The Bank is shortly to publish its Strategic Review, in which it enlisted the help of Mckinsey consultants. As an ex-BoE staffer with 20 years of pent-up ignored (no doubt ignorable and probably tainted) advice I can’t possibly resist the temptation to set out what I would be looking for.
First off, it’s odd isn’t it to do it before you put in place your Deputy Governor for monetary policy? The Review has presumably been going on while they are doing the interview process. How has that conversation gone? Has the Treasury said: ‘look Ms X/Mr Y, Mark has done his review, and we think this is the job you should be doing, and this is how you should be doing it. Are you ok with that? It would be nice to have involved you in shaping the future of your directorates, but we’d rather just get you in to crank the handle and implement McKinsey’s vision for us.’ Or maybe it was more like ‘Look, Mark is doing this review, and we don’t know what he will come up with, but we will back him all the way and want the kind of person who will do whatever he says we should.’
Why not wait, Mark? Perhaps the Review will be a Review of what further Reviews will be done when the senior team is in place.
Second, I would take a look at the human capital situation in the policy/analytical areas. I tweeted rather glibly last week about this during the Treasury Committee hearings, but would like to clarify in case the wrong people get offended by it. In my view, the very top of the Bank on the Executive Team set the wrong vision for how to do monetary policy, and, though I speak more as an ex spectator than a participant on this, I don’t see much difference in the vision of how to do Financial Stability Policy either. The team as a whole is full of unmatchable energy and talent. But they lived a certain life and do things a certain way. You can look at the skill profiles of the directorates they have created, and in my view, they miss a big trick, and look very different to some of their major competitor central banks.
Most of those individuals have spent most of their careers away from the frontiers of macroeconomics and finance themselves. There may be many reasons for that, but one of them might be that they therefore feel that the activities going on at those frontiers are not productive or relevant. The vision they therefore set is to generate an extremely large volume of data analysis. To realise that vision, the Executive Team hire a few dozen extremely clever Heads of Division tasked with delivering and managing that informal data analysis, and hiring the armies of equally clever doers and potential successors. Almost all of those Heads of Division have likewise spent most of their careers (perhaps wisely!) away from that frontier. And so they naturally share the vision that in order to deliver good policy analysis, you should devote just about all your resources to basic data analysis. And they enthusiastically set about recruiting the armies of equally impressive intellects out of Masters programs to produce the goods, and, hopefully, to guarantee succession. This isn’t the only mode of analysis. But the other mode, stemming from frontier empirical or applied theoretical work, is crowded out. Those managing the budgets aren’t familiar with it, are often suspicious of it, and aren’t enthusiastic advocates of it as something worth offering up to their policy clients.
The old joke that I tweeted last week, that some used to make [‘there goes the human capital of the Bank of England’, referring to when the Bank’s foremost macro-model designer used to walk past with his lunch tray] didn’t mean at all that the Bank’s other staff knew nothing. On the contrary. The armies of other staff knew lots of things, and were darned able at finding out more and getting it across elegantly. My point in digging out that old joke here is that the Bank invested very little in this other sort of analysis. Frontier formal model building and analysis has not exactly had a great press since the crisis, so in putting forward this view I can guess that it would be controversial in many quarters, and there would be many arguable defences. [Great! The squeezed those loony macro modellers out! Thank goodness for that! What good did any of that do the economy anyway!].
Despite this dominant view about what to spend money on in delivering policy, rightly or wrongly, the Bank maintains a core macro model for forecasting, which it uses to articulate its forecast. But there are actually alarmingly few people in the Bank who would be either able or willing to take charge of this beast. The combination of project and man management skills, modern macro, empirical macro, and a willingness to forego any hope of cultivating a stream of publications to secure a set of plausible exit options, is a rare combination indeed. I would guess that the Bank has always been within a couple of resignations of a catastrophe in this respect.
There is a larger number of those familiar with RBC/DSGE and econometrics. But, to me, also a distressingly small number. And if you were to ask : how many international economics experts does this small open economy central bank have? You would get a very small number indeed. Or if you were to ask: how many recognised experts in the progress made to incorporating financial frictions into macro does this central bank have, you would get the reply that there are alarmingly few.
The Bank hires regularly from the PhD job market, and tries hard at offering them meaningful roles and career progression. There have been a multitude of initiatives to improve the lives of those doing research and cultivating an interest in the latest macro and econometric tools for policymaking. But there are iron facts working against them. The first I have already mentioned. What is for me a mistaken vision that policy analysis consists in a vast informal Kalman Filtering exercise, involving a few thousand charts. Part of that is not even the fault of the informal Kalman Filtering [jargon for mass chart inspection in search of signal] Executive Team, because it’s the Treasury who appoint the external MPC members, and many of those in the past have been untrained or unsympathetic to this kind of analysis, so naturally you would not make much room in your budget for this kind of product. [Recall Adam Posen, ex-MPC member, who tweeted sternly ‘microfoundations are without merit’]. But the result of this is that those who do want to devote their lives to this feel in the minority. They are troubled eccentrics, with a management tree stretching above them peopled by those who steered clear of what they are doing, begging the question to all but the least observent ‘why don’t you stop coding up those silly models and follow my example?’
