Worthwhile Canadian Initiative

The Balance of the Federation

The Canadian Federation is an institutional arrangement whereby the constituent units are able to both cooperate and compete with jurisdictions that are both separate and coordinate. The debate over the respective roles of the federal and provincial governments has taken various forms over time with views that emphasize the centrality of the federal government along with others that emphasize the federation as a compact amongst equals with the federal government as more of a coordinator.  I suppose this could also be termed executive versus classical federalism as Tom Flanagan described it in a recent Globe and Mail piece. Given that political discourse and decision making out of Ottawa has recently been taking a more decentralized tone when it comes to federal-provincial matters, it might be instructive to take a look at the numbers to see what the balance is between the respective tiers of the Canadian federation.

Raising the pension age: not if, but when.

It is not a question of if: Canada will, eventually, raise the age at which people are entitled to claim Guaranteed Income Supplement and Old Age Security. The US is raising its full retirement age, the UK is raising its state pension age.

We'll raise our pension age for the same reason that they raised theirs: it saves money, and it has little political cost.

Think about it: if Stephen Harper was to announce tomorrow that the age at which people will be entitled to claim Old Age Security was going to increase to 67 in the year 2025, who would protest?

The federal deficit is shrinking

The last few releases of the Fiscal Monitor show that the federal deficit is finally starting to shrink appreciably.

The politics of NGDPLP targeting, redux

Back in November 2011, there was a part of the world that I didn't understand. The politics of monetary policy didn't make sense to me. Now the world is starting to make more sense. It's not that my understanding has changed. It's the world that has begun to change.

Specifically, John Quiggin has come out in favour (HT Marcus Nunes) of Nominal Gross Domestic Product Level Path Targeting. And John Quiggin is a lefty. That helps resolve my puzzle back in November 2011. I didn't understand: "Why isn't NGDP targeting a lefty thing?". Now that NGDPLPT is becoming a lefty thing, the world is starting to make sense to me again. I think it's only a matter of time before Canadian lefties join this Australian lefty. (We don't pay enough attention to Australia, because it's so far away, but Australia is just like Canada except it's hotter and nobody speaks French.)

The efficiency case for nepotism

A firm wanting to invest in a worker, to train her and give her valuable skills, runs a risk: what if she leaves, and takes her valuable human capital elsewhere?

A firm can induce its employees to stay through deferred compensation. It pays new employees less than their productivity merits, and senior employees more. The junior workers work hard and invest in themselves and the company, because they know they will get the big pay-off eventually. The senior workers are happy because they are well-remunerated. The firm is happy because it has a productive and highly trained workforce.

Manufacturing, Technology, Canada and the Dollar.

This week the Ottawa Citzen published my op ed on the impact of technological growth on manufacturing: Where the jobs went.  Jim Stanford of the CAW responded with: The real job killers, also published in the Citizen.  A couple of points I would like to respond to:

Robert Waldmann (and others) on Dean Baker (and hence Paul Krugman) and the burden of the debt on future generations

Robert Waldmann here.

Bob Murphy here.

Richard Williamson here.

I've done my bit, and have failed. Robert Waldmann may succeed. If Robert Waldmann fails too, that would be very bad for the credibility of economics blogging.

A Long Term Employment Picture - Go West for Opportunity

Stephen Gordon’s posts on the recent employment performance in Quebec gave me cause to get the numbers on employment growth over the long term on a provincial basis.  I obtained the seasonally adjusted Statistics Canada employment numbers and used them to construct average annual growth rates in employment by province for three periods: 2001-2011, 1991-2000 and 1981-1990 (Figs1-3).  Over the last decade, the top three provincial performers in terms of average annual employment growth rates have been Alberta, BC and Quebec – with Ontario in fourth place. 

Burn the mathematics

Paul Krugman thinks that economic discourse on the blogosphere is a good thing. He's right when it comes to economic theory. 

Economic theory is deductive: assumptions + fancy stuff = conclusions. Ultimately, the path from assumptions and the conclusions doesn't matter, as long as it's logically consistent. As Alfred Marshall said, translate mathematical results into English, illustrate by examples that are important in real life, then "burn the mathematics."

Asking the right question about fiscal policy

If you can't get a good answer to a question, it might be because you are asking the wrong question. Good answers need good questions.

Before 1975 (roughly), we used to ask questions like: "What is the effect of increasing the money supply today, when unemployment is bigger than normal?" After 1975, economists learned to stop asking questions like that. We learned instead to ask questions like "What is the effect of following a monetary policy rule in which the money supply increases whenever unemployment is bigger than normal and decreases whenever unemployment is smaller than normal?".

We stopped talking about monetary policy actions. We switched to talking about monetary policy rules. Would a countercyclical monetary policy rule be better than a rule in which the money supply was constant?

