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There comes a moment in the lives of most of us (thankfully, we almost all live long enough to experience this) when we discover that “it’s not just my kid that thinks of the events of my life as ancient history, it’s a whole lot of those folks out there!” When I think about the millennial generation (Net Generation, Gen Y, etc.), whose leading wave has seen its feet come ashore on the beach of “never trust anyone over thirty”, I reflect on the fact that between them and the trailing edge of Gen X about half the people on the street don’t share the experiences that I, as a boomer, found as formative. Considering, in turn, that the experiences of the 1930s and 1940s are as alien to me as those of the late 1960s and 1970s are to them, I can only conclude that Santayana’s aphorism about history and its repetition is about to be lived out again.

History as taught in schools has tended to fall into two main camps;

  • Categorization via the periods of war, the reigns of rulers or some other means of treating the clock and calendar as a line punctuated by reference marks. This is not only generally a method that bores 90%+ of the class into intellectual sleep; anyone who turns an active mind to it immediately sees that broad historical strokes don’t nicely align with centuries and decades, the throne-spans of rulers, or the like (this is the problem in the philosophy of history, of periodization, and an underlying reason why Henry Ford claimed “History is Bunk”).
  • The modern anti-historical method of taking an ideological stance (be it Marxist analysis, primacy of a nation-state, feminist theory, or many other forms) and “reading it back” into historical periods in order to establish clearly that they have nothing to teach us. This leaves the student with the clear notion that there is nothing history can contribute and thus a purely functional approach to current issues is defaulted to.

In history, there are significant events that warp the course of peoples. Al Qaeda’s attack on the United States on 11 September 2001, for instance, is one such. All the analysis and attempts to predict in the world did not and could not predict the exact timing, the exact form of the attack and the form the reaction would take. (Who, amongst us, would have predicted that a pioneering nation proud of its primacy would have turned its over 300 million citizens into people willing to give up their hard-won freedoms in a quavering desire for “security”? There are many others on this planet that that would have been a reasonable prediction for: the American people weren’t likely candidates. Yet others — including those who have also suffered attacks — have kept calm and carried on far better.

Yet winding through history as well are long-term processes that unfold. Most of these, unfortunately, are processes of positive feedback: in other words, they produce imbalances that intensify over time. These are the processes that end in a “tipping point”, one where there is a jump into the chaotic from a domain of apparent simple and comprehensible order. While societal innovation — what Toynbee in his A Study of History called the reaction of a creative minority who separate themselves from the conditions at hand to reinvent the process (in the realm of growth, this is Quigley’s [The Evolution of Civilizations] “creation of a new economic engine”) — is one response to the breakdown of order at a tipping point, the far more common one has been the emergence of “The Man on Horseback”, the “Leader” who takes charge and establishes a new order.

We are rife with metaphors for this moment of tipping: the collapse of the camel when one more strand of straw is added to his load; the avalanche that starts when one more snowflake is added to the snow pack on a mountain side; the collapse of a dune when one more grain of sand or small pebble is blown onto it. We remember those who step up to seize control after the collapse as well. Most signal a second slide (think of the Roman Empire once Augustus seized control and became Imperator, of the French Revolution when Napoléon seized control, of the seizing of power in Russia by Lenin and his faction, or the election of Hitler in Weimar Germany): what appears to go well at first decays into terminal collapse.

All of our policies have been designed to add, gram by gram, to the weight the system carries. Positive feedback processes about social welfare, life extension, correcting “injuries of the past” and many others have been wound around our society. For those who have taken on the responsibility of maintaining order in the world (originally the French, then the British, now the Americans) each in turn has reached a point where they are trapped, unable to abandon any outpost of power without opening up another point of weakness and yet unable to afford the cost of maintaining those outposts — and meanwhile, as none have achieved global order (despite global presence) new weak points constantly get added to the mix. (What else is a Somali coast or South China Sea pirate?, to name but one class of case.)

