Deficit-reduction advocates assess proper limits of bond market power
John Williamson echoed that point and said that, while he sees a need to reduce the deficit and the national debt in the medium-term, he recognizes that significant cuts in deficit spending in the near future, while the economy remains fragile, could have disastrous effects.
“I suppose we’ve become accustomed to this world in which we can switch the locale of investments quite freely, a value that’s worth preserving if it’s feasible,” Williamson said. “But if the choice we’re looking at is between financial repression and austerity [in the near future], I would choose financial repression.”
And, he said, financial repression could potentially make officials less likely to defer to the perceived interests of investors.
Considering all of the options
Randazzo of the Reason Foundation pointed out that policy makers were not even considering capital controls and other methods of reining in the power of capital markets. Although he said that he would likely oppose further government interference in financial markets because of what he described as the poor track record governments had in making appropriate and effective regulations in the past, he added that it is very important for officials to consider all of the policy options available to them.
“There are plenty of ideas that I personally think are bad ideas that deserve a public hearing,” Randazzo said.
Randazzo emphasized that all decisions about the debt and the deficit represent choices by policy makers. Williamson agreed and noted that all policy decisions come with potential costs and benefits; it was necessary for officials to judge their policies on the basis of how well they will serve citizens.
When asked if the lack of consideration some policies that investors objected to represents an undemocratic decision-making process, Randazzo said that it depends on the situation.
“If those decisions are not being talked about because Congressmembers don’t know about them, then it’s a failure of the intellectual community, not democracy,” he said. “On the other hand, if officials are just rejecting those options out of hand, then you might have a problem.”
“If policy makers — specifically those that are more inclined to capital controls and regulation — want to bring those ideas into the public debate, then we should talk about them now,” Randazzo went on. “It would be much better to examine all of the options now, so that in ten years we’re not in a situation where we’re looking back and saying, ‘Oh, if only we had talked about doing this back then.’”
Capital controls: how might they work?
Opponents of capital controls often argue that, as capital movements have become a more pervasive part of the economy — involving larger and more frequent transfers — controlling those movements is no longer technically feasible. But that argument has little resonance with many other economists, who say that the change is one of degree, not of kind.
John Williamson of the Peterson Institute for International Economics pointed out that financial institutions and firms already have to maintain records of transactions and monetary transfers, which means that an electronic “paper trail” of financial transactions already exists.
When governments institute controls on capital movements — deciding whether to tax or prohibit transactions of a certain size — they must first require firms to report some or all financial transactions, Williamson said. The U.S. already requires financial institutions to file a report for currency transactions of more than $10,000, and many other countries also require reporting of certain electronic transfers.
Williamson noted that in the 1960s and ’70s the United Kingdom maintained a very comprehensive system of capital controls, limiting even the amount of money that families could take out of the country on vacation.
Monitoring the movement of capital in the U.S. would be labor intensive, and would require a significant investment in government infrastructure, Williamson said. Additionally, the government would have to invest in enforcement mechanisms. But, Williamson argued, those costs are not a reason to dismiss capital controls outright.
Opponents also cite the fact that, historically, capital controls have often been “leaky,” and Williamson agreed that, the stricter the controls are, the more firms feel an incentive to evade them. However, Williamson said, “we know that [all] people don’t pay [all] their taxes, but we nevertheless tax people.”
The issue, he stressed, would be designing a system of controls that are easily enforceable, and investing adequate resources into monitoring transactions and enforcing those regulations.
“There’s no inherent reason why you shouldn’t have reporting requirements even on minimal capital outflows,” Williamson said. “It’s simply a matter of increased reporting and enforcement costs, which should figure into a cost-benefit analysis.”