My first blog post in a while is focused on Jack Layton and his first campaign promise of the year: cap the interest rate that can be charged by credit card companies.
The premise of Mr. Layton's promise: household debt is one of the most serious problems facing Canadians.
While I don't necessarily disagree with his premise, especially as one who is both trying to pay off my debt and who grew up in a fiscally conservative culture (i.e. southern Alberta), I do think that this policy is missing (or simply ignoring) some very important economic principles.
Economists consider the interest rate to be the "cost" of borrowing money. Interest is essentially a fee charged to a borrower that makes lending profitable. If you lower the cost of borrowing, people borrow more. That means an increase in the amount of debt people will have, not a decrease. High interest rates are a large deterent to taking on excessive debt. If you decrease this deterent, people think "hey my minimum payments will be lower, so I can afford to borrow more." In addition, card companies are likely to increase maximum limits so as to maintain profitability.
This actually implies that, in the long run, the average Canadian debt load is likely to increase.
Where reform is needed is in people's understanding of how credit card companies work and transparency within the industry. Hidden fees, rates changes, and the like need to be made more explicit so that individuals and families can make smarter decisions regarding their debt load and internalize the true costs of credit card debt. Layton calls for voluntary practices recently established to become mandatory. This policy would be much more beneficial.
Tuesday, March 29, 2011
Thursday, January 20, 2011
Not so much an economic issue but...
Interesting article today in the paper noted that Hu Jintao the President of China, admitted that his country has a human rights problem and that it needs to work on it.
The article notes that human rights advocates have criticized this confession during the Chinese leader's trip to the White House as being merely words with no confession backing them.
While the criticism rings true inasmuch as China really hasn't done very well at all on this issue, the statement still says an incredible amount about the state of China's policy development.
1. It notes that Chinese leadership, on some level, acknowledges that human rights are a good thing. Regardless whether they have any actual intent to improve their track record, it means that as a public position, they are moving towards an ideal.
2. It also means, again on some level if not to a great extent, Chinese policy decisions are being influenced by international pressure. Be it pressure to maintain relations with the US (for economic reasons) or to develop a better image for more general trade and power purposes.
All this should be qualified by saying that, yes, words are cheap. But there is still some substance to be gleaned from this statement.
The article notes that human rights advocates have criticized this confession during the Chinese leader's trip to the White House as being merely words with no confession backing them.
While the criticism rings true inasmuch as China really hasn't done very well at all on this issue, the statement still says an incredible amount about the state of China's policy development.
1. It notes that Chinese leadership, on some level, acknowledges that human rights are a good thing. Regardless whether they have any actual intent to improve their track record, it means that as a public position, they are moving towards an ideal.
2. It also means, again on some level if not to a great extent, Chinese policy decisions are being influenced by international pressure. Be it pressure to maintain relations with the US (for economic reasons) or to develop a better image for more general trade and power purposes.
All this should be qualified by saying that, yes, words are cheap. But there is still some substance to be gleaned from this statement.
Tuesday, January 11, 2011
More Evidence that We Aren't Out of the Woods Yet
A recent Wall Street Journal Article discusses calls by academic economists at the American Economic Association annual meeting for even stricter reforms on the banking sector beyond what has already been done. Obviously, the experts are suspecting that persistent weakness in the US banking sector provides plenty of reason to suspect that a further bursting of the liquidity buble is possible.
Take this in consideration with a recent post by former IMF economist Barry Eichengreen who points out that internationally there still isn't a significant fallback option for the international monetary system.
Eichengreen notes that the fall of Ireland is spreading contagion, more importantly, he notes elsewhere their "rescue package" is inevitably going to come back to them, adding more stress to the EU banking sector. To top this off, austerity in the rest of the Union will keep economic growth meagre at best and ultimately will prevent the Euro from usurping the USD as the global dominant currency.
He notes that there may be some room for the Canadian Loonie and the Australian Dollar to absorb some of the excess foreign investment but that the majority of it will remain in the US, largely for lack of an alternative place to settle.
That said, if the USD is the best currency available and the reforms called for by the AEA ring true to the continued fragility of the US, what does this say for the next 10 years of global economic recovery.
Perhaps its time to start pushing alternative monetary schemes as a failsafe in the case of another monetary meltdown. Even though it's still viewed as unsustainable, a nation-wide development of regional or local currencies may provide a fallback measure and encourage local cooperation should the current global market crash again.
What are the other options?
