Thursday, 25 October 2012

A political economy argument for economic policy delegation


In a previous post I talked about an example of the pernicious impact that politics can have on academic economists, and promised to write something on how this might be avoided. (For a more recent example, see here.) Now one response to this is to shrug ones shoulders and say it is inevitable given the nature of the discipline. It would certainly be naive to imagine economics could ever be free of ideological influence.  However I do not think it is unreasonable to try and discourage situations where evidence is distorted, and in particular to try and avoid occasions where minority views are turned into policy because they happen to fit certain political prejudices.

As I have argued before, you cannot rely on the media to do this. Much of the media actually encourages this problem, by giving minority views equal airtime. One of the really depressing developments over the last decade has been how, when the issue of climate change is in the news, the media often tries to ‘balance’ the views of some climate change scientist with someone from the climate change denial community.

In the case of climate change, one way that scientists have tried to overcome this problem is by ‘learned societies’ issuing reports. In the US we have the National Academies, and in the UK the Royal Society. Now it is interesting to wonder whether economics could ever do something similar, but you also have to ask how much that would achieve. As I have noted before, no amount of expert opinion stopped certain newspapers in the UK hyping the imagined link between the MMR vaccination and autism, and many politicians worry more about what is in newspapers than what academic opinion says. Some may even encourage erroneous fears for political ends.

The problem in essence is this: on some issue with a significant technical content (i.e. requiring expertise), there is a clear majority amongst academia on what the answers are, but also some minority opinion suggesting something different. Answers are correlated with political preferences, so politicians pick the answers (and the advisors) that suit those preferences, whether they are in a majority or minority. They face no comeback from the media, who instead encourage the view that there are two, evenly populated, sides. Now of course occasionally the minority view will turn out to be the correct view, but most of the time it will not be. So how do we give more weight to the majority view?

One answer is institutional delegation. The government sets up a permanent body (or enhances an existing body) with the remit to focus on the contentious issue. By establishing the institution itself, it gives it political authority. The institution is designed as far as possible to be politically neutral: indeed its survival to some extent depends on this, because it wants to outlive any particular government. It is designed to be transparent, which should help it to be resistant to lobbying interests (including lobbying by the government). It may contain the expertise on the issue, or it may find that expertise within places like the academic community. Because it is non-partisan it can sort expertise from opinion, and distinguish between majority and minority views.

The obvious example we have in macroeconomics is monetary policy and central banks. In some ways this delegation was quite easy, because the institution already existed, and it had operational control. However in other respects it was more difficult to achieve, because delegation involved giving complete power to the institution to determine policy. Governments just set some general parameters, and sometimes a specific target. Independent central banks are far from perfect, but if you think returning monetary policy to governments would be a step forward, have a look at some of the strange ideas gaining political currency in the US.[1]

By delegation I do not just mean politicians giving up control. Instead the institution can be charged with providing expertise and advice. The macroeconomic example here is the fiscal council. The advice they provide may be quite specific and limited (as is the case with the UK’s OBR with macro forecasts) or more general and wide ranging (as with the CPB in the Netherlands). There is no obligation for the government to follow that advice, but it may bear a significant political cost if it does not do so because the fiscal council has been established by government to provide authoritative advice.

Sometimes a private institution can emerge to fulfil a similar role, such as the Institute for Fiscal Studies in the UK. However, this role can easily be contested, by think tanks that have a clear political agenda. Here competition is a problem. We already have plenty of competition over ideas: the failure is in getting the better ideas adopted as policy. Whether delegation of advice can be effective will depend on the political system in place. In countries where large sections of the media can be bought, there is less cost to ignoring such institutions, as the experience of the CBO in the US shows (although the effectiveness of the CBO could be improved, as I suggested here). However in other countries with a more politically independent media, there is a greater political cost in overriding advice from independent institutions set up by government.

Macroeconomists have a standard argument for delegation in the case of monetary policy, and various reasons why fiscal policy may be subject to a deficit bias which delegation might avoid. What I am suggesting here is a more general argument for delegation (which goes beyond economics) in cases which mix technical expertise with political controversy.

