Global austerity?

by on January 24, 2014 at 2:34 am in Uncategorized | Permalink

There is a new UBS study which among other things covers the fiscal stance of the world as a whole.  Please do not misinterpret me as suggesting this implies anything particular for the policy of any individual nation, still the aggregate numbers are interesting to ponder.  Here is part of an FTAlphaville summary:

  • Government consumption’s share of global GDP has risen from 11 per cent to 14 per cent over the past 15 years. In 2013, it hit its highest level since 1980.
  • At the same time, government debt-to-GDP ratios have hit record highs in many countries.
  • Working-age populations are growing more slowly, or in some countries, such as Japan, beginning to decline.
  • Accordingly, the window of opportunity for mature economies to bring government debt levels down to sustainable levels is narrowing, owing to demographic shifts.
  • Given the situation in the government sector, private consumption needs to make a bigger contribution to the next phase of the recovery. Its share of GDP continues to hit multi-decade lows. Fixed investment is also making a smaller contribution to global growth than it did in the pre-crisis years.

And this:

Since the start of 2008, government consumption at the global level has risen by 20 per cent in real terms, whereas private consumption and fixed investment have risen just 8 per cent and 5 per cent respectively. Despite talk of austerity, government spending continues to run ahead of spending in the private sector.

While I have not looked into this particular estimate, China is likely playing a big role in this effect.

prior_approval January 24, 2014 at 3:06 am

‘Working-age populations are growing more slowly, or in some countries, such as Japan, beginning to decline.’

and

‘Accordingly, the window of opportunity for mature economies to bring government debt levels down to sustainable levels is narrowing, owing to demographic shifts.’

are not as related as one may think. Japanese debt, to a major extent, is held by the Japanese.

Which means that the German idea of ‘Generationenvertrag’ – contract between generations – more realistically reflects how a society can handle the need to ensure that no one, for an extreme example, need starve to death to satisfy a creditor’s needs.

Germany defaulted on its debt, had its industries wiped out, was divided into two. And yet, throughout a century of such changes, it was more or less able to provide a pension to the aged, health care for workers, assistance for those unable to work – because the question of how a society works is not about the needs of creditors, but how well a society can distribute wealth so as to ensure that no one is starving or homeless. Recognizing that the true wealth of a society is provided by its members, not its machinery nor its rulers.

This is reflected in the modern German Grundgesetz, at Artikel 14, §2 – Eigentum verpflichtet. ‘Property entails responsibility.’

Society’s commitments to its members should be higher than whatever a creditor desires – which is why a creditor is completely free to extend credit or not. The risk is the creditor’s, after all. Unless the creditor believes that privatizing the profits while socializing the losses is the sort of free market hypocrisy that is profitable.

dan1111 January 24, 2014 at 6:42 am

I agree that having some limit on the possible recourse to recover debt is a good thing. But making debt too easy to escape is highly damaging, not just to creditors, but to other members of society as well. Where does one draw that line?

If Japan defaults on its debt, lots of people will be hurt by that–including many who are not creditors in any direct sense.

mulp January 24, 2014 at 1:35 pm

Limit debt to only the productive assets the debt purchases, with a significant reserve.

You know, like the US debt policy in the 50s and 60s which balanced usury limits with high creditworthiness mandates.

And when tax hikes were demanded by Republicans to fund everything the voters demanded government do.

Reagan changed all that to “debt to fund consumption is a great thing for public and private instant gratification.”

And if Japan defaults, that will be like a tax on Japanese savings, savings created by not hiking taxes to pay for the things the Japanese demanded government do. But in Japan they have the same economists who say that taxes are bad, but either say “debt is wonderfully unlimited”, or at worst say “debt is great because it will result in government bankruptcy”. The lessons on the Reagan economists were learned well in Japan. And I bet a number of Japanese have adopted the lessons of the Tea Party caucus – a government debt default isn’t a default.

Das January 24, 2014 at 6:44 am

I am sorry to say I usually find your comments weird at best, but here you are pointing out an interesting fact.

There is a lot of wealth in the world, especially withing the failing economies in southern Europe. The private wealth in those countries is higher by far than in northern and middle European countries.

If they would just distribute that wealth within their country public debt wouldn’t be a problem anymore. But then why would they: The ECB in Frankfurt is printing them all the trillions of Euros a corrupt government can spend and then some.

Michael January 24, 2014 at 7:54 am

Talk about weird comments! You’re saying Portugal, Spain, and Greece have more private wealth than Scandinavia, Germany, or Britain? Um, okay…

dan1111 January 24, 2014 at 8:11 am

Das overstated it, but wealth per capita does not line up with our perceptions of which countries are doing well.

