Blinder & Schelling Meet Democratizing the FED and Global Warming

["William S. Lear" <rael@xxxxxxxxxx>]

On Tue, November 11, 1997 at 23:16:14 (-0400) Thomas Kruse writes:
>                                               ...     -- pardon me for
>blowing open the boders that define discussion of human rights --
>democratizing Fed policy....

o ALAN BLINDER

Speaking of democratizing the Fed, has anyone glanced at the latest
issue of *Foreign Affairs* (November/December 1997)?

In it you will find Alan Blinder (former Vice Chairman of the FED)
arguing, quite seriously, that more of government should be shifted to
a "politics-free zone", safe from "partisan politicking", as has been
done with "independent agencies like the Federal Reserve" (this is
from the blurb in the table of contents).

Blinder slides past the real cause of our problems---that capital has
the country (soon the entire world, it seems) by the throat.  Blinder
employs the coy, veiled observation so common to the *Foreign Affairs*
writer: "government *appears* excessively beholden to those with
political clout [and, since our political system is *run* on money,
who could that be, Alan?], often at the expense of the public
interest.[my emphasis]" Could it be, just possibly, that the FED also
"appears" beholden to those with political (and economic) clout?

The public, predictably and lamentably according to Blinder, has
engaged in "rejectionist phenomena", such as actually listening and
applauding when Perot attacked the other weasels.

Blinder, with his fingers deftly on the wrists of the nation and in an
act of Freudian projection, concludes that "Americans have decided,
almost subconsciously" that the line "between political and
technocratic decisions" has been drawn "in the wrong place", which has
left "too many policy decisions in the realm of politics and too few
in the realm of technocracy."

Readers may get a laugh when Blinder recounts, in the best "I used to
be on the inside" hauteur, how the "Policy discussions [at the White
House] may begin with the merits ('Which option is best for the
American public?')"; along with laughing out loud at this (my wife and
I did) I think the best advice here is simply to read grimly on.  Read
on and be enraged.  Be enraged that this litany of upper-crust
idiocies from this deluded money-changer will be, with certainty,
transmitted to the bottom-feeders on the opinion pages and Sunday talk
shows, thence to the politicians, and before you can say "rape of
democracy", another nail will be forced into the casket.

This is serious stuff, and merits close attention.

As a special treat, I am herein appending the contents of that
article, which I have just scanned in.

o THOMAS SCHELLING

In the same issue, Thomas Schelling informs us that "The modern era of
greenhouse concern dates from the 1992 Rio Conference, attended by
President Bush, which produced a 'framework convention' for the
pursuit of reduced carbon emissions."  Here we have the excision of
popular efforts to bring awareness of global warming, and the neat
replacement of these untidy sorts with the likes of Bush---all done as
cleanly as can be by simply mentioning the irrelevant fact that Bush
was at the conference (that the U.S. tried to undermine, an
inconvenient detail, apparently).

I won't burden the list with a copy of this latter essay, or any more
details about it, but since we had been mulling over global warming
here and there, I thought it might be of interest.


Bill

---snip---snip---snip---

                     Is Government Too Political?

                           Allan S. Blinder


                        A QUESTION OF BALANCE

Since the 1994 congressional elections, America's central political
debate has pitted "big government" against "small government." This is
a sterile dichotomy that captures the concerns of few citizens.
Americans abhor paying taxes and are constitutionally incapable of
favoring "big government" in the abstract.  Nevertheless, I suspect
that voters want more government, not less, in certain key
areas---crime prevention, environmental preservation, job security,
and education, to name just a few.  Naturally, they want less
government elsewhere.

The real source of the current estrangement between Americans and
their politicians is, I believe, the feeling that the process of
governing has become too political.  Americans increasingly believe
that their elected officials are playing games rather than solving
problems.  Political debate has too much "spin" and too little
straight talk.  The system is too argumentative and tied up in
partisan and procedural knots.  Most important, government appears
excessively beholden to those with political clout, often at the
expense of the public interest.

