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Jobs are a cost, not a benefit.

In the long run, yes. But in the short run, much of the cost of jobs in the jet-building industry is sunk--it is reflected in educational and firm-specific investments by workers in the jet industry. And the return to these investments is a pure transfer from government to workers. Similarly for the investment in jet-building facilities by Canadian firms.

This means that transitioning to foreign-built jets may have real costs, by forgoing these transfers to Canadian workers and firms. Or, to put it differently, by "decreasing demand" for Canadian jets.

Yes, Canadian suppliers are a concentrated interest group, so their concerns tend to be grossly overrepresented in the political process. And there are countervailing arguments: Canadian exporters may benefit if foreign jets are bought, or the Canadian jet industry may charge lower markups in order to retain demand for their products, or we might care about the welfare of foreigners, etc. But the argument that "building F-35s in Canada will save Canadian jobs" is not "wrong", merely incomplete.

Jobs are only a cost if you own the country.

A problem with depending on magic overseas machines is that you depend on overseas machines. See the rare earth processing story for an example.

http://www.salon.com/technology/how_the_world_works/2010/08/30/rare_earth_elements_and_china/index.html

Wouldn't it be cheaper to just hire the Americans to do our flying, you know - marginal cost etc. They're there anyway. :)

The Iowa car crop story is great writing. I recall a similar explanation some years ago based on a secret submarine base that smuggled in Japanese cars.

The Andrew Coyne column almost had me rolling on the floor laughing! The payoff for me was the following punchline, which Coyne delivers with suitable sarcasm. "Indeed, that is the best thing about the contract as signed: it doesn’t have any “industrial benefits.”" The notion that the defense contractors will not be bound to deliver industrial benefits to the other nations purchasing these jets is a delicious fantasy.

Great post Mike, your line about "jobs are a cost, not a benefit" really got me thinking. You've got a good point that Canada should be trying to maximize labour productivity. But isn't your argument valid only during full employment? What I mean is if there is unemployment, and there is an opportunity to obtain reasonably productive jobs like building fighter planes, shouldn't the gov't encourage such job creation? Or should we send our unemployed out to Saskatchewan to become farmers ;)

I know I'm probably missing something here, but if there are a number of unemployed people who have the skills to do the sub-contract work (a large assumption on my part), how is this a diversion of labour resources?

I read Coyne's article and understood most of it, but my question above is confusing me.

Andrew Coyne didn't check the Internet before he wrote the article. Therefore he missed a key ingredient in the jets deal: The Canada-US Defence Sharing Agreement.

Under this deal, in effect since 1956, military purchases by each country from the other partner are required to be offset by equivalent reverse purchases from the other party. Therefore when Canada purchases these jets from the US, the US military will be required to purchase an equivalent amount of military goods from Canadian firms. There is no need to stipulate this in the purchase contract, it's already there in law underneath. This is why Canada-US military trade is so rigorously tracked. I have worked at companies where this was the case.

The result is the integration of the defence contracting base in North America, similar to the Auto Pact. It also means that all this money is going to circle back around to the Canadian economy. All of it. In that way the treaty takes note of the economic theory in the OP and acknowledged it in 1956.

The principle of mandated balance in bilateral arms trade has been around since the Ogdensburg Agreement in 1940. It originated as a way to preserve Canada's Balance of Payments and allow Canada to provide assistance to the UK under Mutual Aid (our counterpart to Lend-Lease) without having to resort to Lend-Lease ourselves through adverse trade balances and terms.

All this whining over sole-sourcing also misses the fact that when the next generation of fighters was being designed in the US, Lockheed-Martin emerged as the sole remaining producer of fighters. The US and UK have both standardized on the F-35. There is no other alternative. Asking for competitive bids when there are no other competitors is ridiculous.

Tax and spend, conservative style. The poor need better incentives, but there is no end of money for death machines. I gotta wonder who they intend to kill with these things? Do we really need to spend billions on stealth fighters to go kill people living in mud huts in Central Asia?

Do we really need to spend billions on stealth fighters to go kill people living in mud huts in Central Asia?

Maybe the stealthiness is for the reporters.

Uh, we need interceptors to defend Canadian airspace. Bonus if they can launch anti-ship missiles too. Always have.

