Paul Tucker on Central Bank Independence and Unelected Power

A Macro Musings Transcript

David Beckworth: Our guest today is Sir Paul Tucker. Paul is a 33 year veteran of the Bank of England where, among other things, he served as both a member and deputy governor of the Monetary Policy Committee. Currently, Paul is a senior fellow at Harvard and the chair of the Systemic Risk Council. Paul recently authored the book, "Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State" and joins us today to discuss it. Paul, welcome to the show. 

While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

Paul Tucker: Thank you, David. I'm delighted to be here. 

David Beckworth: Great to have you. One, you've quite an impressive book here. How many pages is it? 

Paul Tucker: A lot. About 500. 

David Beckworth: Yeah. 

Paul Tucker: That's before the index and the bibliography. 

David Beckworth: But it's a great book, and we'll provide a link to the book on our page for the show. And I encourage all of our listeners to get a copy, work their way through it. Very informative. It's a very sweeping, comprehensive book on central banking and their regulatory state. And we'll get into that in a little bit. 

David Beckworth: But I'd love to hear your story because you're a 33 year veteran of the Bank of England. So, you have a lot of war stories, I'm sure, to tell. But tell us about your journey into that and what it was like working there. 

Paul Tucker: It was an extraordinary place to be. I joined in 1980. And I joined the Bank of England because I wanted to be involved in public policy, in particular macroeconomic policy. And although the Bank of England was not independent then, this had for me the attraction that there weren't elected ministers at the top of the organization. 

Paul Tucker: But over the subsequent decades, the Bank of England moved from being under the day-to-day control of the Treasury to being an independent central bank. And we got monetary independence in the mid-1970s. Lost, if that's the right way of putting it, banking supervision. And then after the financial crisis, banking supervision was given back with greater powers to maintain the stability of the financial system. 

Paul Tucker: So, this was ... Lots went wrong during those 33 years, and the organization was reshaped about two or three times. 

David Beckworth: Now, you went through the exchange rate crisis of the early 90s then, right? 

Paul Tucker: Yes, yes. 

David Beckworth: Many sleepless nights at the Bank of England during that time? 

Paul Tucker: I was what you would call chief of staff to the governor of the Bank of England during that period. I was ... Both when we went into the exchange rate mechanism of Europe and when we came out. And really, this was a turning point. But during the 1980s, inflation had remained stubbornly high and variable, even though the UK Treasury had tried a number of regimes targeting broad money, targeting narrow money, targeting the exchange rate. 

Paul Tucker: And it was only ... I believe, that it was only when all of them hadn't succeeded, and some had abjectly failed, that finally government ministers and civil servants started thinking about central bank independence. And so, the first big step was to announce that the Bank of England's advice to government on interest rates would be published, that our view of the outlook for the economy would be published in what became known as the Inflation Report. And that system operated for about slightly more than half a decade, and it was during that period, I think, that then leaders of the bank, Eddie George, Mervyn King, and others, demonstrated that, actually, we could be trusted, relied on, to do monetary policy better than it had been done before. 

Paul Tucker: And then when Labour were elected in 1997, they gave the Bank of England independence. I think it's very interesting that a left-of-center government created central bank independence in the UK. Typically, it's argued that it'll be governments of the right that favor central bank independence- 

David Beckworth: That is interesting. 

Paul Tucker: ... Because they think that their constituents will be more keen on price stability than people on the left. But there's a flaw in this argument, which is that politics is a competition. And right-wing parties tend to think that left-wing parties will screw up monetary policy more than they will themselves. 

Paul Tucker: And so, they're content for monetary policy to stay in political hands because when the left get in, monetary policy will go wrong, and it will help the right get back into power. And so, it was a left-wing government that made the Bank of England independent, I think, as a way of insulating themselves from that vulnerability. 

David Beckworth: Very interesting. Now, another legacy of your time, there was the advent of inflation targeting. Now, if I understand correctly, were you the second central bank to do this after New Zealand, or third? Somewhere in there? 

Paul Tucker: Yeah. I mean, fairly soon after New Zealand came Sweden, Canada, and ourselves. Yeah. And when it was initially aired inside the Bank of England by a man called Robin Leigh-Pemberton, who was governor. And I was in the room when this happened. The response of the people at the top of the Bank of England was, "Hm, not sure about this. We'll never hit the target." By the early 90s, people changed their minds about that. 

Paul Tucker: And inflation targeting works well, in part, because it is reasonably easy to explain to interested members of the public and to interested politicians. Money targeting is much more opaque, much more esoteric, than inflation targeting. 

David Beckworth: That's one of arguments against nominal GDP targeting that I often hear too. 

Paul Tucker: It is, I'm afraid. 

David Beckworth: It's a communication issue in terms of articulating. Although, I have my responses, but I don't want to go there. I want to talk to you about the Bank of England, because listeners have heard my stories many, many times but they haven't heard yours. 

David Beckworth: So, going to inflation targeting, was it all a consequence or at least partially a consequence of the exchange rate crisis? 

Paul Tucker: Yes. Yes. It was ... I think there are two things to say about it. First of all, there's no doubt in my mind that the period inside the exchange rate mechanism led to very tight monetary policy in the UK, and that helped to break the back of inflation. 

Paul Tucker:  But it wasn't a sustainable regime, essentially because Germany needed a real exchange rate appreciation after German Unification, and they weren't prepared to run higher inflation themselves. And so, everybody else had to deflate, and people didn't expect that, and so, there was a horrible recession. Others stayed in the exchange rate mechanism, we fell out. 

Paul Tucker: But then, finally, the Bank of England, Mervyn King, Eddie George, Robin Leigh-Pemberton, went to the Treasury and recommended to ministers, "Why don't you adopt inflation targeting, and why don't you let us publish our advice?" 

Paul Tucker: I mean, the Bank of England took the initiative. This was a ... The policy was owned both formally and, I think, emotionally by the then Treasury Secretary, Norman Lamont, who I think has never got enough credit for this, but the ideas came from the Bank of England. And this was a crucial moment in Bank of England history, in my view. It was when the balance of intellectual power shifted between Treasury officials and Bank of England officials, essentially because they'd been trying to run a low-inflation policy since Mrs. Thatcher was elected or slightly before, mid-1970s, and it hadn't worked. 