Spain has more wealth per capita than Germany or the Scandinavian countries. Portugal and Greece are lower on the list, but have about the same levels of wealth as Denmark and Finland. Italy has the eighth highest level of wealth per capita in the world, slightly behind Britain but far ahead of the others you list.

Michael January 24, 2014 at 8:19 am

Dan, do you have a source on that? I’ve Googled and found a Credit Suisse report from 2011 which does confirm Italy is richer than Germany, but that’s not enough to convince me.

I suppose, counterintuitively, it could be possible, since PIGS countries have awful government pension programs relative to northern European countries, which requires more private savings.

dan1111 January 24, 2014 at 9:40 am

@MIchael, I found it on this page, looking at wealth per capita:

http://en.wikipedia.org/wiki/List_of_countries_by_distribution_of_wealth

I don’t really know what to make of it, both in terms of causes and what it means.

I do remember this previous post, in which Tyler mentioned that Italians have very low personal debt: http://marginalrevolution.com/marginalrevolution/2011/10/what-can-italy-do-with-its-wealth.html

Brian Donohue January 24, 2014 at 8:11 am

Dude, we’re only in the sixth inning. The next 15 years will tell how well this ‘contract between generations’ mumbo-jumbo pans out.

Z January 24, 2014 at 9:18 am

Precisely. I’d also throw in the fact that Germany was a welfare queen for half a century after the last time they destroyed Europe. The Anglo-sphere took care of them, nursed them back to health and let them live free on our defense dime. Lots of public policies work great when you don’t have to cover the cost of self-defense or past mistakes.

JWatts January 24, 2014 at 11:24 am

Well no, not exactly. The West poured money into 60% of Germany and the Soviets poured money into 40% of Germany. Up until the 1990’s Germany was a huge recipient of foreign investment in the form of massive military expenditures and subsidized resources. But on the other hand, they haven’t done poorly in the 20 years since.

Though admittedly the current energy production situation looks like it’s in the process of a meltdown. (pun intended, of course).

JWatts January 24, 2014 at 11:29 am

I phrased that poorly, I meant that the aid was broader than just the Anglo-sphere and that Germany has still done well since the aid dropped off.

Z January 24, 2014 at 11:34 am

They still get massive subsidies. We have roughly 50,000 uniformed military stationed in Germany, plus twice that in support staff. Of course, that means the German people don’t have to spend much on their own defense. It also means they get to negotiate with the Russians a wee bit differently than if Uncle Sam is not backstopping them.

Look, I have nothing against Germany, but it is a pretty poor test case for intergenerational socialism.

We live in interesting times January 24, 2014 at 1:19 pm

Well, to be fair, after they got antsy in the mid-20th century and were sat on, the rules stipulated they couldn’t spend to build up their war machine. Give them credit, tho, I think they paid back their Marshall loans, the French…not so much.

Turkey Vulture January 24, 2014 at 10:31 am

It also managed to get millions of its people killed in expansionist wars.

Ricardo January 24, 2014 at 3:08 am

“Accordingly, the window of opportunity for mature economies to bring government debt levels down to sustainable levels is narrowing, owing to demographic shifts.”

This looks like a bit of a non sequitur. Public finance theory says that the condition of sustainable debt is that the weighted-average yield on government debt should be less than or equal to the long-run nominal GDP growth rate. Demographic shifts may mean lower GDP growth rates but you need a model to say what will happen to bond yields. If there is a growth slow-down and demographic shift accompanied with high savings rates, you get Japan, not Greece.

prior_approval January 24, 2014 at 3:21 am

Dean Baker says the same thing – and has for probably more than a decade at this point.

The funny thing is, one would think that creditors understand this – and yet, for some puzzling reason, the same concern about demographics is trotted out, over and over again.

Axa January 24, 2014 at 5:06 am

Borrowing some ideas from civil protection, this is the precise difference between hazard and risk. Demographic shift is a hazard that governments have showed have little control on it. While the risk level depends on the magnitude of the hazard and what actions are taken like people buying government debt, higher per capita productivity, higher human capital, etc.

Japan is a example of good risk management so far. However, proper risk management does not make the hazard go away.

8 January 24, 2014 at 3:23 am

The Boomers are the pig in the python. When the pig gets to the other end, it is not a pig anymore.

Brian Donohue January 24, 2014 at 8:12 am

‘Accordingly, the window of opportunity for mature economies to bring government debt levels down to sustainable levels is narrowing, owing to demographic shifts.’

