Since the topic of conversation recently has been about the Stanford Symposium of hawks, I went to look up some material to have some fun writing about it. But, I instead found an interesting blog post on central bank independence by Gary Becker that was posted in 2010. It starts out like this:
Governments that control central banks have often used their power to increase the money supply and create inflation. A growth of the money supply increases the revenue collected by the government through an inflation imposed tax on the holders of money.
These and other abuses of governmental power over central banks helped create the intellectual support for independent central banks. During the past several decades several central banks, such as the Mexico central bank, have become more independent of their government.
Perhaps discussing inflation in such a way allows him to get the point much faster, but it takes a lot of shortcuts that seem to culminate in only a vaguely valid rhetorical point. I could just as easily say that negative supply shocks tax the holders of money as well. But of course that argument could never make any kind of case for central bank independence, thus is not particularly well suited to demagoguery. After all the point would be to keep the government from overindulging in free money – or is that really the point?
Flipping back to a much older document, the US constitution, in Article 1 section 9 I find this:
No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.
In the United States, the US Congress has the power of the purse and would be the one restrained by an independent central bank (maybe – that is the general assumption, but the historical record on that point is inconclusive and unpersuasive) barring some kind of constitutional crisis. And the Congress is accountable to voters. So it doesn’t seem that having some kind of extra-constitutional monetary authority fits into the institution. Certainly nowhere in the Federal Reserve Act where Congress delegates monetary authority does it state the intention of independence. It simply is not needed because should any Congress have a mind to indefinitely rely on the printing press, it would get fixed – as we’ve noticed of late a certain kind of public hypersensitivity to printing money and the political upheavals monetary problems cause. The Republican Party is now in barely cohesive chaos.
Now that I’ve finished my quibble with whether there is intellectual support for independent central banks, at least the US, I am interested in what Gary Becker has to say about what happens when we allow central banks to do as they please:
I have little doubt that central banks should have considerable independence. Yet complete central bank independence from politicians does not seem desirable since banks also can abuse their powers. At times they can be tone deaf to what is happening in the economy, and at other times they are too much under control of the private banks that they regulate… [W]hen central bank policies create inflation or unemployment, the governing party will be blamed because the electorate cannot distinguish the effects of central bank behavior from the effects of presidential and legislative decisions.
I’d argue that the electorate (and likely many economists) also cannot distinguish the effects of negative supply shocks from the effects of central bank behavior, either, as a side note; but I do certainly agree on the substance of the argument.
The way in which government officials stack the Federal Reserve deck sets the central banking tone for years to come, and an independent central bank could and likely has done things outside the interests of the electorate for political reasons. With the terms of office being quite long, an independent central bank could have the economic effect of nullifying elections by refusing to cooperate with a subsequently elected government (not an option in the US according the Full Employment and Balanced Growth Act of 1979 that instructs all government agencies to cooperate with the Executive’s economic agenda). There is at least one recent example of a self-important former Fed governor becoming political and stating that the Fed, with QE, is allowing the government to behave irresponsibly, obviously neglecting to mention the impact of irresponsibility on the part of central bankers. With talk like that, it is not difficult to imagine that the Fed currently has too much independence. The idea is not Fed > Congress, or even Fed = Congress.
Here is what Becker says about the current state of affairs:
The US approach to the Fed makes a reasonable compromise between independence and oversight. The President appoints, subject to Senate approval, all seven members of the Board of Governors of the Federal Reserve for 14-year terms. Neither the President nor the Senate can remove any member prior to the expiration of their terms because of disagreements with bank policies. The President chooses, subject also to Senate approval, the Chairman of the Board, the most powerful position on the Board, from among the sitting Governors. The chairman serves for four years and can be reappointed. The chairman must report twice a year to Congress on the Fed’s policies, and he is asked to testify on other occasions before Congressional committees. He also collaborates with the Treasury on various occasions, as during the 2008-09 financial crisis.
I agree with it to some extent, but also disagree. The members of Congress overseeing Fed activities are not well enough aware of macroeconomics to understand what they are being told by the Chairman. That does not mean I think they should not have oversight. They most certainly should. But it needs to be effective oversight. What I would like to see is clarification of the mandates so that what is going on at the central bank is easier for them notice and to understand without having to consult the central bankers themselves. The interest rate peg is overly complex as to obscure the stance of monetary policy, allowing the central bank to cover up for mistakes and continue on with inappropriate policy with impunity, and we should find some other way that is far more transparent (NGDPLT is a good example of a replacement – if the Fed misses the target, it is quite detectable with one cause).
Also, the statement about not being able to remove members of the BoG is inaccurate. I have a post about that here. The President can remove members of the BoG for cause including the Chairman. The law is silent about what constitutes cause, but if the incident in the conduct of monetary policy in 2008-09, throwing the baby out with the bathwater, is not cause, it should be.
PS: In a rhetorical sort of way, I should probably agree with the regional Fed Presidents who buy into the argument for central banking independence, thinking it would increase their power and allow them to pursue their hawkish agendas with impunity. Because if it is true that an independent central bank would refuse to allow the government to behave irresponsibly, then there would no longer be any rationale for having the regional Fed Presidents sit on the FOMC. When the opposition is arguing for the rope by which they shall hang themselves it would be best to not interrupt. It would be fun to see people like George, Lacker and Bullard all get the boot.