Personal versus Government Debt

April 12, 2017

Personal debt is relatively easy to understand. A person borrows, often for a specific purpose – house, car, education, vacation etc. –  knowing what the interest cost and terms of repayment will be. Once in receipt of the funds the money becomes fungible and can be used for any purpose including a specified item. The loan may make it possible to purchase the item, but the actual dollars used may come from any source available to the buyer.

 

Repayment is a condition of the loan and can only be avoided by renegotiating the terms, or defaulting on the loan with various consequences. For personal loans, the interest rate will be known at the outset, although there may be conditions for revising it if say the government alters interest rates through changes in monetary policy.

 

Consumers are generally aware of their personal debt situation, and can anticipate what will happen when various circumstances change which affect their ability to repay or service the loan. Use of a loan enhances their ability to acquire goods and services which can differ in terms of what is purchased. A loan spent on a vacation, a meal or attending a concert will have different consequences than if the expenditure is made on a house, car, medical procedure or attending an educational establishment. The latter represent a capital investment that can lead to an enhanced flow of income in the future; the former may give immediate satisfaction but have less lasting benefits.

 

The nature and consequences of personal debt are fairly easy to describe and appreciate. Public or government debt is a different kettle of fish in terms of measuring its size and understanding its ramifications which include these and other factors:

 

  1. Government expenditures are financed by a combination of tax revenues and, if needed, borrowing, the latter becoming part of the national as opposed to personal debt. But that debt becomes personal as it is shared by all Canadians and includes the debt of all three levels of government. If governments make poor economic decisions causing increased deficits, then their, and our, levels of liability increase, and Canadians would be likely to face higher levels of taxation.

 

  1. Public debt does not have to be paid off. A ten-year government bond does have to be redeemed at the end of the decade but usually it can be replaced with another bond. A government’s borrowing capacity is thus greater than that of most individuals. It has a much longer lifespan and a continuous and often growing source of revenue to service its debt and repay past loans.

 

  1. Trying to figure out the size of a country’s national debt and its consequences is extremely difficult, at least for me. An internet search results in different concepts of debt being used. Gross versus net debt is fairly obvious, but different sources will quote different figures for net debt for a country in a given year. News reporting is not helpful with reports merely printing what some source, that is thought to be official and thus reliable, publishes.

 

  1. It is often stated correctly that government debt incurred today will have to be repaid by future generations. Whether this is a bad thing or not depends on what the increased debt is used to finance. If it builds and/or repairs highways, hospitals, airports, ports and educational facilities, this represents an investment for future generations. Failure to make such public expenditures would be a detriment to future generations. Of course, there are limits as to how much borrowing can be done at any time, but these type of investments are different from other items of expenditure.

 

  1. National debts are sometimes reported gross and sometimes net with the net figure deducting assets which the government owns such as land, buildings, equipment including military equipment. Some physical assets may be easy to value but how do you value land in Canada’s national parks. These have significant value but since the government would not consider selling them then their only value comes from the revenue generated by visitors less the cost of administering the parks. (A similar private sector situation arises with churches which often find it difficult to borrow money using the building as collateral).

 

I don’t think economists or journalists do a good job of explaining the nature and consequences of deficits and debt except to repeat what each other say. It is not an easy topic to untangle, but if the absurdly low current interest rates on short, medium and long-term government debt persist there are likely to be severe repercussions. Bondholders holding bonds with negative real returns on their investments may turn away from government lending, causing interest rates to rise with consequences throughout the economy.

 

John Cochrane has an interesting article on debt and inflation at

http://www.nationalaffairs.com/publications/detail/inflation-and-debt

What’s special about infrastructure spending?

April 9, 2017

Two economic topics in North America are the return of manufacturing jobs and investment in infrastructure. The first is not going to happen because the nature of manufacturing has changed as automation takes hold. It is similar to what happened to agriculture when tractors and combine harvesters replaced manual labour and horse drawn equipment. Output grew but using a different combination of labour and capital. More farming output is now produced with far less labour, while more labour goes into producing the tractors and harvesters for the way farming is now undertaken. The same is happening today to manufacturing with more labour going into activities like writing software to run the machines which produce goods in place of manual labour.
Infrastructure covers a wide range of items like roads, bridges, railways, airports, harbours and communications facilities. These all require continual maintenance. Failure to do this on a regular basis escalates the the cost of restoring the infrastructure, while the quality of the services provided such as road and rail safety diminishes. The alternatives are spending today to maintain infrastructure or spending more tomorrow. If the latter is chosen not only will the cost be higher, but the service provided by the infrastructure will be of lower quality and impose cost on others. For example, unfilled highway potholes cause the deterioration of motor vehicles.

