The title phrase goes all the way back to the Nixon years, but it seems even more apt now. Looking for some consolation in the wake of Donald Trump's electoral victory? This may be it.
Go back just one year, and there only seemed to be one lonely advocate for stimulative fiscal policy in the world: newly-elected Canadian PM Justin Trudeau. He latched on to the idea of fiscal stimulus about half way through the endless election campaign, and reportedly told his wife, "I think I just won us the election". So it proved, and in the succeeding months he and his government have dramatically scaled up the infrastructure spending plans that got them elected.
Over in the UK, the Cameron government had been preaching austerity, and to some extent delivering it, ever since it was first elected. During the Brexit referendum campaign, Chancellor of the Exchequer George Osborne was rash enough to threaten a "punishment" budget of even more spending cuts if the Leave side were victorious. After the vote, Cameron and Osborne exited the stage as if pursued by a bear, and the fiscal outlook changed abruptly. New Chancellor Philip Hammond, recognizing the potential for damage to the economy during the two years and more before Brexit actually happens, has pledged to keep the spending taps open, delaying sine die any return to fiscal balance.
And then there's Donald Trump. Much of his economic platform is downright scary, given his focus on trade deals that he perceives as unfair to America. However, he has also pledged to start a multi-billion dollar spending program to rebuild the country's aging infrastructure. Since this is something that Democrats will find easy to support, it's very likely to be one of the first thing that Trump does when he assumes office on January 20. Trump may be a Republican in name only, but he seems sure to follow in a time-honoured tradition of GOP Presidents -- rail against the fiscal irresponsibility of Democrats while campaigning, then spend at a dizzying rate once in office.
I've argued numerous times in this blog that the policy mix governments have used since the financial crisis has been wrong: too much monetary ease, not enough fiscal stimulus. With the Fed likely to raise rates in December and several more times after that, we may be about to find out if I was right.
Sunday, 13 November 2016
Wednesday, 9 November 2016
Misunderestimated
I guess we should have seen that coming, because Donald Trump certainly did. The Brexit vote in the UK back in June showed how easily a shameless populist could capitalize on the ill-defined anger* that seems to permeate most "advanced" societies these days. Trump regularly boasted that he would achieve a "Brexit plus" on election day, and so it has proved.
George W. Bush's accidental coinage about himself, "misunderestimated", provides a useful basis for analyzing what happened yesterday. It's clear that the leadership of the Democratic Party misunderestimated the challenges of the campaign in both a tactical and strategic sense.
Tactically, the Dems woefully misjudged Trump's persistence and his appeal. That didn't start with them, of course. Back during the primary season, Trump's rivals for his own party's nomination assumed he would flame out or lose interest. Instead of taking him on directly, they attacked each other, and all in their turn fell by the wayside, leaving Trump with no real opponent for the nomination.
Once the general election started, the Democrats made a similar error, largely relying on Trump's own endless gaffes to defeat him, rather than forcing him to concentrate on the issues, on which he was (and is) conspicuously weak. Hillary Clinton's policy positions were much more detailed and well-articulated than Trump's, but the Democrats were never able to make that count. Trump, like a certain other right-wing demagogue back in the 1930s, just kept playing the same tune to his captive audience over and over again, and it worked.
Strategically, the Democrats misunderestimated the sheer anger felt throughout the electorate. The feeling that Washington is a corrupt and incestuous cesspool, completely out of touch with the problems facing Americans in their day-to-day lives, is all-pervading. This election turned out to be about change, yet the Democrats offered up a nominee who stood foursquare for more of the same. Donald Trump never had to spell out in any great detail what changes he would make if elected: the simple fact that he was not Hillary Clinton was enough for many of his supporters.
This raises the question: if the Democrats had offered up a "change" candidate of their own, would the result have been any different? Maybe, but it's unlikely that the change candidate in the Democratic primaries -- Bernie Sanders -- would have done very well. While CNN was waiting for the results to start coming in last evening, it displayed the results of a number of exit polls it had conducted during the day. One of these asked respondents what direction of change they would like to see under the incoming President; only 15 percent wanted a "more liberal" shift; a far higher percentage wanted a more conservative government. This would not have translated into support for Bernie Sanders.
