Too much independence

I have always been skeptical of allowing Government institutions to be excessively independent. In a democracy, the Parliament should be supreme. Too much independence can lead to organisations becoming fiefdoms with the management of those organisations acting in their own interests rather than in the public interest. We saw a little of that last night when Ken Henry said that Prime Ministers shouldn’t sack Treasury Secretaries.

But the Reserve Bank is probably the most egregious example. While there is a good literature arguing for independent monetary policy, this does not mean that the organisation should be unaccountable.

Unlike the High Court, the RBA is not on budget. It is not subject to normal budgetary discipline and simply remits to the Government a dividend after its costs are subtracted from the revenue (such as seigniorage revenue). It has been given the monopoly right to print Australian currency and effectively is able to use that right to cost pad. I don’t think the Australian taxpayer is getting good value for money from the RBA.

In 2002 the RBA decided unilaterally to increase the indexation of the Reserve Bank Officers’ Superannuation Fund from CPI to Male Total Average Weekly Earnings (MTAWE). This gave an immediate and ongoing benefit to RBA employees, including the many who had already retired.

This was a decision of the RBA – the Government was not consulted nor was there a debate about the merits of the change. It simply happened.

The principal job of the Reserve Bank is to keep inflation low and stable. Its target is set by an agreement between the Governor and the Treasurer

The Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent, on average, over the cycle. This is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community. Seeking to achieve this rate, on average, provides discipline for monetary policy decision-making, and serves as an anchor for private-sector inflation expectations.

The Reserve Bank consistently uses the CPI as the principal measure of inflation (it even has an inflation calculator on its website.)

So if any organisation understands inflation, and the measurement of inflation using the CPI, it is the RBA.

Therefore the RBA deliberately and in full knowledge decided to increase the real income of both extant employees and retired employees by increasing the indexation of the RBA superannuation fund to MTAWE.

This decision created an immediate and ongoing cost to the taxpayer, as illustrated in the chart below where I have indexed CPI and MTAWE to 100 from the time when the RBA took the decision to change the indexation of its superannuation scheme. An RBA officer who retired with $100,000 of superannuation salary in 2002 would now have $160,000 per annum due to that decision rather than $133,000 – and the gap continues to widen.

(I will post separately about indexation in general – an interesting topic in its own right.)

Unlike most statutory offices, the remuneration of the Governor and Deputy Governor is set by the Reserve Bank Board (under section 24A of the Reserve Bank Act 1959) rather than the Remuneration Tribunal.

The Reserve Bank should be put on Budget, just like the High Court of Australia. Monetary policy will still be independently determined, but at least the operating expenses of the Reserve Bank would be subject to normal budgetary control. The RBA Act should also be changed so that the packages for the Governor and Deputy Governor are set by the Remuneration Tribunal in line with other statutory offices.

CPI comparison

About Samuel J

Samuel J has an economics background and is a part-time consultant
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28 Responses to Too much independence

  1. Eyrie

    If the dumb fucks can make it 2 to 3% they can make it zero. Friggin thieves!

  2. SJ, you are fallen for the great failing of the progressive Left.

    Too many policies and ideas of the Left assumed that they are the face of the future, rather than just another political party that will hold power as often as not.

    Democratic socialism is pointless because electoral power is fleeting. Sooner or latter, the left wing parties lose power and capitalism would be resorted.

    In most parliaments, those crazies to the right or left of you, when they win, are tempered by an occasional general election only every 3 to 5 years.

    Unfettered power loses its shine when it must be shared with your opponents. Little wonder that UK Labor reconsidered devolution, an assembly for London, and regional government after 15 years of Maggie Thatcher, good and hard.

    Developing positive alternatives on the Left and the Right includes what to do about the rotation of power and fettered versus unfettered parliamentary and executive power.

    The failure of the Left to develop its own constitutional political economy was a major strategic shortcoming. Frequenting wine bars, cafes and blogs muttering to each other ‘our day will come, our day will come’ is not enough. Don’t join them for that latte.

    Privatisation and deregulation is a lot slower in a federal system with an effective upper house elected by proportional representation. A divided government is a weak government in the hands of a reformer – be they of the Left or the Right.

    Regulatory powers and public ownership is spread over different levels of federations, with different parties in power at various levels at the same time, all worried about losing office by going to far away from what the majority wants. The will of the people is constantly tested and measured in a federal system with elections at one level or another every year.

    I prefer James Buchanan’s constitutional political economy about rules constraining people to behave as desired. Same politicians and voters, warts and all, but with different rules, there are different outcomes.

