Photo: The Atlantic
First of all:
he sets up a too-simple dichotomy between “independence” and “political control.” The devil is in the details here. […] Furthermore, “political control” is unclear here — which politicians have control? Would central bankers be directly elected? Appointed by the legislature? Appointed by the executive subject to recall? And so forth.
It’s one of those things that’s both true and kind of irrelevant. Of course, any dichotomy is too simple. But it can also clarify. The way the Fed is appointed and managed is different from the European Central Bank is different from the Bank of England is different from the Bank of Japan—and yet everyone agrees that these banks are “independent” and that it’s a good thing that they be “independent”.
Indeed, everyone agrees that independence is an important principle. That’s what people will say, and that’s the principle they set up. I am arguing against that principle.
If you look at all those good governance indicators that compare countries, the “Central bank independence” item is a “yes/no” answer, not a grade.
That being said, I probably should have clarified: no, Dan, I’m not suggesting that central bankers be directly elected. (Although, to be honest, I’d be curious to see a small country I don’t live in try it.) I’m suggesting that we return to the system that existed in most countries for most of the time until relatively recently, where the head of the central bank is a senior civil servant and/or political appointee who is named—and fired—by the executive and who is expected to follow the executive’s orders (and/or legislature).
There are details beyond that but the details will vary among countries. In the US the Fed Governor will almost certainly remain a Senate-confirmed position, whereas that concept doesn’t hold in the UK. I’m not going to spell out the org chart. That’s not the point I’m trying to make, here.
Again, everybody agrees that there is this important principle called central bank independence. If you ask 99% of people who know whether the Bank of England is independent, they won’t say “Well, maybe, it’s complicated”, they will say “Yes.” And the reason why it’s independent is because in 1997 the British Labour Party campaigned promising an independent central bank, not a kinda-sorta-independent central bank. Because everyone agrees that there’s a principle that exists called central bank independence.
Dan also writes:
to put it another way, I suspect that Ben Bernanke would be pumping more money into the economy were it not for a fear of Congressional blowback.
Another other way to put it would be: Ben Bernanke would rather see millions more people unemployed than face a risk of a challenge to his power and unaccountability. And that’s an argument for the status quo?
Photo: Business Insider
Obviously that way of putting it is unfair to Bernanke. I’m sure he doesn’t get up in the morning and think “How can I screw the American worker today so that I can accumulate more power?” I think he genuinely believes that central bank independence is vital to the long-term future of the country—more vital than averting long-term unemployment for millions and a potential Lost Decade, apparently. But that’s how his objective interests shake out, and public choice theory tells us that civil servants will have a tendency to privilege their objective interests.Humans have a very powerful way of convincing themselves that they genuinely believe that what’s good for them is for the common good. Pentagon generals don’t say to themselves “I have to resist budget cuts because I want to play with grossly expensive and useless shiny toys“, they say to themselves “I have to resist budget cuts because it’s in the best interests of the country that the defence budget never stop growing faster than inflation.” Middle school teachers don’t say to themselves “Man, I really enjoy supporting a system that wrecks children’s futures so that I can get paid regardless of the quality of the work I do”, they say…well, I don’t really know how they justify it to themselves, but I’m sure they do.
And by the way, if you’re arguing that central banks are already sorta accountable, you’re sawing off the branch you’re sitting on: if they’re already sorta accountable, why not go the whole way?
Besides, if Bernanke isn’t doing what he thinks he’s right because of political reasons, why have an independent central bank to begin with? That’s what independence was supposed to accomplish, wasn’t it? Our wise central bankers could pursue the Required Course Of Action without having to worry about those Damn Politicians. But if that’s not what’s happening, why do we have independence?
Dan also writes:
Second, the notion that central banking decisions are strictly political seems as wrong as characterising them as strictly technical. It is overly cynical to believe that either technocrats or politicians gin up any old theory to justify the policy ends they seek. As with Supreme Court disputes, there are genuine disagreements in economics on the theory side. At this very moment, different central bankers disagree over the best way to reduce unemployment in part because of different economic theories. Expertise is kinda important in these moments.
I must have been unclear, because I don’t disagree with any of this.
I don’t think that central banking decisions are strictly political; I think that they are inherently political (at least in times of crisis), which is different. I don’t believe that technocrats or politicians gin up any old theory to justify the policy ends they seek. I do believe people are affected by incentives. I agree that expertise matters and that there’s a spectrum between “purely” technical decisions and “purely” political ones, and I also agree that the line between the two sides can be hard to place sometimes. When it comes to central banking, though, the people who argue for independence and me agree: we think a line can be drawn. We just disagree where.
But none of that is actually why Dan disagrees with me!
For Gobry’s process to work better, voters have to punish politicians for poor monetary policy and reward them for wise and prudent monetary policies. I see little evidence that voters would have the necessary knowledge and attention span to do this.
Well, sure. This is why I (probably) don’t support direct election of central bankers. But how does this look to Dan:
For Gobry’s foreign policy process to work better, voters have to punish politicians for poor foreign policy and reward them for wise and prudent foreign policies. I see little evidence that voters would have the necessary knowledge and attention span to do this.
