tag:blogger.com,1999:blog-1089082204850170942.post2482045796469911414..comments2024-03-21T12:52:08.166+11:00Comments on Freedom and Flourishing: Which of the western democracies will be able to cope with future growth in government health spending?Winton Bateshttp://www.blogger.com/profile/07383561940886657594noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-1089082204850170942.post-43445773186861964112019-01-22T19:22:12.601+11:002019-01-22T19:22:12.601+11:00That glass of wine sounds very good, Winton, bette...That glass of wine sounds very good, Winton, better than my cask red! And it sounds like a fun day. <br /><br />On crowding out, in very simple terms (I need to keep things simple) the traditional argument is that if Government increases spend that money crowds out private sector spend. Part of your traditional argument on taxation levels is that lower taxes increase the incentive for the private sector to invest. So higher spend crowds out directly plus lowers investment incentives through through higher taxation than would otherwise be the case. Globally, we seem to be in a position where the business opportunities to justify the higher capital spend are just not there. The high tech companies are an interesting case study - https://www.arnnet.com.au/slideshow/525406/pictures-top-tech-hoarders-15-companies-huge-cash-piles/. Higher profits go to share buy backs or higher dividends while investment remains down. Oz companies have been doing something similar. Google et al are interesting when we think that Australian private sector annual capex in total is about$A110 million. <br /><br />But going back to your original point, I agree that high levels of Government debt are a problem especially when combined with SOE and private debt (China) or high household debt. That problem become more acute should interest rates rise which I think is still likely. The issue here is real interest rates, of course. <br /><br />I also agree that the OECD modelling does provide one measure of the costs of aging, if an imperfect one. I wonder, though, about the assumptions involved. <br /><br /> Jim Belshawhttps://www.blogger.com/profile/10075614280789984767noreply@blogger.comtag:blogger.com,1999:blog-1089082204850170942.post-63932709640687999632019-01-22T09:00:23.356+11:002019-01-22T09:00:23.356+11:00Jim
Your point about savings, investment and crowd...Jim<br />Your point about savings, investment and crowding out makes sense for an economy like Japan. International capital flows obviously don’t equate interest rates all over the world. <br />As I see it, crowding out becomes a major problem when debt servicing is perceived as likely to become a problem, and the market demands a substantial risk premium on further government borrowing. When that happens private investors have reason to be concerned that higher taxes will eventually reduce returns on their investments.Winton Bateshttps://www.blogger.com/profile/07383561940886657594noreply@blogger.comtag:blogger.com,1999:blog-1089082204850170942.post-4619272793824562332019-01-21T21:16:35.093+11:002019-01-21T21:16:35.093+11:00It is worse than I thought. I had intended to writ...It is worse than I thought. I had intended to write: “there can be no crowding out unless government borrowing affects the terms on which the private sector can borrow”. Winton Bateshttps://www.blogger.com/profile/07383561940886657594noreply@blogger.comtag:blogger.com,1999:blog-1089082204850170942.post-88651003176737326022019-01-21T20:10:22.068+11:002019-01-21T20:10:22.068+11:00The unhelpfulness of the predictive typing on my i...The unhelpfulness of the predictive typing on my iPad is testing my patience. I typed “Petite Sirah”. Winton Bateshttps://www.blogger.com/profile/07383561940886657594noreply@blogger.comtag:blogger.com,1999:blog-1089082204850170942.post-37380788048231035572019-01-21T20:00:47.991+11:002019-01-21T20:00:47.991+11:00Jim, I am a Federerer fan, but it was pleasing to ...Jim, I am a Federerer fan, but it was pleasing to see him beaten last night by a young Greek. Today we went to the Australian Reptile Park on the central coast. They do a good job of combining education with enterprise entertainment. It was a tiring day, but I enjoyed it more than I had expected.<br /><br />I learned something about the Japanese pension system from your comments on Japan. It looks to me like compulsory superannuation, with the government making contributions for those unable to afford to do so.<br /><br />Your explanation helps me to understand the reasons for the projected growth in tax to GDP in the U.S. if they are to hold debt to GDP constant they need offset the current budget deficit.<br /><br />The OECD people are keen on labour market programs. I haven’t recently looked at the evidence of how well they work. I hope the OECD is right.<br /><br />It is a few years since I thought seriously about crowding out. If we start from a simple model of a small country iborrowing in the world capital market, there can be no crowding out unless government borrowing affects the items on which the private sector can borrow. As far as I can see at the moment, that doesn’t happen until the government has to pay a risk premium on its borrowing.<br /><br />I am too tired to think about the liquidity this evening, apart from my desire for a second glass of wine. I am enjoying a fine bottle of Petite Sarah.<br /><br />Winton Bateshttps://www.blogger.com/profile/07383561940886657594noreply@blogger.comtag:blogger.com,1999:blog-1089082204850170942.post-82761333503667013742019-01-21T18:15:32.601+11:002019-01-21T18:15:32.601+11:00Very important things!
