination between monetary and fiscal policy. The Chancellor knows what he is planning to do from one day to the next, but to what extent is the MPC informed of this? The events of last summer led many to conclude that there is a lack of communication between the Government and the MPC. As paragraph 32 of the minutes of the MPC's meeting of July 1998 stated,The case for a reduction in rates became less clear in the light of the Government's recent announcements on fiscal strategy which raised new doubts about the medium term inflation outlook".But how does the MPC know what the fiscal stance of the Government is? Do the members read the Prime Minister's speeches? Do they study the body language of the Treasury official who sits in on their meetings? If they read the Prime Minister's speeches, they would be reassured that the Government have no plans to increase tax at all. Yet, as we know, the Government are increasing tax. The tax burden is rising from 35.4 per cent to 37.6 per cent during the lifetime of this Parliament. According to the OECD today, taxes are rising faster here than anywhere else in Europe.
We all know that the Government's policy is to take full advantage of the present complicated tax structure and the astonishing plethora of tax credits, allowances, exemptions, reliefs, deductions, disregards and indexations, alteration of which allows such scope for hidden tax increases, which the Shadow Chancellor famously dubbed "stealth taxes". Is that not how the Government achieved the feat of increasing tax without ever announcing a tax increase?
As the minutes of the MPC's meeting in July last year clearly stated,The case for a reduction in rates became less clear in the light of the Government's recent announcements on fiscal strategy, which raised new doubts about the medium term inflation outlook".It was precisely that practice of the Government which led the Treasury Select Committee in another place to ask the Government to display greater transparency in 1001 their tax policies. That was why the Director General of the CBI described,the corporation tax changes which were very carefully [portrayed] as a reduction in tax rates but were actually a tax increase, exploiting the fact that the number of people in the world who understood dividend tax credits is remarkably few, which allows the Chancellor to increase taxes whilst appearing to cut them".The concern is that the Government have woven such a tangled web in their tax policies that the MPC itself might get caught up in it.
The decisions of the Monetary Policy Committee probably have a more direct effect on people's lives than those of any other body in the country. They affect everyone with a home loan, everyone with a credit card, every saver and every business in Britain. This superb report raises some fundamental issues, a few of which I touched on today, and I look forward greatly to noble Lords' contributions to this crucial debate.
§ 4.7 p.m.
§ Lord Ezra
My Lords, I am pleased to have participated in the work of the Select Committee under the able chairmanship of the noble Lord, Lord Peston, who so effectively introduced our debate on the report, and I listened with great interest to the searching questions asked by the noble Lord, Lord Saatchi.
The role of the Bank of England in securing price stability has been a matter of interest to me personally for many years. Over the past decade I have asked a number of Questions on the subject. In particular, in an Unstarred Question on 16th December 1992 at col. 626 of Hansard, I asked Her Majesty's Government whether they considered,that additional responsibility should be given to the Bank of England to assist in securing long-term price stability".I proposed then that a Select Committee should be set up to analyse past trends on prices and inflation, to review what was being done in other countries to contain inflation and to make recommendations. I regret to say that this was turned down by the then government, who took the view that, "We have the right policies and we have no plans to abandon our traditions".
I was therefore very pleased when the present Government decided shortly after the general election in May 1997 that the Bank of England should be given operational responsibility to deliver price stability, as defined by the Government's economic policy. This was subsequently formalised in the Bank of England Act 1998.
I believe that that period of over two years which has elapsed since then has justified the Government in giving the Bank operational independence in this matter. There is widespread agreement, endorsed by the Select Committee, that the Monetary Policy Committee has generally performed its task successfully. In recent weeks there has been some criticism, as referred to by the noble Lord, Lord Peston, that the committee has, perhaps, changed interest rates too frequently. It has done so more than a dozen times—indeed, well over a dozen times after 1002 today's increase—since it was established. In the same period, the Federal Reserve in the United States only made four changes, and the Bundesbank, followed by the European Central Bank, only made three changes. It may be that in the future the MPC will make less frequent changes in interest rates. However, having said that, there is no doubt that what it has done has kept inflation very much in line with the Government's policy of 2.5 per cent.
What is remarkable about the operations of the MPC is the unique degree of transparency which is practised. The publication of the minutes of meetings a fortnight after they are held is an exceptional achievement. Like many noble Lords, I have served on the boards of various companies. I cannot recall a single case where we have received the internal minutes within a fortnight, let alone had them published within a fortnight. So I think that this is exceptional. The transparency adopted by the MPC exceeds that practised by the ECB and the Federal Reserve.
I believe that the operations of the MPC so far, particularly the transparent way in which they are undertaken, has led to perhaps its biggest achievement, which is to reduce inflationary expectations. One of the major factors leading to the big increases in inflation in recent years was the expectation on the part of enterprises, trade unions and the general public that inflation would continue to rise at a high level. I personally suffered from this while I was chairman of the National Coal Board. We had to negotiate with the unions and, whatever we said, they denied it, and replied, "Inflation is going up at this rate and we have got to have at least that, plus". That was the framework within which we operated at the time. However, the situation is quite changed. Inflationary expectations are now very much in line with the Government's low inflation objective. This is undoubtedly something quite exceptional in our recent economic history.
Another aspect which impressed me during the course of the Select Committee's inquiry was the detailed analysis of economic and financial developments conducted by the MPC, both at national and regional level. In my opinion, this has meant that increasingly over the period the decisions the committee reached on the level of interest rates have been informed by a wide-ranging analysis of trends throughout the country, while also taking into account international developments.
In my view, the general conclusion is that the MPC represents a success story. However, we must bear in mind that this is being done at a time when low inflation has been achieved throughout the developed world. What is also uncertain is how this system would operate in the light of major external supply shocks. There was much discussion in the Select Committee, as the noble Lord, Lord Peston, and my other colleagues will recall, about this; for example, in paragraphs 1.43 and 6.12. I believe that the conclusion reached was that we could probably cope better with external shocks with the present system in operation than without it. That may be so. When we interviewed the governor of the Banque de France I specifically asked him if he 1003 thought we were now better equipped to deal with shocks, such as the oil crisis in the 1970s. He said that he thought,we would certainly have the right response".That is how he felt about the matter. But, of course, we do not know. Time will tell—if and when we have the next major supply shock.
Another issue which took up much of our time was the relationship between monetary and fiscal policy. By its very nature, the fixing of interest rates has to be done on a national basis and cannot take account of regional variations. So the question was: could this be corrected by fiscal policy? Generally speaking, the Government's approach to fiscal policy is that it should set a long-term framework and, therefore, specific short-term interventions would be minimised. None the less, there could clearly be a need for such interventions when major sectoral or regional imbalances occur.
We had much discussion about the composition of the MPC and the respective roles of the external and internal members; indeed, both the noble Lord, Lord Peston, and the noble Lord, Lord Saatchi, referred to this. I was a little surprised to learn that the external Members were generally full time on the job, while the internal members, who had their Bank of England responsibility in addition, were therefore part time. This is a complete reversal of the position on the normal board of a company. As the noble Lord, Lord Saatchi, said, in recent days there is reported to have been lively discussion within the MPC about the facilities which should be made available to the external members. It would be of interest if the Minister, when responding, could let us know where matters stand in that regard. We raised the question of the selection of external members and thought that it ought to be more open than it is. No doubt this also will be mentioned by the Minister.
Finally, there was the question of the relationship with the ECB and the euro. During our visit to Frankfurt, when we spoke to the President of the ECB and his colleagues, it appeared that the procedures which they pursued were similar in many respects to those of the MPC. However, as I mentioned earlier, the degree of transparency was noticeably less, which the President of the ECB explained by stating that he did not consider it desirable that the position taken up by members at any one time should be revealed as this could inhibit subsequent changes of position. I do not believe that our experience has shown that that is necessarily so.
The issue of how, through monetary policy, we should prepare for eventual membership of the euro zone and how we might work towards a greater convergence was not pursued in the time available to the Select Committee. I believe that this could well form the subject of a future inquiry.
§ 4.18 p.m.
§ Lord Londesborough
My Lords, I am grateful to the noble Lord, Lord Peston, for introducing this report to the House. I am especially grateful for this opportunity to be one of the last ever hereditary Peers to make a maiden speech, just days after taking my seat—or, to put it another way, just days before losing my seat. I believe that, by tradition, one is granted a final wish before facing the firing squad. Mine is to speak on monetary policy before the trigger is pulled. It is actually a subject with which I am well acquainted, as I have spent the past 15 years building a publishing business where exports account for 90 per cent of sales.
I know that I speak for much of business when I say that our current monetary policy is severely restricting this country's ability to compete in the market-place both at home and overseas. We are losing our competitive edge just at the time when global competition is intensifying.
As we know, interest rates, which have gone up again today, remain much higher than in Europe and in America and show little sign of convergence. How much longer can UK business be expected to shoulder steeper borrowing costs than our competitors? But far worse, particularly for exporters, high interest rates have contributed to three years of increasing strength in sterling, both against the deutschmark and latterly the euro and, of course, the US dollar. For business sectors operating on margins of 10 per cent, an overpriced pound has virtually wiped out profits, forcing some to quit foreign markets altogether.
Where we compete against the Asians, the Latin Americans, the east Europeans, sterling has appreciated by as much as 50 per cent. Next time your Lordships pop into Marks and Spencer to purchase your wool-rich socks, might I suggest that you check the label first? I fear that it is more likely to state "Made in Slovakia" than "Made in Britain". Indeed we heard this week that M&S is now "disengaging" from a supply relationship with Daks Simpsons it can no longer afford and outsourcing offshore instead. The net result, I believe, is as many as 800 lost jobs.
I know that the MPC shares employers' concerns over how long one can finance an average wage rise of 5 per cent per annum when factory gate prices are falling and retail prices have barely risen by l per cent. With low unemployment, employers are being forced to offer higher wages to recruit effectively, adding further upward pressure on wages. You can only stretch company finances so far. If your Lordships believe that you are listening to the whinges of yet another businessman crying wolf, you need only to glance at our balance of payments figures to see how these micro-economic difficulties are impacting on the economy at large.
The trade deficit in goods for the first half of this year alone stands at an appalling £14 billion. Our exports of goods were 10 per cent. down on the first half of 1997, in spite of two years of relative economic growth. There has been a fragile recovery in exports in the past couple of months, but I know that I am not alone in believing that this is only a temporary 1005 phenomenon. With our new found appetite for cheaper imports, even the surplus in services is showing signs of peaking. The result is that our current account balance has dived into the red and we have seen £10 billion vanish from our foreign reserves over the past two years.
I am one of a small but, I believe, growing minority who believes that the forces of disinflation are gathering force. Many retailers can grow only by cutting prices in the current climate. With the advent of the Internet and electronic commerce, which brings with it greater price transparency, British goods and services are in danger of losing further market share. It takes only a couple of clicks on the Internet to make an instant price comparison, and in the case of Britain generally an unfavourable one.
Controlling inflation must always remain a priority, but what about the Treasury's key stated aim of "promoting enterprise"? Tax breaks and small business incentives are all very well but they do not begin to address the problem of a very uneven playing field. My question to the Minister is the following: could he inform this House how the Government intend to respond to this threat posed by greater international competition? Are exporters simply expected to adapt through miraculous productivity advances, or can we expect a more balanced macroeconomic environment?
