Inflation, climate, and hard political decisions
In the late 1970s and early 1980s, the Chairman of the US Federal Reserve, Paul Volcker, famously raised interest rates above 20 per cent in an extremely painful, but ultimately successful, attempt to bring inflation under control. This policy, known as the Volcker shock, reduced inflation from 14 per cent in 1980 to 3 per cent by 1983. The short-term cost, however, was severe. Volcker’s ultra-high interest rates crushed economic demand and pushed the unemployment rate to over 10 per cent.
It remains a striking example of a government confronting a perennial challenge in public policy: accepting short-term pain, in this case a deep recession, to secure a long-term objective, such as price stability.
Volcker was able to pursue this course because, as an unelected official, he did not have to face voters to retain his position. Governments across the developed world have granted central banks political independence for precisely this reason. They recognise that elected leaders are often tempted to cut rates too early or raise them too late, and so delegate these decisions to officials insulated from immediate political pressure.
This kind of institutional self-restraint is sometimes compared to the Greek myth of Odysseus and the Sirens. Odysseus must sail past an island whose inhabitants, the Sirens, lure sailors to their deaths with irresistible song. Odysseus orders his crew to block their ears with wax and has himself tied to the ship’s mast, allowing him to hear the song without acting on it. He orders his crew not to release him under any circumstances. When the Sirens sing, Odysseus pleads to be released, but the crew tighten the ropes and sail on. Only once the danger has passed is he set free.
In much the same way, governments bind their future selves to prevent themselves from taking monetary policy decisions that would undermine their long-term interests.
A similar, though less frequently discussed, approach can be seen in climate policy. Achieving climate neutrality, like controlling inflation, requires difficult choices in the present in exchange for benefits that materialise in the future. Many governments, including Ireland’s, attempt to impose discipline on themselves by placing statutory climate targets into law. These targets are enforceable through the courts, allowing NGOs or members of the public to challenge government inaction. Where elected leaders fail to take politically difficult steps to cut emissions, unelected judges may intervene, in a role that loosely mirrors that of independent central bankers enforcing unpopular but necessary monetary policy decisions.
Last year, Taoiseach Micheál Martin drew criticism for stating that we “cannot mitigate for climate change”. Commentators later suggested this was a misquotation, and that he had instead said “we cannot litigate for climate change”, a claim that better fits the context in which it was made.
Even if that was what he meant, it sits uneasily with Ireland’s own climate legislation, which explicitly anticipates litigation as a mechanism of enforcement. This tension highlights the limitations of using the courts to depoliticise hard policy choices. Unlike central banks, the judiciary’s role in enforcing policy outcomes is indirect, contested, limited to the specific questions of law posed to it, and often controversial.
In an ideal world, one might imagine a more explicit equivalent of a central bank for climate policy. Such a body could be empowered to adjust an economy-wide carbon price. If the Government failed to deliver on complementary measures such as renewable energy deployment, road space reallocation, or investment in low-emission agriculture, the climate authority could step in and raise the carbon price, making fossil fuels more expensive and provoking public anger. If the Government succeeded in delivering these more politically acceptable alternatives, such increases could be avoided.
For now, however, the prospect of such a system remains distant. Policymakers around the world are rowing back on their climate commitments, and some central bankers – including Volker’s eventual successor Jerome Powell – are coming under attack from their elected governments. Despite the urgency of the climate emergency, supporters of Odysseus-style institutional restraint might struggle to venture into the realm of climate policy.
Éamonn Fahey, Director of Research and Policy
