Who should be on the RBA Board?
Plus, US June #NFPguesses
Treasurer Jim Chalmers gave an interview last weekend reiterating that a prospective review of the RBA would look at the composition of the RBA Board. This has prompted quite a bit of discussion about who should be on the Board. Much of that discussion has revolved around the representativeness of the Board, with the implication that the Board needs to be more diverse.
As things stand, the part-time external board members typically consist of business executives and at least one professional economist. Some of the other business executives have formal economics training. Even those without formal economics training would have a high level of economic literacy. The Bank argues that the main skill they bring to the role is the ability to make decisions under uncertainty. In the past, the labour movement has also been represented on the Board.
The Treasury Secretary sits as ex-officio member. In Stephen Bell’s 2004 book on the RBA, former Governor Ian Macfarlane is quoted as saying ‘no one has ever understood whether the Treasury Secretary speaks for the Treasury or the Treasurer, and I still don’t know the answer to that.’ If Ian didn’t know after eight years as Governor, then nobody does.
I suspect the part-time external Board members approach the position much as they would other non-executive board roles. They see their role as ensuring the Bank has engaged in due consideration of relevant factors and that the Board’s decisions are broadly consistent with the Bank’s statutory mandate and agreement with the government.
But monetary policy decision-making is not like other non-executive board roles. The role of the Board, according to the Act, is to ‘determine the policy of the Bank in relation to any matter.’ The Board is a policymaking rather than a governance body.
Interest rate decisions are ultimately about the optimal monetary policy response to shocks. That requires knowing something of the science of monetary policy. There is a reason the Bank employs a lot of PhD economists. Much of their time is spent preparing for the monthly Board cycle and formulating recommendations to be put to the Board. That means monetary policy is already largely determined by professional economists, but with little effective external scrutiny or contestation of that process.
There is also a fundamental tension between the Board’s policymaking role and the view that the Board should also somehow be a representative body. Monetary policy decision-making requires policymakers to set aside their individual and sectional interests to make policy in the public interest. If the board is also viewed as a representative body, it implies that board members are potentially bringing to the table baggage that is at best irrelevant, and at worst harmful, to their role as monetary policy decision-makers.
This tension explains why the RBA goes to great lengths to suppress any information about the contribution of individual Board members to monetary policy deliberations. In the bad old days, this meant fronting the Administrative Appeals Tribunal to argue against the release of the Board minutes under FoI legislation. In those proceedings, the RBA’s lawyers argued that revealing the contributions of individual Board members would expose them to pressure from sectional interests. As recently as 2004, the RBA used powers helpfully given to it by then Treasurer Peter Costello to issue a ‘conclusive certificate’ to prevent publication of the minutes, declaring their release not in the public interest. Needless to say, greater secrecy is not a solution to potential conflicts of interest.
We have come along way since then. Governor Stevens saw the writing on the wall when the Australian Labor Party won office in 2007 and decided shortly after the election to release the Board minutes in the form in which we now know them. However, the contributions of individual Board members are still suppressed. The RBA maintains that identifying the contributions of individual Board members would be inconsistent with the Board’s consensus approach to decision-making. But a consensus model of decision-making overlayed on an internal policymaking process without much external scrutiny and input is not a robust model for decision-making under uncertainty. It reduces transparency and accountability and is vulnerable to groupthink and policy error.
A better approach would be to professionalise monetary policy decision-making by creating a monetary policy committee separate from the Board consisting of RBA executives and full-time external appointees with economic and monetary policy expertise whose contributions to the committee’s deliberations could be fully disclosed.
Sir Paul Tucker has suggested the optimal size for a MPC is seven members. Five members is too vulnerable to groupthink. Nine members is too unwieldly. The seven could consist of three RBA executives and four external members, ensuring the RBA would need the support of at least one external member for its position. In principle, however, there is no reason why the RBA executives should be required to vote in the same way, allowing for much needed contestation within the Bank itself. The external Board members should be able to draw on the resources of the Bank, including their own secretariat. The Treasury Secretary could participate in Board meetings as a non-voting Board member.
Note that this does not mean that the external committee members need to be career academics. John Edwards is a good example of a former board member who had the academic credentials and other policymaking experience to be a good monetary policy decision-maker, without being a career academic.
If monetary policy is to be made by a separate committee, what role would that leave for the Board? The obvious answer is governance and oversight, a function the current Board is not set up to perform, not least because it can’t oversight its own decision-making in relation to monetary policy.
The non-executive Board members should be given the job of oversighting the Bank and whether monetary policy is being conducted in a way consistent with the RBA’s statute and any policy agreement with the government. This could include reporting to the Treasurer and the parliament on the MPC’s performance. The Board could also make decisions about who to appoint to the MPC to arms-length those decisions from government.
John Kehoe notes that the Treasurer and RBA currently maintain a list of eligible prospective appointees to the RBA Board, an initiative of the previous Labor government from 2007-2013 that sought to reduce the politicisation of Board appointments. Kehoe says that the RBA and Treasury have vetoed some candidates proposed by previous Treasurers. Bloomberg previously sought the list under FOI legislation, but all the names were redacted. We know from other FOI requests that the RBA Governor and Treasury Secretary have coordinated on Board appointments. Much of that coordination seems to have been around ticking industry and geographic representative boxes, but as argued above, good monetary policy decision-making requires that Board members set aside sectional interests. I suspect some Board candidates have been added to the eligibility list after the decision has been made to appoint them. This is pretty much implied in the some of the correspondence between the Treasury Secretary and Governor released under FOI.
The current arrangements serve to reduce external input and scrutiny, as well as transparency and accountability, in decision-making. The official family like it that way, but an astute Treasurer should realise that these arrangements are not robust and are more vulnerable to making policy mistakes. The government is uniquely accountable to the electorate for macroeconomic policy errors, regardless of the arrangements for monetary policy decision-making. The government has a strong interest in making monetary policy governance arrangements more robust. It would be surprising if any external review endorsed these arrangements, not least because they are internationally anomalous.
US June non-farm payrolls next Friday has our model looking for a 363k gain in employment compared to a median expectation of 263k and 390k last month (which our model would have called at 339k based on last month’s revisions). Employment was still 822k short of its pre-pandemic high in May. The market is expecting a steady unemployment rate of 3.6%, where it has been stuck for three straight months, just above the pre-pandemic low of 3.5%. Over the same period, our model has been calling the unemployment rate at 3.5%. Since the model forecast for June is essentially unchanged on May, we are also going to call the unemployment rate steady at 3.6%. However, the risks on both series should be viewed as firmly on the downside given the rollover in some of the model inputs.
Bitcoin isn’t much of a macro hedge (Bitcoin bros don’t @ me).
Papers from the RBA’s annual conference on The Causes, Challenges and Consequences of the Low Interest Rate Environment.
Zac Gross’s decomposition of Australian inflation into demand and supply shocks: