Economics, Quick Fix

The First-Time Home Buyer Incentive is a Disaster

The 2019 Budget introduced by the Liberal government includes one of the worst policies I’ve ever seen.

The CMHC First-Time Home Buyer Incentive provides up to 10% of the purchase price of a house (5% for existing homes, 10% for new homes) to any household buying a home for the first time with an annual income up to $120,000. To qualify, the total mortgage must be less than four times the household’s yearly income and the mortgage must be insured, which means that any house costing more than $590,000 [1] is ineligible for this program. The government will recoup its 5-10% stake when the home is sold.

The cap on eligible house price is this program’s only saving grace. Everything else about it is awful.

Now I want to be clear: housing affordability is a problem, especially in urban areas. Housing costs are increasing above inflation in Canada (by about 7.5% since 2002) and many young people are finding that it is much more difficult for them to buy homes than it was for their parents and grandparents. Rising housing costs are swelling the suburbs, encouraging driving, and making the transition to a low carbon economy harder. Something needs to be done about housing affordability.

This plan is not that “something”.

This plan, like many other aspects of our society, is predicated on the idea that housing should be a “good investment”. There’s just one problem with that: for something to be a “good investment”, it must rise in price more quickly than inflation. Therefore, it is impossible for housing to be simultaneously a good investment and affordable, at least in the long term. If housing is a good investment now, it will be unaffordable for the next generation. And so on.

I’m not even sure this incentive will help anyone in the short term though, because with constrained housing supply (as it is in urban areas, where zoning prevents much new housing from being built), housing costs are determined based on what people can afford. As long as there are more people that would like to live in a city than houses for them to live in, people are in competition for the limited supply of housing. If you were willing to spend some amount of your salary on a house before this incentive, you can just afford to pay more money after the incentive. You don’t end up any better off as the money is passed on to someone else. Really, this benefit is a regressive transfer of money to already-wealthy homeowners, or a subsidy to the construction industry.

The worst part is that buying a house at an inflated valuation isn’t even irrational! The fact of the matter is that as long as everyone knows that governments at all levels are committed to maintaining the status quo – where housing prices cannot be allowed to drop – the longer housing costs will continue to rise. Why shouldn’t anyone who can afford to stick all their savings into a home do so, when they know it’s the only investment they can make that the government will protect from failing [2]?

That’s what’s truly pernicious about this plan: it locks up government money in a speculative bet on housing. Any future decline in housing costs won’t just hurt homeowners. With this incentive, it will hurt the government too [3]. This gives the federal government a strong incentive to keep housing prices high (read: unaffordable), even after some inevitable future round of austerity removes this credit. This is the opposite of what we want the federal government to be doing!

The only path towards broadly affordable housing prices is the removal of all implicit and explicit subsidies, an action that will make it clear that housing prices won’t keep rising (which will have the added benefit of ending speculation on houses, another source of unaffordability). This wouldn’t just mean scaling back policies like this one; it means that we need to get serious about zoning reform and adopt a policy like the one that has kept housing prices in Tokyo stable. Our current style of zoning is broken and accounts for an increasing percentage of housing prices in urban areas.

Zoning began as a way to enforce racial segregation. Today, it enforces not just racial, but financial segregation, forcing immigrants, the young, and everyone else who isn’t well off towards the peripheries of our cities and our societies.

Serious work towards housing affordability would strike back against zoning. This incentive provides a temporary palliative without addressing the root cause, while tying the government’s financial wellbeing to high home prices. Everyone struggling with housing affordability deserves better.

Footnotes

[1] Mortgage insurance is required for any down payment less than 20%. If you have an income of $120,000 and you max out the down payment, then the mortgage of $480,000 would be about 81% of the total price. Division tells us the total price in this case would be $592,592.59, although obviously few people will be positioned to max out the benefit. ^

[2] Currently, the best argument against buying a home is the chance that the government will one day wake up to the crisis it is creating and withdraw some of its subsidies. It is, in general, not wise to make heavily leveraged bets that will only pay off if subsidies are left in place, but a bet on housing has so far been an exception to this rule. ^

[3] Technically, it will hurt the Canadian Mortgage and Housing Corporation, but given that this is the crown corporation responsible for mortgage insurance, a decline in home prices could leave it undercapitalized to the point where the government has to step in even before this policy was enacted. With this policy, a bailout in response to lower home prices seems even more likely. ^

Link Post

Link Post – February 2019

Shinzō Abe has made increasing the participation of women in the workforce one of the key planks in his economic recovery plan. This is complicated by the frankly bonkers amount of work that women have to do as soon as they have kids in Japan – work men often cannot help with because they are expected to be in the office for 16 hours at a time. In addition to the normal tasks parents in North America expect (cooking, cleaning, etc.), parents in Japan have to do things like launder the linens their children use at school, fill out exhaustive diaries documenting everything their children do at home, and sign off on every piece of homework. I sometimes feel like someone needs to hijack the public-address system in Japan and play “work smart not hard” on repeat for as long as it takes for the message to sink in.

A brand new Norwegian Air 737 Max 8 had to make an emergency landing in Iran right before US sanctions were reimposed. It’s been trapped in Iran ever since, because Norwegian Air needs a special state department waiver to import replacement parts into Iran (aircraft parts are covered by the sanctions) and the state department, like most of the US government, just spent a month shut down.

Atul Gawande just tweeted out some fascinating information about mortality in Massachusetts. In the graphs, you can see Spanish Flu and HIV/AIDs (causing above trend deaths in 1918 and 1985 to 2002 respectively), as well as the recent upswing in opioid poisoning deaths (classified as injuries). Opioid poisonings seem most common among non-Hispanic whites, which has led African-American and (especially) Hispanic life expectancies to surpass white life expectancies. One troubling fact: the mortality rate for people with more than 13 years of education is a full third that of people with only high school or less. This is true across all age cohorts.

Even if you use no Google apps, your devices will communicate with Google something like 100,000 times a week, complicating any effort to cut the technology giant out of your life.

The Council of Economic Advisors is effective because it has no official power. This means it ends up staffed by people really passionate about economics, instead of people passionate about political power. Economists – even economists who disagree with each other – tend to hold pretty similar positions on major issues (see, for example, the paucity of economists willing to support tariffs or occupational licensing, two popular policies), so they can present a united lobbying front and occasionally persuade presidents to favour policies that make more economic sense.

Rich people don’t always have time to go pick up their yachts. When they don’t some lucky volunteer crew gets all their expenses paid as they sail it to the owner.

Death rates are mostly going down (except for the aforementioned opioid poisonings) but one other notable exception is car-related fatalities. Experts blame the increase in deaths on SUVs and trucks, which kill a lot of pedestrians. Both have a flat front and are higher off the ground, which results in more of any impact being transferred to the body of pedestrians. SUVs and trucks are where the whole US auto market is going, so we should expect to see deaths continue to rise until self-driving cars are introduced or regulators intervene to force some sort of standards for pedestrian safety (the latter seems unlikely).

Why do trains in the US suck so much? Well part of it is incredibly onerous safety standards, which are far stricter than used anywhere else. Now the Federal Railroad Association is modernizing the rules and bringing them more in line with European regulations, which should result in more economies of scale when purchasing rolling stock (making it cheaper) and lighter rolling stock (which will be cheaper to run). This is a big win for “a small wonky group of urbanist writers and policy experts”.

Ethics, Model, Philosophy

Signing Up For Different Moralities

When it comes to day to day living, many people are in agreement on what is right and what is wrong. Giving change to people who ask for it, shoveling your elderly neighbour’s driveway, and turning off the lights when you’re not in the room: good. Killing, robbing, and drug trafficking: bad. Helping the police to convict mobsters who kill, steal, and traffic drugs: good.

