Expertise and the MPC

I’m yielding to no one in my low view of the Reserve Bank Monetary Policy Committee. I’ve been writing about the problems – structural and personal – since the new Potemkin-village model (designed to look shiny and new, but to change little) was set up three years ago, and it was (for example) one of my Official Information Act requests that got the written confirmation that the Minister, Governor and the Bank’s Board had formally agreed that no one with ongoing expertise in monetary policy or macroeconomics, or likely future interest in researching such matters, would be appointed (as an external member) to the new Monetary Policy Committee (three relevant posts here, here, and here). It was a simply extraordinary exclusion, which reflected very poorly on all involved, but which never seemed to get the scrutiny from media or MPs that it deserved. In no other modern central bank would such an approach be adopted.

But, for all that, I thought Eric Crampton’s op-ed in the Herald today overbalanced in the opposite direction. The column is behind a paywall, so I’m not going to quote extensively, but the gist seemed to be that you need a PhD in macroeconomics AND to be actively engaged in ongoing research to serve on the MPC. Crampton and an Otago university academic then report the results of a little survey they’d run of New Zealand academic macroeconomists to find out who those people thought should be appointed to the MPC, when the terms of two of the current externals expire shortly. It wasn’t noted that the most favoured candidate – one of the incumbents, Bob Buckle – does not have a PhD in macroeconomics, and has presumably taken a self-denying ordinance not to do any relevant research or analysis now or in the future (or otherwise he’d fall foul of the exclusionary rule, see above).

I don’t want to run commentary on all the individuals reported on. One or two might well be excellent additions, one or two would probably be dreadful, but none should be disqualified in advance simply because they might keep thinking about the issues, or writing about them in future. Even if the pickings are fairly slim, that far I agree (strongly) with Crampton. Of course, at present none of it probably matters much as management enjoys a permanent majority on the MPC, and the Orr/Robertson approach has been to prevent external members from speaking in public or even having their views recorded in the minutes. Three years sightseeing aside, it is difficult to know why really able people would seek, or accept, appointment at present. Management appointees matter much more, and the most recent appointment – the new executive deputy in charge of macro and monetary policy, with not a shred of relevant experience – suggests things are heading in the wrong direction there too.

But I think the “cult of the PhD” can be carried too far, at least when it comes to policy roles (as distinct from, say, staffing the Economics Departments of our universities). Don Brash had one, but had been primarily a banker and intellectually curious as he was (and is) had no demonstrated ongoing interest or expertise in macroeconomic research. Alan Bollard had one. Graeme Wheeler didn’t. But little or nothing about how well or badly those individuals did their jobs – and reasonable people may debate each – came down to how complex an NBER paper they could each critique (let alone produce). I’ve noted several times over the years that of the Reserve Bank’s chief economists over my working life, about half had PhDs and half did not. But there was no obvious correlation between those who did (or didn’t) and effectiveness or intellectual energy. Some (one?) of the best did, some (two?) of the best didn’t, but one who did was almost surely the worst of them. In English-influenced countries even 30-40 years ago it wasn’t particularly common for even the most able people to pursue PhDs unless they wanted an academic career. A couple of the more published researchers at the Reserve Bank in the last decade or so either didn’t have a PhD, or got one only rather belatedly (having already published quite a bit).

Or we could look around the world. Alan Greenspan was an economist but didn’t have a PhD (Update: thanks to the reader who pointed out that he acquired one well into his policy career). Jay Powell was a lawyer and private equity executive. Glenn Stevens, the previous RBA Governor, seemed to do a pretty reasonable job, and had neither a PhD nor a research track record. I’m not a great Lagarde fan, but she’s a lawyer and politician. Andrew Bailey has a PhD – in history – but spent his career in banking-oriented roles at the Bank of England. On the other hand, Phil Lowe, Mark Carney, Ben Bernanke, and Stefan Ingves have economics PhDs, even if not always with much sign of ongoing research interest.

Which is by way of saying that despite my many criticisms of Adrian Orr, the fact that he doesn’t have a PhD doesn’t bother me in the slightest. And the fact that Caroline Saunders – another of the independents – has one, if in quite unrelated areas of economics, allays not in the slightest my concern about the weakness (and tokenism) of her appointment.

