Worthwhile Canadian Initiative

Damage report

Several recent items have been brought to my attention, providing additional confirmation - if any was needed - that the recession is over:

1. Last Friday's Labour Force Survey for November (more below);
2. Today's release for building permits in October; and
3. Garth Turner has stopped selling survivalist merchandise.

It's time to assess the damage.

Why do (bad) banks (really) matter?

I'm going to put forward two perspectives on why bad banks might be important in understanding the recession: an orthodox perspective; and a heterodox perspective.

When did Canada's recession end? A WCI poll

Canada doesn't have a counterpart to the NBER's Business Cycle Dating Committee, so we don't have a reference set of dates for previous business cycles. I'm pretty sure that most analysts would agree that the most recent expansion hit its peak in October of 2008, but picking a trough looks less obvious.

My understanding of the way the NBER committee works is that they look at a broad range of indicators and try to come up with a consensus. I've chosen 14 series and identified the months in which they hit their minimum values in 2009. If you have any preferred candidates I missed, let me know in the comments and I'll try to add them as well. I'm going to list them by month. Some series - such as the CLI - have troughs that lasted several months, and they will show up more than once.

February: Residential building permits, Nonresidential building permits

March: Sales of durable goods, TSX

April: Composite Leading Indicator, Sales of durable goods, Housing starts, Average work week - manufacturing, Hours worked

May: Composite Leading Indicator, GDP, Durable goods orders, Shipment-to-inventory ratio, Exports

June: Composite Leading Indicator, Retail trade, Imports

July: Employment, Retail trade

My vote would be May, but my preference isn't so strong as to reject a consensus for another month. Please enter your votes, data requests and thoughts in the comments.

Canada's housing starts are following the recovery script

The rebound in the sales and prices of houses in Canada has been making quite a few headlines. That's not bad news, but for those of us looking for signs of recovery, what really matters is whether or not it is being translated into real economic activity.

Reflections on teaching very basic finance to first year economics students

Today I taught basic finance to my first year economics class. We don't have time to cover all the micro chapters, so have to skip some. In the past we skipped the finance chapter. This year we decided to include the basic finance chapter, and skipped consumer choice (indifference curves and budget constraints) instead. That was our sop to the financial crisis. I think we made the right choice.

Taxing the rich is harder than you think

In this post on Ed Broadbent's suggestion for a 6 ppt increase in the income tax rates faced by people earning $250k or more, I mentioned that some serious econometric work had to be done before this could be treated as a meaningful proposal. It soon occurred to me that there very likely had been some work done on this topic, and that I should try to track down some of the literature. It turns out that prospects of using the tax system to counter the trend towards higher concentration of incomes at the top end of the income distribution are limited, and the chances of generating perverse outcomes are large.

Today's GDI release: both GDP and the terms of trade are improving

There's been a certain amount of commentary on today's GDP release. An annualised growth rate of 0.4% for 2009Q3 is better than zero - and it's at the 80th percentile of the predictive density generated by my toy predictor - but it's not what you'd call a strong recovery.

Happily, there's better news about GDI. The rebound in commodity prices has generated in a recovery in our terms of trade, resulting in an increase of our buying power of 3.3% at annual rates.

(See this post for an explanation of the difference between GDP and GDI).

With any luck, this will be the last post filed under the 'current recession' category.

Money, banks, loans, reserves, capital, and loan officers

Anyone who has taken ECON1000 has probably seen the simple model of how banks create money in a fractional-reserve banking system, and how an increase in reserves creates a multiple expansion of loans and the money supply. An alternative approach, cogently argued in comments here by JKH, says that it is bank capital, not reserves, that plays the crucial role. I think there may be some truth in what JKH says, especially at present, but it is not the whole truth. I'm going to lay out what i believe. Others can either learn from what I say, or try to help me learn where I might be wrong (or maybe even both).

In praise of (a little bit of) fiscal dominance

Who makes sure the long run consolidated government-central bank budget constraint balances? Is it the government? Or is it the central bank? The former gives us a Ricardian regime; the latter gives us fiscal dominance.

Most macroeconomists take a Ricardian regime as their unspoken assumption; and, if pressed, would recommend a Ricardian regime, as is required, in the long run, by central bank independence. If the central bank is to have the independence to pursue its own objectives (be it inflation targeting or whatever), the government must take long run responsibility for its own deficits, grateful for whatever profits from seigniorage revenues the central bank deigns to hand over. Worries about the "coordination of monetary and fiscal policies", heard often in Canada until the mid-1990's, were code for the desire for a Ricardian regime.

"Presentation of the Liberal position on climate change and the environment" - cont'd

I went. And apparently it's being sold as a Big Deal; here's the speech. Here are the points I was curious about last week:

• Is this a real policy proposal, or a recital of Conservative failures? A healthy dose of the latter, and some generalities. No details, though.
• Cap-and-trade, or a carbon tax? Cap-and-trade it is. But none of the details that make this more than a catch-phrase. What is the cap? Will be permits be auctioned or given to existing emitters? Any estimates for the effects on prices? Any measures to protect low-income households from the costs? These are the sorts of questions that Stéphane Dion went to a lot of effort to answer.
• How much material can he cover in 45 minutes? Not a lot, especially since he only spoke for 20 minutes.
• Will he answer questions? No.
• Just how good is Michael Ignatieff's French, anyway? Better than I had been led to believe, although he did seem to lean heavily on his printed text.

As a point of electoral politics, there's nothing wrong with replacing a carbon tax policy with cap-and-trade, as long as we all remember that in almost every way that matters, the two models are equivalent: consumers will be faced with higher prices. In the last election, the Liberals and the Greens were the only parties that had the intellectual integrity to accept this fact, and they made an effort to deal with it. I will be very, very disappointed with Michael Ignatieff if his Liberals join the Conservative-NDP Axis of Climate Change Dimwits.

Oh, and I must scold Ms Taber for this throwaway paragraph in the Globe story I linked to:

The Liberals lost badly in the last election, partly as a result of Mr. Dion’s complicated Green Shift plan that would put a tax on carbon. It was not communicated well; Canadians did not understand it.

The Green Shift was NOT complicated: carbon taxes up, other taxes down. What's so hard to understand? Indeed, it was a model of clarity and precision when compared to the muddled schemes that the Conservatives and the NDP were selling.