Reforming the Reserve Bank

A couple of weeks ago I wrote a post on where the Labour Party seemed to be going on monetary policy, informed by Alex Tarrant’s article on his conversations with Grant Robertson.  It all seemed to amount to not very much –  wording changes to make explicit an interest in the labour market (employment/unemployment), but without much reason to think it would make much difference to anything of substance.  My suggestion was that there was a distinct whiff of virtue-signalling about it.   And the sort of change Robertson seemed interested in on the governance front  –  legislating the position of in-house technocrats –  seemed unlikely to be much of a step forward at all.

Last week, had a piece on the same issues by former Herald economics editor Brian Fallow, also benefiting from an interview with Robertson.   Fallow pushes a bit harder.  His summary is that

The changes Labour proposes to make to the monetary policy framework sit somewhere between cosmetic and perilous, but closer to the former.

Cosmetic for the sorts of reasons I’ve outlined.  On the one hand, the Bank has always taken the labour market into account as one indicator of excess capacity.  And on the other hand, plenty of pieces of overseas central banking legislation refer to employment/unemployment somewhere, but there is little evidence that the central banks in those countries have run monetary policy much differently, on average over time, than the Reserve Bank of New Zealand has.

Robertson’s response is pretty underwhelming.

Asked how much difference the regime he advocates would have made, had it been in place in the past, he said, “In the very immediate past, not that much, truthfully. But there have been other times in our history, and there have been other examples around the world, when lower interest rates could have helped to reduce unemployment.”

If he was serious about this making a difference, he’d surely be able to quote chapter and verse.  When, where and how does he think it would have made a difference?

He is, however, clearly tantalised by the current situation

Even now, “Are we satisfied as a country that with 3.5% growth 5.2% unemployment is okay?”

Given that the Treasury thinks our NAIRU is nearer 4 per cent, I don’t think we should be content.  But Robertson has spent so long over the last few years defending Graeme Wheeler that he can’t quite bring himself, even now, to suggest that monetary policy could have been conducted better in the last five years, whether on the current mandate or something a little different.

If the proposed change isn’t cosmetic, Fallow worries that it could be perilous.  Why?  Because when he pushes Robertson he gets a more explicit –  and more concerning –  answer than the one Alex Tarrant got.

He has told’s Alex Tarrant that he was not going to tell the Reserve Bank whether one objective is more important than the other.

Talking to me, however, he said that ultimately the bank would remain independent. “But if unemployment starts to get out of control I would expect in that environment it says ‘At this time we are preferencing that and we are going to lower rates by a greater percentage than we might have’.”

In the event of a stagflation scenario he would expect it to focus more on the falling output and employment side of the dilemma and to ease.

“I think the setting of a clear direction here is what is important.”

In short Robertson seems to be saying that if Parliament were to change the statute, the message to the bank would be when in doubt err on the side of stimulus.

If unemployment is prioritised by the Reserve Bank in such circumstances, it is a recipe for inflation getting away.  In the medium-term, monetary policy can really only affect nominal variables (inflation, price level, nominal GDP or whatever), it simply can’t affect real variables.  Using monetary policy to pursue such goals directly is a risky prescription.  I wouldn’t want to overstate the issue –  New Zealand isn’t heading for hyperinflation – but part of reason we and other countries ended up with persistently high inflation in the 1970s is that too much weight was placed on unemployment in setting monetary policy.  Getting inflation back down again was costly –  including in terms of increased unemployment.  On a smaller scale, as Fallow highlights, the desire to “give growth a chance” was part of what was behind the monetary policy misjudgements of 2003 to 2006, when monetary policy wasn’t tight enough.

Robertson’s words suggest he still hasn’t thought the issues through very deeply or carefully.  For now, I’m sticking with the “cosmetic” or virtue-signalling interpretation of what Labour is on about.   And I’m still uncomfortable at the lack of command of the issues and experience in someone who aspires to be Minister of Finance later this year.

But yesterday, a mainstream economist came out in support of more or less the direction Robertson is proposing.  In his youth Peter Redward spent a few years at the Reserve Bank, and then spent time in various roles, including at Barclays and Deutsche Bank, before returning to New Zealand and establishing his own economic and financial markets advisory firm.  He focuses on emerging Asian foreign exchange markets, but keeps a keen eye on monetary policy developments in New Zealand.

In his short piece at Newsroom, Peter Redward says It’s time for a Reserve Bank change.  He notes of the last few years that

Whether Governor Wheeler consciously aimed for a hawkish interpretation of the Act, or not, we may never know. But hawkish he’s been, leading to tighter monetary conditions than were necessary, boosting the New Zealand dollar and confining thousands of New Zealanders to needless unemployment.

And argues that

…maybe it’s time to adopt a dual mandate in the Act. One possibility is the dual mandate of the U.S. Federal Reserve. The Federal Reserve has a two percent inflation target but it also targets ‘maximum employment’. Economists have differing interpretations of ‘maximum employment’ so it acts as a constraint, and that’s the point.

While no one knows exactly where ‘maximum employment’ in New Zealand is, I believe most economists would agree that it’s likely to be consistent with an unemployment rate somewhere around 4.5 percent (give or take 0.25 percent). If the Reserve Bank had a dual mandate, its elevated level would have acted to constrain the bank’s aborted tightening of policy in 2009 and 2014.

I’m very sympathetic to his critique of Graeme Wheeler’s stewardship of monetary policy, and highlighted in numerous of my own commentaries, after it became apparent that the 2014 OCR increases had been an unnecessary mistake, the Governor’s apparent indifference to an unemployment rate that remained well above any estimates of a NAIRU.

But I remain a bit more sceptical than Peter appears to be about how much difference a re-specified mandate might have made.  As I’ve argued before, past Reserve Bank research suggests that faced with the sorts of shocks New Zealand experienced, policymakers at the Fed, the RBA and the Bank of Canada would have responded much the same way as the Reserve Bank of New Zealand did.  That work was done for periods prior to 2008/09 –  for most of the time since then the Fed was at or very near the lower bound on interest rates, so the game was a bit different –  but it isn’t clear that the specification of the target has been the problem in New Zealand in the last few years.  After all, simply on inflation grounds alone the Reserve Bank hasn’t done well.

Here is a chart of the Reserve Bank’s unemployment rate projections from the March 2014 MPS, the occasion when they started raising the OCR.

2014 U projections.png

The second observation is the last actual data they had –  the unemployment rate for the December 2013 quarter.  So when they started the tightening cycle they thought the unemployment would be falling quite considerably that year, before levelling out around what they thought of as something near what they must have thought of as the practical NAIRU  (this was before last year’s revisions to the HLFS which lowered unemployment rates, and NAIRU estimates, for the last few years).    The problem then wasn’t that they didn’t care about unemployment, it is that they got their forecasts –  particular as regards inflation –  badly wrong.  It isn’t clear why a different target specification would have altered the policy judgement at the time.

Perhaps it would have done so once it became apparent that the OCR increases hadn’t really been necessary, but a stubborn refusal by the Governor to concede mistakes, even with hindsight, plus a mindset firmly focused on how “extraordinarily stimulatory” monetary policy allegedly was –  when no one had any real idea what a neutral interest rate might be in the current environment, and when inflation stubbornly didn’t rise much if at all –  seem more likely explanations.    The Bank kept forecasting that inflation would rise and unemployment would fall –  the jointly desired outcomes.

(And if one looks at the Bank’s forecasts in mid 2010, when they made the previous unnecessary start on tightening, one gets much the same picture –  forecasts of falling unemployment and rising inflation, that simply didn’t happen.)

So why should we supposed that a different specification of the target would have made much difference to how policy was set?  We had an institution that was misreading things, in a political climate where no one seemed much bothered by the unemployment rate holding up, and where for a long time financial markets endorsed the approach taken by the Reserve Bank (often more enthusiastic for future tightenings than even the Governor and his advisers were).   Getting something closer to the right model of the world (for the times), and quickly learning from one’s mis-steps, seem likely to matter more than the words of the Act in this area.

As I’ve said repeatedly here, I’m not firmly opposed to amending the relevant clauses of the Reserve Bank Act to mention the desirability of things like a low unemployment rate.  But even the Federal Reserve Act makes clear that good monetary policy focused on a nominal target creates a climate consistent with high employment.  High employment isn’t a goal for the Federal Reserve is supposed to pursue directly, even if –  all else equal –  a high unemployment rate relative to an (uncertain) NAIRU is a useful indicator that something might be wrong with monetary policy settings. It isn’t clear there is anything much to gain from such amendments –  or that they are where the real issues regarding the Reserve Bank are – but sometimes perhaps virtue needs to be signalled?    My own concrete suggestion in this area would be to require the Reserve Bank to publish, every six months, its own estimates of the NAIRU and to explain the reasons for the deviations of actual unemployment from the NAIRU, how quickly that gap could be expected to close, and the contribution of monetary policy to the evolution of the gap.

Brian Fallow’s article suggested that Labour still hasn’t settled on how to reform the governance of the Reserve Bank.

Robertson is non-committal at this stage on the composition of a monetary policy committee to take interest rate decisions, including to what extent it should include members from outside the bank.

Peter Redward has a more specific proposal for him.

What’s needed is a formal Monetary Board complete with published minutes and, released after a grace period, transcripts of the meeting and the voting record of members. In a recent speech, U.S. Federal Reserve Vice Chair, Stanley Fischer, argued that this arrangement is superior to the sole responsibility model in achieving outcomes and accountability. Changes to the role and responsibility of the Governor will necessitate changes to the structure of the Reserve Bank Board. Best practice would suggest that a Monetary Board should be created to set monetary policy with the Reserve Bank Board selecting candidates for the committee while maintaining oversight of the bank. To ensure that external board members are not simply captured by the bank it may be necessary to provide a secretariat similar to the Fonterra Shareholder’s Council, operated at arms-length from bank management.

