new UN case studies of pension reform

November 25th, 2014

From this month’s International Update, published by the Social Security Administration of the United States:

Recently, the United Nations released Reforming Pensions in Developing and Transition Countries—a series of country case studies that updates the global discussion on pension reform. According to the study, since World War II, there have been two significant trends in pension reform:

1.    the introduction of privately managed individual account programs that supplement or replace existing public programs (beginning in the 1980s in more than 30 countries), and

2.   the rapid growth of universal noncontributory pension programs as the preferred public policy tool for alleviating poverty among older populations in both developing and transition countries [emphasis added].

The study finds that despite the ever-changing nature of national pension programs, driven by demographic and fiscal considerations, coverage levels around the world remain extremely low, with only 50 percent of the working population covered in Latin America; 30 percent in Asia, North Africa, and the Caribbean; and less than 15 percent in Sub-Saharan Africa. And, even when populations enjoy a higher level of pension coverage, as in the former republics of the Soviet Union, benefit levels may not be high enough to move older persons above the poverty line.

US Social Security Administration (SSA), “United Nations”, International Update, November 2014. (Scroll down to end.)

The publication referred to is

Reforming Pensions in Developing and Transition Countries, edited by Katja Hujo (Palgrave Macmillan/United Nations Research Institute for Social Development, August 2014).

The full 369-page book can be purchased from for 132.00 Canadian dollars plus tax (or equivalent in other currencies) at You can preview the first 37 pages, without charge, here.

I am eager to discover how UNRISD defines “universal noncontributory pension programs”. I suspect that they include all noncontributory pensions, universal or not. I will let readers of TdJ know my finding once I obtain access to the full report.


Reforming Pensions in Developing and Transition Countries by Katja Hujo


Beijing, Moscow and ‘spheres of influence’

November 25th, 2014

FT columnist Gideon Rachman has written a must-read analysis of the efforts of China and Russia to create ‘spheres of influence’ in their parts of the world.

Both China and Russia believe that they should have veto rights about what goes on in their immediate neighbourhoods. Russia argues that it is unacceptable that Ukraine – a country ruled from Moscow for centuries – should now join the western alliance. ….

Beijing has now also become more directly assertive on security matters. It is pursuing its territorial disputes with neighbours such as Vietnam and Japan with increased energy. ….

There are some in the west who suggest that – on grounds of pragmatism and in the interests of peace – Russia and China should be tacitly granted these “spheres of influence”. In a recent interview with Der Spiegel, Henry Kissinger made it clear that he regarded it as reasonable to tell Ukraine that it is not free to decide its own future.

The Obama administration, however, has explicitly set itself against this idea. Tony Blinken, US deputy national security adviser, has said of Russia’s aspirations: “We continue to reject the notion of a sphere of influence. We continue to stand by the right of sovereign democracies to choose their own alliances.” ….

As far as the Russians and Chinese are concerned, however, this is an argument that is fundamentally about power – and all US talk about “principle” is simply hypocrisy. After all, ever since the Monroe Doctrine was announced in 1823, America has proclaimed its intention to keep outsiders away from its own hemisphere. In recent decades, it has intervened militarily in Grenada, Panama and Haiti. Even more recently – as the Russians never tire of pointing out – the US has led military interventions far from home, in Iraq, Afghanistan and now Syria. ….

The American response is to point out that the US global military presence is built around alliances between willing partners. … John Kerry, the US secretary of state, even declared last year that “the era of the Monroe Doctrine is dead”. Henceforth, it seems, America will endorse what a Soviet spokesman once called “the Sinatra doctrine” – the idea that all nations can do it their way.

Gideon Rachman, “China, Russia and the Sinatra doctrine“, Financial Times, 24 November 2014 (metered paywall).

savings and growth

November 25th, 2014

An increase in the rate of saving produces a once-and-for-all increase in output, with no increase in the rate of growth. This follows from the Solow growth model, named after the MIT economist who formulated it: Robert Solow (born 1924). The model applies to all times and places, is universally accepted by economists, and frequently ignored by non-economists.

Robert Solow’s name is familiar to anyone who’s taken an introductory macroeconomics course. Solow’s model of economic growth is the first, and for the vast majority of students, the only growth model they will learn. And it’s for this work that Solow won the Nobel Prize in 1987.

The Solow growth model has one key takeaway: the source of long-term economic growth is technological growth. Before Solow’s 1956 and 1957 papers outlining the model, some economists believed that a country could boost its rate of economic growth by increasing its savings rate or adding more workers to its labor force.

But Solow’s model shows something else. Increasing the savings rate could get an economy to a higher level of output after the increase, but the long-run rate of economic growth wouldn’t increase. Doubling the savings rate would increase a country’s GDP per capita, but it wouldn’t change the fact that the economy would grow at the same rate as before. But a “technological” advance boosts the long-run growth rate of the economy.

Think of it this way: an increase in the savings rate moves an economy along a line, but technological growth shifts the line out.

[For more, click on the link below.]

