Regular readers of this blog will know that I have my doubts about the global warming "consensus" that's driving a lot of public policy these days. I don't mean that I doubt that the climate is changing -- always has; always will -- but I'm not convinced that the changes we are currently seeing are man-made.
Here in southern Ontario this year, we're having a real, old fashioned winter. There's been plenty of snow, a massive ice storm that blacked out half of Toronto for the better part of a week, and temperatures well below long-term averages since the start of December. I wouldn't think of arguing that any of this disproves global warming, or whatever the alarmists are choosing to call it this week -- weather is just weather. But it's interesting to contrast how it gets reported these days compared to how things were in the fairly recent past.
Our national weather service, Environment Canada, has developed a habit of issuing "special weather statements" for the least little thing. Slightly elevated winds? Special weather statement! Localized fog? Special weather statement!! Couple of inches of snow? Special weather statement!!! They may have their own good reasons for doing this, but the plethora of warnings of imminent doom is surely serving to create a perception among members of the public that this year's weather is much more extreme than it really is.
Then there's the dreaded "polar vortex", which has visited us (and most of the central and eastern parts of the continent) twice in the past four weeks. I think this is what in the bad old days we used to call "a cold snap", but now it's been dressed out with a much more ominous name. Climate alarmists smugly say that "of course, you can't attribute an individual event like this to global warming", and then proceed to do exactly that.
They've cobbled together an explanation for how warming is making it so cold -- something about how warmer temperatures in the Arctic are loosening the "vortex" of cold winds around the North Pole, allowing the bottled-up frigid air to spill south. Might even be true, but it's remarkable that nobody thought to mention such a possibility until after the fact. The same thing happened, of course, with the recently-mooted "pause" in global warming, which may now have been going on for fifteen years. Ah yes, we're told, the warmth is being absorbed by the deep oceans, a possibility that was never mooted until the pause had actually happened.
Indeed, another set of scientists has moved the goalposts entirely, arguing that there is no pause anyway, if you look at more complete data that they just happen to have come up with. In which case, does that mean that the guys who concocted the theory about the deep oceans absorbing the heat are wrong? Just asking. I mean if, as we are regularly scolded, "the science is settled", it's puzzling that these inconsistencies can still arise.
But wait....I've just returned from a week in Barbados, where the weather, in the middle of the dry season, was the soggiest I can recall in four decades of visiting the island. We didn't need suncream so much as rust proofing. Polar vortexes at home I can handle, but if the weather in Paradise is going screwy, then things really are getting serious. Something must be done!
Wednesday, 29 January 2014
Thursday, 16 January 2014
Economics and freakonomics
Noah Smith has an interesting post on his excellent Noahpinion blog about people who dis economists. In his view, most of the contumely directed against the profession belongs solely with macroeconomists, whose problem is that it's hard to get any "usable results" from their branch of the profession. In contrast, thanks in part to the explosion in available data, microeconomists are doing all sorts of useful things.
I sort of buy this, but only sort of. The problem macroeconomists face is that the "useful result" that most people are looking for is a forecast, which is by its nature impossible. As I've noted here before, the late John Kenneth Galbraith used to say that economists didn't forecast because they thought they knew the future, but because people asked them to.
Macroeconomic models can give you a good idea of how the economy or the financial system works, and can help you identify possible problems and imbalances, but they can't tell you when those problems might hit a tipping point. There were a lot of economists, both in academe and in dealing rooms, who knew that things were going badly awry in the middle of the last decade, but they couldn't predict exactly when or how it would all kick off. I suppose there's an analogy with Heisenberg's uncertainty principle here -- the more clearly you can see the problem, the harder it is to tell when the crisis will hit. But of course, a warning of doom without a timetable is not much use to policymakers.
On the micro side, it's certainly true that there's lots of new stuff being done. One interesting example back in the UK was the role microeconomists played in designing the auction processes used for the privatization of state-owned assets. Some of these auctions secured far more money for the Treasury than the politicians had dared to hope, though the fact that in some cases, the buyers quickly ran into problems suggests that the auctions may have been too clever by half.
