By Les Dunaway
With our non-royalty political structure, the term sovereign is not a household word. It is one with which we need to become familiar. The term refers to governments, as in sovereign debt, sovereign default, sovereign bankruptcy and (less frequently) sovereign fiscal responsibility. The following press release tells of an important scholarly work on understanding this critical set of issues:
WASHINGTON, March 23, 2011 /PRNewswire/ — Today, the Comeback America Initiative (CAI), a non-partisan organization dedicated to fostering a national discussion around fiscal challenges and solutions, in partnership with Master’s students from Stanford University’s Public Policy and International Studies Programs, announced the findings of its Sovereign Fiscal Responsibility Index (SFRI), a new fiscal indicator that incorporates a wide range of fiscal, economic and political factors into ranking a country’s fiscal responsibility and sustainability. According to the indicator, out of the 34 sovereign countries studied, Australia ranks number one while America sits near the bottom at number 28. [emphasis mine]
The study report is heavy reading. It is very, very, very worth your time to be able to participate in the national conversation Americans MUST have as Congress crafts the 2012 budget and as we lead-up to November 2012. Here is the index – the Sovereign Fiscal Responsibility Index – SFRI.
Some excerpts from the study:
- The first step in developing the SFRI is to define fiscal responsibility. The term is applied in many different ways. While the term is typically used to connote government prudence in limiting spending or managing reasonable sovereign debt levels, it also relates to the measures and processes of the government in managing its fiscal affairs This is key! A government that portrays itself as managing spending / debt without well-defined, transparent, processes can dig a country into such a hole that recovery is impossible. Examples include Fannie Mae, Freddie Mac and the Community Redevelopment Act.
- Our definition of fiscal responsibility involves three factors: a government’s current level of debt, the sustainability of government debt levels over time, and the degree to which governments act transparently and are accountable for their fiscal decisions. This implies that responsibility is more than managing one’s annual deficits. Creating sound institutions, rules, and procedures that regulate the budget process are essential. To paraphrase, “the countries with better scores than the US are not only doing a better job of managing debt and spending, they are doing a better job of being honest with their citizens!”.
- We derive the SFRI from this definition and create three major components of the index. We measure current government debt levels and consider a country’s fiscal space. We assess the sustainability of government debt levels over time by looking at a country’s fiscal path. Lastly, in determining degree of transparency and accountability, we evaluate each country’s fiscal governance, including the current rules and institutions in place to check for responsible fiscal decision making. Here are three key concepts: fiscal space, fiscal path and fiscal governance. Fiscal space is similar to your credit card’s limit. Fiscal path is your track record of managing debt, expressed as how long you can keep “doing what you’ve been doing” before crashing. Fiscal governance the the set of public, adhered-to rules used to manage debt and spending.
From above, remember that the US ranks 28th in the overall index. Ranking the US by these three key metrics: in fiscal space the US ranks 25th; in fiscal path 23rd; in fiscal governance 29th. We pride ourselves as being a nation of laws; a nation where the government serves the people rather than the reverse. I do not see either of those beliefs reflected in these numbers – particularly the last one.
I encourage each reader to look at the rankings and see how you feel about our country being ranked where we are. I then encourage each reader to look in a mirror and see if there’s someone there whose actions or in-actions have contributed to the problem. If there is, start changing that picture – I have!