Nothing new here. This is just a brief summary of my views:
I have a proposal that would improve aggregate demand management. I call my proposal "money-financed government expenditure on sacrificing goats".
I propose that every time the government sacrifices one goat, the Bank of Canada is required by law to increase the base money supply permanently by $1 billion, relative to what it would otherwise have been. To say the same thing another way, the Bank of Canada should be required to pay the government for all goat sacrifices, at a price of $1 billion each.
If animal rights people object to my proposal, I am quite willing to modify it so that the "goat sacrifice" is purely symbolic. No (real) goats are involved at all. The government just announces that one "goat" has been "sacrificed". But the price is still $1 billion per "goat sacrificed". The government can spend that extra $1 billion seigniorage whenever it likes, on whatever it likes.
This is how an increase in G (money-financed goat sacrifices) would increase aggregate demand:
It turns out that that Federal Finance Minister Joe Oliver is reported as saying that “the government can shrink the national debt by growing the economy and ‘without actually paying off any debt’.” At the same time, as part of pre–budgetary consultations with the finance committee, the Conference Board of Canada, the Canadian Taxpayers Federation and the Canadian Council of Chief Executives have argued that reducing the federal debt should be a priority in the coming federal budget. This does seem a rather odd coincidence of comments given the recent spate of austerity in Ottawa on the program spending side.
The American middle class hasn't got a raise in 15 years. Median household incomes aren't moving.
Canadian numbers tell a similar story. The market income (earnings, private pensions, investment income) of the median Canadian household is lower now, in real terms, than it was in 1976:
"My guess is that there’s considerably more slack [in the US labour market] than the unemployment number might lead you to suspect, but the truth is that I don’t know."
Timothy Lane, deputy governor Bank of Canada, has an estimate that agrees with Paul's guess. He says (in a talk at Carleton University):
"Chart 11: There's more labour market slack than the unemployment rate suggests in Canada and U.S."
[Now how do I copy and paste Chart 11 from a PDF into Typepad? Stephen? Please help!]
"To consolidate the information contained in the various labour market measures shown in the preceding section, we construct a labour market indicator (LMI) for both countries using a statistical technique known as principal component analysis. This technique extracts the common movement across the eight labour variables to create a simple summary measure of labour market activity. The LMI is scaled to be comparable with the unemployment rate, and thus provides a simple benchmark against which to judge whether the unemployment rate is evolving in a manner consistent with broader labour market conditions."
Now, the Bank of Canada's LMI doesn't necessarily tell us what we need to know either. But it's probably better than looking at the unemployment rate alone.
That's all folks.
I've been meaning to write this post for some time. Scott Sumner's post spurs me to write it now.
First let me ask my dumb econometrics question. It's a very simple question, and I really ought to know the answer. But I don't.
Q1. If you estimate a linear regression, using Least Squares or whatever, will the estimated residuals always sum to zero? If the answer is "yes", then skip the next question. [Update: Ben, Norman, and Matthew tell me in comments the answer is "yes", provided there is a constant term in the regression, and I want there to be a constant term.]
I had the opportunity to hear Derek Burney speak yesterday. Mr. Burney is originally from Thunder Bay (Fort William to be precise) and went on to a distinguished public service career as a diplomat as well as chief of staff to Prime Minister Mulroney, president and CEO of CAE Inc, chairman and CEO of Bell Canada International Inc. and ambassador to the United States. Growing up in Thunder Bay and attending the same high school as he once did, Mr. Burney was a positive example often pointed out by my high school teachers of how one could go on to make a difference.
I want to sketch out a very simple model of the effect of retirement on saving and on the rate of interest. Because I think that saving for retirement is the biggest motive for saving, and that the increase in the length of time people are retired is having a big effect on the rate of interest. And I want a model to try to make my intuition a little bit clearer.
To keep it very simple, I want a model where nothing changes over time. A stationary state. Employment, population, the stocks of capital and land, technology, and output, are all constant over time.
Here is a picture of the model I have in mind:
We normally put the desired flows of saving and investment on the horizontal axis. But in my diagram I have the stock of assets on the horizontal axis. And I measure that stock not in physical units but in value units (with the consumption good as numeraire).
Carolyn Wilkins, Senior Deputy Governor at the Bank of Canada, gave a speech yesterday at noon. She said that the Bank of Canada had lowered its estimate of the (cyclically-adjusted) neutral rate of interest.
"All told, we think that the neutral rate of interest is lower than it was in the years leading up to the crisis because of these structural developments. We estimate that the real neutral policy rate is currently in the range of 1 to 2 per cent. This translates into a nominal neutral policy rate of 3 to 4 per cent, down from a range of 4 1/2 to 5 1/2 per cent in the period prior to the crisis."
Think waaaay back, to the Keynesian Cross model of the traditional first-year textbook:
1. Desired expenditure Yd is an increasing function of income (aka production) Y. So Yd = a + bY where a > 0 and 0 < b < 1
2. In equilibrium, Yd = Y
What is the process that brings the economy to the equilibrium of this model? The traditional textbook story talks about undesired inventory investment. If Yd < Y, then firms will be accumulating inventories of unsold goods faster than they desire, so will eventually cut production.
