Money well spent

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.


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44 Responses to “Money well spent”

  1. Gravatar of flow5 flow5
    23. December 2012 at 20:29

    Sumner it’s too bad your not a member. Your a realist.

  2. Gravatar of Saturos Saturos
    23. December 2012 at 20:47

    Wonder how much they’d have had to pay Scott to get him to serve. Seeing as our gentle persuasion didn’t work.

  3. Gravatar of Major_Freedom Major_Freedom
    23. December 2012 at 20:54

    Elite according to what standard? Obviously not voluntary consumer’s standard, in competition with other caterers of consumer’s preferences, because that would require a market, which is totally absent in the monopolistic central banking.

    Maybe “elite” according to the opinions of the central planning minded people who say “only elite monetary economists should sit on the FOMC”?

  4. Gravatar of Saturos Saturos
    23. December 2012 at 20:54

    Off topic:

    http://www.ndtv.com/article/cheat-sheet/amanat-gang-rape-case-protests-in-delhi-intensify-govt-to-consider-death-penalty-for-rapists-in-rare-308717?h_related_also_see

    Economics exam question: why is this a terrible idea?

  5. Gravatar of jknarr jknarr
    23. December 2012 at 20:59

    If they were honest and had good faith toward appropriate goals, then a billion easy. Appoint them for life while you are at it.

    If we cannot be assured of honesty, good faith, and appropriate goals, (which we can’t) then we may as well pick from the first 100 names in the Boston phone book to rubber-stamp whatever the staff advises.

    The point is that too few people have too much discretion over far too many dollars. Expertise is no solution to a flawed structure.

  6. Gravatar of Major_Freedom Major_Freedom
    23. December 2012 at 22:26

    “…whatever our views about the desirable behaviour of the total quantity of money, they can never legitimately be applied to the situation of a single country which is part of an international economic system, and that any attempt to do so is likely in the long run and for the world as a whole to be an additional source of instability [...] so long as an effective international monetary authority remains an Utopian dream, any mechanical principle (such as the gold standard) which at least secures some conformity of monetary changes in the national area to what would happen under a truly international monetary system is far preferable to numerous independent and independently regulated national currencies.” – Hayek, F.A., Monetary Nationalism and International Stability, pg 93.

  7. Gravatar of Major_Freedom Major_Freedom
    23. December 2012 at 22:28

    “Money is too important to be left to central bankers. You essentially have a group of unelected people who have enormous power to affect the economy.” – Milton Friedman.

  8. Gravatar of Major_Freedom Major_Freedom
    23. December 2012 at 22:31

    “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
    Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” – Keynes, J.M., The Economic Consequences of the Peace, pgs 235-236.

  9. Gravatar of Major_Freedom Major_Freedom
    23. December 2012 at 22:33

    “The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” – Ernest Hemingway

  10. Gravatar of Major_Freedom Major_Freedom
    23. December 2012 at 22:33

    “The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.” – Vladimir Lenin

  11. Gravatar of Bonnie Bonnie
    23. December 2012 at 23:19

    “I argued that only elite monetary economists should sit on the FOMC”

    Bernanke and Mishkin fit that visage; but if I could go back in time to 2006, knowing what I know now, I would strongly oppose their nominations, as futile as it would be.

    I understand your point, Carney is likely worth his pay, but think the presentation of it needs some wordsmithing.

  12. Gravatar of Robert Easton Robert Easton
    23. December 2012 at 23:43

    Focusing on government salaries rather than focusing on whether they make good decisions regarding 1000x the amount of money seems par for the course from the British media. The expenses “scandal” in early 2009, at the worst point in the recession, had such exciting revelations as:

    “Tony Blair claimed £6,990 for roof repairs to his constituency home in Sedgefield.”

    “Gordon Brown allegedly paid his brother in excess of £6,000 for cleaning services and claimed for the same plumbing repair bill twice.”