It isn’t my favoured model, but it would be a considerable step in the right direction, and far superior – in terms of heightened accountability and good governance of a powerful government agency –  to Graeme Wheeler’s preference to legislate his own internal committee.  The biggest problem I see with the Redward proposal, is that it has too much of a democratic deficit.  Monetary policy decisionmakers shouldn’t be appointed by other unelected people –  the Reserve Bank Board –  but by people (the Minister of Finance and his Cabinet colleagues) whom we the voters can toss out. That is how it is pretty much everywhere else.

Peter’s proposal focuses on monetary policy.  But, of course, the Reserve Bank has much wider policy responsibilities, including a lot of discretionary power –  not constrained by anything like the PTA –  in the area of financial regulation.  I presume he would also favour committee decisionmaking for those functions.  I’ve proposed two committees –  a Monetary Policy Committee and a Prudential Policy Committee, each appointed by the Minister of Finance, with a majority of non-executive members, and with each member subject to parliamentary confirmation hearings (although not parliamentary veto).  It is a very similar model to that put in place in the United Kingdom in the last few years.  It puts much less reliance on one person –  who will sometimes be exceptional, and occasionally really bad, but on average will be about average –  and would be more in step with the way in which other countries govern these sorts of functions, and with the way we govern other New Zealand public sector agencies.  I hope the Labour Party is giving serious thought to these sorts of options, and while the headline interest is often in monetary policy, the governance of the financial regulatory powers is at least as important to get right.

And then of course, getting a good Governor will always matter a lot.  The Governor, as chief executive, will set the tone within the organisation, and determine what behaviours are rewarded and which are frowned on or penalised.  If the Reserve Bank failed over the last few years, it wasn’t just because Graeme Wheeler was the sole monetary policy decisionmaker –  his advisers mostly seemed to agree with him –  but because of the sort of organisation he fostered, where “getting with the agenda” seemed more important and more valued than dissent or challenge, in area where few people know anything much with a very high degree of confidence.    Character and judgement are probably, at the margin, more important than high level technical expertise.

And while people are thinking about reforms to the Reserve Bank Act don’t lose sight of how little accountability and control there is over the Reserve Bank’s use of public money, or about the provisions it has carved out for itself from the Official Information Act which allow it to keep secret submissions on major policy proposals even –  perhaps even especially –  when they come from parties who would be affected by those proposals.

Revising the Reserve Bank Act was the first legislative priority for the first Labour government that took office in 1935.    I’m not suggesting the same priority if there is a new Labour-led government later in the year, but there is a real and substantial agenda of reforms to address, which will take time to get right, and which take on some added urgency in view of the vacancy in the office of the Governor that needs to be filled by next March.   That appointment –  a key step in the reform and revitalisation of the Reserve Bank –  should be led by whoever is Minister of Finance, not by the faceless (and unaccountable) men and women of the Reserve Bank’s Board, the people who have presided complacently over the mis-steps of the last few years.




Labour on monetary policy

Alex Tarrant of had an interesting article earlier this week on the approach the Labour Party plans to take on monetary policy and Reserve Bank issues.    It seems that we should take it as a reasonably authoritative description, even though the formal policy has yet to be released. Labour’s finance spokesman Grant Robertson  described it thus

Useful write up from Alex Tarrant on monetary policy in NZ, including some thinking from yours truly.

From the article

Labour’s stance that the Reserve Bank of New Zealand’s (RBNZ) price stability goal should be accompanied by a focus on employment will not see it propose a specific, nominal employment or unemployment figure for the central bank to target, finance spokesman Grant Robertson told

Meanwhile, Labour is set to follow the US example of not outlining which of price stability or employment the central bank should prioritise if the two goals were to clash at any point, he said.

Being picky, one might hope that Robertson appreciates the difference between real and nominal targets:  ‘nominal’ is usually a term referring to price measures, money supply measures, or even nominal GDP (the dollar value of all the value-added in New Zealand), while “real” usually refers to quantities/volumes, or to a price-change adjusted for the movement in the general level of prices (eg real house prices, or real interest rates).    Employment or unemployment are “real” variables, not nominal ones.

Mostly I don’t have too much concern if a Labour-led government were to seek to amend the Reserve Bank Act, or to put words in the policy targets agreeement for the new Governor next March, that made some reference to employment or unemployment.  So long, that is, as no one thinks it will make any difference.

No one seriously doubts that monetary policy choices can affect employment/unemployment in the short-term.  But, equally, no one seriously thinks that monetary policy can make much difference to those variables over the longer-term.

Monetary policy affects employment/unemployment in the shorter-term to the extent it affects economic activity.  And thus, when the Policy Targets Agreement states, as it has since 1999 when the incoming Labour Minister of Finance inserted the words, that the Bank should avoid “unnecessary instability in output”….

In pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable, consistent and transparent manner, have regard to the efficiency and soundness of the financial system, and seek to avoid unnecessary instability in output, interest rates and the exchange rate.

….it was already enjoining the Bank to be concerned about the shorter-term employment/unemployment implications of its monetary policy choices.  And in inserting those words it was really just describing –  to help make it better understood to a wider audience –  what it was the Reserve Bank had been doing anyway.  Those considerations were the reason why, from the very first Policy Targets Agreement, price stability had been something to be pursued over the medium-term, with explicit provision for various shocks to prices.  If the Reserve Bank had attempted to fully offset those shocks –  GST increases, or petrol price increases for example –  it would have come at a cost of unnecessarily disrupting output and employment.

So one option for Labour could simply be to add in “employment” or “unemployment” to the existing list of things the Bank should try to avoid unnecessary instability in.

It is also worth noting that Policy Targets Agreements have long opened with descriptions of what a monetary policy focused on low and stable inflation is trying to achieve –  again, mostly an opportunity to remind people that price stability isn’t just an end in itself.   Under the current government, those words have read

The Government’s economic objective is to promote a growing, open and competitive economy as the best means of delivering permanently higher incomes and living standards for New Zealanders.  Price stability plays an important part in supporting this objective.

Although it isn’t stated explicitly, presumably high employment/low unemployment is part of that mix.

But under the previous (Labour-led) government, it was explicit.  These words were added to the PTA in 2002 by Michael Cullen when Alan Bollard took office

The objective of the Government’s economic policy is to promote sustainable and balanced economic development in order to create full employment, higher real incomes and a more equitable distribution of incomes. Price stability plays an important part in supporting the achievement of wider economic and social objectives.

Of course, those words made no discernible difference to how the Bank ran monetary policy. But then they weren’t really meant to: it was more a matter of “virtue-signalling”: “we care, and monetary policy isn’t just some Don Brash thing”.

And so a challenge that should be put to Grant Robertson and his colleagues is to clarify whether they think that adding a “focus on employment”, whether to the Act or the PTA is intended to make any substantive difference whatsover, and if so how?

In his interview, Robertson refers to the example of the United States, where the Federal Reserve is often described as having a dual mandate.   In fact, in statute that isn’t really true.  Here is what the Federal Reserve Act says of the objectives of monetary policy

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

The goal, in the somewhat outdated language of the 1970s, is to “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production”.    All the rest of it is simply a description of outcomes that, over time,  pursuing that nominal (money and credit) target can help achieve.

Of course, you won’t often hear Federal Reserve officials highlight that statutory goal –  and they will often talk of “dual objectives” –  but it does highlight that there isn’t an easy off-the-shelf model of legislative wording for Labour to adopt.

A few years ago, recognising that these issues were now the subject of active debate in New Zealand, the Reserve Bank did a Bulletin article collecting and classifying the statutory and sub-statutory (eg PTA type documents) monetary policy objectives for a variety of advanced countryies  If I say so myself, it remains a useful reference (partly in highlighting the different roles that different ways of framing objectives can play –  some are explicitly aspirational, some more accountabilty focused, some language is old and some new etc).  In many of the countries, employment pops up somewhere or other –  but mostly, apparently, in that same sense that we’ve seen in New Zealand, or in the US statutory objective, that a well-run monetary policy will contribute over time (perhaps in quite small ways) to a well-functioning economy, and labour market.

Robertson has also talked about the statutory language in Australia.  The Reserve Bank of Australia Act specifies (as it has since 1959)

It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank … are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:

a.the stability of the currency of Australia;

b.the maintenance of full employment in Australia; and

c.the economic prosperity and welfare of the people of Australia.

But surely the challenge for Robertson is “so what”?    Is there any evidence he can point to suggesting that, over time, the Reserve Bank of Australia (or the Federal Reserve) have run monetary policy materially differently from the Reserve Bank of New Zealand?    Past research the Reserve Bank has done looking at exactly that issue suggested not.

Perhaps this might seem a curious stance for me to be taking.  I’ve been repeatedly critical of the Reserve Bank’s conduct of monetary policy over the last couple of years  at a time when the unemployment rate that has lingered well above estimates of the NAIRU  (while, curiously, Robertson has often been a defender of the Governor).    But it is most unlikely that any sort of weak reformulation of the statutory goal would make any material difference, especially when  according to Robertson

Labour is set to follow the US example of not outlining which of price stability or employment the central bank should prioritise if the two goals were to clash at any point, he said.


He told that Labour is not going to tell the RBNZ whether one is more important than the other.

The Bank’s failures over the last few years, to the extent that they can be seen as such, have been mostly about forecasting, combined with some over-confident priors, not about policy preferences, or an aversion to seeing high employment/low unemployment.

But if Labour really wants to give the Reserve Bank two objectives, and not even subordinate one to the other (on, for example, the basic grounds that in the long run nominal instruments –  monetary policy –  can only really achieve nominal targets), it is simply fairly explicitly abdicating what are inherently political choices to unelected technocrats.    The strongest case for an independent Reserve Bank is when there is a widely-accepted single target.

