A political backlash against monetary policy is looming

Martin Sandbu in The FT

Three weeks ago, Sanna Marin, Finland’s prime minister, retweeted a link to an article by a Finnish academic together with the following quote: “There is something seriously wrong with the prevailing ideas of monetary policy when central banks protect their credibility by driving economies into recession.” 

Defenders of those prevailing ideas predictably pushed back, warning against second-guessing independent central banks or not valuing their credibility. But defensiveness is the wrong response. Not just because Marin didn’t actually criticise any central bank actions. But, more profoundly, because avoiding a debate over whether our macroeconomic regime is fit for purpose is more perilous than having one. 

Comparisons with the 1970s often fail to notice one important lesson of that decade: a macroeconomic regime that cannot justify itself will be toppled, first intellectually, then politically. It was from the ashes of 1970s monetary chaos that theories were born justifying independent central banks with a mandate to keep inflation low. Before the century was out, independent inflation-targeting was de rigueur in most advanced economies. 

Forty years on, a new intellectual and political reckoning would be less surprising than the absence of one. The “great moderation” produced by the 1980s monetary revolution has in many countries long been accompanied by stagnant wages for the low paid. The glacial recovery from the global financial crisis prompted the world’s two biggest central banks to revise their policy framework during the pandemic. In 2020 and 2021, the Federal Reserve and the European Central Bank vowed to tolerate a period of higher inflation if employment had further to rise or there would be little room to loosen policy in case of a downturn. But this new attitude fell at the first hurdle. 

With cost of living crises biting and recessions looming in key advanced economies, what are the odds of avoiding a more profound reckoning for much longer? Marin is not the only national leader expressing unease about central banks. French president Emmanuel Macron recently worried aloud about “experts and European monetary policymakers telling us we must crush European demand to contain inflation better”. 

Precisely because central bankers are independent, it falls to political leaders to tell their citizens why it is right to meet Russian energy blackmail with actions to clamp down further on incomes and jobs. They would be remiss if they did not question whether this is the best we can do. 

In comparison, central bankers have it easy. They have legally imposed inflation-fighting mandates, which are not for them to question. And they have an argument: that losing their “credibility” — by which they mean people no longer believe they can keep inflation low — will cost even more jobs and lost income. 

But the credibility of central banks itself is only as good as the credibility of the macroeconomic regime as a whole. That is not to say central bank independence should be jettisoned, but to ask openly whether it actually works for the economy. 

In pursuit of individual mandates central banks may be collectively overtightening, as Maurice Obstfeld has suggested. Or monetary policy uncoordinated with fiscal policy may be making matters worse, as Marin hinted in follow-up comments. 

The IMF has warned governments against budgeting “at cross-purposes” with monetary tightening. But raising interest rates puts monetary policy at cross-purposes with fiscal policy priorities such as investing in the green transition or, indeed, in energy infrastructure that would itself remedy energy-induced inflation. Even if monetary considerations should take priority, such monetary dominance is undoubtedly something to be democratically debated, not technocratically imposed. 

It may even be that central bankers are not independent enough but cave in to the political pressure arising from each new monthly record in current inflation, rather than coolly focusing on their benign medium-term forecasts. 

Like in the 1980s, in time bright economists will suggest better ways of designing monetary policy against energy price shocks. And unless we have a lucky escape from a sharp downturn this winter, a political backlash is surely coming too. The alternative to openly debating these issues in a democratic space is to let that backlash fester until it breaks out in the more radical and dangerous form of a populist assault on institutions. Central banks’ credibility would not be worth much then.

Modi govt is answerable to farmers, not the judiciary. SC’s mediation beyond its remit

 Yogendra Yadav in The Print

In rejecting the Supreme Court-appointed expert committee to mediate between farmers and the Narendra Modi government, the farmers’ organisations have not only wisely sidestepped a possible trap, but they have also reaffirmed a basic principle of democratic accountability and responsible governance.

Let there be no confusion about it. The expert committee appointed by the SC is not meant to advise the court on technical matters of agricultural marketing or on the implications of the disputed agricultural laws. The order of the Supreme Court makes it clear that the committee is to facilitate negotiations between the government and farmers’ organisations: “The negotiations between the farmers’ bodies and the government have not yielded any result so far. Therefore, we are of the view that the constitution of a committee of experts in the field of agriculture to negotiate between the farmers’ bodies and the government of India may create a congenial atmosphere and improve the trust and confidence of the farmers.”

