"Does Canada have Dutch disease?" is a question without a meaningful answer

The debate about whether or not Canada has "Dutch disease" can never get very far, because there is in fact no clear notion what it is. As far as I'm concerned, the term has by now been stripped of meaning: people are using the definition that is most convenient for their purposes.

So in this post, I'm going to summarise some of the points that have been raised:

1) The rise in resource prices. This has induced a shift of capital and labour away from manufacturing towards resources. This is not a subject of dispute. Some people seem to think that this is what "Dutch disease" is, but this phenomenon clearly does not deserve a pejorative label. HEC-Montréal's Simon van Norden put it very well in the comments in Mike's recent post on the topic:

When the world prices resources at a premium at to manufactured stuff, we export more of the relatively expensive stuff and import more of the relatively cheap stuff.

When it prices manufactured stuff at a premium to resources, we use the same strategy. I think Ricardo called this "comparative advantage."

I don't understand how an income-increasing change in the composition of output and employment can be called a disease.

2) The petrodollar. Again, I don't think that anyone disputes that there's a strong correlation between movements in oil prices and movements in Canadian dollar exchange rate. But this correlation is essentially the result of the Bank of Canada's inflation target; the shift out of manufacturing would have occurred anyway. If the Bank of Canada had kept the exchange rate fixed at - say - 0.85 USD, the prices that Canadian oil producers receive would be about 15% higher than what they get now. The oil sands would be that much more profitable, and would be attracting even more investment than they are now. Indeed, the reason Canada abandoned the Bretton Woods system of fixed exchange rates in the first place was that a flexible exchange rate dampened the swings generated by changes in resource prices.

There's not much point in pointing to the appreciating Canadian dollar as the cause of the reduction in manufacturing sector. If the government saw fit to order the Bank of Canada to force down and hold down the exchange rate, it would only succeed in creating inflation. (Not to mention the shitstorm associated with throwing away a policy that had provided twenty years of low and stable inflation )

3) Hollowing-out. As far as I can tell, the only point where the 'disease' tag really sticks is in the idea that manufacturing is a source of spillovers and other forms of increasing returns. The concern here is that if the manufacturing sector contracts "too much", it will lose its ability to recover if and when resource prices fall. I don't see much in the way of evidence for the notion that we should be using this as a basis of policy.

Firstly, we've seen this all before. As Simon also pointed out in that comment,

Over the past 50 or so years, we've seen a few of these "resource" price cycles. And we've seen the Canadian economy shift resources accordingly. (Remember how Alberta land prices fell in the '80s? and the western banks that went bust?) The ability to do so sounds like a very valuable real option to me.

Secondly, the sorts of manufacturing industries that have been losing employment are not the ones that are generally associated with R&D spillovers. The recent IRPP study that everyone's talking about puts it this way: 

[B]ecause the manufacturing sector is traditionally a source of innovations that spill over to other sectors of the economy, the Dutch disease could, by weakening the major sources of innovation, lead to permanently lower growth rates for the overall economy. But the distribution of R&D spending combined with the industry-level analysis of the Dutch disease suggests that this is not a likely outcome in Canada. Almost 80 percent of manufacturing R&D is carried out in just four broad industry groups ..., but the empirical analysis in this study ... demonstrates than none of them has been severely affected by the Dutch disease.  

Moreover,

An important caveat to the notion that the manufacturing sector is the motor of innovation across the economy is that the energy sector itself may provide technological spillovers to other sectors, and these may increase in the context of a resource boom. Even though the energy sector is perceived to be much less R&D intensive than manufacturing, the reality is that R&D spending in the oil extraction sector has tripled since 2003 and now exceeds that of the pharmaceutical sector by a comfortable margin. There is certainly anecdotal evidence that modern extraction techniques are far from “low tech.” Hydraulic horizontal fracturing technologies have vastly increased the amount of proved natural gas reserves in North America, and the oil sands industry has invested billions of dollars in technologies that have lowered the cost of extraction, increased the amount of economically recoverable sources and reduced the industry’s environmental footprint. However, very little research has documented the degree to which these developments have spilled over to other industries.

4) Wages. What amazes me most about the whole debate is that it's being conducted in terms of employment. But as we've been pointing out here on WCI for awhile now, most policy debates aren't about jobs. This is a case in point.  In this debate, total employment is best viewed as fixed; what's at stake here are the sectoral composition of employment and wages. And the shift out of manufacturing has been accompanied by an increase in real wages.

5) Environmental implications. (This is a point that Mike has made often; I'm just repeating it here for completeness.) If an effective policy to price greenhouse gas emissions had been in place over the past 10 years, the pace of oil sands development would undoubtedly have been slower. But there's little reason to think that if carbon had been priced properly, more people would be working in the manufacturing sector. Steel producers would certainly have problems absorbing this new cost, and the fact that the auto sector sought and obtained special protection from the mild efforts of the Chrétien government suggests that the auto sector would also be concerned about its ability to absorb a carbon price. It's hard to see how a link can be made between pricing carbon and increasing (or at least, slowing the rate of decrease in) manufacturing employment without some sort of exemption for the manufacturing sector. And if the manufacturing sector is exempted, then it's hard to see how it could be defended against accusations that the carbon pricing policy is simply NEP 2.0. (That last line is also Mike's.)

I think the question "Does Canada have Dutch disease?" has been evacuated of meaning. The only meaningful thing we can do is discuss the effects of policy measures designed to 'cure' it. And we're still waiting for someone to put them on the table.

 

Comments

[Determinant]

In this debate, total employment is best viewed as fixed; what's at stake here are the sectoral composition of employment and wages. And the shift out of manufacturing has been accompanied by an increase in real wages.

No, this is a false point. The entire problem of Dutch disease is that total employment in manufacturing contracts more than employment expands in the energy sector. It does assume that total wages in the energy sector are lower than in the manufacturing sector. In means that on balance the country afflicted with Dutch Disease suffers a net loss of employment due to exploitation of an energy resource.

Dutch Disease proponents, like myself, claim that this is true. Paul Krugman, in his new book "End This Depression Now" has an unashamed focus on jobs. This argument is really all about jobs, total employment and therefore distribution and equity.

[rsj]

Determinant,

Strangely, I agree 100% with Stephen here.

If industry A (manufacturing) is more capital intensive than industry B (resource extraction), then a shift to industry B would result in an increased demand for labor.

The labor issue is totally separate from the quality of life issue -- e.g. we want more capital intensive industries so that we all become richer in real terms with the same labor effort.

But if the goal is to maintain or increase labor demand, then you want the least capital intensive industries around.

Obviously all of the above assumes that markets clear, etc. We can debate that, but the lack of market clearing and/or adjustment costs is a (third) separate issue. I.e. you can argue that you do not want to be switching back and forth all the time because the markets wont be able to handle that without dropping a lot of people.

Here, a good argument can be made that volatility in commodity prices is one reason not to have your labor force primarily engaged in resource extraction, but I haven't heard anyone make this argument yet, and it would be a tough argument to make as most of the labor force (in advanced nations) will be providing services.

[Jacob AG]

I learned as an undergrad at Boston University that "Dutch disease" has a rather specific meaning.

