Exception

In the last few weeks, governments all over the world have been declaring states of emergency to deal with the coronavirus. Given the remarkable powers that governments at all levels have been acquiring through these measures, it’s not surprising then that both state leaders and commentators are talking about this moment being akin to a state of war.

Although this comparison is powerful—and in many ways correct—it only tells part of the story. Yes, governments are invoking emergency powers and imposing a state of exception of the kind that we usually see in wartime. Yet, if the goal is to save the lives of citizens against and attack, as it is during wartime, then why would government leaders like British Prime Minister, Boris Johnson, have delayed social distancing measures so long for fear of their economic consequences? And why does President Trump continue to flirt with the idea of opening the economy back quickly in some parts of the country in spite of the likely impact on the number of COVID-related deaths?

The answer to this puzzle lies in the fact that the kind of exceptionalist policies that we are seeing being put into place are, for some leaders at least, as much about protecting the economy as it they are about ensuring the public’s security.

Although we often forget it in calmer times (remember those?), liberal democratic governments do reserve for themselves the power impose a state of exception in times of crisis, such as a war. Such exceptionalist measures are designed to temporarily suspend normal liberal democratic rights and processes in order to respond to a supreme threat to the state and its people. The last time we saw this occurring on a broad basis was of course after 9/11, although many have also drawn parallels to the Second World War.

In many ways, the current emergency declarations and measures do bear important resemblances to these wartime measures. Governments have acted with extraordinary speed, rushing legislation through or using executive powers to give themselves the flexibility to act to fight the virus’ spread. They have partly sealed off their borders, turning inwards and actively seeking to manage the supply of essential medical equipment. We are also beginning to see the adoption of subtler, more technocratic measures that are closer to those we saw after 9/11, like the use of data surveillance in South Korea and other countries to map, track and control populations deemed a danger.

All of these exceptionalist measures suspend or constrain normal democratic processes and liberal civil rights in the same of the security of the state and its people.

Yet there are also several key ways in which the exceptional measures being proposed and introduced today are different from these war-time emergency policies. This time around, governments are simultaneously seeking to secure their population’s health against attack while also protecting their economy from ruin.

Governments have historically invoked states of exception not only to fight wars but also to tackle economic crises. Confronted by the ravages of the Great Depression, President Roosevelt famously argued in his inaugural address in 1933 that he was willing to use “broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.” During the 2008 global financial crisis, political and economic leaders again called for exceptionalist measures ranging from bailouts to stimulus measures in order to respond to what they described as an economic emergency.

This time around, governments are facing two existential threats at the same time—a public health threat to their citizen’s lives which can only be treated through a series of measures that themselves pose an existential threat to the economy. The Second World War’s mobilization of a wartime economy helped to rescue western states from the prolonged crisis of the Great Depression. This time around, mobilizing against the health threat means partly suspending the economy, not energizing it. These two sets of emergency responses are necessarily in tension with one another.

While political leaders’ willingness to sacrifice some individuals’ lives for the sake of the economy may strike us as a fresh horror, it actually has a long history. Over a decade ago, I wrote an article entitled “Why the Economy is Often the Exception to Politics as Usual,” in which I suggested that neoliberal international institutions, like the International Monetary Fund and the World Bank, had proven willing to suspend the political rights and freedoms of the citizens of poorer countries in the name of re-establishing a sound economy. In these countries, the supreme goal of economic stability, not political security, was treated as a sufficient ground for exceptionalist measures, even if the consequences were often extreme poverty and deprivation—and yes, very likely, death—or some.

In the Global North, while we remain on average the lucky ones, these recent twin crises have revealed just how vulnerable we have made some of our population in our pursuit of a mythic “sound economy”— including those in the gig economy, without secure employment, and working in essential but unrecognized jobs. These crises have also shown just how willing some political leaders are to require the ultimate sacrifice of some of our citizens in the name of that same “sound economy.”

Responding to these twin public health and economic crises, while also ensuring that we come out the end of this process in something that still resembles a democracy, will not be easy. What’s clear, however, is that those who insist that that the economy’s survival trumps the right of its people to life are mobilizing a particularly vicious form of economic exceptionalism—one that must be recognized and resisted.

This post was originally published on the SPERI blog on April 17, 2020.

Quite a few commentators have noted that central bankers have become rather less boring of late. Since the 2008 financial crisis, central banks have taken on new roles and responsibilities. They have experimented with a whole range of unconventional monetary policies. And, in the process, they have gained considerably in power and influence.

There has been less attention to a key paradox underlying central bankers’ new roles on the world stage: they are being forced to govern through exceptions in an era in which rule-following (particularly the holy grail of the 2% inflation target) has become the ultimate source of policy credibility. Where central bankers are supposed to stick to the rules, they have found themselves endlessly making exceptions, promising that one day things will return to normal.