A particular example where such delegation could be useful is fiscal policy and demand stabilisation. This involves not just the austerity versus stimulus debate, but the macroeconomics of how best to achieve debt reduction with as little damage to growth as possible. One argument against delegating decisions or advice in this area is that the academic community is too evenly divided. I would make two observations. First, I find much less division about fiscal stabilisation policy among those that work in this area than among macroeconomists more generally. Second, would there be so many arguing for austerity today if it was not for the politics of the moment? (Recall that the previous US President used countercyclical policy arguments as part of the case for tax cuts.)

I used to think that fiscal stabilisation issues could be delegated to the central bank, because they know all about demand stabilisation. [2] However the obsession in many central banks with budget deficits probably makes this a bad idea (see the Netherlands). It could be a supranational body like the IMF. But at a national level the obvious alternative is a fiscal council. A fiscal council’s main focus is long term debt control, which is an important issue in its own right (which is why I wrote this) and is sufficient justification to set up such a body. But although the focus of their work should be on the long term, in practice they find they have to spend some proportion of their time (often a very large proportion) on shorter term issues. As a result, the possibility of short term fiscal demand stabilisation could fall within their remit. They can be the apolitical institutional filter that can sort out majority from minority opinion within academia.


[1] In some ways the current debate over fiscal policy reminds me about how monetary policy used to be debated thirty years ago. To which many would say that with monetary policy we know better now, but I think one reason why our understanding has improved is the role central banks play in fostering this knowledge.
[2] The way the proposal would work is that central banks would be allowed to change a select number of fiscal instruments on a temporary basis. The time spans involved, and any limits on the size of changes, would be established by government. When I once argued for this before a committee of UK MPs, to say the idea was not popular among those MPs would be a definite understatement. I did wonder at one stage whether they might ask for the Serjeant-at-Arms to take me to the Tower for undermining Parliament.  

10 comments:

  1. Unfortunately, a very good example of how this kind of approach can fail is provided by the Nutt-sack affair. Professor Nutt was the duly appointed head of an independent agency specifically charged with evidentiary, apolitical policy exploration in a given sphere (drug policy). He carried out this mandate exceptionally well, and in the process provided an answer which was politically unacceptable; so he was promptly sacked for not lying for the Establishment.

    I see no reason to believe that economists would be protected from an equivalent kind of censure.

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  2. I worked in the Finance sector for 44 years and half of those as a manager. I believe British management is mediocre at best and one of the reasons is that they do not take the advice of those who know the situation best (their workers) they believe as managers they know best. It is the same with politicians they will chose the advice that fits their own prejudice. The idea above is a good one it will not be welcomed by politicians

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  3. FDR ended the devastation of Fed policy in the 1930s by returning power over the price level to the government.

    The Bank of Japan resides over decades over stagnation due to its obsession with absolute price stability.

    The fiercely independent ECB is causing untold human misery in the Eurozone by its rigid application of price stability.

    The Bank of England doggedly targets low inflation during our own five year "little depression".

    And you want to give MORE power over demand policy to these central banker types, these unelected technocrats? As if they have not done enough harm already?

    Epic fail, sir.

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    1. Actually I said I once thought of giving some fiscal power to central banks, but now think otherwise. Contrast the way the central bank (and the government) thinks about austerity in the Netherlands with the much more sensible CPB.

      We can all agree that central banks could be doing a lot better. But take the UK case. The MPC sees its job as hitting an inflation target set by the government. The government has the power to change that target to a NGDP target - but has not even hinted that it has the slightest interest in doing so. Do you really think if Osborne was in charge of monetary policy he would be doing any better?

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    2. Would there be a difference between the economists asked to staff the central bank and economists who staff the fiscal council?

      Osborne was hinting loudly that the MPC should ease policy earlier in 2011 (around August/September) than they actually did, so yes on that count. Similarly Darling has implied that he wanted to (correctly) ease monetary policy earlier in 2008.

      The point is really about accountability. When you elevate technocrats to positions of power with wide policy discretion they lose democratic accountability. Even when they fail, the MPC are able to claim absolute success, and few people have really tried to tell the difference.

      The inflation target does not excuse ineptness, since it allows the MPC such wide discretion in practice. If the MPC thought they were constrained from acting "correctly" by the inflation target they could just say that; it seems clear to me they do not think that.

