Worthwhile Canadian Initiative

More reasons to support the PBO

Today's National Post has an op-ed written by a couple of Fraser Institute types entitled "Scrap the Parliamentary Budget Office". It's a remarkable piece of rhetoric. Although its stated purpose is to make the case for eliminating the PBO, it ends up demonstrating once again why an effective PBO is so desperately needed.

Yes, the federal government has a structural deficit. But let's keep it in perspective, shall we?

Don Martin loses it in today's National Post:

Clock tallies IOU to next generation: Stephen Harper will join Jean Chretien as only the second prime minister in history to enroll Canada in the half-trillion-dollar national debt club.

This is silly. Nominal debt figures from 1995 - when the federal debt first went above $500b - should not be directly compared to current nominal debt figures; you have to take into account inflation (a dollar in 1995 was worth more) and economic growth (our ability to pay debts has increased). Here is a graph of the federal debt, expressed as a percentage of GDP and in terms of per capita 2009 dollars:

When the nominal federal debt hit $500b in 1995, that was the equivalent of 59% of GDP. Fourteen years later, $500b works out to about to something like 39% of GDP. In order to reach debt levels that are truly comparable to 1995, the federal government would have to run $50b deficits for at least six years in a row. And no-one is forecasting that.

Yes, the federal government has a structural deficit, and something will have to be done. Panicking isn't it.

Blogging in Cuba: Generation Y

Cuban blogger Yoani Sanchez reports being beaten up and abducted by Cuban...quasi-authorities, for being a "counter-revolutionary" (i.e. having an independent blog). Check out her blog Generation Y.

The Globe's Konrad Yakabuski succumbs to the monetary union zombie

And so it continues. I noted on Wednesday that the Globe and Mail's lead editorial on exchange rate policy demonstrated a singular lack of understanding of the economics of exchange rate policy. A particularly astute commenter noted that it was only a question of time before the zombie notion of monetary union started lumbering across the political landscape in search of brains, and it would appear that the Globe's Konrad Yakabuski has succumbed, in the form of a long essay in the Saturday edition.

I don't have a shotgun, so I'll just fisk it:

Economic illiteracy goes viral

It turns out that I may have been unfair to Patricia Croft (chief economist of RBC-whatever-it-is) over here. As Erin Weir points out, she's not the only high-profile professional economist to go from remarking on the relatively small quantity of Canada's official reserves to making the clanging error of concluding that the Bank of Canada's abilities to stop the appreciation of the Canadian dollar are limited.

And now this from the lead editorial in today's Globe and Mail:

Why we need more Canadian academic economics bloggers

The economic story du jour is the appreciation of the CAD, and Peter Mansbridge had a panel of economists on The National last Tuesday to discuss it. I get the impression that this is a semi-regular recurring feature. The discussion was - how shall I put it? - unsatisfying.

On the role of house prices in the last expansion

I have at various points (here and here) been driven up the wall by lazy journalists who have worked under the assumption that if the US housing market was crashing and burning, then so was Canada's. This premise has led to any number of articles cut-and-pasted from the south with 'US' being replaced by 'Canada'. These pieces were cheap and quick (no research necessary!) and they generated scary headlines. But they were completely stupid and degraded the public's understanding of an important issue.

So it is with a certain amount of satisfaction that I draw attention to a recent Bank of Canada working paper that examines the role of housing prices over the past few business cycles. It turns out that like the US, we have had an episode in which a housing bubble fueled a consumption boom that culminated in a long, painful recession involving significant restructuring. The difference is that our boom-and-bust cycle occurred in the late 1980's and early 1990's:

[R]ising house prices played an important role in consumption growth through the increase in value of housing collateral. This positive effect peaked in late 1986 but continued to have a positive effect on consumption growth until 1989...

Our model suggests that collateral effects contributed as much as 1.0 per cent to yearly consumption growth in 2000 and had a positive effect for most of the remainder of the sample. This contribution is less than in the period from 1986 to 1990, but one simple reason is that the house price increases since 2000 have been more gradual than in the late eighties when they rose to the same level in 3 years rather than 6.

