Considering how polite Canadians supposedly are (at least in their own estimation), it's remarkable how much the nation's politics can resemble a blood sport. Members of opposing parties seem to harbour genuine hatred for each other, and they don't hesitate to spend taxpayers' money to gain electoral advantage.
There's a huge ongoing example of this in Ontario right now. Before the last Provincial election, the Liberal government realised it was at risk of losing a couple of key marginal seats. To woo back a few voters, the government announced that a couple of planned gas-fired power stations would be moved from the marginal ridings to other parts of the province.
It worked, inasmuch as the Liberals were able to cling onto power. Ever since the election, though, the bills have been coming in. Initially the government claimed that the cost of relocating the two plants would be "only" $45 million. Bad enough, you might think, for something so blatantly partisan. But it turns out that the real cost is much higher. Despite every effort by the government to forestall any propoer accounting, it now emerges that the actual cost for just one of the plants was $270 million. A full accounting for the other plant will appear in the next few weeks, and when all's said and done, it's likely that over half a billion taxpayer dollars was squandered purely for political advantage*.
You'd think that any party that did such a thing would be turfed out of office, ideally into the nearest jail cell, but you'd be wrong.. The Liberals are still in office, albeit with a new leader, and are still in with a fighting chance of winning the next election, which could very well take place later this year. Sad to relate, this kind of thing is all too common in Canada, and people just seem to accept that it's part of the game.
Government advertising provides another example, on a much smaller scale, but more insidiously. I've written here before that we were amazed, when we returned here from the UK, to see just how much TV advertising time is taken by the Federal and Provincial governments. They're outnumbered by the ambulance chasing lawyers and the gold buying pawnbrokers, but not by a wide margin.
Much the worst are the Federal government's "economic action plan" ads, which are nakedly partisan. It's surprising to see that the Harper government, which is unarguably the most right wing in the G8, and which is constantly preaching the need for spending restraint, thinks that telling the voters how much their government is doing for them is an appropriate use of scarce financial resources. No need for Canadians to ask what their country can do for them, because their country is falling over itself to tell them.
Now the Harper government is going further. At taxpayer expense, leaflets are to be distributed to Canadian households telling them what a lightweight the new federal Liberal leader, Justin Trudeau, supposedly is. Viciously anti-Trudeau ads are already running on TV, though those appear to be paid for by the Tory party itself. PM Harper is dismissing criticism of the leaflet campaign with an insouciant shrug, arguing that all the parties do it, and it's quite within the rules. It probably is, and in Ottawa nobody from the opposition parties is likely to be pushing too hard for those rules to be changed. Because soon enough, they'll be looking to sling some taxpayer-financed mud too.
* UPDATE, April 30: The estimate for the second plant has just been released: $310 million, meaning that the total cost of this shameful episode is $580 million. Ontario is set to introduce an austerity budget on May 2 -- bet that money would have come in handy.
Friday, 26 April 2013
Sunday, 21 April 2013
Journal of Irreproducible Results
There really is a spoof journal with this title, and very funny it is, too -- check it out here.
I'm thinking, though, that a couple of distinguished economists might not find it quite so funny at the moment. Back in 2010, Kenneth Rogoff and Carmen Reinhart published an article, under the auspices of the American Economic Association (AEA) titled "Growth in a time of debt". They claimed to demonstrate that any time a country's debt topped 90% of GDP, its growth rate was liable to suffer -- averaging about 1% per annum lower than for less indebted countries.
You couldn't claim that this led to the craze for austerity economics -- that had begun much earlier -- but it certainly chimed with the zeitgeist, and provided academic reinforcement for the likes of George Osborne in the UK and the GOP caucus in the United States.
Fast forward now to the present, and Rogoff/Reinhart is at the centre of one of the juiciest academic scandals in some time. A new paper by Herndon, Ash and Pollin calls the paper's entire thesis into question. This later article came into being when Herndon tried and failed to reproduce the results in the earlier piece. I can't do better than to quote from the abstract on the PERI website:
Herndon, Ash and Pollin replicate Reinhart and Rogoff and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. They find that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0:1 percent as published in Reinhart and Rogo ff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.
Wow! Just about every available academic sin in one article! Rogoff/Reinhart have, of course, defended themselves, admitting to coding errors but arguing that even if all of the data are included, their conclusions are still largely correct. Given the nature of the "coding errors" -- one of them was the inclusion of only one year of data for New Zealand, 1951, a year in which GDP fell by more than 7% -- my own first instinct was to be skeptical of their excuse. On further thought, however, I'm inclined to believe them, mainly because they willingly handed over their data set to the Herndon team, something they would hardly have done if they knew it was bogus.
