No contraction without representation: who decides monetary policy?

With the review of the Reserve Bank now launched by Treasurer Jim Chalmers, the array of vested interests, ideologues and axe-grinders that make up those who’ve pushed for a review will get busy on their submissions.

A key area for the review, to be conducted by Canadian central banker Carolyn Wilkins, Professor Renée Fry-McKibbin and veteran bureaucrat Gordon de Brouwer, will be the composition of the RBA board. Unions want a union rep; academic economists want an academic economist rep; The Australian Financial Review warns against any “politically correct” shift away from the board being dominated by business representatives.

Without extensive consultation with previous board members, it will be difficult for the review to gauge whether changing the make-up of the board, or the appointments process, will have a material effect on RBA decisions. Rate hikes during both the 2007 and 2022 election campaigns, along with Philip Lowe’s outspokenness on fiscal and wages policy, suggest there’s no problem with the independence of the board; the fact that Tony Abbott wanted to impose an outsider on the Bank to “fix” it suggests the presence of business leaders on the board has done the Liberals no favours.

Against that, however, it’s clear that the RBA has been far too optimistic about wages growth for far too long, suggesting a near-total detachment from workplace reality for Australian workers. Even now, the Bank continues its “just around the corner” act, insisting wages growth will start any time now (we’ll find out at the end of August whether it is finally, after nearly a decade, proved right, when the June quarter wage price index result arrives).

It’s possible that the presence of a union representative or labour expert might have provided some pushback against RBA staff’s relentlessly Pollyanna-ish forecasts over the past nine years, and enabled a more realistic view of the wage stagnation that has beset most workers to inform its view that monetary policy should remain more or less stable in the years up to 2019. In particular, someone with extensive experience in the vagaries of Australian wage fixation — it may not necessarily be a union official — could have explained how the EBA system has broken down in real time, rather than requiring the bank to eventually draw its own conclusions from the data.

To restate the problem, it’s possible a more representative RBA board might have brought more expertise to bear on an important datapoint informing monetary policy considerations.

Normally representation and expertise are quite separate aspects of the governance of any institution, and especially powerful ones. A powerful public policy body that perfectly replicates the community it serves but has no expertise will fail to serve the community; a completely unrepresentative body of experts might get the big decisions right but be regarded as out of touch and illegitimate. Moreover, we know that experts come with their own biases, and don’t always get it right anyway — especially when faced with a novel crisis like a pandemic. Somewhere in the middle is a sweet spot for both representation and expertise.

At the moment the board is embarked on the most significant decision-making course in decades — certainly since the recovery from the financial crisis, possibly since it intervened to belt the recovery occurring under Paul Keating in the 1990s. Both Lowe and his deputy Michele Bullock insist Australian households have the wherewithal to withstand a long series of rate hikes. They are informed by streams of data and their business liaison program (which so successfully informed all those years of optimistic wage forecasts).

If they get their calls wrong, criticism of how out of touch the RBA is will accelerate. Some political figures outside the mainstream stand ready to exploit such sentiment. Clive Palmer proposed to cap interest rates at the last election — a dramatic abolition of central bank independence. His failure — beyond a single Senate spot — shouldn’t blind us to the reality that community sentiment could shift against what might be portrayed as an elite financial cabal. After all, there are already plenty of wingnut conspiracy theories — with plenty of disgusting anti-Semitic overtones — being peddled on the far right and even in the Senate already about central banks.

More representation may or may not add significantly to the board’s expertise, but it might help offset such sentiment.