So, what's next? Trump is already 70 years old, and although he appears to be in robust health (and is abstemious in his habits), he is bound to run out of energy sooner rather than later. Moreover, although he will enter office with GOP majorities in both the House and the Senate, the next set of mid-term elections, in November 2018, see the entire House up for grabs again. Realistically, Trump will have no more than a year to make his mark before the electoral machine starts cranking up again. That is, of course, plenty of time for him to do some real damage. However, perhaps the greater concern is that he will not have either the ideas or the time to deliver the kind of change that his electoral "base" is seeking. In that case, the anger that has made this election such an unseemly spectacle at times will be redoubled.
* Ill defined, but by no means inexplicable. Living standards across Europe have been stagnant or going backwards since the financial crisis, and most analyses show that the average US worker is no better off in real terms than they were in the 1970s. Add in the astounding rise in income inequality, and it's no surprise that people are angry.
George W. Bush's accidental coinage about himself, "misunderestimated", provides a useful basis for analyzing what happened yesterday. It's clear that the leadership of the Democratic Party misunderestimated the challenges of the campaign in both a tactical and strategic sense.
Tactically, the Dems woefully misjudged Trump's persistence and his appeal. That didn't start with them, of course. Back during the primary season, Trump's rivals for his own party's nomination assumed he would flame out or lose interest. Instead of taking him on directly, they attacked each other, and all in their turn fell by the wayside, leaving Trump with no real opponent for the nomination.
Once the general election started, the Democrats made a similar error, largely relying on Trump's own endless gaffes to defeat him, rather than forcing him to concentrate on the issues, on which he was (and is) conspicuously weak. Hillary Clinton's policy positions were much more detailed and well-articulated than Trump's, but the Democrats were never able to make that count. Trump, like a certain other right-wing demagogue back in the 1930s, just kept playing the same tune to his captive audience over and over again, and it worked.
Strategically, the Democrats misunderestimated the sheer anger felt throughout the electorate. The feeling that Washington is a corrupt and incestuous cesspool, completely out of touch with the problems facing Americans in their day-to-day lives, is all-pervading. This election turned out to be about change, yet the Democrats offered up a nominee who stood foursquare for more of the same. Donald Trump never had to spell out in any great detail what changes he would make if elected: the simple fact that he was not Hillary Clinton was enough for many of his supporters.
This raises the question: if the Democrats had offered up a "change" candidate of their own, would the result have been any different? Maybe, but it's unlikely that the change candidate in the Democratic primaries -- Bernie Sanders -- would have done very well. While CNN was waiting for the results to start coming in last evening, it displayed the results of a number of exit polls it had conducted during the day. One of these asked respondents what direction of change they would like to see under the incoming President; only 15 percent wanted a "more liberal" shift; a far higher percentage wanted a more conservative government. This would not have translated into support for Bernie Sanders.
So, what's next? Trump is already 70 years old, and although he appears to be in robust health (and is abstemious in his habits), he is bound to run out of energy sooner rather than later. Moreover, although he will enter office with GOP majorities in both the House and the Senate, the next set of mid-term elections, in November 2018, see the entire House up for grabs again. Realistically, Trump will have no more than a year to make his mark before the electoral machine starts cranking up again. That is, of course, plenty of time for him to do some real damage. However, perhaps the greater concern is that he will not have either the ideas or the time to deliver the kind of change that his electoral "base" is seeking. In that case, the anger that has made this election such an unseemly spectacle at times will be redoubled.
* Ill defined, but by no means inexplicable. Living standards across Europe have been stagnant or going backwards since the financial crisis, and most analyses show that the average US worker is no better off in real terms than they were in the 1970s. Add in the astounding rise in income inequality, and it's no surprise that people are angry.
Friday, 4 November 2016
Ignore the headline!
Another month, another confusing employment report from Statistics Canada.
The agency reported today that the economy added 44,000 jobs in October, far higher than the 15,000 consensus expectation. But......
