Recession busting: Austerity or Stimulus?

I recently read a piece in the New York Times Magazine titled "God Save the British Economy" which profiled Adam Posen, an American economist who until recently was a member of the Bank of England's Monetary Policy Committee.

The article details Mr. Posen's training and career, but spends a significant amount of time discussing the differing opinions on how to bring major economies out of the recession. Mr. Posen, during his tenure at the B of E, grew increasingly frustrated with the approach of piling austerity on austerity following the financial crisis, especially when it seemed the pain was not in fact benefiting the economy, given that the British unemployment rate has stubbornly hovered at approximetely 7.9% for the last 3 1/2 years. He argues that the experience of the US, which chose stimulus over austerity, has produced a better outcome: an unemployment rate that dropped from 10.0 to 7.7% in the same time frame, albeit at a frustratingly slow pace.

One of the interesting points in the article is the discussion of why Mr. Posen believes the B of E was so unwilling to diverge from its austerity program: he makes the connection to the ruling government's ideology taking precedence over what he views to be prudent economic policy.

While I certainly recognize the challenges of the political ideology interfering with good policy decisions, what struck me as particularly interesting in the article was the lack of discussion of the political and economic consequences of implementing Mr. Posen's policy choice.

As a thought experiment, let us suppose that tomorrow the B of E has a change of heart and immediately ceases all budget cutting, instead printing and circulating more money into the economy in a similar manner to what has happened in the United States. Let us further suppose that this course of action indeed has the effects that Mr. Posen predicts: a decrease in the unemployment rate and a gradual return to the economy functioning at full capacity.

Let us now look a few years down the road to an economically more healthy Britain; an unemployment rate closer to its pre-recession level of 5.2%, and a steadily growing GDP. From an economic perspective, assuming the economy is now on reasonably solid footing, now would be the time to start withdrawing some of the excess supply of money in the system in part through a gradual raising of interest rates, paying off the government debt incurred during the recession, and generally moving back to a state of balance between government revenues and expenditures. My question is, would the B of E at this time suddenly have the political will to make these prudent economic decisions, even if they are unpopular? Is it truly politically easier to reduce the excessive size of government during good economic times to pay for the stimulus in bad times?

Conventionally it has been seen as a virtue to have central banks separated from the political process. It is intended to allow them to look further afield than the next election cycle and make prudent decisions for the long term, rather than what is politically expedient at a particular moment. While I heartily agree with this sentiment and reasoning, it seems to me the lack of consideration of the political repercussions, in addition to the economic, can sometimes bias policy makers towards a particular course of action that might have unwanted repercussions.

I do not pretend to understand the intricacies of Keynesian interventionism, nor am I arguing that Mr. Posen's prescription is the wrong choice economically speaking. However, I do wonder, in Britain, the United States, and other major economies, are the choices of political expediency over prudent policy going to be any less likely to occur in the future than they seem to at present?

Who should pay for post-secondary education?

A few days ago I got caught up in a heated debate with a colleague over one of the more pressing issues facing young Canadians: Who should pay for post-secondary education? My colleague felt that because an educated society is in the interest of all Canadians, post-secondary education should be entirely free for qualified students. I argued that the private gain of those with more education (higher salary, more opportunity) dictates that students should contribute some portion of their education expense.

At present, our system is funded by a mix of government funding and students who pay tuition. This mix, and the total amount of funding per student, varies considerably by province. The recent protests in Quebec over tuition increases served to highlight to much of Canada how different these current numbers are. At the low end, the average Quebec tuition in the 2011-2012 year was $2,519. At the high end, the average tuition in Ontario was $6,640.

To put these numbers in context, the student portion of the total education expense in Canada ranges from roughly 12% in Newfoundland to roughly 31% Nova Scotia (Quebec comes in second to Newfoundland on the low end, Ontario second to Nova Scotia on the high end). These numbers are taken from Statistics Canada and are from the 2008/2009 year so the exact percentages may have changed somewhat, but the underlying trends likely remain roughly the same.

So where does the benefit lie between public good and private gain? The OECD estimates that the "net public return" on investment in university is $52,000 USD for men and $27,000 USD for women, whereas the private gain averages $186,000 USD for men and $134,000 USD for women as an average across OECD countries.