David Beckworth: This is very fascinating to me because ... And in case any listeners don't understand this point, the Bank of England, or the UK in general, had its currency linked to the Deutsche Mark at the time. 

Paul Tucker: Yes. 

David Beckworth: Which meant you effectively were importing monetary policy from Germany. 

Paul Tucker: Yes. 

David Beckworth: And what's good for Germany may not be good for the United Kingdom. 

Paul Tucker: Yes. 

David Beckworth: And we kinda see that today in Europe. And I'm wondering one of the reasons maybe you didn't join the Euro was because of this experience. Did the exchange rate crisis have a bearing on whether you'd stick with the Pound or go with the Euro? 

Paul Tucker: I think it affected the view of the politicians, the political class, yes. I think amongst economic policy officials in the Bank of England, we didn't intervene in the debate publicly or privately, but our view was our economy wasn't sufficiently converged with continental Europe to 

Paul Tucker: ... To have not an optimal currency area, to have zero nominal exchange rate flexibility. So, it was a decision for the politicians. And for them, I think the experience of the ERM episode would have had a very big, very big effect. 

Paul Tucker: There's an irony in this story, by the way, which is that for many years leading politicians in the UK were hugely against the idea of Bank of England independence. Margaret Thatcher was against it. Her successor, John Major, was, for a while, against it. And yet, they're prepared to go into the exchange rate mechanism and tie sterling to Deutsche Mark. 

David Beckworth: Oh, that is ironic 

Paul Tucker: So, it's okay to be tied to the monetary policy of another country's independent central bank, because at the time the Bundesbank was by far the most independent central bank in the world, but you wouldn't want your own central bank independent. So, there's a really interesting set of issues there about power, essentially. 

David Beckworth: Well, one more thing, the Bank of England, and then we gotta get to your book. But I had Adam Posen on the show before. And listeners will recall, he gave this discussion on the differences between the FOMC meetings and the Monetary Policy Committee meetings at the Bank of England. And could you summarize those differences for us, for our listeners? 

Paul Tucker: Well, the Bank of England Monetary Policy Committee has nine members, which is fewer. It meets, now, every six weeks. In my day, every month, and it was a real discussion. It was a real discussion. It wasn't, "The Chair wants to do this, are we going to go along with it?" Or, "How can we nudge the Chair into a slightly different place?" Each of us turned up and argued for and voted for what we thought was right. 

Paul Tucker: And sometimes we changed our mind in the meeting. I was the secretary of the committee for a while and I watched ... Between 1997 when it was created and 2002, I was the secretary, one of the secretaries, and I saw people change their minds. Later, when I was on the committee, I was on the committee between 2002 and late-2013, I changed my mind a couple of times. You run an argument, and you, David, you say, "Well, that can't be right." And then I say, "Well, why not?" Then you set out your view, and you think, "Oh, yeah, actually, David's right about this. Not me." 

Paul Tucker: Proper discussion, a proper discussion amongst economists of what's going on in the economy? What's the outlook for inflation? What's the outlook for demand, spending, pressure? What's happening in terms of the supply side of the economy? Interest about the economy and about economics, with no discussion whatsoever, and this does kind of bridge to some of the points in my book, no discussion about the objective. We wanted the objective to be as clear as possible so that when there were disagreements, if you and I had a disagreement, you don't leave the room thinking, "Well, David and I disagree," because actually we're trying to achieve slightly different things. 

Paul Tucker: Instead, we disagree because we got a different view of the outlook of the economy. This was a tremendous ... In my gut, do I feel the FOMC or the ECB governing council do it as well? No. 

Paul Tucker: And I think it'd be hard for them to do it, as well, given the size of the committees. 

David Beckworth: Yeah. 

Paul Tucker: I mean, if I was involved in negotiating with the ... Mervyn was the lead negotiator, I was part of the number two. And we wouldn't have wanted a committee much bigger than nine. We wouldn't have wanted a committee much ... We wouldn't have wanted five rather than seven. There'd be only two sensible numbers. I haven't got exact recollection, but it seems to me that the only two sensible numbers would be seven or nine. 

Paul Tucker: Do it a bit too big, and you slip into chair dominance because it's the only way of keeping order. Too small, and you get groupthink. 

David Beckworth: Yes. So, every meeting was live, as they would say- 

Paul Tucker: Yes. 

David Beckworth: ... In central bank speaks. Every meeting was live. People could change their minds. It wasn't a big deal to change your minds. 

Paul Tucker: No. 

David Beckworth: Whereas at the FOMC, it's well-known that a governor hasn't voted against the main decision, at least on monetary policy issues, in some time, and presidents do, but none of the governors. And there's been people on the show, like Andy Levin, who have been very critical of what he calls, "a group think," or a tendency toward that at the FOMC. So, it's neat to hear this story. But let's move on to your- 

Paul Tucker: Can I say one thing about that? 

David Beckworth: Sure. 

Paul Tucker: One of the difficulties if you never disagree is how do you know what you really think? 

Paul Tucker: One of the great strengths of a system where it's your vote and you're accountable for that vote, is it makes you think about, "What do I really think ought to happen?" 

David Beckworth: That's fair. 

Paul Tucker: Not what would get me into the newspapers, or make me look ... Create a bit of excitement around me for a while, but what do I actually think? What do I think should happen? 

David Beckworth: Yes. 

Paul Tucker: And where the arguments of the other people are kind of all arguments you should listen to because of the substance and because they know things you don't. 

David Beckworth: Well, let me ask this as a follow-up then. One of the critiques of FOMC members is that their conversations are recorded and put into transcripts, so it makes them more mindful and careful what they say. I know at the Bank of England they recently implemented that as well. Has that at all muted or stymied the free-spirited discussions, do you think? 

Paul Tucker: They've ... It happened shortly after I left, and they wrote a transcript for part of the meeting and not for the other. 

David Beckworth: Oh, okay. 

Paul Tucker: So, I don't know whether that risk has crystallized. I hope it hasn't. But certainly, I think the transcript system must affect the FOMC a bit, but not very much. I mean, I read the transcripts occasionally, there are flippant remarks, and you can read a lot into that in the FOMC. I didn't hear many flippant remarks in the NPC meetings. 