But there are limits to everything. I do not know (and neither does anyone else, despite their claims to the contrary) where the tipping points are. We can at best know two types of things: taken this far previously, this happened; and by experience, the process in its field of conditions is about “here”. That “field of conditions” is relevant: the shift from money as metal to money as a symbol of metal to money as a symbol, tout court, to money as the velocity of debt that unfolded throughout the twentieth and early twenty-first century is what has allowed us to be where we are today. At what point will the accumulated debt “grains of sand” collapse the dune and force the economy to reset at a much lower level of potential? We don’t know.

But we do know (by pattern recognition) that toward the end of a positive feedback process, just before it snaps (either under its own weight or via an external event) it grows rapidly — the exponential curve’s famous “hockey stick” moment.

Having destroyed much of the available investment capital in our society in the technology bubble (itself a creature of the transition to “money as velocity of debt”), and then followed that with attempts to continue to increase debt velocity in the face of the destruction of growth to pay off prior debts that led to the housing bubble (still unfolding, with a second US, UK and EU wave to come and a first major Canadian and Australian wave later this year?), we have now moved to the notion of government as the “spender of last resort”. But global demand for capital to buy the Treasury notes and bonds that, in turn, finance these deficits exceeds the available monies.

Will we see a series of dominos fall? (The domino theory, to return to the starting point of this little essay through history, was the rationale for Vietnam and Cambodia — as defining for the late 1960s and early 1970s as Iraq, Afghanistan [and likely Iran and Pakistan to come] are now — for years.) Or will there be a sudden collapse due to an external event that suddenly seizes all the debt markets and immobilizes them (as was Al Qaeda’s intention in 2001)?

Again, we don’t know — but we rest on the edge of a knife.

Meanwhile, the politics of our countries is rife with proposals for ever more deficit spending, ever more engineering of methods and results, and ever more ways to “set money aside” for a retirement no longer a part of employment (except for a select few) and thus dependent on highly liquid markets to extract wealth trapped in real estate or stocks, and the endless pumping up of growth. I would not be surprised that the next wave of change will either wipe out the tax status of retirement funds, or mandate that they be invested in the debt ponzi scheme now offered by our central banks and Treasuries worldwide, or both. Meanwhile our analogy to the hyperinflation of Weimar or the wiping out of assets in the transition from Czarist to Bolshevik Russia will be the traps that our mortgages, lines of credit and credit cards have become — all recourse instruments, and with escalating rates of interest to shield their rentier owners from a diminution in revenues — while taxes and fees accelerate upward, both to offset the overspending, and to pay for the “final programs” now being discussed by politicians anxious to buy one more vote.

We are, I fear, past the point of soft landings. A crash is coming, one it will be hard to rise from again. Governments will end up falling; much more of the world — including parts of it we consider “developed” — will become failed states or rigid dictatorships.

If this worries you, the time to act is now. Not next week, but now. We are but a few grains of sand away from the crisis.

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This was originally published on 11/01/2009 on my former blog, Worth the Fee to Read It. As the jockeying leading up to a budget in March unfolds, I think these words are as relevant today (now that we’ve racked up a one year deficit of over $56 billion Federally, $24 billion in Ontario and a few billion in Toronto … and, on the global scale, all of this is chump change compared to the overspending in other countries.)

Conventional wisdom has it that governments must spend, spend and spend some more to dig the country — and the globe — out of the current downturn. (That having been done, the spending “cannot stop”.)

Conventional wisdom is dead wrong. All of this deficit spending will barely — if at all — make a difference in the near-term, and it will pile up problems not for the long-term, but for the medium-term: years in the middle of the next decade, at best.

A Little Bit Pregnant

First, let me say that I am not a deficit fanatic. I would like my government(s) to run balanced budgets: budgets that they expect to come in close to break even. Perhaps they have a good year and tax receipts are higher than expected? Then we have a surplus. Perhaps it was a tough year and receipts were lower? Then we have a slight deficit: exactly the same as the commissioned sales person or self-employed contractor who draws the same amount month after month for living expenses and could either end up with money left over as savings at year’s end, or has to dip into his savings to balance the books.

So a little red ink, from time to time, doesn’t worry me. In fact, it worries me far less than do massive surpluses because every line item, every department, every program has had contingency funds up the yin-yang. These are a recipe for bad decisions at the end of the fiscal year, otherwise known as utter waste, within the departments — and sloppy handouts, ill-thought-out programs and the like in the hands of politicians.

