I have just finished a very useful collection of some of the papers of economist Gerald Epstein, entitled The Political Economy of Central Banking. Epstein is Professor of Economics and Co-Director in the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst in the US, which is known for the progressive research agendas of its members.
Rather than write a lengthy review, this post sets out some of the key points made in the book and which stood out for me as being original and important. Epstein’s focus on central banks (CBs) remains especially relevant in today’s world of increased inflation and CB efforts to return it to target rates.
- Epstein argues that CBs, especially the US Federal Reserve, are not as independent as they make out and tend to be captured by a variety of vested interests. In today’s financialised economies, many are predominantly influenced by the financial sector, particularly since its liberalisation, expansion and rising power and influence since the 1970s and 80s. Thus they tend to serve finance and support financial sector profits more than industry/industrial profits and workers/wages and employment.
- Historically, CBs have often played a more developmental role at various times and in various countries, supporting industrial expansion and allocating credit to more productive sectors in order to encourage economic growth rather than financialisation.
- Epstein argues that major reforms to CBs and the economy more broadly are needed today to democratise CBs and make them more accountable to society as a whole, so that they better serve the public good and not simply the financial sector. They need to play a larger role in supporting employment in the macroeconomy and industrial growth, especially in driving the green transition which is so vital to building a more sustainable economy.
- CBs should be more accountable to society eg. to Congress in the US, and their boards and staff more generally should reflect the wider society and economy, including industrial and labour interests.
- Monetary policy in the form of changes to interest rates have distributional impacts and are therefore political. Thus no CB can be truly ‘independent’ and free of partisan influences and political outcomes.
- The financial sector, industry and labour (as classes or sectors in the economy) are impacted differently by monetary policy in terms of their respective income flows in the form of profits and wages, as well as their borrowing and servicing of their stocks of debt.
- Lower interest rates may stimulate industrial investment, economic growth and employment, but can lead to a profit squeeze if the labour market becomes sufficiently ‘tight’. They may also inflate asset prices and boost financial profits. However higher interest rates can also boost financial profits and rentier incomes.
- Epstein contrasts speculative finance with enterprise finance as two different sets of relations between the financial sector and industry. Speculative finance, more dominated by capital markets, may mean that the two sectors operate further apart and with more conflict between their respective economic aims, while enterprise finance means that banks and industry are more closely connected and cooperate in the service of expanding longer term productive investment and profitability. In a more financialised economy, industrial firms may themselves become more like financial institutions, with potentially detrimental impacts on economic performance. These varying relations, which can also be seen as different class coalitions, may alter their members’ preference for tight or loose monetary policy on the part of the CB. Varying degrees of conflictual and cooperative relations between industry and labour can do likewise.
- Epstein questions the evidence that sustaining very low inflation, the remit of independent CBs, is a precondition for robust economic growth. He suggests that moderate inflation can be positively associated with growth and that overly tight monetary policy can damage growth performance over a significant period.
- Quantitative Easing (QE) since the Great Recession of 2008-09 in the US has increased inequality through the inflation of asset prices, and despite some positive impact from increased employment, this has been offset by wage stagnation for many in work. However, an absence of QE and higher interest rates could also have increased inequality by reducing employment growth apart from its other effects. This paradox suggests that more wide-ranging progressive policy responses are needed to reduce inequality in the US and elsewhere, such as changes to labour market regulation and a higher minimum wage, as well as the effective use of fiscal policy.
Epstein’s contributions in the book are varied, original and interesting. His ideas are founded on a political economy approach, so that economics is necessarily seen as political. Particular class configurations in society therefore play a role in determining institutional and policy change, and for the author, CBs can never be ‘independent’ of them. This has major implications for the economy. In a more financialised world, the finance sector itself has become a more powerful influence on CB policy in many countries, and for Epstein, this has had detrimental effects on economic outcomes. The interests of labour in terms of employment and wages have in many cases been neglected in the service of finance and financial profits.
The reforms to CBs that the author proposes are an attempt to democratise aspects of finance and monetary policy so that they better serve the wider society and economy. The aim is to support employment and rising living standards for the majority, and this requires reforms that go beyond CBs alone, with changes made to the financial sector as a whole so that it better supports non-financial business investment. CBs and finance more broadly need to play a more developmental role, as they have done at certain times throughout history. Given the current need for massive investment in the transition to a green economy, there is a case to be made for a comprehensive progressive policy agenda which supports this.
CBs have been called upon to play such a role during episodes of national emergency, such as wartime. In these kind of situations, some of the ‘normal’ rules of capitalism have been suspended in order to focus on a huge collective effort. Repressed interest rates, the state-led allocation of credit to vital industries and price controls have all come into play when needed. A return to more peaceful conditions has tended to see such interventions set aside and a return to freer markets and a less regulated private sector.
Today the global economy faces multiple major challenges which have increasingly called for the state to play more of a role in securing the public good. These include, not least, maintaining political, social and economic stability as nations are battered by a variety of shocks, from the pandemic to war, climate change and inflation, as well as geopolitical instability and a global order under threat of fragmentation as a particular form of globalisation evolves in an uncertain fashion. In understanding and responding to all of this, CBs and their actions are a key part of the institutional and policy makeup. Epstein’s work on the political economy of central banking offers a richer, more comprehensive and more progressive contribution than a purer and narrower mainstream economic approach.