This is a one-year follow-up on my review of the book I.O.U. The author made or implied the following predictions:
- Canada would do well
- France and Germany would do reasonably well, due to their sensible financial systems and Germany’s focus on manufacturing
- Britain would be a disaster, with at least a shrinkage of 600,000 government workers and maybe a decade of pain
Here’s the section under the headline “Britain is doomed”:
Page 217: “Britain has half of the total European credit card debt. … We are all about to feel significantly poorer. That’s because we’re about to get the bill. … the recovery everyone is longing for is the point when we will get the bill. It’s when we recover that we will start to pay back the cost of what happened. Governments can’t begin to fix the holes in their own balance sheets–holes which get rapidly worse as tax revenues collapse and spending vooms upward–until the economy is growing again.”
Lanchester explains that the government budget problem is compounded by the fact that “the average British household owes 160 percent of its annual income.” He predicts that British government payrolls will shrink by at least the 600,000 workers that the government has added in the “last few years” (a government that shrinks in size is almost unprecedented in modern history and Lanchester does not cite any examples).
How are Lanchester’s predictions working out, a year later (probably closer to two years later from his point of view)?
Canada is growing steadily with about 7 percent unemployment (these are the easy numbers to find, but also easy for governments to cook; I would prefer to know the percentage of working-age Canadians who are employed)
France seems to be doing okay. Germany grew 3.6 percent in 2010 and the German unemployment rate is lower than at any time since 1990 (source).
The United Kingdom is doing comparatively poor, much as Lanchester predicted, with a GDP 1.7 percent higher at the end of 2010 compared to 2009 (source) and the unprecedented government shrinkage that Lanchester forecast indeed came to pass, with cuts of “almost half a million jobs” (source) planned.
Lanchester is a novelist, but his predictions seem to have worked out better than most economists’!
Two quick comments:
Canadian employment/population ratio is easy to find from StatCan or St. Lois Fed FRED: https://research.stlouisfed.org/fred2/series/CANEPRNA
(maybe you were looking for more recent numbers though)
The other observation is about the “leverage” when you comment on Barclay’s 61:1 “Loans” to equity and wiping out shareholders when 1/61 of borrowers default. That’s a little too simplistic to judge the health or viability of a bank. Still simplistic, but to consider with a little more context: Suppose instead of 1/61 it was 1/30 ratio (or for some other bank consider a halving of leverage). Then if the 1/61st default (to 0% recovery) then the shareholders lose 50% and the bank continues as a concern. If this is fine, what’s the difference if you operate with 1:61 ratio but if 1/61st default, you go to your shareholders and ask for more equity then? This is basically the negotiation when shareholders demand the dividend paid out instead of contributing to capital. When you can’t keep raising equity (or generally some sort of operating cash – liquidity) that’s when a bank implodes.
Lanchester seems to regard the shrinkage of 600,000 government jobs as a bad thing, no? Since government can’t produce wealth, doesn’t putting 600,000 people back on the market for wealth-creating industries help the economy? Shouldn’t the increase in supply lower the cost of labor and thus make England more competitive going forward?
As in the US, Canadian job figures exclude those who have given up looking for work. There is no differentiation between homemakers and out-of-luck auto workers.
However, our stats agency is quite independent of government independence. So independent, in fact that it turns a profit selling data including estimates of the number of unemployed and underemployed.
7% is a typical unemployment rate for us, perhaps due to a higher minimum wage, over 10 USD an hour in Ontario.
The mood here, however, is good. The economy is growing and our government, not especially well-liked, is close to preisenting a balanced budget this decade. Our debt to GDP is 30% vs. The US 95%. It is hard to determine if these figures include all public debt or only federal.
Our worst expectation, in the stats sense, is a massive US economic collapse.
LT, Stephen: Thanks for the information on Canadian data.
Douglas: I don’t remember Lanchester offering an opinion about the optimum size of the British government. I think in his view it wasn’t worth considering whether or not the country would be better off with the 600,000 extra government workers since the taxpayers couldn’t afford them.
I’m not sure that putting 600,000 government workers back into the labor market will help a country’s productivity. You’re talking about folks who’ve never had to think about a customer or a competitor.
Stephen van Egmond: “[Canadian] debt to GDP is 30% vs. The US 95%. It is hard to determine if these figures include all public debt or only federal.”
Must be federal only. General government gross financial liabilities are 84% of GDP, according to the OECD (see Annex Table 32). The federal government introduced a $40 billion stimulus package (C. D. Howe analysis). Also, the provincial governments are running deficits, providing additional stimulus.
“You’re talking about folks who’ve never had to think about a customer or a competitor.”
I wonder whether TSA employees consider the recipients of their groping and scanning their “customers” or ..?
… was hoping to track down the officially-authorized terminology in the TSA Employee Handbook and found nothing relevant, though this portion was good for a laugh:
Q. Subversive Activity
In accordance with 5 U.S.C., Chapter 73, no [TSA] employee shall advocate, or become a member of any organization that which the employee knows advocates the overthrow of the U.S. Government, or which seeks by force or violence to deny other persons their rights under the Constitution of the United States.
http://www.afge.org/Index.cfm?Page=TSAPolicies&fuse=Document&documentID=2192
… can’t imagine a TSA employee would ever want to become a member of an organization which seeks to deny persons their rights under the Constitution…
Z: I think there are sometimes internal training programs for government workers that try to get them to think of taxpayers as “customers”, but the supposed customers can’t all walk across the street to a competitor and cause a layoff, so it isn’t clear why any of the workers would listen.
More: See the British Office, Episode 4 “Training” at http://www.dailymotion.com/video/xcdgj9_the-office-uk-training_fun (summarized at http://en.wikipedia.org/wiki/Episode_Four_(The_Office,_Series_One) ).
It is difficult to say what will befall to Britain. Shedding 600K public sector jobs is not exactly going to solve much, because all these people will get job benefit allowance and whatnot — they would basically be paid (less) to do nothing whatsoever, rather than actually doing something that might be useful. Admittedly *useful* is the key idea here, and it is not clear how usefulness is assessed.
Britain is going down the drain because it has destroyed its manufacture (and the present government does not seem that keen to shore industry up) and relies on (1) the Banking sector, (2) turism and (3) pharmaceutical companies.
Big pharma is doomed, because more and more patents protecting their assets are expiring, and we know where the banks went. God knows why people come here in Britain for tourism either.
I am not sure that the average debt of the UK household is a relevant predictor for its economy. The utter lack of serious and big investment in manufacture is a big deal. Germany, for instance, is famous for the quality of its products. Thanks to its industry, Germany bailed out East Germany at reunification now and it is not as hard hit as the UK. Maybe, now they have abandoned their ideas of racial supremacy, germans should be invited to run the UK, at least for a bit.
Additionally, lack of industry also means that the 600K jobs shed by the government cannot be used as cheap labour to make British exports more competitive — we have nothing to export in the first place.