Much government activity is associated with expenditure on infrastructure such as schools, universities, hospitals, defense facilities and equipment. Failure to replace and renew equipment for the Canadian navy and airforce creates a saving today while placing a burden on future generations. The same is generally the case for other areas of infrastructure spending.

When a government announces that it will increase infrastructure spending, it is frequently the case that it is going to remedy the failure of previous governments to maintain facilities in good working order. Home owners know only too well what happens to buildings if items like roofs and windows are not repaired and woodwork is allowed to deteriorate for lack of painting. It represents a failure to maintain the value of family infrastructure. Governments forced to increase this type of spending are doing what all governments should be doing, but often fail to do on a regular basis. Far too much attention is often given to the cost of new capital expenditures as opposed to the future ongoing costs of maintaining the capital in good working order.

Voting Systems – be careful what you wish for

March 25, 2017

There are numerous voting systems, none without bias. It is just that the bias favours different groups and so explains who supporters and opponents are. The recent Dutch national election reveals how proportional representation (PR) can work, and the implications if Canada chose a similar system. At present, the federal government has decided not to make changes. While criticized for reneging on an election promise, the government should be congratulated for retaining the status quo.

The Dutch example

The Netherlands adopted PR for its recent election. It works as follows. The country is treated as one constituency with 100 members elected according to the number of votes received by a party. There were 28 parties on the ballot and members elected for thirteen of them. It will take a coalition of four or five parties to achieve a majority for legislation to be passed.

A Dutch voter has no member representing her or his district if the voter has an issue to discuss. Maybe this works with a population of 17 million in a relatively small homogeneous land area, but I doubt whether it would in the widely distributed and varied Canadian situation. A voter in Newfoundland, Quebec and BC for instance would each want to be able to contact someone familiar with conditions in their location. This is one reason why a constituency system is more suited to Canada. There are others. It is possible to have a mixed system with some members elected in constituencies, and some chosen from a list of candidates proposed by parties. How the latter are chosen to be party representatives raises all sorts of issues.

In Canada it is sometimes thought that only the existing parties would run candidates if PR was adopted. This is unlikely as the case of the 28 parties on the Dutch ballot reveals. Under PR, The NDP and the Greens would have collected more seats, and the Liberals fewer seats in the 2015 Federal election, but only assuming that no other parties had formed and were on the ballot, an unlikely event.

With the existing first past the post Canadian system, you can end up with members elected with less than 50 percent of the constituency vote, but it seems to have worked out pretty well over the years not only here but in the UK and a number of other countries, …….and in contrast to the system south of the border where creation of an electoral college to elect a president and gerrymandering of Congressional districts have subverted representation.

When Provinces have held referenda on changing the Canadian voting system, there has been no strong support for change. Maybe the voters are smarter than those supporting change. To repeat, there is no unbiased voting system. Each favours some groups at the expense of others both in electing members and in the passage of legislation. A main check of the existing system is elections required at certain dates or with the defeat of the government.

A Future for News

March 8, 2017

Jodi Rudoren, Editorial Director of the New York Times Global, writes March 7th, 2017.

“The idea of NYT Global is to grow our audience around the world and to make The Times a truly international news organization. That means expanded coverage in Australia and Canada, where the decline of the local media has left readers clamoring for quality journalism.”

As a reader, it appears that the local print media in Canada is dying, at least in the case of the Ottawa Citizen, which has become an emaciated news sheet. There are some excellent columnists writing in various publications and appearing on TV, but in order to find out what is going on beyond the Canadian borders, and understanding how this might affect the country, one is forced to look elsewhere.

Each person is constrained by the 24 hours in each day and has to allocate time for news consumption by reading, listening and watching. The possibility of gaining quality access is expanding with developments in communications technology.

A Real Global Problem

March 7, 2017

The Environment

There is a problem with the environment which does not depend on conflicting opinions based on computer driven models as is the case with global warming. It is air pollution, clean air or whatever you call the ghostly daytime scenes in cities like Beijing, Delhi and now London.

The World Health Organization estimates that seven million people died from air pollution in 2012 which was about one in eight of all deaths in the world that year. It confirms that air pollution is the world’s largest environmental health risk. Most of the deaths are due to heart disease, stroke, lung cancer and acute respiratory infections.

London’s air pollution today is similar to that of the 1950s which was due to coal burning power stations and coal used to heat homes. Today a main reason is the use of wood burning stoves for heating. The pollution is visible and a health hazard.

Environment Canada publishes an Air Quality Health Index and on most days there are no problems similar to those found in the cities of some other countries. As a global issue it is large and visible where it occurs.

 

Forty days into the new US administration – some thoughts

March 3, 2017

1. Michael Moore called the election correctly, unlike almost all the news media pundits. He did so by observing the enthusiastic crowds at Trump meetings, and Clinton’s lukewarm crowd support, plus the fact that Sanders supporters said they would not back Clinton if Sanders was not the candidate. Most of the media forecast the outcome they wanted, not what voters were signaling, which the democrats did not want to hear.