David Beckworth: Okay. 

Paul Tucker: And I wonder slightly whether if, to the extent that the FOMC output is precooked, the discussion is less than ... Well, let me put it another way. When I was secretary to the NPC, there was a big disagreement early-on between Eddie George and Mervyn King, two really big central bankers. 

Paul Tucker: And there was no room for flippancy. These two people were having ... And the other seven were having a real debate about ... So, there was a kind of deadly, relentless seriousness about it as well, because you were deciding. 

David Beckworth: So you're saying the flippancy you see at the FOMC might be a sign that the lack of seriousness- 

Paul Tucker: I can't be sure, but I've been surprised that people that I respect, both as people and as central bankers and economists ... I've occasionally seen some remarks and thought, "But that's kind of odd to say that in that meeting." 

David Beckworth: Maybe it's us Americans, we're the cowboys, we're the- 

Paul Tucker: No, the other way. If anything, the other way around, I'd say. It's the English who are addicted to seeing everything as a joke. 

David Beckworth: Fair point. British humor is great. Well, let's move to your book. 

Paul Tucker: As we saw in the Oscars. 

David Beckworth: Yes. Your book's title, again, is "Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State." And there's something really remarkable about this book because you are a former central banker, and a very important central banker, and you were one during the Great Recession, and you could have patted yourself on the back, you could have taken a victory lap. It could have been this very self-congratulatory book. I mean, after all the Bank of England, again, you avoided the Great Depression. Of all the central banks, the only one to actually not have low-inflation problems that the other countries were having. 

David Beckworth: So, there's much to be praised, and yet, you're a technocrat speaking to the challenges of a technocratic system in this book. So, it's very remarkable. I think it's one of the few, I may be mistaken, where a central banker coming out of that crisis has not patted himself on the back. But with that said, why don't you go ahead and kinda give us the summary of your book and the key points you make in it? 

Paul Tucker: Why don't I initially say why I wrote it, actually? 

David Beckworth: Yes, actually, let's do that. 

Paul Tucker: The Bank of England was given a lot of power, a lot more power after the crisis. First of all, we'd found during the crisis that we'd got all this power to expand our balance sheet and do quantitative easing. So, that wasn't a surprise that we had that legal power. It was striking, the extent to which we needed, in our view, to exercise that power. 

Paul Tucker: And then we were given regulatory powers as well, and people tend to not pay enough attention to this, regulation. Regulatory rule-making is law-making. And so, then you have these institutions that have quasi-fiscal powers through the kind of balance sheet and the ability to create money, and you've got these quasi-law-making powers. This is a hell of a thing. 

Paul Tucker: And I was ... For what it's worth, I'm one of the main architects of the new Bank of England's powers. Obviously, it went through our Parliament, but I was one of the big influences, the big architects, designers, of it. And we said no to some powers that the government wanted to give us. And we also, some other powers that, I guess, we were happy to have, we wanted tighter constraints on them than the government had initially proposed. 

Paul Tucker: And when I left office ... And we did that because we thought we would be too powerful, and this was partly institutional self-interest. Our view was in a political system where laws are easy to pass most of the time, we thought if we have too much power eventually we'll have even less power than we started with. But it wasn't just that. It wasn't just self-interest. I think that Mervyn King, and I, and Charlie Bean, we all felt that there were limits to how much power an unelected body could and should have in a decent democracy. And when I left office, what I wanted to do was to write down, carefully, what was going on in my head, what lay behind that. 

David Beckworth: Okay. 

Paul Tucker: Issues about democratic legitimacy and the rule of law, things that monetary policy makers don't engage with very much. And yet, actually, when you look at the criticisms of central banks and central bank independence, these questions, or tropes, even, of democracy and rule of law come up a lot. And I found that there's more commentary of that kind outside the central banking world, outside economics departments, and the main universities than there was inside central banking. And I wanted to engage with all of that. 

David Beckworth: And out of that came a 500 page plus book. So, tell us about the key points of the book, and the message you're trying to make. 

Paul Tucker: So, one of the key themes of the book is that there's a gap in our constitutionalist framework, that we have ... If you think about to James Madison here, obviously a practical man as well as a great thinker. But in Europe, even Montesquieu, a political scientist, and Locke. These were people interested in how power is exercised by governments. 

Paul Tucker: And I think we can and still should operate with a three-branch state, but no one has thought very carefully about, "So, how do administrative agencies fit into this structure?" Distinguishing carefully between administrative agencies that are under the day-to-day control of, here, the President, or with a leash to Congress because of annual budget re-appropriations, who I'd put in the middle, and then beyond that, institutions that are created by Congress or by Parliament, and where the President or Prime Minister can't sack the policy-makers when they get up in the morning and don't like them, that they don't need to go to Congress or the Parliament for their money because actually central banks give money to the government rather than the other way round, and I wanted to find a ... I wanted to ... So, how does that fit in to our system of constitutionalist values? 

Paul Tucker: And I end up prescribing what I call Principles for Delegation, and I could say something about those if you wish. 

David Beckworth: Yeah, well, just to reiterate your point, so your book is about how do we, in a democracy, delegate powers to these independent agencies and do so with legitimacy in a way that makes it sustainable? So, you mentioned central banks. In your book, you mentioned central banks were kind of the epitome, the pinnacle, of these regulatory bodies because especially since the crisis, we do monetary policy but now we're doing a lot of regulatory work we didn't do before, macroprudential rules. There's a lot of power, and you're right, the President, despite President Trump's tweets in the morning, he can't fire Jay Powell and change the Board of Governors overnight. 

David Beckworth: Other agencies, the EPA comes to mind. That has less ... The President can, I believe, in that case fire- 

Paul Tucker: Yes, yes, yes. 

David Beckworth: ... But there's the degrees of power they have. 

Paul Tucker: Yes, yes. And the literature over here, particularly amongst legal scholars, tends to treat the administrative state monolithically. And I basically ... And I've read a lot of this stuff. And I basically think it's a big mistake not to make distinctions between the EPA, which needs to get its money from Congress and the President can sack the boss, then in the middle, an organization like the SEC where the President can't the commissioners, but the SEC needs to go back each year for its money, which that's ... I'm not saying these are bad things, by the way. And then organizations like the Federal Reserve and the FDIC, who are more insulated from day-to-day politics. There aren't many such bodies of that kind in the United States. 

