Obserwator Finansowy: When we talk about the crisis we rarely talk about productivity. We must produce wealth to pay off debts. Since there will be more debts, we should produce more. Meanwhile, productivity trends in the West have been negative for decades. Depending on the country, we have either stagnation or declines.
Paul Tucker: I agree! Productivity growth is the most important thing to aggregate improvements in living standards over the medium-to-long run. It is also profound for politics. Imagine we lived in a world where productivity growth was 0. Everything in economic life would a zero-sum game. Every policy would primarily be distributive, because one person could be better off only if everyone else was worse off. And the same would go for any town, region or country being better off.
So, it matters whether, since the 2008/09 crisis, productivity growth has been low because of excessive debt, which would be persistent but ultimately would pass (as suggested by Ken Rogoff), or because of deeper problems (so-called secular stagnation, as discussed by Larry Summers). No one knows the deep causes, and so governments should adopt policies that could be useful whatever the underlying drivers. That is one reason why, in some countries, people call for spending to upgrade their economy’s infrastructure.
That aside, the longer the lockdown lasts, the more likely it is that there will eventually be investment to meet changes in consumer tastes, changes to production techniques and supply chains, and to build more capacity for emergencies into health systems and other parts of the economy. Our economies are going to need more resilience in the essentials.
Entrepreneurs will say that it is inefficient to maintain large reserves.
If so, they have an odd idea of economic efficiency. For the economy as a whole, it is inefficient when there is no capacity to absorb the consequences of a natural disaster, pandemic or other crisis. An efficient economy has a lot of self-insurance. The pandemic found rich countries unprepared for foreseeable problems. Efficiency does not mean “minimize costs on an assumption that everything will be fine all of the time, forever”. The challenge will be how much more crisis-insulation and insurance should be incorporated into private, commercial contracts, and how much is best left to the state acting as insurer-of-last-resort.
I wonder how to look at the forced popularity of home office. On the one hand, it can be a way to increase the efficiency of companies, on the other, only to maintain already achieved efficiency. What do you think?
This is impossible to know, and should be left largely to market forces, subject to lessons about things like public transport, which will affect private sector choices. We should expect to see shifts in relative prices. For example, if, as you imply, demand for office space were to slow, then there might be falls in commercial property prices, and that would have some knock-on effect on residential prices. But maybe there will be forces working in the other direction.
Should the fact that the quantitative easing (QE) has not been reduced, be considered a mistake by the Fed or the Bank of England?
I am torn on this. While I would have made some different decisions in the years before the pandemic, they have had a duty to aim to achieve inflation of around 2 per cent with the economy growing in line with productive capacity. Economic recovery has definitely relied too heavily on monetary policy makers, which has fueled excessive risk taking in financial markets, and distorted asset prices. This is to say that, since around 2012/13, the elected policymakers have done too little to stimulate recovery with the much wider range of instruments at their disposal.
Put yourself in the role of finance minister. Something terrible is happening in the economy, you meet with the central banker and together the two of you decide that the best answer to the problem is to share tasks. You will do some stimulation and he/she will do some quantitative easing. This may seem like the optimal economic policy response but for you, the finance minister, this is also politics. As the Minister of Finance, you realize that if you pursue a less active fiscal policy, the central banker will have no choice but to do even more with his/her monetary policy. The internal dynamics of this arrangement weigh on increasing the role of the central bank, because you — as a politician — do not want to risk doing something that will be unpopular with your cabinet, coalition partners, backers, voters. The structural issue that underlies the overreliance on central bankers is that while the central bank is legally obliged to achieve specific legislated goals, the government is not. So, free of any legal obligations, the politicians prioritize being reelected. A lot of criticisms are aimed at central bankers, and I have some myself, but they get the attention because they are the de facto actors while politicians sit on their hands. Some of the opprobrium directed at central bankers should, in fact, be aimed at elected ministers. This is the biggest problem in macroeconomic policy practice and design: politicians have learned that their passivity forces central bank activity. That can become habitual; in fact, may well have done so.
So, we have approached the issues you raise in „Unelected Power”: democratic legitimacy for central banks. On the one hand, we guarantee their independence, on the other, we want to avoid a lack of transparency in their activities. This is not a theoretical problem, it is not purely academic. Recently, the German Constitutional Court found that the European Central Bank (ECB) had exceeded its powers by buying up bonds of Eurozone countries. What do you think is the source of the problem here?
Inadequate architecture of European institutions. On two levels. First, there is no counterpart fiscal authority to the ECB. The upshot is that the ECB is not a normal central bank, it is a central bank in a currency area without a fiscal authority but whose members want their project to continue in all circumstances. In consequence, the ECB must always act as the US cavalry. It is, in effect, the economic sovereign, as defined by the (morally appalling) German legal theorist Carl Schmitt: that the sovereign is the one who decides in the face of an exceptional situation. That’s pretty intractable absent better structural underpinning of the euro area’s foundations. (By the way, going back to your question, I do not agree that central banks do or should avoid transparency.)
Is the German court right?
Well, the German constitutional court’s decision does not address the essence of the issue, which is one of design. The Court has a deep problem: when a constitutional arrangement is in effect impossible to change, the top court becomes the supreme ruler through how it interprets the law. I doubt the constitutional court wants to set itself up as the supreme ruler; after all, it roots its analysis in the Basic Law’s democracy clause. I am not sure they foresaw the wider significance of their intervention in Europe’s current monetary constitution.