Given these numbers, a few things seem clear: Financially speaking, students gain a great deal more benefit from their education than society and pay a small fraction of the total cost. However, from a qualitative standpoint, having higher earning, educated and engaged citizens certainly benefits society on more than a financial level.

While I think that tuition increases are necessary in some instances to keep up with the increased cost of providing quality education, I think that government policy in this area should focus on long-term competitiveness and social well being. While I disagree with the protesters in Quebec on what constitutes affordable education, I do think this conversation needs to be had in the public discourse to ensure that the Canada of tomorrow is the place we want it to be.

Rampant Partisanship

It has been a while since my last post and for that I apologize. I have become one of those infrequent posters that irritate me. That being said, I have not felt the pressing need to comment on anything in particular, so consider the previous dry spell a well-deserved brake for my readers.

Today's topic was triggered by a Facebook post that I saw yesterday. The actual link leads to a post from a CBC advocacy group who is critical of Stephen Harper's policies as they relate to the public broadcaster. I believe their point seems to be reasonable and well thought-out. My issue is they presumably thought that the topic did not have enough of a wow-factor and therefore promoted it using the headline, "CBC Sold to a U.S. Wrestling promoter!"

Now, having a family member in journalism, I am well aware that writers frequently have no input in the headlines on top of their stories, but I don't think that detracts from the overall issue: demonizing political opponents through fictional accusations cheapens debate and detracts from actual policy-based arguments, ultimately ending in a he-said-she-said conversation that only further entrenches people in their own beliefs.

I have personally noticed this in particular against the Conservative government (Stephen Harper wants to privatize EVERYTHING...and probably eats babies) no doubt in part because they are the incumbents and due to my own political biases. I am sure this occurs on all parts of the political spectrum. Rick Mercer had a wonderful bit of satire back in 2006 regarding the ridiculousness of some of the liberal attack ads of the time (http://www.npr.org/templates/story/story.php?storyId=5168834 click the listen link at top of the page, the mock ad is in the first minute, "Stephen Harper has a dragon...").

The particular problem with this tactic on either side of the political spectrum is that it means that the actual issues get lost in the fray. For instance, the current conservative crime bill has been widely critiqued by a number of sources and appears to be regressive, ineffective and cruel. However many of the sources that are critiquing it now have consistently criticized every Conservative initiative and therefore are suffering the same fate as the boy who cried wolf: people have tuned them out.

People are often passionate about politics and rightly so: I would rather people cared enough to engage in the democratic process than stood by in idle apathy. However, this intense passion often leads to personalizing political fights and the need to deify one's own party leader while demonizing the opposing side. We have seen evidence of the approach of this tactic in the American Presidential nomination process: those candidates who do not tow the party line in rampant partisanship are ostracised by their parties, leaving the fight between the most polarized of opponents and leaving independents with no centrist choice.

While I have no expectation of any of this changing overnight, I do wish that there was room for a rational middle ground, a truly non-partisan critique of policy both left and right. Until then, remember that few things are black and white and few people are purely good or evil. Most politicians enter politics genuinely hoping to change things for the better, it is the job of the electorate to determine when they are truly doing so and when they are falling short.

The 99% and the 1%

Over the past couple weeks, a movement known as "Occupy Wall Street" has been gathering a lot of press. It presents itself as a leaderless uprising modeled on the Arab Spring that wants to take the world back from those who have abused their power. As the website occupywallst.org states, "We are the 99% that will no longer tolerate the greed and corruption of the 1%". It is certainly an understandable reaction and a compelling narrative. The only problem is that it is a false one in many respects.

I do not mean to say that there has not been greed and corruption on Wall St. and indeed elsewhere in the financial world. You need only scan a newspaper to see countless anecdotes of the Bernie Madoff's of the world. The problem is that the economic crisis that we are in right now is not the result of the actions of 1% of the population.

While there were certainly some illegal practices in mortgage signings and some shady derivative trading, the ultimate crux of the crisis was that we are spending more money than we make and are relying on ever-rising house prices as the means to fuel this debt. While perhaps not everyone bought into this philosophy and lifestyle, it was far more than 1% of the population who may not have been corrupt, but were certainly greedy. The reason I say this is not to take responsibility away from those culpable on Wall St, I certainly think they should face justice if they committed crimes; but rather to point out that if we are unwilling to address the broader failings of overspending and undersaving that are endemic in the developed world, we cannot hope to get back to a robust, job-producing economy.