Of course, as political science & foreign policy expert Dan knows, nobody in the history of the world has ever voted based on foreign policy. (Well, ok, maybe a couple people.) And the overwhelming majority of voters are utterly clueless about foreign policy. And yet we don’t think foreign policy should be handled by an unelected clerisy. We think it’s totally normal that the President can fire the Secretary of State and that he’s the one who decides on the country’s foreign policy strategy.
But maybe that’s why the world is still an unstable and dangerous place. Maybe if the Secretary of State were appointed for life by a vote of the faculty of the Kennedy School, Afghanistan would have the governance of Norway by now. But I doubt it.
So that’s one thing.
But more importantly, of course voters will punish and reward politicians for poor/good monetary policy. There’s overwhelming evidence that voters are affected by economics. (Swing) voters basically vote on the basis of “Do I feel better or worse about my economic outlook, that of my family and that of my community?” Monetary policy is extremely relevant to that. Much more than foreign policy or the zillion other very important things that we leave up to the political process, certainly.
If the Fed answered directly to Barack Obama, you can bet that he would be pumping more money into the economy and that if it worked at reducing unemployment voters would reward him for it. And Republicans would stoke fears of inflation, which would get people to talk about monetary policy but, crucially, to talk about it as if they can affect it, which would be a good thing. (And paradoxically, those fears of inflation would actually help Obama because all else equal they would get people to dump safe assets and go into risk assets.)
If the ECB answered to the European Parliament, or at least to the Eurogroup, you can bet that Eurozone monetary policy would be different given that the only country that benefits from it is Germany. And if it didn’t because it’s so in hock to rabid anti-inflation ideology, you can bet that the next one would, because the incumbents would be walloped at the next elections, which is why democracy is magic.And now we get to the heart of Dan’s argument:
[P]politicians would rig the game just a bit. Political scientists have extensively discussed the existence of “political business cycles” due to fiscal policy. I have every confidence that political control over monetary policy would simply extend the phenomenon to that policy lever as well.
The fact that politicians still control the fiscal lever is what leads me to think that central banking should still be independent. A diversification of political controls over the economy seems like the best minimax strategy over the long run. Thinking back to how U.S. politicians would have handled the last 20 years of central banking, I suspect that they simply would have exacerbated the boom-bust dot-com and housing bubbles. It’s not clear at all that the added democratic gain outweighs the loss in policy competence.
One thing worth noting here is that central bank independence was sold on the basis of ending boom and bust cycles. Now we’re told that boom and bust cycles would be even worse without independent central bankers. How long and how much will we lower our expectations?
What I see is that under independent central bankers we had booms and busts, then we had the worst economic crisis in 70 years, followed up by, in the United States, policy that succeeded in averting a Depression but still remains very inadequate to returning us to trend growth and, in Europe, a policy that is causing unnecessary suffering for millions of people, killing the common currency, all because of what can only be called a medieval ideology, and the dominance of Germany over the Eurozone (and French fecklessness).
So to sum up:
- “Central bank independence will avert booms and busts.” Huge booms. Huge busts. Culminating in an enormous bust. But don’t worry, it would’ve been even worse without the wise wizards. Ahhh. Carry on then.
- “Central bank independence will finally remove politics from monetary policy.” Whoops! Turns out Bernanke hides in his armoire in fear of the Tea Party and the European Central Bank answers to the readers of Bild.
- “Central bank independence will finally remove ideology from monetary policy.” By which we meant, crucify all of Southern Europe upon a cross of 2% inflation targeting.
Remind me, what is it we’re all doing here?
But Dan never gets to the core of my own post, which I’ll quote again here:
If you said that national security was too important to be left to politicians and that the military and security services shouldn’t have to answer to anyone because they’re so competent, everyone would immediately see why that’s an absurd and very dangerous idea. Instead we see civilian leadership of the military as a cornerstone of democratic governance even though we know democratic leaders screw up all the time because a) we view democratic accountability as an important principle and b) it’s not at all obvious that political leaders will screw up more than military leaders.
Or, to put it another way: what’s the difference between Ben Bernanke and David Petraeus? (Petraeus in his previous incarnation as military head of the War on Terror.)
Both of them are extremely smart, extremely credentialed, extremely capable public servants. No one doesn’t think the world of them personally. No one doubts that they are extremely dedicated to the higher interests of the nation. For both of them, their actions can directly or indirectly affect the lives of millions of people, as well as the political process. Both of them embody, in a sense, a pillar of state sovereignty as we’ve understood it for millennia: minting the currency and fighting wars.
We think it’s utterly obvious that one of them should never be held accountable to politicians for his decisions. We think it’s utterly obvious that one of them should be fired at will and should only carry out the decisions of politicians.
Nobody thinks politicians don’t make awful decisions once in a while. Politicians gave us the War in Iraq, which was a mess of world-historical proportions, but nobody took that to mean that warmaking power should rest in the Pentagon and not Congress anymore.
Why is that? What’s the key difference? I’m genuinely curious.
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