Thinking about 2012 and beyond

As always, there is a wide gap between the political and economic events forecast by experts for the coming year and what actually happens. (Dan Gardner, columnist for Ottawa Citizen, Dec 28, 2011, p. A15, discusses this). Philip Tetlock, originally from UBC and now Professor of Psychology at the Wharton School, has studied political and economic forecasting and finds that many so-called experts do significantly worse than those making random guesses about the future. This does not deter publications like the Economist and daily newspapers publishing predictions for the coming year. Seldom do they alert readers to the inaccuracy of previous forecasts.

Combine this with the observation of Raquel Fernandez, economist at NYU, that at least as far as economists are concerned, they don’t know what they are talking about, although they are quite good at how in general to think about the issues.

“Economists essentially have a sophisticated lack of understanding of economics, especially macroeconomics. I know it sounds ridiculous. But the reason why I tell people they should study economics is not so they’ll know something at the end—because I don’t think we know much—but because we’re good at thinking. Economics teaches you to think things through…. You have to think about the ramifications of policies in the short run, the medium run, and the long run. Economists think they’re good at doing that, but they’re good at doing that in the sense that they can write down a model that will help them think about it—not in terms of empirically knowing what the answers are. And we have gotten so enamored of thinking things through that the fact that we don’t know anything needs to bother us more. So, yes, it’s true that the average guy on the street doesn’t understand economics, and it’s also true that we don’t understand economics. We just have a more sophisticated lack of understanding than the guy on the street.”

Read one of the many forecasts for world economic and political events for 2012 but don’t spend too much time memorizing them, although it is useful to consider what issues they discuss and what parts of the world may be affected. For these and other reasons, I resist from making any forecast for the New Year, but suggest a number of factors which condition my thinking about the future, now more so than in the past.

1. Are nations sovereign?

There are now almost 200 countries in the world which consider themselves sovereign nations. They vary enormously in geographic size, size of population, GDP per capita, language used and many other variables. It is increasingly meaningless to put small nations like Singapore, Vanuatu and Mongolia in the same league as Russia, China and the USA. In hockey and other sports there are different leagues for teams of different skill levels. Each plays by a similar set of rules but there is little point in having a bantam league team play a national hockey league team. The point is that we should recognize that national sovereignty is not a standard which can be respected equally with regard to all nations and the things they do. It never has been and never will be.

2. Should population size be limited?

Some issues receive overwhelming public attention like the environment while others like global and country population size are ignored. For me, the most remarkable change in the past 50 years is world population growth. In the 1950s the world population was 2.5bn. Today it is over 7bn, forecast to rise to over 9bn in the next few decades. For centuries up to 1900, it was estimated to be around 1 billion. Much of what occurs politically and economically in and between countries has a demographic dimension. If Canada today had a population of 14 million, the 1951 total, instead of today’s 34 million, its political and economic issues would be vastly different. And yet no one, except the Population Institute of Canada, talks about this. Other countries like Japan have managed to limit population growth, or allow it to grow more slowly, such as the Scandinavian countries and still seem to survive, although their problems may differ from those where population is increasing much faster. Public discourse declines to talk about controlling population growth because of the uncomfortable issues raised, but this may be a necessary way to control some of the negative aspects of growth. Jared Diamond in “Collapse” notes that those societies which survived had an active program to limit population growth.

3. Is immigration the only solution to an ageing population?

The answer is no based on the adjustments made in countries which already have to consider this issue. Immigration brings in skilled and unskilled persons some of whom are young, but it also brings in family members who are already older and will find it less easy to adapt to modern Canadian society. The same is true for many of the refugees brought into Canada. With an ageing population, adjustments have to be made, but there are alternatives to increased immigration. People can work longer in full and part-time jobs; wages can be raised to attract people to work longer; and capital can be substituted for labour in many but not all occupations. In wartime Britain, the labour force was increased markedly by the employment of women in factories and on the land while men joined the forces. Today women represent a much larger share of the regular labour force but there is still room to increase their participation with the appropriate incentives.

4. The relevance of the counterfactual

Much economic and political analysis is directed at analyzing the impact of certain actions such as lower taxes, the introduction of renewable energy technology, or the invasion of Iraq. People offer different answers because they assume different alternative conditions which would have taken place in the absence of the tax break, energy source or invasion – that is the counterfactual or comparative set of circumstances. For example, when unemployment remains high after a fiscal stimulus by the federal government, some will argue that the stimulus did not work. Others may conclude that without the stimulus unemployment would be higher still. Some argue the Iraq invasion has been a disaster. What would conditions now be like if the Saddam regime was still in power? Look for the assumed counterfactual before deciding which provides the more appropriate analysis.

