Economists Still Have Work to do, Ontario Edition

There are two types of TV shows I cannot stand - people sitting around talking about politics and people sitting around talking about sports.  They're full of people shouting at each other and making really, really stupid arguments.  I can feel my IQ dropping whenever I watch even five minutes of one of these shows.

The exception? TVO's The Agenda.  I love this show.  Terrific choice of guests and Steve Paikin is the best interviewer in the business.  Unlike practically every other show on politics, it raises the level of debate instead of lowers it.

Last night's show was no exception.  Part I was an interview with Ontario NDP leader Andrea Horwath and Part II was a roundtable discussion of the Ontario NDP platform (the segments are available to watch at the links).  The panel included a journalist, Adam Radwanski, who is one of my daily-must reads, and three pundits associated with three political parties - Janet Ecker (PC), John Duffy (Liberal) and Erin Weir (NDP), a friend of and frequent commenter on WCI.  A great group - I learned a lot.

The show, however, showed me that us economists still have a long way to go when it comes to educating the general public on economic issues.  There were four points I found particularly problematic.

 1. Mercantalism Lives

The panel were discussing an NDP proposal requiring the Ontario government to buy Ontarian.  The panel seemed to be of the opinion that the policy is problematic because of the potential for tit-for-tat behaviour from other jurisdictions.  Fortunately, John Duffy saved the conversation right at the end when he stated (roughly) that we do not get rich by overpaying for goods.  Until that moment, the panel missed why trade is good - it allows us to obtain goods and services at a lower cost.

2. The Most Efficient Way to Assist the Poor is to Give Them Money

This was in the context of the NDP proposal to halve the HST on gasoline.  I was delighted when Paikin spent a fair bit of time on this policy issue both with Ms. Horwath and with the panel.  Naturally Weir approved of the gas tax cut whereas Ecker and Duffy did not.  However, both Ecker and Duffy conceded that low and middle income families do need assistance, and offered other policies to assist, such as lower electricity prices.

Unless I missed something, at no point did anyone suggest simply giving lower income families more money through, say, higher sales tax rebate cheques.  It simply did not not occur to anyone.  I suppose that is not surprising - none of the three parties are running on that platform, so they will not bring it up, and Radwanski is covering the campaign, so it would be unusual for him to start discussing policies no one is proposing.  All the heavy lifting on this front will continue to be done by economists.

3. Decisions Are Made at the Margin

Once again, in the context of the gas tax.  The panel discussed how using less gasoline is not an option for rural Ontarians, since they naturally don't have public transit.  In other words, the price elasticity of demand for gasoline is zero, which is complete and utter nonsense.

Public transit is not the only substitute for driving.  An obvious one is that when gas prices rise, people will simple substitute some trips for... nothing.  That is, they will take fewer trips.  They will travel less, they will go to the grocery store less (but purchase more during each trip), they will find ways to increase the number of errands run on one trip.  When gasoline prices rise, people will reduce their gasoline consumption at the margin.

4. Replacing Research with Guesses

Professional economists get accused quite often of abstract theorizing instead of examining the data.  A fair criticism in some instances, but when it comes to economic issues I believe non-economists are far more guilty of this.

Back to the price elasticity of demand for gasoline.  There is no reason to assume it is zero (it isn't).  There is no reason to go on about what alternatives there may or may not be.  Economists know with a great deal of certainty what the price elasticity of demand for gasoline is.  We've been studying the issue for several decades.  There have been, by my count, over 300 studies on the issue.  Here are the numbers.  Why speculate when the answer is easily accessable and well known to specialists?

The Agenda brings in the smartest and most knowledgable guests in Ontario, so this "replacing research with guesses" is fairly rare on the show.  It's all too common on your typical sports or politics show, which is why I find them unwatchable.  Instead what you get is a raft of ridiculous theories, sample size bias and meaningless anecdotes. 

Imagine a host talking to a panel of four pundits about someone about to roll a 6-sided die.

Host: What's your prediction for the big dice roll?

Judy: Well, Jim, I've knocked on thousands of doors in this province, and families everywhere are telling me the same thing.  They like the number 1, so I expect it to do really well.

Bill: Remember, the big dice roll is taking place on a Sunday after church, so the smart money is on 3, the trinity.  We all remember Easter Sunday 1985 when a three was rolled three consecutive times.  History is on the side of 3.

Jim: Look at the data.  An even number has come up on 9 of the last 13 rolls.  You have to play the hot hand on this one and go for 2, 4, or 6.

Alice: I agree with Jim's data, but all that means is that odd numbers are due.  Judy is right that 1 is the trendy pick, but I really like 5 as a dark-horse candidate.

[Off-screen a mathematician is sobbing].

