The Choice of Policy Instruments: Who Decides in Times of Crisis? A Comparative Examination of Financial Policy Practices in 4 EU Countries (2008-­‐2010) Miklos Sebok
Research Fellow, Institute of Political Science Hungarian Academy of Sciences, Email: [email protected] May 31, 2013 – First draft, please do not cite without prior permission ABSTRACT
The paper presents the results of a study of policy instrument form choice in four Western
European countries. Based on an analysis of major pieces of legislation during the period, it
is argued that various forms of institutional change in the form of delegation were the policy
of choice for decision-makers in mitigating the effects of the financial crisis. Newly created
agencies and funds enjoyed a significant degree of bureaucratic autonomy. In a parallel
process, a gradual transformation of extant financial regulation contributed to an upheaval in
the ideational structure that underpinned these policy areas for almost three decades. In this, a
shift from price and fiscal stability to financial stability signalled a new set of goals for
decision-makers, and a realignment of policy instruments duly followed. The results indicate
that exogenous shocks—such as financial crises, or power plant meltdowns—initiate policy
change with distinct policy instrument choices.
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“For since in some Governments the Law-making Power is not
always in being, and is usually too numerous,
and so too slow, for the dispatch requisite to
Execution; and because also it is impossible to foresee, and
so by laws to provide for all Accidents and Necessities
that may concern the publick; (...)
therefore there is a latitude left to the Executive Power,
to do many things of choice, which the Laws do not prescribe.”
John Locke
1. Introduction
The importance of the theoretical problem of bureaucratic delegation is larger than
ever. The cost of the bailouts of financial services firms in the aftermath of the financial crisis
of 2008-2009 resulted in multi-billion dollar checks for the taxpayers of the United States,
Britain and many other countries. The management of these funds was mostly delegated to
government bureaucracies and independent agencies, such as central banks. This is important
because the institutional structure in which these financial restructurings are undertaken
provides strong incentives for and restricts the agency of individual legislators, officials of
the executive branch and bureaucrats. Therefore, the “quality of state regulation of the
economy should depend on the institutional design of state institutions” (Przeworski, 2003:
214).
During their respective crisis situations the legislatures and governments of advanced
industrialized countries (heretofore AICs) created new bureaucratic structures that do not
pass the eyeball test established by the dominant, rational choice-inspired literature on
delegation. A cursory look at the debates surrounding the bailout legislations in AICs in 2008
will show that the level (or degree, I use these terms interchangeably) and structure of
delegation (taken together: the dependent variables of this paper) are shaped by a number of
considerations that are not closely related to party politics. These outcomes are in a stark
contrast with the extant theoretical literature that postulates that both the level and structure
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of bureaucratic delegation is defined by factors associated with divided/unified government,
here defined by the parties in charge of the separate branches of government.
This paper is but a first step towards outlining a general comparative framework of
bureaucratic delegation that offers a solution to this puzzle. In this respect, this is more of an
exercise in theory building than theory testing. I undertake this task in four steps. First, I
present a baseline rational choice institutionalist model of bureaucratic delegation and I
extend it to semi-presidential and parliamentary regimes. Second, I put forth an alternative
hypothesis with regards to policy instrument choice—one that is rooted in the concept of
trusteeship and bureaucratic delegation. In the third section I demonstrate on the banks
bailouts of 2008 in four Western European countries that such an alternative hypothesis holds
up well vis-à-vis the applied baseline model. The final section concludes.
2. Literature review: the baseline model of delegation-based policy
change
Basic definitions
In this paper I define banking crisis as a form of financial crisis that takes „a variety
of forms ranging from temporary liquidity crises to massive insolvencies” (Calomiris, 2008).
Banking crises may prove to be systemic in nature, in which case „a country’s corporate and
financial sectors experience a large number of defaults and financial institutions and
corporations face great difficulties repaying contracts on time. As a result, non-performing
loans increase sharply and all or most of the aggregate banking system capital is exhausted”
(Laeven – Valencia, 2008: 5). Using the most recent IMF database, Laeven and Valencia
contend that of the 124 systemic banking crises between 1970 and 2007 42 are considered to
be twin crises, i.e. they were accompanied by an exchange rate or sovereign debt crisis.
In this paper bank bailouts are defined in a general sense as a coherent set of shortterm policy response to a standalone or systemic banking crisis. This definition is in line with
the more general notion that bailouts are “instances when the government aids one or more
economically distressed businesses in some way” (Wright, 2010: 1). Also, according to
Wright, along with large industries, such as the railroads or automobile manufacturing, “to
date, bailouts have been directed toward the financial system, the proper functioning of which
most experts agree is crucial to economic stability.” Bailouts in the financial sector are,
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therefore, indicative of the larger trends in government interventions during economic crisis
situations. Interconnectedness makes this claim even more convincing: the Troubled Asset
Relief Program (TARP; the official title of the U.S. bank bailout in 2008), originally designed
to help out bank suffering from a liquidity crisis, was eventually extended to lend a helping
hand to General Motors and Chrysler, and their respective financial arms.i
As for the definition of bank bailouts proper, three major elements deserve further
elaboration. First, the notion of coherence is important because bailouts usually constitute
complex policy packages. Among the policy tools deployed during financial crises AïtSahalia et al. (2010) count fiscal policy, monetary policy, liquidity support, financial sector
policies and policy inaction/ad hoc bailouts. For the purposes of the present discussion I will
focus on “financial sector policies”, steps such as recapitalization, asset purchases and
liability guarantees—all of which are easily distinguishable in larger packages of policy
initiatives.
An equally important aspect of the definition is its short-term nature. In this respect, a
brief discussion of banking crises “in time” is in order. The series of government
interventions initiated by each of these crises can be divided into two phases: crisis
containment and resolution. During containment „governments tend to implement policies
aimed at restoring public confidence to minimize the repercussions on the real sector of the
loss of confidence by depositors and other investors in the financial system” (Laeven –
Valencia, 2008: 7). According to Laeven and Valencia the resolution phase „involves the
actual financial, and to a lesser extent operational, restructuring of financial institutions and
corporations.”
These phases are analogs for the abovementioned short and long term policy
responses. It is important to note, however, that there is no clear caesura between the two as
short term responses often remain in place as a part of the long-run policy response. In the
political science literature this implication is variably referred to as „institutional stickiness”,
„positive feedback” or „path dependence”. For now, it is suffice to note that this tendency for
stickiness underscores the long term relevance of these rescue packages and, therefore, the
extant institutional framework that is a result of previous reform proposals.
The timeframe in which bailout legislations, in the narrow sense, as it was introduced
above, are adopted is critical for our present purposes. All propositions in this paper are
derived from the dichotomy of crisis and normalcy. It is argued, that in emergency situations
standard accounts of the origins of policy choices and bureaucratic structure do not apply—
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the form and degree of intervention is shaped by pre-existing structures and the needs
generated by the crisis itself. A sufficiently strict definition of the crisis period, therefore, is
indispensable for the success of the project.
Finally, standalone banking crises are increasingly rare due to their psychological
effects: self-fulfilling depositors' runs on banks and the resulting contagion. Furthermore, this
trend is reinforced by the growing interconnectedness between the sub-sectors of the
financial system that has been bolstered by the liberalization process that produced landmark
legislations such as the Gramm-Leach-Bliley Act of 1999 in the U.S.
Standalone bank crises are, therefore, more often than not, warning signs of a largescale collapse to come as was the case with Northern Rock in 2007 in Great Britain. This
blurs the line between crisis and normalcy, as successive individual crisis situations may add
up to a fairly extended period of financial emergency as in the case of Japan in the late 1990s.
That said, a careful examination of the origins of the decisions in question, whether they were
in the pipeline at least for a while or improvised on the spot etc., may address these potential
ambiguities.
A baseline RCI model of bureaucratic delegation
In the political system policy change comes in different shapes and forms. One aspect
of utmost importance is changes in the underlying institutional structure, which leads to the
study of factors defining “institutional design”. Despite the importance of the origins of
institutions for policy outcomes, “theoretical work on this crucial issue continues to be
sketchy at best” (Pierson, 2004: 103). That said, approaches associated with rational choice
institutionalism (RCI), or with “actor-centered functionalism”, are “prominent in much of the
work social scientists have done on formal institutions” (ibid.: 105). Within this paradigm,
the most widely used baseline model exploring the logic of bureaucratic change in the
context of delegation was developed by Epstein and O’Halloran (1999; hereinafter E-OH).