We are the 99% and we are almost all responsible for the mess we face in whatever small way, so let us also take the responsibility of cleaning it up and stop looking for quick fixes. We can take a page from those who lived through the great depression and relearn prudence in the face of consumerism. This is the only way to regain prosperity for all.

Reexamining Risk

In life generally, and in light of recent economic uncertainty more specifically, the word risk is often used to mean a number of things.

In a financial context, risk is usually used to mean the chance that a given investment will decrease in value, also called investment risk. In more general circumstances, risk is often used to communicate the possibility that a given course of action might end poorly, whether it be a new job, a new relationship, or a new course.

What often isn't addressed, or certainly addressed much less frequently, is the idea that there is a converse to this perception of risk. In the financial context this would be the risk of not investing or under-inventing. While putting money into an investment creates the possibility it will lose value and not leave you with enough money to reach your goal (let us take retirement as an example), not investing, or under-investing can mean you also will not reach your goal because you are not earning the necessary rate of return.

In a general context, I believe this risk also applies in our decisions not to undertake a given course of action. If you decide to turn down a job in a new city because you are afraid of leaving your comfort zone or decide not to explore new relationships because you have had a negative experience, you are functionally limiting your return in new experiences and friendships. While you may not ever find out what you lost in not taking a risk, it is certain that by choosing to turn down opportunity, you have limited yourself.

Next time you are faced with a decision that might lead you into uncharted waters, I would ask you to contemplate both kinds of risk and remember that risk is a part of life and can often lead to unexpected rewards.

The end of the world as we know it?

A couple years ago, around the height of the financial crisis, I had an interesting conversation with some friends at a pub.

At that time it did truly seem that the world as we understood it was crashing down while all kinds of too-big-to-fail institutions looked as if they were in the process of failing. I remember a heated debate as to whether the financial system as we knew it could survive this turmoil or if we were truly witnessing the end of an era, entering into some brave new world. At the time I fell strongly on the resiliency side of the debate, arguing that despite the real perils around us, the system would bounce back. It always had.

Looking back at that conversation now, I ask myself the same question again and find myself, more or less, with the same answer. Technically speaking, the recession in the U.S. has been over for a long while, even if unemployment numbers don't seem to back up that claim. Canada has remained somewhat insulated from the full force of the housing market and economic collapse, sheltered largely by our abundant natural resources and to a lesser extent, prudent regulation.

However, as the recent debt ceiling scare and more recent still stock market volatility has filled front pages of newspapers the world over, it does seem prudent to ask what the future holds. The first answer, of course, is that we cannot know and that for every glass-half-full type who speaks of recovery just around the corner you will find a doom-and-gloomer ready to explain how we are going to hell and the hand basket is quickly unraveling.

What tools do we have to assess who is right and who is wrong? To what extent is it reasonable to defer to experts in decision making today that will in part dictate our future prosperity? First, I would look to historical experience, both recent and more distant. It is perhaps a moot point to say that so far our society has not collapsed, however I do think that stepping back from the present moment is useful. Many times in history people have been convinced of the impending destruction of society whether it be from the threat of atheism, communism, immigration, totalitarianism, or any number of other threats both past and present. What has typically been overlooked, in my opinion, is the capacity and ingenuity of the human mind and the societal will to stand at the precipice and find the strength to turn things around.

Second, I would question both the expertise and track records of most prognosticators in the public forum. Most often, for every correct prediction they have made there are ten others excused away by context, lack of information, or misunderstanding. To avoid being the pot that calls the kettle black, I would like to clearly state that I do not pretend to know any better than anyone else in this regard. However, in the face of uncertainty I would rather believe in the eventual competence of our institutions and citizens to get their acts together rather than wallow in the much easier belief that partisanship, small mindedness, greed and foolishness will triumph over bravery, community, reasonableness and intelligence.

Is this the end of the world as we know it? We cannot know until the world ends, and by then it will be too late. In that light, I choose to continue the day to day tasks of living: seeing friends, enjoying good food, going for walks and dreaming of a future that holds opportunity even in the face of crisis.

