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Michael Pascoe: The fallacy at the heart of the Reserve Bank of Australia review

At the heart of the much-heralded review of the Reserve Bank of Australia is a fallacy: That the Australian economy can be fine-tuned by tweaking interest rates up or down.

And that is built on a bigger lie: That it is all the RBA’s fault our economy was weaker than it should have been before COVID and roared back to life quicker than expected as the emergency receded.

So being based on a fallacy built on a lie, the review is mainly codswallop.

For all the headlines and countless words suggesting massive and historic changes, the best two summaries of the review are brief:

“We’re really talking about improvements at the margin,” Governor Lowe said in reply to a question at the end of Thursday’s media conference.

“More people, more input, more cooks in the kitchen,” wrote the Australian Financial Review’s Chanticleer columnist.

Unlikely to do much harm

The good news is that implementing the review’s recommendations is unlikely to do much harm. The general population won’t notice any difference, the pleasure and pain people feel from monetary decisions will be unchanged, the new RBA will be about as mistake-prone as the old one.

The bad news is the lost opportunity this review represents. There was sufficient wriggle room in the terms of reference for the inquiry to get stuck into the underlying fallacy and lie – but the panel squibbed it.

That’s not surprising. The panel consisted of three economists appointed by Treasury and attacking the fallacy would have turned the focus back on the Treasury – the much greater source of our economic problems and mistakes than the RBA.

For this inquiry to make more than a marginal difference, it needed a 52nd recommendation:

“That a similar inquiry be held into the governance and conduct of the Treasury, focussing on how policy is developed and presented to government, Treasury’s research capability, its culture, the need for greater transparency on its advice and how Treasury balances its two responsibilities of providing the best advice it is capable of to government and doing what the government of the day orders it to do.”

That would open the door to an examination of fiscal policy beyond the usual ideology and political sloganeering, the fiscal policy that has a much bigger impact on our economy and people than monetary policy.

Lowe RBA

Philip Lowe said he would stay on as Reserve Bank governor if asked, to oversee its coming overhaul. Photo: AAP

Simply spin

Just as war is too important to be left to the generals, the development of fiscal policy is too important to be left to politicians. For that matter, monetary policy is too important to be left to economists.

But instead of tackling the fallacy and lie, the review came up with a namby-pamby: “There should be increased joint work between Treasury and the RBA on the relative roles of fiscal and monetary policy.”

It is simply spin for Treasurer Chalmers to claim the review strengthens the RBA’s independence while the Treasury secretary continues to sit on the RBA board with that imprimatur.

(While the main reason for the new monetary policy board seems to be that it brings us into line with what some other central banks do, other central banks don’t have the government’s Treasury secretary sitting on their boards.)

Someone with an eye to decades of internecine rivalry between the RBA and Treasury might almost see this exercise as Treasury’s revenge for being relegated in reputation and weight to second string back when John Stone was Treasury secretary and the Hawke/Keating government found him useless, preferring the better guidance coming from Bob Johnston’s RBA.

Treasury has the excuse that the politicians accept or ignore the advice it offers. We can’t know if the most important Commonwealth department’s advice is good or not as Treasury’s input is secret unless it suits the government to unveil it.

But offering that as an excuse speaks to a weakness in the senior ranks who were happy to do what they were told when they believe it is wrong. We’ve recently had such cultural weakness exposed elsewhere in the public service … Robodebt comes to mind, not for the illegality but for the ethics and ethos.

Dud policies

You want dud policy? Morrison’s $2.5 billion HomeBuilder – ticked off by Treasury. Frydenberg’s JobKeeper lacking a clawback from employers who didn’t need it – a lack allegedly recommended by Treasury. Scores of billions of dollars not just wasted but contributing very heavily to the problems and inflation the RBA is blamed for and supposed to solve.

For that matter, where was Treasury’s advice on the billions of dollars rorted by the Coalition’s grants corruption? But I’m in danger of digressing.

This RBA review was primarily sparked by a group of (forgive the Americanism) Monday morning quarterbacks – including Andrew Leigh, the Assistant Minister for Competition, Charities and Treasury – and, in my opinion, the odd disgruntled former employee.

