« The simple money supply multiplier model and simple keynesian multiplier model | Main | Even more on the ineffectiveness of minimum wages as an anti-poverty measure »

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

Cost of Canadian good for a Canadian government = cost of good - taxes that the government will reap from the corporate and individual taxes resulting from the creation of that good

Cost of US good for a Canadian government = cost of good

Ergo, can't it make sense to look at more than sticker prices when selected a supplier?

Gains of foreign good for a Canadian government: less taxes required to provide a given level of public services.

Or even: more and better public services for a given level of taxes.

Good for the Canadians this should reduce the price of their state. :-)

prowsej,

Your argument fails to consider that municipalities (the level that spends mostly on infrastructure) don't directly benefit from those corporate taxes. They're in effect giving money to the provinces and federal government if they stay in Canada and it's not cheaper. Most of the cities/rural governments are not in a position to be that charitable. On top of that, it encourages 'local' companies to be less productive and hence even more expensive, since in many cases there's hardly any competition in Canada for certain goods and services.

This came to a head in Toronto recently when the city bought new streetcars. Since only one company in Canada (Bombardier) builds them, to make a competitive tendering process they had to 'lower' the Canadian content/construction levels of the trams so Siemens could at least tender as well. The problem of only one company having the resources in Canada (again Bombardier) to do that Siemens would have had to build a Canadian plant for at least part of the construction at a one time cost of almost a billion dollars. The result? Bombardier bid $993-million; Siemens bid $1.5-billion. If there were no content rules, Siemens could have bid ~$850 million. The city just subsidized Bombardier and the corporate taxes will go to Quebec, where Bombardier is based, and the federal government. Toronto is out $143 million it could have spent on anything else.

Who wins here?

re: T.O. streetcars.

Normally, capital investments of this nature are funded 1/3 fed, 1/3 prov. 1/3 municipal. Lacking an agreement with the feds, the Toronto municipal gov't went ahead in 2009 committing 2/3. It remains to be seen in the future whether the feds will pony up their 1/3, or the shortcoming will be made up through other capital projects, deferred.

Manufacturing will be in Thunder Bay, Ont.

How do you know "If there were no content rules, Siemens could have bid ~$850 million."? Or is this just conjecture?

Hey JVF Macleans,

The Feds don't normally put in 1/3; they're historically very ad-hoc with infrastructure funding which normally involves political opportunities for the party of the day. If you follow Toronto politics at all, you'll recall the city's attempt to use the stimulus funds to procure streetcars even though they weren't eligible (and Baird's famous F-bomb). It almost cost Toronto any stimulus funds at all. Funding for these projects has historically been between the cities and the province until Mike Harris drastically reduced the province's share. This is obviously an Ontario view. The federal government (both liberal and conservative) has been more active in Quebec for obvious reasons.

Yes much of the manufacturing will be in Thunder Bay, but Bombardier is still a Quebec company. The Thunder Bay plant is just a factory that Bombardier inherited when it bought UTDC from the Ontario Government (which manufactured Toronto's current streetcars).

I saw the details of each of the bids (the links on the TTC's website are gone now) when they were submitted and most of the extra costs for Siemens was capital for building the manufacturing infrastructure here, plus any shipping costs back to their main plants in the EU. They didn't stand a chance, especially since the content rules were 25% (the more cynical believe that the labour friendly mayor and transit commissioner set this up to keep the unionized employees in Thunder Bay employed). I looked into it after I saw the final bids were so widely divergent and my critical thinking alarm went off. There's no way Siemens would have been that much more expensive or they wouldn't be in the tram business at all. My ~$850 million estimate was removing the capital costs of the new canadian plant and removing the shipping costs on the bid details for all the parts for final assembly. It wasn't a scientific calculation, but you get the idea. I'm a bit of a transit geek so this interested me a lot.

There are rumblings of a free trade (in labour mobility too!) agreement between the EU and Canada that would force governments (on both sides) to procure at the best bid price. I sincerely hope it goes through. Subsidizing inefficient businesses isn't the path to prosperity. Being against buying foreign goods is an ancient mercantilist mindset that Adam Smith, not to say many modern economists, proved is wrong.

Well, I'm not sure using the T.O. streetcar purchase decision and bidding process, made during an environment of stimulus spending, is a good example in this debate. Especially when the winning company is headquartered in Canada. Guess whose streetcars are being featured on the new Olympic line to the airport in Vancouver right now?

Siemens and Bombardier compete the world over for these types of contracts - so perhaps a better comparison should be made between competing lump sum bottom line costs in a third country that has neither head offices nor existing manufacturing facilities.

And I'm not sure it's fair to back out costs on "what ifs" as you have for the Siemens' bid. Siemens could have easily reallocated some costs to disguise their cost structure (for competitive reasons elsewhere -it's the bottom line that really counts) or to make a political statement - knowing that they didn't have a chance in winning - the cards were decked against them from the start.

