Why the Reinhart-Rogoff glitch doesn’t matter for Canada

By Stephen Gordon - Monday, April 22, 2013 at 10:39 AM - 0 Comments

If you’ve heard about Carmen Reinhart and Kenneth Rogoff’s much-cited conclusion that economic growth rates deteriorate once debt-GDP ratios go beyond 90 per cent, you’ll have heard by now that this result appears to have been produced by a coding error (as Econowatch explains here). My initial reaction was the same as that of any other economist who does applied work: an empathetic sinking feeling. This is the sort of mistake that could happen to anyone.

But my second reaction was to shrug. The Reinhart-Rogoff (R-R) result is was most pertinent in the debates about fiscal austerity being conducted in the U.S., the U.K. and Europe, where people are making the case for fiscal contraction before the recession is over. To the extent that there’s a debate about fiscal austerity in Canada, that’s not the one we’re having.

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Why justifying austerity just got harder

By Tamsin McMahon - Wednesday, April 17, 2013 at 7:17 PM - 0 Comments

The Internet exploded this week with the revelation that researchers from the University of Massachusetts had debunked the widely-accepted thesis from Harvard professors Carmen Reinhart and Kenneth Rogoff that a country’s economic growth could be pegged to the size of its government debt and that an economy would start to go off a cliff when a country’s debt-to-GDP ratio rose above 90 per cent.

The Massachusetts economists, Thomas Herndon, Michael Ash, and Robert Pollin, crunched data given to them by Reinhart and Rogoff for 20 countries and years from 1946 to 2010 and found that the economists had made a number of calculation errors, namely excluding several years when some countries had both high debt and high growth in GDP (mostly in the years after the Second World War.)

They also found that five of the 20 countries cited in the study had accidentally been dropped from the analysis because of a “spreadsheet error” that essentially involved Reinhart and Rogoff skipping the first five countries of the alphabet.

Correcting for the mistakes, the Massachusetts researchers found that annual GDP growth was, on average, 2.2 per cent for countries with debt-to-GDP ratios above 90 per cent. That is in stark contrast to Reinhart and Rogoff’s findings that GDP would instead fall by -0.1 per cent.

Reinhart and Rogoff are now being skewered by their critics, particularly because politicians (including our own) have repeatedly cited the 90-per-cent threshold when justifying austerity budgets and the mistakes open up the possibility that maybe deep cuts aren’t needed to kick start an economy after all. (“How Much Unemployment did Reinhart and Rogoff’s arithmetic mistake cause,” is how The Guardian newspaper put it.) Reinhart and Rogoff have apologized for the errors, but insist they don’t alter their central conclusions that more debt is bad for the economy.

More important for Canadians is the fact that Canada was one of the countries omitted from Reinhart and Rogoff’s analysis, thanks to being pretty high up in the alphabet. (The others were Australia, Austria, Belgium, and Denmark)

In fact, while the Massachusetts economists found that some countries (namely the U.S.) fit Reinhart and Rogoff’s model quite nicely, Canada doesn’t. Their analysis of 64 years of Canadian economic data suggests a fairly weak link between debt levels and GDP growth in this country. If anything, Canada’s economy actually grew with higher levels of public debt. It slowed when debt topped 90 per cent of GDP, but average growth in those years was still 3 per cent of GDP a year, well above the 2.2 average for the 20 countries in the study.

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Jobs on the line as Newfoundland and Labrador drifts in red ink

By The Canadian Press - Sunday, March 24, 2013 at 7:55 PM - 0 Comments

ST. JOHN’S, N.L. – Austerity is not a word that has been linked lately to oil-rich Newfoundland and Labrador but that’s expected to change Tuesday.

Finance Minister Jerome Kennedy will deliver the provincial budget amid forecast deficits totalling almost $4 billion over the next three years. Global economic woes, lower prices for commodities and a drop in world demand for offshore oil and Labrador minerals has slammed the provincial treasury. A return to surplus is not predicted before 2015-16.

Public service layoffs and program cuts have already started as anxious workers wait for more bad news.

“I’m expecting a pretty harsh budget,” said provincial NDP Leader Lorraine Michael. “I don’t think they should be cutting back. Cutting back will hurt the economy.”

It’s a view that was echoed last week in a report by the Canadian Centre for Policy Alternatives, a left-leaning think tank based in Ottawa.

The report, titled “Prosperity for All: An Alternative Economic Path for Newfoundland and Labrador,” says the Progressive Conservative government should shun austerity. Cutting public sector jobs also puts at risk private sector jobs as the ripple effect of diminished buying power spreads, said Diana Gibson, a political economist and co-author of the report.