Of course, economists still having work to do is not the end of the world for those who would like to be continued to be employed as economists.

Comments

[Robert McClelland]

why trade is good - it allows us to obtain goods and services at a lower cost.

That isn't necessarily true when it comes to government. The money returned to government coffers via taxation or saved because of a lessened reliance by the public on government services can make a higher priced domestic good or service the cheaper choice.

[Mike Moffatt]

That only works if you ignore crowding out effects, or you want to argue the economy's in a liquidity trap, so you can ignore the crowding out effects.

[Padraic]

You should send your comments to Paikin. In my experience, he is very responsive to this kind of feedback - and hopefully he will invite you on the show.

[Mike Moffatt]

Padraic: You bring up a good point - I just want to say for the record I'm not suggesting I should have been on the panel. For one thing, Stephen would have been a better choice. Ideally, we increase economic literacy enough such that economists are only needed on panels that are specifically about economics.

It's a great suggestion. I did send him the link via Twitter, though.

[Mandos]

How do you know that economic research is better than guesses when it comes to big policy questions? I suggest that the free trade issue---and what economist-driven globalization hath wrought---belies this.

[Trevor]

A rural Ontarian replacing some trips with nothing in response to a tax increase sounds like a major hit to their quality of life. I agree with the economics, but I'm not sure which party wants to offer the assessment that people will be stuck in their homes due to the HST but we'll send them a cheque.

[Mike Moffatt]

"A rural Ontarian replacing some trips with nothing in response to a tax increase sounds like a major hit to their quality of life."

That's a fair point. But that's *completely opposite* to what they're claiming.

[Mike Moffatt]

Of course, if they sent you a cheque, you could always use that to buy more gasoline, so you're, at worst, no worse off.

[Canadian silver bug]

The idea that rural people can't use less is ludicrous when you see every other farmer or his kids zipping around the woods in their snowmobiles and dirt bikes, or driving around playing mail box baseball, etc.. Rurals like urbans have the choice of doing more with less trips, driving better and choosing different vehicles, a F350 is not mandatory for every person living outside a major city.

In the end its not going to be about choice anyway, fuel prices are going up as we reach peak oil we might as well start adapting to this reality now. Had we not been in a slowdown since 2008 we'd already be on the cusp of shortages. To perpetuate the myth that life will continue unchanged is foolish.

I was pleased that Paikin brought up the disincentive to conserve argument against the HST cut, its pure pandering and discredits the NDP on the environment.

It was also disconcerting to have that large fore-headed economist claiming only business has the means to cut back energy use, when home heating, lighting and personal transportation are such a large portion of consumption.

[Andrew F]

By the way, I have many debates about economics that typically end with the other person asserting that demand is perfectly inelastic, me questioning that assumption by pointing out the consequences of that assertion, the other person sticking with their position and me being dumbfounded. You get so far back to first principles that it becomes daunting to continue the conversation.

[Stephen Gordon]

Andrew F, I've unpublished your second-last comment. It wasn't *that* bad, but it's the kind of thing that has a really nasty habit of going places I don't want this board to go.

[Trevor]

If you're going to refund my taxes with a cheque so I can buy the things you've just taxed, I'm going to suggest there's an easier way to get to that outcome...Again, you're right but it's not an easy point to make, even on the Agenda. I wish we would just say that we'll help the poor or disadvantaged by giving them money, but that doesn't seem to poll well.

[whitfit]

What is wrong with rural people having to live with the consequence of their decision to live in a place with higher transportation costs? Nobody seems to be stepping up to subsidize me buying a house downtown. Different choices have different costs. Unless you can make a good argument about distortion or equity or positive externalities then I see no reason for lowering the gas tax to benefit the lifestyle choices of the rural population.

[Determinant]

The rebate idea was hardly mentioned or understood when the HST was rolled out. It should have got more play than it did.

Further, low-income sales tax credits solve the measurement problem. We want to give more money to poor people, or tax them less, same thing. We want the rich, those who spend more with higher incomes, to be taxed more. We have to tell the difference between the two. The gas pump can't tell the difference but income tax returns can. That's why sales tax rebates make sense as a policy but it's terrible to explain.

Second, if Steve Paikin is responsive to feedback please get Stephen Gordon on the show. WCI is a major point of Canadian economic comment so he isn't a nobody. Or Frances. I think Nick is better for macro debates on what the current state of disequilibrium is and why we are suffering for it.

[Trevor]

"Nobody seems to be stepping up to subsidize me buying a house downtown." Well, the New Democrats will freeze your transit fares through a provincial subsidy and I'm sure we could think of a few other subsidized city services that you won't find in rural Ontario if we really put our minds to it.

