Worthwhile Canadian Initiative

The stable "Anglo Saxon" model of finance

Nouriel Roubini is not alone in declaring the "Anglo Saxon" model to have failed. Chris Dillow disagrees. He shows that, judging from GDP numbers, the "Anglo Saxon" countries are not doing worse than the others, so news of the instability and death of the Anglo Saxon model may be exaggerated.

But it all depends on how you define "Anglo Saxon". Chris defines it theoretically as "...lightly-regulated financial markets and high debt...". He defines it empirically as UK and US, in comparison to Japan and the Eurozone.

"Lightly-regulated" maybe, but "high debt" is the opposite of what "Anglo Saxon" used to mean, in past episodes of Anglo Saxon bashing. In fact, if we switch to a more traditional definition of "Anglo Saxon", the current crisis shows the stability of the Anglo Saxon model, and the failure of the "Continental" model.

At least we don't have the Gold Standard to worry about

Will this crisis be as bad as the Great Depression of the 1930's? One important difference is that we don't have the Gold Standard now. That's one good reason for optimism.

Sales taxes, other taxes, expected deflation, and Calvo price-setting

Gauti Eggertsson has an important ("preliminary and incomplete") working paper. It has been discussed by Mark Thoma and Justin Wolfers. The main argument is that tax cuts could cause expected deflation, which would raise real interest rates if nominal rates are stuck at zero, and this would reduce aggregate demand and output. Tax cuts are therefore bad policy under current circumstances.

This is a really important conclusion, and we need to check if it is right. I think it is wrong for cuts in sales taxes (like GST in Canada or VAT in Europe). I am not sure if it is right for other taxes. Eggertson's result is sensitive to his assumption about firm's price-setting. It also depends on his assumption that the central bank targets inflation rather than the price level.

The main lesson I draw from his paper is that it is more important than ever to switch to a price level target, to prevent the possibility of these adverse effects.

Cheer up, Andrew Coyne

It may well be that "there is no longer anything resembling a conservative party in this country".

OTOH, there is no longer anything resembling a progressive party in this country, either.

On the benefits of school choice: a not-particularly-clean natural experiment from Quebec

In an earlier post, I noted that

1. Ontario Catholics are able to choose between sending their children to the (Catholic) separate schools system or the public system, while non-Catholics can only go to public schools.
2. Separate schools systematically outperform their public school counterparts, even though they receive the same funding and draw from almost-identical populations.

This was consistent with a story in which separate schools face incentives that public schools do not and in which they respond to those incentives in predictable ways. Since separate schools do not have a captive market, they have a greater incentive to provide higher-quality education.

There are some interesting echoes of that story here in Quebec. As in Ontario, there are two public systems: English and French. And as in Ontario, only one system has a captive market: unless a child's parent was educated in English in Canada, she must go to a French school.

If we wanted to apply the Ontario story to Quebec, we'd predict that the English system generated better outcomes than the French system. And we'd be right.

Clearly, the English/French distinction in Quebec is not so clean as the separate/public distinction in Ontario: many (most?) students in the English system are there because they are not sufficiently proficient in French. But if it were widely known that English schools were not doing a good job, they would have difficulty retaining their clientèle. Kids pick up second languages pretty quickly.

Competition. It's a good thing.

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.

Why do journalists even try to explain forex fluctuations?

This is just silly:

The Canadian dollar took a beating on currency markets Tuesday and stock markets tumbled amid investor disappointment in the U.S. government's financial rescue package.

The currency closed down 1.97 cents (U.S.) to 80.24 cents after going as low as 80.04 cents as investors dumped a wide variety of currencies and bought into the U.S. dollar.

So ... the rescue package for the US financial sector was poorly received, and investors responded by buying USD? Now that's a strategy for countries facing a currency crisis: engineer a financial meltdown! People will flock to buy your currency!

It's okay to say "Here's the news. We haven't a freaking clue as to why it happened."

Average debt in Lake Wobegon

In Lake Wobegon, all the children are above average height. And the average household has $100,000 debt.

Both those sentences are wrong in exactly the same way.

Markets in everything: Eternal salvation edition

Heaven updates its price list.

In which a US magazine summarises many points with which Canadians should be more familiar

Newsweek

Okay, yes, I found this during a google search for this blog's title.

Why forecasters are predicting a short Canadian recession

As I noted here, pretty much everyone who has had the temerity to publish a forecast for the Canadian economy for 2009 is expecting a turning point in 2009Q2 or 2009Q3. In this post, I'm going to try to piece together the narrative behind this story. I'll be borrowing heavily from Calculated Risk: if you're going to copy answers, make sure to sit next to someone who has done their homework.

