Are central bankers the most overrated workers in the global economy? When Mark Carney, the governor of the Bank of Canada, was hired by the Bank of England this week, the financial media reacted as though the young Brazilian soccer star Neymar had signed for Barcelona -- a well-known prodigy had finally jumped to the big leagues. It's hard to believe the hype around central bankers, though, when a computer might do the job just as well.
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There's no doubt that the job of a central banker is an important one. Countries have increasingly come to rely on monetary policy to smooth out the bumps in their economic cycles. Central banks are usually charged with controlling inflation by expanding and contracting the money supply, and sometimes with protecting their countries from adverse exchange rates.
A few central banks, like the U.S. Federal Reserve, are also supposed to support employment through economic growth, an addition that makes the job more complicated both logistically and politically. Some others, like the Reserve Bank of India, are not even independent of the other branches of government; political leaders can thus impose their will on central bankers, with the result that the bank's credibility -- its main asset when setting expectations about interest rates and the money supply -- can diminish to zero.
Yet for central banks whose main job is simply to control inflation independently of the rest of government, there's not much mystery. You could easily set up a computer to open the monetary taps when inflation was too low and start sucking money out of the economy when it was too high, in both cases stopping as inflation reached a preset target. And John Taylor, an economist and former Treasury official, even came up with a rule-of-thumb that fit the Fed's broader mandate to maintain full employment.
Alan Greenspan did his best to create a mystique around his post as chairman of the Fed with oblique pronouncements and regal surroundings, but his performance through the 1990s -- and indeed up until 2002 -- seemed to follow the "Taylor Rule" quite closely. After that, of course, he left the taps open far longer than a computer would have, blowing up the American credit and housing bubbles that would burst with devastating effect.
Greenspan may have been trying to bolster the reelection chances of George W. Bush, whose tax cuts he backed in an unusual intrusion into fiscal policy. Or he may have been trying to ensure that his final term ended during a boom, in an attempt to cement his legacy. Either way, a dispassionate computer might have done better for the American people.
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