Worthwhile Canadian Initiative

Journalism and Economics

Brad De Long thinks very highly of Greg Ip, even when Brad thinks Greg gets something wrong. Brad thinks Greg is very sharp. So do I. But the other reason why Greg Ip is such a good economic journalist is that he was thoroughly trained in both Journalism and Economics. And I'm very proud to say that he was trained in both right here at Carleton University. (Since I'm blogging on Carleton time, I might as well give Carleton some advertising, especially when it's well-deserved.)

But the data I have (warning: DataCubes is a very powerful tool, but it takes practice to figure it out) make for depressing reading. Greg is very much the exception. Very few Journalism students at Carleton study any economics.

The federal deficit is small, manageable problem with a simple solution. So why are politicians being so boneheaded?

The editorial cartoon in yesterday's Le Soleil has the best take I've seen yet on the issue of how to deal with the federal deficit. The target is Michael Ignatieff, but it could just have well have been Stephen Harper, because their positions on this issue are identical. Here is my approximate translation of the dialogue:

Ignatieff: I've promised to eliminate the deficit of $56b without increasing taxes and without cutting services. Any suggestions?
Aide: How about you stop talking crap?

And crap it is, because the deficit will not go away without tax increases or cuts in services.

Can rent controls cause a recession? A response to Scott Sumner and Bill Woolsey

There is a perfectly sensible theory that says that rent controls reduce labour mobility and can therefore worsen structural unemployment. I'm going to ignore that sensible theory and put forward a silly theory -- one I believe is wrong. But I'm putting forward a silly theory to make (what I think is) a sensible point, about the importance (or lack thereof) of money's role as a medium of account, and about Walras' Law.

The hub and spoke model of money -- a rejoinder to Arnold Kling

The textbooks say that money serves as: store of value; medium of account; and medium of exchange. Arnold Kling seems to miss the importance of the fact that money is a medium of exchange. Worse, he misunderstands me, thinking that I am one of those economists who makes a big deal of money's role as a store of value. I don't. I'm a medium of exchange nut. Worse still, he claims Clower and Leijonhufvud as intellectual ancestors, on his side of the debate aginst me! Clower especially emphasised the role of money as medium of exchange, and Leihonhufvud followed suit. They are my ancestors, not Arnold's!

Mackerels and Money

Arnold Kling asks: why are mackerels different from money? Why should the M in MV=PY stand for money, and not mackerels?

Why can't an excess demand for mackerel cause a recession? Why can't an excess supply of other goods be matched by an excess demand for mackerel?

Keynesians don't know the answer to this question either*. Keynes himself never mentioned mackerels as potentially causing a violation of Say's Law, but he did mention land, which is essentially the same as mackerels.

Does CMHC have big enough reserves?

This post is more of a bleg; because I'm sure someone reading this knows more about the answer than I do.

An insurance company doesn't need reserves if it is insuring a large number of short term uncorrelated risks. The Law of Large Numbers ensures that its annual claims will equal its annual premiums, if it prices its insurance correctly. Every year exactly 5% of all cars insured will crash, so if you price the insurance at 5% of the claim, plus admin costs, you will break even every year.

But suppose there is the same 5% annual risk of a car crashing, but the risks are perfectly correlated. Once every 20 years, on average, all the cars crash. Then you need reserves. If you price the insurance at 5% of the claim, plus admin costs, you would need to keep at least 20 years' worth of premiums, net of admin costs, in reserve. (That's a minimum, because you might get 2 or more crash years in a row.)

So where's the market failure (in macroeconomics)?

Mike Moffatt asks the right question; and it's the economist's question.

In economics, if we think the price of x is too high, we don't just say "we should lower the price of x". We look for the underlying causes of the price of x being too high. "Where's the market failure?"

Dark Age in Macroeconomics? A History of Taught approach

(Or maybe the title should be: "Notes from the Phelps/Lucas Administration"; or "Notes to supplement our fading memories of the late 1970's".)

