Unelected power: banking’s biggest dilemma

We don’t believe politicians and we don’t trust experts – so who is fit to run our central banks?

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A few weeks ago, President Erdogan of Turkey announced on the campaign trail that if he is re-elected later this summer, his first act will be to take control of interest rates from the Central Bank of Turkey. The currency markets were shocked: the Turkish lira promptly dropped by 10 per cent.

The reason is that President Erdogan’s bold proposal flies in the face of what has been for 40 years the modern consensus on the best way to conduct monetary policy. Politicians, that consensus holds, will always be tempted to prioritise popularity at the ballot box over economic stability, resulting in boom-bust cycles ultimately detrimental to growth and employment. The setting of interest rates should therefore be delegated, it says, to a technocratic central bank, which will have the political independence to take the longer-term view.

Erdogan, however, sees things differently. “When people fall into difficulties because of monetary policies, who are they going to hold accountable?” he asked: “They’ll hold the president accountable.” In a democracy, the president was arguing, it is not enough for those who make policy to be competent and effective. When their actions determine who gets what and why, they have to have legitimacy as well; and democratic legitimacy is the one thing that technocrats, almost by definition, lack.

Who is right – the modern consensus, with its emphasis on the need for expertise and independence; or the president, who says accountability and legitimacy should take priority? The underlying issue is summed up in the title of this new book by Paul Tucker – the former deputy governor of the Bank of England, now a fellow at Harvard’s Kennedy School. It is why, when and how elected governments should entrust their capabilities to “unelected power”.

It is difficult to overstate the importance of this question – and therefore how valuable and timely this book is.  In today’s complex market economies, we have come to rely on government by unelected experts in an improbably wide range of areas, far beyond monetary policy alone. In the UK, for example, the regulation of electricity, gas and water pricing, the supervision of fair access to higher education, the management of the environment and the setting of rail season ticket fares are all conducted by independent agencies. There is even a dedicated groceries regulator to monitor the price of peas.

The real elephant in the room, however, is monetary policy. For it is here that the gap between power and accountability has become most extreme. When Michael Gove railed recently against “deliberate policy decisions that have rewarded those who are already asset-rich”, it was central bank decisions he was talking about.  “Loose money policies” he complained “have increased the prices of assets, from real estate to equities, strengthening the economic position of the already wealthy”. In the eurozone, the same problem takes a different form. There, technocrats at the European Central Bank appear to bully elected governments by threatening to exclude them from its bond-buying programme. Either way, the thumb of monetary policy is pressing ever more heavily on the social and economic balance – and as a result, has become ever more politically contentious.

None of this has been lost on electorates: the broad issue of who has the right to decide our rules for us is one of today’s most radioactive political problems. In the era of Trump, Brexit and the anti-establishment revolution in Italy, public dissatisfaction with the rule of experts has become one of the pivots on which global politics is turning. The debate in the US and Europe may not yet have acquired the confrontational tone of Erdogan’s stump speeches (though one of the fringe candidates in the last and in other US presidential elections, Ron Paul, has written a book called End the Fed). But given the populist wave currently crashing over the West, only the most complacent would think we are that far off.

What these political ructions have exposed is chronic decay in the rationale for the system of delegation to experts. Tucker’s ambition in Unelected Power is nothing less than to provide a cure. The result is a monumental exercise in theoretical and practical renovation, which ranges with great erudition and clear logic across political philosophy, economics and public law to reconstruct from the ground up the case for the legitimate exercise of unelected power in a modern representative democracy; and then brings to bear the experience of one of the UK’s pre-eminent public servants to make concrete proposals for institutional reform.

I realise that a 600-page tome written by a career central banker may sound like a daunting prospect. Yet the heart of Tucker’s project is a simple and – to the best of my knowledge – new argument concerning the changing nature of power and government in the 21st century. It is of fundamental importance to anyone interested in the future of liberal democracy.

Tucker’s thesis is most easily illustrated in the field of monetary policy, which lies at the core of the book. The idea of delegating interest-rate setting to an independent central bank was originally introduced in the late 1970s on the grounds that politicians cannot credibly commit to keeping prices stable. The temptation to go for inflationary growth before an election will always be too strong to resist. This “time-inconsistency” problem means that politicians suffer from a chronic credibility deficit that does not affect central bankers, who are insulated from electoral pressures.

