Worthwhile Canadian Initiative

The Interest Rate Time Bomb

The recent policy debate over whether its time for interest rates to start to rise after being at the lowest levels since the Great Depression for nearly five years shows just how much of a policy box governments are in when it comes to fiscal and monetary policy.  Never mind the debate over whether there is a trade-off between monetary stimulus and financial stability. Raising rates to reduce the perverse incentives on long-run economic behavior and activity comes with the risk of destabilizing public finances by raising debt service costs.

Three Short Observations on the Economics of Waterways

The Rhine River is the heart of significant economic activity as a European transport and commercial corridor.  Running 1,233 km from the Alps to the North Sea, its rich economic hinterland generates commercial traffic, which made it attractive as a source of revenue for regional lords and masters for centuries.  Hence, the numerous castles, which were built at key points to defend the trade route and help extract tolls.  By way of comparison, our much longer Great-Lakes St. Lawrence Seaway (3700 km) never developed the fractured payment system – as well as the numerous political entities - that characterized the Rhine.  The upper middle route from Strasbourg to Koblenz is lined with picturesque castles and towns – and industrial activity – such as the massive BASF complex in Mannheim.

Debt and Growth

As you probably all know, the Reinhart-Rogoff  2010 study found economic growth slows when the debt to GDP ratio exceeds 90 percent.  They used data for 44 countries over a 200-year period and found the relationship between debt and real GDP growth was weak for debt to GDP ratios below 90 percent.  However, above 90 percent, economic growth dropped considerably more.  Thomas Herndon, an economics graduate student at the University of Massachusetts-Amherst, has challenged this result.  Using the Reinhart-Rogoff Data data, he found that economic growth slows but not as dramatically as the Reinhart-Rogoff result.  Well, the recent debate over the relationship between debt and economic growth has spurred me to do my own quick analysis.

Modern LM curves are vertical

Modern teaching of modern macroeconomics and modern monetary theory should reflect modern monetary policy -- what modern central banks actually do nowadays. That means the modern LM curve is vertical.

Teaching Mundell Fleming

The Mundell Fleming model is usually taught in second year macroeconomics. It's the open economy version of the ISLM model.

This post is me disagreeing with Simon Wren-Lewis about teaching open economy macro (in textbooks and in the classroom). It is not a disagreement about open economy macroeconomics.

Simon says that the textbook Mundell Fleming model, in some circumstances (like a temporary increase in government spending), violates Uncovered Interest Parity.

I say that the textbook Mundell Fleming model always preserves Uncovered Interest Parity, but in some circumstances (like a temporary increase in government spending), violates model-consistent ("rational") expectations.

Big disagreement? Not really. But I think my way of looking at it is more intuitive.

Exchange controls, barter, and Cunning Plans

It was sometime in the 1960's. My uncle was teaching in Bulgaria. He wanted to buy stuff in Britain, but wasn't allowed to take much money out of Bulgaria. My father was farming in Britain. He wanted to buy stuff in Bulgaria, but wasn't allowed to take much money out of Britain.

My uncle and father thought up a Cunning Plan. My father went to Bulgaria, where my uncle gave him money, and my father bought stuff. My uncle went to Britain, where my father gave him money, and my uncle bought stuff.

Government Spending and Crime

I’ve been doing some data exploration on public sector spending and societal outcomes and have some preliminary results that have caused me to puzzle about what they might mean.  I’ve been looking at annual data for OECD countries (33 countries) over the period 2000 to 2010 and the relationship between public sector size and crime rates.  Public sector size is defined as total government expenditure as a share of GDP.  The crime variables were the number of homicides per 100,000 of population and the number of burglaries per 100,000 of population.  The data is from the OECD and is essentially unbalanced panel data.  The results for homicides did not surprise me but that for burglaries did.

Is Economic Growth Really Ending?

Robert Gordon has argued in his recent NBER paper “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds” that growth rates have slowed and we are reverting to very low historical growth rates and indeed a period of economic stagnation.  However, what I find intriguing is that an examination of some long-term data for Britain provides conflicting results that quite frankly puzzle me. 

Why Is Manufacturing Special?

Andrew Coyne has an excellent piece in the National Post dealing with why there are no good reasons for corporate handouts in the wake of yet another round of assistance to the automobile sector.  He asks what the economic rationale for this assistance is – that is, what is the economic value?  He argues that what passes for economic arguments in support of corporate assistance and bailouts really are but “pseudo-arguments”.  For example, we must subsidize the auto industry because we must be in the automobile business – in essence, the auto industry is special.  Or, other countries are assisting their manufacturing sectors with subsidies so we need to do so to compete.

The Year Ahead

The New Year is when we  try to look ahead and project what we think the economy will be like.  There is no shortage of forecasts from banks, international economic agencies and independent forecasters as to how the Canadian, US and world economies will fare over the next year. 

