Sunday, August 01, 2010
Too many committees may mean a policy headache
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My Sunday Times piece is available to subscribers on www.thesundaytimes.co.uk - this is an excerpt:

The monetary policy committee (MPC) will meet this week, as it has done since 1997, setting interest rates and occasionally resorting to unconventional measures such as quantitative easing, to achieve its 2% inflation target.

It is not the only committee in town. To the MPC are being added, courtesy of the new government, two additional policy-making committees. Everybody by now will have heard of the Office for Budget Responsibility and its interim chairman Sir Alan Budd, who after generating more headlines and comment than is fair for a new body, is heading back to the quiet life in the West Country, leaving things to his permanent successor.

The OBR’s decision-making body is the budget responsibility committee (BRC), a three-member body including the chairman, which will be responsible for official economic and fiscal forecasting, for assessing the long-term sustainability of the public finances and for telling the politicians when they are playing fast and loose. You can have some innocent fun imagining life on the BRC during phases of Gordon Brown’s chancellorship.

As if this is not enough, another powerful committee is being set up, within the Bank, the financial policy committee (FPC), responsible for so-called macroprudential regulation. A Treasury consultation paper last week said a “strong” FPC would have “ultimate authority to identify imbalances, risks and vulnerabilities in the financial system and take decisive action to mitigate these in order to protect the wider economy”.

Is this proliferation of committees a good thing, or could it be a case of too many cooks spoiling the broth?

In the case of the two committees in the Bank, I think it is. In all the inquests about the crisis, and role of the authorities leading up to it, one thing was clear; inflation-targeting was fine as far as it went but it needed to be augmented. In particular, more attention had to be paid to the growth of credit and the prices of assets such as housing, even if they did not directly impact on the target measure of inflation.

This augmenting of inflation-targeting had to go well beyond merely including house prices in the consumer prices index. It had to involve new macroprudential tools (or resurrecting tools used in the past) so that action could be taken to limit the growth of credit in a boom and, by contrast, encouraging its growth in a slowdown. Varying the capital requirements on the banks to take account of the cycle might be one such tool. More direct restrictions on the growth of credit, an echo of the banking “corset” of the 1970s, might be another.

In all the discussion over this, however, the assumption was that these extra tools would be handed to the MPC. Instead the new FPC will get them. The two committees will include the governor and his two current deputies; which implies a big concentration of power in their hands. Otherwise their membership will be different.

No doubt the work of the two committees will be co-ordinated, so one is not cutting interest rates while the other is trying to clamp down on credit growth. I can’t helping thinking, however, that this is an unnecessary complication which increases the chances of policy errors in future.

Sushil Wadhwani, a former MPC member, agrees. In a chapter in the London School of Economics’ Future of Finance report, he thinks the MPC wwas partly to blame in the run-up to the crisis; it could have done more, through interest rates, to restrict the rise in debt and asset prices.

By the same token, however, he thinks it is “odd” not to give the MPC responsibility for the new macroprudential tools. “Standard economic theory suggests that when one has two instruments and two targets, then it is, in general, more efficient to set the instruments simultaneously,” he writes. I think he is right.

What about the other new committee, the BRC? Despite teething problems, some of are due to a new body taking on an independent fiscal role at a time of unusual political change and with a large budget deficit to deal with, it and the OBR look like a welcome change.

We will not really know how it performs until it gets beyond the government’s honeymoon and into some political battles - which could mean it telling the chancellor in a couple of years he has to go further with tax hikes and spending cuts - but it should soon get beyond its shaky start.

For it to do so, it has to make sure it gets the right people on the three-member BRC, and there is a danger that in terms of pay at least, the government is setting the bar too low.

No doubt mindful of his own dictum that public servants should not in general be paid more than the prime minister, George Osborne has set the salary of the OBR chairman at a “full-time equivalent” of up to £142,500, while the two committee members have a full-time equivalent salary of up to £115,000.

The job specification talks of these “high profile and influential roles” taking up an average of roughly three days a week, which is where the full-time equivalent bit comes in.

Let us assume three days a week. That would reduce the OBR chairman’s salary to £85,500, while those of his fellow committee members would be £69,000. These are decent salaries on most measures but, if Budd’s experience is anything to go by, do not begin to compensate for the flak and baggage the job carries with it.

In larger private sector firms, such salaries for very senior posts would be laughable. Tony Hayward can look forward to a £600,000 a year BP salary even after flopping in his handling of the US oil spill, more than six times what the OBR chairman can expect for standing up to the government, being grilled by MPs and filleted by the media.

Nor do OBR salaries stack up well against the other committees. Over at the Bank, Mervyn King enjoys salary and benefits of £305,764, while his deputy governors, Charlie Bean and Paul Tucker, get £254,292 and £257,664 respectively. Members of the MPC, who work an average three-day week, get £131,771 (actual, not full-time equivalent).

Over at the soon-to-be-abolished Financial Services Authority, rewards are even greater. Hector Sants, chief executive, who will join the Bank as a third deputy governor with responsibility for supervision, threatens to blow a hole in its pay structure. His pay, bonus and benefits for 2009-10 totalled £742,011. Lord Turner, the chairman, who will not be joining the Bank - as far as we know - got £482,442.

Money isn’t everything, and there will no doubt be public-spirited and talented people out there who would want to run this important fiscal policy body whatever the salary. But this seems badly skewed.