Are Central Banks the Most Efficient State Enterprise? Hummel's Answer and My Explanation
Two weeks ago, I relayed the following story:
Yesterday at the FEE seminar, I got to hear the excellent Jeff Hummel thoroughly debunk the crazy Rothbardian view that fractional reserve banking is “fraudulent.” It was a fun (and funny) lecture, but the target was too easy. So during the Q&A period, I decided to see whether Hummel would embrace a far greater heresy. My challenge for him:
Agree or disagree: In developed countries during the last 10-15 years, central banks have become (close to) the most efficient state enterprise.
Now you can hear Jeff’s response (as well as the full lecture): Although he favors the abolition of central banking, his answer to my question is basically Yes. And I agree on both counts. Another rough patch may be coming, but it would be hard to improve over the 2-3% inflation combined with stable output and employment that central banks delivered in the 90s and 00s.
But why have central banks have out-performed other state-owned enterprises? My best guesses:
1. The public exaggerates the harm of inflation, and angrily punishes incumbents who allow inflation to spike. Normally, such exaggeration encourages politicians to inefficiently make large sacrifices for small gains. Luckily, though, low inflation turns out to be, in the long-run, a free lunch. The public’s inflation paranoia conveniently drives politicians to accept this free lunch.
2. The people who run central banks are usually economists. Whatever their problems, economists are – compared to other government officials – unusually likely to adopt economically efficient policies if you give them a chance. So contrary to Rothbard’s populist complaints, giving independence to central bankers has relatively good results.