The world's central banks are possibly facing an insolvency of their own making.
The Parallel Democratic Dilemmas of the Court and the Fed
The insulation of the Supreme Court and the Federal Reserve from democratic politics gives rise to similar criticisms of both institutions. The most obvious challenge they present is how to square elite discretion with the proclaimed democratic nature of American society. There is even a name for this issue in Supreme Court jurisprudence—the counter-majoritarian difficulty. There is not such a pithy label when it comes to the Fed, but politicians have railed against its lack of accountability since its inception.
One interesting difference between critics of discretion on the Supreme Court and at the Fed has been that Supreme Court critics have largely focused on the anomaly of nine justices imposing their values on society. That criticism has been levied at the Fed as well. For instance, its decisions about interest rates can favor savers over debtors and vice versa. But another, more distinct line of criticism maintains that its discretion consists of making decisions about a financial future that is inherently unknowable. As a result, critics like Alex Pollock have argued: “When a crisis hits, their own interventions usually, if not typically, create the conditions for future crises.” One interesting result of comparing the Supreme Court to the Fed is to wonder whether this criticism should apply to the Court as well. That is, one might question the institutional capacity of the Court to predict the long-term constitutional needs of the republic and use their discretion to update the law accordingly.
Constraining Elite Discretion by Rules
One proposed solution to the counter-majoritarian difficulty is for the Court to narrow its discretion by operating through clear and publicly-accessible rules. And if, as advocates of originalism argue, these rules can be found in the Constitution itself, the counter-majoritarian difficulty is dissolved—at least if one appreciates the democratic consensus by which these rules are made.
There are also proposals to curtail the discretion of the Fed and to force it to act by rule rather than to seek to improve the economy’s performance by exercise of discretion. The most recent is the Taylor Rule. That rule is an equation by which the Fed should set the nominal Federal fund interest rates according to a set of economic factors, including the targeted inflation rate, the real interest rate, and the rate of economic growth.
Even those who are skeptical that the Court or the Fed can act by rule have tried to make the institutions more consistent with democratic principles by rendering them more transparent. Hence the movement to televise the Supreme Court’s proceedings and to apply established conflict of interest rules to the justices. The Fed is now more transparent than it once was, as the Chairman of the Fed now holds regular press conferences and gives “forward guidance,” suggesting what the Fed is likely to do in the future.
Ideological Change from Social Movements
Another response to the democratic dilemma of the Supreme Court and the Federal Reserve is for social movements to find new popular paradigms with which the essentially technocratic decision making by the Court and the Fed will need to fit. Originalism is also an example of this method of transformation. The Warren (and Burger Court) had so departed from the original meaning of the Constitution that a cottage industry of law professors justified the new approach. The push for originalism came largely from outside the Court, as it was a combination of a political movement at the Meese Justice Department, a social movement of elite lawyers at the Federalist Society, and finally a broad intellectual movement backed by academic lawyers at law schools.
The Fed has seen similar pushback. For instance, the theory of monetarism began essentially as criticism of the Federal Reserve. It suggested that the Fed has been too concerned with interest rates and not enough with controlling the money supply. Milton Friedman and Anna Schwartz blamed the Great Depression on the Federal Reserve’s tightening of the money supply and years of inflation on loosening the money supply. Paul Volcker then used this theory as justification for his tightening the money supply to control the inflation of the 1970s. The Taylor Rule is itself an outgrowth of the monetarist movement.
And these ideological movements to transform America’s elite institutions continue. For instance, a new theory of finance on the left, Modern Monetary Theory, while not a theory of central banking per se, suggests that the economy should be governed by federal government fiscal decisions instead of the Federal Reserve. The Federal Reserve under this view should keep interest rates at zero, permitting maximum flexibility for the government to stimulate the economy through fiscal means.
Polarization and the Future of our Aristocratic Element
The polarization of elites, however, may mean that irreconcilable differences in ideology might undermine the benefits of having an aristocratic element within our mixed regime. One of the main functions of a mixed regime is to bring stability to the rule of law and to the value of money, stability that might otherwise be threatened by the shifting winds of democratic politics. But if the elites themselves are divided, the institutions they control may create instability. Originalism confronts living constitutionalism. Monetarism confronts modern monetary theory. Such stark differences are hard to resolve when the stakes are as high as they are today.
Further complicating matters is the fact that compromise may be very difficult to achieve in our modern aristocratic order. As intellectuals, today’s cognitive aristocrats are naturally attracted to comprehensive worldviews. And religious belief has declined, particularly among elites. More totalizing social frameworks, however, can also satisfy what may be a deep-seated need to feel at home in a chaotic world. Comprehensive ideological belief also provide networks of like-minded people with whom to socialize and reinforce beliefs. Thus, there is reason to fear that both the Supreme Court and the Federal Reserve—the twin pillars of our mixed regime—will become greater sources of social contention than in decades past. When elites are unified, these institutions serve well as auxiliary precautions against the chaos that comes from over-reliance on fickle popular control of government. But in our era of elite polarization, these institutions may themselves become the very sources of the instability that they seek to temper.