The focus should instead be on raising more revenues through more equitable taxation, she said in an interview.

She believes Kennedy should create a fourth tax bracket to draw more money from higher income earners as other provinces have done. Australia and Norway are among countries that get more cash from oil and mining companies through taxes on extraordinary profits, she added.

Newfoundland and Labrador’s natural resources sector is heavily in foreign hands, Gibson said.

“Those profits are leaving not just the jurisdiction but leaving the country. Capturing a better share of that, a fair share for the citizens, would also make sure that money stays in Newfoundland and Labrador to help create jobs, economic growth and diversify the economy.”

Avoiding deep spending cuts also makes sense because provincial economic fundamentals — private sector growth, growing capital investments, high personal income taxes and strong housing starts — all support a steady-as-she-goes approach, says the report.

“All of the indicators of economic strength are solid and cutting spending at this point — the implications of that, as we’ve seen with austerity all around the world, is a dangerous path,” Gibson said.

Asked about the report, Kennedy was pleased that it praised provincial efforts to pay down net debt from a high of almost $12 billion in 2004 to about $8.9 billion this year. But the idea of new taxes for higher earners fell flat.

Kennedy said he did some quick calculations and concluded that about 70 per cent of the population earns less than $40,000 while about seven per cent make more than $100,000 a year.

“There are so few people making more than $150,000 in our province that you wouldn’t really get the bump that you would need. So essentially what they’re suggesting is that we tax the middle class and that’s something that we certainly don’t want to look at.”

Premier Kathy Dunderdale has touted a total of $500 million in tax cuts and $500 million a year for big public sector wage increases in recent years. Now on the bust end of a non-renewable, resource-reliant economy, she has made it clear that tax hikes are a last resort.

Dunderdale has warned for months that spending cuts will be laid out in what her officials are calling a “sustainability budget.”

Still, the St. John’s economy in particular is the envy of other parts of Canada, and major mining expansions for Labrador are planned.

Dunderdale has fended off Liberal Opposition accusations of reckless overspending as government staff and services increased with six surplus budgets in the last seven years. She says low university tuition rates, record employment and a move off oil to renewable energy through the Muskrat Falls hydro development are highlights of Tory rule.

“Mr. Speaker, we are responsible for one of the most booming economies in this country,” she said earlier this month in the legislature, which returns Monday with a throne speech.

On Tuesday, her government will reveal the extent to which it will trim jobs and programs to match its new fiscal reality.

European benefits fly in the face of austerity

By Charlie Gillis - Monday, July 16, 2012 at 6:30 PM - 0 Comments

Luke MacGregor/Reuters

Can anyone help Europe if it won’t help itself? The question seemed pertinent last week after the European Union Court of Justice ruled in favour of Spanish department store workers demanding the right to reclaim any holiday time lost to illness. The decision by Europe’s highest court is binding on employers throughout the EU, including Britain, and came as Spain put the finishing touches on a request for an EU bailout. No surprise, then, that the decision was met with hisses from economists and politicians. “Most employees accept that if they fall ill while on holiday, it is unfortunate,” said Norman Lamb, the U.K.’s employment relations minister. “But they do not expect extra vacation.”

Maybe not on Lamb’s side of the Channel. On the continent, things are different. The new rule joins a cornucopia of workplace benefits that remain even as troubled eurozone economies groan under crushing debt and staggering unemployment. Spanish workers get an extra two weeks off for honeymoons, and 20 days of severance even if they’re fired with cause. In France, companies must give extra paid leave to staff who work 39 hours per week instead of the statutory 35, even if the workers are paid for the overtime. In Italy, firms that lay people off during an economic downturn can face years of costly legal proceedings. By way of remedy, Rome is proposing a law requiring employers to pay laid-off workers a whopping 27 months in wages.

Gold-plated entitlements like these persist despite complaints from economists that they discourage companies from hiring at a time when one in two Spaniards and one in three Italians under the age of 25 are unemployed. They’re also adding to the burden on public-sector institutions, which had been the last redoubt of employment growth since the financial crisis took hold in 2008. Spain’s government-paid workforce actually expanded by 11 per cent in the three years that followed the meltdown. Last week, Madrid warned that mass layoffs of civil servants may be necessary to contain a deficit nearing $90 billion.