I conclude by urging the MPC to take much greater account of the huge interest and exchange rate burdens currently borne by business and industry. If monetary policy does not address these factors, we shall continue to price ourselves out of the market and ultimately damage growth, investment and jobs. The global economy, I suggest, is changing and I respectfully suggest that inflation is no longer to be regarded as Public Enemy No. 1. I thank your Lordships for your indulgence.
§ 4.24 p.m.
§ Lord Barnett
My Lords, I am delighted to have the opportunity to congratulate the noble Lord on an excellent maiden speech. In saying that I know that I speak for many noble Lords in the House. It is good to hear from the coal-face, as it were, what is really happening. There is one way to get interest rates down fairly quickly, but I know that the Front Bench opposite would not necessarily agree with that.
We are told that this is the noble Lord's first and last speech. Therefore I cannot say, as we usually do on these occasions, that we look forward to seeing the noble Lord often in the future. However, we can thank him sincerely for an excellent contribution to our debate. We have heard that he runs what I understand is a small business. He will understand why I very much believe that small is beautiful, both in business and elsewhere! We wish the noble Lord success in his business. That will not just be good for him but also for the country.
The report was clearly summarised by my noble friend Lord Peston, our excellent chairman, who referred to page 53 of the report which contains the 1006 summary of recommendations. I mention the page number just in case some readers have not yet got there. It is first my duty, I believe, to congratulate and support my noble friend Lord Peston in pressing that this Select Committee relating to the control and accountability of the Monetary Policy Committee should be a permanent committee of your Lordships' House. I hope that that proposal will be supported on all sides of the House.
I say with respect to the Treasury Committee in another place that it is, like the noble Lord, Lord Saatchi, much more party political and therefore less objective. I was sorry that the noble Lord, Lord Saatchi, could not help making party political points. As the noble Lord is new to the job I hope that I may tell him that making party political speeches on every occasion—even on non-party political occasions—does not help the party he supports. I repeat that my noble friend Lord Peston called for a permanent committee. I agree with that because as much as I believe that the chairman of the Treasury Committee in another place, Giles Radice, is an excellent chairman—almost, if not quite, as good as ours—he finds it difficult to be objective. If one reads the reports of that committee, one finds that on every occasion vote after vote after vote is taken before a report is agreed. On the other hand, our reports are discussed in depth and in detail and are always agreed unanimously and are therefore more commonsensical—if I may put it that way—and thus more objective. I strongly hope that our Select Committee will operate on a more permanent basis.
I turn to the report itself. We all know the central objective; namely, the objective given to the Monetary Policy Committee to maintain, if it can, a 2.5 per cent level of inflation. I believe that there is some lack of clarity about what consideration the Monetary Policy Committee should give to the Government's economic policy. The Monetary Policy Committee of course considers every aspect of economic policy and every bit of data that is available, although I gather that four independent members of that committee do not receive quite as good data as the executive members. However, that is another matter that we can no doubt deal with later.
Of course one accepts the constant reiteration by both the Chancellor and the Governor of the Bank of England that price stability is necessary for growth and employment to succeed and be sustained. However, there is confusion over the language used constantly and in many different areas about the price stability target and how far that supersedes the Government's own economic policy. I give a few examples. My noble friend Lord Peston referred to Section 11 of the Act and said that it was meaningless. He may be right. The words in that section were mentioned also by the noble Lord, Lord Saatchi. I refer to the words, "subject to that"; that is to say, subject to the price inflation target, the Monetary Policy Committee should consider the Government's own economic policy.
In paragraph 1.38 of our report we refer to the background notes of the Treasury in 1997. They state that the MPC should consider without prejudice the 1007 objective of price stability and that it should support economic policy. In paragraph 1.40 we quote the Governor of the Bank of England. He said that of course it was "continuously addressing" the problem of price stability and inflation. He went on to say that "through that" it supported growth and demand. The Governor told us that he prefers that particular formulation rather than the one in the Bill.
We are told in the new monetary policy framework document, which was issued recently, thatprice stability is not an end in itself".That is fairly obvious. But we get many obvious statements in government documents, so we should not be too surprised about that. I notice that it even makes my noble friend who is to reply smile.
It may be meaningless to my noble friend Lord Peston, but the Bill must surely be the main legal instrument of the Monetary Policy Committee. Or is it? I am bound to ask the Minister that question. The Government refused to accept an amendment moved in Committee by myself and my noble friend Lord Peston which sought to delete the words "subject to that". I notice that the noble Lord, Lord Saatchi, has not yet looked at this matter. The amendment was not supported too strongly by the Opposition Front Bench at the time. I am not now asking the Government to clarify the situation in a new Bill—that would be asking far too much in the busy Session to which we can look forward—but I do ask them to take note of Section 12 of the Bank of England Act. It states:The Treasury may by notice in writing",do a variety of things. I know the Minister is very persuasive. Perhaps he could persuade the Chancellor to consider writing a letter to clarify the situation in relation to price stability and the Government's economic policy.
The heart of the Bill concerns the transfer of monetary policy from the Chancellor to the Bank. In practice, while there is no longer a "Ken and Eddie Show", there is a "Gordon and Eddie Show"—but, as we know, that is held in private on a fairly regular basis. I am sure that they discuss all the various aspects of fiscal and monetary policy—including, almost certainly, the question of the exchange rate, to which the noble Lord, Lord Londesborough, referred.
Perhaps I may say a brief word about that. No one—not even a body as distinguished as the Monetary Policy Committee or our distinguished committee—could decide the appropriate rate. What is the right rate? I have not heard anyone—especially these days—say what is precisely the right rate to help the businesses referred to by the noble Lord, Lord Londesborough, and others.
Given what we say in paragraph 7.22 of our report, and given that we might join EMU in the next few years, we shall have to consider what should be the right rate. That is obvious. If the Government were to say that it is not a matter of "if" we join the single 1008 currency but a matter of "when"—I mention that for the benefit of my noble friend Lord Bruce of Donington—
§ Lord Barnett
—I believe we would see very quickly an impact on the exchange rate. We would start to see the lower interest rates and lower exchange rate referred to by the noble Lord. I hasten to add that that is not the view of the committee; that is my personal view.
Finally, I turn to the decisions of the Monetary Policy Committee on interest rates. We know that it increased them again by a quarter of 1 per cent today. Our chairman said that we do not second-guess the decisions being taken; however, we do consider how and why those decisions are taken. Have the decisions been right so far? Considerable comment has been made about that question—much of it contradictory.
I refer to an article in the Financial Times, which appeared as recently as 29th October. It referred to the National Institute of Economic and Social Research. It was not clear in the leader whether it was referring to the views of the national institute or its own views. Let us take it that it was either. The leader started by saying that maybe the lowering and raising of rates was all a waste of time. Given that we are told that it takes two years for changes in interest rates to have an impact, it would seem that we should thank the former Chancellor, Ken Clarke, for some of the inflation levels we have today. I would hasten to do that.
But then we are told in the same leader that the Monetary Policy Committee has presided over the smoothest recovery since the 1960s. It goes on to say that perhaps it was luck as much as good management. Maybe it was luck; few people know how it has happened. However, we are then told at the end of the leader that the steep rise in rates was needed in 1997. I am sure members of the Monetary Policy Committee will be glad to know that they were not totally wasting their time on reducing or increasing interest rates. Were the decisions taken by the Monetary Policy Committee right? We have heard that the Financial Times or the national institute—or both—consider that the recovery has been smooth and that inflation has been around the target set by the Chancellor.
Eddie George was quoted in The Times "City Diary" as saying—and it is worth repeating what he is supposed to have said:I sometimes feel that the only people who really don't know what should happen to interest rates are the members of the Monetary Policy Committee".The writer of that diary went on to say that he thought Eddie George was joking. I am not sure; perhaps he was not joking. It may be true that they do not know what they are doing. Certainly if one reads any set of minutes of the Monetary Policy Committee, one sees words such as "difficult to know what to do", "it is puzzling", "it is a puzzle". So one cannot help feeling that the decisions might have been made by sticking a finger in the air. Certainly the background to the way 1009 in which decisions are made is far from clear. Our committee should look to see whether there is a better way.
Again reading the Financial Times argument about the lack of research facilities for the four independent members, we should examine the way in which the members are chosen—not only the independent members but also the executive members. Are they chosen on a basis of hawks and doves and balance? Is that the way in which they are chosen? It would be interesting to know. I would like very much to know. Whatever happens, I certainly agree that the Chancellor should not intervene in any argument about facilities.
I hope that the argument put by the Deputy Governor— that it is all part of the mandate that the independent members do not get the additional services they need—will not prevail. The matter is far too important for that. I hope that we will not be told by the Minister that the reason for them not getting the extra facilities is lack of resources. That would be quite disgraceful; the issue is so important. If it is a part of the mandate—as we have been told it is—I hope that that mandate will be changed. That cannot require legislation.
I leave it at that. I hope that Members of your Lordships' House will find the report as good as we believe it to be and well worth considering.
§ 4.39 p.m.
§ Viscount Weir
My Lords, perhaps I may add my congratulations to the noble Lord, Lord Londesborough, on a truly excellent and most interesting maiden speech. I should also like to say what a pleasure it was to serve on the committee, not least because of the admirable way in which the noble Lord, Lord Peston, chaired our proceedings.
The work of the committee was of the greatest interest to me personally, in particular because for 12 years I served as a director of the Bank of England. There is a great difference between the way monetary matters are dealt with today and how they were managed during my time at the Bank. I can clearly recall one of the three splendid Governors under whom I served gloomily remarking, "I am sorry to say that we are having some difficulty with the other end of town". Given the trying economic circumstances prevailing at the time, I more than suspect that the Governor's urbane remark was a euphemism to disguise a difference of opinion of heroic proportions. However, I believe that the new arrangement, and the independence given to the Bank to carry it out, is a real improvement on the old system. It is a great pity, and perhaps a criticism of previous administrations, that something of that kind was not introduced very much earlier.
However, one is also bound to remark how often fashions can change in economic management and how the key issue of the day never seems to be the same for very long. Indeed, former Chancellors are now Members of this House, some of whom in their day awaited the balance of payments figures with dread.
1010 Over some, the exchange rate continually brooded like a malign bird of prey about to strike, while others focused on a speedometer marked with not totally accurate money supply figures as they tried to control the vehicle of our nation's economy. Let us hope that this time we have finally got it right and in particular let us hope that the mechanism that has been put in place will prove sufficiently robust to withstand the external shocks which one day will inevitably test it.
In the time available it will not be possible to touch on many aspects of the report. I shall confine myself to one or two points. First, the well-aired problem that may be called the cobbler's or the shoemaker's dilemma; that is, the almost insoluble difficulty of finding one shoe to fit every size of foot. Even within an individual country, a single monetary policy may be excellent for one part of the economy but is almost certain to be difficult and unsatisfactory for other parts. For example, although there is debate and uncertainty among economists as to the precise relationship between interest rates, monetary policy and the exchange rate of a currency, it is certain that there is a link. Thus, British industry, and in particular exporters, argue that our interest rates today are higher than they should be simply because they make sterling disproportionately strong and they therefore cause considerable difficulty, not only for our manufacturing industry but also for agriculture.