Still, you have to wonder how two distinguished academics let such a flawed piece see the light of day. It seems more than likely that Rogoff and Herndon's "Bayesian prior" in this case was a belief that excessive debt caused slow growth. That's what they expected to find, and when that's what came out of the data, they didn't check that data as closely as they should have. That's not good enough, especially when the conclusions they reached reinforced damaging economic policies in so many parts of the world.
At least Rogoff and Reinhart didn't destroy their data after they had processed it, unlike the notorious climate change team at the University of East Anglia in Britain, who "proved" anthropogenic climate change to their own satisfaction, and then destroyed reams of historical data. Their results, which continue to inform public policy on the issue in spite of the highly suspect circumstances, are quite literally irreproducible. Amazingly, this sort of academic finagling is not uncommon in the climate change community -- see, for example, this evisceration of the so-called "hockey stick" temperature graph.
Do Rogoff and Reinhart have anything in common with the warmists? Both seem keen to draw conclusions that they think people want to hear, and are maybe not as careful as they should be about how they get there. Maybe this has something to do with a remarkable little piece in the NYT this week, which noted that there are now about 4,000 quasi-academic journals on the internet, soliciting articles from anxious authors and then charging them for the privilege of seeing their masterpieces in print. We may be seeing the operation of a new version of Gresham's Law, with bad science driving out good.
I'm thinking, though, that a couple of distinguished economists might not find it quite so funny at the moment. Back in 2010, Kenneth Rogoff and Carmen Reinhart published an article, under the auspices of the American Economic Association (AEA) titled "Growth in a time of debt". They claimed to demonstrate that any time a country's debt topped 90% of GDP, its growth rate was liable to suffer -- averaging about 1% per annum lower than for less indebted countries.
You couldn't claim that this led to the craze for austerity economics -- that had begun much earlier -- but it certainly chimed with the zeitgeist, and provided academic reinforcement for the likes of George Osborne in the UK and the GOP caucus in the United States.
Fast forward now to the present, and Rogoff/Reinhart is at the centre of one of the juiciest academic scandals in some time. A new paper by Herndon, Ash and Pollin calls the paper's entire thesis into question. This later article came into being when Herndon tried and failed to reproduce the results in the earlier piece. I can't do better than to quote from the abstract on the PERI website:
Herndon, Ash and Pollin replicate Reinhart and Rogoff and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. They find that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0:1 percent as published in Reinhart and Rogo ff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.
Wow! Just about every available academic sin in one article! Rogoff/Reinhart have, of course, defended themselves, admitting to coding errors but arguing that even if all of the data are included, their conclusions are still largely correct. Given the nature of the "coding errors" -- one of them was the inclusion of only one year of data for New Zealand, 1951, a year in which GDP fell by more than 7% -- my own first instinct was to be skeptical of their excuse. On further thought, however, I'm inclined to believe them, mainly because they willingly handed over their data set to the Herndon team, something they would hardly have done if they knew it was bogus.
Still, you have to wonder how two distinguished academics let such a flawed piece see the light of day. It seems more than likely that Rogoff and Herndon's "Bayesian prior" in this case was a belief that excessive debt caused slow growth. That's what they expected to find, and when that's what came out of the data, they didn't check that data as closely as they should have. That's not good enough, especially when the conclusions they reached reinforced damaging economic policies in so many parts of the world.
At least Rogoff and Reinhart didn't destroy their data after they had processed it, unlike the notorious climate change team at the University of East Anglia in Britain, who "proved" anthropogenic climate change to their own satisfaction, and then destroyed reams of historical data. Their results, which continue to inform public policy on the issue in spite of the highly suspect circumstances, are quite literally irreproducible. Amazingly, this sort of academic finagling is not uncommon in the climate change community -- see, for example, this evisceration of the so-called "hockey stick" temperature graph.
Do Rogoff and Reinhart have anything in common with the warmists? Both seem keen to draw conclusions that they think people want to hear, and are maybe not as careful as they should be about how they get there. Maybe this has something to do with a remarkable little piece in the NYT this week, which noted that there are now about 4,000 quasi-academic journals on the internet, soliciting articles from anxious authors and then charging them for the privilege of seeing their masterpieces in print. We may be seeing the operation of a new version of Gresham's Law, with bad science driving out good.
Friday, 19 April 2013
Carney leaves Mark
Mark Carney is wrapping up his tenure at the Bank of Canada and preparing to take over at the Bank of England at mid-year. This week, Carney's BoC yet again lowered its growth forecasts for the Canadian economy and indicated that it would keep interest rates at rock-bottom levels (its cash rate target is 1%) at least until 2014. That done, Carney gave an online interview to Thomson Reuters that gives some interesting insights into how he sees the Canadian economy, and raises some important questions about how he will fare in the UK. A summary of the key points by Reuters can be found here, while the Toronto Star's coverage is here. It's the latter article that's the more interesting of the two.
