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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How Donald Trump is slouching towards the Republican nomination

There was supposed to be a ceiling above which Trump’s popular support could not climb.

In America, you can judge a crowd by its merchandise. Outside the Connecticut Convention Centre in Hartford, frail old men and brawny moms are selling “your Trump 45 football jerseys”, “your hats”, “your campaign buttons”. But the hottest item is a T-shirt bearing the slogan “Hillary sucks . . . but not like Monica!” and, on the back: “Trump that bitch!” Inside, beyond the checkpoint manned by the Transportation Security Administration and the secret service (“Good!” the man next to me says, when he sees the agents), is a family whose three kids, two of them girls, are wearing the Monica shirt.

Other people are content with the shirts they arrived in (“Waterboarding – baptising terrorists with freedom” and “If you don’t BLEED red, white and blue, take your bitch ass home!”). There are 80 chairs penned off for the elderly but everyone else is standing: guys in motorcycle and military gear, their arms folded; aspiring deal-makers, suited, on cellphones; giggling high-school fatsos, dressed fresh from the couch, grabbing M&M’s and Doritos from the movie-theatre-style concession stands. So many baseball hats; deep, bellicose chants of “Build the wall!” and “USA!”. (And, to the same rhythm, “Don-ald J!”)

A grizzled man in camouflage pants and combat boots, whose T-shirt – “Connecticut Militia III%” – confirms him as a member of the “patriot” movement, is talking to a zealous young girl in a short skirt, who came in dancing to “Uptown Girl”.

“Yeah, we were there for Operation American Spring,” he says. “Louis Farrakhan’s rally of hate . . .”

“And you’re a veteran?” she asks. “Thank you so much!”

Three hours will pass. A retired US marine will take the rostrum to growl, “God bless America – hoo-rah!”; “Uptown Girl” will play many more times (much like his speeches, Donald J’s playlist consists of a few items, repeated endlessly), before Trump finally looms in and asks the crowd: “Is this the greatest place on Earth?”

There was supposed to be a ceiling above which Trump’s popular support could not climb. Only a minority within a minority of Americans, it was assumed, could possibly be stupid enough to think a Trump presidency was a good idea. He won New Hampshire and South Carolina with over 30 per cent of the Republican vote, then took almost 46 per cent in Nevada. When he cleaned up on Super Tuesday in March, he was just shy of 50 per cent in Massachusetts; a week later, he took 47 per cent of the votes in Mississippi.

His rivals, who are useless individually, were meant to co-operate with each other and the national party to deny him the nomination. But Trump won four out of the five key states being contested on “Super-Duper Tuesday” on 15 March. Then, as talk turned to persuading and co-opting his delegates behind the scenes, Trump won New York with 60 per cent.

Now, the campaign is trying to present Trump as more “presidential”. According to his new manager, Paul Manafort, this requires him to appear in “more formal settings” – without, of course, diluting “the unique magic of Trump”. But whether or not he can resist denouncing the GOP and the “corrupt” primary system, and alluding to violence if he is baulked at at the convention, the new Trump will be much the same as the old.

Back in Hartford: “The Republicans wanna play cute with us, right? If I don’t make it, you’re gonna have millions of people that don’t vote for a Republican. They’re not gonna vote at all,” says Trump. “Hopefully that’s all, OK? Hopefully that’s all, but they’re very, very angry.”

This anger, which can supposedly be turned on anyone who gets in the way, has mainly been vented, so far, on the protesters who disrupt Trump’s rallies. “We’re not gonna be the dummies that lose all of our jobs now. We’re gonna be the smart ones. Oh, do you have one over there? There’s one of the dummies . . .”

There is a frenzied fluttering of Trump placards, off to his right. “Get ’em out! . . . Don’t hurt ’em – see how nice I am? . . . They really impede freedom of speech and it’s a disgrace. But the good news is, folks, it won’t be long. We’re just not taking it and it won’t be long.”

It is their removal by police, at Trump’s ostentatious behest, that causes the disruption, rather than the scarcely audible protesters. He seems to realise this, suddenly: “We should just let ’em . . . I’ll talk right over them, there’s no problem!” But it’s impossible to leave the protesters where they are, because it would not be safe. His crowd is too vicious.

Exit Trump, after exactly half an hour, inclusive of the many interruptions. His people seem uplifted but, out on the street, they are ambushed by a large counter-demonstration, with a booming drum and warlike banners and standards (“Black Lives Matter”; an image of the Virgin of Guadalupe, holding aloft Trump’s severed head). Here is the rest of the world, the real American world: young people, beautiful people, more female than male, every shade of skin colour. “F*** Donald Trump!” they chant.

After a horrified split-second, the Trump crowd, massively more numerous, rallies with “USA!” and – perplexingly, since one of the main themes of the speech it has just heard was the lack of jobs in Connecticut – “Get a job!” The two sides then mingle, unobstructed by police. Slanging matches break out that seem in every instance to humiliate the Trump supporter. “Go to college!” one demands. “Man, I am in college, I’m doin’ lovely!”

There is no violence, only this: some black boys are dancing, with liquid moves, to the sound of the drum. Four young Trump guys counter by stripping to their waists and jouncing around madly, their skin greenish-yellow under the street lights, screaming about the building of the wall. There was no alcohol inside; they’re drunk on whatever it is – the elixir of fascism, the unique magic of Trump. It’s a hyper but not at all happy drunk.

As with every other moment of the Trump campaign so far, it would have been merely some grade of the cringeworthy – the embarrassing, the revolting, the pitiful – were Trump not slouching closer and closer, with each of these moments, to his nomination. 

This article first appeared in the 28 April 2016 issue of the New Statesman, The new fascism