Are Europeans oblivious to the crisis before them? On one level, the recent decision reflects long-held views that benefits, more than just nice, are necessary, says Kurt Huebner, a professor with the University of British Columbia’s Institute for European Studies. To them, “vacation is like bringing in a car for maintenance,” he says. “It’s necessary to get basic repairs in order to function properly. Thus it is logical that if you become sick during this period, you should have the opportunity to recover.” And though the verdict “flies in the face of austerity,” Huebner adds, many Europeans believe workers have done their part in the past decade, as wages have decreased as a share of GDP while profits have risen.

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Is Angela Merkel ‘Europe’s most dangerous leader’?

By Alan Parker - Thursday, June 21, 2012 at 5:10 PM - 0 Comments

A leading British political magazine has branded German Chancellor Angela Merkel “Europe’s most dangerous leader” and compared her to Adolf Hitler.

The cover of the current issue of the left-leaning weekly New Statesman depicts Merkel as The Terminator with prosthetic eye and leather jacket and asks: “Will the German chancellor relent before she terminates growth and pushes us into a new Depression?”

In the accompanying article, published Wednesday, New Statesman senior editor Mehdi Hasan goes further: “Merkel is the most dangerous leader since Hitler.”

Hasan says the “fiscal self-flagellation” of austerity measures Merkel insists some of Germany’s European Union partners adopt are “destroying the European project, pauperising Germany’s neighbours and risking a new global depression.”

Hasan also characterizes Merkel as the world leader who “poses the biggest threat to global order and prosperity” — more dangerous than Iran’s Mahmoud Ahmadinejad, Israel’s Binyamin Netanyahu or North Korea’s Kim Jong-un.

On Thursday, a spokesman for Merkel’s office said, “We do not comment on such matters.”

Reaction in both Britain and Germany has so far been muted, but the president of the World Jewish Congress immediately leaped to Merkel’s defence.

Ronald S. Lauder condemned the New Statesman for what he called a “despicable and totally unfair attack.”

In a statement issued Thursday, Lauder said: “To compare the democratically elected leader of today’s Germany with the brutal dictator Hitler is revolting and sickening. Not only is Chancellor Merkel a committed European, but there are few statesmen in Europe who have done more for Israel and the Jewish people.”

The New Statesman was honoured in 2009 as News Magazine of the Year by the British Society of Magazine Editors.

Spending, cutting, voting and chicken analogies

By Aaron Wherry - Wednesday, May 23, 2012 at 9:00 AM - 0 Comments

The Agenda convenes a panel—including Brian Topp—to discuss austerity and democracy.

Au revoir, austerity

By Michael Petrou with Stavroula Logothettis - Friday, May 11, 2012 at 2:05 PM - 0 Comments

Pascal Le Segretain/Getty Images

Among the casualties of national elections in France and Greece last weekend, Nicolas Sarkozy’s now-finished career is a comparatively insignificant footnote. The outgoing French president suffered a historic defeat, becoming only the second incumbent presidential candidate to lose in half a century when he fell to the Socialists’ François Hollande. But the election wasn’t really about the two men—or at least it wasn’t about Hollande, the bland and modest lifelong politician who possesses little of Sarkozy’s flair and mercurial arrogance.

What is really at stake in France, and across Europe, are competing visions about how the continent might recover from a crushing financial crisis.

In December, 25 of 27 European Union states agreed to a “fiscal compact” to coordinate financial policies and enforce budgetary discipline. But these austerity measures are deeply unpopular in parts of Europe with soaring unemployment and sizzling social unrest. Greece is regularly rattled by strikes and protests. Millions of Spaniards have flooded public squares to protest public spending cuts and record levels of joblessness. In France, where unemployment hovers around 10 per cent, even modest pension reforms provoked massive demonstrations.

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Fantastical dreams of something for nothing

By From the editors - Friday, May 11, 2012 at 1:41 PM - 0 Comments

Photograph by Roger LeMoyne

Last week voters in France and Greece turned their backs on fiscal discipline, preferring the illusion that it’s not necessary to fix their own problems. As Senior Writer Michael Petrou explains in his story on the EU crisis (“Europe votes its troubles away,” page 26), austerity and responsibility are not always the most attractive ballot options.

This week, university students in Quebec will put their own grasp of reality to the test. After several months of often-violent protests against planned tuition fee increases, Quebec students are voting on the government’s latest proposal that maintains the hikes but creates a new and fairer system for student loan repayment. Early reaction from students opposing the plan suggests reality will once again be stymied. For now.

It is beyond debate that a university degree provides substantial economic benefits to the holder. The average after-tax income boost enjoyed by a university graduate is on the order of $15,000. Per year. Society at large may benefit from a well-educated workforce, but these gains are disproportionately weighted toward students themselves. It’s only proper students pay their fair share.

