Worthwhile Canadian Initiative

Trick or Treating, reciprocity and social capital

I grew up in Hillsville. Trick-or-treating was exciting - and exhausting. Just a few treks up long, steep driveways were enough to tire out little legs.

There are fewer trick-or-treaters in Hillsville these days. There's a newer suburb, just 10 minutes drive away, that has ideal trick-or-treating demographics: above average household incomes, children living in the neighbourhood, short driveways, little traffic, and houses built close together.

I have no idea if cross-town trick or treating is more than a marginal phenomenon, but there are on-line analyses of the best trick-or-treating spots (they mention a factor that had never occurred to me - crime).  And it's true that in a quality neighbourhood a dedicated vampire or lion or ghost can score a pillowcase full of chocolate in 60 minutes flat.

Manufacturing Profit Margins, The Canadian Dollar and GDP Growth

Two weeks ago Rob Gilroy posted some fascinating research by National Bank on the profit margins of various manufacturing industries and how they would be affected by a 5% appreciation of the Canadian dollar:

Note that profit margin reduction differs between manufacturing industries.  This is due to the different exporting profiles of different industries (the proportion of sales made within Canada vs. within the United States vs. outside of North America) and what proportion of expenses are priced in U.S. dollars.  I was so fascinated by this research I ended up presenting to my class.  I was reminded of it again when Prof Gordon posted Q3 GDP data.

CIBC World Markets Predicts 93 Cent Dollar

From CTV News:

CIBC World Markets expects the Canadian dollar to sink to about 93 cents (U.S.) this winter.

I decided to see what CIBC World Markets were predicting for the price of oil this winter.  I couldn't find a winter prediction, but did find their prediction for 2011 of $75.

Plug $75 into MERT and you get a Canadian dollar in the 94.5-96 cent range, depending on what you assume will happen to interest rates.  So their very complex model is yielding similar results to my toy, if you assume oil will be around (or slightly above) $75.

A preliminary estimate for Canadian 2010Q3 GDP growth

The August 2010 GDP numbers have been released (increase of 0.3% over July), so It's time once again to update my series of posts (most recent: 2010Q2) in which I try to take the GDP numbers from the first two months of a given quarter, mix them with the LFS numbers from the third month, and concoct a preliminary estimate for quarterly GDP growth. The BEA released theirs today (2.0%); here's mine: 1.5%.

Confessions of a central planner

"So Nick, how come a free-market economist like you is acting like a central planner?"

I heard that a lot when I was an associate dean. Sometimes it was said to tease me. Sometimes out of genuine annoyance.

I had my reply ready.

"There are three ways to allocate resources. The market is best; soviet central planning is second best; and the Hobbesian State of Nature is by far the worst. And right now I'm trying to drag you miserable lot out of the Hobbesian State of Nature into soviet central planning. Maybe later I will try to get something like a market going".

The story out of Texas A&M has been doing the rounds of the blogosphere. Most seem to be against even reporting data on revenues and expenses of individual professors. God forbid actually using that data for anything.

It pays to be hot (sometimes)

There are some research questions you have to answer simply because the data is there: the salaries of Ontario university professors are published on the public sector salary disclosure website, research output is listed on Econlit, university websites and calendars list a person's rank - there are even databases that list every doctoral thesis published, so we can find out when a person received his or her doctorate, and thus estimate their age.

But most tempting of all, on ratemyprofessors.com, students rank their professors for clarity, helpfulness, easiness and “appearance (just for fun): __Hot __Not.” If a professor receives more hots than nots, a chili pepper appears beside his or her name.

Is The Canadian Dollar Over or Undervalued? It's Time for a MERT Update

It has been about 6 months since we last looked at MERT - my toy for examining the relationship between oil prices, interest rates and the value of the Canadian dollar (relative to the greenback).  It turns out that in 2010 the toy has done a very good job at 'predicting' the value of the Canadian dollar, as on average it has only been off by 4/10ths of a cent.

Why readers believe this blog is too left wing -- or too right wing or too...

When Stephen Gordon's recent post on heating costs was reprinted in the National Post's Full Comment section, a few commentators were somewhat hostile: "What a surprise that a professor from Quebec believes we should take even more from 'the rich' and give to 'the poor.'" "If this socialist extremist had his way..."

My recent post on lessons from the animal hospital also generated mixed reactions. One reader wrote, "This article just seems like another means of persuading our govt that a two-tier health system makes sense." Nick Rowe gave a quick-witted response: "Damn! And I thought Frances' post had a hidden socialist agenda: that health care for animals should be nationalised, and "death panels" introduced, to prevent us overspending on our pets due to hyperbolic discounting."

How can people read the same post in such different ways?

A self-contradictory communications strategy

Does loosening monetary policy mean lower or higher nominal interest rates?

An article in today's Financial Times  (H/T Brad DeLong) is a good illustration of the problems that arise when central banks frame monetary policy as a (conditional) time-path for nominal interest rates.

Did War Based Fiscal Stimulus End the Great Depression?

