Fiscal Fallacies: 8 Myths about the 'Age of Austerity'
Myth #4: The leading central banks, international financial institutions, credit-rating agencies and other economic policy makers are neutral expert bodies.
This myth assumes the regulatory, oversight and assessment functions of our central banks, international financial institutions and other economic policymakers are being carried out effectively, impartially and legitimately because these experts know best about complex fiscal and monetary matters. The world’s largest and most influential credit-rating agencies meanwhile claim to be objective and neutral arbiters of the financial performance of businesses and governments. We should trust their technical expertise, it is assumed, and accept that their assessments serve as the backbone for decision-making on the global financial economy as few else understand its complexity from the inside.
Did you know?
The central banks and banking regulators of the US, UK and Europe on the one hand, and the IMF, on the other were disastrously wrong about the basic “efficient market hypothesis,” which stated that private financial actors should not be regulated because, out of a sense of self-interest, they would not risk over-leveraging themselves. As mentioned above, these institutions neglected to take meaningful steps to address the growing threats posed by the high levels of over-leveraging in financial markets in the years prior to the financial crisis, despite many warnings from influential economists. What’s more, most of the central banks and financial regulatory agencies effectively supported much of the comprehensive financial de-regulation and failed macro-prudential oversight alluded to previously.
If these institutions could have been so wrong on such fundamental issues, there is little reason to have confidence they are correct today about prioritizing inflation-targeting over employment-support and financial regulation in the midst of a slow recovery and low inflation. The US Federal Reserve, the UK Exchequer and the European Central Bank, for example, could all take more pro-active steps to address the current recession by allowing more flexibility in the inflation rate in rich countries as a way to incentivize companies holding trillions of dollars in capital to begin investing and hiring – as suggested by IMF chief economist Olivier Blanchard and others. The leading central banks have so far refused to act more boldly. Although these entities are often shrouded in a mystique of infallibility, people have little reason to accept their claims on face value, and should instead take their policy advice with skepticism while considering all other possible alternatives.
The questionable authority of the private credit-rating agencies, meanwhile, also played a significant role in the making of the financial crisis which sparked the current global economic crisis. By giving AAA-ratings to many of the mortgage-backed securities structured in the shadow banking system (non-bank financial institutions), these agencies encouraged investors (including pension funds and other socially-minded bodies) across the world to buy enormous quantities of what later turned out to be "toxic" and worthless assets. Why would credit-ratings agencies make such bad judgments? It’s a simple question of who pays the piper, according to experts. The fact that credit-rating agencies were paid by the very owners of the assets they were rating led to conflicts of interest in which the raters were prevented from giving impartial, reliable grades. Today, the three major credit ratings agencies are joining the army of deficit hawks by reinforcing the “cut to grow” myth (#2 above) by downgrading or threatening to downgrade the bonds of many governments which have borrowed funds in the bond markets to stimulate their economies into recovery. Such actual and threatened downgrades have important political ramifications, empowering politicians and the business lobby to put pressure on governments to cut spending – even in the midst of a recession. Since these ratings agencies are treated as serious, neutral and objective evaluators of whether a country’s economic policies render a sovereign default more or less likely, they are seen as impartial arbiters of a government’s financial performance, and thus beyond the realm of public (or political) scrutiny.
More fundamentally, this myth is based upon the fallacy that economics is a technocratic exercise with decisions made by neutral and objective scientists. The field of economics has in recent decades moved away from its origins in the social sciences toward a model more attuned to the natural sciences, dealing almost exclusively with matching a preconceived mathematical modeling of human behavior to a messy, complex reality. In so doing, this myth of a neutral economic science attempts to downplay the very political nature of economic policy-making and puts forth an image of a detached, apolitical and technocratic economics built on independent and universal laws.
Political factors—not purely objective ones—very often drive economic policy-making, however. Why would central banks ignore the negative employment consequences of their efforts to keep inflation so low? Why has the US adopted a policy of maintaining a strong US dollar despite its impact in a worsening trade imbalance and lost jobs at home? Why has the US, UK, the IMF and the ECB prioritized pushing the costs of bank bailouts onto citizens in the form of increased deficits over supporting debt restructuring? Arguably, the answers to such questions have much more to do with politics, policy capture and the political power of financial interests than they do with basic insights and principles of economics or econometric models. Even researchers within the IMF have admitted as much in a stinging account of the influence of financial lobbying in the lead-up to the 2008 financial crisis: “our analysis suggests that the political influence of the financial industry can be a source of systemic risk…the prevention of future crises might require weakening political influence of the financial industry.”
"In light of the irresponsible behaviour of many private financial market actors in the run-up to the financial crisis, and costly government intervention to prevent the collapse of the financial system,” declared UNCTAD’s Secretary General recently, “it is surprising that a large segment of public opinion and many policymakers are once again putting their trust in those same institutions to judge what constitutes correct macroeconomic management and sound public finances."
Human rights responses
Today advocates of policies that will best enable governments to protect and fulfill economic and social rights must ask pressing questions about the degree to which those who are calling for fiscal austerity are basing these demands on sound, empirically-founded economics, or instead are merely taking advantage of the crisis to reduce the types social spending that they are already ideologically opposed to. Human rights advocates should question the myth that economic policy is an objective, neutral science conducted by benevolent technocrats. Economic policy-making is a highly contested terrain heavily influenced by political considerations and relations of power. As such, human rights law and policy can play a fundamental role in exposing economic and social injustice, checking against the misuse of power as influential and unaccountable today as any dictatorship in decades past, and promoting economic alternatives centered on norms of human dignity and prioritizing the most vulnerable among us.
Photo of financial sector justice activists courtesy of Robin Hood Tax Campaign UK. This briefing can be accessed in pdf format here.