Saturday, March 5, 2016

Against Independent Central Banks: The Short Version

Simon Wren-Lewis appeals to the history of the past few decades to develop an argument for making central banking less independent.  I think there’s a simpler way to put it: good macroeconomic policy typically requires coordination between monetary and fiscal policy.  This was true in the early-mid 1980s in the US when very expansive fiscal policy combusted with tight monetary policy to drive up the value of the dollar and require a Plaza Accord to repair the damage.  It’s true today, as SWL says, to facilitate some sort of helicopter to fly us out of chronically deficient demand.  This is old-fashioned Keynesian economics, the sort I learned in the 1970s, and it still makes sense.

Incidentally, one of the arguments for ICB’s that SWL cites has never impressed me much, that it counteracts the pro-inflation bias of populist politicians.  If the rest of the political economic landscape were perfectly neutral with respect to competing policy objectives, there might be a point. But in the world we actually live in there is a politically powerful financial sector in every country demanding hard money at each moment of the business cycle (except of course the crash).  This lends a contractionary bias to monetary policy under systems in which central banks are insulated from other political pressures.  Obviously, reducing CB independence is not a solution in itself, because politics is often misguided, but if there were truly a soft money bias from electoral pressures, it might take us closer to neutrality overall.


Unknown said...

The only "coordination" of fiscal and monetary policy that seems necessary is for governments to ramp up expenditures with future benefits and present marginal costs during recessions (=low real borrowing rates and marginal costs less than market prices, i.e., unemployed resources). Whether you call this old fashioned Keynesian economics or not is a matter of taste.

Bruce Wilder said...

You are too polite.

Central bank "independence" interpreted as independence from populist political pressure is clearly not a desirable property, except from a corrupt perspective. The one thing a sensible monetary policy cannot survive is leaving a central bank to the tender mercies of the bankster community, the constituency that a central bank must regulate in the public interest, if it is to serve any function other than as handmaiden to the enslavement of peons.

That Simon Wren-Lewis labors within a theoretical framework that doesn't adequately contemplate the multifarious ways in which a Central Bank must regulate the banking and payment system is simply evidence that he is a pompous ignoramus underneath the academic robes. "Central bank independence" is code for such corrupt piety among economists, and we should do nothing to encourage accepting even for a moment the pretence of neutrality or competence among these dignified toadies to plutocracy.

That said, I think it is possible to make a political science point about the usefulness of isolating certain monetary policy decisions in a political body, which, unlike a legislature cannot be rolling logs, as they say. That a Central Bank and a Treasury department must cooperate in executing the operational decisions that manage a currency, a payments systems and keeps a marketable national debt a useful means of financial hedging and a benchmark for a "zero-risk" yield curve -- well, that is arguably a technical point worth having an academic explicate.

That kind of strategic isolation in structuring institutional decision-making in the interest of maintaining a modicum of integrity and technical transparency should never be confused with pious and hypocrtical claims about "central bank independence". In fact, if Simon Wren-Lewis were minimally competent, he would be making a distinction between strategic isolation and political capture, political capture and political responsibility.

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