Just Another Administrative Agency: Preserving Central Bank Discretion Without Illusions

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Being a writer is difficult. One of the most embarrassing things about being a writer is that sometimes you put in 90% of the work on something and then don’t get around to do that last 10%. Today’s piece is a product of that. I wrote it four years ago- in late May/June 2021- for a “roundtable” for the website “Just Money” which was started by Harvard law professor Christine Desan as a place to write about money as a legal subject. By the time I got comments back from law professors Lev Menand and Dan Rohde, I didn’t feel up to going through and processing their detailed feedback. With this kind of writing, the longer you wait the harder it feels to go back to something and make it publishable. 

Given recent events and the targeting of Federal Reserve chairman Jay Powell and the Federal Reserve by the Trump administration, I felt it was finally time to come back and publish this piece. Most of my writing- indeed what my book Picking Losers was going to be devoted to- was piercing the ideology of central bank independence so that the Federal Reserve would be treated like an independent administrative agency like any other. I was very aware of the threat of the presidential dominance of the executive branch and, unlike many critics of central banking independence, think administrative agency independence is very important. I just didn’t think the Federal Reserve deserved unique deference to its expert opinion over and above, say, the CDC. 

What this means is that I’m now in the strange position of defending the Federal Reserve’s administrative agency independence now that it is under threat from the second Trump administration. I will have more to say about current events in the future. What I will say for now is that the threat the Federal Reserve faces was apparent as soon as the Trump administration made it clear it was going to challenge a 90 year old supreme court ruling laying out that independent agency leadership can only be fired for “good cause” reasons. I discussed this issue at far greater length all the way back in February with a piece entitled “Why Should We Care If the Trump Administration, and Musk’s DOGE, are Acting Unconstitutionally?” It is another sign of the weakness in the stock market’s role as a “conventional wisdom processor” that the threat to the Federal Reserve, which was revealed in the “raids” on a number of independent administrative agencies, has only become apparent to stock market participants now.

In any case, this piece should provide useful context for readers to get their bearings on this subject. I’ve edited it lightly based on their feedback but didn’t change anything substantive. I should also mention that I briefly lay out some proposals for changing monetary policy. Those proposals are discussed at far greater length in my full length monetary policy report that was published in January 2022. 

Economics is a discipline filled with false dichotomies. One of its most ideologically powerful is the distinction between “independent” and “democratic” central banking. 

According to most economists, independent central banking is superior to democratic central banking for two reasons. First, managing the macroeconomy requires “freedom of action” to quickly respond to changing events. Second, “politicians” (as well as the general public) prefer policy that is “too loose”. (Most often, it’s claimed that this “looseness” will cause “ruinous inflation”.) 

But the first concern is hardly uncommon. As Yale law professor and economist Yair Listokin has said, “To lawyers, this is a familiar argument for delegating tasks to an expert agency [best] charted by administrative law scholars who have been wrestling with the issue for decades”. Yet it hasn’t occurred to economists to lean on administrative law in confronting these questions (or learn from that field’s specialists). Indeed, economists are mostly unaware that they are wrestling with questions of administrative law.  Administrative legal scholars, for their part, have mostly ignored the core issues of central banking though — as Professor Listokin’s scholarship attests — this is slowly changing.

Meanwhile, cloaked in the language of efficiency and optimality, the second argument is a radical anti-democratic claim. This becomes clear when we conceptually separate it from the former claim. The case for insulating central banks from the preferences of politicians or the general public doesn’t rely on the delays between deliberation and action that consulting the public or lawmakers would require. Instead, the proponents of “central bank independence” are claiming that central bank policy which reflects the public’s preferences would be too economically expansionary. And that this is an overriding risk — regardless of how flexibly or speedily that policy was implemented. Academics in other social sciences, and the public at large, rightly balk at this argument.

Reaching to reclaim and rehabilitate democracy, many decide to defend the position economists posit as the “opposite” of independent central banking. Where economists would have “faceless bureaucrats”, these “populist” thinkers defend legislatures and presidents (or prime ministers) determining monetary policy directly. Rarely do the arguments for these simple schemas of “democratic monetary policy” confront the complexity of timing and tools that monetary policy entails.