Take from all this what you will! The headline number provides a wholly misleading impression, given the loss of full-time jobs and the uneven geographic distribution of new positions. The most plausible interpretation of the data is that after the post-fire bounceback during Q3, the economy has continued to expand gradually in the final quarter of the year. There's nothing here to change Bank of Canada policy.
The agency reported today that the economy added 44,000 jobs in October, far higher than the 15,000 consensus expectation. But......
- All of the jobs added in the month were part-time -- in fact, part-time employment rose more than 67,000 in the month, offset by a 23,000 decline in full-time jobs.
- The preponderance of part-time jobs in October reflects a longer term pattern: over the past year, the economy has added 124,000 part-time jobs, but only 15,500 full-time.
- Half of October's new jobs (24,000) were in the construction sector; as the colder months set in, it is unlikely that this sector will remain a source of strength.
- Manufacturing continues to struggle, losing 7500 jobs in the month, which brings the loss over the past year to more than 25,000.
- Fully 40,000 of the jobs created in October were in Ontario and British Columbia; the remaining Provinces saw almost no change in employment in the month.
- Despite the rise in the headline employment number, the unemployment rate was unchanged at 7.0 percent. However, to the extent that this reflects an increase in the participation rate, it can be interpreted as a sign of improving worker sentiment.
Take from all this what you will! The headline number provides a wholly misleading impression, given the loss of full-time jobs and the uneven geographic distribution of new positions. The most plausible interpretation of the data is that after the post-fire bounceback during Q3, the economy has continued to expand gradually in the final quarter of the year. There's nothing here to change Bank of Canada policy.
Wednesday, 2 November 2016
Deficits stretching all the way to the horizon
Whatever you may think of the specifics of Canadian Finance Minister Bill Morneau's fall fiscal update, tabled yesterday, you can't deny that he's playing a long game. The key measures Morneau is proposing, especially as regards infrastructure financing, will only be truly effective (or not) over a term far exceeding the life of the current Parliament. And given the size of the deficits Morneau expects to run in the short term, any course correction after the next election is likely to be very painful.
Let's start with those deficits. Morneau is now projecting a shortfall of C$25.1 billion for this year. That is, to put it mildly, a pretty stunning change from last year's $1 billion shortfall. Although last March's budget initially projected a $29.4 billion deficit this year, that number included a $6 billion "contingency" amount, which has now been eliminated. This means that the underlying deficit is actually $1.7 billion higher than was foreseen eight months ago.
Looking forward, Morneau expects the deficit to rise to almost $28 billion next year, then fall gradually, reaching $14.6 billion in 2021 -- which is, of course, well into the life of the next Parliament. There is no timetable for a return to a balanced budget. What's more, these numbers include no contingency or cushion whatsoever. In other words, in this fall statement, which is not even a full budget, Morneau has tossed away two of the tools that served Paul Martin well when he was struggling with an even larger deficit problems two decades ago: the contingency provision (which regularly allowed Martin to bring in deficits below original forecasts) and the focus on a two-year planning horizon. This looks ominous.
As for the infrastructure plans, the proposed sums are huge. Ottawa is proposing to spend up to $186 billion on transportation, water, green initiatives and the rest over an 11-year timeframe -- that's more than two Parliaments' worth. This is a 50 percent increase over the amount proposed just eight months ago. Much of the money will go into joint investments with Provinces and municipalities in the usual way -- and cities like Toronto already have their noses in the trough -- but the really interesting part of Morneau's plan is the so-called Canada Infrastructure Bank.
This bank, which will not be set up until early 2017, will be partly capitalized by the Federal government, to the tune of somewhere between $15 and $35 billion, with the exact amount determined by how successful the bank is in persuading the private sector to co-invest. Will this work?
It's certainly true that big pension funds, including the major global sovereign wealth funds and Canadian players like Quebec's Caisse de depots or Ontario's teachers' retirement funds, have increasingly been looking to invest in infrastructure as an alternative to equities and bonds. However, these investors in general show little appetite for what bankers call "completion risk", which is an inevitable element of getting new infrastructure built. Investors have generally preferred to let the public sector take that risk, and then step in to buy once the project is up and running. Ontario had a disastrous experience with this with the 407-ETR toll highway north of Toronto, which the provincial government of the day built and then virtually gave away to private investors. Similarly, private investment in the UK-France Channel Tunnel only materialized when the tunnel was open and operating.
