Worthwhile Canadian Initiative

Frances Woolley joins Worthwhile Canadian Initiative

Regular readers will have noticed that in addition to contributing in the comments, Carleton University's Frances Woolley has written some very fine posts on her own (here and here).

So it is with great pleasure that we announce that Frances has agreed to be a regular contributing blogger in her own right at WCI. Her first post is here.

What makes charities special?

Tax systems reflect values. Because most people think charity is a good thing, registered charities enjoy tax privileges. Donations to charity generate tax credits – representing about $2.8 billion in forgone federal revenue in 2009. Charities don't pay corporate income tax, and receive special GST treatment.

Any time the income tax act draws a line, there are border cases. What are basic groceries and thus free from GST? Unsalted nuts are, salted nuts are not. In the same way, charitable, corporate and voluntary activities sometimes blur. The Heart and Stroke Foundation urges the public to exercise more – and so does Goodlife Fitness. CARE Canada provides international development assistance – and so do new immigrants who send thousands of dollars back home but receive no tax credits for doing so.

A question for Modern Monetary Theorists

What, in your opinion, is the shape of the Long Run Phillips Curve?

Supplementary: if you use the words "full-employment" in your answer, can you do your best to explain what you mean by this. (This is not a "gotcha!" question. I know that's a tall order, because it's not always easy to come up with a simple theoretically and empirically watertight definition of theoretical concepts; many orthodox economists have equal difficulty explaining what they mean by the "natural rate of unemployment".)

On the meme of the 'surprisingly short and mild recession'

Two - count 'em - two opinion pieces today in which people pronounce them astounded at how the Not-So-Great-After-All Recession played out:

Économie: le syndrome A(H1N1): Une analyse récente de la récession, dans le dernier numéro de l'Observateur économique de Statistique Canada, montre à quel point économistes, politiciens et médias se sont mis le doigt dans l'oeil...

Un premier élément d'explication tient aux limites de la science économique, dont les modèles, aussi sophistiqués soient-ils, ont le plus grand mal à pressentir les revirements. Les spécialistes, et les gouvernements qui leur faisaient confiance, ont péché par optimisme en croyait jusqu'à la fin 2008 qu'on s'en tirerait avec un ralentissement. Ils n'ont pas davantage vu venir la reprise, parce que c'est aussi un revirement. Cette erreur d'appréciation a sans doute renforcé par la peur de se tromper encore et par le réflexe de mimétisme qu'on appelle le consensus des économistes. Personne n'osait dire que la récession était modérée, même si les données permettaient de le conclure.

and

What's behind Canada's economic miracle? Housing: Looking back to last year, it would have been inconceivable to talk about a Canadian economic miracle; however, that is exactly what we have on our hands today.

Um, no. Once again, I'm forced - against my will! honestly! - to point out that there were economists who were predicting a short, mild recession. In fact, a short, mild recession was the consensus forecast in December 2008. This is apparently not a well-known fact, but it would have been if enough people had read (or reported on) what I've been saying here on WCI for the past 18 months or so:

• "The most severe recession since the last one!" Or, how Canadian economic forecasters got it right
• Ex ante and ex post comparisons of the Canadian and US employment recessions

Gotta say I'd be a lot more modest about this if the people who had twisted themselves into such a fantod early last year weren't so keen to assure each other that everyone got the narrative for the recession and recovery wrong.

The Euro money supply

I agree with Ambrose Evans-Pritchard and Jacques Cailloux. It's what I was trying to say yesterday. And on Thursday. It's probably gotten too big for Germany, France, the IMF, whoever, to fix. Only the European Central Bank has enough money to fix the Eurozone problem; because it can print it. What's ironic is that what they call "The Nuclear Option" is what first year economics textbooks describe as the normal way that central banks increase the money supply. We call it "Open Market Operations". Print money and use it to buy Eurozone government bonds.

But I don't think that will happen.

The Holy Roman Eurozone

I started writing this post yesterday. It's already out of date. This is what I wrote yesterday; I will continue the post below.

Greece has now gone, at least in expected value terms. With bond yields increased to over 13% today, there is no way I can see Greece running a primary surplus big enough to pay those interest rates on its outstanding debt. When you have a debt/GDP ratio of 100%, every one percentage point permanent increase in interest rates increases the deficit/GDP ratio by the same one percentage point. Yields increased three percentage points just today. Yields in Portugal, Ireland, and Spain also rose, though by smaller amounts. Bond markets do not expect the cavalry to arrive on time, if at all.