The authors put forward a sophisticated formal model and a rigorous empirical research
strategy; a combination that generated a decade-long research program with substantial
results (see Epstein et al., 2009).
Nevertheless, E-OH’s model is not directly applicable to most countries on a similar
degree of economic development, let alone to less developed countries. For the authors limit
their discussion to federal level decision-making in the United States. This curbs the prospect
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for generalization beyond presidentialism, as some major driving forces behind institutional
outcomes are simply untenable in a number of cases and across political systems. As unified
government, which means there is no need to strike deals with coalition partners or the
opposition, does not exist in most parliamentary democracies this approach does not provide
any variation on the independent variable side of the equation. Or we could take a legalistic
view and argue that parliamentarism is based on a fixed value for one of the major
explanatory variables: a government unified (or divided) across the branches. As Strøm
(2000: 3) put it, the “two basic ideas are central to conventional understandings of
parliamentary government: parliamentary supremacy and the notion of fused, or unified
powers” (emphasis added).
These difficulties notwithstanding, the theory of policy change of E-OH is not
irreconcilable with parliamentary systems of government. In fact, the authors themselves are
quite optimistic in their discussion of a potential general theory of delegation under a
separation of powers systems in the conclusion of their book (E-OH: 240-244). They contend
that their two-level approach to policy-making (legislative committee vs. executive agency)
and the assumption that rational politicians will make their choices as single-minded officeseekers have relevance beyond the U.S. polity.
Furthermore, they argue that their findings “should be directly applicable” to
presidential systems as there are “multiple points at which substantive policy measures can be
made“ in parliamentary procedures. Even though their preferred solution–an overblown,
Japanese-style authority for committees–seems less the norm than the exception in
parliamentary systems, as long as there are “multiple points” for entry their transaction cost
politics framework may hold.
One way to approach the problem of portability is to adopt the position of Haggard
and McCubbins (2001: 3) and argue that while the separation of powers is a crucial element
of presidential systems its relevance extends well beyond them. Parliamentary systems with
bicameral legislatures, federal structures or party systems that generate coalition governments
are equally susceptible to the fragmentation produced by the separation of powers. Thus, the
“functional equivalency” of these otherwise dissimilar government structures should have the
observable implication that the “effective number of vetoes” (Cox – McCubbins, 2001–
heretofore: ENV) are equally widespread and generate similar policy outcomes.
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In sum, we may come to the conclusion that, technically speaking, the baseline model
is applicable to comparative research. Whether this is a theoretically sound approach is a
different question. I address this second problem in the next sub-section.
Policy change and bureaucratic autonomy
Theories of delegation-based policy change are, for the most part, based on the
assumption of a unitary executive. In line with the extant literature I define executive
autonomy as the president’s power to make and implement public policy. From a principalagent perspective, however, the assumption of a unitary executive is evidently unrealistic—
and it should be duly relaxed as the argument proceeds.
By changes in executive autonomy I mean adjustments in the aforementioned “zone
of discretion” of a pre-existing bureaucratic unit, or to the total of newly granted powers in
the case of a new unit. The premier constitutional source of this bureaucratic autonomy is
bureaucratic delegation: the establishment of a principal-agent relationship with the outcome
of a potential divergence between legislative preferences and executive compliance with
these preferences.
It should therefore come as no surprise that bureaucratic/legislative delegation is at
the forefront of RCI accounts of inter-branch relations between Congress and the executive.
That said, other—notably endogenous—sources are very much present in real-life interbranch relations. Hence, renewed efforts to create a more general notion of bureaucratic
autonomy are in order.
I start my analysis by contemplating the similarities and divergence between various
approaches to the problem of bureaucratic delegation and control. It is helpful that recent
reviews of the literature are largely overlapping in their emphasis on the key issues in the
subfield. Krause (2009) distinguishes three generations of research into “legislative
delegation”. (Legislation here refers to the principal—it may be used interchangeably with its
agent-centered mirror image: bureaucratic delegation.) The first wave of research focused on
the core rationale of delegation from the perspective of Congress. A reaction to this research
program was a new line of argument that “placed the delegation choice within a separation of
powers framework that explicitly incorporated transaction costs” (ibid.: 4).
In their account of “control systems” Bendor and Meirowitz (2004) make a
distinction between “ex ante controls” and “ex post auditing”. In the second generational
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literature, most closely associated with E-OH and Huber and Shipan (2002), this distinction is
theorized as a trade-off. Thus, the „ex ante and ex post mechanisms of bureaucratic control
have been found to be substitutes, in that politicians’ ability to rely on ex post monitoring
diminishes their preference for low discretion statutes” (Bawn 1997; Gailmard 2002–cited by
Caughey et al., 2009).
These two branches of the literature constitute the core of RCI thinking on
bureaucratic delegation and control. Huber and Shipan (2006: 264) put forth a similar
overview by going through the routine of ex ante/ex post instruments, the “substitution
effects” between the two, and also by assuming that presidential preferences induce
bureaucratic preferences.
Volden and Wiseman (2009) divide the formal literature on bureaucratic delegation
into one branch inspired by E-OH and another based on the spatial model of Ferejohn and
Shipan (1990). In this analysis, the former is more adept at accounting for the role of
uncertainty and expertise, while the latter is best suited to incorporate a wider range of
players. This latter approach also allowed for the jettisoning of the unitary executive
assumption.
The third approach presented by Krause was inspired by Moe (1990), and it seeks to
explore „executive agents’ incentives” in more detail by e.g. focusing endogenous sources of
executive autonomy such as executive decrees (Howell, 2003). This approach moves beyond
Congress-centered accounts, and incorporates the literature on the “institutionalized
presidency” (Weingast, 2005). This line of reasoning assumes that bureaucratic autonomy is
a more general category vis-à-vis not just legislative delegation, but also bureaucratic
discretion (which latter is bestowed on the bureaucracy by Congress or the executive and
excludes sources endogenous to the agency).
For this reason, in my opinion, bureaucratic autonomy is a more adequate choice to
describe the problem at hand as it incorporates the substantial problems related to intraexecutive delegation. Furthermore, this definition can accommodate other inter-branch or
even extra-branch relations such as the role of interest groups or the judiciary (for a complete,
4-branch model of “multi-institutional policy-making” see e.g. Hammond and Knott, 1996).
As for this latter, the judiciary in fact was making a late come-back as in the early stages of
the evolving literature on the administrative state it was this branch that was supposed to
prevent bureaucrats from “running amok (EOH: 20-21).
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A further, and necessary, extension addresses issues of vertical coordination
problems within the executive, problems that may create unexpected alliances between an
agency and Congress against the presidency (see e.g. Wiseman, 2007). Within this context,
Caughy, Chatfield and Cohon (2009) define bureaucratic autonomy as a hybrid of two subconcepts: „independent goal formation and the capacity to achieve desired outcomes.” This
view explicitly part ways with most of the literature on legislative delegation as it theorizes
autonomy as a non-relational attribute (as opposed to, say, the Congressional dominance
literature).
This definition also moves beyond the delegation/control mainstream as it puts a
premium on the informal aspects of autonomy as “a formally autonomous agency might have
little real autonomy, and an agency with limited formal autonomy might have a great deal of
de facto autonomy” (ibid.: 15). An agency, therefore, is autonomous if it has “the capacity to
implement its preferences”, which is, in turn, “a function of its organizational resources and
its freedom from external constraints.” This emphasis on sources and constraints is reflected
in Table 1 that provides a unified account of traditional, Congress-based and more recent,
executive-centered studies.
- Table 1 around here -
The first generational literature is varied in its approach toward ex ante and ex post
instruments. The baseline model (rooted in constitutional division of labor) posits ex ante
statutory delegation of discretion and controls as the essential mechanism for exerting
compliance. McCubbins, Noll and Weingast (1987) focus on an extension that highlights the
importance of administrative procedures as a different form of statutory control. On the ex
post side we find Weingast and Moran (1983) with their view of a bureaucracy that
internalizes the threats of ex post Congressional retaliation. Here we find McCubbins and
Schwartz (1984) as well, who claim that incentive compatibility is effectively achieved by ex
post oversight triggered by “fire alarms”-allied interest groups who take up the job of
monitoring out of self-interest.
