Re: [Futurework] The poverty of nation-states

[Keith Hudson]

Tor,

At 00:59 05/12/2003 +0100, you wrote:

 
The essay says: "Similarly, Norway's supposedly separate rainy-day fund, financed from oil and gas revenues, was raided in 2001 to meet immediate budgetary pressures"
 
It is wrong. It si decided that not more money shall be taken from the fund than goes into it. But since a large part of the money is in shares and stocks, and their value fluctates quite a lot there have been years where the oilfund hardly has grown. The reason that the fund fluctates is changing values of stocks and shares, but every year more money is put into the fund than being taken from it.

Well perhaps Heller got it slightly wrong. But Norway is to be praised for being the first country to start a "rainy-day" fund. Perhaps Norway will also start to add to that fund from normal taxation as well. Because this is what will be needed in the longer term future in order to pay for welfare. If Norway were to do this then it would be showing the way to all the developed countries in the world. But would the Norwegian taxpayer accpet this policy? I don't know because I'm not Norwegian. It certainly couldn't be done in England unless there was the most vigorous campaign by all the political parties cting in unison. But even then the electorate might vote an entirely new political party into power that would despise such a policy. This is the basic faultline of democracy as it has developed so far in the western world.

Keith 

 
Tor
 

----- Original Message -----

From: Keith Hudson

To: [EMAIL PROTECTED]

Sent: Thursday, December 04, 2003 6:27 PM

Subject: [Futurework] The poverty of nation-states

If the accounts of the developed nations were judged in the same way that businesses were, then they would have declared bankrupt a long time ago and their directors taken to court for irresponsible behaviour, if not downright criminality in raiding their employees' pensions funds. For that, in a nutshell, is what developed countries have been doing. They have been 'trading', more or less, on an even keel, rather like an old-fashioned family firm that just about makes sufficient profits to pay for maintenance of its assets and perhaps a modicum of new investment from time to time. But the old-fashioned family firm -- of the sort that usually supplied a good canteen for its staff and a nice sports ground and facilities -- would also be regularly plonking money away into safe funds for its employees' pensions.

But, it will be objected, the accounts of nation-states should not be compared with business companies. A nation's 'business' is not to make profits but to serve its constituents. All right, if that is accepted, then what about the moral obligation it has taken on (just like an old-fashioned business) to look after its elderly when they have reached the end of their working lives? In this regard, the duty of care is exactly the same. It should be judged accordingly.

When William Beveridge wrote his great Report on national insurance in the last years of World War II, which he cleverly foisted on a reluctant Churchill (though the latter didn't have the chance of introducing it, as it happened) he made a bad mistake. And, because most developed countries adopted similar schemes shortly afterwards, they also inherited the same mistake.

The basic mistake is not something we should pillory Beveridge for. It was made in good faith, and nobody queried it at the time. There were then about 10 active workers for every retired person and it made abundant sense that if every worker contributed a relatively small amount every week out of his wage packet then every old person could be given an adequate, albeit not over-generous, pension. Since then, however, the ratio has been declining. It is now about 4 workers for every retired person. In a few years' time it will be 2 workers per oldie. And it will even decline to less than this if most parents in developed countries don't quickly re-acquire the habit of having a replacement number of children -- namely 2.2 per family. Considering also that every retired person, in living longer, is also 'acquiring' many more chronic diseases than previously (a similar sort of oversight made by Aneurin Bevan when he introduced the National Health Service), the problem not only grows but becomes compounded.

While we can excuse both Beveridge and Bevan, there can be no excuses for the politicians of all advanced countries in the last two or three decades as it became increasingly obvious that crunch-time would come sooner or later. Not only has it been obvious, but woe betide any politician or civil servant who attempted to start setting the matter stright. Some three or four years ago, Frank Field, for example, was kicked out of his ministerial position by Blair as soon as he tried to put forward an alternative pensions plan which was sustainable.

