Meditations on Russia and Fukuyama

Russia now seems set for a severe recession. The combination of sanctions and dramatically falling oil prices weakened the state dramatically, with questions about Putin's ability to continue leading the nascent police state.

Western commentators have adopted an arrogant tone about all this. Globalization, inter-dependence, Russia's backwardness: all these narratives have come to fruition. We can stick it to this backwards petro-state, without lifting a finger! Take that you Crimea-annexing jerkwad!

At this point, a layman might think that the tide of history has turned, and the West really has gained the power to use economics to severely punish our enemies.

Let's walk that bit and consider a few essential items:

1. Sanctions are Limited (and it's tough to do more)

Right now, we have limited the ability of senior Russian's to travel, and the ability of some Russian companies to raise money. We're not talking about crippling sanctions, a la Iraq post-1991, and we have spent a long time enacting even these rather limited sanctions.

That means willingness to incur, or inflict, actual economic pain remains low. Europeans still want to buy Russian hydrocarbons, and will pay top dollar for them. Comparatively, the "surrender-monkeys" of Munich were, by this point, raising armies to parry Hitler, and extending defense guarantees to Poland.

Quite frankly, I think Modern Europe lacks the stomach of 1930s Europe, and that's saying something.

This matters because if we cannot enact any sort of serious sanctions, we can't really rely on using sanctions as weapon. It's sort of like combating the NVA and suggesting everything will be fine because we have ICBMs: we're not going to nuke Hanoi. I know it, you know it, and the NVA knows it, so they'll just act as if the ICBMs don't even exist.

Who cares? A weapon isn't a threat unless you can use it. Right now we've shown our willingness to bring out some light-weight sanctions, but not any sort of commitment to real economic ruin.

Why does that matter?

2. Russia's Recession is a Textbook Financial Crisis/Currency Run

This, to me, looks like your standard financial crisis, not all that much different from 1998 or 2008. Most people still do not understand how much major companies depend on financial markets for even day-to-day operations: hell I'm an accountant and most of the people I work with don't understand why Finance needs daily cash flow reporting (ain't it obvious guys?)

We've restricted most major Russian companies, ESPECIALLY banks, from accessing capital markets. And a lot of commercial banks are fearful of lending money to any other Russian companies, since GOK if they will get hit by sanctions/recession/bombs, either. Better to sit it out!

This restricts the ability of most Russian companies to perform daily economic activity, and forces serious cut-backs. Worse, it produces a run on the currency: these Russian companies operate in rubles, but borrowed in dollars or Euros. Now they have to repay all their creditors, in dollars or Euros, so they have to use a lot more rubles to buy dollars.

And since oil is down so much, oil consumers aren't really partial to spending a lot of dollars to get rubles to buy gas, and etc.

Now why does that matter?

3. Crises can be ridden out

You might not be able to stop the recession, but you can certainly moderate its impact. That's the point behind foreign exchange reserves, and Russia has spent the last decade storing hundreds of billions of dollars and Euros for just this case.

In the worst case scenario, the Russian Central Bank might be able to pay off all the interest and principal owned by Russian banks for the next year or two. That would drain the reserves to zero, but collapse would be averted. Hopefully by then some of the sanctions will have been lifted, oil will have gone up, and Russian companies will have adjusted to new realities.

So, not the Great Depression, but a mild recession....

Now that's hardly a severe problem. We're probably better off ramming some of their fishing vessels, for all the good it will do. Either that, or increase the sanctions: shut off ALL financing, refuse remittance payments, and place quotas on oil exports.

Except that's a problem because....

4. Not Everyone is Boycotting Russia

Japan hasn't boycotted Russia much: they've put on hold an investment deal with Russia, but have not severely restricted trade. China just penned a gas deal. But more important than that, the Chinese and Russian central banks have agreed to a 3-year Currency Swap Deal, that just might save Russia's skin.

Additionally, Russia has sought admittance to the world body governing Securities trading: think of it as the SEC, but for the whole world. Admission would allow Russian companies to issue stock and raise funds in Hong Kong (after negotiations).

Russian companies have also explored issuing "Dim-Sum" bonds: bonds denominated in RMB rather than USD. Little harder to shut down a Russian company if you don't control the currency or the capital markets.

Basically, if they can't get financing from the West, Russia will try to finance through China. That's not a sound replacement: the West has a LOT of capital. However, as the Chinese markets mature in the coming decades, the West will find limiting financing a non-viable option.

Summary

We are at a point where our limited sanctions have proven unusually effective: this is not the dawn of a new era. This is PEAK effectiveness. We have control of all the world's major financial institutions, and its capital, while our enemy remains weak, and faces an unfavorable commodity market. These will all go away in the near future. And even at peak effectiveness, we still cannot deter a relatively weak nation from aggressively annexing another nation's territory.

Sanctions are not strong enough by themselves, and they'll never be. Western policy-makers need to explore, and commit, to other means of punishment.

