If you come across claims that you don’t have to pay income taxes in Canada because you’re a “natural person,” you’d be well advised to ignore them, or Canada Revenue Agency may be coming after you.
Canada’s federal tax collector has suffered “staggering losses” due to an anti-tax campaign that claims only “legal persons” have to pay income taxes, while “natural persons” are exempt, according to documents obtained by by the subscription news site Blacklock’s Reporter.
“The Canada Revenue Agency is the victim of a widespread and continually growing scheme to defraud the federal government of millions of dollars in tax revenues,” the agency’s Enforcement and Disclosures Directorate said in the documents.
“Law-abiding taxpayers need to be reassured that fraud does not pay, or they will look to join the multitude of fraudsters.”
Though no estimates were provided for exactly how much money the feds are losing to “detaxers,” as the CRA calls them, the documents urge aggressive enforcement because “the number of participants is growing quickly.”
Since 2000, there have been at least 23 convictions of “natural persons” who argued they didn’t owe income taxes, the Langley Advance reports.
The principal argument goes like this: The “legal person” established by the government, complete with Social Insurance Number, has to pay income taxes. But the “natural person” behind that legal person is a separate entity. If you “transfer” your wealth from the legal person to the natural person, you don’t have to pay income tax.
The CRA neutrally describes these theories as “opinions,” but warns that “individuals who mistakenly confuse opinions with facts may expose themselves to serious financial and legal problems if this results in their failure to comply with the Income Tax Act and other tax laws.”
Some people who have followed the advice of “detaxer” groups have ended up paying the price in the justice system. An Ottawa-area dentist and her husband weresentenced last year to two-and-a-half and four years in prison, respectively, for following the advice of Paradigm Education Group, which lectures on the “natural persons” theory.
Paradigm Education Group, based out of B.C., was itself targeted for tax evasion. The group’s leader, Russ Porisky, was last year convicted of tax evasion and counselling others to commit tax fraud, and sentenced to four-and-a-half years.
“Remember also that many groups and individuals stand to profit considerably from the perpetuation of certain tax myths,” the CRA website states. “Don’t let them profit at your expense!”
Some critics of the government’s approach to tax evasion argue the feds spend too much time on relatively small tax evasion cases, such as the “natural person” cases, while not doing enough to go after larger tax cheats who take advantage of offshore tax havens.
Why is a finite world a problem? I can think of many answers:
1. A finite world is a problem because we and all of the other creatures living in this world share the same piece of “real estate.” If humans use increasingly more resources, other species necessarily use less. Even “renewable” resources are shared with other species. If humans use more, other species must use less. Solar panels covering the desert floor interfere with normal wildlife; the use of plants for biofuels means less area is available for planting food and for vegetation preferred by desirable insects, such as bees.
2. A finite world is governed by cycles. We like to project in straight lines or as constant percentage increases, but the real world doesn’t follow such patterns. Each day has 24 hours. Water moves in waves. Humans are born, mature, and die. A resource is extracted from an area, and the area suddenly becomes much poorer once the income from those exports is removed. Once a country becomes poorer, fighting is likely to break out. A recent example of this is Egypt’s loss of oil exports, about the time of the Arab Spring uprisings in 2011 (Figure 1). The fighting has not yet stopped.
Figure 1. Egypt’s oil production and consumption, based on BP’s 2013 Statistical Review of World Energy data.
The interconnectedness of resources with the way economies work, and the problems that occur when those resources are not present, make the future much less predictable than most models would suggest.
3. A finite world means that we eventually run short of easy-to-extract resources of many types, including fossil fuels, uranium, and metals. This doesn’t mean that we will “run out” of these resources. Instead, it means that the extraction process will become more expensive for these fuels and metals, unless technology somehow acts to hold costs down. If extraction costs rise, anything made using these fuels and metals becomes more expensive, assuming businesses selling these products are able to recover their costs. (If they don’t, they go out of business, quickly!) Figure 2 shows that a recent turning point toward higher costs came in 2002, for both energy products and base metals.
Figure 2. World Bank Energy (oil, natural gas, and coal) and Base Metals price indices, using 2005 US dollars, indexed to 2010 = 100. Base metals exclude iron. Data source: World Bank.
4. A finite world means that globalization will prove to be a major problem, because it added proportionately far more humans to world demand than it added undeveloped resources to world supply. China was added to the World Trade Organization in December 2001. Its use of fuels of all types skyrocketed quickly soon afterward (Figure 3, below). As noted in Item 3 above, the turning point for prices of fuels and metals was in 2002. In my view, this was not a coincidence–it was connected with rising demand from China, as well as the fact that we had extracted a considerable share of the cheap to extract fuels earlier.
Figure 3. Energy consumption by source for China based on BP 2013 Statistical Review of World Energy.
5. In a finite world, wages don’t rise as much as fuel and metal extraction costs rise, because the extra extraction costs add no real benefit to society–they simply remove resources that could have been put to work elsewhere in the economy. We are, in effect, becoming less and less efficient at producing energy products and metals. This happens because we are producing fuels that are located in harder to reach places and that have more pollutants mixed in. Metal ores have similar problems–they are deeper and of lower concentration. All of the extra human effort and extra resource expenditure does not produce more end product. Instead, we are left with less human effort and less resources to invest in the rest of the economy. As a result, total production of goods and services for the economy tends to stagnate.
In such an economy, workers find that their inflation-adjusted wages tend to lag. (This happens because the total economy produces less, so each worker’s share of what is produced is less.) Companies producing energy and metal products are also likely to find it harder to make a profit, because with lagging wages, consumers cannot afford to buy very much product at the higher prices. In fact, there is likely to be the danger of an abrupt drop in production, because prices remain too low to justify the high cost of additional investment.
6. When workers can afford less and less (see Item 5 above), we end up with multiple problems:
a. If workers can afford less, they cut back in discretionary spending. This tends to slow or eventually stop economic growth. Lack of economic growth eventually affects stock market prices, since stock prices assume that sale of their products will continue to grow indefinitely.
b. If workers can afford less, one item that is increasingly out of reach is a more expensive home. As result, housing prices tend to stagnate or fall with stagnating wages and rising fuel and metals prices. The government can somewhat fix the problem through low interest rates and more commercial sales–that is why the problem is mostly gone now.
c. If workers find their wages lagging, and some are laid off, they increasingly fall back on government services. This leaves governments with a need to pay out more in benefits, without being able to collect sufficient taxes. Thus, governments ultimately end up with financial problems, if extraction costs for fuels and metals rise faster than can be offset by innovation, as they have been since 2002.