Then again, perhaps what is really going on is just “virtue-signalling”.  I’m sure Labour has access to plenty of people who can tell them that the RBA, the Fed, the Bank of England and the Bank of Canada –  all with different ways of phrasing monetary policy goals –  don’t do things much differently from each other, or from the Reserve Bank of New Zealand.  Each will make mistakes at times, each with have idiosyncrasies, and from time to time each might have poor decisionmakers, but there is just no evidence that the framing of the New Zealand target keeps the Reserve Bank from making good policy.  But promising to tinker with the central bank goals probably sounds good in certain quarters –  suggesting that the speakers aren’t dreaded “neo-liberals” and might be “sound” on other stuff.

The Tarrant article also confirms that Labour is looking at governance changes for the Reserve Bank.  Sadly not the right ones.

If Labour leads the government after the 23 September general election, it will immediately launch a review into its proposals. This will also include a look at a Labour preference of taking sole rate-setting responsibility from the RBNZ Governor in favour of a rate-setting board that includes the Governor, his deputies and potentially other voices within the bank.

I hope Robertson and his colleagues bear in mind that governance reforms along exactly those lines –  entrenching a legislative role for internal technocrats –  was rejected by the previous Labour government in 2001.  I thought they were right to do so then (even though at the time I held a role that Labour’s independent reviewer, the academic expert Lars Svensson, thought should be a statutory member of the decisionmaking monetary policy committee), and I hold to that view.

At very least, a decisionmaking committee comprised of internal line managers would necessitate wider changes.   Since the case for moving away from a single decisionmaker is to reduce the risks associated with one person, one shouldn’t just move to a system where that one person, together with people s/he appoints/remunerates, make the decisions.  In the right hands, it might work fine, but we build institutions to protect us against bad outcomes and people who turn out to be poor appointees.  The sort of Governor one might have to worry about isn’t likely to be appointing people who will systematically differ from him/her.  If deputy or assistant governors are to be given statutory decisionmaking powers, those appointments (and that of the Governor) need to be ministerial appointments.  But I’m not aware of any other New Zealand government agency where a group of line managers get to make key policy decisions (perhaps Robertson is?).  Far better to use line managers to service (provide the research and analysis to) a decisionmaking committee, appointed by the Minister of Finance, and made up of a mix of internal and external people (as in Australia or the UK, and –  in a different system of government –  the US).

Although I don’t agree with their specific solution, on this issue I think the Green Party is much closer to proposing a good model than Labour (at least on the evidence of this article) is.  The same goes for enhancing the openness and transparency of the Reserve Bank –  another issue Labour seems not greatly interested in.  On that score, one option perhaps the parties on the left could think about is to require the Reserve Bank to publish, at least six-monthly as part of a Monetary Policy Statement, its estimates of the NAIRU (and perhaps other medium-term trend real variables, such as the natural rate of interest, and the projected trend rate of labour productivity).

There are plenty of aspects of the Reserve Bank legislation and practice that warrant review and reform.  Time has moved on, the Bank’s responsibilities have changed gradually etc.   If Labour is in the position to lead a government after the election, I hope they would be open to setting the terms of their review sufficiently broadly to encompass those issues (eg decision-making, appointment procedures, transparency, openness, the allocation of prudential policymaking powers between the Bank and the Minister etc).  I doubt any of these are really vote-winners, but they are the sort of issues that a modern responsible competent government would put on its agenda, for a tidy-up and modernisation.

Perhaps there are votes in promising to rearticulate the monetary policy objectives. But if so, it is more likely to be through “virtue-signalling”, than through the likelihood that  the sort of stuff Labour is talking about would make any material difference at all either to how monetary policy is actually run, or to the resulting economic outcomes.  Surely Labour must know that.  But does it bother them?

New Zealand has serious long-term structural economic underperformance challenges that need to be grappled with.   Sadly, the current government seems largely indifferent to them.  One can only hope that as policy programmes emerge over the next few months, the opposition parties will be offering some serious alternatives.  At present, there doesn’t appear to be much reason for hope on that score.


Reserve Bank Governor and governance: some considerations

Since the announcement last week that the Reserve Bank Governor is leaving at the end of his term, and that his senior deputy won’t be a candidate to replace him, there has been a lot of commentary around both about what the Board and the (post-election) Minister of Finance should be looking for in a Governor, and what changes might be made in the legislative arrangements under which the Reserve Bank operates.  As just one example, both the centre-left economics columnists in yesterday’s Sunday Star Times were writing about aspects of the topic.

That seems entirely appropriate.  The Reserve Bank exercises huge discretionary power in both monetary policy and financial regulation, and the once-vaunted accountability mechanisms have actually turned out to be quite weak.  And the basic structure of the legislation the Bank operates under is now getting on for 30 years old.   Much has changed in that time.

Finding the right individual for the job of Governor matters a lot.  Even within the limitations of the current legislation, the right individual (building the right new senior management team) can make a material difference, in revitalising the organisation, and putting it on a more open and transparent footing –  both as regards policy, and the conduct of the Bank’s own affairs.    Still, we should be careful of what we wish for.  The Herald’s editorial last Friday argued, writing about the monetary policy responsibilties, that “the next Governor will need to be bold”.  Well, perhaps.  But “boldness” isn’t a great quality unless one is sure (a) of to what end it is directed, and (b) of the judgement, capability and character of the person being bold.  If I think back over 30 years of New Zealand monetary policy, Alan Bollard’s deep cuts in the OCR in the crisis conditions of late 2008 probably qualify as bold.  But so did Don Brash’s MCI experiment and Graeme Wheeler’s 2014 tightening cycle.  Neither of those ended well.

In the Sunday Star Times, Rod Oram argued

So, the best we can hope for is the next government, regardless of which party leads it, has the courage to recruit a rare individual as the next Reserve Bank Governor – a person who is highly experienced in the intricacies of the job, yet insightful and brave enough to restore the institution to world leadership.

That last line or so seemed both unrealistic and somewhat ahistorical –  perhaps partly because Oram appears to have come to New Zealand only as the Reserve Bank’s “glory days” were already passing.

The Reserve Bank of New Zealand gets credit for being the first country in the world to introduce (modern) inflation targeting.  I was present at the creation, and am proud of having been part of that.  But it was at least as much accident as design   –  a Treasury that was determined we had to have a contractural arrangement (pretty much every other government agency was getting one), and a muddied post-liberalisation post financial crisis world in which nothing much else would work.  We weren’t forerunners in central bank independence, in getting on top of inflation, in the idea of announcing medium-term targets, or in the publication of accountability documents.  And most of the specific details of our model haven’t been followed when other countries came to revise their legislation.  And if you read our economic analysis during the late 1980s and 1990s it was mixed bag, to say the least.  If I recall with pride the day I read Samuel Brittan of the FT praise our second-ever Monetary Policy Statement, which I’d largely rewritten over a weekend after Saddam Hussein invaded Kuwait and oil prices rocketed, I read some of other stuff we (I) wrote and cringe at least a little.  We were doing some good stuff, but were rushing to catch up with what being a modern central bank really involved, and there were so little institutional resilience that we stumbled into the MCI debacle only a few years later.  (For those too young to understand the reference, (a) be thankful, and (b) I will do a proper post about it one day.)

And what of banking regulation?  After an extensive and acrimonious internal debate in the early 1990s, the Reserve Bank did change quite materially its approach to banking supervision and regulation.  Pulling back from the seemingly-inexorable pressures to become ever more intrusive and interventionist in our banking supervision, we adopted a model which emphasised director-responsibility, and public disclosure, with the aim of better aligning incentives, to strengthen market discipline and reduce the prospect of public bail-outs etc.  Capital requirements were left in place, but as much because the banks wanted them –  they feared they look “unregulated” without them – as because of any Reserve Bank preference.  I wasn’t that closely involved, but I mostly thought it was a step in the right direction –  and lament the way that the Reserve Bank has wound back on public disclosure requirements in recent years.   But if there were elements of the model that did, in small ways, influence the thinking and practice of other countries’ regulatory models, they weren’t very important.  It was innovative, and may even have been right, but it wasn’t really tested –  as the key institutions of our banking system became increasingly Australian-dominated (and hence under the overall oversight of Australian regulatory authorities).  And it hasn’t become the global model – bailouts abounded in 2008/09, no one thinks that problem has been solved, supervision and regulation is at least as intrusive and second-guessing as ever, and the Reserve Bank’s resistance to deposit insurance now looks more anomalous than ever.    There was some good and interesting stuff done, and some able people were involved in doing it, but it was never the basis of “world leadership”.

In any case, how realistic is the idea of “world leadership” in this area?  We are a small country, we don’t resource our central bank that generously (and I don’t think we should spend more), and central banking feels like one of those areas (risk management, crisis management etc) where one should be wary of the pathbreaking – after all, how do we distinguish it from what turns out to be a dead end?; isn’t this what we have academics and think-tanks for etc?  And realistically, if one looks through the lists of people talked about as potential candidates as Governor, be it Geoff Bascand or Adrian Orr (probably the names at the top of most lists) or others –  Rod Carr, John McDermott, Murray Sherwin, David Archer, Arthur Grimes, New Zealanders running economic advisory firms, New Zealanders who are past or present bank CEOs here or abroad etc –  very few look as though they have even the glimmerings of what Oram seems to be looking for.   And even those who just might, have other weaknesses.  For me, I’d settle for someone with the character, energy and judgement, backed up a solid underpinning of professional expertise, to revitalise the institution, rebuild confidence in it, and provide a steady hand on the policy levers, backed by high quality analysis and an openness to alternative perspectives, through both the mundane periods and the (hopefully rare) crises.  And all that combined with a fit sense of the limitations of what monetary policy and banking regulation/supervision can and should do (on which point, I’ll come back another day to Shamubeel Eaqub’s column – not apparently online – on what he thinks the Bank and the new Governor should be doing.)