-Robert

The Asian Weirdtopia

"Weirdtopia" is a concept I recently saw on Less Wrong. The post doesn't completely describe Weirdtopia, but let's use their insight into the morality of Utopia and Dystopia:

Utopia and Dystopia have something in common: they both confirm the moral sensibilities you started with.  Whether the world is a libertarian utopia of the non-initiation of violence and everyone free to start their own business, or a hellish dystopia of government regulation and intrusion—you might like to find yourself in the first, and hate to find yourself in the second; but either way you nod and say, "Guess I was right all along."

 Weirdtopias, on the other hand, make us scratch our heads and think "how did that happen"?

An example, from our Founding Fathers. Alexander Hamilton might consider Utopia a centralized state with a strong industrial base funded by a powerful bank. That's Thomas Jefferson's Dystopia. TJ envisions an agricultural society with a weak government and practically no over-arching financial system.

What actually happened is a society of people who pay farmers to Not Farm, let robots build their cars, work in hospitals or supporting hospitals 8 hours a day, and then spend the rest of their time staring at LolCatz.

That's Weirdtopia.

Weirdtopia remains difficult for us to imagine. We lack the ability to think beyond our specific cultural constraints. This is why many historical thinkers believe Travel remains the best teacher: exposing yourself to new cultures challenges your viewpoints and exposes you to problem-solving skills you might never have imagined.

How can we apply this to Economic Policy, though?

If you believe Joe Studwell, Asian Economies function much like Weirdtopias. Let's consider two competing ways for advising developing economies in the Post-War world:

1. Washington Consensus: liberal market reforms, the advancement of parliamentary democracy, opening up markets for foreign direct investment with relatively little restriction, development of large capital markets to allow greater investment, education of workers, etc.

2. ISI: Create huge barriers to trade and phase out foreign competition. Enable your internal industries to grow without competition.

Okay, okay, now what if I told you I was going to....
1. Redistribute all land to all peasants for labor-intensive farming.
2. Centrally purchase all their crops and centrally sell them on the foreign market.
3. Force them to keep their money in local banks while financing my government almost entirely through inflation, thus reducing the real savings of peasants.
4. Imprison my nation's richest men until they agree to build factories for me.
5. ?????
6. Profit!

That sounds insane.

Yet, according to Studwell, that's more or less how the Northeast Asian Economies actually developed. The key element in economic growth, particularly for LDCs, is actually Industrial Learning: they don't need to invent ANYTHING, because everything they need has been around for centuries. They need, and should, try to climb the Learning Curve as quickly as possible.

That might be tough for Mitsubishi to do on its own. But the entire nation of Japan? They have more leverage when dealing with foreign businesses and can extract better deals. Their emphasis, though, will be on teaching their own companies modern business practices. They are shielded from competition, yes, but there's a huge public-private partnership designed to increase the skill of private companies.

As for the peasants....you're not teaching them how to read?! Nope, not really necessary: for the most part, agricultural productivity in poorer nations is poorer because the emphasis is not on growing food, but growing cash crops with as little labor as possible. This doesn't fit the government model, which needs to feed its own citizens, and has a lot of extra labor that isn't useful for anything else.

The financial system is then repressed, to support only one thing: helping world-class industries scale faster.

That's actually a Weirdtopia.

The funny thing is that this makes a bit of sense. Clearly we're able to rationalize how this works. It simply requires us to put aside our ideological models and then consider the growth of LDCs entirely from the viewpoint of scaling up the industrial ladder.

How to apply this to OUR economy, currently going through a long-term stagnation?

First, it requires us to abandon certain demands for ideological purity. Metternich wasn't right, but neither was Cromwell. Our current world would disgust both: it's likely that OUR future will disgust US as well.

Next it requires us to boil down "success" into a few key attributes. Our policy debates are schizophrenic: STEM Workers, immigration, H1-B immigration, unemployment, short-term unemployment, marginal unemployment, health-care expenses, derivatives trading, etc. It's highly unlikely that most of this matters to any great extent. Our future success will hinge on a few KEY items, and if we can get those right, everything else will fall into place.

The question is, what are those few key elements?

What might give us a hint is thinking about what disgusts us, and envisioning the opposite. For instance, we think high-skill immigration is good, low-skill immigration bad.

Maybe that's wrong.

Maybe the US actually needs to import a hundred million low-skilled Indians, for instance: our management class here and our institutions here will improve their producitivity overnight, while freeing up the time of the Indian political class to implement needed reforms and build world-class firms. Maybe we actually need to BAN H1-Bs entirely, and only allow immigrants who intend to be remedial workers. Maybe treating immigrants as second-class citizens gives our own citizens a huge status boost, or reduces the cost inflation of education and health care and allows our second-class citizens to start investing more in their children.

Just a thought.

How are Young People Doing?

The New York Times has started a small controversy by suggesting student debt really ain’t all that bad. Debt has increased, but with the global decline in interest rates and new payment terms, most students aren’t doing any worse than they were in the early 90s.

More interesting, the MOST indebted students are actually paying LESS than they were in the early 1990s. That means severely indebted households (of which I am a member now :/) have really never been in so great of shape.

