How can we compare climate change and public debt risks?

It seems to me that, over the next 20 years or so, people in Western democracies are likely to suffer to a greater extent from the consequences of an explosion in public debt than from climate change. At the same time, I acknowledge that climate change could possibly pose a serious threat to civilization and perhaps human survival. The chart shown above is my attempt to illustrate how those risks might be compared.

I make no claim to expertise in assessment of climate change risks. My reading on the topic suggests that the theory that increasing concentrations of greenhouse gases in the atmosphere are contributing to climate change is widely accepted by scientists. However, people with relevant expertise obviously have different views about the rate at which climate change is likely to occur, the contribution of human activity, the political feasibility of various forms of remedial action, and the adaptability of humans and other living creatures.

In my view, too little attention has been given to “tail risk” associated with climate change – the low probability that climate change will result in a great deal of human misery, as shown in the chart above. As I have written here previously, if you are concerned about climate change, you (like me) are likely to be more concerned about the remote possibility that your great grandchildren might suffer from having to live with potentially catastrophic climate change outcomes than about the more probable outcome that climate change might cause their incomes to be somewhat lower than economic modelling suggests they would be otherwise. I have also previously expressed agreement with Nassim Taleb that there are some risks we should avoid if possible, even though there is a low probability that they will occur at any point in time. In order to flourish, future generations need to be able to survive.

The reasoning behind the rest of the chart requires more explanation. Why do I think there is a 95% probability that the citizens of western democracies will suffer as much or more over the next 20 years from an explosion in public debt than from climate change? Since I don’t have either the inclination or expertise to weigh up the technical evidence on climate change for myself, I tend to rely on the IPCC’s assessments. I suspect the authors of IPCC reports are still somewhat biased toward attempting to present a view favouring urgent international action to reduce greenhouse gas emissions. Nevertheless, after they have been modified in the light of expert public scrutiny, the IPCC reports are probably the most authoritative source of independent assessments of the relevant evidence.

The IPCC’s assessment of likely climate change outcomes in Chapter 3 of its recent special report, Global Warming of 1.5 ºC, implies that we can expect some fairly serious adverse consequences over the next few decades:

“The impacts of climate change are being felt in every inhabited continent and in the oceans. However, they are not spread uniformly across the globe, and different parts of the world experience impacts differently. An average warming of 1.5°C across the whole globe raises the risk of heatwaves and heavy rainfall events, amongst many other potential impacts. Limiting warming to 1.5°C rather than 2°C can help reduce these risks, but the impacts the world experiences will depend on the specific greenhouse gas emissions ‘pathway’ taken. The consequences of temporarily overshooting 1.5°C of warming and returning to this level later in the century, for example, could be larger than if temperature stabilizes below 1.5°C. The size and duration of an overshoot will also affect future impacts.”

However, a recent OECD report on Greece, which is fairly optimistic about the future of that economy, seems to me to illustrate that public debt crises are likely to result in much more human misery than climate change over the next few decades:

“Despite these positive developments, challenges abound. GDP per capita is still 25% below its pre-crisis level. The public debt is still high and a source of significant vulnerability. Poverty rose sharply during the crisis, especially among the young and families with children. Though poverty has stabilised, it remains near a record high. Skill mismatch is also high and investment remains depressed. This contributes to low productivity – which has fallen further behind other OECD countries – and low wages – resulting in high in-work poverty. Though improving, female labour participation is among the lowest across OECD countries. The recovery in investment is held back by a dearth of finance – due in part to high levels of non-performing loans and to capital controls – high cost of capital relative to wages, cumbersome regulations and low demand. These problems weigh on people’s well-being”. 

As I explained in a recent post, there are strong reasons to expect that the failure of governments in most OECD countries to restrain the growth of government spending is likely to cause debt servicing to become a more widespread problem in the decades ahead.  I think the most likely outcomes in most western democracies will probably be much worse that the outcomes of climate change, although not be as bad as the experience of Greece over the last decade. The chart above is drawn to acknowledge that there is some possibility that democratic governments will lift their performance, or world interest rates will remain low, so debt servicing may not be a problem.

The modest adverse outcomes depicted on the right side of the chart might well be offset by positive factors. There is a good chance that over the longer term the positive impacts of technological advances will be sufficient to offset the negative impacts of both public debt accumulation and climate change, but it would be excessively optimistic to expect rapid technological progress and productivity growth in western democracies over the next 20 years.

Some readers may object to my attempt to compare the risks associated with climate change and public debt explosion on the ground that these are very different risks when viewed at a national public policy perspective. There obviously isn’t much the government of any country can do to reduce climate change risk by acting alone.

