Power and legitimacy

Paul Tucker’s book Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State is a significant contribution to the literature about the trade-off between participatory democratic influence over policy decisions and the technical complexity of much policy and regulatory activity. The focus is on central banking, not surprisingly given the author’s long experience at the Bank of England. However, the book also dips into competition policy. This is my territory, having spent 8 years on the Competition Commission. I’m not entirely convinced by the argument here.

Tucker’s conclusion is that when politicians delegate policy decisions to independent, technocratic bodies, they need to do so in accordance with some key ‘principles of delegation’. To date, they have not done so, and hence the crisis of legitimacy, at least as far as it applies to economic institutions. There are five design principles: there should be a clear statement of the body’s purposes, objectives and powers, to stop mission creep; its operating procedures should be set out; so should its operating principles – how will it go about conducting its delegated policies; there should be sufficient transparency that the institution can be monitored and held to accunt by elected politicians; and there should be some rules for how it can respond to emergencies.

These seem on the face of it perfectly reasonable. But pause on the third – central banks and independent competition authorities should have the way they implement policy set out for them. Thus, Tucker argues, a competition authority’s remit might be set in broad terms as ensuring markets are competitive, or ensuring there is no abuse of dominance; but it should not be left to the competition authorities themselves to turn this into operational rules. He notes that there have been significant changes in competition policy in the US and EU over time, shifting from the older institutionalist tradition to a focus on consumer welfare. As the book notes, this reflected developments in economic theory, adding: “The significance of these momentous changes is not whether they were grounded in good economics but that each occurred without any amendments to the governing legislation.” Thus, “This gives us a glimpse of why the public might not be clear about the pupose and objectives of antitrust regimes.”

Like a number of commentators on competition policy recently, Tucker believes – wrongly  – that the ‘Chicago School’ approach of using a consumer welfare criteria means competition authorities can only look at prices. On the contrary, although that has been the practice (because measuring prices is easier), they can take into account other aspects of economic welfare such as quality or range, or incentives to invest and innovate – this is set out in the CMA’s guidance documents, for instance. In the world of zero priced digital goods, that is exactly what they should do.

But that’s by the by. My hesitation about this principle is that the alternative – having operating rules set by elected politicians – would in reality defeat the purpose of giving economic regulators their independence. For what would stop legislators deciding that the economy is best served by preserving jobs at incumbent firms because they have the biggest economies of scale? This would be the pre-independence world of ministers deciding all mergers on public interest grounds. The time inconsistency problem common to so many regulatory contexts would return with a vengeance if legislatures can change the operating rules whenever they choose. Better to have these rules set by the technical experts, after wide public consultation. Sure, ideologies and tides in the realm of ideas would influence them, but less, it seems to me, than in the counterfactual world. Anyway, are elected politicians so respected now that they would reinject legitimacy back into economic governance? Opinion polling suggests they are among the groups the public trusts least.

Unelected Power engages an essential debate, however. There is a crisis of legitimacy in the western democracies. With QE, central banks have launched a radical change of policy with huge distributional consequences. The book has four sections: welfare, values, incentives and power are their headings. Although it touches on all the economic regulators, it is mainly about central banking, and on this is it authoritative. It will be an essential read for everybody involved in monetary policy, or researching it. It has a long bibliography; Tucker refers to legal and political science literatures as well as economics. One flaw is that it is heavy going in parts, surprsingly because he is a compelling speaker. Nevertheless, this is an important book.


3 thoughts on “Power and legitimacy

  1. I wonder if the CMA, under section 7 of the Enterprise Act 2002, also is allowed to implicitly pursue a political agenda. It’s advice to government on the Bus Services Bill (https://www.gov.uk/government/publications/bus-services-bill-cma-recommendations-to-ministers) assumes that it’s “preferences” (they use the word) are heavily weighted in considerations. This read to me as the Authority intervening in a policy debate put push it towards their “preferred” outcome. There were other policy reasons beside competition to do reregulation, and the CMA made the test harder in this case.