7. A finite world means that the need for debt keeps increasing, at the same time the ability to repay debt starts to fall. Workers find that goods, such as cars, are increasingly out of their ability to pay for them, because car prices are affected by the rising cost of metals and fuels. As a result, debt levels need to rise to buy these cars. Governments find that they need more debt to pay for all of the services promised to increasingly impoverished workers. Even energy companies find a need for more debt. For example, according to today’s Wall Street Journal,
Last year, 80 big energy companies in North America spent a combined $50.6 billion more than they brought in from their operations, according to data from S&P Capital IQ. That deficit was twice as high as in 2011, and four times as high as in 2010.
At the same time that the need for debt is increasing, the ability to pay it back is falling. Discretionary income of workers is lagging, because of today’s high prices of fuels and metals. Governments find it difficult to raise taxes. Fuel and metal companies find it hard to raise prices enough to finance operations out of cash flow. Ultimately, (which may not be too in the future) this situation has to come to an unhappy end.
Figure 4. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.
Governments can cover up this problem for a while, with super low interest rates. But if interest rates ever rise again, the increase in interest rates is likely to lead to huge debt defaults, and major financial failures internationally. This happens because higher interest rates lead to a need for higher taxes, and because higher interest rates mean purchases such as homes, cars, and new factories become less affordable. Rising interest rates also mean that the selling price of existing bonds falls, potentially creating financial problems for banks and insurance companies.
8. The fact that the world is finite means that economic growth will need to slow and eventually stop. We are already seeing slower economic growth in the parts of the world that have seen a drop in oil consumption (European Union, the United States, and Japan), even as the rest of the world has seen rising oil consumption.
Figure 5. Oil consumption based on BP’s 2013 Statistical Review of World Energy.
Countries that have had particularly steep drops in oil consumption, such as Greece (Figure 6 below), have had particularly steep drops in their economic growth, while countries with rapid increases in oil and other energy consumption, such as China shown in Figure 2 above, have shown rapid economic growth.
Figure 6. Oil consumption of Greece, Based on EIA data.
The reason why we are already reaching difficulties with oil consumption is because for oil, we are reaching limits of a finite world. We have already pulled out most of the easy to extract oil, and what is left is more expensive and slow to extract. World oil production is not rising very fast in total, and the price needs to be high to cover the high cost of extraction. Someone has to be left out. The countries that use a large proportion of oil in their energy mix (like Greece, with its tourist trade) find that the products they produce are too expensive in a world marketplace. Countries that use mostly coal (which is cheaper), such as China, have a huge cost advantage in a cost-competitive world.
9. The fact that the world is finite has been omitted from virtually every model predicting the future. This means that economic models are virtually all wrong. The models generally predict that economic growth will continue indefinitely, but this is not really possible in a finite world. The models don’t even consider the fact that economic growth will scale back in mature economies.
Even climate change models include far too much future fossil fuel use, in both their standard runs and in their “peak oil” scenarios. This is convenient for regulators. Oil limits are scary because they indicate a possible near-term problem. If a climate change model indicates a need to cut back on future fossil fuel use, these models give the regulator a more distant problem to talk about instead.
10. Even the most basic economic relationships tend to be mis-estimated in a finite world. It is common for economists to look at relationships that worked in the past, and assume that similar relationships will work now. For example, researchers like to look at how much debt an economy can afford relative to GDP, or how much debt a business can afford. The problem is that the amount of debt an economy or a business can afford shrinks dramatically, as the economic growth rates shrinks, unless the interest rate is extremely low.
As another example, economists believe that higher prices will lead to substitutes or a reduction in demand. Unfortunately, they have never stopped to consider that the reduction in demand for an energy product might have a serious adverse impact on the economy–for example, it could mean many fewer jobs are available. Fewer jobs mean less demand (or affordability), but is that what is really desired?
Economists also seem to believe that prices for oil products will keep rising, until they eventually reach the price level of substitutes. If people are poorer, this is not necessarily the case, as discussed above.
11. Besides energy products and metals, there are many other limits that are a problem in a finite world. There is already an inadequate supply of fresh water in many parts of the world. This problem can be solved with desalination, but doing so is expensive and takes resources away from other uses.
Arable land in a finite world is subject to limits. Soil is subject to erosion and degrades in quality if it is mistreated. Food is dependent on oil, water, arable land, and soil quality, so it quickly reaches limits if any of these inputs are disturbed. Pollinating insects, such as bees, are also important.
Probably the biggest problem in a finite world is the problem of too high population. Before fossil fuel use was added, the world could feed only 1 billion people. It is not clear that even that many could be fed today, without fossil fuels. The world’s population now exceeds 7 billion.
Where We Are Now in a Finite World
At this point, the problem of hitting limits in a finite world has morphed into primarily a financial problem. Governments are particularly affected. They find that they need to borrow increasing amounts of money to provide promised services to their citizens. Debt is a huge problem, both for governments and for individual citizens. Interest rates need to stay very low, in order for the current system to “stick together.”
Governments are either unaware of the true nature of their problems, or are doing everything they can to hide the true situation from their constituents. Governments rely on economists for advice on what to do next. Economists’ models do a very poor job of representing today’s world, so they provide little useful guidance.
The primary way of dealing with limits seems to be “solutions” dictated by concern over climate change. These solutions are of questionable benefit when it comes to the real limits of a finite world, but they do make it look like politicians are doing something useful. They also provide a continuing revenue stream to academic institutions and “green” businesses.
The public has been placated by all kinds of misleading stories about how oil from shale will be the solution. Quantitative Easing (used by governments to lower interest rates) has temporarily allowed stock markets to soar, and allowed interest rates to stay quite low. So superficially, everything looks great. The question is how long all of this will last. Will interest rates rise, and undo the happy situation? Or will a different financial problem (for example, a debt problem in Europe or Japan) bring the house of cards down? Or will the ultimate problem be a decline in oil supply, perhaps caused by oil and gas companies reaching debt limits?
2014 will be an interesting year. Let’s all keep our fingers crossed as to how things will work out. It is surreal how close we can be to limits, without major media catching on to what the problem really is.
What if our commoditized, financialized definition of wealth reflects a staggering poverty of culture, spirit, wisdom, practicality and common sense?
The conventional definition of wealth is solely financial: ownership of universally valued money and assets. The assumption is that money can buy anything the owner desires: power, access, land, shelter, energy, transport and if not love, then a facsimile of caring.
The flaw in this reductionist definition is obvious: not everything of value can be purchased at any price–for example, health, once lost, cannot be purchased for $1 million, $10 million or even $100 million. A facsimile of friendship can be purchased (i.e. companions willing to trade fake friendliness for money), but true friendship cannot be bought at any price: its very nature renders friendship a non-commodity.
This explains the abundance of wealthy people who are miserable, lonely and phony to the core. Only commoditized goods and services can be bought with money or assets.
