What’s in a number (when it’s £160bn)?
May 26, 2010
I’m following on from Dan Hirschman’s excellent posting “11 trillion dollars are missing”, and indeed Daniel Beunza’s aside that national accounting isn’t – or didn’t use to be – a topic that drags one out of bed in the morning. Dan H has made a strong case for the political importance of performativity, and the socially constitutive role of accounting. I don’t think, among the audience of this blog at any rate, that you would find anyone to disagree with those assertions. But, as with all performativity stories, the simple assertion that economics has some kind of influence over the world runs the risk of becoming trivially true; the really interesting aspect of performativity stories is the nuts-and-bolts of interaction of economic theory, accounting practice, and the material world (I’m carefully using material as opposed to real – of course accounts are just as real in many senses as the material).
So let’s consider one particular set of interactions more carefully. You’ll have to forgive the off the cuff nature of this discussion; I’ll go back to the documents another time. But in the UK we have just had an election, which was dominated by economic issues, and in particular a government deficit (expenditure not covered by taxes) of £160bn, or 11% of GDP; the UK’s national debt is £900bn, or 62% of GDP. The Maastrict treaty sets targets of for deficit at 3% of GDP and borrowing at 60% of GDP, so we are on the wrong side of EU rules and the markets don’t like it. We are also emerging from a nasty recession, so policy makers are presented with a conundrum. On the one hand, a relatively loose fiscal policy (for we are all Keynsians now!) seems appropriate to keep the economy improving. In the long term, this makes sense, because economic growth will drive taxes and help pay off the deficit, and a little bit of inflation would help too. On the other hand, the signalling content of the political decision to allow the economy to grow is one of economic profligacy, and this is likely to upset the ratings agencies, and so increase the price of our debt. That way lies disaster, so the spending cuts are already being made – £6bn promised this year. Ouch. We university folk are sweating, I can tell you.
So that gives one set of performative-political machinations that could usefully be unpacked: the role of ratings agencies, ratings, and bond markets in determining the price of a nation’s debt, and all of this filtered through the media. As far as I know, much of the national debt is in long-denomination T-bills that could ride out a short term price hike, so the matter is more academic than in the case of, say Greece. But that is not an angle I want to follow.
Instead, look at the £160bn. Where does this figure come from? Well, it is produced by the Office of National Statistics. And what’s in it? Well, there’s the rub. So far as I can gather it comprises in the most part the various interventions made by the government into the UK banking sector in 2008-9. Large among these are the nationalization of two banks, and the creation of an asset protection scheme, an insurance vehicle for toxic debt. This is where the question becomes tricky, especially in the case of the asset protection scheme.
Consider the accounting for a life insurance company. Assets are required to match liabilities, where liabilities are determined by the careful application of life expectancy statistics to existing policies. Clearly not all policies will be called, but the calls exceed the value of the premia. Over the population, there is a surplus, distributed as profit. It’s a safe and predictable business, largely due to the sophistication of the actuarial data used; also increased life expectancy doesn’t hurt insurers as it does pensions managers. But the point is, liabilities are well known.
In an asset prediction scheme, liabilities are not. Like Schrodinger’s cat in the box, the status of the assets is epistemologically indeterminate until they are paid off or written off. We don’t have normal distributions of default for thrice cut debt obligations. We just don’t know. Certainly, we can say that any bottom or medium tier CMO written after a given time is worthless, but my understanding is that the scheme covers a much wider range of assets. This is Donald MacKenzie’s point about the crunch as problem in the sociology of knowledge: epistemological indeterminacy is as toxic as default, which is why the banks had to be rid of them. But from the insurer’s point of view, the indeterminacy persists until redemption, or default. Then an accountant steps in, and insists that a provision must be made against the likelihood of default; but in the presence of indeterminacy, we have to provide against the whole lot! So we go through a process of a steady hardening of epistemology – which I glibly referred to in an answer to Dan H as “real” – from a set of relative unknowns, through a technical process of codification into a single known: £160bn, a fact.
Once the fact is established, than it grows legs and gets travelling (if we are pastiching Latour!). On its travels it visits ratings agencies, bond markets, the IMF, broadsheet newspapers, electoral hustings and ballot boxes, and finally policy decisions. This is what I mean when I say accounting decisions have real impacts: that the inability of statisticians to adequately determine the extent of our exposure to obscure financial instruments travels through to cuts in public services: healthcare, education, and defence. Very material matters: the inability of a patient to get treatment, or a child to be picked up by social services.
Even then, I’m not really raging against the adequation of accounting devices and individual pain (that’s for another post). I’m objecting to the fact that we are being made to pay off a debt that really exists only as a result of the inability of accounting to deal with epistemological indeterminacy. Or to put that another way, we are cutting now to pay off a debt that hasn’t happened yet. The money has not been lost, it’s simply in a sort of limbo. It’s a similar situation with the national debt, which includes the IMF SDRs. These, as I understand, are a notional basket or reserve currencies that the IMF can use as an accounting measure to justify a borrowing country’s decision to increase its capital lending stock, thus increasing the money supply. (This stuff is the national accountant’s version of Playboy). Unlike Greece, the UK hasn’t spent its overdraft, just lent it on, and the funds can be withdrawn at any time; but withdraw them too soon and we’ll suffer a monetary contraction and recession. Another limbo, yet another “hard fact” that circulates merrily through the media and can be used to beat policy makers into yet more cuts.
Which brings me to my final point – what happens if we pay off these debts and then they come (even a little bit) good? What if the eventual take up of claims on the asset protection scheme is not 100%. Then the accountants will announce a windfall for the national accounts, and politicians will be able to claim their prudence in balancing the books. Where the money won’t go, of course, is back into the health service or education sectors. It can’t go there, because it is only an accounting profit: not real money, just the absence of a provision. Somewhere, somehow, it doesn’t quite add up.
PS: Just lunched with my accountant pal, who reminds me that accountants are more often right than not…