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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.
Tor
----- Original Message -----
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
<<<<
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.
____
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
____
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
>>>>
<<<<
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
>>>>
Keith Hudson, Bath, England, <www.evolutionary-economics.org>
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