Wednesday, 5 October 2016

Constitutions, Credible Commitment, and Brexit

In a famous paper, North and Weingast linked the security of property rights to constitutional government. They argue that the 17th century Glorious Revolution in England created a “credible commitment” by the English state to property rights by giving property owners’ Parliamentary representatives a veto over legal changes infringing those rights. 

For this argument, it is an embarrassing circumstance that the separation of powers between Crown and Parliament N&W described was a transient feature of English and later British institutions. Once the monarch’s role dwindled to a mere formality, the UK’s government was characterised by a hyper-centralisation of power in the Prime Minister and the ruling party, a centralisation usually known as the “Westminster model.” Especially given the absence of a formal written constitution, a British PM has extraordinary scope for discretionary action, including action damaging to property rights. The N&W argument would imply that this lack of constitutional constraint should undermine property rights, which on the contrary are generally seen as being quite secure in Britain.

The Brexit referendum and associated policy initiatives recently announced, however, go some way to rehabilitating the importance of the causal mechanism North and Weingast proposed.  N&W argued that when English property owners became secure in their rights, they were more willing to invest. The causal pathway runs from constitutional constraint to the ability to rely on a stable institutional framework, and thence to the readiness to make investments. Now, property rights don’t have to be conceived narrowly as the sort of rights explicitly specified in legal title or contractual arrangements.  In fact, an ancient common-law doctrine (known as “promissory estoppel” or “reasonable reliance”) suggests that someone who has undertaken costly actions while relying on another’s promise is entitled to legally enforced compensation if that promise is violated.

The Brexit campaign, and especially its aftermath, have shone a spotlight on many such promises made by the British state that it now proposes to violate. Immigrants from the EU, for instance, relied on the assumption they would have freedom of movement and that it made sense to pursue a career (for instance in academia or the medical profession) within Britain. Prospective university students around the world invested time, effort, and often money in study choices premised on the prospect of admission to British universities and the possibility of working here after graduation. Corporations sited operations in the UK, relying on its integration with the EU and access to the EU’s single market. Some people in Northern Ireland probably acquiesced in continued British rule because they relied on membership of the EU rendering the internal Irish border less significant.    

From the perspective of the doctrine of reasonable reliance, all these groups are having ‘property rights’ expropriated. And this is an expropriation facilitated precisely by the Westminster model and the absence of a written constitution. It was the Westminster model that made the calling of a referendum with such profound constitutional significance subject only to the internal decision of the Conservative majority in Parliament. The continuing relevance of limited constitutional constraints is shown vividly in discussions about the role of Scotland or the claim that the Government can rely on “royal prerogative” to invoke Article 50 to leave the EU without Parliamentary approval. With no-one constitutionally empowered to veto them, the Conservatives can act at will to shred what the morality embedded in common law (and what could be more English than that?) would unambiguously regard as property rights—just the sort of scenario North and Weingast describe.

One of the central arguments N&W make is that for absolute monarchs, a reputation for protecting property rights is an inadequate substitute for constitutional constraint, since monarchs’ royal prerogative always includes changing their minds. A reputation, though, is better than nothing. There’s probably little hope that the Tories will recognize how particularly dangerous it is for a government with so much legal discretion to display such contempt for promises on which so many have relied.  


Some lawyers and scholars think the present Government’s beliefs about the scope of its legal discretion are mistaken. Many interesting arguments about the bearing of the UK (unwritten) constitution on Brexit’s admissibility can be found here.

Joseph Singer wrote a great article seeking to extend the notion of property rights building on the idea of reliance.

Sunday, 25 September 2016

Independent central banks, democracy, and Skcolidlog

Goldilocks’ ideal porridge, you may recall, was neither too hot nor too cold, but rather just right. A lot of people think this ideal has been reached in the relationship between central banks and democracy. The operational autonomy of central banks’ personnel and policy ensures there’s not too much democracy, while the ultimate authority of elected officials over personnel selection and policy goals mean there’s not too little democracy either. Just right? 

Not at all, I argue in this post. Experience demonstrates that the ‘operational independence in pursuit of democratically established goals’ formula creates fundamental and disruptive tensions in democratic polities (including and especially the EU/Eurozone, which I class among them). These tensions primarily affect the coordination of fiscal policy and monetary policy. And instead of Goldilocks, we have Skcolidlog: either central banks have too much power to dictate fiscal policy, or too little.

That the ECB enjoyed from early 2010 through the middle of 2012 an influence on Eurozone fiscal policy so immoderate as to fundamentally contradict democracy is a point I have argued before (and at length here). The ECB threat that government bond markets would be abandoned to self-fulfilling market perceptions of fiscal collapse compelled many governments to moderate or reverse programmes of fiscal stimulus and overrode electoral politics.

