The Taming of the Few

Sir Paul Tucker is an unusual type. He is a consummate bureaucratic insider—a 30-year veteran of the Bank of England and now the chair of a group of ex-central bankers called the Systemic Risk Council—who is concerned as much with high principles of democracy and representative government as he is with policy outcomes. In his new book, Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State, he takes up the difficult task of saying when and how it is appropriate for elected officials to delegate authority to agencies insulated from politics. In so doing, he aims to show that modern societies can get beyond a binary choice between technocracy or populism if they manage wisely.

The result is a dense, 600-page tome full of good sense, whose prescriptions holders of unelected power—especially but not only central bankers and others engaged in the management of fiscal and monetary policy—would do well to heed. Tucker’s synthesis of economics, law, political science, and political philosophy is prodigious, and his experience on the front lines of fighting the global financial crisis is imposing. And yet, what is most distinctive about the book is its humility. Tucker’s worry that he and his ilk have become “overmighty citizens” is palpable, and he takes seriously the idea that bureaucrats must ultimately be servants rather than masters. He makes a case for optimism, at least if legislators and unelected officials can properly understand their roles. But that is a big if.

By Tucker’s lights, the standard, expertise-based justification for delegating power misses the point. If specialization were all that is needed, it would be easy enough to create organizational structures in which technical specialists pursue goals supplied by non-specialist decision-makers. Indeed, many of our regulatory structures conform to this model, with political appointees supplying substantive goals that permanent bureaucrats implement. There will inevitably be slippage (agency problems), but all large bureaucratic organizations experience slippage without challenging the basic sinews of representative government.

Rather than expertise, democratic governments’ reliance on independent agencies—which Tucker defines as those purposefully shielded from regular political control—is justified instead by the fact that political actors have difficulties making and keeping credible commitments over the longer haul. Sometimes these difficulties come from the multiplicity of political principals, but not always; even if we think of political actors as having a fixed set of goals, they may find it impossible to pursue long-term priorities given the short-term political benefits of deviating from the agreed wiser path. Delegation of power to actors removed from such short-term pressures can thus be an optimal solution for elected officials, as political economists have lately worked out with great rigor.1

Keeping this in mind, Tucker argues that delegation is desirable when: 1) there is a clearly specified and monitorable goal; 2) that goal has strong and consistent support across political parties and over time; 3) there is or could be a commitment problem; 4) an accepted set of policy instruments is confidently expected to be effective; and 5) pursuing the goal does not generally require making big choices about distributional trade-offs or shifting the balance of political power.

These criteria are demanding and perhaps rarely satisfied. Tucker admits that the requirement of a clearly specified goal, in particular, is almost always honored only in the breach—though he does think that the maintenance of a stable currency, when carefully specified, can be a paradigmatic example. Tucker’s point in formulating these criteria isn’t that delegation ought never proceed unless they are perfectly satisfied. He knows that delegation is going to proceed anyway, whatever normative concerns may be at issue. He is offering these considerations to inform prospective delegators’ sense of best practices. These should also be helpful for reformers seeking to attack the least justifiable instances of delegation in our system, and could well be helpful for those in less well-institutionalized polities (Russia or Ukraine, for example) who may one day seek to create architectures for sound structural reform.

As an example of an agency with a problematic delegation, Tucker points to the Federal Housing Finance Agency (FHFA), created in July 2008 to oversee the (soon-to-collapse) government-sponsored enterprises, Fannie Mae and Freddie Mac. That agency, which is led by a single head who can only be removed for cause, and which does not require congressional appropriations, is charged with extending home ownership, minimizing downside risks, and protecting the financial system’s stability. These goals are clearly in tension with each other, and choosing between them has profound distributional consequences. Congress may pretend that delegating power to this agency somehow solves the underlying issues, but it merely relocates them and, in the process, damages the legitimacy of delegations undertaken for more compelling reasons.2

Having given a sense of when delegation is warranted, Tucker offers another set of principles to inform how it should be handled. The political authority should not only provide a clear and monitorable goal (or a clear hierarchy of goals), it should also set out a plan to do the monitoring. If and when it decides that the independent agency is failing to carry out its mandate, it should have to publicly and explicitly object. This means that demanding accountability from these normally unaccountable bodies must take the form of highly visible political confrontations. If the purported accountability is actually just a desire to force a deviation from settled commitments, voters will at least have a chance to punish this bad behavior.

