Worthwhile Canadian Initiative

How the federal government went from persistent surpluses to persistent deficits

Update: See this follow-up post, which corrects some mistakes made below. I've added comments pointing out which parts needed revision.

In the early years of the millenium, the federal government ran what appeared to be an indestructible series of budgetary surpluses. No matter how many tax cuts were implemented, it ended each year with a sum of money so large that its biggest fiscal policy challenge was to find legal ways to spend it.

Those days are over, of course. Dealing with the deficit will - or should - be a theme of the upcoming federal budget. So it's worth spending some time thinking about just how the policy decisions of the current and previous governments managed the trick of transforming that indestructible surplus into what looks to be a stubbornly persistent defict.

The political economy of rising tuition

Some facts about university finances in Canada:

1. Undergraduate tuition has doubled in real terms in the last twenty years; tuition in professional programs has risen much more rapidly. 

2. University enrolments are growing, as the participation rate - the percentage of people in a given age group attending university - continues to rise.

3. Each provincial government pays universities more or less a set amount per full time student. Between 1993-4 and 2007-8, half of the provinces, including Alberta and Ontario, increased that per student grant, and half, including BC and Quebec, decreased it. 

4. The combined effect of rising tuition fees and enrolments, together with less rapidly increasing, or even decreasing, provincial funding, has been to raise the share of university expenditures funded through tuition.

Why New Keynesian macroeconomists are against labour unions

Like all New Keynesians, I believe two things that are apparently contradictory:

1. We each get paid too much; 2. Because of 1, we all get paid too little.

It only makes sense if you understand fallacies of composition. What is true of each part isn't necessarily true of the whole.

Have universities reached the tipping point?

In 1983, a t-shirt cost about $10 or $20, an album $10 or $15, and undergraduate tuition at University of Waterloo cost $1313.74 annually for architecture, its most expensive undergraduate program.

In 2011, a first year architecture student at University of Waterloo pays $7,697 in fees each year (and architecture is far from being University of Waterloo's most expensive program). Eminem's Recovery costs $12 for a CD album or $5 for an MP3 download. And one can still buy a t-shirt for $10 or $20.

Divine Coincidence Failure. UK lessons for the Bank of Canada

According to "divine coincidence", the monetary policy that is best for stabilising inflation is also best for stabilising real output. Divine coincidence seems to be holding up fairly well in Canada. But the recent UK experience is a case where divine coincidence has failed.

The Bank of Canada's inflation target is up for renewal this year. Canadians spend too much time looking at the US. I think we could learn more by looking at the UK. The Bank of England, like the Bank of Canada, has been targeting inflation. And the UK, like Canada, is a more open economy than the US. Which is why I find the recent UK experience worrying.

Fiscal Policy, the Environment, and How Not to Solve Policy Problems

Canada and by extension the Canadian government faces a number of challenges. There are two in particular I find fascinating:

Does female employment raise or lower savings rates?

When female incomes rise, household expenditure patterns change. One oft-quoted survey paper suggests:

men spend more of the income they control for their own consumption than do women. Alcohol, cigarettes, status consumer goods, even "female companionship" are noted in these studies.

Another well known paper found that a UK policy change that transferred resources from fathers to mothers resulted in more spending on women's and children's clothing. If expenditure patterns change when one sex gains more control over household income, it makes sense that savings behaviour would change too.

But who is more likely to save, men or women?

Reconciling the Minimum Wage Literature

I'm a health and fitness nut, so I read a lot of health studies as well as using my own body as a guinea pig.  I've discovered a lot of things - for instance, I don't know if using creatine monohydrate leads to more strength gains than using a placebo, but I do know it makes you pee every 15 minutes.

Reading health studies (or even worse, hearing reports of health studies) can be incredibly frustrating as they often appear to be contradictory.  Caffeine is good for you. Caffeine is bad for you. Ephedrine and ECA stacks are dangerous. Ephedrine and ECA stacks are effective and safe to use, etc.  What to believe?

Helmer for the Defense: The Liberals and the CIT

In CIT Cuts: The Waiting Until We Can Afford It Argument I characterise the Liberal position on the corporate income tax as incoherent at best and advocating counter-cyclical tax policy at worst.

My very good friend and dodgeball teammate Jesse Helmer has an excellent defense of the Liberal position. In the interest of fairness, I thought you all should see it. It would see to me not to be so much of a "wait until will have a surplus" argument as a "we'll never be able to afford it, but we don't want to rule it out entirely because we don't want to sound like the NDP" approach.  But I'll let you be the judge.

When is a ban a subsidy?

In the United States, surrogate mothers receive fees of about $20,000 to $25,000 for their services. In Canada, the U.K., Australia and a number of other countries, commercial surrogacy is outlawed, but surrogates are compensated for expenses, for example, clothing, food, prenatal vitamins, childcare, travel costs, lost wages, medications, medical bills, etc. In the U.K., reported expenses range from £4,500 (in an arrangement that went awry) to £7,000-£15,000. 