Regardless of whether interest rates alone are the cause, the committee heard striking evidence from witnesses from, for example, British Steel that the current exchange rate was simply making the UK an unsuitable place for that kind of company, with a huge export position, to carry on manufacturing, even when, by the relative standards of the industry such as man hours and energy consumption per tonne, British Steel is extremely efficient in world-class terms.
Surely that is a worrying outcome when so important an industry as steel can barely export anything at all at a profit, as has been the case for prolonged periods in recent times, and when for external reasons over which the industry has absolutely no control, its massive and first-class capital investment produces hardly any economic return at all. The same considerations apply to other sectors of manufacturing industry in the UK.
However, at the same time there is no one in the service, financial or retail sectors who suggests that the exchange rate is at all troublesome. Sympathetic as any of us may be to the difficulties that monetary policy via the exchange rate may cause for basic industries like steel, I have almost as much sympathy for the other side of the question. A proposition that unfortunately all too frequently has been demonstrated in the past is that you do not generate real growth in national wealth by devaluation, whether it occurs by deliberate action or through other circumstances. If our goal is to have a high real wage, high added-value economy—and surely that should be a national aim—that cannot be built on the back of a depreciating currency.
In a sense, the existence of an exchange rate that is awkwardly strong challenges industry to change its course and move towards the more sophisticated 1011 products that define a high added-value economy, rather than continuing to produce the kind of commodity goods that sell strictly on price rather than value and are typical and more suitable for low-wage, developing economies.
To say this may not be at all helpful to those most affected, but my real sympathy for industries which complain about the exchange rate—I have to admit that I myself have done so often in the past—and which complain about interest rates and a monetary policy that is too tight for comfort has to be tempered by those other considerations.
Clearly, for an individual state like the UK it is difficult to set a single monetary policy to suit everyone, even when ironically the goal of that monetary policy is simply to achieve price stability and a proper and low rate of inflation, which is an objective beneficial to, and supported by, everyone in the industrial sector.
What of course follows from the difficulties posed by a single monetary policy for all the different groups in our little island is how much more difficult that same situation must be for a common monetary policy within Europe. For example, today, both in terms of growth and inflation rates, there are very considerable differences between Germany and Ireland.
When such differences widen to an unacceptable degree, then obviously one way in which countries can compensate for that situation is by their national flexibility in fiscal policy. But here is the rub, because quite central to the vision of some important European politicians today is fiscal convergence. If fiscal convergence is achieved to a real degree in Europe, then surely much of that flexibility will be removed and a common monetary policy will become distinctly more difficult to operate without causing considerable problems, many of which will be political in their consequences. I suggest that our Government bear that particular dilemma very much in mind.
Secondly, there appears to be—happily, I would add—absolute agreement that fiscal and monetary policy must march in step and complement each other. That is a commendable idea and it is evident that the Chancellor has rightly emphasised his commitment to that course.
I hope that noble Lords will not feel that I am being awkward or political or doubtful of the Chancellor's sincerity when I say that, from the point of view of industry, the evidence that that desirable partnership is actually working is a little thin. Surely if the exchange rate is causing difficulties for our manufacturers and if monetary policy is a strong factor driving the exchange rate, then it could reasonably be expected that fiscal policy and other policies that have economic and cost consequences for industry would be so designed as to have some compensating effect. But high fuel taxes, proposed energy taxes, expensive changes in pension costs, working time directives and the like are all pulling in precisely the wrong direction. As for the simile of marching in step—I was in the Royal Navy so I never 1012 had to march much and am no expert—is perhaps the right foot of monetary policy not coming down simultaneously with the left foot of fiscal policy? To the listener, that sounds like being in step, but it is not.
As for the current controversy, which is not very helpful to public confidence, regarding the resources made available to the independent members of the Monetary Policy Committee, someone picturesquely remarked to me the other day that it was as if some of the priests in an ancient heathen temple complained that after the animals were sacrificed they could not foretell the future because the other priests would not let them borrow the magnifying glass to have a proper squint at the entrails. I think that a matter like this should have been settled within the Bank of England and that we should not make too much of it.
Finally—here I confess to being just a little political—one thing that it seemed to me was fairly clearly demonstrated to your Lordships' committee was that changes in monetary policy take a couple of years or so to work through in full. Perhaps, therefore, while we can most certainly congratulate the Chancellor on giving independence to the Bank in the way he has done, he in turn might deploy his undoubted and well-known generosity of spirit by thanking his predecessors for bequeathing him for much of his time in office so balmy an economic climate in which to bask.
§ 4.51 p.m.
§ Lord Lipsey
My Lords, one cannot enter your Lordships' House for the first time without being struck by the warmth of the welcome one receives not only from one's own side but from all sides of the House and indeed from the staff. That came as a surprise to me despite the fact that I have worked in the Houses of Parliament for a very long time. It was 1972 when I first started at the other end, working for the late Anthony Crosland MP as his political adviser. I finished only quite recently when I signed off as political editor of the Economist. In my time I have been up in the Galleries and for many arduous hours as a political journalist down in the Bars pursuing my trade. But I have never been in the Chamber before.
In recent years I have been plagued by something of a nightmare. It is that I am chatting away to so many people that I have known in one capacity or another down the years only for one of the larger attendants to materialise behind me, place his hand on my shoulder and march me off to some unnamed fate. So if in the course of my remarks today I cast the odd nervous glance over my shoulder, it is not that I fear that I am being stabbed in the back; it is that which I am remembering.
When the committee so ably chaired by my noble friend Lord Peston was first mooted, it is fair to say that the Treasury viewed it with a certain nervousness. The Treasury feared that it would double-guess the Monetary Policy Committee, which it was admirably well qualified to do. At least three of its members—my noble friend Lord Barnett and the noble Lords, Lord Burns and Lord Roll—had conducted monetary 1013 policy and they knew a thing or two about it. The Treasury was nervous about double-guessing. But the report before your Lordships' House today admirably dispels all those fears as the Treasury would certainly admit. It really is a most distinguished and lucid piece of economic analysis which will contribute to the debate for many years to come.
I had at first thought to devote my remarks to the subject matter of Chapter 3 and of the learned Appendix 3, which I am sure all your Lordships have mastered, on the relative merits of the retail prices index being measured by the arithmetic mean and by the geometric mean. Indeed, I thought to inject a suggestion of my own—that we should instead use the harmonic mean. However, my noble friend Lord Peston pointed out to me that that was the same as the geometric mean, and so I thought better of it. Instead I shall confine myself to two more general remarks.
The first is perhaps illustrated by the story, with which I am sure your Lordships are familiar, of the man who jumped off the top floor of the National Westminster Bank Tower. I believe his name was Wanless. As he passed the 12th floor at a rate of knots, he was heard to mutter, "Not very much seems to have happened yet". Something of that analogy applies to the work of the Monetary Policy Committee. I do not mean that its work has been easy—far from it. I did not envy the decision it had to make this morning when the indicators from asset prices, particularly in the south-east, seemed to require an increase in the rate of interest, whereas other indicators—perhaps the exchange rate and certainly the employment figures for the north of England—might indicate leaving the rate where it was or even cutting it. I do not say that the decision was easy. But that is as nothing compared with what the MPC will face when, as will inevitably happen—perhaps I may be permitted a bit of Balls here—the economy faces an exogenous shock.
The best example of that in recent years was the oil price hike of the early 1970s when the need to combat inflation suggested that the interest rate should be going up while the need to combat unemployment suggested that the rate should be going down. The authorities were completely flummoxed by that; the government, who I then advised, made a complete hash of it; and it took us some years to dig our way out of the hole and leave the golden legacy we left in 1979. We will only truly see the mettle of the new arrangements when such a shock comes along and the really tough decisions have to be made by the Monetary Policy Committee. So far, so good, but the real test is yet to come.
My second point concerns the euro. I am aware of the convention that a maiden speaker must say nothing controversial. In my case, on the subject of the euro, that is very easy because it is a subject on which I am a convinced "Don't know". What should be non-controversial is that it is inevitable that the euro will have an impact on the conduct of our domestic monetary policy. We will not be able clearly to separate the two. It is noticeable that the Treasury, when it produces its regular monthly monetary bulletins, now calls them euro zone. Certainly, the 1014 main focus of the material in them is on monetary conditions in all the European countries and not just those in our own.
It was a hint of things to come that the two committees should both meet today. They were daring to take their decisions before reading the deliberations of your Lordships' House. But the two committees met today and reached their decisions—both rates going up at the same time. That could be a harbinger of what is to come. I believe that developments in the euro suggest that that may happen rather more rapidly than we have hitherto thought. Perhaps I may give some examples. Among the "ins", the talk now is of cutting the period of dual running of national and euro currencies. Among the "nearly ins", Greece has now wrestled its budget deficit down below the 2 per cent of GDP that seems to make entry possible. It will be knocking at the door very soon. Norway is an "out", and a eurosceptical "out", but now it seems that both the Government of Norway and public opinion in Norway are moving increasingly in favour of entry. We see simultaneously a broadening and a deepening of the euro and its strength. Economists are always wary of trends—which have a nasty way of reversing themselves just when one thinks they are most clearly established. But the present tendency seems to be in that direction. That will have a tremendous impact on this country in terms of the conduct of monetary policy.
If we look ahead, say, five years, it is a moot point as to whether the Governor of the Bank of England would have a greater impact on monetary conditions here if he remained primus inter pares on the Monetary Policy Committee or if he were to become just one member among others on the monetary policy authorities in Europe. I do not know which way matters will go, and I do not say that that will happen. It is a moot point as to which position would give him the greater power over monetary policy.
Enough of gazing at the crystal ball. I feel comforted and am glad at the prospect of the committee of the noble Lord, Lord Peston—even though he is prepared to give up the chair; and I am sure that that will be resisted strongly in the light of his first report—being re-formed for years to come to provide us with the kind of excellent report that is before the House today.
§ 5 p.m.
§ Baroness O'Cathain
My Lords, it is a singular honour to congratulate the noble Lord, Lord Lipsey, on a memorable, stimulating maiden speech. It was most impressive, made as it was without a single note and without hesitation or deviation. Although the noble Lord has only recently joined us, I am sure I am not alone in feeling that I have known him for a very long time through his writing as a serious journalist. He is a serious, challenging and informative journalist, and we have heard a serious, challenging and informative speech. On behalf of the whole House perhaps I may say that we welcome him and look forward to regular serious, challenging and informative contributions from him in the future.
1015 Like other noble Lords, I want to pay tribute to the noble Lord, Lord Peston, for his chairmanship of the Select Committee. It was a most interesting experience; indeed, it was wonderful to be a member. I hope, as other noble Lords have said, that the Select Committee will continue.
In my contribution, I intend to concentrate on Chapter 7 of the report; namely, the issue of the selection of members of the Monetary Policy Committee. Although the recommendations made in the report concentrate on the appointment of independent members, I want to refer to the overall composition of the Monetary Policy Committee. The noble Lord, Lord Barnett, touched on the subject, but I want to deal with it in greater depth.