These articles are all adherents to the view of Congressional dominance. In the first
generational literature these claims are countered by Moe (1985, 1989). First of all, Moe
(1985: 1095) argues that the best way to look at bureaucratic autonomy is to conceptualize it
as a “hierarchically ordered system of relationships”. He not only brings the “systematically
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ignored” presidency back in but presents an early attempt at making sense of the internal
structure (appointees vs. staff) of individual agencies. Moe (1990) put a further dent into
Congressional dominance theory by asserting that the very idea of dominance (i.e.
compliance with preferences) is not always in the best interest of Congress (this topic was
also picked up by E-OH).
Finally, Congress and other legislative bodies do a delicate balancing act in choosing
between statutory and non-statutory control mechanisms (Huber, Shipan and Pfahler, 2001).
In this sense EOH’s model is only fully applicable to bodies with—at least potentially—high
bureaucratic capacities. Otherwise they have rely on less costly tools on the ex post side or—
in extreme cases—give up oversight altogether and wait for administrative judges or the
executive to step in.
In conclusion, and based on this cursory review of the literature, Table 1 provides a
summary of these approaches. As it presents some important sources of and control on
executive/bureaucratic autonomy it is in line with the proposition by Krause (2009: 32) for „a
unified theory of policymaking in which legislative delegation is a key component that
intersects with executive action.”
3. Policy instrument form choice under extreme policy uncertainty:
trustee-based crisis resolution
The (not so) unique case of bank bailouts
In this paper I offer an alternative approach to the problem of policy instrument form
choice, and I generate some testable hypotheses based on the proposed theoretical
framework. I adopt a two-pronged approach. First, I generalize what seems useful from the
baseline model by E-OH. I contend that this is theoretical framework that is highly useful to
describe policy change in times of normalcy. For this reason, I expect that the generalized
propositions will not hold for times of emergency.
One of the potential confounds is the issue area chosen for empirical testing.
Historically speaking, bank bailouts are associated with crisis situations. That said, there is no
exception made in the original framework for crisis-driven delegation. And the time series
used for testing the hypotheses derived from the divided/unified government perspective
includes the pieces of legislation highlighted in this paper.
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As the legal environment of finance is thoroughly shaped by legislation during and in
the wake of crisis periods one could argue that the whole issue area of financial regulation
and supervision should be exempted from the baseline model. And an unambiguous
definition and clear delineation of crisis periods (see the section on basic definitions) is a
necessary precondition for this.
These definitional uncertainties notwithstanding, the unique position of bailout
legislation is reinforced by the fact that the politics of finance is inherently highly technical,
involving a large degree of information asymmetry. In this respect it is important to note that
E-OH (1999: 75) argue that high policy uncertainty does, in fact, imply a unique reaction:
“The more uncertainty associated with a policy area, the more likely Congress is to delegate
authority to the executive.” That said, the devil is in the details.
First, in the baseline model uncertainty is a function of the policy area, not of
exogenous shocks. My point here is that the degree of uncertainty may substantively vary
within the boundaries of a single issue area. Second, E-OH do make the claim that “during
times of divided government, Congress will delegate more often to independent agencies”,
which suggests that even when uncertainty is high the first best option of Congress is to
delegate policy instrument choice to IAs.
What follows from all this is an extension of the notion of policy uncertainty, which,
now, is understood as a function of the related issue area and exogenous shocks. In these
cases, extremely volatile situations, associated with an extreme degree of uncertainty (E-OH’s
ω), become an irregular sub-type of the more general case of high policy uncertainty. On the
one hand, for cases of high policy uncertainty, E-OH’s propositions may or may not hold. On
the other hand, for cases of extremely high policy uncertainty (crisis)—and this is the gist of
Proposition 3, to be introduced below—they do not hold as these decisions are reached under
a different mode of representative government.
Following this logic, what I offer here is a resolution to the anomaly of extremely
high policy uncertainty in the baseline model of instrument form choice. The supposedly
alternative approach of this paper, then, presents itself more of a natural extension or
refinement of E-OH’s original offering.
Nevertheless, this is truly an alternative approach in the theoretical sense. The
baseline model draws heavily on the principal-agent theory of representation. The domain of
extreme policy uncertainty, however, is a more natural fit for an alternative theory of
representation: trusteeship. According to Brito Vieira and Runciman (2008: 74) „the idea of
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representatives as trustees acting on behalf of individuals who cannot act for themselves has
often been used to supplement principal-agent conceptions of representation”. Trustees are
not acting on a delegated mandate. Instead, the entire coffer is handed over to them for a
strictly defined period. They are not mechanical, passive extensions of a principal. Rather,
they are „more flexible because they do not act under direct instruction from the individuals
whose interests they are upholding” (ibid.: 75). All this means their hands are not tied when it
comes to policy instrument choice.
Trusteeship may or may not be based on expertise (as in the case of a parent-teacherchild relationship): The constitutive element here is the contestability of claims or—in the
language of politics—ambiguous power relations. To adapt an example of Brito Vieira and
Runciman it is evident that a lawyer cannot plead guilty on behalf of her principal against her
wishes. Trusteeship is different insofar as there is a competing claim as to what constitutes
the best interest of the principal and the trustee may act upon his claim. This is a major
difference vis-à-vis a lawyer-defendant relationship. The way competing claims (meaning: no
predetermined outcomes) are settled „is the stuff of politics itself” (ibid.: 79)—policy
instrument choice gets liberated (to the extent of the resulting bureaucratic autonomy) from
pre-existing rules.
If we allow for independent goal formation and policy entrepreneurship in public
bureaucracies—and this is no heresy in political science, not since Niskanen’ Bureaucracy
and Representative Government, anyway—the only missing element for trusteeship is the act
of delegation—the handing over of the coffers. As surprising as it may be in a representative
democracy this does happen every now and then. Consider the following segment from the
memoir of Matt Latimer, a speechwriter to president G.W. Bush, with regards to the
resolution of the financial crisis in the Fall of 2008:
Meanwhile, the White House seemed to have ceded all of its authority on economic matters to the
secretive secretary of the treasury. The president was clearly frustrated with this. I was told that at one Oval
Office meeting, he got very animated and exclaimed to Paulson, “You’ve got to tell me what you’re doing!” (In
the weeks that followed, Paulson changed his spending priorities two or three times. Incredibly, he’d been given
the power to do with that money virtually anything he pleased. All thanks to a president who didn’t understand
his proposal and a Congress that didn’t stop to think.)1
Delegation to trustees, as opposed to agents, does happen. But what are the
consequences of this differentiation between two modes of representative government? This
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distinction between the normal principal-agency relations, those that define the character of
policy change initiated under more typical circumstances, and trusteeship, delegation driven
by economic crises, is a major theoretical demarcation line with all its empirical implications.
Institution building emerging out of a crisis creates certain kinds of institutional
frameworks and organizations that empower them to an unusual degree, sometimes freeing
them of normal principal-agency constraints.ii If a Secretary of the Treasury is authorized to
act “as necessary” and endowed with a blank-cheque to do so she is elevated to the position
of a trustee. The deliberate creation of trustees may constitute a critical juncture in
institutional development the nature of crisis exempts agency design from its normal
limitations; from business—on in this case: politics—as usual. The state of exception creates
a unique environment for policy change.
To the extent that crises and trusteeship are intertwined, standard theories of
delegation do not apply to the state of emergency. At this point, it is important to note that
this theorem does not imply any specific prediction in regards to the stability of the policy
instruments and institutions created under these unique circumstances. Whether later
legislation formalizes the outcome, the institutions/authorizations are prolonged, revoked or
sunsetted is a question for another paper even if it makes explicit the distinction between the
primary and secondary (derivative) sources of power.iii
There is a final point on the external validity of crisis-driven delegation to trustees.
Financial regulation and bailouts may be outliers due to the institutional traditions of the
policy domain. From the two major independent agency types usually involved in rescue
maneuvers central banks routinely implement stabilization policies, which means that newly
delegated authorities are not indispensable. As for the other type, financial supervisory
agencies, these are generally not well equipped to handle large government transfers as their
mission is more closely related to regulation. This leaves the Treasury as the only standing
bureaucracy with the necessary policy expertise.
On the other hand, while financial regulation and bailout politics are unique in the
unusual degree of policy uncertainty involved, they are far from being an idiosyncratic issue
area. Even if “blank-cheque delegation” to trustees was defined against the background of
financial crisis situations, it may have purchase on similar looming (or actual) disasters in
other policy domains as well. Cohen et al. (2006), for example, offer an analysis of the
creation of the Department of Homeland Security through the lens of “crisis bureaucracies”.