But lately, the shoe may seem to be on the other foot. Consider this exchange at Draghi’s September 2016 press conference
Question: You've been urging governments to act for some time, and I'm wondering if there's a sense that maybe they might now be a little more willing to act and that the ECB could encourage that willingness by not raising excessive expectations about future monetary policy measures, hence the tone today.
Draghi: The ECB can't be in a sort of – let me say, what the ECB can do is to basically flag what is needed for monetary policy to be even more effective than it is at the present time.
In effect, the journalist asked whether Draghi could threaten to limit monetary stimulus in order to compel action by the fiscal authorities, probably hinting toward further fiscal stimulus. Draghi replied that he had only verbal persuasion at his disposal. (Draghi went on to demonstrate once again how low fiscal stimulus is on his list of priorities, but that is beside the point for now). 

While ECB leaders’ protestations of their limited influence in promoting austerity are unconvincing, Draghi’s assertion that in present circumstances he has little leverage on policy is far more believable. The difference between the two situations turns on the nature of the ECB’s mandate. When amidst the government bond market panics of 2010-2012 it was the ECB’s readiness to play a lender of last resort role that was the axis of contention, it was a plausible assertion that this role lay outside the ECB’s mandate. This was one reason a threat to permit bond-market meltdowns was credible. But in the present situation, where the ECB is dramatically failing to meet its clearly specified mandate to attain price stability (which it has defined as inflation ‘close to, but below 2% per year’), it has almost no flexibility: no matter how unhelpful fiscal policy is, the ECB must continue to stimulate, including via policies many find extreme, such as negative interest rates and a massive quantitative easing programme. The ECB has no threat to deploy.

Thus, the discretion created by the lack of a clear mandate to play a lender-of-last-resort role left the ECB with ‘too much’ power, but the presence of such a clear mandate in the case of fighting deflation left it with ‘too little’, at least from the perspective of those who believe further fiscal stimulus is urgently necessary.  

That a Goldilocksian balance remains elusive is not just an idiosyncratic result of current economic conditions. In fact, we are faced with a quite general limitation of the the present formula for reconciling democracy with independent central banking. Lorenzo Bin Smaghi recently likened the situation now facing central banks, in which they must soldier on despite a lack of supportive fiscal policy, to that facing central banks in the 1970s and early 1980s, when the challenge was inflation, not deflation. Most notoriously, Reagan’s budget deficits in the face of the inflation of the early 1980s pushed Fed chair Paul Volcker to maintain extremely high interest rates. In both cases, central bank policy in service of a price-stability mandate had to go to extremes to compensate for unsupportive fiscal policy. 

A very simple game-theoretic analysis (which builds on Blinder’s 1982 discussion of the Reagan-Volcker episode) helps to illustrate the generality of the Skcolidlog pattern in central bank-fiscal authority relations. The diagram above depicts policy choices by fiscal authorities followed by policy choices by central bankers. What it means to ‘reinforce market trends’ is contextual: this could be to contribute to a market panic by explicitly repudiating lender-of-last-resort actions, or to contribute to inflation through fiscal and monetary expansion, or to contribute to deflation or ‘lowflation’ via fiscal and monetary resriction. To counteract market trends is to adopt the opposite policies in each of these circumstances. Case I, “joint irresponsbility,” is the outcome fear of which drove much of the enthusiasm for central bank independence in an inflationary environment, where it would represent both fiscal and monetary authorities adopting expansive policies. But it could equally reflect both the central bank and the government failing to act in the face of a market panic. Case II is the one Smaghi discusses, where the central bank compensates for inappropriate government policy. Case III would involve a central bank pushing in a direction opposite to government policy, where as case IV is coordinated policy to counteract market trends.

This diagram helps clarify when fiscal and when monetary authorities have the preponderance of bargaining power. When the central bank is constrained to fulfil an inflation mandate, the boxes shaded in gray are not available to it. Thus, the fiscal authorities unilaterally choose between options II and IV. Very often it has turned out that fiscal authorities have preferred to force central banks to go it alone instead of coordinating policy, even when the latter would have arguably generated better growth outcomes and more effective attainment of the goals expressed in the central bank’s mandate. The reason for this is that governments have other agendas for fiscal policy. Reagan wanted to “starve the beast,” Cameron to cut back the size of the state. Fiscal authorities arguably did not have to bear the full political costs of these macroeconomically inappropriate policies because central banks compensated for some of their negative economic effects. I think a good case could be made that the ability of elected governments to compel such compensatory action by central banks does serious damage to mechanisms of electoral accountability that are usually held to be at the heart of democracy’s advantages. 

