National debts have risen sharply during the crisis – typically, they look set to hit 100% of GDP in OECD countries. But could they go higher – to 200, 300 or even 400% of GDP? That’s the worrying scenario set out in a paper from three economists at the Bank for International Settlements, the international organisation of central banks. Writing in a personal capacity, the team warns that rapidly ageing populations could lead to huge increases in government borrowing over the coming decades.
Unless action is taken, they say, those rises could eventually dwarf the debt run-up seen during the crisis. Countries in the OECD area, but also the “BRIC” economies, look set to see a growing imbalance in their populations over the coming decades. As people live longer and fewer babies are born, the size of the workforce will shrink and there will be fewer people of working age to support retirees. In the OECD zone in 2000 there were about 27 retirees for every 100 workers, according to the OECD Factbook ; by 2050, the proportion of retirees is forecast to hit 62, and in some countries there will be one retiree for every worker. That combination will hit governments hard: Fewer workers means they’ll be taking in less in tax, while more retirees means higher pension payments and healthcare bills.
The BIS team warns that the cost of fulfilling current government spending commitments means that by 2020 national debt would soar to 300% of GDP in Japan, 200% in the U.K., and 150% in Belgium, France, Ireland, Greece, Italy and the U.S. Their longer-term projections are even more startling, and warn of debt above 400% in the U.S. and 500% in the U.K by 2040. Clearly, such increases would be unsustainable.
For one thing, financial markets would probably stop lending to a country long before debts hit such levels. For another, the cost of paying off the interest on these debts would suck huge sums of productive capital out of the economy in the form of tax. “With a debt level that is two or three or four times your earnings each year, that just won’t work – you won’t be able to service that debt,” the team’s leader, Stephen Cecchetti, told the BBC . “The lesson here is not that this is going to happen – it almost certainly can’t happen,” he added, “the lesson is that something has to change.”
In fact, there are already signs that some change is happening, with a number of countries moving to raise retirement ages. That’s something we’re likely to see more of in the years – and decades – to come.
Nobel laureate Robert Solow has some interesting things to say about the risks of blind faith in financial markets: “The market evangelists, who tend to claim more for unregulated markets than solid theory can justify, are ideologically motivated,” writes Solow.
“They dislike and distrust governments so much that they overlook the exceptions and the implausible assumptions, and simply propose the blanket principle that the market knows best. What is improper in this manner of argument is the frequent casual hint that it is authorized by economic theory. Nothing so general is ever authorized by economic theory.”
Solow is especially critical of free-market fans who excuse everything that happens in financial markets: “What is inadmissible is the assumption that, if the market creates a large and convoluted financial system, the market must be right,” he writes.
While a functioning financial system is at the heart of a successful modern economy, he argues that this shouldn’t be an excuse for financial firms to do whatever they like – especially as some of their activities seem to benefit almost no one but themselves:
“I have read that a firm such as Goldman Sachs has made very large profits from having devised ways to spot and carry out favourable transactions minutes or even seconds before the next most clever competitor can make a move,” writes Solow, referring to so-called high-frequency trading.
As The Economist reports this week, this sort of trading is “attracting suspicion” and coming under greater scrutiny from European and American regulators.
Solow, too, has doubts: “Now ask yourself: can it make any serious difference to the real economy whether one of those profitable anomalies is discovered now or a half-minute from now? […] It remains hard to believe that it all adds anything much to the efficiency with which the real economy generates and improves our standard of living.”
To find out more about OECD work on financial markets, click here.
How much have governments committed for bailing out banks and financial institutions? $11.4 trillion, according to OECD estimates . That’s a lot of money – equivalent to the 2007 GDP of Japan, the United Kingdom, Germany and France combined. Or, as Dow Jones explains, about $1600 for every man, woman and child on the planet.
But that number needs to treated with a little caution. In effect, it represents a worst-case scenario for governments based on their current commitments.
$1600 for every man, woman and child on the planet
For example, it includes the cost of government guarantees, some of which will never be called on. It also includes the cost of purchasing assets and equity, the value of which may go up (or down). Because the job of supporting the banks is still a work in progress, the final cost won’t be known for years.
Of course, governments may still need to make fresh commitments in order to support banks. But assuming they don’t, the final bill could well be lower.
What – or who – caused the crisis? Slate offers not one but 15 answers to that question here. But if you’d like a more official response, you might like to keep an eye on the Financial Crisis Inquiry Commission (FCIC) in the United States, which is due to begin public hearings this week. The ten-member commission was set up by Congress with a sweeping mandate to investigate the causes of the crisis – everything from the possible role of fraud and abuse in the financial sector to the way bankers are paid.
There are precedents for this sort of probe. In the early 1930s, the U.S. Senate’s Pecora Commission investigated the causes of the Great Depression, and “unearthed a secret financial history of the 1920s, demystifying the assorted frauds, scams and abuses that culminated in the 1929 crash”, according to Ron Chernow. That investigation had a long-term impact on the U.S. financial sector, leading to the establishment of the Securities and Exchange Commission (SEC) and the separation of commercial and investigation banking.
Whether the FCIC will have the same impact remains to be seen, but its chairman, Phil Angelides, has made it clear that he wants the commission to ask – and answer – some tough questions. “You have millions of people unemployed, millions have lost their homes, and Wall Street is having a record year with record profits and record bonuses,” he told ABC News. “People want to understand why.” What questions should the commission ask? The New York Times and The Huffington Post have some suggestions.
The Commission is due to report by mid-December 2010, but members have indicated they plan to post important findings on their website (under construction) before then.
We are publishing From Crisis to Recovery, a new book from the OECD Insights series here on the blog, chapter-by-chapter. This book traces the roots and the course of the crisis, how it has affected jobs, pensions and trade, while charting the prospects for recovery.
These chapters are “works in progress” and their content will evolve. Reader comments are encouraged and will be used in shaping the book.
By way of introduction…
Being forced out of a job is an unpleasant experience. Employers often prefer to use euphemisms such as “I’ll have to let you go” that imply it’s somehow liberating or what the worker wanted. Thomas Carlyle, the man who coined the expression “the dismal science” to describe economics, was much nearer the mark. Writing in 1840, he claimed that “A man willing to work, and unable to find work, is perhaps the saddest sight that fortune’s inequality exhibits under this sun.”
Modern research supports Carlyle’s view. For instance, finding yourself unemployed has a more detrimental effect on mental health than other life changes, including losing a partner or being involved in an accident. A long spell of joblessness has social costs too, whether at the level of individuals and families or whole communities.
Tackling unemployment and its consequences has to be a major part of governments’ response to the crisis.
This chapter looks at the workers and sectors most affected by the crisis and how policies can help workers weather the storm.