But we are sensitive to the fact that certainly over the past two or three years price pressures in both product and labour markets have been less than we would have expected based on earlier experience, given the strength of demand. You might explain this in terms of more intense competition and lower margins in product markets; or in terms of an increase in the rate of productivity growth, perhaps related to the application of new technology, such as we have seen in the US; and you might explain the recent relatively benign real earnings growth in terms of the more flexible functioning of labour markets. But we cannot be sure of the explanation, nor of how large or persistent the relevant effects will prove to be. We are nevertheless sensitive to these possibilities; we do indeed try to allow for them in our forecasts and in our policy judgements, based upon careful scrutiny of all the latest information that we have. But the process remains necessarily judgmental, and that, of course, leaves us vulnerable to assertions that we don’t give sufficient weight to this or that factor. That, some of our critics maintain is why inflation has been below target for much of the past two years. In fact the undershoot has been marginal – given the uncertainties - and can just as well be explained by the unexpected strength of sterling’s effective exchange rate, reflecting the weakness of the euro, which has both directly dampened the price level and constrained external demand.
It is a lot easier to keep things straight and be happy if your public persona and private persona are not in conflict – you are one integrated person. Being true to yourself also means facing up to problems and mistakes early. Early on in my career as a professional economist, I got involved in writing a paper about tax reform with the head of the firm’s research department. The night the paper went to the printers, I woke up with complete clarity that there was a mistake in the paper. The mistake did not affect the conclusions of the paper. It just slightly changed all the numbers and was obscure enough that no one would probably catch it. What to do? I decided to take my medicine. I walked into the office of my co-author the next morning and said that we needed to throw out the 10,000 copies of the paper that had been printed. The head of research – Leon Cooperman – was known for his – let me say this delicately – strong personality. But rather than blowing up at me, he said fine, let’s fix it. Facing up to the error must have actually worked in my favor since I won his respect. A few months later, he introduced me to Robert Rubin – who, as you know, went on to become the U.S. Secretary of Treasury. And through Robert Rubin I met all sorts of interesting people in the Clinton administration.