Finding the right person is a challenge, but it is also highly desirable to take the opportunity now to think about the legislation under which the Bank operates –  in particular, the governance provisions.    Ours is quite an unusual model, whether one looks across other central banks and financial regulatory agencies, or across other New Zealand public sector institutions.  Under our law, all the extensive discretionary powers of the institution are vested in one individual –  him or herself unelected, and selected primarily by unelected people (the Board) –  and the range of powers the institution itself exercises is itself unusually wide.     And, as I’ve noted previously, there is no statutory requirement for the Reserve Bank to have, or publish, a budget, let alone anything of its medium-term financial plans, even though financial control of public spending is one of the cornerstones of democracy. Parliament has less control over the Reserve Bank’s spending than over that of, say, the SIS.       And the Reserve Bank takes an approach to the Official Information Act that suggests they still see themselves as somehow “different” and above the normal standards –  for them, transparency and accountability are about them telling us what they want us to see, not about citizens’ access to information and analysis generated at public expense.

So I was pleased to see the Dominion-Post’s editorial this morning, Good time to reform Bank.   In making their case, they quote me

“In New Zealand public life, it is difficult to think of any other position in which the holder wields as much individual power, without practical possibility of appeal,” Reddell has argued.

Joyce should also look to make the bank more transparent. It publicly releases official accounts of its forecasts and analysis reasonably regularly, but it seldom reveals anything of how its debates are conducted behind closed doors.

Again, this is not the case internationally. The US Federal Reserve releases the minutes of its regular meetings three weeks after they happen. New Zealand likes to brag about its open approach to official information, but in this sphere as in others, it has fallen behind the pack.

As they note, there has been reasonably widespread support for reform.  They note support from The Treasury, and from the Green Party (a recent post from James Shaw reaffirmed that support).  And when the Treasury looked at the issue a few years ago (before the Wheeler appointment), they found that most market economists also supported change.  The Labour Party has toyed with favouring change, and when the previous Labour government commissioned an inquiry 15 years ago, their reviewer Professor Lars Svensson also recommended change.     And we know that Graeme Wheeler himself favoured change –  he made the point again in the (rather soft) interview in Saturday’s Herald.

When Bill English was Minister of Finance, the government wasn’t willing to countenance change.  Having let the chance slip before Wheeler was appointed, going with any model other than Wheeler’s favourite one (legislate to give him and his deputies all the power) over the last few years, would probably have been a political negative for English.  And the Wheeler option is an unsatisfactory one on a number of counts –  since the Governor appoints and remunerates his deputies and assistant, it isn’t much protection against poor decisionmaking or a bad Governor.  But now the slate is clear: the Governor is moving on to new opportunities, and his deputy will simply be holding the fort for six months.   A decision now to think hard about reforming the governance model isn’t a reflection on the current Governor (not that Lars Svensson saw his recommendation in 2001 as being so either), and provides an opportunity for the government to provide a steer to the Board about what sort of Reserve Bank they want the new Governor to run.  It is unlikely new legislation could be put in place by next March (when Grant Spencer’s acting term runs out), but a new Governor could be appointed on the expectation that that person will lead the transition to a new, more modern and internationally comparable, governance model for the Bank.

Who knows if the new Minister of Finance is interested, but flicking through some old posts, I was encouraged to find one from September 2015, reporting an exchange in the House between then Associate Minister of Finance Steven Joyce and the Greens then finance spokesperson Julie Anne Genter.  In response to a question on governance, Joyce responded

Hon STEVEN JOYCE : The suggestion that the member makes, of having a panel of people making the decision, is, I have to say, not the silliest suggestion in monetary policy we have heard from the Greens over the years, and many countries—

A backhanded dig at the Greens at one level, but not an outright dismissal by any means.

Commissioning a background piece of analysis from, say, the Reserve Bank and Treasury, to review carefully, and neutrally, the issues and options, to be delivered to the Minister at the end of September, after Wheeler has left and the election is over, would be an appropriate step now.  Such a document –  which could later form the basis for a public consultative document –  would be a useful contribution to advancing the issue, and a resource that would enable any incoming government to work through the issues and analysis relatively quickly  –  consistent with the sort of timeframe relevant to the appointment of a new Governor.

Reform in this area is something I’ve championed for a long time, both inside and outside the Bank.  It isn’t primarily a matter for the Bank –  it is about how Parliament and the executive want a powerful public agency to be structured and governed –  although of course the Bank may have some specific insights on some of the relevant technical details (of which there are many –  reform in this area isn’t the stuff of some two page bill).

I’ve laid out my own arguments for reform more fully in past posts (eg here) and a discussion document of my own.

Making the case for change is, I think, relatively easy.      There is a much wider range of potential alternative models.   At one end, one could leave most other things intact, and simply shift the power from the Governor to a committee of him and his deputies/assistants.  At the other, one could perhaps break-up the Bank, creating a separate financial regulatory agency (paralleling the Australian approach) with separate governance structures for the Bank and the new successor institution.

I don’t have a strong view on whether the regulatory functions should be kept in the same institution as monetary policy –  there is a variety of models internationally.  But if the functions are kept in a single institution, I think there is a pretty strong case for separate governing bodies for each of the main functions –  both because different sets of expertise are required, but also to help manage the tensions and conflicts and strengthen accountability for the exercise of the various different parts of the Act(s).    This post covers some of that ground.   The key features of the governance model I propose would be:

  • The Reserve Bank Board would be reformed to become more like a corporate (or Crown entity) Board, with responsibility for all aspects of the Reserve Bank other than those explicitly assigned to others (NZClear, foreign reserves management, currency, and the overall resourcing and performance of the institution).
  •  Two policy committees would be established: a Monetary Policy Committee and a Prudential Policy Committee each responsible for those policy decisions in these two areas that are currently the (final) responsibility of the Governor.  Thus, the Monetary Policy Committee would be responsible for OCR decisions, for Monetary Policy Statements, for negotiating a PTA with the Minister, and for the foreign exchange intervention framework.  The Prudential Policy Committee would be responsible for all prudential matters, including so-called macro-prudential policy, affecting banks, non-bank deposit takers and insurance companies.  The PPC would also be responsible for Financial Stability Reports.
  •  Committees should be kept to a moderate size, and should comprise the Governor, a Deputy Governor, and between three and five others (non staff), all of whom (ie including the Governors)  would be appointed by the Minister of Finance and subject to scrutiny hearings before Parliament’s Finance and Expenditure Committee.  There should be no presumption in the amended legislation that the appointees would be “expert” –  however that would be defined – although it might be reasonable to expect that at least one person with strong subject expertise would be appointed to each committee.
  •  The Secretary to the Treasury, or his/her nominee, would be a non-voting member of each committee (the case is probably particularly strong for the Prudential Policy Committee).

In addition, the legislation should be amended to provide for the publication of (substantive) minutes of the meetings of these bodies (with suitable lags), and to require stronger parliamentary control, and public scrutiny, over the Bank’s spending plans.

It isn’t, of course, the only possible answer, but of those on offer I think it provides the best balance among the various considerations: providing internal expertise and external perspectives, clear lines of accountability for diverse functions, greater transparency and financial accountability, coordination across functions and arms of government, all while providing a significant role for the Governor as chief executive, and linch-pin, of the organisation, without anything like as dominant a personal policy role as there has been until now.

We won’t find –  and probably shouldn’t be seeking –  a Governor who walks on water.  But an able person who would effectively lead a revitalised Bank into a new era, with this sort of governance structure, would be making a very substantial contribution.  Change management skills and a commitment to organisation-building should be at least as important as personal technical expertise.  I hope that is the sort of person, and the sort of structure, that the post-election Minister of Finance, and the Board, end up looking for.




On Graeme Wheeler

Morning Report had invited me on this morning to talk about Graeme Wheeler, the change of governor, prospects for a permanent successor etc.  The death of Steve Sumner apparently changed their schedule so that interview didn’t happen, but I’d already jotted down some notes as to what I might say, so I thought I’d use them here.  Wheeler, of course, still has seven months in office, and we’ll see his next Monetary Policy Statement tomorrow.

When Graeme Wheeler was first appointed as Governor, there was generally a fairly positive reaction.  I shared that view.  Until quite late in the process, I’d assumed that Grant Spencer was the favourite for the role –  after all, successful organisations tend to promote from within, and a capable insider should always have an advantage, being constantly visible to the Board.  And so when Graeme was appointed, my initial reaction was “well, he must have been a very strong candidate to have beaten the capable internal deputy”.    And it was well known at the time that Bill English and John Key had been keen to have Wheeler back in New Zealand –  there had been well-sourced talk that the Minister had wanted him as Secretary to the Treasury, something apparently stymied by SSC bureaucracy.

With hindsight, one can only conclude that the Bank’s Board –  the key players in the appointment of the Governor –  just didn’t do a very good job in evaluating the candidates. Perhaps that shouldn’t be surprising –  mostly behind the scenes people themselves, they don’t have much experience in appointing someone to a position with as much visibilty and probably more untrammelled power than most Cabinet ministers.  There are suggestions that Board members were rather too easily swayed by big names Wheeler had produced as referees, and by his international connections (coming just a few years after the international financial crisis) rather than looking hard at the qualities required to do the Reserve Bank Governor job well.    Since many of the Board members then are still on the Board now, one can only hope they’ve learned from their experience.