Paul Tucker: In Europe, there are now lots. Before the mid-1980s, they were kinda next to none. Now there are lots. Too many. I think it's possible that you may have too few here. I think it's ... 

David Beckworth: Too few regulatory bodies? 

Paul Tucker: Too few bodies that have a clear mandate and are insulated from day-to-day politics. We'll come back to that. 

David Beckworth: Well, let's talk about that. Let's talk about the rise of the administrative state or the regulatory state. What justifications do we typically hear for why we need an EPA or an SEC or a Federal Reserve? 

Paul Tucker: So, there are two justifications, and the difference between them goes to a vast issue that is well-debated here and will never go away. One is, well, if you pass a law, a very detailed law, somebody has gotta implement it. Not everything is going to end up being adjudicated in the court. There's somebody out there somewhere directing people in the national parks where to park. They're exercising some legal power. They are part of the administrative state. 

Paul Tucker: And so, there is always going to be a bureaucracy. In a country with a small state, we're small bureaucracy, but it will still be big, a country with a big state will have a bigger bureaucracy, but there will always be a bureaucracy. And there was one from the ... There's one before independence in the United States. The colonial governments here had a bureaucracy. Everyone always has a bureaucracy. 

Paul Tucker: The other thing is quite different, which is that if Congress or Parliament doesn't specify what it wants in enormous detail, their discretionary power is given to the bureaucrats. And how much discretionary power do you want to give? And this is where I think it's really important to make a distinction between agencies that are under the day-to-day control of the President, or in my country, a minister, and agencies which are not. So, you know, there's more of a "democratic deficit," to use a slogan, where there's vagueness or gaps in the statute. The person administering the statute is going to be making discretionary judgements, and yet, they weren't elected themselves, and so can't be accountable directly to the people. 

David Beckworth: Now, there's been a rise in populism around the world, and I wonder to what extent, if any, can you trace the rise of populism to dissatisfaction with the rise of the technocrats who run the administrative state? 

Paul Tucker: Oh, I think you can, and who knows how much? My gut instinct is that you can, but it's kind of to do with the remoteness. 

Paul Tucker: So, my view of government is that eventually it messes up. Any part of government. And sometimes it messes up in massive ways that hurt the people, and kind of lasting ways. And the brilliance of representative democracy, part of its brilliance, is that it separates how we feel about the system of government from how we feel about the government of the day. 

Paul Tucker: And so, when government screws up, we go and vote, and we vote out the people that have let us down if we think the other side or some other party will do a better job for a while, or if we just think the system needs a bit of cleaning. But you can't vote out these- 

David Beckworth: Jay Powell. 

Paul Tucker: Jay Powell, or just as you can't vote out the members of the Supreme Court. 

David Beckworth: Right. 

Paul Tucker: Either in your country or in mine. I mean, constitutional democracy certainly has, in principle, a space for unelected people essentially as commitment devices. Why do we have an independent judiciary, which in my country goes back to the struggles of the 17th century codified in law beginning of the 18th? It's because we want to make a commitment to fair adjudication of the law, that the people that have written the laws won't decide how the laws are applied, and we want the laws to be applied to the people that wrote the laws if necessary as well. Now, that's a commitment problem. 

Paul Tucker: So, when economists talk about monetary policy, they're always talking about commitment problems. 

David Beckworth: Right. 

Paul Tucker: But that's a commitment problem. Imagine I'm the law-maker and I'm the judge, which, you get back far enough in history in Europe, same thing. It's called a king. Or, certainly a medieval king. 

David Beckworth: Sure. 

Paul Tucker: And the king ... Imagine this king or queen is benign, and they say, "I promise I'm going to do this fairly." And they mean it, actually. And then a difficult case comes along, and the decision was marginal, and did they keep their promise or not? 

Paul Tucker: And so, an independent judiciary is a way of committing to fair justice, to applying law in a fair way. So, we've got a space for, I think, a Supreme Court as a commitment device. And an independence central bank is a commitment device for the promise to have low and stable inflation, because we can't expect elected politicians to stick to that. 

David Beckworth: Right. 

Paul Tucker: Not because they're bad people. They may or may not be bad people. Not because they're bad people but because they've got elections to win. And the way monetary policy works, if I reduce interest rates today, I'll get a little bit of a boost in the economy and- 

David Beckworth: Get reelected. 

Paul Tucker: And get people on floating rate mortgages, or even here, long term mortgages. The cost of servicing their mortgage will go down, bit more money in their pocket. Maybe the economy does better for a while, more people in jobs, and you get reelected. And then the price of that comes, which is ... Turns out that the economy was already at capacity and there's inflation and now we've got to have a recession to ... 

Paul Tucker: Whereas an unelected person isn't subject to that temptation because they're not running for office, but what matters then is whether we can harness them, whether they care about something else, where we can harness them to do what we want them to do. I don't think we should regard central bankers as people of extraordinary virtue who we can trust because, I don't know, they've got good souls or something. It's, "Do they care about something else?" 

Paul Tucker: And I think they do. I think they care about their professional reputation, and their public reputation, for delivering the mandate they've been given, but that means that mandate should be reasonably precise. If you just say, "This happens away from central banking," and then for some of the big regulatory agencies in this country, Congress has effectively said, "Here are some powers. Go and make things better." 

Paul Tucker: And I think it's a good ... I'd like all of those things to be under the control of politicians, actually. I'd hate it if the Fed had a mandate of that kind. 

David Beckworth: Yeah, so your goal of the book, if I understand correctly, is to preserve that space, that legitimate space where you need a technocrat to implement the principle that the legislative body gave them, but you don't want them to go too far, you want them to do it in a legitimate manner, so that the public doesn't get upset, it doesn't give rise to populism. 

David Beckworth: So, you outline in your book some principles for doing that, some principles ... You call them Delegation Criteria. I believe there's seven of them. And since this is Macro Musings, let's work our way through them and maybe think of them in terms of central banks. 

Paul Tucker: Yeah, yeah. 

David Beckworth: So, your first one is, "The goal can be specified." 

Paul Tucker: Yeah. Can and then should be specified. 

David Beckworth: Should be specified. 

