Worthwhile Canadian Initiative

Economic policy advice for the NDP, Part VI: Climate change

The NDP has traditionally had a certain amount of credibility in its concern for environmental issues, and it can fairly fairly credited for dragging many environmental issues to to the political forefront.

But that's not the same thing as being able to come up with sensible policy prescriptions to deal with the problems it identifies. The NDP made a hopelessly confusing hash of the greenhouse gas (GHG) file in the last election (see the intemperate rants here, here and here), mainly because of its lack of understanding of environmental economics.

Canada's Black Shift

This chart is from The Economist:

There is only one country (thanks to sharper-eyed Frances in the comments) are only two countries in this list that have reduced gasoline taxes in the last ten years. Okay, the units are measured in euro cents, and the CAD depreciated slightly against the euro over this period. But even if taxes have increased in CAD terms, they increased even more almost everywhere else.

(The delightful phrase in the title is shamelessly stolen from Declan at Crawl Across the Ocean.)

Possibly the most extravagant compliment that I've ever been paid

The National Post's Full Comment section occasionally links to us. (No, we don't get paid for this; they follow the usual blog convention of copying a couple of paragraphs and sending readers here for the full article. Everyone is free to do so.) My post Economic policy advice for the NDP, Part III: The GST ran there awhile ago, and it elicited this comment:

This guy is smart and evil, i.e. the most dangerous. He is full of ideas for the NDP on how to increase taxes in a way that the parasites in government milk the most of the tax paying citizens.

Finally, someone understands.

What is the problem that EI reform is supposed to solve?

If asked, people might say something along the lines of this Toronto Star editorial:

The rolls of the unemployed in Canada continue to grow... Many or most of them won't be eligible for employment insurance (EI), due to the program's Byzantine eligibility requirements.

Very alarming - especially that word "most". But how do we know that a large fraction - let alone "most" - of the newly-unemployed are in fact not eligible for EI? Isn't that something we'd like to know?

I know it's something I'd like to know, so I decided to do some digging. It turns out that the EI system is holding up pretty well - in fact, much better than one might have expected.

Economic policy advice for the NDP, Part V: Give money to low-income households

Here is what I would like some staffer to ask next time NDP strategists are kicking around ideas for goods to subsidise or services that governments to provide at a discount in order to advance their agenda of reducing poverty and inequality:

"Why don't we just give low-income households money and let them spend it on what they need most?"

Because one you start asking yourself this question regularly, you're less likely to come up with policy proposals that are inefficient, inegalitarian and regressive.

US travel to Canada and the exchange rate: A textbook case

Via Megan McArdle, I learn that Kevin Drum is puzzled by the drop in day trips by Americans to Canada. Megan is quite right; the exchange rate is the explanation.

I've been teaching from the French translation of Krugman and Obstfeld's International Economics. Unfortunately, it was translated for the European market, so all the examples are about France and the US. So in the section where they introduce exchange rates, they show that US visits to French restaurants vary closely with fluctuations in the USD-Euro exchange rate. I decided to dig up another example that would be more familiar to our students, so here is what I show my students when I want to illustrate how people react to changes in the exchange rate:

Economic policy advice for the NDP, Part IV: Corporate income taxes

Here is my first recommendation to the NDP on corporate income taxes: accept the fact that previous NDP positions have been - to put it kindly - painfully amateurish and should be discreetly tossed into the Dumpster of Disavowed Doctrines. It's tabula rasa time, and the long path back to reality-based policy starts below the fold.

Economic policy advice for the NDP, Part III: The GST

The NDP has never been a fan of the GST, and persuading Canadian progressives of its merits is a never-ending variation on the theme of "but these go to eleven:"

Progressive Person: How do we raise the tax revenues we need for the social programs we want to implement without tanking the economy?
Economist: Consumption taxes. Theory says that consumption taxes such as the GST are the least-disruptive way of generating tax revenue, and available evidence appears to be consistent with the theory.
PP: But consumption taxes are regressive!
E: Yes, but we can correct for that using targeted transfers to low-income households so that they aren't worse off; that's what the GST rebate is for. And there will still be lots left over to fund those social programs.
PP: But consumption taxes are regressive!
E: I know. But they introduce fewer distortions than the alternatives, and we can recompense low-income households for their lost buying power.
PP: But consumption taxes are regressive!
E: I'm not disputing that point, but there's more to the analysis than that. Okay, let me explain the effects of the various forms of taxes...
<15 years later>
E: ...and so we see that a consumption tax accompanied by direct transfers to low-income households is the most effective way of generating the tax revenues you want.
PP: But consumption taxes are regressive!