Clearly, there are more questions than answers
Take this in consideration with a recent post by former IMF economist Barry Eichengreen who points out that internationally there still isn't a significant fallback option for the international monetary system.
Eichengreen notes that the fall of Ireland is spreading contagion, more importantly, he notes elsewhere their "rescue package" is inevitably going to come back to them, adding more stress to the EU banking sector. To top this off, austerity in the rest of the Union will keep economic growth meagre at best and ultimately will prevent the Euro from usurping the USD as the global dominant currency.
He notes that there may be some room for the Canadian Loonie and the Australian Dollar to absorb some of the excess foreign investment but that the majority of it will remain in the US, largely for lack of an alternative place to settle.
That said, if the USD is the best currency available and the reforms called for by the AEA ring true to the continued fragility of the US, what does this say for the next 10 years of global economic recovery.
Perhaps its time to start pushing alternative monetary schemes as a failsafe in the case of another monetary meltdown. Even though it's still viewed as unsustainable, a nation-wide development of regional or local currencies may provide a fallback measure and encourage local cooperation should the current global market crash again.
What are the other options?
Clearly, there are more questions than answers
Friday, December 10, 2010
Re: Economist - Cheerier Growth for 2011
So the Economist puts out a poll of estimates for growth, current account deficits, and inflation next year on a monthly basis.
In case this seems like mumbo-jumbo to yoy, here's the main points.
> all the numbers are positive. Dispite the gloomy scepticism of all the media and commentators is this. At the end of the day, almost every country (a few outliers like Ireland and Spain) has positive numbers under "Real GDP, Percent Change" for 2010 and 2011. That means that their economies have grown both this year and the last year.
> There is concern about Canada's larger-than-expected current account deficit. This (a) shouldn't be surprising considering that the US dollar has been persistently low relative to the Canadian dollar, and (b) shouldn't be too alarming, especially with the relative increase in stability in the US financial market. They got hit hard and are putting in regulations pretty quickly. All that to say, CA deficit, IN THE SHORT RUN, is largely problematic because it represents vulnerability. Our deficit comes from US imports being cheaper and their economy is settling and not too likely to fluctuate rapidly anytime soon. Long run effects may be a problem but I don't think this is the time for CA deficits to be at the forefront of economic policy.
In case this seems like mumbo-jumbo to yoy, here's the main points.
> all the numbers are positive. Dispite the gloomy scepticism of all the media and commentators is this. At the end of the day, almost every country (a few outliers like Ireland and Spain) has positive numbers under "Real GDP, Percent Change" for 2010 and 2011. That means that their economies have grown both this year and the last year.
> There is concern about Canada's larger-than-expected current account deficit. This (a) shouldn't be surprising considering that the US dollar has been persistently low relative to the Canadian dollar, and (b) shouldn't be too alarming, especially with the relative increase in stability in the US financial market. They got hit hard and are putting in regulations pretty quickly. All that to say, CA deficit, IN THE SHORT RUN, is largely problematic because it represents vulnerability. Our deficit comes from US imports being cheaper and their economy is settling and not too likely to fluctuate rapidly anytime soon. Long run effects may be a problem but I don't think this is the time for CA deficits to be at the forefront of economic policy.
Tuesday, November 23, 2010
Life Money and Illusion Part 1
I am currently reading Mike Nickerson's book, Life, Money and Illusion. As I've been inconsistent in updating this blog. I've decided to simply write my thoughts at various points in the book.
Nickerson's undelying message in the book is that the essential problem with the global financial system is that money has stopped being a highly liquid holder of real value, and has become, in itself, a perverse form of phantom capital which was condemned as sinful in antiquity. He shows that because currency is created from nothing, speculation becomes commonplace.
I encourage you to read the book and could talk about his conclusions ad-nausium. However, I will settle to say, it is well worth a careful read.
Amongst other things, Nickerson points to the prevalence of the media and advertising industries in western culture. He points to the fact that as a result of their constant influence, they are able to "create" demand by instilling the thought that certain products are necessary. He suggests that naturally, people will work until they have enough money to meet their needs and then stop working. He notes that this point was reached in North America in the 40s and 50s as wages increased enough to merit discussion of a 30 hour work week.
In economic terms, individuals decisions to work is based on how much they value the things they can buy as opposed to how much they value their leisure time. Advertising makes the percieved value of things one can buy go up and therefore the amount of time one spends working.
IF we were to begin to value our leisure time differently, we would see a shift in waste and, I believe, and increase in our ability to enjoy life.