However, I have drawn the chart with individual well-being in mind. From an individual’s perspective, the risks surrounding climate change and public debt are quite similar. Nothing that individuals do by themselves will make much difference to national or global outcomes. Voting might appear to provide an avenue for individuals to influence national outcomes but, as others have observed, voting in a national election is like ordering a meal from the menu in a restaurant and being served the same meal irrespective of what you order.  

There are options that individuals can consider to reduce their exposure to both climate change and public debt risks. For example, consideration of climate change risk might influence decisions about housing location and construction, and consideration of public debt risks might cause individuals to reduce the extent that their families rely on government for health services, education and retirement incomes.

It strikes me that climate change and the risks of public debt explosion also pose similar ethical issues for individuals. Does the fact that an individual’s actions, considered in isolation, has a negligible impact on global and national problems absolve him or her of an obligation to moderate his or her contributions to those problems? I think not, but I will leave consideration of the issue for another time.  

Is subjective-predictive morality consistent with the template of individual responsibility?

This question arose while I was reading Josh Bachynski's book The Zombies, subtitled On Morality.

Josh explains subjective-predictive morality as follows:

“You all know and have seen it (and used it too!). It is the simple morality we commonly use when giving a gift, throwing a party, or trying to predict and ensure how well things will end up for others. When we are practically good. When we seek to help and not hurt others, for no other reason than this is good. What we currently call being courteous or nice, for the sake of just being courteous or nice. When we are not trying to do what’s “Right” per se. When we are trying to do what’s right by them”.

Doing right by others is encompassed in the ethics of doing right by yourself. What is good feels good.  Josh explains the process of subjective evaluative judgment as involving (1) pleasant or unpleasant feelings (2) cognitive reactions concerning the value of those feelings (3) predictions as to whether we will have reason to regret the action contemplated. Josh suggests:

“This is the way we naturally insert quality control into our valuations.”

He goes on to observe:

“As it turns out, in searching for the moral, we have actually made a powerful discovery. And this is in what is also rational or prudent”.

I suggest that readers who are interested in learning more about Josh’s philosophy should read Leah Goldrick’s review at Common Sense Ethics, which contains a link to her interview of Josh, and then begin to read the book itself. This is a long book. I found the authors chatty writing style entertaining at first, but tedious after the first few chapters.

Josh Bachynski’s ethics of doing what is right by oneself and others seems quite similar to the template of responsibility, advocated by Douglas Den Uyl and Douglas Rasmussen in The Perfectionist Turn. The ethics of responsibility is based on “the existential fact that we must make something of our lives”. This is explained in a passage I have quoted previously:

“For the template of responsibility, the basis for determining worthiness is human flourishing or wellbeing of some sort. Its ultimate value is integrity. Integrity expresses itself interpersonally in honour but when applied to the agent herself, the term ‘integrity’ signifies a coherent, integral whole of virtues and values, allowing for consistency between word and deed and for reliability in action”.

There are some differences between the two approaches. Pleasant and unpleasant feelings are not given a great deal of prominence in Den Uyl and Rasmussen’s view of human flourishing. They define human flourishing as consisting of “activities that both produce and express in a human being an actualization of potentialities that are specific to the kind of living thing a human being is and that are unique to each human being as an individual”. At one point, Den Uyl and Rasmussen suggest that “an objective account of human flourishing can be characterized as a life of right desire”. They argue that the value of something to a person “is not necessarily a mere matter of “its being desired, wanted, or chosen” because a person “is more than a bundle of passions and desires”. That is still consistent with the view that emotions such as joy and disgust provide important information to help us to decide what we value.

Another possible source of difference is in respect of naturalism. From my reading of The Zombies, it seems likely that Bachynski would be suspicious that Den Uyl and Rasmussen’s teleological naturalism could be seeking to perpetuate ancient errors about human nature that scientific advances have given us reasons to question. I don’t think such suspicions would be well-founded because Den Uyl and Rasmussen present a view of human flourishing that is explicitly individualistic, agent-relative and self-directed.

As I see it, the differences between the philosophical approaches discussed above have parallels in the differences between some psychological therapies. Subjective predictive morality seems to have much in common with rational emotive approaches (REBT) in which people use reasoning to moderate their emotional responses. The template of responsibility seems to a lot in common with an acceptance and commitment approach (ACT) in which people ask themselves how they can actualize their potential in the given situation to act in accordance with their values, whatever their current emotional states might be. Perhaps there may also be parallels in the differences between philosophic approaches of the Stoics and Aristotle.