Well…

Nuh-Uh. Gen Y is probably the most hobbled generation in quite some time. Thought Leonhardt is correct that college debt is not the only issue (and somewhat exaggerated), Gen Y is NOT in solid shape. Nor are young households in general. In fact, post bubble, younger households (ones under 40 years old) are the only households to actually become less wealthy.

 

 

 

Mid-30s isn’t really so “young” to me (27). That includes a lot of prime wage earners…the situation for younger people is even worse, whichis why we have record numbers of young people living at home (though, this is a small increase. The number of young people living at home is always higher).

Let’s list problems one by one…

JOB MARKET

As we covered last time, the job market has not been healthy in almost 15 years, and a college diploma is only insulation from the pain, not body armor.

 

What I want to really hammer home is the young people dropping out of the labor market entirely. They're not just not getting raises....they have no money, at all, period.

We’re not just talking compositional effects or kids going to college, by the way. In the 90s, the percentage of young high school grads with a job was in the low 70s. By 2010, that had fallen to barely above half. These aren’t kids that have gone on to college, these are kids with no further education in the pipeline, who simply have no job prospects.

How do we know that? College attendance hasn't even increased that much. The proportion of young people in college has increased from 35% to 39%. That’s small, and doesn't account for the huge, huge drop in employed young people. (On a side note, that's not even economically helpful, if that 4% just drops out. )

This weak job market sets the tone for everything else wrong in a Millenial’s life. It’s really, really hard to get ahead in the world when earnings have actually fallen with time. And since 2000, yes, even the college graduates have been hurting

Focusing on student debt loads obscures the picture. The job market really is not producing the kind of outsized returns to education we imagine it might. Even if it were true, the majority of young people do not attend college. And among those that do, many do not graduate.

A more complete picture of the labor market shows that the labor market has simply failed young people entirely. Most young people will receive lower wages than young people even a decade ago.

Something that may make things even clearer, is the time it takes to reach median earnings. While young people used to reach “average” rather quickly, delayed career onset has resulted in them taking longer and longer to reach “average,” which of course means a lot less buying power than other households.

And, again, this isn’t a “lift all boats” thing, this is a “young people don’t have increasing wages” thing.

Unfortunately, it is not the only one.

Rising Rent

While all ages and demographics rent, young people are dramatically more likely to rent than other people. Why should be obvious: they have lower incomes, weaker credit histories, less stable jobs, and less stable lives in general (especially romantically, more on that later).

Over the next decade, 8 in 10 under-30 households will rent at some point in the next decade.  A full fifth will rent the entire time.

 

However, despite the recession and lagging income, rents have continued to rise throughout most American cities. And it’s not just major cities like New York City. Throughout the US, renters as a whole are spending almost a fifth more on rent than they used to (as a percentage of their income), That includes even places like Cleveland, hardly known for anything besides dashed hopes, Drew Carey, and a revolving Lebron James door.

Again, this isn’t just low income. Rents are increasing throughout the whole country.

 

And it’s most likely going to get worse. Rental demand has increased strongly, and the US now has lower rental vacancies than during the Bubble Period!

 

This is huge. Vacancy rates in the US have been rising for decades. This represents a climatic shift in the US vacancy market, and no one seems to be talking about!

Has there been any construction to keep pace with this? Well, yes, but we’re still off from where we “need” to be. Especially given our exceptionally low vacancy rate, and an especially low housing starts that are sure to rise in the coming years.

This is a recipe for significant appreciation in rents, at a time when more than half the population is considered “rent-burdened” in major cities. As rent makes up the major expense of young people, this is an especially difficult burden for them to carry, particularly at a young age when they are working to reduce debt and build up initial equity, 401ks, etc.

I guess we will see more young people living at home? According to Pew, we see an increase to 36% of young people living at home (from 32%), which falls into “Deviation” range. This might even increase as the decade continues.

Major policy changes to address rental housing short-falls would probably go a long way towards helping out the younger generation. Until then, we’re likely to see a rising proportion of young people living at home, as well as more rent-burdened young households.

Damaged Housing Market

Housing disproportionately drags down young households. The below graph extends our age range all the way to 40, but it’s a useful picture of the real assets of young people. You can see that the collapse in housing prices severely affected younger households, and has not yet staged a recovery.

Why this is? Well, I don’t really know. Young households might be over-exposed to the Sand State bubbles that are only now staging minor recoveries. If that’s the case, we might expect a recovery in the near future for younger households, but right now they are balance sheet-impaired, and housing represents the single largest asset of many young households.

In particular, this damages the balance sheets of the most well-off young people. A majority of college educated households under 40 have mortgage debt, even if they have student loan debt.  Less educated young people and poorer young people do not have households.

Another point is that while young households have, in general, reduced their debt load, a major factor is that homeownership in this group has fallen substantially.

 

The major factor here seems to be a lack of income, caused by a lack of education. Even indebted households still hold significant housing assets, while younger households without education don’t, even despite their higher credit ratings (more on that later).

While certain figures might not show a major decline for younger households, it’s important to note that younger households have eschewed significant investments like housing and auto ownership. This is affecting LOWER income people most, so it’s not a “lifestyle choice,” as much as a concession to economic reality.

