Quotulatiousness

June 8, 2010

Are we ready for “a serious debate about returning to the gold standard”?

Filed under: Cancon, Economics, Government — Tags: , , , , — Nicholas @ 13:02

The more I read of Maxime Bernier’s thoughts, the more I wonder how long it’ll be before he’s drummed out of Stephen Harper’s party: he’s far too sensible. Here, for example, he outlines what it is that central banks do to your money, and why it’s a bad deal for ordinary Canadians:

All this guessing about setting rates has nothing to do with capitalism and free markets; it has more to do with central planning and government control of the money supply. In a monetary free market, the interest rate would be determined by the demand for credit and the supply of savings, just like any other price in the economy.

Government control over money has serious consequences that few people seem to be aware of.

One of them is that central banks are continually increasing the quantity of money that is circulating in the economy. In Canada for example, if we use the strictest definition of money supply, it has increased by 6 to 14% annually during the past dozen years. The situation is about the same everywhere.

The effects of constantly creating new money out of thin air have been a debasement of our money and a dramatic increase in prices. The reason why overall prices go up is not because businesses are greedy, or because wages go up, or because the price of oil goes up. Ultimately, only the central bank is responsible for creating the conditions for prices to rise by printing more and more money.

With all this, it’s surprising that he has (so far) managed to stay in the Conservative party, which doesn’t appear to actually believe in anything much anymore . . . other than the need to stay in power.

Update, 9 June: His speech (from which the article linked above was drawn) gets positive reviews.

Consumer debt doesn’t follow the script

Filed under: Economics, Media, USA — Tags: , , , — Nicholas @ 07:49

Or, in a demonstration of individual rationality, doesn’t follow the script where consumers sacrifice themselves and go even deeper in debt to spark further economic recovery:

While some pundits out there might have you believe that the US economic recovery remains solidly on track, Friday’s May jobs report threw a spanner into those notions, and the latest reading on consumer credit offers little evidence that the crucial consumer intends to share with Uncle Sam the burden of bolstering the economy.

The Federal Reserve’s report on April consumer credit today shows total credit outstanding rose a little less than $1 billion, following a revised $5.4 billion drop in March; March credit was originally reported up $2 billion.

Within the details, the item that jumps out most is the decrease in revolving credit, which fell at a 12% annual rate and declined for the 19th straight month. Revolving credit outstanding has fallen 14%, or roughly $138 billion, since autumn of 2008. Non-revolving is roughly flat since late ‘08.

It would help if the pundits would settle on one of the two diametrically opposed roles that consumers are “supposed to” assume. At an individual level, consumers are being lashed for their profligate spending and borrowing habits, and excoriated for their unprecedented levels of personal debt. This is bad, the pundits say (and I don’t disagree): individuals and families should not be taking on so much debt and efforts to reduce outstanding debt are praised. However, consumers as a group are expected to spend, spend, spend in order to help pull the retail sector back into healthy growth.

So if they do the right thing as individuals, they’re doing the wrong thing for the economy as a whole? Perhaps the emphasis on consumer-led recovery is mistaken, especially given the levels of debt that consumers have already taken on.

June 1, 2010

QotD: The Pascal’s Wager of Economics

Filed under: Cancon, Economics, Government, Quotations — Tags: , , — Nicholas @ 12:33

[S]timulus spending is the Pascal’s Wager of economics. Seventeenth century philosopher Blaise Pascal couldn’t prove God existed, but figured he might as well be devout since, if there is a God, he’s saved from damnation. If there wasn’t, well, no harm in trying. Politicians see stimulus spending the same way. They can’t prove it works, but if they sit on their hands during a downturn, they know they’ll be blamed for inaction should things turn worse. If and when the economy recovers, as it has here, the government’s happy to take credit. And if more misery comes? They can at least claim to have staved off larger calamity — which is how it’s gone in the U.S., where they’re now spending their third stimulus package in two years.

Politicians are only acting rationally. Last year, they were convinced they faced another Great Depression. [. . .]

Get used to this. Since the narrative that stimulus spending pulled us back from the abyss works for Ottawa, it virtually guarantees that, when dark economic clouds are again sighted from Parliament Hill, we’ll see this routine recur: Dire recession warnings from politicians, followed by stimulus as insurance to cover political hides from any economic blame. As long as future taxpayers get the bill, via future debt payments, it’s as risk-free a gambit as Pascal’s: The latest stimulus added tens of billions in national red ink with little political distress for the Tories.

