Losing ballast for a faster recovery: Slashing the government

Almost every developed country worldwide is nowadays fully immersed on its own fight for economic recovery. But this fight is made tougher by high unemployment rates, sovereign solvency doubts, inflation and financial speculation. The resultant situation is hard to tackle for governments: they need their economies to grow but they must ensure they are solvent and responsible, thus being a stable soil for said recovery to grow on. 

I am not going to discuss the measures for economic growth here, but the ones used to keep the state under control. These measures to try to lower government spending range from budget cuts, the end of some subsidies, establishment of debt ceilings, social services restrictions... to issuing (more) debt to be able to keep public spending at actual levels. Some of these moves are smart, some of them are insane, specially the debt issuing one... But all of them are late, very late.

2011 data from The Heritage Foundation , The Wall Street Journal via Wikipedia 

 

In the last decades we have grown accustomed to bigger and bigger states, with a never-ending growth in civil servants, entities, organizations, committees... Just have a look at the table above on the column for Government expenditure in percentage of GDP and you will see some unbearably high numbers (I will come back to analyze this table in a future post). This growth in size and cost was associated with the growing complexity of running a state in modern times, the never-ending appearance of new social measures and so on. Everybody let the parasite grow deep inside us, and when the ride was smooth nobody seemed to care about the extra weight that was being placed on the shoulders of the economy. But what now that we are on one of the bumpiest sections of this one-way road that is history? No matter how much horsepower your car has, if you start putting rocks in the trunk its performance will fall to the ground.

Stopping the government growth and its crazy spending is not enough, we must shrink its size and cost to reasonable levels. But how do you shrink a government without stopping its functions?

Get used to China's trade deficit

When the balance of trade for February 2011 was published a lot of people were genuinely shocked to see that China had a 7.3$ billion trade deficit, the first since March 2010. When those same people think of China, they think on an enormous factory and lots of container full of goods ready to be transported to the West. While this image is right to some extent, they seem to disregard China's soaring internal demand for non-Chinese goods (mostly luxury items) and the uncomfortable neighbor that rising commodity prices are.

China's main clients are Europe and the USA, and with both of them growing slowly in the first quarter of 2011, exports have obviously slowed down too. China knew this, and expected to offset this slowdown with increasing internal demand. However this internal demand had another idea, it has focused mostly on non-Chinese goods... China is starting to have an incipient middle-upper class, but more importantly it is creating lots of new millionaires every month. And this newly created wealth is mostly being used to buy western goods, specially luxury cars, high-end clothes and fine jewelery. Take as an example BMW and Mercedes, whose sales in China grew 76% last year. This can be the biggest example, but it is only one of many; luxury clothing brands keep opening flagship stores (mainly in Shanghai) to fill the never-ending Chinese appetite for foreign luxury.

How many containers full of light bulbs, ipod accesories or handkerchiefs do you need to compensate for a Chinese entrepreneur buying a fully-equipped BMW 7-series? There you have your trade deficit...

Germany's biggest enemy: a strong euro.

Neither the (now certified) fall of Portugal nor increased debt pressures on other european peripheric countries have been enough to tumble down the never-ending rise of the euro exchange rate against other significant currencies. This should be very worrying for the heart and engine of the eurozone, Germany. I am sure Germany is already worried about that, what I mean is they should be worried enough to do something about it. 

A net exporter like Germany should not allow its currency to be its Achilles heel. Ok, the currency is not really German, but they are its founding fathers and the main reason why it exists... With this in mind, it becomes very difficult to understand why they allow 'their idea' to make their international trades more expensive and complicated. In the actual economic situation, competitiveness and efficiency are key to keep selling and Germany can lose their edge because of this. It is survival of the fittest.
The competitiveness indicators based on consumer prices published by the ECB show this trend clearly, see charts below (where 100% equals the index value in 1999 ) with an obviously sharp decline coincidental with the rise of the euro.

Harmonised competitiveness indicator for Germany. Credit: Deutsche Bundesbank

A strong euro is obviously good for debt issuing, for general borrowing and for imports but it can really hurt the muscle of Europe. Maybe you could think of it as eating everyday at McDonalds (no bashing here, just an example): it is cheap, it is easy and convenient as you can find one almost everywhere and it gets you through the day. But in the long-term fats are bad for your figure and, more importantly, bad for your most important muscle, the heart. The European Central Bank (ECB) is damaging the heart of Europe.

