Paul Krugman has been worrying about the appointment of Neel Kashkari to the FOMC as President of the Federal Reserve Bank of Minneapolis as replacement for Narayana Kocherlakota.
The Wall St Journal circulated a summary of NK2’s recent tweets on monetary policy. This appointment was the third in a row of non-economists to the FOMC, but in the context of a lower frequency invasion of the FOMC by economists, according to a WSJ chart doing the rounds of Twitter, prompted by this debate.
The issue is what expertise is appropriate for setting monetary policy. Deep understanding of monetary and financial economics, as extolled by the Universities, or experience in the University of business or political Life? Leaders and managers, or Matlab and spreadsheet-loving nerds?
Here, the UK’s Monetary Policy Committee has an advantage. Setting policy in a state that is not yet significantly federated, seats on the committee can be divided up into those allocated to the Bank of England’s executive team, who manage the Bank, and sit on its other policy and management committees, and those there solely to think about how they cast their interest rate vote.
By contrast, the US, hampered by the legacy of the geographic distribution of its banks at the time of the inception of the latest incarnation of the Federal Reserve, has to allocate many seats to those also charged with managing hefty local institutions, the regional Feds, on top of 7 seats to the Board of Governors, many of which will be genuine senior management jobs, not expert advisory jobs.
Things are worse still in the Euorozone. All of whose who cast votes are member state central bank Governors or managers of large units within the ECB proper. And in selecting these individuals, member polities and the ECB have to balance the attributes of leadership and economics within a single person.
This is one reason why I would be against any move towards a regional MPC in the UK, one of the ideas that seems to be on the table for Labour’s BoE mandate review conducted for John McDonnell. It would reproduce the pressure to find rounded leader-experts.
This is not to denigrate leadership, where it’s needed, and suggest that nerds be made leaders of large institutions. There are probably a fair few individuals nominally in senior management positions in central banks who would not consider leadership and management to be a comparative advantage. They got there by dint of their economics and financial expertise, chosen as part of a pragmatic response to the problem I am drawing attention to – that too many seats on a decision making committee that requires expertise are nominally reserved for managers and leaders.
Tilting the balance too far in favour of economics expetise by shoehorning expert nerds into these jobs creates other problems. Shadow management jobs and structures around them grow to take up the management slack left by the expert figure-head. The power to deliver runs through lines different from those on the organagram. And this can strain lines of responsibilty and accountability.
In short, the FOMC and ECB Governing Council would probably be better if there was a neater divide between manager decision makers, and nerds, along UK-MPC lines. Reforming either institution along these lines is likely to be politically infeasible.