This is the ball. Keep your eye on it for the next decade. I’m much more optimistic than even a year ago that this will come right.

Z January 24, 2014 at 9:34 am

I’m guessing you mean that arithmetic will force a slow retrenchment of the state. I’m not so sure about that. I think reform follows crisis or catastrophe. The tremors of the last five years have been just that, tremors leading up to the big quake. The magnitude of the quake is open for debate, but it will have to be really big to shake the ruling class of their faith. Central Europe had to be reduced to cannibalism for western elites to forgo Christianity. Europe and Asia were leveled before nationalism fell from favor.

Brian Donohue January 24, 2014 at 9:45 am

Maybe. Your view is almost Marxist, though….contradictions continue to build until they hit a breaking point, then violent conflagration.

Other than the Civil War (peculiar institution), US history looks like a counterexample. Also, see English history since 1688.

The instinct of politicians to pander is difficult to overcome, but 2013 was a year of medicine (higher taxes, holding the line on spending). Yeah, there were howls aplenty, but it feels like the big ole ship is slowly turning.

Z January 24, 2014 at 10:33 am

Marx was not wrong about everything, but you’re missing the mark. Great technological change sweeps away the old order in the fullness of time. From a distance it looks like a smooth transition, but in the moment it is something different. The industrial revolution swept away the old order and exacerbated old frictions. The American Civil War is a good example of both, I think. Further, the US may have escaped destruction in the two great European wars of the 20th century, but who can argue that the nation was not fundamentally transformed by both?

Perhaps you are right and everything is under control and we will transition into the brave new world without incident.

Brian Donohue January 24, 2014 at 10:58 am

I allow the possibility of your scenario. If something is unsustainable, it will stop. But how?

My point in my original comment is that there are grounds for hope that we may be addressing the issue like adults. And there are recent precedents of responsibility (1986, 1996).

Perhaps it comes down to disposition. I’m not a ‘The End is Near’ sandwich-board type, although I understand that every once in a long while, they’re right.

Z January 24, 2014 at 11:26 am

Since I have not offered up a scenario, I’m not sure what you mean. I’m not a seer so I I’m not going to know what comes next. I see nothing to suggest our elites are on top of things and prepared to make the sacrifices required to avert a crisis. When the money runs out, things will change and it will not be a lot of fun for them and many of us, but change is rarely much fun.

We live in interesting times January 24, 2014 at 1:25 pm

And there are recent precedents of responsibility (1986, 1996).

Gee, I wonder why…I write tongue-in-cheek.

msgkings January 24, 2014 at 1:31 pm

I’m with Brian on this, well said. Change can happen over time with enough pressure, and that pressure is happening now. Sometimes it does go apocalyptic like Z is implying, but usually, especially in the US, it goes more the way Brian is implying.

Careless January 27, 2014 at 10:18 am

1996: when the peace dividend, the Boomers at the peak of their earning potential, and a bubble combined to increase tax revenue to the point where we almost broke even.

That’s our best case scenario, not one we’re going to see in any decade this century, and we didn’t pay down a dime. If that’s as “responsible” as we get, we are screwed.

BFB January 24, 2014 at 8:23 am

“Given the situation in the government sector, private consumption needs to make a bigger contribution to the next phase of the recovery. Its share of GDP continues to hit multi-decade lows.”

Private sector consumption will increase when the institutional framework in which the private sector operates is more conducive to the incentives that make (formal) entrepreneurial risk, including (especially?) investments in fixed capital and labor, more attractive. Improving that framework begins with the public sector- I am not holding my breath.

Also, isn’t there, at least, some “crowding out” of private consumption by the public sector that is established in the empirical econ literature, which would point towards a smaller private sector rate with an increasing government share of GDP?

We live in interesting times January 24, 2014 at 1:20 pm

Get ready for a “global wealth tax.”

mulp January 24, 2014 at 2:37 pm

“Government consumption’s share of global GDP has risen from 11 per cent to 14 per cent over the past 15 years. In 2013, it hit its highest level since 1980.”

In the US, isn’t this figure something like 35%?

According to Heritage, the tax burden is about 27% of GDP but since Reagan revenue has virtually nothing to do with government spending because deficits don’t matter.

Is low government consumption a virtue?

Like the oil rich states with low tax burdens with the economies based on pillage and plunder of the earth?

Or like Afghanistan or Sudan or Nigeria at 6-7% tax burdens because government does very little for the people.

Is Germany a terrible place with a tax burden of 40%?

Germany runs a small deficit while the US runs a huge deficit, and Japan a deficit in between.

Germany taxes and spends like the US did before Reagan.

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