What can Governors do?

How much influence can individuals have over the economy? This is one question raised by the appointment of Mark Carney as the Bank of England's new "quality guv'nor".

The media-political class think the answer is "a lot" - hence the Times' headline "Chancellor banks on top outsider to save economy."

Sadly, we'll never get a clean answer to this question because we'll never see two economic histories side by side, one with Carney as Governor and one with Tucker. But I suspect there are limits to what Mr Carney can achieve:

1. He cannot set monetary policy targets. That's the job of the Chancellor. Granted, a Governor could, in principle, stimulate the economy by forecasting low inflation and thus setting a loose policy. But his ability to do this is constrained, in part by the fact that low inflation forecasts might not be believed by outside economists or financial markets.

2. Ability might be irrelevant for monetary policy. One way in which this might the so is simply that even amateurs can quite quickly learn how to set reasonably effective monetary policy. Alternatively, it could be that inflation is so unpredictable that no amount of ability will be much help. Paul Ormerod has written (pdf): 

Given that the change in inflation is indistinguishable from a random series, [MPC members] not know what the rate of inflation is going to be in, say, one year’s time. Specifically, they do not know whether it will be higher or lower than it is at present. So their ability to control the rate of inflation, to meet the target, is very seriously constrained.

3.New research warns us that large parts of policy-makers' CVs might be irrelevant. Marc-Daniel Moessinger has found that although finance minsters' age and political experience are associated with lower public borrowing, their "educational background or ideology have no significant impact on public debt changes." Why should the backgrounds of Governors matter more?

4. The fact that Canada weathered the global crisis well might have little to do with Carney. Here's Andrew Coyne:

That our banking system was not so badly mauled by the crisis as others had, of course, less to do with Carney or any current officeholder than with the historical and policy inheritance they came into: if any single person deserves credit it’s probably Mike Wilson, author of the sweeping financial regulatory reforms carried out under the Mulroney government in the 1980s.

We might add that Canada's position as a net commodity exporter and the fact that its domestic savings exceeded domestic investment in the 00s (thus reducing the chances of high bank leverage) also helped.

I'll concede that Mr Carney might be better able than King was to deal with any future financial crisis. But this might owe less to personal dispositions than to the facts that the Bank will have more power to deal with such crises in future, and that we are intellectually less ill-prepared for a crisis now than we were in 2007.

None of this is to say Mr Osborne should have gotten anyone off the street to be Governor. The role of Governor is not so much to shape the economy decisively as to give the impression that he is in control. It is here that Mr Carney's background - at Goldmans as well as at the BoC - helps. It equips him to give outsiders the impression that he knows what he's doing, whatever the reality.

I suspect the best precedent for Mr Osborne's decision is Fabio Capello's appointment as England manager. That experience taught us that when an impressive CV hits a dysfunctional structure, the structure stays in place. It also taught us that, when this happens, people find lots of ways of blaming the individual and thus avoid having to question their ideological faith in the importance of individuals rather than structural forces.

Comments

[Tony]

But according tohttp://baselinescenario.com/2010/03/25/the-canadian-banking-fallacy/ Canadian banks were highly leveraged

[Nick Rowe]

What Paul Ormerod said is a total non-sequitur.

Under inflation forecast targeting, if the Bank is responding correctly to new information, deviations of inflation from target at the *must* be unforecastable at the targeting horizon. His assertion that inflation is unforecastable is exactly what you would expect if the central bank was controlling it to a fixed target. This is an immediate implication of the orthogonality of forecast errors with respect to the information set if the Bank has rational expectations.

I've done a few posts on this. E.g. http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/06/no-you-cant-test-whether-core-is-useful-that-way.html

[Nick Rowe]

I tend to agree with the rest of what you said though. Mark Carney is good, AFAIK, but there's far too much personality cult here.

(But man, what Paul Ormerod said in that quote is so totally wrong! Jeez!)

[Nick Rowe]

Maybe he's never heard of Milton Friedman's thermostat? http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/07/why-are-almost-all-economists-unaware-of-milton-friedmans-thermostat.html

[Chris Purnell]

I think that a Governor can make a negative impact by having disastrous policies cf. the early 1930's with Montague Norman. Whether he can have a similar positive result I'd have thought was doubtful at best. Using indicators from non- comparable economies is ludicrous as the management of stresses are likewise non- comparable. Thus I think that the analogy with football managers going onto be National coaches is apposite.

[Keith]

But if Chris has made a correct case, and I think he has, then the markets and political class should be quite happy for any one to be chosen off the street as the Governor. By extension of the argument the character and qualifications of most people are irrelevant to economic efficiency. Most people can do most jobs and most of the time the structure of society determine the results not the characteristics of the person doing the job. The Governor can only control some aspects of the economy and if they are not the effective parts he will make no impact.

[BT London]

Carney is Goldman Sachs and doesn't care about TBTF universal banks. He thinks Basel III is the cure.

http://www.nakedcapitalism.com/2012/11/marshall-auerback-bank-of-canada-governor-is-wrong-on-too-big-to-fail-and-wrong-on-canadas-banking-system.html

[Luke]

Slightly off topic, but does the appointment of a (perfectly competent) Canadian suggest a tendency to think there's some magic solution? Nothing to do with any structural problems, all to do with a few people cocking up, let's get in a new broom and all will be well.

I have my doubts.