Is this a Dark Age in macroeconomics? In other words, have we collectively forgotten some (important) stuff that we used to understand?

I want to approach this question by looking at what was taught in the past to economics graduate students, so we can compare what is left out now to what was left out then.

On the form of the Canadian recovery

There's a certain amount of speculation about the form of the US recovery, based on scenarios of how its economy will work its way out of a balance sheet recession. As I understand it, the main candidates are (in alphabetical order):

• U: The US economy grinds along as households deleverage themselves, and the economy picks up when consumers have paid off a sufficient amount of their accumulated debt.
• V: The various stimulus measures manage to provide a bridge to the point where the US economy can expand on its own.
• W: The various stimulus measures succeed only in providing a temporary boost, and the US economy goes back to grinding its way back out of the recession.

If Canada had fallen into recession for the same reasons that the US did, then a discussion of what its recovery will look like would follow similar lines. But Canada's recession occurred for very different reasons, and our recovery won't look the same as that of the US.

Sandra Peart is blogging again. Please adjust your feeds accordingly

Adam Smith Lives! (A history of economic thought blog) is back from an administratively-induced hiatus. From her latest post:

David Levy and I are working on the role of experts and expertise in social science.  We're much concerned of late -- in the light of the financial meltdown and various successful ponzi schemes -- with the ethical foundation of transparency.

We all look forward to seeing more. And I am greatly pleased to put Adam Smith Lives! back on the still-too-short list of Canadian economics bloggers.

When the going gets weird, the weird turn pro

It is a season in which even the most jaded observers of federal politics can only look on in slack-jawed, googly-eyed wonder. Here is a press release from the NDP web site:

Liberals on board with Conservative tax hikes: Despite publicly opposing the Conservatives’ HST plan, Michael Ignatieff is now endorsing it. Ontario Premier Dalton McGuinty confirmed today that Ignatieff has guaranteed that the federal Liberals will follow through with the highly unpopular plan should they form the next government.

Yes, dear reader, you understood correctly. The federal NDP has decided that the cause of social democracy will be advanced by positioning itself as the anti-tax party.

Could someone who is acquainted with the people who wrote that press release please direct their attention to these posts?

• Economic policy advice for the NDP, Part II: Defending big government
• Economic policy advice for the NDP, Part III: The GST

My own memories of the Phelps/Lucas administration

My own memories are similar to Paul Krugman's, but with one important difference. This is the bit I remember differently:

"The Lucas view took the economics profession by storm – not because there was any solid evidence for it, but because it was so clever, because it led to nice math, because it let macroeconomists give in to their inner neoclassicists."

Why did the opposition parties let Stephen Harper outplay them so badly on Employment Insurance?

It appears that we will have some sort of modification to Employment Insurance. The main measure involves an extension of benefits to some EI recipients who may be at risk of exhausting their benefits, and that - and the prospect of an election - appears to be enough for the NDP and the Bloc. For the NDP in particular, this is an embarrassing climbdown.

All Microeconomics gets Say's/Walras' Law wrong

It's not just John Cochrane; it's not just (modern) Chicago; it's (nearly) all of us.

Which economist has not written, said, thought, taught, or learned, the following:

"Let there be n goods (including money, if it exists). Max U(X1,X2,..Xn) subject to SUM over n[P(X-E)]=0. Aggregate over all people. Therefore the sum of the n excess demands must be zero."

It's second year microeconomics. And it's wrong.

Quebec: An oasis of sanity in a desert of GST/HST silliness

The Charest government is floating the idea of increasing the QST - which has been harmonised with the GST since the very beginning - by another percentage point (in addition to the one-point increase announced in last spring's budget) as a way of dealing with the post-recession deficit. This is clearly the right thing to do, and the Quebec Liberal government is to be congratulated for putting the proposal on the table. But what, you may ask, is the reaction of the PQ opposition?

PQ leader Pauline Marois said the government should hold off until the economy has stabilized.

