Worthwhile Canadian Initiative

GDP, GDI, terms of trade and why Canada is in a recession: It's all about the beer and pizza

The Parliamentary Budget Office has released a report (pdf - h/t to Kady O'Malley) that makes note of the distinction between Gross Domestic Product (GDP) and Gross Domestic Income (GDI), and shows that by the latter measure, the fourth quarter of 2008 was even more dreadful than the GDP numbers that made all the headlines.

As a public service, I'm going to explain what the difference is between GDP and GDI and how it relates to the current recession. It starts below the fold, and yes, there will be beer and pizza.

I hope Hillary fails

Nothing personal, but I just do not understand why she is asking China to buy more US treasuries. This just doesn't make any sense to me. She ought to be doing the exact opposite. Can someone explain it?

Regardless of the ultimate cause of the crisis (and China and perhaps Japan saving too much and buying too many US treasuries is at least one candidate for the ultimate cause), the proximate cause of the crisis is that everyone wants to hold US cash, and US Treasuries. And nobody wants to hold stocks, commercial paper, real assets, or buy newly-produced goods and services. The yields on US treasuries were driven down to zero. The US dollar appreciated, when it should be depreciating to let US net exports increase so it can pay down it's foreign debt.

Worthless Canadian Reaction?

What else can you call it, when two large Canadian labour unions call for a Buy Canadian provision in government spending? Embarrassing? Shameful? Perhaps "imprudent" might be the best word, given Canada's reliance on foreign trade.

Only idiots start wars they can't win.

So Jack Layton is idiot du jour:

Canada should pursue 'Buy Canadian' strategy: Layton:  Canada should adopt a "Buy Canadian" strategy in response to the "Buy American" clause included in the proposed U.S. stimulus package, NDP Leader Jack Layton urged Tuesday.

During question period in the House of Commons, Layton said that there's a "golden opportunity" to boost slumping domestic sales with a "perfectly legal and appropriately designed 'Buy Canadian' strategy."

I understand that being a politician requires you to be stupid from time to time (and time and time again...), but this is far beyond the call of duty. Even if you're willing to be dumb enough to be indifferent to the gains from trade, this makes no sense even by the criteria of mercantilism: Canada runs a ginormous trade surplus with the US. There is no way that Canada's interests will be well-served by this.

Will Canadians ever be offered the chance to vote for an intelligent, progressive party?

The political economy of protectionism

Update: Paul Krugman has a very good response to my earlier post. He is NOT endorsing protectionism:

"First of all: my piece was NOT an endorsement of protectionism — it was an explanation that there is an economic case for it, but also that there is a strong political economy case (which I consider dominant) against acting on that economic case."

He also looks at what happens when you change the assumption about expectations of exchange rates, while assuming flexible rates.

My original post follows:

I really like Paul Krugman's political economy argument for protection. It's a lovely piece of economic analysis. But I still think it's wrong. (The basic macroeconomics behind it is also wrong under flexible exchange rates, but that's another story, discussed in my previous post.) Once politicians are allowed to use the policy lever of protectionism, they won't just move it to where Paul Krugman wants them to move it; they will move the lever all the way to "full".

Paul Krugman implicitly assumes fixed exchange rates

Update: Paul Krugman has a very good response. He is NOT endorsing protectionism:

"First of all: my piece was NOT an endorsement of protectionism — it was an explanation that there is an economic case for it, but also that there is a strong political economy case (which I consider dominant) against acting on that economic case."

He also looks at what happens when you change the assumption about expectations of exchange rates, while assuming flexible rates.

My original post follows:

Paul Krugman has now come out in favour of (temporary) protectionism. His argument has two parts. The first part is basic macroeconomics. The second part is political economy. The political economy part is sophisticated and interesting. But the basic macroeconomics part is wrong. He implicitly assumes fixed exchange rates. That is not a good assumption for the world economy.

"Buy domestic" policies are individually irrational too

Most (all?) economists agree that in a global recession, when each country wants to boost demand for the goods it produces, policies which steer demand to domestically-produced goods are individually rational (provided other countries don't retaliate), but collectively irrational when all countries do the same.

I think most economists are wrong. It's not just collectively irrational, but individually irrational as well, at least for countries with flexible exchange rates.

If only Wilfrid Laurier had won the 1911 election

Much discussion in the past few days and weeks about the wisdom of throwing public money at the Detroit Three (when did they stop being the Big Three?). I'm in the camp of those who don't like the idea, but I'm not going to be a zealot about it just now. Given where we are right now, we don't have much choice but to try to help GM, Ford and Chrysler get through the next few months. But why are we in this situation in the first place?

I blame Robert Borden and the 1911 Conservatives. For most of its history, the Liberal Party of Canada has been the voice of free trade, and it made reciprocity the main issue of the 1911 federal election campaign. The Conservatives won by playing the ancient trick of equating autarky with patriotism: "No truck nor trade with the Yankees!". This set the stage for a century in which the interests of the producers of manufactured goods took precedence over those of consumers.

Self-sufficiency in food: always and everywhere a bad, bad idea

I'm back from vacation, and the quality of economic analysis in our nation's Newspaper of Record hasn't changed:

Everything is not peachy: From households to nations, we need to get serious about food self-sufficiency. Self-sufficiency isn't a sexy idea. At best, people who say they're interested in being self-sufficient are stereotyped as dour, old-fashioned rural types. At worst, they're seen as fanatical survivalists planning for an apocalypse. Economists also tell us that self-sufficiency is an anachronism. Instead, it is specialization that produces wealth, and economies - including the world economy - produce the most wealth when everyone, including countries, specializes in what they do best and then trades their products for the other things they need. The more specialization, the more connectivity among specialists, and the more trade along those connections, the better.

Unlike many, the authors appear to have read what economists have to say. But they don't understand it.

But there are problems with this model. As we specialize, we become more dependent on other people, industries and regions in the global economy. That may be fine for non-essential goods such as children's toys and kitchen appliances, but should we depend on others for life's essentials such as food? Also, specialization at the global level tends to reduce the diversity of producers and products - a small number of large, highly efficient producers often comes to dominate the market for specific goods. In complex systems from economies to ecologies, however, lower diversity usually means lower ability to adapt to rapidly changing circumstances. And, finally, all that connectivity among specialized producers around the world makes everyone more vulnerable to cascading system failures: a shock or failure in one part of the global system can propagate through the rest of the system in the blink of an eye, like a row of falling dominoes.

Taken to an extreme, the dominant economic model of specialization, connectivity and trade reduces the resilience of our communities and societies - our ability to take care of ourselves in volatile times.

This is exactly wrong. Specialisation and trade reduces exposure to catastrophic risk. In countries that insist on self-sufficiency, a bad harvest means starvation. In countries that participate in world markets, a bad harvest means a trade deficit in food.

When will the Canadian dollar start to appreciate again?

Since 2002, we've been seeing a pattern in which periods of CAD appreciation alternate with periods where the trade balance increases:

The cycle goes something like this:

1. When the trade balance is high, the CAD appreciates. The appreciation brings the trade balance down, and the CAD hits a plateau.
2. While the CAD is plateaued, the trade balance increases.
3. Go to 1.

Right now, we're at step 2: the CAD has been trading in a narrow range around parity with the USD since November, and during this time, the price of oil and other commodities that Canada exports have risen sharply - and so has the trade balance.