    The rotation of power is common in a democracies, and the worst rise to the top, so it is wise to design constitutional safeguards to minimise the damage done when those crazies to the Right or the Left of you get their chance in office, as they will.

  3. Samuel J

    Jim, you’re right about constraints, but I think of that in a Federation where sovereign parliaments compete against each other. But my principal argument here has been that the RBA has too much independence. If it was on budget it would still have the independent monetary policy lever.

  4. johanna

    Agree with Samuel that you have missed the point, Jim. They can write their own ticket for expenses, in the name of being “independent.”

    Independent statutory authorities are handy for keeping the flak off Ministers (just look at the ABC), but the downsides are there for all to see.

  5. SJ, nugget combs used that independence in the 1960s to buy a lot of Australian art. I noticed these paintings adorning most of their walls when at the bank for a job interview while at university.

    Robert Tollison and others (1983) wrote about how control over the budget the Fed influenced monetary policy. they found a positive relationship between the number of Fed employees and growth in the money supply. Toma (1982, 1997, 2013) argued that the self-financing nature of the Fed influenced its monetary policy since at least the 1920s.

  6. samuel j

    Indeed, Jim. The RBA has the best Australian art collection outside of the NGA. It has the best wine collection – including Grange – in Australia. Only Penfolds has a larger collection of Grange.

    The very first VIP plane in Australia was one purchased by the RBA for Nugget Coombs. The RBA flew that plane well before any corporate executive had a VIP plane.

    H.C. Coombs may have pretended to be a socialist, but he managed to fatten his own remuneration package quite handsomely. He had that VIP plane well before any prime minister had access to a VIP plane.

  7. samuel j

    In short, who controls the RBA? There is no capital market discipline – the RBA cannot be subject to a takeover attempt. The RBA Board exercises no corporate governance role (this, by the way, puts the RBA Board members in potential breach of the CAC Act, but who is going to take action against RBA Board members)?

    The RBA management is effectively master of its own universe, with a guaranteed and growing revenue source and plenty of opportunity to fatten up. No criticism by politicians is brooked, as it is batted off as an attack on their independence.

  8. Andrew

    Who’s going to take action against an RBA board member? Didn’t Goose Swansteen punt McKibben for outing the botched stimulus?

    As for Ken Henry, he’s the embodiment of why govt should be able to sack Treasury heads. (And why once out of there they should never be allowed in any non wombat-related employment again.

  9. Menai Pete

    A glance a the graph shows how retired Defence Force personnel have had their pensions screwed by successive Governments (including this current one) refusing to change their indexation from the discredited CPI to a more realistic base.

  10. Samuel J

    No Menai Pete. The taxpayer has been screwed by indexing all other pensions (including the age pension and disability support pension) to above the CPI.

    All pensions and defined benefit superannuation payments should be indexed to the CPI which overstates inflation. I will argue this in a separate post over the next few days.

    With the ageing population, it is vital that we reduce the indexation of pensions to the CPI. It is not discredited and I find it offensive that public servants and defence personnel want to screw more out of the taxpayer.

    A realistic base is one which is fiscally sustainable and maintains the real income of pensioners. That is the CPI less about 100 basis points. I’d settle on the CPI.

  11. Squirrel

    It would be most interesting to know what reason(s) were given for the 2002 change to RBA staff superannuation pension indexation.

    Re the Governor and Deputy Governor, this from the Bank’s 2013 Annual Report:

    “Remuneration of the Governor and Deputy Governor, and fees of non-executive members of the Reserve Bank Board and the Payments System Board, are governed by the Remuneration Tribunal. The positions of Governor and Deputy Governor are Principal Executive Offices (PEOs) within the jurisdiction of the Remuneration Tribunal. As the employing body of the Governor and Deputy Governor, the Reserve Bank Board sets their remuneration following a recommendation of the Remuneration Committee (comprising three non-executive directors). No adjustment was made to the remuneration of the Governor or Deputy Governor in 2012/13. Total remuneration (and salary) for these positions in 2012/13 was $986,773 (including salary of $842,285) and $700,000 (including salary of $593,782). These rates are consistent with those declared by the Remuneration Tribunal. “

  12. Baldrick

    Nice work, if you can get it.

    RBA staff costs have grown steadily since 2008/9:
    2008/09 – $132 m
    2009/10 – $141 m
    2010/11 – $148 m
    2011/12 – $156 m
    2012/13 – $169 m

    The Bank’s Workplace Agreement provided for a 4 per cent salary increase in 2012/13 for the staff it covers, with scope for a modest additional payment in recognition of good performance. Staff on individual contracts received, on average, a salary increase comparable to that provided by the Workplace Agreement.

  13. Ellen of Tasmania

    This is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community.