Morneau is gambling that his Canada Investment Bank will be able to change that pattern, attracting institutional investors to become involved at the outset. If he's right, the government will be able to leverage its own funds to produce far more infrastructure spending than the public purse could finance on its own. If he's wrong, however, the expected boost to GDP from infrastructure investment will be much lower than the Government has been counting on. It's a worthwhile experiment -- heaven knows, there are not many alternatives available -- but it's by no means guaranteed to work, and it's certainly not going to help much in the immediate future.
Let's start with those deficits. Morneau is now projecting a shortfall of C$25.1 billion for this year. That is, to put it mildly, a pretty stunning change from last year's $1 billion shortfall. Although last March's budget initially projected a $29.4 billion deficit this year, that number included a $6 billion "contingency" amount, which has now been eliminated. This means that the underlying deficit is actually $1.7 billion higher than was foreseen eight months ago.
Looking forward, Morneau expects the deficit to rise to almost $28 billion next year, then fall gradually, reaching $14.6 billion in 2021 -- which is, of course, well into the life of the next Parliament. There is no timetable for a return to a balanced budget. What's more, these numbers include no contingency or cushion whatsoever. In other words, in this fall statement, which is not even a full budget, Morneau has tossed away two of the tools that served Paul Martin well when he was struggling with an even larger deficit problems two decades ago: the contingency provision (which regularly allowed Martin to bring in deficits below original forecasts) and the focus on a two-year planning horizon. This looks ominous.
As for the infrastructure plans, the proposed sums are huge. Ottawa is proposing to spend up to $186 billion on transportation, water, green initiatives and the rest over an 11-year timeframe -- that's more than two Parliaments' worth. This is a 50 percent increase over the amount proposed just eight months ago. Much of the money will go into joint investments with Provinces and municipalities in the usual way -- and cities like Toronto already have their noses in the trough -- but the really interesting part of Morneau's plan is the so-called Canada Infrastructure Bank.
This bank, which will not be set up until early 2017, will be partly capitalized by the Federal government, to the tune of somewhere between $15 and $35 billion, with the exact amount determined by how successful the bank is in persuading the private sector to co-invest. Will this work?
It's certainly true that big pension funds, including the major global sovereign wealth funds and Canadian players like Quebec's Caisse de depots or Ontario's teachers' retirement funds, have increasingly been looking to invest in infrastructure as an alternative to equities and bonds. However, these investors in general show little appetite for what bankers call "completion risk", which is an inevitable element of getting new infrastructure built. Investors have generally preferred to let the public sector take that risk, and then step in to buy once the project is up and running. Ontario had a disastrous experience with this with the 407-ETR toll highway north of Toronto, which the provincial government of the day built and then virtually gave away to private investors. Similarly, private investment in the UK-France Channel Tunnel only materialized when the tunnel was open and operating.
Morneau is gambling that his Canada Investment Bank will be able to change that pattern, attracting institutional investors to become involved at the outset. If he's right, the government will be able to leverage its own funds to produce far more infrastructure spending than the public purse could finance on its own. If he's wrong, however, the expected boost to GDP from infrastructure investment will be much lower than the Government has been counting on. It's a worthwhile experiment -- heaven knows, there are not many alternatives available -- but it's by no means guaranteed to work, and it's certainly not going to help much in the immediate future.
Tuesday, 1 November 2016
"Outsized"??
The big event for the Canadian economy today will be Finance Minister Bill Morneau's fall fiscal update, in which he is widely expected to put more flesh on the bones of the government's infrastructure plans. He will probably also admit that the budget deficit is likely to be higher than previously forecast because the economy is growing so slowly. More on this tomorrow.
Speaking of growth, however, today saw the release of August GDP data. The economy grew 0.2 percent in the month, but July's growth was revised down to 0.4 percent from the 0.5 percent first reported. You can see the details here, but think about this: a "rebound" on this scale, after the dismal (albeit wildfire-related) numbers posted back in the spring has analysts dipping into the thesaurus and coming up with the adjective "outsized". It's a sign of how accustomed we have become, in the years since the financial crisis, to seeing the economy perpetually teetering on the brink of recession.