I don't think it's reading too much into Carney's comments to say that as he takes his leave of Ottawa, he's perplexed by two things: the continued willingness of Canadian households to take on more debt, and the reluctance of cash-rich Canadian companies to invest. His perplexity is a bit surprising, and may raise concerns about how things will pan out once he gets settled in at Threadneedle Street. Let's look at these two issues in turn.
Carney has been warning for some time that if households don't curb their borrowing, the Bank of Canada may be forced to start raising interest rates. It's hard not to see this as a hollow threat. Carney knows only too well that if he actually started to raise rates, a lot of Canadians -- and the entire Canadian economy -- would be in very deep water very quickly. Raising rates is not really an option, so he's hoping that the threat alone will get people to straighten up. The data suggest this is working, but not quickly enough for the Bank's liking.
The odd part for me, though, is that it's working at all. Canadians were fervid borrowers before the financial crisis hit. If you then offer them unprecedentedly low interest rates on those borrowings, can you really expect them to borrow less? It would be a violation of economic logic and of human nature if they did.
And what about Canadian corporations, who are sitting on piles of cash, which Carney last year dubbed "dead money" -- in common, of course, with corporations in the US and elsewhere in the world. Carney wants them to invest it, but why would they? I wrote in my previous posting that the fact that central banks are maintaining near zero interest rates and continuing with money creation is a clear sign that they lack confidence in the economy. If that's so, why would companies feel any different?
Or look at it this way. If we really are looking at a future of low growth and low inflation, corporate investment decisions have to be exceptionally well thought-out. There's no prospect of getting skated onside by a burst of inflation or a buoyant economy. Who can have that kind of confidence, or animal spirits, right now? It's particularly surprising to read, in the Star article, that Carney sees the availability of cheap credit as one of the factors that should get Canadian companies to start investing again, which seems to undermine his concerns about all that "dead money".
If I can see these things, it's impossible to imagine that Mark Carney can't see them too. The big difference* is, of course, that nobody is looking to me to solve these conundrums. But they are looking to Carney, and it's revealing to discover that he has little to offer by way of a solution beyond words of persuasion. It's tempting to conclude that Canada's success in avoiding getting dragged into the worst of the financial crisis owes less to Carney's credentials as "the greatest central banker of his generation", and more to the proclivity of Canadian finance ministers, of every party, to intervene in the banking system whenever they see something they don't like. The bankers may hate it, but it's proved to be no bad thing.
Anyway, it's off to London for the Carneys. The problems he will face there, aside from his wife's well-publicized difficulties in finding a house, will bear a lot of resemblance to those he leaves behind. Consumers are over-indebted. The top end of the housing market has become untethered from reality. The manufacturing sector is in a funk, battered by lagging demand among key trading partners and an arguably overvalued exchange rate.
It will be interesting to see whether Carney's approach to these issues differs from the one he took in Canada, which was basically to hope that cheap money would cure all the world's ills. One intriguing aspect that he may not have faced before is that the outright independence of the central bank's decision-making is a much more recent innovation in the UK than in Canada. It was only enshrined when Gordon Brown took over as Chancellor in the late 1990s. There are still a lot of influential politicians, including former Chancellor Kenneth Clark, who think that was a mistake. Even if voices such as Clark's continue to be largely ignored, Carney can expect to be under much closer and more critical scrutiny in London, from politicians and the media alike, than he has usually been in Ottawa. Word has it that he doesn't always take kindly to criticism. This promises to be fun to watch!
*Leaving aside the fact that I'm much taller, and he's much better paid.
I don't think it's reading too much into Carney's comments to say that as he takes his leave of Ottawa, he's perplexed by two things: the continued willingness of Canadian households to take on more debt, and the reluctance of cash-rich Canadian companies to invest. His perplexity is a bit surprising, and may raise concerns about how things will pan out once he gets settled in at Threadneedle Street. Let's look at these two issues in turn.
Carney has been warning for some time that if households don't curb their borrowing, the Bank of Canada may be forced to start raising interest rates. It's hard not to see this as a hollow threat. Carney knows only too well that if he actually started to raise rates, a lot of Canadians -- and the entire Canadian economy -- would be in very deep water very quickly. Raising rates is not really an option, so he's hoping that the threat alone will get people to straighten up. The data suggest this is working, but not quickly enough for the Bank's liking.