    “Nick Clegg allegedly claimed the full amount permissible under the Additional Cost Allowance, including claims for food, gardening and redecorating. The Telegraph also said Clegg claimed £80 for international call charges”

    £80! Outrageous. And this was the biggest news story for months. As opposed to, e.g., the economy is falling apart and should anything be done about it.

  13. Gravatar of ChargerCarl ChargerCarl
    23. December 2012 at 23:54

    I agree with scott, but I understand why people in the UK are pissed. Their public servants (and ours in the U.S.) have failed them horribly, and millions of lives have been ruined because of these failings. As far as they know Mark Carney’s just another lousy slave to the institution.

    I hope he earns his paycheck.

  14. Gravatar of Alex Alex
    24. December 2012 at 00:05

    Agreed on the media-invoked fixation over “wasting” taxpayer’s money. But if a CB’er comes into a position knowing they’ll be paid untold wealth should they succeed and merely “not-untold wealth” should they fail then there would be a tendency to swing for the fences no. Not hard for me to imagine a situation where reaching for the bazooka feels a pretty easy decision to make. Being an expert in the right field offers no guarantee whatsoever you won’t have your decision-making glasses fogged by such incentives… As a non-economist, I ask what would be a sufficiently reliable model be to counter such risks?

  15. Gravatar of . .
    24. December 2012 at 01:09

    Spot on.

    Andrew Sentance is a great example of an unqualified central banker. He was on the BoE’s monetary policy committee 2006-2011. He consistently voted for higher interest rates from 2008-2011, citing fears of inflation.

    His articles justifying his position suggest he does not understand the difference between headline or core inflation, nor any of the optimal inflation targeting literature. For example he cites rising commodity prices as a reason to raise tighten monetary policy. He confuses one of changes in the price level, (such as the depreciation of the pound in 2007) with permeant changes in the rate of inflation.

    I could go on, but it’s too depressing.

    Given he and his colleagues’ inept decisions are directly responsible for nominal GDP growth collapsing, unemployment rising by over a million and wages stagnating, you would have thought he’d show some contrition.

    But no, he’s busy demonstrating his complete ignorance of monetary and the consequences of his decisions. See his article in the telegraph here:

    http://www.telegraph.co.uk/finance/9762979/We-ignore-the-threat-of-inflation-at-our-peril.html

    Scott – you’re doing great work, keep up the pressure. If you’ve time to intellectually eviscerate this buffoon you would be doing the UK a great service.

  16. Gravatar of Pravin Pravin
    24. December 2012 at 01:44

    economists? where the eff are you economising by spending other people’s money for non market activities.it may be far cheaper to install a computer with the voice of FDR or whoever can ‘instill confidence’

  17. Gravatar of Major_Freedom Major_Freedom
    24. December 2012 at 01:44

    If Sumner were serious, then he would have no problems pooling a portion of his, along with other monetarist political strategists’ incomes, and financing the income of these angels were supposed to find who are able to create net gains to everyone else despite not being subject to profit and loss in a context of private property and economic competition.

    I won’t hold my breath, because of course OTHERS will have to be forced to pay (nominal or real) for what Sumner cannot achieve in a competitive market. It’s “ex cathedra” pronouncements masquerading as reasoned argument.

  18. Gravatar of Major_Freedom Major_Freedom
    24. December 2012 at 01:45

    Pravin gets it.

  19. Gravatar of RebelEconomist RebelEconomist
    24. December 2012 at 02:54

    Since UK inflation seems set to accelerate back above target next year, if Carney agrees to change the target to NGDPLT, he is going to look corrupt – like he was bribed to get the government off the hook of meeting the inflation target.

  20. Gravatar of Jaap de Vries Jaap de Vries
    24. December 2012 at 03:51

    Actually Scott, your argument is a bit flawed. We indeed believe that any amount would be enough if the governor could indeed increase the speed of the recovery and restoring full employment more quickly. However, ex-ante it is not really obvious he could do that, especially not to the wider public.