In general, Tucker’s principles are meant to ensure that transparency and accountability have their due, even as most policy decisions are made by unelected officials.Tucker’s principles are meant to ensure that transparency and accountability have their due, even as most policy decisions are made by unelected officials. The independent agency must not hold itself immune from criticism brought by normal citizens, since such hubris is sure to erode trust and thereby destroy the independent agency’s ability to overcome the very commitment problem that justifies its existence in the first place. Some degree of transparency about operating procedures and techniques is therefore necessary—and, to succeed, it can’t just be a lawyerly outpouring of incomprehensible jargon. Central banks and other independent regulators must understand that it is in their own interests to clearly communicate with citizens directly (through their websites, for example), and with the elected representatives who will ultimately decide their fate. Central bankers ought to see testifying before congressional committees as a real opportunity to educate political actors rather than an ordeal to endure at the hands of ignoramuses.

Although legislators in a typical democracy will never operate at the level of experts, there is nevertheless hope that they will “invigilate” the insiders’ work, engendering a level of circumspection often lacking in closed expert networks. Denizens of independent agencies are usefully reminded that they must continually earn the trust of those political actors who have delegated power to them, rather than simply exercising it as a birthright. Tucker calls this “democracy as watchfulness.”

Without dwelling on it, Tucker offers an excellent point about an independent central bank’s place in a system of separated powers. Because the power to induce inflation is essentially a power of (indirect) taxation, allowing the Executive Branch to control the money supply essentially gives the President a unilateral power to tax. Once the struggle to define money is removed from the rough and tumble of congressional politics (where it resided in the late 19th century), it is crucial to separate the control of fiscal and monetary powers for basic Madisonian reasons.

One of Tucker’s most important prescriptions for central bank design seeks to operationalize this principle with a well-articulated “Fiscal Carve-Out,” which prohibits bankers from opting into the distributionally sensitive realm of fiscal policy. Drawing a perfectly clean line between monetary and fiscal activities is impossible, but Tucker insists that it’s still very much worth the effort to create rules covering when and why the bank can buy or lend against various assets, when and how the bank is supposed to seek the counsel of the elected executive or representatives, and how the bank’s losses will be reported and covered. By clearly addressing these questions in relatively calm times, the legislature can keep the bank from becoming a de facto picker of winners and losers between regions, sectors, or specific firms during crises.

If we want a healthy relationship between the national legislature and the independent agencies to which it devolves decision-making authority, Tucker’s book offers a remarkably tangible program for achieving it. From his system designer’s perspective, we can see the shortcomings in our current arrangements and formulate a reform program in response. The people’s representatives and the unelected officials they rely on can work in tandem to achieve what neither populism nor technocracy alone could manage. This is a happy and worthy ideal that too few people work to realize in our current age.

And why is that? What is it that regular central bankers and other denizens of independent agencies value apart from realizing the goals provided by democratic bodies?

A recent literature forcefully argues that their real interest is in building a business-friendly, international neoliberal order that can resist the imperatives of democratic sovereigns if and when they become too threatening to market order. This formulation can admittedly sound conspiratorial and unhinged; “neoliberal” is a word that has been thrown around in deeply careless ways during the past several decades. But much of the best recent work on the neoliberal order traces the history of specific institution-building efforts, and the portrait that emerges is one in which experts acting through international organizations are indeed meant to “transcend” democratic shortcomings.

Notable among these books is Quinn Slobodian’s Globalists (Harvard University Press, 2018), which offers a decades-long account of how leading neoliberal thinkers, including F.A. Hayek and other members of the Austrian School, directly participated in creating an institutional order meant to facilitate global prosperity through international commerce. Far from being market fundamentalists who believed that all that was necessary for freedom was the withdrawal of the state, Slobodian’s Vienna- and Geneva-centered neoliberals determined that the rule of law and sanctity of contracts were in need of international protectors in the post-imperial world that was forming after the World War and Versailles. In a sense, they were not different at least as regards practical intentions from John Maynard Keynes after the Second World War, when roughly the same kind of challenge arose. They realized their vision first in the League of Nations and later in the various bodies leading up to the European Union and the World Trade Organization, among others.