  2. There is no better way to dismiss a serious point than to mischaracterize it and then to refute logically the mischaracterization. This is what Diane Coyle seems to be doing in reviewing Tucker’s recent book: “Unelected Powers.” The serious point Tucker raises is that experts appointed to independent agencies must be constrained by a monitorable objective set by elected politicians. Otherwise, they would lose legitimacy when (inevitably) they will make mistakes. You may agree with his point (I happen to do so) or disagree, but it is a new and refreshing idea that must be taken very seriously, especially when it comes from an expert, who was instrumental at running the monetary and financial policy at the Bank of England during the financial crisis and its aftermath.

    Coyle mischaracterizes Tucker’s position as independent agencies “should have the way they implement policy set out for them.” She then proceeds to dismisses this idea on the basis that “if legislatures can change the operating rules whenever they choose” “the time inconsistency problem common to so many regulatory contexts would return with a vengeance.” There is a huge difference, however, between setting monitorable objectives and setting the operating rules. In the monetary context, a monitorable objective is “inflation must be at x%”; the operating rules involve how to achieve this objective (through the interest rate or through the control of monetary aggregates). My reading of “Unelected Power” is that Tucker wants the first objective to be set by politicians, letting the choice of operating rules to experts. On the one hand, a politician seeking re-election would find it impossible to change the objective fast enough to benefit his electoral chances. On the other hand, choosing (and changing as needed) the inflation goal is ultimately a fiscal decision, with important distributional consequences, which cannot be delegated to an unelected official.
    Coyle also mischaracterizes Tucker’s description of the 1970’s change in antitrust policy in the United States. During the first part of the 20th century, U.S. antitrust was dominated by a Brandeisian idea that the effects of economic concentration are not only economical, but also political. It is based on this idea that at the end of the war the American occupying forces broke up Japanese Zaibatsu and German conglomerates like the infamous IG Farben. During the 1970s, the so called “Chicago School” narrowed the antitrust focus to the mere economic consequences of concentration.

    Coyle claims that “Tucker believes – wrongly – that the ‘Chicago School’ approach of using a consumer welfare criteria means competition authorities can only look at prices.” To the contrary, Tucker is aware that a consumer welfare criterion can include quality considerations and dynamic efficiency issues (p. 61-62). What it does not include is the emphasis on freedom present in Brandeis and German ordo-liberalism (p. 168-9).
    Tucker, who does not necessarily disagree with the change, objects to how it occurred: based on a consensus of experts, rather than to a political decision. Albeit the appointment of judges such as Bork and Posner by Reagan was a political decision, it was not a transparent political decision, consciously made by Congress after appropriate deliberation.

    Toward the end of her review, Coyle raises a much more serious question: “are elected politicians so respected now that they would reinject legitimacy back into economic governance?” She concludes that “opinion polling suggests they are among the groups the public trusts least.” It is a very widespread point of view, but it misses the central point of “Unelected Power.” The key advantage of a democratic system is that we can distinguish between who govern us and the system of government. If we do not like who governs us, we can change him or her. Unelected power cannot be changed. The more people feel that key controversial decisions are made by unelected representatives, the more they will lose trust in the system. Thus, rather than a justification not to delegate decisions to the democratically elected representatives, the lack of public trust is a reason to move in the direction Tucker suggests.

    The only point I agree with Coyle is that the book is not an easy read. But the problems it tackles are not easy either. In a world of easy-to-read airport books with not much depth, “Unelected Power” stands out for its unique ability to weave in economic arguments, with political science, and legal ones. It is a tome to ponder, not a book for the beach, but it is worth all its 600 pages.

    • Thank you for taking the time to comment at such length. Needless to say, I don’t entirely agree with you. Paul’s framework seems to me to work much better for monetary policy if one accepts there is a clear and easy to monitor objective – low and stable inflation. I really don’t agree there is a similar easy to monitor outcome in the case of competition policy. So there is little scope for that clear distinction between objective and operating rules. As for speed, UK politicians changed competition law almost overnight during the financial crisis to enable bank mergers. (While the Chicago school of course accepts the principle of non-price factors affecting economic welfare, the practice has been to focus on prices, which are easier to measure.)
      It is certainly an important book asking important questions but you don’t persuade me its approach extends all that easily to areas outside monetary policy.
      Anyway, thank you once again for commenting. Readers can judge for themselves whether I was ‘mischaracterising’ as opposed to disagreeing.

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