S&P: do what we want and no one gets hurt

Different metrics

MacEwan argued that in order for a government to maintain its democratic integrity, the bond market must be viewed not as a determinant of public welfare, but as one of many tools that the government can deploy or manipulate in order to achieve its goal of promoting public welfare.

The first and most important step to take, MacEwan said, is “to recognize that what’s good for profits is not necessarily good for people.” He added that although there are many instances in which the desires of investors do coincidently line up with the desires of citizens, that correspondence is just that: a coincidence.

Thus, for example, the interests of financial markets and the public would both likely be served if officials vote to lift the debt ceiling in the coming months. But, MacEwan said, the past two years are full of examples in which the desires of markets stand in stark contrast to the well being of the public.

“In everything from tax policy to monetary policy to environmental regulations, we see how the interests of the public and [the interests of investors] are not always the same,” he said.

“Look at the way in which the tax arrangements for international investors get set up,” MacEwan went on, referring to loopholes in the U.S. tax code which allow profits made by American companies overseas to remain untaxed. “By allowing them to avoid taxes, we are essentially giving them an incentive to invest and produce jobs abroad.” While this may be profitable for investors and businesses, “it’s terrible for the people who lose their jobs here.”

Chang pointed out that the financial sector has harnessed both Democratic and Republican politicians to remove regulations the industry saw as harmful to its profit margins.  For example, the Glass-Steagall Act had for decades prohibited depository banks from engaging in speculative activities. The Act was repealed in 1999, in large measure based on the argument that less regulation was needed to allow financial institutions to “innovate” and “thrive.” 

“Look what happens,” Chang said, when you take away regulations designed to protect the public interest.

Patrick Bond, a political economist at the University of KwaZulu-Natal in Durban, South Africa, pointed out that it makes little sense to judge policy decisions based on the perceived will of investors, because “their primary motivation is not the public welfare; it’s to make money.”

“If you had a relative who just cared about making money, would you want them watching your kids?” he asked.

John Weeks, a political economist at the University of London, said that he has been making that argument for a long time. “One common thing you hear is, ‘well, the government might do stupid things, [and, by] telling you that you shouldn’t be borrowing…they’re doing you a favor.’”

“Even if that were true, it would still be undemocratic,” he added. “You’re not just for democratic processes…when they have a good outcome. Sometimes they have a bad outcome and you have to live with it. That’s what democracy means.”

Since financial markets are not an adequate proxy for public welfare, many economists and social scientists argue, it is imperative that the elected officials stop using the bond market as a primary metric of the well-being of constituents. That would require, MacEwan said, a fundamental change in that way that officials view their policy options.

Asking different questions

After the S&P report called for reducing the deficit by cutting spending, Sen. Charles Schumer (D-NY) responded quickly: “Now we just need to resolve how to do it.”

Dean Baker, co-director of the Center for Economic and Policy Research, observed that this response was not unusual. Catering to the perceived will of investors by reducing spending, he said, has become de rigueur for many Democratic and Republican officeholders — essentially, it is the only policy option on the table.

“If we stopped asking what’s good for markets and started asking what’s good for people, we could come up with a whole different view of what the government should be doing,” said Bill Mitchell, an economist at the University of Newcastle, in Australia. Regardless of the outcome in a particular situation, he said, the serious consideration of a variety of policy options would both encourage and reflect a better-functioning democratic process.

If “politicians would be primarily concerned with things like…wages, unemployment, living standards, accountability, [then] everything would be on the table,” Mitchell said.

For example, if officials were more concerned with depressed wages, Mitchell went on, they might be less concerned with the risk of inflation. Christina Romer, the economist and former adviser to the Obama Administration, recently provided another illustration.  She argued that continued stimulus was necessary in order to help the economy recover faster and create more jobs. But Federal Reserve Chairman Ben Bernanke, despite the fact that inflation has been registering at levels below the Fed’s target, still cited fears of greater inflationary pressures in announcing last week that the Fed’s credit-easing policies would be coming to an end.

Chang added that the government is aggressively pursuing several new free trade agreements, which have been shown to increase the profits of some companies but sacrifice thousands of manufacturing jobs in the process. If jobs were a higher priority, he said, the Obama Administration might reconsider such a strategy.

If the public welfare were your primary criteria, Mitchell said, perhaps one would go further: “95 percent of the financial sector is completely unproductive. Does it help produce anything real? No. Does it help anybody get jobs? Not really, or certainly not as many as would be produced by investing those resources in productive ways.”

Different roads to take

After S&P released its report, John Chambers, chairman of the sovereign ratings committee at S&P, said that if the U.S. were to implement significant austerity programs along the lines of those introduced in the United Kingdom, it would restore the debt outlook to stable.

L. Randall Wray, an economist at the University of Missouri, Kansas-City, called the report a “purely political statement,” and questioned whether making political statements or threats should be part of a ratings agencies job.

But — leaving aside the appropriateness of a ratings agency’s unsubtle warning about the harm to creditworthiness that it would impose were it’s particular policy preferences not adopted — do governments actually have a choice of what to do?