If the Iowans were not growing cars, would they be growing wheat to feed the Detroit auto workers?

determinant: the f-35 isn't an interceptor (that's the f-22). It's sort of an all purpose killing machine. It can do dog fighting but it can also attack targets on the ground or at sea, support troops etc..

Of all the conceivable enemies out there, who among them can only be killed with an f-35? Or do we expect bin Laden to get arms from inter-stellar aliens?

Bob: "I know I'm probably missing something here, but if there are a number of unemployed people who have the skills to do the sub-contract work (a large assumption on my part), how is this a diversion of labour resources?"

I want to take that one!

The Bank of Canada can create as much demand for Canadian-produced goods as it likes. Just by printing money. If there were unemployed resources due to deficient demand, that's the cure. The only limit is if you create too much demand for labour and other resources and that causes inflation. For various reasons, we seem to be stuck with a positive "natural rate of unemployment"/"Non-Accelerating Inflation Rate of Unemployment" (NAIRU).

So if protectionism did increase demand for Canadian-produced goods, the Bank of Canada would have to tighten monetary policy to reduce it again. No net effect on unemployment, unless you can figure out some way to reduce the NAIRU/natural rate. If anything, protectionism will increase the NAIRU, because it reduces competition.

Patrick:

We will be using the F-35 in the same way we use the CF-18, as an interceptor, among other things. The F-35 carries the same mix of missiles as the CF-18 does, or their replacements like ASRAAM and AMRAAM.

We will be using it to fill the interceptor role. The fact that we also use it for everything else is why we are buying the F-35.

Air power is one of the jack-of-all-trades military capabilities. It's usually the first resort in an international crisis too.

Interceptor. Yeah. I know. But doesn't it strike you as silly. Who are we intercepting? ET? What possible threat is there out there to Canada that requires the F-35?

Nobody we could conceivably be using these things to kill has anything that even comes close the the CF-18 as it is. Stealth fighters to drop bombs on mud huts is, pardon the pun, overkill.


Russian T50? http://www.strategypage.com/htmw/htairfo/articles/20100914.aspx
I'm out of my area of course (as always?)

Technically, it's a rival. But are we really likely to go to war against Russia or India? I thought those guys where our friends now ...

geez ... *were* our friends. Time for bed.

"The Bank of Canada can create as much demand for Canadian-produced goods as it likes. Just by printing money. If there were unemployed resources due to deficient demand, that's the cure."

Right, they can, but do they? Isn't there deficient demand now? Isn't this what Krugman and DeLong are pleading with their Bank to do? I guess I'm saying politicians know they are accountable to voters, how many people pay enough attention to the BoC to hold them accountable.

Angella: The Fed ought to create more demand right now. I'm less sure about the Bank of Canada right now.

On average, over the last 20 years, yes, the BoC has been creating sufficient demand. It hit its inflation target almost exactly, on average. And I expect it to do so in future.

And the F-35 will not create demand right now. It will create it over the next 10? years.

Plus, even if I thought the BoC should create more demand right now (I think maybe it should, but I'm not sure), and even if the F-35 deal created demand right now, I'm not in charge of demand, the BoC is. And the BoC thinks it has monetary policy where it wants it, right now. Otherwise it would be doing something different. So if the F-35 deal created demand right now, the BoC would just tighten monetary policy to offset the effects on demand 100%.

The BoC always has the last move in the game.

I don't want to argue in favour of building jet fighters in Canada. But I strongly disagree with this sort of thinking.

The basic problem with this logic is that it treats comparative advantage as given and unchangeable. But in the real world, it is far from static. If we built jet fighters in Canada, we would develop the skills, the infrastructure, the support services, and so on to do that. Those developments would also raise our comparative advantage for producing other high-tech things. Producing those things, in turn, would reduce the cost of producing jet fighters. It might well be cheaper right now, given current costs of production and current prices to obtain fighters by trading wheat for them, but that does not mean that it would be cheaper in the future if we decided to pay a bit more to build them ourselves in order to further develop our industrial capacity.

If we built more jets, and increased our capacity there, we would be building less of something else, and losing our capacity there.

Diversity is the spice of life.

@Nick, that is a different (and correct) argument about building fighters. Fundamentally, they are not useful.

@ Nick, that's a good point, the BoC can simply tighten monetary policy if it wants to. And it has decided to target inflation, and remains credible there.