Paul Tucker: I go on to say that it should be specified, and should be capable of being monitored. And the system in the US gets a half-pass. The UK system gets a better pass. 

Paul Tucker: So, let me describe the UK system to bring out the difference. 

David Beckworth: Okay. 

Paul Tucker: The UK system, the primary legislation, what was passed in Parliament, says, "Pursue price stability," and subject to achieving that, "Maintain the healthy economy." And then Parliament also says, as a matter of law, it says to the Executive branch, "Set a target for the Bank of England." And they set the inflation target at 2%. 

Paul Tucker: And so, the Bank of England doesn't set- 

David Beckworth: So Parliament set the 2%? 

Paul Tucker: Well, the Executive branch set it. 

David Beckworth: Okay. 

Paul Tucker: But they have to set. They're told. They couldn't set ten, because that wouldn't be price stability. If they set up an inflation target of ten percent, or a money growth target that was incredibly high, someone could take them to court and say they'd misused their powers under the legislation. 

Paul Tucker: But the Bank of England's objective is given from outside. 

David Beckworth: Interesting. 

Paul Tucker: And the great thing about two percent ... And whereas the Federal Reserve chose it for itself, and did it ... I think it's good what they did. I think their 2012 statement under Ben Bernanke about their policy objectives was a really good statement. I think they should have encouraged more public debate on it than they did. 

Paul Tucker: When I said that to people, people said, "Oh, we talked to Congress behind the scenes." And I said, "Yeah, but the point is to talk about it in the open because it's democracy." 

David Beckworth: Right. 

Paul Tucker: How can the people know what their members of Congress are doing on their behalf unless a bit of it's ... And you know, this isn't national defense. This is setting the inflation target for goodness' sake. 

Paul Tucker: Anyway, the key thing about whether it's the Fed system or the Bank of England ... The numbers are basically the same, too. The great thing is that the inflation number gets enhanced each month, and you and I, and our sound engineer, and everyone listening, they can see whether inflation is two percent. And if it's lower or higher, the central bank is expected to say how quickly they'll bring it back to two percent and why they think it's diverged from two percent. If oil prices go up a lot, central banks typically will accommodate some of that. They'll let inflation rise temporarily so as to avoid the economy going into an unnecessary recession. 

Paul Tucker: But the key thing is did medium-term inflation expectations remain anchored? Are you really confident that it is going to come back to the target that you've set yourself or been given? Now, that's sort of a long disquisition on a monitorable target. 

Paul Tucker: You think about how many other fields where there's delegated power, and we could say, "So what is it exactly we ask them to achieve?" Or, we ask them to achieve ... Take the SEC, we ask them to improve capital formation, and efficient financial markets, and investor protection. Well, how much investor protection? Or, what's the balance between investor protection and capital formation? 

Paul Tucker: And low and behold, and this is perfectly reasonable, a new president is elected and the new chair of the SEC says, "We're going to give a little bit more emphasis to capital formation and a little bit less to investor protections." So, for me, that's not an agency that should be fully independent in the way that the Fed is. 

David Beckworth: ….specified

Paul Tucker: Well, whether it- 

David Beckworth: Or clearly. 

Paul Tucker: It certainly hasn't been well specified. 

David Beckworth: Okay. 

Paul Tucker: And probably couldn't be. 

David Beckworth: All right. 

Paul Tucker: And so, there are choices about public policy goals going on and they belong with the people we elect. 

David Beckworth: All right. Second delegation criteria is, "Society's preferences are relatively stable and concern a major social cost." 

Paul Tucker: Yeah, let me give you an example of where I think this isn't the case here. So, I'm no expert on environmental policy issues, but there's obviously a very engaged contested debate in this country about Climate Change and things like that. And lots of people don't like the current administration's policies and think it's a terrible thing the president was able to change them, and actually, the EPA should have been independent and stuck to the good works that were going on before. 

Paul Tucker: But of course, there are actually plenty of people in this country that think the new policies of the EPA are absolutely fine, and not just people that are in big business who've got vested interested. That seems, to me, to be a field where there isn't a settled consensus in this country about what the public wants government to do for them. 

Paul Tucker: Now, if you flip to my world, do I think there's a constituency out there for high and variable inflation? Well, maybe a few hedge-fund people, but you know, away from them, no, I don't think so. I don't think so. Do I think there's a constituency out there for financial crisis? We really need more financial crisis, either more frequently or when they come, they really need to be even bigger. No, there's not a constituency for that. So, I would think that these are areas where people want stability in the value of money and in the resilience of the- 

David Beckworth: The public. 

Paul Tucker: ... The core of the banking system. Yeah. I think- 

David Beckworth: Not experts, per se. 

Paul Tucker: No, no! The public. 

David Beckworth: The public. 

Paul Tucker: Yeah. 

David Beckworth: 'Cause I know someone will say, "Well, we have a consensus among experts on the climate," but your point is the public hasn't reached a consensus. 

Paul Tucker: Yeah. 

David Beckworth: Okay. 

Paul Tucker: And if you think about ... And you know, almost ... Democratic government is almost always sensitive to this in slow motion. So, Paul Volcker, someone who should be in our thoughtsa truly great man. He breaks the back of inflation in this country because President Carter and the people around President Carter realize that the public are completely fed up with it. 

Paul Tucker: In the opinion polls of the late 1970s, inflation was very high and was ranking as something that the public was fed up with and wanting cured. 

David Beckworth: Okay. So, that was our second delegation criteria- 

Paul Tucker: Yep. 

David Beckworth: ... "Preferences are relatively stable." 

David Beckworth: Third one is, "There is a problem with credible commitment." 

Paul Tucker: So, we've talked about this a bit in the context of the judges, but monetary policy is the classic area, probably, where there's a credible commitment problem. So, say I'm a central banker and I announce that inflation is going to be two percent. And there's a world out there, an economy of workers and managers, people owning capital, etc. 

Paul Tucker: And for years, inflation has been ten percent. And they say, "Well, we've got to go into our annual wage bargain? Are we going to believe him that it's going to be two percent? They always say that. Do we think it'd be ten percent again? Oh, it'll be ten percent again." So, they reach a wage bargain that reflects an expectation of ten percent. 

