A Note about Defecits

In particular, government budget defecits.  We here in Canada are set to crack a doozy, $50 billion.  The next biggest budget defecit was spun out by Mulroney’s government at $39 billion.  There’s going to be a lot of noise made abot this number, but in the sum, what does a large defecit mean?  Is Canada on it’s way back to the poor house?  Is there something inherently ‘bad’ about a defecit?

I read an article yesterday where the author compared personal finances with government finances.  They made the analogy that personal debt and living on credit is bad, and therefore a country’s debt and defecits are equally as bad.  This is total BS (with a capital B!  .. and S!).  Newsflash, countries and their governments are fundamentally different from an individual citizen!  Countries of the recent past are much longer lived than their citizens, and they can can print their own money.

As an individual, there are times in your life when it is prudent to take on debt and defecit spending.  Starting out into post secondary education on the back of a student loan is one of those times.  It’s a temporary state in order to reap the future benefits of obtaining some higher education.  The plan is to pay off the temporary debt when income is higher in the future.  There is a simislar story when purchasing a house using a mortgage.  You might take on a huge amount of debt, but it’s managable and people seem to enjoy owning their own house, so they do it.

For a government running a country, at this particular time, it is prudent to let the defecit balloon to ease through the recession.  The last time an economic crisis of this magnitude happened was at the start of the Great Depression, and the government response at that time was to raise taxes and cut spending to keep a balanced budget and to erect protectionist barriers to trade.  The collective actions of the world’s governments at the time were enough to send the world economy completely into the shitter.  Much misery ensued.  This time around, it appears as if the collective actions of the world’s governments have prevented catastrophe, and it’s merely going to be a bad global recession.  Governments around the world are heading into budgetary defecits, with the aim of reducing them in the future.

Now, when it comes to carrying debt, individuals are liable, and you don’t want to leave a big mess of debt for your loved ones to deal with when you leave this plane of existence.  Countries in the modern era appear to be sufficiently long lived that this problem doesn’t exist.  Countries could carry debt into the future indefinitely, as long as that country could support carrying that debt.  For this reason, a country’s finances look very different from an individual’s finances.

Lastly, when is a budget defecit not a budget defecit?  This might seem a little strange, but if you are in a period of high inflation, and the defecit is modest, then it may in fact be what economists like to call a ‘real’ surplus.  It’s a real surplus if a country’s gross debt is reduced in percentage of GDP.  I’ll give an example, as it’s not intuitively obvious and requires an economic explanation.

Say inflation is running at 10%.  That means that prices are increasing at 10% every year, so on the whole, GDP in nominal terms will rise 10%, holding everything else constant.  Let’s also say that the government will run a defecit; this defecit will increase the country’s debt by 5% of GDP, but because GDP is rising by 10%, the country’s debt falls as a percentage of GDP.  In this case, a nominal defecit has turned into a real surplus.  Did you follow that bit of magic?   Through inflation, the government has been able to reduce it’s debt load.  Wouldn’t it be great a citizen had the same powers as a government?  It would, but that will never be the case, and people should stop comparing personal finances with a country’s finances.

What’s a recession?

You can’t avoid talking about the economy these days. What started with a banking crisis, progressed to a credit crisis, and now it’s a full blown economic crisis. Worst downturn in 70 years, that sort of thing. Economists don’t actually know if this will eventually end up being the case, but they have projections and best bets and the range of forecasts is glum. However, we won’t know if it’s been the worst economic downturn since the Great Depression until we are out of it, and all the data is in the books. So what’s a recession? And what’s a depression? And where do they come from?

A recession is defined as two quarters of negative economic growth. I’ve had friends chuckle at this definition, negative growth being somewhat of an oxymoron. In plain words, it’s two quarters of economic contraction; the economy gets smaller for six months running. There’s no hard and fast way to define a depression, but loosely it is a severe recession. Wikipedia suggests a depression is characterized by people selling tangible assets in order to fund everyday living, which might be how people on the margins of society operate, but when your neighbour starts hawking family heirlooms to buy bread, that’s a clear indicator.

When an economy is shrinking, and you are participating in that economy (ie, you’re not off in the woods eating berries and bark), then you are necessarily getting a smaller piece of the pie on average. With an expanding population, an economy’s natural state is one of growth. Growth above and beyond what comes from population growth translates into increased wealth for the economy. In a recession, less income and wealth are being generated as less widgets are sold and assets fall in value. If the population was holding steady, or shrinking, this wouldn’t ‘feel’ so bad. But historically, populations expand, so in a recession there are more people looking to earn income from a smaller economy. If you hold onto your job, you might feel like nothing has changed, but somewhere, somebody is looking for work and worried about the future, and soon enough they’ll be willing to do your job for less than you are paid.