A solution in the current case would, perhaps, be for the Bundesbank to set out (in ways the ECB support) how ECB policy has been proportionate. Whatever the truth of the Bundesbank’s alleged involvement in promoting the court case, it could now usefully be part of the solution.
Does the Fed have similar problems with democratic legitimacy for its unusual activities? Recently, the US Central Bank said it will grant direct loans to the SME sector, bypassing private banks.
In the US, any crisis of legitimacy is somewhat more likely to come through politics than the courts. An immediate awkwardness is that, by promising to support the junk bond market, the Fed will have rescued some over-indebted firms and their private equity investors. That creates moral hazard problems given that a market economy will not allocate resources efficiently if a taxpayer rescue underpins financial engineering. That presents the Fed with legitimacy problems, and so it will probably need to promote reforms to reduce incentives to be excessively levered, and to exit from these policies as soon as it can. The question of selling the private sector paper can and should be separated from the stance of monetary policy (because it could sell private paper but buy more treasury bonds, if necessary, to leave the size of the monetary base unchanged). They could, if necessary, be market makers of last resort without underpinning particular prices; I wish they had started there, but it’s now something they could retreat to when the time is ripe. All this is, underneath, another manifestation of the general problem I described to you: Congress is slow, the central bank is fast.
Why aren’t private banks lending?
I cannot be sure. Perhaps because of the risk; perhaps because they anticipate action from the central banks and governments. But we will have to wait to see the data for the next few months before reaching views on whether banks are part of the solution or are choosing to sit on their hands. The ECB set an excellent example in barring banks from paying dividends and high-end bonuses, pulling the Swiss and UK banks in their wake. The Fed did not follow, which is an extraordinarily poor decision on their part. If the central bank becomes a substitute for the entire banking system, it is quite a thing to allow the bankers to distribute profits to themselves and shareholders rather than hold them against possible large losses if the pandemic persists and losses escalate.
How long can this crisis last?
I have no idea how long it will last. It will make a huge difference whether the immediate health crisis is largely over by the autumn or whether, because of continuing risks, the economy can do no more than limp along until a vaccine is widely available. The stress scenario is that there is not a vaccine this time next year. The super-stress scenario is that the virus mutates so rapidly and potently that annual inoculation is not enough. That underlines how important it is now that the partial reopening of the economy underway in some countries must be carefully designed and controlled. The dilemma between health and the economy suggested by some is off beam. If infection and fatalities rise, do you really think everyone will willingly go out to work, and to shop? The challenge is to design economic production and services, including public transport, so that people are tolerably safe given the state of knowledge.
Meanwhile, the banking system must be prepared for worse, and unfortunately some central banks have made a big mistake in cancelling their annual stress tests. This is the worst possible time for such a decision: they should proceed but with a different scenario. Economic crises are, I am afraid, like Dante’s circles of hell: whichever one we are in, it could get worse. I am not saying it will get worse, but there should be some contingency planning for that possibility just in case, alongside planning for happier scenarios.
Has the current crisis revised your recipe for central banking reform that you presented in „Unelected Power”?
No. The purpose of the book was to describe how the general values of constitutional democracy should apply to central banking if these mighty institutions are to be legitimate. One of the book’s principles is that independent experts should be assigned only those tasks that involve the problem of „credible commitment”, that is, to be implemented effectively, they must be implemented regardless of the political cycle and regardless of the wishes of bankers: independence must mean independent from politicians, from bankers, from fund managers, and so on. What’s more, this ceding should be based on a clearly defined goal to be achieved, the implementation of which can be followed and evaluated. Otherwise, if they are given some power and after a while we ask how they are doing, they could just assert that they are doing fine, and their enemies could say they are doing terribly. Also, independent central banks should be transparent, and should publish their operating principles so that their actions are systematic.
I could go on, as the book sets out many more design precepts. But even with just those principles, it is clear that few are satisfied during the current crisis. Has the Fed done too little or too much, taken the right actions, or should it have done other things? It is not known what strategy central banks are adopting in the fight against the crisis; what they are aiming to achieve and how we can assess their success. This is partly why I said they are at the moment more like the operating arm of the finance ministry, as they were, broadly speaking, from the 1930s to the 1980s.
A practical question. I am an economic journalist, which means that I like to be smart about money. And yet, when I look at my account balance and think whether these savings are safe, I don’t know much more than a hairdresser or pizza supplier. We live in a very uncertain times. Is there any threat to our savings?
Retail bank deposits are backed by state-sponsored guarantee systems in order to deter runs. So, their safety depends on the safety of the relevant state. Take the Eurozone. Everyone says there is one money, but that’s not really true. There is one currency and 19 types of private money because the Eurozone has 19 national banking systems with 19 different deposit guarantee systems, backed by 19 different states with varying degrees of economic resilience. In that sense, there is a single monetary policy but not a monetary union based on one money. That’s why people call for a mutualized deposit scheme, although they rarely argue for it in the way I just have. Any central bank is part of its economy’s wider money-credit constitution, and the design of that needs to be both efficient and legitimate. My views on that profound truth have not changed since I wrote “Unelected Power”.
Paul Tucker is a senior fellow at the Harvard Kennedy School and the Harvard Business School. He was deputy governor at the Bank of England from 2009 to October 2013. Today, he is the President of National Institute of Economic and Social Research. He is also an author of “Unelected power.”