[Paul Friesen]

I'm not really in favour of a "buy Ontario" policy for government, but I'm not at all sure that it couldn't boost the wealth of this province relative to others if pursued sensibly. I understand that it would make some goods more expensive. But I seem to see the determinants of wealth for different countries and regions in a way that is different from most economists, and in my world, it could make a difference.

I figure that there is a simple reason that some countries are richer than others - economic clustering. Counties in which lots of activity has clustered are the rich ones because all that activity causes wages to be bid up. Companies are drawn to the clusters despite the high wages they must pay by lots of things - easy access to customers and suppliers, good government services possible due to the wealth, and so on. Countries that got left out as the clusters formed are the poor ones.

If that is right, it is not enough to just look at trade through a Ricardian trade model. You have to consider the effects on clustering. If the government can start or strengthen a cluster in some industry through its purchases, it could be worth paying a bit more. A recent example of a conscious effort to do this is the buy-Ontario provisions of the green energy program which seem to have been successful at getting an industry started. (Whether or not that industry survives the coming election is up in the air of course.)

[SimonC]

Trevor: I found it easier to find other subsidized rural services off the top of my head
Rural households pay the same price tran urbanites for electricity distribution, internet access and phone line services even though the cost to provide them with these services is much higher. Also, rural areas have a lower gas tax in Quebec.

AndrewF: I was told that residential electricity demand in Quebec was totally inelastic no later than last weekend when discussing what they should do with electricity prices. At that point I gave up arguing.

[hosertohoosier]

Paul, I agree that clusters are important for economic success, but protectionism is a bad way to get there. First, free trade enhances specialization in industries that are areas of strength for an economy. Protectionism encourages diversification, which undermines the formation of clusters. Think about the cluster that nurtured Ontario for the past 50 years. Ontario became a major producer of automobiles AFTER protectionist barriers were eliminated (ie. with the signing of the Auto Pact).

Second, I submit to you that all clusters are not equal. It might be possible to make Ontario a major producer of oranges, but the costs of doing so - both in terms of subsidies, infrastructure, higher prices from protectionism, and the opportunity cost of orienting ourselves to a more natural area of strength would be high.

The best clusters are those that emerge organically, rather than those that are consciously picked (and for the record I find the idea that a frigid northern province with low population density, and unexceptional amounts of wind is a natural green energy superpower dubious). It just isn't clear to me why the government - given its own litany of perverse incentives - is going to be able to do a better job of picking winners than private investors. Rather, I think a more appropriate role of government is to create a general environment (through infrastructure, job training, tax policy, etc.) that is conducive to Ontario's next big industrial transition, whatever that may be.

[Andrew F]

Fair enough, Stephen. I agree that it was a borderline comment. I think it's fair, but not very kind.

[Account Deleted]

The Agenda was worth watching and i got to learn many new things from that ,,,and as the title of the article suggests , its true that economists still have many things to do to justify their role...
To avoid the risks, I follow http://www.forecastfortomorrow.com/ they give an accurate predictions about the market and other happenings

[Mandos]

That was a clever form of advertising spam.

The fact that economists believe that giving the poor money is the best way to improve their welfare demonstrates a lot of paucity of vision. People *resent* that the poor are getting money! It's one of those things that goes on the chopping block. For a REALLY BIG example, Northern European publics deeply resent the idea that the most straightforward way to save the Eurozone is a fiscal union...

The repeated reality of this suggests that this allegedly-optimal-on-paper solution is not a practical solution. I would go so far as to say that no solution will work that does not entail a prior guarantee of productive employment, which will entail protection from certain kinds of competition.

[anon]

From your linked Globe article for the numbers: "A straight removal of four percentage points of tax from gasoline would, by itself, lower gasoline prices by 3.7 per cent." And subsequently 3.5% after you account for pass-through. These seem like they've been calculated as the percentage change from an increase in PVAT from 4% to 8% rather than a decrease from 8% to 4%; could you explain how this was done and/or the justification? Not nitpicking - genuine methodology interest.

[Bill Bell]

People support mercantilism because they think this will make more jobs which will enable them to buy more goods and services. Right? They don't see a job as a cost.

So what keeps economists from offering some simple argument against this thinking? After all, every time a pol opens their mouth they mention that their policies will somehow result in more jobs. I myself don't want any more jobs.

[Jacques René Giguère]

Mercantilism:
There are two sides to it.
First: the common people error. People tend to see exports paid in money coming from some sort of fount which then goes somewhere never to be seen against and lost.hence the idea of" money is going into a foreign country instead of creating jobs here". ( Heard yesterday at a CRTC hearing about foreign internet suppliers.)
Nobody understand that you pay imports from your exports ( If you pay with fiat money, you get the goods for free ...until the foreigner asks payments in goods,when the Chamber of Commerce guys and politicos will suddenly shout " jobs creating exports boom!"
A lot of people think in what PK calls the immaculate transfer theory. And they don't understand the meaning of the minus sign in GDP=C+I+G+X-M. They really think that M means a loss of jobs or income.
That's why, in my Introductory macro course, I put so much emphasis on understanding the balance of payments mechanism (and the real meaning of the National income accounting equation).

