Why central banks will just keep getting weaker

Mario I. Blejer, former governor of the Central Bank of Argentina, on independence.

The global financial crisis has raised fundamental questions regarding central banks’ mandates. Over the past few decades, most central banks have focused on price stability as their single and overriding objective. This focus supported the ascendancy of “inflation-targeting” as the favoured monetary policy framework and, in turn, led to operational independence for central banks. The policy was a success: the discipline imposed by strict and rigorous concentration on a sole objective enabled policymakers to control – and then conquer – inflation.

But, as a consequence of this narrow approach, policymakers disregarded the formation of asset- and commodity-price bubbles, and overlooked the resulting banking-sector instability. This, by itself, calls for a review of the overall efficacy of inflation-targeting. Moreover, after the financial crisis erupted, central banks were increasingly compelled to depart from inflation targeting, and to implement myriad unconventional monetary policies in order to ameliorate the consequences of the crash and facilitate economic recovery.

With advanced economies struggling to avoid financial collapse, escape recession, reduce unemployment, and restore growth, central banks are being called upon to address, sometimes simultaneously, growing imbalances. This has triggered a search for a radical redefinition of central banks’ objectives – and has cast doubt on the appropriateness of maintaining their independence.

In particular, central banks’ behavior during the crisis has called into question whether inflation-targeting is an effective framework in the presence of systemic shocks, and, more broadly, whether it can be sustained throughout economic cycles. After all, a policy regime that sets aside its only goal during a crisis seems to lack the ability to cope with unexpected challenges. Critics identify this “crisis straitjacket syndrome” as the main problem with single-minded inflation targeting.

While theoretical arguments can be made to justify recent departures from policy, the reality is that in the post-crisis world, advanced-country central banks’ goals are no longer limited to price stability. In the United States, the Federal Reserve has essentially adopted a quantitative employment target, with nominal GDP targets and other variations under discussion in other countries. And financial stability is again a central-bank responsibility, including for the more conservative European Central Bank.

This shift toward multiple policy objectives inevitably reduces central-bank independence. Some analysts have recently claimed that this is because the pursuit of GDP growth, job creation, and financial stability, as well as the establishment of priorities when there are tradeoffs, clearly requires political decisions, which should not be made by unelected officials alone. Moreover, by pushing interest rates toward zero, the current policy of quantitative easing (increasing money supply by buying government securities) has strong, often regressive, income effects. Opponents of central-bank independence contend that, given the allocational and distributional consequences of current monetary-policy interventions, central banks’ decision-making should be subject to political control.

But this argument neglects an important point. While it is true that multiple policy targets tend to increase the political sensitivity of central banks’ decisions, concentrating only on price stability also has important distributional consequences and political implications. In fact, politicisation is a matter of scale, not a substantive transformation of monetary policymaking.

The real reason why central-bank independence tends to create a democratic deficit under a multi-target monetary-policy regime, and why it has become increasingly vulnerable, is that the two main arguments in favor of it no longer apply.

The first argument in favor of central-bank independence is that, without it, politicians can exploit expansionary monetary policy’s positive short-run effects at election time, without regard for its long-run inflationary consequences. (By contrast, fiscal and exchange-rate policies rarely imply comparable temporal trade-offs, and thus are difficult to exploit for political gain.) But this argument becomes irrelevant when ensuring price stability is no longer monetary policymakers’ sole task.

The second argument for institutional independence is that central banks have a clear comparative advantage in dealing with monetary issues, and can therefore be trusted to pursue their targets independently. But this advantage does not extend to other policy areas.

Given that central banks are likely to continue to pursue multiple objectives for a long time, their independence will continue to erode. As long as governments do not encroach excessively on central-bank decision-making, this development will restore balance in policymaking and support policy coordination, particularly in times of stress.

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No, IDS, welfare isn't a path to wealth. Quite the opposite, in fact

Far from being a lifestyle choice, welfare is all too often a struggle for survival.

Iain Duncan Smith really is the gift that keeps on giving. You get one bile-filled giftbag of small-minded, hypocritical nastiness and, just when you think it has no more pain to inflict, off comes another ghastly layer of wrapping paper and out oozes some more. He is a game of Pass the Parcel for people who hate humanity.
For reasons beyond current understanding, the Conservative party not only let him have his own department but set him loose on a stage at their conference, despite the fact that there was both a microphone and an audience and that people might hear and report on what he was going to say. It’s almost like they don’t care that the man in charge of the benefits system displays a fundamental - and, dare I say, deliberate - misunderstanding of what that system is for.
IDS took to the stage to tell the disabled people of Britain - or as he likes to think of us, the not “normal” people of Britain -  “We won’t lift you out of poverty by simply transferring taxpayers’ money to you. With our help, you’ll work your way out of poverty.” It really is fascinating that he was allowed to make such an important speech on Opposite Day.
Iain Duncan Smith is a man possessed by the concept of work. That’s why he put in so many hours and Universal Credit was such a roaring success. Work, when available and suitable and accessible, is a wonderful thing, but for those unable to access it, the welfare system is a crucial safety net that keeps them from becoming totally impoverished.
Benefits absolutely should be the route out of poverty. They are the essential buffer between people and penury. Iain Duncan Smith speaks as though there is a weekly rollover on them, building and building until claimants can skip into the kind of mansion he lives in. They are not that. They are a small stipend to keep body and soul together.
Benefits shouldn’t be a route to wealth and DWP cuts have ensured that, but the notion that we should leave people in poverty astounds me. The people who rely on benefits don’t see it as a quick buck, an easy income. We cannot be the kind of society who is content to leave people destitute because they are unable to work, through long-term illness or short-term job-seeking. Without benefits, people are literally starving. People don’t go to food banks because Waitrose are out of asparagus. They go because the government has snipped away at their benefits until they have become too poor to feed themselves.
The utter hypocrisy of telling disabled people to work themselves out of poverty while cutting Access to Work is so audacious as to be almost impressive. IDS suggests that suitable jobs for disabled workers are constantly popping out of the ground like daisies, despite the fact that his own government closed 36 Remploy factories. If he wants people to work their way out of poverty, he has make it very easy to find that work.
His speech was riddled with odious little snippets digging at those who rely on his department. No one is “simply transferring taxpayers’ money” to claimants, as though every Friday he sits down with his card reader to do some online banking, sneaking into people’s accounts and spiriting their cash away to the scrounging masses. Anyone who has come within ten feet of claiming benefits knows it is far from a simple process.
He is incredulous that if a doctor says you are too sick to work, you get signed off work, as though doctors are untrained apes that somehow gained access to a pen. This is only the latest absurd episode in DWP’s ongoing deep mistrust of the medical profession, whose knowledge of their own patients is often ignored in favour of a brief assessment by an outside agency. IDS implies it is yes-no question that GPs ask; you’re either well enough to work or signed off indefinitely to leech from the state. This is simply not true. GPs can recommend their patients for differing approaches for remaining in work, be it a phased return or adapted circumstances and they do tend to have the advantage over the DWP’s agency of having actually met their patient before.
I have read enough stories of the callous ineptitude of sanctions and cuts starving the people we are meant to be protecting. A robust welfare system is the sign of a society that cares for those in need. We need to provide accessible, suitable jobs for those who can work and accessible, suitable benefits for those who can’t. That truly would be a gift that keeps giving.