Clearly, that's a dramatisation: in real life, it would never have occurred to a progressive to ask an economist how to finance social programs without tanking the economy. But below the fold, I'll try to summarise once again why the NDP should abandon its traditional antipathy to the GST and start to view it as an important instrument in advancing its agenda.

The grain of truth in the Junker Fallacy

I saw an example of the Junker Fallacy recently (it doesn't matter where). You have probably seen it too somewhere.

"Investment is low because people (or firms) spend all their savings on speculation rather than investment -- bidding up the price of houses, shares, land, or in corporate takeovers; there is no money left over for real investment that could increase future productivity".

It is indeed a fallacy, in that the argument makes no logical sense. It's an example of a fallacy of composition: what is true for each individual is not true for the whole. But there can be a grain of truth in it, in some circumstances, if it's re-stated correctly.

Economic policy advice for the NDP, Part II: Defending big government

A while ago, there was a spurt of articles bemoaning the 'out-of-control' spending of the federal government, making the point that federal spending has been outpacing the rate of growth of GDP over the past five years. We are presumably expected to believe that future federal governments will be obliged by the inexorable logic of budgetary arithmetic to reduce spending.

This reasoning is wrong on many, many levels. Below the fold, I'll develop the arguments that can (and should!) be used to to explain why spending should not only not be cut, but can be significantly expanded without harming the economy.

Economic policy advice for the NDP, Part I: Inequality

One of the themes being played up in the NDP's convention is its attempt to 're-brand' (up to, but not quite, including dropping the 'New' from its name), and part of this is apparently an attempt to develop a credible economic platform. The NDP has historically been pretty consistent in its refusal to take advice from professional economists, so on the off chance that the NDP is serious about this endeavour, I'm starting a series of posts on the economic analysis behind some of its core themes. Below the fold, I'll do a brief survey of what is probably the most important economic issue for the NDP: inequality.

Banks, Money, and Debt

"You and I can only lend money if we've got some to lend; but banks can create money and debt simultaneously at the stroke of a pen". Might commercial banks be the cause of the increase in debt over the last few years?

Maybe partly, but basically no. You can't just look at one side of the market for debt; you have to consider both supply and demand. And when you are talking about macroeconomic things, like total amounts of debt and money, you cannot just do partial equilibrium analysis; you have to do general (dis)equilibrium analysis and look at the economy as a whole. It's the only way to avoid fallacies of composition.

Bagehot on "Who owns the Fed?"

Who owns the Fed? Is the Fed really privately owned?

I don't know, and I don't really care (except perhaps out of idle curiosity). Learning who has really owned the Fed all these years would make little or no difference to how I view the Fed.

Money and debt

Could monetary policy have caused the recent rise in levels of debt?

The obvious answer is that loose monetary policy lowers interest rates, which causes people to want to borrow and spend more, and so go deeper into debt. That answer is both obvious and wrong, as I explained in a previous post. Low interest rates make people want to borrow more, but they won't be able actually to borrow more unless someone wants to lend more. There is both a demand and a supply curve of debt.

How far out of line is the Canadian exchange rate?

No one knows. There is approximately an infinity of exchange rate models out there, and according to the one(s) used at the Bank of Canada, the CAD is over-valued. I don't think anyone will strenuously object to the notion that the CAD is in some sense too high - that is, higher than what most models would predict. But is this gap significantly greater than the normal range of fluctuations that we've seen in the past? And is this gap important enough to induce a change in how the Bank conducts policy?

We'd have a better understanding of this problem if people routinely reported error bands with their estimates (a pet peeve of mine), but they don't. So instead, I'm just going to plot some graphs and do some eyeball econometrics.

A mildly disappointing Labour Force Survey release

Well, that wasn't was we were hoping for. But even so, the past few months in which employment had gone sideways means that after 9 months of recession, employment is where it was at this time in the previous two recessions:

Another series I'm watching is hours worked. It's much more choppy than employment, but it's more closely related to movements in GDP:

Once again, after a sharp fall at the beginning of the recession, hours worked has now bounced back up to where they were at the same point in other recessions.