I'm a bit dismayed by the fact that so much of the public's perception of economics is derived from the Freakonomics books, which are entirely microeconomics -- if, that is, they're economics at all. They're good knockabout fun, but basically they're just common sense with a bit of statistics thrown in. I'd like to think there's more to the subject than that.
So pace Noah Smith, but I'm still more drawn to macro than micro. The fact that the problems are difficult doesn't mean they shouldn't be attempted, though there's no doubt that you need to develop a carapace. When new acquaintances ask me what I used to do for a living, I can never decide whether "ex economist" or "ex investment banker" is the safer response.
As a final thought, there are plenty of folks out there who will tell you that the reason macroeconomics has developed a bad rap is that we're doing it wrong. For example, check out the Marx-based take on things at David Ruccio's blog, Occasional Links and Commentary. Just be warned, if you sign up for updates, that Ruccio's definition of "occasional" may be different from yours!
* * * * *
I will be heading south in search of some warmth in the next few days. Posting will get back to normal around Groundhog Day.
I sort of buy this, but only sort of. The problem macroeconomists face is that the "useful result" that most people are looking for is a forecast, which is by its nature impossible. As I've noted here before, the late John Kenneth Galbraith used to say that economists didn't forecast because they thought they knew the future, but because people asked them to.
Macroeconomic models can give you a good idea of how the economy or the financial system works, and can help you identify possible problems and imbalances, but they can't tell you when those problems might hit a tipping point. There were a lot of economists, both in academe and in dealing rooms, who knew that things were going badly awry in the middle of the last decade, but they couldn't predict exactly when or how it would all kick off. I suppose there's an analogy with Heisenberg's uncertainty principle here -- the more clearly you can see the problem, the harder it is to tell when the crisis will hit. But of course, a warning of doom without a timetable is not much use to policymakers.
On the micro side, it's certainly true that there's lots of new stuff being done. One interesting example back in the UK was the role microeconomists played in designing the auction processes used for the privatization of state-owned assets. Some of these auctions secured far more money for the Treasury than the politicians had dared to hope, though the fact that in some cases, the buyers quickly ran into problems suggests that the auctions may have been too clever by half.
I'm a bit dismayed by the fact that so much of the public's perception of economics is derived from the Freakonomics books, which are entirely microeconomics -- if, that is, they're economics at all. They're good knockabout fun, but basically they're just common sense with a bit of statistics thrown in. I'd like to think there's more to the subject than that.
So pace Noah Smith, but I'm still more drawn to macro than micro. The fact that the problems are difficult doesn't mean they shouldn't be attempted, though there's no doubt that you need to develop a carapace. When new acquaintances ask me what I used to do for a living, I can never decide whether "ex economist" or "ex investment banker" is the safer response.
As a final thought, there are plenty of folks out there who will tell you that the reason macroeconomics has developed a bad rap is that we're doing it wrong. For example, check out the Marx-based take on things at David Ruccio's blog, Occasional Links and Commentary. Just be warned, if you sign up for updates, that Ruccio's definition of "occasional" may be different from yours!
* * * * *
I will be heading south in search of some warmth in the next few days. Posting will get back to normal around Groundhog Day.
Monday, 13 January 2014
Peak demand
It couldn't last, of course. For the first two weeks after the ice storm, the media were full of stories about how power company workers were giving up their Christmas break to get the lights and heat working again, how people were coming in from other provinces to help, and so on. All of which was true. But now, with the power back on (and the January thaw underway), the second guessing has begun.
Over at the National Post, dear old Conrad ('Lord") Black, who apparently lost power at his own mansion for a couple of days, has a bad word to say for just about everyone. The Toronto Star, meanwhile, is careful not to dis the front-line workers, but quotes four unnamed Toronto Hydro employees as saying that the company's communications systems, both between the company and its customers and between its operations centre and the line crews, buckled under the strain imposed by the storm.