Kevin Libin, “The Stimulus Bluff: There’s Mounting Evidence That Government Spending Has Had No Impact On The Economic Recovery. Too Bad Politicians Aren’t Listening”, National Post, 2010-06-01

May 22, 2010

Another reason public service pensions are better than private ones

Filed under: Economics, Politics, USA — Tags: , , — Nicholas @ 12:03

Megan McArdle points out another key difference between “ordinary” pensions and US state government pensions:

Public employees rack up overtime in their last year of work, with the active encouragement of their supervisors and even local politicians, then they retire with inflated pensions that can be greater than their base salary.

New York is the understandable focus, but these problems are hardly unique to my home state. In fact, New York is among the better states on funding of pensions, because they actually have to do some. Other states kinda sorta haven’t really bothered — at least not at anywhere near the levels that would be needed. New York’s problem is notable only because its public sector unions are unusually powerful.

The problem is that these things are nearly impossible to change. People have worked for twenty years or more under the expectation of pensions that were calculated this way; you can’t just wait until they’re 58 and say “Ha, ha, just foolin’.”

<sarcasm>Of course, the money will always be there, right? No reason for anyone to change their expectations.</sarcasm>

May 21, 2010

California’s version of the Greek public service problem

Filed under: Economics, Politics, USA — Tags: , , , — Nicholas @ 09:54

David Crane shows why California’s public pension scheme has much in common with the Greek pension scheme, in the sense of a mind-boggling disconnect from economic reality:

In 1999 then California Governor Gray Davis signed into law a bill that represented the largest issuance of non-voter-approved debt in the state’s history. The bill SB 400 granted billions of dollars in retroactive pension boosts to state employees, allowing retirements as young as age 50 with lifetime pensions of up to 90% of final year salaries. The California Public Employees’ Retirement System sold the pension boost to the state legislature by promising that “no increase over current employer contributions is needed for these benefit improvements” and that Calpers would “remain fully funded.” They also claimed that enhanced pensions would not cost taxpayers “a dime” because investment bets would cover the expense.

What Calpers failed to disclose, however, was that (1) the state budget was on the hook for shortfalls should actual investment returns fall short of assumed investment returns, (2) those assumed investment returns implicitly projected the Dow Jones would reach roughly 25,000 by 2009 and 28,000,000 by 2099, unrealistic to say the least (3) shortfalls could turn out to be hundreds of billions of dollars, (4) Calpers’s own employees would benefit from the pension increases and (5) members of Calpers’s board had received contributions from the public employee unions who would benefit from the legislation. Had such a flagrant case of non-disclosure occurred in the private sector, even a sleepy SEC and US Attorney would have noticed.

Until very recently, public service pension schemes might as well have been listed in the dictionary under “soporific” — except for the beneficiaries, nobody paid much attention. Even so, you’d think that the breathtaking assumptions in the Calpers bill would have woken up at least a few politicians and reporters. Of course, no political body has an effective “Office of Realistic Assumptions” to run proposed legislation past (although it wouldn’t be a bad idea), so it might well be that nobody bothered to check the sums before the bill was passed.

Or, more likely, that nobody voting that day expected to be held accountable for the outcome.

Update: Good news! The state legislature just passed new regulations! That’s bound to fix the problem, right?

Oh, wait . . .

California’s public pension funds would have to report the ethnicity and gender of some of the outside investment managers they hire under a bill that passed the state Assembly on Thursday.

The bill states that businesses owned by women and minorities are not adequately represented in the state’s pension fund portfolios, compared to their proportion of California’s population. It passed on a 41-22 vote and now moves to the state Senate.

Well, that will certainly fix the funding issues in no time, won’t it? Your California state legislature, constantly working for you!

