My editor asked me to write about the Robert Gerard scandal, so I did reflecting on some broader governance issues. Readers with an eye for some of the economic debates will detect in the background of the second half of the column the debate on Reserve Bank independence.
As the credibility of monetary policy came on the agenda from the late 1960s on, there was a loud chorus that central banks should be given independence. It was an important campaign with huge benefits which we’ve been enjoying in Australia for fifteen years. Brad de Long said this in a column printed in the AFR some time ago (e-mail me for a copy) lamenting the extent to which politicians had buggered up economic policy (he’s an American so he’s got more to complain about than us).
At this point I, as a pundit, am supposed to come up with my magic plan my clever scheme for fixing things and putting the world to rights. I don’t have one.
But there is a glimmer of hope. The past two generations have witnessed the rise of independent central banks whose monetary policy, largely insulated from partisan politics, aims for the maximum possible employment and purchasing power consistent with price stability
But an awareness of the importance of independence soon generated the kinds of social signals that I first became aware of as an adolescent in school and which go a long way towards making up intellectual fashions. Two ideas stood out as self evidently those which marked you out as hard headed enough to be an economist. The first was that monetary policy should be given one target (price stability) not two (employment growth and price stability). This was justified by a cursory reference to the ‘targets and instruments’ literature which in fact shows the opposite – namely that if you don’t have enough instruments, or if they entail costs of their own in achieving their goals, then one is always involved in tradeoffs between ‘second best’ options there are no first best options.
The second idea was that ‘more independence is always better’. On paper Australia has probably the least independent central bank in the English speaking world. Yet it does have substantial independence sufficient independence for it to have kept to its inflation target as well as any central bank.
Now these two hard headed (and in my view wrong) views come together. They appeal to the same types, who flatter themselves about their cleverness and hard headedness which is often not much more than a discomfort with thinking in terms of necessary tradeoffs. (Isn’t economics supposed to be about tradeoffs?)
And they come together in the hairy chested independent central bank that pursues price stability without asking the question implicit in Brad Delong’s formulation of the central bank’s task “What policy will maximise growth and still allow me to deliver on the fundamental objective of price stability (without which growth will be undermined in the long run)?” In so far as institutional design has an influence on these things as opposed for instance to the temperamental makeup of the dramatis personae one can argue that the RBNZ’s brand spanking new ‘independence’ and single objective (price stability) helped produce New Zealand’s 1998 recession. It demonstrated its independence and delivered price stability alright. But next door the RBA thought it could preserve long term price stability (which it turned out it could) with higher growth by not tightening policy.
I’m an admirer of the way in which, without fanfare we ‘muddled through’ to a very sensible policy given the institutions (and institutional constraints) we had and the political constraints as well. Here’s Bernie Fraser putting what I’d call the Australian ‘fuzzy’ view about targets and instruments.
[W]hy should discretionary fiscal policy be included in the Macroeconomic Tool Kit? . . . I think policy makers need to call upon all the relevant policy instruments at their disposal and not try to do the job with one arm tied behind their backs.
And discretionary fiscal policy can be as relevant as monetary policy, notwithstanding the view that I think is still held in some quarters that one policy instrument can only pursue one objective at the one time. I am sure that you have all heard of this particular notion and it leads to the view that monetary policy should be confined to combating inflation and that fiscal policy should be confined in a medium term setting to pursuing sound public finances and to contributing to increased national saving.
I have never been personally comfortable with this one dimensional view of economic life. It rather flies in the face of general observation that in economics everything is really connected to everything else. But more specifically, such notions overlook the fact that fiscal and monetary policies both work in essentially the same way, by seeking to increase or reduce the amount of slack in the economy, and this is basically the way each of these policies have their impact on inflation and employment and so on. . . .
The key point I want . . . to make is that access to both fiscal and monetary policies will enhance the capacity of policy makers to follow a more stable economic path and do that better than they would be able to do it if they had to rely upon monetary policy alone.
If that’s Bernie Fraser’s defence of a relaxed view of targets and instruments, Ted Evans is on the record attacking the idea that ‘more independence is always better than less’. I call this the doctrine of ‘engaged independence’ in the column.
Scratch a little below the surface in Canberra and you find the ideas Ted Evans and Bernie Fraser are defending are well represented. There is something distinctively Australian about it and I think it is a measured approach to the subtle problems of the political economy of central bank governance and, at least since the debacle of 1989-90 we’ve done as well as any central bank in the world. So far, the proof of the pudding’s been in the eating.
Groenewegen and McFarlane’s A History of Australian Economic Thought comments on the tendency of Australian economists to be willing “to test new ideas with critical scrutiny and to embrace at least some of the views of the non-specialist.”. Boyer Lecturer Tom Fitzgerald an immensely learned and likable man who I knew a bit in the last few years before he died, picked up this theme in his Boyer Lectures referring to the Brigden Committee’s anticipation of the Hecksher/Ohlin/Samuelson ‘factor proportions’ theory of trade.