Section 13 of the Bank of England Act 1998 stipulates that the membership of the Monetary Policy Committee is to consist of the Governor of the Bank of England; his two deputy governors—two members appointed by the Governor, both having executive responsibility within the Bank of England, one for monetary policy analysis and the other for monetary policy operations; plus four members appointed by the Chancellor—the "independent" members.
To offer a personal observation—one which, I confess, I did not make during our deliberations—I believe that, whereas the current membership of the Monetary Policy Committee works well (at least, so I thought until I read the comments in the press at the weekend), it could lead to problems.
When I put my name down for this debate, I did not realise how topical the issue of the structure of the MPC would be when it took place. I am somewhat bemused to see that there appear to be some tensions between the independent members and the members who have dual responsibility; namely, as members of the Monetary Policy Committee and also as full-time employees/executives of the Bank of England. I suppose with hindsight that is not surprising.
I find it "not surprising" because, based on my experience of working at board level in industry and commerce over many years, I know that being an executive or non-executive director of a company is not identical to being a member of the MPC; but the duties, responsibilities and issues addressed at board level do bear some similarity to those addressed by the Monetary Policy Committee each month.
The strategy to achieve the objectives of the body are constantly uppermost in the minds of the directors: the analysis of the external circumstances which have impinged, and are likely to impinge, on the strategy is discussed; documents from the company's economist, finance directorate and operations directorate to support the in-house view are produced and deliberated upon—not unlike what we were told in evidence is the general modus operandi of Monetary Policy Committee meetings. So far so good, but in my experience a board works best when the non-executive directors have a greater number of members on the board than the executive directors.
1016 That view is borne out by experience in the US, where all major corporations have a large majority of non-executive directors as members of the board. That may seem an irrelevant point, but I think not. Faced with a united phalanx of five "insiders", the four "outsiders" (that is, the independent members) could sometimes feel outnumbered, or even—dare I say?—intimidated.
I am sure that that is not necessarily the situation that pertains in the present Monetary Policy Committee. However, we must not lose sight of the fact that membership of all institutions (including, sadly, this House) can and does change fundamentally from time to time. Our report looked not only at the operation of the Monetary Policy Committee since its inception, but made specific recommendations in regard to its future operation. Perhaps that is an issue that should be addressed in the future. As a "kite flyer", should the Monetary Policy Committee have three members of the Bank and five independent members?
That leads me neatly to the specific issue that I want to address; namely, the selection of the independent members. Just to refresh the memories of all noble Lords who, I know, have spent the long, hot summer reading the report, perhaps I may reiterate the relevant recommendations and make some further comments on them.
First, our report states at paragraph 7.13 that,The existence of a vacancy should be known. People should be encouraged to apply on their own behalf, or should be able to write in recommendation [of] a candidate whom they fear the Treasury may have missed".It goes on to state that,We are convinced that the Treasury can devise a more open method, enabling good candidates to put their names forward for consideration, and knowledgeable people to make suggestions".Secrecy in making any appointment is bound to lead to accusations of "cronyism". Whether one likes it or not—and I personally loathe it—the press and other media seem to have a reflex action which activates the baying of that word any time a press notice giving information about another appointment to a review body, a health authority or any other quango is issued. As an aside, I heard on the radio just a few days ago that press notices are now issued by this Government at the rate of one every nine minutes. Fanned by the media, cynicism abounds. I do not believe that cronyism was involved in any of the appointments to the Monetary Policy Committee. But some are not as convinced as I am.
In order to avoid any smidgen of such cynicism, would it not be better to be much open about selection? This is supposed to be an "inclusive" Government. I think it would be to their advantage to avoid the charge of being exclusive in such appointments. And from the point of view of the members, it does not help establish the "independence" of the "independent" members if they are seen to have been appointed in what could be called a cloak and dagger manner.
There is an additional point: the current independent members do seem to be south-east Britain oriented. Is that a good idea? Of course, I recognise 1017 that appointing representational members is absolutely "not on", but I am sure that there is a raft of economists skilled in monetary matters living and working "north of The Wash" (extending the geographic area a few dozen miles north of Watford!). This is a serious point. On several occasions when taking evidence we were struck by the disparity of view concerning the impact of interest rates depending upon the sectoral and geographic base of the witnesses.
I am very aware that the Monetary Policy Committee members are assiduous in trying to obtain up-to-date economic intelligence from sectors and regions. That involves lots of travel, hours of external meetings and masses of data. But if someone on the Monetary Policy Committee had first-hand experience of that disparity between sectors and regions and was based in the regions, it could add in a significant way to the knowledge base on which decisions are taken.
Our second recommendation on the subject of the appointment of the independent members (at paragraph 7.14) states:Our view is [that] an appointment period of five years will be efficient enabling new ideas to be brought in regularly without infringing the need for independence".There is always a difficulty in trying to balance experience and expertise. Sometimes, particularly the older one gets, one thinks that experience is not given the credit which is its due. Certainly, on our committee we gave huge credit to the experience of our most respected member, the nonagenarian noble Lord, Lord Roll. But many people would say that he is exceptional, the exception that proves the rule. Sadly, there are not too many Lord Rolls about the place now. However, even the most experienced noble Lord would agree that a constant infusion of new ideas and creative ways of looking at old problems is an essential ingredient in getting a good picture of the necessity for changes in interest rates—or indeed, no change in interest rates. One can become stale or even bored. The Monetary Policy Committee members are involved in exceedingly detailed analyses of a recurring nature. To go through a copy of the background data that we were given—some 300 charts and tables every month to peruse, analyse and decide upon—is really daunting. Indeed, as one who has done that—and I can see the noble Lord, Lord Peston, nodding in agreement—I know that economic analysis can be pretty turgid sometimes. Although they are all very dedicated people, there must come a time when they realise that a certain monotony pervades their study and would be willing to make way for new blood.
My noble friend Lord Saatchi drew attention to the fact that appointment to the Bundesbank is for a term of eight years and to the US Federal Reserve for 15 years. However, we decided that five years is probably the best length of appointment, both from the point of view of the Monetary Policy Committee as a whole, needing infusion of new blood, and indeed from the point of view of the individual members. Too long an involvement in the rarefied and constrained atmosphere of the Monetary Policy Committee could 1018 militate against them getting another position if they were not academics, or indeed even if they were. The experience gained while working as a member of the Monetary Policy Committee would always have a market value but such a value could reduce over a longer span than five years.
We made a third recommendation: that the renewal of appointments should be rare if not impossible and that appointments should continue to be staggered. This recommendation is both essential, particularly the one about continuing to be staggered, and common sense. Continuity is important and the introduction of new members should be planned in such a way as to ensure that there is never more than one member climbing up the learning curve at the same time. It was inevitable that, at the commencement of the work of the Monetary Policy Committee, each independent member was faced with the problem of how to become effective and efficient as soon as possible. To be as successful as they have been shows what they are made of. However, future appointments, particularly if they are made in the same covert manner, might not be as successful.
While we agreed that renewal should be rare if not impossible, in order to achieve the staggering of appointments, renewal might have to be undertaken in one or two cases. In such a situation, renewal could be made for a year or two at the most to provide a hand-over period to ensure that there would be minimum disruption to the work of the Monetary Policy Committee.
Our fourth recommendation on the issue of appointment derives from the concern that the independents can be full time, and I quote:we now accept that some full-time appointments must be made, but we would not care to see all the independent members being full-time".This is a very difficult one. The very nature of the work of the Monetary Policy Committee would militate against the part-time employment of almost all economists working in industry or commerce. I truly cannot see anything but conflict of interest. It would put the independent part-time member in a most invidious situation. There would scarcely be any situation where a conflict would not arise. I specifically mention industry or commerce because it is from those areas of economic activity that it is so essential that the Monetary Policy Committee should have members with real-time, hands-on experience.
I know that our report suggests that the field of independent members would be:academics, employees of some charities and similar bodies'',but on reflection, I think we are being a little naïve to continue with that. The report also states:and businesses, if there are any, where no possible conflict of interest could arise".I do not believe that there are any. Perhaps this is yet another issue that needs to be addressed by continuing scrutiny of a new permanent Select Committee, the appointment of which is suggested in the preface to the report and which I endorse.
§ Lord Goldsmith
My Lords, I rise with trepidation. There are two reasons for that and both are connected with the fact that I am a practising barrister in my day job. If noble Lords detect some poignancy in the use of the word "day" (having regard to the hours your Lordships have been keeping since I had the privilege of joining this House) you would be right.
The first reason for trepidation is that it might be thought that, as a professional advocate, I would experience no nervousness at standing to speak before your Lordships. That would be wrong. There are many similarities between what I do and your Lordships' proceedings, but there are significant differences. Perhaps the most significant is that I do not rise to argue someone else's case; I do not rise to say on instructions what the answer should be, but to try to express my own opinion. That opportunity is something of a novelty for someone who is normally a paid mouthpiece for others. I hope that it is one that I shall not abuse.
I should like to echo the words of my noble friend Lord Lipsey in thanking so many Members of your Lordships' House for the kindness, welcome, warmth and help that I too have experienced since becoming a Member of your Lordships' House. People said that I would find the House welcoming. I think you have to experience it to realise how true that is. I am so touched, as he is, by the fact that that warmth and friendship is not simply from those on these Benches but from all quarters of the House and, having regard to present events and uncertainties, from all Members of your Lordships' House whatever the route by which they have reached this House, if I can put it that way.
I thank also the officers, staff and attendants for the help they have given me in trying to find my way around. I cannot say that I have yet succeeded, but at least I am beginning to know which parts I do not yet know my way around, if you follow my meaning.
My second reason for trepidation is that I rise on a debate among so many distinguished experts, including economists and others who understand the subject. I come at this as a layman. I hope that it is of some comfort to my noble friend Lord Peston and to those who served with him on the committee that, as a layman, I found the report, to which I would, if it is not presumptuous, pay tribute, readable, interesting and clear. It told me much about the workings of the Monetary Policy Committee and the difficulties, for example, in relation to exchange rate targeting.
In one sense, no apology is needed for daring to speak on this subject before your Lordships because, although the matters covered in the report are technical in many areas, the subject on which they touch is absolutely critical and of the greatest importance to all people in this country. When, days after the election, the Chancellor of the Exchequer announced the decision to give operational independence to the Bank of England on monetary policy, like many others I felt that it was a bold, decisive and right step. It is encouraging to see that the experts on your Lordships' committee endorse that decision.
1020 The report reminds us that, in the 1970s, inflation ran as high as 27 per cent at some points. That strikes home with me because that was when I was starting off in a career and starting a family, and the difficulties of considering how to plan a future against bust and boom and great uncertainty were considerable. I very much hope that my children, who are beginning to approach the same stage, will be able to make their decisions against a background of stable growth and high employment, which the Chancellor has identified as consequences of the present monetary policy.
The point on which I want to focus and on which perhaps I may have a little to contribute has already been touched on briefly by the noble Lord, Lord Ezra, and in rather more detail by the noble Baroness, Lady O'Cathain. It is the question of the appointment of the independent members of the Monetary Policy Committee. The report is convincing on the undoubted quality and distinction of the present members of the committee. It must also be right, indeed the statute so provides, that the appointments must be made by the Chancellor of the Exchequer, and nothing that I say is intended to undermine those propositions.