May 20, 2010

The root of the Greek economic crisis

Filed under: Economics, Europe, Government, Greece — Tags: , , , — Nicholas @ 12:07

No, it’s not the evil banks, the evil insurance companies, the evil oil companies, or even the evil manufacturing sector (take it as read that most media types think every corporation is, by definition, evil). No, in this case the reports are starting to identify the real culprit: the civil service. Mark Steyn summarizes handily:

They were not an “anti-government” mob, but a government mob, a mob comprised largely of civil servants. That they are highly uncivil and disinclined to serve should come as no surprise: they’re paid more and they retire earlier, and that’s how they want to keep it. So they’re objecting to austerity measures that would end, for example, the tradition of 14 monthly paycheques per annum. You read that right: the Greek public sector cannot be bound by anything so humdrum as temporal reality. So, when it was mooted that the “workers” might henceforth receive a mere 12 monthly paycheques per annum, they rioted. Their hapless victims — a man and two women — were a trio of clerks trapped in a bank when the mob set it alight and then obstructed emergency crews attempting to rescue them.

Unlovely as they are, the Greek rioters are the logical end point of the advanced social democratic state: not an oppressed underclass, but a pampered overclass, rioting in defence of its privileges and insisting on more subsidy, more benefits, more featherbedding, more government.

We’ve already seen that employees in the public sector have been outpacing their private sector equivalents handsomely, but the Greek civil service has it even better than most:

Greek public sector employees are entitled not only to 14 monthly paycheques per annum during their “working” lives, but also 14 monthly retirement cheques per annum till death.

Nice. I wonder how they got into that interesting arrangement? No matter, the private sector will ride to the rescue, right? Not likely:

According to the World Bank, when it comes to the ease of doing business, Greece ranks 109th out of 183 countries. If they were dramatically to liberate their business-killing economy, they might overtake Lebanon at big hit position 108, and Ethiopia at 107, and maybe Papua New Guinea at 102. And who knows? With even more radical reform, they might crack the Hot One Hundred and be bubbling under such favourable business environments as Yemen (99) and Moldova (94). Greece ranks 140th when it comes to starting a business, and 154th when it comes to protecting investors.

If it’s that difficult to start a new business, is it any wonder that so much of the Greek economy is in the underground/unreported/untaxed sector? Many media reports say that anywhere from 10% to 25% of Greek economic activity is “off the books”. A quick Google search will show a much higher range of estimates going up to 60% . . . and that might be an optimistic under-estimate.

If more than half of the nation’s economic activity is in the black market, it will take much more than adding a few auditors and inspectors to the tax department to fix the problem: an absolute majority of Greeks are actively hiding their business from the government, and any serious attempt to crack down on them will bring down the government. And that’s not even the biggest danger — the Greek government isn’t the most stable entity to start with. The government falling might be a safety valve, because the other alternative is literally revolution.

Talk about your destabilization!

May 11, 2010

A trillion dollars doesn’t buy as much as you’d expect

Filed under: Economics, Europe — Tags: , , , — Nicholas @ 07:54

It doesn’t, for example, buy exemption from the laws of economics:

European Union President Herman Van Rompuy said European governments need to consider pooling their national powers and create a joint economic government.

“We can’t have a monetary union without some form of economic and political union and that is our big task for the coming weeks and the coming months,” he said.

He said he would draft tougher rules for EU leaders to discuss in October that go beyond current EU limits on debt and deficit.

The core problem is near-zero economic growth, high unemployment and governments unwilling to take painful steps to get people to work more and longer.

Simon Tilford, an economist at the Center for European Reform think tank, warned that EU governments so far haven’t come up with anything “game changing.”

“What Europe needs is a growth pact because without growth, public finances aren’t going to be sustainable,” Tilford said. “The bond markets are going to be forcing them to make those kind of changes.”

Even EU president Van Rompuy warned that the bloc risks irrelevance and the end of its expensive welfare programs if it can’t speed up economic growth, forecast to expand by just 1 percent this year.

“With 1 percent growth we can’t finance our social model any more. With 1 percent structural growth we can’t play a role in the world,” he told the World Economic Forum in Brussels. “We need to double the economic growth potential that we now have.”

So even with a trillion dollar injection, you still can’t spend more than you make, year after year, and hope to carry on as if there wasn’t a problem. Who knew?

April 15, 2010

A very disturbing notion

Filed under: Economics, Europe, Government, Politics, USA — Tags: , , , — Nicholas @ 12:59

The Cato Institute’s Richard W. Rahn speculates about some very disturbing notions:

Politicians in developed countries have found that their citizens often get upset when inflation reaches high levels and then tend to vote out the culprits. You may recall that the less-than-astute Jimmy Carter lost his re-election campaign, in part, because inflation at one point reached 14 percent and the prime interest rate hit 21 percent.

