GV101 Week 16

Independent Institutions:
Courts and Central Banks
 Can/Should Some Policies be
“Locked Away” from Majority Rule?
“Willpower is trying hard not to do something that you really want to do,”
said Frog.

“You mean like trying not to eat all these cookies,” asked Toad.

“Right” said Frog. He put the cookies in a box. “There, now we will not
eat any more cookies.”

“But we can open the box,” said Toad.

“That is true” said Frog. He tied some string around the box. He got a
ladder and put the box up on a high shelf. “There, now we will not eat
any more cookies.”

“But we can climb the ladder. . . .”

Lobel, 1972, Frog and Toad Together

“Who Guards the Guardians?”
Socrates, in Plato’s Republic
 Outline
1. Designs of Courts and Central Banks Across the World

2. Principal-Agent (PA) Theory

Why delegate to independent institutions?
What are the consequences of delegation?
How can independent institutions be controlled?

3. Application of PA Theory to Courts and Central Banks

4. Case Studies
Dutch Supreme Court and Euthanasia
Elected vs. Appointed Judges in the US
Bank of England Monetary Policy Committee (MPC)
 Two Models of Legislative-Judicial Relations
Legislative Supremacy
The majority in a parliament is ‘sovereign’: no parliamentary majority can
bind the hands of a future parliamentary majority
=> Courts might be able to strike down particular parliamentary acts (e.g.
on human rights grounds), but the parliament can then enact a new law
=> A Supreme Court could be granted certain powers, by statute, but a
parliament could re-write the statute to change the court’s powers

Constitutional Supremacy (‘Higher Law Constitution’)

Clear separation of powers between a legislature and a supreme court:
with the court mandated to protect certain rights (in a ‘bill of rights’) against
a legislative majority
=> Needs a ‘written constitution’, which cannot be changed by a legislative
majority
Question: how should the judges be appointed? (by the legislature?)
 Examples from Around the World

Legislative Supremacy Constitutional Supremacy

United Kingdom United States of America (1788)
New Zealand Brazil (1946)
Finland Japan (1947)
France IV Republic (1946-58) Germany (1949)
Israel India (1949)
France V Republic (1958-)
Spain (1978)
Czech Republic (1992)
[European Union]
 How Are Judges Appointed?
UK Supreme Court (est. 2009)
A selection commission, composed of the President and Deputy President of the
Court and members of the judicial appointments commissions of England/Wales,
Scotland, and N. Ireland

US Supreme Court
Nominated by the President, and elected (by a majority vote) in the US Senate

German Constitutional Court (Bundesverfassungsgericht)

Bundestag and Bundesrat elect 4 judges each (by a two-thirds majority), with the
election of the Court’s President alternating between them

French Constitutional Council (Conseil Constitutionnel)

Former Presidents + 3 members appointed by the President, the President of the
National Assembly, and the President of the Senate

European Union Court of Justice (ECJ)

1 judge appointed each by the governments of the 28 EU member states
 “Ideal Points” of US Supreme Court Justices
Andrew Martin & Kevin Quinn,
http://mqscores.berkeley.edu/

=> Justice Kennedy is the

‘median voter’ at the moment

Trump nominated Neil

Gorsuch, who is well to the
‘conservative’ end of current US
Federal Judges

But, as he replaced Scalia, the

median judge is still Kennedy
Elected vs, Appointed Judges at the US State Level
Choi, Gulati and Posner 2008
Current UK Supreme Court
Justices Age Alma Mater
Baroness Hale, Pres. 73 Cambridge
Lord Reed, Deputy Pres. 62 Oxford
Lord Kerr 70 Queen’s, Belfast
Lord Wilson 73 Oxford
Lord Canwath 73 Cambridge
Lord Hodge 65 Edinburgh
Lady Black 64 Durham
Lord Lloyd-Jones 66 Cambridge
Lord Briggs 64 Oxford
Lord Arden 71 Cambridge
Lord Kitchen 63 Cambridge

Appointed by a committee, composed of the President,

the Deputy President and 1 member of the Judicial
Appointments Commission
 What Do Central Banks Do?