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Hence, my expectation is that similar theoretical problems arise in a policy domain
with a substantively high starting policy uncertainty. In case an inherently complex and
volatile issue area is upset by an exogenous shock the same rules governing politics under the
state of emergency prevail: crisis resolution in the wake of Hurricane Katrina, or the BP oil
spill in 2010, is a case in point.
The causal logic of crisis-driven delegation
The causal logic against which crisis-driven delegation unfolds is as follows. In a
crisis situation pre-existing bureaucratic capacities render general legislative, and even
committee capacity strongly dominated while the short time frame highlights the advantages
of relying more heavily on ex post oversight. So far this is more or less in line with standard
assumptions in RCI delegation theory. The paths diverge, however, once the very question of
bureaucratic structure is relegated to irrelevance by elected decision makers yearning for a
quick solution that helps avoiding a complete collapse of the financial system. The two main
elements, therefore, that vindicate an autonomy-based—as opposed to a mandate-based—
perspective are the political implications of crisis and the politicians’ rational reaction to
these implications. Put bluntly, they need a trustee to clean up the mess and choose the
instruments they deem necessary to do so.
As to the first point, crisis upsets theoretical frameworks fine-tuned to normalcy.
Budget appropriations, for instance, are rendered useless as a metrics of the level of
delegation as they are extremely sensitive to exogenous factors such as the depth of crisis (i.e.
budgetary allocations are exclusively a function of the size of non-performing assets). A
corollary to this point is that crisis decisions are made in a larger than usual stakeholder
environment due to the high stakes and high uncertainty involved (this was pointed out by
Baumgartner and Jones, 2009).
Furthermore, the bureaucratic structure emerging after crisis legislation may differ
from pieces of law adopted in a “going concern” status because of its temporary nature.
Extraordinary lines of credit, such as those provided through the discount window, a ban on
shorting or the suspension of convertibility involve a degree of discretionality on behalf of
trustees that is seldom present in under normal circumstances.
Rational politicians carefully adapt to these new circumstances. In crisis situations,
under duress, members of the legislation will operate in a fashion that is more risk-averse
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than usual. In these cases of extreme policy uncertainty asymmetrical information provides a
large incentive for lawmakers to trust the executive, and the president to trust the
bureaucracy, regardless of party affiliation. As crisis situations are the exception rather than
the norm the legislature will rely on built-in ex post control provisions to re-balance power
relations tilted towards the executive. The choice of policy instruments and short-term
bureaucratic structure will become a secondary issue in negotiations about the bill.
The psychology of these decisions is thoroughly defined by a crisis situation in which
they are reached. They are less a result of a lengthy process of evolution but of a mixture of
pre-existing capacities and improvisation under a time constraint. “Satisficing” (Herbert
Simon) often prevails over a quest for the first best solution, which leaves optimization as a
less potent description. Satisficing is an especially potent description of decisions regarding
democratic accountabillity, as these are considered to be a luxury on the verge of breakdown.
This dilemma is captured by Jefferson’s fable of the “good officer” who realizes that to “lose
our country by a scrupulous adherence to written law, would be to lose the law itself, with
life, liberty, property and all those who are enjoying them with us; thus absurdly sacrificing
the end to the means” (Letter to Colvin).
Propositions
Based on the functional equivalency assumption of divided government; the
theory of trusteeship; and that of crisis-driven delegation a couple of competing hypotheses
may be formulated for the purposes of a comparative study of non-presidential systems of
government. The baseline model (E-OH: 78) generates 9 hypotheses related to three topics of
which three are closely related to the problem at hand. Hypothesis 1 claims that “less
discretionary authority will be delegated to the executive during times of divided
government”. Hypothesis 3 contends that “during times of divided government, Congress
will delegate more often to independent agencies and non-executive branch actors.” Provided
that the notion of political “fragmentation” is well defined (see above) the adaptation of the
first hypothesis to non-presidential separation of powers systems is straightforward.
PROPOSITION 1. (Level of delegation). Less discretionary authority will be
delegated to the executive during times of a more fragmented government.
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For the extension of Hypothesis 3 I rely on Scartascini et al. (2008) who make an
explicit link between the number of veto points and policy outcomes. Following HaggardMcCubbins and Tsebelis they contend that “as the effective number of vetoes increases, the
polity becomes more resolute and less decisive” or equivalently: “many veto players make
significant policy changes difficult or impossible”. This notion is analogous with the claim
that more fragmentation leads to less delegation. Along these lines, a similar proposition may
be put forth with respect to the role of independent agencies in policy choice.
PROPOSITION 2. (Structure of delegation) As the effective number of vetoes
increases, the polity becomes more fragmented and the probability of delegation to
independent agencies (as opposed to cabinet departments) increases as well.
I understand these propositions as “natural” extensions of E-OH’s hypotheses to
separation of powers systems. It goes without saying that this more general set of hypotheses
subsumes the original propositions. Thus, it is the validity of these reformulated baseline
propositions that I explore in this paper.
I also put forth an alternative hypothesis, one that is based optimized for the crisis
mode of representative government; that is, delegation-based policy choice under extreme
policy uncertainty.
PROPOSITION 3 (Blank-cheque delegation to trustees in times of crisis). In crisis
situations the beneficiary of legislative delegation is a trustee-type institution. This implies
that standard principal-agent models of delegation are not applicable to these cases: The
degree and structure of delegation is shaped by the crisis and not party politics, and policy
choice gets liberated from pre-existing constraints.
The proposition has the observable implication that issues of short-term policy choice
and bureaucratic structure are not at the forefront of the bailout debates. It also implies that
bureaucracies with pre-existing capacities are the beneficiaries of the provisions of the
adopted law as they have a competitive capacity advantage vis-à-vis new bureaucracies.
The proposition—if verified—puts a dent in actor-centered functionalist explanations
of policy choice (such as the one by E-OH) as it directly contradicts some of its basic tenets.
For one, it is certainly not reconcilable with Moe’s (1989: 269) account that asserted that
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“any notion that political actors might confine their attention to policymaking and turn
organizational design over to neutral criteria or efficiency experts denies the realities of
politics”. What this approach offers, rather, is an alternative hypothesis for a different mode
of representative government without discrediting “normal” theories of “normal” politics. A
direct consequence of this is that a general theory of policy choice and its underlying
institutional structure remains elusive: What is feasible for evolutionary periods of policymaking is less functional in a punctuated equilibrium setting.
4. Empirics
Research design
Empirical strategy and case selection
In light of the theoretical considerations of the previous two sections, the primary aim
of this paper is not theory testing, but theory building (adaptation and extension). Gerring
(2004) makes a compelling argument for qualitative case studies that have more “affinity”
towards an “exploratory” strategy of research. This approach sets its aim at “theory
generation” and the exploration of “causal effects”. In my quest to establish a coherent
relationship between the ends and means of research I rely on the qualitative approach of a
small N cross-sectional comparisons that controls for a number of possible confounds. That
said, the above hypotheses can be easily reformulated for the purposes of a future large N
research design as–according to Gerring–the two are not “antagonistic approaches to the
empirical world” (see Conclusion).
My research design involves four brief case studies, based on the “method of
difference” principle. The British, French, German and Dutch financial markets, government
structures and the actual bailout strategies implemented in the heat of the crisis have a lot in
common and, therefore, form an adequate group of cases for such an analysis. The countries
in the sample are all advanced industrial states, which retain a substantial degree of financial
policy sovereignty and thus the capacity to influence the behavior of major actors based in
the core of the world economy (same is not true of e.g. small open economies with privatized
bank sectors in Central and Eastern Europe).
All cases in the sample have bicameral legislative bodies with a relatively minor role
for the upper chamber. The government structure is unitary in all except for Germany.
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Besides the U.K., all sample countries are part of the euro zone. That said, this splendid
isolation of Britain does not weaken, but, in fact, reinforces the general argument (see the
section on the independent variables). By focusing on the simultaneous bank bailout
legislations of 2008 we can also keep time constant through the cases. Indeed, apart from
being the “most similar” cases, the U.K France, Germany and the Netherlands are convenient
choices as the bank rescue packages were almost simultaneously adopted–a further step
towards the natural experiment ideal-type. The units of analysis in this sense are major pieces
of legislation that were widely considered to be “bank bailout packages”, and were put
forward almost simultaneously by the governments in the sample. (The UK was an early
frontrunner with a first Banking Act in February 2008.) These bailout programs are laws
adopted by the legislature of each country, which also laid the groundwork for further
“delegated legislation” (see Table 2 ).