Economic downturns have been a feature of capitalism and the market for as long as they have existed. If capitalism is an expression of human psychology and drive, then periods of relative optimism progress into periods of enthusiastic optimism and then there is a painful slide into disbelief and extreme pessimism. Once optimism starts creeping back in, the cycle of boom and bust is starting anew. If we could eliminate this aspect of capitalism, then we would be much happier in general. There would be steady economic growth without the periods of contraction, where people and families are displaced and the feeling that the future is bleak is prevalent.

Next time, I’ll explore the idea of the business cycle and loosely where it comes from and why it produces these periods of boom and bust.

Al Gore Changes His Mind?

I picked this up at the Daily Dish this morning.  It’s a reference to a post by Shellenberger and Nordhaus at The New Republic on how Al Gore, in a recent missive to president elect Obama, has subtly changed his message regarding climate change and carbon emissions.  The shift is in priority, away from putting a price on carbon to emphasising investment in green technology.  This strikes me as a tactical decision by Gore.  In order to retain relevancy in an uncertain economic environment, he has shifted his rhetoric away from taxation and regulation towards the ever hopeful idea of new technologies.  In this case, he might have been taking notes from the recent federal election in Canada where Dion’s carbon taxing initiative was a political  millstone; it confused voters, was hard to explain and difficult to justify to the public how a new tax was necessary.

The writers at the New Republic have picked up on Al Gore’s shift as it fits their world view and their belief that new technology is necessary and simultaneously the best way to deal with the problems of climate change and carbon emissions.  I am ever hopeful in new technology as well but, historically, new technologies that deal with old problems, well, they tend to develop problems that are unique and troublesome in their own right.  To paraphrase that old expression, technology happens.

Here’s a response and a criticism of that piece over at The Bellows by Ryan Avent.  He suggests that regulation is already happening in a rather awkward and scatter shot way, by various levels and branches of government.  He also criticizes Shellenberger and Nordhaus.  The money quote,

But it should be clear that pricing and investments ought to go hand in hand. Pricing provides information about where and how to invest and incentives to adopt new technologies, while investments in research ease the transition off fossil fuels as carbon prices slowly ramp up over time. That’s the necessary carbon policy. And it’s hard to see how we get to where we need to be without both.

I am fully on board with what Avent is saying here.  There’s not one solution, there are many and they need to be explored simultaneously.  Government investment in technology is problematic in that you have people making decisions about what to do with the dollars involved.  If those people are subject to lobbying, you might get questionable bridge technologies such as ethanol.  Using markets to find what is desired at a societal level removes decision making from potentially flawed individuals in favor of what is going to work in the market.  With a properly designed price environment, the market will find solutions to the problem.

As a matter of political signalling, I find the whole situation to be fascinating.  I have not examined the leanings of these writers, but I am assuming the writers at the New Republic are on the right.  Indicative of this is their fear of regulation, the holy belief in the saving power of technology, and the uncertain embrace of state sponsored spending bailouts and investment that is sweeping governments around the world. 

Alternately, Avent appears to be more left leaning than Shellenberger and Nordhaus, but he’s the one advocating for using the power of markets (historically the domain of the right) and the effective pricing of externalities, in this case carbon emissions.  This just goes to show, when dealing with a complex issue, ideas of left and right are quite useless.  A complex problem requires complex solutions, with contributions from all over the spectrum.

So, did Al Gore change his mind? I don’t think so. It looks like this is case of some writers wanting to say “I told you so!”, when all Gore wants to do is to keep the issue on the front burner before it’s relegated to the dustbin by current economic events.  Avent is more in tune with what is necessary to move forward on climate change and carbon pricing, but Gore has got a message and a speaking tour to maintain.

Harper and Dion, A Turning Point?

What Dion and the carbon tax couldn’t do for the liberal party, the banking crisis and stock market plunge apparently are.  Timing, as they say, is everything and Harper’s seems to be off, in quite spectacular fashion.  I believe pundits were observing that this election was hastily called in the fall session of parliament to take advantage of good times economically before things got too rotten.  Oops.  The Liberals are now painting Harper as being out of touch with what is happening and slow to respond.  And that was exactly the playbook the conservatives were running.  Things are good, steady as she goes.  Current events have relegated that playbook to the dustbin and Harper’s carefully managed election is getting more interesting and unpredictable.

