Now is the time for complacency: Where are the mainstream radical centrists?

Radical Centrist

Australia’s ‘economic miracle’ off the back of what might be called the ‘reform period’ which can be dated fairly neatly from late 1983 and the floating of the dollar to mid 2001 (which, IIRC was the date the ANTS tax reform package was introduced). It came about because people in the opinionosphere – initially led by academics with the torch being taken up by bureaucratic entrepreneurs like Alf Rattigan and political entrepreneurs like Burt Kelly from the late 60s, broadening to journalists most senior bureaucrats by the early 1980s. This growing movement forged a consensus about what was wrong with our economic policies and, by implication, what to do about it. As it grew into orthodoxy, ‘reform’ took on a sadly reductionist turn – with the big ideological slogan being deregulation – letting the market work.

Not only is the idea that you can reduce reform to a slogan, or even use the slogan to get your bearings a misfortune. To get the slogan wrong looks like carelessness. All social activity of any sophistication involves a rich ecology of the public and the private. The disastrousness of this turn was concealed for some time by the fact that there was quite a lot of detritus hanging round after around a century of ad hoc protectionism and in such circumstances deregulation works with the stroke of a pen – at least for a while.

The thing is, the public sector has immense resources. It’s tragic that it’s not a hotbed of ideas. Politicians are busy people and can’t figure this stuff out for themselves. Of course line departments still need to deliver services, but I would argue that those aspiring to high office in the public service should have achieved and demonstrated some degree of sustained thoughtfulness – as they might do for instance with ‘sabbaticals’ during which they did, or participated with others in, worthwhile research and/or ‘think tank’ work. And that’s quite apart from the many hundreds of funded research and ‘think tank’ positions in government in research agencies within various portfolios. Pretty much every major department has a research agency – some of them are considerable. And there are government funded ‘think tanks’ like the PC.

Sadly these possibilities are barely realised. The enthusiasm and broad-mindedness with which many public servants begin their careers stands barely a chance amid the pervasive careerism of the public service, and the fetters of conformity and groupthink.

Yet we’ve actually granted some of these agencies high degrees of independence – one would have thought precisely to enable such independence of mind. The Reserve Bank probably has more independence than any other government agency and it has a substantial research department. I’m no expert on its output and I know there’s lots of good work done there. But I doubt it would be a career enhancing move to offer a fairly thoroughgoing critique of the structure of banking from the Reserve’s research department or anywhere else in the bank.

But elsewhere such independence has been used inject far more edge into the public debate. In an unsympathetic review on Oct 28th 2010 entitled “King plays God” the Economist reported:

In a speech on October 25th … in New York, Mervyn King [then Governor of the bank of England] savaged big banks and criticised the new Basel 3 rules as too soft. Then he said what he really thought, arguing that “of all the many ways of organising banking, the worst is the one we have today.” Possible remedies included not just breaking up banks, but also “eliminating fractional reserve banking”— the centuries-old practice of banks taking in deposits and lending most of them out in riskier and longer-term loans. Having ignored finance for a decade the Bank of England now seems to want to reinvent it.

That is, admittedly, more fun than shifting base rates by 25 basis points once in a while. But since the Bank will take over bank supervision in Britain from the Financial Services Authority (FSA), Mr King’s stance is deeply controversial. At the Bank there seems to be a lack of unanimity. Mr King and Andy Haldane, the author of some imaginative papers on finance, are radicals. Paul Tucker, a deputy governor who helped negotiate the new Basel 3 rules, is thought to be more pragmatic, as is Adair Turner, the chairman of the FSA.

In the meantime Adair Turner seems to have joined the radicals. His conversion seemed to be underway while he chaired the Financial Services Authority in the UK, but has matured since his departure. Here’s a great summary (pdf) of his big new(ish) book arguing, amongst other things that “bank capital requirements should be four or five times their current levels”!