Given the limits of the conventional model of wealth, the question naturally arises: what if we defined wealth more by what cannot be bought rather than by what can be bought? Another way of making the distinction is to ask: what has been commoditized/globalized such that any person with money anywhere on the planet can buy it? What cannot be commoditized because it is intrinsically inaccessible to commodification?
We can start our inquiry with a series of questions:
1. What would be the impact on an individual’s health if modern medicine/pharmaceuticals were no longer available? Put another way: how dependent is one’s “good health” on commoditized interventions? How independent is an individual’s health/vitality from commoditized medicine?
Health that is sufficiently vibrant that it has no need for commoditized medicine cannot be bought, and therefore it is a form of intrinsic (non-commodity) wealth.
2. Can a shipwrecked individual swim two miles through open ocean from a doomed ship/yacht to safety? Money has no value if there is no help that can be bought; the individual’s only wealth in this situation (assuming they know how to swim) is their core physical strength and endurance–forms of wealth that cannot be substituted with money.
3. If Cicero was correct and “The man who has a garden and a library has everything,” then let’s ask not how extensive one’s library might be in terms of the number of volumes, but ask how many of the books (or ebooks) have been read, absorbed and enjoyed by the owner?
In other words, it’s not the ownership of a library which creates non-commoditized wealth but the joy, knowledge and pleasure derived from the reading of the books which defines wealth.
4. The same analysis can also be applied to a garden/orchard: what if we ask not how large the garden/orchard is in terms of square meters, but how expansive is the owner’s participation in the care of the garden/orchard, how much pleasure is created by the toil and harvest, and how much of the bounty is shared with others?
5. How many friendships does an individual have that began in high school or earlier and are still vibrant? How many friends does one have who can be entrusted with the deepest personal crises? How many friends’ homes are open to you, rain or shine?
What if we defined the person with no true friends as impoverished, regardless of their ownership of assets and cash? Many people seem to have professional acquaintances they call “friends” to mask their bottomless poverty of real friends and friendships.
6. What if wealth were measured in personal integrity, i.e. honesty, trustworthiness, compassion and the ability to remain accountable even as things fall apart?
This of course just a start: we could continue our redefinition of wealth to include kindness, empathy, the skills needed to organize volunteer community work parties, and so on.
As we explore what actually cannot be bought or commoditized, it raises this question: what if our commoditized, financialized definition of wealth reflects a staggering poverty of culture, spirit, wisdom, practicality and common sense?
|At least 11 people have been killed as Muslim Brotherhood supporters clashed with police in Cairo and other Egyptian cities, the country’s Health Ministry has said.
The ministry told Al Jazeera that four deaths were recorded in Cairo on Friday, two each in Alexandria, Ismaliya and Fayoum, and one in Minya in upper Egypt. Protesters said the real figure was much higher.
The ministry did not say whether the dead were protesters, police or bystanders.
Dozens more were reported injured, while at least 122 people have been arrested, according to medical and security officials.
The clashes come amid an ever-widening state crackdown on the Muslim Brotherhood movement.
Rallies in support of ousted President Mohamed Morsi have turned increasingly violent ahead of a key referendum this month, which would ban religiously based political parties and give more power to the military.
It would be a further step towards the complete removal of the Brotherhood from public life after the group won every election in Egypt since Hosni Mubarak was overthrown in 2011.
‘We are not afraid’
Protesters set fire to a police vehicle in Cairo using petrol bombs as police fought street battles with rock-throwing protesters in the capital.
“We are not afraid, we love Egypt and what we are doing is for Egypt,” said Mohamed Dahi, a 39-year-old protester, as he distributed leaflets calling for a boycott of the referendum.
“I am against all injustice and the military rule. I won’t accept any military rule in Egypt,” Dahi told the AFP news agency
as as he participated in a protest along with his 10-year-old son.
Demonstrators chanted “Down with military rule” and slogans against army chief Abdel Fattah el-Sisi, who removed Morsi from the presidency in July.
Cairo’s main squares were sealed off by security forces using barbed wire and military vehicles. They included Tahrir Square, as well as Rabaa al-Adawiya and Nahda squares, which were the sites of a bloody crackdown on Morsi’s supporters in August.
The clashes took place less than two weeks before a vote on a new constitution, a milestone in the road map which the army-backed authorities say will pave the way for a return to a democratic rule by next summer.
Protesters opposed to the army’s overthrow of Morsi have been holding daily demonstrations in Cairo and in other cities ever since the military government declared the Muslim Brotherhood a “terrorist” group last month, a move that upped the penalties for dissent.
The Snow Avalanche Image
During the good times the snow falls and slowly builds up. Without anyone noticing, the snow reaches a pre-collapse state. It is at this time that avalanches are born. The impossible becomes the inevitable.
The Arab Spring is an example of the snow avalanche concept as applied to societies.
Tarek al-Tayeb Mohamed Bouazizi was a Tunisian street vendor who set himself on fire on 17 December 2010, in protest of the confiscation of his wares and the harassment and humiliation that he reported was inflicted on him by a municipal official and her aides. His act became a catalyst for the Tunisian Revolution and the wider Arab Spring, inciting demonstrations and riots throughout Tunisia in protest of social and political issues in the country. Source: Wikipedia.
How is it possible that a Tunisian fruit vendor could bring down governments through one act of defiance? It simply is not possible unless the countries involved were already in a pre-collapse state. The snow was ready to avalanche and just needed a trigger. The fruit vendor provided the trigger.
The Avalanche Concept Applied to Societies
Stability is not your friend. Controlled instability is your friend. Compare democracies and dictatorships: One has controlled instability – elections, and the other has only stability. The dictatorship model is more stable, until there is a revolution and everything breaks. Democracies avoid the revolutions by voting out the bums. Systems with controlled instabilities avoid the big avalanches.
While democracies use controlled instability to avoid revolutions, the same is not true in economics. Typically democratic governments suppress recessions in order to get reelected. This suppression process seeks to enhance economic stability. The elimination of controlled instability in economics pushes societies to the point of economic avalanche – a depression.
When is an avalanche likely?
First rule, moving from a stable state to avalanche state takes time. Time of stability is the most important factor in determining when the next avalanche will occur. Looking back in history will give us an idea of how long it takes before things break. For the US, that time is 80 to 100 years since the beginning of the last crisis. The last crisis period ran from 1925 to 1945. The next crisis period runs from 2005 to 2025. These periods are based on the research by two historians as told in The Fourth Turning.
Second rule, problems or cracks start to appear in society after a long period of time. Experts start to warn about instabilities or dangers on the horizon. Societies become more sensitive, and there are protests and/or riots.
Third rule, there must be a triggering event. However, this event does not need to be big as we saw with the Tunisian fruit vendor. Causality is not linear. Linear causality is where small things can only have a small impact.
Avalanches, forest fires, economic crashes and wars work the same way. They all follow the same mathematical distribution in terms of collapses – the power law distribution. Who cares? Keep reading as I apply these concepts.