Sterilised, unsterilised, beggar-thy-neighbour, forex market interventions.

The Loonie has been appreciating recently. This has a number of people, including me, a bit worried. What can/should the Bank of Canada do about it?

Why did debt increase?

Updated below.

I have heard the argument so many times: "Low interest rates caused people to want to borrow and spend, and that's what caused debt to increase". It's such a simple and obvious explanation; only someone with a PhD in economics could fail to understand it. Unfortunately it's also an explanation that makes no sense at all. You don't need a PhD to see what's wrong with it; you just need to understand ECON 1000's supply and demand properly. But that begs the question: if that explanation makes no sense, what did cause debt to increase?

Hardball, lowball and the allocation of Nortel's assets

Paul Wells directs our attention to a piece by Roger Martin - of U of T's Rotman School of Management - in the Globe and Mail:

Bankrupt Nortel Networks Corp. is auctioning off its assets to pay what it can to creditors. A key component of those assets is valuable intellectual property related to the next-generation wireless standard, known as long-term evolution, or LTE. Those intellectual property assets were created by Nortel with millions of dollars of support from Canadian taxpayers through the Scientific Research Tax Credit program...

The time is now - right now - for the Canadian government to step up to the plate and use the Investment Canada Act review provisions to demonstrate that, like the leaders of Canada's great global companies, it has graduated from scout status to being a full partner in global competitiveness.

It is a crying shame that dreadful management has destroyed a great Canadian company in Nortel. But that doesn't mean that as some kind of bizarre penance we have to help a major global competitor of RIM acquire important Canadian-made intellectual property assets that it can, and will, use against Canadian interests.

I can't get past that last sentence: it betrays a fundamental misunderstanding about what Canadian interests are. Yes, certain Canadian firms may find themselves in a more difficult position - but then again, if ownership of Nortel's assets were crucial to survival, there's an obvious remedy: pay the full market price for them.

I can't think of any reason why we should care about the nationality of the person who owns those patents. Seriously: who cares? Apart from the warm fuzzies ("It's ours!") and indulging in unseemly bits of xenophobia ("No outsiders!"), there isn't much in the way of a concrete reason to have a preference. Moreover, arguments based on the fact that public funds were used to subsidise Nortel should be dismissed out of hand: that money is a sunk cost. When you do a cost-benefit analysis, you always ignore sunk costs.

Martin's argument explains much of our current problems when it comes to productivity. Here we have a case of intellectual assets that have been produced by Canadians, and their owners are expected to accept less than full market price. Why? Because no Canadian investor thinks that they're worth what foreigners are willing to spend.

Right there, we see why no Canadian in their right mind would spend much time or effort doing R&D: they know that the best price they can ever get is one offered by other Canadians. And this price is always going to be lower than what other innovators in other countries can expect to receive.

Worse, this also means that Canadian bidders can knowingly low-ball when they make their offers for Canadian-born intellectual property. Why didn't RIM outbid Ericcson? Because they know that they could bid low, invoke patriotism and still get the assets at a discount?

If we want Canadian firms to start thinking that R&D and innovation are things of value, perhaps we should disabuse them of the notion that they can be had on the cheap.

A preliminary estimate for Canadian 2009Q2 GDP growth

Three months ago, I tried to construct an advance estimate for 2009Q1 GDP growth, based on the GDP releases for the first two months and the LFS release for the third month. Here is what I came up with:

The mean of [the predictive density] is -6.9%, and its standard deviation is 0.5%; the interquartile range is [-7.3 , -6.6]. This density incorporates parameter uncertainty as well as the two error terms (employment and hours to monthly GDP, monthly GDP to quarterly GDP) and the standard deviation isn't very far from those of the BEA's revisions of its advance estimates. But since I've punted on the whole question of data revisions, that estimate of 0.5% is very much a lower bound.

The 2009Q1 number came in at -5.4%, which put me three standard deviations away. That's pretty embarrassing as far as forecast errors go, but I can at least comfort myself with the fact that at least I published a standard deviation and not just a point estimate. AFAICT, no-one else did.

Below the fold, I'm going to go through the exercise again for 2009Q2.

Update: A glitch has been fixed, giving a number that looks more like what everyone else is publishing.