While many moral debates can get complicated, this one rarely does. Even when helping the police involves turning on your compatriots – “snitching” – many people (although notably not the President of the United States of America) think the practice is a net good. There’s a recent case in Australia where opinion has been rather more split. Why? Well, the informant was a lawyer – specifically, a lawyer who had worked with the accused parties. Here’s a sampling of commenters on both sides:

In this case I feel it is for the greater good that human garbage like Mokbel are convicted even if the system has to be bent to do so. [1]
The job requires strict adherence to the ethical rules. If you let your dog run the house, the house gets torn apart.
The brave lady in question went above and beyond to keep Victorians safer. If these thugs are released or sentences reduced there will be uproar.
The right to an open and fair trial is a hallmark of a democratic country even if sometimes a defendant who is in fact guilty gets acquitted.
While I’m normally happy to see violent mobsters go to jail, here I must disagree with everyone who offered support for the lawyer. I think it was wrong of her to inform on her clients and correct for the high court to rebuke the police in the strongest possible terms. I certainly don’t want any of those mobsters back on the street and I hope there’s enough other evidence that none of them have to be released.

But even if some of them do end up winning their appeals, I believe we are better off in a society where lawyers cannot inform on their clients. This, I think, is one of the ethical cases where precedent utilitarianism is particularly useful in analysis and one that demonstrates its strengths as a moral philosophy.

(To briefly recap: precedent utilitarianism is the strain of utilitarian thought that emphasizes the moral weight of precedents. Precedent utilitarians don’t just consider the first-order effects of their actions on global wellbeing. They also consider what precedents their actions create and how those precedents can be later used for others for good or ill.)

The common law legal system is premised on the belief that the burden of proof of crime rests upon the state. If the state wishes to take away someone’s liberty, it must prove to a jury that the person committed the crime. The accused is supposed to be vigourously defended by an advocate – a lawyer or barrister – who has a legal and professional duty to defend their client to the best of their abilities.

We place the burden of proof on the government because we acknowledge that the government can be flawed. To give into every demand it makes leads to tyranny. Only by forcing it to justify all of its actions can we ensure freedom for anyone.

(This sounds very pretty when laid out like this. In practice, we are rather less good at holding the government to account than many, including myself, would like. Especially when the defendant isn’t white. I believe part of why society fails to live up to its duty to hold the government to account is sympathies that commonly lie with police and against defendants, the very sympathies I’m arguing against holding too strongly.)

But it’s not just upon the government that we place a burden to avoid pre-judging. We require advocates to defend their clients to the best of their abilities because we are skeptical of them as well. If we let attorneys decide who deserves defending, then we have just shifted the tyranny. Attorneys can make snap judgements that aren’t borne out by the facts. They can be racist. They can be sexist. They can make mistakes. It’s only by forcing them to defend everyone, regardless of perceived innocence or guilt, that we can truly make the state do its duty.

This doesn’t mean that lawyers always have to go to trial and defend their clients in front of a judge and a jury. It could be that the best thing for a client is a guilty plea (ideally if they are actually guilty, although that’s also not how things currently work, especially when the accused isn’t white). If a lawyer truly believes in a legal strategy (like a guilty plea) and the client refuses to listen, the attorney always can walk away and leave the trial defense to another lawyer. The important thing is that someone must defend the accused and that that someone will be ethically bound to give it their best damn shot.

Many people don’t like this. It is obviously best if every guilty person is punished in accordance with their crime. Some people trust the government to the point where they view every accused as essential guilty. To them, lawyers are scum who defend criminals and prevent them from being justly punished.

I view things differently. I view lawyers as people who have signed up for an alternative morality. While conventional morality holds that we should punish criminals, lawyers have signed up to defend all of their clients, even criminals, and to do their best to prevent that punishment. This is very different from the rest of us!

But it’s complimentary to my (our?) morality. It is not only best if we appropriately punish those who break the law. I believe is also best if we do it without punishing anyone who is innocent.

We cannot ask lawyers to talk to their clients, figure out if they’re innocent or guilty, and then inform the judge or dump as clients all of the truly guilty. This will only work for a short while. Then everyone will figure out that you have to lie to your attorney (or tell the truth if you’re innocent) if you want to avoid jail. We’re now stuck trusting the judgement of attorneys as to who is lying and who is telling the truth – judgement that could be tainted by any number of mistakes or prejudices.

In the Australian case, the attorney made a decision she wasn’t qualified to make. She, not a jury, decided her client was guilty. She doesn’t appear to be wrong here (although really, how can we tell, given that a lot of the information used in the convictions came from her and her erstwhile clients weren’t able to cross-examine her testimony) but if we don’t want a system where a random lawyer gets to decide who is guilty or not, the important thing isn’t that her testimony is true. The important thing is that she arrogated power that wasn’t hers and thereby undermined the justice system. If we let things like this stand, we enable tyranny.

The next lawyer might not be telling the truth. He may just be biased against black clients and want to feel like a hero. Or she might be locked in a payment dispute and angry with her client. We don’t know. And that should scare us away from allowing this precedent to stand. A harsh rebuke here means that the police will be unable to use any future testimony from lawyers and protects everyone in Australia from arbitrary imprisonment based on the decisions of their lawyer.

Focusing on the precedents that actions set is important. If you don’t and instead focus solely on each issue in isolation, you can miss the slow erosion of the rights and freedoms that we all rely on (or desire). Its suitability for this sort of analysis is what makes precedent utilitarianism so appealing to me. It urges us to dig deeper and try to understand why society is set up the way it is.

I think alternative moralities, actively different moral systems that people sign up for as part of their professions are an important model to hold for precedent utilitarians. Alternative moralities encode good precedents, even if they stand in opposition to commonly held values.

We don’t just see this among lawyers. CEOs sign up for the alternative morality of fiduciary duty, which requires them to put the interests of their investors above everything but the law. Complaints about the downsides of this ignore the fact we need companies to grow and profit if we ever want to retire [2]. Engineers sign up for an alternative, stricter morality, which holds them personally and professionally responsible for the failures of any device or structure they sign off on.

Having alternative moralities around makes public morality more complicated. It becomes harder to agree on what is right or wrong; it might be right for a lawyer to help a criminal in a way that it would be wrong for anyone else, or wrong for an engineer to make a mistake in a way that would carry no moral blame for anyone outside of the profession. These alternative moralities require us to do a deeper analysis before judging and reward us with a stronger, more resilient society when we do.

Footnotes

[1] Even though I disagree strenuously with this poster, I have a bit of fondness for their comment. My very first serious essay – and my interest in moral philosophy – was inspired by a similar comment. ^

[2] This isn’t just a capitalism thing. Retirement really just looks like delay some consumption now in order to be able to consume more in retirement. Consumption, time value of [goods and services, money], and growth follow the same math whether you have central planning or free markets. Communists have to figure out how to do retirement as well and they’re faced with the prospect of either providing less for retired people, or using tactics that would make American CEOs blush in order to drive the sort of growth necessary to support an aging retired population. ^
Link Post

Link Post – January 2019

Power generation and distribution is used in economics textbooks as the classic example of a natural monopoly. Lebanon proves this doesn’t have to be the case, with a mostly functional (and mostly illegal) parallel power distribution system that many people rely on to supplement the official system. I don’t think this should be used more generally – having a bunch of small generators is definitely more polluting – but it’s interesting to see that markets can work even in cases where people normally expect them to fail.

On the advice of a high school teacher, I once read most of the epic fantasy series “The Malazan Book of the Fallen”. One thing it made clear to me was just how dangerous and difficult it is to be an absolute ruler. Anyone who controls the information flow to you can essentially control you. By this token, it should be worrying that Xi Jinping is centralizing China around himself – leaving the government vulnerable to serious missteps if he’s given inaccurate information.

Speaking of China, here’s a story about two journalists accidentally winning a car chase in Xinjiang. Xinjiang is one of the most surveilled places in the world and up to one million Uighurs are currently held in concentration camps, which explains why the Chinese government is so on edge when journalists poke around.