On the other hand, when the central bank does have discretion, and the gray boxes are open to it, as in the lender-of-last-resort case, it can often impose its will on government policy. In particular, if the CB prefers case II to case III, and case III to case IV, then fiscal authorities fearful of their policies being undermined may have to choose to reinforce market trends as a condition of central bank action. This is what happened to some European governments when the ECB was willing to rescue government bond markets only on condition of austerity. 
The diagram above shows some empirical cases of each outcome, with ‘1970s’ standing in however approximately for joint monetary and fiscal irresponsibility. What all of this implies to me is that the idea that independent central banks bound by a policy mandate can serve as a useful check on elected governments depends, in fact, on an unrealistic conception of the circumstances in which central banks act (they will sometimes be called upon to act in areas beyond their mandate) and on the preferences of democratically elected governments (who may use mandates to force central banks to deal with the consequences of their inappropriate policies). The cases suggest that the Skcolidolg pattern has some real empirical relevance. 

What, then, is to be done? Some people argue for giving central banks more power over fiscal policy, especially in near-deflationary circumstances like at present. But it seems to me—I won’t try to defend the point in this already over-long post—that this runs the risk of exacerbating the problem of electoral accountability that has hindered electorates from understanding the impact of the macroeconomically inappropriate policies that right-wing governments seem so prone to run. Nearly two decades ago, Berman and McNamara argued that insofar as the case for the economic advantages of independent central banking was dubious, it provided no grounds for overriding the usual preference for favour of democratic governance in the case of central banking. When one looks at how central banking has interacted with democracy in practice, their case only gets stronger. It’s time to bring central banks back under the direct control of elected officials, so that they bear the responsibility for both good and bad choices about monetary policy. Ultimately, there’s no way to get the porridge right unless you make it yourself. 

Friday, 3 June 2016

Experiments in political science and the Cartwright critique

Over the course of the last couple of years, the political science discipline has twice hit the headlines for scandals linked to "field experiments." Maybe this isn't surprising: such experiments have become incredibly fashionable. Success in an academically fashionable endeavour can bring large rewards, and it's certainly plausible this has created incentives making fraud or poor judgement more likely.

To the extent that bad behaviour reflects incentives, one can always try to to police against it more vigorously. But changing incentives may be more effective. In this spirit, I'd like to encourage political scientists to stop being so damned excited by experiments and offering such big reputational rewards for them!

As a reason to calm down, consider some arguments (or great lecture version) from the brilliant philosopher of science Nancy Cartwright. Experiments (of the presently fashionable sort) rely on the logic of randomly assigning groups to "treatment" and "no treatment," so that any difference in outcome between the two groups can confidently be ascribed to the treatment. Yay, science!

Cartwright's core insight is that what such experiments can establish is only the role of a particular link in what might be a complicated, and highly context-dependent, causal chain. To build on an example she uses: Suppose you had a set of toilets, and assigned each of them randomly to have the lever attached to its side pressed or not. On completion of the experiment, you could confidently assert the relationship "lever pressing leads to water release." This formulation, though, would entirely obscure the point that these levers only release water because they are part of a mechanism to open a chamber supplied with water by pipes, etc.

Thus, if you went off to deploy your exciting new experimental result to solve California's drought by having everyone push the levers attached to the sides of their toasters, you'd be disappointed by the results. As Cartwright says (p.102), "Once stated this is an obvious and familiar point," but nonetheless one too often overlooked. This she effectively demonstrates with empirical examples of the disappointing performance of 'experimentally validated' policy interventions in new contexts.

So why is it that experimentalists are overlooking this obvious and highly consequential point?  [I'm not going to defend in detail the claim that they are, but will assert that the discussions about 'external validity' from experiment evangelists are not nearly searching enough.]  Let's use a little notation to make the argument more compact: the causes of an outcome O of an experiment are the experimental intervention I (such as lever pushing) + the rest of the mechanism M.  

So the question becomes, why the emphasis on I rather than M?

  • A lot of the methodological backdrop for political science experiments is drawn from experimental medical trials. In these, the common features of human organisms are regarded as similar enough that M will function in the same way. This assumption can be criticised even in a medical context, but for social scientists the issue is orders of magnitude more significant. 
  • Unlike pressing a lever, field experiments in political science are difficult to organise and often quite expensive. After all that effort to demonstrate the role of I, it's hard to remember that the M is important too.
  • I will often have been chosen precisely because it's the aspect of a broader mechanism that is easiest to manipulate. If the effects of M cannot be assessed via randomised controlled trials, then experiment absolutists will deny the possibility of making any meaningful claims about those effects. They haven't faced up to the fact that this means that they will never have any basis sanctioned by their own methodological precepts to assert that the results of one experiment have any generalisable implications whatsoever.

Whatever its origins, the mania for measuring the effects of interventions, and the corresponding neglect of the causal import of the context of these interventions, strikes me as very bad thing for many reasons, on which I hope to expand on another occasion.

PS: Cartwright's is not the only impressive critique of experimentalism on offer; I especially recommend Dawn Teele's edited volume. But so far, the critiques don't seem to have made much of a dent in the popularity of field experiments. Political science as a discipline seems to have an almost congenital need to affirm its 'scientific status'. But we should be suspicious of anything we need so much. How much did that ring really help Gollum?