RBA Review Report ignores the real questions and proposes to entrench the failed Groupthink

Over the last few decades, I have done a lot of reading and research on the way organisations and groups deteriorate into what socio-psychologists call Groupthink, which is a system of patterned behaviour that takes the group increasingly further away from reality and sees it denying basic facts while at the same time maintaining authority for its activities and work. Academic disciplines, in particular are susceptible to this sort of dynamic, because of the hierarchical structure of the workplace and the fact that the senior professors have a vested interest in suppressing any research findings that contest the work that got them to those senior posts when they were younger. The economics profession is riddled with this organisational disease. Second, I have also researched and written about the concept of depoliticisation – which involves the hollowing out of national sovereignty and curtailment of popular-democratic mechanisms. Both these phenomena are at the centre of my rejection of many of the key recommendations of the external review of the Reserve Bank of Australia – Final Report: An RBA for the Future – which was published today (April 20, 2023). While the Report purports to providing the central bank with a pathway to the future, what is really being proposed – in the form of a new monetary policy board stacked with ‘experts’ (economists) – is less political accountability (depoliticisation) and a decision-making structure that is hindered by Groupthink.

Constructing the problem

The first task in any problem solving exercise is to construct the problem correctly for that determines, in most cases, the path to solution.

If you fail in that first task, then the ‘solution’ will also likely fail.

Such is the case of the RBA Review exercise.

The first question I would explore had I been in charge of the review would be whether the current monetary policy approach is effective and fit for purpose.

That is, has the practice where central banks are left by government to set an inflation target (or a band of acceptable rates as in the case of the RBA), and, then assume all deviations from that target are demand-driven such that they vary interest rates up and down, which means they seek to deliberately use unemployment to discipline any inflation pressures beyond their target – served the interests of citizens?

The corollary to that question relates to the fact that when the major macroeconomic policy assignment prioritises monetary policy (as above), this requires fiscal policy (government spending and taxation) to play a subordinate role, such that when the central bank is pushing up rates, fiscal policy has to contract (move to an austerity stance) so as not to force the central banks to force rates higher than it might.

So that question would ask whether the subordination of fiscal policy has served the interests of citizens.

In other words, before we get into the issues of central bank government, structure of decision-making committees, and those sort of matters – we have to determine whether the approach taken over the last several decades has worked and is the superior way to run macroeconomic policy.

Unfortunately, the Review process didn’t really interrogate those questions.

It simply concluded that:

The monetary policy framework of an independent central bank undertaking flexible inflation targeting is well suited to the future challenges Australia can expect to face.

At that point, I am diverging and rejecting the way that the Committee has constructed the problem.

The current monetary policy framework is totally unsuited to meeting the future challenges of Australia, regardless of how the decisions are made and/or publicised.

The Review Committee made 51 recommendations which are mostly trivial – the most talked about was to create a new committee of ‘expert’ economists to make the monetary policy decisions rather than the existing board structure (which is mostly stacked with business people who cannot claim to be economic experts).

But it just accepts that the dominance of monetary policy in the macroeconomic policy mix and the subordination of fiscal policy is sound and requires no further discussion.

The Committee completely ignores that fact that during this era of ‘inflation targetting’ we have seen:

1. Major financial crises with bank failures requiring nationalisation and massive income losses for ordinary citizens.

2. Massive real estate housing bubbles and collapses – and housing in many countries now being largely unaffordable for low-income citizens.

3. Prior to the pandemic with inflation well below the stated targets, central banks demonstrated their failure in stimulating higher inflation despite their efforts. They systematically missed their targets for years.

4. Studies have shown that there has been no fundamental difference in outcomes for nations where the central banks did not adopt targets compared to other nations that did.

5. As a result of the pandemic, the supply chain for goods and services was significantly disrupted at the same time that governments sought in various ways and in varying degrees of coverage to protect incomes for workers restricted in one way or another.

The result was always going to be a transitory period of inflationary pressures.