On the other hand, structural deficits — situations where the budget is planned to be in deficit annually (and where, as in the mess inherited from Trudeau and Turner by Mulroney, the deficit deepens annually as the interest pile up takes over everything) — are an incredibly stupid idea, on the same plane and of about the same moral quality as liar loans being written to create fees knowing they can’t be repaid.

Now, to be even-handed about this, none of our politicians are calling for a return to permanent structural deficit. No, all of them claim that we just have a crisis to solve now: we run up serious amounts of red ink for just a few years, and then we can return to fiscal prudence. So they say. (Already the promises have begun to spend money we don’t have — not to mention the whinges about attempts to cut, anywhere.)

But when was the last time a government program was terminated, its workers fired, its office leases broken, with not one penny more to be spent on that again, ever? I can’t recall one. I can recall occasional shrinkages — rare moments, those — but in general, once a department or Ministry has a mandate, it never gives it up, and it never stops funding it.

For every dollar of “stimulus”, some civil servant handles it. Someone else supervises them. Someone else manages them. Someone else develops policy for the effective use of the money — and they have supervisors, managers, directors, too. Someone else audits them, supports them technically, prepares their briefs to Treasury Board, procures their supplies. All of these have management chains, too. Every one of these increments becomes permanent, because pay grades are based on the number of people — and number of dollars under administration — associated with a job. So every new initiative does two things: it adds to the pile of spending that is “Ottawa”, “Victoria”, etc., never to be removed — and it siphons 20¢ of every dollar spent off the top to pay for itself (on average).

Now do you see why I believe any planned deficit is an almost automatic route to structural deficits? At the risk of offending people, the planned “stimulus” deficit is like getting pregnant. The plan is to abort the pregnancy. Instead everyone delays — there are so many reasons not to act — and the child comes to term.

You can’t be a little bit pregnant. You either are — or you’re not. When it comes to the dangers of structural deficits, “not” — don’t spend, by intention, beyond your means — is the best public policy course.

Deficits Avoid Decisions

Governments that say they’re making the hard decision to forgo all the hard work of sweating down the last structural deficit and to take action “as it’s needed now” miss the point. Choosing to run a deficit is avoiding the decisions that do need to be taken.

How many old programs — all those civil servants and their management trees, chasing ever smaller returns in their program areas — could be outright eliminated to find the funds required for your “stimulus”, if, indeed, it is needed. (That’s a separate question that has as much to do with vote buying as anything else. Another day, perhaps.) Yes, that’s the harder decision, for almost every one of those programs has some advocate in the country who will scream bloody murder if it’s touched in any way.

Nevertheless, MPs and MLAs are elected for the express purpose of making decisions. If you don’t want the job, resign. (Regardless of party, voting your party line likewise is avoiding a decision. Each MP has a personal moral responsibility to decide issues on their merits. The House and Senate need far more Chuck Cadmans and far fewer trained seals.)

It would have been nice if we’d had a cap in place on spending ages ago: something along the lines of “Federal spending is, by law, not to exceed $5,000 per capita”. Budget growth then becomes a function of population growth. Otherwise, to start something new, you have to wind up something old. Perhaps the people who point at Olympic Gold Medals and demand more spending on amateur sport would be upset if the whole Department of Amateur Sport & Fitness (or whatever bureaucratic monicker it is using today) was summarily axed, along with all its spending, because GM and Chrysler need the money. But a cap would have trained our politicians to cut, and to do so regularly. At the moment they don’t have the habit trained. So they reach for deficits. It’s easier.

Why This Deficit Matters More than Previous Ones

There are many opinions out there today about what the future holds, and I’m not going to chew through all of them now. Suffice it to say there are three things on the immediate horizon that make running deficits a bad idea now — as I think you see, I think Trudeau-era deficits were an equal problem, but we had the time to fix that problem, and at the moment it doesn’t look good for the “ability to fix” this one out in the 2010s or 2020s.