Paul Tucker: And I get the news about the wage bargain, and I say, "Oh damn! I can now only achieve two percent if I create a horrible recession and loads of people are forced out of work and loads of businesses fail. Hm, I'm going to have to acquiesce in their expectation." So, the cost of them ... They're getting nothing from it being ten percent in the long run, but because they didn't believe my promise, I couldn't deliver on my promise. It was a self-fulfilling lack of trust. 

David Beckworth: Yep. 

Paul Tucker: And what we need is institutions that are credible, that when people say, "Inflation is going to be two percent." People say, "Yeah, actually, on average it is going to be two percent here in Europe, and it's going to shift away from that but I believe them, and when I do my wage bargaining that's going to be my starting point for it." Plus productivity and the local firm, and so on. 

David Beckworth: Okay. So, credible commitment was the third delegation criteria. The fourth one is, "Policy instruments are expected to work, and there exists an external community of experts." 

Paul Tucker: So, this is relevant to the macroprudential debate. Some people, and more in continental Europe, want to use bank capital requirements to fine tune or rough tune the credit cycle. And I would say we don't know enough to know whether or not it's working. We might see what we hope to see, but we won't actually know whether those instruments worked. 

Paul Tucker: We can use them for something else. We know that if we make banks have more capital, they're less likely to fail. We don't know that if we make banks have more capital next year, that that will dampen credit growth by a certain amount or a certain expected amount the year after that. 

Paul Tucker: The point about experts is important because you need a big community of experts. Imagine you're in a field where there are only two experts, and you give one of them the job of making monetary policy and the other one is outside somewhere. Well, there can be no decent public debate, 'cause there's this woman making policy and there's this man shouting from outside. 

David Beckworth: Right. 

Paul Tucker: You need a real community with disparate views. 

David Beckworth: Right. 

Paul Tucker: Now, actually, macroeconomics fulfills that criteria easily. There are lots of people that are expert with different views so there's always a healthy debate. But that's not true of all fields. 

David Beckworth: Okay. Next delegation criteria. "The independent agency will not have to make big choices on distributional trade-offs." 

Paul Tucker: So, this is a big, big deal. And there's a subtlety here in that I'm emphasizing choices rather than effects. Did quantitative easing, as implemented by the Fed, the Bank of England, European Central Bank ... Did it have some distributional effect? Yes. 

Paul Tucker: Some of them good and probably supported the economy, and so people in insecure jobs probably held on to those jobs more than they would have done otherwise. But it also pushed up asset prices and probably made the rich even richer, and it probably wasn't so great for the people in the middle. And kind of upper-middle-middle, people that are relying on a return on the modest amount of savings. 

Paul Tucker: But I don't think people went into quantitative easing decisions saying, "Well, shall we help the rich and the poor and mess up the middle?" But where it really doesn't matter is if you get central banks able to intervene in credit markets. You know, should we help, I don't know, the Northwest of the country, or the Southeast of the country, or the Rust Belt, or new, dynamic tech sectors? Shall we support the housing market in Alabama, and try and depress the housing market in Manhattan? I mean, honestly, no, no, no, no! 

David Beckworth: Right, you don't want that. 

Paul Tucker: You don't want unelected people doing that. 

David Beckworth: Right, that's something Congress, if we go down that path Congress should do. But not someone in an independent agency that's unelected to power. 

David Beckworth: Okay, next criteria. Number six, "Legislature has the capacity to oversee the independent agency's stewardship." 

Paul Tucker: Yeah, there's a point for Europe here, because some European countries, including possibly my own, have more independent agencies than Parliament has the capacity to oversee effectively. Here in the States, I would make a slightly different point. 

Paul Tucker: The House Committee is just too big to oversee the Fed. Well, it's actually the same problem in Europe. The ECON committee of the European Parliament is just too big to oversee Draghi effectively. And I'm not making a point about the individuals on it. And certainly in the case of ECON Parliament, some of my good friends are on it, but it's just too big. 

Paul Tucker: You know, if you've got 70 people, each got a question for a few minutes, that's quite easy if you're the President of the central bank. It's the quality of the oversight hearings. I mean, there should be much more meatier debate here about is Senate oversight of the Fed, is it good enough? And political scientists tend to think about it as either a fire alarm or a police patrol thing. They're catching the agency out, catching the Fed out. 

Paul Tucker: Of course that's important, but it's an impoverished way of thinking about these oversight sessions. These are occasions when you go to your elected legislator and try and answer their questions in, not the language of the MIT classroom or the George Mason classroom, but in the language that an interested member of the public can tune into. 

Paul Tucker: There is nothing ... There was a nice party when I left the Bank of England, and my final remarks were about what an extraordinary privilege it was to go to our Parliament and testify, and try and explain what we were doing. And I don't get the sense here that people think about it in quite the same way. Well, I kinda know they don't 'cause I've asked them. 

Paul Tucker: But you have to think about it that way. I'm making a normative point because these people were elected and they're representing the people, and you are a power-holder but you weren't elected by the people and you have to be accountable to the people via their elected representatives because they're deciding whether or not to maintain the regime. 

David Beckworth: Right. 

Paul Tucker: Senate could amend the Federal Reserve law. Parliament could amend the Bank of England law. And their capability to do so is a good thing. 

David Beckworth: Yeah, it's funny, you mentioned the size of a House Financial Services Committee. As we're taping today, Chairman Jay Powell is before it, and I was just looking at the names, just looking for some members. And I noticed, my goodness. This is a large committee. They each have five minutes to talk. We're going to be here a long, long time, but it speaks to this point that it's too big to really be effective oversight. 

Paul Tucker: There's a London-based political scientist who did a comparative analysis of Congressional oversight of the Fed and Westminster oversight of the Bank of England using modern quantitative textual analysis techniques. 

Paul Tucker: And the Westminster system comes out a lot better on this. It would come out worse on other things, but on this, it comes out better. 

David Beckworth: Well, we have something to learn. Okay, finally delegation criteria. "Society is capable of bestowing the esteem or prestige that can help bind these independent agency policy makers to the mass of the regime goals?" 

Paul Tucker: Yeah. So, I think we've touched on this, so I can be brief, but yeah. Imagine that the people that hold these powerful positions didn't actually care what people thought about them. And so, they'd just run off the ranch and pursue whatever goal they wanted to pursue, and their own interests, or their friend's interests, or whatever. 

