the curse of being overqualified
23 April 2022
The reputation of a central bank is determined as much by its relationship with the government as by its handling of financial crises and economic downturns. Over the past 300 years, as governments have sought to increase or sometimes restrict the powers of central banks, the mood has varied from cooperative and cohesive to hostile and corrupt. By the end of the 20th century the tone had shifted to a more serious respect. Politicians learned that they interfered with central banks at their own risk. Technocrats were told to aim for some combination of low inflation, high employment, a stable financial system and a reliable currency, and were mostly left alone to find jobs.
As noted in this special report, the line between infiltration politics and independent central banking is blurring again. It’s not just because central banks have bought up huge amounts of public debt in an effort to shore up economies. They have also come close to distributing the subsidies that are in their accounts. He did this to keep firms alive during the pandemic. Now they are considering plans to tackle issues like climate change. They are being pressured to solve various social problems. And they are working with digital currencies which, in their most radical form, could expand their role in allocating credit.
This expansion in powers is echoed in the emerging world. Central banking in the prosperous world has moved toward China’s approach, with greater emphasis on its balance-sheet and credit guidance, and a multiplicity of its objectives. One observer says the PBOC is called upon to solve economic problems, as it is considered more competent than other ministries. The existence of targeted-lending schemes has made it easier for PBOCs to reduce loans to green borrowers. And among the larger economies, China was the first to test a digital currency.
In a prosperous world, greater use of their balance sheets by central banks was inevitable as they sought to meet their mandated goals. Unable to take advantage of interest rates, they were forced to experiment with new instruments. The extraordinary circumstances of the pandemic justified a wide, indiscriminate safety-net. It would be equally foolish for central banks to ignore emerging risks and technologies. Geopolitics will have a more significant impact on their decisions. Governments can direct central banks to issue digital currency. And understanding how climate change can affect the economy and financial system is an important task.
laser focus
However, what must be fiercely opposed is the endless addition of new policy targets. For one thing, as the examples of climate change and inequality show, not all problems can be fixed by monetary policy. Even economists in China have concluded that this is too blunt a tool for tackling long-standing structural problems. And in democracies the question of how to best subsidize the eligible or the taxable is certainly better left to elected and accountable politicians rather than technocrats.
The central banks were given freedom to focus on a narrow remittance. That is why they retain legitimacy in the public eye. But to act more on central banks risks dragging them into the political arena, opening them up to ever-increasing demands. This would undermine their status as neutral technocrats and, ultimately, may raise doubts about their independence. A survey by two academics, Ms. Binder and Ms. Skinner, found that college-educated Americans were more responsive to the Fed than those without a college education taking an active role in tackling climate change and inequality.
More important today, given that inflation in the rich world is operating at around 8%, the spread of the target would interfere with actions that only central banks can perform. As long as inflation was low, central banks could have little disadvantage in venturing into new areas. Its resurrection should serve as a timely reminder of why they were granted independence in the first place, and why their mission matters. Suppressing social problems can make them seem like convenient dog bodies for governments. The real question for them now is whether they can control inflation and at what cost. It will be important to focus on their core work. I
This article appeared in the Special Reports section of the print edition under the title “The Curse of Merit”