It is a shift in the economy away from the tradable goods sector (i.e. manufacturing) in favor of the non-tradable goods sector (i.e. services), as a result of the differential inflation caused by having one dominant export, which would usually but not necessarily be a natural resource (it could also be foreign aid, or a big tourist attraction, or something like that).

The word "disease" was not supposed to refer to the economy as a whole, only to the the manufacturing sector, which would necessarily see a decline. Obviously the services sector and the natural resource extraction sector (or the tourism industry, or whatever) would not be diseased at all, and could (would?) in fact more than compensate for the decline in manufacturing.

But I agree that the term has evolved over time, and has been abused, which is unfortunate.

[Rod Smelser]

rsj, I think the oil and gas sector is one of the most capital intensive, as is mining for metals and minerals, much more than manufacturing.

I have to wonder why there isn't mention of export services like tourism in relation to an increased value of the currency. If the $Cdn is up, so is cross-border shopping, so is Canadian travel abroad. Travel to Canadian tourism destinations like Banff and Whistler will be down.

[DavidN]

Agree with both Jacob AG and Rod Smelser comments.

Corden and Neary (1982) has a model for 'Dutch disease': http://wy-sublettecounty.civicplus.com/archives/43/booming_secor_and_de-industrialization%5B1%5D.pdf

On page 831 it goes through effect 'Dutch disease’ on factor incomes. Note that while real wages may rise labour may still be worse of e.g. demand for services increase, price for services increase, higher proportion of consumption on services = labour worse off. For example, I know in Australia there have been dramatic rise in cost of living in mining towns due to resource boom, e.g. housing rent going up by 10-20x, stores shutting down because can’t afford to pay the same wages as the mines etc etc.

Also specific factor in manufacturing can also be interpreted as immobile or unskilled labour. If you’ve got a mortgage/family can’t exactly move to the other side of the country, if you don’t have the right skills you can’t transfer to the mining sector, or if you’re a woman there aren’t to many mining jobs available etc. Those manufacturing specific/immobile workers are unambiguously worse off under the Corden and Neary model.

To repeat my comment in the other thread, it’s clear there is an aggregate gain from a resource boom, but those gains aren’t shared, in fact the losses can be and are disproportionately concentrated in some sectors such as manufacturing. Whether there should be a policy response is a normative question, I would guess if you’re on the wrong side of the boom your answer would be in the affirmative.

Having said all that there are policy responses that don’t necessitate 'beggar thy neighbour' policies. Here is an article going through some policy responses in the Australia context: http://www.melbourneinstitute.com/downloads/working_paper_series/wp2012n05.pdf

[Bill]

5) Environmental implications. (This is a point that Mike has made often; I'm just repeating it here for completeness.) If an effective policy to price greenhouse gas emissions had been in place over the past 10 years, the pace of oil sands development would undoubtedly have been slower.

And that's why your response is incomplete. Environmental implications extend FAR beyond GHG emissions. Water, air pollution are externalities that the oil sands producers are not paying for.

You are not being complete, despite what Mike Moffatt says.

[oblivious]

Wages: I don't this can be entirely dismissed, since some people just don't want to relocate or have strong barriers preventing it. Certainly asking large bodies of people to uproot themselves and settle down someplace else would significantly exacerbate the "hollowing out" problem you outline.

"The only meaningful thing we can do is discuss the effects policy measures designed to 'cure' it. And we're still waiting for someone to put them on the table." I agree that we should try to be much more specific than the politicians and media generally have been and I think this is a great post for trying to do so, but then there are lines like "And if the manufacturing sector is exempted, then it's hard to see how it could be defended against accusations that the carbon pricing policy is simply NEP 2.0." I think media and others have been quick to put words in Mulcair's mouth when he didn't really say anything substantial or even (as your post points out) well defined. This past week we've basically been hearing from every corner that the NDP have a socialist interventionist "hidden agenda."

[Stephen Gordon]

I think Mulcair brought that on himself, by making a link between environmental issues and Dutch disease. As Mike and others have mentioned, the only obvious way to go from "stronger environmental protection" to "increase manufacturing employment" is by way of a special exemption for the manufacturing sector.

[Robert McClelland]

The only meaningful thing we can do is discuss the effects policy measures designed to 'cure' it. And we're still waiting for someone to put them on the table.

We can't effectively move on to that until there is enough agreement that there is a problem. While I can accept the use of the term Dutch Disease is not being employed to your rigorous academic standards it is being employed in a manner that is sufficient for political purposes and general discussion amongst the public. So why not bend a little and accept that Canada is afflicted with Dutch Disease so we can move on to determining how severe the problem is and then on to determining the best course of action to eliminate or marginalize its effects.

[Jciconsult]

Your arguments are useful but rather silly coming from a tenured prof who will never likely move universities. The jobs lost in Ontario very often (there is data on that) involved families with homes and TWO jobs and kids in school AND VERY SPECIFIC SKILL SETS. The portability of skill sets in the goods production sector is often seriously overestimated. You could shift from macro to micro to (heaven help us) politics because your skill set is portable within that range. I expect that even you would be challenged to hold a job in Alberta as a welder or pipefitter.

[Stephen Gordon]

Maybe I could get a job as a consultant and troll comment boards.

[ianlee]

Stephen,

During the German economic miracle (wirtschaftswunder), exports of manufactured goods increased dramatically.

In 1949, the German Deutschmark was 4.2 to 1 USD
By 2000, the German Deutschmark had appreciated to 1.75:1
In 1949, Japanese yen was 314.470:1 USD
By 2000, Japanese yen was 107.739:1
Source: Foreign Currency Units per 1 U.S. Dollar, 1948-2009: http://fx.sauder.ubc.ca

Neither Germany nor Japan has any oil or natural gas or uranium resources.
Did the manufacturing success (and annual productivity increases) of Germany and Japan contribute to the remarkable appreciation of the German Deutschmark and the Japanese yen?

How could Germany and Japan compete in manufacturing export market with the steady increase in their respective currencies over 50 years from 1949 to 2000 - if we accept the hypothesis that a steadily increasing exchange rate causes the decline of the manufacturing sector?

Is "Dutch disease", perhaps unwittingly, suggesting that the strong performance of a particular sector of a particular country in export markets puts upward pressure on the currency of that country?

Restated, is the debate concerning the alleged decline and harm to Ontario manufacturing, in essence a discussion of declining competitiveness and productivity coupled with exports to slow growth economies of US and EU instead of fast growing economies of emerging markets - as suggested by Gov Carney in his April 2012 speech, Exporting in a post-crisis world? http://www.bankofcanada.ca/2012/04/speeches/exporting-in-a-post-crisis-world/

[richard]

"Maybe I could get a job as a consultant and troll comment boards."

The competition there is quite tough - neither showers not suits are required, and spell checkers usually take care of the grammar.

[Robert McClelland]

It's hard to see how a link can be made between pricing carbon and increasing (or at least, slowing the rate of decrease in) manufacturing employment without some sort of exemption for the manufacturing sector.

Mulcair's plan is to go after the source polluters and most manufacturing is not a source polluter.

[genauer]

ianlee,

just throwing in a few key factors, and key words.

