Worthwhile Canadian Initiative

Fiscal policy, ideology, and framing

TiC

Take a standard New Keynesian macro model. Assume it sometimes gets stuck in a ZLB liquidity trap, where monetary policy can't work.

There is a very simple solution: use fiscal policy.

Government spending should be cut whenever the economy is not in a liquidity trap. That is the clear policy implication of New Keynesian macroeconomic models.

I am very pleased to see that Canada's Conservative government is currently following that New Keynesian policy recommendation, and is cutting government spending now that the Canadian economy is no longer at the ZLB. All New Keynesians will applaud this sensible policy. Any opposition to this use of fiscal policy must be ideological.

/TiC

Compensating differentials, field of study and the Quebec student strike

Only something like 35% of Quebec students are on strike*, and in a column in today's La Presse, Yves Boivert notes that those on strike are overwhelmingly from the arts and social sciences faculties; those in natural sciences, engineering, medicine, etc have all stayed in class and their session is ending normally. His argument is that since people in the arts and social sciences cannot expect the sort of salaries that students in other faculties will likely get, the tuition increase hurts them more, so it is to be expected that they will be more likely to object.

My first reaction was: "Okay, that makes sense."

My second reaction was: "Hold it, what about compensating differentials?" Increased salaries are only one form in which the returns to education are realised, and it's one that is a relatively recent addition. For centuries, people had been studying philosophy, history and literature for their own sake. Students would take all forms of returns into account when choosing their fields of study, and those at the margin between electrical engineering and English literature would view the combinations of the two sorts of returns as equally balanced in each discipline. Increasing the cost shouldn't change anything.

A complication is that the high-earning programs usually have limited enrollment, so applying marginal analysis here may be problematic.

What do you think?

*For non-Canadians: The Quebec government decided last year to increase tuition fees in Quebec by 75% over 5 years, to a level just under the Canadian average. A student strike has been in progress for 11 weeks or so.

Three arguments for NGDP targeting

This is in response to David Andolfatto's questions.

Nominal GDP is just one of an infinite number of variables that monetary policy might target. The probability that NGDP is exactly the best target variable is infinitesimal. I nevertheless support NGDP targeting, because I think it is probably reasonably close to that unknown best target variable; and I think NGDP level path targeting is probably better than reasonable alternatives like inflation or price level targeting.

Here are three reasons why I believe that:

Visualizing GDP Performance

Statistics Canada just released its GDP statistics by industry for the provinces and territories for 2011. 

Designing exam questions: the realism-clarity trade-off

Which is the better exam question:

Wicksteed, stocks and flows

Flows are very very small relative to stocks. Each of us demands a flow of air to breathe, but since the flow demand is very very small relative to the stock supply of air, air is a free good. OK, that analogy is not perfect, so let me build a little "model".

The Big Three Are Still Big

Employment growth in Canada has been particularly robust in the west and nowhere is this more evident than when examining recent employment growth amongst Canada’s CMAs.

Taxing the rich: "Part of this complete breakfast"

The 'starve the beast' strategy works like this:

1. Cut taxes.
2. Observe that cutting taxes has produced a government deficit.
3. Cut spending to reduce the deficit.

This idea is apparently American in origin, but the US never has quite managed to get the hang of it; they keep getting bogged down at Step 2. The federal Conservatives implemented Step 1 when they cut the GST*, Step 2 was reached in the 2011 budget and they started Step 3 in the most recent budget.

How OECD governments generate tax revenues

I did a post last year documenting the choices OECD countries have made when it comes to tax rates - you might want to take a look at it before continuing. I'll wait here.

Okay, welcome back. Given the recent attention ([1],[2],[3]) given to the link between tax rates and tax revenues, this post is going to compare how much revenues these tax rate choices produce.

Short vs long-run natural rates of interest

Just a quickie, because I'm (supposed to be) grading exams.

I want to suggest a small change in Paul Krugman's two recent posts (here and here). One that would narrow the gap between his way of thinking and (say) Scott Sumner's.

Desired saving and desired investment depend on a lot of things. One of the things they depend on is expectations of future aggregate demand and hence future (real) income. So, no matter how you define the "natural rate of interest", the natural rate of interest will depend on expected future (real) income.

The impact of tax cuts on government revenues

An average person, asked to explain the impact of cutting taxes, might well reason:

I have represented this argument in flow chart form to give it a spurious air of logical coherence. Yet any flow chart is only as good as the reasoning that underlies it. In this case, that reasoning is seriously incomplete.

Provincial Finances: An Estimate of “Tax Prices”

My previous post dealt with differences in provincial health spending and how on a per capita basis some provinces were substantially above the provincial average while others were not.  One of the factors behind any government spending at the provincial level is own source revenue capacity so in light of some of the comments asking about revenues I decided it would be useful taking a look at them.

A survey about rubrics

I use rubrics sometimes, and I'm curious to know if other people do as well, and how they feel about them, so here is a survey about rubrics:

Rubric Survey

I've put a couple of demographic questions on towards the end, but please feel free to skip them. Update: preliminary results over the fold.

An erratum on US employment flows during the recession

In my most recent post, I did some eyeball econometrics and missed something. It turns out that Canadian and US employment flows during the recession were not quite as dissimilar as I had thought. (Thanks to Dan Kervick in the comments for catching it.)

Flows in and out of employment during the recession

These are the slides I prepared for this conference a few weeks ago in Ottawa, in which I tried to get a handle on the gross flows in and out of employment during the recession, and how it compared to the US experience. It's actually the extended version of those slides; I ended up hacking out almost half of them at the last minute.

Where has all the research gone?

I would like to write something for Economy Lab on how difficult it has become to find older Government of Canada publications.

Living in a demand-side world

I know what it's like to live in a demand-side world, because I used to live in one. Let me tell you about it. Maybe it's like the world you live in.

How to answer "true, false, uncertain" questions

True, false, uncertain: "Natural gas price controls during the late 1970s hurt producers at the expense of consumers, but did improve economic efficiency." (Source)

True, false, uncertain: "Assuming that the Ricardian Equivalence proposition holds in small open economy (SOE), a temporary tax cut will have no effects on the current account." (Source)

From first year micro to PhD macro, economics students encounter "true, false, uncertain" questions. Answering such questions well requires an understanding of the nature of truth.

Two more random arguments for microfoundations

1. Because it helps us understand micro better too. For example, suppose we found that macroeconomic models worked a lot better if we assumed that firms were monopolistically competitive rather than perfectly competitive. Even if you were a microeconomist with no interest in macroeconomics, that tells you something useful. It's one more bit of evidence for monopolistic competition.

2. Because it's there. Even if macroeconomics were of no practical use whatsoever, I would still want to understand it. The macroeconomy is what people do. I want to understand why people do what they do. Just because. It's interesting. And I want to push that understanding down to understanding the interaction between individuals, if I can. You tell me there are emergent properties at the macro level? Neat! Can we understand how emergent properties emerge? (Is money an emergent property?)

Others have made sensible arguments for doing microfoundations. See Noah Smith for some, and for some links to others. I just wanted to add my twopence-worth.

Is a Constitutional Challenge Public Health Care's Next Arena?

Many Canadians believe that the Canada Health Act is the bulwark that is supposed to be protecting public health care and that it should ensure comparable levels of coverage across the country.  Yet, if one examines per capita provincial government health spending, the evidence shows that there are major differences.