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CHAPTER 1
Introduction
POWER, WELFARE, INCENTIVES, VALUES
A press conference is not enough to call it "democracy." I do not expect this illegitimate institution to hear my voice.
— Josephine Witt protesting at the European Central Bank's April 15, 2015, press conference
It is time to end regulation without representation and restore our faith in the people to make the best decisions for families and businesses.
— US Senator Mike Rounds (R-South Dakota), The Hill, May 21, 2015
In the course of 2016, first the UK referendum on membership in the European Union (EU) and then the US presidential election, coming on top of popular discontent and protest in parts of Continental Europe, thrust into public debate issues of populism and technocracy. As models for government, they appear to stand at opposite ends of the spectrum, either embracing or distancing the people. Of course, it is not so clear-cut. Populist leaders typically claim a special alignment or accord with the interests of the People, understood as the True or Authentic members of a political community, allowing them to dispense with the messy business of actual public participation, debate, and disagreement. Technocracy, meanwhile, at least in caricature, claims to have uncovered some kind of scientific method for figuring out what is in the public or common interest — provided, that is, that they, the unelected experts, are left to get on with it, checked only by another group of unelected power holders, the judges. In fact, our technocrats must consult and explain, but still that is not the same as political accountability.
Nowhere in our major democracies does either of those systems of government actually exist, but their underlying ideas nevertheless confront each other today as rallying cries in the real world of politics. Those seeking the votes of people feeling let down by and fed up with government over the past quarter century or more find common cause in blaming distant and aloof experts as the enemy. Those on the other side, fearing that (what they see as) basic values or rights will be put aside, warn of the false allure of populist demagogues.
This contest, struggle even, undoubtedly reflects genuine changes in politics and government. The main parties on the Left and the Right are no longer the mass movements they were up until the 1970s, offering distinct political programs appealing, in part, to tribal identities. And in government itself, delegation to more or less independent agencies, led by unelected technocrats, has ballooned over recent decades (and earlier in the US).
Those phenomena are related. If there exists sufficient consensus around the goals and the means of public policy that it can be delegated beyond the day-to-day reach of elected politicians, political parties offering rival visions of the good life and how it might be achieved lose some of their point. Protesting at this and, perhaps, a drift toward liberalism, a former deputy leader of Britain's Labour Party complained in 1997 that "Tony Blair is taking the politics out of politics."
But recent socioeconomic disappointment puts the consensus around delegated governance in an uncomfortable light. Economic growth has been subdued since the Great Financial Crisis, and the gaps between the poor, the just-coping, and the rich have widened over recent decades. Hence, it is not complete fantasy to see our democracies as flirting with a peculiar cocktail of hyper-depoliticized technocracy and hyperpoliticized populism, each fueling the other in attempts, respectively, to maintain effective government and to reestablish majoritarian sensibility.
This conjuncture of politics and economics might conceivably end up challenging the basic structures and values of liberal democracy, the dominant model of collective governance since the fall of the Berlin Wall in 1989. That system combines liberalism — broadly, constitutionally constrained government under the rule of law — with representative democracy via some form of free and fair elections. In the years following the demise of the Soviet Empire, there have been growing concerns about illiberal democracies, which elect their governments but pay no more than lip service to minority and individual freedoms. The current concerns in the West, by contrast, parse things the other way round: undemocratic liberalism, a system of government in which individual rights are entrenched but too little of government is decided by the ballot box or heeds the welfare of the people.
The current upsurge of debate about technocracy and populism can, therefore, make it seem as if we are approaching a point where choices between illiberal democracy and undemocratic liberalism will be hard to avoid. In a way, the purpose of this book is to challenge that pessimism of absolutes. It explores whether it is possible to find a place for technocratic independent agencies in our system of government without jeopardizing democratic legitimacy. Nearly all the discussion will be dry, but in the background is the need to chart a way through a malaise of false choices about government and, thus, about who we are as political communities.
It is not as if unelected power is new. Democratic societies have long found ways of accommodating, and often honoring, the Military, the Judiciary, and, where it existed, an established Church. It is more that there has been a shift in the reach and techniques of unelected power, which now routinely involves writing legally binding rules and regulations. This is nowhere more apparent than in the world where I spent much of my professional life, central banking, which in many countries is today a new third pillar of unelected power alongside the judges and the generals.