- Table 2 around here -
A final factor reinforcing the internal validity of the framework is that the
Treasury/Ministry of Finance and the central banks play a large and, more importantly,
somewhat similar role in banking supervision in all countries, along with the respective
financial services watchdogs (the ECB was seemingly not a source of variation with regards
to national bailout efforts directed at individual financial institutions).
Dependent variables
The two propositions introduced in Section 3 pertain to a major factor in
shaping policy choice, the level and structure of bureaucratic delegation. In the following, I
focus on the operationalization of these theoretical variables and argue for a composite index.
As I mentioned above, the empirical strategy attached to the baseline model is not
feasible in its entirety for the present project, and for a number of reasons. The construction
and operationalization of the dependent variable in E-OH’s model is undoubtedly a
significant contribution of the book. Also, since the numerous pieces of landmark legislations
and the provisions they contain are just as feasible a unit of analysis for delegation in
parliamentary systems as in presidentialism the book passes this test with flying colors.
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The first most important theoretical innovation of the book is the very definition of
delegation as a discretionary rule-making authorization. E-OH (1999: 91) go on to
operationalize delegation as the
“authorization of a program, that allows the agency some discretionary authority; the creation of a
board or commission with authority to regulate some aspect of economic activity; granting an agency authority
to modify or change decision-making criteria; allowing an agency to allocate moneys or benefits where they
determine the sum and/or possible recipients of those benefits; allowing an agency to wave or exempt
constituents from certain rules or procedures; and extensions of decision-making authority that would otherwise
expire.”
The construction of operational variables in “Delegating powers” is based on the idea
of the zone of “total discretion” which equals the difference between the delegation ratio (r=
provisions with executive delegation/total provisions) and the constraints ratio (f= categories
of constraints in a law/total categories – ibid 93; 103, respectively). These are the
components of total discretion, along with an index of “relative constraints” which scales the
“constraint index by the amount of delegation in a law” (ibid 104). Total discretion, then, is
calculated as delegation minus relative constraints. In sum, by coding the extant institutional
arrangements and the relevant pieces of law we can calculate the indexes of delegation,
which, in turn, enable us to make cross-sectional comparisons of the extent of delegation and
also that of structure.
It goes without saying that this is not the only possible operationalization. All things
considered, while E-OH’s choice of a more substantial metrics is vindicated, its return-oninvestment ratio is arguably lower than that of the less complex measures. Fortunately,
methods are available that are more feasible in the context of the present research agenda. I
opt, therefore, for three alternative measures of delegated authority, this important factor in
shaping policy choices: the length of laws; agency autonomy; and budget authorizations.
First, the non-substantive method adopted by Mayhew (1991) spawned a number of
similarly procedural “brute force” methods. One with a substantively large impact is the word
count method of Huber et al. (2001). The authors offer a simple measure: The number of
words in new text circumscribing the responsibilities of the bureaucracy. In the context of the
present research the length of the pieces of legislation in question should be indicative of the
extent of control measures, and therefore the limits on delegation built into the legislation.
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The length of laws, therefore, will serve as on of the dependent variables in this informal
model.
Second, a similarly useful proxy presents itself in the form of institutional
independence measures (for an overview see Iversen, 2006). In the case of European central
banks Quaglia (2008: 6) provides a detailed comparative assessment of institutional
autonomy based on a metrics of legal provisions, policy capacity, legitimacy etc. A similar
study was undertaken by Gilardi (2008) for independent regulatory agencies. As analogous
indices have been developed with respect to all-important units of the government structure,
research into the extent of delegation can benefit from this literature. Degree and structure
overlap in this literature: a non-majoritarian agency, such as an independent central bank
(form) enjoys more autonomy (degree).
Interestingly, this branch of research share a number a common properties. E-OH
describe delegation as the creation of “policy authority residing outside Congress” (E-OH,
1999: 154). Based on this definition they form two major groups: executive agencies and
non-executive branch actors, such as state and local agencies and the courts. As for our
primary concern, the executive agencies, E-OH use 5 subtypes: the Executive Office of the
President (EOP); cabinet departments (CD); independent agencies (IA – such as central bank
authorities or –financial supervisory agencies); independent regulatory commissions (IRC);
and government corporations (GC – ibid 80). Each of these organizational units is associated
with a level of initial discretion (and, taken together, they form a “bureaucratic structure” –
ibid 156). This classification by and large lends itself well to generalization to nonpresidential separation of power systems.
On this more general level, the relevant division line is between majoritarian and nonmajoritarian units of the government structure. In this respect, and as a general assumption,
EOPs, CDs and (for the most part) GCs can be considered to have ideal points closer to the
chief executive than IAs and IRCs. To the extent that this assumption holds, one could expect
an empirical overlap or correlation between the level and structure of delegation, at least
under less fragmented governments. This should come as no surprise as they represent the
same theoretical consideration: The room for maneuver (or “decisiveness” in CoxMcCubbins speak) and to choose freely from policy instrument options for the chief
executive. This leaves us with a binary dependent variable for the structure but also that of
the degree of autonomous policy choice: independent/non-majoritarian agencies (IAs and
IRCs) and majoritarian agencies (EOPs, CDs, GCs).
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Finally, perhaps the most straightforward measure of the degree of delegation
ingrained in policy choice is the level of budget authorizations/appropriations granted to the
executive branch. In this respect, nominal figures seem less useful than measures relative, for
example, to the size of the GDP of the country or total budgetary outlays. This metrics will
serve as the third dependent variable in the verbal model.
While these quantitative measures have a distinct competitive advantage over less
concrete metrics, the abovementioned scales are not without downsides. For there is a real
trade-off between more objective quantitative measures that are “blind” to the saliency of a
single line in a mass of text and qualitative interpretations of the saliency of the same line
item that inevitable retain an element of subjectivity. The local administrative practices of the
sample countries, for instance, may affect the actual wording of bills, just as the degree to
which MPs rely on informal “fire alarms” as opposed to formal oversight mechanisms that
are built in the legislation ex ante.
In the face of these and similar conundrums the best strategy is to hedge our bets and
rely on a number of metrics. It would be, therefore, ill advised to settle on just one workhorse
dependent variable as the abstract propositions warrant a more diversified approach. The
construction of an index á la Iversen (2006) remains a possibility yet for our present purposes
this is not a necessity. As long as the alternative measures indicate a similar causal link
between the variables of interest, this combination of metrics presents itself as a viable means
to gauge the validity of the propositions.
In sum, this section has provided an overview of the toolkit for the measurement of an
important determinant of policy choice: the degree and structure of delegation. In the next I
undertake a similar exercise with respect to the independent variables of the informal model.
Independent variables
The central topic of this section is the definition of fragmentation. In this paper, by
fragmentation I mean the effective number of veto points (ENV), a concept that I introduced
above. It is important to note that the number of effective vetoes is not necessarily constant in
a given polity over time. In a quasi-formal rendition this means that ENV is a function of the
number of parties in parliament; the number of coalition partners; the ideological distance
between said parties on the one hand; and the relatively fixed institutional characteristics of
the polity on the other.
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The inclusion of these general regime characteristics is certainly not unprecedented in
the literature on the politics of bailouts (see e.g. Rosas, 2009). That said, a more conclusive
list of veto point types remains elusive even as the case studies to be discussed in the
forthcoming chapter reveal at least a partial catalogue of said veto points.
In light of these prefatory considerations now I turn to the question of
operationalization. Unfortunately, U.S.-centered studies are often not directly applicable to
European cases. Adler and Leblang (2006: 216-220), for instance, introduce a number of
measures of “governmental configurations”. The four main categories could be reformulated
as the role of the executive (the party affiliation and incumbency of the president/prime
minister), unified/divided government, institutional conflict (gridlocks and vetoes) and
institutional compromise (partisan and ideological compromise). Ideological scores of the
DW-NOMINATE variety or other, however, are not available for the European countries and
databases such as the VoteWorld Comparative Parliamentary Roll-Call Voting Reference
File does not contain the required data either. Since similar limitations hinder the adaptation
of the rest of their variables this means that only a more simplified metrics may come into
play.
The original independent variables of the model by E-OH are burdened with similar
problems. First, they are based on two sources of variation: policy uncertainty and political
uncertainty. For our current purposes only the latter is relevant as in this paper I do not
address problems related to the policy uncertainty principle. In line with the approach of
Huber and Shipan (2006: 262) “the issue type is held constant”.