Two: the specialist error. Who amongst us ( and especially those who only have the Business Econ course) remember that free trade, and division of labor in general, works only at full employment? Otherwise, the second best theorem and the 0 shadow price gets in the way.
If you can't create your own fiat money and either use gold or use fiat money created by somebody else ( canadian province or Eurozone member), mercantilism might make sense during a recession.
Mercantilists were always worried about losing gold, not about jobs or income, even though they surely knew that grapes grew better in Portugal.
Keynes already recognized that in the Intro to the General Theory when he recalled an editorial he had written in the Economic Journal in 1913 condemninig protectionism.

[Declan]

Mike, you must have missed this classic xkcd comic which addresses your brain shrinking TV commentary watching.

I hope you didn't follow the carbon tax debate in B.C. too closely, the level of abuse of your point #3 that was out there (I can't count how many times people said, 'a carbon tax won't do anything unless it's high enough to make a difference') might have driven you over the edge.

[Whitfit]

Trevor said:

"Well, the New Democrats will freeze your transit fares through a provincial subsidy and I'm sure we could think of a few other subsidized city services that you won't find in rural Ontario if we really put our minds to it."

This is all way off topic, though I think that thinking clearly about subsidies/different tax rates on different goods is definitely about economic thinking, but...

I would (from a purely selfish, urban dwelling perspective) eliminate inter-rural/urban transfers. Note that I never said that government shouldn't be subsidizing/differentiating taxes for certain activities, but that the principles on which they are done shouldn't necessarily reflect the different costs of living in different places (unless there is an positive externality that you can point to). For instance, some uploading of transit costs to regional governments can be justified on co-ordination, environmental and income inequality grounds. And I'm not so sure the Provincial government, outside of mass transit, subsidizes urban services that aren't available in rural areas. In fact, look at the cost of policing, hospitals, roads and the use of public resources (crown forests, minerals etc...), not to mention farm policies, and I would bet that the Province, on a per capita basis, pumps a lot more money (and creates a lot of protected markets/non transfer benefits that cost other consumers) into rural Ontario than urban Ontario. If the GTA was a province, with the power to tax on par with Ontario, I would wager that it would be a net gain for the GTA, and a net loss for the rest of Ontario (only speaking now in terms of transfers - there are obviously other considerations).

[Nick Rowe]

I found this comment by Jacques Rene caught in the spam filter. Don't know why it ended up there. Here's Jacques:

"Mercantilism: There are two different sides about that: 1) mercantilism advocate usually do not understand the balance of payments. They believe that there is a fount of money from whence you buy things and if you buy abroad , somehow wealth diasappear. They do not understand that balance of payments must somehow somewhen be balanced. And that if you use fiat money, until the foreigner buys back from you, you got his goods for free. They do not understand that the necessary trade surplus needed to pay back in the future reduces your consumption. They rather crow about "job creation through vigorous exports". They do not understand the meaning of the minus sign in the GDP=C+I+G+X-M equation. A trade version of PK immaculate transfer theory if you will. That's why I put so much emphasis on Balance of Payment in my Inroductory Macro course. 2) Advocates of mercantilism-is-always-bad forget that the whole trade-is-always-efficient is right in macro terms only if a) both partners are at full employment ( second-best optimum and shadow prices =0 remember guys?), something that Keynes told us in the introduction to General Theory and b) you use fiat money. If you need to extract gold it may make sense to not lose gold ( mercantilist were always talkiing about not losing gold, not about employment or whatnot. Any econmic entity that do not control his money supply , either a Cdn province or a eurozone member is perfectly rationnal and right to be mercantilist in the short term during a recession . Go back to full employment and the mercantilist bugbear will go back to sleep."

The above was Jacques Rene.

[Chris J]

A couple of comments about gas in Northern Ontario. Carpooling to work often is an option and it went up when gas hit about 1.40 two years ago. But this is all precisely the point: by giving people maximum flexibility they adapt as best they see it. (Don't poor people who bicycle to work also need a break?)

For the resentment argumen, there are different solutions. One is a negative income tax: everyone then gets to see on their tax return that they get credited $1000 on their first 10k in income. (Numbers pulled out of the air.) Yes, yes, this is paid for with higher HST, but when people fill out their tax forms they see they are getting the extra $1k as well.