Guess who's trains are on the new Skytrain line to the airport in Vancouver even though the rest of the trains were already Bombardier? Korea's Hyundai :-). There were zero Canadian content rules. They, in my opinion, did the right thing by going with the cheapest solution.

I agree with you in regards to the process that led to a Canadian company winning. It's politics and it's just a fact of life. Part of it is education on economics, though. BC has no transit manufacturing interest, so they had less pressure on them. And bottom line is exactly why Siemens backed out. They already had a few plants in the United States, so it was unneeded duplication; they would have never recouped their investment. Also, Siemens tried to bid on subway cars a few years ago and was explicitly shutout when the city awarded a no-bid contract for new cars to Bombardier. (I should note that I'm not anti-Bombardier at all, but I just think they should have to compete fairly).

I disagree with it being a bad example, as it still highlights the issues of what government procurement does to markets, trade, and government efficiency overall. These bids were high profile, had large amounts of money involved, and special interests as well. The streetcar purchase also had nothing to do with stimulus spending, it was specifically excluded from the federal stimulus package. The current cars need to be replaced soon and would have been bought anyways.

At least we will finally be getting A/C in them.

Stephen, in your analytical pieces (well, at least one) you demonstrate that we are in a demand limited economy, but in your policy recommendations you keep assuming we are in a supply limited economy.

As in, buy local, increase Canadian demand. Import, no increase in Canadian demand.

So buy Bombadier and reduce the costs to Toronto taxpayers of welfare in Thunder Bay.

I thought I covered that point in the last two sentences I added.

"It should be noted that during a recession, there is a case for imposing 'buy local' rules"

No, no, no!
That is the worst time for for "buy local" rules. Increasing inefficiency during a downturn is not a good idea.

Doc: I think you're wrong with the efficiency thing. Strikes me as the hair shirt fallacy (i.e. things are bad, so the government has to tighten its belts). With mass unemployment, insufficient AD, and interest rates at zero, burying dollars to dig them up again might actually be the thing to do to pull you out of the deflationary death spiral.

"So buy Bombadier and reduce the costs to Toronto taxpayers of welfare in Thunder Bay."

$142 million for 300 (or was it 600? i don't recall) jobs that the city of Toronto is in no position to afford is a steep price to pay. Also, you could have increased Canadian demand more efficiently had you saved that $142 million and spent it on something else. You could have had streetcars and tax breaks so consumers could spend, more affordable housing, less debt, etc.


Patrick, there are those of us that believe there is no such thing as a 'deflationary death spiral' with regards to aggregate demand. It's been demonstrated in past recessions as well as improvements in manufacturing that falling prices doesn't cause people to pull back their spending. Think about the prices for consumer electronics. People know the big TVs will get cheaper, but they still buy them now. Australia had almost no stimulus or great spending packages, yet they managed to get through the past 2 years without any negative growth. While Keynes' analysis was innovative and a neat observation, he missed the monetary contraction that happened and the inability of people to pay off old loans with less money in circulation as well as for businesses to properly invest when in real terms they may have been fine, but on paper they were losing money. The depression didn't stop until monetary contraction finally came to a halt.

Christopher: Two things: first, falling prices of one good (e.g. electronics) relative to other goods is not the same as deflation and mass unemployment. Second, mass unemployment DOES put a big dent in spending.

I am not that familiar with Australia, but I suspect that they where to some extent free-riding on the Chinese stimulus.

mass unemployment DOES put a big dent in spending

True, but what I was trying to do was tie in to the fact that a fall in demand is not necessarily a 'death spiral'. We've had across the board aggregate falls in demand in 1982 and 1990 and we recovered with minimal stimulus. In Britain in particular Thatcher slashed spending to the (relative) bone and after the monetary corrections (slowing the growth of money) for high inflationary environment there at the time, the economy started to grow again.

C'mon. 1982 and 1990 are not valid comparisons. Interest rates where not 0%, and inflation was high. And the world financial system hadn't just gone catatonic. Some pretty respected people (e.g. Paul Krugman, Joe Stiglitz) have been screaming from that rooftops that if gov'ts pulled back now, the economy (in particular the US economy), would crater. And if the Fed tightened, it would be a catastrophe.

Anyway, I doubt we're going to agree, and I'm really just parroting the position of people like Krugman.

For the record, I'm not saying the Fed itself should tighten monetary policy now. I think US congress should curtail spending, though. But that's the united states' problem more than it is ours.

But yes, we're going to have to agree to disagree. The recessions then were different though 1990 had nothing to do with inflation, which was in check by then. You'll remember that the US was going through the savings and loan crisis as well.

Stephen, you are arguing that recessions are a temporary special case, I am arguing that a demand limited economy is a (more or less) permanent condition.

A period of insufficient demand - or excess capacity - is pretty much our working definition for a recession.

Jim Rootham, At the right prices, there are no limits to aggregate demand.

Yes, private investment is treated as a "demand item" and it is the most volatile part. Perhaps, what you mean to say is that the economy is growth constrained?

The comments to this entry are closed.

Search this site

  • Google

    WWW
    worthwhile.typepad.com
Blog powered by Typepad