As for political uncertainty the selection of explanatory variables in E-OH’s model
offers a less obvious fit for non-presidential systems still. The various metrics put forward by
E-OH to gauge the effect of a binary notion of divided/unified government are only partially
useful: the basic dichotomy less, the more complex ones, based on seat shares amongst
others, more so. As co-habitation is rare in some semi-presidential systems (e.g. France); just
as one-party governments in PR-parliamentarism (e.g. Germany, Netherlands); and most of
the time divided government is not applicable to Westminster style parliamentarism (e.g. UK
– except for cases of a “hung parliament” but then again, this is a rare occasion, occurring
just once between 1929 and 2009; and for a limited period of 9 months); the binary approach
seems to have a limited purchase on the cases in the sample. That said, the introduction of
ENV offers a promising variable on a mid-range level of abstraction that may resolve these
issues related to the operationalization of fragmentation.
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A large N study could make use the World Bank’s Database of Political Institutions,
which also includes data on the political balance of power (the respective political
denomination of the head of state and the majority in the legislature etc.). The five subset of
factors (chief executive variables; party variables in the legislature; electoral rules; stability
and checks and balances; federalism) in this database contain 125 individual variables. At
first glance, of these factors at least a dozen variables provide meaningful metrics for our
present purposes, including ‘opp1vote’, ‘numvote’, ‘check’ etc. On the other hand, an update
for the database for 2008 was not available yet at the time of the research project.
Despite their obvious differences the abovementioned measures present a largely
overlapping set of independent variables to gauge fragmentation. Therefore, all things
considered–and with an eye on keeping the discussion as simple as possible while retaining a
significant degree of explanatory power–in this paper I use three proxies for measuring
ENV/political fragmentation. Of these one varies and two others are fixed on the short term.
The first one is a more nuanced version of the divided government variable (with
values: unified; mixed; and coalition; “mixed” being a coalition with a dominant party).
Besides this I rely on two institutional variables. The first one is the degree of separation of
powers, which is self-explanatory (it is the key to understanding the E-OH model). The
second is the proportionality of the electoral system, which (via Duverger’s “law”) is more
conducive to coalition governments as opposed to single party governments. These also may
take the values high, mixed and low and are summed up in Table 3.
- Table 3 around here -
The rationale for using electoral systems as a proxy is that–more often than not–they
are “associated with a distinct party system” (Iversen – Soskice, 2006: 167) and, therefore,
are widely used to account for the emergence of coalition governments. An example for this
choice in the context of financial regulation is provided by Rosenbluth and Schaap (2003):
Based on evidence from twenty-two industrialized countries, they argue that “the political
dynamics generated by these electoral rules continue to shape the nature and extent of
prudential regulations that countries adopt in the place of banking cartels.”
Based on the two institutional proxies, the degree of separation of powers and
electoral systems, a rank order may be established for our sample starting with the UK and
ending with The Netherlands, and with France and Germany in between (the latter being
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closer to the pole that signals more fragmentation). This rank order is also in line with the one
used by Cox and McCubbins (2001) who put Germany (unified power/separated purpose)
and France in the middle of the spectrum with the completely unified UK on one, and the
extremely fragmented US at the other end of the spectrum.
In the final analysis I subsume the three independent variables under three categories–
low, mixed, and high fragmentation–each with a different prognosis for the outcomes
generated from the model. The British and Dutch cases are straightforward: The former
constitutes the low-fragmentation, the latter the high-fragmentation end of the spectrum.
Based on the results of the 2005 election the Labour Party held 356 of the 646 seats of the
House of Commons. In the Netherlands the fourth government of Prime Minister Jan Peter
Balkenende was based on a grand coalition formed in 2006 between the centre-right CDA
(41) and CU (6), and the centre-left PvdA (33). (In the brackets are the seats attained in the
Lower House.) This coalition had a thin majority of 80 in a 150-seat Lower House.
From the cases with a hybrid institutional structure France shows a relatively lowfragmentation as in the period in question it was ruled by a coalition established in 2007 and
dominated by the party of the president and the prime minister. (François Fillon’s second
government was supported by 345 of 577 deputies of which 313-a simple majority-were
sitting in the group of president Sarkozy’s party, the UMP.) Germany, on the other hand, is a
relatively high-fragmentation case as it was governed by a grand coalition of CDU-CSU
(226) and SPD (222) with other majority coalitions available in a Bundestag of 614 seats. As
a grand coalition–almost by definition–indicates a larger-than-usual policy distance between
its constitutive parties Germany is closer to the Dutch case. Moreover, this position is
reinforced by an institutional factor, the larger than usual role for the second chamber, the
Bundesrat in policy-making. While a relatively high degree of covariance between these
variables is more than probable, my expectation is that this will not affect substantively these
general findings.
The beneficiaries and degree of delegation in crisis: A cross-sectional
analysis
Expected results
Having introduced the propositions and the theoretical and operationalized variables,
along with the empirical strategy designed to gauge the cause-effect relationship between
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them, the final step before turning to the actual cases is a preliminary analysis of the
hypotheses. Crude as this analysis is, my expectation is that a more refined/quantitative probe
into both sides of the equation would point toward the same conclusion. Furthermore, if an
analysis of empirical phenomena based on such rudimentary measures signals a tension
between the model/propositions and actual decisions further inquiries with regards to both
model and measurement would be in order.
Turning now to the sample, if the propositions about non-presidential separation of
powers systems are correct, they would have the following observable implications: the
highest degree of delegation in policy choices is expected in the UK, followed by France with
its less unified government due to a coalition in the National Assembly. A grand coalition in
Germany, and especially the multiparty grand coalition government in the Netherlands
signals a more fragmented polity and, therefore, less delegation—and to more independent
agencies.
In a similar vein, in the UK and France a less fragmented government implies
delegation to executive branch departments as opposed to Germany and the Netherlands
where the extended version of the equilibrium of E-OH’s model suggests more delegation to
independent agencies. By contrast, if we find evidence in the political debates/voting data
about agency design, that the eventual institutional choice was informed by considerations
regarding trusteeship, blank-cheques and the like, as opposed to fragmentation, this would
weaken the hypotheses that build on these purely political variables.
Cases
UK
The outlier UK data is seemingly in line with Proposition 1 as it occurred in a less
fragmented political environment. A forceful case can be made, however, that this data is but
a reflection of the depth of the underlying financial crisis and have nothing to do with
executive-legislative relations. As far as anecdotal evidence goes, insider accounts
overwhelmingly confirm this latter interpretation.iv
As for the structure of delegation, the British case is relatively straightforward and is
in line with the prognosis of the baseline model. With relatively few veto points the
government had a free hand to craft a series of executive decrees pertaining to various policy
choices. Timing also had a major impact: A makeshift Banking Act had already been
approved due to the early collapse of Northern Rock. This opened up some space for
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executive discretion before a new, supposedly long-term regulation could have been put in
place. By October 2008 an early draft of this new proposal (to be voted on in early 2009) was
already introduced in the House of Commons.
That said, demands with regard to “more information about Labour’s blank cheque”
were certainly not uncommon weeks into the bailout as “despite repeated requests (…)
Parliament (had) still not been given a chance to consider” these momentous events.v In the
meantime a majoritarian agency, the UK Financial Investments Limited (UKFI)—“a
company wholly-owned by the Government”—was established to manage the holdings
acquired by the bailouts. In summary, the UK case by and large conforms to the baseline
model, except for the length of the eventual legislation, as the emphasis of Proposition 3 on
ex post oversight is verified by the length of the Banking Act of 2009. Nevertheless, the
second Banking Act was a hybrid of short-term crisis management and “long-term”
resolution that puts the usefulness of the word count metrics into question.
France
In France, a less-than-fragmented political elite propped up an obscure creditrefinancing agency (SRAEC) to create La Société de financement de l'économie française
(SFEF). A unique feature of this arrangement was that it was a government corporation as
opposed to a cabinet department agency, which created the possibility of private entities
(banks) acquiring a majority presence on the board. This outcome somewhat contradicts
Proposition 2 as a unified government implied that executive should have dominated the
emerging bureaucratic structure. Furthermore, the SFEF was a garden-variety short term
bailout institution as it has been “put to sleep” by statute (La Loi de Finance 2010) in less
than two years and very much in line with the original intentions.