Jackie Cochran had a life that reads like a novel; she founded the Women’s Airforce Service Pilots in World War II (which handled routine flying tasks, like airplane delivery, so more men could be fighter pilots), was instrumental in convincing Eisenhower to run for president, and served as a test pilot after the war. She was the first woman to break the sound barrier and holds more aviation height and distance records than anyone else who has ever lived. She also ran her own cosmetics company, charmed one of the ten richest men in the world, and helped kill the female astronaut program in the ’60s, probably “out of concern that she would no longer be the most prominent female aviator”. Fittingly, there’s a play about her unbelievable life.

Strangely touching recollections of working on Black Friday.

Tighter pollution laws can make cities much more livable – and be a boon to anyone with respiratory disease. But maybe they’re going too far when they threaten to destroy Montreal’s legendary bagel bakeries.

It’s almost a cliché to talk about how divided America is. This NYMag article takes the cliché to its (il-)logical conclusion and imagines an America divided between two interstate compacts (and a handful of neutrals). I don’t think it’s quite plausible, but there are many ways it seems better than the status quo?

I was surprised to find out that chicken pox is now considered a vaccine preventable disease and outbreaks of it are notable. I vaguely knew there was a vaccine now, but I didn’t realize that there’s now a whole generation of kids who never got chicken pox. Unfortunately, some parents dislike vaccines, so their kids are at risk of outbreaks (as well as shingles later in life).

Falsifiable

2019 Predictions

Here are my 95 predictions about the next year. If you’d like to make you own predictions, you can download my blank template. Like previous years (2017, 2017 results, 2018, 2018 results), I’ve broken them down by region.

Canada

  1. Liberals win the next Canadian election – 60%
  2. Majority government in the next Canadian election – 60%
  3. NDP loses seats in the next Canadian election – 80%
  4. Conservatives gain seats in the next Canadian election – 70%
  5. Jagmeet Singh is not in parliament at the end of 2019 – 51%
  6. No court finds the assisted dying bill isn’t in line with Carter v Canada in 2019 – 80%
  7. No court rules on carbon tax constitutionality in 2019 – 90%
  8. No terrorist attack in Canada that kills > 10 Canadians in 2019 – 90%
  9. Opioid poisoning deaths decline from 2018 levels in Canada – 80%
  10. Construction on the Trans Mountain pipeline does not begin again in 2019 – 90%
  11. Canadian unemployment rate at or below 6% at the end of 2019 – 60%
  12. Health Canada still doesn’t allow Soylent to enter the country by the end of 2019 – 70%

America

  1. Less than 100km of concrete wall (or steel slat wall) on the border with Mexico will be constructed – 80%
  2. No registry of Muslims created – 90%
  3. No department of the Federal Government is eliminated – 90%
  4. Congress and Trump do not sign into law an extension of DACA – 60%
  5. Mueller’s investigation finishes in 2019 – 70%
  6. Impeachment proceedings aimed at Trump are not started in 2019 – 60%
  7.  More than a dozen credible (having held past elected office representing at least 100,000 people) candidates declared for the Democratic primary by the end of 2019 – 80%
  8. Less than two dozen credible candidates declared for the democratic primary by the end of 2019 – 70%
  9. Trump is still president at the end of 2019 – 90%
  10. No terrorist attack in America that kills > 10 Americans – 70%
  11. No terrorist attack in America that kills > 100 Americans – 90%
  12. Opioid poisoning deaths decline from 2018 levels in America – 70%
  13. NGDP growth below 5% for 2019 – 60%
  14. US unemployment rate at or below 4% at the end of 2019 – 60%
  15. Some form of North American free trade deal still in effect at the end of 2019 – 80%
  16. At least two metros beyond Phoenix see open, commercial self-driving car services by the end of 2019 – 51%
  17. More than one month of cumulative government shut downs in 2019 – 51%

South America

  1. FARC peace deal remains in place on January 1, 2020 – 60%
  2. Inflation in Venezuela is above 10,000% for the year of 2019 (as measured by DolarToday) – 80%
  3. Venezuelan GDP continues to contract in 2019 – 90%
  4. United Socialist party retains control of the Venezuelan presidency in 2019 – 80%
  5. Protests (and the official response to those protests) result in more than 100 fatalities in Venezuela in 2019 – 51%
  6. Major Venezuelan opposition groups do not enter any sort of power sharing agreement with the Venezuelan regime in 2019 – 90%
  7. No successful coup in Venezuela in 2019 – 90%
  8. Venezuelan oil production below 750,000 bpd by the end of 2019 – 60%
  9. Brazilian Real down against the US dollar at the end of 2019 – 51%
  10. Argentina meets its 17% inflation target by ±2% – 70%
  11. Argentina meets its IMF target of primary budget balance by the start of 2020 – 51%

Middle East

  1. No Israeli politician is indicted by the ICC over settlement activity in 2019 – 90%
  2. Netanyahu is no longer prime minister of Israel at the end of 2019 – 51%
  3. No Palestinian led Intifada in Israel that results in the deaths of >1000 combined attackers, security forces, and civilians (this is a conflict characterized by suicide bombing and police responses) – 90%
  4. No Israeli led operation in the West Bank or Gaza that results in the deaths of >1000 combined soldiers, civilians, and militants (this is a conflict characterized by rocket fire and military strikes) – 80%
  5. Fatah and Hamas do not meaningfully reconcile in 2019 (e.g. Fatah still doesn’t control Gaza by January 1, 2020) – 70%
  6. No significant resurgence in ISIL in 2019 (e.g. it does not gain territory over the next year) – 90%
  7. Fewer casualties in the Syrian Civil War in 2019 than in 2018 – 70%
  8. No power sharing agreement or durable ceasefire (typified by the three months following the agreement each having less than 500 fatalities) in Syria in 2019 – 80%
  9. Bashar Al Assad is still President of Syria on January 1, 2020 – 90%
  10. Protests in Iran do not result in more than 100 fatalities by the end of 2019 – 70%
  11. Hassan Rouhani is still President of Iran on January 1, 2020 – 90%
  12. No new international sanctions against Iran (does not include adding new organizations or individuals to old categories and requires coordinated participation of at least two countries) – 80%
  13. America does not rejoin the JCPA – 90%
  14. No attack on the Iranian nuclear program by Israel – 90%
  15. Iran does not withdraw from the deal limiting its nuclear program – 80%
  16. Conditional on Iran remaining in the nuclear deal, inspectors find no evidence of violations after the deal began – 90%
  17. Yemen Civil War continues – 90%
  18. The Hodeidah ceasefire in Yemen is maintained for 2019 – 51%
  19. America withdraws support for Saudi Arabia in the Yemeni civil war – 51%
  20. Mohammed bin Salman either remains as crown prince of Saudi Arabia, or becomes king (i.e. no coup or succession shake-up) – 80%
  21. No resolution or lifting of embargo in the Qatar crisis – 80%
  22. OPEC production cuts continue through to the end of 2019 – 70%

Africa

  1. South Sudan peace deal holds – 60%
  2. Libya still has two rival governments on January 1, 2020 – 60%
  3. No protests, riots, or rebellion in Egypt that kills >100 people in a one week period – 80%
  4. No protests, riots, or rebellion in Tunisian kills >50 people in a one week period – 90%
  5. No terrorist attack in Tunisia kills >20 people – 80%
  6. ANC wins South African elections – 80%
  7. Botswana’s Transparency International rating closest to January 1, 2020 shows improvement under president Masisi – 60%

Asia

  1.  Inflation rate in Japan remains below 2% in 2019 – 90%
  2. Japanese constitutional reform (removing pacifism) does not occur in 2019 – 80%
  3. At least two more countries ratify the CPTPP in 2019 – 51%
  4. All signatories have not ratified the CPTPP by the end of 2019 – 90%
  5. North Korean détente with Trump last through 2019 (typified by no new sanctions or missile tests) – 51%
  6. Xi Jinping visits North Korea in 2019 – 80%
  7. US-China trade war ends – 51%
  8. Modi wins elections in India – 70%
  9. No return to democracy in Thailand in 2019 – 90%
  10. Legal deadlock on same-sex marriage in Taiwan not resolved this year – 51%

