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UNELECTED POWER
PAUL TUCKER, HKS,COLUMBIA, NYC, 18 OCTOBER 2018

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SOLVING THE DEMOCRATIC DEFICIT IN CENTRAL BANKS AND OTHER INDEPENDENT AGENCIES: FILLING A GAP IN CONSTITUTIONALISM
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POWER OF THE POST-CRISIS CENTRAL BANKS
Poster boys and girls of today’s Unelected PowerNew third pillar alongside Judiciary and MilitaryUsedbalance-sheet powerslike never beforeQE, steering supply of credit, LOLR, and Market maker of last resortLatent quasi-fiscal powers o/a capability to impose inflation taxAnd new regulatory powersPart ofregulatory stateas well asfiscal stateSo standard defense of independence insufficient
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BASIC PROBLEM AND THESIS
Too much government power lies in unelected handsMarginal US lawmaker an unelected regulator or judgeGovernment no longer designed in a principled waygap in constitutionalism: Locke, Montesquieu, MadisonNeedPrinciples for Delegation
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FOUR HIGH-LEVEL THEMES OF BOOK
Legitimacy up there with JusticeTechnocracy v. Populism:Technocracy should retreat a bitImportance of rule of law and democracy in debates about FedLegal liberalism is insufficient:Judges guarding against the arbitrary exercise of power cannot cure a democratic deficit: our republican values matter tooOur deep political values should constrain Rational-Choice Institutional Design:Political Values Robustness Testof RC design precepts
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WHY LEGITIMACY MATTERS
Legitimacy makes a system of government resilient in the face of inevitable policy failures and disasters.Representative democracy special partly becauseIt separates how we feel about the government of the day from how we feel about thesystem of governmentBecause we can sack (vote out) our governorsExcept we cannot vote out our unelected governorsLiable, in slow motion, to erode trust ingovtunless it is principled and widely understood
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CONSTITUTIONALISM
Shapes structure of governmentLimits on governmentVeto points matter hugely:USA: hard to pass laws; once passed, hard to change or repeal themStructures the incentives of those in the elected branches, and the judicial branchUK: Parliament can legislate easily, so judges insist they decide points of lawUS: Congress legislates with difficulty, which might explain why judges ’defer’ to admin agencies on some questions of statutory interpretation (Chevron)
ADMIN STATE AND CONSTITUTIONALISM
Germanya rare exception among advanced-econ democracies:Under German Basic Law, formally can be no IAs (other than BUBA post Maastricht). Not obviously truede factoFrance: Written constitution puts admin under PM, but IAs carved out byConstCourtIAs now structured under a generic statute, following critical Senate reportUK: flexibility (of course)Long resisted o/a doctrine-cum-tradition of parliamentary accountabilityPartly solved through Select Committee system; now lots of IAs
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US DOCTRINE ON THE ADMIN STATE
Not provided for explicitly by the ConstitutionCourt has allowedAdmin state to exist, provided delegated regime has an “intelligible principle”Congress to stipulate case-by-case that an agency’s policymakers can be sacked only “for cause”.Agencies regarded as part of Exec Branch: when issue legally binding rules, merely filling in the details left by Congress
VAGUEAND MULTIPLE OBJECTIVES
FCC: in “the public convenience, interest, or necessity” and “so as to provide a fair, efficient, and equitable distribution [of radio services]”Federal Energy Regulatory Commission: to ensure that utility-type charges are “just and reasonable”EPA: to set a policy for air pollutants “requisite to protect the public health” with an “adequate margin of safety”, and with a secondary requirement to deliver policies “requisite to protect the public welfare”SEC: to deliver a combination of investor protection, fair, orderly and efficient markets, and capital formationFederal Reserve: safety and soundness of banking groups.
