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.

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[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.