Canadian Exceptionalism in Compensation

The Parliamentary Budget Office's most recent release "The Fiscal Impact of Federal Personnel Expenses: Trends and Developments"  provides some interesting statistics on the amounts of employee compensation paid by Canada’s federal government.  According to the report: “in 2011-12, Canada’s federal personnel expenses were $43.8 B, or 2.55 per cent of GDP. These expenses supported a workforce of 375,500 employees and provided approximately $114,100 on average in total compensation per employee.”  Media reports attributed to the President of the Treasury Board claiming that these average compensation amounts were inaccurate and that actual compensation was lower (Tony Clement said the average compensation was closer to $95,000) were rebutted by the PBO with an information update.  As entertaining as all this was, the fact is that any discussion of public employee compensation in Canada should cover more than just the federal government and that it might be more appropriate to compare us to where we stand relative to other countries.

As the World Turns

Several posts ago, I presented some numbers by Angus Maddison on the evolution of global GDP output shares over the period 1500 to 2001 which showed that Asia’s share of world GDP declined from 1500 to about the mid 20^th century but has since been rising.  I decided to try and do a bit of an update using the IMF’s World Economic Outlook 2012 Data Tables which provide GDP in US purchasing power parity dollars up to 2011 and then estimates after that to the year 2017.  The results are both simple and complex.

Resource Revenue Retention: New Twists on an Old Idea?

In a post on iPolitics, author and journalist Madelaine Drohan discusses the move by the PQ government in Quebec to embrace the Generations Fund - a sovereign wealth fund created by the Liberal government of Jean Charest in 2006.  The original plan was to invest water power and mining royalties into a fund whose income would be used to pay down the provincial debt.  The fund was apparently valued at 4.3 billion dollars at the end of March 2012 and the recent PQ budget has directed that starting in 2015-16, all mining royalty revenues – about 325 million dollars a year – would go into the fund.  Given the prospect of future mining development in Quebec’s North under the auspices of the Plan Nord, this fund could grow substantially in the future.

Carney's Departure: The Bigger Picture

Well, it has been an exciting couple of days in Canada on the policy side given the juxtaposition of the following news: 1) the federal by-election results suggest a more competitive political environment for the federal Conservatives in the stronghold of Alberta 2) the world-class City of Toronto is deposing its Mayor over a conflict of interest involving a high-school football team 3) the federal government is raising the limit on tax-free savings account contributions by 500 dollars and 4) Mark Carney is heading off to the Bank of England.  What’s the connection?

Growing Ontario One Report at a Time

The Conference Board of Canada has chimed in on what ails Ontario and how to get it moving in a recently released report titled Needed: A Comprehensive Growth Strategy for Ontario. The report argues that after rebounding from the 2008-09 recession, Ontario has slipped into tepid growth of around 2 percent annually and needs a comprehensive economic growth strategy to improve its long-term growth potential. What is to be done?

We Will Bury You...Eventually?

Few probably recall (I was not even born yet) the November 18, 1956 Western ambassadors reception at the Polish embassy in Moscow where the then Soviet First Secretary of the Communist Party Nikita Krushchev supposedly uttered the famous quote: “We will bury you.”  The actual line apparently was apparently something to the effect of “Whether you like it our not, history is on our side. We will bury you.”   Coming during the Cold War when the threat that the economy of Soviet Union and communism would overtake the world was taken seriously, the line took on a life of its own.  Krushchev apparently made a similar quote to Richard Nixon at a technology exhibit to the effect that the Soviet Union would eventually pass America and then “We’ll wave to you.”

One of These Countries is Not Like the Others

Given that the Finance Minister is presenting the Federal Fiscal Update today in Fredericton, it is instructive to review some fiscal comparisons right out of the release of the 2012 Federal Fiscal Reference Tables (which in turn used the OECD Economic Outlook May 2012 numbers for the international comparison).  Figure 1 plots the ratio of total general government receipts to GDP for the period 1991 to 2011 for the G-7 while Figure 2 plots expenditures as a share of GDP.

An Economic Salute to US Presidents!

Well tonight is the next US Presidential debate and what better way to help set the stage than an economic retrospective on American Presidents and their relative performance when it comes to economic growth.  I went onto Eh.Net and have obtained real per capita US GDP in 2005 constant dollars for the period 1790 to 2010 and used it to calculate the annual growth rate of real per capita GDP.  From this, I then calculated the average annual growth rate for real per capita GDP for 44 US Presidents and ranked them from highest to lowest. 

Value for Money in Health

The Conference Board is having a Summit on Sustainable Health and Health Care October 30^th and 31^st in Toronto featuring a plethora of media, industry, health service and academic experts who will focus on the need to refocus the health system “from treating acute illness to preventing and managing chronic disease so governments, healthcare leaders and businesses need to combine forces to help all Canadians lead healthier lives.”  They will discuss the transformation of health care, inequalities in health care, workplace wellness initiatives, health management, intelligent funding, end of life decisions and health and the social media revolution.  It all sounds like a really swell time.  There will probably even be a couple of nice meals and lots of social networking. Here what they should also be discussing – where is the value for money in Canada’s health care system? 

Winter is Coming...

Well, here are some depressing statistics from Banca D’Italia’s recent release on Italy’s economy.