Monetary policies:
Set interest rates (e.g. basic mortgage lending rate)
Control ‘money supply’ (e.g. print money / “quantitative easing”)
Manage foreign exchange & gold reserves
(to influence exchange rate of currency)

Other policies:
Government’s bank (e.g. buy up government bonds)
Bankers’ bank (‘lender of last resort’)
Regulate and supervise the banking industry
Advise government on other economic policies
 Goals of Monetary Policy?
Price stability (low inflation)
Unanticipated inflation leads to lender losses
But, stable interest rates -> more investment

Economic growth (higher employment)

Price stability -> economic growth (e.g. more savings)
But, high interest rates -> lower growth

Currency stability
Currency fluctuations -> uncertainty & lower investment
But, high exchange rates -> lower growth
and low exchange rates -> inflation
 Models of Central Bank Independence
Most dependent

Monetary policies decided by Finance Minister

e.g. UK before 1997

Finance Minister sets inflation target, Central Bank sets interest rates
e.g. UK after 1997

Central Bank sets inflation target AND interest rates, and system
established by legislative statute
e.g. US Federal Reserve, German Central Bank before the Euro

Central Bank sets inflation target AND interest rates, and system set
out in a constitution or treaty
e.g. European Central Bank

Most independent
Central Bank Independence and
Economic Performance
Alberto Alesina and Larry Summers, 1993
 Principal-Agent (PA) Theory
A theory to understand relations between
the delegator (the ‘principal’) and
the delegatee (the ‘agent’)

Started in the study of law, then economics, and now political

science

First used in study of US government (legislature vs. executive),

but increasingly used elsewhere (parliamentary government,
EU politics, international organizations, parties etc.)

Main insights of the theory:

explains why principals delegate to independent agents
explains why agents do not do as they are told (‘policy drift’)
explains how policy drift can be reduced
 Why Delegate?
To protect particular policies from short-term change by a particular
political majority

To establish a ‘credible commitment’ to a particular policy

To reduce workload and enhance efficiency in decision-making

(reduce ‘transaction costs’)

To increase the use of experts in policy-making

To avoid taking blame for unpopular policies (‘blame shifting’)

To produce stable and predictable policies

 Courts & Central Banks: Why Delegate?
Courts Central Banks

Protect human rights Time inconsistent preferences

Complete legislative ‘contracts’ End ‘political business cycle’

Control other agencies Lock-in stable macro-economic

environment
 How ‘Policy Drift’ Occurs
The cause:
agent does not have the same policy preferences as the principal

Causes of differences in preferences:

Appointment procedure -> biased preferences of agent

Specialised knowledge of agents

Institutional/budgetary interests of agency

Capture of agent by private interests

 Courts & Central Banks: Policy Drift?

Courts Central Banks

Judges tend to be Central bankers are natural

‘old rich white men’! ‘hawks’

But, liberal legal training => An ‘epistemic community’ of

protect individuals vs. the state neoclassical economists
(e.g. NL euthanasia case)

Closer connection to financial

Assymmetric access to courts institutions than manufacturing
-> favours rich & powerful
 Impact of Policy Drift

X Z Y

Left Right
Leg. Exec. Agent
 Controlling Policy Drift

Appoint new agents

Restrict budget of an agency

Write detailed legislation (to limit discretion)

Parliamentary scrutiny of agency actions

Delegate to courts to constrain agency (e.g. competition authority)

New laws (e.g. revise agency mandate)

 Limiting Policy Drift

X Y

Left Right
Leg. Exec. Agent
Courts & Central Banks: Political Control?
Courts
‘Politicised’ supreme courts
e.g. Fra Conseil Constitutionel
Partisan appointment of judges
Creation of ‘special courts’
outside standard judicial
structure
Central Banks
Partisan appointment of central
bank governors
Appointment of non-economists to
bank governing boards
Separation of mandate:
politicians set inflation target
central banks set interest rates
 Case 1: Dutch Supreme Court and
Euthanasia
15 year battle between Dutch Parliament and Supreme Court on the
issue of Euthanasia:

Dutch Code of Criminal Law officially stated that euthanasia was a

criminal offence

1984 -> Dutch Supreme Court recognised a physician’s request to

end a patient’s life

1993 -> Parliament finally passed a law, which effectively

recognised the Court’s interpretation

=> Questions:
Why did it take so long for the Parliament to pass a new law?
Why did the Parliament end up accepting the Court’s interpretation?
Positions of Dutch Parties on Euthanasia
Dutch Governments
Battle Between the Court and the
Governments