And so it goes on. But the problem won't go away. Periodically, attention is drawn to certain catastrophe of the old, the unemployed and the sick -- yes, even in the most advanced countries in the world -- by increasingly authoritative voices. The latest one is Peter Heller, the deputy director of fiscal affairs at the International Monetary Fund and some of his results are shown in an Economist article below. As can be seen, many governments have given promises to their electorate which they cannot possibly deliver unless some drastic changes are made in the insurance rates that workers pay and, moreover, a start made in starting pension funds which can guarantee at least part of future pensions in the medium term future and total pensions in the longer term.

I also follow with an article on a similar theme by Hamish McRae, economics editor of the Independent. He also dwells on the fact that, in most developed countries, individuals are also in debt -- and to a considerable extent in some. The average credit card debt in England is well beyond a year's disposable income. God knows what will happen when interest rates start increasing towards more normal rates.However, he very firmly considers that government debt is far more serious than personal consumer debt.

There is something in the subject of psychology which is called the Miller Effect. This says that we pay by far the most attention to immediate problems, even if they are trivial, while we take little notice of catastrophes if they are far distant. Unfortunately, politicians seem to suffer from the Miller Effect far more than the rest of us. But that is what they are paid for! At least, that is what they offer to do when they put themselves up for election. However, as Hamish McRae says, politicans don't worry overmuch because they won't be in office when the bailiffs call on their former electors. I'm increasingly thinking that, to be realistic, governments should give sufficient notice that people should start to take on the responsibility of looking after themselves and how they are going to live when they retire from work because all the evidence suggest that politicians will never be able to. Also, perhaps parents would start to have more children so, if the government fails to help them in their old age -- as seems almost certain -- then they will have someone to rely on when they become infirm.

Keith Hudson   

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IN THE LONG RUN WE ARE ALL BROKE

How to stop governments going bust

Investors have good reason to worry about states defaulting on their loans: Argentina and Russia provide chastening recent reminders. But both were dysfunctional economies with troubled political pasts. Surely, there is no need to worry about the indebtedness of the governments of stable, advanced countries?

Maybe not, but take a look all the same at the table below.

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Iceberg ahead

Govenrment net debt as % of GDP in 2002

Country -- Explicit debt/Implicit debt

(in order of size of implicit debt)

Canada -- 45/420

Spain -- 42/355

Belgium -- 100/310

Holland -- 45/290

United States --45/265

France -- 40/230

Germany -- 45/200

Denmark -- 25/175

UK -- 30/110

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Most countries' explicit net debt -- issued as bonds and traded every day in financial markets -- is at manageable levels, relative to GDP. However, embodied in current tax and expenditure policies are a lot of obligations for which governments have not yet had to make explicit provision. This implicit liability arises mainly from future increases in spending on pensions and health care. Include it, and total debt vaults to levels last seen (for explicit debt) in wartime. Governments often fall into bad habits when their debts are so high, usually by resorting to the printing press and using inflation to cut the real value of their liabilities.

Credit-rating agencies are alerting their clients to the danger. Standard & Poor's gave warning last year that many European governments will be relegated to the second division of borrowers if they do not tackle spending commitments that are set to soar as populations age. So far, however, investors do not appear to be charging higher risk premiums on explicit debt-the sanction that would most concentrate the minds of finance ministers.

Yet the long-term budgetary risks are real and looming ever closer, says Peter Heller, deputy director of fiscal affairs at the International Monetary Fund, in a thought-provoking new book. (Who Will Pay? Coping with Aging Societies, Climate Change, and Other Long-Term Fiscal Challenges) These risks arise not only from the effects of an ageing population on pension and health-care bills, but also potentially from medical technology, global warming, security and globalisation. Irrespective of ageing, advances in medical technology are likely to push up public spending on health care: the more medical science and public health services can provide, the more people will want. Climate change may increase the incidence of floods, storms and droughts -- "extreme weather events" -- after which governments often step in as insurers of last resort. Some governments are already under pressure to spend more on defence: the "peace dividend" made possible by the end of the cold war is exhausted. And globalisation may limit governments' ability to exploit their national tax bases as both capital and labour become increasingly footloose.

There may be some pleasant surprises to set against this catalogue of doom. Rising productivity ought to mean that future generations are richer and will be able to afford bigger tax bills, especially if the world economy enjoys the sort of productivity growth that America has experienced in recent years. Europeans could start to have more children, who would prop up their onerous pay-as-you-go pension systems.

