Worthwhile Canadian Initiative

In which I try to answer Jeffrey Simpson's question

From today's Globe and Mail:

A surfeit of rah-rah, a dearth of serious debate: Take the economics profession. Very few economists in the private sector take on the big-picture national issues – the TD Economics unit being a significant exception – preferring instead to analyze the ups and downs of the stock market and this quarter's economic growth, or lack thereof.

Where were (and are) the country's university and business economists on the biggest hole blown in federal finances in decades – the two-point reduction in the goods and services tax? Was their silence explained by the fact that they were a) too busy with their pie-in-the-sky mathematical models on which university tenure and promotion depend, b) too afraid of offending the government, or c) too lazy to care?

Whatever the reason, the group that theoretically had much to offer the country largely took a pass.

Ouch.

Okay, one partial response is that whenever economists were asked about the GST cut, their answers were pretty clear. Perhaps an additional question is why economists' opinions were systematically ignored.

But there is a deeper point, and it is one that worries me as well: Simpson's option a) is probably the closest to the truth. For whatever reason - and I have my own theories as to why - Canadian academic economists have not paid sufficient attention to our responsibility to participate in public debate.

Why would unions oppose a basic income?

The Berkeley Electronic Press has a new journal: Basic Income Studies. The Basic Income - also known as the Guaranteed Annual Income (GAI) in Canada - is a proposal that I'm very much favourably disposed to, even though I'm not familiar with all of the technical details. I took a look at its inaugural issue, and I'm glad I did.

One article struck me in particular: Yannick Vanderborght's "Why trade unions oppose basic income". Why would unions - who often take pride in their  commitment to progressive goals - object to a basic income policy?

Social choice and optimal inference

One of the highlights of my graduate school years was the lecture where I learned about Arrow's Impossibility Theorem. It's hard to imagine an question more important to the social sciences that the social choice problem: how can we aggregate individual preferences into a coherent social order? Arrow's answer is that we can't, but that doesn't make the issue less important. Of course, from the perspective of a graduate student looking for a thesis topic, Arrow did his job rather too well: you had to be a serious math jock to identify and solve an issue he hadn't already dealt with. And I'm by no means a math jock.

But it turns out that my modest skills as an econometrician are useful in attacking the social choice problem using another approach, one that is as old as the social choice problem itself, but of which I was unaware until it was explained to me by my colleague Michel Truchon.

Optimal Tax Theorist bleg; can 100% marginal tax rates ever make sense?

This is a bleg. I'm looking for someone who: understands optimal tax theory better than me (shouldn't be too hard); can explain it simply (may be harder).

Here's the question: can it ever be part of an optimal tax system to have 100% marginal tax rates on some part of the income distribution?

Even more evidence that people respond to incentives

A few years ago, Human Resources Development Canada (HDRC) ran an experimental project to see how single parents on welfare responded to changes in their budget constraint. It has long been known that single mothers on social assistance are particularly vulnerable to the welfare trap: not only are their payments clawed back as they earn wage income, they risk losing their non-monetary benefits. In many cases, these parents face marginal income tax rates of well over 100%.

So the HDRC came up with the Self-Sufficiency Project (the SSP), which provided income supplements to single parents (almost without exception, these were women) who, after having received social assistance for at least a year, found full-time work. These premiums were quite generous: a participant could receive up to $12,000 a year, thus doubling what she might otherwise have earned at a job that paid minimum wage.

Horizontalism, black holes, and liquidity traps

The same "horizontalist" macroeconomic theories that predict the existence of black holes also predict that standard monetary policy is useless in a liquidity trap, and for the very same reason. But we do not observe any economies ever falling into black holes, so black holes probably don't exist. So if those macroeconomic theories are wrong about black holes, they may also be wrong about monetary policy being useless in a liquidity trap.

Economic growth and convergence

One of the main predictions of standard neoclassical growth models is convergence. If there are diminishing returns to capital, countries that have relatively higher levels of capital will have lower rates of return on investment than will countries in which capital is relatively scarce. Since poor countries offer higher rates of return on investment, they will accumulate capital at a faster rate - and will eventually catch up to rich-country levels of income.

Unfortunately for the model, empirical evidence in favour of the convergence hypothesis appears to be pretty weak. Here is what you get when you look at the relationship between income levels in 1950 and average growth rates over the period 1950-2001 for the 146 countries for which data are available (source is Angus Maddison's estimates):

My Christmas wish: a not-completely-stupid debate on climate change policy

Here are the ingredients:

• A recognition that climate change is a real problem that has to be addressed.
• A recognition that the costs of climate change policy cannot be shuffled off to hate-objects such as oil companies and Albertans.
• An honest discussion of what the costs of an effective climate change policy are.

Is that too much?

Or should I just ask for the Beatles box set?

Why don't we observe (macroeconomic) black holes?

Like physics, modern macroeconomic theory predicts the possibility of "black holes". The analogy with physics is close, but not exact. Because unlike physics, where it's not easy to see a black hole, there should be no difficulty in macroeconomists seeing a black hole, if one exists. At the very least, we should certainly see any economy being sucked into one. So where are they? Why don't we ever see any?

Productivity: The demographic tipping-point

Real, per-capita GDP growth has averaged about 1.7% in Canada over the past 30 years - where has it come from? A less-than-exhaustive but more-than-cursory examination of the data suggests the following breakdown:

Source	Contribution
Technical progress:	0.9%
Capital deepening:	0.5%
Decrease in hours worked per week:	-0.2%
Increase in employment rate:	0.25%
Increase in working-age population:	0.25%
Total:	1.7%

We already know that the 0.9% technical progress number is nothing to be proud about, and we could probably do better in the way of fixed business investment. What intrigues me is those last three terms.