Felix Salmon's depressing post explains why the German cavalry won't come. He talks about the consequences for European commercial banks, and their need for a rescue.

I'm more interested in how the European Central Bank will respond. I am certainly not an expert on the ECB, but when you can't find anyone who is an expert tackling this question, you have to make your own stab at it; even if you get things wrong.

A public finance vignette

Here's a short story, simple but true, that illustrates a lot of public finance: from public choice to Ricardian Equivalence.

I live on a cul de sac. Many of my neighbours wanted our gravel road paved, and were prepared to pay for it. The municipality held a neighbourhood referendum, and the motion passed by more than the required two thirds majority. They hired a contractor to pave the road, and split the cost equally among the 60 households. And today I got a letter asking whether I wanted to pay a lump sum of $6,050 or 15 annual payments of $583 added to my property taxes (which includes interest at 5%).

The private and public costs and benefits of post-secondary education

It's handy - if not entirely accurate - to think of the decision to go to university as being one in which the costs and benefits of post-secondary education are weighed. Since governments control or influence many of the key factors in this decision, this is a convenient framework for policy-makers.

But a similar exercise could also be done by policy-makers. It's generally assumed that the public benefits of PSE justify the costs, but to what extent?

The OECD's 2009 Education at a Glance puts together numbers for 21 OECD countries, and I've summarised some of them in graph form.

The CPI release: blip, counter-blip, or the beginning of the parity pass-through?

Today's CPI release shows a reduction in pretty much every measure of inflation, so talk of just how high and how fast the Bank of Canada will increase interest rates will be a bit subdued for a few days - although last I checked, the CAD was still trading above parity.

Taxation in Canada - Part III: The Case Against Personal Income Taxes

When I was an undergraduate, I remember hearing the following argument from a very smart non-economics student friend of mine:

There is no real benefit to lowering income taxes - it's an illusion. Yes, if income taxes are lowered, people might decide to work more overtime. But what would they be doing with that time otherwise? Spending it with their families. Yes, GDP goes up, but at a cost of hours spent relaxing or playing with their kids. All you end up creating is a bunch of workaholics who neglect their families, and that isn't reflected in GDP. There is no net benefit to society.

It is a pretty good argument, but an incomplete one. When we fill in the missing pieces, it turns out that personal income taxes do come at a cost to society.

Eurozone: is this the big one?

I'm scared again. I haven't felt this scared for over a year. Things were starting to look better, in Canada in particular, but around the world more generally. Now Greek bond yields are shooting up.

I was worried about the Eurozone in January 2009. And again in December. Maybe it was just my Euroskeptic "Anglo-Saxon" genes talking, but those old posts read quite well today. I mentioned my worries again in January 2010, when I made my New Year's forecast for Canada. "My main worry is that something will go badly wrong in Eurozone financial markets. I find it very hard to predict how that would affect Canadian financial markets."

That's what I want to try to do now: predict how the fallout will affect the rest of the world, including Canada.

Correcting DeLong

This post was written by Simon van Norden of HEC-Montreal.

Brad DeLong is a very smart guy who writes something like 2,000 blog posts a year.

But I have to correct him on a recent one.....

The topic is financial regulation and what people knew in the 90s versus what we know now. Part of this is due to President Clinton's recent remarks on his own failure to improve financial regulation. More narrowly, some people are also arguing about Robert Rubin's opinions. Brad DeLong wrote

Canada and the bank tax

The G20 meetings look to be a barnburner:

Ottawa rejects IMF bank tax recommendation, shows flavour of summit to come: On Wednesday, Finance Minister Jim Flaherty once again flatly refused to co-operate with any notion of taxing banks, even though the latest overture has come from the International Monetary Fund itself...

[W]hile Ottawa supported the process to ask for the IMF study, the government is rejecting the results - in stronger language than ever.

"We believe that Canadian taxpayers should not bear the costs of bailouts of financial institutions in other countries," Flaherty told a Toronto financial conference, a day before heading to Washington to make the same argument to his international colleagues.

I can't see why Flaherty should back down.

The SEC case no one is talking about...

This post was written by Simon van Norden of HEC-Montréal.