Subjective predictive morality and the template of responsibility both involve the use of practical reason. The question of which approach is better should probably be viewed as an empirical matter. In your experience, which approach has been of greatest help you in doing the right thing by yourself and others? The correct answer could well be different for different individuals.

In the light of similarities between subjective-predictive morality and the template of individual responsibility, it may come as a surprise to some readers that the authors have vastly different political perspectives. Josh Bachynski describes himself as “a left-leaning liberal democrat” and his book begins with a rant to the effect that he sees “ecological/economic disaster” as “disturbingly likely” because of “wasteful and self-destructive profit structures”. Douglas Den Uyl and Douglas Rasmussen are classical liberals who have proudly given one of the chapters in their book the title: “The entrepreneur as a moral hero”.

I find it impossible to believe that those vast differences in world view stem from differences in their philosophical views about ethics. There may be some differences in the value they place on individual liberty, but they don’t seem to be huge. Their different world views must stem from different perceptions about the way the economic system works and the likelihood of ecological/economic disaster. It is a matter of who is right and who is wrong about relevant aspects of the real world.

For what it is worth, I think there is a very high probability that Josh is wrong, but I acknowledge that we shouldn’t be ignoring low probability outcomes that would be disastrous for humanity. Unfortunately, as I observed in my comments on Nassim Taleb’s book, Skin in the Game, when it comes to consideration of potential Black Swan events that threaten the survival of humanity, the political systems we have inherited do not ensure that political leaders have enough skin in the game for their minds to focus appropriately. Political leaders tend to focus on their survival at the next election rather than on the survival of humanity. It is up to citizens who are concerned about potential Black Swan disasters to initiate appropriate action themselves.

Where did I go wrong in writing about the greatest threat to human flourishing?

Chapter 8 of my book Free to Flourish, published in 2012, is entitled “The Greatest Threat to Progress”.

The concluding paragraph of that chapter now seems like an exercise in wishful thinking:

“There is an urgent need for innovations to promote a better balance between the responsibilities and effectiveness of government. The best hope is that, as more people perceive the threats that democracy is facing, they will unite to foster the development of better norms of political behaviour."

Do you perceive that a growing proportion of voters in your nation are using politics opportunistically to obtain benefits for themselves at the expense of others? If so, do you perceive that such behaviour is a threat to the democratic political system? Are you willing to commit to promoting mutual benefits for all citizens in your participation in political discussions and in casting your vote?

If you answered “yes” to all those questions, how much time and energy are you prepared to invest in encouraging others to unite with you in fostering restoration of better norms of political behaviour?

I still think it is commendable for individuals to foster better norms of political behaviour, for example in their activities on social media. However, the idea that citizens might unite to restore better norms of political behaviour now seems excessively optimistic.

Where did I go wrong?

I haven’t changed my view that the failure of democratic governments to cope with their expanding responsibilities is the greatest threat to human progress – the ongoing expansion of opportunities for human flourishing - in coming decades. Democratic failure seems likely to be particularly traumatic for people who have become heavily dependent on government.

My analysis in Chapter 8 of what determines whether democracies can cope still looks sound. The democratic governments that are highly effective in raising revenue and managing provision of services with little corruption (e.g. Sweden) are able to cope with greater responsibilities than can governments that are less effective in performing those functions (e.g. Greece). The ability of democratic governments to cope depends on the balance between responsibilities and effectiveness.

It still seems correct to argue that there is an inherent tendency in democracies for the size of government to expand and for the effectiveness of government to falter. That is a natural consequence of unrestrained politicking by interest groups.

I still think Joseph Schumpeter and Bryan Caplan were correct to argue that citizens are prone to irrational prejudice in political matters. My empirical work helps illustrate the nature of the problem. It shows that the percentage people who seek an expanded role for government is higher among citizens who claim to have little confidence in the civil service and no interest in politics.

My argument that democracy has survived because it has been constrained by constitutions, rule of law and federal systems of government still looks ok. If writing the chapter now I would also emphasise that norms of reciprocity have helped to restrain interest group opportunism in the past.

I think my discussion of changes in democracy brought about by increased citizen involvement through talk shows, social media etc reached the correct conclusion. The changing political environment seems to have provided greater incentives for political parties to become involved in identity politics, and to seen to be doing more to deal with all the problems of modern life:

"The realm of personal responsibility has shrunk as more personal problems have become transformed into social problems. The net result in most high income countries has been an aggravation of the tendency for governments to take on more responsibilities than they can cope with effectively. Yet governments are constantly pressured and tempted to accept additional responsibilities."

