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ABSTRACT
Public credit programmes – the state provision of direct loans or loan guarantees – are difficult to govern. The dominant approach to governing public credit provision involves estimating the cost of public credit programmes and including these estimated costs in the budget process. This, I argue, is a mistake. The legislature uses the budget to make informed decisions about which programmes to fund and not fund. Conventional budgetary accounting, however, is technically incompatible with credit – regardless of the cost estimation procedure adopted. Consequently, using the budget to govern the public provision of credit results in the legislature making choices about what to fund and not fund based on an incomplete and inaccurate picture of the state’s fiscal capacity and the existing resource allocation. Instead, legislatures should govern the public provision of credit using an experimentalist architecture that controls credit provision through the regular reassessment of outcomes.
Acknowledgements
I would like to thank the Sheffield Political Economy Research Institute’s Political Economy Workshop for allowing me to present a very early-stage draft of the paper, and for their immensely helpful feedback. Colin Hay and Jens van ‘t Klooster also offered detailed commentary and support. Finally, I’d like to thank the two anonymous reviewers for their insightful and motivating thoughts and contributions.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 The categorisation of credit policies as fiscal policy is a relatively recent phenomenon. As recently as the 1950s credit policy was widely considered to be a third category of macroeconomic policy alongside monetary and fiscal policy. For an interesting overview (see Douglas et al. Citation1950). For more on the recent blurring of monetary and fiscal policy (see Ban Citation2021).
2 At the time this meant indoor plumbing, electricity, a new roof, and so on, but one could easily see how today this could come to mean green transition related updates such as home insulation.
3 This refers to section 13(b) of that act, which was repealed in 1958 with the formation of the Small Business Association (SBA).
4 That included the provision of credit through both public and private channels. As inflation reached 18 percent in 1980, Carter hit three credit-related brake pedals: he invoked the Credit Control Act, passed the Depository Institutions Deregulation and Monetary Control Act, and introduced the idea of a credit budget. The first two actions were aimed at limiting private credit provision, the last was dedicated to limiting the extension of public credit.
5 The idea that the proper mechanism for control would be at the aggregate level is an artifact of the fact that the legislature had, since the early- to mid-twentieth century, delegated most of its specific levers of macroeconomic control. This is perhaps most obvious in the case of state spending and borrowing. Congress delegated the power to make specific spending decisions to executive agencies, retaining aggregate control in the form of the executive budget—established in 1921—and delegated the power to borrow money to the Treasury (attempting) to retain aggregate control through the aggregate debt ceiling.
6 There are still credit programmes not ‘on the books’, as outlined in section one. See also Quinn Citation2019, p. 169.
7 This claim should not go unquestioned as it is far from obvious. In cases of market upheaval, one might see flight to the state sector and thus the costs to the government could drop.
8 Advocates suggest this would make cost estimates ‘more accurate’, a claim that one can only suppose comes downstream of the theory that public credit should be employed exclusively to solve market failures. What this view fails to realise, however, is that taxpayers are not as Lucas suggests, just like shareholders, because in the case of public credit they are both the lenders and the beneficiaries. Consequently, neither minimising risk nor maximising return are their exclusive aim. In fact, what makes any (potential) credit programme worth funding is unclear and cannot be boiled down to a budgetary calculation using the FVA cost estimate.
9 I acknowledge that this point is particularly relevant to the US case.
10 It is the importance of the budget in legislative decisions that motivates some advocates of FVA. As Douglas Elliot put it in his Congressional testimony on behalf of the implementation of FVA, “given how strongly the budget numbers drive decision-making, [in not implementing FVA and relying on cash cost approaches like FCRA] we are effectively acting as if Congress and the taxpayers do not care about risk’ (Elliott Citation2015).
11 The incompatibility of credit and budgetary governance of course doesn’t necessarily imply that budgetary governance of credit policy isn’t useful. Some parties may benefit politically from the legislature making credit decisions based on inaccurate or incomplete information. The argument I have offered in this paper rests on the assumption that legislative decisions are better, for the democracy, when they are based on more, clear, accurate information. Thank you to one of my anonymous reviewers for pushing me to emphasise this point.
12 This may have been the case in part because credit policy was categorised as fiscal policy. If credit policy is fiscal policy and the traditional mechanism for governing fiscal policy is the budget, one can see why Carter and those around him made the inference they did.
13 It also set up a tradeoff between controlling and expanding credit that has led to the proliferation of off budget credit programmes like the Federal Financing Bank and the Export-Import bank in the U.S.
14 In the same spirit many have called to re-establish an institution much like the RFC, for some examples (see Cassidy Citation2020, Gunian and O'Neill Citation2020, Johnson Citation2021).
15 For a summary of such proposals (see Cantrell Citation2021).
16 Insofar as Monnet’s proposed institution is aimed at gathering information, an institution somewhat like the CBO in the United States. When it comes to institutions dedicated to gathering information, independence is well-established as a necessary condition for success (Przeworski et al. Citation1999). However, insofar as Monnet’s proposed institution goes beyond information gathering to assessing, designing, or implementing policy, it starts to look more similar to Hockett and Omarova’s, and its independence becomes an obstacle to the experimentalist approach to governance I have outlined.
17 This is particularly true in the European case that suffers from a particularly acute democratic deficit (Majone Citation1998).
18 It is for exactly this reason that some argue experimentalist governance is required to support a flourishing democracy (Downey Citation2021).
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Notes on contributors
Leah Downey
Leah Downey is a PhD graduand in Political Theory at Harvard University and a visiting academic at the Sheffield Political Economy Research Institute (SPERI).