Nick Bunker, “An appreciation of Robert Solow“, Washington Center for Equitable Growth, 24 November 2014.

statistic of the day: microbrewery boom

November 24th, 2014

The fashion for craft beer and artisan products has led to an explosion in the number of microbreweries. Since 2008 their number has more than doubled in the European Union to 3,616 and almost doubled in the US to 2,768 at the last count.

Gavin Jackson, “Datawatch: number of microbreweries“, FT Data blog, 24 November 2014 (unlimited access – free registration required).




money illusion in housing markets

November 23rd, 2014

Why do home buyers today think that mortgages are more affordable today than they were three or four decades ago? Tim Harford, the FT ‘undercover economist’, explains.

[C]ontrast today’s low-inflation economies with the high inflation of the 1970s and 1980s. Back then, paying off your mortgage was a sprint: a few years during which prices and wages were increasing in double digits, while you struggled with mortgage rates of 10 per cent and more. After five years of that, inflation had eroded the value of the debt and mortgage repayments shrank dramatically in real terms.

Today, a mortgage is a marathon. Interest rates are low, so repayments seem affordable. Yet with inflation low and wages stagnant, they’ll never become more affordable. Low inflation means that a 30-year mortgage really is a 30-year mortgage rather than five years of hell followed by an extended payment holiday. The previous generation’s rules of thumb no longer apply.

Because you are a sophisticated reader of the Financial Times you have, no doubt, figured all this out for yourself. Most house buyers have not. Nor are they being warned.

Tim Harford, “Why a house-price bubble means trouble“, Financial Times, 22 November 20014 (metered paywall).

Nominal interest rates were, indeed, high in the 1970s and 1980s, but inflation was also high. The result was low and sometimes negative real interest rates (the rate of interest minus the rate of price inflation). Borrowers’ positive reaction to low nominal rates of interest, disregarding price inflation, is an example of ‘money illusion’, although Mr Harford does not use the term.

This reasoning, by the way, applies to all debt – including student loans and credit card debt, not just mortgage debt.

World Toilet Day

November 21st, 2014

The contribution of toilets — both waterless and flushing — to public health has not received much attention. Tim Taylor seeks to correct this oversight.

The reason that the United Nations voted last year to designate November 19 as World Toilet Day is because … on that day in 2001 … the World Toilet Organization [was formed]. Out of the global population of 7 billion, about 1 billion people defecate in the open, with about 600 million of those people living in India. According to the World Health Organization and UNICEF, there are 19 countries in the world where more than half the rural population still practices open defecation.

Especially in areas with relatively dense populations, this practice has health consequences. ….

In the bulk of this post, I have manfully avoided referring to Sir Thomas Crapper, who greatly improved and popularized the flush toilet in the 19th century. I have not discussed the We Can’t Wait promotions or the dancing turds ads in India. I have sidestepped whether toilet policy should be pursued through a bottom-up or top-down approach.

Timothy Taylor, “World Toilet Day“, Conversable Economist, 19 November 2014.

I would like to to add that Thomas Crapper (1836-1910) was not knighted by Queen Victoria, nor did he invent the flush toilet, though he did manufacture and promote them. He was a successful industrialist and plumber, born in Thorne, Yorkshire (UK). John Harrington invented the flushing toilet in 1596, long before Thomas Crapper was born. George Jennings in 1852 also patented a flush toilet. Mr Crapper held three patents for water closet improvements, but none for a flush toilet. Because of his surname, many writers (emphatically not Tim Taylor) erroneously credit him for invention of the flush toilet.

monetary stimulus in Japan

November 20th, 2014

Canadian economist William White argues that Japan’s planned expansion of the money supply can “quickly take inflation to very high levels”. Many economists think that is precisely what Japan needs. Mr White, on the contrary, believes that monetary action “is not needed and it will not succeed in stimulating the economy”.

Here, from his op-ed, is a brief introduction to Mr White’s reasoning. Among economists, his is definitely a minority view. It might even be correct. Unfortunately, in macroeconomics everything changes at once, so we will never know for sure, even if the Bank of Japan goes forward with its plan.

Japan’s recent slow growth has been largely driven by demographic trends. Since 2000 growth in GDP per person of working age has been significantly above that in the US. As for persistent deflation, the level of Japanese consumer prices has fallen less than 4 per cent in the past 15 years. There is no evidence of an accelerating deflationary trend, nor of consumers delaying spending in anticipation of lower prices. Indeed, the household saving rate has fallen since the 1990s from a traditionally high level to zero today. Finally, the BoJ estimates that the amount of spare production capacity is also close to zero.

William White, “Japan’s plan for further stimulus is not courageous but foolhardy“, Financial Times, 20 November 2014 (metered paywall).

William White (born 1943) was at the Bank of Canada from 1972 until 1994, when he joined the Swiss-based Bank for International Settlements (BIS). He retired from the BIS in 2008. The following year he was appointed chairman of the Economic Development and Review Committee at the Paris-based Organisation for Economic Co-operation and Development (OECD.

the War for Independence in British North America

November 19th, 2014

FT reader Ted Gaffney, who resides in Connecticut (USA), reminds us of oft-forgotton facts of the rebellion launched in 1775 by British colonists in North America. The war (actually a civil war) ended in 1783 with independence for 13 British colonies.

