Debt and Transparency

If one wishes to create a just deserts economic system in which benefits recieved are related to contributions made, then economic transparency is a must.


Debt is one of the many instruments that societies use to adjust the benefits that different individuals and groups receive out of the total production of the society, and it has some commonalities with the others and some differences. One of the commonalities is that it is used to transfer production benefits from one individual or group to another individual or group. Taxes, subsidies, fees, fines, wages, salaries, tolls, alternative remuneration, and many others share this trait. One can design a socio-economic system using any of them to adjust the allocation of benefits among the individuals and groups, and a change in one of them, for example, a revision of the tax rules, can be thought of having a primary purpose of taking some wealth or income from one subset of the population and delivering it to another subset. Of course there could be a three-way redistribution or a four-way, and while these are interesting, let’s just look at the simplest case.

Debt is a number on an accounting ledger. The movement of benefits occur when the magnitude of the debt is changed, or the interest on the debt, if there is any, is paid. If A owes a debt to B, if the debt is increasing, A is receiving some benefits accounted for by that, and B is losing some. If A pays interest on the debt to B, B is receiving some benefits and A is losing some. If the debt is forgiven, A is receiving some benefit and B is losing some. If the debt is paid off, B is receiving some benefits and A is losing some.

If there is some higher-order regulation going on in the society, so that, for example, the governance is seeking to have some influence on who gets benefits and who loses them, they can do so fairly directly by taxation, which is typically within the purview of a government. Taxation, positive or negative, of the payment of interest on a debt can be done, and was historically part of the US code for many years before being eliminated. It was negative during that period for the payor, and still is for mortgage interest. Taxation, like every other type of transfer of benefits, has side effects, in that individuals and groups adjust their behavior based on their total benefits, including both debt and taxation. It also, like every other type of transfer of benefits, is gamed by those involved with it to maximize their own received benefits.

Like wages and salaries, debt can be transparent or opaque. However, with wages and salaries, the side losing benefits, the payer of the wages or salaries, is likely to be obvious, except for some small fraction of the remunerated work done. The payees are also fairly obvious, but the amounts can be confidential. With debt, it is the custom that one side is transparent and one side is opaque.

When an individual takes out a debt from an institution, it is really a debt between that individual and the owners of the institution. For an individual taking out a debt for the first time, or even beginning the arrangements for an eventual debt, the individual would not be disclosing any other debts, as there would be none. However, as part of the process by which an individual demonstrates his ability to handle the terms of the debt, the individual taking out a debt is forced to reveal all his other debts, as well as economic information which might inform the potential creditors about the individual’s likelihood of repaying that debt or otherwise complying with the terms of the debt. This information is in the direction of transparency.

Despite this, there is no comparable transparency on the part of the grantors of the debt. If it is an individual, there is no block of information on this individual’s total loans or other financial information. Perhaps for the purpose of the immediate loan, this is not relevant, as if the loaning individual has the wherewithal available, then it is irrelevant to the debtor what the other financial conditions of the creditor is, unless there is something in the contract that makes it relevant, for example, allowing the loan to be called in under certain conditions.

For the purpose of a governance-wide understanding of the financial condition of the population they govern, it is relevant. Because there are multiple feedback loops which can severely distort the benefits distribution in a governed area, this type of information would provide governance and anyone else who wanted to know, for example investigative reporters, with some data to help them form their conclusions. To be more specific, if it was true than ten individuals owned almost all the debt in a large region, and this was unknown, then those in governance could not readily assess what might happen under different sorts of regulations relating to debt and its associated details. Having this level of concentration of ownership of debt would indicate that the feedback loops associated with massively unequal distribution of wealth and income had already taken hold. Specific remedies to this type of distortion of the economic landscape could not be done so easily.

What is the value that a one-sided type of transparency, in this discussion related to debt but generally applicable to all economic transactions, relationships and conditions? Is it of value to the debtor that his/her economic situation be laid open to scrutiny by anyone seeking to consider him/her as a potential recipient of a loan, and then of value to the creditor that his/her economic situation be completely concealed? Rather, both of these situations, where the informational advantage is solely on the side of the creditor, are of value to the creditor and of potential harm to the debtor. The real difference is not simply related to some individual transactions, but it is intimately related to the ability of those in governance, those who study economics, and those who are concerned about the long-term stability of the socio-economic situation to understand quantitatively and specifically, what the actual distribution of benefits within the society is, how these relationships are structured, and how they change. This information protects the status quo, as zero change is typically the default decision made or advised on in the absence of information sufficient to draw any conclusions. This, for individual transactions, a one-sided transparency or even a two-sided transparency to these particular parties damages the long-term stability of the society.

There could be objections to the concept of transparency on the grounds that many or most transactions are not between individuals, but between an individual and a group, such as a partnership, company or corporation, or between two such groups. The objection is non-substantial however, as there must be ownership rights of any such group that ultimately lead to individuals. A bank, as an example, is owned by its stockholders or partners, and by dissecting the fractional ownership of any group down to the individuals behind the group, clarity can be obtained for all types of transactions. Another objection might be to the fact that there are transactions between individuals or groups within one governance region and individuals or groups within another one. This also subsides under the condition that any transaction or contract must be with one region, either as it was stated as one of the conditions of the transaction or contract that one of the two possible regions was to be the legal home, or because, in the absence of such a stipulation, that the one in which the contract was concluded is the legal home. In the age of the internet and video communications, having the stipulation could be made mandatory for any legal transaction involving individuals or group from two distinct governance regions.

What actions might be taken by the governance region, once it was armed with all necessary information gained by such transparency conditions? First off, statements would be rephrased. Instead of: “Such and such a subset of individuals has too much debt”, the same situation would be “such and such a subset of individuals has granted too much debt and has amassed resources allowing that which are far beyond anything that could be accumulated by a just deserts socio-economic system and such and such other group has been loaned money by them in excess of what is reasonable for them to pay.” The one-sided statement lacks so much clarity that it would be hard for the governance to decide what to do in response to it.

Demands for privacy in this or some other financial areas sometimes revolve around the fact that financial information provides an advantage in negotiations. However, stated another way, it means that some parties, individuals or groups, might be deluded by their own assumptions, or mislead by another party, if there was not full financial disclosures by both parties to all transactions. To campaign for the right to delude and mislead is not the most promising course for a subset of people trying to gain favor from people involved with setting up a new socio-economic system. Neither is a cause for privacy made by the desire of some to conceal accumulations far in excess of what could be possible if earnings were made proportional or less to the amount of contributions, measured by the combination of time and talent and excluding secret information. Thus, it would seem that a socio-economic system based on just deserts principles would demand a high degree of economic transparency everywhere in the system.

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