Democracy, Bureaucracy, Central Banking

The history of central banking (and large scale monetary policy generally), is fascinating. This lecture I found particularly enlightening (George Selgin): https://www.youtube.com/watch?v=JeIljifA8Ls

Noteworthy remarks:

• Even before central banking, government regulation required banks purchase junk assets (causing failures)
• Nonuniform currency price slippage (when each bank issued its own notes) may have been < 1%
• The National Bank Act taxed private bank notes at 10%, effectively destroying private currency circulation
  • National Bank notes were backed by US debt. As the debt shrank, currency became scarce, leading to crisis.
• Canadian banking at the time (not centralized until 1935) was both deregulated and did not suffer currency crises (see 17:54 for graph)

Now, it turns out that the Fed was designed not by politicians, or bureaucracy, but instead by special interest groups (namely Wall St.). See The Meeting at Jekyll Island

To be more bland, here's a graph from 1993 paper by Alesina and Summers showing how inflation rate correlates with the independence of the central banks from the politics:

To me that chart looks a bit fishy if you see independence as being opposite of democracy. Given Germany the maximal score of indepence of the central bank when all of the executive board is appointed by people who are democratically accountable seems strange when there are countries like the US where a good chunk of the seats of the executive board aren't chosen by people who are democratically accountable. 

Whether or not you let banks (shareholders) decide about who gets appointed to the executive board of a central bank or let democratically accountable people decide is a question that's distinct from whether those people are independent from the people who appointed them once they are appointed.

The graph seems to have been made in 1993 which is 3 years after the German channlor got the president of the Bundesbank to resign because of policy differences.

If a German political party would adopt in it's platform NGDP targeting which Eliezer Yudkowsky recommended, they could focus on appointing people to the executive board that believe in NGDP targeting.

When it comes to Democratic accountability it also feels like you ignored the Elephant in the room. Democratic accountability is not just about election but it's also about understanding what people do to be able to criticize their decisions. Removing the power to do trillion dollar deals in the dark from burocrats lists their power but might very well make the whole system more efficient. 

This seems like a problem with representative democracy: creating long-term problems for short-term increase in popularity. I wonder how much this problem exists in Switzerland.

Making an important institution independent forever, that also has a potential to create problems. What if they start doing something obviously wrong (e.g. just shamelessly transparently stealing money), and no one will be able to stop them? I suppose there would still be an option to write a new law that takes away their independence... but then again, why don't current political parties do the "take away the independence of central bank + do something populistic" combo now?

Seems to me that a good balance was reached somehow, and I am completely confused about how was such thing even possible. (Could we replicate the same strategy in other aspects of governance?)

This strikes me as something akin to a not-quite alternating Prisoners' Dilemma. The party in power can unilaterally take the selfish option (goose the economy for electoral benefit) or not. Over time there are three types of outcomes. 1) if you act selfishly when given the chance and I don't, I'm a chump (and vice versa); 2) if neither of us act selfishly, we're even; and 3) if we both act selfishly we're still even, but the economy is worse overall because we keep flooding the information system (prices) with noise.

One natural solution would be for all parties to agree to remove the option to act selfishly and lock in outcome #2. Such a setup, then, can emerge from all parties initially consenting, just as Odysseus asked his men to bind him to the mast. (Of course, this system can also arise in less consensual, more problematic ways.)

The idea of a civil service seems similar in spirit. Each party might prefer to stuff the bureaucracies with their cronies and use all the various Assistant to the Regional Postmaster positions as electoral giveaways, but of course the tables will get turned when they lose and who knows if any of those people are even marginally competent.

(In both examples, though, the solutions have their own problems, since we can't escape tradeoffs.)

There doesn't seem to be any technical issue with making this both democratic and independent: have a direct election for central bank boards? This creates a divide with "normal" politics and creates more democracy.