The deeply political policy of Reserve Bank independence

And how it undermines Labor's ability to govern

Not so long ago, one of the key catch cries of the progressive left was that we live in a society not an economy. It was, I believe, a response to Margaret Thatcher’s famous quote about there being no such thing as society. More generally, it addressed the instigation, under neoliberalism, of policies that prioritised economic growth and market forces over social welfare and community well-being.

It was a good catch cry.

“…so they are casting their problems on society and who is society? There is no such thing! There are individual men and women and there are families and no government can do anything except through people and people look to themselves first.”

I was thinking about this as I watched various members of the progressive left attack the Greens this week for daring to suggest that the government—you know, the elected government of the Australian people—should override the will of the Reserve Bank and drop interest rates as a way of helping those struggling with mortgages and other cost-of-living pressures.

“I just think the Greens are out of control at the moment, full of self-importance and out seeking a populist approach to everything. It’s crazy what they’re saying to us,” Senator Gallagher told ABC Radio.

This discussion—more a shrill assertion of orthodoxy—is a useful reminder of, not just how much neoliberal thinking pervades the political class, but of why a Labor Party of the sort we now have seems so out of touch with the needs of everyday voters.

The logic of central bank independence (CBI) is perfectly reasonable and has a lot to recommend it, and I am not dismissing it out of hand. Put simply, the idea is rooted in the need to maintain price stability and mitigate inflationary pressures that can arise from political pressure. Independence allows central banks to resist moves by politicians who may want expansionary monetary policies to boost short-term economic performance, perhaps at the cost of higher inflation in the long run.

Okay, sure, but at the very least, in a period of economic hardship for many people, that logic needs to be defended and explained in a way that assures people they are not just being abandoned. You can’t just assert it and scoff. Because at its heart, CBI is just another aspect of the broader aims of neoliberalism, which are, as Quinn Slobodian reminds us, designed to “insulate market actors from democratic pressures”:

For the last twenty years, political scientists and sociologists …have identified efforts to insulate market actors from democratic pressures in a series of institutions from the IMF and the World Bank to port authorities and central banks worldwide, including the European Central Bank, governance structures like the European Union, trade treaties like the North American Free Trade Agreement (NAFTA), and the WTO.

They have also seen efforts to insulate in the expansion of international investment law designed to protect foreign investors from diverse forms of expropriation and to provide a parallel global legal system known as the transnational law merchant. They have traced the emergence of an “offshore world” of tax havens and the proliferation of zones of many types, all designed to provide safe harbor for capital, free from fear of infringement by policies of progressive taxation or redistribution.

“Insulation of markets” is a useful metaphorical description of the aim of neoliberalism as a specific institution-building project rather than as a nebulous “logic” or “rationality.

Slobodian, Quinn. Globalists: The End of Empire and the Birth of Neoliberalism (pp. 4-5). Harvard University Press. Kindle Edition. (Emphasis added.)

The class nature of all this should be obvious, and it is no wonder those further down the economic ladder sense that the system doesn’t have their interests at heart, that as far as most politicians are concerned, we do live in an economy and not a society.

Former Chief Economist with the USA China Economic and Security Review Commission, Thomas Palley, argues that “central bank independence in high-income economies should be understood in terms of class conflict, with independence being a neoliberal policy innovation aimed at advancing neoliberal political and economic interests. [I]ndependence advances neoliberal interests (i.e. industrial and financial capital) at the expense of others (i.e. labor).”

Palley notes that such independence is deeply undemocratic but that it has been so completely internalised “that the hegemony of independence has resulted in a rigged debate.”¹

The overwhelming support of the economics establishment determines the stance of the establishment media. And when central banks discuss the issue, they inevitably turn to central bank insiders and the same establishment economists. The result is a drowning of critics who are dismissed as “populists” and “non-adults”.

Ring any bells?

For a policy that is held as so self-evidently good by so many in the political class, it is useful to remind ourselves of the shaky foundations of the underlying claims. The Palley article I am quoting is worth reading in full, and this from Professor John Quiggin is also a useful corrective:

It is important to observe that no theoretical rationale for Australia's inflation target has ever been put forward.

Both the idea of targeting consumer price inflation and the choice of the 2–3 per cent target band are arbitrary. They were inherited from the very different circumstances of the early 1990s and the judgement call of a right-wing New Zealand finance minister.

The recent review of the Reserve Bank acknowledged the challenges to this orthodoxy but didn't consider them.

My point is not that governments should necessarily take back control of interest rate settings; only that such discussion used to be a normal part of the progressive debate, of the notion that we live do actually live in a society and not an economy, and that the interests of people should be put ahead of those of markets and industrial and financial capital.²

This is the logic of the Greens’ call for government intervention in interest rate settings.

Under Hawke and Keating, Labor tried to offset the economic imbalances of neoliberalism with a suite of social policies that provided material support for voters, but it is the logic of the neoliberal economic reforms that now dominate and that need a renewed strategy to deal with. As Guy Rundle noted on Tuesday, and I know some of you will hate this, but I think it’s true:

Labor hasn’t even taken advantage of siding with the system, and arguing for the ethics of doing such. To side with the “system as it should be”, Labor would both defend the autonomy of the Reserve Bank and introduce a full and fearless inquiry into robodebt. 

That would show, and be, a certitude, a commitment to one part of the institution — the justice system — against another part of it — a cynical and nihilistic executive — in the name of the people. 

Instead, no robodebt inquiry, and no stimulating the economy a little with a directed rate cut. Labor’s message to the people who might vote for it is you’ll get nothing, and like it. Or not like it. We don’t give a fuck. Also, we shot your dog. Vote for us.

In his 2015 book An Economy is not a Society (snap!), Dennis Glover talks about these issues and the way neoliberalism has elevated the interests of capital over those of labour leading to greatly increased inequality in Australia. He speaks specifically of how the Labor Party’s embrace of such policies—and we can include in this their almost militant support of CBI—undermines their electoral appeal and drives voters elsewhere:

My point is that while this Labor story involves economics, it isn’t essentially an economic story, and one shouldn’t answer it simply by emphasising modern Labor’s economic credentials. It’s a romantic moral tale, one that appeals to a radical spirit in Australian culture, and one that today’s progressives, considering joining the Greens but not really wanting to, are crying out for Labor to tell anew.

[M]aking the economy stronger isn’t an end in itself; creating a better society is. In short, Labor has to remember that it is primarily a social movement, not a policy unit of the Department of Treasury.

Nearly a decade after this was written, matters have only got worse.

The significance of the current debate about interest rates and Reserve Bank independence isn’t just about who sets interest rates: ultimately it is about the ability of progressive politics to deliver prosperity and security to the Australian people. It is about ensuring we live in a society not an economy.

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1. Just to reinforce this: the undemocratic nature of neoliberalism is a feature not a bug. Neoliberal systems are designed to remove decision making from democratic institutions and install them in technocratic ones runs by various elites.

2. Nobel laureate, Joseph Stiglitz, who has just finished a speaking tour of Australia, is another leading economist who has called for a more nuanced understanding of CBI. In his book The Price of Inequality, Stiglitz argues that CBI can reinforce the interests of financial elites at the expense of broader economic stability and social equity. By prioritizing the interests of creditors and financial markets, independent central banks may inadvertently perpetuate a system that favors the wealthy, thereby undermining the principles of fairness and justice in economic governance. He says that, at the very least, central banks should be accountable to the public to ensure that their decisions align with broader societal goals.