    So not any wage seems justified because he has to prove that he is worth it first. I do agree on your point that it should be clear to the public this is the most important position in a country which has its own currency.

  21. Gravatar of Benjamin Cole Benjamin Cole
    24. December 2012 at 04:08

    I have a different point of view.

    Fed policy should be controlled by the Fed Chairman. Who serves under Treasury Secretary. That’s it.

    And the Fed Chairman is appointed by the US President, upon inauguration. No Senate approval needed. Can be fired at will.

    Maybe Sumner is right, and only superbly trained monetarists should sit not he FOMC. My problem with that (and I am a layman) is that I read highly regarded monetarists with a whole spectrum of views. Woodford says this, Williamson says that, Sumner say thither, and Selgin says yonder. The Grumpy Economist is ever worried about inflation. John Taylor says the Taylor Rule means we should tighten monetary policy.

    Not one points out we have been monetizing trillions in debt and yet inflation expectations are at record lows. That is taboo—a problem with assembling only experts. Taboos become shibboleths that become pillars of righteousness.

    I happen to agree with Market Monetarists. Actually MM is not hard to understand. Any good businessman who is a MM’er would be way better than Bernanke, a superbly trained and authoritative figure.

    But more importantly than that, I believe in good governance.

    In democracy, public institutions should be transparent, accountable, and provide clarity as to intentions and policies. If the public thinks a public agency is doing a bad job, they should have a clear mechanism for changing leadership at that agency.

    Right now, only Rube Goldberg could figure out how macroeconomic policy is made in the USA. If it is made. The mysticism, obscurantism, opacity of the Fed is abominable.

    It is even worse in Europe, as pointed out by Sumner. Imagine the powerlessness of a citizen in Europe who wants to vote for a more-aggressive and expansive monetary policy. That is not democracy.

    Please, when experts say “only we experts should run an agency, and we should be independent,” I find myself agreeing with Churchill. Democracy is a lousy way to run a government, but better than the second-best way.

    Finally, I disagree with Sumner about something!

    But probably a lot of monetary “experts” agree with him, that only they should be running the Fed.

    That should scare Sumner even more than me.

  22. Gravatar of Bill Woolsey Bill Woolsey
    24. December 2012 at 04:52

    Scott:

    Plosser?

    Kocherlakota?

    Bernanke the creditist?

  23. Gravatar of Robert Robert
    24. December 2012 at 04:55

    Insofar as good monetary policy depends on good communications, unfortunately Mr Carney has shot himself in the foot by negotiating what is perceived an outsize pay deal. It confirms the public percpetion of him as a paid up member of the global banking and central banking elite that has brought our present troubles opon us. He faces an uphill task – though that’s not so say he can’t manage it; as an avid runner, he’s got stamina. See comment on http://www.themoneytrap.com/2012/11/is-carney-the-right-man/

  24. Gravatar of Negation of Ideology Negation of Ideology
    24. December 2012 at 05:06

    I see the point, the difference between good monetary policy and bad monetary is definitely worth trillions. But then wouldn’t a pay for performance approach be better?

    And isn’t the ultimate goal of rules based systems like market monetarism to make the Federal Reserve more like the Patent Office? My vision is a future Chairman just logs onto the computer and makes sure the program that replaced the FOMC is running, and then calls the President and says “Looks good, NGDP futures are on path. I’m going to go play a round of golf.”

  25. Gravatar of marcus nunes marcus nunes
    24. December 2012 at 06:37

    Scott
    This is from your post on October 15 2010:
    “In other words, we at TheMoneyIllusion deserve credit for a mere $5 billion dollars in wealth creation. And I say “we” because it’s a collaborative project. For instance commenter Marcus Nunes sent me the old Bernanke papers from 1998 and 2003, in which he told Japan to do all the things that we are now telling the Fed to do. After I posted long excerpts, lots of other bloggers and media outlets started picking up on the story. Don’t think that Bernanke isn’t aware of what he told the Japanese to do, and don’t think he isn’t aware of all the media outlets quoting those comments. So I figure Nunes deserves about a billion. Notice how these tiny crumbs, $5 billion, $1 billion, roughly correspond to the wealth of Facebook’s two founders”.
    So yes, Carney should get all he asked for and maybe more, conditional on him implementing NGDPLT.