There are two points that I want to make and I draw a little on my experience of the law in the context of the appointment of judges, a matter which is controversial and on which I do not intend to embark this afternoon. However, there are some parallels which can be perhaps drawn. One is in relation to the openness of the appointment procedures. The report shows—it was very much part of the Government's policy—that this new development should be open and accountable. In moving the Second Reading of the Bill which became the Bank of England Act, my noble friend Lord McIntosh of Haringey emphasised that point. It would be a great shame if the strong statements which have justifiably been made about accountability and transparency were undermined simply by a lack of understanding of how the appointment process works. I note that at paragraph 7.13 the report, although not in any way doubting the quality of recent appointments, expresses some concern that the appointment process was not understood.
In the evidence, certain of the witnesses, including the noble Lord, Lord Desai, questioned whether advertisements might be used. The same issue arose in the law. In 1995, when I had the privilege of being one of the officers of the Bar, we had to consider, and make recommendations on, the appointment of judges. We found ourselves, a little to our surprise, recommending that even High Court judge appointments should be advertised. We took the view that that did not demean the office; that it was not incompatible with approaching individuals who were known to the Lord Chancellor; and that it certainly did not in any way mean that the noble and learned Lord was not the right person to make the appointment. However, it did mean that the constituency of potential appointees could be wider. It seemed to us that there could be 1021 surprises in that people who might have been thought not to be willing to serve might actually put their names forward.
I come to the second question, on which some time has already been spent, of full-time as against part-time appointments. I note that the committee was surprised at the start of its investigation to discover that some of the independent members were full time. I respectfully suggest that that might have seemed, at the time of the passage of the Bill, to be an improbable result. However, as the report shows, some of the independent members are full time although the Bank of England's own members are part time. In a sense, the "away team" has in some ways become more at home than the "home team".
There is no doubt that considerable time must be spent on the work of the committee and any suggestion that it is a job that can be done by turning up once every three months and giving a bird's eye view of the economy is plainly wrong; but the fact that certain members of the committee are able to fulfil their responsibilities part time indicates that being full time may not be an inevitability.
If I have understood the position, and particularly the evidence of the deputy governor, Mr Mervyn King, at questions 305 to 307, the question that arises is whether measures to avoid conflicts of interest restrict choice. It appears that only an academic post is considered to be compatible with membership of the committee. As the report says, in effect, an external member must either be an academic or a retired person or, if from a business background, must resign and sever his links with his former environment. I am in no position to judge whether others with different skills are right to be appointed to the committee, but I am concerned about whether that apparent rigidity limits the choice available to the Chancellor.
I entirely recognise the commercial sensitivities of such appointments, to which reference has already been made. However, I note that the Gouverneur of the Banque de France, in giving his evidence at question 1391, identified as members of what had been his expert team, chief executive officers in the insurance and banking industries, as well as of small and medium-sized businesses. I wonder what procedures are in place there to avoid the same questions arising.
There may be such procedures. I refer, for example, to the full disclosure of interest which, in the case of agents or judges, may deal with what would otherwise be conflicts of interest. So too, "Chinese walls" can sometimes operate well. One must consider the circumstances, but they are well used by financial institutions in the City of London. Their effectiveness is recognised in the core conduct of business rules, published by the Financial Services Authority. As the Law Commission stated in its 1992 consultation paper on fiduciary duties and regularity rules, they require effective and detailed organisational arrangements, but they can sometimes work. Indeed, your Lordships' House in its judicial capacity in January of this year in Bolkiah v. KPMG held that in principle Chinese walls might even operate in litigation. I am not saying that 1022 I would for a moment know whether such procedures could operate, but the improbable result which your Lordships' committee found might be the result of believing that it is impossible to have such procedures.
In his book The Sign of the Four, Sir Arthur Conan Doyle describes Sherlock Holmes telling Dr Watson, with some exasperation,How often have I said to you that, when you have eliminated the impossible, whatever remains, however improbable, must be the truth?In fiction, the author can fix the facts incontestably. That which he wants to be impossible can be impossible. In real life, when something leads to an improbable result, perhaps that leads one to go back and question whether that which was impossible really is impossible in all circumstances. So that the Government have the greatest choice of candidates in the future, I venture to suggest that this is a question that Ministers might revisit.
§ 5.26 p.m.
§ Lord Burns
My Lords, my first task is a very pleasant one. It is to congratulate the noble Lord, Lord Goldsmith, on a maiden speech of great clarity and insight. I think that I speak on behalf of all noble Lords when I say that we very much enjoyed his transition from paid hack to independent thinker and that we all look forward a great deal to hearing more example of his independent thinking and to having the benefit of his insights on a range of issues. I shall return a little later to some of the points that he mentioned, with which I very largely agree.
It has been a great pleasure to participate in the committee and I pay tribute to the noble Lord, Lord Peston, for bringing the committee to such a wide measure of agreement. When we started, it looked highly unlikely that we would come to the degree of agreement that we had reached by the end, and it is fair to say that we all learned from each other as we went along. I regard that as being a very important part of serving on such a committee.
I find it useful to separate into two groups the issues that we covered. The first relates to the economics of monetary policy, and the second to the institutional arrangements for delivering that policy. There is now a fairly wide measure of agreement on the economics. In particular, it is generally accepted that the main purpose of monetary policy is to deliver low and stable inflation. Of course, that does not mean that everything is plain sailing. If inflation goes above target for whatever reason—whether world prices or forecasting errors—at some stage there will be difficult issues to address relating to how quickly to bring inflation back to the targets. There are still some very serious analytical issues with which policy-makers will have to deal when there are conflicts of objectives, including the behaviour of unemployment and, as we have heard today, the exchange rate.
Overlaying all of the economic arguments is the ongoing judgment about the trend growth of the economy. Some people still argue that by giving growth a chance, we improve the chance of increasing 1023 the underlying growth rate. Others, as we know, argue that we may now have a new paradigm of global competition and pressure on prices, which is removing some of the difficult choices which were faced previously.
So, there is still plenty to argue about. I do not think that the economics profession is finished on the subject of monetary policy, and I very much doubt whether what we now seem to accept as a general agreement about many of these issues will remain for ever. For the moment, however, there seems to be a fairly broad level of agreement.
There is now also fairly widespread agreement about the institutional arrangements for delivering the economics. The report is very much directed towards the second group of issues, and that is where I should like to focus my remarks.
The report argues that the new arrangements have worked well, and it is right that the successes should be acknowledged. Inflation has been close to the target throughout the period; unemployment has continued to decline to levels not seen for many years; in particular, long-term interest rates and inflationary expectations are very much closer to the target than before. Those are the real achievements of the new system. Speaking from the viewpoint of a traditionally cautious civil servant, there are dangers in making excessive claims about the system. It is still early days. It is difficult to separate out how much of the success is due to the MPC arrangements, how much is due to the earlier framework of inflation targets and the published minutes on inflation—we came to describe them as "The Ken and Eddie Show"—and how much is due simply to favourable world conditions.
I tend to agree with the noble Lord, Lord Lipsey, in his excellent maiden speech, that the real challenge will arise when world inflation picks up. From that point of view we have been going through a remarkably benign period. I do not make these points to belittle the achievements of the new arrangements, but experience suggests that if the contribution of any innovation is over-estimated it leads to greater disappointment when the innovation comes up against tougher circumstances. We can be in no doubt that this regime will face tougher circumstances.
In the same light, we should also look at the committee's recommendations that seek to point out weaknesses in the new arrangements in a number of areas. This is not a matter of questioning the basic idea of independent monetary policy, but trying to ensure that it is more likely to continue to be successful. I should like to raise a number of issues on which the committee touched. First, as to the inflation target, I am broadly happy with the formulation of the objectives of the MPC. The inflation target regime was introduced at the end of 1992. The new arrangements have moved us to a symmetric target which is a distinct improvement, but I caution that we should not go overboard on the success of the inflation targets.
The reason why explicit inflation targets were not adopted earlier was not because no one had thought of them but that when they were looked at they gave rise 1024 to a number of serious concerns, the most important of which was the time lags in the system. When one has very long time lags and it is difficult to predict inflation there is concern about whether, to put a lot of eggs into the basket of inflation targets, will lead one into difficulty at some stage. Over the past seven years inflation has been within a remarkably narrow band. I shall be extremely surprised if it continues to remain in that band. We must get used to disappointments in this area. I worry that people have concluded that somehow, after all the troubles of the past 25 to 30 years, the control of inflation is now very straightforward.
The committee had a lot of fun over the drafting of Section 11 of the Act and the requirement to support the Government's economic policy. The meaning of the words,subject to that, to support the economic policy of Her Majesty's Government",came under a good deal of scrutiny. It became clear to some of us that the noble Lords, Lord Peston and Lord Barnett, had been engaged in this at an early stage. On one or two occasions I began to wonder whether they were seeking to turn the meaning of the Act into what they wanted in the first place. However, I am sure that that is an ignoble thought. The more I consider the words the more I find myself in agreement with the noble Lord, Lord Peston, that they have considerably less practical significance than appears to be the case. I am content with the general conclusion that inflation should be the overriding factor here.
The committee also spent some time discussing the whole question of the co-ordination of fiscal and monetary policy. At various stages in my past career I have argued that one of the reasons for leaving monetary policy with the Chancellor is that it enables him to look at the subject of fiscal and monetary policy together. A number of questions were raised as to whether the new arrangements would cause difficulty in that area. As we heard more and more evidence and were taken through the process—for example, that fiscal policy was basically an annual process, that monetary policy was an ongoing process and what mattered was that each of the participants had a clear view of what the other was doing when making decisions—the conclusion at which I arrived was that, if the information was available to the policymakers, there should not be a problem on that front. If people want to disagree with a policy choice that is one matter, but I am not sure we received any evidence that the wrong policy had been chosen because the incorrect information was available.
However, when we come to the question of the appointment of members of the MPC I have more concern. I share some of the concerns of the noble Baroness, Lady O'Cathain. I strongly support the principle that members should have,knowledge or experience which is likely to be relevant to the Committee's functions".However, I would be concerned if that was interpreted as meaning that only university professors, or potential university professors, should apply. Many of us who have been involved in economics for a long 1025 time know that although knowledge or experience of monetary policy is important it should not be restricted to that. There are other categories of knowledge and experience that can also be helpful in this area and should not be under-estimated.
I also support the committee's recommendation that appointments should be made in a more open fashion. At a minimum we should encourage people who believe that they have the qualifications to put themselves forward for consideration. The process of trawling through "the usual suspects"—of which I have had considerable experience—can easily become blinkered and give the unfortunate impression that choices are made from a very narrow circle. I strongly support the recommendation that external appointments should be for five years and normally not renewable. Often, political influence arises much more through the process of re-appointment than initial appointment.
The response of the Government is that there is no reason why well-performing members should not be re-appointed, but how is that to be judged? I believe that the present three-year term sits very unhappily with a process where it is accepted that the time lags mean that changes in interest rates take two years to have their full effect. Therefore, we shall be judging people's performance on very little data. We know their voting records but do not know the quality of the arguments advanced because that part of it is anonymous. I believe that that is a recipe for suspicion, grievance and the appearance of passing judgment when it is impossible to do that fairly. I strongly believe that if we want members to be independent and avoid the threat of an implicit judgment on their performance we should have the courage to give them sensible terms of appointment and rotate membership.