While in some respects attractive, the self-styled populist perspective is a trap. By accepting the premise that monetary policy is only democratic if interest rates and credit policy decisions are directly set by legislatures or heads of state, outside critics help reinforce the choice of economists to conflate anti-democratic preferences, with issues of administrative action, and careful deliberation. In the post-Trump world, it is easy to casually dismiss such suggestions as dangerous and defend central bank independence as a kind of “lesser evil” to those who are not deeply invested in the issue. Professor Skinner’s beginning submission to this roundtable is a strong recounting of this “lesser evil” case.

We do not have to accept this dichotomy. Rejecting central bank independence doesn’t have to mean rejecting administrative discretion, or some degree of independence from short-term political considerations heads of states and legislatures face. Conversely, arguing for “democratizing” central banking doesn’t necessarily mean more legislative or executive determination of the day to day — or even year to year — decisions. Once we learn to ignore this false dichotomy, we can start to imagine a variety of administrative structures which provide ordinary people the ability to provide meaningful input into these decisions.

Following this line of thought quickly returns us to the issue of administrative law. These questions are dealt with quite routinely by administrative lawyers. They really aren’t as special or unique as economists seem to believe. Anyone who paid attention during the disastrous response to Coronavirus in the United States can appreciate the need for independence from short term political considerations. At the same time, the manifold failures of public health officials themselves also suggest that greater accountability to the public — including institutionally unsupported academics — is necessary to produce better policy. Democratizing central banking while preserving the capacity of central bankers to respond quickly and effectively to the state of the economy (as well as to crises) means recognizing that central banks are “just another administrative agency”.

Recognizing that central banks are no different from other administrative agencies simplifies the question of democracy considerably. There are various models for democratizing administrative agencies — “local councils” and “citizen oversight juries” to name a few — and more generally a wide literature on balancing the need for expertise with the need for democratic accountability. There are also various methods to balance the need for coordination with other parts of government and the need to be able to act independently during intergovernmental conflict. It’s beyond the scope of this article to assess various different proposals (let alone propose my own comprehensive framework.) It is also unnecessary. By merely establishing that these issues are one and the same across the administrative state, a whole new pathway for scholarship emerges. We can finally break down the claustrophobic narrowness of the literature on central bank independence. Joining ongoing debates over administrative discretion and accountability will help us elucidate the genuinely unique economic aspects of central banking.

One of the biggest benefits of treating central banks as just another administrative agency is it allows us to experiment with various different economic policy arrangements. The ideology of central bank independence encourages other administrative agencies to not develop macroeconomic competence, while the clear inadequacies of conventional central bank tools lead to extreme proposals where more and more economic policy powers are handed off to central banks. When we treat each federal agency as potentially an important macroeconomic actor, it follows that we must put greater value on coordinating economic policy, not just across branches of government, but within the administrative state itself. Rather than seeing coordinating entities like the Financial Stability Oversight Council as anomalies, we should see them as the norm. (Albeit future efforts should feature more dispersed decision-making authority, and more insulation from presidential pressure). 

The Coronavirus Depression has itself showcased the potentially large benefits from relying on other economic policy tools. Expanding unemployment insurance benefits is a powerful tool for economic stabilization, and protection. Direct payments to individuals is popular and can operate quickly, if administratively regularized. Grants to state and local governments are also powerful and avoid painful cuts. All of these provided income to the economy without needing interest rate “room” or relying on burdening fragile non-federal balance sheets with even more debt.

The Coronavirus Depression has also showcased the large costs of not taking other administrative agencies seriously as economic policymakers. Our payments system is creaky and out of date, making it more difficult to get money quickly into every resident's hands. The reliance of unemployment benefits on state administration has run headfirst into political polarization at the local level and made the distribution of unemployment benefits uneven and erratic. Meanwhile we expected small agencies like the Small Business Administration to administer large programs, in partnership with notoriously discriminatory banks. Worse, by assuming that central bank independence has solved the problem of partisan conflict and fleeting political interests, policymakers have been mostly bereft of the infrastructure needed to avoid these issues in fiscal policy. Automatic and trigger-based administrative agency policies only saw mainstream development right as the Coronavirus crisis emerged. This timing meant there was no time to implement them before the crisis hit.