FitzGerald spoke of the episode as an inspiration to Australian economists:
What is inspiring . . . is the example of Australian economists who arrived at independent conclusions contrary to the world orthodoxy, who invited criticism from the most eminent upholders of that orthodoxy, and, on being rejected, put their argument in an international forum, to gain ultimately a large measure of acceptance for their initial heresy. Today they are far better remembered and admired by an eminent American economist, the Nobel Prize winner Paul Samuelson, than by any Australian counterparts. . . . Professor Samuelson has recently referred to them as ‘my-down-under-heroes’
Troppodillians may laugh but I’m put in mind of the sublime story of the British monarchy morphing from an autocrat with theoretically absolute powers into a constitutional monarchy fitted mainly for the cover of womens’ magazines over the course of around 800 years. So too in Australia two institutions have taken old Acts of Parliament and infused them with a contemporary relevance by giving a meaning to words within them that were there all along but which lay dormant as it were. I’m speaking of the Reserve Bank and the Tariff Board – which subsequently became the Industries Assistance/Industry/Productivity Commissions.
Organic institutional development at its best and something to defend.
Well with all that out of the way, here’s the column.
What’s given the West two centuries of economic progress? It wasn’t capitalism. It wasn’t democracy. As the Russians and an army of gung-ho economic advisors learned from the depression that marked Russia’s transition into the modern world, capitalism and democracy only thrive on well functioning institutions.
Institutions were trashed in Soviet Russia. They’ve not fared too well here lately either. The Government’s continuing defence of Robert Gerard’s indefensible position on the Reserve Bank Board exemplifies the current malaise. One by one, independent institutions feel the pull of an Orwellian vortex of executive party political power and spin.
Thus governments coast to coast, of both political persuasions fund political advertising that’s ever more thinly disguised as public information. Officials holding high office are appointed and dismissed at whim. After some unguarded concession of the obvious, they issue ‘clarifications’ to protect their jobs and their political masters. Upper houses cease reviewing the Governments who now control them. And so it goes.
If we want to protect our institutions and thus secure our democracy against cronyism we could start with the Reserve Bank board.
The Americans subject their major appointments to congressional confirmation hearings. But setting politicians to catch other politicians’ appointments has been a recipe for a circus.
By contrast, Britain’s quieter approach has lifted expectations of public appointments far higher than ours. Prime Minister John Major established the Committee on Standards in Public Life in 1994 after a scandal in which conservative MPs asked questions on notice, for £2,000 a pop from Harrods owner and once aspiring father-in-law of Princess Di’s Mohamed Al-Fayed.
According to the resulting “Nolan Rules” appointments to public boards are still made by Ministers, but only after positions have been advertised and a merit-based shortlist is compiled by a panel that must include an independent assessor.
Ministers can depart from the procedure including by appointing someone not on the shortlist but this must be reported to the Commissioner for Public Appointments who may comment publicly.
Of course these mechanisms don’t guarantee integrity in Government, and there’s a range of important appointments to which they don’t apply including appointments to the Bank of England Monetary Policy Committee (the closest equivalent to our RBA Board).
But they sure help. Their very existence sets expectations which are influential even where they are not technically required. And the Committee on Standards in Public Life remains a focal point for deliberation on emerging issues of relevance.
In 2003 it reported on what we call Ministerial ‘minders’ or ‘staffers’. In Australia they’re the very model of Nixonian ‘plausible deniability’ Ministers’ agents one day, people who forgot to tell the Minister that the kids hadn’t been thrown overboard the next.
This year the Committee put pressure on the PM Tony Blair after his wife Cherie earned some quick cash discussing her busy life with Tony on the lecture circuit.
When he was ALP Shadow Communications Minister, Lindsay Tanner suggested something like the Nolan Rules for appointments to the ABC Board. With Shadow Treasurer Wayne Swan flagging policy development on RBA board appointments, let’s hope the idea catches on.
The RBA is alone amongst its central bank peers in not having monetary policy decisions formally dominated by economic experts. Indeed its board comprises fewer experts than non-experts.
It’s easy to ridicule this. But some wise elder statesmen defend it. In 2000 in a Speech to the Sydney Institute, then Treasury Secretary Ted Evans addressed a national debate on a proposal to build independent fiscal policy institutions in the image of our independent monetary institutions.
Evans argued that though RBA Board members should not be party-political, they should have “political abilities”. The Australian tradition of monetary independence has always valued what I’d call ‘engaged independence’. Here the RBA seeks to combine its fundamental commitment to appropriate monetary policy with close collaboration with Governments.
This, and the Government’s ‘reserve power’ to publicly overrule the Bank (which has never been used for fear of market and political reactions) helps co-opt Government into tacit albeit sometimes reluctant support of the resulting monetary stance.
Evans argued that these subtleties were lost on those calling for an all-expert Board.
[A]t least at this stage of Australia’s economic development, monetary policy has become independent partly because the Bank Board is not so comprised.
I admire this reasoning, and the way Australian monetary policy has ‘muddled through’ to be as good today as any country’s. But to use Evans’ expression, the argument has been lost on some like the Prime Minister and Treasurer whose continued brazen defence of Gerard has thrown the switch to cronyism.
However hard it was won, RBA independence is now well established. So I think it’s time to move on and appoint the Board transparently and on merit.
I also hope that the Bank will continue its recent exemplary record of ‘collaborative independence’ to deliver a combination of low inflation and employment growth that’s as good as any central bank in the world.