That quote from Free to Flourish is followed immediately by the heading: “A basis for hope”. That is the section in which I made a valiant attempt to persuade myself that citizens might unite to foster the development of better norms of political behaviour.

There was nothing wrong with looking for a basis for hope. In retrospect, I was just looking in the wrong place.

Developments over the last few years suggest that there is a basis for hope in two different directions.

First, it looks to me as though the consequences of democratic failure might not be quite as dire as I had envisaged in 2012. At that time it seemed to me as though democratic institutions were coming under threat in some countries of southern Europe because of increased public disorder associated with government debt crises and resistance to government spending restraint. I was concerned about democratic governments being replaced by authoritarian regimes, as has occurred under similar in the past in Europe and Latin America.

What has happened is that democratically elected leaders have remained in place to administer the austerity that was imposed by the European Central Bank. The failure of democratically elected governments to control government spending resulted in external imposition of constraints on fiscal policy. This has been accompanied by a great deal of economic misery in the countries affected, but outcomes have been better than I had expected.  

As discussed in a recent post, I expect that in most OECD countries the failure of democratic governments to restrain the growth of government spending is likely to cause debt servicing to become a more widespread problem in the decades ahead. Perhaps there are grounds for hope that when they see the writing on the wall, a sufficient proportion of voters in most wealthy countries will be supportive of political parties proposing economic reforms, rather than waiting until they are imposed by creditors (or institutions such as the ECB and IMF).

Second, there is now a stronger basis for hope that the faltering institutions of representative government could one day be replaced by superior institutions. I was sceptical about that possibility at the time of writing Free to Flourish. Since then, however, it has become evident that blockchain technology and smart contracts may have potential to enable people to act together to produce some public goods cooperatively without central government involvement. I became enthusiastic about the potential for that to occur a few months ago when reading The Social Singularity, by Max Borders.  I have learned a little more about blockchain and smart contracts since then, and am still enthusiastic about the potential it offers.

A transition from government to cooperative provision of services cannot be expected to prevent the human misery likely to occur as a result of failure to constrain government spending before debt servicing problems become acute. Over the longer term, however, it may become possible for people to enter voluntarily into real social contracts that offer better opportunities for human flourishing than the hypothetical social contracts of political theory.

Perhaps it would have been better for Chapter 8 of Free to Flourish to have concluded by focusing on ways in which individuals might be able to protect themselves and their families from the consequences of democratic failure.

The most obvious way for people to protect themselves and their families is to avoid becoming heavily dependent on government. I acknowledge that for many people that is easier said than done. Few people choose to become heavily dependent on government. Hopefully, safety nets will continue to be available for those who need them most.  Nevertheless, self-reliance and voluntary cooperation for mutual benefit will provide most individuals the best hope for economic security in the years ahead.

Which of the western democracies will be able to cope with future growth in government health spending?

The chart shows that those OECD countries with the greatest burden of debt servicing a decade ago have subsequently had the lowest growth in government spending. It isn’t hard to understand how that might happen when we think about the consequences of accumulating debt in our personal lives. If we go heavily into debt, a higher proportion of our income must be devoted to servicing debt and less is available for other spending. Our creditors are likely to be reluctant to extend further credit if they become concerned about our ability to service existing debt.

At a national level, there are additional complications including the potential for governments to inflate away the real value of debt denominated in local currency and possible ‘bailouts’ by the IMF and ECU. Nevertheless, governments that become poor credit risks must pay a higher risk premium than is normal for government bonds, in order to obtain access to additional credit.

There is evidence that rising government debt to GDP ratios are associated with lower economic growth, which in turn, leads to lower growth in government revenue. That obviously has potential to further squeeze non-interest government spending. The results of a recent study published by the Dallas Fed (‘Rising Public Debt to GDP Can Harm Economic Growth’, by Alexander Chudik, Kamiar Mohaddes, M. Hashem Pesaran and Mehdi Raissi) suggest that over the longer term persistent accumulation in debt as a percentage of GDP at an annual rate of 3 percent is eventually associated with annual GDP growth outcomes that are 0.2 to 0.3 percentage points lower on average. To put that in perspective, the average growth rate of OECD countries has been about 1.5 percent per annum over the last decade. Causality could run both ways. Lower GDP growth can lead to higher debt levels, which, in turn, can lead to lower economic growth.