  26. Gravatar of marcus nunes marcus nunes
    24. December 2012 at 07:02

    “Spot on”
    Several months ago I said Andrew Sentance was the “Joseph Kony” of MP:
    http://thefaintofheart.wordpress.com/2012/03/19/andrew-sentance-is-the-joseph-kony-of-monetary-policy/

    Apparently he has maintained the role, even as an outsider!

  27. Gravatar of Rien Huizer Rien Huizer
    24. December 2012 at 07:57

    Scott,
    This compensation package is ridiculous. All he has to do is tell his co-voters that they will support NGDPLT targeting, select an appropriate level of N-etc create a futures market in UK NDGP (making sure that in case of a negative LEVEL, bets will be honored as well) and sit back. I reckon that will be about a week’s worth. Once targets are chosen and the mechanism implemented, there will be nothing left to do but watch the mighty ship of the UK economy sail away on automatic pilot. Maybe he should ask mr Draghi over for drinks once the ship is out of sight..

  28. Gravatar of Jon Jon
    24. December 2012 at 08:35

    Last I checked, the onus was on congress to articulate a clear policy in the law. An ambuguous policy might need a board of elite theorists, but a clear policy needs only a board of technocrats.

    That’s just what our board of bankers gives us. A group of people who can read market forecasts and understands the statutory tools unfortunately they operate under an ambiguous framework that allows them to invent theory which the elite chairman feels compelled to defend before congress.

    If the chairman was more constrained by the law, he might actually challenge the status quo framework when defending the institution’s performance.

  29. Gravatar of ssumner ssumner
    24. December 2012 at 08:58

    Bill, The best solution is to give the central bank a useful mandate, and take away discretion. But as long as we give them discretion, we ought to have the most qualified people serving. They make mistakes too, but the odds are better than if you give discretion to the unqualified.

    Negation, Yes, pay for performance (NGDP futures) is best.

  30. Gravatar of Don Don
    24. December 2012 at 09:20

    More than a decade of poor employment. The social scientists are going to have an amazing “natural” experiment, when they study the longer term implications to such long-term unemployment. The quotes are because there is nothing natural about poorly executed monetary policy.

  31. Gravatar of Doug M Doug M
    24. December 2012 at 09:45

    The wisdom of crowds says that any group will make better decisions if each member has a different point of view from the others no one is able railroad the others and none is easily swayed.

    All boards should strive to have a diversity of opinions, backgrounds and experiences.

    If they are all “elite economists” from academia they will be far more likely to fall into the echo chamber.

  32. Gravatar of jknarr jknarr
    24. December 2012 at 10:26

    Scott –

    What makes you think that you know even (qualified) central banker incentives and motivations? Power corrupts, and absolute power corrupts absolutely.

    What is qualified, anyway? That they know bad theories better than the other guy?

    How do we know whether there are “mistakes” anyway?

  33. Gravatar of Bill Ellis Bill Ellis
    24. December 2012 at 13:03

    I like the Idea of doing what ever it takes to attract the best people to the most important jobs in our government…
    I have long advocated that our elected officials be payed in line with the best CEO pay… not only to attract the best people… but because currant pay standards make it very difficult for a common person to afford to be a congressman.

  34. Gravatar of Bill Ellis Bill Ellis
    24. December 2012 at 13:04

    HAPPY HOLIDAYS EVERYONE !!!

  35. Gravatar of ZHD ZHD
    24. December 2012 at 13:48

    Scott,
    How about we take all of your “elite” monetary economists and put their salaries on the line in predictive markets. Where policy is set by their bets against each other and the efficacy rewards/punishes the losers.