Very important things!<br />Jim Belshawhttps://www.blogger.com/profile/10075614280789984767noreply@blogger.comtag:blogger.com,1999:blog-1089082204850170942.post-80110179564805970902019-01-20T23:13:25.884+11:002019-01-20T23:13:25.884+11:00Jim, I will try to respond tomorrow - watching te...Jim, I will try to respond tomorrow - watching tennis tonight, an outing with grandchildren tomorrow morning.Winton Bateshttps://www.blogger.com/profile/07383561940886657594noreply@blogger.comtag:blogger.com,1999:blog-1089082204850170942.post-69825329984671727672019-01-20T21:51:07.762+11:002019-01-20T21:51:07.762+11:00That OECD paper is a reasonably complicated exerci...That OECD paper is a reasonably complicated exercise with some fairly standard modelling assumptions. A whole lot of issues arise, but dealing with Japan first. <br /><br />Japanese government debt was 254% of GDP in 2018 up from 215.8% in 2010. The minimum was 51% in 1980. The rise reflects reactions to the stock market crash of the 1980s and attempts to reflate the economy including 15 years of quantitative easing along with very low long term interest rates. As you note, Japan has had I think high savings rates for a long time. Since the 1980s the country has run a balance of payments surplus. Low interest rates at home have encouraged overseas investment to the point that inflows of interest and dividends are a major contributor to the surplus. It's a bit like Britain was before its overseas investments were badly damaged by two world wars. Japan has a dual old age pension system. https://www.tokyo-icc.jp/guide_eng/life/01.html.<br /><br />Phew. I just wanted to be certain of all those facts.<br /><br />Turning now to the OECD modelling, I was interested to discover that Australia was underspending on R&D, infrastructure and labour market programs and needed to increase spend there. An increase in taxation to fund it would pay dividends in terms of future living standards while holding debt ratios steady. <br /><br />In terms of the increase in the tax share necessary to account for the effects of aging in the base line case projects primary revenue as percentage of GDP needs to increase by 6½ percentage points of GDP from 2018 to 2060 in the median OECD country. Leaving aside other assumptions for the moment, a key assumption is that Government debt levels stabilise at present levels. This means that countries presently running budget deficits such as the US have to recover those. With expenditure on all other items maintained in real per capita terms, aging costs become an important variable. Thus Australia needs a projected increase of 5% almost totally due to health costs while the US is over 10% of which health costs are about b.5%. There are some compositional issues here that I am ignoring. <br /><br />With health cost containment and labour market reform, the required increase in primary revenue as a % of GDP by 2060 is projected to be perhaps 3%, a bit over 2$ for Australia including additional spend on labour market programs and family support support of around 1% of GDP. <br /><br />It's a bit difficult to know what all this means. The existing debt levels as a % of GP are essentially pegged, which implies some increase in borrowing. The base health costs appear to be taken as a fixed thing. The projected income increases depend on various assumptions. The countries covered exclude most of Africa where populations are growing fastest. The assumption about maintaining real per capita spend would appear to imply that countries like Japan and Russia will be reducing spend as populations fall. They may be able to do so in some areas, but not in others. And then there are, as you note, interest rate uncertainties. <br /><br />There are a number of bits in the analysis that are interesting. For example, if as seems to be the case the desire to save exceeds the desire to invest, then the availability of liquid funds has limited impact on investment. On the surface, increased government spend would then not crowd out private investment but may actually increase returns and private sector investment. Then, too, there is the assessment of Australia's vulnerability to trade wars. <br /><br />In all this, one of the issues is the point at which aging costs start to fall as the number of older people decline. And then there is the question of migrant flows. <br /><br />I have spent far too much time wandering around these issues. Still, it is interesting. Jim Belshawhttps://www.blogger.com/profile/10075614280789984767noreply@blogger.comtag:blogger.com,1999:blog-1089082204850170942.post-67284143120811405342019-01-20T17:54:22.606+11:002019-01-20T17:54:22.606+11:00Hi Winton. I need to read the OECD paper before co...Hi Winton. I need to read the OECD paper before commenting! Jim Belshawhttps://www.blogger.com/profile/10075614280789984767noreply@blogger.comtag:blogger.com,1999:blog-1089082204850170942.post-31946923340597066732019-01-20T16:06:34.933+11:002019-01-20T16:06:34.933+11:00Hi Jim
Thanks for your thoughts.