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A Greek exit: Good idea, hard to do

By Erica Alini - Tuesday, May 8, 2012 at 4:45 PM - 0 Comments

It may be time for Greece to leave the eurozone. Analysts have been saying since late last year that a Greek exit, now known as “Grexit” among economics dorks, was a likely scenario. Last weekend’s messy elections and this morning’s bombshell statements by the country’s left-wing Syriza bloc make it all the more likely. So what would a Grexit actually look like, and would it be good or bad for Canada and the rest of the world economy?

The short answer is that letting Greece slip out of the eurozone is a good idea in theory, but a hard one to pull off without disastrous consequences in practice. David Smith, economics editor of The Sunday Times, summed it up nicely in a post he wrote before the election results came out:

“A Greek exit, should it occur, would eventually be good for Greece and remaining eurozone members. Getting there, however, without triggering a domino effect, and without a hugely damaging impact of the banking system, is the difficult part.“

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Europe on growth: All together now?

By Gabriela Perdomo - Friday, April 27, 2012 at 3:13 PM - 0 Comments

(Markus Schreiber/AP Photo)

Last week, we wondered whether Chancellor Angela Merkel and other German officials were too stubborn to notice that their push for austerity is choking Europe’s economy. There’s a chance they aren’t.

On Wednesday, European Central Bank President Mario Draghi called for a European “growth compact,” acknowledging that fiscal austerity is “starting to reverberate its contractionary effects.” Merkel agreed with Draghi, though she immediately specified what type of growth she would–or rather wouldn’t–like to see:

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Why won’t Germany understand austerity is killing Europe?

By Gabriela Perdomo - Wednesday, April 18, 2012 at 1:03 PM - 0 Comments

Dullhunk/Flickr

German leaders are looking increasingly like loners in their insistence that austerity is the sole cure for the eurozone’s ailing economies. Chancellor Angela Merkel and Bundesbank Governor Jens Weidmann continue to maintain that the only way for Greece, Italy, Spain and Portugal to fix their finances and calm investors’ nerves is higher taxes and spending cuts. But scores of prominent economists have been arguing that too much of that medicine risks killing the patient. Their warnings are becoming more and more dire.

Nouriel Roubini, aka Dr. Doom, was frantically waving red flags from the (web) pages of Slate last week:

“(…) the recession [in Europe] will worsen throughout this year, for many reasons.
First, front-loaded fiscal austerity—however necessary—is accelerating the contraction, as higher taxes and lower government spending and transfer payments reduce disposable income and aggregate demand. Moreover, as the recession deepens, resulting in even wider fiscal deficits, another round of austerity will be needed. And now, thanks to the fiscal compact, even the eurozone’s core will be forced into front-loaded recessionary austerity.

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How to end needless labour strikes? Start with good faith negotiations.

By From the editors - Tuesday, March 27, 2012 at 12:03 PM - 0 Comments

Darryl Dyck/CP

As many as 200,000 college and university students in Quebec claim to be “on strike.” Rather than attending classes, writing papers or preparing labs, on select days the students have been cutting classes, blocking traffic and getting tear-gassed.

At issue is a provincial plan to raise university tuition from what is the lowest in Canada to a rate that will be . . . the second-lowest in the country (assuming other provinces maintain their current tuition fee policies). Quebec students currently pay an average of $2,400 per year according to Statistics Canada. The national average is more than double that—$5,400. Quebec’s plan will gradually raise tuition fees until they hit $3,800. Quebec student groups argue tuition should be free, and they’re prepared to walk to make their point.

Unlike strikes in the real world, however, university students lack the sort of leverage enjoyed by actual employees. Students pay for the privilege of going to school, not the other way around. So when they withhold their services, it’s not the provincial government that finds itself inconvenienced, it’s the students themselves. Keep in mind also that the vast bulk of benefits from post-secondary education go directly to students—an undergraduate degree provides an estimated 10 per cent annual return over a student’s entire lifetime. (Not all students have divorced themselves from looming adulthood. Most students at McGill, for example, voted against a strike.)

As absurd, overreaching and self-defeating as the Quebec student strike appears, it is simply the most outrageous example of what promises to be a year filled with overreaching and self-defeating labour strife.

Austerity has become the watchword at all levels of government. As municipalities, provinces and Ottawa struggle to cut deficits and contain costs, it seems increasingly likely public sector unions—used to healthy regular increases in wages and benefits—will find themselves mightily disappointed. Like their confreres at school in Quebec, we may thus expect public sector unions to take to the streets to express their displeasure.