TbTF

Meanwhile Andy Haldane (my favourite public servant in the whole world) hasn’t just been imaginative (here’s Haldane‘s recent talk about the benefits of a digital currency), as well as masterful in his various discussions of the state banking is in and what might be done about it. He’s also turned his mind to measuring and publishing things that I expect bankers would rather he didn’t. Like the implicit subsidy ‘too-big-to-fail’ banks receive from creditors who discount the rate at which they lend them money on account of their confidence that they’ll be bailed out if things go wrong. The figures are not pretty. In this 2012 speech he suggests that the implicit subsidy to the systemically significant large banks in the global financial system is a cool $300 billion though it was much higher during the crisis. The same methodology was then applied to calculate the implicit subsidy to each British Bank. In 2014 at someone else’s suggestion, the Bank of England had me in while I was in London to discuss my paper Central banking for all: a modest proposal for radical reform indicating that it was relevant to things they were thinking about.

As an aside I note that all this is backed up by at least two very senior economic journalists who are either first class professors of economics or who could be if they wished – John Kay and Martin Wolf. Both speak with great authority and thoughtfulness about some of the most important issues – particularly the inadequacy of current institutional arrangements for banking. (One could add Samuel Brittan, though at 82 he’s getting on a bit!). Both have books out on what’s wrong with finance and what to do about it. I’ve reviewed Wolf’s latest book here on Troppo. And here’s Kay on finance:

The declared purposes of the new regulatory institutions in Britain are to promote stability and maintain confidence. This approach is not surprising, since the institutions of financial services regulation are mostly captured by the industry. In some cases they are directly controlled by it; more often, they are manned by people who see the industry through its own eyes because they have no other perspective. The regulatory goal is the health of the industry, which is in turn interpreted as the health of the particular firms from which it is today composed. The purpose is the achievement, not of financial stability, but of industry stability, as if these were the same thing: but since the sources of instability are to be found in the structure of the industry, accomplishment of this goal is in fact a guarantee of further, and potentially more damaging, crises.

I guess this kind of independence of ‘independent’ government agencies and the weightiness of the best commentators from the fourth estate remains much more the exception than the rule in most countries. But we should appreciate it where it occurs. It’s something that can only improve the quality of debate and so the ultimate institutional choices made.

The interview of the blog-post.

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27 Responses to Now is the time for complacency: Where are the mainstream radical centrists?

  1. I am and will always be Not Trampis says:

    Nick,

    One of the reasons is Hawke and co realised after a lot of talk, that they to reform otherwise growth would be very tepid.
    That urgency is not here at present as yet. nor is the quality of politician I might add.

  2. paul frijters says:

    agreed, but it is hard to see where the political firepower is going to come from in Australia to make it happen. To regain more sensible debate will require a mayor and long depression, I think: nothing like a set-back for people to take notice of where they are and where things are going. And I personally do not expect that depression to happen for a long time yet because the money-tourism from China and other Asian economies. Just think about the scale of this money tourism, with near 300,000 new migrants per year bearing financial mean as they come in, and an undisclosed amount of money coming in to buy houses, to invest, and in other ways to escape China. That will be a boon for us for a long time to come. Till that well dries up enough for us to see a major depression, calls for major thinking about major reform will have little resonance.

    Simple message: if you want to have a serious debate about reforms, go to countries that are hurting and that see the need for it. Like the UK. Though even there, I think that the City of London is far too powerful to let a mere 8-year lull in growth upset the banking apple-cart.

    • Nicholas Gruen says:

      Paul,

      With considerable respect I think what you have said is part of the problem I’m trying to address. Of course there’s truth to what you say, but it’s also a staple of Very Serious Person talk. Anyway, I have gone on and on writing this comment to the point that it is probably better taking it up in another post – which I’m editing as I type these words (allowing some leeway for the the idea of simultaneity ;)

      • Nicholas Gruen says:

        By the way, Paul, the thing that isn’t making its way as fully into the next blogpost is this.

