Economics PhD: Key to Success in Central Banking?

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Free Exchange, in Guts or PhD?, contends that that having a PhD in economics is crucial for modern central bankers:

When Paul Volcker, Stan Fischer, Jacob Frenkel and Jean-Pierre Roth discussed what central bankers and academics learn from each other at a conference last month, the line that stayed with me was Mr Fischer’s comment that “central banking has become a profession.” The current Bank of Israel governor went on to claim that academic economics was a big help to him in trying to decide how to run Israel’s monetary policy. Mr Frankel, who formerly held Mr Fischer’s job, agreed and said that having an economics PhD was a plus. But Mr Volcker, a former chairman of the Federal Reserve, would have none of it.

A central bank governor’s most essential trait was “guts” and some management abilities, said Mr Volcker. When discussing Ben Bernake’s qualities, he focused on the Fed chairman’s two terms on the local school board; Mr Bernanke’s MIT PhD, Princeton professorship and outstanding research were only also-run traits….

But the world is changing. Today’s central bank governors frequently have PhDs. I’ve listed the degrees of the 27 Eurosystem governors: 8 PhDs, two of them from MIT, 4 Masters and Mervyn King’s FBA (Cambridge). All but a couple from very small nations had some sort of economics degree, except, of course, the French governor (an énarque).

The post then goes on to provide a table showing the training of central bankers in various countries.

This analysis is utter rubbish. All it shows it that an economics doctorate is now increasingly important in getting appointed as a central banker. It in no way, shape or form proves that this training is helpful in doing the job. In fact, one could make a strong case in the US that the Fed is badly hampered by being overweight with PhDs and underweight individuals with substantive experience in finance and markets, which long ago was considered important. Prior to Arthur Burns, who was considered to be a disaster, no Fed chairman had been an academic. Limited real-world experience makes them woefully ill-equipped to question what banks and brokers are telling them.

Susan Webber, in a Conference Board Review article, Fit vs. Fitness, wrote at some length about how convention-driven hiring standards can lead to sub-optimal results. One example (emphasis hers);

Columbia University professor Amar Bhide coined the phrase “novelty aversion” to describe how investors shun ventures that are unprecedented—notably, both Federal Express and Cisco found it difficult to secure early funding. It isn’t much of a stretch to extend his logic to hiring and promotion. Both venture capitalists and corporations are in the business of picking winners—the former attractive investments, the latter talented employees….

This preference for the familiar also leads companies to adhere to the same hiring rules of thumb, whether or not they are correct. In many industries, one encounters a pattern of hiring certain types for specific roles. For example, former members of the armed forces are prized as drug detail men; trading firms take particular interest in candidates who have been successful at blackjack or poker.

Despite firms’ faith in their hiring criteria (and many cases, having the comfort of seeing competitors use broadly similar screens), there is no way to know for sure that your decision rules are correct. Even if you went to the trouble of keeping tabs on candidates whom you turned down, you could not determine whether their success or failure elsewhere was a valid indicator of how they would have done with you.

Consider the experience of Oakland A’s general manager Billy Beane, the hero of Michael Lewis’s Moneyball: The Art of Winning an Unfair Game. The baseball industry has always measured players’ skill and achievements by a handful of well-known statistics, but in recent years researchers have questioned the value of those traditional measures. To make the most of a limited budget, Beane used the new principles to sign low-salaried players whom his analysis showed were dramatically undervalued. The result: The team, with one of baseball’s lowest payrolls, has placed first or second in its division each of the last eight seasons (and there’s still time to turn around 2007).

Here, then, you have a business where the recruiting is unusually transparent, the basic rules have remained unchanged for decades, competitive encounters are in full view, and the incentives for success are high. This would seem to be the perfect environment for developing good decision rules, yet the entire industry was largely wrong.

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  1. Tom Lindmark

    Great little article! The comment about being underweight people with real world experience is on the mark. I never discount the value of getting as much education as humanly possiple but you have to make sure that you don’t get your feet stuck in either academia or business. You need to have experience in both if you hope to come up with a relevant world view.

  2. David Merkel

    In a recent survey of the FOMC, one of my comments was that the body has educational monoculture — the grand majority of the Fed governors were PhDs in economics, and all from the neoclassical school (I don’t consider Chicago to be a separate school).

    My suggestion is that a few economic historians would be valuable, who don’t have degrees in economics. Maybe also some experts on creditworthiness in bank lending.

    Often the qualitative insights of non-economists are more valuable than the guys who trust the macroeconomic models.

  3. Anonymous

    Sy Krass said…

    This is a problem that totally pervades all aspects of our society in all industries and businesses. Hiring people that you know, hiring people with certain merits, hiring people that only think like you. It’s rasiing mediocrity to the point where it’s thought of as excellence by the idiots in charge. I’m not exagerating when I say it will be the death of our society. Talented people without connections not getting positions they deserve hurts us all.

  4. Anonymous

    Be careful what you wish for in calling for “real world experience”.

    If you mean the decision-making board should include business people generally, you have the Australian model – not obviously better than the others. If you mean that board members should have financial markets experience, then look out for conflicts of interest for all those current or ex-investment bankers, not to mention regulatory capture.

    Where the “real-world” experience can come from is actually from working in a (good) national central bank for most of your career. That way you will see the markets with less risk of being captured, not to mention develop decades of experience in economy-watching of the exact kind central banks need and use.

    There’s an enormous difference between an academic, and someone who did a PhD at the beginning of their career, or soon after starting work, but has been at the central bank all their life.

  5. Uncle Pelerin

    What about a fella like this? Is this who we’re talking about?

    Appointed in 2006, apparently because he married into the family of a big Bush contributor.

    Chief Liaison to the regulatory agencies.

    Wikipedia tells us that his background on wall street was a great help during the financial upheaval of 2007/2008. B.S. He might have been able to explain to them the fine legal points of bailing out bear stearns (or not as it doesn’t look like he worked as an attorney at all). Explain to them how cds and cdo and siv and all other derivative garbage worked? One wonders… he studied policy with a little econ as an undergrad, then law. Then at the age of 35 he’s appointed to one of the most important positions in the country. That position might be window dressing; that position might just be a nice way for Bushco to influence regulation.


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