Worthwhile Canadian Initiative

Stimulus? What stimulus?

Over here, I expressed confusion at Mark Carney's reported remarks to the effect that 'whatever good news existed was caused artificially by massive government and central bank stimulus':

What government stimulus? The 12-month moving average of federal government program expenditures has been falling since December. (The deficit is due to declining tax revenues.)

It occurs to me that I hadn't actually made that point here before. So here is a graph of the 12-month moving sums (the monthly data are very volatile and have significant seasonal elements) of federal government expenditures and revenues up until March 2009.

Ottawa has moved into deficit over the past few months, but not because it has been indulging in an increase in spending. The 12-month moving sum of program expenditures declined in the first three months of the year; the deficit is due to an even more rapid decline in revenues.

eta: Okay, the GM/Chrysler bailouts should probably be added, since the loans haven't been written off yet. But still.

Monetary stability vs financial stability

I want to compare and contrast the pursuit of monetary stability with the pursuit of financial stability. I am talking mainly about Canada, though much of what I say applies to other countries as well.

It is Canada's sad fate to have a comparative advantage in really bad economics journalism

Murray Teitel embarrasses us in front of the English. And we hadn't even begun to expunge our collective guilt for Naomi Klein.

Please please please go out and buy a copy of Filthy Lucre. Buy several; give them to your friends. Or else I may have to start stitching US flags on my luggage when I go to conferences.

The housing market: the oversold story of the Canadian recession

Here is what is hopefully one of the last of a once-robust breed - The Apocalyptic Canadian Housing Market Story:

Judging by the latest real estate data, the Canadian housing market could scarcely be better. Average home prices are up more than 16 per cent this year, and in May they hit an all-time monthly high, according to the Canadian Real Estate Association. By those numbers, Canada didn’t just sidestep the housing market crash that continues to plague the United States, it sailed right through it virtually unscathed. And yet, there are plenty of signs that the Canadian housing market is still sitting on some very shaky ground—and even the potential that Canada’s big housing crash is yet to come.

Yadda yadda yadda.

We all know that the proximate cause of the US recession was the bursting of its housing market bubble: it blew up banks, laid waste to personal balance sheets, and left millions of people stuck in homes whose mortgages were more than their market value.

And then Canada went into recession. Unfortunately, this set up the following error of logic that was repeated in all-too-many Canadian newsrooms:

1. The US is in recession because its housing market blew up.
2. Canada is in recession.
3. Therefore, Canada's housing market must be blowing up as well.

And so it was the fate of any number of hapless Canadian journalists to be given assignments to bash out pieces that fit this narrative. But these exercises were all doomed to failure. The decline in house prices in Canada is a symptom of the recession, not its cause.

Parsing Mark Carney at third remove

There's much in this CP story that I don't understand. The thrust seems to be that Bank of Canada Governor Mark Carney is making it known that he is more pessimistic about the state of the Canadian economy. It's hard to know what to make of it all.

Why is Bank of Canada's Carney raining on economy's recovery parade? Bank of Canada governor Mark Carney has economists, and perhaps the markets, trying to read between the lines again, if not scratching their collective heads.

The youthful central banker has made three public pronouncements in the past two weeks that have surprised listeners for their foreboding tone on economic developments, particularly since Carney is widely regarded as being in the glass-half-full crowd.

I suppose I'm in that category as well, if only because the OMGWTFBBQ!1!1!!! campsite is full.

In recent speeches in Montreal and Regina, the bank governor was almost dismissive of indicators of economic improvement, warning that whatever good news existed was caused artificially by massive government and central bank stimulus. The private sector "is not there yet," he cautioned.

What government stimulus? The 12-month moving average of federal government program expenditures has been falling since December. (The deficit is due to declining tax revenues.) True, the Bank of Canada's monetary policy is becoming increasingly more effective. Real short-term interest rates are now significantly negative because the threat of deflation is receding.

And in a report from an off-the-record speech Tuesday at the Woodrow Wilson International Centre for Scholars in Washington, Carney broke with official Ottawa dogma in declaring Canada's recession to be as deep as that in the U.S.

Well, if you look at GDI, that sounds about right. When you take into account the hit on our terms of trade, then that comparison is plausible.

The rest of the article consists of reactions to these reports, but there's one bit that deserves comment:

Another sign of trouble is in bond yields, which have pushed long-term mortgage rates up just when the economy desperately needs Americans and Canadians to start buying homes again.

This increase is good news: it reflects the belief that deflation is less likely, that a recovery is more likely, and that the Bank of Canada will be raising interest rates as inflationary pressures return.

Reader survey: feedback and comments

Well, it's been just over a week since we posted the Reader Survey, which is a good time to take stocks of the responses.

Comparing employment growth in Canada and the US over the longer term

A recurring theme in discussions about what we might expect from an eventual US recovery is that it will be long and painful. This is not entirely due to the severity of the current recession. As Michael Mandel notes, the recent drop in US employment capped a decade in which employment growth was already slower than usual. But once again, Canadian data tell a very different story, so we should be careful about making direct comparisons between the outlook for the US and for Canada.

Don't borrowing-constrained households spend more of a tax cut??

One of the standard arguments against the Ricardian Equivalence Proposition is that some households are borrowing-constrained. They want to borrow and spend against their future income, but can't find anyone to lend them money. So when the government gives them a tax cut, financed by higher future taxes, the government is effectively lending them the money they had previously wanted to borrow and spend. So borrowing-constrained households will spend most or all of a tax cut.

Now I think I keep hearing what seems to be the opposite argument. Mark Thoma, for example:

Monetary and fiscal policy ought normally move together

We normally think of monetary and fiscal policy as alternative methods of stabilising fluctuations in aggregate demand. It is only in abnormal times, like the present, when central banks' interest rate instruments are at or near the zero lower bound, that we might want to use both monetary and fiscal policy together. Only if we are nervous, and afraid our belt might fail, might we wear both monetary belt and fiscal braces.

But this isn't right, even if you accept the consensus of the past couple of decades: that monetary policy should play the lead role in macroeconomic policy by stabilising aggregate demand to keep inflation on target; and that fiscal policy should be decided on purely microeconomic grounds. Government spending decisions, and deficits, should respond to monetary policy in the same way as private spending decisions.

The economic impact of canoeing

Seeing the path on the rocks worn by millions of passing feet on an old portage just upstream of Ottawa reminds you that what is now a short detour off a recreational walking trail was once the trans-Canada highway. Canoes once had a very large economic impact in Canada. Now they have very little.