        As I emphasised in the ‘interview of the post’ – which I did yesterday, the post isn’t really about what to do or how to get ‘more reform’ (assuming that we know what it is). It’s about how public servants should think about their role, how the beneficiaries of ‘independence’ in the bureaucracy (or the more independent parts of it) might change the way they think of and execute their role. And that goes whether or not we’re doing well or badly.

      • It seemed a good idea at the time. says:

        “The thing is, the public sector has immense resources. It’s tragic that it’s not a hotbed of ideas.”

        I must come from a different planet. I always thought that the public service was an administrative function – that is, collect the taxes, pay the bills and implement government policy without fear or favour.

        I find the “hotbed of ideas” in the public service to be dangerous – ideas lead to ideology, and we have enough of that.

        The average Australian politician does not have the intellectual capacity to design policy, and that is best left to the think tanks to provide a “hotbed of ideas” for politicians and the public to consider.

        • Jim says:

          I agree that the politicians don’t have the capacity to develop policy beyond setting some broad objectives.

          But the last thing I’d do is rely on a bunch of ‘think tanks’ to develop all of the policy. Most are ‘captured’ by one side or the other (would you really want the IPA developing social policy?), they often tend to look at issues in relative isolation, and they have little/no experience in policy or programme delivery (an important factor to consider when designing policy).

      • Nicholas Gruen says:

        That post is now well and truly up. Re-reading it, it’s quite good!

    • This is a prime example of lachesism: the longing for the clarity of disaster. It’s the same motivation that causes people to vote Trump. Underlying this misandrist thought is the belief that the lachesist is largely immune from the consequences of this disaster. Paul F should check his privilege before making such assertions.

  3. conrad says:

    “The thing is, the public sector has immense resources. It’s tragic that it’s not a hotbed of ideas”

    I think for some departments (at least the few which I some knowledge of), the basic problem is you have people that arn’t really obsessed with what they do (at least compared to academics I know), or those that are do not get listened to. For example, there are very few people with really excellent knowledge of early mathematics learning in Australia, and this is clearly true of education departments, where they simply outsource things like test construction to ACER and cause long term problems in other areas. The problem here is that ACER appears to have little knowledge of this area as well, so they just produce something with some reliability but poor validity like the NAPLAN which teachers then go and teach to, and this is fine for the public but clearly could be much better So there is something wrong with either the employment strategies of these departments, how people remain up to date with things, or who makes the final decisions as to what to do.

    Some other departments where there really do have good people that are interested in nothing else (the ABS) I think have other problems — I’m told that once upon a time they had technical people and managers, but then forced the technical people to become managers, which presumably many didn’t want to do and presumably many were not great at. And so those that do have lots of skills and really love using them just get wasted.

  4. Nicholas Gruen says:

    Thanks Conrad,

    There’s what I have now come to call an ‘arteries and capillaries’ problem here – but which I wrote up here.

    The Germans have a very different approach as I recorded in this comment on the same thread – which undoubtedly comes with its own pathologies – but theirs is closer to the traditional model of the application of professional knowledge.

  5. Jim says:

    I cannot imagine the public service will ever be a “hotbed of ideas” again while the MBA-trained HR professionals are in charge of recruitment. There is simply a structural barrier in the form of position descriptions in the senior ranks of the public service that don’t recognise the value of portfolio-relevant knowledge and/or analytical skills.

    Exhibit A: Position Description for the Chief Economist (a supposedly technical position) at the Murray Darling Basin Authority (circa $200K) which is currently advertised…..

    “You will be a strategic, innovative and self-motivated person with exceptional influencing and relationship management skills and the drive and initiative to make a difference through your exceptional experience. Your excellent interpersonal skills will enable you to work collaboratively with senior decision-makers throughout the MDBA.”

    I think the translation for this is probably something like….

    “You will be a mildly machiavellian, hard-working, sly-talking wannabe executive; with an innate ability to create low-risk group-think and all-encompassing bureaucratic processes in lieu of hard analysis and real action (which might be difficult or unpopular).”