    Rubbish.

  14. Ellen of Tasmania

    The Evil Princes of Martin Place: The Reserve Bank of Australia, the Global Financial Crisis and the Threat to Australian’s Liberty and Prosperity. By Chris Leithner.

  15. Ellen of Tasmania

    And just for good measure:

    Why We Should Abolish the RBA

    (From the Liberty Australia website.)

  16. sj, I did not know that Nugget Coombs was the first Chardonnay socialist!

  17. Samuel J

    Squirrel, that is one thing Wayne Swan did – he was so appalled at the package that the RBA Board awarded that he insisted they follow the Rem Tribunal. But the RBA Act remains unamended and the formal role lies with the RBA Board.

  18. Samuel J

    Jim, yes you could say Nugget Coombs was the first Chardonnay socialist. Although I think he was more like a Grange Hermitage Socialist!

  19. Dalai Lama

    The RBA is above all a socialist central planning institution which has no place in a supposedly free market society. The nonsense about 2-3% inflation ‘not materially distorting economic decisions’ is arrant nonsense – in a properly functioning society, mild deflation in consumer price goods should be the norm, as it reflects progress in efficiencies and technology. Note that the central banks are typically blind to asset price bubbles (dot com, housing and now the financial markets), which their policies have persistently enabled in ever greater cycles.
    Forget about the rate at which the RBA officials’ remuneration has been increasing. To paraphrase Rabz:
    SACK.THEM.ALL!
    SHUT.THEM.DOWN!

  20. Tapdog

    I am really surprised the 7.30 interview with Ken Henry has not received more scrutiny from folks around here.

    KH: ….a department is unable to defend itself publicly….that’s most unfortunate

    SF: Joe Hockey shouldn’t have made those comments?

    KH: Joe shouldn’t have made those comments-no.

    SH: One of Tony Abbott’s first moves when he came into government, was to organise the removal down the track of Martin Parkinson as Head of Treasury. Is that the normal operation of government? Putting people you trust into key departments and getting rid of other?

    KH Well its never happened in Treasury in what is it ..114, 113 years.There have only been 16 Tresury Secretaries in that time – Martin was number 16. No government has thought it appropriate to put in somebody who they thought was of the right , let’s say, appropriate political character. I’m not saying that is what motivated the Prime Minister on this occasion……

    SF: It sound like that though?

    KH: Well it may be but I really don’t know. The fact is I don’t know.But if that IS what is intended then that would be a very disappointing move and quite an historic one.

    SF: Should Martin Parkinson stay in his position?

    KH: I think that should be up to Martin.

    SG: But should he be ASKED to stay in his position?

    KH: Yes. I think he should.

    Yes SJ way too much independence and there are plenty of questions. Like why does Ken Henry think it is unfortunate that public service departments are unable to defend themselvbes publicly?

    To my way of thinking this can only occur if public servants get the wrong idea about who is running the joint. If there is any defending for them to do they need to do so with their political masters. Not direct with the public.

    We have a whole new breed of unelected media savvy public servants who enjoy celebrity status and who are unaccountable to the electorate. The activist multi media public servant feels qualified, entitled even politically obliged to participate in public discussion and has no problems pushing partisan ideological barrows.

    It’s a particularly unattractive model which subverts the proper lines of authority between Parliamentary and Executive function. Now if I were fond of conspiracy theories, I would be worrying that such subversion might be a deliberate strategy of the politcal Left. By putting political activists into highly visible and semi-permanent executive roles, you are to that extent putting your political and social agendae beyond the reach of the electorate. You endow it with a permanence that transcends the electoral cycle. Your erode the authority and effectiveness of the Parliament, and all of that is rather super if your aim is to permantly sideline the traditional democratic process.

    So when Sarah Ferguson calls into question the legitimacy of installing public service heads who are sympathetic to the politics of the incumbent government and when Ken Henry says it never happens, I start to wonder if I have suddenly crossed over into some parallel universe. I would have thought it is not only legitimate, but more or less essential if want efficient and timely implementation of government programs.

    And conversely I regard as downright subversive, the notion that senior public servants should expect some kind of cosy sinecure that survives the life of the government of the day.

  21. .

    The RBA ought to maintain liquidity and have a short run target of 0% inflation within a -2% to +2% band and in the medium to long term, set at 0%.

  22. johanna

    Tapdog – nice comment.

    Henry’s arrogant assumption that department heads should be unsackable is breathtaking. The days when Secretaries were at arm’s length from government are long gone, ever since the Hawke government put them on contracts and made them accountable to Ministers, rather than to the Head of the Public Service.

