Worthwhile Canadian Initiative

Why Canadian economists should worry less about productivity

Canada's famously low levels of productivity and low rates of productivity growth have preoccupied Canadian economists for decades. But increased productivity - as it is usually measured - is not a sufficient condition for higher standards of living. It's not even necessary. For instance, the post-2001 fall in Canadian productivity is simply a mathematical artifact of an income-increasing sectoral reallocation of capital and labour.

Gérard Debreu was once asked why he titled his landmark monograph Theory of Value instead of something like the more usual Price Theory. His answer was "Because value equals price times quantity." And this is the point: increasing quantities increases the value of production only if prices hold steady, or at least don't fall too much. But if prices are falling, increasing productivity won't necessarily show up as higher income.

Video Series on Generation Y and Employment

The Globe and Mail has been producing some terrific videos on economics topics.  Okay, that's a bit self-serving, since Armine Yalnizyan and I were in a series on the future of manufacturing in Canada, but honestly, there are some gems here!

I like two recent ones by Philip Oreopoulos: Why millenials aren't getting jobs and What Gen Y can do to find work.  Prof. Oreopoulos focuses on cylical factors, but I think it's vital not to lose track of the structural changes to the economy.  Or as Arnold Kling asks: Explain why, with unemployment over 9 percent, there has emerged the phenomenon of self-service frozen yogurt shops.

The escalating cost of cheating

Custom essay network offers to "custom write your college essays to match your language skills and academic level, whether you are a school, pre-college student having English as your second language or you are a Ph.D. student skilled in the language....In our work we use the same plagiarism scanning services as the most of your teachers use. So we grant 100% plagiarism free papers."

I knew such services existed (from this tell-all article), but I expected them to be located in the internet equivalent of a dark, dimly lit alley, right next door to an internet porn shop. Instead, they dominate the google search results for "economics essay" or "economics essay topics".

What I found most intriguing about about Custom essay network's service was the price list:

What does lower US GDP mean for Canadian monetary policy?

A thought-experiment. A rather real thought-experiment.

Assume you are Governor of the Bank of Canada. Your job is set monetary policy to bring inflation to the 2% target in the "medium term". You are just about to conclude a meeting where you will decide what target for the overnight rate you will set at the next Fixed Announcement Date. You have tentatively agreed on R% as the new target.

Then someone bursts into the meeting room and shows you Stephen's graph. The US GDP data for the last 2 years have been revised down. The US economy has been much weaker than you thought it was. How do you respond to the news? Do you raise R, lower R, or leave R the same?

(Note: I am not asking whether you think the Bank of Canada should have a higher or lower overnight rate target compared to what it actually is today. I am asking whether you think it should be higher or lower compared to what you thought it should be just before you saw Stephen's graph.)

The US GDP revisions aren't as bad as you think. They're much worse.

The BEA's advance estimate for 2011Q2 GDP growth was accompanied by news that 2011Q1 growth had been revised from 1.8% to 0.4%. This is bad enough, but the data revisions are much, much worse than that. Here is a graph of the data that were archived by the St Louis Fed last month, along with the most recent BEA data:

This is very, very bad news.

A preliminary estimate for Canadian 2011Q2 GDP growth

The May 2011 GDP numbers are out, so it's time for my quarterly attempt to provide an estimate for quarterly GDP growth a month before Statistics Canada releases its first estimates - the most recent exercise is here. This is done by using simple linear regression model of monthly GDP growth on monthly LFS data for employment and hours worked to produce an estimate for (in this case) an estimate for June 2011 GDP. This estimate is then combined with available monthly GDP for April and May to construct an estimate for quarterly GDP for 2011Q2. This isn't quite as ad hoc as it sounds; Statistics Canada recently published a note exploring the informational content in the GDP numbers of different frequencies (and check out footnote 2).

Smart Meters and EMF: The Green Party Goes Off-The-Rails

A lot has been made on Elizabeth May's anti-wifi twitter comments yesterday (Kate Heartfield of the Ottawa Citizen has a nice summary).  What is far more concerning to me is the Green Party announcing a new anti-Smart Meter policy for British Columbia due to concerns about EMF radiation. This leads to a couple of questions:

Wealth and Its Distribution: Tomorrow is Yesterday

Wealth and income inequality is a big issue and I thought some historical perspective on wealth inequality might be interesting given that my research to date has led me to conclude that little has changed for the bottom of the wealth distribution at least in terms of relative wealth shares.  While there has been the growth of a middle wealth holding class over the last one hundred years in Canada, the wealth share of the bottom half of the wealth distribution is remarkably unchanged. 

Taxes and the value of paper money

Does the value of an intrinsically worthless (paper) money depend on the government's power to tax? I am going to answer this question from a quantity-theory perspective. The short answer is "yes". But the full answer is different from some other theories that also answer "yes".

Those of you who already understand the modern quantity theory of money will find nothing new in Part 1 of this post. I'm just trying to explain the standard story as simply as possible, without any math or jargon (I have even carefully avoided using the words "real" and "nominal"). You may find Part 2 more interesting.

Can the buck "break the buck"?

Obviously not, in any literal sense.

But this might be a metaphor worth exploring. Are central banks like money market mutual funds? What happens to the value of the US Dollar, or the Euro, if the risk of sovereign default causes the value of a central bank's assets to fall below the value of its liabilities?