Well, why wouldn't they? As even sober weather experts are admitting, this may have been the worst ice storm in the region's recorded history. A third of the city was without power, so the number of calls, and the number of places that needed fixing, and the number of crews out fixing them, were all unprecedented. No business can put in place enough spare capacity to be able to handle such an event without experiencing some problems and delays.
It's like the subway at rush hour. People don't like the fact that they can't get a seat, but unless the train has tipped over into PIXC mode (that's rail-speak for "Passengers In eXcess of Capacity" -- see, you can learn something here), they mostly understand why. If the operator provided enough capacity to give everyone a seat at rush hour, then most of the trains would be almost empty 20 hours a day. That would be expensive, so fares would go up, and passengers would like that even less than strap-hanging.
Similarly, if Toronto Hydro provided enough communications capacity to be able to handle 100 times the normal call volume -- which is what they experienced at the height of the storm -- they'd incur massive ongoing costs for equipment and staff that might only be used a couple of times in a century. The Lord knows there are enough (justified) complaints about electricity costs in Ontario as it is, without piling on all that overhead.
That's not to say there are no lessons to be learned, and the utility's bosses have promised to learn them. But it's infuriating to find the Star, in particular, piling in on this one, when they can't even deliver the daily paper to my front door reliably any more.
Over at the National Post, dear old Conrad ('Lord") Black, who apparently lost power at his own mansion for a couple of days, has a bad word to say for just about everyone. The Toronto Star, meanwhile, is careful not to dis the front-line workers, but quotes four unnamed Toronto Hydro employees as saying that the company's communications systems, both between the company and its customers and between its operations centre and the line crews, buckled under the strain imposed by the storm.
Well, why wouldn't they? As even sober weather experts are admitting, this may have been the worst ice storm in the region's recorded history. A third of the city was without power, so the number of calls, and the number of places that needed fixing, and the number of crews out fixing them, were all unprecedented. No business can put in place enough spare capacity to be able to handle such an event without experiencing some problems and delays.
It's like the subway at rush hour. People don't like the fact that they can't get a seat, but unless the train has tipped over into PIXC mode (that's rail-speak for "Passengers In eXcess of Capacity" -- see, you can learn something here), they mostly understand why. If the operator provided enough capacity to give everyone a seat at rush hour, then most of the trains would be almost empty 20 hours a day. That would be expensive, so fares would go up, and passengers would like that even less than strap-hanging.
Similarly, if Toronto Hydro provided enough communications capacity to be able to handle 100 times the normal call volume -- which is what they experienced at the height of the storm -- they'd incur massive ongoing costs for equipment and staff that might only be used a couple of times in a century. The Lord knows there are enough (justified) complaints about electricity costs in Ontario as it is, without piling on all that overhead.
That's not to say there are no lessons to be learned, and the utility's bosses have promised to learn them. But it's infuriating to find the Star, in particular, piling in on this one, when they can't even deliver the daily paper to my front door reliably any more.
Saturday, 11 January 2014
There's only one taxpayer (and I think it's me)
If there's anything apart from hockey that unites all Canadians, it's hatred and contempt for Toronto. When I lived in that city I never quite understood it, but from where I sit now, it's getting to be a lot easier to figure it out.
Toronto bureaucrats are now estimating that the total clean-up costs for two major weather-related emergencies in the past six months -- the ice storm just before Christmas, and a flash flood back in July 2013 -- will be around $170 million. And they don't want to pay for it, so they're casting around for someone else to pick up the tab. The Province of Ontario? The federal government? Pony up, guys!
Now, it's true that whenever there's a big natural disaster in the United States -- Superstorm Sandy is a recent example -- the local government quickly declares an emergency in order to qualify for federal disaster relief. In principle there's nothing wrong with asking your bigger brothers for a helping hand. In the case of Toronto, however, it makes a bit less sense. With a population of about 5 million*, the Greater Toronto Area constitutes the lion's share of the population and economy of Ontario. What's more, the average income in the city itself is significantly higher than in the rest of the Province.