A parallel I sometimes draw with the MPC is with the Cabinet. As Crampton notes, the MPC makes decisions that are final. So, in many areas, does the Cabinet (and often individual ministers). Very rarely do we expect the Prime Minister or Cabinet ministers to be professional technical experts in any of the areas they are minister for, let alone with the whole ambit of policies for which Cabinet is responsible. It often isn’t even helpful to have had a health expert as Minister of Health, and I’m pretty sure that in all New Zealand’s history we’ve never had an economist as Minister of Finance (nor is it common in parliamentary systems elsewhere). That isn’t a problem. We expect there to be a distinction between professional and technically-expert advisers on the one hand, and decisionmakers on the other. When either group tries to do the job of the other, or the advisory expertise is lacking, things run into difficulty.

[UPDATE: Bill Rowling, Minister of Finance 1972-74, did have an economics degree.]

The parallel with the MPC isn’t exact. We want the Cabinet to be making intrinsically “political” calls, about preferences, priorities, values etc. But we also want them to be judicious people – not unduly swayed by the latest whizz-bang research paper or think-tank idea, or the latest data point. We want/need them to be thinking about communications, public acceptability and so on.

So I’m not suggesting an MPC made up of the first 10 names in the Wellington phone book, or a bunch of pleasant (or otherwise) political hacks. But there is a place for a balanced committee, served by a highly expert staff (research, analytical, policy, markets, operational – all quite different components of what a capable monetary policy function needs). It seems quite likely that some of those roles would these days naturally be filled by people with PhDs – key figures in the research functions, most often perhaps the Chief Economist – but technical research virtuosity (of the sort a highly productive PhD may still offer – many do, many don’t) is just one, important, part of the relevant set of skills. Even in that sort of area, a passion to make sense of what is going on, to interpret evidence and data carefully, to be open to new ideas and fresh perspectives, seem to me to be what we should be looking for. Qualifications aren’t irrelevant, but qualities matter at least as much. And in an MPC that is dominated by management (which also controls all the staff resources), the willingness to think independently and ask hard but realistic questions, to engage effectively with experiences in other times and other countries, are what are likely to add most value. Some functioning academic researchers may be able to do that well, and their particular talents and experience should add value to the Committee. But so, far example, might someone who’d spent decades at the interface of economics and financial markets, or even – and one wouldn’t want this type dominating the Committee – the sort of classic old-school corporate director who is not afraid to ask questions when things don’t make sense, and who may act as a really effective test for how well the expert arguments, analysis, and lines of reasoning may be received in wider public audiences (I can think of a couple of these types who were on the RB Board in years past). Temperament is often at least as important as virtuosity. And effective public communications – not always an academic (or bureaucratic) strength – is vital.

Of course, the bottom line at present is that almost every dimension of the Reserve Bank (and particularly its macro/monetary functions) is weak: little research, little transparency, weak senior management appointments, a Governor with the wrong temperament for the job, an MPC structured to be ineffective, and weak appointees to the MPC. The ban on people with ongoing research interests – almost laughably bad as it is – is more like a symptom of a weak institution…..and a Minister of Finance who seems just fine with all that. And not even, it seems, bothered when core inflation bursts out the top of the target range.

UPDATE: I’d been aware that several of the top figures at the Bank of England in recent decades, including Eddie George and Paul Tucker, had not had PhDs (the latter having gone on to write a very serious book about central bank governance etc), but when I wrote the post I’d been labouring under the impression that the most prominent and eminent such figure – Mervyn King – had had a PhD. A reader got in touch to point out that he hadn’t. I’ve disagreed with many of King’s views, including in posts here, but no one can doubt that he was (and is) a figure of considerable intellectual eminence and thoughtfulness, whose speeches (for example) read well and make one think. He would seem ideally suited for an MPC.

15 thoughts on “Expertise and the MPC

  1. Wikipedia says:

    In 1977, Greenspan obtained a Ph.D. in economics from New York University. His dissertation is not available from the university[18] since it was removed at Greenspan’s request in 1987, when he became chairman of the Federal Reserve Board. In April 2008, however, Barron’s obtained a copy and notes that it includes “a discussion of soaring housing prices and their effect on consumer spending; it even anticipates a bursting housing bubble”.[19]

    McTague, Jim (March 31, 2008). “Dr. Greenspan’s Amazing Invisible Thesis”. Barron’s. Archived from the original on April 6, 2013. Retrieved October 17, 2008.

    McTague, Jim (April 28, 2008). “Looking at Greenspan’s Long-Lost Thesis”. Barron’s. Archived from the original on February 16, 2013. Retrieved July 25, 2009.

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  2. If someone without a PhD can quickly grok work like Baqaee and Farhee’s, great. It’s the rare microeconomist who will stay on top of the latest work in macro techniques though. And when the Bank’s own internal capabilities seem to have vastly diminished, having real expertise in the next round of MPC external appointments will be vital.

