Saturday, January 22, 2022

From independent central bankers to central bank politicians

The theory says that Independent Central Banks are an institutional innovation that facilitates commitment to make the fight against inflation credible, in democratic contexts where there is constant pressure to run expansionary policies. Complemented with arguments that have to do with expertise, the idea of setting up technocratic agencies insulated form day-to-day politics has expanded its field of influence to reach regulatory institutions, fiscal authorities and other agencies.

The political scientist Marver Bernstein introduced some decades ago a number of qualifications to the virtues of the institution of "independent" authorities, one of them being that unpopular but necessary policies in democracies require political skills.

Some recent developments show that Bernstein was correct, and they show it in a way that was perhaps not anticipated by Bernstein and other critics. These developments have to do with the transition from Central Banks (CBs) to governments by some prominent central bankers.

Mario Draghi, the former Chaiman of the European Central Bank, is now the Italian Prime Minister (and will soon perhaps be the President). Admittedly, this is in an Italian tradition, since it is not the first central banker to become Prime Minister in times of crisis in that country, except that Draghi comes from the European CB, and not from the Banca d'Italia.

Janet Yellen in the US used to be the Governor of the Federal Reserve and is now the Treasury Secretary, and a prominent member of President Biden's cabinet. Finally, it was yesterday announced that the current Governor of the Central Bank of Chile (appointed by the Socialist Michelle Bachelet and confirmed by the conservative Sebastián Piñera), Mario Marcel, will soon become the new Finance Minister, a key position in the government of the newly elected progressive President, Gabriel Boric.

These are not extravagant examples from hidden countries, but cases from very important economies: the US, the European Union (and one of its largest and more economically problematic countries, Italy), and Chile (for many years the poster child of the Washington Consensus).

These are not exaclty conservative central bankers, but they have self-defined themselves as center-left (although Draghi presides over a very broad coalition). Yellen is part of the Democratic Party government of President Biden, and Marcel is an independent close to the Socialist Party, that will be part of the leftist coalition of Boric.

Can this trend be extended to authorities in other fields becoming politicians? That is the case of the Spanish José Luis Escrivá, the current minister for Social Security and Inclusion in the progressive coalition government. Escrivá was the first Chair of the Independent Fiscal Authority, set up by Spain under the recommendation of the European institutions after the Euro Crisis, where he was appointed by the then conservative government.

All these individuals have the credentials of well-trained and experienced economists, some of them with academic experience at the highest level. It will be interesting to see how they develop their role now as political and technical managers to keep populists (from the left and right) at bay.

But faced with this kind of revolving doors, now when we see an "independent" authority, perhaps we don't have to think of him o her as an apolitical technocrat, but as a technocratic politician.

Tuesday, January 4, 2022

Under-scrutinized parochialism

All the books by Amartya Sen have a common thread, and this is going beyond Arrow’s Impossibility Theorem. I have recently re-read substantial parts of his books on justice and on identity, I read in summer his partial autobiography, and I have always handy the re-edition of his book on Social Choice. Arrow reached the somewhat pessimistic result that from a set of individual rankings of social outcomes, it was not mathematically possible to reach a collective ranking that fulfills a minimal number of reasonable properties (such as transitivity). One example of this is that there is no voting rule that is not vulnerable to breaking one of a few such reasonable criteria. Sen took this result not as a final destination, but as a starting point for a research program to explore partial possibilities that could deliver imperfect but practical solutions. This could be in terms of voting rules, measurement of economic well-being or other aspects of social organization.

In “The Idea of Justice” he applies this notion to the exploration of a comparative theory of justice, where the objective is not to reach a perfect ideal of justice, but to correct injustices in a practical way, not focusing only on institutions, but also on social outcomes ("what happens to people"). He connects this program of practical justice to the notion of “Democracy as public reason.” That is, the possibility of deliberation and discussion allows societies to uncover injustices and correct them. Sen’s sentence that “Outrage can be used to motivate, rather than to replace, reasoning,” which was perhaps written fifteen years ago, resonates today very loudly.

Once we understand that democracy goes beyond ballots and elections, one key aspect to be confronted is that a danger for democracies is to remain trapped in local interests and prejudices. Arguments may be enriched by a global impartial spectator or more practically by the view of others in other lands. This is for two reasons: one is that the interests of people in different societies, countries or regions are more and more interconnected. One decision in one country affects what happens in another country. In other words, there are significant externalities. Another reason has to do with perspectives and ideas. Others may have thought about something that affects us. I see that in communities (like mine) that are over-exposed to nationalist rhetoric: we could learn a lot not only from a better knowledge of our own history, but also from a better knowledge of the (mostly tragic) consequences of nationalism elsewhere.

Other examples come from the US: knowledge from what happens and what is discussed in other countries could help that particular democracy to understand why the death penalty, or the reluctance to embrace public health, are very exceptional among developed democracies. 

Similarly, why phenomena such as famines are not the same as sectarian identity conflicts, makes it possible to understand why the manipulation of identities poses such a threat to democracies and especially to the respect of minorities or the respect of voiceless majorities. In a famine, the non-affected majority can feel empathy for those that suffer, once they are exposed to the relevant information. However, in a sectarian conflict, one community may not feel any empathy for another one, even when they are confronted with the relevant facts and data.