Quebec employment watch: le mystère persiste

The hunt for data that are consistent with the sharp drop in employment reported by the Labour Force Survey in November and December ([1],[2]) continues. Today's release of initial Employment Insurance claims for November don't look like what we'd see in an economy that was seeing a sharp jump in unemployment:

A very simple derivation of the balanced budget multiplier in a very monetarist model

This is mainly a brain-teaser. But I hope you find it useful, as well as fun.

1. Assume initially there is no government. So G=T=0, and Y=C+I. (You can add in net exports too if you want, or delete I if you want to make the model simpler still.)

2. Assume MV=P(C+I), where V is fixed and C+I is output of consumption plus investment goods that are bought and sold for money.

The Bank of Canada revises up its forecast

There's not been a lot of drama in the Bank of Canada's recent announcements for its overnight rate target, nor does it look as though there will be for several months. As long as there's a non-negligible risk that the eurozone will produce a financial crisis, the Bank of Canada won't be in any hurry to increase interest rates. The Bank has made it clear that it will (temporarily) tolerate an inflation rate above 2%, rather than make an interest rate hike that it would later regret. I don't have any problem with this stance. So the only really interesting thing to write about is the evolution of the Bank's outlook.

Where (I think) Mike Woodford's model of the multiplier is wrong

Paul Krugman asks a fair question. If anyone disagrees with what Mike Woodford says about the New Keynesian government expenditure multiplier, can they point to where exactly they disagree with Mike Woodford's model (pdf).

I am going to do just that.

I'm not 100% sure I'm right (we never should be). But I think Mike Woodford is making exactly the same mistake that Greg Mankiw made decades ago in an otherwise very lovely little paper which purported to show Keynesian results in a macroeconomic model with monopolistic competition.

In a nutshell: Mike Woodford is implicitly assuming that government expenditure is built with corvee labour. It doesn't buy goods from monopolistically competitive firms like everyone else. It just commandeers labour from everyone and makes us build goods for the government. That shifts the total labour supply curve right. And Woodford's workers are always on their labour supply curves. It's a supply-side multiplier!

Consumption smoothing and the Keynesian multiplier

This is the simple short version, but it covers quite a lot of ground. Nothing much new here. Maybe the bit towards the end is newish.

The cruel consequences of moral hazard in health care

Our health care system devotes too many resources to prolonging life, and too few to improving its quality.

A case described by Lisa Sanders vividly illustrates what I have in mind:

A couple of years earlier she started “walking like a drunk,” [the patient] told the slender, middle-aged doctor. Her legs were weak and her feet were numb. The only feeling she had in them was a pins-and-needles sensation, as if her feet had gone to sleep and never woke up. A few months ago she started falling. She broke her ankle in a particularly bad fall; the ankle got better, but she didn’t. Now she was in a wheelchair.

Her internists referred her to a neurologist, who sent her to the hospital for an M.R.I. After the test she was so weak that the doctors were reluctant to send her home, and she was admitted to the hospital. And here she was, hoping for an answer.

After tests and more tests, one observant doctor hit upon the right diagnosis: the patient's dentures didn't fit properly. To keep the dentures in place, she had been using a tube of denture adhesive a day. But her brand contained zinc, which led to zinc poisoning, nerve damage, and a host of other medical problems.

If S weren't I

There is something very strange about a counterfactual conditional in which the counterfactual is logically impossible. There are no possible worlds in which something logically impossible happens, so we can't ask which of the possible worlds in that subset is most plausible. The subset is empty.

"If saving were bigger than investment, what would happen to income?"

That's a bit like asking: "If 6 were 9, what would happen to income?".

(Assume closed economy, "saving" means "national saving", etc.)

The Gambling Economy: A Zero Sum Game?

Two stories in the Toronto Star this week have left me wondering if there is a new grand strategy at work for transforming Ontario’s economy in the wake of its manufacturing decline.

Macroeconomics and the Celestial Emporium of Benevolent Knowledge

This is what we teach, right at the very beginning of macro:

1. Macroeconomics is about GDP.

2. On the expenditure side, GDP is divided into Y=C+I+G+NX

3. On the income side, GDP is divided into Y=C+S+T

Now read what Borges said on a closely related subject.

We don't have to think of macroeconomics that way.

It's still too early to tell what is going on in the Quebec labour market

I still don't know why - or even if - the Quebec labour market is doing as badly as the numbers I've presented here and in Economy Lab suggest.

It turns out that almost all of the bad news comes from two consecutive bad LFS numbers from November and December. As I discussed here, there's a certain amount of sampling error associated with the LFS data, and the standard errors are larger for subsamples. There's still a non-negligible probability that I'm making a big deal out of statistical noise. And there's as yet no other independent source that could confirm or contradict the LFS.

This is troublesome, because employment is generally a lagging indicator for the business cycle. If training new workers is costly, then firms would generally prefer not to lay off the workers they've already trained, and they will hesitate to hire until they are certain that they will be able to recover the costs of training new workers. So it just doesn't seem right that the first sign of a possible Quebec recession should be a drop in employment. Other things should have happened first.

But the LFS is all we have to work with, so that's what this post is based on.