My thought? This is skeptical, but younger households might hold down other expenses that do not show up in debt figures. Maybe they’re only eating Ramen and mystery meat. Maybe they forego routine medical and dental care. Maybe they’re even wearing torn up clothing and turning down the thermostat to dangerous temperatures in the Winter weather.

Delayed Marriage

This is a less a policy issue, and more a land-mark social change. The US right now is riding a “a marriage is dead” wave that drives up average marriage ages and lowers the overall marriage rate. This is not a US trend, but a trend affecting most nations in the world. See, for instance, this graph of marriage decline across various OECD nations.

 

Millennials are drastically less married to be than other generations, even adjusting for age.

Most young Millenials would like to be married, but the major problem is that they believe they require a solid economic foundation to become married. The days of my parents, getting married and barely eking out a 3 cent surplus per month? Those days are over. Instead, marriages these days are more likely to resemble my current marriage: mergers of successful independent adults, who have established 401ks, decently high incomes, and set for a future with relatively little concern about money.

Perhaps it’s a good thing to delay marriage, especially when money concerns count for such a huge fraction of divorces. And looking at this graph, just having a higher marriage rate and a low divorce rate clearly does not mean economic prosperity, unless Mexico and Mauritania are now considered bastions of wealth.

 

However, this delayed marriage rate is significant for two reasons:

1.       It reveals economic stress on young households

2.       It causes economic stress on young households

On the first, marriage is now something for wealthy people, a dramatic shift in the way we think about marriage. Indeed, while marriage rates have been declining across all age groups, marriage is still holding up among college-educated folk, high-income folk, etc. And these people aren’t exactly running off to get divorces either. They get married, and stay married.

However, if a huge cause of delayed marriage is economic stress, what does it tell you when young people are putting off marriage? Hint: it means they don’t feel wealthy enough to marry. At this point, it means they don’t even feel financially secure enough to start life.

Obviously, this is a social choice, but if our young people do not feel financially secure enough to marry and start children until they are almost 30 (and even then only the rich kids!), we have a big problem.

An additional problem is that the lower marriage rates (and subsequent high divorce rates) decrease economic fortunes for young people even more, particularly young men. In particular, it forestalls home purchase (exposing our young people to those nasty rent markets longer), and results in increased uncertainty regarding expenses. Socially speaking, single people are far more adventurous, and drop a lot of money on daily social activities.

A full treatment would be reserved for later, but a delayed marriage does impact the finances of young people somewhat.

 

Who is Hurting?

You can absolutely see that young homeowners and young college debtors have some struggles.

However, debt burden isn’t really bad(though rent burden is much higher, as previously mentioned). This would suggest that the college debt in particular is not the key problem hurting young people.

Most revealing, actually, would be this graph of asset ownership. If the mark of economic uncertainty is not owning a house or a car, college graduates with student debt are still performing a lot better than people who don’t go to college, and have no debt at all. And indeed, the presence of debt barely seems to make a dent on daily lives.

 

Student debt definitely impacts net worth, but on a monthly basis (am I severely burdened by debt) and daily basis (do I have a car), it’s not as big of a deal.

So who is actually hurting?

Again, you’re looking at the less educated people. In particular, high school grads or less, who have no rising wages, a difficult time finding a job (especially in this recession), and therefore show much lower ownership of assets like houses and cars.

However, as we discussed before, just because college graduates are doing better, does not mean we should send more people to college. Young college graduates have also seen flat wages, which is not what we would expect from a New Renaissance, or a true return to education. It suggests a shrinking pie, which people are struggling to get a slice of.

That might suggest why higher-income people are now loading on debt. It’s a rat race just to stay even, with the losers tossed into a dying macroeconomic pit.

This, I think, is a more useful view of how young people perform in the modern economy. Thus, it’s not informative to look at those with student debt, specifically, because they are still the “winners” in this economy (especially if they managed to graduate from a formal, 4 year institution).

Instead you’re looking at people who never had a shot at the big-time, or gambled and lost and now have this debt burden with no degree.

How Bad Can It get

I’d like to say we are at a local minimum, but that’s not necessarily the case. Things can certainly get much worse for our young people. Many European nations, despite their social safety nets, offer difficult economic prospects for their young people

 

These reflect long-standing structural problems in these economies, and not merely poor economic conditions. But, of course, that’s no news the readers here. What matters to us is the suggestion that the US might now generate some structural issues of its own. The difference being that, while Europe has a highly restrictive labor market that naturally creates unemployment among marginal groups, the US would have a tight labor market due to the fundamental methods of production.

I am making that second part up. I don’t know how to describe US economic fortunes. The important part is that we KNOW what causes European unemployment: bad policy. Bad policy can be reversed.

In the US case, the poor fortunes reflect something deeper, and might be much harder to fix.

Okay. That being said, let’s look at the numbers.

Youth unemployment is going down, along with the rest of the economy:

July 2013 Male 20-24 unemployment: 14%

July 2014 Male 20-24 unemployment: 12.5%

July 2013 Female 20-24 Unemployment: 10.9%

July 2014 Female 20-24 Unemployment: 9.8%

So at least the economic recovery is catching up the lower rung of the age ladder. Thank the Lord, the recession didn’t permanently knock the whole damn class off-kilter. Without anything else to go again, that would make me think the current crop of college-educated young folk should completely recover their positions.