The report was particularly forward-looking in pointing to the paradox thatthe only full-time members of the MPC are the outsiders".That seems to lead to some stress, as several noble Lords have said today. We have all read about the supposed arguments that take place within the bank about how far the independent members should have separate access to bank resources. I do not know the details. No doubt with a certain amount of good will a solution can be found. However, we must ask whether there is here a basic flaw. The committee expressed concern that three of the four outside members worked full time in the bank. Why that has arisen is understandable. They are restricted in their other activities if they are to avoid the possibility of conflict of interest, and the frequency of meetings makes it difficult for people to have university jobs outside London. Yet it is evident that to be a. member of the MPC is unlikely to be a full-time job.
I made reference to the noble Lord, Lord Goodhart, and asked how it was possible for him to do a job in two or three days a week which took other people five days a week. To that there is no answer. One asks: how do they fill the rest of their time? Research is one approach but that needs support. That is where the problem appears to arise. Furthermore, the idea of a 1026 group of independent members tucked away together in a bank with an independent research base taking five days to do a two or three-day job does not appear to be the basis for harmonious committee work in the longer term. I suggest that if members are to be truly independent and bring fresh thinking to the deliberations they should have their main base away from the bank, and preferably they should be separate from each other.
One possibility is other suitable part-time appointments within the public sector. Another is the base and research institutes or university departments with their own budgets for research assistants. The intellectual stimulation would then be taken away from the bank and we would avoid the feeling, which is clearly beginning to drift in, that somehow they are full-time and part of the bank, but, when it comes to resources poor relations compared with the executive members.
My final point relates to the conduct of the meetings. I return to a point I made previously, but, unfortunately, I was unable to persuade the committee. It relates to attribution in the minutes. I fully accept that as regards the interchanges during much of the meetings it would be counterproductive to identify who said what. I can see the argument that what matters is the emerging consensus. However, it is curious that when it comes to the summing-up we do not know why individuals were persuaded to move in one direction or another. The independent members appear to have no reservations about talking to the press or giving lectures setting out a framework of their views, but, when it comes to the meeting, all of a sudden they become extraordinarily coy about who said what. Indeed, after tracing some of the speeches one can identify certain speakers with certain paragraphs. Therefore, I hope that in the interests of transparency we shall see some progress on that aspect.
I believe that the new arrangements have settled in well. The committee has been able to point to a number of areas. I hope that your Lordships' House will play an on-going role in monitoring the performance of the committee and will continue to be able to make suggestions.
§ 5.41 p.m.
§ Lord Woolmer
My Lords, I stand before you to speak for the first time and have three causes for trepidation and one cause for a strong sense of déjà vu. Trepidation because I speak to an outstanding report. Trepidation because I follow three excellent maiden speeches. Trepidation because as a former director of Leeds United, I have to tell your Lordships that the team kicks off in Moscow at six o'clock tonight and, unusually, I shall not be there to watch the game.
I have a sense of déjà vu because 20 years ago the Treasury Select Committee was established in another place and I had the honour to be a founding member. I remember well the contributions of the noble Lord, Lord Higgins, to those debates and I am delighted to see him on the Benches opposite tonight.
1027 Two of the advisers to that Select Committee were Dr Alan Budd and Professor Willem Buiter. He was then called William, but I notice that he is now called Willem. I must ask him when the change took place. Perhaps it was in order to become a member of the committee. Your Lordships will not be surprised to know that the Select Committee, in one of its first investigations, considered monetary control and monetary policy. That is only 20 years ago. Your Lordships might forgive my sense of déjà vu.
While I began life as an economist, in later life I have become more acquainted with business and management. I have the privilege of being the Dean of the Business School at the University of Leeds. As a result, I well understand the concern of those in industry of the impact of monetary policy on their sector. A number of witnesses alluded to the impact of monetary policy differentially upon industry and upon regions. However, if the implication is that monetary policy should be looser and inflation should be higher, I cannot agree. Adding 2, 3 or however many per cent to the inflation rate would not improve the performance of the manufacturing industry; nor would it improve the performance of individual regions with individual problems.
If anything, low and stable inflation enables us to see what the real position is. It enables us to cost the magnitude of doing something about these problems. Casual thinking about inflation is not a substitute for clear analysis and debate about the cause of real differentials in industrial or regional performance.
However, as regards the exchange rate, I sensed less clarity and agreement within your Lordships' committee than in other parts of the report. At one stage, the committee advised us that it is important not to exaggerate the problem of the value of the pound, reminding us that the pound sterling against the deutschmark is still below its level 10 years ago. At other times, it told us that even economists have no idea what determines the exchange rate and that with free markets the exchange rate is always right. Indeed, it advised us that, in any case, the authorities are not able to control the exchange rate. Yet I felt that it had chided the Monetary Policy Committee a little on not taking the exchange rate seriously enough. In the light of the advice of the committee, perhaps it is sensible not to try to do anything about the exchange rate, at least until we move, if at all, towards entry to the European common currency.
Conan Doyle has already been quoted tonight and I felt that at times there was in the report the dog that did not bark. Often, the question is whether the Monetary Policy Committee or anyone else can do a great deal about the exchange rate or even about interest rates. We live in an increasingly interdependent world. We all know that; it is common place to say it. In economic terms, we live extremely close to the European Union and my noble friend Lord Lipsey made some telling points in that regard. Also in economic and capital market terms, we live extremely closely to the United States. The degree of independence of the world economy, and our 1028 connections with Europe, calls into question the extent to which the monetary authorities, certainly in this country, are truly able to exercise much independence in monetary policy not only in relation to the exchange rate but also in relation to interest rates.
The committee explored the benefits of low and predictable inflation. I share the view with most, if not all, in this House that those benefits are considerable indeed. It makes transparent and readily understandable the real costs and benefits of our choices and decisions in the present and over time. But given the importance of confidence and expectations regarding the rate of inflation and of its stability, I should like to see that explored more by the committee, perhaps in its future deliberations.
The frequently voiced concern about allegedly low annuity rates indicates that there remain at least some people in society who do not really believe that the rate of inflation will stay at 2.5 per cent or below. Wage negotiators must still go into talks having to aim at a nominal rate of wage increase, about double that of productivity, in order to ensure that inflation does not erode the otherwise gain they would receive from their increased productivity.
Therefore, inflation and expectations about inflation have not gone away. Perhaps they are only dozing and waiting for other events to happen. How do expectations and confidence regarding the rate of inflation in this country compare with those in other EU countries? How do our wage negotiators and our companies, in their wage negotiations, really see their expectations and how does that compare to elsewhere? How does that impact upon decisions in wage and product markets?
The committee asked the House to consider whether it might be helpful for the committee to be made permanent. For my part, I found its report helpful and a solid basis for taking forward consideration of these matters in future. I hope that the House in due course will feel able to support that suggestion.
§ 5.50 p.m.
§ Lord Poole
My Lords, I begin by congratulating the noble Lord, Lord Woolmer, on his excellent first contribution to your Lordships' House. I must say that I particularly agreed with his observations, for example, on exchange rate matters. I am sure that with his long experience of local government, the other place, and, indeed, football, he will bring great wisdom and insight to our deliberations in the years to come. We welcome him.
It was a great privilege to serve on the committee under the chairmanship of the noble Lord, Lord Peston. It was really splendid from time to time to be joined by the noble Lord, Lord Roll, from whom I certainly learned a great deal, as I believe did my colleagues.
As your Lordships are aware, in our report we concluded that the MPC has played its hand fairly well. However, the truth—as has been remarked upon by a number of previous speakers—is that we do not really know as yet how robust these arrangements will 1029 be, because the system has not been in existence for long enough to be subjected to a sufficiently serious test, with inflation diverging significantly from its targets, really to prove itself.
As the bank says, and others have noted, the lag between monetary policy action and its full effects can easily be two years. In that case it is indeed true that, for the majority of its existence, the apparent success of the MPC in getting inflation down close to its target can, in my view, be more properly attributed to decisions taken by my right honourable friend Kenneth Clarke when he was Chancellor, than to anything done by the MPC itself.
It pays to look at the numbers. Of the 29 countries in the OECD, only five have an inflation rate over 3 per cent: Mexico, Iceland, Poland, Turkey and Hungary. If those countries are taken out, the OECD average is in fact 2.2 per cent, which is virtually identical to our own rate of inflation as measured by the RPIX, of 2.1 per cent. In other words, one could, if one was being unkind, say that all that has happened is that we have shared in the general international phenomenon of low and comparatively stable inflation rates, and therefore one could reasonably ask whether the MPC has actually achieved anything at all.
Our report states that a 2.5 per cent inflation target is appropriate at the current time. The noble Lord, Lord Peston, will know that I agree with that statement. None the less, it raises some difficult issues, about which, frankly, the Government must be much more honest. The Government repeatedly say that this inflation regime amounts to the maintenance of "price stability", an expression which even appears in the Government's response to our report. In effect, the Chancellor has set the MPC a task not to ensure price stability, but rather, to keep prices rising at not more than 2½ per cent per annum.
If that is price stability, then, like the president of the ECB and one member of the MPC, I am a Dutchman. Over 20 years, inflation of 2½ per cent per annum produces a cumulative increase in price level of 64 per cent. At that rate, the price level will double in about 28 years. I happen to live in Clapham, and from my omnibus—the 137—that hardly looks like price stability. It is just more stable than it used to be.
It seems to me that there are two possible explanations, but only one of them amounts to a reasonable one. One explanation is that the official RPI measure overstates inflation, so that 2.5 per cent is somehow really a number much closer to 1 per cent. In that case, if one is aiming for price stability, accurately measured, then one does indeed need to aim for some small positive inflation number. However, next to no one believes that the RPI overstates inflation by as much as 2½ per cent per annum.
Therefore there is, in my view, a second explanation, which implies that there are good—although perhaps not necessarily compelling—arguments why the authorities should in fact aim for a positive rate of inflation even when it is properly measured. That is of course most easily expressed by the idea that "a little bit of inflation does you good".
1030 As we took evidence, I came to believe that that indeed is the argument implicitly accepted by the Government. In other words, while they talk continually about price stability, the Government are deliberately aiming for inflation, albeit at a low rate. I understand that argument, and I accept that it is probably right at the moment, but somehow it does not sound satisfactory and I have a feeling that there is unfinished business here. At the very least, it is unsatisfactory continually to refer to this regime as one which maintains price stability, because that is grossly misleading. In the end, such misleading use of language can only undermine public confidence.
I believe that that goes to the heart of the matter. It was clear to most, or probably all, of us on the committee, that the old academic certainties which believed that there was a strong causal link between changes in interest rate levels and inflation have now been shown to be, frankly, less than certain. Although the MPC goes to huge lengths to analyse the economic runes, I, at least, am unpersuaded that anything approaching science is really at work. Until the MPC has safely guided us through some unexpected major economic shock without inflation running away, I personally shall believe that its work is more about the psychology of market management than the appliance of science.
If inflationary expectations have been reduced—and they certainly have—it is because interest rate decisions have been taken out of the political arena. That is the MPC's success, and, if I may say so, this Government's. It is now generally believed that inflation is being tackled, with the effect that it indeed is being tackled, with long term inflationary expectations now falling.