Mr Heller accepts that there are huge uncertainties; after all, fiscal forecasts a year ahead, let alone a decade or more, are often wildly wrong. But he thinks that the balance of risks lies on the downside. Worse, risks may hit the public finances at the same time; for example, governments in Europe could find their outlays ballooning from weather-related damage as well as population ageing. As for appealing to the generosity of future richer generations, he is properly dubious about governments' ability to squeeze more tax out of their citizens. Higher tax rates might merely mean a bigger shadow economy, or an abandonment of over-taxed work in favour of untaxed leisure.

Plan, plan and plan again

So what is to be done? First, governments must look much farther ahead than they do now. An increasing number of western countries are planning their public finances on a basis of three to five years, but this is nowhere near enough, argues Mr Heller. They need to incorporate a long-range perspective (of at least 25 years and preferably more) into their budgets. Second, these projections should be vetted by independent agencies such as America's Congressional Budget Office, because of governments' tendency to see the silver lining and not the cloud.

Such long-range forecasts would alert both politicians and the general public to the need for pre-emptive action to avoid a future fiscal crunch. One way forward would then be to run budget surpluses over the next few years in order to create borrowing room in the more distant future. But Mr Heller cautions against pinning too much hope on this approach. It has been tried before. In the late 1990s, America's Social Security surpluses were supposedly in a "lockbox" -- which was prised open the moment the rest of the federal budget swung into deficit. Similarly, Norway's supposedly separate rainy-day fund, financed from oil and gas revenues, was raided in 2001 to meet immediate budgetary pressures.

If governments are to avoid going bust, politicians will have to grasp the nettle. They must cut back on the over-generous promises they have made to their citizens, above all in pensions and health care. And they must do so sooner rather than later. Delay means that future generations of pensioners will find themselves short-changed through an abrupt cut in benefits. Given due warning, they could take steps to protect their incomes in retirement.

Politically, this is not much easier than promising to lock away surpluses. Even so, recent pension reforms by European governments are a small step in the right direction. But how much better it would be if governments published comprehensive long-range fiscal projections, scrutinised by independent bodies and open to public debate. Unless governments are forced to be honest about their predicament, it will be hard to stop them going bust:

Economist -- 22 November 2003

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IT'S THE GOVERNMENT DEBT THAT SHOULD WORRY US

Hamish McRae

Mortgage borrowing up 14 per cent and spending expected to be up more than 5 per cent this Christmas -- the borrowing boom seems to continue. But as the debts mount, so too do the worries. And those worries are not just about the risks people take on by borrowing too much but also about the risks to the economy were they not to borrow too much. Economic growth depends on consumers keeping going.

But of course it is not just consumers who are increasing their debts. Our government is increasing its debts too, debts which it takes on our behalf as taxpayers. We will leam next week just how much when the Chancellor produces his pre-Budget report but it is pretty clear that he will need to borrow about £30bn this year to make ends meet.

The same pattern is happening all over the world. On the Continent, where personal debts tend to be lower than here, government debts are higher. In the States people and the administration are both plunging deeper into debt. Proportionate to the size of the economy, the US is running up debts as fast as France and Germany, the two countries that have just broken the EU's Stability and Growth Pact. You don't have to be an economist or a banker to wonder where it will all end. Common sense says things cannot go on like this.

But while the surge of debt is a matter for concern, it should not, I suggest, be a matter for panic. The important thing to get clear is there are good reasons for borrowing and bad ones. And this applies both to people and to governments.

As a broad principle it makes sense to borrow if it is to acquire an asset or to invest in some project that generates a stream of revenue that clears the debt. It makes less sense if it is just to consume something now instead of waiting and having it in a few months' time. Now try applying this.

Start with people because that is the bit within our control, then a quick word about our political masters. The surge in our mortgage borrowing is not quite as alarming as it looks. Sure, it is huge and sure, quite a lot of the additional borrowing is not because people are moving house but because they are putting aside some cash to spend. Some figures suggest that close to 10 per cent of our spending is financed by borrowing in this way.