Paul Tucker: But it comes back to why they must have a monitorable ... An objective that can monitored fairly easily. And we'd say, "Hey, you said inflation would be two percent and it's been five percent for ages. What on earth are you doing?" And they have to care about that. 

Paul Tucker: No, actually. We live in societies. You live in a society and I do where people do care about that. But it can erode. It can erode. And then we would be in ... None of this would hold together then. 

David Beckworth: So you'd say the Fed, the Bank of England, they fit most of the delegation criteria? 

Paul Tucker: Yeah. I think the Bank of England ... We haven't touched committees. The Bank of England doesn't take its lender of last resort decisions via a formal committee and it should. That's a weakness in the system that I was a part of. 

Paul Tucker: I think the Fed ... Actually, I think its current leadership will try to do this, and is trying to do this, I think they need to be more active in explaining their policies to Main Street rather than to Wall Street. You know? I'm going to exaggerate, but give your important speeches not at the Economic Club of New York, but in, I don't know, I've mentioned Nebraska already, and Idaho, or Louisiana. 

David Beckworth: To Main Street versus- 

Paul Tucker: To Main Street, yeah, yeah. Why do these institutions exist? They exist in order to serve the interests of the broader public and they have a duty to explain as best they can to the broader public. They need to do that. 

Paul Tucker: I think in this country ... Although not only in this country. Probably, the Fed needs to do more to clarify what its objectives on the banking side are. How do we know whether it's doing a good job or a bad job until it's too late? I think the innovation of stress-testing, which I think it's the US's big contribution to the Post-Crisis. I mean, that's the one thing that was uniquely started here. 

David Beckworth: Okay. 

Paul Tucker: A lot of other things people say started here but didn't actually, particularly. I think stress-testing can probably be used more to explain to the public and to Congress what's going on. 

David Beckworth: Well, let me ask in the time we have left about some recent developments here on this side of the Atlantic in the Federal Reserve. One of them is the Fed recently announced that it's going to stick with its floor system, it's operating system, that emerged in the Crisis. And originally, said it was going to normalize and go back to something more like a corridor system. And the FOMC met, I believe, for three meetings, maybe it was four, but at least three meetings. They discussed it internally, and in the last meeting in January, they made it official, we're going to stick with this. 

David Beckworth: And for some of us, this seemed to be a pretty big change. Now, we kinda saw the writing on the wall. We know the direction that we're going. But it still seems, to me at least and to some others, that this was a very important decision that didn't get a lot of public hearing, has long-term consequences that are very significant. How would you see it through your delegation criteria? 

Paul Tucker: So, I think it's a reasonable decision in terms of the transition to a different steady state regime. I am not convinced it's a good decision, and it may be a poor decision for the steady state long-term, and that's because the way such a system operates is that the central bank balance will always air on the side of being bigger than it needs to. 

Paul Tucker: Can't be smaller than it needs to be because then interest rates would rise above the policy rate, but you do not need to operate a flood system in order to control the short term interest rate, and you do not need to stipulate what level of reserves banks need to hold. And we could get bogged down in technical detail, which would be a mistake, but I think they should be ... I think the long term system should probably be different from the one they've adopted. 

Paul Tucker: There's another point though, which is that they should have encouraged more public debate on this. But they did encourage some. Vice Chair Quarles talked about this in a conference at the Hoover Institution in Stanford last year, and actually, I thought he said lots of sensible things. I was pretty critical of some analysis that had come out of other parts of the Fed, and this will be published, I haven't softened my criticism in the version that will be published, and that basically I thought some analysis came out of the Fed that was not correct. Actually, I thought it was pretty weak. 

Paul Tucker: But it'd be wrong to say there hasn't been any consultation. There should have been more. My goodness, it matters! Because if the balance sheet is bigger than it needs to be, there'll be people, not necessarily inside the Fed that wants the Fed to use it to do exciting things. That's the nature of politics. 

David Beckworth: Right, right. 

Paul Tucker: You want to operate with ... I say this in the book somewhere. You want to operate with a smallest balance sheet as you possibly can and with as vanilla a balance sheet as you possibly can. Now, in emergencies, that's not going to be very small and it's not going to be very vanilla, and because of the shock to everybody from the financial crisis, today's smaller size is going to be a lot bigger than it was before the crisis. 

David Beckworth: Right. 

Paul Tucker: So I'm setting it out of principle rather than a prediction of what the number is. But nevertheless, I don't think the best place for them to be in the long run is that here's the number. 

David Beckworth: Yeah. I agree with that and I've had George Selgin on several times, and I agree with him in terms of which system is better, optimally. Let's move to another development. So, the Federal Reserve this year is having a conference in June at the Chicago Fed, and it's part of a broader review of its tools, communications, and strategies. And I'm particularly interested in the strategy. I guess the communication part would be a part of this as well, because as listeners know, I'm a big fan of nominal GDP level targeting. In fact, Paul, you have your own nominal GDP targeting mug which you seemed really happy to get earlier before the show started. 

David Beckworth: But if the Fed were to, say, move to a price level target or a nominal GDP level target, what would be the best way to do that in terms of the criteria you've given us? 

Paul Tucker: Well, I think there's a big challenge here because on the one hand, if growth remains persistently low, then the "equilibrium real interest rate" as economists call it is going to be low. And so, monetary policy is going to hit the zero-bound more frequently and that's not a good thing, particularly in this economy where discretionary fiscal policy is almost impossible to agree in a timely way. 

Paul Tucker: If anything, I think Congress should strengthen the automatic stabilizers so that ... I think a number of economies ... You know, maybe lower debt, stronger automatic stabilizers. 

David Beckworth: Right. 

Paul Tucker: So, there's that, but there's a trade off against comprehensibility. So, one of the beauties of inflation targeting is it's going to be two percent it's going to be two percent, it's going to be two percent. And people both listen and learn that it's going to be roughly around two percent, whereas if you have price level targeting of any kind, or average inflation targeting, you don't know what inflation is going to be the next year until you discover what it was last year. 

Paul Tucker: And if you're going to boost, if you're going to- 

David Beckworth: …High inflation  

Paul Tucker: ... Plan for high inflation and expect it to generate a recession in order to do it. 