With much stronger automatic and trigger-based fiscal policies, the need for a large degree of fiscal or monetary policy discretion is reduced. There is also no need for monetary policy discretion to take the form of interest rate adjustments. As professor Eric Monnet deftly shows, monetary policy has historically included a breathtaking variety of financial regulatory policies. While I won’t lay out a detailed alternative architecture for administrative agency economic policy here — this is a short article, not a book! —  I will bring up a few suggestive modifications. 

Direct quantitative and qualitative financial regulation could be the main tool of monetary policy — even if it was decided on by an inter-agency council. Further, it could mainly be used as a contractionary tool, to stabilize the economy on the “upside” while fiscal policy of all types — legislative and administrative discretion along with trigger-based and automatic — responds to recessions. Interest rates on all government liabilities could be fixed to zero — or some other low number — while the central bank would adopt responsibility for issuing government securities. The treasury could finance government payments through coinage or some other tax receivable and/or legal tender instrument. Meanwhile central bank issued securities would drain the banking system of settlement balances when desirable.

While this might not be consistent with central bank independence as conventionally defined, central banks under this proposal would still retain quite a large degree of discretion. One could even argue that — on the plain of purchase and sale policy — central banks under this proposal have greater discretion. This is because they are the sole issuers of government securities, and they alone determine how many are outstanding — and of what maturity. More importantly, fiscal policy would regain its “independence” from monetary policy and no longer have to fret over contractionary monetary policy increasing interest payments to the private sector. The myth of an all powerful independent central bank wouldn’t survive such reforms. But this framework doesn’t fit the opposite caricature of a strongman president controlling all economic policy by himself either. 

There are also a number of reasons to think this sort of apparatus would produce much better economic and social outcomes. Given that the rise and dominance of central bank independence has coincided with decades of weak monetary wage growth, exploding inequality and chronic elevated unemployment, it is almost certainly the case that this kind of policy framework would lead to stronger monetary wage growth, lower inequality (especially with high top marginal tax rates), and less unemployment. For the full effect this might also require taking non-financial regulation more seriously as macroeconomic tools. Even when administrative agencies struggled to coordinate, the limitations on their discretion along with powerful automatic and trigger-based policies would prevent the consistently and overly contractionary policy we’ve seen.

Of course, critics of abridging or dismissing central bank independence quickly skip past issues of unemployment, climate change, and racial or economic inequality. To them, the real question is whether demand-driven accelerations in inflation will be avoided by any new proposed architecture. Proposals stand or fall on this test, in the “anti-democratic” view. There is no way to completely dismiss this possibility. Testing the limits of our economic capacity certainly risks inflation more than our typical policy — keeping the economy in a perpetual state of “semi-slump”. Reasonable people can disagree about what counts as a “semi-boom”. A fiscal policy body could conflict with a central bank over the state of the macroeconomy, and act at cross-purposes. 

Yet, I’d argue this hypothetical policy conflict is worth the risk in the face of the clear reality of multiple decades where demand was inadequate and there was no other administrative agency able to — or directed to — respond. Further, this kind of agency conflict might lead to undesirably high levels of demand at particular turning points in the business cycle. But there is no reason to think that such a conflict would lead to accelerating inflation. Powell’s Federal Reserve is right to wait until it sees the “whites of inflation’s eyes”. There’s no reason to think a fiscal agency — with more limited discretion than the current Federal Reserve — would act differently. A more democratized economic policy might also be able to recognize more clearly when price increases are the result of undesirable forms of market governance rather than the inevitable effects of enhanced demand. 

Obviously much of what I’m discussing would require legislation to enact. It would also need to avoid being struck down by courts to succeed. Democratizing the administrative state can’t make much progress while these undemocratic institutions dominate policymaking. It is notable that defenders of central bank independence in the United States typically argue from the premise that the U.S. is overall democratic...But the important institutions — such as money — must be insulated from “democratic pressure”. 

But this isn’t the only way to look at things. If instead you see our anti-democratic monetary policy — what historian David Stein calls “Jim Crow monetary policy” — as a product of, well, Jim Crow another view presents itself. It then becomes plausible that democracy is the solution rather than the problem. Democratic deliberation within the administrative state can be consistent with quick and flexible policymaking. Indeed, initiatives to give the Federal Reserve a taste of democratic deliberation (such as Fed Up!) have inarguably improved Federal Reserve policy. It’s time defenders of central bank independence got off the mast.