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The court goes on to specify that the committee has been “constituted for the purpose of listening to the grievances of the farmers relating to the farm laws and the views of the government and to make recommendations.” Presumably, the committee will try to find a middle ground and advise the government on how the laws should be tinkered with in a way so as to satisfy both the government and the protesting farmers.

That is precisely why the farmers’ organisations had resisted, right from the beginning, the idea of any such committee. They have objected to being forced into binding mediation, questioned the instrument of a committee and suspected the composition of such a committee. On all three counts, their assessment has been proven right.

Beyond remit

First of all, the farmers have been suspicious of being pushed into binding mediations that they never asked for or consented to.

They have never said no to negotiations with the government. Sure, the talks with the government have been frustrating. The Modi government has been intransigent. Yet, that is the only site for negotiations in a democracy. In the last instance, elected representatives are there to speak to the people. They are accountable to the people and to the farmers. The courts are there to adjudicate between right and wrong, legal and illegal. The courts are not there to engage in give and take, which is a crucial part of any negotiation. That is why the courts are responsible to the Constitution and not accountable to the people. That is the logic of democratic governance. Any attempt to shift the site of negotiation from the government to the judiciary amounts to overturning this basic democratic logic.

The government’s keenness to shift this “headache” and the Supreme Court’s alacrity to take over has strengthened the resistance of the farmers. It needs to be underlined that the protesting farmers did not approach the court. Nor did the government, at least not on paper. The initial petitioners were third parties who wanted the court to evict the farmers from their protest site. The other set of petitioners questioned the constitutionality of the three laws and wanted these scrapped. None of the petitioners prayed for mediation from the court. Yet, from day one, that is what the court was interested in. The court dismissed, rightly so, the pleas asking for eviction of the protesting farmers. It recognised, again rightly so, the democratic rights of the farmers to engage in peaceful protest. As for the pleas, regarding the constitutional validity of the three laws, the court put this on the back burner saying that it will consider these at an appropriate time.

The Supreme Court could have expedited this process by setting a time frame within which it will decide upon the constitutional validity of these three laws. That would have been most appropriate. But it chose not to do so. Instead, the court chose to focus on a third issue beyond what was asked for by any party and beyond its legal remit. Farmers’ organisations were smart enough to resist this move from the beginning.

 Technocrats can’t mediate

The second objection of the farmers’ organisations was to the very mechanism of a technical committee of experts. This idea was proposed by the Modi government in the very first round of negotiations held on 1 December, and the farmers rejected it there and then. Such a committee would be very useful to clarify a point of law, or to work out policy or fiscal implications of the proposed laws. Such a committee could also help work out the details of a compromise formula, once the basic framework is agreed to. But a technical committee cannot possibly work out the basic framework itself. Mediation is not done by technocrats. It is done by non-specialists who have some familiarity with the subject, but more importantly, who enjoy the trust and confidence of both parties. The Supreme Court-appointed committee of experts was never going to be that mechanism.

Dushyant Dave and the other three lawyers representing just eight out of 400+ farmers’ organisations involved in this protest were wise to keep away from the court’s deliberations on this issue.

 A partisan committee

Finally, a committee is only as good as its members. It is no secret that the farmers’ organisations were apprehensive about the composition of a committee appointed by the court. The court’s order confirmed their worst fears. The process by which the court arrived at these four names left a lot to be desired, to put it mildly. The same court that chided the government for passing the farm laws without consulting the farmers adopted an even less transparent process to decide upon this committee. Names like P. Sainath and ex-CJIs were thrown around and quietly dispensed with. No one knows who suggested the four names. Little surprise then that the four names have invited disappointment and ridicule. Not because the four members are not respectable, but because these are arguably the four best advocates for the government’s position and the laws. That the court chose such a partisan committee to mediate between the farmers and the government has cast a shadow on itself.

Someone might ask: Forget the technicalities, but what’s wrong with the top court stepping in to resolve a deadlock? Well, that is possible provided the Supreme Court were to enjoy moral authority over and above its legal and constitutional powers. Such moral authority is commanded, not demanded.

Is it the Populists who threaten Democracy - or is it the Technocrats?

Mark Blyth - Brown University