Germany
In Germany both chambers of the parliament adopted a bailout package with two
smaller opposition parties, the Left and the Greens, opposing the bill in the Bundestag.vi The
Bundesrat, the upper chamber, that consists of the representatives of 16 state governments,
passed the bill unanimously. This indicated that the upper chamber–just as in all other sample
cases—was not an effective veto point once the decision had been made in the lower
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chamber. The bureaucratic structure or the level of capital injection played a secondary role
in the debate with executive-legislative relations being a hot button issue: “It’s a 500-billioneuro blank cheque,” said Greens caucus chief Renate Kuenast.
The newly created Sonderfonds Finanzmarktstabilisierung (SoFFin) has been
managed by the Federal Agency for Financial Market Stabilisation. Seemingly, this is an
independent agency in E-OH’s nomenclature (an “independent public-law institution” as it
was defined), which would confirm Proposition 2. A closer look, however, reveals that the
“Management Committee” consisted of three members who were appointed by the Federal
Ministry of Finance in consultation with the Deutsche Bundesbank. Also, the agency was
“subject to the legal and technical oversight of the Federal Ministry of Finance” and the
Federal Ministry of Finance was “politically responsible for the decisions of the FMSA.”
vii
With the ties close to the Ministry of Finance as they were, the German case does not
adequately corroborate Proposition 2.
The Netherlands
While the case France and Germany show a mixed picture the case of The
Netherlands is particularly puzzling. A grand coalition was in charge of crisis management,
with Wouter Bos, a deputy prime minister/finance minister from the junior partner Labour
party taking the lead. In a mechanical application of the baseline model this politically shaky
setup is supposed to lead to lengthy bills and delegation to independent agencies. What
happened, on the contrary, was a hands-on approach by the government relying mostly on its
decree powers with only ex post legislation and oversight taking place on behalf of
parliament.
On September 28, 2008 Fortis had been bailed out in a coordinated effort between the
governments of Netherlands, Belgium and Luxembourg. The Dutch government on October
9 then declared that a €20 billion fund was created to strengthen the equity of the financial
sector. During the week of October 13 the Dutch government initiated of €200 billion
guarantee for interbank lending. And finally, during the week of October 20 the Dutch state
took a stake in ING Group's core capital in the form of securities, amounting to €10 billion
and Aegon received a capital injection from the government over €3 billion. All this was
managed by the Agentschap van de Generale Thesaurie, which is a standard-issue Treasury
agency and which is, as is common in the developed world, part of the Ministry of Finance.
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Furthermore, according to news reports, it was Bos who decided on October 7, “after
consultations at a European level”, to temporarily guarantee private bank accounts up to
€100.000. And together with Nout Wellink of the Dutch Central Bank, he presented a
comprehensive bailout plan. While an emergency debate was held in the Parlement based on
a first sweep of new reports statutory action—to my knowledge—was not taken. Perhaps this
was the reason why cross-party support developed for an inquiry into the causes and
management of the credit crisis.viii This “accountability” coalition stretched from the far-left
to the far right and included all opposition parties. Besides the criticism, however, the letter
expressed support for finance minister Bos for “putting out the fire” which, it said, was “of
vital importance” while the crisis continued. And despite the sense of urgency expressed in
the letter ex post parliamentary investigations of the government interventions only started in
April 2009.ix
Discussion
The actual variables for the cases at hand are summarized in Table 4. On the
independent variable side, the factor of choice of the baseline mode, fragmentation is
presented. The rank order—as discussed above—draws on three sources: divided/unified
government, government system and electoral system. The first of the dependent variables,
the length of legislation, is based on Huber et al. (2001) and it is self-explanatory.
- Table 4 around here -
The second variable, the cost of bailouts (calculated as a proportion of GDP–see
Table 5), deserves further elaboration. The financial data presented in Table 5 combines new
appropriations and the discretionary funds of central banks. That said, the sheer size of the
differences (and the Treasury-specific costs indicated in Table 2) testifies to the
comparability of the numbers. Finally, the third dependent variable represents the relative
independence of the recipients of delegation from the chief executive, with values: high;
mixed; and low.
- Table 5 around here -
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A cursory analysis of the propositions regarding the four cases yields the following
conclusions (see Table 4). According to Proposition 1 less authority is delegated under more
fragmented governments. The results are mixed, leaning negative: The UK holds up well,
France and the Netherlands significantly less, with Germany in the middle. Proposition 2
contends that under fragmented government independent/non-majoritarian agencies become
the primary beneficiaries of delegation. Once again, the Netherlands and Germany are
significant outliers, with the Treasury having a leading role in bailout efforts.
Proposition 3, the alternative hypothesis derived from the theory of trustees, on the
other hand, is upheld by the findings. The notion of blank-cheque delegation was a recurring
theme in the debates about bailout. The level of delegation as measured by budget
appropriation proved extremely sensitive to exogenous factors such as the depth of crisis.
Policy coordination between European government agencies (as opposed to political parties)
was a generally recognized fact. Even in the most accommodating British case parliament
crafted a lengthy piece of legislation packed with oversight measures only after the worst
days of the crisis–and the same happened in The Netherlands. In the meantime a heavy
reliance on executive decree power, a definitive sign of trusteeship, was the main tool of
government intervention. In a similar fashion, the Treasury in Germany, and the Ministry of
Economy (which incorporates the Treasury) in France was put in a decisive role in managing
and supervising the newly created bureaucratic units. And finally, extant bureaucratic
capacities played a major role in shaping the structure of delegation with the Treasury taking
the initiative in all cases in the management of bailout efforts.
The Dutch and German cases are particularly interesting for two reasons. First, grand
coalitions do not seem to have the same effect as divided governments did in the U.S.
context. Only opposition parties voted against the bailout measures. This indicates one of two
things. Either the fragmentation-based analysis needs to be revised or we may accept ENV as
an important factor with a significant modification. Coalition governments should be treated
as unified governments with regards to landmark policy decisions. The results are the same:
fragmentation in its present operationalization is not a useful explanatory variable.
Divided/unified government may, in fact, be useful in the context of parliamentary
systems under normal circumstances. Under extremely high degrees of policy uncertainty in
the issue area of financial policy, however, there is a tendency to delegate the decisions
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Miklos Sebok
regarding policy choice to the Treasury regardless of the underlying ENVs. The answer to the
puzzle lies in trusteeship as an alternative to principal-agent explanations.
5. Conclusion
In this paper I have presented an extension and application of the “delegating powers”
model by Epstein and O’Halloran to non-presidential systems of government in a specific
issue area. I argued that this extension is plausible; and proposed the notion of fragmentation
and the effective number of veto points as more general substitutes for the pivotal
independent variable of divided government. The cursory overview of a basic application of
this model to a cross-sectional sample of four AICs has produced ambiguous results
indicating the presence of a number of possible confounds. A new proposition was offered;
one that can account for decisions regarding policy choices under extreme degrees of policy
uncertainty.
The most important finding of the paper is that universal theories of legislative agency
design remain elusive. The least we can say is that one of the most widely used and
acclaimed frameworks (E-OH’s “delegating powers”) proved to be ineffective in explaining
major policy decisions such as agency design outcomes regardless of the level of policy
uncertainty. On the other hand, the alternative proposal of a “blank-cheque delegation” in
crisis situations held up well in a “ticking-bomb scenario” such as the case of the financial
crisis of the late 2000s. This signifies the relevance of a novel approach, one that meets the
needs of this other mode of representative government: the state of emergency.
The concept of trusteeship provides a theoretical background against which testable
propositions, such as Proposition 3 about the blank-cheque nature of crisis-driven delegation,
may be generated. Even as the primary aim of this paper was theory building, as opposed to
theory testing, the crisis-driven delegation theory of policy instrument choice involving
trustee-type institutions proved a promising description of policy choices in crisis situations.
