The central recommendation of last year’s RBA Review has been chewed up and spat out by politics, and in the process the bank is being politicised.

The Coalition now seems to be against reforming its governance, for political reasons.

It took a while for shadow finance minister Jane Hume to get there in her interview with David Speers on Insiders on Sunday, but eventually she did: “We’re comfortable with the board that we have that are dealing with monetary policy as they are.”

It took Speers 11 questions to pull those teeth and it’s not entirely clear whether she speaking with the full authority of the party on that, or even whether being comfortable with the way things are means you’re against changing it. But let’s take it at face value.

The idea of the RBA Review panel was to create a new board of experts to look after monetary policy with the governor, as most other central banks around the world do, and have a separate board to govern the bank.

Reason revealed

The reason for that was compellingly put: After some exhaustive work, the panel had found that the existing board of generalists and business people was being treated like mushrooms by the governor and the RBA staff because they are not economists and unable to hold the boffins sufficiently to account.

Treasurer Jim Chalmers and shadow treasurer Angus Taylor both agreed with this idea 18 months ago, but then Taylor changed his mind, or was rolled (according to Chalmers), and wanted the new board to be the old one, so Labor doesn’t stack it with mates.

Chalmers said OK, fine, whatever, as long as it’s optional – that the existing people can move across to the new board if they want to. The last word from Angus Taylor, before Jane Hume fronted Insiders on Sunday, was that he wanted them automatically (forcibly?) transferred to the new monetary policy committee.

According to Hume, they now don’t want them transferred at all: “You stick with the current arrangement because you need that continuity and stability of the current board.”

Status quo

We are in the world of political victories for the sake of political victories, except the upshot is that the RBA Review’s call for a new board of experts has been rejected and all those engaged in the status quo (that is, everyone at the RBA) would be quietly satisfied.

As economist Chris Richardson remarked: “Every CEO in the world would prefer a board that doesn’t know as much as they do about the business. That makes the CEO’s life easier, but it delivers worse outcomes for shareholders, and in this case the shareholders of the RBA are ordinary Australians.”

To be honest, Chalmers probably didn’t help his cause by appointing Iain Ross and Elana Rubin to the board last year. They are both fine people, but happen to have spent time at the ACTU, exciting suspicion in Coalition minds that the ALP wants to stack the board with socialists and woke progressives, when it’s the Coalition who should be stacking it with Abbott (Tony) and Costello (Peter).

Jim Chalmers must now try to persuade the Greens to pass his legislation, whatever it might end up saying, and they, of course, will use this unexpected acquisition of leverage to get something in return, such as giving the RBA the power to direct banks’ lending and for the Treasurer to retain a veto power over interest rate decisions.

Inflation control

Meanwhile Jim Chalmers’ statement that the Reserve Bank is “smashing the economy” and his Labor predecessor, Wayne Swan’s that they are “hammering” it and left hanging in the air like two farts in a lift.

Is the RBA board smashing/hammering the economy?

Well, yes, of course they are, because the governor and his, then her, team of boffins told them to in order to fulfil their legislative mandate to control inflation, and meet the target that’s not in legislation, but in a past governor’s speech in 1993, of 2 to 3 per cent inflation.

Would a new board of experts do anything different?

We can’t know, of course, but there would be a more sophisticated debate.

Actually, to their undying credit the existing RBA board has been trying to throw as few people as possible under the unemployment bus, and haven’t increased interest rates in Australia as much as other countries have.

But they didn’t have to because Australian house prices have gone up more, so Australians are more indebted and have a lot more variable rate mortgages that the United States in particular, where most borrowers are on 30-year, fixed-rate deals.

The result is that disposable household income has declined more in Australia than the US, even though the policy rate there is 1.15 per cent higher than here.

Political power

It’s quite possible that a board of economists would be less worried about unemployment than the existing board of business people, and likely to focus more on inflation, but that’s not what this argument is about – it’s about politics, and who gets to stack the board.

A more accurate way to express the “smashing” and “hammering” is that the RBA is conducting a massive transfer of income from the indebted to the wealthy because that’s the only thing they can do to control inflation, and it works to reduce the rate of price increases because the indebted losers reduce their spending more than the wealthy winners increase it, resulting in a fall in net demand and a rise in unemployment.

And while the US Federal Reserve will start cutting interest rates this week, the RBA won’t be doing the same because unemployment has not increased enough yet.

As the RBA’s assistant governor (economic) Sarah Hunter said in a speech last week: “Our current assessment is that the labour market is operating above full employment.” That is, it’s more than full.

You might have thought “full employment” meant that everybody had a job, but not so, at least not to the RBA.

Full employment is the level of unemployment consistent with low inflation. They don’t exactly know what it is, but they do know we’re not there yet.

More smashing and hammering needed.

Alan Kohler writes weekly for The New Daily. He is finance presenter on the ABC News and also writes for Intelligent Investor