Europe

  1. No resolution to the crisis in Ukraine – 80%
  2. Ukrainian elections are held – 70%
  3. Poroshenko no longer president of Ukraine by end of 2019 – 60%
  4. Russian GDP growth is less than 3% – 80%
  5. No gain of greater than 20% in the value of the ruble vs. the dollar – 90%
  6. Fall of more than 10% in the value of the ruble vs. the dollar – 51%
  7. Sanctions against Russia are not significantly rolled back (e.g. sanctions remain in place against Rosneft, Novate, Gazprombank and Vnesheconombank by all members of the G7 remain in place at the end of 2019) – 90%
  8. Teresa May remains prime minister of the United Kingdom – 70%
  9. Brexit does not occur on or by March 29, 2019 – 60%
  10. No snap election/vote of no-confidence in the UK in 2019 – 60%
  11. No resolution to the Julian Assange situation – 60%
  12. Poland’s EU voting rights aren’t suspended – 70%
  13. Euroskeptics make gains in 2019 EU elections – 80%
  14. The average of the last 5 opinion polls of Macron collected on Wikipedia have his net favourability below -30% – 80%
  15. Italy keeps its budget within the agreed upon EU boundaries (triggering no fines or other disciplinary action) – 80%
  16. DeepMind releases an algorithm that can beat top humans in StarCraft II – 51%
Falsifiable

Grading My 2018 Predictions

In what is becoming a New Year’s tradition, let’s look at how accurately I predicted the future a year ago.

Canada

  1. Liberals remain ahead in the CBC Poll Tracker seat projection – 70%
  2. Trudeau has a higher net favorability rating than Andrew Scheer according to the CBC Leader Meter on January 1, 2019 – 80%
  3. Marijuana is legalized in time for Canada Day – 60%
  4. Marijuana is legalized in 2018 – 90%
  5. At least one court finds the assisted dying bill isn’t in line with Carter v Canada – 70%
  6. Ontario PC party wins the election – 60%
  7. The Ontario election results in a minority government – 80%
  8. The Quebec election results in a minority government – 80%
  9. No BC snap election in 2018 – 90%
  10. No terrorist attack in Canada that kills > 10 Canadians in 2018 – 90%
  11. More Canadian opioid poisoning deaths in 2018 than in 2017 – 60%
  12. Canada does better at the 2018 Winter Olympics (in both gold medals and total medals) than in 2014 – 90%
  13. Canada does not win a gold medal in men’s hockey at the 2018 Olympics – 70%
  14. Canada does win a gold medal in women’s hockey at the 2018 Olympics – 51%

America

  1. Trump announces that the US is pulling out of NAFTA and begins the process of putting the US withdrawal into motion – 51%
  2.  Less than 100km of concrete wall on the border with Mexico will be constructed – 90%
  3. No registry of Muslims created – 90%
  4. Congress doesn’t take action to extend DACA – 80%
  5. No department of the Federal Government is eliminated – 90%
  6. There isn’t a government shutdown before the midterm elections – 60%
  7. Democrats take back the house in the 2018 midterm elections – 80%
  8. Democrats take back the senate in the 2018 midterm elections – 60%
  9. Mueller’s investigation finishes in 2018 – 60%
  10. Impeachment proceedings aimed at Trump are not started in 2018 – 80%
  11. Trump is still president at the end of 2018 – 90%
  12. No terrorist attack in America that kills > 10 Americans – 70%
  13. No terrorist attack in America that kills > 100 Americans – 90%
  14. Susan Collins doesn’t get the Obamacare stabilization measures she was promised – 70%
  15. More US opioid poisoning deaths in 2018 than in 2017 – 80%

South America

  1. FARC peace deal remains in place on January 1, 2019 – 80%
  2. The black market exchange rate for Venezuelan Bolivars is above 110,000 to the US dollar on January 1, 2019 (as measured by DolarToday) – 80%
  3. Inflation in Venezuela is above 100% for the year of 2018 (as measured by DolarToday) – 90%
  4. United Socialist party retains control of the Venezuelan presidency in 2018 – 90%
  5. Protests (and the official response to those protests) result in more than 100 fatalities in Venezuela in 2018 – 60%
  6. Protests (and the official response to those protests) do not result in more than 1000 fatalities in Venezuela in 2018 – 70%
  7. Major Venezuelan opposition groups do not enter any sort of power sharing agreement with the Venezuelan regime in 2018 – 80%

Middle East

  1. No Israeli politician is indicted by the ICC over settlement activity in 2018 – 90%
  2. There isn’t an election in Israel in 2018 – 80%
  3. US does not physically relocate its embassy to Jerusalem in 2018 – 90%
  4. No Palestinian led Intifada in Israel that results in the deaths of >1000 combined attackers, security forces, and civilians (this is a conflict characterized by suicide bombing and police responses) – 70%
  5. No Israeli led operation in the West Bank or Gaza that results in the deaths of >1000 combined soldiers, civilians, and militants (this is a conflict characterized by rocket fire and military strikes) – 70%
  6. Fatah and Hamas do not meaningfully reconcile in 2018 (e.g. Fatah still doesn’t control Gaza by January 1, 2019) – 51%
  7. No significant resurgence in ISIL in 2018 (e.g. it does not gain territory over the next year) – 80%
  8. Fewer casualties in the Syrian Civil War in 2018 than in 2017 – 70%
  9. No power sharing agreement or durable ceasefire (typified by the three months following the agreement each having less than 500 fatalities) in Syria in 2018 – 80%
  10. Bashar Al Assad is still President of Syria on January 1, 2019 – 90%
  11. Protests in Iran do not result in more than 1000 fatalities by the end of 2018 – 70%
  12. Protests in Iran do not result in more than 100 fatalities by the end of 2018 – 51%
  13. Hassan Rouhani is still President of Iran on January 1, 2019 – 90%
  14. No new international sanctions against Iran (does not include adding new organizations or individuals to old categories and requires coordinated participation of at least two countries) – 80%
  15. No new US sanctions against Iran (does not include adding new organizations or individuals to old categories) – 51%
  16. No attack on the Iranian nuclear program by Israel – 90%
  17. Iran does not withdraw from the deal limiting its nuclear program – 90%
  18. Conditional on Iran remaining in the nuclear deal, inspectors find no evidence of violations after the deal began – 90%
  19. Yemen Civil War continues – 60%
  20. Saudi Arabia pulls troops out of Yemen – 51%
  21. Mohammed bin Salman either remains as crown prince of Saudi Arabia, or becomes king (i.e. no coup or succession shake-up) – 80%
  22. Rockets fired from Yemen cause casualties in another country – 51%
  23. No resolution or lifting of embargo in the Qatar crisis – 80%
  24. OPEC production cuts continue through to the end of 2018 – 60%

Africa

  1. No power sharing between ZANU-PF and the opposition will happen in Zimbabwe before the elections (if they occur) in 2018 – 80%
  2. Zimbabwe will hold election in 2018 – 70%
  3. No peace deal ends South Sudan fighting – 70%
  4. Libya still has two rival governments on January 1, 2019 – 70%
  5. No protests, riots, or rebellion in Egypt that kills >100 people in a one week period – 80%
  6. No protests, riots, or rebellion in Tunisian kills >50 people in a one week period – 90%
  7. No terrorist attack in Tunisia kills >20 people – 80%
  8. Zuma is not impeached in 2018 – 51%