Reasons for an oil producer to go nuclear.

This same week I read at Bloomberg's Businessweek that Abu Dhabi, the 7th country in the world by estimated oil reserves, is building a civilian nuclear reactor to go-live on 2017. The article mainly focused on the assertiveness of the United Arab Emirates (UAE) going forward with their plans despite the ongoing events at Fukushima. Nothing exceptional here from my point of view, as there is nothing in common between the Fukushima plant and and what  the UAE is building in Braka together with Korea Electric Power Corporation (KEPCO).  What I am most interested about is the fact that one of the oil-richest countries in the world is going nuclear.

Illustration of the future, 4-reactor nuclear plant.

Internal energy demand is growing fast in Abu Dhabi, but it is still marginal compared with all the oil the UAE is exporting worldwide. We know Abu Dhabi, as every other producer, can have oil for cheap, so its domestic oil consumption would not justify the huge investment a nuclear energy facility demands. We could also consider Abu Dhabi not a front runner in climate preservation, and because of their small population density they do not have to be much worried about their fossil fuel emissions neither. 

So what could be the reasoning behind this ambitious nuclear plan started in 2008. Are their oil reserve estimates too optimistic? Do they prepare for a sooner-than-expected post-oil era? Or are they simply trying to keep their energy independence? Not being suspicious here, just trying to make some sense of such an expensive and (unfortunately) controversial decision.

Crazy or genius ideas: Individual Carbon Emissions Cap (II)

On the previous post I put on the table an idea to help control carbon emissions at an individual level while at the same time creating a way for citizens to monetize from their energy efficiency. I named it the Individual Carbon Emissions Cap (ICEC for short). After explaining its inner workings on the first post, now is the turn to explain why I think it could be highly beneficial for the economy.

Motivation

I am fed up of seeing the utility companies promoting energy saving and efficiency (even though one could think, on first instance, it goes against their business) but governments doing nothing but subsidize renewable energies producers. Renewable energies, as of today, are not capable of covering our whole energy consumption and they will not in the short term either, at least if we follow our historical trend of growing consumption. For renewable energies to really become alternative energies, efficiency measures must be applied to our daily life.

That is where ICEC kicks in, by setting a comprehensible limit on individual carbon emissions it promotes energy efficiency while at the same time boosting non fossil-based energies as they do not emit any CO2.

Prize efficient people, punish wasteful spenders = Prize the economy

I do not want anybody to think about the ICEC as a tax, because it is not. It could only become a tax for someone who is not capable of living without wasting a lot of energy by doing so. If that was the case, then tax him like you would with a normal business... The ICEC limit is high enough to not disrupt you usual life habits, but at the same time giving you an incentive to be efficient. For those who find the way to be efficient, the prize could not be more obvious: cash. Well, apart from the peace of mind of helping the environment and such... This cash could be forced to be for consumption only (if needed), then it would give a much needed boost to our weak economic recovery by increasing goods consumption. The best part? it would come at zero cost for the government, no need to raise taxes to the already tax-massacred citizens and, collaterally, it would mean increased earnings from VAT and other already existant taxes on consumption.

Crazy or genius ideas: Individual Carbon Emissions Cap (I)

This marks the start of a new series of posts that, from now on, will share the blog's spotlight together with the habitual posts analyzing the situation of the global economy. These series will be far more subjective than the economic analysis posts, I will just expose some ideas that cross my mind. That means I could incur in some inaccuracies from time to time, so take it with a grain of salt. 

When there is so much talk about carbon emissions, lowering carbon footprints, global warming, the problem with fossil fuels, etc. what if  we began helping by setting a yearly CO2 quantity that people are allowed to emit? I am talking about creating an "Individual Carbon Emissions Cap", similarly to what it is done with industrial emissions as stated by the Kyoto Protocol but taking it a step further by making citizens part of it. 

What does this mean? Every participant country would set an Individual Carbon Emissions Cap (from now on I will call this ICEC for clarity's sake) for its citizens; a defined number of kilograms of CO2 that one person was allowed to emit to the environment over a year. For some people ICEC would instantly become an asset, for others it would mean a new tax, but in any case a tax you have control over... People would be able to trade part of their ICEC on a newly-defined public market (obviously with fixed prices per year to avoid the speculating vultures from spoiling the idea) and they could also make their cap grow by planting trees, sharing cars, installing or buying energy efficient devices and similar tree-hugger 'activities'.