Mathematics of Collapse
Take a look at this little video about the mathematics of war.
Take a look at the graphs in the video. These are the same graphs as forest fires. Notice how the frequency (y-axis) versus size (x-axis) graph follows a straight line for both attacks in war and forest fires. Wars in total also follow the same graph.
The next graph shows attack frequency versus the size of the attack in the Iraq war.
The following graphs show forest fire frequency versus size of the fire.
The graphs between the Iraq war and forest fires look kind of similar, don’t they? They tend to form a straight line. Why is that?
Societies and forests move into the future in the same way. Each new day is heavily influenced by the past. And that is a positive feedback loop process. That feedback loop process causes collapses to be similar in both sets of graphs with both having a power-law distribution of collapses. You can treat societies and forests the same way in terms of collapses. If you suppress small collapses then you will get bigger collapses. If you suppress bigger collapses then you will get the mother of all collapses. If you suppress that collapse then you will sit on the edge of a cliff forever, or until you allow the collapse to happen. The probability of an extreme collapse (the black swan) is 10 to 20 times greater than you think. A society or forest becomes susceptible to a black swan (catastrophic fire, depression, major war, …) after a long period of stability. Use history to determine what “long period” means. For a snow avalanche, long period may mean months. For a forest or society, long period may mean 50 years or 100 years.
If societies follow a positive feedback loop process, then so do economies. Economic stability (suppressing collapses) leads to catastrophe. That’s why Japan has been stuck in the mud for the last 20 years. The West is now stuck with Japan at the edge of a cliff waiting for something to push them over.
Why is stability a bad thing?
During the good times, the bad stuff (bad ideas, bad decisions and corruption) grows along with the good. Small collapses help to eliminate some of the bad stuff before it gets too big. Suppressing all collapses means the bad stuff grows so big that only a huge crash will fix the problems. No crash equals no solution.
How can we tell when the bad stuff has become a real problem? In the next paragraph see how scientists figured out how to discover the rot developing in growing sandpiles until there was a complete collapse.
“To find out why [such unpredictability] should show up in their sandpile game, Bak and colleagues next played a trick with their computer. Imagine peering down on the pile from above, and coloring it in according to its steepness. Where it is relatively flat and stable, color it green; where steep and, in avalanche terms, ‘ready to go,’ color it red. What do you see? They found that at the outset the pile looked mostly green, but that, as the pile grew, the green became infiltrated with ever more red. With more grains, the scattering of red danger spots grew until a dense skeleton of instability ran through the pile. Here then was a clue to its peculiar behavior: a grain falling on a red spot can, by domino-like action, cause sliding at other nearby red spots. If the red network was sparse, and all trouble spots were well isolated one from the other, then a single grain could have only limited repercussions. But when the red spots come to riddle the pile, the consequences of the next grain become fiendishly unpredictable. It might trigger only a few tumblings, or it might instead set off a cataclysmic chain reaction involving millions. The sandpile seemed to have configured itself into a hypersensitive and peculiarly unstable condition in which the next falling grain could trigger a response of any size whatsoever.”
Without color-coding it’s a lot harder to see the rot. We have to rely on clues. Extreme problems in one or more areas of society after a long period of stability probably indicate that that society is in trouble. 9/11 was one clue. The financial collapse in 2008 was another clue. There is rot in our military. The US nuclear arsenal has been gutted. So America appears to be in trouble at this time.
About the Power Law Distribution
Find out a little more about the power law distribution. Did you ever wonder where the 80-20 rule comes from? Please meet the power law distribution.
The power law – sometimes referred to as the Pareto distribution, Zipf’s law, or the 80-20 rule – has drawn a great deal of attention lately as an alternative to the ‘normal’ (Gaussian) distribution (i.e, the bell curve). The power law has gained in popularity among more numerate intellectuals, policy makers, and business people because it seems to fit better with common sense than what we were told in Statistics 101: Extreme and rare events have a greater than expected impact; a few products, people, and websites seem to have the bulk of market share, wealth, and mindshare; etc.
The power law distribution doesn’t fit everything which means outliers exist. However, it does a much better job than the normal distribution. For our purposes of trying to understand the real world better, the power law distribution provides a good foundation.
Collapse Framework for Societies
What follows is a framework for viewing collapses in society – economic collapse or war/revolution. I have essentially summarized the concepts I covered above.
1. Societies follow a positive feedback loop process. Each new day is heavily dependent on the past. This is similar to forests and sandpiles. The process never stops and collapses are impossible to prevent. One may only transform the size and timing of collapses.
2. Positive feedback loop processes are subject to self-organizing criticality. They will automatically move toward a pre-collapse state, then just collapse.
3. Collapses follow a power-law distribution. Outliers exist.
4. All collapses are the same. There is no difference (other than size) between a small collapse and a big collapse. Big collapses require longer to form and happen less often.
5. Collapse transformation: Collapse suppression will delay a collapse and make the resulting collapse bigger. Suppress small collapses and you will get bigger collapses. Suppress bigger collapses and you will get the mother of all collapses. Suppress that and you will sit on the edge of a cliff forever waiting to fall or be pushed over the edge. Think Japan.
6. Collapses are caused by the build-up of bad ideas, bad decisions and corruption. These things can spread to all corners of society.
7. War or revolution is just a collapse like an economic collapse. Only the form is different.
8. Collapse suppression leaves the original problems (bad ideas, bad decisions and corruption) in place giving them the ability to continue growing.
9. A collapse in one area could mean problems in other areas as well. For example, 9/11 could mean more than a terrorism problem. It could represent a sign of spreading problems into all corners of society.
10. The longer the time of stability means the longer (and bigger) the problems can grow. Time of relative stability is the most important criteria in determining when a large collapse is possible. History helps us determine which time frames are important.
11. When a system has reached a point where a small event can have a large impact then it is at a pre-collapse state or tipping point. Causality is not linear.
12. Big collapses (the outliers) may represent phase transitions where everything you know changes.
13. Black swans are outliers in a normal distribution which cause a phase transition.
14. Dragon-kings are outliers in a power-law distribution which cause a phase transition.
15. Examples of systems with a power-law distribution (outliers allowed): Forest fires, sandpile collapses, snow pile avalanches, earth quakes, financial market collapses, wealth, city size, serial killers, riots, attacks within war and wars.
16. In financial mathematics, the use of the normal distribution is forbidden. It assumes behavior is independent. In a crisis or collapse, market behavior is not independent as people start herding. Naturally this means in reality all financial mathematics uses the normal distribution. Were you wondering why these models blow up?