In time, however, delegation has been revealed to pose an equal and opposite problem. Monetary policy is not a purely technical matter concerned only with smoothing out economic cycles, but always and everywhere affects the distribution of wealth and income as well. This has become ever more obvious in the post-2008 era of quantitative easing. As such, central bankers’ credibility is not sufficient justification for committing to politically controversial policies – they must also have the legitimacy to do so. Yet precisely because of their statutory independence, the source of their legitimacy is hard to trace.

For four decades, this idea – that there is an unavoidable dilemma between credibility and legitimacy, with elected officials enjoying legitimacy but no credibility, and central bankers’ credibility but fragile legitimacy – has been the alpha and omega of regulatory theorists, and the chief source of neuralgia for those devising institutional reform. Tucker’s bold and liberating thesis, simply stated, is that the dilemma no longer exists.

His case is that the 21st-century information technology and social media revolutions have completely transformed the argument. In the age of Twitter, Facebook and Breitbart news, politicians’ status as elected officials is not enough for their actions to be deemed legitimate; nor can central bankers rely on their expertise and independence for their pronouncements to be deemed credible. The rules of the game have fundamentally changed, with the public demanding constant real-time dialogue with their agents in government – regardless of whether they are elected or not.

It is hard to dispute this account. Donald Trump was elected US president in accordance with the US constitution – yet half the population reject his right to govern. As for the central bankers: one doesn’t have to go as far as Erdogan’s rabble-rousing threats to grasp the loss of trust in their authority. Listening to Gove explain how the public is fed up with experts will do.

Many people find this situation depressing and believe it represents a mortal threat to liberal democracy. For Tucker, however, it offers an opportunity. Politicians and central bankers, he argues, should accept this new reality and adapt to the new regime – and they can look forward to a remarkable and unexpected pay-off if they do.

This is that legitimacy and credibility are no longer in conflict. What is required to deliver the one, delivers the other as well. The unelected technocrats so crucial to the efficient operation of complex market economies can regain their credibility – and in doing so, will also recover their legitimacy. The recipe, in theory, is simple. It is radically to reform the flow and control of information between independent agencies and the general public to fit in with the changed expectations of the information age.

Policy objectives must be clearly stated and observable. Policy actions must be comprehensible to the public. There must be transparent communication of results. And policymakers must be open to independent scrutiny. In a world in which information and opinion are shared more freely than ever before, it is these things alone that both generate legitimacy and make policy credible.

This simple idea really is a major innovation in our understanding of how modern liberal democracies have begun to operate in the information age; and the geographical scope, philosophical depth and logical rigour of the arguments Tucker mounts to support it make Unelected Power an extremely important, even essential, book.

I have only one reservation: unfortunately, not a trivial one. No one yet knows – either in central banks, or in any other institution – exactly how to put the recipe above into practice. What is more, there are ominous signs that some existing efforts to do so have unfortunate side-effects.

Let me give an example. A few years after 2008, I asked a senior central banker why policymakers were still relying on economic models that had manifestly failed in the crisis. I understood that there had not yet been time to build new and better models – but using ones known to be wrong was surely perverse? Would it not make more sense, I asked, to revert to the regime that had served well in the days before there were any such economic models at all, and resort to expert discretion?

The policymaker’s response was revealing. My question made perfect sense in theory, he explained, but the rules of the game had changed. The public was no longer willing to give wise central bankers the benefit of the doubt as they once had done. Policy decisions had to be seen to be based on a publicly verifiable process, rather than on some so-called expert’s whim. Since no alternative yet existed, the flawed models would have to continue to guide policy – regardless of the fact they were universally known to be wrong.

The lesson I drew is that the pursuit of transparency can conflict with the goal of good policy. Satisfying modern demands for free information, open dialogue and a lack of hierarchy may restrict policymakers’ options in a manner that actually makes policy worse.

Does this mean a new dilemma – this time between transparency and effectiveness – lurks behind the old paradox of credibility and legitimacy? I suppose only time will tell. But given the impressive contribution he has made to our understanding, I would not bet against Paul Tucker being there to disarm it if it does. 

Felix Martin is the author of “Money: the Unauthorised Biography” (Vintage)

Unelected Power: the Quest for Legitimacy in Central Banking and the Regulatory State
Paul Tucker
Princeton University Press, 656pp, £27

Felix Martin is a macroeconomist, bond trader and the author of Money: the Unauthorised Biography

This article appears in the 15 June 2018 issue of the New Statesman, Who sunk Brexit?