Paul Krugman believes it is a slam dunk.  It's probably a bad idea to argue with a Nobel prize winner, but my understanding was the science was not quite as settled on that point as Prof. Krugman would have us believe.  Below the fold I'll cite a few pieces of research on the topic.

The NDP's misdiagnosis

A couple of weeks ago, the NDP suggested removing the GST from heating bills, and I bemoaned the idea as just another example of a policy designed to fit a communications strategy instead of the other way around. I was hoping that the proposal would do the decent thing and go away quietly, but the NDP has apparently given it a budget generous enough to air some ads. If you judge policies by how effective its communications strategy is, the initial reviews are positive.

The rest of this post is for the dwindling band of citizens who adhere to the quaint notion that politics should be about policies.

Is debt too high? Debt, pensions, and houses

Debt to income levels are high by historical standards in Canada and the US. Here's a recent report (pdf) from TD Economics showing household debt/income ratios at around 150% in both countries. But is that "too high"? And is that evidence that some people, like the Flopsy Bunnies, are very improvident?

I'm going to play with a very simple model, and do some back of the envelope calculations, to try to work out what the average debt to income level would be even if everybody were perfectly provident.

In my toy model, total debt/GDP ratios are driven by lifecycle savings. It is providence that causes high total debt/GDP ratios. Provident people save and lend for their retirement, which creates debt. But the most interesting (to me) result is that forced saving in pension plans has a very large effect on personal debt/income ratios. The greater is forced saving, the smaller is voluntary saving, and the more slowly people pay down their mortgages. It is easy to explain high personal debt/income ratios in this way. You can easily get personal debt/income ratios around 100% just from this cause alone.

The economics of health care: lessons from the animal hospital

The veterinarian called at 2:30 a.m with an update on our dog's status. The bladder stone was still stuck in Micky's urethra. Did we want to go ahead with surgery, or...? The unstated alternative: euthanasia.

As I sank back on the pillow I thought "I've been teaching health economics wrong all these years."

Canada, the Eurozone, and interest rates

This is something I know I don't understand. Compare the following two statements:

A: "Some Eurozone countries have higher interest rates on their government bonds, reflecting higher perceived risk of default. This raises all interest rates in those countries, and so reduces aggregate demand in those countries."

B: "Some Canadian provinces have higher interest rates on their government bonds, reflecting higher perceived risk of default. This raises all interest rates in those provinces, and so reduces aggregate demand in those provinces."

Corporate tax cuts by the numbers

The federal government is set to reduce corporate income tax (CIT) rates from 18% to 16.5% in January of 2011, and then again to 15% in 2012. The effects of these measures have been characterised in two ways:

• $6b per year in tax revenues. The Liberals use this number when they explain that they are choosing to use $6b/yr to finance social programs instead of corporate tax cuts, and (for reasons discussed below) the Conservatives don't seem to be disputing it.
• 233,000 jobs.  The Conservatives are using this number to describe the costs of reversing the CIT cuts.

Although I wouldn't say that these numbers are meaningless, they should be put in proper context.

Thank you, Worthwhile Canadian Initiative commentators

Thank you to the commentator who (several months ago) wrote about the anchoring effect of minimum payments on credit card statements - that's the subject of the latest Economy Lab column.

More on the Canadian Dollar, Innovation, Industry and the Trefler Piece

A follow-up to Prof Gordon's blog entry on Dan Trefler's op-ed.  There are (at least) three traps you can fall into when analyzing the effects of changes to the Canadian-U.S. exchange rate on Canadian business.  In my view the Trefler op-ed falls into at least two of the three traps.  After the break I will discuss the three traps and consider the exchange rate at the industry level.

How does an appreciating Canadian dollar prevent improvements in innovation?

Dan Trefler's op-ed in Saturday's Globe and Mail had this passage:

Do we want to be an innovation-based economy? Or do we want to be a resource-based economy? Unfortunately, we can’t be both. The loonie won’t let us.

Why can't we be both?

The ethics of co-authored doctoral dissertations

Every thesis is, to some extent, a collaboration between the supervisor and the student. A student will have a research topic or an idea. The supervisor can say, "this is an excellent data set," "have you read this paper?" or "try taking this approach." A meeting between supervisor and student can turn into an hour long session at the chalkboard - "O.k., let's try it this way and see if we can work something out" "what you're saying is essentially the relationship between X and Y is like this."

Why a Dying Manufacturing Industry Leaves Canada More Vulnerable to Dutch Disease

I am really enjoying the Economy Lab feature at the Globe and Mail.  Two stories in particular caught my eye: Why Canada's manufacturing sector is dwindling and Get ready for a $1.15 loonie.  Keeping in mind Dan Gardner's warnings on expert predictions, both pieces hit the mark.  In particular, Prof. Gordon is correct that the Canadian dollar is only a minor factor in the decline of Canadian manufacturing.

However, other than some obscure Ivey lecturer who won't shut up about it, not enough is being made to connect the two issues.  When we put the two arguments together, it almost certainly leads to the conclusion that Dutch Disease is going to become an increasing problem in Canada in general, but southwestern Ontario in particular.  Here's why: