The current battle over the liberal world order seems to be about trade, climate, and security policy. But monetary policy has also become an increasingly important arena of conflict. Populist leaders seem to love nothing more than denouncing central bankers and challenging the legitimacy of the current monetary order, as Donald Trump famously did during the US presidential election campaign when he accused central bankers of “doing political things” by keeping interest rates low.
In responding to this challenge, it is tempting to point to central banks’ independence from politics as a defense against the dangers posed by erratic leaders. Yet that would be a risky move. It turns out that decades of appeals to technocratic exceptionalism — the idea that monetary policy should be shielded from democratic oversight — have had costs. Indeed, this exceptionalism can lead to the very politicization of monetary policy that it seeks to avoid.
Central banks play a paradoxical role in today’s liberal democracies. Their work is highly technical, yet the consequences of their actions are inevitably political, producing big winners and losers. They wield great power in democratic societies, and yet they are unelected — because of the fear that politicians tend to push up inflation to appease their bases unless interest rate policy is insulated from democratic pressures.
The underlying tensions in central banks’ technocratic exceptionalism became particularly evident in the aftermath of the 2008 global financial crisis. In recent years, the banks’ entire mission has become unclear: for decades, they have been focused on fighting inflation, yet since the crisis there has been no inflation to worry about despite massive central bank interventions. In fact, the opposite fear — this time, of deflation — has driven extraordinarily loose policies and a great deal of experimentation, ranging from massive bailouts to quantitative easing and ultra-low (even negative) interest rates. Although more normal conditions appear to be on the way at last, the decade of exceptional policies has taken its toll on the legitimacy of the current global monetary order.
The loudest critics of central banks have been on the populist right: Victor Orban’s regime in Hungary, pro-Brexit forces in the United Kingdom, Marine Le Pen’s Front National in France, Tea Party Republicans, and even President Donald Trump in the United States. Riding the growing wave of public skepticism about experts and elites, these illiberal populists have identified central bankers as among the worst offenders.
To save the current monetary architecture from such challenges — an absolutely vital task in a world in which the reliable circulation of money serves as the foundation for economic and political stability — monetary policy needs to have a more robust form of democratic accountability built in. Only then can nations ensure that central banks genuinely meet the needs of those for whom they work: the people.
Of course, with the forces of populist illiberalism on the rise, it is hard not to be relieved that at least some aspects of economic policy are insulated from political oversight. If central bank independence is supposed to protect monetary policy from excessive political pressure, then what better example of its merits than the fact that at least a little of the economy is off-limits to the Orbans and Trumps of the world?
Yet there is a peculiar irony at work here: this argument suggests that our best response to illiberal tendencies is an equally illiberal strategy of excluding monetary policies from democratic accountability. Although technocratic exceptionalism is tempting, especially in the face of the threat of illiberal democracy, it is also quite dangerous, since it reduces accountability even as it never quite succeeds in getting the politics out of monetary policy. This disconnect with the public ultimately fuels the kind of populist backlash the world has recently seen, further politicizing monetary policy with potentially very worrying consequences.
In the short term, we may well be relieved to know that the norms of central bank independence and rule-based policy provide a measure of protection from populist tendencies under the Trump administration and elsewhere. But when Trump ideologue Steve Bannon criticizes capitalism for its amorality and invokes the concerns of middle-class and working-class people, all the while defining the alt-right as their champion, we need to come up with a better answer than to encourage people to have faith in the two percent inflation target.
The feature-article-length version of this blog was originally published by Foreign Affairs on 6 December 2017. It is now also available as a chapter of the e-book A New Financial Geopolitics? The U.S.-Led Monetary Order in a Time of Turbulence.