This post was written by Mike Veall of the Department of Economics at McMaster University.
David Reevely and Jim Stanford, followed up by Paul Boothe, Mike Moffat, the Globe and Mail and others have shown that the Ontario Progressive Conservative millions job plan does not follow from the research it is based on. For example, one of their commissioned studies says that a reduction in regulation (Ontario level to Alberta level, however measured) will yield a total of 10,600 jobs. But the PC plan says that will create that many jobs per year, so that over 8 years, that is 8 × 10,600 = 84,800 jobs. They make the same mistake looking at other proposals.
I had been looking at this too but was slow to the draw. One point that I don’t think that has yet been covered is that one of the pieces the PCs misinterpreted, the study by Washington D.C. economist Benjamin Zycher, is not exactly technically watertight itself. So let’s flog the dead horse. I am grateful to WCI for giving me the space to do so.
GDP = 0.97×lagged GDP + 2.23GDP growth rate + 7.37×Total Population +19.47×Total working-age population - 2.41×Corporate tax rate – 0.88×Personal tax rate + 10.87×Energy Production - 0.71×Electricity cost index + 0.53×NWPTA participation + Provincial Fixed effects
Employment = 394.12×GDP + 1738.38×GDP growth rate + 667.55×Total Population + 934.66×Total working-age population - 3992.22× Corporate tax rate – 38.77×Personal tax rate + 1381.07×Energy Production - 179.26×Electricity cost index + 198.88×NWPTA participation + Provincial Fixed effects
Probably anyone who is still with me at this stage can do their own critique of this model but issues to flag include:
- For the GDP equation, normally we would say lagged GDP and the GDP growth rate are complete determinants of GDP (i.e. current GDP = lagged GDP × (1 + the GDP growth rate). Mr. Zycher is not estimating an identity only because he linearizes this relationship. Mr. Zycher writes about this issue, writing, “Since lagged GDP and the GDP growth rate should explain current-year GDP fully, this identity allows us to examine the effects of the proposed reforms in isolation”. I do not understand this statement: my view is that given the identity, the other variables have no place in the equation.
- Referring to the GDP equation, Mr. Zycher writes “Note that each of these variables can be viewed as exogenous or pre-determined”. I don’t see how this statement can apply to energy production. GDP affects energy production. Energy production affects GDP.
- The employment equation has a recursive-ish structure with the GDP equation. Here Mr. Zycher rules out simultaneity by fiat but there are clearly some identification issues which are probably not worth detailing. Mr. Zycher does not include the indirect effects through GDP in assessing the employment effects of policy changes but reads them straight off the second equation alone.
Do the results make sense? Mr. Zycher estimates that the effect of ending the wind and solar subsidies will be to reduce the energy cost index from 160.9 (the Ontario index level) to 132.7 (the Canadian average). Hence he multiplies the Electricity cost index coefficient -0.71 times (132.7-160.9) and obtains 20.022. Since he is measuring GDP in billions, he estimates an increase in GDP of about $20 billion.
For comparison, suppose the working-age population went up by 1000 because of immigration. The units for both the population variables are 1000 so, using the coefficients from the equation, GDP would increase by (7.37 + 19.47) = $26.84 billion. That is almost $27 million per immigrant. That seems unreasonable.
None of this is a statement about the PC program, just a statement about the research that underlies it. But why didn’t they find/commission research based on growth equations for GDP and employment rather than level equations?
Note: See also Mike's follow-up post.