Slobodian offers this history as someone clearly critical of what the neoliberal order has since become in the 21st century. He describes the post-1919 neoliberal goal as a world “kept safe from mass demands for social justice and redistributive equality by the guardians of the economic constitution.”3 When he shows how neoliberals’ nostalgia for the Hapsburg Empire and imperialism generally shaped their thinking, he does not mean to flatter. But unlike Nancy MacLean’s controversial and much-criticized Democracy in Chains (Penguin, 2017), Slobodian does not paint his neoliberal subjects as scheming ideologues. Indeed, he is often at pains to show that Hayek, Mises, and others were more practically oriented than their modern-day admirers and detractors alike assume, and that threats to basic global economic order in a populist era, famously termed by Ortega y Gasset “the revolt of the masses,” were not lurid fantasies.

Indeed, Hayek, Mises, Wilhelm Röpke, and others were so successful in framing the terms for the world order precisely because they were often operating as part of the respectable establishment. A four-day colloquium in Paris organized by Hayek in 1938 centered on the work of Walter Lippmann, who was then busy denouncing “the fallacy of laissez faire” on his way to painting a portrait of what he called “the Great Society” characterized by internationally shared, ever-evolving legal institutions—a vision Hayek found attractive.4 Although our current elites’ fondness for “governance” as something that transcends mere governments and their clumsily coercive techniques is often thought of as vaguely leftist, Slobodian shows how it grew out of the original neoliberals’ sense of cosmopolitan responsibility.5 Engaging in this style of thinking does not therefore require a conscious decision to oppose democracy, let alone to carry water for commercial interests. All that is required is a belief that the challenges of a globally interconnected world can only be met by global networks of experts pursuing sound diplomacy and a world governed by law.

It is instructive to consider an example of why such ideals, which are so appealing in the abstract, can nevertheless end up sounding hollow and self-serving—and hence why Tucker’s concerns are not idle.

One institution Slobodian does not cover is the Bank for International Settlements (BIS), based in Basel, Switzerland. In its own description, the BIS is “the central bankers’ central bank.” By its nature, then, it is an institution serving the needs of an international elite. For his part, Tucker testifies to the positive impact of his own “Basel experience,” which he says “makes for more open-minded central bankers, by exposing them to the different ideas, practices, problems, and contexts of their peers.” He concedes, though, that thanks to the BIS’s convening power, central bankers come “closer to fitting the description of a transnational elite” than just about any other group.6

The BIS does indeed make for a rather easy target for those concerned about cosmopolitan technocrats who put the interests of global commerce ahead of those of their home nations. Adam LeBor’s Tower of Basel: The Shadowy History of the Secret Bank That Runs the World (Public Affairs, 2013) is an at-times breathless critique along these lines, and it must be said that the BIS has often played to type. For one, its initial design came from a collaboration in 1929 between the famously caped Montagu Norman, who was Governor of the Bank of England, and Walter Layton, editor of The Economist.7 Layton actually withdrew, saying he could find no way to reconcile the bank’s existence with democratic governments’ freedom of action, but Norman and others managed to devise a multilateral treaty, the Hague Convention, that created the BIS so that it could operate as a creature of the national central banks themselves, with very little room for any government interference in its operations. In 1930, Pierre Mendes-France, later a leader of France’s Fourth Republic, offered lofty encouragement to the BIS: “In the mists of the future, the mystical purpose of a union in financial order . . . under wise and prudent management may become a potent aid for the preservation of world peace.”8

LeBor, who is looking, finds plenty to hold against the BIS. It was crucial in keeping some commerce flowing through Nazi Germany before and during the onset of war, and it facilitated the Nazi expropriation of various conquered nations’ gold. After the war, it was a key forum for those remaking Europe on business-friendly terms, and later it was a key pusher of the European Monetary Union—both of which deeds LeBor regards as plainly nefarious.