INDEPENDENT AGENCIES:DEFINITION
Definition:Insulated from the day-to-day politics of both elected branches of governmentAttributes of independence:Control over delegated policy instrumentsJob security of policymakersBudgetary autonomy (or at least not anannualbudget process)
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CONFUSION IN USA
SEC, CFTC, FTC, FCC not IAs on this definition: annual budget appropriation process gives Congress ongoing leverageCFPB is an IA on this definition (but does not satisfy thePrinciples)Fed and FDIC are IAsUK: FCA,OfCom, utility regulators are IAs
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DEGREES OF INSULATION MATTER
Part of problem is lack of distinction betweenExec Agenciessuch as EPA: President has day-to-day leverage, giving some democratic coverSemi-independent agenciessuch as SEC: sensitive to shifting currents of Congressional opinion due to annual budget process, and so can look to President for protectionIAsDegree of insulation conferred is rarely principled, but result of balance of forces and incentives
INCENTIVES-VALUES (IN)COMPATIBILITY
Current state of affairs might beincentives-compatibleBut it is NOTvalues compatibleHence need to generate a soft political norm,egthePrinciples
JUSTIFICATIONS FORDELEGATION-WITH-INSULATION
Fair adjudication only:but cannot validate rule-issuing powerExpertiseLandis during 1940sDoes not work: could have an independent body that gives public advice to a political decision makerNecessary but not sufficient
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CREDIBLE COMMITMENT
To work, some policies require trust in government promisesTechnocrat v. Politician incentivesAlesinaandTabelliniPolitician: re-election/current popularity:pursue welfaretodayTechnocrat: professional and public reputation for doing jobDeliver statutory mandateRequires mandate that constrainsAnda society capable of bestowing esteem: echoes old republican idea ofhonour
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ROBUSTNESS TEST: OURPOLITICAL VALUES
But most ofgovtfaces problems of credible commitmentNeed to bring in our political valuesDemocracyparticipationrepresentationpolicy via trial and errorRule of lawGenerality, predictability, transparencyFair adjudication and due processConstitutionalismSeparation of powers
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NON-MONOLITHIC VALUES
Goes beyond legal liberalism, as in:Legally valid delegation by legally elected assemblyCompliance with administrative law policed by judgesOurrepublican valuesmatter too!Why the technocratic retreat is neededBurke’s prescriptive legitimacy: entrenchment via the test of timeTechnically, book conducts arobustness testrather than seeking an overlapping (lowest common denominator) consensusEffect is to pile up the requirements place on IA-regime design
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PRINCIPLES FOR DELEGATION TO IAs
Delegation Criteria forwhetherto delegateDesign Precepts forhowto delegateMultiple-Mission Constraints
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WELFARE v LEGITIMACY
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DELEGATION CRITERIA:WHETHER
Broadly settled public preferences re purposeEnvironment policy v. financial stabilityProblem of credible commitmentNo big choices re distributional issues or high level valuesTax and social security
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DESIGN PRECEPTS:HOW(1)
Legislature to set aclear objective that can be monitored,set after public debatespecific objective constrains the ability of politicians to shape policy through power of appointment: ‘personnel is NOT policy’for well-designedIasA revived non-delegation doctrine for IAs onlySo IAdoesn’t have to make long term trade offs, decide what its mission requires it to achieveWould need a political norm that the Court felt bound to respectCourt’s legitimacy at stake here too
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DESIGN PRINCIPLES (2)
Decisions via one person-one vote,after deliberationDisperses power; aids public debate by revealing disagreement; internal policing of policymakers substituting their favored goals for the legislature’sPowers not to be used in ways that interfere unduly with liberal freedomsGerman principle of proportionality
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DESIGN PRECEPTS (3)
IA to publishOperating Principlesfor how will aim to exercise discretion in systematic and fair wayContrast pre-crisis LOLR policyTransparency sufficient to underpin accountability to elected assemblyWhose key role is decide whether to maintain, amend or repeal regime
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JUDICIAL REVIEW OF IAs
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EMERGENCIES
Clarifyex antewhat happens when an IA could help contain a disaster but is at boundary of powers:egtemporary formal extension of powers granted by elected politiciansprinciple is resisted by US Hamiltonians:big challenge for FedIf IA could act within powers but in ways not remotely contemplated by public or legislators, consult elected politiciansegECB should have done so
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MULTIPLE-MISSION CONSTRAINTS
Missions intimately intertwinedBetter results expected from joint productionSeparate statutory policy committees for each mission, with a majority of members of each committee on only that committeeTo mitigate incentive toprioritisemost salient: Wilson;Holmstrom/MilgromegGreenspan FedChair and other members on multiple policy committees charged with ensuring smooth info flows and joined-upness
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EXAMPLE 1: ANTI-TRUST
Highly vague statutory objectivesJudges decided to switch from Harvard School to Chicago School doctrineHigh policy not set by elected representativesViolatesDesign Precept 1Contrary to our deep values
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EXAMPLE 2: PRUDENTIAL SUPERVISION
IMF and BCBS Core Principles insist on independenceSupervisors insisted cannot publish state of firmHence accountability via oversight impossible until after failureAnd typically highly vague or multiple statutory objectivesA “trust us” regimeNot consistent with our political values
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EXAMPLE 3: INCIPIENT CRISIS IN SECS REG?