If I am right that credibility is at the heart of the matter, the row which has broken out between the independent members of the MPC and senior bank officials over access to the bank's research resources is, in my view, far more dangerous than it looks. All the fuss in the press is a quite unnecessary shame, particularly if it is fed principally by the independent members, as I suspect that it may be. They have done all of us, and the Government, a disservice.
Let us face it: the row is about the current annual budgeting process within the bank. It is about resource allocation. As a matter of fact, the Act clearly states that it is a matter for the court, not the Governor, or the MPC, to decide. This is an internal issue which has been blown up in a way that may undermine the very thing which is making the MPC so successful: the credibility based on its collegiality.
In passing, one cannot help but observe that when the MPC was established, incidentally, the exact status and role of these independent members was unclear. I am led to understand that the Chancellor envisaged that they would indeed, as some have said that they should, retain full-time positions outside the bank—that is, to continue to be real people. In the event, only one, Professor Charles Goodhart, has done that. In practice, the other three have become full-time 1031 members. The irony pointed out by many is that those members are more full time than the bank staff on the committee who have other valuable things to do.
As regards the independent members, it would therefore be a very real shame if, by banging about so publicly, those inside-outsiders were to undermine the very thing that makes the MPC a success. The MPC's role is too valuable to have it frittered away by pointless public wrangling.
I started by welcoming the noble Lord, Lord Woolmer, to this House. Perhaps I may be permitted to say that this is in all probability the last time that I shall have the privilege of speaking here. This afternoon some maiden speakers have said how kind people have been to them as they start here. I, too, should like to say thank you to all my friends and colleagues on all sides.
§ 6 p.m.
§ Baroness Hogg
My Lords, it is a mark of interest in this report that it should have attracted no fewer than four distinguished maiden speeches. If it has also attracted the last speech from my noble friend Lord Poole, I for one shall be extremely sorry.
In particular, I take the opportunity to welcome my former colleague, the noble Lord, Lord Lipsey, to the House. I realise that if I were to refer to him as my noble friend, I should cause him some embarrassment. But because he is my friend, I should like to say how much I welcome him and how much, I know, he will add to this House's debates.
The timing of this debate has been made most apposite by the revelation that certain systemic tensions exist between members of the Monetary Policy Committee. Therefore, while I commend this excellent committee and, in particular, its chairman, the noble Lord, Lord Peston, on its work, I focus my reflections on its recommendations regarding the role of the independent members of the MPC.
Clearly, it has been desirable that independence should have been accompanied by an infusion of excellent independent economic talent into the Bank of England. However, I suspect that the form which the MPC takes may have to evolve; that we have, as with this House, a transitional MPC.
The issue that has burst its way into the public print—if one can so disrespectfully describe the Financial Times—is whether the independent members have sufficient rights to command resources within the Bank, and thus to arm themselves with research. Clearly, some independent members feel that they do not.
The answer that seems to please almost everyone is that the Bank should hire some more economists to support the independent members. The Governor of the Bank has been much criticised for not acting to satisfy them much earlier, rather than leave it to the Court of the Bank—which in truth has been left without much of a role to play in the new world—to see fair play. Hum! I believe that some of the criticism 1032 of the Governor is highly misplaced and that the weakness lies in the design of the MPC with which he was presented.
It is all too easy to throw money at the problem, but I believe that the Court should pause for thought. Of course, it is important that the outside members should feel able to challenge the insiders. But from their voting patterns I can see little evidence that they did not. Of course, the longer they stay on the job and away from other jobs from which they may be debarred, the more they can be expected to run down their outside expertise and to need recharging, like batteries. However, the more the independent members are embedded into the comfort of the Bank with their own research staffs, the more they come to look like "insiders" rather than "outsiders". In an entertaining letter to the Financial Times this week, Peter Oppenheimer warns them against allowing themselves to become a kind of monetary equivalent of the House of Lords. Therefore, I warmly support the recommendation of the Select Committee that appointments should be for no more than five years and non-renewable. I also support the committee's view that the process of appointment should be opened up.
The fundamental problem is that the independent members have a mongrel role; they are cross-bred out of two different ideas of, on the one hand, the non-executive director and, on the other hand, the outside appointment to an executive team. If they are non-executives, it is not clear to me that they require executive back-up. Rather, it might be better to follow corporate governance practice in the private sector—and here I agree with my noble friend Lady O'Cathain—and ensure that they have sufficient weight, not because they lead executive baronies but because they are in a majority on the MPC.
Full-time appointments should be avoided, as they could be—here I beg to differ with my noble friend—if the Bank and Treasury were less anxious about conflicts of interest. I agree strongly with the noble Lord, Lord Goldsmith, that we are possibly too precious about this.
If, on the other hand, the independent members are in effect full-time executives, the distinction between outsiders and insiders disappears. I note in passing, and with absolutely no disrespect to those concerned, that the outside membership of the MPC would not pass the PIRC test of independence for non-executive directors. However, if they are intended to be insiders, it is then far from clear to me why we need so large an MPC.
Does any organisation work well when nine different executive teams are charged with the same responsibility? I wonder whether the public would not at some future date come to ask whether it was necessary to maintain a whole series of academic baronies in the Bank in order to arrive at a decision whether to move interest rates by, it is hoped, only a quarter or a half percentage point at a time.
It could be argued that economists are such peculiar animals, so diversely opinionated, that one is only likely to receive a sensible answer by averaging a large 1033 number of them. I forget which politician gloomily reflected that from six economists one receives seven conclusions, two of them from Mr Keynes. However, I recall that it was Truman who prayed to the Almighty—
§ Lord McIntosh of Haringey
My Lords, when the noble Baroness says "average" does she mean "a harmonic mean"?
§ 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.
§ 6.7 p.m.
§ 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 1034 the "harmonised index of consumer prices"? Should one's target be a point or a range? What institutional set-up maximises the credibility of monetary policy? Is there a trade-off between independence and transparency? And so the questions go on. They are important questions, and we do not really know what the answers are.
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.
A second important issue raised by the report concerns the apparent incoherence of the Chancellor's mandate. His instructions to the Bank are—I quote paragraph 1.6 of the report—to maintain price stability",and,subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment".What does the phrase "subject to that" mean? Suppose the Government's objectives for growth and employment are inconsistent with the 2.5 per cent inflation target. In theory the Chancellor can simply change the inflation target to accommodate that, but that would endanger the credibility of the Bank as the guardian of sound money.
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.
1035 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 macroeconomic 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:As a layman, what I think has happened is we have global competition as never before. We have a pace of technological change as never before. The ability to raise productivity in some sectors of the economy is quite immense. The ability to hand on price increases to restore margins is very, very limited, so that one sees around the world prices confined, earnings confined and expectations changing".That suggests to me that the better conduct of monetary policy has not been the only, and perhaps not even the most important, cause of the long-term fall in the inflation rate. It is now much less costly in terms of short-run output and employment to have a low inflation policy than it used to be in the period from the 1960s through to the 1980s. We have a 2.5 per cent inflation target, not because that has any particular logic or virtue—although economists can always be found to praise the health-giving properties of a little inflation—but because what I may call the natural rate of inflation—the rate at which the forces pushing down the price level and those pushing it up find a certain equilibrium—is lower than it used to be.
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.
Meanwhile I repeat my thanks to this Select Committee for packing so much good matter into such a small number of words.
§ 6.16 p.m.
§ Lord Paul
My Lords, first, I must declare an interest. I am chairman of the Caparo Group, a company engaged in manufacturing.
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 1037 strength of Britain. That is why I am concerned about the consequences for manufacturing of decisions by the Monetary Policy Committee. Interest rates affect exchange rates and exchange rates affect the pricing of our exports. Technological expertise has become so universal, and sufficient productive capacity exists in Europe, that many of our exports today have to compete on price; and exchange rates have been running against us. Many businesses find that this causes them to be seriously disadvantaged in export markets, while domestic markets are eroded by imports cheapened by a favourable exchange rate. I give an example. Even in a small company such as mine, an adverse exchange rate of one pfennig draws £200,000 from the bottom figure.
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 1038 Monetary Policy Committees have to develop a permanently bifocal vision. They are both independent and organic parts of the body of an economic nation.
§ 6.26 p.m.
§ 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 arid 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,We are in danger of holding this debate in an entirely obsolete intellectual framework".I should like in a few minutes to share with your Lordships my reasons for reaching that conclusion.
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 1039 transaction costs across the whole of industry and commerce; and the huge shift of costs on to consumers themselves with the odd paradox that it is consumers who not only pay, but feel more in control and enjoy paying in order to get more direct access to capital markets or, in the case of voters, to policy or, in the case of consumers, to the producers.
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?
1040 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 1041 rate rises could be achieved, which would actually change the whole pattern of interest rates, would it have the effects attributed to it? It may be that the results are perverse, not the automatic transmission as listed in your Lordships' report. It is quite possible that if interest rates are raised, house prices will rise. The latest interest rate is said to have been partly influenced by the belief that there is a house price bubble. If interest rates are raised, the net effect would be to increase the bubble because it would increase mortgage fund availability.
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.
Montague Norman—who is not everyone's friend—when asked his reasons for an interest rate change by some cheeky journalist, said:I don't have reasons: I have feelings".Feelings would be a much better guide to the limited role that all this interest rate manipulation can play than the attempt to produce these arcane and unreliable reasons.
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.
1042 Perhaps I may dare to quote Keynes in the presence of my noble friend Lord Skidelsky. He once said:Economists are of little use if all they can do is tell us when the storm is passed that the ocean is flat again".When I hear that the answer to the problems of the present is for the Bank of England to hire 30 more economists, I think "Heaven preserve us"! My noble friend Lady Hogg was quite right to query whether that was the right way forward. We need not more economists but fewer pretensions on the part of our economists, economic advisers, central bankers and political leaders about what they can achieve.
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.
§ 6.41 p.m.
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 like to pay tribute to the chairmanship of this important Select Committee, whose report and evidence I read from cover to cover. I must 1043 congratulate my noble friend Lord Peston on the extremely penetrative questions that he asked witness after witness—indeed, on occasions, he did so almost to a point where one could sense that he was becoming irritated by some of the replies that he was receiving. This contributes to the fact that as a most eminent economist, and someone for whom I have the utmost personal respect, my noble friend has almost abandoned any idea that he can make future forecasts. The enormity of this position must surely be appreciated. In fact, it permeates the work of the committee.
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 1044 Policy Committee have had on the economy as that will not emerge until much later. Then it will be possible to make more objective judgments.
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 1045 they can participate more actively in the economy and cause others to consider them rather than considering only those who are rich and powerful and who can contribute to party funds on a substantial scale.
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.
§ 6.56 p.m.
§ Lord Vinson
My Lords, it was indeed a great honour to serve on this committee and to examine what must be one of the most important areas of national policy.
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.
1046 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.
I believe that even HICUP exaggerates inflation. I have a strong suspicion that both indices fail adequately to take into account increases in quality— 1047 again a point made by the noble Lord, Lord Howell. Perhaps I may reinforce his point by making another. If over years the standard of living increases by roughly 2.5 per cent per year, then it doubles every 25 years. In order for the standard of living to double, relative prices must effectively halve. It is this element of price reduction and/or quality improvement which I believe is seriously missed in the current calculations of both indices, not least because they are so hard to measure.