17. How to build a better economic model. The key here is to harness collapses.
In a recent Brookings Institution essay entitled “The Rhyme of History: Lessons of the Great War,” historian Margaret Macmillan argues that there are strong and haunting parallels between today’s geopolitical landscape and Europe of 1914. Pivoting off the well-know Mark Twain adage that history does not repeat itself, but does rhyme, Macmillan suggests that the one-hundredth anniversary of World War I encourages us to reflect on the “valuable warnings” of the past. The actual and potential conflicts in the year ahead are many, and some of the same structural forces that lead to the Great War a century ago will be prevalent in 2014.
Macmillan is an eminent historian (her book, Paris 1919 is a must-read), but analogies between 1914 Europe and the world today should not be drawn hastily. World War I continues to preoccupy scholars and pundits alike, in part because it was so destructive, and in part because there is still no consensus on why exactly it occurred. With the centennial of the conflict approaching, we can expect to see 1914 references made a great deal — particularly with respect to the power transition that is currently in progress in the Pacific — but we should remain duly skeptical of this tempting parallel. Many of the conditions that were present in antebellum Europe do indeed prevail today. Whether these forces actually raise the risk of war is far from established, however, and the expectation that they do may itself increase the chance of conflict.
In her Brookings essay, Macmillan identifies several conditions that were present in Europe before the Great War that, she argues, also raise the risk of conflict today. The first of these conditions is globalization and its unintended consequences. In both 1914 and at present, there existed the common assumption that the world was becoming too interconnected to resort to war — conflict would be prohibitively costly. But, Macmillan points out, a hundred years ago as now, those who preached interdependence often ignored the fact that globalization can lead to job loss, foster intense localism and nativism, and provide a breeding ground for radical ideologies and movements (including those that employ terrorism). Globalization, Macmillan warns us, can also heighten interstate rivalries.
Related to this is a second trend — rising nationalism and sectarianism. Once trapped in interstate rivalries, leaders may seize upon nationalism and bitter historical enmity to appeal to their publics. In 1914, the predominant antagonisms were the Anglo-German and Russo-German rivalries; today they include Sino-American and Sino-Japanese competition. Third, Macmillan reminds us that tightly-knit defensive alliances may encourage conflict or cause it to spread. In 1914, Germany saw itself as inextricably bound to Austria, as France did to Russia. Today, she warns, the United States could easily be drawn into war in either the Middle East or East Asia by its alliance ties.
Finally, Macmillan warns that “World Policemen” may be forced into retirement, leaving a vacuum of instability and uncertainty. By the early 20th century, the British clearly could not sustain the demands and costs of their empire. Likewise, Macmillan avers, the United States will not be able to preserve hegemony indefinitely. Even if it its reach is primarily confined to Asia, the most obvious challenge to U.S. influence will come from a rising China, and crises or conflicts may break out unless the dominant powers can establish a stable international order.
Macmillan is hardly the first to point to these conditions as potential precursors to conflict. With respect to China’s rise, analysts have argued frequently that Washington and Beijing’s national security interests put the two countries on a collision course. Some have gone so far as to insist that this clash is inevitable. But in her comparison of the international conditions that preceded the Great War and those that prevail today, Macmillan fails to address one truly crucial question: Why did the forces of globalization, nationalism, interlocking alliances, and power transition combine to produce war in 1914 specifically?
The prevailing patterns that Macmillan identifies as historical rhymes may all be thought of as permissive conditions to conflict: these forces may have helped to pave the way to the Great War’s onset, but none alone was the immediate cause of war in 1914. Moreover, these forces were almost certainly present in Europe prior to that fateful year. Why, then, did they not combine to produce a major war when Austria annexed Bosnia in 1908? Why did they not stoke the Balkan Wars of 1912 and 1913 and produce global conflagration then? If we are to accept that any specific set of conditions caused the First World War in 1914, we must also be able to explain why those forces did not produce war earlier or later, or why conflict could not have been avoided altogether despite their prevalence.
Indeed, in the copious literature on World War I, scholars have attempted to dissect these important counterfactuals. Some argue that the structural conditions that Macmillan identifies really did make a European conflict inevitable — interlocking alliances, the Anglo-German power transition, nationalism, and other factors meant that war would have occurred in 1915 or 1916 if it did not in 1914. But other analysts insist that the Great War was the immediate result of assassination of the Austrian Archduke Franz Ferdinand. If he had not been killed in Sarajevo on June 28, 1914 — or if he had been shot and lived — the great powers might have avoided war, not just in that year, but in perpetuity. If an idiosyncratic event like the Archduke’s assassination is the key to explaining the war, however, it is not clear how much credence we should give to other underlying factors. Macmillan’s background conditions for conflict may be insufficient to bring about a war, and indeed, may not even be necessary. And if this is true, then the parallels that can be drawn between the onset of the First World War and geopolitics today may be impoverished at best.
So is this a simple warning that decision makers should approach historical analogies with caution? It is that, but also more. Among the many causes of the First World War that international relations scholars have identified was the widespread belief in European capitals that a great power conflict was highly likely. Combined with prevailing military technologies and strategies of the time, this assumption led statesmen to think that they would be advantaged if they struck first, rather than waiting for an adversary attack that was sure to come in due course. By overemphasizing historical parallels, we risk convincing ourselves that conflict is imminent, when in fact it remains eminently avoidable. If we were to combine Macmillan’s warnings about economic interdependence, nationalism, alliances, and power transitions, for example, it would be tempting to flag the next fracas over the Senkakus/Diaoyus, where all of these forces are clearly present, as the new Sarajevo. Combined with great power military strategies that may be escalatory, conflict anticipation via analogy could produce disastrous results indeed.
With the one-hundredth anniversary of the First World War fast upon us, and a power transition manifestly under way, Macmillan’s essay will certainly not be the last analysis to draw connections between 1914 and present-day geopolitics. Indeed, there is surely value in paying heed to the similarities and differences between the two eras. By listening anxiously for historical rhymes that portend major conflict, however, we risk deafness to the multitude of factors that make the challenges of the present day unique, and soluble far short of war. A rhyme, after all, is a correspondence of sound, but not of meaning.
Here’s to wishing the world a 2014 that is considerably more peaceful than the centennial it will mark.
Representatives from the National Security Agency claimed during a Dec. 15 segment on 60 Minutes that the department had foiled a plot by a foreign state—later revealed to be China—to destroy the U.S. economy by attacking the basic systems that allow computers to operate.
Experts and commentators poked fun at the “Dr. Evil” nature of the plot, and questioned its authenticity. Yet, such attacks already exist. The scale at which it could be carried out by China, however, is in question. There may be more efficient ways for Chinese hackers to cripple the United States economy and Internet access in the event of a conflict, experts say. One such massive attack has actually been engineered before.
China’s alleged attack was discussed by heads of the NSA in a Dec. 15 segment on 60 Minutes. It allegedly targeted the BIOS system of computers, which function as the set of instructions to a computer when it is turned on.
