Saturday, March 28, 2015

Politicians or Technocrats: Who Splits the Cake?

In most countries, non-elected central bankers conduct monetary policy, while fiscal policy is chosen by elected representatives. It is not obvious that this arrangement is appropriate. In 1997, Alan Blinder suggested that Americans leave "too many policy decisions in the realm of politics and too few in the realm of technocracy," and that tax policy might be better left to technocrats. The bigger issue these days is whether an independent, non-elected Federal Reserve can truly be "accountable" to the public, and whether Congress should have more control over monetary policy.

The standard theoretical argument for delegating monetary policy to a non-elected bureaucrat is the time inconsistency problem. As Blinder explains, "the pain of fighting inflation (higher unemployment for a while) comes well in advance of the benefits (permanently lower inflation). So shortsighted politicians with their eyes on elections would be tempted to inflate too much." But time inconsistency problems arise in fiscal policy too. Blinder adds, "Myopia is a serious practical problem for democratic governments because politics tends to produce short time horizons -- often extending only until the next election, if not just the next public opinion poll. Politicians asked to weigh short-run costs against long-run benefits may systematically shortchange the future."

So why do we assign some types of policymaking to bureaucrats and some to elected officials? And could we do better? In a two-paper series on "Bureaucrats or Politicians?," Alberto Alesina and Guido Tabellini (2007) study the question of task allocation between bureaucrats and politicians. In their model, neither bureaucrats nor politicians are purely "benevolent;" each have different objective functions depending on how they are held accountable:
Politicians are held accountable, by voters, at election time. Top-level bureaucrats are accountable to their professional peers or to the public at large, for how they have fulfilled the goals of their organization. These different accountability mechanisms induce different incentives. Politicians are motivated by the goal of pleasing voters, and hence winning elections. Top bureaucrats are motivated by "career concerns," that is, they want to fulfill the goals of their organization because this improves their external professional prospects in the public or private sector.
The model implies that, for the purpose of maximizing social welfare, some tasks are better suited for bureaucrats and others for politicians. When the public can only imperfectly monitor effort and talent, elected politicians are preferable for tasks where effort matters more than ability. Bureaucrats are preferable for highly technical tasks, like monetary policy, regulatory policy, and public debt management. This is in line with Blinder's intuition; he argued that extremely technical judgments ought to be left to technocrats and value judgments to legislators, while recognizing that both monetary and fiscal policy involve substantial amounts of both technical and value judgments.

Alesina and Tabellini's model also helps formalize and clarify Blinder's intuition on what he calls "general vs. particular" effects. Blinder writes:
Some public policy decisions have -- or are perceived to have -- mostly general impacts, affecting most citizens in similar ways. Monetary policy, for example...is usually thought of as affecting the whole economy rather than particular groups or industries. Other public policies are more naturally thought of as particularist, conferring benefits and imposing costs on identifiable groups...When the issues are particularist, the visible hand of interest-group politics is likely to be most pernicious -- which would seem to support delegating authority to unelected experts. But these are precisely the issues that require the heaviest doses of value judgments to decide who should win and lose. Such judgments are inherently and appropriately political. It's a genuine dilemma.
Alesina and Tabellini consider a bureaucrat and an elected official each assigned a task of "splitting a cake." Depending on the nature of the cake splitting task, a bureaucrat is usually preferable; specifically, "with risk neutrality and fair bureaucrats, the latter are always strictly preferred ex ante. Risk aversion makes the bureaucrat more or less desirable ex ante depending on how easy it is to impose fair treatment of all voters in his task description." Nonetheless, politicians prefer to cut the cake themselves, because it helps them get re-elected with less effort through an incumbency advantage:
The incumbent’s redistributive policies reveal his preferences, and voters correctly expect these policies to be continued if he is reelected. As they cannot observe what the opponent would do, voters face more uncertainty if voting for the opponent...This asymmetry creates an incumbency advantage: the voters are more willing to reappoint the incumbent even if he is incompetent... The incumbency advantage also reduces equilibrium effort.
An interesting associated implication is that "it is in the interest of politicians to pretend that they are ideologically biased in favor of specific groups or policies, even if in reality they are purely opportunistic. The ideology of politicians is like their brand name: it keeps voters attached to parties and reduces uncertainty about how politicians would act once in office."

According to this theoretical model, we might be better off leaving both monetary and fiscal policy to independent bureaucratic agencies. But fiscal policy is inherently redistributive, and politicians prefer not to delegate redistributive tasks. "This might explain why delegation to independent bureaucrats is very seldom observed in fiscal policy, even if many fiscal policy decisions are technically very demanding."

Both Blinder and Alesina and Tabellini--writing in 1997 and 2007, respectively-- made the distinction that tax policy, unlike monetary policy, is redistributive or "particularist." Since then, that distinction seems much less obvious. Back in 2012, Mark Spitznagel opined in the Wall Street Journal that "The Fed is transferring immense wealth from the middle class to the most affluent, from the least privileged to the most privileged." Boston Fed President Eric Rosengren countered that "The net effect [of recent Fed policy] is substantially weighted towards people that are borrowers not lenders, towards people that are unemployed versus people that are employed." Other Fed officials and academic economists are also paying increasing attention to the redistributive implications of monetary policy.

Monetary policymakers can no longer ignore the distributional effects of monetary policy-- and neither can voters and politicians. Alesina and Tabellini's model predicts that the more that elected politicians recognize the "cake splitting" aspect of monetary policy, the more they will want to redelegate it to themselves. Expect stronger cries for "accountability." However, the redistributive nature of monetary policy, according to the model, probably strengthens the argument for leaving it to independent technocrats. The caveat is that "the result may be reversed if the bureaucrat is unfair and implements a totally arbitrary redistribution." The Fed's role in redistributing resources strengthens its case for independence if and only if it takes equity concerns seriously.

8 comments:

  1. I'm not too impressed with the analysis of the effects of monetary policy on distribution that I've read. They generally list a lot of things that are questionable (we can throw out anything related to interest rates if we only consider the medium/long term), and leave out effects that are clear. As an example of the latter, the inflation rate directly affects the taxation of capital, since taxes are applied to nominal gains, not real gains.

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  2. One of the first serious pieces I have read on this topic. Where Binder et al at wrong is in their assumption that political decision takers will be biased in favour of inflation. In fact, the opposite is the case. Inflation affects everyone; unemployment hits only those who lose their jobs. We have seen time after time that governments can get reflected with high unemployment, but not with high inflation in the industrial world.

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  3. Its hard to say coz in the end everything comes down to morality where each individual may have different perception n in certain cases particularised decisions have been beneficial in the longer run

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