Re: IMF + FOMC = ?

["Canova, Timothy" <CANOVA@xxxxxxxxxxxxx>]

Dear Stephen,

I am in complete agreement with you and I like the way you undermine the
"choice" in public choice when it comes to central banking policy.

Tim


Timothy A. Canova
Associate Professor of Law
University of New Mexico School of Law
1117 Stanford Drive N.E.
Albuquerque, New Mexico  87131

Tel:  (505) 277-5654
Fax:  (505) 277-0068
e-mail:  canova@xxxxxxxxxxx


-----Original Message-----
From: Stephen Block [mailto:stephenb@xxxxxxxx]
Sent: Saturday, May 19, 2001 3:59 AM
To: Canova, Timothy
Cc: 'pkt@xxxxxxxxxxxxxxxx'
Subject: Re: IMF + FOMC = ?


Tim and Basil,

I have a different take on Basil comments that:


> There are no countries where monetary policy is directly conducted by
> democratically elected representatives.
> I think it is because the majority cannot be trusted to chose (vote for)
> the level of interest rates. The majority would always prefer lower rates,
> since this in the short run increases total wealth and so utility.
> It comes down to long run versus short run, and political leaders would be
> tempted to appeal to short run preferences to get elected.
> Basil Moore

First, no doubt the majority is not trusted by bankers. But it does not
follow that they cannot be trusted. That raises a slew of issues concerning
the nature of liberal democracy which, although pertinent, I will leave for
now in order to keep this concise.

Second , though, what if the majority votes for low interest rates? You
would then have to prove that this is necessarily harmful. Obviously
monetarists would say necessarily yes, but just as obviously Keynesians
would say hardly ever necessarily.

Third,  your argument is based upon the public choice assumption (which is
conveniently selective on such subjects) that the majority ought always to
be trusted except in those cases where it chooses to contravene the logical
reasoning of economic liberalism. In which case it is pronounced, not that
the majority has erred, but that their politicians have talked them into it.
The seductive nature of politicians seems otherwise to be ignored.

Fourth, and following from above, monetarism is in fact significantly easier
to "sell" to a population than wage and price control. That was, in my
opinion, why Nixon cleverly switched from the latter to the former. In the
case of monetarist solutions, one simply asserts that there is _no_ "choice"
but to raise interest rates, or better yet, one employs reasons concerning
inflation being a world-wide phenomenon and that the policy was essentially
dictated from the outside (something Mulroney did in Canada during the
80's). Avoiding the reasoning behind the policy avoids the need to defend
it. This is in fact in the "long run" more compatible with "public choice"
policies than actually explaining to the public that they do or, do not, in
this case, have a choice.

Fifth. The short-run / long run distinction therefore really is a joke in
this context as honest politicians will take the heat, and perhaps lose, if
they have principles. Public choice is based upon the premise than
politicians are inherently dishonest, unless, as in these instances, they
are willing to call something 'choice' when in fact what they mean is that
usually the wealthy minority will finally be afforded the right to choose
something the majority would reject, if it were given a _reasoned_ choice.
That is why monetarists would reject that possibility of giving the the
choice, as would nearly all central bankers - who would argue for their
"independence".

That leaves aside the very pressing question, however, as to what we truly
mean by "independence". Independence of mind ? A matter of opinion. Not
accountable to anyone? Hardly. Just not accountable to the majority, who
they do not trust.

Stephen Block
Vanier College