1. DE and JP did never run inflation like the US did. I had a ton of discussion in the last few days ("the battle for the ECB") about how to measure that exactly, and I think the US is off by 0.25 % even in measuring it.
2. There is this well known Balassa Samuelson Effect for PPP factor dependence on the (relative) GDP, see for example also the famous Goldman Sachs paper Nr. 99 (BRIC) for a formula
3. DE and JP did not "catch-up" in productivity like EM (emerging market) countries,
but to a large degree "re-built", which enables faster growth at moderate savings levels, which were never so high, at least for Germany, as many people believe.

4. There are some more second order effects, some are described in the Goldman-Sachs GSDEER and related papers / models. So far you get with (not silly ISLM) but significantly extended Fleming Mundell models, lets say until 2000. Plenty of papers around. One can understand trade volumes, current account surplus http://www.slideshare.net/genauer/currencies with adding surprisingly little dynamics to it. You will have a hard time to understand slide 2, I did not have time, found a good way to make this more understandable. But feel free to ask. This might help me to help you and others.

5. Since about 10 years, or lets say since the "Asian crisis 1998" there is something new in addition going on, which I call "volume squeeze". After the US squeezed cash strapped asians, they took this lesson to heart, and it is now getting to payback time.
Classic Supply and Demand relation are more and more distorted by generation / destruction volumes. As a key word the "global savings glut". For this part to understand you have to dive into demographics, social security as it is now,
and 20 years down the road. I believe I understand this for DE, US, JP, China
new recent edition: http://www.oecd.org/dataoecd/37/41/49454618.pdf
For the OECD keep in mind, these guys know less than you hope, take it with a lot of salt !
For tax codes, no good public references, but important for the DE current account surplus since 2004

You might get some ideas from the comments in
http://ftalphaville.ft.com/blog/2012/05/18/1006351/a-bund-a-bund-my-kingdom-for-a-bund/?updatedcontent=1#comments

So far I think I understand most of it. Quantitatively.

6. Long term political strategies of China etc.
Here me too has to speculate, mostly.

[Jacques René Giguère]

Dutch disease is not about reallocation of capital. It what happens when a sector generates rent. If the price of oil was equal to its marginal cost, all resources would be used and the shift to oil would have no consequences except higher incomes for everyone. When you generate rent, the distribution process halts. The resource curse is that you have to build useless monument or buy military hardware. Their building is the only way to back the income into the popualtion.
Ok. in the very long run, we could all move to Alberta, Canada would produce so much oil from costly sources that the price would drop while the cost would rise, and roughnecks would pay $100 for a hot-dog so the waiter would earn the same wage and Stolper-Samuelson would be happy.
In the meantime, another 30-year old restaurant closed here two days ago as the staff decamped north and retired professors have been asked back as young ones can't afford to migrate here and house themselves.
Money,money everywhere and no restaurant to drink a drop at.

[Livio Di Matteo]

IanLee & DavidN:
"Is "Dutch disease", perhaps unwittingly, suggesting that the strong performance of a particular sector of a particular country in export markets puts upward pressure on the currency of that country?"
"Corden and Neary (1982) has a model for 'Dutch disease': http://wy-sublettecounty.civicplus.com/archives/43/booming_secor_and_de-industrialization%5B1%5D.pdf"

A booming sector model is a good way of analyzing an export oriented sector that combines export led growth with neoclassical labour market adjustment properties. In Canada, we tend to think of economic booms as resource driven (oil, wheat, etc...) but the reality is any export sector can be a booming sector and any booming sector if large enough can put upward pressure on a country's currency. There has been criticism of oil in the West driving up the value of the dollar and hurting manufacturing but if we had a really successful manufacturing export sector, would there be the same criticism that it was driving an appreciation of the dollar? Likely not.

[genauer]

Just to stir your envy a little bit,
here in Dresden, DE, I have 100 restaurants in 20 min walking distance.
A Sunday open supermarket, and a "spätshop" where I can buy fresh bread and whatever to drink Sunday/Monday night 2 am at competitive prices.

10 min to high speed trains, 20 min to the airport, and I do leave the windows open over night without being disturbed by noise.

"Ich habe gar kein Auto"
I do not even have a car : -)

And we need good people (engineer and similar : -)

[Bob Smith]

"Mulcair's plan is to go after the source polluters and most manufacturing is not a source polluter"

That's a pretty broad, and not wholly accurate, statement - as Mike points out in his latest thread. I wonder how popular Thomas Mulclair will be in his home province when he starts imposing a carbon tax on Alcoa or whether he'll be able to hang onto those NDP seats in Northern Ontario once he starts taxing the Algoma steel mill (http://www.ec.gc.ca/ges-ghg/default.asp?lang=En&n=DF08C7BA-1#section3). And one would be hard pressed to argue that taxing source producers who produce inputs for manufacturing (coal and natural gas plants elecricity plants, transportation, chemicals, etc.) won't affect manufacturers.

As an aside, it's interesting to note that 6 of Canada's universities have facilities on that list of large polluters.

[Robert McClelland]

I wonder how popular Thomas Mulclair will be in his home province when he starts imposing a carbon tax on Alcoa or whether he'll be able to hang onto those NDP seats in Northern Ontario once he starts taxing the Algoma steel mill

Obviously the implementation will determine that. If done in a sensible manner the effects should be manageable and not cost the NDP politically in these regions.

And one would be hard pressed to argue that taxing source producers who produce inputs for manufacturing (coal and natural gas plants elecricity plants, transportation, chemicals, etc.) won't affect manufacturers.

I wouldn't argue that manufacturers won't be indirectly affected this either. But having now watched McGuinty nearly phase out coal generated electricity it looks as though the effects will be relatively minor and quite manageable.

[Patrick]

"I wonder how popular ... "

And there's the problem. Excepting those who are not actually producing it, we are all 'richer' for paying too little for energy. For most of the economy, energy is a cost.

[Matthew]

Aren't the manufacturing job losses in Ontario maintly due to technological advances? I seem to remember Mike Moffat writing a post about this in connection with the plant closeures in London. If correct, it would seem to indicate that the "dutch disease" is not to blame.

[Bob Smith]

"But having now watched McGuinty nearly phase out coal generated electricity it looks as though the effects will be relatively minor and quite manageable"

Where are you looking? Industrial electricity prices have risen steadily in Ontario over the last decade and has been one of the factors, couple with the rising dollar to be sure, that has crippled the Ontario manufacturing sector. The effect has not been minor. And it's going to get worse. The only reason Ontario hasn't seen serious electricity shortages (or had to rely on expensive non-base generating capacity) over the last few years is because Ontario's economy was conveniently crippled by a recession. Based on current growth levels, and scheduled increases in generating capacity (i.e., not much), Ontario will have severe power shortages by 2018 when the oldest of OPGs nukes start going off-line.

The one mitigating factor has been the collapse in the price of natural gas as a result of increased natural gas production in the US, making it cheaper to fire up natural gas reactors.

[Bob Smith]

"If done in a sensible manner the effects should be manageable and not cost the NDP politically in these regions."

What makes you think that taxing local industries in Quebec or Ontario will be any more popular among Quebecers or Ontarians than taxing local industries in Alberta is with Albertans?

