Accountability

Scrooge

As global inequality grows to “extreme levels” — as revealed in the just-released World Inequality Report — it is hard not to wonder what it bodes for the health of liberal democracy — around the world and here in Canada.

Even though our growing levels of inequality may not come close to those in the United States, recent conflict-of-interest stories about both Liberal and Conservative MPs, a growing reliance on tax havens, and cash for access scandals all raise serious concerns about the influence of the wealthy in Canadian politics.

If money talks, then the rich are now deafening the democratic system. As economist Branko Milanovic explains, “the higher the inequality, the more likely we are to move away from democracy toward plutocracy.”

One of my favourite recent New Yorker cartoons shows two men in business suits looking out from a lavish corner office, as one says to the other, “Part of me is going to miss liberal democracy.”

Although we’re not quite there yet, the dark tone of the cartoon reminds us that the economic “haves” can be just as likely to become disaffected with democratic politics as the “have-nots” often singled out as the source of populist pressures (in fact, elites have historically been the most important factor behind de-democratization, as Charles Tilly notes in a recent book).

Reading that New Yorker cartoon, it is hard not to imagine that at least one of those businessmen is likely to be a good friend of President Trump’s. He’s turning conflict of interest into performance art, talking up his daughter’s clothing line and getting national park gift shops to sell Trump branded wine.

Yet, while Trump and entourage demonstrate a particularly brazen willingness to blur the line between public office and private gain, the problem is a much wider one — with echoes here in Canada.

The Paradise papers revelations, the cash for access scandals, and the use of “loopholes” in ethics screens are all legal strategies for giving the wealthy an unfair advantage in a system where we are all supposed to be equal as citizens. Each of these strategies works in a different way to undermine the democratic culture that makes our political system work. In the process, they further blur the line between public good and private gain, eroding the trust that makes democratic politics viable.

Cash for access is the most straightforward. It takes the existing informal advantage that the wealthy have to ensure that their voice is heard politically and weaponizes it. Why bother voting as an ordinary Canadian when politicians will spend their time listening to someone paying $10,000 for a rubber chicken dinner?

The “loopholes” in ethics screens that various Liberal cabinet ministers have admitted to using, as well as the failure of certain Conservative MPs to disclose business ties to China, work more subtly. They create the possibility that public office holders will be swayed by their private assets as they make decisions designed to serve the public good. Why bother being an engaged citizen when you don’t know whether those making the decisions are pursuing their own interests or ours?

The Paradise papers tell us that many of the public figures who speak and act in the name of the public good use tax havens to avoid paying their fair share. Why bother buying into a democratic system requiring that we all do our part by paying taxes when those with the most power are actively avoiding doing so?

Of course, the line that we draw between public and private in a liberal democracy is always something of a fiction. Liberal political thought tells us that everyone is an equal citizen in the public domain, with an equal right to participate politically. Liberalism is also based on the premise that we should be free to pursue wealth accumulation in our private lives, meaning that we will often be quite unequal in economic terms.

In theory, this private inequality should not affect our formal public equality as voting citizens. In practice, things are rather different, as wealth often translates into a greater political voice — as any government that has tried to put a halfway house into an affluent neighbourhood or to reduce tax advantages for doctors incorporated as small businesses will tell you.

To keep a democracy alive, and to ensure that everyone has a meaningful voice and stake in the political system, we must do two things. We must work to keep those private inequalities from getting too large (via public education, social programs, a progressive tax system, etc.). And we must work to minimize the ways in which private inequalities translate into unequal influence (via election financing laws, conflict of interest provisions, etc.).

In Canada, we have made progress on some of these measures, but we have also fallen behind in many respects. As recent census data shows, earnings inequality has continued to grow in Canada over the last decade, while the top 1% increased their share of total income in 2015.

When trying to figure out how we got here, there is blame enough to go around. The Chrétien Liberals began the trend towards growing inequality when they gutted transfer payments for social programs in the 1990s. Inequality grew under the Harper Conservatives, who also eroded some of the other bulwarks against buying political influence, notably through reversing changes to election financing laws, making parties more reliant on private donors once again.

Although the Trudeau Liberals have clearly stated their desire to reduce inequality, and have begun to tackle some of these problems, their own recent conflict of interest scandals suggest a very long way to go before the political culture in Ottawa starts to change.

As that New Yorker cartoon reminds us, unless we start taking the problem of inequality much more seriously now, we may soon find ourselves thinking nostalgically of the “good old days” of liberal democracy.

This blog post originally appeared on the CIPS Blog on December 19, 2017.

As pundits debate whether the US Federal Reserve will raise interest rates again this summer or fall, we are reminded of just how much of the economy’s direction hinges on central bankers’ decisions.