Now suppose that all goods are services, like haircuts, and it is physically impossible to store unsold haircuts. That traditional story cannot work. We cannot even imagine a state of affairs in which Yd < Y. What are firms doing? Dragging people in off the street and forcing them to buy a haircut?
How are we supposed to teach this stuff in a modern service economy?
In normal times, like today, or 2004, my subjective probability distribution for the average annual inflation rate over the next 5 years looks something like this:
The Bank of Canada tries to keep inflation between 1% and 3%, and targets the 2% midpoint of that range. In any one year, inflation will rarely fall below 1% or rise above 3%. And if we take a 5 year average of annual inflation rates, that is very unlikely to happen. And it is unlikely the Bank of Canada will change its inflation target in the near future, and if it did change the target it would probably give us a few years advance warning.
It is hard to remember what we thought in the past. It is especially hard to remember the things we were scared of in the past, when those things we were scared of happening did not in fact happen. Who wants to remember their silly nightmares?
But I do remember being scared in 2008. And one if the things I was scared of was a 1930's style deflation, where the price level fell, a lot. How far could the price level fall? Could I totally rule out a 50% fall in the price level, which would give an average 5-year inflation rate of minus 10%? (Yes, I know, I should take the geometric average.) Maybe the Bank of Canada and other central banks would totally fail to respond to the crisis, and people would lose confidence that they would respond, which would make the price level totally unanchored. If people think that fiat money is worth nothing, then it is worth nothing. And if people think that fiat money is worth everything, then it is worth everything.
That big deflation didn't happen of course. We know that now. But we didn't know that at the time.
When I was at my most scared, my subjective probability distribution for average inflation over the next 5 years probably looked something like this:
I am not an orthodox New Keynesian macroeconomist (ONKM), but I can pretend to be one.
Q: What determines the rate of interest?
ONKM: "The central bank sets the rate of interest."
Discussion: the above answer is a pure liquidity preference theory of the rate of interest. By having a perfectly elastic money supply curve, at some rate of interest chosen by the central bank, the stock of money adjusts to equal whatever quantity of money is demanded at that rate of interest. Like in all liquidity preference theories, the rate of interest is determined by the demand for money and the supply of money. The only difference here is that the money supply curve is perfectly interest-elastic.
Q: But what determines where the central bank chooses to set the rate of interest?
ONKM: "Loanable funds."
The Tax Foundation released its 2014 International Tax Competitiveness Index (ITCI) of 34 OECD countries and Canada’s overall rank was 24 out of 34 countries. Despite our recent snagging of Burger King, we are apparently in the bottom third of OECD countries when it comes to tax competitiveness. Interestingly enough, the United States did even worse than us coming in 32nd place – ahead of Portugal and France. However, despite our low overall ranking, we were in the top third when it came to consumption taxes where we ranked 10th out of 34 (in this category the United States ranked 4th). This was our best performance.
[I am trying to explain what I think is a conceptual confusion by the "Open Borders" people. Unfortunately, my brain isn't very clear either.]
Land can't move, of course. But borders can. We can't move land across the borders, but we can move borders across the land.
So if half the people in country B want to move to country A, there are three ways we could satisfy their desire:
1. Move the people across the border.
2. Move the land and people across the border, by letting country B annex half of country A.
3. Move the land and people across the border, by letting country A annex half of country B.
Which of those three would be better? Are all three equally feasible? Why would people object more to some than to others? Why would one be more morally acceptable than the others?
Imagine two course sections with the following grading schemes:
Section A: 4 assignments worth 5% each for a total of 20%; 35% midterm; 45% final.
Section B: 4 assignments worth 10% each for a total of 40%; 60% final.
In my experience, students often reason: "Section B places more weight on assignments. I can work with my friends and use other resources, and get good marks on the assignments. Therefore it'll be easier to get a good grade in Section B."
The pressure to cut taxes comes from those who pay relatively more in taxes, and benefit relatively less from government spending.
Men, on average, earn more than women. Hence they pay more taxes than women do:
CIHI has just released its latest report on physicians – Physicians in Canada 2013 – and the key findings can be summarized as follows: (1) For the 7th year in a row, the number of physicians in Canada increased, reaching 220 per 100,000 population in 2013. (2) In 2012–2013, total payments to physicians in Canada grew 3.5%, reaching $22.8 billion—the lowest growth in more than a decade. –– The average gross payment per physician was $328,000, virtually the same as in the previous year. (3) The average cost paid to physicians per clinical service was $58.15. (4) Family physicians billed an average cost per service of $43.35, while specialists billed $77.69.
Just trying to get my head clearer on some related stuff.
I have a weird thought-experiment, that I think helps us understand fractional reserve banking better. Even though, paradoxically, there are no commercial banks in my thought-experiment. There is just One Big Bank, owned and controlled by the government, that issues the only form of money, that is used as the only medium of exchange and unit of account.
There are two parallel worlds:
In one world the Bank holds assets equal in value to its monetary liabilities.
In the second world, the Bank holds no assets at all. It has M on the liability side of its balance sheet, and absolutely nothing on the asset side. So if the Bank wants to expand or contract the money supply, it cannot use Open Market Operations, but can only use helicopter (lump sum transfers) and vacuum cleaner (lump sum taxes) operations.
I'm going to ask what happens, in both of those parallel worlds, in an extreme case - when we go to Milton Friedman's Optimum Quantity of Money (aka ultra-liquidity).