Halifax bus drivers, Toronto librarians, teachers in British Columbia. Across the country, Canadians are already feeling the effects as public sector labour unions push back against the necessity of balanced budgets.

The current dispute in B.C. over teacher pay is instructive. The B.C. Teachers’ Federation’s initial contract demand, released last summer, called for B.C. educators to be the best paid in the land—which would have meant a 22 per cent wage increase for some teachers. They also wanted 10 days paid bereavement leave—activated upon the death of not just a close relative, but of a friend, too, plus another 26 weeks of compassionate care leave to allow a teacher to look after “any person,” on full pay, rather than teach. Further, there were to be eight paid discretionary days to be taken whenever and for whatever reason, and sizable increases in paid preparation (i.e., non-teaching) time. The only thing missing was free unicorn rides to school.

None of this would be reasonable in times of plenty. With the B.C. government committed to balancing its budget by 2014, such demands can only be described as off-the-charts wacky. (The teachers have since lowered their demands to a 15 per cent wage increase plus assorted benefit goodies.)

The province has offered the same net-zero wage it’s negotiated in 130 other public sector labour agreements. And Premier Christy Clark’s government recently passed legislation temporarily removing teachers’ right to strike. But there is still no contract, and the teachers are considering escalating job actions this week.

It is no longer possible to expect taxpayers to fund perpetual increases in wages and benefits for the public sector, particularly as private sector workers see their pensions disappear and salaries stagnate. There exists a massive gap between public sector union expectations and taxpayers’ ability to pay. How best to close this gap?

Strikes are a time-honoured way for two sides to hammer out their differences. Unfortunately, public sector strikes create widespread pain for the entire community. And because of this, governments often lose their nerve for toughing it out. When things get uncomfortable, politicians tend to opt for back-to-work legislation, followed by binding mediation. And mediators are famous for splitting deals down the middle, a process that encourages unions to make outrageous opening demands in the first place. In the B.C. teachers’ dispute, both government and union are playing these all too familiar roles.

An alternate solution, one proposed for B.C. in a 2004 provincial report, is final offer arbitration. Both sides present their best final offer and an impartial arbitrator picks between the two options, rather than splitting any differences. Such a system pushes each side to negotiate in good faith and present reasonable offers; it’s used successfully in professional sports. If there is a downside, it’s that arbitrators play the role that should properly be filled by taxpayers’ elected representatives.

But where governments are unwilling or unable to see public sector strikes through to a successful conclusion, final offer arbitration may be the best option for all taxpayers—particularly in a year that promises plenty of labour unrest.

Know your spin

By Aaron Wherry - Monday, March 26, 2012 at 12:58 PM - 0 Comments

The Harper government would prefer you not think of Thursday’s budget in terms of what will be cut.

The government wants Canadians to see the budget as a growth plan, and not simply a slashing exercise aimed at eliminating the deficit. “If you concentrate on savings, you are going to miss out on what this budget is all about; it’s about long-term sustainability for jobs, growth and prosperity,” a senior government official said Sunday.

See previously: The austerity that dare not speak its name

Greece: When democracy is denied, people take to the streets

By the editors - Tuesday, February 21, 2012 at 10:00 AM - 0 Comments

Yannis Behrakis/Reuters

Ancient Athenians made no distinction between themselves and their government. Official pronouncements attributed decisions to “the citizens of Athens” and left it at that. Such an inclusive sense of democracy is sadly absent in the modern city.

This week in Athens tens of thousands of protesters, angered by severe new austerity measures proposed by the unelected caretaker government of Prime Minister Lucas Papademos, set fire to scores of buildings and rampaged throughout town. They were met by riot police lobbing tear gas and stun grenades. And after the package passed, Papademos quickly expelled members of his government who voted against it. This is apparently no time for dissent or debate.

The turmoil in Greece is well earned. Many decades of lavish but unsupportable welfare state spending have left Greece impossibly burdened; its sovereign debt stands at 160 per cent of GDP. And yet the new austerity package could accelerate the already precipitous fall in living standards. The economy shrank by seven per cent last year and unemployment among the volatile 16-24 age group is 46 per cent.