Compensation for expenses is not taxable income, but commercial fees are. There are, therefore, tax advantages to structuring a contract as "expenses" not "income."

Surrogate motherhood: the case for commodification

Nicole Kidman and Keith Urban have one. So do Elton John and David Furnish, and that woman in the New York Times. 

They all have children borne by surrogate mothers.

In Canada, as in the UK, Australia, France and several other countries, it is illegal to pay surrogate mothers for anything more than their expenses -- food, living costs, forgone wages, and so on.

Tatonnement: in Walras, PSST, and monetary disequilibrium

Walrasian general equilibrium theory models the economy as a system of demand and supply equations. The quantities of goods traded, and the prices at which they are traded, are the solution to that system of equations.

Who solves those equations? A fictional Walrasian auctioneer, who calls out prices at random, asks people their demands and supplies at those prices, and then adjusts the prices if demands do not equal supplies. That's the Walrasian "tatonnement", or groping by trial and error towards the equilibrium.

Statistics Canada under siege

If there's one thing that has prevented me from despairing completely about the débâcle that is and will be the 2011 census, it's been my faith in the professionalism and expertise of the people who work at Statistics Canada. Their present political masters may be deaf to reason, but this is only a temporary state of affairs. There will eventually be a change of government and when that happens, the expertise of the StatsCan professionals will still be there.

Why is Canadian GDP Growth Higher Under Liberal Governments?

Canadian economic growth is about two percentage points higher under Liberal governments. At least, that's what my colleagues Stephen Ferris and Marcel Voia found in their recent article in the Canadian Journal of Economics (earlier ungated version here).

This is a large impact. For example, if the economy was growing at 1 percent under a Conservative government, switching to a Liberal government would increase the predicted GDP growth rate to around 3 percent.

The question is: why?

Organic Milk and Japanese Cars

In the Spring of 2009, the Dairy Farmers of Canada launched the "100% Canadian milk campaign." Products displaying the logo shown on the right are guaranteed to be made with 100% Canadian milk.

I'll admit it. As someone who lived through the British BSE outbreak of the 1980s, I'm slightly paranoid about milk safety. I'm the kind of person the Dairy Farmers are talking about when they write "Canadians see Canadian milk as being high quality, fresh, safe and free of antibiotics and hormones." Given the choice, I'll buy Canadian milk every time.

So I went to the store and looked for 100% Canadian milk products. But I couldn't find many. President's Choice organic milk and butter do not display the 100% Canadian milk label, nor do Organic Meadow products (though they have Certified Canada Organic and Foodland Ontario labels). But (not certified organic) St. Albert's cheese has the 100% Canadian milk logo, as does Gay Lea butter and Maple Dale cheese.

I began to wonder: Why is it so hard to find organic dairy products with the 100% Canadian milk label?

Excess demands for apples, bonds, and money in a representative agent economy

1. Assume a representative agent model in which everyone has exactly the same supply and demand for apples. No apples get traded in equilibrium. A law which lowers the price of apples will create an excess demand for apples, but will have no effect on anything else. People will now want to buy apples, but won't be able to, because nobody wants to sell apples. And so they will go on doing whatever they were doing before the price of apples was lowered. OK?

Retirement savings plans: brilliant economics, lousy psychology

The US has 401(k)s and IRAs. The UK has personal pension schemes. Canada has Registered Retirement Savings Plans or RRSPs. 

Economists typically support such plans because of their effects on savings. The plans also make the tax system fairer, granting all taxpayers access to the tax advantages enjoyed by employer pension plans.

But the truly brilliant part of retirement savings plans is their contribution to the fiscal challenges posed by population aging. In Canada, when a taxpayer turns 71, RRSPs must be converted to registered retirement income funds or RRIFs. Starting at age 72, the taxpayer must make annual, taxable, withdrawals. Similar rules apply to IRAs and 401(k)s. The baby boomers will be withdrawing funds from their 401(k)s and RRSPs -- and paying a good chunk of taxes on those withdrawals -- precisely when the revenue is needed to pay for their health care and other needs.

Brilliant economics. But lousy psychology. It ignores the basic insight of prospect theory: loss aversion.

Videogames and the sexual division of labour

Consider a model in which individuals have a fixed amount of time to allocate between three activities: paid work, household production, and gaming. Each one of these activities requires an investment of effort and human capital, and each provides rewards, either monetary or non-monetary.

The Politician's Syllogism, the minimum wage and the welfare effects of random redistributions of income

We're all familiar with the concept, but for those who weren't aware that it had been formalised, given a title and a Wikipedia entry, the Politician's Syllogism goes like this:

1. We must do something.
2. This is something.
3. Therefore, we must do this.

And so it is with the minimum wage. Poverty and inequality are problems that demand some sort of policy response, and if you're not familiar with the file, then increasing the minimum wage sounds like a halfway-plausible response. At least it's something, right?

Popular support for increased inequality?

One part of Canada's tax-transfer system increases inequality of wealth. That's not an unfortunate side-effect of the policy; it is deliberately designed that way. It would be very easy to design it differently so that it did not increase inequality.