The Panama Papers highlight, with painstaking clarity, that austerity is not a shared sacrifice.
- By Pedro Nicolaci da CostaPedro Nicolaci da Costa is editorial fellow at the Peterson Institute for International Economics. He spent over a decade covering the Federal Reserve, first at Reuters then The Wall Street Journal.
It’s not like we didn’t know what was going on. But the “Panama Papers,” the largest-ever document leak and one that implicates political leaders and business executives around the world, confirms it — cementing a widespread distrust of public and private institutions in the global economy.
It remains to be seen whether the scale of the revelations, whose full scope is only slowly starting to emerge, will be a catalyst for positive change or just more fodder for curmudgeonly conspiracy theorists. But one thing is clear: The debate over global economic policy is going to be deeply affected for a while to come.
The epic document dump, which includes 11.5 million files from the Panamanian law firm Mossack Fonseca, implicates a string of world leaders, their families, and close associates in an intricate web of shell companies constructed for the sole purpose of hiding money from tax authorities.
Following the Great Recession and world financial meltdown, policymakers have fallen broadly into two camps: those who see a significant role for official intervention through fiscal and monetary stimulus policies, and those who see government as the problem and push for structural changes to push it out of the way.
Both Europe and the United States imposed considerable austerity on government finances despite prevailing modern economic thinking suggesting governments should spend more, not less, in times of economic weakness.
This budget-cutting approach to exiting the economic crisis, predicated on the dubious notion that fiscal prudence will boost confidence and hence growth, was sold to the public as a shared sacrifice across society. But as the Panama Papers appear to show, the very wealthy play by an entirely different set of rules than the average person when it comes to paying taxes.
That means any discussions about the direction of various government budgets are now going to play second fiddle to a more urgent debate about rampant tax evasion by the upper echelons of society. It also heightens concerns about inequality that have driven the post-crisis debate. How are governments supposed to fund themselves if those who can most afford to pay taxes are most able to avoid them and do so with impunity? And how are voters supposed to expect their taxes to be well-spent if many of their political and business leaders are themselves wealthy tax evaders? After all, tax avoidance and evasion by Greece’s elites played a significant role in making the country the indebted basket case it has become.
In one country, Iceland, the political consequences have been immediate. Thousands took to the streets Monday demanding the prime minister’s resignation for his alleged involvement in a money-hiding scheme. By Tuesday, he was out of a job.
Elsewhere, the impact is likely to trickle more slowly. Still, the mere existence of myriad parallel investigations from the U.S. Justice Department to the Australian authorities casts a new pall of uncertainty over a wobbly global economy that has already been mired in slow, subpar growth for several years.
Brazil offers an interesting and fresh case study. The recent corruption scandal that began with oil giant Petrobras and then spread to many key leaders in the government (now including a looming impeachment proceeding against President Dilma Rousseff) has prompted some observers to revert to the view of Latin America as the ultimate institutional basket case. But as Monica de Bolle, a senior fellow at the Peterson Institute for International Economics, argues, the developments in Brazil, and the active role of the judiciary in securing high-profile prosecutions against corrupt actors, are actually a sign that institutions built since the country’s exit from dictatorship in the 1980s are actually standing up pretty well to what is otherwise a systemic political crisis.
Ironically, it is that sense of justice and fairness that is sorely lacking in rich nations still smarting from the pessimism that has enveloped the global economic outlook since the 2008 financial meltdown. Many of the key players in the crisis, including the CEOs of the major Wall Street firms that pushed the financial system to the brink, were bailed out. Several remain in their jobs today, making millions of dollars a year — as if nothing had happened.
The sense of social imbalance is reinforced by the perception that a revolving door between government and the private sector, particularly in banking, ensures the rules are rigged in favor of corporations to the detriment of individuals and taxpayers. The role of global banks has been a prominent feature of early reporting on the Panama files, reinforcing the impression of the entire sector as one big, risky rip-off machine, preying on consumers and governments to maximize profit. The scandal is only the latest in a series of almost countless ones, most of which were settled with fines and no admission of guilt. There is hardly a global financial market that has not been systematically manipulated by major Wall Street firms: interest rates, foreign exchange, metals, electricity — the list goes on.
One ideal scenario is that the revelations become so damaging to financial stability that it forces a massive rethink of global tax havens, which, by some estimates, top $20 trillion, an amount larger than the entire annual output of the U.S. economy.
In the short run, however, the Panama Papers are likely to add to a generalized anxiety about the future in financial markets. With heightened uncertainty comes greater volatility, which will make it hard for policymakers, including U.S. Federal Reserve officials worried about the global outlook, to figure out what to do next. Longer term, the truth will ultimately have a cleansing, cathartic effect. But in the meantime, expect more bumps on the road to a more stable global economic environment.
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