“One of our analysts actually saw that the nation state had the intention to develop and to deliver, to actually use this capability—to destroy computers,” Debora Plunkett, who directs cyberdefense at NSA, said on60 Minutes.
The NSA did not say clearly which country was behind the attack, yet 60 Minutes reported that other security experts familiar with the attack confirmed it was China. It said the NSA was able to work with computer manufacturers to prevent the attack.
A Practical Matter
While many security experts question the claim, cyberattacks that target BIOS systems currently exist. BIOS viruses are appealing to hackers because they are almost impossible to detect or remove—even if the user completely erases the contents of the computer.
Jonathan Brossard, CEO of security company Toucan System, demonstrated a BIOS virus at the 2012 Black Hat security conference. He described it as a way to hack computers like a nation-state would.
The core problem with the rumored Chinese attack, however, is not about whether it is possible. It’s about whether the attack is practical.
“There are so many other ways to destroy computers, that aren’t nearly as hard,” Chester Wisniewski, senior security adviser at cybersecurity company Sophos, said in a telephone interview from Vancouver.
The most practical way to—at least temporarily—destroy the global Internet has already been demonstrated. In April 2010, 15 percent of global Internet traffic suddenly routed itself through China Telecom networks for about 18 minutes.
“Although the Commission has no way to determine what, if anything, Chinese telecommunication firms did to the hijacked data, incidents of this nature could have a number of serious implications,” states a report from the U.S.–China Economic and Security Review Commission, regarding the 2010 attack.
Affected websites included those belonging to the U.S. government and military.
The incident was caused by what’s called “IP hijacking.” The form of attack targets the highly vulnerable system where Internet Provider (IP) addresses communicate.
Russian hackers had used a similar attack against Estonia in 2007 to cut the country’s communications. Wisniewski said, “What better way to do it than take all their IP addresses and say they belong to someone else, then they can’t talk to anybody anymore.”
Regarding the alleged BIOS attack, Wisniewski said it is feasible for a nation-state to target BIOS systems. Due to the nature of the systems, however, any large-scale attacks would be unnecessarily complicated.
Different types of hardware use different BIOS, and to launch an attack on the scale alleged by the NSA, a hacker would need to customize the attack for potentially thousands of systems.
If the NSA were referring to the BIOS of Internet routers, rather than computers, however, the alleged attack would be more feasible.
Such an attack has already been demonstrated by the NSA itself. Documents stolen by Edward Snowden and leaked on Dec. 31 allege the NSA gained access to the BIOS systems of many routers for spying purposes.
Using the same vulnerabilities, if a hostile nation-state were to even target a sufficiently large number of routers manufactured by Cisco, “basically the entire Internet would fail,” Wisniewski said.
He added, “If that’s what they were warning us about, I’d be concerned.”
Abstract: Government investment in carbon capture and storage (CCS) is a large and expensive fossil-fuel subsidy with a low probability of eventual societal benefit. Within the tight resource constrained environments that almost all governments are currently operating in, it is irresponsible to sustain this type of subsidy. CCS has been promoted as a ‘bridging’ technology to provide CO2reductions until non-fossil-fuel energy is ramped up. But the past decade of substantial government investment and slow progress suggests that the challenges are many, and it will take longer to build the CCS bridge than to shift away from fossil-fuels. Optimism about the potential of CCS is based primarily on research on technical feasibility, but very little attention has been paid to the societal costs of governments perpetuating fossil-fuels or to the sociopolitical requirements of long-term regulation of CO2 stored underground. Deep systemic change is needed to alter the disastrous global fossil-fuel trajectory. Government investment in CCS and other fossil-fuel technologies must end so that the distraction and complacency of the false sense of security such investments provide are removed. Instead of continuing to invest billions in CCS, governments should invest more aggressively in technologies, policies, and initiatives that will accelerate a smooth transition to non-fossil-fuel-based energy systems. We need to divest from perpetuating a fossil-fuel infrastructure, and invest instead in social and technical changes that will help us prepare to be more resilient in an increasingly unstable and unpredictable future.
For over a decade, billions of dollars of government investment in carbon capture and storage (CCS) technology have provided a glimmer of hope for reconciling carbon dioxide (CO2) emissions and global growth in fossil-fuel use.[1, 2] CCS has offered a vision of a future in which the impacts of growing fossil-fuel reliance are minimized by capturing and storing the CO2 instead of allowing it to accumulate in the atmosphere.[3, 4] Many have projected that CCS is a technology critical to ‘solving’ climate change while continuing our reliance on fossil-fuels.[5-10]
But it is becoming increasingly clear that investing in CCS is not money well spent. As the global climate-energy situation becomes increasingly dire, bold measures with near-term influence are needed to reduce, rather than sustain, fossil-fuel reliance. Governments around the world need to divest in fossil-fuel technology and stop subsidizing CCS and other fossil-fuel technologies. Instead of continuing to invest billions in CCS, governments should be investing more aggressively in technologies, policies, and initiatives that will accelerate a smooth transition to non-fossil-fuel-based energy systems. Despite the challenges of envisioning a less-fossil-fuel-dependent energy future, we know that an eventual move away from fossil-fuels is inevitable. A decrease in investment in fossil-based energy technology coupled with an increase in innovation investment in non-fossil-based energy systems will help us prepare for this transition promoting gradual change and reducing the likelihood of an abrupt, disruptive shift away from fossil-fuels.
A FALSE SENSE OF OPTIMISM
Given the magnitude of society’s reliance on fossil-fuels, the technological vision of CCS has had a powerful influence on governmental action on climate change.[11, 12] The emergence of the possibility of CCS over 10 years ago enabled many fossil-fuel dependent actors, particularly individuals and institutions in coal-dependent regions of the world, to stop denying the existence of climate change; CCS provided the possibility of continuing coal use while also addressing climate change. Now with recent increases in natural gas reliance, CCS similarly offers the possibility of reconciling climate mitigation goals with growth in natural gas power plants. But this vision of CCS has also enabled complacency about the growing dangers of sustained fossil-fuel dependence. And the billions of dollars in government funds devoted to CCS has reduced the level of investment in non-fossil-fuel energy including initiatives and technologies with more concrete, near-term societal benefits. As the need to reduce fossil-fuel reliance is increasingly acknowledged for climate and many other reasons, CCS investments are dangerous as they further incentivize and legitimize continued use of fossil-fuels, and they create a false sense of optimism that our current energy systems can be safely perpetuated.