But that doesn’t mean we don’t have problems. Remember, this is a decade-old trend….and our young people might be recovering, but they are in anemic shape right now.

 

 

Who Really Loads on The Debt?

In case you've missed it, there's been a lot of push-back on the "Student Debt Apocalypse." More to come on that later. But a thought for right now.

Brookings took a look at some numbers, and showed something quite remarkable:

Back in the old days, college debt was something the middle class had, while sometimes poorer kids would borrow some money to get into school.

Not anymore.

These days, it's the ultra-rich, Davos-aspirational class that loads itself up on debt.

My take? These are upper class and upper middle class families that have grown extremely wealth and status envious, and are seeking to leverage themselves to the hilt for a shot at the big time. They are taking on a lot more education than ever before, at more expensive schools than ever before, with less clear career paths than before.

Just think about that, next time the topic of student-debt comes up. We're not helping Richard Wright, we're helping Mitt Romney.

Canadian Politics Part 2: A Current Snapshot of 2015

Shall the Liberals return as the natural governing party of Canada? Can they gain a majority, or at least a minority of 338 seats, starting from a base of now 37 seats?

On June 30, four by-elections took place across Canada: 2 in Alberta, 2 in Downtown Toronto/Inner Burbs. Notably, the Liberals picked up Trinity-Spadina from the NDP, after Olivia Chow, widow of the late former NDP leader Jack Layton, resigned her seat to run for mayor of Toronto, of which she leads the pack against embattled mayor Rob Ford. It wasn't even close from 2011, as the NDP vote share dropped from 54.5% to 34% while the Liberal vote share increased from 23% to 53.5%. Meanwhile, in Fort McMurray-Athabasca in the Northern Albertan Tar Sands area, the Conservative vote share dropped from 72% to 47%, while the Liberal vote share increased to 35%.

Meanwhile, Angus Reid, the pollster most accurate in the Ontario Election (and generally has a solid reputation) has pinned the latest Federal numbers here for June 12th:

Forum Research on the other hand pinned the numbers at Liberal: 39 Conservative 31 NDP 19, so quite a lot of room for variation between the Liberals and the NDP. Of course, the discrepancies between Canadian Pollsters are notorious - let us not forget EKOS pinned the NDP's numbers at 17 and Ipsos at 30 when they captured 24% - so averages may matter more than individual numbers. But these are the two recent ones, and each could tell an entirely different story of 2015.

And of course, poll numbers can change like the wind across time:

As usual, the Conservatives maintain strong leads in Alberta and the Prairies, having captured 51 of 56 of the seats in those three provinces. Alberta will be reapportioned from 28 to 34 seats. However, the Tories cannot expect to get 67% of the vote to the NDP and Liberal's 17% and 9% respectively another time. With the expanded vote share, the Liberals can expect to make significant inroads in the 3 Centre-Western-Southern ridings in Edmonton, as well as a couple in Central or Northern Calgary (like McCall or Confederation), as they nearly picked up Calgary Centre in the last by-election. The NDP can hope only to pick up Edmonton-Griesbach and Lethbridge at best.

In Sasketchewan and Alberta, the Liberals are once again on the upsurge at the expense of both the Conservatives and NDP. They can make some clear gains inside Winnipeg, while holding onto that 2010 by-election gain in Winnipeg North. Of course, it's possible that voters could rally to the NDP, as they have led the province for the better part of two decades, or that given that government's current unpopularity, that they swing wholesale to the Liberals. In Saskatchewan, where the Liberals would gain is less clear. The new boundaries favor the NDP picking up 3 or 4 seats, but their dropped vote count would make that more difficult. Where the Liberals gain outside of Ralph Goodale's Wascana is unclear, perhaps the Northern Churchill River riding with a large First Nation population?

In British Columbia, if Angus is to be believed, the Liberals are up primarily at the expense of the Conservatives, with the NDP maintaining steady from 2011. BC also increases its seat count from 34 to 40, and hosts a great many of unique battleground areas. The Interior and Northern parts are heavily Conservative, with a few NDP pickups. Victoria and Vancouver Islands are primarily NDP, with some Con ridings and Elizabeth May's Green seat. Vancouver districts with heavily immigrant and affluent urban populations will be primarily Liberal-Conservatives contests. And funny enough, the white working class suburban Vancouver ridings are NDP-Conservative contests. Now running at parity with the NDP, with the Liberals not too far behind, can the Conservatives maintain their seat hegemony, or will they start to lose out on all sides? Is this NDP's support here illusory as it was in the 2013 Provincial Election? Can a surge in Liberal support lead to seats outside of Vancouver?

Over in Atlantic Canada, it seems like an all but foregone conclusion that the Liberals will sweep all but a few of the seats across the provinces. The real question is whether the Liberal's majority lead lasts here or not before we can begin to pick apart which seats the Liberals WONT end up winning.

