Week 15 - delegation to independent institutions Flashcards
(11 cards)
Which are the two independent institutions, that are not elected, that the government may delegate power to?
- Supreme Court
- Central Bank
How are judges appointed TO THE SUPREME COURT SPECIFICALLY in the UK vs the USA?
The UK - The selection commission. This is made up of legal experts, including: the president of the supreme court, deputy president, members of of the judicial appointments commission.
The USA - Nominated by the president and then elected by a majority vote in the Senate.
How do regular judges come to power in the US?
Between the different states in the USA, they cannot agree on how to select their judges. Therefore different States will either 1) elect their judge or 2) appoint their judge.
What is the role of the central bank?
- Set monetary policy - interest rates (set the base rate) and quantitive easing
- Lender of last resort - their interest rate is slightly higher than regular banks to avoid people going to them
- Lender to the government - the central bank collects all taxes and holds the money until they’re told where to spend it
- Regulators of the banking industry - make sure commercial banks abide the rules they set out, and assess how much risk they are taking and how much money they are reserving.
- Meet their targets - for example, the bank of England has many targets all aimed at stabilising the economy. in the UK these targets include:
A. inflation rate of 2%
B. low unemployment rate
C. economic growth
D. Stable foreign currency reserves
What is the principal agent theory, and how coined it?
Jensen (1976)
The principal-agent problem is a situation the principal delegates some power to an agent to carry out a specific task. However, the agent has different incentives to the principal, leading to a conflict of interests. The outcome is often not how desired.
The principal - the executive
The agent - the non-elective body
What are the main reasons, the government would delegate power to a non-elective body?
- Improve credibility
- Fix coordination problems / free rider problem -
- Remove pandering -appealing to the interest of voters rather than the best option. Doing what voters want all the time, isn’t always the best thing for long term consequences.
What are the two main issues with delegation?
(this relates to the principal agent problem)
- Policy drift - any organisation you create is going to have its own preferences. The bank may make decisions not in the interest of the government – he may have more concerns about price stability rather than economic growth, which hurts politicians likelihood of winning the next election if there is no economic growth.
- Shirking -the employee you hire may not work as hard as you may want them to. Their incentives are not aligned with your own. This leads to great inefficiencies and misallocation of resources.
Why may we delegate power to courts?
In many ways, we want courts to have different incentives than our voters. We don’t want individual rights to be subject to the will of the majority.
Voting systems do not treat everyone equally, they lead to majoritarian ruling.
A second major role is to complete legislative contracts – parliaments cannot think of every possible problem when writing legislation, so courts put in that body of law to understand what the law actually means.
They control other agencies, saying whether they’re against the law or not.
They also limit the power of the executive.
why may we delegate power to central banks?
Time and consistent preferences – as a political leader i have an incentive to have a credible financial policy, but these incentives are not static – my incentives now are quite different to my incentives near an election. Near an election he may say screw price stability, i only care about employment because that’ll win me the election. Oftentimes therefore we don’t get stable monetary policy when it is set by the executive.
Information gaps – oftentimes politicians do not know enough about financial or monetary policy in comparison to an economist, etc.
Political business cycle’s – the problem of cycling in the economy as the result of government intervention in government policy.
^prior to elections, we see monetary expansion. We see this because of the strong incentives for governments to win elections by appealing to the voter – when you lower currency, this tends to increase the amount of lending, decrease unemployment, etc yet this is oftentimes a short-term effect. Yet nonetheless, politicians have the incentive to do it, to get elected.
^The result of this cycle, is real exchange rates become unstable.Picture
In the lead up to elections, countries deflate their currency. After the election, they raise it back again. This is the political business cycle – business expansion follows the patterns of politics.
Credibility – we want credibility in monetary policy in order for businesses to make long term decisions in terms of borrowing, employment, etc. You need an institution with authority and credibility that people believe will meet its targets because that’s its only incentive.
Do elected or appointed judges perform better, and which political scientist coined this research?
(Choi 2010)
The behaviour will be different due to the difference in incentives. He compares judges elected vs not in the USA: the outcome should show findings on the quality of the decisions these judges make and the extent of shirking and effort put into their decisions.
What they find:
Elected judges are more productive – less shirking: more incentivised to do things visible to the population. Appointed judges make a lot fewer decisions.
Quality in the decision is higher in appointed judges - (quality is measured here through the amount of outside citations) appointed judges get a lot more citations than in comparison to elected judges.
This suggests: trade-off between pandering and shirking.
^elected judges are also much more likely to give maxim sentences for convicted criminals. In places where there is more support for the death penalty, the judge is more likely to approve the use of the death penalty.
Do central banks actually improve the quality of economic policy?
The role of VETO players – serve an important role of policy stability but at the cost of policy flexibility. Central banks have a very similar type of logic to them – you are creating a VETO player in the system, which makes policy more stable yet decreases flexibility.
Central banks power is oftentimes decided by how democratic the country is:
Autocratic – central banks don’t do a lot
Democratic – they do a lot
In order for a central bank to work, they have to have credibility. If you create a central bank but then say that you still have the right to overrule it, then the central bank doesn’t mean anything. As you start to limit the power of the central bank, this makes the decisions of that central bank a lot less credible.
Authoritarian governments are much more likely to have fixed exchange rates. If you have a fixed exchange rate, you solve some of this credibility problem – you’re not relying on the credibility of an institution but rather a commitment to an exchange rate public and available to everyone.
Yet like veto players, there is often a trade-off:
(Hansen 2021) a study that looked at all the banking crises over the years and its effects on economic outcomes – changes in employment credit and stock market.
In terms of responding to crisis’s, central banks do not do that well. A stable and independent bank are more likely to see shocks because of this policy inflexibility trade off. What you may want in an economic crisis is a lot of money pumped into the economy very quickly – yet if you have a lot of authority invested in central banks who have targets for stability rather than rapid adjustment, it can often be quite different to respond to these shocks.