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.
§ 7.4 p.m.
§ 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 1048 manipulation. On the specific question of independence, they said that they would consider the matter once the Bank had demonstrated a successful track record in its advice and had built public credibility. They considered the matter rather quickly. The right honourable gentleman the Chancellor of the Exchequer announced his decision only five days after the election. Therefore there was no time for proper consultation and, as a result, he did not get it quite right.
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.
The Government said that they would reduce taxes, but they have increased them. Worse, even after they have increased taxes, they still pretend that they have reduced them.
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.
I also question the extent to which Article 107 of the Maastricht Treaty—which provides that, inter alia,governments of the Member States undertake … not to seek to influence the members of the decision-making bodies of the ECB 1049 or of the national central banks in the performance of their tasks"—is consistent either with the Chancellor's letter or, indeed, with the Bank of England Act, both of which require the Monetary Policy Committee to support the Government's economic policy.
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:The discretion necessary for effective economic policy is possible only within a framework that commands market credibility and public trust".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.
1050 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.
1051 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.
§ 7.16 p.m.
§ 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.
The most recent manifestation of it—a relatively recent manifestation—was the so-called attack of the monetarists on the Keynesians, Keynesianism very often being totally misunderstood and perhaps 1052 sometimes deliberately misinterpreted. Our committee—the noble Lord, Lord Peston, and other members will perhaps agree—was certainly not free from controversy. To have managed out of this to produce a unanimous report which at the same time is not free from fairly acute debate on this or that subject is a remarkable achievement and forms a good basis for future inquiry.
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 1053 precisely the other way round. It should be that monetary management should be designed to support the broader economic objectives of the Government and only subject to that to aim at price stability. I would not advocate that particularly but that would be to many people a much more sensible way of putting it. So that is another subject which sooner or later will have to be resolved. It may even require a change in legislation as it is enshrined in the Bank of England Act.
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 1054 subject will be discussed in future and I hope that the Select Committee will have that as one of its subjects for scrutiny.
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 1055 immediate effect, whichever way it may turn out to be, on stock markets. In the United States, investors and speculators have long since ceased to be interested in income. They are interested only in capital appreciation and in the growth of assets. They are immediately affected, not necessarily by the fact of interest rate changes but by the expectation and the psychology created by them.
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.
I conclude by strongly supporting the idea that the Select Committee should continue in one form or another, and that it should continue to scrutinise this subject.
§ 7.34 p.m.
§ 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.
I should like also to congratulate the four noble Lords who have made their maiden speech this afternoon. They have made a most important contribution to the debate.
I want to focus on one of the first conclusions set out in the report; namely, that,The Government was right to give operational independence for monetary policy to the Bank of England".I have not yet reached that conclusion. I still have an open mind as to whether such a move was right. There is little dispute that a low and stable inflation rate is good for the economy. However, there is less 1056 agreement on how to achieve low inflation. As the report states,high and uncertain inflation makes it more difficult for individuals and organisations to make correct economic decisions".Thus, it is generally harmful to the economy. Low inflation means that investors can plan for the future with confidence.
The report states also that,there is little clear economic evidence that mild inflation is very harmful".But when does mild inflation become high inflation? Whatever the evidence about mild inflation, the economic objective of successive governments has been to achieve low and stable inflation. Establishing the Monetary Policy Committee and giving it operational independence for setting interest rates was carried out with a view to helping achieve low and stable inflation.
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.
1057 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.
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 1058 its evidence to the committee that the retail prices index is more widely needed than just as a measure of inflation, vital as that is.
It is needed:for increases to social security benefits and state pensions, for national savings and index linked gilts, for wage bargaining and for price adjusted contracts and the prices charged by utilities,and, I would add, the Inland Revenue regime for private sector defined benefit pension schemes.
The retail prices index is therefore of vital interest to everyone in the land. The office also said in evidence:No single measure of inflation can meet all users' needs".I am left wondering exactly what is meant; but what is certain is that we need the retail prices index and its calculation to be a matter of trust and unshakeable public confidence. A single consistent measure which gains continuing public acceptance is highly desirable. Maybe this is what we enjoy now, although the Select Committee has expressed its doubts.
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,We recommend that the provision in the framework document for the Chancellor to decide 'the scope and definition of the retail prices index' be deleted.The Government's response to this recommendation was that,the RPI is an indicator of the utmost economic importance which is used for many different purposes. As a reflection of its special importance to the UK economy and in line with long-standing arrangements, the scope and definition of the RPI has remained under the ultimate authority of the Chancellor. Under these arrangements, the Chancellor of the Exchequer is directly accountable to Parliament and the public for any decisions that are taken on the scope and definition of the RPI. The Government intends to continue with these arrangements.1059 Do I detect a hint of both poacher and gamekeeper?
The very next House of Commons recommendation ended by saying:Ensuring that the head"—of the Office of National Statistics—has the required freedom from political interference".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' 1060 committee points the way forward. In its conclusions, it states:The Office for National Statistics needs to play a more active role in dealing with all the problems that have emerged in connection with the measurement of inflation".The committee, if renewed, may find the Chancellor of the Exchequer barring its way, but I shall wish it every good fortune in its endeavour to cast more light on the index and its calculation.
§ 7.50 p.m.
§ 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 macroeconomic 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 1061 of the Bank is a thoroughly good move that takes us in the direction of robust, sound institutions that will serve the economy well in the future.
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 1062 desirable that their positions should be part-time. The dangers of them being full-time are considerable: they will become incorporated into the Bank; they will not express an independent position or bring with them the breadth of view that a genuinely outside member would have.
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.
§ 8.2 p.m.
§ 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 1064 17 Swiss francs to the pound but after 40 years the pound had been devalued by 90 per cent and his only comfort was that his wife had increased by 40 per cent.
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 1065 "AN" in it is Islamic and that two-thirds or three-quarters of the world's oil and mineral resources are there, one realises that there was wealth. Where did it go? Some people have said that it went into a laundry and that it came out into the banking system as laundered money. But it came in and of that there is no doubt. We in the West have large quantities of other people's money and to a large extent it is influenced by the differential in exchange rates.
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.
§ 8.11 p.m.
§ 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.
On the other hand, I am sorry that the noble Lord, Lord Saatchi, and the noble Viscount, Lord Trenchard, felt aggrieved that the Labour Party 1066 manifesto had not been totally explicit about the intention to grant independence to the Bank of England in respect of monetary policy. As the noble Viscount said, what was included flagged the principle as clearly as even the raising of the Governor's eyebrows. I realise, of course, that in the vaults of Smith Square is the video, "Setting Free the Bank"; the party political broadcast that the Conservatives dared not show. I am sure that history might have been quite different.
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,The British 'common law' genius for pragmatic institutional design and adaptation, and the example of openness and transparency set by the Bank of England since its independence in June 1997".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 1067 attainable under the criteria set out by my right honourable friend the Chancellor, but that not all the institutions and mechanisms established to date are as well-placed to address the consequences of a single currency as I would like.
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.
§ 8.20 p.m.
§ 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.
The level of private debt escalated in a similar fashion. During the 10 years from 1980, consumer debt rose from £11 billion to £43 billion, while mortgage borrowing increased more than five-fold.
1069 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.
§ 8.27 p.m.
§ 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 1071 a crucial contributory determinant of the rate of inflation. In exercising its role, the MPC has performed pretty well.
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.
1072 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 König, its Chief Economist, stressed the importance of fiscal flexibility at Länder level. Dr Remseperger, a member of the bank's directorate, reinforced this view in respect of the Euro zone. His 1073 view was that it would be necessary to have different tax systems across the euro zone and that it would be a big mistake to harmonise the tax system. That is one piece of evidence which we should have at the front of our minds as we approach the forthcoming debate about possible UK membership of the euro zone.
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.
§ 8.40 p.m.
§ 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.
We have heard four excellent maiden speeches. The noble Lord, Lord Londesborough, delivered a speech of great sincerity and clarity, reminding us of what it is 1074 like to be at the other end of this exercise—an entrepreneur trying to make money, generate employment and remain solvent.
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 1075 friend the Shadow Chancellor has set up his own commission to look at the relationship between the Bank of England and the Treasury.
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:Price stability is a precondition for high and stable levels of growth and employment, which in turn will help to create the conditions for price stability on a sustainable basis. To that end, the monetary policy objective of the Bank of England will be to deliver price stability … and, without prejudice to this objective, to support the Government's economic policy, including its objectives for growth and employment".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.
In any case, it has always seemed to me that the management of money, like the administration of justice, should be kept as far away as possible from the 1076 ballot box. If that is achieved, governments will not be tempted to print money when it becomes politically attractive for them so to do.
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:The Monetary Policy Committee is accountable to the Government for the remit set out in this letter".Then, paragraph 5.3 of the report, which deals with some evidence that was given by Sir Andrew Turnbull, states:Explaining the division of responsibilities, Sir Andrew said that 'The objective of the Treasury is to pursue sustainable growth for the economy as a whole.' The Bank has been set 'a specific objective, which is to deliver inflation'. He also claimed a limitation in the Chancellor's responsibilities when he stated that 'Apart from when things go badly wrong, he is not responsible for the level of interest rates that the MPC has chosen'".If Sir Andrew is right, what meaning can we ascribe to the remarks of the Chancellor of the Exchequer in his letter defining the MPC's accountability? The MPC either is or is not accountable to the Chancellor for its setting of interest rates. If it is accountable, the Chancellor is politically responsible for the decisions of the MPC. The Chancellor of the Exchequer cannot have it both ways.
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 1077 same time, however, the committee must have legitimacy in the eyes of the nation, because it takes decisions which affect in the most intimate manner the daily lives of our citizens. How do we achieve these objectives?
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 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, 1078 and it is certainly the sense of this debate, that the direction in which the Government are travelling is the right direction; they just need to think more clearly about the arrangements they put in place to guarantee both independence and legitimacy.
§ 9 p.m.
§ 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.
1079 In particular, I should like to look at why a new policy framework was needed, and question whether the new framework has performed well since its introduction.
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 corning 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.
1080 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. 1081 However, the MPC is directly accountable to the Government for the inflation target that it has been given.
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.
1082 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,we have made it clear by our actions that we are just as vigorous in relaxing policy when the risks to inflation are on the downside as we are in tightening policy when the risks to inflation are on the upside".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 1083 consistently recorded solid growth and rising employment over this period, avoiding the boom and bust pattern of the past to which my noble friend Lord Currie referred.
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 1084 speech of the noble Lord, Lord Londesborough, that the important objective is to achieve what we have been achieving; that is, stability. In those circumstances, despite the difficulties that we are having, I believe that we are moving in the right direction.
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.
§ 9.24 p.m.
§ Lord Peston
My Lords, I hope I may be forgiven if I do not summarise the debate and respond to all the individual speeches. Of course I could do that, but you can have too much of a good thing.
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 1085 others of his valuable contributions to our committee, that I had no idea he had such a hidden secret. I shall have to reflect on that.
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.
§ On Question, Motion agreed to.