What this means is that if Ontario does step in, any funds it provides will in fact be monies raised from Toronto area taxpayers in the first instance, and from less wealthy taxpayers in the rest of the Province in the second. Toronto politicians must surely realise this, so why are they even thinking about asking? The answer is that thanks to Rob Ford, no politician in Toronto dares even to talk about raising taxes if he or she wants to be re-elected. Property taxes in Toronto are far lower than in surrounding municipalities, a fact that is directly contributing to the city's decaying infrastructure.
Ontario Premier Kathleen Wynne should tell Toronto that if the city wants financial help, whether it be for emergency repair work or for transit improvements, it first needs to put up some money itself, even if that means it has to raise taxes. Sad to say, with a provincial election probably coming before mid-year, she's very unlikely to say that. Toronto will get its (i.e. my) money, and Rob Ford will carry his mendacious low tax mantra into October's municipal elections.
* The city of Toronto itself accounts for about 3 million of those; there are three other cities in the Toronto region (Mississauga, Brampton and Hamilton) that all have populations between 500,000 and one million.
Toronto bureaucrats are now estimating that the total clean-up costs for two major weather-related emergencies in the past six months -- the ice storm just before Christmas, and a flash flood back in July 2013 -- will be around $170 million. And they don't want to pay for it, so they're casting around for someone else to pick up the tab. The Province of Ontario? The federal government? Pony up, guys!
Now, it's true that whenever there's a big natural disaster in the United States -- Superstorm Sandy is a recent example -- the local government quickly declares an emergency in order to qualify for federal disaster relief. In principle there's nothing wrong with asking your bigger brothers for a helping hand. In the case of Toronto, however, it makes a bit less sense. With a population of about 5 million*, the Greater Toronto Area constitutes the lion's share of the population and economy of Ontario. What's more, the average income in the city itself is significantly higher than in the rest of the Province.
What this means is that if Ontario does step in, any funds it provides will in fact be monies raised from Toronto area taxpayers in the first instance, and from less wealthy taxpayers in the rest of the Province in the second. Toronto politicians must surely realise this, so why are they even thinking about asking? The answer is that thanks to Rob Ford, no politician in Toronto dares even to talk about raising taxes if he or she wants to be re-elected. Property taxes in Toronto are far lower than in surrounding municipalities, a fact that is directly contributing to the city's decaying infrastructure.
Ontario Premier Kathleen Wynne should tell Toronto that if the city wants financial help, whether it be for emergency repair work or for transit improvements, it first needs to put up some money itself, even if that means it has to raise taxes. Sad to say, with a provincial election probably coming before mid-year, she's very unlikely to say that. Toronto will get its (i.e. my) money, and Rob Ford will carry his mendacious low tax mantra into October's municipal elections.
* The city of Toronto itself accounts for about 3 million of those; there are three other cities in the Toronto region (Mississauga, Brampton and Hamilton) that all have populations between 500,000 and one million.
Thursday, 9 January 2014
Undiplomatic
Under the Harper government, Canada's foreign policy has veered away from its traditions of moderation and consensus-finding, to what seems like an almost deranged desire to pick fights. Consider: in recent years Canada has become an international pariah by snubbing all international efforts at seeking agreement on climate change; it is launching a provocative attempt to claim ownership of the North Pole, even though the government's own technical advisers have warned that the claim has no merit; it has cut back on overseas aid while telling all its foreign missions that their main purpose is to boost trade and investment; and it has expressed extreme scepticism about the steps toward detente with Iran, implicitly criticising allies such as the US and UK that actually have skin in that particular game.
The government's stance on Iran is part of its vocal and unstinting support of Israel, a stance so obsequious that Foreign Minister John Baird, visiting Jerusalem a couple of years ago, was told by his Israeli counterpart that "it seems as if you like us more than we like ourselves"! Prime Minister Harper is about to pay his first visit to Israel, where he will no doubt be lionized, and to set the stage for his visit, he has just announced a jaw-droppingly inappropriate nominee for the post of Canada's ambassador to Tel Aviv: Toronto lawyer Vivian Bercovici.