In Ontario, it appears that the Liberals have a strong formula for success by dominating the Toronto and the GTA, with pockets of support in the East, cities in the Southwest, and new possible strength in the Toronto Exurbs. The Conservatives have to be worried that their gains in this province can be quickly eroded by the Liberals in the GTA/East and by the NDP in the Southwest/North. The NDP, following Trinity-Spadina's loss in the by-election and the 3 Toronto seats lost during the provincial election, has to be worried that they won't lose all of their 2011 Downtown Toronto gains to the Liberals entirely. Will this by-election loss also discourage quality candidates from running in 2015? Ontario's 12 new seats should spice up the mix, but most of the movement will have been in the GTA and Hamilton regions while the rest should be relatively untouched.

Finally to the Belle Province of Québec, the movement appears to be... against the Liberals and toward the NDP. As hinted in the previous post, the Bloc Québecois seems to be hovering at between 15-20% support, and this is generally before people are aware that their new leader is the controversial Mario Beaulieu - it's not a good thing when former 15 year Bloc leader Gilles Duceppe bolts from the convention. Polls would suggest that half of the Bloc voters would vote NDP, and the rest would vote for other parties or stay home... not good news for the Liberals here. A 38-26 NDP-Liberal lead could break down into a repeat of 2011 NDP dominance in the province where they won 58 of 75 seats. Those kinds of numbers suggest them winning ~58 of 78 seats, with the Liberals picking up ~15 seats and the Conservatives and Bloc the remainder (if the Bloc survives at all).

It may perhaps be that the early punditry and polling battle will be who wins out in their home province of Québec: Thomas Mulcair, or Justin Trudeau? Currently, Thomas Mulcair sports much better ratings in this province and the country, but this is liable to change. Who wins decisively out of Québec may translate to stronger numbers in Ontario and the ROC - who wins Ontario will win Canada. In that case, today's baseline may be completely unpredictable as to what happens in 2015. All parties have varying foundations of support, with the NDP's perhaps the weakest and the Conservative's the strongest, with the Liberals the greatest potential. On the other hand, the NDP shows the greatest upside for their leader, with the Conservative's at a permanently low level and Justin Trudeau as pretty split at the moment.

So who will win the Canadian election in 2015? Hard to tell. It took the debates for the NDP to go from 15% to 30%+ in the polls in 2011, and it took a poorly thought of ad for the Progressive Conservatives to collapse in support in 2013. So the real question is, who will win in a debate? Stephen Harper, Thomas Mulcair or Justin Trudeau? I have my answer and suspicions, but I'm no psychoanalyst, so we shall see!

Canadian Politics Part 1: Ontario's Provincial Election

Recently, a provincial election took place in Ontario, leading Kathleen Wynne's Liberal Party to go from a minority to a majority, mostly at the expense of Tim Hudak's Progressive Conservative Party, who promptly resigned after the election in losing 6 seats and 2 very winnable elections, while Andrea Horwath's NDP stayed the same in seat count.

Given my crazy interest in Canadian politics (which is unusual for an American), here is a brief overview of the main political parties in Canada, with an emphasis on Ontario for Part 1:

The Conservative Party is a center-right to right-wing party (comprised of the former right-wing Reform/Canadian Alliance and the center, center-right Progressive Conservative party). They held minority governments from 2006-2011 (nearly interrupted in 09 by a Liberal-NDP-Bloc alliance, that was solved essentially by Harper shutting Parliament down and the Liberal Party leader being couped by a Harvard Professor [no joke]), and have had a majority since 2011, winning 39.5% of the vote (yes, that's all you need for complete legislative control..). While Harper did embrace a moderate stimulus in '09, and while he hasn't majorly upset the relatively 'Centrist' balance of Canada, some accomplishments include a 3% reduction in the corporate tax, changes/cuts in Unemployment Insurance, ending the gun registry, wheat board, supporting a stronger dollar and strong (foreign) investment into Albertan/Sasketchewan Oil Sands, (somewhat at the expense of manufacturing, forestry, etc. according to the NDP). Harper essentially won a majority in 2011 via Ontario by winning 2/3s of the seats and eating into traditionally Liberal areas in the GTA.

In Ontario, it is still the Progressive Conservative party, who controlled the province for 40+ years before 1985 and acted more like Nixonian Republicans than Mike Harris (1995-2003) or the latest leader Tim Hudak who were more like Jack Kemps and Paul Ryans. Other PC Parties, like the Albertan one, still carry a more moderate flare in the sense that they're pro-business and pro-public investment, health care, etc.


The Liberals have also been dubbed the "Natural Governing Party" of Canada, and that is because since WWI and the party's lock on Québec, it's formed government about 3/4 of the time. The New Deal-esque welfare state was essentially developed by Mackenzie King and Louis Saint-Laurent, with a very progressive, federalist, multicultural and activist state under Lester Pearson and Pierre Elliott Trudeau (alpha male extraordinaire) with things like Medicare instated. Then, in the 1990s, the Chretien/Martin Liberals essentially scaled back with major federal cuts to the provinces, leading to major cuts to Medicare among other things, while maintaining a pretty solidly progressive stance on social issues, human rights, environmental concerns, etc.