    If you employ someone that meets the mandatory MBA and HR clichéd requirements (see above), the chances of them also having relevant portfolio knowledge and genuine analytical stills is probably close to zero. So the best way to gain promotion in the public service is to be a generic portfolio-hopping careerist with no real passion beyond his or her own career advancement. Not exactly the right ingredients for a hotbed of ideas (particularly good ideas).

    • Nicholas Gruen says:

      Thanks Jim,

      As sometimes happens on this blog, I was going to quote something like that, but didn’t have the time to look it up. But now I don’t have to as you’ve done it for me.

      What I call hallucinatory job advertising.

      Delicious. Magnificent.

      Food, not just for thought. It is worth its own imaginary vehicle moment.

      Stand by for one of Troppo’s legendary competitions.

  6. Nicholas Gruen says:

    I should have known, Mervyn King has just published a book, leaving the only one of those mentioned above who hasn’t being my fave – Andy Haldane.

  7. Ingolf says:

    Nicholas, I’m late to this discussion, with apologies (I clearly don’t look in often enough!).

    I agree with you. King and Turner have long stood out as that almost mythical beast, senior financial markets officials willing to try to get at deeper underlying causes.

    Back in late 2010, I wrote a longish piece keying off (curiously enough) exactly the King speech you highlight, together with Turner’s contribution to the LSE publication “The Future of Finance“. It seemed to me then, and still does, that:

    “To better the odds [of finding a tolerable way out the current impasse], it would help to have a reasonably clear goal to aim for in the restructuring of our battered financial systems[6], one that’s not too arcane, that can be widely grasped. Of the alternatives on offer, King’s and Turner’s broad approach[7] seems not only politically possible, but also most likely to be effective.”

    Not that their approaches are identical, of course, but they both shared the view that radically increased bank capital requirements ought to be at the core of any successful long-term reform.

    Haldane also shared that position, at least in 2011. His long talk back then, “Control Rights (and wrongs)“, in which he considered whether financial markets are capable of effective self-regulation, made many very good points but also in my view misstepped in a few areas.

    To the extent I’ve read him lately, I’ve been less impressed with him; he seems to have more and more become a prisoner of the present unfortunate and slightly hallucinogenic reality. Difficult to avoid, I suppose, when one is an officer on the bridge.

    P.S. I haven’t read King’s book, but from the Bloomberg review it looks like good stuff.

  8. Ingolf says:

    Nicholas, Mervyn King is featured on tonight’s Big Ideas (RN).

    I missed it but will catch up on podcast.

  9. Nicholas Gruen says:

    Thanks – I’ll podcast it.

    And the Bank of England folks have been hard at work floating central banking for all (without mentioning my paper on it.).

  10. Nicholas Gruen says:

    Well as a question of fact I’m pretty confident that he didn’t plagiarise either of us. A case of independent of invention, though it would have been nice to have been acknowledged and if he could have used Google Scholar a bit better.

    Oh, and there’s no civil right against plagiarism is there? (Unless there’s a breach of copyright, which there hasn’t been.)

    • Ingolf says:

      It must have been 6-8 years ago when you first mooted some of the ideas covered in your paper. I’ve read (most of) it now; what a well thought out and beautifully presented proposal you ended up producing.

  11. Nicholas Gruen says:

    Some more great stuff from Andy Haldane.

  12. Moz of Yarramulla says:

    New Matilda has a very relevant article on this today, pointing out that the “huge problem” of banks not immediately passing on Reserve Bank rate cuts is just one part of the actual problem. Someone has already pointed out plan.

    Amusingly it would largely solve that superficial issue, while at the same time satisfying the banks’ preference for no new regulations :) I bet they’d find a new reason to complain.

  13. Nicholas Gruen says:

    I just ran into this. Can’t say some of us weren’t showing leadership! But we all know that after the Wallis Commission, everything was hunky and remains hunky(ish) to this day.

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