In recent years Ms Bercovici has penned a monthly column for the Toronto Star, which she has mainly used to hurl immoderate abuse at anyone who so much as dares to suggest that Israel is anything less than a bastion of virtue. This recent column will give you the flavour of her work. I had always assumed that she must be on the payroll of the government of Israel, yet now we find that she is about to pitch up there, supposedly to represent the interests of the people of Canada.
The selection of Ms Bercovici, in preference to a career diplomat who might have been overjoyed to receive such a prestigious posting, shows that the Harper government has no real concept of what the role of diplomacy is. Between friendly nations like Canada and Israel -- especially between friendly nations, in fact -- it's important to have ambassadors who can have a quiet word with their host governments when the interests of the two countries appear to differ, as they always must from time to time. Sadly, there's no reason at all to think that Ms Bercovici will be anything other than a noisy cheerleader for the Netanyahu government. This may suit Messrs Harper and Baird right now, but in truth, it's not in the best interests of either Canada or Israel.
It's hard to think of a more unsuitable ambassadorial choice, unless Barack Obama is about to make Dennis Rodman his official legate in Pyongyang.
The government's stance on Iran is part of its vocal and unstinting support of Israel, a stance so obsequious that Foreign Minister John Baird, visiting Jerusalem a couple of years ago, was told by his Israeli counterpart that "it seems as if you like us more than we like ourselves"! Prime Minister Harper is about to pay his first visit to Israel, where he will no doubt be lionized, and to set the stage for his visit, he has just announced a jaw-droppingly inappropriate nominee for the post of Canada's ambassador to Tel Aviv: Toronto lawyer Vivian Bercovici.
In recent years Ms Bercovici has penned a monthly column for the Toronto Star, which she has mainly used to hurl immoderate abuse at anyone who so much as dares to suggest that Israel is anything less than a bastion of virtue. This recent column will give you the flavour of her work. I had always assumed that she must be on the payroll of the government of Israel, yet now we find that she is about to pitch up there, supposedly to represent the interests of the people of Canada.
The selection of Ms Bercovici, in preference to a career diplomat who might have been overjoyed to receive such a prestigious posting, shows that the Harper government has no real concept of what the role of diplomacy is. Between friendly nations like Canada and Israel -- especially between friendly nations, in fact -- it's important to have ambassadors who can have a quiet word with their host governments when the interests of the two countries appear to differ, as they always must from time to time. Sadly, there's no reason at all to think that Ms Bercovici will be anything other than a noisy cheerleader for the Netanyahu government. This may suit Messrs Harper and Baird right now, but in truth, it's not in the best interests of either Canada or Israel.
It's hard to think of a more unsuitable ambassadorial choice, unless Barack Obama is about to make Dennis Rodman his official legate in Pyongyang.
Saturday, 4 January 2014
Card games
The Liberals currently governing the Province of Ontario have racked up quite a track record of sheer incompetence, laced with outright corruption, in recent years. The expensive cancellation of power plants to curry voter favour, the mess surrounding the privatized air ambulance service, ORNGE (yes, that is how you spell it, and no, it doesn't mean anything), the endless dithering over transit plans in the Toronto region, and on and on. In the meantime the Province's manufacturing base has been pulverized and the public finances have fallen into a black hole.
But for sheer, comic ineptitude, nothing quite matches the gift card fiasco that has unfolded over the past week. With the power off for hundreds of thousands of people in the wake of the pre-Christmas ice storm, a whole lot of food in fridges and freezers got spoiled. Premier Kathleen Wynne, almost certainly without consulting anyone first, persuaded a couple of grocery chains to offer pre-paid gift cards to needy people to help them restock, and pledged to match the value of the stores' own donations. It was announced that cards would be made available at a number of public offices across Toronto.