In 2006, Gilles Duceppe, former long-time leader of the Bloc, correctly accused the Liberals of campaigning from the left and governing from the right. To be fair Liberals are pretty solid on social policies, infrastructure, etc. and its current leader Justin Trudeau has admitted to smokin' teh weed a few years ago as an MP (and thus supports legalization), but they're also very third-way ish and support the Keystone pipeline, since there's an opening for some seats to win in Calgary and Edmonton. Some of their provincial parties are a little strange (LBritish Columbia is center-right/free market based, as can sometimes the Nova Scotia/New Brunswick ones too. Québec Liberal party includes basically all federalists)


The NDP was formed by the Cooperative Commonwealth Federation and labor/farm unions as a sort of all-encompassing Socialist/Social Democratic Party in the 1960s. It typically garnered 15-20% of the vote, had major influence during Liberal Minority governments (including the Lester Pearson one where Tommy Douglas got Medicare through) and generally governed provincially in a center-left fashion up until the 1990s or so; they are also for proportional representation, abolishment of the Senate, etc. In 1990, Bob Rae won a majority government in Ontario, suffered through the '91 recession (with Rae Days), and essentially traumatized Ontarians towards the NDP for the most part 'til this day (even though Bob Rae became a federal Liberal and literally ran the party for 2 years before Trudeau). NDP also went through a big slump 1993/1997/2000, where they also began to move to the center. They became pretty reinvigorated under Jack Layton, going from 11 seats in 2000 to 39 seats in 2008 to 108 in 2011, and becoming Official Opposition for the first time, while primarily embracing a Social Justice / Environmental friendly approach. If they were to form government, I'm guessing Tom Mulcair, a former Québec Liberal Environmental minister, would be slightly progressive but mostly centrist. He's one of those highly intelligent, highly capable, highly combative, and highly pragmatic politicians.. (probably one of my favorites, to give my own opinion)

The Bloc Québecois has generally held between 38-54 seats in Quebec, making it very difficult for federal parties to form government, and with the collapse of the Mulroney PCs in 1993, it became a 2-way battleground between the Liberals and the Bloc, which the Bloc began to win in 04/06 once again after losses in '97 and '00. They then began fighting a two-way front with the Conservatives, and then a 3-way front with the NDP in 08/11. In 2011, the Bloc Quebecois went from 48 seats to 4, vanquished by the NDP's increase of 1 to 58 seats in that election (that 1 being Tom Mulcair, thus his future election as Party leader). At this point, it's unlikely that it'll make a recovery, but never say never. Sovereigntists will be much more concerned with the provincial PQ, and the remainder of the Bloc voters will likely just stay home or vote NDP. They were somewhat progressive, but moreover Quebec-centric.

Greens are a party that is focused environmental issues, is centrist, a spoiler party, and only has its leader Elizabeth May elected in British Columbia. Its voters are made up of disaffected people of all other parties (including Conservatives) and young people.

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So with that being said, what happened over the course of the Ontario election? Liberals ran to the left (after previously being center, center-right fiscally under Dalton McGuinty), NDP ran somewhat to the center. Libs played to Toronto's base and ate apart the Tories + NDP in that area, while maintaining and even expanding elsewhere (mostly GTA I believe); NDP played to Southwest and Northern Ontario (manufacturing, unions, rural communities, medium cities like London, Windsor, Hamilton, Niagara, Sudbury and Waterloo?). The Tories and Tim Hudak went hardcore supply side economics, so chances are the Tories will probably need to go with a 'Red' Tory, like perhaps a return of John Tory? Or maybe just simply someone less scary and transparently ideological.

NDP can be semi-happy that their vote % actually went up (1% anyways) and they had a bunch of near-wins in Southwestern Ontario; we'll see what happens when all of these districts are all reconfigured in the new lines. Liberals obviously have to be the most happy. Tories have nothing to be happy about except that they're finally rid of Hudak.

What would this mean for national politics? Well, a minority Hudak government probably would have meant further disaster for the Harper government at the federal level. But is this exactly good for the Liberals? Liberals have never won a majority federally while they were in charge in Ontario since at least before WWII. This could either be a roadmap to the kinds of seats the Trudeau Liberals need to win in Ontario to form government, or it could be somewhat of an anchor (though Ontario/Canada doesn't look to be THAT chaotic coming ahead).

For the NDP, it could possibly build upon some of its gains and strength in Southwestern Ontario (and Oshawa/Kitchener-Waterloo) - the question is, can Mulcair's NDP not suffer that complete wipe-out the ONDP faced in Toronto (going from 5 to 2 in the city, though going from 1 to 2 just outside, neither of which the NDP holds federally)? It's pretty likely this point that Trudeau Liberals will be able to knock out the HarperCons out of most of those GTA seats, but will they be able to knock out Layton's GTA gains under Mulcair? And what does this mean for the Federal Trinity-Spadina by-election at the end of the month, which the NDP just lost provincially? And speaking of which, what would Olivia Chow's election as Mayor of Toronto mean for the NDP in the city going forward? etc. etc.

