Saturday, January 23, 2010

Schumpeter and Central Bank Independence

OK, maybe I'm dragging Schumpeter anachronistically to the present, but talk of the Martha Coakley fiasco imperilling Ben Bernanke's survival at the Fed sets me thinking about democracy and central bank independence (stuff I've been teaching about this week).

First, if central bank independence means isolating central bankers from political pressures, then this ain't central bank independence. A special election potentially leading to a Fed Chair's removal is a remarkable politicization of the institution (I mean politicization in the sense of partisan, electoral politics - obviously everything the Fed does is political in the broad sense). OK, these are not normal times, and in normal times the Fed is more protected from partisan battles. But this shows that central bankers' performance has a far closer relation to electoral politics than we've been assuming.

Second, Schumpeter's minimalist 'throwing the bums out' conception of democracy ends up applying, at a remove or two, to central bankers as well as politicians. The whole point about the elitist conception of democracy present in Schumpeter's thinking is that the masses don't have the skills to understand government, but that they need to have the option of removing rulers if they mess up. Central banks, of course, are 'independent' because the dominant theory holds that the masses would have them take myopic, short-termist decisions, rather than sensibly shepherding the economy to stable growth. Good luck with that. Central banks didn't understand the economy two years ago, and probably don't now. The masses know the economy stinks. Voting against the government, and potentially by extension against Bernanke, might get the bankers taking popular disquiet a bit more seriously. Populist pressure doesn't necessarily lead to the right policies, but when the results of policy are so damning, it allows for a change of course which may not happen if elites are truly insulated from mass opinion.

Moral of the story: No matter how complex the policy detail, you can't let the bankers run the economy on their own.