Asia

  1.  Inflation rate in Japan still remains below 1% in 2018 – 70%
  2. Japanese constitutional reform (removing pacifism) does not occur in 2018 – 51%
  3. China will not deploy its military against Taiwan or Hong Kong in 2018 – 90%
  4. North Korea will test a submarine launched ballistic missile in 2018 – 70%
  5. North Korea will not test nuclear weapons or launch any missiles during the 2018 Olympics – 80%
  6. North Korea will test a nuclear weapon in 2018 – 51%
  7. No country will attempt to shoot down a North Korean missile test in 2018 – 80%
  8. If there is an attempt, it will succeed – 51%
  9. North Korea tests a missile that is judged by experts at 38 North as likely able to carry a plausible North Korean nuclear weapon to the United States – 60%
  10. No current member of China’s Politburo Standing Committee visits North Korea in 2018 – 70%
  11. No meeting between Kim Jung-un and Moon Jae-in in 2018 – 90%

Europe

  1. No resolution to the crisis in Ukraine – 80%
  2. Russian GDP growth is less than 3% – 80%
  3. No gain of greater than 20% in the value of the ruble vs. the dollar – 70%
  4. Sanctions against Russia are not significantly rolled back (e.g. sanctions remain in place against Rosneft, Novate, Gazprombank and Vnesheconombank by all members of the G7 remain in place at the end of 2018) – 90%
  5. Angela Merkel remains chancellor of Germany – 60%
  6. Germany holds another election before a government can be formed – 51%
  7. No date set for another Scottish referendum in 2018 – 80%
  8. Teresa May remains prime minister of the United Kingdom – 70%
  9. The UK does not terminate the process of Brexit in 2018 – 90%
  10. There is no final Brexit withdrawal deal reached in 2019 (Donald Tusk wishes to have one by October) – 51%
  11. No snap election/vote of no-confidence in the UK in 2018 – 80%
  12. Poland’s EU voting rights aren’t suspended – 90%
  13. Poland and Hungary continue to refuse to accept migrant quotas – 90%

Notes

  • I originally worried that I’d missed the mark with my Venezuelan devaluation predictions (South America #2), as DolarToday gave an exchange rate of 730.29 BsS. to the dollar. But it turns out the BsS. is a new currency, with each one equivalent to 100,000 of the old bolivars. This means the current exchange rate is 73,029,000 old bolivars to the USD. Inflation was 4305%. It is now an unfortunate fact that some online video game currencies are worth more than the old Venezuelan bolivar.
  • For Middle East #3, I got conflicting information from Wikipedia as to whether the embassy was officially moved, or just moved in name pending the ambassador finding a place to live in Jerusalem. I decided that it should count as moved for all practical purposes.
  • With respect to Middle East #15, I believe that the US withdrawing from the P5+1 deal and restarting sanctions should probably count as new sanctions.
  • I think Africa #8 is technically correct, because Zuma wasn’t impeached, but forced out by his party. Still, I think I will aim to make broader predictions about embattled leaders leaving in the future.
  • I calculate Japan’s inflation rate at around 1.05% based off the most recent statistics I could find, although this may need to be adjusted once December’s numbers are out and further adjusted once we have the year-end numbers. I got Asia #1 wrong, but not by much!
  • I was worried that no member of the standing committee had visited North Korea, potentially making Asia #10 a technical success, despite it obviously being falsified in spirit (by the three meetings in China by Xi Jinping and Kim Jong-un). Luckily, Li Zhanshu, a Standing Committee member, visited to commemorate the founding of North Korea.
  • I’m a bit unsure how I should treat Europe #10; the UK negotiated a Brexit deal, but no one actually believes in can pass parliament. I’m going to tentatively mark this as correct, but will revise if parliament passes this deal unaltered.
  • EDITED TO ADD: I originally didn’t mark America #6 as failed because I totally forgot about the one day government shutdown in January. I’ve since updated everything to add this in.

Calibration

The whole point of having predictions with binned probabilities (here, 51%, 60%, 70%, 80%, 90%) is that you can then check your accuracy; an individual prediction can be right or wrong, but when you pool several predictions you were equally sure of, you can tell if you were right or wrong to be that sure. Here’s how I did:

  • Of my predictions at a 51%confidence level, I got right and 6 wrong (50%).
  • Of my predictions at a 60%confidence level, I got 4 right and 7 wrong (36%).
  • Of my predictions at a 70%confidence level, I got 13 right and 5 wrong (72%).
  • Of my predictions at an 80%confidence level, I got 19 right and 5 wrong (79%).
  • Of my predictions at a 90%confidence level, I got 23 right and 2 wrong (92%).
  • Two predictions were invalid, because they were predicated on a North Korean missile test that never occurred.

Some people prefer to look at this graphically. Here I’ve plotted my answers versus what you’d expect if I was perfectly calibrated (something I say is 70% likely to happen happens 70% of the time). Whenever the blue line labelled “Mine” is below the red line labelled “Perfect”, I was overconfident. Whenever it’s above the red line, I was under-confident.

Like last year, I’m pleased with these results. Most of my probability bins were very well calibrated, although I seem to have become rather overconfident at the 60% level. I was under-confident at that level last year by a significant amount, so this might just be normal variance. I’ll keep an eye on this for next year.

In terms of specific classes of failed predictions, I can identify two.

First, I tend to overestimate how quickly bureaucratic processes will finish (see: 3, 5, 23). Second, I tend to assume the future will look much like the present (see: 11, 29, 72, 74-79). This might be because of the availability heuristic; the present is more available than alternative futures, so I might be viewing it as more likely than I should.

I hope to account for these biases in my soon to be released predictions for 2019. Stay tuned!

All About Me, Politics

Knocking on a thousand more doors – political campaigns revisited

“Hi, I’m Zach! I’m out here knocking on doors for Tenille Bonoguore, who is running to represent you in Ward 7. Do you have any questions for her, or concerns that you’d like her to know about…” is now a sentence I have said more than possibly any other.

Ontario had municipal elections on October 22nd. I looked at the bios of my local candidates, emailed all of them to find out more about their platforms, met with two of them, and ultimately decided that I wanted to help Tenille. Soon after that, I had been drafted to help manage canvassing efforts (although my colleague Tanya did more of that work than I did) and I was out knocking on doors again.

I knocked on countless doors and talked to an incredible variety of people. I don’t even know how many times I went out canvassing, but it was lots. More, I think, than the last time I did this.

This blog post outlines the differences (I found) between municipal politics and provincial politics, as well as the difference between volunteering for a campaign and being part of the core campaign team. I hope it can be informative for other people looking to get involved in politics any level.

The first thing I should mention about municipal campaigns is that they are (in many cities; Toronto is one notable exception) much smaller than campaigns for provincial or national government. If you’re volunteering for one, you will probably frequently meet and talk with the candidate. This was a big contrast to my volunteering at the provincial level, where I met the candidate only once (and that was brief), despite regularly canvassing on her behalf.

This, along with the non-partisan nature of many municipal elections means that volunteering at the municipal level is a much better way to get your voice heard. When there’s no party line to toe, your perspective (or a voter’s perspective as relayed by you) can change someone’s mind and lead to a (potential) city councillor voting differently.

Money also goes a lot further in municipal elections. Waterloo had a spending limit of around $12,000 (and I don’t know how many candidates even hit that). This means that donating a couple hundred dollars could make you one of the largest donors to a candidate. I don’t recommend this as a way of influencing policy – I didn’t see anyone act differently because of who donated and I sure as heck didn’t see donors get any sort of special “access”. Trying to get “access” is more or less pointless anyways; municipal boundaries are often small enough that a simple email is all you need to get real, detailed answers right from a candidate (or sitting counsellor).

That said donating is a great way to support a candidate you care about and help them get their message out.

The smaller scale of municipal campaigns also means that any past experience will probably make you the resident expert in something. When you volunteer for a provincial campaign, you’re a small cog in a big machine. When you volunteer municipally, it’s not like that.

Although not all campaigns need your help to the same degree. Incumbents almost never lose races municipally. Only one incumbent (out of 4 who stood for re-election) lost in Waterloo. In Cambridge, no incumbent counsellor lost re-election. Incumbent counsellors are also more likely to have an experienced existing team, potentially limiting the responsibility you could hold. This isn’t necessarily a bad thing! There’s lots to be said for learning skills from more experienced people.