Beyond acknowledging CCS investment as an additional fossil-fuel subsidy, many other factors indicate that the time has come for governments to stop investing in CCS. First, despite the billions of dollars already invested, widespread CCS deployment remains a distant, far-fetched, extremely expensive possibility.[15-17] The slow progress and long-time horizon for realizing any potential societal benefits from CCS investments is problematic because the CCS strategy has a limited lifetime. CCS has been promoted as a ‘bridging’ technology to provide some CO2 reductions until non-fossil-fuel energy is ramped up. But the past decade of steady investment but slow progress suggests that it will take longer to build this bridge than to shift away from fossil-fuels. Australia’s recent cuts and deferred investment in its CCS programs reflects recognition of this time-scale problem; Australia cut its investment in its long-term CCS strategy to provide near-term budgetary relief and also to offset costs of the country’s emission trading scheme, which represents a more direct, near-term approach to reducing atmospheric CO2 (the future of Australia’s cap-and-trade system is now uncertain following the September 2013 election).
In the current global economic situation, government expenditure of the magnitude required to advance CCS is no longer justifiable. A single CCS demonstration plant is estimated to cost on the order of 1 billion dollars, and those advocating for more investment in CCS are asking governments to spend $3–4 billion each year for the next decade.[9, 19] Reallocation of this level of funding to promoting non-fossil-fuel energy would be a much less-risky more responsible and justifiable way for government to invest public money.
The amount of energy required to capture and store CO2 is often not adequately recognized in optimistic perceptions of the potential of CCS. This so-called energy penalty has been estimated to be about 30% with a range from 11 to 40%. This means roughly that for every three coal-fired power plants utilizing CCS an additional power plant would be required simply to supply the energy needed to capture and store the CO2. The magnitude of this energy penalty (including even the lower estimates) is so high that it is difficult to imagine a future scenario in which consuming this much additional energy to enable CCS would actually make sense.
In addition, CCS is unlikely to ever become an effective global CO2 reduction strategy because of the political difficulties of managing and preventing leakage of the underground storage of CO2 for thousands of years after it is injected. Optimism about the potential of CCS is based primarily on research on technical feasibility, but very little attention has been paid to the sociopolitical requirements of regulating and enforcing long-term monitoring and maintenance of CO2 stored underground. Global institutional structures with capacity to enforce liability for thousands or even hundreds of years do not exist. And political instability, corruption, and inevitable tensions among countries create severe and constant risks of any proposed global CO2 storage management scheme.
The health and safety costs of perpetuating fossil-fuels represent another reason to end government investment in CCS. The large, industrial-scale, fossil-fuel power plants that CCS is being designed to enable cause major health and safety risks to both the communities surrounding the plant (including water and air pollution) and to the communities impacted by fossil-fuel extraction (including coal mining, hydraulic fracturing for natural gas extraction, and fossil-fuel transport). In addition, strong public concern about the health and safety risks of storing CO2 underground has derailed several large-scale CCS demonstration projects in the past 4 years including the Vattenfall project in Germany and the Barendrecht project in the Netherlands. Concern about earthquakes triggered by injection of large volumes of CO2 underground is contributing to technical understanding of the risks of leakage.[27, 28] The private sector has recognized the many risks of CCS and has only been willing to invest in CCS in conjunction with strong government investment.
ENCOURAGING COMPLACENCY WITH CLAIMS OF ‘SOLVING’ CLIMATE CHANGE
A final critical reason to end government investment in CCS relates to the impossibility of claims that CCS is critical to ‘solving’ climate change. Climate science now tells us very clearly that no matter what is done to curb greenhouse gas emissions the climate is changing irreversibly to a new and different reality. So any claims that a specific technology like CCS is critical to ‘solving’ climate change is misleading and perpetuates a false sense of complacency about the realities and risks of climate change. This complacency coupled with optimism that CCS provides a ‘solution’ to climate change is dangerous, and it detracts from the increasingly urgent need for systemic changes that are now desperately needed to prepare us for the changing climate regime.
Continued CCS investment appears to fuel optimism in the face of the dire global energy realities including rapid recent growth in coal-fired power plants in developing countries. During the past decade global coal consumption has grown by more than 50% with much of that growth concentrated in China and India. Maintaining optimism about this situation is extremely difficult, but the assumption and hope that one day these new coal-fired power plants might be retrofitted with CCS has been an important mechanism for remaining positive.[31-33]
CHALLENGING ASSUMPTIONS OF INEVITABILITY OF SUSTAINED COAL USE
For many climate and energy experts around the world, CCS has become the holy-grail of climate mitigation. Advocating for government support for CCS technology has become a passion for many deeply committed, technologically optimistic energy professionals. This optimism seems to make sense for those who believe the dominant narrative that continuing growth of coal is inevitable due to its low cost, abundance, and reliability. In this narrative coal offers unique potential to continue to expand electricity access in the developing world providing unparalleled economic development opportunity. The problem with this narrative is that the extreme negative social, economic, environmental, and human health impacts of coal are dismissed and not adequately considered. The time has come for energy analysts and governments to recognize that sustained growth of coal use is NOT inevitable. If governments invest in and focus on alternative visions, mainstream energy projections based on dominant current assumptions become increasingly unlikely.
The case for substantial government investment in CCS seems to have sustained such broad appeal because many assume that the economic, political, and social hurdles of advancing CCS are lower than the hurdles of moving away from fossil-fuels. CCS advocates frequently point out that CCS is preferable to moving away from fossil-fuels because CCS does not demand a radical alteration of national economies, global trade, or personal lifestyles. But radical systemic change in our energy systems is needed now more than ever before, and investments that slow down this transition are a dangerous distraction.
From a technological perspective, it has been suggested that the infrastructural requirements and inflexibility of CCS would exacerbate ‘technological lock-in’ to fossil-fuel use. From a political perspective, it now seems that the sunk-costs associated with the amount of money already invested in CCS is creating a difficult ‘political lock-in’. For governments that have already invested millions or billions of dollars and considerable political capital to advance CCS, ending this support is politically challenging. And the billions of dollars already spent has created a large and powerful CCS advocacy coalition that includes multiple institutions and individuals around the world whose professional responsibilities include advocating for more government funding for CCS.[34, 35] The technically optimistic focus of these CCS advocates has limited consideration of the societal risks of CCS investments and the societal value of investing instead in alternative non-fossil-fuel-based strategies.
For the well-being of societies around the world, divestment from fossil-fuels needs to become a governmental priority. Despite the obvious political challenges of resisting the powerful fossil-fuel establishment, a subtle but definite signal of movement toward such a rebellious idea was given by President Obama last summer when he mentioned ‘divestment’ in his speech on climate. Although the US officially continues to espouse an ‘all of the above’ energy strategy which includes investing in CCS, the time has come for the United States and other governments who have invested in CCS to exercise their influence to selectively divest in fossil-fuels and invest more heavily in non-fossil-fuel energy technologies. The perceived need for CCS has already been reduced in the EU where regulations now in place incentivize moving away from fossil-fuels by putting a price on CO2 emissions. And proposed new CO2 regulations in the United States have already changed firmly held assumptions of sustained long-term coal use in the United States and reduced expectations of widespread deployment of CCS.