David Beckworth: Oh, come back down the trend. 

Paul Tucker: In order to come back down to the trend. Well, no major central bank will try that more than once. I mean, this is the kind of thing ... I worked for one of the great central bankers when I was in the middle of my career, Eddie George. And I can just imagine ... I can just see him. He's passed away, sadly. I can just see him looking at me, thinking, "This is stupid. If you think you're going to persuade me to do that?" 

David Beckworth: Well, I think that's probably ... You know, Ben Bernanke has his temporary price proposal. 

Paul Tucker: Yeah, no. Ben Bernanke's proposal is ... I don't know whether I support it, to be honest, but I think it's a good way of framing the debate. Keep the system that they've got, or something like the system that they've got, for normal times. Don't imagine that we're in an emergency all the time. And then, try to make clear on what would you do in an emergency. 

Paul Tucker: There are other people that want to raise the inflation target, maybe to three percent or four percent. I'm slightly nervous about doing that. Once you get to four, you know, inflation will be five, six occasionally, and it'd be very easy to slip back into the old ways. But on the criteria, my delegation criteria, I think it's terrific they're having the public debate. I hope it won't just be an esoteric thing in Chicago University, but something that they can explain. 

Paul Tucker: And I think they will. I think the current chair and the two vice chairs have committed to encouraging public debate, and I would encourage them ... But don't be too clever in what you go for. The people aren't forgiving, and nor should they be. 

David Beckworth: All right. One last question, and I have to ask this because I am the nominal GDP targeting guy. And I want you to be brutally honest. But going back to the point we'd had earlier in the show about the difficulties of communicating a nominal GDP target. 

Paul Tucker: Yeah, yeah. 

David Beckworth: So, here's my elevator pitch in terms of that. Number one, an inflation target can also be hard to communicate. So, Ben Bernanke, 2010, inflation was maybe close to ... Core PCE inflation was around one percent and he wanted to actually do QE2 to get it back up to two. 

David Beckworth: And so, people in Congress were like, "What? You wanna get inflation higher?" And that was a hard sell. And what I would envision is instead of saying, "We want to stabilize inflation around two percent." We would say, "Look, we wanna stabilize your ..." I wouldn't use the term nominal income, but, "Your dollar income growth around a particular target. I want you to look at your average dollar incomes and have them stabilize." 

Paul Tucker: Okay. So, two completely different responses. On the first, that absolutely reveals better than I did earlier the weakness of the US system where the Fed chooses the target. Same thing in the United Kingdom. "What are you doing trying to get ..." The Bank of England, trying to get inflation back up to two percent. "Oh, we're trying to achieve the target that the elected government gave us- 

David Beckworth: Good point. 

Paul Tucker: ... "And setting the target as required by Parliament." I didn't choose two percent. You chose two percent. So, that's- 

David Beckworth: That's a good point. 

Paul Tucker: That probably gets across more cleanly, the virtue of that, that there isn't some unelected person sitting in a room saying, "Now what do I think would be the best thing to do? I've been told what the best thing to do is, and what my judgment is going to be about is how best to do it." 

David Beckworth: Well, in the case of the US government, would the Treasury Department give that to them? 

Paul Tucker: You could ... Constitutionally ... Although a man called James Landis, who was Dean of the Harvard Law School in the 40's, I think, and was one of the architects of the SEC, the FTS, FTC. He advocated that the US could use what we call Second Rule Legislation. So, Congress would authorize members of the Cabinet, President, Treasury, Secretary, to do things via a subordinate legislation. It's kind of a form of regulation, if you like, except that it's about government itself. 

Paul Tucker: It hasn't happened very much here. It's been a very ... It was controversial when it started in the UK in the first part of the 20th century. It was opposed by our then Chief Justice, but actually it's turned out to be a very important part of our system of government. You need checks and balances around it. But you could do that. You could do that here. 

Paul Tucker: And in a sense, you've taken a step towards that with lender of last resort. If the Fed now lends to non-banks, it has to get their permission from the Treasury Secretary. I don't think that's a crazy thing. 

David Beckworth: That's right. Part of the Dodd Frank Reform. 

Paul Tucker: Lots of people object to that. I don't think that's a crazy thing. 

David Beckworth: Well, let's end on your second point that you were going to throw down. 

Paul Tucker: Yeah, which was ... 

David Beckworth: We were talking about nominal GDP targeting, and I talked about- 

Paul Tucker: Oh, yes, yes! The way you expressed it. It was almost as though you were speaking to each citizen about their individual nominal income- 

David Beckworth: Yes. 

Paul Tucker: Yeah, well, that's a big mistake, David, because somebody is sitting at home and they're thinking, "Well, actually, they said my nominal income was going to go up by four percent a year and I haven't had ..." "My nominal income has gone ..." "My income has gone down. My income has gone down." So, I think as soon as you get away from aggregates, you're in that difficulty. And if you say, well, we're trying to get nominal income and aggregate nominal income to expand at, say, I'm making up four percent, but four percent a year. 

David Beckworth: Right. 

Paul Tucker: No one will have the faintest idea what aggregate nominal income is. No one normal knows what that means. I had a conversation with someone recently where I used the economic expression, "The marginal purchaser." And I was talking to a highly educated business person. And by marginal, they thought I meant small and irrelevant. You know? 

Paul Tucker: So, it's ... Whereas the thing about inflation is that people go down to the shop or buy online, and they say, "Bloody hell!" Sorry for the English. "This has gone up a lot." Inflation is something visceral that people can understand. Things like money target, money targets for the money growth, or nominal income growth are things, which I'm asserting today, things that people find hard to understand. 

Paul Tucker: And if you then say, "Well, I'll explain it to you in terms of your own income," then there's the hazard that they think you've promised that their income will go up in every household of X percent a year, and that's not how the world works, sadly. 

David Beckworth: All right. Our time is up. Our guest today has been Sir Paul Tucker. Thank you so much for coming on the show. 

Paul Tucker: No, thank you very much for inviting me, David. 

David Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. If you haven't already, please subscribe via iTunes or your favorite podcast app, and while you're there, please consider rating us and leaving a review. This helps other thoughtful people like you find the podcast. Thanks for listening. 

Photo credit: Bank of England/Wikimedia Commons

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.