A report that recommended profound changes lacked any evidence to show it was not a set of solutions in search of a problem.
The long-awaited review of the Reserve Bank, released to the public last Thursday, had few surprises yet had surprising omissions. For a report that recommended profound changes to the central bank, it lacked any evidence that these changes are, in fact, necessary – beyond that other countries do things differently and that Australia should follow suit.
In short, the report contained a set of solutions in search of a problem.
It turns out that the Reserve Bank is not run to the satisfaction of local economists. Perhaps the Reserve Bank does not employ as many economists as it should. It certainly does not listen to as many economists as they would like. Yet the report fails to demonstrate that this – well, frankly – disregard for the Australian economics profession has had any adverse effects on the conduct of monetary policy.
We are invited to believe that as many as 51 recommendations should be adopted as quickly as possible. The 48th recommendation is that this process should be bipartisan. Well, no. Even if the government accepts all 51 recommendations, the rest of parliament should reject most, if not all of them.
Let’s begin with the very first recommendation; that the Treasurer’s power to overrule RBA decisions be removed. To be sure, this power has never been exercised, and it is difficult to imagine that it would ever be exercised.
Nonetheless, without this power, control over arguably one of the most important policy settings in Australia would be entirely outside the remit of the elected government and the parliament. As important as so-called “independent” monetary policy may be, Australia remains a democracy and democratic power can and should only be exercised with the consent of the electorate.
The recommendations get worse.
As was expected, the review recommends the establishment of a monetary policy board with nine members and a governance board with seven members. It is not clear why a governance board is necessary – the review describes its function in wishy-washy new age terms. It is the monetary policy board that establishes the teddy bears’ picnic that the review envisages.
No convincing rationale
The monetary policy board consists of the governor, deputy governor, the Treasury secretary and six external members. Much as at present. Yet now the Treasury secretary would be statutorily independent of government – i.e. not present as the Treasurer’s agent. So why have them there at all? The review seems to think this is a good idea but is unable to provide a convincing rationale.
The review makes the argument that the skill set of the current external RBA board members is insufficient to “challenge” the views set forth by the governor and RBA staff. The review suggests that a skills matrix be deployed to identify the necessary skill set. These external members should have “economic expertise”,“analytical ability”, “strategic perspective”, “communications skills”, and “leadership and corporate experience”.
Economic expertise is further broken down into “open-economy macroeconomics, the financial system, labour markets and the supply side of the economy”.
Unfortunately, for the review, it turns out that every current (and likely past) member of the RBA board already meets the criteria of the skills matrix. All those businesspeople understand the supply side of the economy, have “analytical ability”, “strategic perspective”, “communications skills”, and “leadership and corporate experience”. Quite frankly, the people least likely to meet the requirements of the skills matrix are all the academic economists who are currently polishing their CVs hoping for a gig on the monetary policy board.
And, what a gig it would be! There would only be eight meetings a year but plenty of seminars in between, and the RBA would provide them with staff. Highly remunerated, prestigious and it comes with minions.
Astonishingly, the review also recommends that the monetary policy board engage with a monetary policy expert advisory group. But aren’t the members of our monetary policy board already the experts? Surely, that was the whole point of the skills matrix. More jobs for even more economists.
One small problem, though. Where are all these highly qualified economists going to come from? Sure, Australia has several economic talking heads that appear semi-regularly on our televisions. But they aren’t all monetary economists, or even macroeconomists.
A search for highly qualified Australian monetary economists using the Web of Science suggests that the monetary policy board might struggle to find enough suitably qualified individuals over time. Of course, immigration would be a short-term solution to that shortage, but isn’t the first recommendation that political oversight of monetary policy be removed? It is not clear how that is going to work.
In the end, it isn’t clear how any of this benefits Australians as opposed to those economists who will get a gig at the RBA.
This article was originally published in The Australian Financial Review on or about 23 April 2023 and was written by the author in their capacity as a contributor for that publication. It has been republished on the IPA website with permission. The views expressed are those of the author alone.