The odd part for me, though, is that it's working at all. Canadians were fervid borrowers before the financial crisis hit. If you then offer them unprecedentedly low interest rates on those borrowings, can you really expect them to borrow less? It would be a violation of economic logic and of human nature if they did.
And what about Canadian corporations, who are sitting on piles of cash, which Carney last year dubbed "dead money" -- in common, of course, with corporations in the US and elsewhere in the world. Carney wants them to invest it, but why would they? I wrote in my previous posting that the fact that central banks are maintaining near zero interest rates and continuing with money creation is a clear sign that they lack confidence in the economy. If that's so, why would companies feel any different?
Or look at it this way. If we really are looking at a future of low growth and low inflation, corporate investment decisions have to be exceptionally well thought-out. There's no prospect of getting skated onside by a burst of inflation or a buoyant economy. Who can have that kind of confidence, or animal spirits, right now? It's particularly surprising to read, in the Star article, that Carney sees the availability of cheap credit as one of the factors that should get Canadian companies to start investing again, which seems to undermine his concerns about all that "dead money".
If I can see these things, it's impossible to imagine that Mark Carney can't see them too. The big difference* is, of course, that nobody is looking to me to solve these conundrums. But they are looking to Carney, and it's revealing to discover that he has little to offer by way of a solution beyond words of persuasion. It's tempting to conclude that Canada's success in avoiding getting dragged into the worst of the financial crisis owes less to Carney's credentials as "the greatest central banker of his generation", and more to the proclivity of Canadian finance ministers, of every party, to intervene in the banking system whenever they see something they don't like. The bankers may hate it, but it's proved to be no bad thing.
Anyway, it's off to London for the Carneys. The problems he will face there, aside from his wife's well-publicized difficulties in finding a house, will bear a lot of resemblance to those he leaves behind. Consumers are over-indebted. The top end of the housing market has become untethered from reality. The manufacturing sector is in a funk, battered by lagging demand among key trading partners and an arguably overvalued exchange rate.
It will be interesting to see whether Carney's approach to these issues differs from the one he took in Canada, which was basically to hope that cheap money would cure all the world's ills. One intriguing aspect that he may not have faced before is that the outright independence of the central bank's decision-making is a much more recent innovation in the UK than in Canada. It was only enshrined when Gordon Brown took over as Chancellor in the late 1990s. There are still a lot of influential politicians, including former Chancellor Kenneth Clark, who think that was a mistake. Even if voices such as Clark's continue to be largely ignored, Carney can expect to be under much closer and more critical scrutiny in London, from politicians and the media alike, than he has usually been in Ottawa. Word has it that he doesn't always take kindly to criticism. This promises to be fun to watch!
*Leaving aside the fact that I'm much taller, and he's much better paid.
Monday, 15 April 2013
The Queen and the Maestro
An interesting feature-length documentary that came out last year, called "The Queen of Versailles", should make every central banker think twice about the supposed benefits of rock-bottom interest rates. The movie centres on a developer by the name of David Siegel, who grew the largest timeshare empire in the world, Westgate, largely on the back of cheap money. Egged on by his much younger wife, a living miracle of silicone and botox and a mother of seven children, he tapped the banks up even further to build "Versailles", intended to be the largest home in America at 91,000 square feet.
Then the financial crisis hit. All of a sudden the money dried up. Siegel's business came to a screeching halt, because his model only worked as long as the kind of people who buy timeshares could get access to cheap money. He had to fire almost all of his sales staff, while trying to conceal from the existing buyers the news that his bank was attempting to foreclose on his flagship property, a blue glass monstrosity in Las Vegas. And to his wife's horror, work on Versailles came to a standstill.
At the end of the movie, with the Vegas property out of his control and Versailles slowly crumbling, Siegel muses quietly to the camera: "I developed 28 resorts. If I'd just stopped at 15, we'd still be all right today".
There you have it. The combination of cheap money and capitalist greed is a powerful one, both for good and for ill. The longer you keep throwing cheap or free money at people, even successful ones like David Siegel, the less sensibly they'll use it. And if their plans have no rationale other than to take advantage of the cheap money, then taking that money away will cause things to fall apart very quickly indeed.
I've criticised the Toronto Star's financial columnist, David Olive, a few times recently, but over the weekend he published a very good piece about why the continuing flood of cheap money provided by central banks is failing to get the global economy moving again. The financial crisis was largely caused by cheap money, under the leadership of "Maestro" Alan Greenspan, so it was never easy to believe that the solution to the crisis would lie primarily in a whole lot more of the same.
QE and all that were rushed into being as measures to cope with a dire financial emergency. Half a decade on, they're still with us. That can only mean that the central banks lack all confidence in the economy -- and if they feel that way, how can businesses be expected to feel any different?