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  4. Politicians cannot be trusted to do the right thing in economic downturns. Politicians do not act in a timely manner or with appropriate level of response. One solution is to push as much policy as possible into automatic stabilizers. This is already done to an extent with Unemployment Insurance, Workman's Comp, Food Stamps and EITC in the US. Ideas of an "Infrastructure Bank" that would kick in to deficit spend on pre-vetted and necessary investments could have an important role as automatic stabilizer. Additional stabilizers could be added.

    The problem for the latest recession (in my view) is not enough attention paid to regulatory policy and too little use of regulation to address asset bubbles. Regulators protected the short term profits from asset bubbles rather than protecting the longer term economy.

    jonny bakho

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  5. Delegation is a very bad idea, because it avoids responsibility.

    The decision on the amount of money that government can be permitted to access is a matter for parliament to decide. They are the elected representatives of the people and the people elected them to take the hard decisions.

    The level of government spending should be decided by parliament - taking advice from the so called experts (who are just as subject to lobbying, bias, and bandwagon following as any other human being - hence the disaster in 2008).

    Then if they get it wrong, we the people can vote them out. Too many of the MPC are still in their posts despite a right royal screw up of immense proportions.

    I find this argument that 'policians spend too much' annoying. The people elected them and the people are entitled to elect politicians that spend too much and wreck the economy.

    That is the price you pay for representative democracy.

    The last four years of gloom has been the price we've paid for dabbling in technical autocracy.

    Experts should advice. Parliamentarians should decide.

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  6. I agree with Neil Wilson for five reasons.

    1) Democratic controls are already very weak. For example, during the 2010 UK election campaign, all of the main political parties agreed that spending cuts would be required, but none of them would specify what cuts they would make. Hence, the electorate had no means of making a rational voting decision, and the current government has no mandate for any specific cuts. Further delegation of decision making to expert groups would weaken democratic controls even further.

    2) I don’t agree with the Italian decision to send experts to prison for misinforming the public about earthquakes, but there must be some accountability. How would we hold experts to account when they got things wrong?


    3) When different aspects of policy are delegated to different groups, these groups blame each other when things go wrong. The public then has no way of knowing the truth. Surely, that is one of the lessons we should have learned from the current crisis with respect to financial regulation. This problem would also apply to further delegation of economic policy setting,

    4) Who would select the experts, and which experts would be selected? How would political bias be avoided in the selection process? How would political bias be avoided in subsequent economic decision making, particularly when the (perceived) bias was different to that of the elected government of the day?

    5) Given that the mainstream macroeconomics profession was blind-sighted by the current crisis, why should the public trust these same economic ‘experts’ going forward?

    If academic economists want greater control of economic decision making then they should set up an empirical economics party and stand for election.

    I have a further, related point. One of the most interesting aspects of reading economics blogs, such as this one, is how rarely they discuss the quality of education in economics. For example, according to a recent poll (mentioned on The Daily Politics), most people in the UK don’t know the difference between ‘debt’ and ‘deficit’ and, as a result, think that the current government is reducing national debt. This is an indictment of politicians, the media and the economics profession. In a democracy, one of the best ways to get effective economic decision making is to have a better educated, and better informed, electorate. Why do academic economists not speak out about this and why do they not put forward proposals for improving this situation? Perhaps we should delegate responsibility for economics education to someone else.

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  7. Professor Wren-Lewis,

    What do you think of this forthcoming book?

    http://www.voxeu.org/article/how-should-macroeconomics-be-taught-undergraduates-post-crisis-era-concrete-proposal

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  8. Set things up to be automatic. Politicians do nothing better than doing nothing. ;)

    Apparently, in the US, the most effective stimulus was unemployment insurance, which was set up long before the crisis. As the austerity hysteria indicates, human psychology may tend to be pro-cyclical. However, counter-cyclical policy is not such a hard sell. Recent events have shown that we do not have enough automatic stabilizers on the down side, and time and again events have shown that we do not have enough on the upside. You do not want to have a framework that is too rigid. You want it to be something that legislators can amend. But here is the key. They will not get much flak from their constituents for letting things take their course. Let inertia be our friend. :)

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