Daniel W. Drezner

Has independent central banking jumped the shark?

Has independent central banking jumped the shark?

As European leaders meetagain — to figure out what to do about the Eurocrisis, Business Insider’s Pascal-Emmanuel Gobry fires a broadside at the entire edifice of independent central banks: 

If one myth has been slain by the financial crisis and the response to it, it’s the idea that central banks ought to be independent and unaccountable politically.

The idea of central bank independence was that it would guarantee good monetary policy. During the Great Moderation it certainly seemed that way. But now it’s no longer the case…

[The] point is that the choice between inflation and unemployment is a political, not a technical choice. What’s "better"? To screw debtors or creditors? To make millions unemployed or to "debase the currency"? Those are very important questions. More important, they’re questions that cannot be solved by economics. They can be informed by them, but at the end of the day what you prefer is going to come down to your own moral value system. In other words, it’s a political choice. And the way we make political choices in modern countries is through the democratic process, not through unelected, unaccountable technocrats….

The bottom line is that the argument of supercompetence of central bankers is dead and once that’s gone you need to revert those powers back to the political process (emphasis in original).

Now, this is a pretty powerful argument.  One would be hard-pressed to say that Jean-Claude Trichet or Alan Greenspan or Ben Bernanke have covered themselves in glory during the past five years or so.  Why not return central banking to the politicians? 

Well…. before I answer, I want to object to Gobry’s framing of the issue in two ways.  First, he sets up a too-simple dichotomy between "independence" and "political control."  The devil is in the details here.  Political scientists have done a lot of research into how legislatures exert influence over supposedly "independent" institutions like courts and regulatory agencies, and this logic applies to central banks as well.  Or, 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.  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. 

Second, the notion that central banking decisions are strictly political seems as wrong as characterizing 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.  

OK, these contestations aside, I still have a basic problem with Gobry’s argument.  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.  Instead, they would likely vote on other considerations, or vote based on short-term considerations such as the unemployment rate and GDP growth without considering whether short-term pump-priming is occurring or long-term sustainable growth.  Furthermore, 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. 

That said, Gobry makes a powerful argument, and I’d like to hear from readers.  Has independent central banking jumped the shark?  What do you think?