I guess I was saying that politically, the 'job creation' argument is so popular because jobs are place-based and so are politicians.

Angella: "I guess I was saying that politically, the 'job creation' argument is so popular because jobs are place-based and so are politicians."

And that's a good point too. Because the BoC can't do place-based policies.

On a personal level, in an economy where incomes are rationed by labour and in the presence of unemployment, increasing employment through a project such as this seems entirely rational on a micro level.

Your "car crop" idea assumes that there is another, equivalent product that we can trade for this. Really? That implies that aggregate demand isn't a problem. I believe it is. That means that trading this for that is not a simple solution. Is is not possible that we want fighters but other countries don't want our other goods in the proportion that would produce equivalent employment but rather less?

ISTM most people extract value from the economy by work and labour, mediated through money, rather than investing capital. Therefore more work equals more income. Please feel free disabuse me of this notion, I'm writing this to be a bit provocative.

Second, the stimulus measures brought forth so far have done precious little for manufacturing. The type of jobs being promoted by stimulus measures matter. In Ontario's manufacturing sector infrastructure-based stimulus is at best peripheral and at worst irrelevant. Military spending, either through direct fighter manufacture or DPA-based equivalent trades will be stimulative to manufacturing.

Nick, you said "If we built more jets, and increased our capacity there, we would be building less of something else, and losing our capacity there."

Not necessarily. Once you have an advantage in something, there is a strong tendency not to lose it. Sure, if you grow a new industry, you have to draw labour from other sectors. That pushes up the price of labour. It makes more mechanization make sense. Labour gets partly replaced by machines. Prices of the other goods you make will have to rise, but if you have been making them for a long time, you will still be able to produce them more cheaply than anyone else. Price rises will reduce demand, but only in extreme cases are you likely to lose those industries. You will just wind up with supply equalling demand again, but with higher prices for everything you produce and higher incomes.

This is a terrible example for me to use (I am not a big fan of huge military spending) but I will roll with it anyway. I am a scientist, not an economist.

1- Canada had the opportunity to build the best jets in the world. Instead we destroyed the ones we built. I am speaking of the Arrow, of course. We decided, simply, to produce wheat, nickel and oil and use Britain and the USA as the "magic technology".

2- Canada lost an immense number of highly trained engineers who went to work for NASA and other places.

3- Therefore Canada lost enormous wealth-creation opportunities in the last few decades.

The world is changing. Someone is going to figure out how to do artificial photosynthesis in the next couple of decades and then guess what: we won't be able to turn oil into stuff we want. Climate change may actually improve our farming in central Saskatchewan and Manitoba - so maybe wheat will still undergo magic transformation for us.

But we face enormous risks. Maybe this is a tired argument, but ought we not to think about new ways of creating wealth for Canadians? Maybe just maybe, we should be pumping enormous amounts of money into alternative energies and doing things that distort the economy. Because if we figured out how to do artificial photosynthesis, we would be very wealthy indeed.

- Chris J

Chris: "Maybe this is a tired argument, but ought we not to think about new ways of creating wealth for Canadians?"

Who is "we"? Remember, Canadians are always thinking up new ways of creating wealth for themselves. The question is: should we leave it to individuals, or is there a reason why the government needs to do something that individuals cannot (or the government could do better)?

Paul: machines aren't free. They take resources (labour, land, machines) to make.

If we produce everything more cheaply than everyone else (the old mercantilist dream) then the exchange rate will appreciate, until we don't.

And if an increase in demand could increase our capacity and productivity in everything, then just print money.

I've known several people close to the Avro story. The real story. Avro was a management mess, a horrid money-waster with a flair for publicity. The Arrow was also a gas-guzzler and did not meet the RCAF's requirements.

Avro had brilliant engineers but wretched management.

Nick - thank you. A request for a future post: How does our wealth creation compare to 10 years ago? 20 or 30 years ago? How about California's? Finland's (or some other EU country)?

I find it telling we still use wheat in this metaphor.

- Chris J.

'2. Unless we're going to be given the jets for free (unlikely), we will need to work to obtain the jets, no matter where the jets are actually built.'

Countries A, B, C are building the same jets with addendums, the builders are to spend Ax%, By%, Cz% of the contract within each respective country. Canada, pays 100% + a (research). What is the real cost/jet? How will we measure the benefits? Via tax receipts?


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