But as we all know, a lot of people are taking out additional mortgages not to move but to improve their existing property. Ten years ago if you wanted a bigger house you moved. Now that stamp duty has risen so much there is a huge penalty on moving. The cheaper way to get their extra space is to add on a conservatory, have a loft conversion, or maybe convert the garage into an office.

A further tranche of mortgage lending is for buy-to-rent rather than owner-occupation. This too has led to some tooth-sucking: do people really realise that property prices might fall? But the idea that somehow it is more virtuous to borrow to buy your own home than to buy one to rent to someone else is, in economic terms, illiterate. If you live in a house it is unlikely to produce much income to dear the debt, whereas if you rent it out the whole idea is to make a profit. So let's not worry too much about that.

There are however three areas where there should be real concern.

One is when people deliberately over-house themselves because they believe they will make a profit on the deal. That has been a source to riches for many over the past 40 years but may not be in the future. In a world of high inflation, sooner or later any investment in property comes good. Even people who were caught in the negative equity trap of the early 1990s are now ahead, assuming that is that they managed to keep up the payments.

But the future may not be a period of high inflation or even inflation at all Because prices have risen all our lives we assume they will continue to do so. But there have been several periods over the past 200 years when prices of property have fallen, just as prices of goods are falling now. Indeed the fact that interest rates are very low implicitly suggests that inflation will be very low and may even disappear.

A second concern is the extent to which young people build up debt from their student days, an issue that is going to loom larger. Apply the principle: if the investment in higher education enables people to earn more in later life -- and all the statistics suggest it does -- then it makes sense to borrow to get the qualifications. But what is good for the general may not be right for the specific. Some people may be taking on debts that, for whatever reason, they may not be able to service. So leaving university with a pile of debt does commit young people to getting a reasonably-paid job.

And a third concern is the swathe of borrowing at high interest rates for ordinary day-to-day consumption. Far too often this is couched in moral terms, whereas the matter ought to be presented in practical ones. Do borrowers realise how interest payments will eat into their real wealth? Do they realise the penalties for defaulting? Do they realise that the things they are buying may well become cheaper if they wait, saving them both the interest and giving them a better price? Do people simply get into a muddle because it is so easy to hand over the bit of plastic?

I suppose all these concerns matter less when people have a continuing and growing stream of income: you just earn your way out of trouble. But if your income falls then there is a problem.

The general conclusion that stems from all this is that consumer and mortgage debt in Britain is mostly manageable. People are not stupid. They may to some extent have been seduced by low interest rates but most are very well aware that rates will go up, as they have started to do. They make the reasonable assumption that in a world of low inflation, rates will not rise that much. They also reckon that the job market will remain fairly strong, which also seems reasonable.

Of course debts cannot carry on rising at their present rate and of course some individuals will have problems repaying. That will be very ' unpleasant for them and disturbing for society as a whole. But I don't think there is a catastrophe on a national scale a-brewing in the next couple of years. Much more likely is a longer period of slight disappointment as homes do not rise much in value as they expect, just as many people are discovering their pensions are not worth what they thought they were, and that taxes are higher than they were led to expect.

But if we need not, in general, worry about personal debt we should be worried about national debt. Britain is in a better position than most EU countries as we have reasonable growth prospects and lowish overall debts. Our debts are rising at close to 3 per cent of GDP but next year we may grow at close to that rate. This is not the case elsewhere. The most obvious disaster is Germany, which has low growth prospects, a declining workforce and huge, rising national and local government debts. Italy is in the same boat, France not quite as bad.

But beware even here. We are OK but not great And next Wednesday, when the Chancellor admits that he has got his sums wrong again, we should remember a new golden rule. People, by and large, are sensible about debt because they know they will have to pay it back. Politicians, by and large, are not because they know they will be out of office when the bills land years later.

Hamish McRae is the economics editor of the Independent

Independent -- 3 December 2003

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Keith Hudson, Bath, England, <www.evolutionary-economics.org>

Keith Hudson, Bath, England, <www.evolutionary-economics.org>