Democracy, pfft.

Megan McArdle is justifiably confused by the reaction of many libertarians to independent central banks:

I’ve been thinking a lot lately about the political theory of an independent central bank.  A lot of the libertarians I know have deep issues with the activities of the Fed, which have been largely unaccountable to elected officials.

That’s a valid critique.  But here’s the problem:  the Fed has performed vastly better on any metric except “being elected” than the Congress.  There’s little doubt in my mind that if we had not had an independent central bank, unemployment would be many percentage points higher, GDP would have contracted much more strongly, and we wouldn’t now be making optimistic noises about the thing bottoming out. (…)

All the people that I know, left and right, who are currently very worried about the democratic implications of the Fed’s actions, seem to spend an awful lot of time trying to insulate their pet cause from the democratic process–whether that cause be property rights or sexual behavior.  As an institution, what the Fed is doing now is not much different from what most of them want the Supreme Court to do on some issue or another:  rule it out of the bounds of majority debate.

I completely agree with Megan up to this point, but I’m baffled by the practical conclusion she reaches (read the whole thing).

I would prefer private currency, but given that we do have a government monopoly over money, monetary policy is clearly necessary and I see a very strong case for insulating it from everyday democratic politics. Those running central banks are appointed by elected officials, giving the voter does have some say over how monetary policy is ultimately conducted, but are not subject to the short term vagaries of public opinion. This is incredibly important in times of crisis.

Stupid, stupid populism abounds at times like this and preferences tend to spike in a highly interventionist direction. In the same way that moral panics over teen drinking and the like lead to oppressive laws through the democratic system, panics over hard economic times would lead to excessively inflationary monetary policy if such choices were similarly responsive to the will of the people.  If policy were perfectly responsive to public opinion, the public would get exactly what they want at every moment, good and hard as Mencken would say. Since voters are guided more by irrational instinct than reasoned choice, and irrational instinct often spikes in times in crisis, technical inefficiency in the way political institutions transform preferences into policy can be good for everybody.

Sensible monetary policy generally sounds like a good idea to most people most of the time: irrational instincts and instrumental interests in this case converge. If central bank governors are appointed in times of normal preferences, we should put relatively smart and sensible people in the job who will perform reasonably well even when majority preferences turn wacky. This effectively involves public opinion binding itself to the mast of technocratic governance at times when technocrats and the public agree, in order to protect against later irrationality.

Of course, if a governor happens to be appointed in a time of crisis, the normative implications are completely reversed…

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