Michael Pascoe: Reserve Bank review fails at the starting gate

by Michael Pascoe

Like war being too important to be left to generals, monetary policy is too important to be left to economists, let alone a three-economist panel that has serious shortcomings.

And that is not the worst thing about Jim Chalmers’ review of the Reserve Bank.

What has been announced is rather like believing a review of the army uniform is overdue, but only reviewing left boots.

What the RBA primarily is, monetary policy, is only one leg of the macroeconomic policy beast.

Reviewing monetary policy in isolation – not in the context of reviewing fiscal, population and wages policies – is a bit silly.

We might end up with an improved left boot, but the rest of the kit remains all over the place.

As argued here before, the RBA does not run the economy. Monetary policy isn’t even the most important arm (or boot) of economic policy.

It’s just the bit that the commentariat that focuses on monetary policy focuses on and it’s easy to write a headline about – Interest Rates Shock Horror!

Treasurer Chalmers’ brief but broad terms of reference stipulate reviewing “the interaction of monetary policy with fiscal and macroprudential policy”, but how the panel can meaningfully assess the RBA’s interaction with the undefined, fluid, political unreviewed thing that is fiscal policy is not obvious to me.

If we’re to have a macroeconomic review, it would make sense to review the goals of monetary and fiscal policy and how they interact with each other, not just monetary interacting with fiscal. (There is a difference.)

And the review ignores the interaction with and impact of population on wages policy altogether – both no doubt in the “too hard” basket.

Then there is the makeup of the panel, something the commentariat has been remarkably quiet about.

Most obviously, one of the three has, in my opinion, what in many other spheres would be considered a conflict of interest.

Limited perspectives

Professor Renée Fry-McKibbin, “leading Australian academic on macroeconometrics” that she is, is also married to Warwick McKibbin – an outspoken commentator and critic who worked at the RBA, served on its board and is one of the economists who campaigned for the review. His perspective is one I suspect Professor Fry-McKibbin would have found very hard to not absorb over the years.

An unconflicted review must not only be done, it must be seen to be done.

Carolyn Wilkins, on the other hand, is a standout “international expert on monetary policy” with experience at two foreign central banks, bringing fresh eyes to the Australian central bank. Just the sort of panel member a doctor would order.

The third member of the panel, Dr Gordon de Brouwer, is a distinguished public servant, academic and former RBA employee. As of this month, he’s also Secretary for Public Sector Reform, reporting to the Minister for the Public Service. A big job.

Three talented, first-rate people. But all economists. All busy people, two of them extremely busy, I suspect. Two are resident in the eucalypt tower of Canberra, none in Sydney or close to Australia’s financial markets.

Wherein lies another shortcoming. Or two.

RBA governor Philip Lowe has copped flak for previously suggesting it was unlikely interest rates would rise before 2024. Photo: TND

The first impact of monetary policy is on financial markets – that’s where the plumbing of monetary policy resides and which the panel is required to review.

If you’re reviewing a left boot, you need to have a deep understanding of how the laces function, how the boot is held on. I’ve seen no indication that any of this highly qualified panel has a close understanding of the laces, or the plumbing.

And the secretariat the panel will rely on a very great deal comes from Treasury.

Underlying tension

That is understandable – it’s the Treasurer’s review. But, to use another analogy, it’s a bit like having rugby league do a review of Australian rugby union. On the surface, the NRL is a similar sport that would have expertise in many overlapping areas with union, but it’s a different religion and would come with baggage.

Treasury also lives in the eucalypt tower, removed from the plumbing and communication issues that are essential in understanding the RBA. It has become a more politicised body.

And while they certainly talk and co-operate, there has long been tension between Treasury and the bank competing to be the preeminent source of economic advice.

Another potential problem: The panel is specifically charged with reviewing the RBA’s “governance (including Board structure, experiences and expertise, composition and the appointments process) and accountability arrangements”.

Governance in general and board membership in particular were key issues for the group that agitated for this review. Neither the panel or Treasury claims expertise in governance.

Past lessons

Australia has been fortunate to have had important and major reviews of our financial system – the Campbell Review the daddy of them all, Keith Campbell making a massive contribution to our nation.

The Campbell, Wallis and Murray reviews were all led by canny businessmen, ably assisted by economists and others.

It is plain silly to have a review of monetary policy, governance and communication without the real-world skills of top business people – and, for that matter, top trade union and social sector people.

Yes, yes, submissions will be taken from all quarters and considered by the secretariat and (somehow, given their workload) the panel, but so highly concentrating the process in the hands of economists does not look healthy.

Just as academic economists criticised the RBA for not having more alleged monetary policy experts (i.e. academic economists) on the board, it now seems odd that a review of the bank is exclusively run by economists.

After all, an old adage has it that if all the economists in the world were laid end to end, they still wouldn’t reach a conclusion.

Or, for those who know the joke, assume we have a can opener…