MONDAY 22 MAY 2000

PROFESSOR STEPHEN NICKELL

  Chairman: Welcome. Mr Davey is going to ask the first question.

  106. Welcome, Professor Nickell.
  (Professor Nickell) Hello.

  107. The press have been trying to decide whether you are a hawk or a dove and have been asking various economists and they seem to be unclear about which camp you are going to end up in. Do you want to tell us which you think you are going to end up in?
  (Professor Nickell) No. I do not think I want to be known particularly as someone who will end up in either camp. I think that the issue is really a question of where you think the economy is relative to its potential and in which direction you think demand is moving relative to potential supply, and on that basis one would make one's judgment. Presumably a dove is someone who perhaps is optimistic about potential supply. A hawk is someone perhaps who is pessimistic. I do not see myself really on either side.

  108. Somebody else suggested that because you have got a very distinguished track record in labour market economics and indeed were a founder of the NAIRU idea that, looking at the UK's economy with a very tight labour market, you would be more in the hawk camp and fairly pessimistic about the future supply potential.
  (Professor Nickell) The issue of the tightness of the labour market is a very interesting one. It is certainly true that, for example, where I live near Banbury there is an unemployment rate of about 1 per cent and it is true that there are symptoms there of a strong excess demand for labour, yet it is not entirely clear to me that that is causing severe inflationary pressure in the area of Banbury in the sense that I do not know of any evidence that wages are really taking off, and of course there are other parts of the country where there definitely is not an excess demand for labour. So my feeling about the situation in the labour market is that you just keep looking at things to try and find out exactly where you are relative to equilibrium and it is important that you never move too fast. For example, in 1989 the economy expanded very fast, unemployment fell very rapidly and there was evidence that this was unsustainable. At the moment we are creeping along, the unemployment rate is falling extremely slowly and it seems to me that is a good position to be in because you sit there and you watch what is happening to wages all the time in this situation, and in some senses you push it as far as you think it can go and that is a good strategy.

  109. So this theory you have worked on and tested so many times in your professional career, you would put that on hold and be—
  (Professor Nickell) No, this is quite consistent with the theory. The theory says there is a place where the labour market is in equilibrium and if you try and push too far beyond that, you will have rising inflation. But the practical issue of course is where that place is and I do not know. So the strategy is to move rather gradually and keep a close eye on what is happening to wages and hope in that way that you can keep as close to the equilibrium as possible without pushing into the realm of a situation where inflation takes off.

  110. Do you support the Government policy on growth and employment?
  (Professor Nickell) I think so.

  111. You only think so?
  (Professor Nickell) I was trying to think what all the Government's policies on growth and employment actually were, of which there are an enormously large number.

  Mr Cousins: Do you openly support them?

  112. I think Mr Cousins is quoting the Act to you, basically.
  (Professor Nickell) Okay. I was taking him literally.

  113. Do it both ways, it is more interesting.
  (Professor Nickell) There are some policies to do with tax breaks and capital gains and that sort of thing, which I sometimes feel are a bit too complicated, but overall, if you are asking me now to think in terms of the Act, the way I see the Act is that that bit about supporting growth and employment is to emphasise the fact that the target is symmetric. In other words, it is just as bad to under-shoot as to over-shoot, because if you look at what happens in some other countries, this symmetry is not there. If we were just told to hold inflation down, that is easy, you are just banging it on the head all the time. It is very important that we keep inflation up at the target as opposed to holding it down at the target. My interpretation of that second bit is to emphasise that point. That is how I would interpret it.

  114. You are on record as supporting the cuts in access to unemployment benefit earlier in the 1980s and you are clearly in favour of restricting eligibility to disability benefits. If a government were to increase benefits, would you think, as a member of the MPC, that is something you had to correct for?
  (Professor Nickell) My record on benefits is not quite as straightforward as you claim.

  115. I do agree that straightforwardness has not exactly been a hallmark of our experience this afternoon, but it is good to have a stab at it.
  (Professor Nickell) Let me try and be straightforward. My view about benefits is that benefits should be generous, but there should be a very strict work test. That is to say that you should have a system of benefits which, in my personal opinion, should be more generous than they are now, but that one should have a system whereby individuals are pressurised and encouraged to take up jobs that are available, and that there should be relatively well defined rules about what sorts of jobs they could turn down and when, and that you should not be allowed to turn down jobs beyond a certain duration of your unemployment spell. That would be the system that I would think should be operated. If the Government said, "Okay, we are going to raise benefits", I would not be particularly worried about that, so long as they maintain a strict work test. That is my view.

  Mr Cousins: Thank you.

  116. Professor Nickell, in your response to the written questionnaire that you have provided us with in answer to question 13 you say, "recommendations on fiscal policy I leave to others." Then on question 15 you say, "In conclusion, I should mention a final possibility which is for the Government to announce a process for joining the euro. This involves matters of political judgment upon which I would rather not comment." Is that preference because you do not have opinions on these matters or because you think membership of the MPC precludes any such opinions?
  (Professor Nickell) Shall we do the fiscal policy first?

  117. Whichever you please.
  (Professor Nickell) I guess my feeling about this is that I took that question to ask me to comment directly on the Government's fiscal policy stance. My feeling is that it is better if MPC members, or prospective MPC members, did not do that basically because if I say, "Well, I think the Government's fiscal stance is too tight or too loose", then the world at large immediately says, "Oh, that means that he will press for interest rates to go up or down or whatever, and that will affect the foreign exchange market." I think that would add to general instability and make us all worse off. That is basically the reason why I would prefer not to comment on the actual fiscal stance of the Government. I am quite prepared to discuss fiscal policy more generally. The same sort of argument applies to my statement about the euro. If I said, "I think the Government should institute moves to join the euro now", I think that would be a rather irresponsible thing to say.

  118. As one of the four independent members of the MPC, do you not think it is appropriate to take a stance on policies such as these that impinge on the central purpose of the Committee?
  (Professor Nickell) Well, no, I suppose I do not. I think it is quite sensible, and I could discuss whether I think it is a good idea that Britain be in the euro or not, but I would hesitate to discuss whether today the Prime Minister should announce that we should start moving to join, which is a rather different thing. Similarly with fiscal policy, I am quite happy to discuss what sort of fiscal policy I think is good and what is not, but I hesitate to discuss something that the Government has recently done which my opinions of would have an impact on how markets view my future decisions.

  119. You do not think it would be appropriate to comment that certain directions of fiscal policy would be a way of relieving the MPC of certain intractable problems?
  (Professor Nickell) No, no. I mean the fact is that the MPC behaves in a fairly transparent way and goes about its business in a fairly transparent way. The Government and the Treasury, the people who set fiscal policy, know what this is, so they know, when they are deciding their fiscal policy, what the consequences are going to be for monetary policy. That seems just as it should be, and I think that is all that is required.