The OECD projecti...Hi Jim<br />Thanks for your thoughts.<br />The OECD projections assume that government spending on items other than health and pensions will be maintained in real terms on a per capita basis. You may be right that education spending will decline if there are fewer children, but teachers’ unions may have other ideas. Overall, given that some increase in per capita GDP is projected, maintaining spending constant in real terms seems to me to be very conservative. <br />The health spending component of the projected increase in government spending for the U.S. doesn’t seem exceptionally large relative to that of other OECD countries. The exceptional element for the U.S. is “other factors”. The authors of the report tell us that “captures the initial gap between primary revenue and the level that would stabilize the debt-to-GDP, but also changes in GDP growth rates over the projection period”. Sorry, if that is as clear as mud! These reports get a fair amount of professional scrutiny before they are published, so I expect that aspect of the methodology is defensible.<br />Your point about Australia’s first intergenerational report is taken. Things rarely turn out as expected, but it is still worthwhile attempting to anticipate where problems might arise. The OECD projections to 2060 seem to me to be fairly optimistic for reasons I have noted. Apart from that there seem to me to be large down-side risks around at the moment, including the potential for international trade to be more severely disrupted. On the other hand, as a technological optimist, it does seem possible to me that productivity growth will be a higher than projected. <br />In my view, Japan doesn’t qualify as the canary in the coal mine because its interest rates on government debt are exceptionally low, despite a relatively high government debt to GDP ratio. I understand that is because of a high savings rate and debt being denominated in domestic currency. The accumulation of government debt in Japan seems to have been more attributable to macro policy than population aging. I get the impression that the Japanese system of health care for the elderly relies more heavily on family and voluntary community involvement than most other OECD countries. There may be potential for other countries to achieve better outcomes at lower cost by moving in that direction, but I don’t expect much headway to be made in reducing the growth of government health spending before debt servicing becomes a problem.<br />Perhaps the OECD report should have focused to a greater extent on ongoing pressures for increases in government spending in areas other than health. If the future is anything like the past, however, we can be sure that there will be ongoing pressures for government spending increases in many different policy areas accompanied by ongoing resistance to tax increases. In the past, most democratic governments have been able to contain such pressures before debt servicing problems emerged. The new factor in the political environment of many democratic countries is that economic reform is now much more difficult to achieve than it was 30 to 40 years ago.<br />Winton Bateshttps://www.blogger.com/profile/07383561940886657594noreply@blogger.comtag:blogger.com,1999:blog-1089082204850170942.post-85977767963728173142019-01-20T08:36:11.139+11:002019-01-20T08:36:11.139+11:00I do wonder a little about your arguments here, Wi...I do wonder a little about your arguments here, Winton. <br /><br />As a starting point, an aging population means less spending on certain functions including education and children's health, so you get a compositional shift in spending. Then, too, countries that have already invested in universal health systems are, I think, in a better position to manage the incremental increase in spend because of lower marginal costs. Consider the case of the US with its pattern of over and under investment in health services. The US already spends a higher proportion of its GDP on health services than, say, Australia, but also has a higher proportion of its population who lack basic cover. That implies that the US will need relatively more spend to cope with an increase in the number of older people.<br /><br />The original argument put in the first Australian inter-generational report (May 2002) was that population aging created a double whammy as workforce growth stopped with production and revenue effects while the net cost of servicing an older population went up. Within this mix, Government debt and debt servicing imposed another constraint in responding to the aging challenge. Increases in productivity, cuts in Government spending, were required, if the problems of an aging population were to be managed. <br /><br />The outcomes in the almost 17 years since that report have been different from those projected. This is not a criticism. The value of reports such as these is that they provide a benchmark against which the expected to happen can be compared to the what happened, the variances analysed. <br /><br />Several things happened. Immigration has been higher than projected. More importantly, I think, the proportion of the older workforce staying in some form of employment has been greater than expected. At the same time, the proportion of the workforce that is unemployed/underemployed has increased, especially among the younger age cohorts, creating a growing workforce pool that could be employed. <br /><br />To my mind, Japan is the canary in the coal mine for population aging, in part because of that country's opposition to immigration. The Japanese population peaked at 128 million in 2010 and is now in decline, projected to fall to 100 million by 2050. The proportion of those over 65 has increased from 7.1% in 1970 to 26% in 2014 and could reach 40% by 2060. In Australia, the proportion over 65 has risen from 9% in 1977 to c15% on 2017 and is projected to reach 22% by 2057. So Japan is now where we might be in some time after 2057.<br /><br />I think my point in all this is that the comparative statics you use does provide an an indication on one variable, but its only a small part of the story. <br /><br /> Jim Belshawhttps://www.blogger.com/profile/10075614280789984767noreply@blogger.com