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    • And in sense that is the problem (of course working under Silk might be a problem to. With a different better Governor so many problems would start to solve themselves, or the way would be opened to solve them. Better people, different mindsets, more openness etc etc – management, staff, MPC, and Board.

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  3. I share the view that a PhD is not a prerequisite for the ability to be highly effective in making decisions on monetary policy. Indeed, if one looks at monetary policy decision-makers globally, over the last 30 years or so, I suspect a very substantial proportion of them did not/do not hold a PhD. Those that did/do, might well have done their thesis on topics that are of no or scant relevance to monetary policy or even macroeconomics. It would be interesting to see whether there is any empirical evidence to support the view that those with a PhD or other high level degree in macroeconomics are better monetary policy decision-makers than those with a lower level economics qualification. I very much doubt that there would be a strong relationship to support the contention that a high degree in macroeconomics necessarily leads to, or is even likely to improve the capacity for, high quality monetary policy decision-making. In my career, I have worked with many people with PhDs (economics and finance mainly) and have often been struck by how underwhelming many of them are in terms of policy analysis and delivery of practical outcomes. In contrast, the best of those with whom I have worked in my long and varied career have had lower level degrees but displayed a remarkable capacity for sound judgement, discernment and analytical capacity. The level of the degree was irrelevant to their performance.

    What is needed for the MPC are people with the analytical ability to read the economy, analyse the data, and make sound judgement calls on what are often quite finely balanced considerations. People with practical knowledge of the economy and an analytical mind are as likely (probably more likely) to do that than would an academic economist with little practical lnowledge of the economy. Relevant experience trumps academic qualifications any day. Crucially, what is needed on this MPC are people who have the mind and spine to challenge Orr and to bring independence of thought to the decision-making process.

    Monetary policy is often prone to ‘over engineering’ by those with an academic fascination for monetary economics. Much is made by central banks of the complexity of monetary policy decision-making, with an over-indulgence of econometric models, undue faith in forecasts, and a love of making it seem more complex and mystifying than it needs to be. If we invested the same level of resourcing in health policy, regulatory policy, infrastructure policy and education policy as we do in monetary policy, we would likely get much better bang for taxpayer bucks in terms of overall economic and social outcomes. I have long been bemused by the excessive staffing of the monetary policy functions of central banks and the quasi-academic nature of many of the staff who work in them. I think we would probably get better monetary policy outcomes by having a smaller number of perople with the requisite experience and judgement than we would by loading the decision-making process by those with PhDs.

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  4. A PhD often shows a person has a specific area of expertise, and the perservernce to see it through. All good. But my experience if Central Banks – ive worked at two and been offered a job at a third – and in banking, where i was MD and led one of the largest research teams in Asia Pacific, is that its not necessary in a commercial bank setting at all. Indeed the best economists i had didnt have one. In Central Banks outside of the Research Dept. its also not necessary.

    What youre looking for is people with a strong background in economics, also some understanding of financial instruments, a flexible mind, an ability to communicate, verbally and in writing, and an ability to work both in a team and in isolation. You also want someone who has the humility and maturity to be able to say “i dont know” and “i can ask for help with this”.

    Having interviewed probably upwards of a hundred economists and financial market strategists, ive concluded that those requirements are a pretty tall order.

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  5. Monetary committee or not the RBNZ has failed to keep inflation in line. First it was too low and now too high.
    The extra RBNZ liquidity in the market has also driven house prices through the roof in the last 12 months with net
    Immigration at below zero.
    They are not performing.

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  6. PhDs: Should they, shouldn’t they?

    Perhaps the Bank of England sums it up best: “Each member of the MPC has expertise in the field of economics and monetary policy. Members do not represent individual groups or areas – they are independent.”

    Not all members of the BoE’s MPCs have PhDs, but they all seem to qualify in terms of expertise in monetary policy and economics. You probably can’t say that now about the RBNZ’s MPC…what a ‘plan’…can’t wait to see the ‘comms’.

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  7. Just read your piece on Stuff (What’s gone wrong), and I whole-heartedly agree with your opinion on Orr.

    I spat tacks when he dropped the OCR in 2019, as it was already well-evidenced then that it was the cause of the rising house prices and thus inequity (I was doing post-graduate study in econometrics at the time). Every time Orr opens his mouth, I’m left somewhat confused – for every cause he states, it seems he gets the effect backwards – just like our current crop of politicians (both red and blue).

    Orr has to go, yesterday. Shame his supervisor does too (and I voted red!).

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