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Five seriously austere measures that aren’t in the Drummond report

By Erica Alini - Friday, February 17, 2012 at 6:35 PM - 0 Comments

Roger Blackwell/Flickr

Economists have long warned that current spending patterns have put Ontario on track for a fiscal doomsday. In an attempt to show Ontarians the way to economic salvation, Premier Dalton McGuinty appointed a commission on public-service reform last year, headed by former TD economist Don Drummond. His report, unveiled on Wednesday, is a 362-item long laundry list of cost-cutting (and a few revenue-boosting) measures the provincial government should consider to keep the public deficit from ballooning to $30.2 billion by 2017-18. The prescriptions go far beyond the usual calls for budget freezes and capping wage increases in the public sector; Drummond recommends scrapping all-day kindergarten, increasing class sizes, and shutting down casinos. To make Ontarians feel better about the coming age of austerity, we’ve put together a list of the five most unusual ideas other governments have considered or implemented to fix their own beleaguered finances. 

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Drummond report crushes Ontarians’ morale–and the table

By Erica Alini - Wednesday, February 15, 2012 at 5:16 PM - 0 Comments

You might as well call him Dr. No–as in, no full-day kindergarten, no more small class sizes, no pay increases for doctors, and so on.

Don Drummond, a former TD economist and chair of Ontario’s commission on public-service reform, has unveiled his much-anticipated report on how to restore the fiscal health of Canada’s largest province. Drummond’s two-volume, 532-page tome crushed Ontarians’ morale on Wednesday–as well as the table onto which Ontario Provincial Police officers unloaded copies of the report during the media lock-up this morning, according to the Toronto Star.

Drummond has predicted that Ontario’s deficit will balloon to $30.2 billion in the next seven years, unless the province manages to contain total yearly spending increases to 0.8 per cent. Nearly a third of his suggested cuts concern healthcare–unsurprising, given that public spending there has been growing at an eye-popping average annual rate of 6.3 per cent over the past five years.

But it’s not just doctors who are up in arms against the Drummond report. There’s enough in there to make just about anybody mad: The document, in fact, recommends raising the retirement age for teachers; scrapping a new 30 per cent Ontario tuition grant for undergraduate students (unless the budget for post-secondary education can be otherwise contained to 1.5 per cent annual growth); axing a 10 per cent rebate on electrical bills; closing one of the two head offices of the Ontario Lottery and Gaming Corporation, as well as shutting two casinos in Niagara Falls.

“Ontario faces more severe economic and fiscal challenges than Ontarians realize,” Drummond said. And that, in all likelihood, was the main point of his report: to deliver a shocking wake-up call, as Adam Radwanski noted in The Globe and Mail last weekend.

“Our message will strike many as profoundly gloomy,” Drummond said Wednesday. “It is one that Ontarians have not heard, certainly not in the recent election campaign, but one this commission believes it must deliver.”

Healthcare: Technology is a bigger cost driver than demography

By Julia Belluz - Friday, February 10, 2012 at 12:34 PM - 0 Comments

dno1967b/Flickr

An aging population—or “gray tsunami”—is the shadow lurking in the background of health care, poised to drive up health-care spending and wipe out the system as we know it. Technology, on the other hand, is a means to improving efficiency in the system and reducing costs. Consider the early, sparkling promises of Obamacare south of the border or electronic health records in Canada. Policymakers trumpet this conventional wisdom—but it isn’t quite right.

As a recent report by the credit rating agency Standard & Poor’s argues, your grandmother’s visits to the doctor aren’t the key driver of health costs. Health technology, however—encompassing anything from drugs to diagnostic imaging—is becoming the great burden on the health systems of G20 countries.

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As the economy slows down, should austerity pick up speed?

By Erica Alini - Tuesday, January 31, 2012 at 2:01 PM - 0 Comments

Statistics Canada

Canada’s GDP numbers for November came out this morning, and it was a rude awakening. The economy slowed down unexpectedly in November, with output dipping 0.1 per cent, as opposed to the consensus forecast of 0.2 per cent growth. “While it initially appeared that the Canadian economy smoothly decelerated late last year, it now looks like Canada stumbled as it approached the 2011 finish line,” CIBC quipped in a note.

Dragging down overall output was a 2.5 per cent drop in oil and gas extraction activity, possibly due to low oil and gas prices and softening demand for exports. Notably, construction in both the residential and non-residential sector was down 0.3 per cent.

Statistics Canada

The November slowdown is expected to bring down quarterly growth from a projected two per cent annualized expansion. Recession–defined by economists as two consecutive quarters of negative growth–isn’t necessarily upon us. But with Europe teetering on the brink of fiscal disaster, global demand cooling, and the Canadian housing market possibly due for a downturn–which could shave as much as one per cent off of GDP, according to some estimates–is it really time for the Harper government to pull the breaks on public spending?

Another concern is that, with rates already at record lows, there’s little the Bank of Canada can do to soften the impact of deficit cuts with expansionary monetary policy. As Stephen Gordon noted yesterday, there are steep costs associated with introducing austerity at the wrong point of the business cycle.

