Since I'll soon be caught up in a whirlwind of holiday activities with family near and not-quite-so-near, blogging will resume sometime in early January.
In some circles (such as on the pages of the National Post), whenever the virtues of the Nordic model are cited, a standard riposte is "What about Ireland?"
Well, indeed. When I was putting together the graphs for this post, I found that Ireland was quite literally off the chart.
The 'Nordic model' has many admirers, and I'm one of them. It appears to have the best of both worlds: the wealth that markets provide best, combined with the social programs that governments provide best. As I noted earlier, there's no obvious tradeoff between these two objectives: we can have both, if we want. For many, this may seem to be a surprising claim, but it's really just a result from basic textbook economics.
So where does the notion that generous social programs mean lower economic growth come from? Because a large govt sector requires correspondingly large tax revenues. The story as it is usually told goes as follows: Increasing taxes distorts incentives. If people face higher tax rates on employment income, they will work less. If investors face higher rates on capital income, they will invest less. Since both factors of production have been reduced, output goes down as well. Conclusion: raising taxes will reduce output and total income.
That story is correct, so far as it goes.
A couple of weeks ago, we learned that Canada had a near-record $9.3b current account surplus in 2005Q3. Today, Statistics Canada announced that the net investment position deteriorated by $17b over the same period.
The reason, of course, is the continuing rise of the CAD:
The value of international assets fell to $1,001.1 billion, a $5.6 billion decline from the end of the second quarter. The dollar, which gained 5.4% against its US counterpart during the quarter, removed $46.3 billion from the value of these assets, which offset all net transactions.
At the same time, Canada's international liabilities increased by $11.6 billion to $1,171.4 billion. The strengthening dollar removed $22.3 billion from the position, but the net transactions of $38.2 billion more than offset this effect.
As a result, net external liabilities represented 12.3% of Canada's gross domestic product at the end of the third quarter, up from 11.4% in the previous quarter.
The courier company UPS has filed a claim under NAFTA's Chapter 11 against Canada Post, in which it claims that the government-owned corporation is using its profits from its first-class mail business - for which it has a government-mandated monopoly - to unfairly subsidise its courier division.
Today's Toronto Star - the connaisseur's preferred choice for Horribly Stupid Economic Analysis - has this article, which reproduces without comment this incredibly self-serving analysis:
If UPS wins, Canada Post may opt to get out of the courier business and that would be disastrous for the corporation, said union president Deborah Bourque.
"The corporation needs the profits it gets from the courier business to provide universal service," she said in a statement.
Yes, dear reader, you read that right. She's claiming that Canada Post's profits from its courier business - where it is one competitor among many - are subsidising the operations in which it holds a legal, artificial, monopoly.
And what's worse, she expects us to swallow it. And why wouldn't she? The Toronto Star did.
When I was younger, I would occasionally get irritated waiting in line at a cash register while an older citizen sorted through a handful of coins to pay the exact amount. After all, it was faster to pay with notes and let the cashier - who had the various coins in a conveniently-arranged tray - handle the change. Why didn't they do what everyone else did?
Now that I'm a bit older, I know why: after a couple of decades of dumping handfuls of change into a bowl on their dresser, they've accumulated approximately 3.94 metric tonnes of coins, and they'll be damned if they'll sit down to roll it all up and haul it to the bank.
I happened to be an assistant professor at the University of Western Ontario when John Palmer wrote his "Ban the Penny" article, and it made sense to me. Of course, it makes even more sense to get rid of nickels while you're at it, and he's expanded his campaign.
Jim Hamilton at Econbrowser talks about Alberta's oil sands:
One of the reasons for interest in oil sands is the potential magnitudes involved. The Alberta Energy and Utilities Board estimates the ultimate volume of Canadian bitumen in-place at 2.5 trillion barrels, which if it could somehow all be extracted would be enough to satisfy by itself the entire world petroleum demand at current rates for 80 years. Even if only a tiny fraction of this proves ultimately to be developed, this would be a very important resource indeed.
Nor is the exploitation of this resource merely a theoretical possibility. Almost 40% of Canada's current crude oil production of 2.6 million barrels per day is derived from oil sands. About 1/3 of current production is from in situ methods, in which the oil sands are heated while still underground, and 2/3 from open-pit mining and above-ground processing.
He notes that there are several obstacles before all this becomes a reality, most notably the massive capital investment that will be required.
North of the border, of course, we've been talking about the oil sands for quite a while, but generally with such qualifiers as 'may possibly' and 'in the not-too-distant future.' It's only recently that discussions of their effect on world markets have started to have policy implications for the here and now.