30
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Miklos Sebok
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Appendix
Table 1 – Executive Autonomy: Sources and Controls
Stag
e / S&C
Ex
ante:
policy-making
Ex post: implementation
(latent)
Stat
1,
Governing
by
“Ongoing
utory
legislation (d=0) – e.g. investment institutions
control
in policy capacity
controls”
and
procedures
–
(EOH,
1999: 25 – also oversight)
2, Delegation with controls
1, Legislative veto – renewing
on discretion (d=1 w/ constraints) and withholding appropriations (Calver
in the legislation proper
et al.’87, Huber et al. 2001)
a, Budgetary: (KiewietMcCubbins,
1991)
2, Legislative amendments to
e.g. administrative decisions
“limitation riders”
3, Judicial review: nullify/alter
b, Rules: “Fire alarms”
4, Presidential removals (EOH:
(McCubbins – Schwartz, 1984) 25)
(Moe,
1989),
reporting
and
consultation (EOH, 1994)
c,
Structural
5,
OMB
performance,
–
shaping
(5 types in EOH)
d, Political appointees to
public bureaucracies by Congress
and the president (Moe, 1982,
Lewis, 2004)
3, Administrative law –
procedural (McNollGast ’87)
utory
sources
1, Legislative delegation
(EOH, Moe, 1990)
2. Executive orders etc.
(Howell, 2003)
3. “Shaping” legislation
34
budgets,
controls: screening and modifying legislative
bureaucratic design + divvying up proposals (Moe, 1985)
Stat
“monitoring
International Conference on Public Policy, 2013
Miklos Sebok
(Wilson, 1989)
Non
Costly auditing: 1, Oversight
-statutory
hearings (latent control/police patrol –
cons
Weingast-Moran, 1983), 2, “Informal
traints
rights recognized in practice” (Moe,
1985:1100),
“subtle
and
indirect
mechanisms”
Free auditing: 3, De facto
oversight by interest groups (fire
alarms)
Non
Capacity
-statutory
building:
sources
entrepreneurship
and
1,
networkPolicy
w/
interest
groups 2, HR strategy (in line with
mission),
Political
entrepreneurship:
3,
The
“Power
to
Persuade” and political leadership
based on legitimacy (Neustadt,
Moe 1982)
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Miklos Sebok
Table 2 – Short term “bailout packages” in 2008
UK
Germany
France
The
Netherlands
Date
October 8x
October 13xi
(executive
October
13
Octob
er 3
proposal)
Nam
e
of
law/decree
Cabinet
BR-Drs.
NOR:
Cabin
decisionsxii based on the 750/08:
BCFX0824244L
powers delegated by the
: Loi de finances
Banking
Provisions)
Finanzmarkt
(Special Act
2008,
superseded
The
Banking
of
et decisions;
rectificative pour
Stabilisierun
by gs-gesetz
le
financement
de l'économie
Act
2009xiii
Size
£500 billion
€ 480 billion
€360
€200
billion
Effec
tive date
February
12,
2009
New
instit
ution
October 17,
2008
UK
Investments
Financial
(UKFI)xv;
October
erung (SoFFin)xvi
Octob
16, 2008xiv
er 11, 2008
La
Pre-
Sonderfonds
Limited Finanzmarktstabilisi
billion
Société
de existing
financement
de (Agentschap
l'économie
van
de
française (SFEF) Generale
Thesaurie)
Bure
100% Treasury
IA w/ 100%
66%
100%
aucratic
Ministry of Finance Banks
–
34% Ministry
design
appointees
Ministère
de Finance
of
l'Économiexvii
New
program
“Bank
SFEF
“Credi
Recapitalisation Fund”;
t
“Credit
Scheme”
Scheme”
36
SoFFin
Guarantee
Guarantee
International Conference on Public Policy, 2013
Miklos Sebok
Table 3 – Government and electoral system fragmentation
Government
High (PR)
Mixed
Electoral
Low
(Maj-
Plur.)
system
High
USA (0.39)
(Presidential)
Mixed
France (0.16)
(Semi-presid.)
Low
Netherlands
(Parliamentary)
Germ
(1.00); Italy (0.91)
UK (0.16)
any (0.91)
The data refers to the proportionality (%) of the electoral system. Data source: Iversen
– Soskice, 2006: 176.
Table 4 – Delegation outcomes
UK
Franc
e
Independent
variable
Germa
ny
Netherla
nds
Lowe
Low
High
Highest
High
Low
Mixed
-
Low
High
(baseline st
model): Fragmentation
Dependent
variable:
Length (51256)
(1310)
(4764)
(words)
Dependent
variable: Cost:GDP
Highe
st (0.2)
Dependent
variable: Independence
Sources: see Table 2
37
Lowe
st (0.016)
Low
Mixe
d
(0.0307)
Mixed
(0.136)
Low
International Conference on Public Policy, 2013
Table 5 – Bailout costs/GDP
Source: Dermine – Schoemaker, 2010: 3-4
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Miklos Sebok
Wingfield, Brian – Muller, Joann: Bush May Roll Out TARP For Detroit,
i
www.forbes.com,
12.12.08. Downloaded from: http://www.forbes.com/2008/12/12/bailout-washington-
detroit-biz-beltway-cx_bw_jm_1212autosupdate.html
ii
I thank James D. Savage for this formulation of the underlying idea.
iii
I thank Herman Schwartz for pointing out the tension between these sources of
iv
Dey, Iain: How the government bailout saved our banks, The Sunday Times,
power.
October 3, 2009. Downloaded from:
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6860385.ec
e
v
Forsyth, Michael: Financial crisis: Bail-out questions that must be answered, The
Daily Telegraph, October 24, 2008. Downloaded from:
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3255946/Financial-crisis-Bail-outquestions-that-must-be-answered.html
Deutsche Welle Staff Report: German Lawmakers Pass Bank Rescue Package,
vi
Deutsche Welle, October 17, 2008. Downloaded from:
http://www.dw-world.de/dw/article/0,,3719946,00.html
vii
Structure of the SoFFin and the FMSA, The Official Website of SofFin.
Downloaded from: http://www.soffin.de/en/soffin/structure/index.html
viii
DutchNews.nl Staff Report: Cross-party support for credit crisis inquiry,
DutchNews.nl, October 29, 2008. Downloaded from:
http://www.dutchnews.nl/news/archives/2008/10/crossparty_support_for_credit.php
ix Gray-Block, Aaron: Dutch to probe cause of credit crisis – reports, Reuters.com,
April 15, 2009. Downloaded from:
http://www.reuters.com/article/idUSLF53184620090415
x
Treasury statement on financial support to the banking industry, HM Treasury,
October 13, 2008. Downloaded from:
39
International Conference on Public Policy, 2013
Miklos Sebok
http://www.hm-treasury.gov.uk/press_105_08.htm,
Financial crisis: UK bank bail-out: The
key points, The Daily Telegraph, October 8, 2008. Downloaded from:
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3156699/Financial-crisis-UK-bankbail-out-The-key-points.html
xi
Cremer, Andreas: Germany Pledges EU500 Billion in Bank Rescue Plan,
Bloomberg.com,
October
13,
2008.
Downloaded
from:
http://www.bloomberg.com/apps/news?pid=20601100&refer=germany&sid=aYSv0XgWCvqk
xii
Armitstead, Louise – Aldrick, Philip: Britain's £500bn banking bail-out: The inside
story of a dramatic week, The Daily Telegraph, October 18, 2008. Downloaded from:
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3224819/Britains-500bn-banking-bail-out-Theinside-story-of-a-dramatic-week.html;
debate.
UK Parliament, Publications and records, Daily hansard –
October
8,
2008.
Downloaded
from:
http://www.publications.parliament.uk/pa/cm200708/cmhansrd/cm081008/debtext/81008-0003.htm;
A
number of ‘statutory instruments’ were also issued in these days, for BandB
(http://www.opsi.gov.uk/si/si2008/draft/ukdsi_9780111471180_en_1),
for
(http://www.opsi.gov.uk/si/si2008/draft/ukdsi_9780110810058_en_1)
and
NR
Landsbanki
(http://www.opsi.gov.uk/si/si2008/uksi_20082668_en_1).
Banking Act 2009. Office of Public Sector Information, Downloaded from:
xiii
http://www.opsi.gov.uk/acts/acts2009/pdf/ukpga_20090001_en.pdf
xiv
LOI n° 2008-1061 du 16 octobre 2008 de finances rectificative pour le financement
de
l'économie,
Legifrance.gouv.fr,
Downloaded
from:http://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000019653147
xv
Establishment of UK Financial Investments Limited (UKFI), HM Treasury,
November
3,
2008.
Downloaded
from:
http://www.hm-
treasury.gov.uk/uk_financial_investments_limited.htm
xvi
Source: http://www.soffin.de
xvii
Source: http://www.agefi.fr/articles/Premiere-reunion-Societe-Refinancement-1053786.html
40
International Conference on Public Policy, 2013
All links were retrieved from the webpages on May 31, 2013.
41
Miklos Sebok