The Globe and Mail likes to think of itself as Canada's Newspaper of Record, but its coverage of economics falls well short of that standard. I've more or less given up on the biweekly column by the Canadian Auto Workers' Jim Stanford, whose columns invariably take the form of a game of "spot the economic fallacy". But now it appears that the Report on Business has been infected as well.
The other day, Neil Reynolds had a column entitled Ideally, we should have a 100-cent dollar:
At 90 cents (U.S.), the Canadian dollar is getting back where it belongs, which is at par with the American dollar or within a few cents of it, either up or down.
Andrew Coyne noted the silliness of such an assertion:
There is in fact no reason at all why the two currencies should tend to trade at par, or any other parity for that matter. This hoary myth persists for one reason, and one reason only: because they have the same name.
No one suggests the yen, or the pound, or the euro should "naturally" trade at par with the US dollar: why would they? Nor would anyone propose anything so preposterous of the Canadian dollar, if it had a different name.
You would have thought that Mr Reynolds would have the good sense to retract his analysis, or at least stop talking about it, but you'd be wrong. He makes it worse, much worse:
Don't sell short the rewards of parity:
Let's define our terms. It's reasonable to define "strong" as any value for the Canadian dollar above par with the U.S. dollar and "weak" as any value below par.
Most estimates I've seen for the CAD-USD PPP exchange rate are around 0.85. It's not clear that Reynolds knows what the PPP is.
It is in the extraordinary purchasing power of the early Canadian dollar that one glimpses the economic rewards of a strong currency. Bank of Canada statistics show that a loaf of bread cost 4 cents in 1910, a pound of sirloin steak 14 cents. A minimum-wage labourer in Toronto earned 23 cents an hour. The bank records these corresponding prices for 2005: bread, $1.79; sirloin steak, $6.99. And a minimum-wage labourer in Toronto earns $8 an hour.
In other words, the 1900s labourer earned enough in one hour to buy almost six loaves of bread; the 2005 labourer could buy only four. The 1900s labourer earned enough in one hour to buy 1.6 pounds of steak; the 2005 labourer could buy about 12 ounces.
Mr Reynolds is apparently unable to make the distinction between real and nominal prices. What he's describing is the evolution of the relative prices of steak, bread and labour, not the buying power of the Canadian dollar.
And the last paragraph defies parsing; the only reaction I can muster is slack-jawed horror:
More than 80 per cent of Canada's exports go to the United States. In Canada's economy, one dollar in three is an American dollar. Parity is in everyone's best interest. Yet the hardest challenge will be the last 10 cents -- in Mr. Manley's analogy, the last 10 metres. Bank of Canada Governor David Dodge suggests that the country can't adapt to a stronger dollar. This is difficult to fathom. Since when has anyone had much trouble adapting to an across-the-board tax cut?
The Globe is now mounting a serious challenge to the Toronto Star's title of 'Canada's Most Economically Illiterate Newspaper.'
Oh. My. God.
I don't know what else to say.
Posted by: Adam | May 17, 2006 at 10:24 PM
It is too bad he doesn't understand PPP. If he did then his comparison would not have been between 1910(!) and today. He would have picked something that could be reasonably bought in many countries around the world, then checked out how much it took in local currency to buy that basket of goods, and then declared the exchange rate of that currency amount to be "parity" compared to all other countries. Or Purchasing Power Parity (PPP).
Figuring out the price for a resonable basket of goods is a pain in the %#@. As a shortcut he could do what The Economist does, and construct a Big Mac index. Or he could save himself yet more time and simply copy The Economist's figures.
PPP is the only parity that makes economic sense.
Of course, PPP doesn't determine an exchange rate though. That is determined by FFF, in a relatively free market for currencies anyway. What is FFF? My pet nickname for Flow of Funds Fundamentals. FFF is the relative desire to export and import, and the relative desire to invest "here" rather than overseas, and the whims of currency traders all added together, thus causing currencies to rise and fall.
Note that PPP is a factor in exports and imports, and in the decisions of tourists (if you don't already count that as imports and exports), and in the decision of capitalists who are thinking of building factories somewhere, or buying businesses somewhere etc. But it is only one factor in those decisions and it may swamped for a long time by other more important factors, such as tax treatment of corporations or individual savings, the perceived neccessity of such savings in the wake of things like government pensions, the perceived relative property rights of various countries (e.g. safe havens), commodity prices vs a country's position as a commodity producer/consumer, etc.
Take away the ))) from the PPP and you get FFF, which is what matters for a currency's exchange rate (in a relatively free market). :)))
However, PPP is what matters when figuring out if resident's as a group are "gaining" or "losing" as a result of their currency's world price.
Finally, if the writer of the quoted article wants to give Canadians a raise, he should figure out how to raise their productivity. The employee/employer percentage of workers' productivity as a group is remarkably stable over long time periods.
Posted by: happyjuggler0 | May 18, 2006 at 11:52 AM