CENTRAL BANKS AS THE EPITOME OF TECHNOCRATIC POWER
The high tide of central banking came in the mid-1920s — until now, that is. In the words of the League of Nations' prescriptions for economic reconstruction after the First World War:
[Central banking] should be free from political pressure, and should be conducted solely on lines of prudent finance. In countries where there is no central bank of issue, one should be established.
Within a decade of that proclamation, the 1929 stock market crash, the unraveling of the gold standard, and the Great Depression were enough to see central banks stripped of responsibility, status, and power.
They did not regain preeminence until the 1990s, when the International Monetary Fund and World Bank began prescribing independent central banks and the framework for price stability known as inflation targeting to the emerging-market economies rising around the world. But, as though revisiting their past, the Great Moderation they presided over turned nasty, twisting itself into the Great Financial Crisis and years — not yet behind us — of below-par growth.
From Impotence to the Only Game in Town
For the central bankers themselves, however, history has not repeated itself. Indeed, the contrast with the aftermath of the banking crisis, monetary disorder, and economic slump of the 1920s and 1930s could hardly be greater. Then, governments quickly turned away from globalization and central bank–centered macroeconomic policies. Nationalism was the order of the day — autarky, propped up by barriers to trade, controls on capital flows, and financial repression. When at the end of World War II the international economic order was reconstructed at Bretton Woods, New Hampshire, central banks were largely bystanders. In the aftermath, they became backroom advisers and agents as the West was rebuilt and the Cold War negotiated.
How different things are today. Notwithstanding financial disorder and economic stagnation on a grand scale, globalization has hardly been rolled back (as I write); and while the core program for reforming the monetary and financial system was once more forged in international gatherings, this time around central bankers were the leading players. Domestically, they generally emerged from the crisis with more, not fewer, responsibilities and powers. Internationally, recovery seemed to depend on them. They have been, in a popular but deeply troubling phrase, the Only Game in Town (chapter 24).
Numerous explanations for this extraordinary contrast with the fate of central banks in the 1930s suggest themselves. Their monetary innovations avoided a repeat of the Great Depression, which is quite a thing; the failure of non-central-bank regulators in the run up to the latest crisis was even more abject; and the central bank–academic economist axis has remained a potent force in shaping post-crisis reform debates. Whichever appeals most, the consolidation of power should make us ponder.
Preexisting Doubts
There were skeptics about monetary independence even before the crisis. For the libertarian Right, the existence of state-backed central banks is an anomalous encroachment on freedom, relieving citizens of the need to be prudent and, in consequence, putting our economies on an inevitable roller-coaster cycle of destructive boom and bust. For parts of the radical Left, central banks are inevitably in cahoots with high finance, repeatedly bailing it out at the expense of taxpayers; and their very existence standing in the way of the emergence of powerful state banks that could be used to pursue wider, redistributive social justice.
In between those political poles lie two broad camps of critics. One, on the social democratic Left, doubts that independent monetary authorities bring economic benefits; fears that central banks are inherently "conservative," and thus unacceptably indifferent to employment and activity; and, even when granting the potential benefits of technocratic expertise, cannot see how it can be squared with democratic legitimacy. They regard monetary independence as a false step, taken as part of an unwarranted crisis of confidence in democratic politics during the inflationary 1970s that followed Vietnam and Watergate and reflecting a wider turn toward delegating "discipline" to autonomous, depoliticized agencies. Driven and, in turn, underpinned by a shift toward international governance and away from domestic democratic control, monetary independence is seen by these critics as symptomatic of a triumphant neoliberalism.
Meanwhile, leading neoliberal thinkers themselves would lament the extent to which today's central banks operate by discretion, echoing Chicago's Henry Simons in the 1930s:
Deleg[ation] to administrative authorities with substantial discretionary power ... must be invoked sparingly ... if democratic institutions are to be preserved; and it is utterly inappropriate in the money field.
More soberly, while the one group seeks to remedy a "democratic deficit," the other wishes to recover the "rule of law" (chapters 8 and 9).