I think Wheeler has done a poor job as Governor, both in the specific decisions he has made, and in the processes and procedures and style he has adopted.   For most of the time, he seems to have been aided and abetted –  or at least sheltered –  by the Board, who are actually paid as the public’s agents, not as associates and defenders of the Governor.

And it is not as if times have been unusually hard for him.  We haven’t had a recession in New Zealand and there has been no major flare-up of international financial stresses during his term (so far).  The terms of trade moved around a bit, but not much more so than usual.  There was no domestic financial crisis, no major domestic fiscal stresses, no change of government, and the major natural disasters of the last decade (the Canterbury earthquakes) had all happened by the time the Governor took office.   Sure, what is going on globally is a little hard to fully make sense of, but whereas most other advanced country central banks had by 2012 largely reached the limits of conventional monetary policy (interest rates very close to zero) that has not yet been a constraint here.

The Reserve Bank’s primary function –  according to the Act –  is monetary policy.  Graeme came into office with a new PTA that he was comfortable with –  in particular, with an explicit focus for the first time, on the 2 per cent midpoint of the inflation target range.  And yet over his 4.5 years in office, annual headline inflation has averaged not 2 per cent but 0.8 per cent.  Falling oil prices played a part in that, but CPI ex petrol has averaged not 2 per cent, but 1.1 per cent.  The Governor’s preferred measure of core inflation –  the sectoral factor model measure –  has averaged not 2 per cent, but 1.35 per cent.  All sorts of one-off factors that the Governor can’t be really be held accountable for influence inflation rates –  thus cuts in ACC levies have held down headline inflation in the last couple of years, while large increases in tobacco taxes have artificially boosted headline inflation throughout the Governor’s term.

There are a lot of comfortable commentators inclined to treat these inflation outcomes as a matter of indifference –  so what they imply, after all low inflation is better than high inflation.    But persistently low inflation over several years –  and especially when it doesn’t arise from surprisingly good productivity outcomes – almost invariably comes at a cost –  lost output, and lost employment.  And that has almost certainly been the case over the last few years.   Throughout the Governor’s term, the unemployment rate has been reasonably materially above estimates of the non-inflationary or “natural” level –  these days thought to be around 4 per cent.  The Governor’s choices affected the lives and options of real people –  and years lost out of employment simply can’t be got back.

My standard here isn’t one of perfection.  Central banks, engaged in active discretionary monetary policy of the sort now common around the world, will inevitably make mistakes.  Central banks try to operate on the basis of forecasts, and yet no one  –  least of all them  – knows the future.  So in evaluating the Governor, we need to look at the specific circumstances, and at the willingness to acknowledge and learn from mistakes.  Here, Graeme Wheeler doesn’t score well.

Before he came to office, the Reserve Bank had already once misjudged the need for a tightening cycle to commence, and had had to reverse itself.  At the time –  2010/11 –  they had some company internationally, and there was a fairly widespread expectation that interest rates would need to return to “normal” fairly soon.  That wasn’t the case by the end of 2013, when the Governor was not just talking about tentatively beginning a tightening cycle, but confidently asserting that interest rates would need to rise by 200 basis points.   He –  and his machinery of advisers –  simply got that one wrong.  Fortunately, they never raised the OCR by 200 basis points, but it was 18 months before they even started to reverse themselves –  and even now, to my knowledge, they have never acknowledged having made a mistake.  In so doing, they’ve unnecessarily exaggerated both interest rate and exchange rate variability, all the while leaving unemployment unnecessarily high.   Good managers and leaders recognise that human beings make mistakes, but they expect those who make them to acknowledge and learn from them.  Graeme Wheeler failed that test.

The other big part of the Reserve Bank’s policy responsibilities is the regulation of key elements of the financial system, to promote the soundness and efficiency of the system.  Graeme made that a much more prominent part of the Bank’s role with his enthusiasm for successive waves of LVR controls.   The Reserve Bank has no policy responsibility for the housing market, or for house prices, only for the soundness and the efficiency of the financial system.    And yet I see a leading commentator criticising the Governor for not doing the impossible:

Wheeler should have earlier called out the Prime Minister and Finance Minister on their tardiness in developing policy responses to counter the house price bubble. But he was late to the party.

Notably, the bank was also tardy in its own policy responses, thus earning itself a rebuke from then Prime Minister John Key, who rather cynically tried to take the focus off a Government that was running immigration hot for its own ends.

A more adept governor should have been able to persuade the politicians that slowing the boom was a job for both the politicians and the central bank. And that it was necessary for NZ’s long-run stability.

Quite how Graeme Wheeler was supposed to have changed the mind of the government on reforming supply – when no one else, in New Zealand or in many Western countries, has succeeded in doing that –  is a bit of mystery.  I have pretty high expectations of a Reserve Bank Governor, but that seems like a Mission Impossible task.  It is not that reform couldn’t be done, but against a Prime Minister determined to present high and rising house prices as a mark of success, a central bank Governor, with no detailed background in the area, no real research to back him, and no particular mandate wasn’t likely to succeed.  After all, our housing supply and land use laws have created problems, interacting with immigration policy, for 25 years, and Alan Bollard and Don Brash had made no inroads either.

As for the Bank being “tardy”, hardly.  When Graeme Wheeler took office, no one in the Reserve Bank had been keen on direct LVR controls –  they were a clear fourth preference, when assessed against the Bank’s responsibility for financial system soundness and efficiency.    But Graeme rushed such restrictions into place, at times surprising even his own senior managers, with no tolerance for any debate or dissent (there was no substantive discussion of the merits of the measures at the key relevant internal committee).  If you think LVR limits were a good thing, the last thing you can accuse Graeme of was being tardy.  I think they were ill-conceived, sold on a false promise (about how temporary they would be), are still poorly-researched, and have spawned one new set of controls (and odd exemptions) after another.  And, unsurprisingly, the real housing market issues –  mostly about land supply, not finance –  haven’t been dealt with.  Wheeler liked to fancy himself as a shrewd political player, and yet if there is a valid criticism of him in this particular area it is as much that he eased the pressure on politicians by rushing to do something/anything, at time when there was a growing sense that “something must be done”.  The appropriate response to “something must be done” is not “so anyone should do anything”.    And it remains concerning that despite Wheeler’s penchant for increased use of direct controls –  harking back to earlier decades –  there has been little or no serious analytical or research engagement with the issues around the efficiency of the financial system, and the way in which direct controls can undermine efficiency, and in the process favour insiders over outsiders, the well-connected and well-resourced over the more marginal, and so on.  The experience of the US over 2008/09 –  where Wheeler lived at the time –  always seemed to loom large, and never once has the Bank answered my challenge to consider the similarities and differences between the US and New Zealand, or to look at the experiences of countries (many of them including New Zealand) that didn’t have domestic financial crises in 2008/09 despite large house price booms.

Effective communication is a big part of what the central bank governor should be expected to do, and the more so in New Zealand where (a) all the statutory power rests with the Governor personally, and (b) where the Bank has such wide-ranging powers, and is not just responsible for monetary policy.  And yet during the Wheeler years, the Bank hasn’t done well on that score either.    The number of on-the-record speeches the Governor has made has dwindled, and those he does give don’t typically compare favourably –  in terms of quality, depth and insight –  with those of his peers in other countries.   There have been specific communications stuff-ups (speeches inconsistent with subsequent action etc), although I’m reluctant to be too harsh on those –  most central banks end up with some of those problems in one form or another, at some time or another.  But it is also a matter of accountability:   Wheeler has been very reluctant to grant serious media interviews (none at all to the main TV current affairs programmes, and only belatedly the occasional soft-soap interview to the Herald) in a way that is quite extraordinary for someone personally wielding so much power.  A Cabinet minister wouldn’t get away with it.  And in his press conferences, the Governor has often come across as embattled, defensive and weary.    Despite his past senior roles, he had no background in the public limelight, and clearly wasn’t comfortable with it.  But that was a significant part of what made him, at least with hindsight, the wrong person for the job.

Neither in my time at the Bank –  around half his term, involved in most of key policy committees –  nor subsequently have I seen any sign in the Governor of wanting to foster a climate of debate and explorations of ideas and alternative options.  I mentioned the LVR controls already, but they weren’t the only example.  In my own experience, one small example lodged in my brain.  One day a few years ago Graeme was down in a meeting in the Economics Department and there was a bit of a low key discussion about alternative policy approaches etc: the death glare I received for even mentioning, hypothetically, nominal income targeting was a pretty clear message, not just seen by me, that what the Governor wanted was support for his position, and answers to his detailed questions, not alternative perspectives or debate, no matter how non-urgent the issues were.  People respond to incentives.  In a area so rife with uncertainty as monetary policy, it is very dangerous approach.  The same goes for the ability to deal with external criticism –  a capable and intellectually confident Governor would recognise the value in alternative perspectives and relish the prospect of engaging with the alternative ideas.  Doing so is part of how people come to have confidence in the Governor.  But there has been none of that with Wheeler –  if anything he seemed to become unreasonably rattled by disagreement (his active effort to tar the messenger who drew to his attention the OCR leak last year was a sad example of that –  made worse by the cover he received for it from his Board).

I could go on, but won’t at length.  The Governor has been highly obstructive in his approach to the Official Information Act –  we still don’t have access to papers relating to the 2012 PTA for example –  and has done nothing to advance transparency around the Bank’s medium-term spending plans.  Nothing appears to have been done to prepare for the likelihood that the near-zero bound will become an issue here in the next recession.  The refusal of the Governor to engage with serious evidence of past misconduct around staff superannuation policy is a blight.  And despite the large team of researchers and analysts the Governor commands, there has been little good policy-relevant research published in the last few years, particularly in the areas of financial system regulation and macro and financial stability.  Sadly, the Reserve Bank has been living off reputational capital for some considerable time now, and one of the challenges for a new Governor should be turning that around and lifting the quality of the Bank’s outputs and its senior people.

