Constraining Public Finance: Expert Evaluations of Long-Term Harm

Friday, June 24, 2016: 9:00 AM-10:30 AM
205 Dwinelle (Dwinelle Hall)
Eleni Arzoglou, Harvard University, Cambridge, MA
In the aftermath of they Great Recession, why did we not see a paradigm shift in economic ideas and macroeconomic policies akin to the one caused by the Great Depression (Blyth 2002; Dobbin 1993)? Though policymakers initially responded by resurrecting the ideas and policies of Keynesianism(Pontusson and Raess 2012), by 2010 they reversed course, overtaken with concerns of ballooning public debts and the need for fiscal consolidation.

            Scholars of economic ideas have explained this interrupted continuity in terms the ideological power of austerity (Blyth 2013), the adaptability of neoliberalism’s core tenets (Schmidt and Thatcher 2014; Thatcher 2013) and the degree of perceived consensus among networks of economists (Farrell and Quiggin 2012). They have yet to examine the role of the technical level of expertise, which produced evaluations of public debt as harmful. We know that economic ideas achieve the greatest influence when attached to issues portrayed as highly technical, beyond the grasp of non-experts (Hirschman and Berman 2014). By 2010 technocrats appraised public debt as dangerous and called for fiscal consolidation. The deep institutionalization of economic ideas within sociotechnical tools, or policy devices (Fligstein, Brundage, and Schultz 2014; Muniesa, Millo, and Callon 2007) could provide an additional explanation for the resilience of neoliberal ideas in fiscal policy selection.

            In order to uncover the calculative practices related to public debt, I examined archival material like annual reports and country reports of domestic and international bureaucratic agencies tasked with budget reporting, including the U.S. Treasury, the G.A.O., the FASAB, the O.M.B and the C.B.O domestically, and country surveillance internationally, such as the IMF, the O.E.C.D and Credit Rating Agencies. In order to gain mastery over the technical subject matter, I completed an IMF online course, “Debt Sustainability” on the Edx platform, where a team of IMF analysts teach participants the tools of their trade, i.e. Debt Sustainability Analyses (DSA) for both market-access and low-income countries. Having pinpointed the techniques of calculation common to these expert institutions, I carried out an investigation of the economics literature to trace the sources and development of these practices within academic knowledge.

            In this paper I argue that experts in a range of domestic and international bureaucratic agencies possess a common calculative device which disciplines governments by quantifying their long-term future debt obligations and bringing them into the present. Centered on present value discounting techniques, it purports to capture problems with debt levels far into the future (75 year or even infinity) and calls for anticipatory action in the present, by slashing spending or raising taxes.

            The idea that the government faces a “budget constraint”, much like individual consumers or companies, was invented in the late 1960’s to early 1970’s (Haliassos and Tobin 1990) during the New Classical backlash to Keynesianism. The Governmental Budget Constraint was created by turning an accounting tool, the accounting identity which keeps track of government finances after they have occurred (post-facto), into an economic model that says the government is ex ante limited in how much it can spend (Christ 1968). The intertemporal aspect was introduced in a 1979 paper, which equated the present discounted value of all future government payments to the present discounted value of all future revenues (Barro 1979). Thus, New Classical economics invented a mathematical formula claiming to capture the conditions for government “solvency”. New Keynesians accepted the validity of this approach and used it in their models, making it a part of the core of macroeconomic analysis (Reay 2012). As a technique, it never came under attack, even from those ‘star’ economists who strongly advocated for Keynesian policy solutions after the Great Recession.

            Blackboxed within the assumptions of the IGBC equation are a number of policy alternatives. A No-Ponzi scheme condition rules out the possibility of indefinitely rolling over debt. This ensures that debt most be repaid and bond investor interests always served, even though there is scant econometric evidence to back up this condition. The assumes the growth rate is independent from public spending, so that there are no Keynesian multiplier effects. It rules out monetization of debt in the belief it would always be inflationary. By making these assumptions, the IGBC artificially constrains advanced countries to be solvent through the long term. Furthermore, it only quantifies explicit obligations. Implicit obligations, like bailing out a collapsing banking industry, remain “unseen”.

            Economics Phd’s brought this device with them from academia, setting it into practice in budgetary authorities, the IMF and the OECD (Fourcade 2006). The IGBC was further adapted into measures of Debt Sustainability, calculation of the “Fiscal Gap”, Fiscal Imbalance and Generational Accounting. By adopting these techniques, expert bodies bypassed the political process, issuing political judgments about the need of  “incorporating a longer term perspective into federal budget decision making”.  On September 28th 2009, the Federal Accounting Standards Advisory Board (FASAB) mandated that the Treasury, the O.M.B and the G.A.O report on “the present value of projected receipts and non-interest spending under current policy without change”. These bodies stressed that welfare obligations will in future make debt “unsustainable”. They recommended anticipatory action to prevent harm by adjusting spending and/or taxation today. Through its Debt Sustainability Analyses, the IMF asked crisis ridden countries to focus on achieving primary surpluses rather than pursuing stimulus-spending growth strategies. Credit Rating Agencies and the OECD copied the IMF approach.

In an era with high debt figures in OECD countries, the IGBC will continue to be the key technology which tells policymakers there is not alternative but to cut welfare spending and pursue primary surpluses. They will continue to ignore the main trigger for the recent sovereign debt crisis as a major source of future harm. Banking crises are a leading cause of sovereign debt problems in advanced countries (Reinhart and Rogoff 2009:142), yet experts will continue to fixate on welfare obligations. In order to understand the resilience of economic ideas, we must pay attention to the construction of technocratic tools, how they take on the mantle of mechanical objectivity (Porter 1996), become impervious to critique and disconfirmation by events.