[ml]

“I don't understand how an income-increasing change in the composition of output and employment can be called a disease.”

If the income-increasing change were happening for enough people and if it were sustainable for a long enough period then I think most people would have to conclude it is a good thing. Problem is, I’m not sure that enough people are sharing in the income gains and I don’t think it is sustainable over the long run.

A good chunk of the lost manufacturing jobs over the past decade have been replaced by good jobs in the broader public sector. That is why your wage charts show growth. Clearly, that is not going to happen going forward, at least not in certain parts of th country like Ontario. If both the public sector and the manufacturing sector are not growing, where are the good jobs going to come from?

The manufacturing sector was able to spread the income gains much more broadly and that is why its demise is being mourned by many people. I can see why some people call it a disease.

[Determinant]

Exactly, it's a utilitarian argument. The idea is that Ontario's manufacturing sector employed more people than Alberta's energy sector does at present and the job losses in manufacturing due to currency appreciation have been greater than the gains in energy and energy services.

The paradox, or disease, is that natural resource exploitation has caused a total job decline when compared with manufacturing.

[Stephen Gordon]

There really is no way the data will ever shake you from that belief, is there?

[BSF]

Has anybody looked at whether what's happening to the Cda/US exchange rate over the past few years has been the Loonie rising or the Greenback falling?

[Deus-DJ]

Stephen,

I think you didn't quite flesh out the third definition (which I believe is the true definition of Dutch Disease), or what you labeled the "hollowing out" hypothesis, that manufacturing has increased returns (ie technological achievements increases employment in manufacturing sector, while in primary commodity sector it reduces it). But why it's a DISEASE is the effect it has on the exchange rate. The point is that if you're looking for export led growth, your manufacturing industry is unable to compete due to the prohibitively high exchange rate...however, the two conditions that must be satisfied in this case is that, for one, a country's model of growth is predicated on exports, while on the other the manufacturing industry is still in development ie its in infant industry mode. However, neither of the two are necessarily the case when it comes to Canada (which depends more on domestic consumption, and already has a fully developed manufacturing and service base). Hence Dutch disease has absolutely NOTHING to do with Canada, and anyone who says otherwise is abusing the term.

[Deus-DJ]

In other words, Dutch disease is only relevant when speaking of (generally speaking) developing nations, and not developed ones.

[Deus-DJ]

BSF, no I haven't, but it's still irrelevant due to the points I made. Dutch disease has no meaning on a country with already developed manufacturing sector.

[rsj]

Dutch disease has no meaning on a country with already developed manufacturing sector.

Right, because Holland was undeveloped...

[genauer]

the low lands were the very first "modern country" way before the UK.
And a typical example for default with uncontrolled finances.

[Robert McClelland]

What makes you think that taxing local industries in Quebec or Ontario will be any more popular among Quebecers or Ontarians than taxing local industries in Alberta is with Albertans?

Because you can sell it to Quebec and Ontario manufacturers with a side order of cooled off dollar. Mulcair can simply point out that while they will take a hit with the cap and trade the loss will be recouped with the lower dollar. Please note, I'm not saying Mulcair is right that a cap and trade will lower the dollar, only that this can be his political messaging.

[DavidN]

I think a lot of the confusion has come about by equating Dutch disease with the resource curse which are two different things. Dutch disease has a specific definition within trade theory (see my comment above on Corden and Neary 1982) and refers to the effect attributable to trade between different currency regimes where a boom in one tradable sector can cause a sizeable appreciation in exchange rate resulting in recession/depression of all other tradable sectors, which can affect any currency regime, developed or developing. Dutch disease has it’s own wikipedia entry: http://en.wikipedia.org/wiki/Dutch_disease.

Livio,

Technically Dutch disease can come about through any booming tradable sector (not just resources) however it’s commonly associated with boom in resources (if I was to hazard a guess) because resources is unique in being about to generate the magnitude of capital inflow from consumption+investments in a short amount of time.

You’re probably right about the amount of the criticism, but I see that as a symptom rather than something artificial driven by political fear-mongering. Manufacturing is far more labour intensive than resources, in Australia manufacturing employs 9% vs 2% for mining when mining and manufacturing generate about same amount of GDP and I presume it would be the same in Canada. The boom in resources is not going to soak up unemployment from declining manufacturing even if there was no nominal rigidities in labour movement. It’s an issue that always comes up with trade but there are winners and losers (even if in the aggregate it’s a gain) so like it or not, this is a political economy dynamic to this issue as much as an economic one.

Having said all that, contrary to what Stephen suggested above, there are policy responses that don’t require direct central bank currency manipulation. As suggested in the second article I linked above, one policy response is to set up a sovereign weight fund investing overseas which will relieve the pressure on appreciation. Alternatively if you have a two-speed economy (unlike in the EU), you can leave the central bank to do it’s main job of controlling inflation and rely on fiscal transfers. Even the government generating a surplus will leave more room for the central bank to lower rates (assuming no lower bound issues) putting less appreciation pressure on the exchange rate. Policy intervention do not have to be protectionist or industry specific/targeted.

[Determinant]

I think a lot of the confusion has come about by equating Dutch disease with the resource curse which are two different things. Dutch disease has a specific definition within trade theory (see my comment above on Corden and Neary 1982) and refers to the effect attributable to trade between different currency regimes where a boom in one tradable sector can cause a sizeable appreciation in exchange rate resulting in recession/depression of all other tradable sectors, which can affect any currency regime, developed or developing. Dutch disease has it’s own wikipedia entry: http://en.wikipedia.org/wiki/Dutch_disease.

Yes. That's exactly what I have been discussing because Canadian manufacturing is highly reliant on export to the United States for its profits. It is therefore very sensitive to exchange rate appreciation. High loonie due to petrodollar effect => loss of profit margin due to decline in final US selling price wrt Canadian dollar costs => layoffs => Dutch Disease.

There really is no way the data will ever shake you from that belief, is there?

I was trying to express a view which disagreed with yours. What's with the ad hominem?

You once said, Stephen, that in order to do econometrics you had to have an economic theory in mind first. It appears to me that you are a (neo)classicist. I happen to have different views.

[DavidN]

I need to add an addendum,

'The boom in resources is not going to soak up unemployment from declining manufacturing even if there was no nominal rigidities in labour movement' however under the Corden and Neary model services should take up the rest of the slack (assuming no labour movement rigidity) due to the spending effect (in services).

This doesn’t change the overall qualitative result that labour-specific to manufacturing (i.e. labour that can’t transfer to services or mining) are unambiguously worse off.

[Steve Bank]

regarding (4):

What's a good policy response to unemployment in Ontario? Or is there no good policy response, and we just need to wait for people to move to Alberta?

Or is the answer too complicated for a quick comment response?

Even if you could point me in the direction of a reliable source on the subject (even a hard one!), I'd be appreciative.

[JP Koning]

Stephen Gordon,

Off topic, but this sounds up your alley.

http://newmonetarism.blogspot.ca/2012/05/sectoral-reallocation-and-labor-market.html#comment-form

[Determinant]

Further, Stephen, your point (2) misses the economic mark. Again, pricing power. Ontario firm sells finished product to US customers in US Dollars, costs are 70% in Canadian dollars (less US imports). The CAD appreciates 30%, that 30% can't be made up due to market competition in the US, thus the Ontario firm's costs rise by 21% in a way that can't be made up by increased revenue.