Government investment in CCS is a large, expensive, and unnecessary fossil-fuel subsidy with an extremely low probability of eventual societal benefit. In the tight, resource constrained environment that almost all governments are operating within, it is irresponsible for governments to sustain this type of subsidy. Deep systemic change is required to alter the disastrous global fossil-fuel trajectory. Government investment in CCS and other fossil-fuel technologies must end, so that the distraction and complacency of the false sense of security such investments provide are removed.
Albert Einstein famously pointed out that problems cannot be solved with the same mindset in which they were created. We need to move beyond the powerful fossil-fuel mindset, and let go of the false sense of optimism that CCS investments provide. We also need to end the perception that CCS or any specific mix of technologies has the potential to ‘solve’ climate change. We need to divest from perpetuating a fossil-fuel infrastructure, and instead invest in social and technical changes that will help us prepare to be more resilient in an increasingly unstable and unpredictable future.
Albertans urged to get flu shots 3:00
Alberta Health Services (AHS) says there are more than 965 confirmed flu cases in the province and there have been five deaths.
“Those are only people who have gone to seek medical attention and physicians have done specimens that have been sent to the lab and those have been confirmed positive,” said Dr. Judy McDonald. “We expect that there is much more influenza circulating in our communities that has not been lab confirmed.”
Officials say 920 of those cases are of the H1N1 strain, which is covered by this year’s flu vaccine. The overall number of flu cases has jumped by 50 per cent in one week.
Dr. Glen Armstrong, an infectious disease expert, says the numbers aren’t a record but more than the province has seen in recent years.
“It may be that because we’ve had a bit of a holiday over the last couple of years. People have become complacent and are thinking, ‘OK, it’s no big deal, you know I don’t need to get vaccinated,'” he said.
Armstrong says even if you got the H1N1 vaccine during the 2009 pandemic, you should get immunized again.
“Because you don’t get lifelong immunity,… you get sort of a spike of immunity that will protect you for maybe a year or so. But after that immunity starts to wane and so this is a good opportunity to get revaccinated and to boost your immunity back up again to give you maximum protection,” he said.
Mass immunization clinics reopen
Health officials are urging people to get the vaccination, particularly before children head back to school.
Albertans who have not yet received a flu shot can still visit AHS mass immunization clinics, local pharmacies and family physician offices.
The vaccine is still available, free of charge, to all Albertans six months of age and older. But officials are reminding Albertans that children under the age of nine are not able to receive the vaccine at pharmacies.
Alberta Health Services clinics at Brentwood Mall in Calgary’s northwest and at the South Calgary Health Centre are both open today.
Mass immunization clinics in Edmonton will reopen Friday at the Bonnie Doon Health Centre and Northgate Health Centre from 9 a.m. to 4:30 p.m. MT.
For complete details on clinic locations and hours, call Health Link Alberta toll free at 1-866-408-5465 or visitalbertahealthservices.ca/influenza.
Finland has little room to deviate from a proposal to fill a 9 billion-euro ($12.3 billion) gap in Europe’s fastest-aging economy if it’s to avoid debt levels doubling in the next decade and a half, according to the central bank.
The northernmost euro member risks joining the bloc’s most indebted nations if the government fails to reform spending, according to calculations by the Helsinki-based Bank of Finland. Without the measures, debt could exceed 110 percent of gross domestic product by 2030, according to the bank. The ratio was 53.6 percent in 2012. Success with the plan would help restrain debt levels to about 70 percent by 2030, the bank said.
The central bank’s assessment shows that the government’s plan would have a “real impact,” Finance Minister Jutta Urpilainen said in an e-mailed response to questions via her aide. Structural reforms are needed if “the Finnish welfare state has a chance to survive,” she said.
The only euro member with a stable AAA grade at the three main rating companies, Finland’s economy is struggling to emerge from the decline of its paper makers and its flagging Nokia Oyj-led technology industry. Export demand has failed to offset weak consumer demand, as companies fire workers and the government responds to deficits with cuts. Lost revenue is hampering government efforts to set aside funds needed to care for the fastest-aging population in the European Union.
In the period August to November, Finland’s six-party coalition put together a package to streamline and reduce public spending to eliminate a gap of more than 9 billion euros in public finances by 2017. The package consists of several different measures, each to be sent to parliament independently. Some of the measures, including changes to pensions and health-care providers, are still being drafted.
Finland’s “costs related to aging will grow faster than elsewhere within the next two decades,” Petri Maeki-Fraenti, an economist at the Bank of Finland, said in an interview. Aging costs will be “decisive” in accelerating debt growth after 2020, he said.
The government reduced its economic forecasts on Dec. 19 for the 10th time since coming to power in June 2011. Even as exports look set to recover and rise 3.6 percent in 2014, GDP will grow only 0.8 percent after declining 1.2 percent in 2013, the Finance Ministry said.
The Bank of Finland’s calculations assume an average economic expansion of about 1.5 percent in the long term, compared with an average of 3.7 percent during 2003 to 2007, according to a February 2013 report by economists Helvi Kinnunen, Maeki-Fraenti and Hannu Viertola.
“We must get used to slower economic growth for an extended period of time,” Maeki-Fraenti said.
The average debt level in the euro area shot up more than 25 percentage points in five years after hovering around 70 percent for the majority of the last decade. Finland has followed suit, with the Finance Ministry estimating its debt-to-GDP ratio rising to 60 percent this year from 33.9 percent in 2008.
Euro-area debt reached 93.4 percent of GDP at the end of the second quarter, according to theEuropean Central Bank. Italy reduced its government debt to 103 percent of GDP in 2007. Since the debt crisis, its debt has begun mounting again, rising to 134 percent of GDP this year, the European Commission forecast Nov. 5.
Debt levels exceeding 90 percent hurt economic growth, Harvard University economists Carmen Reinhart and Kenneth Rogoff argued in a 2010 paper. Three years later, their claims were refuted by University of Massachusetts researchers, citing “serious errors” that overstate the significance of the boundary.
The World Bank set a similar “tipping point” at 77 percent in a 2010 paper, while a 2011 studyby the Bank for International Settlements identified a sovereign debt threshold of 85 percent. An IMF report from 2012 found “no particular threshold” that would consistently precede low growth.
Finding an absolute threshold for debt after which economic growth starts slowing is “quite impossible,” Bank of Finland’s Maeki-Fraenti said. Addressing sluggish growth and public debt is necessary for Finland due to the pressure from aging and the decline of its cornerstone industries, he said.
“As the debt level is still relatively tolerable and our unemployment hasn’t shot up in the same way, it has perhaps led some to believe that the problems shall be fixed on their own as export demand revives,” he said. “Our view is slightly more pessimistic.”
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