Still, if your main goal is to maximize your contribution towards the election of candidates who you trust, you should focus on open seat races (a seat where there’s no incumbent, due to retirement, scandal, etc.). Second to open seat races might be challengers who are unusually good candidates (e.g. they have extensive community ties and recognition, or other political experience).

(This is speculative. Local conditions may vary. You, or a sitting counsellor you trust might be best positioned to figure out where you can do the most good)

The ease in which you can find yourself in a position of responsibility in a municipal campaign comes with one drawback if you accept it – it can be stressful to be responsible. I don’t want to discourage anyone from getting involved, but I did find even my limited leadership role a source of stress.

From my point of view, three things make being part of a campaign team stressful:

  1. It’s a lot of work; the emotion work of listening to people’s concerns can be emotionally draining and the walking physically taxing. This leads to you trying to do admin work when tired and worn-out.
  2. The outcome is uncertain. Many people like certainty and the combination of caring about a specific outcome a lot and being unsure if it will come about can wear you down.
  3. The buck stops with you. When you’re a simple canvasser, you just need to show up; everything else is taken care of. When people asked me to do things, they wouldn’t get done unless I took care of them.

Now there were two further factors that probably made this more stressful for me than the average volunteer. First, I was working around my blogging French practice. If I was exhausted from campaigning and didn’t work on them, I’d beat myself up about it. People who respond to exhaustion in healthier ways (hint: any other way) wouldn’t have this stressor.

Second, one of the other candidates may have been engaging in underhanded tactics. As a young idealist, I took this rather hard and wasted a lot of energy being angry about it.

Now, I want to be clear that me being such a ball of stress wasn’t the fault of the campaign or anyone else in it.

I read an article a few months ago (that I’m now no longer able to find) about a campaign run and almost entirely staffed by women in California. The women who worked on it talked about how supportive the environment was and how useful it was to have things like “what are times you need off for childcare?” and “please let us know if you feel like you’re taking on too much” asked explicitly at the start.

Tenille’s campaign wasn’t run entirely by women, but it was pretty close (there was only myself and her husband on the core team). And just like the campaign I read about in California, Tenille and Zivy (our campaign manager) did an excellent job checking in with everyone and doing their best to make sure no one took on too much. If I pushed myself past the point I should have, it wasn’t for lack of them trying to create a campaign that didn’t encourage that.

I don’t want to get all gender essentialist here, but working on this campaign made me genuinely believe that women might bring something important and different to the political process. Previously, I’d wanted to see gender balance in elected representatives for basic fairness reasons. Now I find myself even more committed to it.

I think there were two things that made the stress all worth it. The first was getting Tenille elected. I was continually floored by just how good she will be as a counsellor. She knows so much about how Waterloo’s weird two-level government works, has been very involved in the community, and has a journalist’s instinct for hard questions. The second upside is all the other people I met.

There’s this branch of decision theory called functional decision theory that claims the key component of decision making is the algorithm that people use to make decisions. Functional decision theory holds that you can coordinate with someone without talking to them, as long as you can make an accurate guess as to what their decision-making algorithm will be.

This is relevant to campaigning, because you can coordinate with other cool people with similar beliefs to all end in the same room. All you have to do is figure out what candidate they’ll volunteer for and get on her campaign team. Then you’ll all show up in that candidate’s living room, drink coffee, and figure out how to get her elected.

(This can also be a general piece of advice; if you want to meet people you’ll find cool, go do whatever you think a 10% cooler version of you would do. Being part of a core campaign team works so well for this because you’ll spend a lot of time with the other members and be in a social context that provides lots of stuff for you all to talk about. This beats being a canvassing volunteer, where you’ll only see the same people intermittently and have less of a context that encourages mingling.)

Most of the people I met through the campaign are in a rather different stage of life than I am; they aren’t all young techies like most of my other friends. Many of them had kids. Some of them even had jobs outside of tech! Despite the fact that our lives looked rather different, I found I really liked them. They were universally kind, thoughtful, and willing to listen to other perspectives.

(It is rare that I get to hear multiple people talk about why that had kids, what they expected to get out of it, and how they were surprised, but it turns out I really enjoy it when I do. Knowing people at other stages of life is great because you can get advice about your stage of life.)

We had a potluck and reunion a month after the campaign was over and I found myself giddy afterwards; it wasn’t just the stress of the campaign that made me like them. They’re just cool people.

The social scientist Jonathon Haidt wrote in The Righteous Mind that many of the experiences people highlight as the most meaningful in their life happen in the context of some shared struggle. Whatever the depredations, working together for some important cause feels good. In my last post on canvassing, I also quoted Hannah Arendt, who talked about the “extreme pleasure” of working in a group. She was right. Haidt is right as well. Canvassing, volunteering, trying to get someone elected – these are all things that you will look back on and feel proud about.

It’s for these reasons – and because politics needs good, dedicated, decent people – that I recommend becoming involved at any and all levels of government. You don’t have to run yourself. There are plenty of excellent candidates out there who need help, money, and time. If you’re new to politics, consider volunteering to knock on doors. If you’re an old hand, consider taking on a leadership role.

You might change the world. And you might make amazing friends.

Model, Quick Fix

When QALYs Are Wrong – Thoughts on the Gates Foundation

Every year, I check in to see if we’ve eradicated polio or guinea worm yet. Disease eradications are a big deal. We’ve only successfully eradicated one disease – smallpox – so being so close to wiping out two more is very exciting.

Still, when I looked at how much resources were committed to polio eradication (especially by the Gates Foundation), I noticed they seemed incongruent with its effects. No polio eradication effort can be found among GiveWell’s top charities, because it is currently rather expensive to prevent polio. The amount of quality-adjusted life years (QALYs, a common measure of charity effectiveness used in the Effective Altruism community) you can save with a donation to preventing malaria is just higher than for polio.

I briefly wondered if it might not be better for all of the effort going to polio eradication to instead go to anti-malaria programs. After thinking some more, I’ve decided that this would be a grave mistake. Since I haven’t seen why explained anywhere else, I figured I’d share my thinking, so that anyone else having the same thought can see it.

A while back, it was much cheaper to buy QALYs using the polio vaccines. As recently as 1988, there were more than 350,000 cases of polio every year. It’s a testament to the excellent work of the World Health Organization and its partners that polio has become so much rarer – and therefore so much more expensive to prevent each new case of. After all, when there are few new cases, you can’t prevent thousands.

It is obviously very good that there are few cases of polio. If we decided that this was good enough and diverted resources towards treating other diseases, we might quickly find that this would no longer be the case. Polio could once again become a source of easy QALY improvements – because it would be running rampant in unvaccinated populations. When phrased this way, I hope it’s clear that polio becoming a source of cheap QALY improvements isn’t a good thing; the existence of cheap QALY improvements means that we’ve dropped the ball on a potentially stoppable disease.

If polio is eradicated for good, we can stop putting any effort into fighting it. We won’t need any more polio vaccines or any more polio monitoring. It’s for this reason that we’re much better off if we finish the eradication effort.

What I hadn’t realized was that a simple focus on present QALYs obscures the potential effects our actions can have on future QALYs. Abandoning diseases until treatments for them save many lives cheaply might look good for our short term effectiveness, but in the long term, the greatest gains come from following through with our eradication efforts, so that we can repurpose all resources from an eradicated disease to the fight against another, forever.

Link Post

Link Post – December 2018

This true crime story ticks a lot of my boxes. The villain is created by the slow entropic decay of corruption and temptation, while the hero chose to prosecute white collar crimes because he wanted to go after crimes of greed, not desperation. I continue to believe that as a society, we’re too lenient on crimes of greed and too harsh on crimes of desperation, so it was easy to cheer the prosecution on.