The subsequent escalation of war in the Ukraine and then the OPEC+ restrictions on oil supply exacerbated those pressures but didn’t alter the transitory nature of them.

Transitory meant that we could identify the original cause(s) and there were no second-round propagating factors to entrench the inflation once those original cause(s) abated.

It doesn’t necessarily mean short in duration.

It all depends on when those original causes abate or are worked around (in the case of the Ukraine disruptions to food and energy).

But most central banks responded to these temporary inflationary pressures as if it was a full-blown excess demand event with a wage-price spiral to follow and started pushing up interest rates.

The inflationary pressures were already abating because the supply-side factors were resolving.

Blind to that reality, the RBA kept pushing up rates, in an obsessive display of its mediocrity.

It hasn’t yet caused a major shift in unemployment or spending as it designed to do, yet inflation is falling.

Put that together and you realise its policy effectiveness is very low, very uncertain and may eventually cause recession once the horse has bolted.

The RBA has very little clue of the impacts of its rate hikes so far.

What we can tell is that there has been a massive redistribution of income from low-paid mortgage holders to wealthy individuals.

But, to repeat, inflation was already falling as a result of factors that were not interest-rate sensitive.

Put those five points together and you would conclude the much-hyped ‘inflation targetting’ era has been a failure.

It has resulted in elevated levels of unemployment and underemployment, lower rates of GDP growth, lower rates of productivity growth and innovation, and delivered massive real estate booms and financial crises.

Prior to the adoption of inflation targetting in 1994 (for Australia), inflation had burbled along throughout the 1980s as a residual from the OPEC oil shocks and the subsequent distributional battle between workers and capital as to who would absorb the real income loss that the sharp rise in imported oil delivered.

The low inflation period began as a result of the 1991 recession and was nothing at all to do with the ‘modern’ conduct of monetary policy.

While interest rates did rise to very high levels in the late 1980s in Australia, it was the obsessive pursuit of fiscal surpluses under the Hawke-Keating Labor government that did the damage.

I wrote about all that in this blog post – The Great Moderation myth (January 24, 2010).

The fact that the Review Committee really ignored all this is a testament to their own blinkered vision.

It simply failed to construct the problem correctly and as a result it has made recommendations that will make matters worse.

Depoliticisation

In our 2017 book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, September 2017) – we considered the way in which neoliberalism had depoliticised economic policy making.

We traced early demonstrations of this phenomenon to 1976 when the British Labour government (Callaghan and Healey) lied to the British people about having run out of money and told them they had to borrow from the IMF or court an economic and financial disaster.

It was pure fiction but the spectre of the IMF loan provided the government with the perfect alibi with which to head off mounting political opposition, by presenting austerity as the only way forward.

At the time, Healey (Chancellor) was facing harsh opposition from within his own ranks from the Left (Tony Benn etc) and needed some external catastrophising beyond the control of government to counter the demands this group of rebels were making.

By then, with flexible exchange rates becoming more widespread after the collapse of the Bretton Woods system, the IMF had lost its raison d’être (as the banker to stabilise the fixed exchange rate system) and was reinventing itself as the attack dog for the growing neoliberal dominance.

So, in that vein, the IMF was more than happy to play along with Callaghan and Healey to support their austerity quest.

In subsequent years and decades, depoliticisation has become commonplace across all advanced countries, whereby politicians shield themselves from the flack that arises from harsh policies by claiming that some external group, organisation or body had forced their hand – the TINA strategy.

Initially, it was the IMF that was the bad apple forcing governments into austerity.

As neoliberalism became more entrenched we saw the emergence of so-called ‘independent’ structures within government – like the ‘Congressional Budget Office’ in the US, the ‘Office for Budget Responsibility’ in the UK, and similar organisations all over the world – that became pressure lobby’s against government fiscal flexibility.

They were packed full of mainstream economists (see later) and their regular fiscal reports, analyses, debt simulations, etc became media events to heap pressure on any government that dared depart from the narrow path of austerity.