Since the 2008 financial crisis, the power of central banks has grown, as they have used unorthodox tools to stimulate the economy, taken a greater role in financial regulation, and put themselves in more politically sensitive positions, including the tough debt negotiations with Greece.

In spite of this powerful role, central bankers are remarkably insulated from democratic oversight. As a recent “Buttonwood” column notes in The Economist, “Janet Yellen and Mario Draghi are very important players in the world economy, arguably more important than the US President or the German chancellor. And yet they are not elected; if voters do not like the job they are doing, they cannot get rid of them.”

There is a great deal at stake in decisions about monetary policy, as I suggest in a recently published article in Ethics & International Affairs. Central banks not only define the broad direction of the economy but also create winners and losers. Consider, for instance, the disparate reactions of a prospective first-time home buyer and a retired couple living on their savings to the prospect of yet another drop (or increase) in the interest rate.

Central bank independence in its current form is relatively recent. Elected leaders exercised considerable influence over monetary policy in the post-war era, seeking to achieve the right “trade-off” between full employment and inflation. It was only in the 1980s that policymakers moved away from this kind of Keynesianism and embraced the ideas of Milton Friedman, who advocated the creation of an independent monetary authority.

Friedman and other economists believed that if governments were given any discretion over monetary policy they would adopt inflationary policies because these were more likely to be popular with the electorate. They argued that the only way to ensure price stability was to radically limit the government’s influence over monetary policy by making central banks autonomous and requiring them to stick to a simple rule, such as an inflation target. By the late 1990s, central banks in over thirty countries had gone down this path and were using some form of inflation targeting.

The current model of central bank governance does provide for a certain kind of accountability—but only a very narrow one. Ensuring accountability generally involves three elements: broadly-agreed upon standards, information on whether they are met, and sanctions if they are not. Because the principle of central bank independence involves a very limited set of standards—specifically, the achievement of an inflation target—and very few opportunities for sanction, the main mechanism for accountability is provided by publishing information about the bank’s activities. Hence we have seen the rapid expansion of central banks’ commitment to providing more and better information about their models and decisions in recent years.

Unfortunately, while this informational form of accountability may have worked during the stable years of the “Great Moderation” (from the mid-1980s to the 2008 crisis), it is no longer up to the task in the volatile post-crisis era.

Bank of Canada Governor Stephen Poloz and US Federal Reserve Chair Janet Yellen have both suggested that growing economic uncertainty has reduced the effectiveness of simple models and rules. What these bank governors have not acknowledged (unsurprisingly) is the challenges that this growing uncertainty poses for existing forms of accountability.

If uncertainty limits the effectiveness of rule-based policy, then it ultimately requires greater discretion on the part of policymakers. This is not a problem in itself (here I would disagree with those Republican lawmakers who would bind the Fed even further with more stringent rules). More discretion does, however, require a more robust form of accountability.

There are three basic principles that should underpin any such reforms.

1) Fostering more deliberation and dissent

While the informational model of accountability obligates decision-makers to explain their actions, it reduces this process to a simple publication of data. What is missing is the back and forth of question and answer—the process of genuine debate and deliberation. By the mid-2000s, central bankers were being treated like oracles, with Alan Greenspan as the most revered among them. There must be more room for dissent—both among those with the power to set monetary policy and in the wider society that is affected by those policies.

2) Ensuring that central banks are answerable to the wider public

Because financial issues are complex and their impacts are often diffuse, monetary policy questions rarely become salient enough to mobilize public action. In this context, the power of sanction actually shifts away from the two groups to whom central bankers should be accountable—the government and the public—and toward financial actors, who can impose very serious sanctions on central banks if they disagree with their policies. Without overly politicizing monetary policy, we need to find creative ways of ensuring that central banks are more accountable to the wider public.

3) Broadening the objectives against which their actions are judged

One way of ensuring that monetary policymakers are accountable to the public is to ensure that the issues that affect citizens are reflected in the standards that guide bank policy. At present, most of these issues are not officially on the agenda, which is constrained by the goal of achieving a very low level of inflation.

A number of commentators have recognized this dilemma and have suggested that today’s inflation targets may no longer be appropriate. A recent Federal Reserve working paper suggests that increasing the current inflation target and supplementing it with a nominal GDP target makes economic sense. Such moves to broaden the objectives used to guide central bank decisions would also go some way toward increasing their accountability.

As central banks take on an increasingly powerful role in our political and economic lives, it is time to find new ways of ensuring that they are more fully accountable.

This blog first appeared on the Carnegie Council’s Ethics & International Affairs website.

Category: Accountability

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