What if both Greenspan and his critics were right?

In 2003, Alan Greenspan argued that the Fed needed to set low interest rates to prevent falling into a liquidity trap and deflationary spiral. (H/T commenter Declan). In 2008, Greenspan's critics argue that those same low interest rates caused an asset bubble, which burst, causing the economy to fall into a liquidity trap and deflationary spiral. Is it possible that Greenspan and his critics were both right? Was the US economy doomed either way?

Employment sticks to the script

Unfortunately, we're at the scary part.

Here's what has happened to employment during the first three months of the recession, compared to previous recessions.

IS, LM, and two wedges: understanding the second wedge

A simple macroeconomic model of the current situation is the ISLM with two wedges. The first wedge between the IS and LM curves is the gap between nominal and real interest rates. The second wedge between the IS and LM curves is the gap between government and private interest rates. We add (or subtract) the two wedges to get a theory of aggregate demand. The second wedge is the thing we don't understand very well.

Stiglitz on inflation targeting: A Canadian perspective

I don't understand this.

Davos Man's Depression: The so-called “efficient markets” model, which holds that prices fully and efficiently reflect all available information, also came in for a trashing. So did inflation targeting: the excessive focus on inflation had diverted attention from the more fundamental question of financial stability. Central bankers’ belief that controlling inflation was necessary and almost sufficient for growth and prosperity had never been based on sound economic theory; now, the crisis provided further skepticism.

I'm willing to go along with the first point, but from a Canadian perspective, the second isn't an obviously compelling argument. The US doesn't have inflation targeting, and their financial sector melted down in a most spectacular fashion. Canada has had inflation targeting for almost a generation, and our financial crisis has amounted to mopping up the mess that spilled over from the US.

Apparently I'm missing something.

Fiscal vs monetary policy, globally

This does not make sense. Why are so many countries around the world using fiscal policy when they have not yet made full use of orthodox monetary policy?

The US makes sense. The Fed has already lowered the policy rate to zero, so it has no more room for orthodox monetary easing, so it's adding some fiscal policy as well. Japan, ditto. But the rest of the world makes no sense at all.

A tale of two Depressions

The Ottawa Citizen's Dan Gardner has a mission, one that is almost Quixotic in nature: solitary, noble, and doomed to failure. He has taken it upon himself to chastise lazy pundits who seek to augment their columns with injections of Ersatz Gravitas^TM (It's deep! It's cheap!) by comparing the present-day Canadian economy with the Great Depression. (A recent sortie.)

So Dan, here's a graph that you can use as a cudgel in your quest. It compares GDP during the Great Depression with the lower range of GDP forecasts described here:

 
If you squint, the two lines overlap almost exactly. But don't try it at home; you'll only get a headache. Leave it to the professionals.

[Updated to add the red text arrow.]

Comparing recessions and recession projections

According to this story, there seems to be some disagreement about how the current recession will play out:

The issue is Mr. Carney's prediction last month that the recession will begin to recede by the end of the year, followed by a sharp rebound of growth averaging 3.8 per cent in 2010. While Bay Street accepts the premise of a recovery next year, the bank analysts expect growth at only about half that pace.

"There is a divide," said Avery Shenfeld, senior economist with CIBC World Markets, who will be attending today's gathering. "The financial community is closer to a rate of growth of 2 per cent [in 2010] than 4 per cent."

It's not clear to me that the divide is really all that important. The Parliamentary Budget Office has constructed 'low' and 'average' scenarios from the private sector forecasts, and I've graphed them along with the Bank's projection and with the paths of GDP in the two previous recessions:

The Bank's projection really isn't all that rosy over the next few quarters: it follows the path of the PBO's low scenario as well of that of the previous recessions up until 2009Q2.

When placed in historical context, it's hard to tell a story in which the Bank is diverging greatly from the private sector forecasts. Everyone sees a trough in the latter half of 2009, and all the paths are consistent with a recession that is shorter and shallower than the previous two episodes. At this stage, a 2 ppt disagreement about 2010 growth rates doesn't seem all that important.

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?

Exchange rate expectations in a liquidity trap

Bottom line:  Since we don't know much about how an economy can escape a deflationary spiral by itself, we don't know the counterfactual conditional, and so can't estimate the effect of a fiscal expansion on the future price level and the rational expectation of the future exchange rate under PPP. The assumption of static expectations of exchange rates might be the best we can do, and roughly rational. If so, a fiscal expansion will not affect net exports, and protectionism is not needed.