Back in 2009 I argued that only elite monetary economists should sit on the FOMC. Some of its current members are not even monetary economists, elite or otherwise. They are unqualified people serving in the most important economic policy position on the planet. I also argued that we should do whatever it takes to attract the best:
I don’t care how much is costs, even if we have to pay FOMC members a billion dollars a year, we will save much more money in the long run if we can get “strong” central bankers (pun intended) who have the vision to see what needs to be done, and who understand that effective policies require explicit target paths for macro aggregates.
Three years later Matt O’Brien made an even better case:
That’s another way of asking how long it will take the economy to return to trend. Here’s where things get really depressing. According to Fed Vice Chair Janet Yellen, we won’t get back to full employment until after 2018. If we assume the output gap will steadily shrink until then, that leaves us with roughly another $4 trillion in lost income. Maybe more. If Svensson really could double our recovery speed, he’d be worth $2 trillion to us. Even if that’s being wildly optimistic, something on the order of hundreds of billions of dollars probably isn’t. Tell me that wouldn’t be worth paying Svensson a billion dollars a year. Maybe more.
A trillion dollars . . . a billion dollars . . . and now the Financial Times is quibbling over a lousy million dollars:
Mark Carney took some persuading to become the next governor of the Bank of England. We know that he initially resisted George Osborne’s blandishments, only agreeing to apply when the term of the appointment was reduced from eight years to five.
But the full price paid by the chancellor has only this week emerged with news that on top of the £624,000 in salary and pension contributions Mr Carney negotiated for himself, the next governor will also receive a housing allowance worth £250,000 a year. This number was computed, we are told, on the basis that it would, after tax, give Mr Carney enough money to rent a house for his family in one of London’s smarter neighbourhoods. It also makes him, when all the cash amounts are totted up, among the best-paid central bankers in the world.
No one doubts that the governorship is an extremely challenging job, or that Mr Carney is a very able candidate. But Mr Osborne’s willingness to bend over backwards to secure the Canadian’s services still raises questions.
At a time of austerity and calls for public-sector pay restraint, it runs against the grain to raise the governor’s pay so dramatically. Sir Mervyn King, the present incumbent, is on just £305,000 a year. And while a bit of the increase can perhaps be explained by the need to make up for the loss of some extremely generous pension rights, even this is an odd message to send when the government is bearing down on far less generous public-sector pensions elsewhere – to the point that many talented, middle-ranking civil servants are quitting for the private sector.
The liberality extended to Mr Carney cannot be blamed on a lack of alternative candidates. The chancellor had other credible choices to hand, including Paul Tucker, the current deputy governor. Moreover, had he publicised his willingness to entertain five-year governorships, or to pay nearly £1m a year to the successful candidate, other figures of merit might have stepped forward.
By breaching both the government’s pay policies and the terms of his own job search, Mr Osborne has attached too much weight to “star power”. The governorship of the BoE is a great public office and should not need to command private sector premiums.
I know nothing about Mr. Tucker, but given the fact that the BOE has failed to provide enough growth in nominal spending to offset the drag of fiscal austerity, or should I say “austerity”, I’m not surprised that Osborne looked elsewhere. I do agree that the BOE is a “great public office” and that it’s unfortunate they needed to pay extra to attract Carney. But facts are facts, and right now a sound monetary policy is 100 times more important than whether our top civil servants are excessively motivated by monetary considerations. Make that 1000 times more important. Maybe even a million times.
Nicolas Goetzmann sent me another FT article, which correctly notes that it is NGDP growth, not inflation, that determines nominal interest rates:
In reality, bond markets are reflecting economic fundamentals. Risk-free rates should approximate nominal GDP growth, which has been in sharp decline globally. With governments caught between stimulus and austerity, and monetary policy achieving little traction, bonds have looked the safest bet.
The great investment question for 2013 is whether change is in the air and the deflation trade is over.
In Japan, the election victory of Shinzo Abe means the last bastion of hard money has fallen. The next governor of the Bank of Japan, to be appointed in the spring, will be a dove. A shift towards inflation targeting is likely. There will also be less enthusiasm for driving the economy off a fiscal cliff, as Yoshihiko Noda, the outgoing prime minister, risked with planned tax rises.
Globally, the move to soft money is gathering impetus – as seen in the US Federal Reserve’s move to tie monetary policy to unemployment and by favourable talk of nominal GDP targeting by the Bank of England’s governor-designate.