The result is falling margins leading to layoffs, wage reductions and the usual employment malaise.

This was explained to me by several managers at different firms, it was their world. Welcome to manufacturing in Ontario.

[Alex Plante]

Why, despite an improving terms of trade over the past 10 years, is Canada suffering a $50 billion/yr current account deficit?

http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ01a-eng.htm

Could it be that part of the rising value of the CDN dollar over the past 10 year is a speculative overshoot?

[Stephen Gordon]

"Suffer" is the wrong word

[ianlee]

Lots of sturm and drang. In further support of Stephen's arguments, from Statistics Canada, John Baldwin and Ryan Macdonald, The Canadian Manufacturing Sector: Adapting to Challenges, 2009

"The decline in manufacturing’s share of the value of economic activity however, does not necessarily imply that manufacturing itself is in decline or, that it necessarily represents a deindustrialization of the Canadian economy. The decline in manufacturing’s share of activity may be the result of other areas of the economy expanding more rapidly, or the result of a society starting to value services like education, health care or financial services more than manufactured products. More importantly, the decline in manufacturing’s share of the value of goods produced does not imply that the absolute or relative size of the volume of goods has also fallen (which is at the core of the deindustrialization argument). Before we reach the conclusion that the economy is de-industrializing, we must examine the evidence that is commonly used to argue that there has been a decline in manufacturing industries".

"We find little evidence of a moribund manufacturing sector in decline. We do find that manufacturing has undergone significant change in response to the numerous challenges that it faced"

And from Eric Lascelle, TD Economics study of the data, in May 18, 2012 Globe and Mail:

"Mercifully, Canada’s poor competitiveness just doesn’t seem to matter very much. Despite plummeting competitiveness since 2000, Canada has managed faster economic growth than the United States, more vigorous job creation (including fewer lost manufacturing jobs), and continues to gain on the United
States in the UN’s Human Development Index".

"Could this charmed existence eventually prove unsustainable, as it did for Greece? The evidence is to the contrary. Canada’s foreign financial indebtedness has not materially increased since the episode began".

"Instead of bemoaning poor competitiveness, Canadians should applaud the astonishing resilience of their economy. Yes, during periods of high commodity prices, resource-intensive countries like Canada shed competitiveness. But this is paired with no obvious diminishment to well-being, thanks to the material benefits of the resource wealth itself. Meanwhile, when commodity prices are low, resource firms struggle, but rejuvenated competitiveness puts manufacturing back on the offensive. This is an impressive and likely durable balancing act".

And finally the empirical results from from the IRPP Study: Dutch Disease or Failure to Compete?
A Diagnosis of Canada’s Manufacturing Woes, (which corroborates Governor Carney's conclusions in Exporting in a post crisis world):

"The results are more nuanced than conventional wisdom would suggest. Only 25 of the 80
industries (accounting for about one-quarter of total manufacturing output) show a significant
negative relationship between the US-Canada exchange rate and output. The effects are
most pronounced in small labour-intensive industries such as textiles and apparel. Larger
industry groups such as food products, metals and machinery are much less adversely affected
by the strong dollar, and these minor problems have generally been offset by strong growth in
demand. Interestingly, automotive industries do not show symptoms of the Dutch disease;
their weakness stems from cyclical changes in demand and lagging productivity growth"

[DavidN]

ianlee,

'How could Germany and Japan compete in manufacturing export market with the steady increase in their respective currencies over 50 years from 1949 to 2000 - if we accept the hypothesis that a steadily increasing exchange rate causes the decline of the manufacturing sector?'

To clarify some things, if the appreciation in exchange rate is due to increased demand for manufacturing then the manufacturing sector is the cause of Dutch disease and you should see the non-manufacturing tradable sectors decline.

In the case of a resource boom, the resource sector is the cause of Dutch disease and you should see a decline in non-resource tradable sectors such as manufacturing.

Dutch disease is not specific to manufacturing. The cause of exchange rate appreciation determines which sector is subject to Dutch disease.

[ianlee]

DavidN - I was being ironic to make the point that you are now making.

I find the entire Dutch disease debate to be utterly surreal.

1. There is nothing intrinsic or magical concerning increasing resource revenues from exports – as money is fungible - and any substantial increases in inflows from a rise in any exports (mfg or resources or anything else exported) will place upward pressure on the exchange rate.

2nd shibboleth claimed by Mulcair, CCPA, CAW is that a rise in the exchange rate renders the mfg sector less competitive or uncompetitive. Yet, Germany and Japan for 50 years have demolished that argument, year after year, with increases in exports, at the same time as their respective currencies steadily appreciated – demonstrating that mfg exports are not completely tethered, in lock step, to the exchange rate.

I thought Simon de Nordren (?) said it best, "When the world prices resources at a premium at to manufactured stuff, we export more of the relatively expensive stuff and import more of the relatively cheap stuff."
"When it prices manufactured stuff at a premium to resources, we use the same strategy. I think Ricardo called this "comparative advantage."

[DavidN]

That’s because Germany and Japan exchange rate appreciation is driven by demand for there manufacturing goods. You can’t have Dutch disease on your own sector ...

[DavidN]

I think this article by Dani Rodrik on International Trade and Redistribution is relevant to the discussion: http://www.project-syndicate.org/commentary/free-trade-blinders

'I began the class by asking students whether they would approve of my carrying out a particular magic experiment. I picked two volunteers, Nicholas and John, and told them that I was capable of making $200 disappear from Nicholas’s bank account – poof! – while adding $300 to John’s. This feat of social engineering would leave the class as a whole better off by $100. Would they allow me to carry out this magic trick? Those who voted affirmatively were only a tiny minority. Many were uncertain. Even more opposed the change. Clearly the students were uncomfortable about condoning a significant redistribution of income, even if the economic pie grew as a result. How is it possible, I asked, that almost all of them had instinctively favored free trade, which entails a similar – in fact, most likely greater – redistribution from losers to winners? They appeared taken aback.'

[Simon van Norden]

Stephen;

Sorry....been travelling and missed the shitstorm you've triggered. I'm glad people found my earlier comment useful. Several people above have already done a good job laying out the basic trade theory, but let me add one historical remarks.

The Bank of Canada firmly nailed down its position on this issue throughout the 80s, 90s and 00s; a succession of governors and deputy governors were of the view that shifts in the relative price of resources played a big role in moving the CAD/USD exchange rate. This view was trotted out whenever some faction (from business groups wishing for tighter integration with the US to CEA presidents lamenting the Great Canadian Slump) would agitate for a monetary union with the US. The BoC's counterargument was consistently that a floating exchange rate was reacting to real shocks and helping the Canadian economy adjust. I was therefore surprised to hear Dr. Carney the other day seemingly trying to deny that "Dutch Disease" affected Canada. I still need to read his exact words more carefully, many senior Bank of Canada officials have for years made public statements backing the Dutch Disease story; a governor who walks back from that line would leave those people twisting uncomfortably in the wind.