2. The Democrats nationally are now in the weakest position they have been in for decades with no obvious leadership candidates. They have lost Senate and House seats, governorships and control in a growing number of states. They did however get about three million more of the popular vote in the presidential contest. While this does not count in the way presidents are elected, it reinforces the message that the country is divided.

3. The newly elected president does not read mainstream media, although his staff does. He Tweets and watches cable news networks, especially Fox News. His behaviour suggests a cocktail of narcissism and mental instability. This seemed to change with a measured and lengthy speech to the joint Congressional Houses on Feb. 28th. The speech contained spending proposals which would vastly inflate the budget deficit and weaken the US dollar and raise interest rates. However the stock market has boomed since the election…..go figure.

4. The involvement of Russia in the election is still unknown, but after a brief honeymoon period between the US and Russia there are signs of future instability due to contacts between Republican cabinet appointees and Russian officials before the election. This could be linked to Trump’s tax returns which may show that he had funding from and commercial ties with Russian businesses.

5. Elected Congressional Republicans are having a hard time knowing how to respond to the President’s proposals. Some they like, but some they strongly oppose, and so does Ivanka.

6. A personal prediction (few turn out to be accurate) – the President’s close advisers, Bannon, Priebus, Conway, Spicer and Miller are unlikely to hold these positions a year from now. They helped to shape the campaign rhetoric but may not be the most adept advisors for governing.

7. Leading firms in the mainstream media are labelled as providing ‘fake news” when they criticize the new administration. These firms seem to be hanging in and retaining their influence and may become the most effective critics of the government.

Prediction – Marie Le Pen will win the French election.

What does populism mean?

February 22, 2017

Populism is a loosely defined term which seems to refer to actions taken by any group within a society which is fed up with conditions affecting them, low wages, unemployment, refugees, immigration and so on.

It is used to describe the reasons for Brexit in the UK, terrorism/racism/immigrants and unequal income distribution in the US, and refugees and related conditions in countries such as France, the Netherlands, Italy and even Germany.

In Canada, according to Wikipedia, populist movements describe the Social Credit and the Reform Party in Alberta, Creditistes, the Union Nationale and PQ in Quebec, the federal Liberal party under Prime Ministers Mackenzie and Laurier, labour parties leading up to the CCF and NDP, and support for various premiers of Ontario.

This seems to be rather all inclusive referring to any time when a group in society becomes activated and organizes politically. It merely describes contemporary political conditions. A recent case of populism today would be Ford Nation in Toronto, where one segment of the city feel that they are taxed for the benefit of another. The Ford brothers used this to their political advantage.

It does not seem to be a useful term unless the reasons for it are given.

Census helps to define Canada

February 21, 2017

A satellite view of Canada at night shows lights along the US border and precious little north of that. The 2016 Census reports that 83 percent of the population of 35 million lives in cities of 10,000 or more, 40 percent in the 15 largest cities, and 8 percent in Toronto. Immigrants have accounted for about two-thirds of the 5 percent population increase over the past five years.

These few facts show that

  1. The landmass of Canada is largely unpopulated, not unlike the eastern seven time zones of Russia. Canada’s maritime boundaries are virtually unprotected at least by Canadian forces with its under equipped navy and airforce. The US is the de facto defense provider, although the NORAD agreement has been in place since the 1950s.
  2. Recent immigrants like previous ones prefer to live in cities, and many head for Vancouver, Toronto and Montreal. They don’t want to live in rural areas where there is masses of space but limited services. (Note, all Canadians are immigrants, arriving at different times, including native peoples who are traced to Africa and migrating over the Russian land bridge to North America around 60,000 years ago. In this sense, there are no indigenous people. All arrived at different times in the past. Those that arrived after 1500 brought diseases which helped to decimate those who arrived earlier.)
  3. The immigrant wave, from say 1500, came, settled and stayed. Until recently, they had no cell phones or wifi that could keep them in daily contact with family and friends at home. Travel and communications were expensive. Today’s immigrants are less connected to Canada in this regard, especially with the reduced cost of travel and communications.
  4. Life was hard for early immigrants. Access the Doukhobor website to see a photograph of women harnessed to a plough, as evidence of the hardships faced by those who arrived in Canada around 1900.
  5. Conditions for today’s immigrants are different. Some will want to stay. Others may decide to return home when and if conditions improve and are in transit. Canadians have largely welcomed recent arrivals, although there is resistance to those crossing the US border and applying for refugee status, as is permitted by Canadian law. Unlike the refugee crossing from North Africa and the Middle East to Western Europe, North America is bordered by the expanse of the Atlantic and Pacific oceans which gives rise to different physical barriers. Policy enforcement also differs here, although it has resulted in an estimated 11 million illegal immigrants in the US and perhaps 500,000 in Canada….no one knows.