Can Bill Morneau do anything about that? We'll find out later today.
Speaking of growth, however, today saw the release of August GDP data. The economy grew 0.2 percent in the month, but July's growth was revised down to 0.4 percent from the 0.5 percent first reported. You can see the details here, but think about this: a "rebound" on this scale, after the dismal (albeit wildfire-related) numbers posted back in the spring has analysts dipping into the thesaurus and coming up with the adjective "outsized". It's a sign of how accustomed we have become, in the years since the financial crisis, to seeing the economy perpetually teetering on the brink of recession.
Can Bill Morneau do anything about that? We'll find out later today.
Monday, 31 October 2016
Carney will stay on for one more year
After a lengthy meeting with Prime Minister Theresa May, Bank of England Governor Mark Carney has announced he will stay on as Bank of England Governor until June 2019. This will mean he serves six years in the job, as opposed to the customary eight. However, since he arranged an opt-out clause at the five-year point as a condition of taking the job, it represents a compromise of sorts.
Assuming TM-the-PM follows through on her intention of triggering the formal 2-year Brexit negotiations in March 2017, today's announcement means Carney will be in charge at the Bank at the time the UK actually leaves the EU. Indeed, 2019 looks like a very interesting year for the UK all around, with Brexit, then a new Bank of England Governor to bed in, and then a general election, unless May sees an opportunity to call an earlier vote.
You wouldn't have blamed Carney if he'd cut and run: he has been under attack from all sides in recent weeks. William (Lord) Hague criticized him for keeping interest rates too low, inadvertently making it very clear why he (Hague) never served in a major economic portfolio -- higher rates would be an absolute disaster for the UK right now. Michael Gove, one of the unsuccessful bidders for the job now held by May, wrote a diatribe in which he again accused Carney of being an "expert", which now seems to have a wholly pejorative meaning in Gove's lexicon.
And then there's Jacob Rees-Mogg, one of the more unhinged Brexiteers, who has been fiercely critical of Carney because the Governor dared to suggest that the Brexit vote might have consequences that the Bank might prudently need to prepare for. There were rumours over the past week that if Carney were to hightail it back to Ottawa, Rees-Mogg might get the job, an appointment that would surely have set Sterling on a course towards parity with the Venezuelan bolivar.
Despite May's profession of confidence in Carney today, it's unlikely that any of these dolts will suspend their criticism of him for very long. It's brave of him to stay, and it's frankly more than Ms May and her team deserve.
Assuming TM-the-PM follows through on her intention of triggering the formal 2-year Brexit negotiations in March 2017, today's announcement means Carney will be in charge at the Bank at the time the UK actually leaves the EU. Indeed, 2019 looks like a very interesting year for the UK all around, with Brexit, then a new Bank of England Governor to bed in, and then a general election, unless May sees an opportunity to call an earlier vote.
You wouldn't have blamed Carney if he'd cut and run: he has been under attack from all sides in recent weeks. William (Lord) Hague criticized him for keeping interest rates too low, inadvertently making it very clear why he (Hague) never served in a major economic portfolio -- higher rates would be an absolute disaster for the UK right now. Michael Gove, one of the unsuccessful bidders for the job now held by May, wrote a diatribe in which he again accused Carney of being an "expert", which now seems to have a wholly pejorative meaning in Gove's lexicon.
And then there's Jacob Rees-Mogg, one of the more unhinged Brexiteers, who has been fiercely critical of Carney because the Governor dared to suggest that the Brexit vote might have consequences that the Bank might prudently need to prepare for. There were rumours over the past week that if Carney were to hightail it back to Ottawa, Rees-Mogg might get the job, an appointment that would surely have set Sterling on a course towards parity with the Venezuelan bolivar.
Despite May's profession of confidence in Carney today, it's unlikely that any of these dolts will suspend their criticism of him for very long. It's brave of him to stay, and it's frankly more than Ms May and her team deserve.
Monday, 24 October 2016
Canada renews inflation target, with a new wrinkle or three
The Bank of Canada has been using an inflation target of 2 percent as its main monetary policy guidepost since 1991. The Bank and the Government review the target every five years and tweak it as appropriate. Today the Bank announced that the target is to be renewed for a further five years, but with some quite significant changes in the way the inflation level is assessed.
The inflation target notionally focuses on headline CPI, but because of the volatility in that series, the Bank has mostly focused on a "core" measure known as CPIX, which omits items such as gasoline, fruits and vegetables and mortgage interest. However, the Bank has found that CPIX is no longer giving a reliable reading of underlying price trends. In part this is happening because of administered price changes that have nothing to do with underlying price or cost pressures. The soaring cost of electricity in Ontario as a result of the Provincial government's aggressive "green" strategy is an obvious example; the cumulative impact of the planned carbon levy in the next few years may well be another.
In the opposite direction, prices for some products behave counter-cyclically, falling when the economy is weakening. The Bank cites new car prices as an example here. Such price movements do not accurately reflect capacity constraints in the economy, which are one of the key factors the Bank is looking to focus on as it attempts to set monetary policy.
Going forward, the Bank will now look at three new measures of underlying inflation, known as CPI-trim, CPI-median and CPI-common. These measures, fully described in the technical paper linked above, all attempt to give a more accurate read on inflationary pressures than either CPI or CPIX is capable of doing.
It's tempting at first blush to think that the Bank of Canada is going down the road once taken by Alan Greenspan at the Fed. The "maestro" was forever searching for new inflation measures to support his gut feel that price pressures were low. After a brief dalliance with the employment cost index (ECI), he eventually settled on the entirely unmemorable core personal consumption expenditure deflator.
However, that's not what the Bank of Canada is up to here. With inflationary pressures as low as they are in Canada right now, there's no need for the Bank to put up any kind of smokescreen. The purpose of adopting the new measures is exactly as stated: to give the Bank a better read of what's going on. That said, the proliferation of new measures is unlikely to improve public understanding of the inflation targeting regime. Given that a large number of Canadians sincerely believe that the inflation rate is way higher than what is reported by StatsCan each month, there are bound to be a few conspiracy theories online and in the letters pages in the next few days.
The inflation target notionally focuses on headline CPI, but because of the volatility in that series, the Bank has mostly focused on a "core" measure known as CPIX, which omits items such as gasoline, fruits and vegetables and mortgage interest. However, the Bank has found that CPIX is no longer giving a reliable reading of underlying price trends. In part this is happening because of administered price changes that have nothing to do with underlying price or cost pressures. The soaring cost of electricity in Ontario as a result of the Provincial government's aggressive "green" strategy is an obvious example; the cumulative impact of the planned carbon levy in the next few years may well be another.
In the opposite direction, prices for some products behave counter-cyclically, falling when the economy is weakening. The Bank cites new car prices as an example here. Such price movements do not accurately reflect capacity constraints in the economy, which are one of the key factors the Bank is looking to focus on as it attempts to set monetary policy.
Going forward, the Bank will now look at three new measures of underlying inflation, known as CPI-trim, CPI-median and CPI-common. These measures, fully described in the technical paper linked above, all attempt to give a more accurate read on inflationary pressures than either CPI or CPIX is capable of doing.
It's tempting at first blush to think that the Bank of Canada is going down the road once taken by Alan Greenspan at the Fed. The "maestro" was forever searching for new inflation measures to support his gut feel that price pressures were low. After a brief dalliance with the employment cost index (ECI), he eventually settled on the entirely unmemorable core personal consumption expenditure deflator.
However, that's not what the Bank of Canada is up to here. With inflationary pressures as low as they are in Canada right now, there's no need for the Bank to put up any kind of smokescreen. The purpose of adopting the new measures is exactly as stated: to give the Bank a better read of what's going on. That said, the proliferation of new measures is unlikely to improve public understanding of the inflation targeting regime. Given that a large number of Canadians sincerely believe that the inflation rate is way higher than what is reported by StatsCan each month, there are bound to be a few conspiracy theories online and in the letters pages in the next few days.
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