(and as always, http://www.threehundredeight.com/ is the best place for Canadian elections)

Part 2: Predicting various scenarios in Canada's October 2015 election.

College and Reinvention

“I’m thrilled today that President Obama is moving forward with an ambitious new plan to make college more affordable for every American. We know that higher education is more important than ever, but we also know it’s never been more expensive. We have heard from students and families across the country who are worried about affording college, and we believe that higher education cannot be a luxury that only advantages the wealthy.”

-From the Official Department of Education Blog
 

 

Right now, 94% of Americans expect their children to attend college. That’s a pretty remarkable rate, and nothing to sneeze at. Indeed, we’re looking at the most educated cohort of young people in history. Truly, we’re looking at a high point in American education, with more PhDs(including the STEMs), more lawyers, more accountants, more everything.

And this is the most racially diverse cohort ever. It’s not just more white kids going to school. It’s more black kids, hispanic kids, immigrant kids, everyone.

 Most hail this as a national achievement, with calls to do even more. See the Obama initiative, along with the cries that even that is not enough.

 Let’s put a damper on that for a second.

 Policy-makers are lazy bums looking at decades of past trends. They improperly extrapolate this data into the future. Worse than that, they are not looking at all the data they have today, which indicate a really tough environment for college grads and young people in general. They are not getting called out on this, and worse, they probably actually do think that more college is a magic bullet for our economic problems.

My spin: College is an important institution for the economy. A degree is useful both for signaling purposes and improving human capital. The degree is also individually important, as college students earn dramatically more money than non-graduates. However, the US economy faces significant head-winds and structural change. While this is generally acknowledged, it is NOT acknowledged that recent college graduates are merely the top rung of a sinking ladder, and that college students lack the necessary skill to propel the US economy forward on their own.

Meaning more college is NOT an economic solution, and more college right now will just create millions more credentialed paupers.

Let’s take this bit by bit, looking at some data.
 

Most people, when suggesting that people go to college, take a look at the so-called college premium. What that means is the extra money college graduates get over high school students. There are some problems with this measure, but it’s a good general measure of how much college is “worth.”

And, certainly, college students have fared better than non-college grads in this environment.

 

 

Given our lack-luster economic performance lately, along with increasing inequality, college seems like a sure-fire economic winner. Complicated theories have formed to explain this college premium over the years, many involving the change in our economic structure over time.

 

The hypothesis is that our increasingly knowledge-based and globally competitive economy rewards workers with more skill.

Certainly there has been some change in the work-force over the years. For example, we can see that so-called “routine” tasks have been increasingly automated, therefore decreasing the demand for those jobs and lowering those wages. This has been described as the Polarized Job Market:

 

 

This has been a generational change. And I don’t deny any of this. That’s pretty important from a policy perspective, too: workers need to get retrained so they can continue to earn wages. Businesses need workers with different skills to compete globally.

 

So yeah, more college=good for the economy, over the last few decades.

But in recent years,the trend does not hold. Just take a look at the graph above, with "Abstract: tasks actually decreasing slightly, after decades of increasing. Or consider wages. While college students are doing better recently, that's partly because no one is doing well.

 

Note of course that I am not entirely convinced we count benefits correctly.  However it does mean that rather than some new economic super-revolution, we barely hold our ground.

This is not what you would expect out of a new transformative 21st Century renaissance.

 This is certainly different than the economy we saw in the 1990s, which saw increasing wages. This strong economy was all-encompassing, as we would expect from a New Renaissance. Even high school dropouts had some better wage growth in the late 90s.

 

So clearly something else is happening here, just like we can see something else was happening in the early 1990s when college wages weren’t increasing at all. 

Since 2000, we show some pretty substantial decreases in the labor rates of young people, even amonghigh school dropouts and high school grads, that NEED to be working.

These economic changes do dramatically affect the less educated...high school graduates in the labor force declined from rates in the 70s to scarcely above 50, but even college grads saw their employment rate fall from 89 to 83% (likely due to recession, of course).

That really, really seems odd. Since 2000, we’ve seen a paralysis in wages. Since 2000, we’ve also seen the less educated drop out of the labor force, dramatically. Which wasn’t necessarily the case prior to 2000. What the hell is going on?

That’s an important question, actually, What the Hell is going on? Because that dictates the policy solutions.  It’s certainly possible extra college but this huge trend break makes me think we have bigger problems.

The real question we need to ask our policy-makers is what actually causes the underlying collapse in labor markets. Otherwise we are investing a lot of money in the wrong area. This is especially true since so many college entrants drop out and college debt is still increasing while the rest of the economy deleverages, and student debt might make it a lot moredifficult to pay back other kinds of debt, too.

This looks more like a collapse in the demand for labor: wages are not increasing, and participation is going down. Increasing supply in response to a collapse in demand is like a type-writer manufacturer building a new factory in 1990.

In this particular post, I do not have any explanations for the persistent economic weakness, or suggestions to improve thing. Rather, I want a quick link to point at whenever policy-makers lazily suggest “more college” as a solution to all our economic problems.