Worthwhile Canadian Initiative

The "Cripes!" growth model

I first heard about this growth model back in the 1980's, applied to management consulting firms. Only the expletive wasn't "Cripes!".

It's a 2-stage growth model:

Stage 1: "Cripes! We've got all these consultants on the payroll! How are we ever going to pay for them all? Better get some more contracts."

Stage 2: "Cripes! We've got all these contracts! How are we ever going to complete them all? Better get some more consultants."

The optimal number of things to think about

I think our minds (brains, whatever) are like a multi-product firm. We have to decide how many things to think about -- how many different products to produce. We don't think about just one thing all the time; but we don't think about an infinite number of things either. There must be fixed costs of thinking about each thing, so initially increasing returns, otherwise we would think a little bit about everything. But eventually, as we think more and more about one particular thing, we run into diminishing returns. So we think about more than one thing. Each topic of thought has a U-shaped average cost curve, or inverse-U-shaped average product curve.

The house price bounce is (mostly) real - for now

I have been checking almost daily for the Teranet-National Bank May house price data, and now it's out. Their national composite price index increased 0.72% from April to May. This confirms the less accurate and more anecdotal data we've been hearing about the Canadian housing market improving this Summer.

Income = Expenditure, and debt

Nothing new here. Just another kick at the debt can. And basic national income accounting.

Risks to Canadian recovery

The Bank of Canada says it believes the recession has ended. Maybe they are right; I haven't checked, but I get the impression that their forecasting has been better than most over the last year. This doesn't mean that output and employment will immediately return to normal, of course. But it does mean, if they are right, that output and employment will stop falling. Or at least, that output will stop falling, because employment normally lags output.

I don't know if the Bank of Canada is right. It might be. And I'm certainly feeling less worried than I was back in the Fall and Winter. I want to ask a different question: what are the biggest risks to recovery? Here is my list of things that might still go badly wrong:

We are born with a short position in housing

Felix Salmon has a lovely metaphor that helps me articulate something I've been wanting to say about the risk of buying a house:

"In that sense buying a house isn’t an investment, so much as it’s a way of permanently covering your built-in short position when it comes to the shelter market."

"We were there for GM and Chrysler. Why not for Nortel?"

That's the title of Jeffrey Simpson's column in today's Globe and Mail. The realpolitik answer to that question bores me to tears, but I can think of a sensible answer based on economics. Whether or not this answer has anything to do with the the real reason for this choice is an exercise that I leave to the reader.

Policy-makers should be generally unconcerned when a particular firm is in difficulty: if a company is unable to make profitable use of productive resources, then those resources should be released to firms that can. If we were not in the middle of a recession, I would be stomping all over the GM-Chrysler bailout with my biggest, baddest hob-nailed boots; the job losses associated with a GM-Chrysler collapse would be more than offset by our normal rate of job creation (see this post). But these are not normal times.

There are other reasons for not throwing public money at Nortel:

• Compared to automobile manufacturers, Nortel doesn't have much in the way of physical capital that can pretty much only be used to produce a handful of products. The productive capacity of Nortel can be redistributed to other firms much more easily that that of Chrysler or GM.
• The human capital of Nortel workers is much more mobile than those of workers at GM-Chrysler. A former Nortel worker is much more likely to find a job that makes effective use of her skills than is a former GM-Chrysler worker.

And I must take exception to this bit in Simpson's column:

...here's a patriot who believes in doing something for his country and company at the same time.

Yikes. This is how oligarchs get their start.

Why the Bank of Canada should 'rise' interest rates

I don't want tighter monetary policy; I want looser. I don't want the Bank of Canada to raise interest rates, but I do want the Bank to do something that would cause it to want interest rates to rise. I want it to buy real assets.

We have become so accustomed to thinking about monetary policy in terms of interest rates, both as monetary policy instrument, and as the monetary policy transmission mechanism, that it's hard to find the right words to describe it any other way. Which is why I abused grammar in the title of this post.

And this matters. Monetary policy is about expectations, and it works when people understand what it means. And right now people don't understand what it means, so it doesn't work.

Weird Fiscal multipliers in New Keynesian models under ZIRP

Paul Krugman has bravely and commendably been trying to understand intuitively the underlying reasons for the big differences between fiscal policy multipliers in a couple of New Keynesian models. Someone needs to do this job. (Take as read a general rant against economists who write down fancy mathematical models without understanding or explaining the results intuitively.)

A fiscal multiplier is the model's predicted change in output per dollar change in government spending (or taxes), other things equal. My guess is that the differences in multipliers has little to do with the models, and has a lot to do with the other things assumed equal. By messing with the other assumptions, it's easy to get fiscal multipliers ranging between plus and minus infinity, even in the same, standard model.

More on the open letter supporting the OPBO

Kevin Milligan's open letter has received some attention ([1], [2]), and that's all to the good. Kevin has been doing a good job of making the case for a strengthened and a more independent Office of the Parliamentary Budget Officer (do mosey on over to his blog for more), so the following points are largely based on ones he's already made. The reason I'm making them again is that I don't want people to start thinking that Kevin is the only one who is willing to take the time to put pen to paper fingers to keyboard in support of the OPBO.

• Although the OPBO fiscal projections have made headlines, this is only a small part of what a properly-structured OPBO can do. The Congressional Budget Office regularly makes public its projections for the effects of different policies using differing sets of assumptions, and US public discourse is the richer for it. We're seeing fiscal projections because that's almost the only thing the OPBO has been able to do with the resources currently at its disposal.
• I am unimpressed by the "Kevin Page is breaking the rules" argument. The rules are dumb and should be changed.
• An effective PBO will not usurp the role of politicians; it will provide them with the technical expertise to do their job properly. Yes, there's the risk that the PBO will tell you that your pet project is a pile of pig doots, but not because the PBO is part of a nefarious partisan conspiracy. You should accept the fact that your pet project is a pile of pigs doots and do your homework next time.