This paradox poses real challenges for efforts to foster a sustained global economic recovery. Governing through exceptional policies is always a politically-fraught undertaking, particularly over the long-term, but it is even more difficult in a context in which the dominant convention is one of strict rule-following.

Since the early experiments with monetarism in the late 1970s and early 1980s, most central banks have moved towards an increasingly rule-based approach to monetary policy, with inflation targeting becoming the norm in many countries in recent years.

Yet today we are faced with a situation in which the rules no longer apply but are still being invoked as if they did.

A recent Buttonwood column notes that the Bank of England has missed its inflation target “almost exactly half the time” since 2008. The European Central Bank (ECB) has effectively expanded its narrow mandate, which formally requires it to make price stability its top priority, by arguing that employment and other issues are crucial to achieving it. Yet the ECB and the Bank of England continue to act as if the old rules still apply.

If we look beyond the narrow rules that are supposed to be governing central bank actions and examine the wider changes in their recent policies, we find similar patterns. Scratch an unconventional monetary policy and you will find a kind of economic exceptionalism: an argument that the crisis that we face is extreme enough that it requires a radical but temporary suspension of economic rules and norms.

Most of the unconventional monetary policies that have been tried to date, and just about all of those that have been proposed as future possibilities if we face a renewed global recession, break quite radically with existing norms. Negative interest rates weren’t even supposed to be economically possible (until they were tried), while quantitative easing (a central bank’s buying up bonds by massively increasing the size of its balance sheet) still carries a whiff of irresponsibility linked to its past as a way for governments to avoid fiscal retrenchment by “printing money.”

More recent proposals include helicoptering money into the government’s or the public’s accounts, abolishing cash to make low interest rates effective, and even introducing a reverse incomes policy—a government-enforced increase in wages (as opposed to the wage controls of the 1970s) to try to get inflation going.

All of these existing and potential policies break with current economic norms, and all are being pitched as temporary, exceptional measures that are (or may be) necessary in the face of an extreme crisis.

Ironically, rule-following was designed precisely to avoid this problem. It came into its own as an influential approach to monetary policy in the wake of the destabilizing 1970s, with their stop-go economic policies and rampant inflation. Mainstream economists came to love rule-based monetary policy as did politicians—not just neoconservatives like Margaret Thatcher and Ronald Reagan who first championed the approach, but eventually the more centrist politicians who followed like Tony Blair and Bill Clinton, as well as today’s mixed lot.

A rule-governed approach to policy was designed to be both politically and economically stabilizing—to do away with the problem and even the possibility of exceptions by removing not only governments’ but even central bankers’ discretion: just stick to the rule, and everything will work out. A tidy, efficient, depoliticized (although certainly not apolitical) approach to monetary policy.

Yet rules only seem great until they don’t apply anymore. A rule that pretends it can always apply (or at least, as Colin Hay puts it in his introductory blog, in the 99.9% of times that seem relevant) inevitably runs serious problems when an exception becomes necessary.

Of course, as Alan Greenspan has noted, the victory of rules over discretion was never entirely true in practice. But it was an extremely powerful narrative—one that promised that central banks’ (and governments’) commitments to low inflation and economic stability was credible because they were constrained to follow the rules.

It was also a very effective narrative that has convinced markets that anything other that rule-following is likely to be destabilizing. As central banks begin to face the limits of those rules, their earlier persuasiveness has come back to haunt them: a recent paper from some Federal Reserve staff notes that although a higher inflation target would make sense in the United States, increasing it could well backfire if market actors believed that it would be too inflationary.

This fixation on rule-following has thus put central bankers into a credibility trap. If bankers admit that the rules no longer apply, then they risk losing their credibility as market actors have come to believe the mantra that rules—particularly low inflation targets—are the only way to ensure sound monetary policy. On the other hand if they don’t admit the limits of the rules, and continue lurching from exception to exception, they will eventually lose credibility as the gap between rhetoric and reality widens.

Central banks are damned if they do admit the limits of rules and damned if they don’t.

Of course, the most viable solution to this trap is for governments to stop relying so heavily on central banks in the first place and start taking some responsibility for economic recovery through concerted fiscal action (something that the Canadian government has at least started to do). Yet for that kind of fiscal action to work, governments have to convince the markets that they believe in it enough to stick to their guns and follow through—a rather unlikely scenario in today’s austerity-driven times.

As the potential for renewed economic crisis continues to grow, this credibility gap will only widen—as central bankers and governments find themselves lurching from exception to exception, refusing to question the neoliberal rules that no longer seem to apply.

This blog was first posted on the Sheffield Political Economy Research Institute’s website.

Tag: Exception

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Central banks are facing a credibility trap