In return for these perceived vices, citizens exact retribution from
professional politicians: witness the romanticized yearning for a man
on a white horse (first Ross Perot, then Colin Powell), the meteoric
rise and fall of the anti-politician Steve Forbes, and the growing
pressure for term limits.  Each of these rejectionist phenomena is a
Bronx cheer for career politicians.

So what is the solution?  Policy without politics?  Of course not.
But "politicalness" is not something that must be turned on or off
like a light switch; it can come in shades, more like a rheostat.  We
could be having a different debate.  It would not be about the scale
of government, but about the scope of politics; not about whether
government is too "big" or too "small" in some abstract sense, but
about what things the government should and should not be doing.  And
it would be about how political the government's various decisions
should be.

Although important, this last question is rarely mentioned.  My
contention is that one root cause of Americans' current distaste for
government is that our system is too political.  Short-term electoral
considerations and political gamesmanship have fueled much voter
resentment.  Fortunately, we can do something about it.

It is, of course, neither possible nor desirable to depoliticize
government.  Policymaking in a democracy must be political---that is,
legitimized by popular support rather than by technical analyses.  And
American democracy, in particular, was designed to be messy and
frustrating.  But different arrangements for governance draw the line
between political and technocratic decisions in different places, and
every society must choose where that line should fall.  I believe that
Americans have decided, almost subconsciously, that we have drawn the
line in the wrong place, leaving too many policy decisions in the
realm of politics and too few in the realm of technocracy.

                        LEARNING FROM THE FED

This admittedly deviant thought occurred to me while reflecting on my
recent experiences in two very different government positions.  From
January 1993 until June 1994, I worked close to the political
epicenter of the United States---on the president's staff as a member
of the Council of Economic Advisers. From June 1994 through January
1996, I served as vice chairman of the Board of Governors of the
Federal Reserve System, an independent agency created not
coincidentally during the Progressive Era, when reformers believed in
making government more "objective" and less "political." The contrast
was stark.

Regardless of who is president, life at the White House is fast-paced,
exhilarating, and---of necessity---highly political.  Policy
discussions may begin with the merits ("Which option is best for the
American public?"), but the debate quickly turns to such cosmic
questions as whether the chair of the relevant congressional
sub-committee would support the policy, which interest groups would be
for and against it, what the "message" would be, and how that message
would play in Peoria.

These matters are not just apposite in our form of government, they
are inescapable. Nevertheless, a policy's merits can quickly get
buried under a mountain of political detritus even before the policy
emerges from the White House pressure cooker. Then it goes to
Congress, where things only get worse. The principles that count on
Capitol Hill for Republicans and Democrats alike are the political
ones.

At the Federal Reserve, on the other hand, the pace is deliberate,
sometimes plodding. Policy discussions are serious, even somber, and
disagreements are almost always over a policy's economic, social, or
legal merits, not its political marketability. Overtly partisan talk
is deemed not just inappropriate, but ill-mannered. The attitudes of
particular legislators, interest groups, or political parties toward
monetary policy are rarely mentioned, for they are considered
irrelevant. And the Fed rarely discusses its "message." The Fed does
not always make the right call, but its criteria are clearly
apolitical. And its decisions are arguably better, on average, than
those made in the political cauldron.

What accounts for the different styles of decision-making? It is not
that the Federal Reserve has smarter or more morally upright people in
authority. Rather, they labor under starkly different conditions. The
White House and Congress are supposed to be political venues. Where
else should a great democracy hash out its political differences? But
the Fed is an independent agency. Independent of what? Well, mostly of
politics. Federal Reserve governors are presidential appointees
subject to Senate confirmation, but once they arrive at Fed
headquarters they are neither obliged nor expected to do the bidding
of the president or Congress. The Federal Reserve was designed to
stand above the fray, insulated from politics, making monetary policy
on the merits. And it does, to a remarkable degree.