More recently, the BIS took up the burden of setting international banking supervisory standards for an increasingly globalized financial system. Its power in this arena is purely informal, as its decisions do not have legal force. But with member states committed to following its mandates, it has nevertheless exerted an enormous influence over financial regulatory structures all throughout the developed world.9

Doing so seems to have significantly contributed to the onset of the global financial crisis. In 1988 the BIS drafted its first set of standards (Basel I), and later issued another set in 2001 that was completed in 2004 (Basel II). These standards set different capital requirements for loans versus securities, thereby effectively encouraging banks to pile up securitized mortgages on their books. Rules implemented by the U.S. Securities and Exchange Commission in an attempt to incorporate the concepts of Basel II drove American investment banks to load up on similar types of securitized mortgages, creating an unsound environment extremely vulnerable to downturns in the mortgage market.10 Basel II also allowed banks to design their own capital requirements based on internal risk models (subject to some minimal requirements). This was supposed to make capital requirements more sensitive to particular institutions’ risks, but, not terribly surprisingly, it encouraged banks to underestimate their own risks.

And yet, before the crisis, the refrain out of Basel was simply that cutting-edge expertise and consummate professionalism had dictated optimal standards. After the crisis hit, this language came to sound like self-serving misdirection. The experts were largely drawn from the ranks of the powerful (and high-paying) institutions being regulated, and—for all their talk of being farsighted leaders—they built up a system that served the short-term interests of those institutions at the expense of the rest of society. Humble citizens who knew nothing of financial arcana before the crisis understandably do not rush to console themselves with the idea that the international technocrats had done their best to make globally enriching world commerce hum along. Instead, they feel scandalized, and they turn to their democratically elected representatives to respond.

Tucker’s faith in representative government rests on the belief that these elected officials can ultimately channel their constituents’ rage toward something constructive—but post-crisis experience gives us plenty of reasons to doubt that faith. Rather than “democracy as watchfulness,” they often seem to lurch toward “democracy as revenge.”

This was illustrated in the United States by the “Audit the Fed” groundswell in the years following the Federal Reserve’s ambitious crisis responses. Proponents of an audit generally made it sound as if the Fed had been entirely opaque. This mostly wasn’t true—the Fed has regularly submitted to GAO audits of its basic processes since 1978 and was required to make extensive disclosures about its crisis activities under the Emergency Economic Stabilization Act of 2008—but it tapped into heightened anxieties about the Fed’s unaccountability. And the Fed had insisted on withholding information about the identities of those firms that had received its aid. Representative Ron Paul (R-TX) and Senator Bernie Sanders (I-VT) became outspoken champions of an audit, with Paul at one point in 2009 signing up 320 co-sponsors for his Federal Reserve Transparency Act.11 Eventually, Sanders’s favored version of an audit was incorporated into Section 1102 of the Dodd-Frank Act of 2010, including forcing the release of loan recipients’ identities.

That all sounds constructive enough, but the “Audit the Fed” crowd was little sated by having gotten an audit of the Fed. From the start, critics of the movement alleged that it was merely a front for an attempt to dismantle the Fed entirely. Paul had been a savage critic of America’s central bank and its fiat currency for decades, and had published a best-selling treatise, End the Fed, in 2009. Maine’s Republican Party had put in a party platform supporting an audit “as the first step in Ending the Fed.” And Paul kept pushing an audit bill long after the audit ordered by Dodd-Frank had been published, with his son Senator Rand Paul (R-KY) continuing the effort after his retirement. Given the nature of this reform coalition and its apparently implacable demands, defenders of the Fed understandably saw it as incapable of playing the role of good-faith reformer. Instead, they sought to draw attention to the loonier elements who were out to smash the whole international financial order, and who were not shy about using the full range of anti-Semitic justifications for doing so. Both sides, then, were locked into a struggle to delegitimize the other—hardly a good environment for reform.Both sides, then, were locked into a struggle to delegitimize the other—hardly a good environment for reform.

The same dynamic has been apparent in the debates about the role of the European Central Bank (ECB) since the crisis. According to the ECB’s telling, the institution has performed admirably over its twenty years of existence, stabilizing the value of the euro against inflation and deflation alike, including through the purchasing of sovereign bonds (“outright monetary transactions,” initiated in September 2012). Given that its mandate makes price stability a clear goal, the institution regards its record as excellent.