5. How different are government and private corporations?

Often the two are described as different ways of managing economic activity. They are different but often have similarities. Consider the British East India Company chartered in 1600. It was funded privately but received a mandate from the Crown (the government) to engage in certain commercial activities on the Indian subcontinent. At the same time it had governmental powers to administer the areas where it did business and a private security (military) force to provide protection. It was a commercial-governmental hybrid for the region where it operated. The company also allowed its employees to do business on their own account as well as for the company. Today, politicians and bureaucrats may do this but are not supposed to, and may get their knuckles rapped if caught. Currently, we have government organizations which provide services like museums, rail, bus and air travel, and the operation of highways, some are corporations which have joint government and private ownership, and some which are entirely privately owned but may be the recipients of large government contracts as in the case of planes, trains, ships and construction projects. The distinction between public and private enterprises and the implications thereof are often not clear.

6. What’s the matter with the CBC?

A main problem is the method of financing with a mix of government funding and commercial advertising revenue. The BBC in the UK (but not abroad) and the Australian Broadcasting Corporation (ABC) are funded entirely by the government and do not compete with private broadcasters for advertising. CBC television competes with private broadcasters and to do so buys programs which attract audiences. Some of these like Coronation Street and Jeopardy are not Canadian programs and there is no reason why these could not be bought and shown by private broadcasters. Check the primetime weekly schedule for CBC TV and see how many programs constitute Canadian content.

7. How new are social media?

An insightful Economist article (Dec.17, 2011) shows that “everything old is new again” by describing how social media worked for Martin Luther in 1517 to debate his 95 Theses. Luther was appalled by the actions of the Catholic clergy in raising money – “the pious defrauding of the faithful” – to provide a building fund so the Pope could repair St Peter’s Basilica in Rome. The Pope’s sidekick, Tetzel, a Dominican friar, raised money by selling indulgences saying “As soon as the coin in the coffer rings so the soul from purgatory springs.” The debate had a wide audience reached through pamphleteering with publication in German as opposed to Latin thus assuring a larger audience. The Pope used Latin. Within 14 days of publication, the Theses were spread throughout Germany shaking the foundations of Catholicism and promoting the emergence of Protestantism.

8. Outsourcing and non-tradeable goods

Outsourcing is another word to describe the extent and nature of vertical integration. Firms either produce inputs themselves or buy inputs from other firms. The former involves internalizing production (vertical integration within the firm), the latter is vertical integration by outsourcing to other firms. Firms have always done this where goods and services are not available locally. Alcan has to outsource its bauxite from Jamaica and Australia, cars manufactured in Canada import parts from Japan and China. Because of falling transportation and communications costs, it is now easier to outsource abroad more goods and services, especially where production is labour intensive and wages abroad are lower.

Some products cannot easily be outsourced such as haircuts, restaurant meals, construction projects and medical services. These tend to be non-tradeable goods and are ones where there will remain opportunities for employment even in higher wage economies. Skilled jobs will also performed in higher wage locations.

9. The Retail Sector

The retail sector provides a look at changing times. Canada increasingly consists of big box stores which are more like warehouses (Costco, Ikea, Chapters) than shops where you expect to receive service. Consumers reduce their time shopping either by shopping online with mail or courier delivery, or searching online for items and then visiting the warehouse stores to take delivery. The new stores opening in our local neighbourhood are food, restaurant and coffee shop related or providing non-tradeable services like hair dressers, fitness salons and massage parlours. The consumer saves time and through the internet better information about the quality of products to be bought.

10. Corruption

Economists and others point to political and financial corruption among leaders in developing countries. With the known cases of financial mismanagement in developed countries since 2008, this seems highly selective criticism. Where to begin? Taxpayers in Greece and Italy are known to evade paying taxes; Madoff is one of many names of financiers involved in theft; at home, Conrad Black was jailed for minor mischief, at least compared with Madoffian dimensions. The list is long and raises the question as to whether corruption is as endemic in developed countries as it is in developing countries, and how to address it.

11. The future

Looking forward, I think it may take another 5-10 years to work off the present obesity of deficits and debt. Unlike the 1930s, when the recession ended with a world war, unemployed men joined the military and women went to work in factories and on the land. Consumers were encouraged to save by buying Victory Bonds, which they cashed in at the end of the war and used to buy the clothing and consumer durables which were not available during wartime. Instead of a postwar recession, there was fairly steady growth for the next few decades. Today, fortunately, there is less prospect for a war but consumers and governments are heavily in debt and so unable to provide a needed stimulus, although corporations do have substantial savings. In the early 1990s, the rising Canadian government debt due to budget deficits was addressed by cuts in program expenditures, but what really saved the day was rising tax revenues due to the GST and economic growth at home and abroad. A problem today is that Canada’s major trading partners in the USA, Europe, Japan and China are also experiencing slower growth and will not provide much of a stimulus. This time is different.

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