Is now a good time?

By Aaron Wherry - Monday, January 30, 2012 at 11:43 AM - 0 Comments

Stephen Gordon projects the sort of job cuts the public service might be facing.

Federal program spending accounted for 7.4 per cent of GDP in the fiscal year that preceded the spring 1995 austerity budget, and this share fell by 1.3 percentage points over the next two years. In 2011-12, federal program spending was projected to be 7.0 per cent of GDP, and was to fall by 0.8 percentage points by 2013-14. In other words, the cuts in program spending announced in last year’s budget were roughly 60 per cent as large as what we saw in the mid-1990s.

Federal public service employment fell by 29,000 in 1996, and by an additional 26,000 in the following three years. If the effects of the planned cuts are proportional to what was experienced in the 1990s, then the number of job lost would be on the order of 30,000.

Stephen also considers whether now is a good time for austerity. Not that this spring’s budget will have anything to do with austerity.

See also: Looking the wrong way

Looking the wrong way

By Aaron Wherry - Tuesday, January 17, 2012 at 11:48 AM - 0 Comments

Alex Himelfarb attempts to put austerity in perspective.

Today’s austerity, however, is not primarily about fiscal prudence. If it were it wouldn’t be proceeding in tandem with large, unaffordable and unnecessary tax cuts for the most affluent among us. These tax cuts make deeper program cuts inevitable. The persistent emphasis on low taxes and cuts to services and public goods  looks more like ideology masquerading as fiscal common sense. In this light, austerity seems rather to be about cutting back the state and rolling out the free market agenda. Less public, more private; less collective, more individual. It is, in other words, the fulfillment of the neoliberal counter-revolution rather than an economic plan for the future…

We need to have the debate – and the starting point cannot be some assumption about the inevitability of austerity. In fact, it ought not to be about big government versus small government. It ought to be focused on what will work to enhance the quality of life for most Canadians and what will make Canada more resilient for future generations. It ought to be a debate about what challenges, what problems, most urgently cry out for our collective attention and action. The preoccupation with austerity should not blind us to what really matters for our collective well-being.

Call girls, graft and Italy’s paralysis

By Erica Alini - Tuesday, September 27, 2011 at 9:20 AM - 4 Comments

Alberto Pizzoli/AFP/Getty Images

On Sept. 19, Italy had its debt rating slashed by Standard & Poor’s. Three days earlier, the world had learned the country’s leader privately calls himself a “spare-time” prime minister.

The remark, along with several snippets of phone conversations that were never meant to leave Silvio Berlusconi’s inner circle, found its way into national and international headlines when wiretap transcripts tied to an ongoing investigation became public. The controversial excerpts featured the prime minister insulting Germany’s Chancellor Angela Merkel, and boasting about sleeping with eight women in a single night. Most importantly, the tapes revealed that he may have been the object of blackmail by some close associates who used to supply him with prostitutes and aspiring starlets for his parties. The wiretaps also uncovered high-level corruption at Finmeccanica, a state-controlled defence and industry group. Though the inquiry has not lead to charges being laid against Berlusconi so far, it represents the fifth judicial proceeding the prime minister is embroiled in, on top of four court cases where he is defending himself against accusations including corruption, tax fraud and paying for sex with a 17-year-old girl.

The new scandals have come at a time when Berlusconi’s approval ratings were already plumbing unprecedented lows—at around 24 per cent, according to one newspaper poll—and no other political personality or party seems ready to supplant him at the helm. The Italian leadership is coming to resemble a headless chicken, just when the country must pull together to implement a $73-billion austerity package meant to reassure rattled investors that it won’t become insolvent on $2.6 trillion in public debt.

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Starring in a Greek tragedy

By Cynthia Reynolds - Tuesday, July 5, 2011 at 8:45 AM - 0 Comments

Karoly Arvai/Reuters

Perpetual crisis is not what George Papandreou imagined when he was elected prime minister of Greece in 2009. But that was before the stunning revelation that his predecessors had run up a debt so enormous—and so much larger than they reported—that if he failed to fix it, the resulting chain reaction would not only cripple his country, but potentially destabilize the euro, as well as a still-vulnerable global financial system. In 2010, he called his economy “a sinking ship.” Today, for Papandreou, things are so much worse.