    Parkinson went from being head of Climate Change (a fairly minor job in that league) to Head of Treasury, the second highest after PM & C. This meteoric rise was no coincidence. He was a mate who could be trusted, in Labor’s view.

    Well, live by the sword, die by the sword.

    Incoming governments don’t get rid of these people for the fun of it. Heads who are perceived as neutral and good at their jobs are retained. Changing them is disruptive in the critical early months of an incoming government.

  23. .

    Henry’s arrogant assumption that department heads should be unsackable is breathtaking.

    Even after being censured by Parliament? Breathtaking indeed.

  24. Squirrel

    “Samuel J

    #1223992, posted on March 14, 2014 at 7:23 am

    Squirrel, that is one thing Wayne Swan did – he was so appalled at the package that the RBA Board awarded that he insisted they follow the Rem Tribunal. But the RBA Act remains unamended and the formal role lies with the RBA Board.”

    Well good for Wayne, for once. It reads to me like a Sir Humphrey compromise – the RBA retains its independence on the remuneration of the Governor and Deputy Governor, but would obviously come under attention if it strays from the recommendations of the Remuneration Tribunal.

  25. Squirrel

    “Dalai Lama

    #1224041, posted on March 14, 2014 at 9:03 am

    The RBA is above all a socialist central planning institution which has no place in a supposedly free market society. The nonsense about 2-3% inflation ‘not materially distorting economic decisions’ is arrant nonsense – in a properly functioning society, mild deflation in consumer price goods should be the norm, as it reflects progress in efficiencies and technology. Note that the central banks are typically blind to asset price bubbles (dot com, housing and now the financial markets), which their policies have persistently enabled in ever greater cycles.
    Forget about the rate at which the RBA officials’ remuneration has been increasing. To paraphrase Rabz:
    SACK.THEM.ALL!
    SHUT.THEM.DOWN!”

    We seem to be (perhaps have been for quite some time) in an age of the cult of the central bankers – it’s a new priesthood, with battalions of groupies/acolytes strewn throughout the commentariat and elsewhere hanging on their every word, analysing their Delphic utterances with electron microscopes, and generally rabbiting on endlessly about the what the “Fed”/”Reserve” may or may not do or contemplate doing.

    In truth, the high profile activities of the central bankers seems to involve increasing amounts of pushing on damp string and “jawboning” (kudos to anyone who can come up with a replacement for this desperately over-used cliche).

    If things get really nasty for Australia, with the capex cliff and/or a terms of trade shock, I think it will be very apparent very quickly to all but the most ardent believers that the real power now rests with the markets, and our local central bank emperor will be looking rather naked.

  26. Menai Pete

    All pensions and defined benefit superannuation payments should be indexed to the CPI which overstates inflation

    Samuel J. The payments made to ex-Defence Force personnel through the DFRDB (Defence Force Retirement and Death Benefits Scheme) are not superannuation, pensions or welfare payments but are defined as retired pay.
    As such payments should maintain parity with earnings and Government has been negligent in not doing that.

  27. Samuel J

    What rubbish Menai Pete. The scheme clearly is stated as a superannuation scheme. Why should retired military personnel share in the productivity gains (which lead to higher pay) of current serving personnel? Aren’t you just rent seeking?

  28. Uc Dai Loi

    Sam,
    If you look at a DFRDB Defence Force pay slip or Group Certificate the term “Retirement Pay” is the terminology used. I believe this is because our after tax wages were compulsorily garnished by 5%, we all had to lend this money to the Reserve Bank, interest and cost free. Did the Reserve Bank Officers contribute 5% of their after tax wages into their fund. Please correct me, but I think this is the difference between Superannuation and Retirement Pay? Our workplace agreement also stated that we had a compulsory retiring age of 55 years and that if we served for twenty years or more we would be paid “Retirement Pay” on discharge. This “Pay” was then fully taxable at our marginal rate, so when you got a civilian job you immediately paid back 51 cents in the dollar in PAYE tax and in later years 10% gst on anything you purchased. Our workplace agreement also stated that this “Retirement Pay” Quote “will not lose value”. We, in hindsight, stupidly believed, that this meant, a basket of goods purchased on our first “Retirement Pay” day, we would be able to purchase the same basket of goods 10 years later. Some members lent the Reserve Bank their money for 35 years believing this “will not lose value” statement to be true. This reduction of purchasing power only became an issue when the government changed the method of measuring the CPI. Of course, the Reserve Bank boys were right on to it, understood how much they would lose and quickly, as you point out, looked after themselves, also our politician’s, they covered themselves in glory rushing to fix their Parliamentary Super scheme to the Male Total Average Weekly Earnings (MTAWE).

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