FacebookTwitterGoogle+RedditEmail

Tyranny of the Central Bankers

The European Central Bank (ECB) announced earlier this month that it was raising its overnight lending rate by a quarter of a percentage point to 1.25 percent. This is very bad news for people across the eurozone countries and possibly the rest of the world as well.

This action shows two things. First, the ECB is prepared to slow the eurozone economy and throw people out of work. This is the point of raising interest rates. The ECB targets two percent inflation with the current inflation rate in the eurozone around 2.5 percent.. The inflation rate is above the ECB target due to a jump in the price of oil and other commodities. These price rises in turn are primarily attributable to instability in the Middle East and increased demand from China, India and other fast-growing developing countries.

Raising interest rates in the eurozone will do little to reduce the prices of commodities. However if higher interest rates throw enough people out of work in the eurozone, it can place sufficient downward pressure on wages to offset the impact of higher commodity prices. If commodity prices rise by much more than two percent, then the ECB can make wages rise by less than two percent, thereby returning to its magic number and declaring ‘mission accomplished’.

This brings up the other fact demonstrated by the ECB’s action. It has learned nothing from the events of the last three years. Those who hoped that the worst economic downturn in 70 years might change the Bank’s behavior are sure to be disappointed. It continues to adhere to its goal of maintaining an inflation target oblivious to the costs in unemployment and lost output.

Unfortunately, the ECB is not alone in this respect. Most central banks are now controlled by inflation targetters who explicitly ignore the impact of the banks’ actions on output, employment and financial stability.

A deficit of democracy

The worst part of this story is that these fundamental decisions about economic policy are made by a small, secretive clique operating largely outside of the public’s purview. Central bank decisions on interest rates are likely to have far more impact on jobs and growth than any of the policies that are debated endlessly be elected parliaments. Yet, these decisions are made largely without democratic input.

In fairness, politicians bear much of the blame for this situation. They established institutional structures that largely place central banks beyond democratic control. There is probably no bank that is as insulated from the democratic process as the ECB, in large part because of its multinational structure, but all the central banks in wealthy countries now enjoy an extraordinary degree of independence from elected governments. In many countries they are even more independent than the judicial system.

Even worse, the politicians have actually mandated many central banks, like the ECB, to pursue an inflation target to the exclusion of other considerations. This gives the central bankers a license to throw millions of people out of work in order to chase their obsession with inflation.

Giving the central bankers free rein to chase inflation targets could perhaps be justified if they had a track record of success, but they don’t. The world economy stands to lose more than $10 trillion in output because of the central banks’ failure to stem the growth of the dangerous housing bubbles.

While the central bankers were congratulating themselves for hitting their inflation targets, the bubbles were growing ever larger, and the financial system was becoming more highly leveraged. All they could express when the bubble finally collapsed in 2008 was their surprise.

In other professions, people would have been fired for such a momentous failure. However if any central banker lost their job due to this disaster, the firing was kept very quiet.

The economic crisis should have taught central banks that it is not sufficient to pursue an inflation target; maintaining high levels of employment and overall financial and economic stability are also important – and failure to meet these challenges should result in replacing the current crop of central bankers.

Processes must also be in place to hold the central bankers accountable to elected governments. The choices they make involve issues on which the public should have input, particularly the tradeoff between higher unemployment and the risk of more inflation.

Naturally, different actors will take different positions on this tradeoff. The financial firms, who tend to be close to the central bankers, are unlikely to be very concerned about the cost of unemployment. However, they will view the risk of higher inflation with enormous trepidation because it will typically lead to large losses for the industry.

The larger public is likely to take the opposite position, as moderately higher rates of inflation pose little cost. This choice should be the sort of topic that arises in political campaigns, since it is likely to have far more consequence for the public than whatever tax or spending policies the competing parties are promoting.

None of this means that we want politicians deciding interest rates. However, the people who do decide them should be answerable to politicians in a way that is not true today. In this way central banks should be like any other regulatory agency. For example, politicians do not decide which drugs the US Food and Drug Administration approves. However if it goes five years without approving any drugs – or approves a number of them that cause sickness and death – serious problems ensue.

In short, this is simply a question of restoring accountability to the central bankers for their management of the economy. The days of the central bank as a church beyond the reach of the commoners should be brought to an end.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by International Relations and Security Network.

 

 

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

Weekend Edition
August 17, 2018
Friday - Sunday
Daniel Wolff
The Aretha Dialogue
Nick Pemberton
Donald Trump and the Rise of Patriotism 
Joseph Natoli
First Amendment Rights and the Court of Popular Opinion
Andrew Levine
Midterms 2018: What’s There to Hope For?
Robert Hunziker
Hothouse Earth
Jeffrey St. Clair
Roaming Charges: Running Out of Fools
Ajamu Baraka
Opposing Bipartisan Warmongering is Defending Human Rights of the Poor and Working Class
Paul Street
Corporate Media: the Enemy of the People
David Macaray
Trump and the Sex Tape
CJ Hopkins
Where Have All the Nazis Gone?
Daniel Falcone
The Future of NATO: an Interview With Richard Falk
Cesar Chelala
The Historic Responsibility of the Catholic Church
Ron Jacobs
The Barbarism of US Immigration Policy
Kenneth Surin
In Shanghai
William Camacaro - Frederick B. Mills
The Military Option Against Venezuela in the “Year of the Americas”
Nancy Kurshan
The Whole World Was Watching: Chicago ’68, Revisited
Robert Fantina
Yemeni and Palestinian Children
Alexandra Isfahani-Hammond
Orcas and Other-Than-Human Grief
Shoshana Fine – Thomas Lindemann
Migrants Deaths: European Democracies and the Right to Not Protect?
Paul Edwards
Totally Irrusianal
Thomas Knapp
Murphy’s Law: Big Tech Must Serve as Censorship Subcontractors
Mark Ashwill
More Demons Unleashed After Fulbright University Vietnam Official Drops Rhetorical Bombshells
Ralph Nader
Going Fundamental Eludes Congressional Progressives
Hans-Armin Ohlmann
My Longest Day: How World War II Ended for My Family
Matthew Funke
The Nordic Countries Aren’t Socialist
Daniel Warner
Tiger Woods, Donald Trump and Crime and Punishment
Dave Lindorff
Mainstream Media Hypocrisy on Display
Jeff Cohen
Democrats Gather in Chicago: Elite Party or Party of the People?
Victor Grossman
Stand Up With New Hope in Germany?
Christopher Brauchli
A Family Affair
Jill Richardson
Profiting From Poison
Patrick Bobilin
Moving the Margins
Alison Barros
Dear White American
Celia Bottger
If Ireland Can Reject Fossil Fuels, Your Town Can Too
Ian Scott Horst
Less Voting, More Revolution
Peter Certo
Trump Snubbed McCain, Then the Media Snubbed the Rest of Us
Dan Ritzman
Drilling ANWR: One of Our Last Links to the Wild World is in Danger
Brandon Do
The World and Palestine, Palestine and the World
Chris Wright
An Updated and Improved Marxism
Daryan Rezazad
Iran and the Doomsday Machine
Patrick Bond
Africa’s Pioneering Marxist Political Economist, Samir Amin (1931-2018)
Louis Proyect
Memoir From the Underground
Binoy Kampmark
Meaningless Titles and Liveable Cities: Melbourne Loses to Vienna
Andrew Stewart
Blackkklansman: Spike Lee Delivers a Masterpiece
Elizabeth Lennard
Alan Chadwick in the Budding Grove: Story Summary for a Documentary Film
FacebookTwitterGoogle+RedditEmail