So, Messrs Greenspan and Bernanke and King -- you got us into this. Any ideas how to get us out? If you do, David Siegel and his spendthrift spouse would love to hear from you.
Then the financial crisis hit. All of a sudden the money dried up. Siegel's business came to a screeching halt, because his model only worked as long as the kind of people who buy timeshares could get access to cheap money. He had to fire almost all of his sales staff, while trying to conceal from the existing buyers the news that his bank was attempting to foreclose on his flagship property, a blue glass monstrosity in Las Vegas. And to his wife's horror, work on Versailles came to a standstill.
At the end of the movie, with the Vegas property out of his control and Versailles slowly crumbling, Siegel muses quietly to the camera: "I developed 28 resorts. If I'd just stopped at 15, we'd still be all right today".
There you have it. The combination of cheap money and capitalist greed is a powerful one, both for good and for ill. The longer you keep throwing cheap or free money at people, even successful ones like David Siegel, the less sensibly they'll use it. And if their plans have no rationale other than to take advantage of the cheap money, then taking that money away will cause things to fall apart very quickly indeed.
I've criticised the Toronto Star's financial columnist, David Olive, a few times recently, but over the weekend he published a very good piece about why the continuing flood of cheap money provided by central banks is failing to get the global economy moving again. The financial crisis was largely caused by cheap money, under the leadership of "Maestro" Alan Greenspan, so it was never easy to believe that the solution to the crisis would lie primarily in a whole lot more of the same.
QE and all that were rushed into being as measures to cope with a dire financial emergency. Half a decade on, they're still with us. That can only mean that the central banks lack all confidence in the economy -- and if they feel that way, how can businesses be expected to feel any different?
So, Messrs Greenspan and Bernanke and King -- you got us into this. Any ideas how to get us out? If you do, David Siegel and his spendthrift spouse would love to hear from you.
Thursday, 11 April 2013
Misremembering Thatcherism
Margaret Thatcher is continuing to divide opinion in death as she did in life. Over on the right, commentators are giving her credit for "making Britons proud again" and for restructuring the British economy. A generation on, both of these seem like pretty hollow achievements. The Britain I left half a year ago was almost as fractious, fearful and devoid of hope as I remember it being in the mid-1970s, when I emigrated for the first time. (It's a long story).
Meanwhile, a lot of commentators from the left of the political spectrum are casting Mrs Thatcher as the Godmother of fiscal austerity. Here is a typical example, from the reliably misinformed Tom Walkom at the Toronto Star. This is not a new interpretation of Thatcherism, but as Chris Dillow pointed out a few years ago, it's simply untrue. The lady stood for a lot of things that the left doesn't much like -- privatisation, union busting, militarism, jingoism -- but cutting public spending simply wasn't one of them.
In fact, right wingers always seem to talk the talk on fiscal austerity a whole lot better than they walk the walk. Right now in the UK, George Osborne has achieved the notable feat of curbing spending hardly at all, while convincing all and sundry that he's pared it to the bone. One can only imagine how ugly things may get now that real cuts in important programs have actually begun, which happened at the start of this month. And of course, in the United States, Bush 43 inherited a fiscal surplus from Bill Clinton and promptly turned it into a monster deficit. It's the Bush-era tax cuts, rather than anything Barack Obama has done, that are the real cause of the fiscal pressure the US is facing at the moment.
Generally speaking, left-of-centre politicians seem to do a better job of delivering fiscal austerity than right wingers do. An early example of this in the UK, back in the 1970s, was old eyebrows himself, Denis Healey, who was regularly portrayed as "the best Tory Chancellor Britain ever had". Healey was, of course, a life-long Labourite. More recently, Gordon Brown spent several years as a fiscally responsible Chancellor, until he started to believe his own quotes about "putting an end to boom and bust".
What's behind this pattern? Back in the 1980s in Canada, the Tory governments under Brian Mulroney announced austerity budgets year after year, to howls of complaint from the Liberal opposition, only to see deficits and debt rise inexorably. Then, in the 1990s, the Liberals under PM Jean Chretien and Finance Minister Paul Martin got the public finances under control in short order. When asked how the Liberals had managed to do this when the Tories had failed so abjectly, Martin said something to the effect that "the secret is that we don't have the Liberals in opposition".
That was only part of the story. What really worked for Martin and Chretien was a combination of a strong US economy and a weak Canadian dollar. Still, it's undoubtedly true that when the chips are down, left of centre governments are better able to sell fiscal austerity to their electorates than the heartless beggars over on the right, partly because right wingers can't credibly oppose them on the issue. That's as true today as it was when Margaret Thatcher was in power.
FOOTNOTE: There's a very good analysis of Mrs Thatcher's economic policies here.
Meanwhile, a lot of commentators from the left of the political spectrum are casting Mrs Thatcher as the Godmother of fiscal austerity. Here is a typical example, from the reliably misinformed Tom Walkom at the Toronto Star. This is not a new interpretation of Thatcherism, but as Chris Dillow pointed out a few years ago, it's simply untrue. The lady stood for a lot of things that the left doesn't much like -- privatisation, union busting, militarism, jingoism -- but cutting public spending simply wasn't one of them.
In fact, right wingers always seem to talk the talk on fiscal austerity a whole lot better than they walk the walk. Right now in the UK, George Osborne has achieved the notable feat of curbing spending hardly at all, while convincing all and sundry that he's pared it to the bone. One can only imagine how ugly things may get now that real cuts in important programs have actually begun, which happened at the start of this month. And of course, in the United States, Bush 43 inherited a fiscal surplus from Bill Clinton and promptly turned it into a monster deficit. It's the Bush-era tax cuts, rather than anything Barack Obama has done, that are the real cause of the fiscal pressure the US is facing at the moment.
Generally speaking, left-of-centre politicians seem to do a better job of delivering fiscal austerity than right wingers do. An early example of this in the UK, back in the 1970s, was old eyebrows himself, Denis Healey, who was regularly portrayed as "the best Tory Chancellor Britain ever had". Healey was, of course, a life-long Labourite. More recently, Gordon Brown spent several years as a fiscally responsible Chancellor, until he started to believe his own quotes about "putting an end to boom and bust".
What's behind this pattern? Back in the 1980s in Canada, the Tory governments under Brian Mulroney announced austerity budgets year after year, to howls of complaint from the Liberal opposition, only to see deficits and debt rise inexorably. Then, in the 1990s, the Liberals under PM Jean Chretien and Finance Minister Paul Martin got the public finances under control in short order. When asked how the Liberals had managed to do this when the Tories had failed so abjectly, Martin said something to the effect that "the secret is that we don't have the Liberals in opposition".
That was only part of the story. What really worked for Martin and Chretien was a combination of a strong US economy and a weak Canadian dollar. Still, it's undoubtedly true that when the chips are down, left of centre governments are better able to sell fiscal austerity to their electorates than the heartless beggars over on the right, partly because right wingers can't credibly oppose them on the issue. That's as true today as it was when Margaret Thatcher was in power.
FOOTNOTE: There's a very good analysis of Mrs Thatcher's economic policies here.
Tuesday, 9 April 2013
Practice what you preach (2)
Royal Bank of Canada (RBC) has been "outed" by the CBC for firing about 45 skilled employees and replacing them with workers brought in from abroad. Adding insult to injury, the firees are required to train their replacements before heading off to join the unemployment line. There's some dispute about the details, but that hasn't stopped other media outlets, including the Toronto Star, from joining in the criticism of Canada's largest bank. Here's the take on the story from today's paper.
Wait up a second, though. Didn't the Star fire an almost exactly equal number of its own skilled workforce not so long ago, also as part of an outsourcing initiative? Indeed it did, and I wrote about it in a posting on this blog back on March 5. Ah, you'll say, but that's different -- those jobs were outsourced to other Canadian workers. The Star would never dream of giving jobs to foreign workers just to save a few bucks, would it?
Well, today we received our copy of the new Toronto Star cookbook. Printed in China.
Wait up a second, though. Didn't the Star fire an almost exactly equal number of its own skilled workforce not so long ago, also as part of an outsourcing initiative? Indeed it did, and I wrote about it in a posting on this blog back on March 5. Ah, you'll say, but that's different -- those jobs were outsourced to other Canadian workers. The Star would never dream of giving jobs to foreign workers just to save a few bucks, would it?
Well, today we received our copy of the new Toronto Star cookbook. Printed in China.
Sunday, 7 April 2013
Caveat depositor (but that's not a bad thing)
It's now become clear that the depositors' "haircut" at the heart of the recent bailout plan for Cyprus wasn't just an idea that emerged out of a clear blue sky. Financial authorities in many parts of the world are looking at plans to deal with future crises through a "bail-in" of a troubled bank's creditors, possibly including its depositors. Canada's recent budget, prepared before the details of the Cyprus scheme emerged, had a reference to the development of such a plan buried deep in the fine print.
This news has led to a predictable outbreak of hysteria among the usual gang of wingnuts and goldbugs. Most of these worthies have convinced themselves that a co-ordinated Cyprus-style deposit grab is just around the corner, as "global elites" protect themselves from an inevitable financial meltdown. It's not just the paranoid fringe that's piling on here, though: respectable newspaper columnists and quite a few well-known economists have roundly condemned the Cyprus bailout as mad, bad and dangerous.
Is it really? Let's try to get a bit of perspective here.
When banks are about to fail, there are two things the financial authorities can do. One is to let them fail. We all saw how well that worked with Lehman Brothers -- though I'm still in the Michael Lewis camp on that one: the problem wasn't that Lehman was allowed to fail, but that it had been allowed to succeed. The alternative is to try to bail them out or in some way stabilize them, and this is what was done all around the world in 2008 in an attempt to stem the crisis. The litany of names is all but endless -- Northern Rock, Lloyds TSB and RBS in the UK, Dexia in France/Belgium, UBS in Switzerland, AIG in the United States....and in addition to the rescues of specific institutions, we saw unprecedented measures to support the entire global financial system, including the TARP program in the US and quantitative easing in both the US and the UK.
Has it worked? Yes, in the sense that there have been no more major financial collapses in recent years. No, inasmuch as we are as far as ever from re-establishing normal conditions in financial markets. Banks (even the ones that are not "zombies") are still risk averse, and as a result it is proving frustratingly difficult to generate the kind of economic growth that will ultimately relieve the pressure on markets and institutions.
What is indidputable is that the financial bailouts imposed massive and ongoing costs on taxpayers around the world. This was, not surprisingly, unpopular, especially as the bankers themselves seemed to be "getting away with it". And the impact on the fiscal positions of governments in countries implementing bailouts, from Ireland through the UK to the US, has been severe.
If there were to be another major financial meltdown any time soon, it would be very difficult for governments to ride to the rescue again as they did five years ago -- neither their taxpayers nor the bond markets would stand for it. So it's no surprise that governments are looking at alternatives, and that their lupine gaze has fallen on banks' creditors, including depositors.
Which brings us to the issue of deposit insurance. If, like a lot of the folks at the sites I linked to above, you are mortally shocked by the fact that the Cyprus bailout did not keep all depositors whole, ask yourself this: why do all national deposit insurance schemes specify a limit for the amount of an individual depositor's funds that they protect? The limits vary -- $100,000 in Canada, 85,000 GBP in the UK, 100,000 EUR in the Eurozone -- but they're there for a reason.
That reason is to encourage wealthy depositors to make their own judgments about the creditworthiness of the institutions to which they're entrusting their savings. Contrary to the opinions of some "experts" on the subject, deposits with banks are not in some form of "safekeeping". If they were, how would banks ever be able to pay interest on them? They wouldn't be able to do that if all their depositors' money was sitting gathering dust in a shoebox under the manager's bed. No, funds placed in the bank are used by the bank to make loans and do all the other things that banks do, and if you're lucky enough to be depositing more than the insured limit, it behooves you to find out a little bit about just what your bank is up to.
One of the mistakes that financial authorities made during the recent financial crisis was to tear up the deposit insurance limits and throw taxpayers' money at every potential loser, however unworthy. Ireland went the farthest in this regard, guaranteeing all deposits, with disastrous results. The UK government bizarrely extended guarantees to people who had stuffed money into Iceland's notoriously wobbly banks, and then attempted to stick the Icelandic taxpayer with the bill. What bank depositors should be learning from the Cyprus bailout, and the noises about similar ideas coming from many parts of the world, is that if it all goes pear-shaped again, the Governments will be sticking religiously to the terms of their deposit insurance arrangements. So if you have more than the insured limit, the message you should be hearing loud and clear is, caveat depositor.
Is there any alternative to bail-outs and bail-ins? For many in the media and the blogosphere, the answer to that seems to involve introducing "banksters" to a knotted rope and a gallows pole, but that won't get anybody their money back. However, there is an important new book -- The Bankers' New Clothes, by Anat Admati and Martin Hellwig -- that argues that the solution is to make banks hold much more equity capital than they do at present. They argue that capital should be built up quickly by forcing banks to retain earnings rather than paying them out as dividends, and claim that a switch to a more firmly capitalized banking system would not have any overall negative impacts on national economies.
I mentioned this book briefly in a posting a few weeks ago, admitting at the time that I hadn't actually read it. I have now. It's available from Amazon, and there is a Kindle version. It's a bit dry and repetitive, but the arguments are strong. The authors are almost certainly right to say that it's only a lack of political will that will stop governments from imposing a solution of this sort on their banks. If you flinch at the thought of a Cypriot buzzcut, this is the alternative you should be urging on your elected leaders instead.