[Simon van Norden]

sorry, that should have read "carefully, BUT many senior...."

[ianlee]

DavidN: "That’s because Germany and Japan exchange rate appreciation is driven by demand for there manufacturing goods. You can’t have Dutch disease on your own sector ..."

Of course you can. No one has been granted an immunity from failure (which implictly assumes some omipotent agent possesses the authority to grant).

Restated, a firm or a sector can become less competitive over time, because competitor firms in that same sector in another country are achieving relatively higher levels of productivity increases due to e.g. more efficacious ICT or M&E or training investments or because you are granting larger wage increases in the firms in your sector relative to other countries.

Indeed, see the excellent ECB data that shows that Greek wages grew faster than all other EZ countries while German wages appreciated the least 2000-2010 in EZ. Per ECB, Greece is somewhere around 35% less competitive per worker hour while Spain is approx 30% and even France (IMF Sustainability Report, 2011) is about 20% below Germany per worker hour.

[ianlee]

'I began the class by asking students whether they would approve of my carrying out a particular magic experiment. I picked two volunteers..."

You have shifted the debate from an analysis of whether Dutch disease exists or not and why or why not, to a very different normative debate concerning whether students or people more generally, would or ought to support free trade in general.

The answer can be provided - in this context - very clearly. During the last 10 years, the Cdn economy lost 500,000 mfg jobs while creating 2.5 million new jobs in other industries across Canada.

Restated, for every mfg job lost, we gained 5 new jobs in Canada. That is an excellent ROI!

As there are still a lot of mfg jobs left in Canada, using that ratio, at that rate, if we destroy enough additional mfg jobs, we will eliminate unemployment in Canada:)

[ianlee]

I forgot to provide the following salient notes from Jason Langrish, (Exec Director of Canada-Europe Roundtable and formerly with Cdn Trade Commission to the EU)

""Yet in 2011 export growth for passenger cars was two times that of oil, while gold was three times that of oil. In fact, oil export growth was middle of the pack, even when compared to other commodities.""

""And if oil, for which Canada is the world’s eighth largest exporter, is a driver of Dutch disease, shouldn’t the severe drop in the price of natural gas – a commodity for which Canada is the third largest exporter in the world – also be taken into account? For example, in 2011 Alberta reported that its natural gas royalties dropped to about just 3.6% ($1.4-billion), down from about 15% of provincial revenues ($5.8-billion) in 2009.""

""The Canadian dollar is strong for a variety of reasons, of which oil resources is one. The country has a strong fiscal position, its banks are well capitalized, credit is available and the real estate sector has not gone off the rails. These days, there are a shortage of healthy, growing economies in which to invest and prosper. Canada is one, creating a strong dollar.""

""Dutch disease is not infecting Canada"", iPolitics, May, 18, 2012

[Bill]

Can the shift from manufacturing to resources or vice versa occur too quickly? Or not quickly enough? Isn't that the main issue? Rate of change?

[Guest]

Stephen,

The term Dutch disease has a very clear meaning: it is a concept explaining the process by which a boom in one tradable sector causes the appreciation of a country's currency and a corresponding decline in another tradable sector (or other tradable sectors in Canada's case).

Your point seems to be that this concept should not be saddled with a pejorative sounding label like "Dutch disease". You make the classic argument that the benefits of a booming tradable sector such as oil and gas must, ipso facto, outweigh the decline in other sectors--otherwise they wouldn't be generating enough demand to result in an increase in the country's currency. If that's the case, I suggest you take that problem up with The Economist magazine, since they coined the term; one can hardly blame Thomas Mulcair for their allegedly poor choice of words 35 years ago.

As to the substance of your contention that Dutch disease should not be considered a problem because the benefits of a booming tradable sector such as oil and gas outweigh the decline in other sectors that may occur as a result of an increase in the value of a country's currency, I would point you to Paul Krugman's seminal 1987 paper "The Narrow Moving Band, the Dutch disease and the Competitive Consequences of Mrs. Thatcher ".

www.eco.uc3m.es/~desmet/trade/KrugmanJDE1987.pdf

Krugman lays out, quite simply, that the danger of Dutch disease is not, ipso facto, the decline of competing sectors, but that (a) even DURING a Dutch disease-type boom the economy suffers because manufacturing has spillover effects whose benefits are external to currency valuation AND (b) in the case of a boom based on a non-renewable resource, sectors like manufacturing do not bounce back even AFTER the boom (when the resource is exhausted or market conditions change such that the boom in that particular sector ends). The point being that the loss of spillover effects is not the only problem, even in Paul Krugman's analysis.

Before I go any further, it's worth pointing out that this specific paper is among the work that won Krugman the Nobel prize. You may disagree with Krugman's analysis, but it's a little disingenuous to try to denigrate and dismiss Thomas Mulcair's economic ideas when they're based on Nobel prize winning work in economics (the intellectual case, that is; the factual case that this phenomenon is occurring today, in Canada, is purely a question of whether the appreciation of our currency is based on the oil and gas boom and whether a high dollar results in lower exports in other sectors, both of which you seem to have admitted are accurate.)

But there's also a new element that Thomas Mulcair has added to this conversation: subsidies to the oil and gas industry--mostly in the form of allowing the industry to externalize environmental costs. The idea here is clearly that subsidies to the oil and gas industry not only cost the public and encourage environmental damage, but because they are targeted at a booming export market, they create "artificial" pressure on the Canadian dollar. Since the product we're subsidizing is being exported in extraordinary quantities, it seems inarguable that this is correct. Mulcair's argument then becomes essentially that in addition to costing taxpayers and the environment, oil and gas subsidies are also undermining other export industries via the Dutch-Currency-Phenomenon-That-Shall-Not-Be-Named.

Thomas Mulcair lays out these arguments in this speech to the Economic Club of Canada starting at time 8:26 at the link below. I highly recommend you watch it. In other venues Mulcair has also made the point this affects all exporting industries, not just manufacturing.

http://www.cbc.ca/news/politics/story/2012/04/05/pol-mulcair-speech-economy.html

The argument that the correlation between the value of the dollar and the price of commodities "is essentially the result of the Bank of Canada's inflation target" is also incorrect. The increase in the value of the dollar is due to increased demand for Canadian dollars in foreign exchange markets. Of course the Bank of Canada could raise or lower the exchange rate in a nominal sense by printing more money, but as you alluded to this would be no different--to a first approximation--than adding or removing a zero to or from every currency note, bank deposit and price tag in the country. This would not, as you claim, lead to more investment in the oil sands because the nominal price of oil would be effected along with everything else. And that's the point, really: that increased demand for the Canadian dollar affects other industries precisely because it makes the REAL price of Canadian goods higher relative to the same goods produced in other countries, not just nominal price.

This is rather basic stuff. I suspect your comment that action by the Bank of Canada to increase the money supply would lead to more investment in the oil sands is based on China's success in attracting investment by devaluing its currency. But remember, China's currency devaluation is backed by fiscal policy in the form of buying foreign debt. Very different circumstance.