Governments, in turn, told their citizens that the analysis of the ‘independent’ experts was authoritative and had to be observed – thereby shifting the ‘blame’ for hard cuts to welfare and privatisations etc onto these unaccountable, unelected and amorphous officials.

The ‘central bank independence’ ruse was part of this depoliticisation.

In Reclaiming the State we wrote:

The various policies adopted by Western governments from the 1970s onwards to promote depoliticisation include: (i) reducing the power of parliaments vis-à-vis that of governments and making the former increasingly less representative (for instance, by moving from proportional parliamentary systems to majoritarian ones); (ii) making central banks formally independent of governments, with the explicit aim of subjugating the latter to ‘market-based discipline’; (iii) adopting ‘inflation targeting’ – an approach which stresses low inflation as the primary objective of monetary policy, to the exclusion of other policy objectives such as full employment – as the dominant approach to central bank policymaking; (iv) adopting rules-bound policies – on public spending, debt as a proportion of GDP, competition, etc. – thereby limiting what politicians can do at the behest of their electorates; (v) subordinating spending departments to treasury control; (vi) readopting fixed exchange rates systems, which, as we have seen, severely limit the ability of governments to exercise control over economic policy; and, most importantly perhaps, (vii) surrendering national prerogatives to supranational institutions and super-state bureaucracies.

The RBA Review Committee simply accepted all that, without really even mentioning it, as if there is no contested ideas or terrain here.

It evolves into the Groupthink problem

One of the key recommendations of the RBA Review is that (page 123):

The Government should constitute a Monetary Policy Board with responsibility for monetary policy decisions and oversight of the RBA’s contribution to financial system stability (except payments system policy), but not broader corporate governance.

The difference between this recommendation and the current state is that the Review wants Monetary Policy Committee members to be largely drawn from academic and business economists, who they claim have the expertise that other people do not.

They claim that “economic expertise of the Reserve Bank Boards external members is lower than for comparable central banks”, which has “limited the depth of challenge and debate at the Reserve Bank Board”.

Essentially, as I understand the dynamics of the current board which makes the monthly interest rate decisions, the governor and his staff come in to the meeting with the plan and a heap of selective data, and a host of ‘fears and speculations’, and impose that on the rest of the Board, which is mostly business lackies appointed by governments to curry favour.

So they want the next board to be economists with “a deep understanding of areas such as open-economy macroeconomics, the financial system, labour markets and the supply side of the economy”.

And “it would very likely mean more academic expertise than is currently on the Reserve Bank Board.”

So currently, the ‘economists’ (governor and staff) dictate the outcomes.

Under the new arrangement a host of New Keynesian macroeconomists will be appointed to the Board and make the decisions.

No real change at all.

The likely appointees are all from the same sort of academic programs and hold out the same analytical framework.

Just read the literature that comes out from that cohort – uniform nonsense mostly – which supports the inflation targetting approach and thinks fiscal policy should be subjugated.

The New Keynesian cohort have been regularly demanding higher interest rates and claim that unemployment is currently well below the ‘full employment’ mark and must rise to kill off inflation.

And it is not their well-paid, secure jobs that they want destroyed when they pontificate in the media on these issues.

So as well as further depoliticisation, the Groupthink that has crippled the economics academy will be driving the monetary policy decision making.

It is a very depressing outlook really.

The Treasurer was out in force promoting the recommendations from the Review and claimed that we were in an over-full employment state at present, given unemployment rates are below the so-called NAIRU estimates from Treasury.

I most recently wrote about that issue in this blog post – RBA appeal to NAIRU authority is a fraud (February 23, 2023).

So when the Treasurer is claiming we need austerity and rising unemployment to deal with inflation he is appealing to a fraud and his alleged precision has no basis in fact or statistical analysis.

Conclusion

More of the same.

Conversations within the same camp about the same things represented as ‘independent’ analysis.

Groupthink in action.

The Review’s Report should be rejected.

That is enough for today!

(c) Copyright 2023 William Mitchell. All Rights Reserved.