This news has led to a predictable outbreak of hysteria among the usual gang of wingnuts and goldbugs. Most of these worthies have convinced themselves that a co-ordinated Cyprus-style deposit grab is just around the corner, as "global elites" protect themselves from an inevitable financial meltdown. It's not just the paranoid fringe that's piling on here, though: respectable newspaper columnists and quite a few well-known economists have roundly condemned the Cyprus bailout as mad, bad and dangerous.
Is it really? Let's try to get a bit of perspective here.
When banks are about to fail, there are two things the financial authorities can do. One is to let them fail. We all saw how well that worked with Lehman Brothers -- though I'm still in the Michael Lewis camp on that one: the problem wasn't that Lehman was allowed to fail, but that it had been allowed to succeed. The alternative is to try to bail them out or in some way stabilize them, and this is what was done all around the world in 2008 in an attempt to stem the crisis. The litany of names is all but endless -- Northern Rock, Lloyds TSB and RBS in the UK, Dexia in France/Belgium, UBS in Switzerland, AIG in the United States....and in addition to the rescues of specific institutions, we saw unprecedented measures to support the entire global financial system, including the TARP program in the US and quantitative easing in both the US and the UK.
Has it worked? Yes, in the sense that there have been no more major financial collapses in recent years. No, inasmuch as we are as far as ever from re-establishing normal conditions in financial markets. Banks (even the ones that are not "zombies") are still risk averse, and as a result it is proving frustratingly difficult to generate the kind of economic growth that will ultimately relieve the pressure on markets and institutions.
What is indidputable is that the financial bailouts imposed massive and ongoing costs on taxpayers around the world. This was, not surprisingly, unpopular, especially as the bankers themselves seemed to be "getting away with it". And the impact on the fiscal positions of governments in countries implementing bailouts, from Ireland through the UK to the US, has been severe.
If there were to be another major financial meltdown any time soon, it would be very difficult for governments to ride to the rescue again as they did five years ago -- neither their taxpayers nor the bond markets would stand for it. So it's no surprise that governments are looking at alternatives, and that their lupine gaze has fallen on banks' creditors, including depositors.
Which brings us to the issue of deposit insurance. If, like a lot of the folks at the sites I linked to above, you are mortally shocked by the fact that the Cyprus bailout did not keep all depositors whole, ask yourself this: why do all national deposit insurance schemes specify a limit for the amount of an individual depositor's funds that they protect? The limits vary -- $100,000 in Canada, 85,000 GBP in the UK, 100,000 EUR in the Eurozone -- but they're there for a reason.
That reason is to encourage wealthy depositors to make their own judgments about the creditworthiness of the institutions to which they're entrusting their savings. Contrary to the opinions of some "experts" on the subject, deposits with banks are not in some form of "safekeeping". If they were, how would banks ever be able to pay interest on them? They wouldn't be able to do that if all their depositors' money was sitting gathering dust in a shoebox under the manager's bed. No, funds placed in the bank are used by the bank to make loans and do all the other things that banks do, and if you're lucky enough to be depositing more than the insured limit, it behooves you to find out a little bit about just what your bank is up to.
One of the mistakes that financial authorities made during the recent financial crisis was to tear up the deposit insurance limits and throw taxpayers' money at every potential loser, however unworthy. Ireland went the farthest in this regard, guaranteeing all deposits, with disastrous results. The UK government bizarrely extended guarantees to people who had stuffed money into Iceland's notoriously wobbly banks, and then attempted to stick the Icelandic taxpayer with the bill. What bank depositors should be learning from the Cyprus bailout, and the noises about similar ideas coming from many parts of the world, is that if it all goes pear-shaped again, the Governments will be sticking religiously to the terms of their deposit insurance arrangements. So if you have more than the insured limit, the message you should be hearing loud and clear is, caveat depositor.
Is there any alternative to bail-outs and bail-ins? For many in the media and the blogosphere, the answer to that seems to involve introducing "banksters" to a knotted rope and a gallows pole, but that won't get anybody their money back. However, there is an important new book -- The Bankers' New Clothes, by Anat Admati and Martin Hellwig -- that argues that the solution is to make banks hold much more equity capital than they do at present. They argue that capital should be built up quickly by forcing banks to retain earnings rather than paying them out as dividends, and claim that a switch to a more firmly capitalized banking system would not have any overall negative impacts on national economies.
I mentioned this book briefly in a posting a few weeks ago, admitting at the time that I hadn't actually read it. I have now. It's available from Amazon, and there is a Kindle version. It's a bit dry and repetitive, but the arguments are strong. The authors are almost certainly right to say that it's only a lack of political will that will stop governments from imposing a solution of this sort on their banks. If you flinch at the thought of a Cypriot buzzcut, this is the alternative you should be urging on your elected leaders instead.
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