The news last week that the SEC was filing charges against Goldman Sachs was a bombshell; it dominated the day's headlines and continues to fill blog-space. As it happens, that announcement came the same day as a report that the SEC would prefer that everyone forget about. The SEC issued a press release about that report which stated (in its entirety)

"This report recounts events that occurred at the Commission between 1997 and 2005. Since that time, much has changed and continues to change regarding the agency's leadership, its internal procedures and its culture of collaboration. The report makes seven recommendations, most of which have been implemented since 2005. We will carefully analyze the report and implement any additional reforms as necessary for effective investor protection."

It was long ago....times have changed....the problem has since been fixed.....and if it hasn't been, we'll be sure to fix it now.....so there's no nothing to discuss.....

It's game on at the Bank of Canada

Bank of Canada maintains overnight rate target at 1/4 per cent; removes conditional commitment.

Now what?

The Bank of Canada tries to avoid surprises when it can, and increasing interest rates when it has made a commitment not to would constitute a surprise. So removing the commitment - which itself it not much of a surprise, after drawing so much recent attention to the adjective in 'conditional commitment' - means that a June rate increase will not be a surprise.

And now the question becomes by how much will/should the Bank increase its overnight rate target on June 1?

Looking very much forward to Thursday and the release of the Monetary Policy Report.

Minimum wages and employment

"An increase in the minimum wage will raise workers' incomes, which will increase aggregate demand, which will increase output and employment. So would an increase in union wages."

I remember hearing that argument a lot in the 1970s. You don't hear it as much nowadays, but it still lives on in the underworld of economic ideas.

It's (usually) wrong; but it's not a stupid argument. And you can't dismiss it just by drawing a downward-sloping labour demand curve, and showing how an increase in wages will cause a movement up along that demand curve, to a point with lower employment. The whole point of the argument is that an increase in aggregate demand will shift the labour demand curve to the right.

And (most) firms (nearly) always want to expand output and employment. What constrains firms from doing so is not that wages (and other costs) are too high to make additional sales at current prices unprofitable. What constrains firms is demand. They want to sell more output, and would be able to hire the extra labour needed to produce more output. They just can't find the extra customers to buy more output.

Ask any firm this question: "If I could bring you more demand, at your existing price and quality, would you be able and willing to produce more and sell more?" Most would answer a very enthusiastic "Yes!". That's why they spend money on advertising, for instance.

When I put down the textbook and look out the window I see a world where output and employment are (nearly always) constrained by demand, not by supply. So it seems very plausible to suppose that an increase in wages across the economy, if it raised aggregate demand, would increase output and employment, even if it did raise costs a bit. You wouldn't want to raise wages too much of course. If you did raise wages too much so that marginal costs increased above the price of the good, it wouldn't work, because firms would no longer want to increase output and employment to satisfy an increase in demand.

So, what's wrong with the argument?

A new addition to the Canadian economics blogroll

Stephen Williamson has started a blog, and has hit the ground running: I count 12 posts since his first post on April 2. Although his current position is at Washington University in St Louis MO, a quick glance at his bio page will explain why I have no compunction about claiming him as one of us.

So far, most of his posts are on US policy, but he had a very nice piece in which he ripped apart the otherwise inexplicable Boone-Johnson 'Canadian banking is not the answer' article.

Please adjust your feeds accordingly.

(Thanks to David Andolfatto for bringing this to my attention)

As if we needed more fuel on the fire...

The Celebrating pointlessness: minimum wage edition thread has been going on strong for over two weeks. Can we turn the fire into a raging inferno?

From today's Huffington Post: Minimum Wage, and Controversy, Reaches Distant U.S. Islands, on a Government Accountability Office on the minimum wage which was released today. A PDF of the study is available here. h/t: Bruce Bartlett.

The outlook for long-term unemployment

Does anyone remember the Employment Insurance psychodramas of last spring and summer? Threats were made, deadlines given, and lines were drawn in the sand. It all ended up in a temporary extension of benefits, and the issue went away.

Although almost all of the noise was made about reducing the EI eligibility requirements, the real issue was the prospect of increased long-term unemployment. Not only might they see their EI benefits exhausted, there's also the risk that their chances of finding a job that made full use of there skills would diminish with the time spent out of work.

So maybe it's time to revisit this issue. Between October 2008 and March 2009, SA employment fell by 389,000 and SA unemployment rose by 354,000. So by March 2009, there were 1.6m unemployed on a NSA basis. How many were still unemployed a year later?

The answer is below the fold.

DIY Economics: Canadian Dollar Edition

I have made available the data set I discussed in The Correlation Between Oil Prices and the Canadian Dollar: 1995-2010.

Excel file here: Canadian Dollar Data. Would love to see what you come up with!