But what justifies assigning so much power to a small group of
unelected officials, nowadays mostly economists?  Isn't that
undemocratic?  The usual defense of central bank independence is more
pragmatic than philosophical: It works, and for three main reasons.
First, and least important, monetary policy is a somewhat technical
field where trained specialists can probably outperform amateurs from
the political realm.  Second, the effects of monetary policy take a
long time to filter through the economy, so good policy decisions
require patience and a long time horizon---two attributes not normally
associated with politicians.  Third, the pain of fighting inflation
(higher unemployment for awhile) comes well in advance of the benefits
(permanently lower inflation).  So short-sighted politicians with
their eyes on elections would be tempted to inflate too much.  For
these reasons, more independent central banks in many countries have
been able to deliver lower inflation and steadier growth and
employment.

As Fed vice chairman and since, I have often offered variants of this
defense of central bank independence.  I believe it.  But as I made
the case, a nasty little thought kept creeping through my head: the
argument for the Fed's independence applies just as forcefully to many
other areas of government policy.  Many policy decisions require
complex technical judgments and have consequences that stretch into
the distant future.  Think of decisions on health policy (should we
spend more on cancer or AIDS research?), tax policy (should we reduce
taxes on capital gains?), or environmental policy (how should we cope
with damage to the ozone layer?).  Yet in such cases, elected
politicians make the key decisions.  Why should monetary policy be
different?

At first my inability to offer an intellectually coherent answer to
this question led me to question the justification for central bank
independence.  If monetary policy decisions really are so similar to,
say, tax policy decisions, why should Congress delegate monetary
policy to an independent agency while reserving tax policy for itself?
A disquieting thought for a central banker!

But as I thought about the matter more deeply, the question started to
turn itself around.  The justification for central bank independence
is valid.  Perhaps the model should be extended to other arenas.
After all, good tax policy requires complex technical judgments and a
long time horizon, just like good monetary policy.  The tax system
would surely be simpler, fairer, and more efficient if the details
(though not the broad policy goals) had been left to an independent
technical body like the Federal Reserve rather than to congressional
committees.

                      POLITICAL OR TECHNOCRATIC?

So here is the broad question of governance that, in my view, the
nation should be debating: Would the country be better off if more
public policy decisions were removed from the political thicket and
placed in the hands of unelected technocrats---subject, of course, to
congressional approval and oversight?  Upon raising that question,
three issues leap to mind.  First, which policy matters are ripe for
such reassignment and which are not?  What principles should govern
the choice?  Second, how can a democratic society justify handing over
important policy decisions to unelected officials?  Third, is it
realistic to think that government could be depoliticized in this
manner?

Two factors that influence whether a particular policy decision
belongs in the domain of technocracy or that of politics have been
mentioned already: the relative importance of technical expertise
versus value judgments and the importance of a long time horizon.
Expertise is clearly, if tacitly, valued in public administration.
For example, politicians decide on overall funding levels for public
hospitals and schools and set broad guidelines for their operation.
But experts, for the most part, make the detailed decisions and policy
judgments.  When politics intrudes on the educational system, the
results are usually unfortunate (for example, mandating the teaching
of scientific creationism in public schools).  Scientific agencies
like the National Aeronautic and Space Administration and the National
Institutes of Health function in a similar way.  Congress does not
(usually) decide which approaches to cancer research are most
promising or when the space shuttle should fly.

At the extremes, it is easy to tell a technical judgment from a value
judgment.  No one would want scientists deciding on public policy
toward abortion or capital punishment, for example, even though each
issue has some scientific aspects.  The central questions are
fundamentally moral and are therefore properly decided in the
political arena.  But as we move toward the middle of the spectrum,
the line between technical and value judgments begins to blur.
Consider two economic examples: monetary policy and tax policy.

To decide on the appropriate monetary policy, a member of the Federal
Open Market Committee needs, among other things, forecasts of
macroeconomic activity and inflation, estimates of the magnitude and
timing of the economy's responses to changes in interest rates, and
educated guesses about how financial markets would react to
alternative policy actions.  Each of these evaluations requires
technical expertise.  But the policy decision also demands a value
judgment about the relative importance of the two goals assigned to the
Fed by Congress: maximum employment and stable prices.  Even if they
make identical technical judgments, committee members who attach
different moral weights to unemployment and inflation can reach
disparate conclusions about monetary policy.

