Bankers Shouldn't Run Central Banks
The Japanese government did something weird last week, but weird in a good way that other governments should follow. It nominated (drumroll) a new member of its central bank (fanfare) who has actually (fireworks) worked in industry (huge applause, fade to sunset) -- namely Yukitoshi Funo, 68, who used to run Toyota Motor's North American business. Equally surprisingly, the guy he'll replace later this year is Yoshihisa Morimoto, himself a former executive of Tokyo Electric Power Co.
I'm willing to bet that if you asked the average person to guess what kinds of people set the interest rates on their mortgages or car loans, they'd be shocked to discover how rarely a central bank committee features an industry executive or a business leader. Instead, the boards are packed with economists and academics, none of whom ever had to fund payroll on a Friday, decide whether to open a new factory, hire workers in expectation of good times ahead or lay off staff to survive a downturn. In short, monetary policy is mostly decided by unelected theoreticians who have never had much skin in the game of what actually happens in the real world.
The one industry -- if you can call it that -- that's renowned for breeding future policy makers is banking. Goldman Sachs leads the way as an incubator for borrowing-cost bosses, spawning both Mario Draghi who helms the European Central Bank, and Mark Carney, the Canadian-born Bank of England governor. As important as the world of finance is to the global economy, though, it's hard to justify its dominance in central banking deliberations. And the risk of promoting groupthink is obvious.
Still, it's only natural that the economists who work at central banks prefer working with other economists. In a 2012 paper, Lauren Rivera, a professor at the Kellogg School of Management at Northwestern University in Illinois, found that elite professional services firms effectively block outsiders by only recruiting those who share their existing culture:
Hiring practices are gatekeeping mechanisms that facilitate career opportunities for some groups, while blocking entry for others. Hiring is more than just a process of skills sorting; it is also a process of cultural matching between candidates, valuators, and firms. Employers sought candidates who were not only competent but also culturally similar to themselves in terms of leisure pursuits, experiences, and self-presentation styles. Concerns about shared culture were highly salient to employers and often outweighed concerns about absolute productivity.
Trawling biographies and tapping the brains of colleagues, I found a handful of counterexamples. Edward Kelley, who retired as a Federal Reserve board member in 2001 after 14 years of service, ran his father's manufacturing company for two decades before joining an investment company in 1981. David Lilly, who served the Fed from 1976 to 1978, was previously president and chairman of Toro Co., whose products include lawn mowers and other landscaping equipment. Wayne Angell, who joined the Fed in 1986, was a farmer in the early 1970s and brought a sharp focus on what was happening in commodities during his tenure. Even he, though, had a PhD in economics completed in the 1950s, and ended up at Bear Stearns before starting his own economic forecasting shop.
In the U.K., Richard Lambert had risen through the ranks of the Financial Times to become its editor before the Bank of England tapped him to join its monetary policy committee in 2003; although he'd never run a company, he'd met hundreds of chief executives as a journalist, and went on to run the Confederation of British Industry. Deanne Julius, a British rate-setter from 1997 to 2001, worked at both Shell and British Airways; Andrew Sentance's BoE service from 2006 to 2011 followed his own stint at British Airways. Both, though, worked for their companies as economists, rather than executives.
I'm sure I've missed some examples from around the central banking world, but the bottom line is that the expertise of entrepreneurs and executives isn't being tapped to help steer the global economy, and that's a missed opportunity. (The same argument applies to finance ministers, but I suspect asking business people to stoop to the grubby world of politics is a step too far.)
So why not try persuading Bill Gates, Richard Branson, Elon Musk, Michael Dell, Lakshmi Mittal, Giorgio Armani, Dave Geffen, Vincent Bollore or James Dyson to serve a term at a central bank? And while we're at it, why not Elizabeth Holmes, the youngest self-made female billionaire in the U.S., or Angela Ahrendts, poached from Burberry by Apple, or Marjorie Scardino, who ran the Economist magazine and then its owner Pearson until a few years ago?
Funo has been with Toyota since 1970. He's currently a senior adviser to the car company's board and, as well as heading its U.S. operations, he previously ran Toyota's non-Japan Asia business. He may turn out to be terrible at determining what the Japanese economy needs. But I'd much rather he had a shot at making economic policy than yet another university-trained economist who knows the coefficient of everything but nothing about the value of a factory floor.
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