Finally, the implication that the internalization of environmental costs would not lead to more employment in manufacturing doesn't seem to be supported by any of the prima facia evidence. As you pointed out "in this debate, total employment is best viewed as fixed". That being the case, the question is not whether manufacturing would be impacted by pricing carbon, but rather the relative impact. According to the national inventory of greenhouse gas emissions, extraction, refining and leakage from oil and gas produces roughly 149 Megatonnes of greenhouse gas emissions and (according to CANSIM data) directly contributes roughly 3% to our GDP while manufacturing produces roughly 42 Megatonnes of greenhouse gas emissions and (according to the same data) directly contributes roughly 13% to our GDP.

http://ec.gc.ca/ges-ghg/8BAF9C6D-FDB6-4694-95D8-6A366FFBECB0/2010%20NIR%20Executive%20Summary.pdf

There is one thing you wrote that I agree with: this conversation is irrelevant. Economists agree externalities should be priced into the market; they agree that it is demand for oil and gas that is inflating the value of our dollar; they agree that a high dollar hurts exports. The rest is a matter of degrees.

If you want to argue that the impact of oil and gas subsidies on other industries isn't as big a deal as Mulcair thinks it is--even though you agree with the need to end those subsidies anyway--then be my guest. But trying to argue that Mulcair's thesis doesn't make sense just doesn't hold up to the facts.

[Determinant]

Hear hear!!!

Be my guest, Guest :)

[Deus-DJ]

rsj:

ok, sorry, obviously size of the economy matters too

[ianlee]

Guest

Please forgive my audacity for raising questions concerning anything that Krugman has said. However in my defense, I am still stuck at the empirical level of exports and imports for Canada's economy.

Per CANSIM Table 380-0027 Exports and imports of goods and services annual (dollars x 1,000,000), 2007-2011

I will only reproduce key points I wish to highlight - anyone can refer to full table

Total CDN exports of goods & services for 2011: $465,407
Total CDN imports of goods & services for 2011: $607,436

Total CDN exports of - 2011 (rounded to nearest Billion)

Agriculture & fish: $37
Energy: $58
Forestry: $27
Industrial goods: $70
Machinery & Equip: $88
Automotive: $78
Other consumer gds: $16
Export - services: $64

IF I understand your argument and your interpretation of Krugman correctly - you are suggesting that the export of $58 B in energy products (to help your argument let us assume it is ALL oil sands oil) is causing the CDN dollar to appreciate significantly (and thereby harming mfg goods exports)

BUT - you implicitly argue - that the CDN export of $70 B industrial goods + $88 B machinery & equipment + $78 B automotive + $16 B other consumer goods + $64 B services = $316 B in exports is not influencing the appreciation of the CDN dollar.

And implicitly, you are assuming that other issues such as Canada's international reputation, strength of its banks, relatively low debt to GDP etc have negligible impact on the value of the CDN dollar

Are you making this claim or have I misunderstood you?

If so, what is unique concerning oil exports in terms of the revenue impact on the value of the CDN dollar? Is money not fungible? Or are the monies received from the export of oil somehow different from the revenues received from the sale of mfg goods or industrial goods - in terms of impact on the CDN dollar?

[Mike moffatt]

Your numbers for GHG emmissions, I believe, are too low for both industries. Where are you getting your figures?

For an economy wide comparison, this Pembina data is useful if a but dated:

http://pubs.pembina.org/reports/canada-2008-summary-v3.pdf

[ianlee]

Re GHG and carbon tax issue, a carbon tax will increase the cost of energy.

Please see Industry Canada: Manufacturing Costs Manufacturing (NAICS 31-33)
http://www.ic.gc.ca/cis-sic/cis-sic.nsf/IDE/cis-sic31-33cote.html#cot2

""Under this topic you will find a breakdown of manufacturing costs by category for the Canadian Manufacturing (NAICS 31-33) sector. This information can be used as a benchmark against your manufacturing costs and can help you to identify trends in particular expense categories""

Manufacturing Costs by Category

""In general, the three most important categories for manufacturing costs are:

■cost of materials and supplies;
■cost of energy, water and vehicle fuel; and
■production worker wages.""

""Manufacturing costs in the Manufacturing sector were dominated in 2009 by the costs of materials and supplies. Considering these costs are the major factor in its manufacturing activities, this sector is vulnerable to any fluctuation in the prices of materials and supplies"".

****
From this report, it is estimated that energy and fuel are approximately 4% of mfg costs.

A carbon tax will somewhat increase the cost of energy to mfg firms, thereby somewhat diminishing their competitiveness.

Restated, Mulcair's suggested carbon tax will increase energy costs to mfg sector - thereby making mfg somewhat less competitive - as a consequence of the proposed policy.

I thought Mulcair justified his suggestions on the basis he was trying to help - not harm - the mfg sector.

[Stephen Gordon]

Guest:

1) Krugman's point is of the form "If A then B"; it doesn't demonstrate that A is true. My point is that there don't seem to be spillovers in the sectors that are losing employment.

2) One might also note that the service sector accounts for roughly 60% of the economy and for roughly 0% of GGE. I don't doubt that one can put together reasonable assumptions that would predict that if carbon pricing were in place, the manufacturing share of employment in the GGE-emitting sector would increase, everything else equal. But I suspect that these assumptions would also predict that the share of employment in the entire GGE-emitting sector would fall. In other words, manufacturing would have a larger proportion of a smaller share of employment - and it's not obvious a priori which effect will dominate. And if you throw in the declining relative price of manufactured goods, things get messier still.

[Bill]

I don't know why no one is looking at investment (not just production) from oil sands activity. What are we talking $200 - $500 billion?

[Guest]

Stephen,

1) Krugman's argument is "if A then B and C" where A is the rise in currency/crowding out of certain industries, B is the loss of spillovers and C is the ghost town effect. C occurs even if B doesn't. In other words, the fact that manufacturing doesn't bounce back once it declines is not based on spillovers sepcifically, it's based on all sorts of networking effects. Think first mover advantage in reverse: we're ceding the networking effects we've built up over time to other countries as they pick up, not only the types of manufacturing they would have crowded us out in anyway, but types of manufacturing that would be competitive in Canada were it not for the high dollar.

I'll add that in our current context--at a time when even many on Bay Street are calling on us to follow the example of Germany by moving i Ontario towards high-end manufacturing (industrial policy?)--we're not just talking about losing current manufacturing job. We could also be hindering our ability to make necessary transitions within the manufacturing sector. This is something the IRPP study misses entirely.

Amongst existing manufacturing enterprises, it may be low-end manufacturing that suffers most from the high dollar, but if so that's because high-end manufacturing can't pick up and move as easily (human capital, etc.). But what about the new high-end manufacturing markets we should be entering that we're not due to a high dollar?

Thomas Mulcair has often used the phrase "we're destabilizing the balance economy we've built up since the Second World War." That's actually quite a good way to describe the importance of networking effects.

Now I admit that networking effects are difficult to quantify and that might give people pause before crafting policy based on their impacts, but Mulcair is advocating a policy, cap and trade as well as enforcing existing environmental regulations, that is well supported to begin with. He's just giving us another reason why we should care about a policy we all agree on anyway.

2) Services account for a non-trivial share of GHG emissions, primarily because much of the transportation industry is part of the service sector and transportation accounts for a huge portion of GHG emissions.