As I’ve noted before, I give the Governor a small amount of credit for his recognition that the single decisionmaker model is past its use-by date, and should be reformed.  A committee of his own apppointees –  his two deputy governors and one assistant governor, all answerable to him – is not the right answer, but at least he was willing to start addressing the issue, unlike his predecessor.  Responsibility for the Reserve Bank governance model rests mostly with the Minister of Finance and the Treasury, but the Governor sought to get approval for legislative changes and failed.  That reflects poorly on him  –  our current model is so out of step with how countries do things and how government agencies are structured –  and is partly a reflection of his own fixation on a technocratic model, and partly of the loss of trust he incurred with the Minister and the Treasury (including around the financial regulation powers).  The Bank should have been able, by a flow of good research and analysis, to have helped shape a public debate on the appropriate future governance model.  But it failed to do that –  and now still refuses to release any of the background papers from that long-completed work programme undertaken at taxpayers’ expense (and this time, extraordinarily, they have managed to get Ombudsman cover for their refusal).

Quite who will be the next Governor is anyone’s guess.  If I had to put money on it, I’d assume it would come down to a choice between Geoff Bascand and Adrian Orr –  both of whom have their own weaknesses –  but there are other possible candidates both here and (New Zealanders) abroad.  Even though the Bank’s Board have all been appointed by the current government and have the key role in determining who will be the next Governor, quite a bit could still turn on the outcome of the election and what changes, if any, they might want to make to the Act.  In my view, whoever wins the election should focus quite quickly on sketching out a plan for governance reforms, and should look to appoint a person who will be able to carry those through and help the Bank adapt, and perform well, under a new model, under which the Governor personally would have a vital role, but a much less dominant personal role in determining monetary and bank regulatory policy.

Doing so now isn’t a reflection on Graeme Wheeler –  as perhaps it might have been seen as a year or two ago –  just a recognition that times, and the institution and its challenges, have changed,  While so much power rests with the Governor personally, it is important to appoint someone with some reasonable credibility in the subject areas the Bank is responsible for –  an effective deputy can do much of the day-to-day management of what isn’t a very large or complex organisations –  but if the new government, of whatever stripe, is seriously willing to move to a committee-based model (the more conventional approach) then the requirements for a Governor would be rather different.   Change management skills would be a key component, as part of revitalising the Bank and shaping a position for a strong chief executive who can support the decisionmakers –  rather than being both the principal decisionmaker, and the one who controls all the flow of paper, him or herself.  It might be a little more akin to the important role a Secretary to the Treasury plays in leading his organisation as advisers to the Minister of Finance.

A temporary Governor: is it lawful?

And so we have confirmation that Graeme Wheeler is leaving his position as Governor when his current term expires, a couple of days after the election.  (Reserve Bank statement, and Minister of Finance statement.)

That is less newsworthy than the solution the Board and the Minister have come up with –  the appointment of current Deputy Governor (and deputy chief executive) Grant Spencer as acting Governor for six months, to allow the search and appointment process for a new permanent Governor to conclude after the election, when the shape (and policy orientation) of the new government is known.  Spencer will retire at the end of that acting period, and will not again seek permanent appointment as Governor (having sought the role unsuccessfully in 2012).

It is a pragmatic solution, and not that out of line with the one I had proposed –  that Wheeler be invited to stay on for perhaps a year, to allow the appointment to be made by the new government.  It would be interesting to know why that didn’t happen –  was Wheeler not willing, or the Board or Minister not interested?  No doubt, Spencer will be a safe enough pair of hands for six months.

But there are other unanswered questions.  For example, is this a solution envisaged by the Act?     The only previous appointment of an Acting Governor was when Don Brash resigned to go into politics, and Rod Carr was appointed as acting Governor while the selection process for a permanent successor took place.  There is a clear need for acting Governor provisions in such cases –  Governor can resign, die, or otherwise become incapacitated (and can even be removed for cause by the Minster).

But here is the relevant statutory provision (section 48)

If the office of Governor becomes vacant, the Minister shall, on the recommendation of the Board, appoint—

(a) a director of the Bank; or
(b) an officer of the Bank; or
(c) any other person—

to act as Governor for a period not exceeding 6 months or for the remainder of the Governor’s term, whichever is less.

As I have read that section, it envisages an acting Governor to complete a Governor’s term. not to provide a temporary Governor when it is inconvenient to appoint a permanent one.

That interpretation seems consistent with two other aspects of the Act.  First, Governors must be appointed for an initial term of five years (although subsequent extensions can be for shorter terms).  Parliament made that choice deliberately, presumably to help emphasise that the Governor was to operate at arms-length from the government.  If, by contrast, an acting Governor could keep on being appointed for terms of six months at a time, it would allow the intent of the Act, operational autonomy, to be eroded if the government determined on such an approach, without coming back to Parliament to amend the law.

And second, the PTA provisions of the Act clearly tie in to the fixed term appointment of a Governor –  and in that context an acting Governor filling in for an unexpected vacancy (as Rod Carr was in 2002) simply carries on with the PTA the substantive Governor had had in place.  There is no provision in the Act for a PTA with an acting Governor –  and the existing PTA is personal to Wheeler, and expires with his term in September this year.

Steven Joyce’s statement says that

Mr Joyce and Mr Spencer have agreed that there will be no change to the Policy Targets Agreement for the period Mr Spencer will be acting Governor.

Which might be fine for practical purposes.  But that isn’t the way the law was written.  In legal effect, there is likely to be no PTA in place during that interregnum,and that isn’t how the Act should operate.

I welcome the fact that the authorities have recognised the significance of the issue that the governor’s term expired just after the election  (it is a point I have been making here for more than a year, including this post).  And in practical terms, no harm is likely to be done by having Spencer as acting Governor, but I remain uneasy as to whether this specific solution is legal, or consistent with the spirit and intent of the Act.

More generally, it highlights again the desirability of a more throughgoing review of the governance provisions of the Reserve Bank Act.  That should not be a particularly partisan issue –  more like an opportunity for some sensible reflections and revisions in light of 27 years experience with the current framework, changes in the role of the Bank, changes in the governance of other core government agencies, and changes in the understanding of how mechanically (or not) monetary policy can be run (and monitored).

UPDATE: Just to be very picky, the Minister’s statement says Spencer will act from 27 September 2017 to 26 March 2018.  But –  unless I have badly misread something –  Wheeler took office on 26 September 2012, and therefore his five year term appointment must expire at the end of 25 September 2017.   Easily remedied, but it looks a little careless.


Towards a new Reserve Bank Governor

The Prime Minister confirmed the other day that this year’s General Election will be held on 23 September.  The Governor of the Reserve Bank’s five year term expires on 25 September, the Monday after the election.  That is a far from ideal situation.

Graeme Wheeler is widely expected to confirm in the next few days (what he already apparently told some staff last year) that he won’t be seeking a second term.  Comments from the Minister of Finance the other day more or less confirmed it –  if he was going to have a second term there would typically be an announcement of the reappointment by the Minister himself, not a statement from the Governor.

But although the Governor’s likely departure adds a bit more colour, the issue I want to focus on here would be relevant whether or not the Governor was seeking reappointment.

There is no provision in the Reserve Bank Act for an acting Governor, other than to (at most) complete the term of a Governor who leaves early (thus, Rod Carr was appointed acting Governor for a time in 2002 when Don Brash resigned with immediate effect to go into politics).   If a Governor is to be in place on 26 September, the appointment will have to have been made before the election.    There are various practical reasons for that, some obvious and some less so.  Anyone appointed from outside the Bank would have to give notice from a current position, and before anyone can be formally appointed that person has to agree a Policy Targets Agreement with the Minister of Finance.  That simply isn’t going to happen on the Monday morning after the election.

And so an appointment must be made by the Minister of Finance in the current government, to take up a position three days after an election in which there could be a change of government.  The office of Governor cannot be left vacant for a few weeks –  since all powers in the Bank (including crisis response powers) are vested in the Governor.    And the Governor, personally, is the single most powerful unelected person in New Zealand –  his/her choices materially influence the short-term performance of the economy (short-term here including horizons of several years), and how the financial system is regulated, which under some models directly impinges on firms’ and households’ access to credit.

None of this might matter if (a) there were a stellar candidate to become the Governor, whom everyone across the political spectrum was happy with, and (b) if the major political parties/groupings had a common approach to monetary policy and financial regulation.   That isn’t so now –  whereas, say, when Don Brash was being reappointed in 1993 and 1998 it was nearer to being true (certainly any differences on monetary policy between National and Labour were of second order importance).   Since the Act came into effect in 1990, twice before a Governor has been appointed in election year. In 1993, the Governor’s new term began several months before the likely election data, and in 2002 the appointment of Alan Bollard was not made until a couple of months after the election.  We haven’t faced this particular set of circumstances previously, and it to my mind the position highlights several deficiencies in the governance provisions of the Reserve Bank Act.

None of this might matter if the things we sought from a Governor could be written down so explicitly that there was little or no room for discretion.  A new government could, of course, insist on a new Policy Targets Agreement, and the new Governor would simply have to go along, no matter what his/her personal sympathies might be.   But as the last five years have illustrated again there is huge scope for discretion even within a typical PTA, and there is nothing akin to the PTA to govern the financial regulatory activities of the Bank.