We are all Albertans / On est tous des albertains

One of the least edifying spectacles of the domestic coverage of the Copenhagen conference was the pointing of fingers at Alberta, most notably by the leaders of the provincial (in every sense of the word) governments of Ontario and Québec. The tar sands are in Alberta, so the reasoning goes, and it's up to Albertans to pay for the problems they generate. The hypocrisy of this stance has already been pointed out by several commentators: as Lysiane Gagnon asks, where did the Québec government think the $8.4b equalisation cheque that it cashed last year came from?

Underestimating the costs of climate change policy is not helpful

One of the things about blogging is that you never know what posts will be jumped on or how they will be interpreted. This post about the Suzuki-Pembina report is a case in point: both sides of the debate seemed to think that I was offering aid and succor to the cause of the climate change deniers. (I take particular exception to Colby Cosh's use of the word 'hoax'; there's nothing in what I wrote that would justify that sort of spin.)

The real problem is that the error that Jack Mintz noted - and to which I added the 'assuming a can opener' line - doesn't seem to be an isolated incident. According to this meta-study (a fancy name for a literature review), there seems to be a systematic tendency to downplay the economic costs of climate change policies:

This is best illustrated with the Summary for Policy Makers of the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC 2007). Emission reduction costs are reported for three alternative targets. While 118 results were available for targets in the range of 3.2 to 4.0°C warming, there were only 6 estimates of the costs of keeping warming in the range of 2.0 to 2.4°C. According to the reported results, moving from a 3.6°C to a 3.0°C target would double the abatement costs. Moving from a 3.0°C to a 2.2°C target would increase costs by 37.5% only. As the underlying models are correctly specified – that is, convexity in abatement costs means that stringent targets have higher and accelerating costs – the IPCC results can only be explained by selection bias; only models with low emission reduction costs reported results for the most stringent targets.

This may be part of a communications strategy based on the belief that an honest discussion of the economic costs of climate change policy is something to be avoided. But if Climategate has taught us anything, it is that the power of the environmentalist argument rests entirely on its intellectual integrity.

What is it with Microeconomists?

They are certainly not stupid. And they are certainly not ignorant either. I know that the ones I'm complaining about are smarter than me, and more knowledgeable than me. And that includes economics smarts and knowledge. Some of them make me feel totally inadequate on a daily basis (I read their blogs daily). Some of my best friends are microeconomists. But they just don't get macro!

Greece, the Eurozone, and Canada

I have been following the story about Greece. Like some other Eurozone countries, Greece has high deficit/GDP and debt/GDP ratios. Unlike Canada, but like Canadian provinces, Greece cannot print money. Eurozone countries are like Canadian provinces, as I argued in here back in January. But the Eurozone, unlike Canada, lacks a federal fiscal authority. The Eurozone is what Canada would be if we abolished the federal government, except for the Bank of Canada.

I rather stuck my neck out in that January post. I had "poster's regret" soon after. But now I'm looking a lot more prescient than I felt at the time. (Which proves it would be sheer luck, even if I do turn out to be right).

The case for the Bank of Canada's intervening in the forex market gets even weaker

The lines of reasoning that have been advanced over the past few months in favour of slowing the appreciation of the Canadian dollar can be broken down into two categories:

Random Thoughts

Sometimes my brain can't concentrate on any one topic long enough to write a serious post. Or maybe I just don't know enough to give a good answer to some question I want to answer. So here is a random collection of thoughts:

If Canadians were serious about climate change, Prime Minister Stéphane Dion would be the toast of Copenhagen

Here is what Paul Krugman put at the top of his list of Paul Samuleson's contributions to economics:

Revealed preference: There was a revolution in consumer theory in the 1930s, as economists realized that there was much more to consumer choice than diminishing marginal utility. But it was Samuelson who taught us how much can be inferred from the simple proposition that what people choose must be something they prefer to something else they could have afforded but don’t choose.

Over the past few days, there have been any number of politicians, pundits and pollsters who have scolded the Conservative government for the position it has taken in Copenhagen. But what did they expect? When Canadians were offered a choice between a climate change policy that offered the possibility of personal inconvenience and the siren call of the Axis of Climate Change Dimwits, a clear majority of voters chose parties who promised a climate change policy that would cost them nothing.

Stephen Harper is carrying out the mandate we gave him. We bought all those 'Fossil of the Day' awards; we're going to have to own them.

What is "the natural rate of interest"?

"The natural rate of interest" is a theoretical construct. It is a theoretical construct that only has a defined meaning within a certain class of economic models. And even within that class of models, the exact definition may vary from one model to the next.

Memo to journalists: Disregard the Suzuki-Pembina report on the costs of climate change policy

The David Suzuki Foundation and the Pembina Institute recently sponsored a study that concludes that the economic effects of a significant reduction in greenhouse gas emissions would be relatively small. Since its release, any number of journalists have dutifully cut-and-pasted bits from the summary report into their commentaries. But it never seemed to occur to them to ask how these results could be reconciled with what had already been written on the subject.

House price risk is negative covariance with your PV desired rents

If you buy a house, the risk is minus the covariance between the price of the house and the present value of the rents of the house you would desire to live in.

I disagree with Felix Salmon. Strangely, Felix seems to have misplaced the significance of an idea he had earlier: we are born with a short position in housing.