Other iron facts. The Board of Governors at the Fed has greatly expanded its demand for PhDs. [Three of my ex staff got jobs there]. Many other central banks have too. The EZ member central banks have often decided to focus on research to reinvent themselves post euro. [For example, the Banque de France]. At the same time, there has been a long-lasting pay freeze. And at a time when the university labour market in the UK has been deregulating fast, as the wave of fees coming in from Asia and other places for economics and finance course starts to make its presence felt in salaries, busting official lecturer/reader/professor pay scales. When I was first recruiting for the Bank back in the mid 1990s, we used to be able to say that we offered much better pay, at the cost of some independence (you had to work on things the Bank was interested in, of course). However, the Bank now regularly gets outbid by all of the top-ranked and many second-tier departments in the UK. I won’t name names. But I can’t count on my two hands the number of institutions that pay more for entry-level PhD jobs. In short, others are scooping up more of the talent and paying them more.
Another iron fact. Censorship. Researchers like to feel that what they are doing is noble and objective. But the Bank, though it has moved some way in recent years, is extremely risk-averse towards allowing its junior researchers to publish research, even highly technical pieces, that might cast what they are doing in an unfavourable light. Recapping on previous tweets on this, red-line topics in the past have been papers that progress the task of assessing the euro as an optimal currency area; papers that suggest that the Great Moderation was good luck and not good policy [ironic, eh!]. I once had a QB article of mine on the zero lower bound doctored to suggest that such a situation was ‘highly unlikely to occur in the UK’. Two of my staff were prevented for about 12 months from even presenting at conferences a paper on monetary and macroprudential policy. And there are dozens of other examples, often biting earlier in the process, as the naive new PhD recruit finds out that they have to bin this or that idea that won’t make it. I didn’t ever fall foul of this myself, because as an old hand I was an expert self-censor, knowing what would and would not make it through the thicket of those who understood the ‘optics’ and the ‘political economy’ and the ‘big picture’ of these matters.
I risk becoming one-sided here. There are big reputational risks in being freer with your publication policies. Central banks are nothing without their integrity and their competence. The value of the currency and the ability to perform lender of last resort functions depend crucially on confidence. But other central banks manage fine. The Fed and the ECB for years published papers about inflation targeting, flouting the stated regimes of their policymaking clients. One senior Fed system staffer said ‘OK you can’t call Bernanke a nutcase, but pretty much anything else goes’. Both the Fed system and ECB working paper series are stuffed with analysis that is implicitly or explicitly critical of what they are doing. Those institutions found their way to an equilibrium where staff wrote about their own views, and outside observers understood that, and so the disclaimer was taken at face value. BoE working papers also carry a disclaimer. But the disclaimer is mostly a sham, because pretty much all views that are in any way at variance with what the policymakers want to say are stripped out. It says that ‘these are not the views of the Bank of England…..’ and in so doing conceals the energetic and skilful censorship and selection behind the work.
So, that’s a very long way of saying that the Bank could realise a different vision for supporting its policy and analysis functions, and staffing them. This isn’t going to happen without very senior appointments of people who would share that vision. (In that respect it is going to be very interesting to see who gets the DG for monetary policy job [such as it is likely to become] with the two recognised thought leaders in monetary economics, Charlie Bean and Mervyn King, soon to be both gone.) I doubt it will be easy to achieve without creating a recognised research department, such as exists at other central banks. This idea is almost unexpressable in the Bank of England, and will mark you out as a nutter who wants to fritter hard-won seigniorage. It’s true that there are risks in creating such bodies, principally that they end up doing what they want to do, and not what’s useful. But at least they guarantee that you will have some, a guarantee that the Bank’s current staffing model does not provide, and often, when I was there, looked perilously like imploding before our eyes. Those who scoff at the mess this body of skills and knowledge pitched the world into might laugh at the suggestion we need to secure more of it. For my part, I see a bewildering array of impressive work in macro and finance, and econometrics, trying to make sense of the mess, and if the Bank of England can’t organise itself to tap into enough of it, it won’t give itself the best chance of setting good policy, or of shaping the debates over supranational policies.
The Strategic Review is a great opportunity to change this vision. I’ve watched the talent in the Bank jump at all kinds of impressive and daunting feats in the last several years. Despite the lack of formal training at the frontier of macro/finance/empirics, knowing their average IQ and work rate, I forecast they would overcome this without any difficulty whatsoever, if only the right incentives were put in place and given the right direction.