In a previous post, I noted that in many ways, the current US situation resembled what Canada had to deal with in the early 1990's. It would seem that the parallel is even closer than what I thought.

Journalism and Economics

Brad De Long thinks very highly of Greg Ip, even when Brad thinks Greg gets something wrong. Brad thinks Greg is very sharp. So do I. But the other reason why Greg Ip is such a good economic journalist is that he was thoroughly trained in both Journalism and Economics. And I'm very proud to say that he was trained in both right here at Carleton University. (Since I'm blogging on Carleton time, I might as well give Carleton some advertising, especially when it's well-deserved.)

But the data I have (warning: DataCubes is a very powerful tool, but it takes practice to figure it out) make for depressing reading. Greg is very much the exception. Very few Journalism students at Carleton study any economics.

Tomorrow's CPI release will say that headline inflation is negative. But that's not the same thing as deflation.

I'm not looking forward to tomorrow's CPI release. Not because I'm expecting bad economic news, but because I'm expecting bad economics journalism. (You may want to check out this post before continuing.)

Tomorrow's headline inflation number will be calculated as follows: take the June 2009 number, divide by the June 2008 number, subtract 1 and multiply by 100. This number will almost certainly be negative, but it will most emphatically be not a sign that Canada has drifted into deflation.

The reason for this is that in June 2008, there was a runup in gasoline prices. Between May and June 2008, the transportation component of the CPI rose at an annual rate of some 22%, and this brought the annualised monthly inflation rate of headline CPI up to 8.8%. Since then, gasoline prices have fallen, and so has the CPI. So when the June 2009 numbers are published, the headline rate of inflation will be calculated using a base of  114.8. In May 2009, the CPI was at 114.1, so the only way we could avoid seeing a negative year-over-year inflation number is if June comes in at 114.8 or higher - an annualised inflation rate of 7.6%. If that happens, the real risk is of inflation, not deflation.

So tomorrow and Saturday, expect to see dumb headlines such as "Canada slips into deflation" in the MSM. Try to ignore them.

Update: Gaaah! Andrew of Stackelberg Follower informs us that the barrage has already begun. I'm going to document a Hall of Shame of articles that make this predictable mistake. If you see something I've overlooked, please let me know in the comments.

1. A focus on deflation - Globe and Mail
2. Deflation raises its head for first time in 15 years - Globe and Mail. What the heck is "technical deflation"?

Update²: Credit where credit is due. I've already come across articles that got the story right, so here's a Hall of Fame. Again, let me know if you see others.

1. Canada seen starting brief deflation spell in June - Reuters. The article gets it right, but the editor who wrote the headline clearly didn't understand it.
2. Inflation below zero? It's happening now, but won't last long, economists say - Canadian Press. "This is more of a story of how high gasoline prices were a year ago than how low prices are today," explained CIBC chief economist Avery Shenfeld. Yay!
3. Inflation rate may go negative this week - Canwest.
4. Inflation turns negative, falls below zero for first time in 15 years at -0.3 per cent - Canadian Press. Economists have stressed that Canada does not have a deflation problem - a broad and prolonged period of falling prices - and that the dip into negative territory will be short-lived. Well done!

US dollar rises on bad employment news. And on good employment news.

I can never get enough of these sorts of articles:

Loonie weakens as jobless data spooks investors: Canada's currency weakened after a U.S. government report showed employers cut more jobs in June than economists forecast, diminishing prospects for the country's economic recovery.

"A worse number is going to be bad for risk appetite," said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. "The initial reaction has been to buy the U.S. dollar" against other currencies such as the Canadian dollar and the euro.

Very plausible, you might think. But here's the forex story from last month's US employment release:

Greenback rallies after jobs data signal recession abating: The dollar advanced the most against the euro since April and rose to a three-week high versus the yen after a U.S. government report showed employers cut fewer jobs last month than economists forecast.The greenback climbed against almost all of the other major currencies as a slower deterioration of the labour market supported bets dollar-denominated assets will gain as the U.S. leads the global economy out of a recession.

To summarise:

• Positive US jobs numbers raise the USD against other currencies.
• Negative US jobs numbers raise the USD against other currencies.