This post claims that the pharmaceutical industry is soon going to fall apart because returns on R&D aren’t keeping up; all the low hanging fruit is gone and none of the harder to reach stuff is profitable. If anyone can give me a sense of how deeply I should be worried by this, I’ll be deeply appreciative.

If your restaurant is failing, or if you want to maximize your chances of success when you open a new location, you can apparently turn to restaurant consultants. I was especially appreciative of their weird specialized vocabulary.

The first commercial flight to circumnavigate the world did so accidentally, soon after the attack on Pearl Harbour made its return flight over the Pacific too dangerous. This is one of the cases where you want to yell at reality for being too unrealistic with its tropes; it features everything from an accidental passenger to a near miss in a mine field.

When I wrote about scrip stamp currencies, I joked that if they lasted more than a couple years, they’d melt down in some bizarre way. Alberta provides a real life example, where the scrip stamp system broke down within a month.

I’m young enough that I kind of just assumed the food item known as “the wrap” always existed. Turns out this is not the case! This article tracks the rise of wraps and the mania that surrounded them, as well as their inevitable fall and strange afterlife as a bland staple in catered lunches.

In 1994, Paul Krugman wrote the famous “Myth of Asia’s Miracle“, which claimed that Asian countries could not maintain their high growth rates indefinitely, especially because they lacked high productivity growth. 15 years later, another economist revisits this assertion and shows that massive re-investment can more than make up for slow productivity growth and drive strong overall growth. Turns out that in nation-building, quantity can have a quality all of its own.

LASIK side-effects worse, more common than most people realize.

I found a record of important political events from 1890 and I have to say, I’m glad we’ve come so far since the 19th century. Back then, the rest of the world was ganging up on America for taking a sudden protectionist turn, which doesn’t remind me of anything current at all.

I find I really enjoy it when judges are acerb, which makes this paper written by a judge about how annoying lawyers like catnip to me. It contains the line: ‘On mornings when I am scheduled to hear a family case, if someone greets me in the court house hallway with, “Have a good morning, Your Honour,” I typically reply, “Thank you, but I have other plans.” I adhere to the view that a legal system without Family Court is like Christianity without Hell.’, in the introduction, so you can tell right away that it’s going to be good.

Economics, Model

Why External Debt is so Dangerous to Developing Countries

I have previously written about how to evaluate and think about public debt in stable, developed countries. There, the overall message was that the dangers of debt were often (but not always) overhyped and cynically used by certain politicians. In a throwaway remark, I suggested the case was rather different for developing countries. This post unpacks that remark. It looks at why things go so poorly when developing countries take on debt and lays out a set of policies that I think could help developing countries that have high debt loads.

The very first difference in debt between developed and developing countries lies in the available terms of credit; developing countries get much worse terms. This makes sense, as they’re often much more likely to default on their debt. Interest scales with risk and it just is riskier to lend money to Zimbabwe than to Canada.

But interest payments aren’t the only way in which developing countries get worse terms. They are also given fewer options for the currency they take loans out in. And by fewer, I mean very few. I don’t think many developing countries are getting loans that aren’t denominated in US dollars, Euros, or, if dealing with China, Yuan. Contrast this with Canada, which has no problem taking out loans in its own currency.

When you own the currency of your debts, you can devalue it in response to high debt loads, making your debts cheaper to pay off in real terms (that is to say, your debt will be equivalent to fewer goods and services than it was before you caused inflation by devaluing your currency). This is bad for lenders. In the event of devaluation, they lose money. Depending on the severity of the inflation, it could be worse for them than a simple default would be, because they cannot even try and recover part of the loan in court proceedings.

(Devaluations don’t have to be large to be reduce debt costs; they can also take the form of slightly higher inflation, such that interest is essentially nil on any loans. This is still quite bad for lenders and savers, although less likely to be worse than an actual default. The real risk comes when a country with little economic sophistication tries to engineer slightly higher inflation. It seems likely that they could drastically overshoot, with all of the attendant consequences.)

Devaluations and inflation are also politically fraught. They are especially hard on pensioners and anyone living on a fixed income – which is exactly the population most likely to make their displeasure felt at the ballot box. Lenders know that many interest groups would oppose a Canadian devaluation, but these sorts of governance controls and civil society pressure groups often just doesn’t exist (or are easily ignored by authoritarian leaders) in the developing world, which means devaluations can be less politically difficult [1].

Having the option to devalue isn’t the only reason why you might want your debts denominated in your own currency (after all, it is rarely exercised). Having debts denominated in a foreign currency can be very disruptive to the domestic priorities of your country.

The Canadian dollar is primarily used by Canadians to buy stuff they want [2]. The Canadian government naturally ends up with Canadian dollars when people pay their taxes. This makes the loan repayment process very simple. Canadians just need to do what they’d do anyway and as long as tax rates are sufficient, loans will be repaid.

When a developing country takes out a loan denominated in foreign currency, they need some way to turn domestic production into that foreign currency in order to make repayments. This is only possible insofar as their economy produces something that people using the loan currency (often USD) want. Notably, this could be very different than what the people in the country want.

For example, the people of a country could want to grow staple crops, like cassava or maize. Unfortunately, they won’t really be able to sell these staples for USD; there isn’t much market for either in the US. There very well could be room for the country to export bananas to the US, but this means that some of their farmland must be diverted away from growing staples for domestic consumption and towards growing cash crops for foreign consumption. The government will have an incentive to push people towards this type of agriculture, because they need commodities that can be sold for USD in order to make their loan payments [3].

As long as the need for foreign currency persists, countries can be locked into resource extraction and left unable to progress towards a more mature manufacturing- or knowledge-based economies.

This is bad enough, but there’s often greater economic damage when a country defaults on its foreign loans – and default many developing countries will, because they take on debt in a highly procyclical way [4].

A variable, indicator, or quantity is said to be procyclical if it is correlated with the overall health of an economy. We say that developing nation debt is procyclical because it tends to expand while economies are undergoing expansion. Specifically, new developing country debts seem to be correlated with many commodity prices. When commodity prices are high, it’s easier for developing countries that export them to take on debt.

It’s easy to see why this might be the case. Increasing commodity prices make the economies of developing countries look better. Exporting commodities can bring in a lot of money, which can have spillover effects that help the broader economy. As long as taxation isn’t too much a mess, export revenues make government revenues higher. All of this makes a country look like a safer bet, which makes credit cheaper, which makes a country more likely to take it on.

Unfortunately (for resource dependent countries; fortunately for consumes), most commodity price increases do not last forever. It is important to remember that prices are a signal – and that high prices are a giant flag that says “here be money”. Persistently high prices lead to increased production, which can eventually lead to a glut and falling prices. This most recently and spectacularly happened in 2014-2015, as American and Canadian unconventional oil and gas extraction led to a crash in the global price of oil [5].

When commodity prices crash, indebted, export-dependent countries are in big trouble. They are saddled with debt that is doubly difficult to pay back. First, their primary source of foreign cash for paying off their debts is gone with the crash in commodity prices (this will look like their currency plummeting in value). Second, their domestic tax base is much lower, starving them of revenue.

Even if a country wants to keep paying its debts, a commodity crash can leave them with no choice but a default. A dismal exchange rate and minuscule government revenues mean that the money to pay back dollar denominated debts just doesn’t exist.

Oddly enough, defaulting can offer some relief from problems; it often comes bundled with a restructuring, which results in lower debt payments. Unfortunately, this relief tends to be temporary. Unless it’s coupled with strict austerity, it tends to lead into another problem: devastating inflation.

Countries that end up defaulting on external debt are generally not living within their long-term means. Often, they’re providing a level of public services that are unsustainable without foreign borrowing, or they’re seeing so much government money diverted by corrupt officials that foreign debt is the only way to keep the lights on. One inevitable effect of a default is losing access to credit markets. Even when a restructuring can stem the short-term bleeding, there is often a budget hole left behind when the foreign cash dries up [6]. Inflation occurs because many governments with weak institutions fill this budgetary void with the printing press.