You can probably guess what happened next: mayhem. Huge numbers of people showed up on a frigid morning to get their share of the largesse, and the cards ran out within minutes. There weren't enough cards in Ontario to meet the demand, so more had to be flown in from Manitoba. A second day of distribution prompted equally chaotic scenes, and then by Friday, the last day of the program, things became a bit more orderly, possibly because a lot of people had become discouraged.
At the end of it all, about 8,500 people had received cards. Considering that upwards of 100,000 had been without power for long enough to lose their food, this was (if you'll excuse the pun), the tip of the iceberg. There were stories of people swanning up in BMWs trying to get their hands on the loot, and one woman even told a TV crew that she'd seen four people arriving at one of the distribution sites in a limousine!
But even if all the cards went to the needy, this would still have been a textbook example of how not to distribute social assistance. Nobody put even a moment's thought into the logistics of the program, hence the shortage of cards. Selection of who got the cards was almost Darwinian -- if you got up early and had sharp elbows, you were in luck. And the program, although initiated by the Province, only operated in the city of Toronto itself, even though people in a whole lot of other towns and cities also lost their power for prolonged periods.
Premier Wynne has defended the gift card program while acknowledging it could have gone better. Her argument seems to reflect the famous syllogism: something has to be done; this is something; therefore this has to be done. She seems to be a thoroughly decent person, with her heart in the right place. All the same, you don't have to be Diogenes to think that the likelihood of an election this spring may have influenced her decision to get involved.
In which case, it could turn out to be a spectacular electoral own-goal. Those who got the cards, to judge from their reaction, saw this kind of help as no more than their right, and are unlikely to reward the Liberals at election time. Those who tried and failed to get cards are likely to have long memories. And for everyone else in Ontario, Wynne has provided a reminder that she and her colleagues couldn't organize a two-car funeral.
But for sheer, comic ineptitude, nothing quite matches the gift card fiasco that has unfolded over the past week. With the power off for hundreds of thousands of people in the wake of the pre-Christmas ice storm, a whole lot of food in fridges and freezers got spoiled. Premier Kathleen Wynne, almost certainly without consulting anyone first, persuaded a couple of grocery chains to offer pre-paid gift cards to needy people to help them restock, and pledged to match the value of the stores' own donations. It was announced that cards would be made available at a number of public offices across Toronto.
You can probably guess what happened next: mayhem. Huge numbers of people showed up on a frigid morning to get their share of the largesse, and the cards ran out within minutes. There weren't enough cards in Ontario to meet the demand, so more had to be flown in from Manitoba. A second day of distribution prompted equally chaotic scenes, and then by Friday, the last day of the program, things became a bit more orderly, possibly because a lot of people had become discouraged.
At the end of it all, about 8,500 people had received cards. Considering that upwards of 100,000 had been without power for long enough to lose their food, this was (if you'll excuse the pun), the tip of the iceberg. There were stories of people swanning up in BMWs trying to get their hands on the loot, and one woman even told a TV crew that she'd seen four people arriving at one of the distribution sites in a limousine!
But even if all the cards went to the needy, this would still have been a textbook example of how not to distribute social assistance. Nobody put even a moment's thought into the logistics of the program, hence the shortage of cards. Selection of who got the cards was almost Darwinian -- if you got up early and had sharp elbows, you were in luck. And the program, although initiated by the Province, only operated in the city of Toronto itself, even though people in a whole lot of other towns and cities also lost their power for prolonged periods.
Premier Wynne has defended the gift card program while acknowledging it could have gone better. Her argument seems to reflect the famous syllogism: something has to be done; this is something; therefore this has to be done. She seems to be a thoroughly decent person, with her heart in the right place. All the same, you don't have to be Diogenes to think that the likelihood of an election this spring may have influenced her decision to get involved.
In which case, it could turn out to be a spectacular electoral own-goal. Those who got the cards, to judge from their reaction, saw this kind of help as no more than their right, and are unlikely to reward the Liberals at election time. Those who tried and failed to get cards are likely to have long memories. And for everyone else in Ontario, Wynne has provided a reminder that she and her colleagues couldn't organize a two-car funeral.
