Interest.co.nz had a story yesterday picking up on the Official Information Act releases (from the Minister and from the Board) I wrote about the other day about the appointment of the members of the new Monetary Policy Committee. The story focused on the weird decision to exclude from consideration “any individuals who are engaged, or who are likely to engage in future, in active research on monetary policy or macroeconomics”. This wasn’t just a hypothetical: at least one person who could have been quite suitable for the MPC was actively turned away on these grounds.
The tweet promoting the story sums up reaction quite well
One measure of how crazy this is, is that Don Brash has been willing to comment on the record. Whatever else he talks openly about, Don has generally been very careful not to comment much about Reserve Bank matters since leaving office as Governor, and he is the chair of a bank the Reserve Bank (prudentially) regulates. And yet this time he has spoken out.
“One would’ve expected the members of the MPC to be experts in monetary policy, or at least macroeconomics more generally. It seems quite extraordinary to exclude people who would have that kind of expertise…
The claim has been that the issue here is about “conflicts of interest”. Conflicts of interest were, and always will be, a real and important issue to consider in putting together an MPC. We couldn’t, for example, have as an MPC member someone who was advising clients on monetary policy and macroeconomics, or who was actively trading financial markets themselves. I hope all the MPC members have suitable stand-down periods written into their terms and conditions that mean that members can’t leave the MPC one day and turn up advising a bank or hedge fund on New Zealand monetary policy a very short time later.
But “conflict of interest” is one of those labels that is sometimes flung around loosely, as a weapon against people someone is trying to exclude, without sufficient calm deliberation as to the specific nature of any alleged conflict. There is simply no conflict of interest involved in having someone on the Monetary Policy Committee who is doing, or is likely to do, active research in monetary policy or macroeconomics. In fact, it would be highly desirable to have at least one such person on an MPC. It isn’t a conflict so much as a natural complement.
There might, appropriately, be rules about such a person not being able to, say, sell their research findings to a hedge fund or an advisory firm. There might, appropriately, be rules about them not trying to trade the research results (in the unlikely event that the research results were that good. That would be no different than (see above) prohibitions on selling advice on related issues. And any (external) member of the MPC should have no better access to – or ability to use for research – Reserve Bank data than any other researchers. But actually having someone on the MPC who was thinking and writing about monetary policy and macroeconomics – whether quantitatively or through other approaches – would normally be a plus rather than a minus.
In truth, there aren’t that many people in New Zealand who would fit the description (researching now, or likely to in the future, monetary policy or macroeconomics), but that isn’t really the point (and overseas people with such expertise should have been able to have been considered for at least one slot). One of the old arguments against a committee was that it would be hard to fill it: harder still (with capable useful people) if you rule from the start people actively engaged in thinking and/or writing about the issues.
And it isn’t as if the management majority on the MPC is so stocked with monetary policy or macroeconomic expertise and experience that any more might simply be redundant (although diversity of view and perspective, and informed challenge, would be valuable even then). Of the four internals, probably only the Governor has ever done anything that might reasonably be called research on monetary policy and macroeconomics, and that will have been the best part of 20 years ago.
In a comment on my earlier post someone (whom I deduce to have been a former Reserve Bank staffer) noted
A former colleague used to say that if Bernanke, Yellen, Williams, Orphanides, Bean, Forbes, Posen, Pagan or Gregory were Kiwis they would have stood no chance for a role at the RB. I started agreeing with him more.
That covers the Fed, the ECB (central bank of Cyprus), the Bank of England, and the RBA. And it isn’t even remotely an exhaustive list of the people serving on decision-making monetary policy committees in the last few decades (whether in executive or non-executive roles) who would have been excluded on the bizarre criteria the Minister and Board have cobbled together.