You might remember Canada was the only G7 country running surpluses, and the only one retiring its national debt. This — and the price to get there was higher than it needed to be because of so many previous bad decisions (and so many bad ones made in reversing our disastrous structural deficit course) — was a benefit that would have made the 2010s and 2020s truly “easy street” for Canadians relative to other parts of the world. (Having given this up — and we wiped out all the gains of the past fifteen years in one year’s orgy of “stimulus” — we’re going to dig the hole deeper just trying to scrabble our way back up to balance, then live with that hole eating a hole in our pockets for years to come just to undo the damage of 2009.)

The three worries I have for the future are:

Demographics
The demographic bulge of the Baby Boomer generation is coming to “retirement”, and even with them continuing to work that work is likely to be part-time, both for personal reasons and as employers seek to reduce labour costs and revitalise their workforces. This reduces income tax receipts and employment tax receipts at the same time as pension demands increase. In other words, this was why we were working so hard to reduce the debt, knowing we were about to have a hole knocked permanently in government revenues. (Everyone who will work and pay taxes in Canada in the next twenty years is already alive, and we are singularly inept at maximising the return on our investment in immigration, aka “doctors and engineers driving cabs for a minimal income”.)

Liveable Infrastructure
This refers to the complex effects of energy costs on transportation, delivery, work and schooling, effectiveness of the housing stock, etc. Our current city-sprawl and choice to have goods — such as food — shipped thousands of kilometres so that we can enjoy the same diet year round is a infrastructure for living that probably is unsustainable into the future. That, in turn, implies spending a great deal of money to retrofit our human environment to deal with issues of affordability and cost, for it would be even more expensive to abandon what we have and build anew. What will be needed isn’t altogether clear yet, nor is how much of this must be done privately, what must be public:private in partnership, and where government intervention might be helpful. That it will need doing, though, is at the same level of clarity as a long-range winter forecast for cold and snow just about everywhere in Canada.

Unsustainable Program Transitions
This last refers to the entitlement programs already in effect in Canada — some federal, some provincial — that are slowly but surely eating us out of house and home. The public medical system in Canada, for instance, is in decay in most provinces, while simultaneously chewing through one dollar in two of the provincial budget (or more). Eventually the combination of decay, delisting of procedures and reductions in service capability that have been the norm ever since the provinces restricted medical school enrolment coupled with Paul Martin’s balancing of the Federal budget by slashing transfers to the provinces in the 1990s will bring the system teetering to the point of collapse. Throwing more money at these systems is probably not the answer; figuring out how to restructure the entire system is — but the longer we wait to tackle these hard questions, the fewer options we’ll have and the more likely we’ll toss money we don’t have at the time at the problem. After all, the auto makers wouldn’t have “needed” a handout now if they’d tackled their problems a decade ago.

All three of these argue that at some point in the next few years the Government’s freedom of manoeuvre will be deeply curtailed. Balanced budgets en route to that point would ensure we continued to hold the line on interest expenditures (which, as with our own personal budgets — a $10.00 pizza bought on a credit card at 24% interest and paid off by minimum payments turns into an over $220.00 pizza by the time it is discharged — is a pure waste of money). Practice at real decision making rather than sloughing the problem off into deficit spending would prepare the way for much harder decisions to come.

Oh, and I haven’t yet noted that the next years are likely not to be growth years. Indeed, except for the twentieth century, the norm in economic life is a balance of inflationary (growth) and deflationary (consolidation) years. After a sixty year continuous inflation, we should reasonably expect at least a decade-long deflationary consolidation. Instead, central bankers and politicians around the world think just slopping cash around in as many forms as possible will allow us to escape back to the abnormal conditions from 1945 to 2008. Bad thinking, at least from this student of economic history’s point of view.

So there you have it. These are the arguments for not going into deficit. Such a move robs our future, impoverishes our children, and probably is like standing, in the grand tradition of Canute, in the way of the tide. But there are few moral thinkers in Parliament today. Instead, I expect the calculation of votes, the bribing of we citizens with our own money, the unrighteous indignation of most days in the Commons and the subordination of the strategic to the tactical to continue.

Remember all of this as you whinge. You are robbing your children and your grandchildren of their future. How you will face them depends a lot on whether you’re willing to make hard decisions now — and insist your MP and MLA do the same.

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