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.
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.
What's less clear is whether a computer would have done better than central bankers during the global financial crisis. The deep downturn in economic activity required them to take creative and dramatic action to save the global economy from freefall. Unprecedented forms of monetary support like Ben Bernanke's "credit easing" and the return of Operation Twist could hardly have come from a computer programmed to buy and sell the same government securities over and over again.
A computer would also have fallen short at the European Central Bank, despite its narrow focus on inflation. Last year, the growth rates of the 17 economies in the eurozone ranged from -7 percent in Greece to +7 percent in Estonia, adjusted for inflation. How could you set a single monetary policy for all of these countries? It would be impossible for anyone, human or machine.
With these experiences in mind, the right way to think about monetary policy may be like driving a car on the highway. Today's cars can be driven manually or using cruise control. Under normal conditions, cruise control works just fine, maintaining a constant speed by adjusting the amount of fuel going to the engine. When the driving gets a little hairy, you want humans in charge. Their reactions may not be perfect, especially in retrospect, but the cruise control computer doesn't have the same analytical ability or range of available actions.
The driving has certainly become pretty hairy in the United Kingdom, and so it's understandable that the Bank of England would want to draft a foreigner widely seen as at the top of his field. To his credit, Carney is nothing like Greenspan -- his statements are sharp and transparent, using a combination of plain language and data to convey his conclusions. But the days of stardom for people like Carney may be numbered.
Put simply, the computers are catching up. Within a decade, self-driving cars will likely become commonplace on American highways. Just like central bankers, the cars will have to process a lot of information quickly and use a limited number of tools to choose a safe path forward despite constant uncertainty.
Of course, self-driving cars will have to perform as well or better than humans, even in the most difficult situations. Yet if a rule as simple as Taylor's would already have performed as well or better than Greenspan did throughout his entire tenure at the Fed, then surely a computer to replace Bernanke or Carney is within the capacity of current technology. The only questions left are who will program it, and who will be the first to give it a test drive?