Their complaint was that the RBA did not cut interest rates fast and far enough before COVID – as if it was purely the bank’s fault the economy was growing too slowly as the federal government concentrated on tightening fiscal policy to get “back in black”.

The RBA had spent years begging the government to invest more in the nation’s future, but to no avail in the Coalition’s lost decade. Most folk seem to forget the bank cut the cash rate three times in 2019 to just 0.75 per cent.

Josh Frydenberg

Then treasurer Josh Frydenberg was too concentrated on a budget surplus when interest rates were low. Photo: AAP

Subsequently, the complaint has been that the RBA loosened monetary policy too much when COVID hit and was too slow to start increasing rates. (Most of the quarterbacks make that criticism with the benefit of hindsight.) And that 2024 mistake.

The curious thing about the “other central banks do it” justification for the key recommendations is that there is no evidence whatsoever that a separate monetary policy board has resulted in more successful policy – because it hasn’t.

One of the three review panel members has worked in Canada’s central bank and works in the UK’s central bank. Compared with the RBA, the Bank of England’s record is rubbish. Canada does have lower inflation of 4.5 per cent at present, but it also has an unemployment rate of 5 per cent. I wouldn’t call that success.

Also curious is that we are to have three fewer board meetings but more talk by more people and more “communication” – which sounds suspiciously like more noise and less information.

If anyone says we don’t know enough about what the RBA is thinking, I can only imagine they are not reading and listening to all that the institution keeps pumping out.

If you want to know greater detail about the RBA’s view of the world and Australia, the bank’s next quarterly statement on monetary policy will be up on the RBA website Friday week. Download the 8.6MB PDF and go nuts before reading the financial stability review, the many regular speeches and panel discussions by the governor, deputy-governor, assistant governors and others, the bank’s bulletin publication, sundry research discussion papers and, of course, the board minutes as well as listening to the several media conferences the governor already gives – then tell me what’s missing.

The six new monetary board members are each to have an annual public chat, so we might end up with something like the various US Fed members having public dove/hawk personas and profiles. More noise.

There will be big winners from this review: Those six new highly paid part-time RBA staffers, as that is what they will be, will be expected to put in a day a week with full access to the RBA’s research capacity – by far the nation’s best – to help them pursue their interests.

Boost for academic economists

These will be career-making appointments and so ripe for potential conflicts of interest as to preclude much employment on the other four days of the week.

In other words, they are positions primarily designed for academics who just happened to be key agitators for the review.

Academic economists are delighted, but not everyone is so sure.

BetaShares chief economist David Bassanese told the ABC there were “grounds for concern” over how the new monetary policy board would operate.

“To the extent more board members will come from academia, there is a greater risk that policy will be set in an ivory tower, devoid of real-world appreciation of the facts on the ground,” he said.

“It’s also far from clear that academic economists, even so-called monetary economists, have any superior ability to form judgements on the correct level of interest rates.”

I have to disagree a little with Mr Bassanese there – it is actually clear that they don’t have any superior ability.

Nobody has an accurate crystal ball.  At any one time, some people are making correct guesses and are sure to tell everyone afterwards, but nobody outperforms for long.

Extra layer of oversight

Yet we are to have an extra layer of monetary policy oversight because some other central banks do and one other cited reason: The smear rejected by Dr Lowe that the existing and recent RBA boards have not had the knowledge or the ticker to challenge the governor.

That should be seen as an enormous criticism of treasury secretaries past and present. If the person at the top of the nation’s second-biggest economic think tank hasn’t been capable of challenging the governor, what good will half a dozen part-time academics be?

There have been bad RBA appointments over the years – Bob Hawke’s little mate Sir Peter Abeles immediately comes to mind – and the question of conflict of interest arises for all those on company boards, but in decades of dealing with business and other leaders, I’ve found few get to the top and stay there as shrinking violets.

Treasurer Chalmers’ PhD thesis was on Paul Keating’s prime ministership, Brawler statesman: Paul Keating and prime ministerial leadership in Australia.

Mr Keating reputedly has never forgiven the RBA for the sky-high interest rates that delivered “the recession we had to have” and, more recently, for implied criticism of increasing the superannuation guarantee.

I’m guessing he would welcome the effective diminution of the institution.

Fortunately, it’s only at the margin.

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