Although his image is one of an academic and not very statesman like, Dion has always appealed to me because he seems genuine.  You’re not getting much filtering when you see Dion speak.  He’s dropped the teleprompter in his speeches, probably as a way to seem more natural in an unnatural tongue, but I think it also speaks to a growing confidence.  In comparison, I always get the feeling that Harper is tightly in control of himself and his faculties and that gives me the willies.  It seems odd, but I don’t want someone so sure of themselves in power.  Give me some complexity and a willingness to change and adjust.

With about a week to go, the Liberals are gaining ground, and the Conservative are out of majority territory.  Jack Layton appears to have the NDP on track for modest gains, but I think his populist message of tackling corporate Canada is misguided.  Making ‘big polluters’ pay, Jack?  Wake up buddy, we *are* the big polluters.  I didn’t catch the televised debates as I was in lectures, but apparently Elizabeth May came off very well in her first go at it.  Hopefully the Greens can capitalize and claim a few seats.  It’s going to be an interesting final push.

Buffett and The Banks

I believe that the rejection of the bailout bill in congress earlier this week is short sighted.  Congress might be picking up on the sentiments of Main St, in that the average joe is unwilling to bailout Wall St, but what Main St fails to recognize is their complicity in the current banking crisis.  Bankers need willing borrowers, and the borrowers have demonstrated they were just as greedy as the bankers.  Trying to put some distance between themselves and their greed, ie Wall St, is a natural reaction but one that should be ignored. 

Letting things work themselves out on Wall St is a huge unknown.  Fear is running rampant at the moment and it is a destabilizing force.  Warren Buffett, a humble and decent man not known for hyperbole, and also the most successful investor ever, just came out and said that America is looking at an economic ”pearl harbour”.  He also has been making investments in the markets this past week, in Goldman Sachs and General Electric.  However, if the bailout does not proceed, he believes his recent investments will have been a mistake.

Shale Gas

Regular readers of this blog will not be surprised that I am revisiting energy!  Check out this article at the globe and mail.  I am going to summarize here because the globe does this annoying thing of charging for articles after a period of time has elapsed. 

If I am beating a dead horse here, I apologize, but it’s a part of economics that fascinates me and it’s entirely predictable.  The usual disclaimers should be included here for ignoring GHGs, climate change and profligate energy use; this is strictly an examination of the market at work in a functional and efficient fashion.  I’ll be talking about market failures soon enough I imagine, but they are much more depressing and insidious, not to mention harder to spot.

Natural gas is a clean burning fossil fuel and is essentially localized to the North American market.  Unlike oil’s shipping infrastructure, moving natural gas around on the oceans is a new thing, and shipping it around is done in the form of liquefied natural gas.  It had appeared that natural gas production in North America was going to be in terminal decline and that we’d have to start relying on liquefied natural gas imports to satisfy energy needs. 

But now,  production of natural gas is expected to rise 30% by 2030, including rising production in the continental US (take note ‘peak oil’ theorists).  This is thanks to shale gas, a natural gas that is trapped within shale rock.  It’s an unconventional reserve previously thought of as being too difficult to tap.  In response to the disruption of natural gas production by Hurricane Katrina, and the resultant high prices, drillers started working on getting at the shale gas.

A few years later, and costs have come down to a level where drillers can make a profit at the current average price levels, let alone the prices seen in 05/06.  Note, natural gas has not correllated with the price of oil in the last year.  This is another example of prices spurring development of technology and previously unusable or unknown resources.  It would be silly to think a similar story will not unfold with oil.

MD

Productivity and Development

Productivity is a measure of how much one can produce, given available time and capital.  A farm worker, with no tools (ie capital), only has her labour to produce a crop and will not be very productive; picture tilling soil and harvesting by hand.  Throw in a hoe, or a combine harvester, and the farm worker’s productivity starts improving, sometimes dramatically.  Rising productivity in an economy means that more is being produced with less, and so the people participating in that economy are richer on the whole.   

Increased productivity has produced the developed economy that we live in today.  Going back to subsistence living, people had to always be focused on survival and there was little room for anything else.  Once people got past the level of subsistence, there was time to develop technology and society.  In other words, and sticking to the agriculture theme, a productive farming sector freed up people’s time.  When a village could feed itself with less than the sum total of the available labour, then people had time to be kings, priests, blacksmiths and teachers, for example.