But this is both too modest and too forgiving. In fact, as Tucker notes, because of the absence of any fiscal authority in the European Union, the ECB’s “monetary technocrats [are] adrift in the constitutional order of things, precariously perched as existential guarantors. Hence the legal and political dilemmas posed by the ECB’s Sisyphus-like labors to preserve Europe’s monetary union and the wider project it represents.”12Assessments of the ECB’s performance in this larger role have generally been rather harsh. A new account of the crisis emphasizes its hesitancy in addressing Europe’s woes and intransigence against any debt restructurings by Greece or other struggling member-states.13 Suspicion of the ECB’s supposedly neutral motives is a recurrent theme for populists in Spain, Greece, Italy, and elsewhere. Italy’s current Minister for European Affairs, Paolo Savona, has called the eurozone as managed by the ECB a “German cage.”14

Tucker serves up two trilemmas that suggest that the clashes over the Fed and ECB are generated by the very structure of our globalized political economy, rather than being anomalous results of a once-in-a-lifetime perfect storm. The first is what the economist Dani Rodrik calls the “globalization paradox.” Rodrik argues that a state can choose at most two of the following three characteristics: full integration into global markets, national sovereignty, and real democracy.15 If democratic majorities acting in nation-states insist on exercising their will, they will need to find ways to resist the influence of international capital. An extension of Rodrik’s thinking by Dirk Schoenmaker gives a sense of how the framework bites in finance in particular. As Tucker relates it,

. . . if the world opts for financial integration and financial stability, then democratic nations will not have autonomy over policies on the financial system. Since it is hard to imagine people opting to embrace recurrent financial instability, the apparent choices are (1) to give up financial globalization and thereby regain domestic control, (2) to retain financial integration and relocate democracy to the global plane (the dream of cosmopolitan democrats), and (3) to maintain international financial integration, set financial policy globally, and accept the dilution of democracy!16

Framed in this way, democratic legislatures’ yen to rough up their own internationally oriented central banks seems like an almost necessary aspect of the system. So, too, does the choice for recurrent instability that Tucker says is unthinkable. Any consciously choosing decision-maker would indeed reject instability, especially when the memory of the last crisis is fresh. But for a legislature attempting to manage the tensions between the demands of citizens and those of mobile capital, and without any way to settle these questions definitively, regular implicit choices for instability seem unsurprising. Such choices, rather than a meek acceptance of the dictates of an international financial world they cannot really hope to control, may offer the most natural compromises. That hardly means the situation is sustainable. As Ross Douthat described the situation in a recent consideration of Europe’s insurgent populists: “The center is hated, but whether overtly or covertly it finds some ways to hold. The question is how long this situation can last.”

So, what can we realistically expect from central bankers and other technocratic actors empowered by democracies but operating in thoroughly international and sheltered policy realms? How should they conduct themselves so as to best preserve their ability to overcome commitment problems and realize society’s goals?

They must remember, always, from whence their power comes. It is easy enough to acknowledge this outwardly. For his part, former Fed Chairman Ben Bernanke often intoned that “Congress is our boss” and insisted that the Fed would always respect the legal requirements put on it by the legislature. Much harder is to adopt an inward attitude of subordination, especially when legislatures seem oblivious to basic facts. That subordination does not require those who wield unelected power to abstain from trying to educate and improve elected officials. But it does mean that they must accept their judgments as final and legitimate. Technocrats have no right to save the people from themselves. If there are mistakes, the people’s representatives are the ones, and the only ones, who are entitled to make them.

Accepting representatives’ superior claims to legitimacy ought to be aided by a recognition that, as Aristotle put it, “the guest will judge better of a feast than the cook.”17 That is so despite the cook’s superior knowledge of technique. Experts who have erred will always be tempted to hold themselves as beyond mere mortals’ criticism, by saying that only those who have been initiated into the mysteries of their craft have the context to properly understand the ultimate correctness of their actions. Sometimes this will be right, but not always, and so it can be no kind of trump card in a free society. Accountability must be to the non-expert people and their often-clumsy representatives, or it is not really meaningful.

The humility that makes Tucker’s book so appealing is not based in any kind of thoroughgoing self-doubt. He thinks the brainpower of the central bankers who come through Basel is immense, and that, by and large, they progress toward better policy. Instead—quite appropriately for someone given a knighthood for his service to central banking—his attitude comes from a kind of modern sense of noblesse oblige, heavy on the obligation. Let us hope Tucker can inspire others who wield unelected power to feel and act on this sense as much as he does, titled nobility or no.