SEC is responsible for: protecting investors; maintaining fair, orderly and efficient markets; and facilitating capital formationTrump Administration has appointed a chair who plans to shift the emphasis to the last, in hope of reinvigorating the economy.UK’s Financial Conduct Authority has a strategic objective of ensuring that financial markets function well, and three operational objectives:securing an appropriate degree of protection for consumersprotecting and enhancing the integrity of the UK financial systempromoting effective competition in the interests of consumers.No standard is set and no weighting is given for trading off the operational objectives.
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WHATABOUT THEIR ROLEIN STABILITY?
If monetary authorities are independent so as to help solve society’s problem of making credible commitments to maintain stability…And if, at least in the wake of the financial crisis, securities regulators are integral to maintaining financial stability….Then securities regulators need, in their stability role, the same degree of independence as monetary authorities and to be subject to the same kind of constraints.
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OVERMIGHTY CITIZENS?
THE QUEST FOR LEGITIMACYIN CENTRAL BANKING

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MONETARYINDEPENDENCE:CURRENTCRITIQUE
“Central bank independence had a specific justification. Monetary policy was thought to have major dynamic consistency issues and did not have much non-technical political content. In today’s world where the dominant problem is too little not too much inflation the dynamic consistency argument loses its force. And the greater salience of exchange rate issues, fiscal monetary cooperation and credit allocation aspects of monetary policy draws it closer to policy normally delegated to democratic institutions. So at a minimum central bank independence needs reconsideration and it’s possible that it can no longer be justified in its current form.”Larry Summers, exchange with the author, 2017
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CBI: THE DEFENCE
Commitment problem wider than strict time-inconsistency leading to an inflation biasPolitical monetary policy makers would have found it hard to provide the post-2008 stimulus needed to support economic recovery:unpopular with some high-propensity-to-vote citizens: saversIf they had tried, would not have been trusted to refrain from inflating away the debtPlus a constitutionalist argument
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CONSTITUTIONAL CENTRAL BANKING
Under fiat money, independence for the monetary authority is a corollary of the higher-level separation of powers between the fiscal authority of the legislature and the elected executive governmentOther options are a committee of Congress or a commodity standardDoubt whether the volatility in output and jobs entailed by gold standard would be tolerated underfull-franchisedemocracyCentral banks a solution to the problem of not giving the monetary levers to the elected execPuts the burden on design and constraints
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POLITICAL SCIENCE EXPLANATION OF CBI
Standard story:Legislators serve interest groups, and conservatives serve financeFinance dislikes inflationTherefore, CBI will be granted by Right so as to lock in low inflation policySo why didLabourgiveBofEindependence? Alternative story:Right will not grant CBI when it thinks Left will be worse atmonpol, helping bring Right back into powerSo Left has incentive to grant CBIEgItalian Communist Party positionSustained only if general benefits: saves inflation-risk premium
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WHAT MORE?POSITIVEECON V. POLITICAL ECONOMY
Debates conducted as though purely challenges in positive economics: which instruments work best:market failuresBut what aboutgovernment failures and political values?!Little said about design of policy institutionsImplicit assumption in macro-finance: if central banks are most capable policy body, they should be empowered with previously missing instruments
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FRACTIONAL RESERVE BANKING
Our societies permit FRBPolitical economy: a device for separating government from the allocation of creditBanks are providers of liquidity insurancethrough demand deposits and committed lines of creditenables households and business to economize on holdings of liquid assetsBut leaves banks (and near banks) fragile:liabilities highly liquid, but assets that are opaque and illiquidHence risks of runs: Diamond &Dybvig
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THE LIQUIDITY REINSURER
Enter central bank as liquidity reinsurer: Lender of Last Resort (LOLR)My paraphrase of Walter Bagehot’s famous dictum:Central banks should make clear that they stand ready to lend early and freely (iewithout limit), to sound firms, against good collateral, and at rates higher than those prevailing in normal market conditions.This version emphasizes lending tosound firms only.Principles for Delegationrequire function should be formalized, with objective, constraintsetc
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TOWARDS FINANCIAL STABILITY
“I insist that neither monetary policy nor the financial system will be well served if a central bank loses interest in, or influence over, the financial system.”Paul Volcker, “The Triumph of Central Banking?”, 1990
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ONE FUNCTION LEADS TO ANOTHER
LOLR invariably at the scene of financial crises and disasterNeeds information to judge soundness of potential borrowersin circumstances where prophylactic sup andreghave “failed”Will want to be able to influence policy on minimum resilience requirements, and to be assured supervision is professionalBofJand BUBA do thisde factobut notde jurenot in accord with today’s application of political values: accountability