An insightful European banker suggested to me over breakfast a couple of weeks ago that the European political class would use selective expropriation, rather than inflation, to avoid paying back all of the debt. The way this would be done would be that the political leaders would announce they would only pay back those bonds with full interest that were held by labor unions and other “politically correct” interest groups but not the bonds held by “greedy bankers” and rich people. Maturities would be extended and promised interest rates lowered – effectively reducing the value of the bonds.

My initial reaction was that, yes, such a selective expropriation might work in Europe, but not in the United States. As I thought more about it, however, looked at what was happening and heard President Obama’s rhetoric attacking “greedy” bankers and insurance companies, I began to think that not only was my European friend right about Europe, but his scenario was equally valid here.

The Obama administration has already indicated that it’s quite comfortable with protecting unions at the expense of other contracting parties (in the Government Motors case, at the very least), so it’s not much of a stretch to see this as a possibility in larger matters.

April 12, 2010

New “green” jobs to pay over $300K

Filed under: Cancon, Economics, Environment — Tags: , , , , , , , — Nicholas @ 15:49

Oh, wait. Sorry, that should be will cost over $300K:

The Government of Ontario recently signed a $7 billion no-bid contract with two Korean companies to supply wind and solar power to the province. Officials claim the backroom deal will boost “green” industry and job creation. But it’s hard to fathom how the additional employment can possibly be beneficial when each new manufacturing job will cost taxpayers a whopping $303,472. Nor do dramatic increases in electricity rates constitute much of a bargain.

Having failed on his pledge to shutter all coal-fired plants in the province by 2007, Ontario Premier Dalton McGuinty evidently has sought a grand green gesture that would appease the global warming alarmists. Executives of Samsung C&T Corp., in concert with the Korean Electric Power Corporation, were understandably eager to cooperate.

The agreement commits the province to buy wind and solar energy from the two companies at artificially high rates. It also extends to Samsung and Korean Power preferential access to the transmission network at the expense of independent wind power producers. As if either provision won’t adequately punish Ontarians, McGuinty also has pledged to override local zoning laws in locating new wind farms and transmission corridors.

Update, 12 February 2011: Even Premier McGuinty can only deny financial reality for so long:

Times of international turmoil are great moments for domestic governments to make important announcements they don’t want to be noticed. Especially if the announcement involves a sudden reversal in policy that could seriously embarrass the government.

So Friday afternoon was an ideal time for Ontario’s Liberal government to take a big chunk of its alternative energy program and chuck it overboard. Attention was riveted on Egypt, where spectacular events were unfolding. The perfect opportunity for Premier Dalton McGuinty to engineer yet another major reversal, while paying a minimal price among voters.

After years of touting wind projects as a critical piece of the alternative energy puzzle, the government let slip — very quietly — that offshore wind projects are no longer part of the game plan. Turns out there just isn’t enough scientific evidence that offshore wind projects do a lick of good, said Brad Duguid, the energy minister.

March 17, 2010

Superbubble?

Filed under: China, Economics, Politics, USA — Tags: , — Nicholas @ 12:14

Jon, my former virtual landlord, sent me this link, suggesting that it “gives you an opportunity to round up all of your ‘as I said about China earlier…’ [posts]”.

The world looks at China with envy. China’s economy grew 8.7 percent last year, while the world economy contracted by 2.2 percent. It seems that Chinese “Confucian capitalism” — a market economy powered by 1.3 billion people and guided by an authoritarian regime that can pull levers at will — is superior to our touchy-feely democracy and capitalism. But the grass on China’s side of the fence is not as green as it appears.

In fact, China’s defiance of the global recession is not a miracle — it’s a superbubble. When it deflates, it will spell big trouble for all of us.

I don’t want to give the impression that I’m anti-Chinese, because that isn’t why I post this sort of material. I think the Chinese miracle has been to raise literally hundreds of millions out of poverty, but it hasn’t been a purely positive thing: hundreds of millions of others are supporting the uplift but being deprived of similar opportunities. It’s a fantastic achievement, but it has involved — and continues to involve — injustice and repression.

