Perhaps the fourth most important job in the world is up for grabs. If you (*ahem*) want to be the UK’s chief central banker, the job is available – applications are due by 8th October to 1 Horse Guards Road, London. I say fourth most important because there are only three economies larger than the UK in the same depressed state: the US, Japan and the Eurozone. Unfortunately those doing the hiring have no idea how and why this job is important.
Why is this job so important? It is important because the central bank, to a large degree, determines how quickly we recover. If the bank keeps money tight we will recover very, very slowly, if it gets money right we will recover very, very quickly. I’ve decided to stop demanding loose money because that isn’t what I really want. Monetary policy should be set at the level that is predicted to produce the outcome you want, neither loose nor tight, but right.
For several years that is exactly what the Bank of England did. From mid-2004 to mid-2008 they set policy so that they expected 2% inflation in two years time. As this graph cribbed from Britmouse shows.
Since 2008 they have consistently set policy too tight to hit their target, that is, even by they own preferred metric they have been hamstringing the recovery. Money has been tight so growth has been slow. This makes the quality of the successor to Mervyn King very important indeed. Even doing his job properly would be an improvement on the Bank’s current practice.
I would argue that even this is not good enough. Someone who could do Mervyn King’s job well and set policy that is predicted to succeed, not fail as he has, will not get us the recover we need to put a million people back to work. We will remain depressed because inflation is a bad indicator of an economic recovery, much better is something like nominal GDP, which I have been going on about ad nauseum because people still don’t get it. (Click on the two graphs in the right of the blog for more info on this)
Below is a graph that shows the gap that has opened up between where the UK’s nominal GDP should be and where it is.
The economy wants to produce £1.7trn of goods and services a year, but tight money has restricted it to about 1.57trn of goods and services a year. £170 billion is what the UK economy is missing out on each and every year because our central bankers are not good enough at their jobs (nor currently authorised by the treasury) to bring us back to trend. The total loss currently totals around £500,000,000,000 or half a trillion pounds.
So what is a good central banker worth? Well, about £500,000,000,000 would be one answer, but bygones are bygones so lets be more constructive about it. A good central banker is one who closes that gap as quickly as possible. In the US they estimated that thier (bad) central bankers has cost their economy $4trn in lost output and will cost the economy another $4trn by 2018. A good central banker could be worth $4trn to them if they could return the economy to trend twice as quickly, which seems possible.
Lets copy the mechanism they employed here and makes some assumptions. First, a bad central banker closes that gap by 2018 during which the gap steadily closes. Second, a good one does it in half that time and the gap closes correspondingly until then. After a fairly convoluted process involving my half remembered A level maths I’ve decided that a bad central banker costs us a total of £500 billion in lost output, while a good one loses us “only” £250 billion in lost output. So doing this job correctly is worth perhaps a sixth of everything the UK can produce in a single year.
That they’re paying Sir Mervyn’s replacement a measly £307,792 a year suggests to me they aren’t taking things seriously enough. By our metric of good banker versus bad, they are only expecting an economist 0.0001% better than Mervyn King. Which might be setting the bar a little too low, even as a replacement for our worst central banker since the 1930s.
Of course, it being the coaltion, things are even worse than they at first appear. They aren’t even looking for an economist 0.0001% better than Mervyn King, they’re looking for a financial regulator. Read this paragraph and weep:
The successful candidate will have experience of working in, or with, a central bank or similar institution; or will have worked at the most senior level in a major bank or other financial institution. He or she will demonstrate strong leadership, management and policy skills; will have an advanced understanding of financial markets and good economic knowledge. He or she will be a strong communicator, have good interpersonal skills and will be a person of undisputed integrity and standing.
Advanced knowledge of financial markets, but only “good” economic knowledge? Forgive me a moment, but are you fucking kidding me Cameron?
They don’t want a central banker, they want a financial regulator. A financial regulator needs to prevent fraud and ensure banks adhere to the rules laid out by parliament. A central bank is in charge of nominal demand because they issue currency. The two needn’t have anything to do with each other. Now that the Bank has to take on the FSA’s financial regulation duties they are going to let their other responsibilities go by the wayside. Ignorance will damn us, not incompetence. As Scott Sumner has said of the 1930s, the last time we got things this wrong:
The elite bankers and financiers of Wall Street were pretty smart people. So were the central bankers of the US, Britain, and France. But they weren’t smart enough… So the wealthy conservatives of the interwar period who dominated central banking dug their own graves, and the graves of millions of others. Not through greed but through ignorance.
This time is perhaps worse. At least in the 1930s people had a rough idea what a central bank was meant to do. Today, those in charge don’t know for which job they are hiring, so those who are hired won’t know what they’re meant to do, and the rest of us will all suffer for it.
This in’t because any of us deserve it or because those doing the hiring or being hired are necessarily bad people, but because life is hard and confusing sometimes. Everyone is finding it hard and confusing and this is why I keep shouting about this, because nobody needs to be evil to inflict suffering, just wrong. So we need to stop being wrong as quickly as possible.
Filed under: Economics, BOE, Britmouse, Matthew O'Brien, Mervyn King, Mick Konczal, NGDP, Scott Sumner