SQ2 X SQ1

Left Right
Lab Lib CDA
Court
 Case 2: Elected vs Appointed Judges
Choi, Mitu Gulati and Posner 2008
“Conventional wisdom holds that appointed judges are superior to elected
judges because appointed judges are less vulnerable to political pressure.
However, there is little empirical evidence for this view”

How to test these ideas: measuring “judicial quality”

Productivity: total number of opinions written per year

also: majority opinions, dissenting opinions

Opinion quality: number of out-of-state citations to a particular opinion

also: law review citations, outside federal court citations

Independence: tendency to disagree with co-partisans

“opposing opinion” = a majority or minority opinion against judges that
were appointed by the same party as the judge in question
 Some Results

=> Elected judges write more opinions than appointed judges

Appointed judges write higher quality opinions than elected judges
Elected judges are not less independent than appointed judges

“The results suggest that elected judges focus on providing service to the voters,
whereas appointed judges care more about their long-term legacy as creators of
precedent”
 Case 3: Bank of England MPC
First decision of 1997 Labour Government (Chancellor Gordon Brown)
was to grant independence to the Bank of England, with interest rates
set by a ‘Monetary Policy Committee’ (MPC)

9 members of the MPC:

5 ‘internal’ members, from the staff of the Bank
Governor + 2 Deputy Governors appointed for 5 years
by the Crown (effectively the Chancellor of the Exchequer)
2 other internal members (Executive Directors) appointed for 3 years
by the Governor, after consultation with the Chancellor

4 ‘external’ members
appointed by the Chancellor for 3 years
hearings in the House of Commons Treasury Select Committee
but the Committee does not take a vote and cannot exercise a veto

=> Gordon Brown could pick who he wants on the MPC !

Estimates of the Preferences of MPC Members
Location of Mean/Median MPC Member
-.5 0 .5 1

Median

Mean
Location of Average MPC Member
Location of Mean/Median MPC Member
-.5 0 .5 1

Median

Mean
PubExp
... Compared to Public Expenditure

35 36 37 38 39
Public Expenditure as a % of GDP
 In Sum
• Courts and Central Banks are examples of independent (‘non-
majoritarian’) institutions – political institutions which are not directly
elected, but have significant power to influence policy outcomes

• Other examples of ‘non-majoritarian’ institutions are competition

authorities (e.g. Cartel Office), market regulators (e.g. telecoms),
environment agencies, the EU Commission etc.

• Principal-Agent Theory is a tool-kit for conceptualising the relationship

between politicians and these independent institutions

• How the rules of appointment and decision-making work, together

with the policy preferences of the politicians and the agents, will
determine how far the independent institutions are able to shape
policy outcomes
 References
Alesina, Alberto and Lawrence H. Summers (1993) ‘Central Bank Independence
and Macroeconomic Performance: Some Comparative Evidence’, Journal of
Money, Credit and Banking 25(2): 151-162.
Choi, Stephen J., G. Mitu Gulati, Eric A. Posner (2010) ‘Professionals or
Politicians: The Uncertain Empirical Case for an Elected Rather than Appointed
Judiciary’, Journal of Law, Economics, and Organization 26(2) 290-336.
Cukierman, Alex, Steven B. Webb, and Bilin Neyapti (1992) ‘Measuring the
Independence of Central Banks and Its Effect on Policy Outcomes’, World Bank
Economic Review 6(3): 353-398.
Hix, Simon, Bjorn Hoyland and Nick Vivyan (2010) ‘From Doves to Hawks: A
Spatial Analysis of Voting in the Monetary Policy Committee of the Bank of
England’, European Journal of Political Research 49(6): 731-758.
Martin, Andrew D. and Kevin M. Quinn (2002) ‘Dynamic Ideal Point Estimation via
Markov Chain Monte Carlo for the U.S. Supreme Court, 1953-1999’, Political
Analysis 10: 134-153.
Rogoff, Kenneth (1985) ‘The Optimal Degree of Commitment to an Intermediate
Monetary Target’, Quarterly Journal of Economic 110(1): 169-90.
Steunenberg, Bernard (1997) ‘Courts, Cabinet and Coalition Parties: The Politics
of Euthanasia in a Parliamentary Setting’, British Journal of Political Science
27(4) 551-571.
 To Do
How independent are the supreme court and the central bank in
your adopted country?

How are the judges and central bankers chosen in your adopted
country?

Why do some countries have independent courts or central banks

while others do not?

How should judges be chosen?

How should central bankers be appointed?

e.g. elected or appointed? And, if appointed, by whom?