OVER the weekend, rumours flew that Mark Carney, the dashing Canadian at the helm of the Bank of England, might leave his job in 2018. (He initially promised to serve for five years, but a full term is eight, and many Britons hoped he would stay on.) An early exit for Mr Carney, who has been on the job since 2013, would be understandable. While Canada is the world’s great liberal icon, Britain is a mess. Not only must Mr Carney steer the British economy through the rough, post-referendum economic seas, but he has also faced criticism from Tory leaders, who are angry with Mr Carney for trying to warn Britons that Brexit would in fact be economically damaging.
This morning, the Financial Times reports that the rumours are wrong, and Mr Carney stands ready to serve a full term. One could practically hear the sighs of relief around the City. Yet is it right that so much should seem to ride on the presence or absence of one man?
Back in 2012, when his appointment was first announced, I said no:
I worry, however, that this appointment tells us something disconcerting about monetary policy. In particular, I worry that it means that economics has done so poor a job explaining the roots of ongoing economic failures that politicians feel unable to adopt institutional reforms, or new mandates, in response to economic weakness. If governments can’t feel secure in knowing what went wrong and how to fix it, their best bet is to find people who have presided over reasonably successful economies and pay a premium for their skills, whatever those are.
Perhaps that’s right. But that might not be all there is to it. Central banks are not given notional independence because the maestros who run them are mysterious geniuses who need the freedom to work their magic. They’re given notional independence because it is thought that politicians can’t be trusted to implement the technocratic business of central banking—the incentives they face are wrong, and different from those facing a central banker.
The technocratic business of central banking is supposed to be straightforward: central bankers have particular mandates and particular targets and a suite of tools that can be used to keep the economy on track. There are lots of uncertainties, but the job should not require knowledge or skills that are not publicly available. If Mr Carney knows something about how monetary policy works that others don’t, it makes no sense for him to keep it secret so he can negotiate for a slightly higher Bank of England salary. He should either publish that knowledge and bask in the professional glory or quit and start a hedge fund in order to make some real money.
So it is possible, as I wrote in 2012, that governments care so much about hiring stars as central bankers because they really don’t understand how monetary policy or the economy works and putting people with successful pasts in charge seems smart. But it’s also possible that star central bankers really do matter, because central banking isn’t technocratic in nature at all but is intensely political.
Is it intensely political? Well, yes, of course it is. After all, central-bank independence isn’t established by inviolable divine law; what elected governments giveth they can also taketh away. Central-bank policy is therefore constrained by the need to protect long-run institutional independence. Central bankers are also keen to extend their institutional influence, but it takes political still to know when, for example, it is politically advisable to weigh in on a public debate about fiscal policy and when to keep silent. More broadly, central banking is in large part a PR exercise. To do the job well, those in the top jobs must be able to manage public expectations: about the future path of inflation in some cases, about the solvency of the banking system in others. The reason to want someone like a Mark Carney in charge of a central bank, or a Raghuram Rajan, or a Stanley Fischer, is not because they possess secret economic knowledge, but because they are skilled politicians, capable of projecting influence while also protecting the central bank’s “independence”.
If that’s really what’s going on, however, then perhaps the very idea of independence isn’t all it’s cracked up to be. Independence, after all, is primarily about shaping incentives, and the incentive to protect institutional independence can lead to perverse behaviour. If the need to protect independence prevents a central bank from adopting a radically different policy (like a switch from an inflation rate target to a target for the trend-level of nominal GDP, for example) and the economy suffers through years or decades of demand-side stagnation as a result, that’s bad.
The unfortunate news is that handing monetary policy back to elected leaders looks undesirable just now, given the quality of politician that rich economies have been producing in recent years. Which is somewhat ironic. If central bankers had been more aggressive in their efforts to boost demand and bring down unemployment over the last decade, rich-world politics might not have taken such an ugly turn.