Brief Post Script: Those of you who loyally read my blog (thanks!) know that I have on a number of occasions criticized the policy positions of the late Jack Layton. While I am sure it is evident to those of you who know me well, I would like to extend my condolances to his family and friends and my gratitude for his patriotism and broadening of the Canadian political debate. May he rest in peace.

The American Debt Ceiling: A Primer for Canadians

Unless you have been under a rock for the last month or so, you have likely at least heard mention of something called the debt ceiling in the paper or on the news.

Essentially the issue on the table is that the American Federal Government, on or around August 2nd, 2011 will officially be out of money. Technically speaking, this means that any expense typically paid out via the Federal Government will not be paid. The most talked about reprecussion would be a default on American debt, and in particular treasury bills which have long been considered risk-free. However, on a practical level, a number of other expenses would also cease to be paid including welfare cheques, government worker salaries, and the operating expenses for libraries, museums, courts, etc.

For a number of years the US Government has been running a deficit, most recently exascerbated by the financial crisis, but present for many years before as well, meaning that year after year it is borrowing more money to finance its expenses. The legislative solution to the immediate problem of getting money is to raise something called the debt ceiling, essentially a federal debt limit imposed by Congress and raised occasionally on an as needed basis. Raising the debt ceiling is not an unusual thing
(See this graph http://http//www.washingtonpost.com/blogs/ezra-klein/post/thirty-years-of-the-debt-ceiling-in-one-graph/2011/07/11/gIQAEJdEGI_blog.html) however what is out of the ordinary is the brinkmanship that seems to be taking place in both parties as they get closer and closer to the end.

A number of misunderstandings have surfaced in discussion of this issue and while I have neither the time nor the energy to address them all, I will try to tackle the most glaringly inacurate. The first, and perhaps most fundemental misunderstanding is that raising the debt ceiling is an indication of new spending. It is not. As it happens, the debt ceiling must be raised simply in order to pay the bills on spending that has already been legislated, much of it under previous governments.

The second misunderstanding is that the debt ceiling drop dead date (August 2) is some kind of scare tactic by the US Treasury and that the government could really continue paying its debts long after this. This belief requires either a misunderstanding of the financial responsibilities of the American Government or else a belief that Obama and/or the rest of the government is actively lying and intentionally deceiving the global public. As for myself, I am not much of a conspiracy theorist and given the large degree of independent verification from non-partisan institutions, I find the August 2 date to be credible.

The third and final falacy I will try to address is the notion that even if the debt ceiling is not raised and the US Government does default, this would be just the kick in the backside the government needs to motivate it to finally get spending under control and the short term cost now would pale in comparison with the benefits of cost cutting that would follow. This point is one degree more difficult to address as it is essentially speculation and cannot be proven one way or the other until it happens. However, given the historic nature of a US Government default coupled with the global tendency to see said debt as risk-free, I think it is more likely than not that interest rates would rise substantially causing further burden on an already struggling economy. I know if I had $14 Trillion in debt, I would do everything in my power to avoid an interest rate increase.

So what does all this mean for Canada? I think it is important to note that the Bank of Canada, the Canadian Government and most international institutions still believe that the likelyhood of a default is low. That said, were it to happen, a number of consequences would likely impact Canada. Initially the Canadian Dollar along with a basket of international currencies seen to be stable would rise verus the US Dollar as investors sell it in favor of more solvent countries. Soon after, there would be a noticable drop in cross-border trade with the US (assuming an extended default) as those goods and services usually purchased by the Government would no longer be purchased. Eventually, likely sooner than later, an agreement would be made to increase the debt ceiling and pay overdue debts at which point things would gradually move back towards something approaching normality though the repercussions would be felt for a long time.

You have likely noticed that I have not addressed the political issues of Democratic versus Republican bills, philosophies, and posturing. That is because, not only would that require an entirely seperate blog post, but it also detracts from an apolitical understanding of the underlying issues. If you would like to explore those issues, I would recommend the following sites:

http://www.economist.com/blogs/democracyinamerica

http://www.nytimes.com/pages/business/index.html

http://www.forbes.com/

As always, if you have any other questions, comments, or anything else please let me know.