Nickerson's undelying message in the book is that the essential problem with the global financial system is that money has stopped being a highly liquid holder of real value, and has become, in itself, a perverse form of phantom capital which was condemned as sinful in antiquity. He shows that because currency is created from nothing, speculation becomes commonplace.
I encourage you to read the book and could talk about his conclusions ad-nausium. However, I will settle to say, it is well worth a careful read.
Amongst other things, Nickerson points to the prevalence of the media and advertising industries in western culture. He points to the fact that as a result of their constant influence, they are able to "create" demand by instilling the thought that certain products are necessary. He suggests that naturally, people will work until they have enough money to meet their needs and then stop working. He notes that this point was reached in North America in the 40s and 50s as wages increased enough to merit discussion of a 30 hour work week.
In economic terms, individuals decisions to work is based on how much they value the things they can buy as opposed to how much they value their leisure time. Advertising makes the percieved value of things one can buy go up and therefore the amount of time one spends working.
IF we were to begin to value our leisure time differently, we would see a shift in waste and, I believe, and increase in our ability to enjoy life.
RE: The Fed Can’t Serve Two Masters
http://www.cato-at-liberty.org/fed-cant-serve-two-masters/#utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CatoHomepageHeadlines+%28Cato+Headlines%29
While I was always taught that the Phillips curve is a woeful fantasy that has brought about significantly bad policy. It does beg the question, if stimulus isn't effectively increasing employment, and monetary policy CAN'T increase employment...what is the US to do about its most significant of economic woes?
I will develop this thought a bit more in the future, but consider this. Jobs are created when people engage the demand for products and services. Production expands, business start up and jobs are created...currently, there is insufficient domestic demand to support US production enough to increase jobs. Perhaps, then, one of the most globally linked economies in the world needs to focus on encouraging development elsewhere enough so that global demand bouys up policy.
By this I mean a foreign policy that is concerned about developing other countries...rather than fighting currency wars with them.
While I was always taught that the Phillips curve is a woeful fantasy that has brought about significantly bad policy. It does beg the question, if stimulus isn't effectively increasing employment, and monetary policy CAN'T increase employment...what is the US to do about its most significant of economic woes?
I will develop this thought a bit more in the future, but consider this. Jobs are created when people engage the demand for products and services. Production expands, business start up and jobs are created...currently, there is insufficient domestic demand to support US production enough to increase jobs. Perhaps, then, one of the most globally linked economies in the world needs to focus on encouraging development elsewhere enough so that global demand bouys up policy.
By this I mean a foreign policy that is concerned about developing other countries...rather than fighting currency wars with them.
Monday, August 30, 2010
Politics, Economics, and Political Economy
Having completed my Master's degree and continuing to be relatively reflexive on my education, abilities, knowledge, and skills. I find it interesting to note how often I will start with questions such as "what economic policies are best for country x" and end with questions like "what institutional regime permits certain policies to work and not others". The former is obviously a very economic-centric question while the latter is a very politically-centric question.
The reason the two often become so easily crossed in my mind is because of the types of sub-fields I'm interested in. In economics, I'm concerned with macroeconomic policy, especially development policy (i.e. fiscal and monetary policy, etc). Invariably, macro-policy is dependant on politics and, therefore, political science enters the scene.
The problem is, it makes it hard to have a debate. One can't simply come down with an opinion of whether stimulus should be halted. The timeless economics response becomes "it depends". It depends on whether we are discussing the US, Spain, or Thailand. It depends on how the stimulus was put into place, the cultural response that people will likely give, the autonomy of the government in power and whether they are will to risk a period of slow down in lieu of longer-term stability.
This is what makes economic questions political and what makes the study of the two together an opportunity for a spectacular synergy.
The reason the two often become so easily crossed in my mind is because of the types of sub-fields I'm interested in. In economics, I'm concerned with macroeconomic policy, especially development policy (i.e. fiscal and monetary policy, etc). Invariably, macro-policy is dependant on politics and, therefore, political science enters the scene.
The problem is, it makes it hard to have a debate. One can't simply come down with an opinion of whether stimulus should be halted. The timeless economics response becomes "it depends". It depends on whether we are discussing the US, Spain, or Thailand. It depends on how the stimulus was put into place, the cultural response that people will likely give, the autonomy of the government in power and whether they are will to risk a period of slow down in lieu of longer-term stability.
This is what makes economic questions political and what makes the study of the two together an opportunity for a spectacular synergy.
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