It also requires continued state control over media, and not just BBC/CBC/PBS type state funding, but actual state censorship and worse:

During the crisis, Chinese exports were down more than 25 percent, tonnage of goods shipped through railroads was down by double digits, and electricity use plummeted.

Yet Beijing insisted that China had magically sustained 6 to 8 percent growth.

China lies. It goes to great lengths to maintain appearances, including censoring media and jailing those who write antigovernment articles. That’s why we have to rely on hard data instead.

Those lies will compound the impact when the lies can’t be maintained any more:

What happens in China doesn’t stay in China. A meltdown there — or even a slowdown — would have severe consequences for the rest of the world.

It will tank the commodity markets. Demand for industrial goods will fall off the cliff. Finally, Chinese appetite for our fine currency will diminish, driving the dollar lower against the renminbi and boosting our interest rates higher. No more 5 percent mortgages and 6 percent car loans.

It will be bad for the US and the rest of the world’s economies, but it could well be catastrophic (in the full meaning of that word) for China. As the US economy contracted over the last couple of years, it revealed lots of malinvestments . . . and the companies which were most exposed to the risks took huge hits to their balance sheets and their business models. A similar shock to the Chinese economy could topple the government or raise the already-high chances of massive unrest and corresponding increased repression.

Interesting times, indeed.

As Jon suggested, you can see my previous concerns about the Chinese economy here.

March 5, 2010

New economic term: the Jukebox economy

Filed under: Cancon, Economics, Government — Tags: , , — Nicholas @ 08:33

Terence Corcoran endorses a neologism from Bob Hoye, which seems to perfectly capture the current notions about the role of government in the economy:

In the economic culture of our time, in which government is seen as the engine of growth and prosperity, maybe it is too much to expect anything more. We live in what veteran Vancouver investment advisor Bob Hoye has called a jukebox economy. “Jukebox economics,” he wrote recently, “is a suitable description of the notion that the economy can only be kept going if the government feeds it quarters.”

So long as jukebox economics is the dominant economic ideology in Canada and elsewhere, the orthodoxy that guides our politicians and the conventional wisdom our media feeds off, we will continue to get budgets like the one Mr. Flaherty delivered on Thursday. In his speech he kept pumping quarters into the machine, calling the spending “investments” and describing the outcome as “jobs.”

Quarters in, jobs out. “We are in the middle of the largest federal investment in infrastructure in over 60 years. We are putting Canadians to work.” Are these good investments producing worthy jobs? Will they boost productivity and real economic gains that will actually generate what Canada desperately needs, which is greater wealth and progress that actually increases the standard of living for Canadians?

Nobody’s really counting. The word “productivity” didn’t cross Mr. Flaherty’s lips, even though it is universally acknowledged as Canada’s single greatest weakness. Even in the best of times, Canada falls behind. In the 424-page official Budget 2010 document assembled by scores of economic experts, the productivity problem is studiously avoided. The case is never made that the massive multi-year spending plans could really generate productivity gains, most likely because Finance Canada officials know they don’t exist. Of about 15 mentions of productivity gains, most are associated with a few tax cuts and the tariff reduction on manufacturing equipment imports — one of the few worthy measures in the budget.

It’s become a common notion that the government has a tap, marked “jobs” which they can easily turn on and off. This is why so many journalists demand that the government “create” jobs — they think that not only is it the government’s role, but that it’s a unique one. Individuals and firms don’t create jobs, in this mental model, unless the government prods them into doing so.

It’s another example of cargo cult thinking . . . that by some form of sympathetic magic, the government can induce the sky gods to produce the required manna on demand.

February 16, 2010

The (looming) Greek default

Filed under: Economics, Europe, Greece — Tags: , , — Nicholas @ 12:56

Tim Cavanaugh dispenses with the careful-to-avoid-blaming-anyone information being peddled by most reporters:

If you ever start thinking no place could suck harder than the good ol’ U.S.A., just look to the glory that is Greece. The Greek government is responding to its self-inflicted debt crisis by doing just about every single thing wrong.

That might not be clear from most of the media coverage. To comprehend any of the popular descriptions of Greece’s public debt problem, you need to be a yes man as mindless as the guy whose job it is to keep saying “Certainly, Socrates… You’re quite right, Socrates…” in the Platonic dialogues.