Last year’s $155-billion bailout package, which included tax hikes and hefty public sector pay cuts, was supposed to rescue his country. Instead, the economy has shrunk 5.5 per cent over the past year, plunging Greece deeper into recession and sending Papandreou back to the so-called Troika—the EU, the European Central Bank and the IMF—to ask for another bailout to service its debt, which now stands at $479 billion, or 150 per cent of its GDP. His socialist party, the PASOK, is in shambles, with members defecting or threatening to defect during this week’s votes on whether to approve another round of austerity measures demanded by his eurozone counterparts. Meanwhile, a 48-hour general strike in protest of the cutbacks shut down schools, transportation and other services, while demonstrations turned violent.

Unlike his charismatic father, who also served as prime minister—and helped create the financial mess he has to mop up—most consider Papandreou an uninspired speaker, lacking the oratory skills to rally a rebelling population. Perhaps worse, they consider him an outsider. Born in the U.S. and educated abroad, he’s increasingly viewed as too quick to appease the Troika, willing to trade sovereignty for bailouts that will keep the country dependent and the population poor. Grappling with a 16 per cent unemployment rate—36 per cent for youths—protesters shout “George, go home” outside of Parliament.

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Let's show a little fiscal restraint here

By Andrew Coyne - Monday, June 13, 2011 at 10:30 AM - 59 Comments

Dave Chan/Reuters

The first signs of what was to come appeared in the Globe the previous week. “Public sector layoffs may be the tip of the iceberg,” teased the headline, leaving the story to convey the grim news: “The federal government’s bid to curb spending amid a multi-billion-dollar fiscal shortfall has delivered some of its first job casualties of the year.” Brace yourself, it gets worse. “Five curators at the country’s pre-eminent art gallery have been given layoff notices, while about 50 Environment Canada term employees, including scientists and scientific support staff, have been told they’ll no longer have jobs by the end of the month.”

OH MY GOD, they’ve—wait, what? Five curators? Fifty Environment Canada employees? Nobody likes to see anybody lose their job, but how exactly is this evidence of a bid to curb anything? Some perspective: the federal public service, not counting uniformed military or police, employs more than 280,000 people. That’s an increase of about 33,000 since the Tories took power in 2006. Those unfortunate gallery curators and weather forecasters make up about one-sixth of one per cent of the extra employees the government has taken on over the last five years. If this is the “tip of the iceberg,” and if, as every schoolboy knows, four-fifths of an iceberg is below the surface, then we can look forward to reductions in the public service roughly equivalent to about two weeks’ worth of new hires.

Nevertheless, when at last it was “revealed” that the federal government would, as it said it would in its first attempt back in March, and as it repeated it would every day of the election campaign, cut $4 billion out of federal spending by fiscal 2015, well, you could knock us over with a feather. “Budget on the table, public service on the chopping block,” the Globe told readers the next day, while the Star screamed: “Cuts loom as Harper vows to slay deficit.” It would be, the Globe story said, “the most aggressive period of government restraint since the mid-1990s.” Which is fair enough, since it would be the only period of government restraint in that time: since 2000, spending has more than doubled.

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Stimulus vs Austerity 2.0

By Jason Kirby - Thursday, April 28, 2011 at 2:56 PM - 9 Comments

Economic arguments are, by their nature, complex and abstract. Few more so than the question of whether massive government spending helps or hurts the economy. That’s why there’s been so much attention paid to the divergent paths the U.S. and U.K. took after the Great Recession. Under Prime Minister David Cameron the U.K. pursued hard-nosed austerity to tackle the country’s deficits, while the U.S. resisted all such moves and instead opted for more stimulus.  Here we had a massive lab experiment pitting two economic theories against each other, playing out in real time on the world stage. Back in January Maclean’s delved into the battle in our story Which Country is Right.

How’s the experiment going? The results so far are inconclusive. Both sides have claimed some measure of victory. Just as critics predicted, cuts to government spending in the U.K. have kept a lid on economic growth, with GDP stagnant for the past six months. Writing on his New York Times blog economist and arch-Keynesian Paul Krugman has hammered away at the notion that spending cuts would awaken the so-called confidence fairy and lead to an investment boom. But at the same time U.S. economic growth slowed dramatically in the first quarter, despite the continued steroid infusion from fiscal stimulus and the Federal Reserve’s quantitative easing strategy. Worse still, rating agency Standard & Poor’s fired a shot across the bow when it downgraded the outlook for Uncle Sam’s debt from stable to negative for the first time in 70 years.

The experiment continues.

In the meantime, EconStories is back with Round 2 of their video battle between economists John Maynard Keynes and F. A. Hayek. In their first video, Fear the Boom and Bust, the two rap battle over their economic theories. Now they’ve been summoned from history again to appear before a Congressional committee. Watch and learn…