The situation is rendered even more unsatisfactory by the dominant role of the Reserve Bank Board in the process of appointing the Governor.  If, as is the case in most countries, the Minister of Finance had the lead role in appointing the Governor, an appointment like this –  needing to be made before the election but to take office after the election –  migth appropriately be made in consultation with the Opposition.  It would be inappropriate to install someone quite controversial in an appointment made pre-election.  But under our Reserve Bank Act, the Minister of Finance can only appoint someone the Board has recommended.  The Minister can reject a nominee but can never impose his own.  Minister and Prime Ministers have been known to send messages as to the sort of people they might think appropriate, or even those they wouldn’t accept, but the prerogative to nominate rest with the Board members, who can at times have a rather high view of their role (as is legally appropriate, if perhaps not politically).

This time, there isn’t a serious alignment issue between the Board and the government –  all Board members have been appointed or reappointed by the current government.  But it is easy to imagine a slightly different timing: the Governor’s term expires four months after the election, there is a significant change of government, and the incoming Minister of Finance is left with no choice but to appoint a Governor nominated by a Board appointed entirely by his/her political appointments.   There is, quite simply, a serious democratic deficit.  It is quite extraordinary that the government cannot install as Governor –  the person who will have the biggest policy influence on short-term macro outcomes, with quite limited effective accountability, for the following five years –  someone they are comfortable with.

These problems arise for several reasons.  One is simply that whatever the length of the Governor’s term (unless it was as short as three years) every so often the appointment will be due in election year, and election dates shift around (unlike, say, the US system).  But the other reason this matters here more than most places, is that our system vests so much power –  all of it on monetary policy, and most of it on financial regulation –  in a single individual, the Governor personally.  Hardly any other country (none that I’m aware of –  given that the Bank of Canada doesn’t do financial regulation) does that.  With, say, a five person committee, with one member appointed every year, far less hangs of any single appointment (although the Governor will always remain particularly important).  And the other reason is the (again unusual) New Zealand practice of tying the PTA to the Governor’s appointment/reappointment –  by contrast, in the UK the Chancellor sets the inflation target in each year’s Budget, and in Canada, the PTA-equivalent isn’t renewed when the Governor is appointed, but in the middle of his/her term.

I’ve argued for a long time that all of these issues need to be addressed legislatively.  Doing so would bring the governance of our central bank more into line with (a) international practice, and (b) how we govern other public sector agencies in New Zealand. Sadly, that isn’t going to happen before 26 September –  the current government, at least in public, has been reluctant to admit that there is any room for improvement in the governance model.  And so we are left with the near-certainty of a new Governor being appointed before the election, with a PTA set before the election, and the possibility of material change of government.  It seems unlikely that a National-ACT government wouldd be looking for the same sort of policy or person as, say, a Labour/Greens/NZF government.

There are not any easy answers to this problem –  but a first step would be an open recognition of the issue from the relevant parties (Board, Minister, key Opposition parties).  I’ve argued previously that perhaps the least bad way forward now would be for Graeme Wheeler to accept a reappointment for one year (or even six months).  As regular readers know I’m not one of Graeme’s bigger fans, but it would seem a fairer and more acceptable approach, allowing the longer-term appointment to be made by the incoming government (of whichever stripe) rather than risk an appointment to take effect three days after the election that a new government could have real difficulties with. There don’t appear to be any statutory obstacles to such a solution: new Governors have to be appointed for a five year term, but reappointments can be for any (shorter) term.

It doesn’t seem likely that route will be chosen.  And perhaps the Board/Minister will end up appointing someone fairly acceptable to all parties, but laws exist for hard cases, and this is one of those areas where legislative change is now well overdue.

As for who might become Governor, and what I think the Board should be looking for, that can be covered in a later post.   And as some people have asked, next week –  when perhaps the hyperventilation around Trump will have died down somewhat – I will offer some posts on the New Zealand Initiative’s immigration report.

Experts: harness them, don’t let them set the course

There was interesting long article in The Guardian the other day by Sebastian Mallaby, the author of a new biography of Alan Greenspan, on “The cult of the expert – and how it collapsed”.  His focus is central banking, but his concerns range much wider. For Mallaby, the (alleged) “collapse” of this “cult” is something to lament.

Of course, when you are brought up the son of a former senior British ambassador, educated at Eton and Oxford, previously a columnist for the Financial Times and then the Washington Post, when you are married to the editor of The Economist, when your books are biographies of two prominent unelected figures – Greenspan and James Wolfensohn, former head of the World Bank –  and when your column is published in The Guardian –  house journal of the British left-liberal technocratic elite – such a lament might be seen as not much more than a piece of class advocacy.

But I’ve usually found Mallaby interesting, and this column – which is well worth reading – had me reflecting again on quite what I think experts should be for.  To get ahead of myself (and pre-empt a long post), my answer was “advice” and “execution”, but only rarely for “decisions”.  That is a quite different answer than the one Mallaby offers. For him, experts simply need to sharpen up their act, become a bit more politically savvy, and show that they deserve the power they have assumed.

Quite early in his article, Mallaby poses the question thus

No senator would have his child’s surgery performed by an amateur. So why would he not entrust experts with the economy?

That one seemed pretty straightforward to me.  When one of my kids needed surgery a few years ago, I wanted expert advice on the options, risks and implications, and I wanted an expert carrying out the surgery, but the decision to proceed with one option rather than another wasn’t the surgeon’s.  It was mine.  The doctor has some specialized knowledge and technical skills, on the sort of case he had probably seen hundreds of times before (and I’d seen not at all).  And if the doctor ended up doing a completely different procedure than the one I’d authorized, or botched the operation, I had specific remedies and complaints procedures I could follow.  I’m sure there are complex cases, and sometimes genuine debate among medical professionals about the best way to treat some conditions, but ultimately the decision to proceed or not is made by the patient (or parent/guardian).

The same might go for house renovations.  A good architect, and capable expert builders and other tradespeople, can together enable an outcome that I couldn’t deliver myself.  Most of us need, and value, expert advice, and expert execution, but the decision to renovate the house, and how far to go, is the customer’s.  It is about choices and preferences on the one hand, and advice from experts who actually usually know what they are doing on the other.

It isn’t clear to me that there are very many areas of public policy where arrangements should be much different.

There are plenty of areas where in the administration of policy we don’t want politicians to have a hands-on role.  It is one of the cornerstones of our system that rules and laws, once established, should be applied impartially, without fear or favour.  Whether it is Supreme Court judges interpreting and applying the laws, or clerks administering benefit eligibility rules in WINZ, we don’t want politicians –  or any other of the “powerful” – getting a better deal, and more favoured treatment, than anyone else.  It is an ideal, and it isn’t always perfectly realized, but it is an ideal that is important to keep before us in designing and monitoring systems.  But it isn’t mostly an issue about technical expertise, but about impartiality in deciding on the administration of the rules.

Setting the rules themselves is quite a different matter.  That is, in many respects, the essence of politics and political debate –  hard choices, conflicting interests, conflicting evidence, and sometimes conflicting values.

As Mallaby notes, central bank operational independence, especially around monetary policy, became something of a stalking horse for people with interests in many other fields of policy.

The key to the power of the central bankers – and the envy of all the other experts – lay precisely in their ability to escape political interference. Democratically elected leaders had given them a mission – to vanquish inflation – and then let them get on with it. To public-health experts, climate scientists and other members of the knowledge elite, this was the model of how things should be done. Experts had built Microsoft. Experts were sequencing the genome. Experts were laying fibre-optic cable beneath the great oceans.

He draws on the published thoughts of Alan Blinder, Princeton economist, who spent time as chairman of the Council of Economic Advisers, and as vice-chairman of the Federal Reserve.  As Mallaby tells it:

His argument reflected the contrast between his two jobs in Washington. At the White House, he had advised a brainy president on budget policy and much else, but turning policy wisdom into law had often proved impossible. Even when experts from both parties agreed what should be done, vested interests in Congress conspired to frustrate enlightened progress. At the Fed, by contrast, experts were gloriously empowered. They could debate the minutiae of the economy among themselves, then manoeuvre the growth rate this way or that, without deferring to anyone.

To Blinder, it was self-evident that the Fed model was superior – not only for the experts, but also in the eyes of the public.


…..Blinder advanced an alternative idea: the central-bank model of expert empowerment should be extended to other spheres of governance.

Blinder’s proposal was most clearly illustrated by tax policy. Experts from both political parties agreed that the tax system should be stripped of perverse incentives and loopholes. There was no compelling reason, for example, to encourage companies to finance themselves with debt rather than equity, yet the tax code allowed companies to make interest payments to their creditors tax-free, whereas dividend payments to shareholders were taxed twice over. The nation would be better off if Congress left the experts to fix such glitches rather than allowing politics to frustrate progress. Likewise, environmental targets, which balanced economic growth on the one hand and planetary preservation on the other, were surely best left to the scholars who understood how best to reconcile these duelling imperatives. Politicians who spent more of their time dialing for dollars than thinking carefully about policy were not up to these tasks. Better to hand them off to the technicians in white coats who knew what they were doing.

And yet, 20 years on, there is no sign that the public  –  really anywhere in the advanced western world –  wants to hand more policy-setting power over to technocrats and unelected officials.  (On other hand, the power grab by officials –  and even ministers averse to the involvement of legislatures –  goes on in almost every country; the administrative state keeps growing.)

The Reserve Bank of New Zealand Act gets a brief mention in Mallaby’s article.  In conception, it was perhaps the strongest possible case for delegating operational policy decision to officials (“experts” –  although none of the three decision-making Governors since 1989 would really have qualified as monetary policy experts when they were appointed).   It seems to me that three or four beliefs/propositions underpinned the case for handing over decision-making power around the conduct of monetary policy:

  • politicians had all the wrong incentives and would almost invariably postpone hard decisions, creating a bias towards inflation, and excessive economic variability,
  • it was relatively straightforward to specify the goal society wanted pursued with monetary policy (so officials weren’t being asked to make meaningful trade-offs, just “read the data, and do the right thing –  the latter according to the societal rule”)
  • it was relatively straightforward for able technocrats to make the right decision –  consistent with the societal rule.
  • holding officials to account was quite straightforward.

