Sunday, December 6, 2020

Judy Shelton at the Bank of Canada? No thanks

How would I feel if Judy Shelton was a candidate for Governor of the Bank of Canada? Here are my thoughts.

A bit of background first. Judy Shelton was a Trump appointee to a key spot on the Federal Reserve board, the U.S.'s central bank. A President's appointees must be confirmed by Congress, and this was probably the most heated confirmation process I've ever followed. Shelton has espoused several controversial view points, including a return to the gold standard

The reason this appointment is so important is because Federal Reserve board members determine American monetary policy. That is, they decide whether to pluck interest rates up or down in order to ensure that the central bank is hitting its mandated targets.

That's a pretty important job! Not only would Shelton have been in the monetary policy hot-seat, she would have been on track to become the next head of the Federal Reserve. But it was all for naught. Shelton narrowly lost the spot as several Republican senators, including Mitt Romney, dissented.

So Shelton for Bank of Canada? Here's a simple set of guidelines I'd suggest Canadian voters adopt when they consider what sorts of people should be at the helm of the Bank of Canada. 

First, I'd suggest that anyone being considered for the Canadian monetary policy cockpit have a PhD in economics, preferably one in macroeconomics. And second, they should have administrative experience. (I'd be willing to accept a master's degree in economics as a substitute, with sufficient time spent working up the rungs of a central bank. The administrative experience is important because candidates will be in a management position.) Once they've passed those two hurdles, the finer points of their candidacy can be discussed.

A quick scan of Shelton's background reveals that she has a PhD in an unrelated discipline and no prior central banking experience. So if she was being floated for the job of Bank of Canada governor she wouldn't have passed through my filter. (Current Fed governor Jerome Powell, who is a lawyer, wouldn't have got through either.) 

Some readers may think I'm only stating the obvious. "Of course the most important people at a nation's central bank should have high-level economics degrees." But other readers will be disappointed in my criteria. I mean, here I am, an independent blogger—one who doesn't have a graduate degree—advocating an elitist sclerotic filtering mechanism.

Note that I'm not criticizing Shelton for her controversial stance on the gold standard. If she was a trained economist whose gold standard views had survived through years of rigorous training, she'd pass through my basic filter. Nor am I criticizing Shelton because she was a Trump appointee. Christopher Waller, another recent Trump appointee, would have easily passed through my filter.

Here's why I think my filter makes sense for Canadian voters. Monetary policy is complicated. Luckily we have an institution that teaches it: economics departments. Once someone has attained a PhD (or Masters + experience) in macroeconomics, odds are they'll be better than most at understanding how to operate the levers of a central bank. 

Why not draw central banking talent from other venues like the media, activism, think tanks, law, finance, business, or the blogosphere (ahem)? These venues don't attack the problems of central banking in as disciplined a manner as an economics department does. And so the average quality of these talent pools will not be as high.

In particular, I want to comment on the idea of drawing central bankers from the business/finance community. Many voters may think that Canadian business personalities like Kevin O'Leary, investor Prem Watsa, or banker David McKay would be uniquely qualified to run the Bank of Canada. I disagree. Sure, these titans of business will have good administrative experience (although no better than anyone else at the top of their field). 

But running monetary policy has little in common with running a business. Like the litre, second, and meter, the Canadian dollar is one of Canada's most important weights & measures. We put well-trained physicists at the National Research Council (NRC) in charge of maintaining our key physical measurements, not business people. (In fact, NRC scientists recently guided us onto a new standard for the kilogram.) Likewise, we need people with proper scientific training to manage our key economic measuring unit, the $.

Will my filtering system leave out a lot of good candidates? Yes. Will it bring in some bad ones? Certainly. Economics departments have tons of problems. Trust me, I've heard stories from insiders.

But even if it's not a great filtering system, it's still the best filtering systems we've got. Imagine that the plane you're on has lost its pilot in mid-air and needs a replacement. If one of the passengers has been to flight school, that person is probably going to be the best pick for flying the plane.

The WSJ marketed Shelton's candidacy on the basis of diversity. Yes, diversity of opinion is important. We want the co-pilot on our plane to criticize the pilot when one sees him/her make a mistake. But we still want both to be trained pilots with solid skills. They need to know exactly what that little red button above and to the left of their heads does when pressed. We wouldn't put a cake decorator, a plumber, and psychologist in the cockpit, just for the sake of diversity.

It's interesting to contrast U.S. and Canadian central banks on my very simple filter. Going back to 1970 the U.S. has missed twice: Jerome Powell and William Miller. The hits include Janet Yellen, Ben Bernanke, Alan Greenspan, Arthur Burns, and Paul Volcker.

Canada hasn't missed once. Everyone from Louis Rasminsky and James Coyne to Mark Carney, Stephen Poloz, and Tiff Macklem qualify.  


  1. Have worked with Ph.Ds my entire career and would not agree with your filter. Also, Paul Volcker did not have a Ph.D as you appear to state in the 2nd to the last paragraph.

    1. I've worked with portfolio managers and investment strategists for big parts of my career, their understanding of monetary policy is pretty weak. I agree that my filter isn't great, but it's probably the best one voters have got.

      I thought I read somewhere that he had a graduate background in economics. Thanks for the correction.

  2. Marriner S. Eccles, undoubtedly the greatest Chairman of the Federal Reserve of the US, and definitely among the top 3 central bankers of all time, would have failed to pass your filtering system - enough said...

    1. I'm not sure if Eccles was the greatest or not, but I never said my filter would catch everyone.