While those critiques flourished at the margins of public policy debate in the years before the crisis, the question of whether our central banks are simply too powerful has now become more widespread. That is not surprising given the extraordinary exercise and accumulation of power by central banks since global markets broke down in the summer of 2007. Using their balance sheets like never before, they have intervened in almost every part of the bond and loan markets, initially in order to contain market disorder and later to stimulate economic recovery. Discomfort has been evident on many fronts: in legal challenges against the European Central Bank (ECB) in Europe's constitutional courts, in US litigation around the US bailout of AIG, and in political steps in Congress, from both sides of the aisle, to reform the Federal Reserve.
Even if those challenges come to nothing, they demonstrate a need to think through afresh the degrees of freedom central banks should be granted and, in particular, how far they should be able to venture into what has traditionally been regarded as the preserve of fiscal authorities. So when my friend and former colleague, Bundesbank director Andreas Dombret suggested in the autumn of 2016 that central bank independence is not debatable, my immediate thought was that these institutions are among the last on earth that need "safe spaces" to protect them from criticism or verbal attack.
Central Banking and the Regulatory State: The Issues Become Larger and Deeper
Safe or not, the space they occupy has been enlarged. The earlier criticisms I recalled of central bank independence (CBI) concerned their role as an autonomous part of what I shall term the fiscal state, given their ability to change, even transform, the consolidated government's liabilities and assets, and so its risks and income streams (chapters 4 and 22). Now, however, they are more than that.
As the lender of last resort to the financial system — the economic equivalent of the US Cavalry — central banks invariably find themselves at the scene of financial disasters. If ever that was doubted, it has surely been put to rest since markets, firms, and whole economies began to crack in the summer of 2007. No less did those events underline the futility of attempting to insulate the supposedly high-minded pursuit of monetary stability in the interest of general economic prosperity from the altogether more prosaic (but vital) business of keeping the financial system afloat. After a generation during which those two facets of stability policy had drifted apart, even when housed within the same institution, as at the US Federal Reserve, they have once again been harnessed together (chapter 19). Banking supervision has been returned to the Bank of England and granted to the ECB; the Federal Reserve (or Fed) has been supervising nonbank financial groups judged to be systemically significant; and central banks in many jurisdictions have been granted "macroprudential" powers to mitigate threats from credit booms.
In terms of the distribution of administrative power, the practical upshot of this reversion to and elaboration of past orthodoxy is that central banks no longer inhabit a rarefied zone in which experts exercise specialized powers in order to smooth macroeconomic fluctuations. In a massive development for modern governance, their newly fortified powers to oversee and set the terms of trade for banking and other parts of finance unambiguously make them part of the "regulatory state"— a distinctive part of the modern state apparatus that developed during the twentieth century, first in the United States and later in Europe, leaving public law playing catch-up (chapters 2, 3, 8,13, and 15).
This transforms the debate. For the most fervent advocates of monetary independence, it risks taking central banks into more overtly political waters, jeopardizing hard-won achievements of the 1980s and 1990s. For those always uncomfortable with CBI, it increases their unease about a democratic deficit. Concretely, if central banks are to be independent, it must now be on two fronts: from the City of London and Wall Street (what used to be known as the "money interest"), as well as from electoral politics.
In consequence, deliberations on central banking can no longer be bracketed away from what have until now seemed to be largely parallel concerns about a regulatory state empowered to write and issue rules that are legally binding on citizens and businesses. If we must lift our eyes to that broader context in order to meet the challenge of whether society risks central banks and their leaders becoming overmighty citizens, then we need to confront deeper, higher-level questions about the legitimacy of delegating power to unelected officials more generally. In our representative democracies, this places power two steps away from the people, who do not get a chance to vote on the technocratic elite governing much of their lives, and whose elected representatives have voluntarily surrendered much of the day-to-day control they traditionally exercised over the bureaucracy.
With the meteoric rise in the economic might of nondemocratic states in East Asia, this might be met with relief by those, such as political scientist Daniel Bell, who call upon Confucian traditions when advocating government via meritocratic technocracy — Plato's Guardians in modern garb. For them, independent agencies might be in the vanguard of a return to the predemocratic governance of the eighteenth-century's commercial republics (chapter 8). For others, the very same agencies violate the deepest traditions of economic and political liberalism as it developed during the nineteenth and early twentieth centuries. Mirroring their unconscious alignment over central banking, the participatory Left and the constitutionalist Right find common cause in attacking unconstrained delegation.
(Continues…)
Excerpted from "Unelected Power"
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