Thursday, 2 January 2014
Happy New Year? Not according to the IMF.
Here's a thoroughly scary thought to start the new year. According to a report from the IMF, debt burdens in developed countries are now at their highest level in 200 years, and extreme measures -- restructuring, a tax on savers or (whisper it not) higher inflation will soon be needed to alleviate the burden.
The report is authored by Kenneth Rogoff and Carmen Reinhart of Harvard University. You may recall that they triggered a noisy academic argument last year when they published a paper that appeared to show that countries that allowed their debt/GDP ratio to rise beyond 90% inevitably endured lower growth rates than more fiscally-disciplined countries. There were suggestions, which were of course denied, that Rogoff and Reinhart had been rather selective in the data they used to prove their thesis. A couple of years before that, Rogoff published a paper arguing that a "modest" increase in inflation, say to about 4 percent, would help make debt burdens more manageable over time. So there's nothing exactly new in the underlying arguments of this latest report.
One thing that is a bit striking, however, is the comparison that is made with debt writeoffs during the Dirty Thirties. It's not clear that this is a valid comparison, inasmuch as the many of the writeoffs all those decades ago involved the United States forgiving post-Great War loans it had made to the European combatants. It's difficult in the extreme to imagine that something similar could be arranged today, when so much sovereign debt is owed to private lenders. It's unlikely that the bond vigilantes are as generous and far-sighted as FDR was. And as for the US departure from the gold standard, which effectively imposed a 15% haircut on the country's creditors, well, no comparable measure is even available in today's world of floating exchange rates.
Besides, there's a whole other level to the problem now. Private individuals are now much more deeply in debt than they were in the Thirties, when credit cards and personal lines of credit and equity withdrawal loans were simply unheard-of. Here in Canada, for example, the personal debt/disposable income ratio is in excess of 160%, an all-time high. It's hard to be surprised at that when the central bank keeps assuring everyone that it won't be raising interest rates for a long time to come.
Rogoff and Reinhart argue that taking extraordinary steps ("financial repression") to deal with the debt burden will be better in the long run than the current policy of just muddling through. That may well be true for public debt, but the problem, in most countries, is a lot broader than that.
The report is authored by Kenneth Rogoff and Carmen Reinhart of Harvard University. You may recall that they triggered a noisy academic argument last year when they published a paper that appeared to show that countries that allowed their debt/GDP ratio to rise beyond 90% inevitably endured lower growth rates than more fiscally-disciplined countries. There were suggestions, which were of course denied, that Rogoff and Reinhart had been rather selective in the data they used to prove their thesis. A couple of years before that, Rogoff published a paper arguing that a "modest" increase in inflation, say to about 4 percent, would help make debt burdens more manageable over time. So there's nothing exactly new in the underlying arguments of this latest report.
One thing that is a bit striking, however, is the comparison that is made with debt writeoffs during the Dirty Thirties. It's not clear that this is a valid comparison, inasmuch as the many of the writeoffs all those decades ago involved the United States forgiving post-Great War loans it had made to the European combatants. It's difficult in the extreme to imagine that something similar could be arranged today, when so much sovereign debt is owed to private lenders. It's unlikely that the bond vigilantes are as generous and far-sighted as FDR was. And as for the US departure from the gold standard, which effectively imposed a 15% haircut on the country's creditors, well, no comparable measure is even available in today's world of floating exchange rates.
Besides, there's a whole other level to the problem now. Private individuals are now much more deeply in debt than they were in the Thirties, when credit cards and personal lines of credit and equity withdrawal loans were simply unheard-of. Here in Canada, for example, the personal debt/disposable income ratio is in excess of 160%, an all-time high. It's hard to be surprised at that when the central bank keeps assuring everyone that it won't be raising interest rates for a long time to come.
Rogoff and Reinhart argue that taking extraordinary steps ("financial repression") to deal with the debt burden will be better in the long run than the current policy of just muddling through. That may well be true for public debt, but the problem, in most countries, is a lot broader than that.
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