A Central Banker’s Plea for Less Power
(Bloomberg Opinion) -- After more than 30 years at the Bank of England, the last four-plus as deputy governor for financial stability in the immediate aftermath of the global financial crisis, Paul Tucker left in late 2013 for a fellowship at Harvard’s Kennedy School of Government, where he started work on a book. I was in the same fellowship program at the same time and was also starting work on a book, of which I have now written 1 1/2 chapters. Meanwhile, the Princeton University Press has just published Tucker’s 656-page “Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State.” So that’s a little chastening.
It is also, it turns out, a really important and timely book about the role and the limitations of what U.S. scholars generally call the administrative state, the seemingly inexorable expansion of which is at least partly to blame for recent populist uprisings in the U.S. and Europe. For the past couple of years, political scientist Philip Wallach, now at the center-right R Street Institute in Washington, has been trying to get people to pay attention to what he has called “the administrative state’s legitimacy crisis” (I wrote about this in 2016). Now he has an ally from across the Atlantic in Tucker.
I talked to Tucker in London last week. What follows is a much-edited transcript of our conversation.
Justin Fox: Why do so many countries not only let unelected bureaucrats like you run their central banks but also shield them from direct political accountability?
Paul Tucker: For some good reasons and some not-so-good reasons. The good reason is that in the medium to long run, unelected technocrats can stick to an objective of low and stable inflation, whereas elected politicians, however knowledgeable, however committed, just have this huge need — it's not a temptation, it's a need — to deliver for the electors in the short run. The bad reason, that goes beyond central banking, is that the politicians can shed blame.
It can be really sensible for politicians to delegate to technocrats, but there’s a temptation to delegate too much and too far. This is particularly true in the States, I think. Congress can just shed blame and leave an unconstrained technocrat as the marginal lawmaker. That seems pretty crazy.
JF: In the U.S., there was a re-establishment of Federal Reserve independence in 1979, by Paul Volcker; elsewhere, such as the U.K., it came later and was more formalized. I'm sure that in the late 1990s almost anyone you asked would have said, “Oh, this is working brilliantly.”
PT: There's a really strange thing that happens in the second half of the '90s into the early zeros, which is that central banking becomes mainly about monetary policy. It's perceived mainly to be technical economics; therefore, you need mainly professional technical economists doing it. And what's happening in the background is that interest in and influence over the banking system, and I’m quoting Paul Volcker, gradually gets eroded and no one seems to notice until it all goes horribly wrong.
Why was the Fed created in 1913? Because it was finally concluded that the U.S. monetary system did need a lender of last resort. Yet less than a century later, people had kind of forgotten that that's important until they found themselves doing it on an almost intergalactic scale.
JF: One of the things you talk about in the book is that when a central bank becomes the main organization fighting a crisis like that, it allows the normal fiscal authorities to abdicate.
PT: This is the paradox at the center of the book, and one I'm not sure I cure. On the one hand, I sincerely believe that if you're going to give powers to technocrats who are insulated day to day from both elected branches of government, then you ought to give them a pretty precise objective. But the more you set them an objective, the more they are trapped into substituting for you, the politicians.
JF: Why is that?
PT: Because if the politicians are secure in the knowledge that the central bankers must, under the law, do whatever is within their powers to generate economic recovery (or whatever), then the politicians have weaker incentives to use fiscal policy. I call this the “grand dilemma of central banking”: They must have a precise objective for democratic reasons, but it can leave them as the only game in town.
JF: I'm thinking back to the U.S. in 2011. There had been a lot of fiscal stimulus before then, but you had a new congressional majority with this bunch of people who thought that the problem in the financial crisis was almost entirely the response, not the crisis itself. And one sort of gets why then the technocrats felt like, “We need to deal with this because these people are bonkers.”
PT: The politicians at that point are either sincere and — your word — bonkers, or they're not sincere and very crafty. But the effect is the same either way. The Fed or the ECB sit there, and it's not just that they have a desire to fill a vacuum, it's that they have no choice. Because if they sit on their hands, then we would have had disinflation turning into deflation and a bigger recession.
JF: You have this nice pair of phrases in the book that things seem to be moving toward "hyper-depoliticized technocracy" and "hyper-politicized populism." This was an example of that.
PT: There are lots of books about populism versus technocracy. Mine is a book from within the technocracy saying, "Can the technocrats please work out how to retreat and how to be more self-restrained?" Because if you're the answer to every question, given that you won't be perfect and occasionally you will fail, expect a populist backlash.
JF: To use another nice pair of phrases from the book, all these books about populism are about illiberal democracies, and your concern is undemocratic liberalism.
