This post was written by Mike Veall of the Department of Economics at McMaster University.
Sorry, I am still on about the research that was used to formulate the Ontario Progressive Conservative jobs plan. Again I emphasize this is about the underlying econometric research by Benjamin Zycher, Senior Fellow of the American Enterprise Institute. It is not about what I think the plan’s proposals actually will or won’t do.
In a Financial Post piece on this topic, I was the point and Mr. Zycher was the counterpoint. I didn’t know there was going to be a counterpoint, but this is not a complaint. Terence Corcoran should be credited with running a piece critical of his own writing. And as I argue that Mr. Zycher’s time series econometrics (see pages 13 to 18) is incompetent, Mr. Zycher deserved a chance to respond. (BTW, I have sent him this post and renew my offer to debate him about this.)
My piece was edited by the Financial Post. While I understand space constraints and that it may be impractical to consult authors about such edits, it was unfortunate that among other things it cut the reference to Jim Stanford’s comment on Mr. Zycher’s research (which is much more thorough than mine and anticipates much of what I write below). It also cut the reference to my more detailed comment in Worthwhile Canadian Initiative.
Regardless Mr. Zycher’s counterpoint is just plain weird. To see this, let’s go back to his original work and focus on his employment equation:
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
Mr. Zycher takes the -3992.22 Corporation tax coefficient, multiplies it by negative 3.5 because that is the percentage point corporate income tax that the Ontario Progressive Conservatives propose and concludes the cut will increase “full-time equivalent employment by about 14,000”.
But even though there is no indication of it in his original paper, Mr. Zycher now says that the equation can be interpreted as saying that the increase would be 14,000 the first year, 28,000 the next year and so on to get 112,000 after 8 years.
But his equation has no dynamics and is inconsistent with the cumulative interpretation. The one-year effect equals the two-year effect equals the eight-year effect by construction.
I tried to get this across in the Post by pointing out that if Mr. Zycher could pretend there were dynamics in the econometric equation to cumulate the corporation income tax cut effects, one could equally pretend the same for other variables that enter the equation in exactly the same way, such as the population variables. That approach would imply that a 1000 one-time increase in the stock of working-age immigrants would increase employment by a clearly ridiculous 13,000 after eight years.
But I should have stayed out of the pretending game: one should never use the reductio ad absurdum argument with someone whose work (in this case) is already absurd.
Hence Mr. Zycher responds with…”he [Veall] fails to distinguish between economic shifts that play out over several years and those where adjustments would be quick”. But this is surreal. This is precisely what his own econometric model fails to distinguish.
Hence when he writes it that a “cut in the corporation income tax…would increase investment and induce other effects that would not be complete after a year”, that may be so, but again the problem is that his own econometric model excludes any multi-year effect. Yes, he has no dynamics, he has no dynamics today.
There are other problems including a regressing-an-identity point regarding his GDP equation to which he doesn’t respond. (For detail on that and other problems, such as endogeneity, again see my original post.)
But the issue is more fundamental. For Mr. Zycher, step one is to estimate an econometric equation and then step two is to pretend that it says what he wants it to say. My suggestion is that he skip the econometrics step.
Note: this is a slightly revised version than the one originally published.