There is a small element of caricature in the way I’ve written that list, but I think it gets at the essential assumptions behind the monetary policy bits of the Reserve Bank Act.

Perhaps it was a reasonable story for ministers and officials to tell themselves in the early post-liberalization years.  But none of it bears much relationship to reality.

Perhaps politicians postpone hard decisions on monetary policy –  though it has never been clear to me why this should have been more of a problems in respect of monetary policy (where the lags are quite short) than in other areas of public life (where the lags are often long, and adverse consequences hard to pin down even years later).  And, of course, we’ve now spent the best part of decade grappling with inflation rather lower than most official targets suggest desirable.

And people pretty quickly realized that technical experts could disagree –  at times quite vociferously –  and that there was no very obvious reason to consistently favour one technical expert over another.  And there were/are real choices being made –  on things that matter to voters, such as how much to prioritise lingering unemployment gaps, and on things where it isn’t easy for society to write down in advance how it wants to technical experts to manage the tensions and trade-offs.  And there is no reason to think that “technical experts” are any better placed to decide those trade-offs (or less prone to be influenced by their own class or educational interests/biases) than the public as a whole through the political process.

And, largely as a result, effective accountability for central bankers is limited at best –  really only at the time of potential reappointment.  There are no complaints procedures or expert review and investigatory bodies.  And while the New Zealand case isn’t general, in our case not only is the power handed over to an unelected agency –  notionally ‘expert’ –  but it has been handed over to a single individual for many years at a time.  That isn’t done in other areas of public policy, even when policymaking powers have been delegated by Parliament.

A fundamental part of any proposal to delegating policymaking power to “experts” has to be that such “experts” really know what they are doing.  But the evidence for that, even as regards monetary policy is now pretty slender.  I certainly wouldn’t be hiring as builder or a surgeon someone who had as bad a track record as the world’s central bankers have had over the last decade or so.  That isn’t intended as a personal criticism of any of them, all of whom have no doubt sought to do their best.  But they’ve constantly misjudged inflation pressures, and not randomly but systematically.  I’m not even suggesting replacing them with another bunch of superior experts.  It is just that the limitations of our knowledge are simply too great.  Even if we could all agree that the only thing we wanted from our central banks, year in year out, was 2 per cent inflation, there is no expert consensus on how best to deliver it, and what expert consensus there is has a pretty poor track record.

And, of course, there is even less agreement in practice –  where society seems not just to want 2 per cent inflation, year in year out. In the current climate, some favour a more aggressive use of monetary policy, perhaps to use demand to soak up laid aside labour and prompt a resurgence in the supply side of the economy (Janet Yellen’s recent speech seemed to point a bit in that direction).  Others are quite content to put inflation targets somewhat on the backburner for a while, out of fear of incipient financial crises (in this part of world, both Graeme Wheeler and Phil Lowe) seem inclined to that sort of thinking.  In Sweden not long ago the monetary policy decision-making body was torn apart by the tension between these sorts of views.  There is no straightforward generally agreed analytical framework, revealed only to the “experts”, enabling them to make such decisions better than anyone else.

Thus, I was bit troubled when I read Phil Lowe’s first speech as Governor.  In it he notes some of these choices and trade-offs, but then falls back on the (non-statutory) concept of “the public interest” (the RBA’s statutory goals are much vaguer than those of the RBNZ, but “the public interest” doesn’t feature, at least not directly).

He notes

So when thinking about what type of variation in inflation is acceptable, it is natural for us to start by asking ourselves: what is in the public interest?


Granted, this can be hard to define and opinions can differ


This might all be less tightly defined than some people would like. But given the uncertainties in the world, something more prescriptive and mechanical is neither possible nor desirable. Inevitably, judgement has to be exercised. Successive governments have appointed nine dedicated Australians to the Reserve Bank Board to exercise that judgement in the public interest.

I have a lot of sympathy for the view that a “more prescriptive and mechanical” target for discretionary monetary policy isn’t really possible.  But if it isn’t possible, why should suppose that Lowe, his deputy, the Secretary to the Treasury, and the non-executive directors –  not one of whom ever faces an electoral test –  are best placed to work out what is in “the public interest”?  Better than the (somewhat dysfunctional) elected governments?    If there is going to be an operationally independent central bank, I think the Australian governance model is clearly superior to our own (though in turn probably inferior to the UK’s) but why would one delegate such discretionary powers at all?  One could no doubt mount an argument for lower, or higher, interest rates in Australia at present, even with a shared assessment of the outlook for inflation.  The differences will turn on preferences, values and –  frankly –  hunches.  They won’t turn on, say, the sort of solid track record of a surgeon who has done much the same operation hundreds of times before.  None of us –  central bankers, outside economists, politicians, the public –  have ever seen quite such conjunctions of economic circumstances before.

None of which is some call for rank populism.  As I said very early on in this post, there is a valuable role for experts in advice and execution.  We want capable people who know exactly what they are doing conducting the market operations that implement monetary policy.  And it is likely that economists and related experts can offer some useful advice on the options that societies face around monetary policy and the underperformance of economies in recent years.  But the “experts” just don’t know that much at present – that isn’t an accusation, it is a fairly neutral description of what one reads in speech after central bank speech.  And it isn’t a matter of shame, but of alignment.  We shouldn’t –  and generally don’t –  delegate policy decisions when the evidence base is weak and there are real and contested tradeoffs.

And all this has been about monetary policy, where perhaps once the case for delegation looked strongest.  Banking regulation is perhaps a clearer illustration of my point: we want people administering the rules without fear or favour, we need detailed expertise on specific instruments or institutions, and we need expert advice as input to policymaking.  But in setting policy there are real and inescapable choices, and there is little obvious reason to think decision-making on what the rules should be should be delegated to “experts”.  Take LVR policy as a recent New Zealand example: all the choices have distributional implications, there is little or no established body of knowledge of research, and in the end the decisions that have been made rest on little more than educated hunches, and about risks, costs and tradeoffs.  Perhaps they are the right hunches, but we have no way of knowing. It isn’t remotely like asking a doctor to use his expertise to reset a broken bone.  If the case for such policy is so strong, let the experts persuade the politicians –  who are elected, and can be unelected.

Mallaby is writing with two backdrops in mind.  The first is his recent biography of Greenspan, who appears as a hero in the story.  And the second is what he appears to regard as the “disaster” of Brexit and the Trump insurgency (even if the latter now appears unlikely to storm the citadel).  About Greenspan, you can read Mallaby’s argument for yourself.  I’m more inclined to the view, reflected in Peter Conti-Brown’s book that I wrote about earlier in the year, that Alan Greenspan is an argument for term limits for heads of central banks.  Over 19 years as head of the Federal Reserve he became such a dominant presence, including in the political debate, that (among other things) his views somewhat overshadowed the looming risks that eventually culminated in the 2008/09 crisis.  And frankly, no matter how able –  and Greenspan didn’t walk on water –  there is something amiss when a technocrat, never facing an election, wields that much power.

I was (and am) a Brexit supporter, so I can’t share Mallaby’s distaste for Michael Gove’s dismissal of “experts” in that debate.  How one’s country should be governed, in close association with which other countries, seem quintessentially like an issue on which the public might quite reasonably have a view.  To be sure, as always, there is a place for expert advice on the issues and implications of the various possible choices, but “experts” have interests too, and they are necessarily or always those of the wider public.  As I noted earlier in the year, in many cases the end of the British empire led to independent successor states that struggled economically.  Perhaps independence was a “sensible economic choice”, but in sense that is the point; people value different things, and perhaps put a premium in that case on self-government, even if at some economic cost.

Towards the end of his article, Mallaby notes

Democracy is strengthened, not weakened, when it harnesses experts.

And I agree.  But the operative word there is “harnessed”.  Experts have a valuable role as advisers and –  in policy matters often a different set of “experts”  –  as implementers.  Expert advice can help illuminate the costs and consequences of the choices and tradeoffs societies make –  whether relatively mundane ones around monetary policy, or more existential ones around decisions to go to war, to construct welfare states or whatever –  but “experts” are typically ill-equipped to make those decisions for us.  In fact, often enough, even what appears to be a consensus of expert opinion –  or establishment opinion (often the same thing) – is left in tatters by experience.  To end on a note more of politics than economics,  there was a column in the New York Times a few days ago

Almost every crisis that has come upon the West in the last 15 years has its roots in this establishmentarian type of folly. The Iraq War, which liberals prefer to remember as a conflict conjured by a neoconservative cabal, was actually the work of a bipartisan interventionist consensus, pushed hard by George W. Bush but embraced as well by a large slice of center-left opinion that included Tony Blair and more than half of Senate Democrats.

Likewise the financial crisis: Whether you blame financial-services deregulation or happy-go-lucky housing policy (or both), the policies that helped inflate and pop the bubble were embraced by both wings of the political establishment. Likewise with the euro, the European common currency, a terrible idea that only cranks and Little Englanders dared oppose until the Great Recession exposed it as a potentially economy-sinking folly.

Like most cults, the “cult of the expert” is more dangerous than Mallaby –  or most of the expert class – acknowledges.  And hotly contested political debate, messy as it often, wrong directions that it sometimes takes, are how we make the hard choices, the trade-offs, amid the inevitable uncertainty. Abandoning that model is akin to gutting our democracy of much of its substance.  So I still want an expert operating on my child, but I want parliaments making laws and setting taxes (not officials) and parliaments taking us to war (not generals).  And I increasingly wonder whether monetary policy decisions should be left to officials either –  no matter how technically able, and how many of them on the decisionmaking panel.