There is nothing inherently wrong with printing money, just like there’s nothing inherently wrong with having a shot of whiskey. A shot of whiskey can give you the courage to ask out the cute person at the bar; it can get you nerved up to sing in front of your friends. Or it can lead to ten more shots and a crushing hangover. Printing money is like taking shots. In some circumstances, it can really improve your life, it’s fine in moderation, but if you overdue it you’re in for a bad time.

When developing countries turn to the printing press, they often do it like a sailor turning to whiskey after six weeks of enforced sobriety.

Teachers need to be paid? Print some money. Social assistance? Print more money. Roads need to be maintained? Print even more money.

The money supply should normally expand only slightly more quickly than economic growth [7]. When it expands more quickly, prices begin to increase in lockstep. People are still paid, but the money is worth less. Savings disappear. Velocity (the speed with which money travels through the economy) increases as people try and spend money as quickly as possible, driving prices ever higher.

As the currency becomes less and less valuable, it becomes harder and harder to pay for imports. We’ve already talked about how you can only buy external goods in your own currency to the extent that people outside your country have a use for your currency. No one has a use for a rapidly inflating currency. This is why Venezuela is facing shortages of food and medicine – commodities it formerly imported but now cannot afford.

The terminal state of inflation is hyperinflation, where people need to put their currency in wheelbarrows to do anything with it. Anyone who has read about Germany in the 1930s knows that hyperinflation opens the door to demagogues and coups – to anything or anyone who can convince the people that the suffering can be stopped.

Taking into account all of this – the inflation, the banana plantations, the boom and bust cycles – it seems clear that it might be better if developing countries took on less debt. Why don’t they?

One possible explanation is the IMF (International Monetary Fund). The IMF often acts as a lender of last resort, giving countries bridging loans and negotiating new repayment terms when the prospect of default is raised. The measures that the IMF takes to help countries repay their debts have earned it many critics who rightly note that there can be a human cost to the budget cuts the IMF demands as a condition for aid [8]. Unfortunately, this is not the only way the IMF might make sovereign defaults worse. It also seems likely that the IMF represents a significant moral hazard, one that encourages risky lending to countries that cannot sustain debt loads long-term [9].

A moral hazard is any situation in which someone takes risks knowing that they won’t have to pay the penalty if their bet goes sour. Within the context of international debt and the IMF, a moral hazard arises when lenders know that they will be able to count on an IMF bailout to help them recover their principle in the event of a default.

In a world without the IMF, it is very possible that borrowing costs would be higher for developing countries, which could serve as a deterrent to taking on debt.

(It’s also possible that countries with weak institutions and bad governance will always take on unsustainable levels of debt, absent some external force stopping them. It’s for this reason that I’d prefer some sort of qualified ban on loaning to developing countries that have debt above some small fraction of their GDP over any plan that relies on abolishing the IMF in the hopes of solving all problems related to developing country debt.)

Paired with a qualified ban on new debt [10], I think there are two good arguments for forgiving much of the debt currently held by many developing countries.

First and simplest are the humanitarian reasons. Freed of debt burdens, developing countries might be able to provide more services for their citizens, or invest in infrastructure so that they could grow more quickly. Debt forgiveness would have to be paired with institutional reform and increased transparency, so that newfound surpluses aren’t diverted into the pockets of kleptocrats, which means any forgiveness policy could have the added benefit of acting as a big stick to force much needed governance changes.

Second is the doctrine of odious debts. An odious debt is any debt incurred by a despotic leader for the purpose of enriching themself or their cronies, or repressing their citizens. Under the legal doctrine of odious debts, these debts should be treated as the personal debt of the despot and wiped out whenever there is a change in regime. The logic behind this doctrine is simple: by loaning to a despot and enabling their repression, the creditors committed a violent act against the people of the country. Those people should have no obligation (legal or moral) to pay back their aggressors.

The doctrine of odious debts wouldn’t apply to every indebted developing country, but serious arguments can be made that several countries (such as Venezuela) should expect at least some reduction in their debts should the local regime change and international legal scholars (and courts) recognize the odious debt principle.

Until international progress is made on a clear list of conditions under which countries cannot take on new debt and a comprehensive program of debt forgiveness, we’re going to see the same cycle repeat over and over again. Countries will take on debt when their commodities are expensive, locking them into an economy dependent on resource extraction. Then prices will fall, default will loom, and the IMF will protect investors. Countries are left gutted, lenders are left rich, taxpayers the world over hold the bag, and poverty and misery continue – until the cycle starts over once again.

A global economy without this cycle of boom, bust, and poverty might be one of our best chances of providing stable, sustainable growth to everyone in the world. I hope one day we get to see it.

Footnotes

[1] I so wanted to get through this post without any footnotes, but here we are.

There’s one other reason why e.g. Canada is a lower risk for devaluation than e.g. Venezuela: central bank independence. The Bank of Canada is staffed by expert economists and somewhat isolated from political interference. It is unclear just how much it would be willing to devalue the currency, even if that was the desire of the Government of Canada.

Monetary policy is one lever of power that almost no developed country is willing to trust directly to politicians, a safeguard that doesn’t exist in all developing countries. Without it, devaluation and inflation risk are much higher. ^

[2] Secondarily it’s used to speculatively bet on the health of the resource extraction portion of the global economy, but that’s not like, too major of a thing. ^

[3] It’s not that the government is directly selling the bananas for USD. It’s that the government collects taxes in the local currency and the local currency cannot be converted to USD unless the country has something that USD holders want. Exchange rates are determined based on how much people want to hold one currency vs. another. A decrease in the value of products produced by a country relative to other parts of the global economy means that people will be less interested in holding that country’s currency and its value will fall. This is what happened in 2015 to the Canadian dollar; oil prices fell (while other commodity prices held steady) and the value of the dollar dropped.

Countries that are heavily dependent on the export of only one or two commodities can see wild swings in their currencies as those underlying commodities change in value. The Russian ruble, for example, is very tightly linked to the price of oil; it lost half its value between 2014 and 2016, during the oil price slump. This is a much larger depreciation than the Canadian dollar (which also suffered, but was buoyed up by Canada’s greater economic diversity). ^

[4] This section is drawn from the research of Dr. Karmen Reinhart and Dr. Kenneth Rogoff, as reported in This Time Is Different, Chapter 5: Cycles of Default on External Debt. ^

[5] This is why peak oil theories ultimately fell apart. Proponents didn’t realize that consistently high oil prices would lead to the exploitation of unconventional hydrocarbons. The initial research and development of these new sources made sense only because of the sky-high oil prices of the day. In an efficient market, profits will always eventually return to 0. We don’t have a perfectly efficient market, but it’s efficient enough that commodity prices rarely stay too high for too long. ^

[6] Access to foreign cash is gone because no one lends money to countries that just defaulted on their debts. Access to external credit does often come back the next time there’s a commodity bubble, but that could be a decade in the future. ^

[7] In some downturns, a bit of extra inflation can help lower sticky wages in real terms and return a country to full employment. My reading suggests that commodity crashes are not one of those cases. ^

[8] I’m cynical enough to believe that there is enough graft in most of these cases that human costs could be largely averted, if only the leaders of the country were forced to see their graft dry up. I’m also pragmatic enough to believe that this will rarely happen. I do believe that one positive impact of the IMF getting involved is that its status as an international institution gives it more power with which to force transparency upon debtor nations and attempt to stop diversion of public money to well-connected insiders. ^

[9] A quick search found two papers that claimed there was a moral hazard associated with the IMF and one article hosted by the IMF (and as far as I can tell, later at least somewhat repudiated by the author in the book cited in [4]) that claims there is no moral hazard. Draw what conclusions from this you will. ^

[10] I’m not entirely sure what such a ban would look like, but I’m thinking some hard cap on amount loaned based on percent of GDP, with the percent able to rise in response to reforms that boost transparency, cut corruption, and establish modern safeguards on the central bank. ^