One-third of the populace could be described as “patriots” opposed to parliamentary interests and controls; one-third were “loyalists” – supportive of the king’s policies; and one-third were not committed either way.

Although the loyalist segment were ultimately driven from their homes and resettled in Upper Canada, it was the Native American population that bore the greatest impact in defeat.

In particular, George Washington commanded that a “scorched earth” policy be used to break the power of the largely pro-British Iroquois Confederacy. John Sullivan’s campaign of 1779 devastated the Iroquois heartland, destroying dozens of villages, burning cornfields, and inducing a wintertime famine that led to thousands of deaths by disease and hunger. However cruel the guerrilla war fought between fellow American neighbours, it was far worse and more merciless when directed against the indigenous peoples.

Ted Gaffney, “Native American people bore the greatest burden“, letter to the editor, Financial Times, 18 November 2014.

Without minimizing the unspeakably cruel treatment of indigenous peoples, I would add that United Empire Loyalists suffered loss of property, for which they were never compensated. Their only crime was to support the government of the day.

ordoliberal Germans

November 17th, 2014

German journalist Wolfgang Münchau complains that his country’s dominant economic ideology is out of sync with the rest of Europe. Until recently, Germany had a national currency, so this exceptionalism did not matter very much. Now Germany dominates a large currency area (the eurozone), and its policies matter a lot.

German economists roughly fall into two groups: those that have not read Keynes, and those that have not understood Keynes. To describe the economic mainstream in Germany as conservative misses the point. There are some overlaps with the various neoclassical or neoconservative schools in the US and elsewhere. But as compelling as a comparison between the German mainstream and the Tea Party may appear, it does not survive scrutiny. German orthodoxy straddles the centre-left and the centre-right. The only party with some Keynesian leanings are the former communists. ….

The Germans have a name for their unique economic framework: ordoliberalism. ….

After 1945, ordoliberalism became the dominant economic doctrine of the centre-right. In the 1990s, the Social Democrats started to embrace it, culminating in Gerhard Schröder’s labour and welfare reforms in 2003. Today the government is ordoliberal. The opposition is ordoliberal. The universities teach ordoliberal economics. In the meantime, macroeconomics in Germany and elsewhere are tantamount to parallel universes. ….

[O]rdoliberals have no coherent policy to deal with depressions – once or twice in a century disasters. Whenever I ask one of them what one should do in a depression, the answer usually includes some reference to “creative destruction”.

Wolfgang Münchau, “The wacky economics of Germany’s parallel universe“, Financial Times, 17 November 2014.

German ordoliberals seem to have much in common with followers of Hayek, though Mr Münchau does not explicitly mention this.

inflation and deflation

November 16th, 2014

Since the 1007/2008 financial crisis, austerians have consistently warned that fiscal stimulus and loose monetary policy would produce severe inflation. This did not happen, so austerians have been quiet lately. One outspoken austerian (Chicago economist John Cochrane) now admits that we face a problem of deflation, not inflation. Does he admit that his forecasts were terribly wrong? No. Does he say he is sorry for encouraging policies of austerity in the Great Recession? No. He now thinks that economies are robust, that markets are self-correcting so long as governments do not interfere too much.

“The danger now is inflation,” warned University of Chicago economist and Paul Ryan dinner companion John Cochrane in 2009. He warned of this again in 2010: “A substantial inflation will follow — and likely a ‘stagflation’ not inflation associated with a boom.” And again in 2011. (“As a result of the federal government’s enormous debt and deficits, substantial inflation could break out in America in the next few years.”) And again in 2012 (“Inflation Should Be Feared”).

Inflation has stayed very low. And look, here is John Cochrane in today’s Wall Street Journal editorial page, no longer warning of inflation. Now he is arguing that deflation might be coming, but it’s not so bad:

Jonathan Chait, “Inflationista John Cochrane Wrong But Not Sorry“, New York Magazine, 14 November 2014.

Here is part of Cochrane’s WSJ op-ed:

With European inflation declining to 0.3%, and U.S. inflation slowing, a specter [of deflation] now haunts the Western world. ….
Clearly, our central banks want higher inflation, and the current slow decline was unintended. So, just as clearly, central banks have a lot less understanding of and control over inflation and deflation than most people think. ….

Maybe the economy isn’t so inherently unstable and in need of constant guidance after all. Bottom line? Relax.  

John Cochrane, “Who’s Afraid of a Little Deflation?“, Wall Street Journal, 14 November 2014.

Princeton economist Paul Krugman is in Argentina, recommending austerian policies. Really!

And if anyone starts yelling that I’m being inconsistent in saying that deficit spending and money-printing are a problem in Argentina, because those are the same policies I want in the US, the answer is, yes, they are — because the US is in a liquidity trap, suffering from persistent suffering from persistent lack of demand, while Argentina is overheated.

Paul Krugman, “Inflation Truth, Really“, The Conscience of a Liberal, New York Times blog, 14 November 2014.