There is a list of all former UK MPC members here, and the sort of people Robertson, Quigley and Orr would have excluded would include (in addition to those in the quote above) (and still non-exhaustively) Charles Goodhart, Willem Buiter, Sushil Wadhwani, David Miles, Danny Blanchflower and, of course, Andy Haldane. Lars Svensson (and a bunch of other who served at the Riksbank) would be excluded. So too would Alan Blinder (former vice-chair of the Fed), Stan Fischer (another former vice-chair and former Governor in Israel) Ric Mishkin, Jeremy Stein and, just of the current FOMC and alternates, John Williams (president of the New York Fed) and several others. It is simply an absurd stance.
One measure of the absurdity is that Donald Trump – hardly a byword for trust in expertise – hasn’t applied the same sort of standard. One of his latest two nominees to the Board of Governors is Chris Waller, Director of Research at the St Louis Fed – who had a new empirical article out on monetary policy just a couple of months ago. Earlier Trump sought to nominate Professor Marvin Goodfriend, an active researcher on monetary policy issues (and often more “hardline” than the Fed). It is the sort of standard people generally expect to be applied – not all active researchers by any means, but nothing like the sort of Robertson-Quigley-Orr (RQO) blackball – when it comes to the monetary policy decisionmaking body.
By the RQO logic, you wouldn’t anyway actively engaged in monetary policy research as one of the internal appointees either. Which would be equally absurd. Just as well, I suppose, as none of them are, but in most central banks – with four internals on a committee – you’d probably expect at least one would meet that standard.
What do the Minister and Bank have to say for themselves?
Here is the Minister’s take
Robertson admitted: “It was a difficult balance to strike and we certainly had conversations about where it should lie.
“The idea is that we want the person to be able to focus on the MPC work; that we’re not looking for a lot of public comment on that work.
“It’s where you draw the line between somebody’s professional working life and commenting on aspects of the economy or aspects of monetary policy that the Committee would be considering.”
Robertson didn’t accept the argument those with the skills to be on the MPC were the sorts of people highly likely to do “monetary policy” or “macroeconomic” research when their terms were up, and ruling them out would severely limit the talent pool.
Robertson said members having a good understanding of monetary policy was important, as was ensuring they have a range of backgrounds.
“Over time this will evolve. What I’m trying to say is that I actually have some sympathy with the view that we do want informed people on the committee. I think we’ve got that, but we do have to get a balance.”
(Note that there was no hint of those “conversations” was in the OIA releases from either the Minister or the Board.)
To be fair, it doesn’t sound as if this blackball was really his idea. Perhaps he isn’t even really that keen. But it still isn’t a very convincing response. Being an external member of the MPC isn’t a full-time role – it was advertised as being about 50 days a year – so you might have supposed that someone (eg an academic) doing research in the broad area of monetary policy or macroeconomics (macro is a big field might offer a bonus – the taxpayer gets the benefit of that work without having to pay them to do it. And quite how doing academic (or similar) research on macro issues after they left the MPC should be disqualifying, well….tells you all you really need to know. The aim was about excluding capable, energetic, knowledgeable people – experts who might have made a valuable, if potentially awkward for management, contribution to a diverse committee. And, to sheet home responsibility, I don’t suppose Robertson really cared that much but Bank management will have.
The Bank’s response was interesting. Recommendations of MPC appointments were a matter for the Board, chaired by Waikato University Vice-Chancellor Neil Quigley. Quigley apparently wasn’t commenting – rather makes my point about an unaccountable shadowy Board, in this one of their few areas of formal power – but a Bank staffer provided this comment.
The RBNZ spokesperson likewise said: “The full seven-member monetary policy committee has a broad range of economic expertise that does include monetary policy, labour markets, macroeconomics, asset markets, financial markets, agricultural economics, international trade, fiscal issues, taxation, etc.”
(Without getting into the substance of those claims) that response simply doesn’t address the issue at all. It is little more than stonewalling and distraction. Part of the point about externals was to provide a counter-balance, an alternative perspective, on management. What possible grounds could the Bank have had for such a blackball on specific research expertise and interest in monetary policy or macroeconomics? An academic expert in wellbeing is fine apparently, but not one who is actually expert in monetary policy, macro or financial markets. Almost beyond belief.