PT: Putting it into the American way of talking: "What's the cure for the problems of the administrative state? Well, it's going to be oversight by the courts." There is something unhinged about this approach.
I know the court is at the level of the Constitution and the central bank isn't, but there is something peculiar about thinking that under representative democracy, the cure for excessive technocratic power can be the unelected judges. What about Congress?
When you raise that with people, they say, "Oh, Congress won't do anything." Writing Congress and parliaments off as hopeless seems to be the apotheosis of undemocratic liberalism, and invites a backlash from the people.
JF: We've been talking so far mostly about central banks, which you refer to as the “poster boys and girls of the technocratic elite.” These issues exist in other forms in other bureaucracies, though. There is a role for these technocrats, right?
PT: Yes, it would be terrible if there weren’t insulated technocrats, but we should only ask them to do things where we know what we want them to do. We should want the objectives to be chosen by Congress or by parliaments. And too often the objectives are incredibly vague, or multiple. You have multiple objectives, all of which have are vague, and so these unelected people are basically deciding high policy when they interpret and trade off their objectives.
JF: Is it because the technical tasks have gotten more complex or just because the politics have gotten more dysfunctional?
PT: I think more the second than the first. It's a bit the first, but pretty complicated things went on in the 19th century. All tax is complicated, and yet parliaments and Congress pass detailed tax statutes. In the U.S., it partly goes back to the struggle between the Roosevelt administration and the courts in the 1930s, where to an outsider it looks like the court both overshot in striking things down and then retreated too much. Rather than forming judgments about the substance of the policy, they should have formed judgments about, “OK, there's this delegation. Is it a delegation with a clear objective or not?”
JF: You actually offer a set of principles for delegation.
PT: They're under three headings: whether to delegate, how to delegate and when it's OK to combine missions.
The "whether" one is that there should be broad public support — bipartisan support — for the purpose. This would be a good reason why environmental policy in the U.S. is in a non-independent agency, because for every person who hates what the EPA [Environmental Protection Agency] is doing now, I don't know how many other people, but it's not a small number, are saying, “Ah, pretty damn good what they're doing.”
Whereas there is not, compared to when I was born in 1958, a constituency saying, “Let's have some more inflation. That'll make the world a better place.” There aren't people out there saying, “Let's have more financial crises, or when they come around really bigger ones.” That's the first test. While innocuous-sounding, it turns out to be meaningful.
Then the question is, Can you frame a clear objective that is monitorable so that we know whether the body is bending to politics or bending to an industry? Take securities regulation. The objectives of the SEC [Securities and Exchange Commission] are, broadly, investor protection, efficiency of markets and capital formation, right? What we see is as administrations change, the weight given to them changes — there's just been a change from investor protection to capital formation. The SEC isn't independent; it has to go to Congress each year for its money. That strikes me as a good thing, because no one can monitor their success.
Another one which matters is how to delegate. You should delegate to committees with one person, one vote. This works in the Fed, more or less, although the committee is a bit big for monetary policy. The CFPB [Consumer Financial Protection Bureau] has one decision taker, complete budgetary autonomy and vague objectives. So I would say it shouldn't be independent, both because of vague objectives and one decision taker. Too much of the debate about the CFPB has been "Do we like what it’s doing?" rather than "Is this how we should delegate power?"
There are lots of independent regulators in the UK that have got one decision taker. In a system that is based on cabinet government where our prime minister isn't as powerful within the executive branch as your president, it seems amazing to delegate lawmaking powers — because that's what regulations are — to one person heading an agency.
To end with multiple missions, that would be, in the case of central banks, monetary policy and banking stability. Don't put them together unless they're inextricably intertwined, and then have separate committees within the organization. The reason for that is if you delegate two missions to one person or the same group of people, they will spend most of their efforts on the thing they either find more interesting or is most salient.
JF: It’s like the Fed in the 1990s with monetary policy.
PT: Exactly. This is why the new Bank of England is designed the way it is, precisely because of what I've just said. I know this for sure because that's why I recommended there should be a separate FPC [Financial Policy Committee] and a separate PRA [Prudential Regulation Authority], each with a majority who is only on that body.
In a sense, my big theme is why were we so careful about the structure of government in the 17th and 18th centuries, while from the middle of the 20th century onwards, we've become careless or sloppy?
JF: You write that it’s something political theorists stopped being interested in.
PT: I'm amazed. My book is a plea for political theorists to take legitimacy seriously alongside justice.
JF: So in the end is that your biggest recommendation, that we just start talking about this stuff again?
PT: Yes, yes, yes. The book is a form of practitioner's intervention in constitutionalism. It's kind of a scream or plea for “Hold on, we were just getting on with central banking. How is it that you guys or women forgot to think about the structure of the state?”
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