You might be wondering why I think the chart shown above has much relevance for western democracies other than Greece, Italy and Portugal, which had high government debt servicing burdens a decade ago. The relevance stems partly from the continued increase in government debt as a percentage of GDP in most OECD countries over the last decade. On average, net financial liabilities of those countries have risen by around 23 percentage points of GDP over the last decade to around 67% of GDP in 2018.

Those looking for reasons to be complacent can obtain some reassurance from low world interest rates. With interest rates paid by governments lower than the rate of economic growth in most OECD countries, debt servicing is not yet a widespread problem. At current interest rates, it would be possible for the debt to GDP ratio to decline in most OECD countries, even if governments pay interest on their debts by borrowing additional funds.

How likely is it that world interest rates will remain at low levels over the next few decades? In their recent OECD paper, The Long View: Scenarios for the World Economy to 2060, Yvan Guillemette and David Turner suggest that relatively low growth in investment is likely to keep downward pressure on world interest rates, even though population ageing is likely to reduce savings rates. Nevertheless, they note evidence that reversals of the relationship between world interest rates and economic growth rates have been “fairly common” in the past. They warn that a sustained rise in interest rates relative to growth “could eventually make large debt stocks costly to service and unsustainable”.  Their projections suggest that some decline in economic growth rates is likely to occur in most parts of the world over the next 40 years.

My concerns about the potential for debt stocks to become costly to service in many more OECD countries are related to the implications for government spending of the ongoing increase in the proportion of elderly people in the populations of these countries. The implications of demographic change have been much talked about over the last few years, but the magnitude of the likely impact on government spending doesn’t yet seem to be widely appreciated. The study by Guillemette and Turner projects an increase in annual public health and pension spending of about 5 percentage points of GDP for the median OECD country between 2018 and 2060. The bulk of that increase is for public health spending, which is projected to continue to be pushed up by technological change and government health policies, as well as demographic factors.

The methodology used by Guillemette and Turner produces estimates of the increase in the revenue to GDP ratio needed to pay for projected government spending increases without any further increase in debt to GDP ratios. An increase in revenue as a percentage of GDP of 6.5 percentage points of GDP is projected to be required for the median OECD country over the period to 2060. A much larger increase is projected to be required in some countries. For example, the required increase in revenue for the U.S. is projected to be 10 percentage points of GDP.

I think the baseline scenario presented by Guillemette and Turner is too optimistic because their modelling takes no account of the disincentive effects of higher taxation on GDP growth. The possible magnitude of this excess burden of taxation is discussed in an Australian context in an article posted on this blog a few years ago.

Leaving that aside, it seems to me that ongoing increases in debt to GDP ratios - and hence substantial increases in government interest payments as a percentage of GDP - are a much more likely outcome in most OECD countries than tax increases in the years ahead. In those countries where debt servicing isn’t yet a problem, there seems likely to be much less political opposition to further increases in public debt than to tax increases. That suggests to me that over the next few decades most OECD countries are likely to increase their debt to GDP ratios until debt servicing does become a more widespread problem.

Guillemette and Turner present scenarios that would require smaller increases in government revenues than in the baseline (no-change) policy scenario, but those scenarios involve health policy and labour market reforms that have been difficult to achieve in the past. I don’t think we can expect voters to be any more supportive of reforms that could damage their short-term interests than they have been in the past. The best we can hope for is that when they see the writing on the wall, a sufficient proportion of voters in most countries will be supportive of political parties proposing economic reforms, rather than waiting until they are imposed by creditors (or institutions such as the ECB and IMF). In 2013 I wrote something here contrasting the responses of Sweden and Greece to fiscal crises, that illustrates the choices available.

The transition may be traumatic, but it seems likely that technological advances will provide options superior to government provision of many services in coming decades. What I have in mind particularly is the potential for blockchain to enhance opportunities to seek mutual benefit in voluntary cooperative enterprises, as previously discussed on this blog. That may create potential for functions to be transferred from the public sector to cooperative enterprises that can perform the functions more efficiently.

During the next few decades most of the western democracies seem likely to experience ongoing difficulty in coping with the additional government spending required to meet the health needs of the elderly.  The most likely outcome seems to me to be an increase in debt to GDP ratios that will result in more widespread debt servicing problems. It seems inevitable that debt servicing problems will lead to a lower rate of growth in government spending in many OECD countries, possibly accompanied by the transfer of some functions to voluntary cooperative enterprises.

That leaves the difficult question of identifying which of the western democracies are more likely to be able to implement those reforms through normal democratic processes in order to avoid having austerity imposed upon them by creditors and international agencies.