 

The latest census and geopolitical conditions are factors describing the circumstances facing Canadians today.

 

Cultural Appropriation

February 15, 2017

The Shattered Mirror

February 8, 2017

 

 

The Shattered Mirror – News, Democracy and Trust in the Digital Age proposes increased bureaucratic input and public funding for a sector rocked by new technology.

What Uber has done to the taxi business and Airbnb to accommodation, has invaded all forms of media including news reporting and distribution. Daily newspapers are haemorrhaging advertising revenues and many have been forced out of business, or to adopt different means of distribution. Many other sectors are affected by technology such as education with the offerings of online courses. Existing suppliers fight back to maintain at least some semblance of the status quo, often lobbying governments for increased support. Ultimately new technology usually wins and a new breed of entrepreneurs rise to fill any gaps to provide the desired goods and services.

The process is part of Schumpeter’s stages of creative destruction which benefits consumers, and those producers who adapt. Those who lose appeal to the government for support. Such is the case for The Canadian Public Policy Forum’s latest report The Shattered Mirror, News, Democracy and Trust in the Digital Age which examines how technology has affected traditional news media. It argues that the public is poorly served by the new digital news providers and that democracy is at risk with, for example, the reporting of fake news.

Since the 1950’s numerous reports have examined the Canadian media including news. They include:

1951 Royal Commission on National Development in the Arts Letters and Sciences (Massey Report).

1961 Royal Commission on Publication (O’Leary Report)

1970 Special Senate Committee Report on the Mass Media, (Davey Report)

1981 Royal Commission on Newspapers (Kent Report)

1982 Report of the Federal Cultural Policy Review Committee (Applebaum Hebert Report)

2006 Senate Report on the Canadian News Media (40 recommendations and 10 suggestions).

 

All recommended measures of protection and support to which The Shattered Mirror adds its contribution. Written by a person who has had a distinguished career in journalism, this almost assures that the recommendations will include further government support for the industry. It succeeds in this regard. It would be the same if dairy farmers were asked for advice on supply management or academics on university funding.

The report contains thirteen proposals. Many require additional administration of funds and rules which in total would require both added bureaucratic overhead and time spent by firms to qualify for the funding.

Two proposals provide the tenor of the report and the tortuous process that would be required to comply with the provisions.

  1. In the proposal to extend provisions of Section 19 of the income tax act to other media. Producers of eligible news will be required to show that: (Recommendation No.1).

At least 75 percent of editorial payroll and 75 percent of their eight most highly paid employees are Canadian individuals or personal-service companies.

At least five percent of the company’s revenue generated in Canada is spent on editorial operations, with a significant amount for civic-function journalism.

 

  1. Creation of a fund managed independently from the government (Recommendation No.5).

Creation of the Future of Journalism and Democracy Fund would provide financing for digital innovation, especially in its early stages, and be directed at those operators who produce civic-function journalism at the national, regional and local levels. To qualify, enterprises would have to be Section 19-compliant and deliver original news on digital platforms that are refreshed at least once a week. The fund would cover a maximum of 75 percent of the cost of a project. The ability of applicants to attract support from other partners would factor into the grant decision.

 

Proposals regarding the CBC fail to note shrinking audiences especially for English language television. CRTC Annual Monitoring Reports (available online) show the CBC’s share of the English language television market fell from 13.2 percent in 1994 to 7.5 percent in 2000 and to 5.1 percent in 2012. While government financing has remained around $1bn, this segment of its mandate has been shrinking, so that on a per viewer basis the funding has been increasing.

If the CBC is to survive, consideration should be given to it being funded only by government and not selling commercials. The latter puts it in competition with private broadcasters, allowing it to use public funds to buy programs like major sporting events. In the UK and Australia, the public broadcaster is funded almost entirely by government, with far less angst being created between public and private broadcasters. A government owned broadcaster, if one is needed, can devote its attention to its public service mandate and have a far lesser concern for audience size.

 

The Shattered Mirror focuses on the importance of civic-function journalism defined as the coverage of elected officials and public institutions, from legislatures, judicial and quasi-judicial bodies and city halls to school boards and supporting public services. That is important, but in a globalized world coverage of what happens outside Canada is increasingly important. Much of this can be accessed online from websites and blogs run by people whose judgement I personally respect in different news related fields, and superior to many traditional news sources. In broadcast media, my preference is for The Agenda on TVO and the PBS Newshour. In both instances the anchors are informed but do not insert their own opinions, unlike what prevails with the CBC and CTV.

There is much more to comment on in the report. As it stands it argues the case for supporting more of the same with increased bureaucratic input. It deserves further discussion.