For example, we're even starting to think about the bargaining power they may provide during trade disputes. Take the never-ending saga of the softwood lumber dispute, for example: despite numerous NAFTA rulings in favour of Canada's position, the US govt doesn't seem to be in any hurry to conform to its treaty obligations. So it shouldn't be too surprising to see news items like this:
On the weekend, NDP leader Jack Layton proposed a neighbourly warning that Canada is prepared to impose export duties on oil and gas exports to the United States if they don’t agree to respect NAFTA and refund duties.
As things stand, this is more than a bit silly: we don't have the market power to move oil prices on our own.
Update: The US has announced it is reducing duties on softwood lumber imports. I'm sure it's just a coincidence...
Or at least, not as bad as we once feared.
Foreign ownership has been a hot-button issue in Canada since, well, forever. In itself, foreign investment is a Good Thing of course, since it increases the demand for Canadian labour. But it is possible to imagine having too much of a good thing: foreign firms control more than half of the manufacturing plants in Canada. The political implications are obvious, and they've been making themselves felt with varying degrees of intensity ever since the Pearson governments of the 1960s. (American readers who are of the opinion that unending current account deficits are of no concern might want to consider the political implications of a comparable level of foreign control in the US.)
Before FTA and NAFTA, the standard model was the 'branch plant': a US-owned shop set up behind the tariff wall to serve the Canadian market. Although production took place here, everything else - R&D, design, marketing, etc - was done at the multinational's head office. If technical progress is the key to economic growth, it would be worrisome to see it mainly occurring outside Canada.
One of the consequences of FTA/NAFTA was the demise of the branch plant: a welcome development. But - somewhat surprisingly - foreign ownership of manufacturing plants has remained pretty stable. What are the implications for productivity?
Mr. Croswell is one of a half-dozen 18-year-olds graduating this year from Orillia District Collegiate and Vocational Institute who have agreed to talk about the federal election and what it means to them. As it turns out, it means nothing to them. What does any federal politician have to say to an 18-year-old whose urgent priority is to get a diploma and get out of this troubled city?
Orillia is 140 kilometres north of downtown Toronto, and that is important because 140 km is too far: Orillia is outside the swelling sprawl of the so-called 905 area (named after its area code) and the commuter havens that surround it. In a generation, its population has crawled to 30,000 from 24,000. If the nearby casino and the headquarters of the Ontario Provincial Police weren't there, things would be much worse.
Everyone expects the hospital for the mentally handicapped to close sooner or later, the farming economy is in decline, and manufacturing is so small scale that the Boston Pizza outlet is one of the city's larger private-sector employers.
Politically, however, Orillia is one of the more interesting cities in Canada. It dominates the riding of Simcoe North. Paul DeVillers, a popular local Liberal MP, is stepping down, leaving a constituency with historically strong Conservative roots ripe for the picking. Bill Stanton, a local resort owner, has been running hard for the Tories for months, and many of the locals favour him to win.
But Mr. Stanton hasn't been seen outside Orillia District Collegiate, and neither have any other candidates.
No one is giving any thought to the O.D. vote, which is fine because no one at O.D. is giving any thought to them.
It's been more than 25 years since I graduated from ODCVI and moved away. Nothing's changed.
As was speculated earlier, the Conservative Party of Canada is proposing to cut the Goods and Services Tax rate from 7% to 5%. So far, the best reaction come from the University of Western Ontario's Jim Davies, in this CBC story:
"Stupid, stupid, stupid, stupid," he said.
Aside from minor quibbles about the number of times the word 'stupid' should have been repeated (personally, I think I'd have said it five times, but Jim and I have different speech patterns), it's hard to argue with that assessment.
In today's National Post, William Watson says 'Voters deserve to know where parties stand on size of public sector'. I suppose that's true, but I really don't see why it matters much.
Here's a graph of various rich countries' GDP per capita and social spending:
I don't see any obvious tradeoff there.
Nor has the empirical growth literature been able to identify any sort of relationship between economic growth rates and the size of the public sector. Bonobo Land summarises Xavier Sala i Martin's survey paper 15 years of new growth economics: What have we learnt? as follows:
i) There is no simple determinant of growth.
(ii) The initial level of income is the most important and robust variable (so conditional convergence is the most robust empirical fact in the data).
(iii) The size of the government does not appear to matter much. What is important is the 'quality of government'.
(iv) The relation between most measures of human capital and growth is weak. Some measures of health, however, (such as life expectancy) are robustly correlated with growth.
(v) Institutions (such as free markets, property rights and the rule of law) are important for growth.
(vi) More open economies tend to grow faster.
There may be ideological grounds for preferring a large or small public sector, but it doesn't seem to be much of a factor for economic growth.