What we have currently in the world is a wide range of countries at various stages of economic development.  The most developed have a high level of productivity and the average worker in these countries is concerned mostly with the acquisition of luxuries; subsistence is taken for granted.  Developing economies (such as China) are rapidly acquiring technology and capital and are increasing productivity.  Workers in developing economies are not concerned with subsistence, but maybe their parents were.  Undeveloped economies are not very productive and often are still only concerned with survival and subsistence living, like some countries in Africa.

I’m just about finished up reading ‘Bad Samaritans’ by Chang, and so this post and my next few will all be tied into or inspired by this book.  Here he summarises what a country has to put in place to move forward developmentally, “-the foundation of economic development is the acquisition of more productive knowledge.” (pg 142).  It sounds really simple.  But putting it into practice requires long term strategic planning and is anathema to the neo liberal economic orthodoxy.  More to follow.

Signal Down! Reconnecting in 3 weeks time (or so)

Although I’ve got a few ideas kicking around, I haven’t been able to properly express them with my available time and I am unhappy with the drafts I’ve got up and running.  I want to respond to this post and it’s survey over at Scott’s blog and I will do so in the future.  I will be away working and then travelling with the old man and my little brother during August, so I won’t be posting here for the next 3 weeks or so. 

I am currently reading ‘Bad Samaritans – The Myth of Free Trade and the Secret History of Capitalism’ by Ha-Joon Chang, and this book is having an impact on my views regarding how governments and markets interact.  The sub-title is a bit fantastic and reeks of conspiracy theory, but that’s misleading as so far it’s an excellent and well researched book with a strong contrarian bent.  I should be done this book by the time I am ready to post again, and hopefully I’ll have it assimilated and ready for some debate.

Revisiting Fossil Fuels and Peak Oil

Wealth of oil in Arctic, report says

This link refers to estimates of 112 412 billion barrels of oil that is undiscovered in the Arctic.  The report was issed by the United States Geological Survey, and is an example of why ‘Peak Oil’ is a fringe theory.  Now the question is, should we be drilling for oil in the Arctic?  And on the strategic level, who’s oil is it?  Hence the jockeying for position in the North.  Plenty of smart people, governments and corporations are preparing for the time when the Arctic melts and new resources become accessible for exploitation.  Notice what this means for future expectations of global warming, in that it is being planned for at the highest levels.  Climate change skeptics, please pay attention.

The Carbon Tax and Canada Day

The BC carbon tax goes live today and Canada turns 141.  Both causes for celebration.  Unfortunately the carbon tax is coming in at a time when we are already seeing record high (nominal) prices at the pump.  The price of gasoline is the most widely quoted spot price of a commodity.  Everyone knows what the price of gas is.  I remember the belly aching 3 years ago when it cracked the $1.00/L mark for an extended period.  Wooo boy, now we’re ready to break $1.50/L in BC.  This is making Gordo’s carbon tax harder and harder to stomach for the average person, and the NDP are attempting to portray the carbon tax as a gas tax.  It is a gas tax, but it’s more than that, and the unfortunate timing of high energy prices and the introduction of an important economic lever might be a problem.

On the other hand, high energy prices are having a strong effect on consumer behaviour, exactly what is trying to be accomplished with the carbon tax.  SUV sales in the US are down substantially, while compacts are being snatched up.  Bicycle stores have 3 week wait times for tune ups and bike mechanics have all the work they want.  Locally, our transit provider, for the first time ever, ran out of 3 zone transit passes and had to make a second print run for the month of June.  There is evidence of a drop in gasoline consumption; economically speaking, we are seeing demand destruction in response to higher prices.    People are feeling the pinch and adjusting behaviour.  This is exactly what should be happening, a little bit of pain is causing people to rethink and reorganize their lives.

All of this will make it more difficult to maintain a carbon tax, as people shift their top concern from the environment to the price of energy, which is already underway in Canada.  Over time, consumers will adjust to the higher prices and it will become less and less of a concern.  Prices will eventually come down (if you believe my post on Peak Oil).  It’s at this point where a steadily increasing carbon tax should be well established in order to maintain a small amount of price pain so that the changes in consumption we are seeing today are maintained and encouraged to continue.  If this does not occur, the pendulum will swing back and gas guzzlers will return to the roads.  As prices stabilize in the future, the government and regulators should be on hand to make sure we do not get complacent about energy again.  Keep that tax coming Gordo, we need it now and we’ll need it even more in the future.