Streetwise Professor

February 22, 2010

Transparency for Thee, But Not For Me

Filed under: Economics,Financial crisis,Politics — The Professor @ 10:23 pm

I am reading Reinhart and Rogoff’s This Time Is Different.  Interesting, in a scary sort of way.

One thing that struck me with particular force, particularly in light of recent news, is their lament at the difficulty of ascertaining just how much debt governments have issued.  They state quite forcefully that government accounting is notoriously opaque, and that governments are the enemies of transparency.

Ripped right from the headlines, that.  Think all the news stories emanating from Europe, focusing on Greece, but making it clear that dodgy accounting and budgetary gamesmanship is rife throughout Europe.  Not that the US is much better.  Just look at the steadfast refusal to account honestly for the impact of the Federal takeover of Fannie & Freddie–which follows the refusal of the government to account honestly for the contingent liability inherent in the implicit guarantees extended F&F (which weren’t all that implicit, were they?)

This is of direct relevance to current fiscal policy debates.  Krugman and other pro-stimulus/pro-deficit types argue that the current debt/GDP ratio of the US is nothing to worry about.  We had a higher one after WWII, and we grew out of that, right?  But things are very different now.  The demographics are extremely different.  The US’s relative economic standing is very different.  Moreover, and most importantly, the true debt burden is far larger than the “official” figures would suggest–think Social Security, Medicare, Medicaid, and the vast unrecognized but very real contingent liabilities and guarantees and implicit commitments the government has undertaken.  And it makes sense to borrow from the future to fund an existential conflict like WWII; the spending proposed by Obama, let alone Krugman et al, is certainly not needed for any such existential end.

So, remember: most of what you read about the government’s finances is incomplete and/or misleading, when it isn’t an outright lie.

This, of course, from the very same people who lament the lack of transparency in various private endeavors (e.g., dark pools, OTC derivatives, corporate accounting).  Yes, there are some concerns in these areas, but the systemic consequences of government finance here and abroad are far more important.  Far more.  Those in government–legislators, Treasury, the Fed, regulators–who want to mandate greater transparency for private actors should therefore start their sunshine campaign a little closer to their work.  A lot closer, actually.

Like that’s going to happen.

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  1. I completely agree with this post.

    One more thing I would add, however, is that the US is unlikely to see any further substantial growth in GDP. Energy resource availability (and rare earth metals) are becoming limiting factors to any further growth, and the US is facing increasing competition for them from China and “resource nationalists”.

    As such, I think any commitments it makes to containing its budget deficit are completely non-credible and within a few years investors will realize this too, with bad consequences (e.g. Argentina 2002) for the US.

    PS. Ironically, if your suggestions on increasing transparency were actually implemented, this loss of faith might be all the more immediate?

    Comment by Sublime Oblivion — February 22, 2010 @ 11:09 pm

  2. S/O: Complete agreement, eh? A sign of the end times, perhaps?

    I agree that US economic growth will be slow: I disagree strongly, however, that it will have anything to do with energy (or other natural resource) availability. It will have far more to do with a crushing tax burden. Which will, ironically, tend to reduce demand for natural resources.

    The ProfessorComment by The Professor — February 23, 2010 @ 7:23 am

  3. IMHO, tax burdens don’t matter very much. Finland, Scandinavia in general, have very high tax burdens but that doesn’t stop their GDP per capita from growing at a respectable clip.

    I agree that demand for natural resources will be “destroyed” following the next recession, as happened in 2008-09, and thus consequently prices will fall back down to earth. But that’s like the chicken and egg thing; did the recession cause the oil price fall, or did the high oil price cause the recession? I think they are very tightly coupled and the simultaneous economic crash and oil price collapse of H2 2008 were no coincidence.

    PS. Have you heard of Robert Ayres’ work on thermoeconomics, and if so what do you think of it?

    Comment by Sublime Oblivion — February 24, 2010 @ 11:35 pm

  4. S/O–crude cross sectional comparisons that don’t control for other factors that can influence relative incomes and growth rates aren’t particularly persuasive. Empirical research that does control for such things shows that marginal rates on income and capital taxation do matter.

    Your mention of Scandanavia reminds me of something one of my thesis advisors, the late Sherwin Rosen once wrote (I quote from memory): “In Sweden they tax you to pay other people to take care of your children.”

    The ProfessorComment by The Professor — February 25, 2010 @ 1:57 pm

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