The same is true of tax policy.  As an example, consider a question
that has been debated in recent years: Should the United States lower
the tax rate on capital gains?  Answering such a question requires
technical information, such as evidence on whether a lower capital
gains tax would spur saving and investment.  But a policymaker must
also confront a stark value judgment: If cutting the capital gains tax
would encourage more investment but would favor the wealthy, should it
be done or not?  That is a question for legislators, not technocrats.

The second factor relevant to choosing between technocracy and
politics is the importance of a long-run focus.  Myopia is a serious
practical problem for democratic governments because politics tends to
produce short time horizons---often extending only until the next
election, if not just the next public opinion poll.  Politicians asked
to weigh short-run costs against long-run benefits may systematically
shortchange the future.  Despite this well-known problem, however, few
government decisions have been removed from the political thicket.
Monetary policy is one of them.

                       WHOSE GAIN, WHOSE PAIN?

To these first two factors we must add a third.  Some public policy
decisions have---or are perceived to have---mostly general impacts,
affecting most citizens in similar ways.  Monetary policy, for
example, certainly has sectoral effects, but it is usually thought of
as affecting the whole economy rather than particular groups or
industries.  Other public policies are more naturally thought of as
particularist, conferring benefits and imposing costs on identifiable
groups.  The details of the tax code and trade agreements are clear
examples.  In thinking about such issues, economists typically focus
on efficiency and resource allocation: How does the policy affect the
bill of goods that society produces?  But public debate in the
political arena invariably concentrates on distributive implications
instead: Who gets the gain and who gets the pain?

When the issues are particularist, the visible hand of interest-group
politics is likely to be most pernicious-which would seem to support
delegating authority to unelected experts.  But these are precisely
the issues that require the heaviest doses of value judgments to
decide who *should* win and lose.  Such judgments are inherently and
appropriately political.  It's a genuine dilemma.

Perhaps one solution is for the electorate to decide which types of
policies---such as tax preferences or trade provisions---should be
used as redistributive tools and which should not.  Then the former
could be left to elected politicians and the latter delegated to
independent, nonpolitical bodies.  But this approach seems altogether
too rational; muddling through on a case-by-case basis is more likely.

The comparison between monetary policy and tax policy illustrates the
interplay of these three factors---technical versus value judgments,
time horizon, and general versus particular effects.  Monetary policy
has long been depoliticized in the United States, largely because
fighting inflation requires a long time horizon.  But economists will
tell you that tax policy requires peering at least as far into the
future.  The ultimate impact of any significant change in the tax code
can take years to reach fruition.  And many tax changes impose large
transitional costs as households and businesses rearrange their
financial affairs to adapt to the new tax environment.  Thus, even if
a new law ultimately proves beneficial, society may be worse off for
several years.  Despite this awkward problem, all important tax policy
decisions are left in the hands of elected politicians, shortsighted
though they may be.

There are other striking parallels between monetary policy and tax
policy.  In both, the costs precede the benefits, and both involve
difficult technical issues about which members of Congress may lack
expertise.  Moreover, both types of policy decisions rest on value
judgments that ought to be made by the elected representatives of the
people.  The one important difference is that the details of tax
policy are more particularist than monetary policy.  But it is unclear
whether that points toward technocratic or political decision-making.

Overall, then, the similarities seem far greater than the differences.
Yet our governing mechanisms for tax policy and monetary policy could
hardly be more different.  We assign one to the nonpolitical Fed, and
leave the other to the intensely political Congress. Have we got the
division of labor right?

                    LEAVE IT TO THE PROFESSIONALS?

On to the second question: How can a believer in democracy justify
turning over policy decisions to nonelected professionals?  The
answer, I believe, is warily.  But doing so makes sense if it leads to
better public policy.  To illustrate, let me return to the example of
the Federal Reserve which, while hardly a perfect institution, is
probably the clearest existing example of a nonpolitical policymaking
body.