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MONETARY SYSTEM STABILITY
Mission with two parts:Stability of the value of central bank money in terms of goods and servicesStability of the value of private banking-system money in terms of central bank money
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A DELEGATED STABILITY-POLICY REGIME
Managing credit cycle: nomonitorableobjective proposedInstead, frame ‘finstab’ objective in terms ofresilience of systemMaintenance of core services through stressed conditionsPoliticsshddecide/blesstargetteddegree of resilience given any long-run trade-offsMicro-prudential objective “safety and soundness” to be recast/interpreted in that lightDynamicmacroprupolicy directed to maintaining desired degree of resilience
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MISSING REGIMES
Not same asmitigating every resource misallocation caused by fin system pathologiesleaning against real economy over-indebtedness that doesnotthreaten system resilience/stability, but might be a drag on economic activityThose powers could be granted to elected exec branchCentral bank might in principle give public adviceBut that too would need a carefully designed statutory framework
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A MONEY-CREDIT CONSTITUTION
Buchanan argued for a Money ConstitutionGiven FRB, must be aMoney-Credit Constitution. Five broad elements:an objective for price stability;a standard of resilience for the private banking system, with consequent constraints on balance sheets;a lender-of-last-resort regime to provide liquidity insurance to sound intermediaries;a statutory framework for resolving fundamentally bust firms in a more or less orderly way, so that the LOLR doesn’t bailout such firms but sticks to its job of providing liquidity reinsurance;and, crucially, constraints on the use of central banking’s latent fiscal and regulatory powers.
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LIBERAL CONSTRAINT BITES ON MACROPRU
“An IA’s rule-making should not interfere with individual’s liberal rights more than necessary to achieve the legislated purpose and objective (proportionality)”Problem for,eg, across-the-board LTV and LTI caps for borrowers: not proportional because other, less invasive options
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BALANCE-SHEET POLICY
Time consistent: central banks should not deny that they will do things that in fact they would do. So any absolute constraints must be in primary legislation and incentive-compatible for law-makers.Balance-sheet operations should at all times be as parsimonious as possible consistent with achieving their objectives, in order to aid comprehensibility and accountability.Minimize risk of loss consistent with achieving statutory objectives.Ifpermitted to operate in private-sector paper, should be in as many sectors as possible; with selection of individual instruments as formulaic as possible; and valuation methodology published.
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BALANCE-SHEET SIZE
Following paying interest on reserves, could in principle have three instruments:policy rate (and talk about reaction function)size of balance sheetcomposition of asset portfolio.Principle of parsimony means not all are needed all of the timeUnder normal circumstances, let balance sheet sized be determined by banks choosing the level of reserves they each wish to target over a monetary maintenance period
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THREE PILLARS OF UNELECTED POWER
“I don’t hate [him]…I do love him, but the day that I say that I agree with him when I don’t, is the day he must get rid of me because I am no use to him anymore.’”Field Marshal Alan Brooke after a row with Winston Churchill, Spring 1944“The Justices have their being near the political marketplace, in which the effects of their judgments are felt…A number of controls are built into their craft, which they practice under the scrutiny of a profession whose expectations and approval must matter to them.”Alexander Bickel, 1962“Central bank governors require three qualities above all. A deep commitment to price stability. An ability to be clear and direct to politicians about the policies that are required to produce economic stability. And the ability to be unpopular when circumstances require.”Mervyn King at a retirement dinner for Jean-Claude Trichet, 2011
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SELF-RESTRAINING CENTRAL BANKERS
Like the military but unlike the judiciary, the central bankers must be ready to advise in private on the wider government policies that arenecessaryfor monetary-system stabilityUnlike the military, precisely because they have job security, they must not press and press, while not equivocating in their adviceUnlike the military, they can repeat this advice in public at their own initiative, but in doing so the intimate connection with their formal mandate must be explicit and able to withstand tough scrutiny;They cannot be in the business of offering their opinion, in private or public, on things they happen to know about or are interested in but do not rely upon in fulfilling the trust placed in them by legislators;Like the judiciary, they must not be drawn into offering specific private advice or public remarks about things they will or might have to decideLike the judiciary, as legitimacy seekers, they can (and, rationally, ought to) explain their institution to the publicLike the judiciary, they must be ready to take criticism.
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UNELECTED DEMOCRATS
THANK YOU FOR LISTENING,PAUL TUCKER, COLUMBIA, NYC, 18 OCTOBER 2018
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UNELECTED POWER - sipa.columbia.edu