It is often said that the chair of the Federal Reserve is the second most important person in Washington. I’m not sure the statement is exactly right, but that it is plausible is, in a sense, remarkable. Why should the second most important person in Washington not be elected by the people, or at least directly accountable to and subject to dismissal by elected officials? The president cannot fire members of the Federal Reserve Board of Governors, and for the past quarter-century it has been taboo for the president or his economic team to so much as comment on the Fed’s activities.
President Trump has now broken this taboo — as he has so many others — by commenting repeatedly on Fed policy. That makes the publication of “Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State” by Paul Tucker, a former deputy governor of the Bank of England, especially timely.
Tucker has been at the center of the global financial system for decades as George Soros broke the pound, Britain decided to stay out of the euro zone, the Bank of England became independent and, most important, as it confronted the great financial crisis of 2008. It is to his great credit that rather than taking the typical step of a retired official and writing an autobiographical memoir in the “How We Saved the Financial World With Our Courage, Thoughtfulness and Humility” genre, he has attempted something so much more ambitious and forward-looking.
What makes Tucker’s book profoundly important and takes it way beyond most discussions of central bank independence is his recognition that the issue is just one manifestation of a much broader feature of modern democracies: the delegation of power to institutions designed to be insulated from politics and the popular will. As a senior economic adviser to Presidents Bill Clinton and Barack Obama, I was enjoined not just from commenting on the Fed but from providing input to the Federal Communications Commission as it passed judgment on net neutrality, the Justice Department as it formulated antitrust policy toward Microsoft, the Commerce Department as it reached judgments on foreign subsidies, and the Federal Deposit Insurance Corporation as it dealt with failing banks.
As Tucker says in his preface, “This book . . . is about power — unelected power. . . . How to . . . hold it accountable, legitimize it. But it is also about how to make the power of independent agencies useful, serving society’s needs.” Questions relating to unelected power going well beyond central banks seem especially pressing today. Trump was elected in no small part because of a sense that government institutions, while perhaps staffed by experts, had come to be unresponsive to the needs and desires of ordinary people. On the other hand, I — and I suspect many readers of this review — hope with more than usual fervor that independent institutions of government will maintain their separateness from the presidency in the months and years ahead.
“Unelected Power” considers the role of judges, civilian-military relations and regulatory agencies but, reflecting Tucker’s background, concentrates most closely on central banks. His 31-page small-type bibliography testifies to the depth and breadth of his research. He ranges from the pure political philosophy of Locke and Montesquieu, to the Federalist Papers, to European parliamentary debate records, to mathematical economic theories, to trading-floor conventions in exploring his topic. His practical experience with the tensions he addresses, combined with his distance from conventional academic disciplines, makes his writing both more accessible and more convincing than much of what is produced by administrative-law specialists and political scientists.
Tucker’s conclusions, taking the form of a set of “Principles of Delegation” that delineate which matters should be delegated to independent agencies and how they should be monitored and held accountable, are wise, if not earth-shattering.
Discussing his particular specialty, Tucker finds it natural that in normal times, many democracies establish independent central banks to set monetary policy but have elected officials retain control over the government budget. Monetary policy has the widely agreed goal of achieving low inflation and is highly technical in its execution. Government budgetary choices inherently involve value judgments, are less technical and have effects that are much less easily monitored. Hence fiscal policy in all democracies is under the control of elected officials.
I wonder, though, if this kind of cleavage between fiscal and monetary policies will be as compelling in the future. The idea that central banks can determine rates of inflation but cannot over the long term affect real economic performance has been called into question by recent events. In many countries. notably Japan, it has proved difficult for central banks to get inflation up to target levels.
Moreover, central banks are increasingly being drawn into matters that involve value judgments. It is widely believed that central banks in the wake of the financial crisis favored the interests of the financial sector over other economic interests. More directly, central banks increasingly are involved in providing credit to many different actors in the economy. They are centrally involved with exchange-rate issues, which have important political ramifications domestically and internationally. Their actions directed at maintaining financial stability inevitably have consequences for those who hold and do not hold certain financial assets.
For these reasons, I suspect we may have moved beyond the conditions arguing in favor of peak central bank independence in the industrialized world. On the other hand, as debt projections look increasingly ominous and Congress passes huge unpaid-for tax cuts during boom economic times, political decision-making in fiscal policy matters is increasingly called into question. Many look for some kind of commission or other device to at least partially remove deficit reduction from politics. This last example points up what I think is the principal difficulty with Tucker’s extremely thoughtful analysis. It focuses on sensible structures of decision-making in a world where views differ but all actors are basically well-intentioned.
To take another example, I think an unfortunate aspect of the basically sound Dodd-Frank financial regulation legislation is that it curtails certain authorities within the Fed from lending money in situations like those faced in 2008 without explicit political authorization. Of course I favor the principle of democratic accountability. But I think the likely consequence will be that in some future crisis, a downturn will be exacerbated because politicians will not respond in some cases until events absolutely compel action. We will all be worse off.
In the wake of the financial crisis of 2008, policymakers continue to reassess the ways in which government and the financial sector interact. Democratic institutions are facing a reappraisal in light of the widespread populism of the past few years. Tucker’s arguments ought to be carefully considered. Of the many books written by those involved in responding to the financial crisis, his may deserve the longest shelf life.
-Washington Post book review