    You could even let in non-monetary economists, and non-elites furthermore.

    A system of continuous double sided dutch auctions for setting policy is the only way to actually extract whatever useful knowledge might be inside the heads of a central banker.

  36. Gravatar of Major_Freedom Major_Freedom
    24. December 2012 at 14:32

    ssumner:

    Bill, The best solution is to give the central bank a useful mandate, and take away discretion.

    You don’t need elite economists to do this. Monkeys can do it. A computer can do it.

    Actually, “no discretion” is impossible. There will need to be discretion on what percentage inflation/spending to target, what to buy, from who to buy it from, how often, and how violence against innocent people is to be specifically used to maintain it. SWAT teams or FBI?

  37. Gravatar of Shane Shane
    24. December 2012 at 16:48

    Some wag once said that Newt Gingrich is a dumb person’s idea of a smart person. This article is the dumb, conventional wisdom’s idea of what the newer, smarter thinking–NGDPLT–is:

    http://www.reuters.com/article/2012/12/20/us-centralbanks-idUSBRE8BJ0T120121220

  38. Gravatar of Nick Waddell Nick Waddell
    24. December 2012 at 17:48

    As a Canadian, I am surprised at how little Carney is to be paid. Of course, most of the media coverage here was of the “huge payday for Carney” variety, but considering what is at stake, the $400,000 housing allowance, for instance, doesn’t seem preposterous, especially in a city as expensive as London….

  39. Gravatar of As Usual, Sumner Ignores Micro As Usual, Sumner Ignores Micro
    24. December 2012 at 20:32

    [...] this post Scott Sumner shows he would make a great talent agent: Back in 2009 I argued that only elite [...]

  40. Gravatar of As Usual, Sumner Ignores Micro – Unofficial Network As Usual, Sumner Ignores Micro - Unofficial Network
    24. December 2012 at 21:06

    [...] Exile → As Usual, Sumner Ignores Micro Posted on December 25, 2012 by admin In this post Scott Sumner shows he would make a great talent agent: Back in 2009 I argued that only elite [...]

  41. Gravatar of As Usual, Sumner Ignores Micro – Unofficial Network As Usual, Sumner Ignores Micro - Unofficial Network
    24. December 2012 at 21:06

    [...] As Usual, Sumner Ignores Micro Posted on December 25, 2012 by admin In this post Scott Sumner shows he would make a great talent agent: Back in 2009 I argued that only elite [...]

  42. Gravatar of Richard W Richard W
    25. December 2012 at 11:35

    Carney will be doing well if all the grief he gets is a few comments about his salary by the chatterati. Churchill wanted to hang Montagu Norman for bad monetary policy. He recorded in his diary that he would “turn King’s Evidence against him” (testify in court) The truth is the British media will pretty much give Carney a free reign. Politicians are relentlessly pursued but the governor of the BoE is rarely if ever directly criticised.

  43. Gravatar of Scott Sumner Scott Sumner
    26. December 2012 at 14:40

    jknarr, Who’s to say whether a Walmart cashier or someone with a law degree is more qualified to serve on the Supreme Court? There are no certainties in life, but on average better decisions will be made by people who understand the field in which they are working, as compared with those who have never even studied the subject in a serious way.

    Bill, I believe Singapore does that.

    ZHD, Of course the first best policy is to let the market set monetary policy. Second best is to let the experts control policy. And then there is the third best . . . our current system.

  44. Gravatar of Getting What You Pay For, or Why Policy Makers Should be Making More Money | The New Equilibrium Getting What You Pay For, or Why Policy Makers Should be Making More Money | The New Equilibrium
    21. January 2013 at 13:11

    [...] catching up with a long neglected RSS reader, which I’ll blame on the holiday season, this post from December by Scott Sumner on how much of a premium is justifiable in order to secure competent and efficacious central [...]

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