Several exceptions exist to the disclosure of information (for more details see Stiglitz 1999). First, the most important and convincing exception involves privacy matters concerning individuals and organizations. In exercising its duties the government gath-ers enormous amounts of information on individuals, such as income and health sta-tistics, but few, if any, of the issues discussed here fall within the privacy exception.
Second, a closely related exception concerns certain information that an informed party would never disclose to the government if he or she knew that it would subse-quently be made public. The importance of the confidentiality of doctor-patient and lawyer-client relationships has long been recognized, and a limited number of inter-actions within the public sector should fall within the confidentiality exception.
Third, the importance of secrecy in times of war is indisputable. When a nation’s survival is at stake, it must do everything in its power to increase its chance of win-ning. The success of a military attack may well depend on surprise. The problem is that national security exceptions have been extended to issues where national secu-rity is clearly not an issue.
Crying Fire in a Crowded Theater
The disclosure of information can occasionally have life-threatening effects. Typi-cally the issue is not whether to disclose the information, but how. Justice Holmes’
famous exception to the right of free speech was based on causing a panic by crying
“fire” in a crowded theater.
In economics circumstances arise in which these kinds of concerns are real, for example, disclosing that a bank is likely to have to be closed could—and in the ab-sence of deposit insurance probably would—lead to a run on the bank. The Interna-tional Monetary Fund’s (IMF’s) disclosure in Indonesia that it was likely to close down some 16 more banks in addition to those already closed, that depositors would only have limited insurance, but that it had not yet determined which banks were to be closed down, caused enormous damage as depositors withdrew their funds from all private banks.
Often, however, the argument is used to defend secrecy when it should not be used. Under the Clinton administration the secretary of the treasury argued that open discussion of such issues as monetary policy might roil the market, leading to instability. Curiously, those who take this position tend to be those who are strong advocates of markets. While they have great confidence in the market, they evidently believe that market allocations are affected by irrelevant ”noise.” Should we not have enough confidence in democratic processes and in the market to believe that the market can see through the cacophony of voices, assess the fundamental arguments, and weigh the evidence?
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Of course, if the information being discussed or disclosed is of relevance, that is, it affects economic fundamentals, then disclosing the information as soon as possible allows the most efficient allocation of resources. If some political decision might have economic effects, then it makes sense for market participants to appraise the likeli-hood of alternative actions for themselves. Secrecy deprives them of the information they need to make those assessments.
A particular variant of this analysis focuses on monetary policy. The extent to which central banks should act in secret has been extensively discussed. Should they disclose their proceedings, and if so, with what time lag and in what detail? Again, a certain irony accompanies these discussions. While market advocates praise the price
“discovery” function of markets, much of the price discovery function in the bond market is directed at figuring out what the central bankers believe and are likely to do. Rather than having this indirect dance, would it not make far more sense to have the central bank directly disclose that information? If the market believes that it is of value—as evidenced by the huge number of individuals who watch the actions of central banks throughout the world—then should the government not make that information available and in a timely way?
Neither theory nor evidence provides much support for the hypothesis that fuller and timelier disclosure and discussion would have adverse effects. Indeed, as infor-mation eventually comes out current procedures that attempt to bottle up informa-tion result in periodic disclosures of large amounts of informainforma-tion. Just as the economy is likely to be more stable with frequent small adjustments in exchange rates than with a few large ones, so too is the economy more likely to be stable with a steady flow of information. With a flow of information less attention would be paid to any single piece of information, and revisions in posterior distributions would be smaller.
At best, however, the argument that fuller disclosure and discussion might roil mar-kets is only an argument concerning the timing and manner of disclosure, and not an argument for indefinitely postponing public discussion.
Central banks are emblematic of a broader set of problems facing democratic societies today. Democratic societies must find and have found ways of engaging expertise in complicated and technical decisionmaking in a manner that reflects both shared values and expertise. Because of the complexities of the technical issues in-volved, many countries have devolved responsibility for making critical decisions, for example, issuing regulations, to specialized agencies. Yet the decisions cannot reflect only the interests of the affected industry groups, which are likely to have a disproportionate share of the expertise, but should be forged in ways that leave both the decisions and the framework within which they are made open to democratic processes. In many areas regulatory processes reflect these concerns, for instance, publishing proposed regulations and allowing for a comment period.
To the extent that responsibilities have been delegated more widely, for instance, to independent agencies to engage greater expertise and to isolate the decisionmaking
from the vicissitudes of the political process, there is an even greater need for open-ness and transparency.
Undermining Authority, or Don’t Air Your Dirty Linen in Public
The argument that public discussions—including discussions of uncertainties and mistakes—will undermine the authority of public institutions is one of the most cor-rosive of democratic processes. It is akin to the kinds of arguments that authoritarian regimes conventionally use. On the contrary, I would argue that were governments to deal honestly with their citizenry confidence in government and public institu-tions would increase, not decrease. Human fallibility is at the cornerstone of the design of our political institutions and is why we have systems of checks and bal-ances. We all know that information is imperfect and that these imperfections of information play out in some of the most important decisions we have to make.
Thus to pretend that any institution is infallible or that it has perfect confidence in the actions being undertaken is to fly in the face of reality. Only those who want to be fooled will be. Admission of fallibility and demonstration that one can learn from one’s mistakes should enhance public confidence in an institution, at least by dem-onstrating that the institution has enough confidence in itself and in democratic pro-cesses to engage in open discussions.
The IMF has argued that if open discussions of alternative policies were permit-ted, this would expose policy disagreements, and the lack of confidence that the policy it recommends or imposes as a condition for a loan may feed the opposition.
However, such a stance violates both principles of democracy and principles of sci-ence. Science recognizes uncertainty, that the consequences of alternative actions are not fully known, and attempts to quantify the degree of uncertainty associated with different positions. Economic science recognizes the existence of choices, tradeoffs, and risks. Different policies affect different groups within society differently and impose different risks on different groups. There is no single Pareto dominant policy, that is, a single policy that is best for everyone. and democratic processes recognize that in democracies, it should be up to the country to choose from among the alterna-tives and that such choices cannot and should not be made by technocrats, whether from within the country or outside it.
In the end, the repeated failures of the IMF—of the programs and policies such as the big bailouts and capital market liberalizations that it sold with such confi-dence, a confidence well beyond what the evidence warranted—has undermined confidence in the institution itself, to the point where even people on Wall Street speak of the “emperor who has no clothes” (Soros 2002). Had it been more open, both about the uncertainties and the choices, confidence in the institution would arguably be greater today. As is so often the case, secrecy also feeds concerns that a
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special agenda is being pursued that reflects special interests rather than more gen-eral interests.7
The public might be more effectively convinced that special interests did not domi-nate the discussion, if that was in fact the case, if more openness was apparent, both in the decisionmaking process and concerning the nature of disagreements. Open-ness in process assures the public that the decision does not reflect the exercise of special interests,8 and a summary of the discussion convinces the public that all im-portant arguments were considered, all sides were looked at, and a judgment was made that the weight of evidence came down in favor of the course of action being undertaken. After all, governments are elected in part to make these difficult judg-ment calls. What the public wants to know is that real deliberation has taken place.