Worthwhile Canadian Initiative

The progressive politics of pricing publicly-provided products

Whenever I make the points summarised in this post, someone invariably counters with the following median-voter argument:

• A policy in which only low-income households benefit will not command majority support.
• Making the program universal will ensure a more stable electoral base.

This argument is not without merit, and it's pretty convincing in certain contexts. But it doesn't work in all contexts: there are several important cases in which the traditional progressive preference for universal programs leads to regressive outcomes.

The perils of pricing publicly-provided products

One of the more resilient errors in policy analysis - in Canada, anyway - takes the following form:

a) Public goods should be provided at zero price by the government.

b) Therefore, goods provided by the government should have zero price.

The former assertion is correct, but b) is a non sequitur: not all publicly-provided goods are public goods.

There are several recent items that demonstrate the extent to which confusing public goods with publicly-provided goods leads to bad policy outcomes:

Does the public demand for lower interest rates cause higher interest rates?

I read this in the Globe and Mail this morning.

I interpret the argument to be that a cut in the Bank of Canada's overnight rate would lower the spread between borrowing and lending rates at the commercial banks, and so cause a decline in banks' profits.

This argument reminded me of two previous posts on this blog.

What next for the Bank of Canada?

The Bank of Canada currently sets the overnight rate at 1%. Markets expect it to cut by about 50bp on Tuesday. I think it should cut to zero (or 0.25%, which is effectively zero, given the traditional spreads). I thought it should cut to zero back in December. But if it does cut to zero, or if we think that cutting the overnight rate any further will have a negligible effect, what else can or should it do?

Can Canada recover alone? Why not, exactly?

If Canada gets its macroeconomic policies right, is it possible for Canada to recover from the recession, even if the rest of the world does not? The same question could be asked for any individual country. And if not, why not?

Location, location, location: Canadian house prices by city

The Teranet-National Bank Housing Price Index has begun to make regular appearances in the media ([1], [2]), which is all to the good. But it's important to note - as the producers of the index take great care to emphasise - that the Composite-6 index masks considerable variation in movements in house prices across major Canadian cities.

So here is a graph of the various city-specific indices (along with the Composite-6), expressed as a per cent deviation from their most recent peaks:

The run-up in house prices in Vancouver and Calgary was much steeper than elsewhere: a drop of 20% would only bring prices back to their 2006 levels. And in places like Toronto and Ottawa, a return to 2006 means a decrease on the order of 10%.

The silence of the keynesian econ-bloggers

OK. I'm trying to attract your attention. But I'm not knocking Keynesians. I'm more or less a Keynesian myself, especially under current circumstances. And I'm coming at this question from a Keynesian perspective.

Is it good economic policy for Hillary Clinton to try to persuade China to continue to buy US Treasuries?

Why have economics bloggers, US and Keynesian economics bloggers in particular, remained almost silent on this issue?

Why Canadians should be grateful that Joe Clark lost the 1980 election

Ed Glaeser lists five problems with the US policy of letting homeowners deduct mortgage interest payments. Megan McArdle (among others) agrees, but isn't very optimistic about the chances of getting rid of it:

Current homeowners bought their homes on the expectation not only that they would enjoy tax deductibility, but that they would be able to resell their house at a higher price because of the imputed value of the tax deduction to the next owner.  If you remove the deduction, most people will see a permanent decline in the value of their largest asset.

To a libertarian, this is a valuable cautionary tale:  we should assume that any program we introduce will be with us in approximately that form forever, because ending it will harm the beneficiaries.  Liberals are understandably unhappy with applying this lesson very broadly.  Which is one of the reasons I suspect that the mortgage interest tax deduction will outlive us all.

Canadian readers of a certain age and with an improbably high mastery of Policy Wonk Trivia will no doubt recall that one of the features of the 1979 Progressive Conservative (remember them?) government's budget was a proposal to make mortgage interest tax deductible. The budget also included other measures such as a stiff increase in the tax on gasoline, which was a good idea, but disastrous politics. Something like Stéphane Dion's Green Shift. The budget was defeated, Joe Clark lost the resulting election, and mortgage deductibility hasn't been seriously proposed since.

But if Joe Clark had won the 1980 election and implemented his budget, we'd be looking at a Canadian housing market that is in much worse shape than the one we have now.

I hope Hillary fails

Nothing personal, but I just do not understand why she is asking China to buy more US treasuries. This just doesn't make any sense to me. She ought to be doing the exact opposite. Can someone explain it?

Regardless of the ultimate cause of the crisis (and China and perhaps Japan saving too much and buying too many US treasuries is at least one candidate for the ultimate cause), the proximate cause of the crisis is that everyone wants to hold US cash, and US Treasuries. And nobody wants to hold stocks, commercial paper, real assets, or buy newly-produced goods and services. The yields on US treasuries were driven down to zero. The US dollar appreciated, when it should be depreciating to let US net exports increase so it can pay down it's foreign debt.

A very simple macro model of the last few years

Here is a very simple model of interest rates, debt, asset prices, and recession. It seems to fit the facts of the last few years reasonably well.

There are two types of people: the A's and the B's. The A's have normal interest-elastic savings and investment functions. They save less and invest more if the (real) rate of interest falls. The B's have perfectly interest-inelastic savings and investment functions. The rate of interest has no effect on their savings and investment decisions. The A's also have normal wealth-elastic savings functions. They save more if their wealth declines, because of increasing debt for example. The B's have perfectly wealth-inelastic savings functions. Their wealth does not affect their desired level of savings.