This is the proper concern to raise, as befits the duty of an opposition party. The idea is a good one, but it's important to get the timing right.

Which brings me to the horrible mess that greets me when I look at what's going on elsewhere. Switching away from retail sales taxes to the HST is such an obviously good idea ([1],[2],[3],[4], ad infinitum) that it's hard to imagine why the feds have to bribe provinces to do the smart thing.

What's even more unfathomable is the political spin applied to the various HST proposals. For example, I can't make head nor tail about these pieces, where we are supposed to believe that bribing provinces to do the smart thing is somehow bad federal politics. And apparently the federal Liberals are saying one thing and its opposite on the Ontario HST proposal.

But this pales in comparison to the lunacy associated with the reaction to BC HST proposal, where the BC NDP (!) is organising a tax revolt, using  pretty much the same rhetoric it used against the carbon tax. BC politics are weird at the best of times, but I can't figure out how the BC NDP managed to situate itself as the anti-tax party.

I am greatly cheered by the fact that I live in a province governed by grown-ups.

Why does Senator Sharon Carstairs think that the Parliamentary Budget Office shouldn't make its reports public?

Anyone? Kevin Milligan at Support the OPBO would like to know. So would I. The relevant legislation appears to be silent on the matter.

A "proof" of Say's Law; and why money is weird

For a whole economy, does planned expenditure on newly-produced goods necessarily equal planned income from the sale of newly-produced goods? That's what I mean by "Say's Law" in this context.

Say's Law is wrong, and the fact that it is wrong is really important for macroeconomics. But it's not obvious why Say's Law is wrong. And you have to get right inside the minds of those who think Say's Law is right if you want to change their minds. That's what I'm trying to do here.

It is money (qua medium of exchange) and only money, that makes Say's Law wrong. And those Keynesians who reject Say's Law but who also reject the uniqueness of money are as wrong as those who accept Say's Law.

John Cochrane, Paul Krugman, and Say's Law, again

Via Casey Mulligan and Karl Smith, here is John Cochrane's response to Paul Krugman. It's a very good response. But there is one part where John Cochrane is definitely wrong. It's small, but important. And it's all about Say's Law, and the crucial difference between a monetary exchange and a barter economy.

Is the Bank of Canada bluffing?

From today's interest rate announcement:

Persistent strength in the Canadian dollar remains a risk to growth and to the return of inflation to target. In its conduct of monetary policy at low interest rates, the Bank retains considerable flexibility, consistent with the framework outlined in the April MPR.

The Bank has been issuing warnings such as these at regular intervals over the past few months. The forex markets then back off, the CAD starts back up again, and another warning is issued.

There's no question that the Bank of Canada is able to force a depreciation of the CAD if to chooses to do so. So the question is whether or not the Bank will actually intervene in forex markets for the first time since 1998.

Long-term unemployment in Canada and the US

The more I look at the US, the more I see unpleasant parallels to Canada's experience of the 1990's - what Pierre Fortin called The Great Canadian Slump. Even after we emerged from the worst of the 1990-91 recession, we still had to deal with a large current account deficit, out-of-control government deficits and significant NAFTA-induced sectoral shifts. The outlook for the US is depressingly similar, although their sectoral shifts are associated with re-allocating resources away from construction and finance.

One thing in particular jumps out at me: the spike in long-term unemployment in the US. Unemployment is bad for many reasons, but long-term unemployment is particularly harmful. As the duration of the unemployment spell lengthens, workers may find it harder to find work that makes best use of their skills; many will either start over in another field or abandon the work force entirely. Either way, human capital is destroyed and the economy's productive capacity is diminished.

Here are graphs of the number of people unemployed for 27 weeks or longer, expressed as a percentage of the working-age population and as a percentage of the total number of unemployed. The data are not seasonally adjusted.

I suspect that we'll be hearing the expression 'jobless recovery' quite frequently in discussions of the US economy over the next few years.