Almost, but not quite. Because in all these debates over the last five or six years that presaged the move to a committee, management never ever wanted to materially dilute its influence, power and control (Wheeler wanted to set up a statutory committee that was only him and his senior staff, appointed by him). In response to a question from Eric Crampton on my post the other day I noted
I don’t think it is really a conflict of interest issue, but more one about the “collegial” model that the Bank management largely persuaded Robertson to go along with. They don’t really want MPC members taking an independent stance, or presenting conference papers that might raise questions (no matter how indirectly). Bank management tended to have a very negative view of the role Lars Svensson played at the Riksbank, and were also influenced years ago by negative views from BOE management about the way some external MPC members played their (then) new roles. They don’t want “big beasts” – they want people who will go along or (charitably) who will quietly ask not-too-hard questions in the closed confines of the Board room.
Remember that even when the Bank favoured a move to a committee – Wheeler tried to get the legislation changed – they never wanted to diminish management influence (that was explicit in Wheeler’s proposal, but strongly suffused what they got Robertson to sign up to). There is no sign Robertson much cared, and altho Tsy was probably a positive influence at the margin, the Bank was more invested in the issues than Treasury.
That still seems about right to me. Even though – against the Minister’s initial stance, persuaded by the Bank – Treasury eventually managed to get provision in the MPC rules for individual members to speak openly, it never seemed very likely those provisions would be used much if at all – and thus we’ve heard nothing from any of the external MPC members since they were appointed. After all, the Governor is the boss of the internals (a majority of the committee), not known for his tolerance for dissent (or competing egos), and he played a huge role in appointing the externals (one of a three man interview panel, and the one with time, resources, and knowledge at his disposal). The prohibition from the start on anyone who knows too much, and might want to go on thinking and researching, was just one more element in the winnowing process to make sure that they secured a tame and safe team. Buckle, Harris, and Saunders may even add a little value at times, but it will all be terribly safe, and not very demanding. Just the way management like it – and of course, the Board has always acted as defensive cover for the Governor. (This hypothesis may also explain how Buckle got on the MPC – he is now retired, but has done research on macro, and even written a little about monetary policy: the OIA from the Board showed that his name was suggested by……management.)
It might be one thing – although still pretty undesirable – if the Bank had covered itself with glory in the conduct of monetary policy and associated economic analysis in the last decade. But that is so very far from being the case – not only has inflation consistently undershot, but Bank speeches and research offer little that is interesting, insightful or challenging. And there is little sign now that management is any nearer to having rebuilt an internal capability of excellence – indeed, reports suggest the internal research capacity has been gutted. Add in a closed and defensive culture, and the sort of challenge and contest that a couple of people actively working on monetary policy or macro could have brought to the table should have been exactly what the situation demanded.
But management won and mediocrity prevailed. Robertson, Orr, and Quigley deserve to be the laughing stock of international central banking – worse than Trump on this score, the only people responsible for advanced country central banking who wanted to ensure that no one with any real expertise – who might add real value – got near monetary policy decisionmaking (even as the Bank’s own internal research capability has been gutted).¹ The Bank’s international reputation in the 1990s was always a bit overdone (better than deserved), but those who were involved then, and those who once sang the Bank’s praises then – could probably never have imagined things would quite come to this. But bureaucrats guard their bureaucratic empires, and ministers often let them get away with that. And so mediocrity triumphs and the opportunity to produce a good quality MPC has passed for now. Fortunately, the prohibition on expertise isn’t in the Act, this Minister won’t last for ever, Quigley’s term ends soon, and the very future of the Board is up for grabs. But if you don’t start off new institutions strongly, it is hard to pull them up to a better, more internationally comparable standard, at some later date. Such a shame. Such a lost opportunity.
- Well, perhaps they and the Irish Minister of Finance.