How does America reconcile an independent central bank with democratic
values?  First, the Fed's independence derives from authority
delegated by Congress.  In the Progressive Era, politicians made a
once-and-for-all decision to limit congressional power in this way.
They did so for the same reason that Ulysses tied himself to the mast:
he knew he would get better long-run results even though he might rue
his decision in the short run.  The decision was democratic because
Congress voted for it democratically.  And Congress can undo it any
time it sees fit.

Second, the Fed's basic goals are chosen by elected politicians, not
by nonelected officials.  The Federal Reserve Act directs---and I
choose that verb advisedly---the central bank to pursue both "maximum
employment" and "stable prices." The Fed is not free to jettison
either goal, or to substitute an alternative goal more to its liking.

The third ingredient in the democratic stew is that the people at the
top of the Fed are politically appointed.  This is as it should be; it
is what gives Federal Reserve governors political legitimacy.

Fourth, the public has a right to demand honesty, a certain amount of
openness, and a high degree of accountability from its central bankers
in return for their broad grant of power.  Because monetary policy
actions profoundly affect the lives of ordinary people, a central bank
in a democracy owes those people an explanation of what it is doing,
why, and what it expects to accomplish.  While on the Federal Reserve
Board, I often criticized the Fed's penchant for obfuscation and
mystery on these grounds---and I still do.

Finally, in a democracy, the central bank's decisions should be
reversible by the political authorities, but only under extreme
circumstances.  A Federal Reserve decision on monetary policy can in
principle be overturned by an act of Congress. And Fed governors can
be removed from office for good cause.  These mechanisms have never
been used, but America is wise to have them in place.  Delegated
authority must be retrievable.

With suitable modifications, similar democratic principles could be
applied to other independent policymaking agencies.  If such a body
were established to run tax or environmental policy, it should
exercise delegated authority that Congress could retrieve if it saw
fit, and its basic goals should be set by Congress. The agency should
be required to be considerably more open and accountable than the Fed,
and its top officials should be politically appointed and removable
for cause.

                     TAXATION WITHOUT OBFUSCATION

An illustration of how these principles might be applied may help
clarify matters.  Without necessarily advocating such a change, let us
consider how Congress might make some aspects of tax policy less
political.

An independent federal tax authority might consist of presidential
appointees serving fixed terms and removable only for cause, much like
the Federal Reserve Board. These political appointees would have a
highly skilled technical staff of nonpolitical civil servants, most of
whom could be drawn from what are now the Treasury's Office of Tax
Analysis and the staff of the Congressional Joint Committee on
Taxation. Unlike the Federal Reserve, the authority would be required
to explain in detail the reasoning behind its decisions, and to open
its supporting materials to public scrutiny.

The legislation establishing the authority should set its basic goals.
Should the United States tax income, consumption, or something else?
Should the authority strive for tax neutrality or should it seek to
encourage particular activities such as saving, homeownership, or
charitable contributions?  What distributional goals should it seek?
Congress now provides tacit answers to these questions through its
actions.  But these answers often form an unprincipled and
inconsistent hodgepodge.  One salutary effect of the proposed reform
would be to make these clearly political decisions more explicit.
Forcing politicians to take explicit stands on these general issues
might even increase, rather than diminish, democratic accountability.

Having set the basic goals and parameters, Congress could do one of
two things.  It could explicitly delegate certain limited policymaking
powers to the authority while reserving the most basic decisions for
itself.  Or it could direct the authority to design all the details
and then subject the whole package to a single up-or-down vote.

Such a division of policymaking labor would improve policy design by
assigning specific decisions to the persons best equipped to make
them.  Elected officials would select the ends of tax policy because
ultimate goals hinge sensitively on moral, political, and value
judgments that should be made democratically by elected politicians.
But appointed professionals would design the means to achieve those
ends, presumably choosing them on nonpartisan, technocratic grounds.
Such a change in institutional arrangements would almost certainly
produce a tax code far more efficient and just than the present one.