If you are looking only for a clear, definite, reliable answer, stop reading now. I don't have one.

How to find a topic for an economics research essay

Calculus. Years of macro theory. Micro theory. Econometrics. Study the lecture notes, practice old exams, give the prof what he or she wants. It works.

Until the day the prof says "Come up with an original research topic."

Panic. "But no one's ever taught me how to be original."

Personal Information, Privacy and Social Programs

I think this is a fairly obvious point, so I am a little surprised I have not seen it anywhere else.

The raison d'être for eliminating the mandatory long-form census was privacy concerns.  As Tony Clement put it: "Do you believe the government should be asking you what time you leave for work in the morning?"

The census changes, however, are an aberration for this government, which is moving hard in the opposite direction, requiring Canadians to provide all kinds of private information to the government - specifically the Canada Revenue Agency.

Do Keynesians believe their own models?

I ask this as a quasi-Keynesian myself. I'm not (merely) trying to score points.

[Update 2. Paul Krugman weighs in. Like Brad DeLong, and Scott Sumner (in comments), he questions my assumption that the central bank can keep the interest rate fixed, without buying all the outstanding bonds.]

Take the standard ISLM model straight off the shelf (or straight out of the second-year textbook). Draw the LM curve horizontal; either because the central bank conducts monetary policy by setting a rate of interest, or because the economy is stuck in a liquidity trap where money and government bonds are perfect substitutes. Now let's hit it with a shock.

The shock is that all the bond rating agencies downgrade the rating on government bonds. Specifically, the rating agencies say that whereas the previous default risk was zero, there is now a 1% chance per year that the government will renege on 100% of all promises to pay money on its bonds. (Or a 10% chance per year of reneging on 10% of repayments, whatever.) And assume that everybody believes the rating agencies. Further assume that the central bank holds the interest rate on government bonds constant, by offering to buy and sell unlimited amounts of government bonds at prices commensurate with that same interest rate. [Update: but is this assumption reasonable? See comments by Brad DeLong, Andy Harless, Scott Sumner, and me, below]. Further assume that fiscal policy stays constant.

What happens?

Bulgarian snapshots: An economist on holiday

It's been 20 years since the Soviet Union collapsed, taking the Bulgarian economy with it. Twenty years of transition and rebuilding. Bulgaria has (mostly) abandoned communism, (mostly) embraced capitalism and, in 2007, joined the European Union. 

All of which makes it a great place for an economist's holiday...

Taylor Rules and the Bank of Canada's Monetary Policy Report

This morning I've been in email conversations with several economists who do not understand, or disagree with, something in the Bank of Canada's latest Monetary Policy Report (pdf). Specifically, Technical Box 2. These include some very good macroeconomists.

I think I do understand it. And I agree with the Bank of Canada. So I am going to give my interpretation of what the Bank is saying. I think the Bank is right, and it's an important point that we need to understand.

The Bank of Canada is saying that it expects output to return to normal, and inflation to return to target, before the policy rate returns to normal. And that this would not happen if the Bank followed a simple Taylor Rule, but will happen if the Bank gets policy right. A Taylor Rule is not always the best policy. It may not be the same as targeting the inflation forecast.

What may trouble some economists is that if output returns to potential, and inflation returns to target, shouldn't the Bank make the policy rate return to normal too? The Taylor Rule says it should.

Health Outcomes & Health Financing: An Example

I finally got around to looking at the OECD Health Data release for 2011 and as is my habit, I spend some time looking at the overview reports and charts as well as playing around with some of the data. The first chart provided by the OECD that I want to draw your attention to is total health expenditure per capita in the OECD countries in U.S. PPP dollars ranked from highest to lowest and and with the public and private shares highlighted on the graph.

Why does stuff take so long to happen?

For example, the Eurozone crisis.

A couple of decades back, I noticed that things often seemed to happen the way economists thought they would happen, but that they always seemed to take about ten times longer to happen than you would have thought they would. We go from one equilibrium to another equilibrium in a few seconds on the chalkboard. It seems to take forever in the real world.

Taxation and other forms of sacrifice

The most minimal form of government is a night watchman state: a government that provides law and order, and lets markets take care of the rest.

But are people willing to pay the taxes and make the sacrifices required to support even this most rudimentary level of public services?

The peanut theory of recessions

I've got three targets in this post: economists who say that recessions are caused by real wages being too high; economists who say that recessions are caused by real interest rates being too high; and economists who say that recessions can't be caused by an excess demand for money, because we can always go to the bond market/ATM and get some more. That's a lot of economists. Most economists, in fact.

An upward-sloping IS curve

Brad DeLong's post on John Cochrane's upward-sloping IS curve triggered this post. But this is not about John Cochrane. It's about why tight monetary policy may cause real interest rates to fall, if monetary policy is expected to stay tight for long enough.

The story of an upward-sloping IS curve I'm putting forward here isn't really new. I read something roughly similar a few months back, but I have forgotten who wrote it. (It was a paper linked by a commenter on a previous post, had "Monetarist" in the title, and was written about 10 years back.) It's also not that different from the Old Keynesian "accelerator" story.

Understanding why an IS curve might slope up is empirically important, because it could help us understand why real interest rates might be low in a recession even if that recession had a monetary cause. (Normally, with a standard downward-sloping IS curve, an upward/leftward shift in the LM curve would cause higher real interest rates as we move along the IS curve.)