The New York Times blames the investment banks that held a gun to the crowned heads of Europe and forced governments to take on more debt. The Guardian says it was deregulation and privatization of state enterprises that caused public spending to, um, increase? (Just go with it.) Greek tax collectors say the problem is that tax collectors need to be paid more. And because he knows that being able to print your own money always encourages fiscal responsibility, Paul Krugman says it’s because Greece went off the drachma too soon. (That problem may be working itself out faster than anybody planned.)

But the beauty of Greece’s looming default is that it is a totally straightforward story of uncontrolled public spending and the determination of governments to run up impossible debts. In this case, as the above Times article spells out, those debts were run up in duplicitous ways that in fact violated the public debt rules of the EU from which Greece is now trying to get a bailout. Your worst nightmare of a wastrel American politician — call him Barack Schwarzenegger — would have a hard time mismanaging state finances this badly. Since getting on the euro in 2001, the Greek government has apparently been fudging its budget statistics, a practice countenanced by both conservative and socialist governments. To its credit, the current government kicked the current crisis into high gear when it released a deficit-to-GDP number of 12.7 percent — double the previously announced figure, and by far the highest in Europe.

Read the whole link-laden thing.

February 11, 2010

Greek underground economy: “Vlacha means stupid”

Filed under: Economics, Europe, Greece — Tags: , — Nicholas @ 08:56

Greece has a thriving economy . . . but it’s not the official, tax-paying one:

The Greek government is trying to recover billions of euros lost to tax evasion as part of its austerity programme, but as the BBC’s Malcolm Brabant finds, many Greeks see it as their right to keep as much black money as possible.

A good friend of mine bent my ear with a vengeance on the day the Greek government cranked up its austerity programme another notch.

“My husband is thinking of writing the word vlacha on his forehead in very big letters,” she said.

Vlacha means stupid.

Her husband’s name is Stelios and he is anything but a stupid man.

Stelios is a leading cancer specialist whose dedication to saving lives is such that he rarely takes time off, or holidays.

But he has come to the conclusion that he is stupid because he has been honest.

February 3, 2010

Canada’s economy judged (marginally) more free than the US

Filed under: Cancon, Economics, Government, Liberty, USA — Tags: , , , — Nicholas @ 09:30

H/T to Power Line blog for the image.

Paul Volcker praises Canadian banking system

Filed under: Cancon, Economics, USA — Tags: , , , — Nicholas @ 08:50

Expect this to continue to be the story of the week in Canadian newspapers:

Paul Volcker, the former U.S. Federal Reserve Board chairman who’s now a key economic advisor to the White House, told U.S. lawmakers Tuesday they ought to learn from Canada’s banking system as they seek to overhaul rules governing the biggest U.S. banks.

Speaking at a hearing to tout his proposal to rein in risky investing activities by large U.S. commercial banks, Mr. Volcker said the life’s work of Canadian banks is retail banking: “That’s no longer true of great big American banks.”

With just five or six banks dominating the industry, Canada’s banks benefit from having less competition, Mr. Volcker said. “It’s a stable oligopoly.”

There’s a mixed blessing in that: fewer banks means less competition, so there’s less need for banks to compete for customers in meaningful ways. Look at the feeding frenzy once banks were allowed to buy trust companies . . . partly because trust companies were more actively competing for business. Having a “stable oligopoly” has benefits, but consumers have fewer choices on where to bank, and banks have far less pressure to lower fees or increase services.

Here’s what Americans may find the most unexpected part of the story:

Canada’s banking system also has been shielded by the fact that it has less government interference in its mortgage market, unlike in the United States, where banks have been pressured by the government to make low-cost loans to the economically disadvantaged, he said.

Mr. Volcker’s endorsement of Canada’s banking system — the only Group of Seven nation that didn’t need taxpayers to bail out its banks — came two days after The New York Times published a piece by Nobel Prize-winning economist and columnist Paul Krugman that said the United States should emulate Canada’s financial regulatory regime.

Unfortunately, the wrong lesson is likely to be drawn from this: much of the reason Canada’s banks didn’t need to be bailed out was the much lower political interference in their lending policies. Instead, US politicians are likely to insist on even more political interference to achieve the “right” result.

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