                   PUTTING PRAGMATISM INTO PRACTICE

Is the idea of less political decision-making practical?  Can it be
done in the United States today?  I believe the answer is yes.  The
Federal Reserve is not flawless, but it is an outstanding example of
technocratic policymaking---and its star is shining as never before.
Moreover, experience with other government agencies and institutional
arrangements point in the same direction.

While no other agency has the full policymaking authority that the Fed
has over monetary policy, the U.S. government is replete with
independent agencies that were designed to insulate decision-making
from political influence.  The Securities and Exchange Commission and
the Food and Drug Administration are two prominent examples.  They are
not perfect, but they work.

Congress has had similar success with the Base-Closing
Commission. Some years ago, finding itself tied up in political knots
over which military bases to close, Congress delegated much of its
authority in the matter to a nonpartisan commission working with
experts from the Pentagon. The idea was to insulate the process from
political pressures, leaving Congress with a single up-or-down vote on
the entire list.  The experiment is now viewed as a noteworthy success
and illustrates a crucial point about feasibility: in some areas
Congress may be willing, and sometimes eager, to relinquish power,
especially when the issue involves the apportionment of pain.

Lastly, consider "fast track" authority for trade agreements.  When
the U.S.  government negotiates a trade agreement, many issues are on
the table.  Because it is certain that any agreement will create both
winners and losers, the relevant interest groups are mobilized for
battle.  If Congress were to vote on each component of a trade pact
individually, politics-as-usual would probably pick any proposed
agreement apart---leaving our trade negotiators in an untenable
position.  So Congress typically grants the administration "fast
track" negotiating authority for a limited period of time, and under
certain stipulations.  When negotiations are complete, Congress votes
yes or no on the entire package with no amendments permitted. (At
least that's the idea; the reality is somewhat less tidy.)

So the question before us is not one of feasibility.  Policymaking can
be made less political, and several contemporary examples illustrate
the principle in action.  It even seems to work tolerably well.  The
real issue is desirability.  Do we want to take more policy decisions
out of the realm of politics and put them in the realm of technocracy?

My strong suspicion is that if faced with such a question, our
disgruntled electorate would answer with a resounding yes.  But that
is a proper subject for public debate.  There are, after all, cogent
arguments on the other side.  For example, the scientific evidence on
important public policy issues is rarely conclusive; more often than
not, it leaves lots of room for interpretation and judgment calls.
And even unelected technocrats have political and ideological views,
which inevitably color the calls they make.  We see this in the
courts, at the Fed, at the Securities and Exchange Commission, and
elsewhere.

                         FIXING WHAT'S BROKEN

All societies tend to see their current governing institutions as
immutable, as if they were the natural order of things.  But they are
not.  What men and women have created, they can change---and change
they should when these institutions grow dysfunctional.  I have always
opposed change for its own sake---if it ain't broke, don't fix it.
But the public's evident disdain for the current system of governance
is leading more and more Americans to tune out in disgust, wishing a
plague on both political parties.  Such attitudes weaken American
democracy and suggest that the system is indeed broke and needs to be
fixed.

Two popular nostrums are on offer as remedies for our political ills:
either "less government" in some abstract sense, or "devolution" of
government functions to lower levels.  I do not believe that either
holds the answer to what irks Americans. The time has come instead for
a real national debate over a question that no one seems to be
discussing: Might policies be better, and American democracy stronger,
if more public policy decisions were made on less political grounds?
It is not an impossible dream.

****************************************************************************

Alan S. Blinder, "Is Government Too Political?", *Foreign Affairs*,
November/December 1997, pp. 115-126.

Alan S. Blinder is Gordon S. Rentschler Memorial Professor of Economics at
Princeton University and Director of Princeton's Center for Economic
Policy Studies. In 1993-94 he served first on the Council of Economic
Advisers, and in 1994-96 as Vice Chairman of the Board of Governors of the
Federal Reserve system.