In a recent interview by Alex TabarrokI saw this exchange:
Auren Hoffman (52:52.27)
Now, your colleague, Tyler Cowen, has just made the argument that we should reach out to the elite economist, that you don’t even have to be an economist to be a member of the Federal Reserve Board. What do you think about that?
Alex (53:09.104)
Arthur Burns, I think he was the first one with a PhD. There have been a few since then, but before there were a lot of people at the Federal Reserve who didn’t have PhDs in economics.
There’s a lot to get out of there:
1. Have we reached an advanced economy?
2. Do we need economists to decide monetary policy?
In my opinion, the financial economy peaked in the period before the Great Recession in 2008, and has declined slightly since then. The second question is more difficult to answer. Let’s start with an analogy, which illustrates a common mistake when thinking about this type of problem.
Let’s say you are asked for an opinion on how to fix things in a democratic country plagued by bad governance. What is your solution? Maybe you despair that voters are electing the wrong politicians. He suggests that the country become a dictator, and appoint a person like Lee Kuan Yew as the head of the country.
I hope you see the problem. Except that you they are dictators, you don’t get to choose who gets elected. When a country is ruled by a dictator, it is a competitive world to rise to the top. A successful candidate is more likely to resemble Nicolas Maduro or Vladimir Putin than Lee Kuan Yew.
In the case of monetary policy, the issue is not whether Ben Bernanke, Janet Yellen or Jay Powell did a great job; the problem is what kind of person is likely to achieve the best result. To make things even more complicated, the performance of the Fed chairman is not the same as the performance of the Fed as a whole, as decisions are made by committee. In my opinion, the Fed as a whole has done better under Yellen than her predecessor or successor, but I’m not sure how much of that was because of her decision-making, and how much because others were mistreated. the hand. In plain English, it’s complicated.
Other government agencies are facing the same problem. Is it necessary to have a law degree to serve in the Supreme Court? Is it attractive? Is it necessary to have a degree in finance to work at the SEC? Is it attractive?
It won’t be long before we’ll be asking if AI can be as effective as a human.
I am an elitist, but not a credentialist. I really like working for the Fed with people who are at the highest level of expertise in monetary policy. (Today, that is true of some top Fed officials, but not all.) However, I don’t really care if they have a PhD in economics. For example, I think Tyler Cowen could be a Supreme Court justice, despite the fact that (AFAIK) he doesn’t have a law degree. Yes, he will never be elected because his votes will not be “reliable”.
I have noticed that most people are overconfident in their ability to make good monetary policy. That’s probably true for me too, as it’s always difficult to have an unbiased view of your own ability. When people are overconfident, they tend to have the following thought process: “The Fed chair is over there! I can do a better job than him.” On the first point they are generally right, on the second I am not so sure.
People tend to remember their successes more than their failures, for natural reasons. So they remember the asset price bubbles they correctly called, but forget about the assets that went up so much after they called them a bubble. I have noticed the almost complete negative correlation between those who had positive views on monetary policy in 2009, and those who had positive views on monetary policy in 2021—including yours truly.
You may have heard comments about how it’s better to be governed by a bunch of people picked from the Boston phone book than to study at Harvard. But on closer inspection, is that really true? Professors have a lot of nutty ideas, but so do ordinary people. For example, polls suggest that the general public is overwhelmingly supportive of authoritarian policy proposals. And even if ordinary people have more sound opinions than most professors on “woke” issues, I doubt whether they have more sound opinions on questions like where to set the interest rate on bank reserves.
Some might argue that they don’t encourage picking Fed officials in a phone book; rather they choose to appoint people with extensive experience in banking and finance. Excuse me, I’d like to be appointed a plumber at the Fed. At least with the plumbers, we’ll understand that they don’t know what they’re doing, and we can probably pressure them with restrictive policy legislation, or let the Fed staff decide. Most people at the top of finance and banking are shockingly ignorant of the basics of financial economics, but they don’t know it. If you think that “thinking from price changes” is a failure of some economists (and it is) check out some of the comments made by top entrepreneurs. “Perhaps a large interest rate cut would scare people away, thereby reducing demand.” “Perhaps a rise in interest rates would increase demand, putting more money in the pockets of the grateful.” It makes you want to cry.
Among economists, thinking about changing prices is like the low-grade flu. Among non-economists, it is a global epidemic.
So yes, on average an economist will know more about monetary policy than a non-economist. But Fed chairs don’t just need to be smart; they need to be effective leaders, an area where entrepreneurs often have an advantage. In the end I suspect this is one of those 55%-45% things, where the economists are slightly better, but the non-economists will outnumber the economists so often that it will be hard to tell the difference. Anyway, if serving at the Fed is really a position where ignorance is better than knowledge, then it’s the only such position I know of.
PS. In this post I explain averages. I have met a number of people in business and finance who are well versed in monetary policy.
PPS. In this paper, I focus on the issue of monetary policy determination. Obviously, we need people with banking experience to manage the banks. I wish we could follow the UK practice of having separate boards for these two professions.
PPPS. Readers of this blog know that I am opposed to discretionary monetary policy. This post is based on the idea that I won’t get my way, at least for the foreseeable future.
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