Your broader point I agree with, but I would state it in a different way.

The problem with any externalization of environmental costs is that it ultimate misallocates resources (K, L, etc.) to production that cannot be justified at true market prices. It's true that it's not just currency impacts that would shift the allocation of capital and labour resources from one industry/sector to another, but the direct market effects as well. That's actually why the originators of the dreaded Dutch-Currency-Phenomenon-That-Shall-Not-Be-Named models focused not only on whether resources shifted from other sectors to the booming sector (of course they would), but also whether the existence of currency and trade within the model caused an additional shift from non-booming tradable sectors to non-booming non-tradable sector (which it did).

So, yes, we can't know for sure which effect will dominate, but non-booming tradable industries are currently taking a double hit, non-booming tradable industries with low emissions are taking a triple hit--except perhaps Bay Street which making up the money on the other end (investment flows). The point being, it's not correct to say that the only way the internalization of environmental costs helps manufacturing employment is to assume an exemption.

I'll add here one issue that doesn't get enough play in this conversation: the degree to which the rents from the oil sands are being exported due to foreign ownership. When we see huge dump trucks on TV in the oil sands we tend to think about all the investment and employment oil sands production is creating. But economic data tells us natural resource extraction is actually not very labour and capital intensive.

Why? It certainly seems like it would be.

The reason is that it's not the numerator (labour costs + capital investment) that's low, it's that the denominator (revenue) that's high, and the reason that the denominator is high is that the value of the oil in the ground is much greater than the value-added in extracting it. In another industry this would not be an issue, but the value of the oil in the ground is set by resource royalties in this market, not by market forces. This won't be part of the federal debate because it's province jurisdiction, but the low royalty rates currently being charged by resource rich provinces are, in many cases, effectively padding the profits of foreign-owned corporations, taking that wealth out of the country, with a relatively small portion of total revenue being paid to labour income and capital investment.

[Guest]

Mike Moffat,

I provided a link. The National Inventory Report.

The difference appears to be there was a drop off in refining in 2010 (high dollar, anyone?).

http://ec.gc.ca/ges-ghg/8BAF9C6D-FDB6-4694-95D8-6A366FFBECB0/2010%20NIR%20Executive%20Summary.pdf

[Guest]

Stephen,

I forgot, buildings are another major reason that the services sector produces a non-trivial contribution to GHG emissions.

[Mike Moffatt]

Ahh.. I see where you've got it.

You're misreading the data. Keep in mind, if a plant produces its own electricity (with say nat gas) to power their production, that electricity production falls under 'energy production' not 'manufacturing'.

Look at the data I presented in the other post. The top manufacturing facilities alone have GHG levels beyond 42 million tonnes.

[Guest]

Ian Lee,

First, let's clear up a couple of things.

Mulcair is not proposing a carbon tax. He is proposing we enforcing existing environmental regulations do deal with issues like toxic sites and a cap and trade system to deal with climate pollution.

Also, with regard to Krugman, I specifically wrote that "You may disagree with Krugman's analysis, but it's a little disingenuous to try to denigrate and dismiss Thomas Mulcair's economic ideas when they're based on Nobel prize winning work in economics".

Far from considering it "audacity [to raise] questions concerning anything that Krugman has said", I made the--fairly inarguable point--that it's a little bit much to hold candidates for Prime Minister to a higher standard than that of Nobel prize winning work in economics.

Now on to substance...

You make the argument above that in the last decade we've lost 500,000 manufacturing jobs, but gained 2.5 million jobs. I'm not sure why this is relevant. Obviously there are many factors at play in terms of job creation in multiple sectors and industries.

You go on to make two arguments more closely connected to the point at hand: (1) that we have seen manufacturing thrive in other countries as their exchange rate has increased and (2) that oil makes up a modest portion of our exports, so how can it be "responsible" for the high dollar?

On the first point, I would say "chicken and the egg" followed by "ceteris paribus".

In the countries you cite, it seems to be the case that it was the success of their manufacturing sector that drove the increase in their currency. Of course a rising currency didn't hurt the manufacturing sector in those examples. That would be like me saying that the increase in the dollar caused by oil export is hurting our oil exports!? It's simple supply and demand--the price of a product increasing as demand increases except in this case the "price" is the currency.

Now, of course, as you point out, one might have said in such a time and place that a high currency caused by some markets within the manufacturing sector was crowding out other markets within the manufacturing and why should we care any more about oil crowing manufacturing as a whole than we care about one element of manufacturing crowding out another?

But this, of course, brings us back to the economic literature on network effects, the ghost town effect, etc. As well as the new element introduced by Mulcair--that because subsidies are driving the oil industry, we're cutting our noses off despite our face by supporting one industry in a way that harms others.

On the other hand, if we assume that the appreciation in the currency of the countries you cite was based on something other than the success of manufacturing itself, then it's just a ceteris paribus situation--sure, manufacturing may have been thriving, but not as much as it would have had X, Y, Z not caused the currency to increase.

On your point about the empirical data, I would say several things.

First, I'm aware of the data and it's certainly interesting.

Second, the reason it has become commonly accepted that oil is driving the high dollar is that we have much more direct empirical evidence on the subject--namely day-over-day, month-over-month and year-over-year sequential correlations in the price of oil and the exchange rate. If we initially find this hard to square with the fact that oil is only a modest portion of our total exports, then we should apply the scientific method and build a theory to match our observations, not the other way around. As far as I'm aware, the overwhelming majority of analyses of these correlations suggests that it is indeed oil that is driving the dollar--so much so that that, as wrote, idea has become common place.

Third, oil could be having an impact on the dollar that's disproportionate to its contributions to our total exports for two obvious reasons: the elasticity of demand and speculation. The former because it allows for a case in which a modest increase in demand leads to a large increase in price, and the latter because it would lead investors to hedge by moving themselves into Canadian dollars (more than they would otherwise) to protect against high oil prices.

Fourth, even if oil exports do not make a disproportionate contribution to the value of the dollar, it changes very little. Demand for our currency is cumulative, but our concern is with the value of the dollar at the margin leading to marginal increases in the price of our non-booming export markets. Put another way, a 20% increase in the value of the dollar is still huge even if it's being driven by an industry that's only 20% of our exports. The entire increase in a currency can be driven by an industry that is only responsible for a fraction of total export, and if that industry is being driven by subsidies then that increase is artificial.

Fifth, oil contributes disproportionately to our exports compared to its overall contribution to the economy. This is relevant for two reasons. First, the networking effects--because oil is a relatively small contributor to our GDP and manufacturing is a relatively large contributor to our GDP, any damage done by currency effects driven by oil risks having an outsized effect on a much larger industry. Second, to the extent that oil is being driven by non-market forces--subsidies and low royalty rates--whatever impact it is having on the currency is disproportionate to its role in the economy.

I don't want to argue the detail of each and every point I've raised above. I'm sure arguments can be made on both sides of each. But the argument that can't be made is that if you believe the failure to internalize environmental costs is a subsidy (or a defacto subsidy), then the failure to do so effects other industries inclding via our currency. People should stop freaking out abou the magnitude of the problem--whoich an Industry Canada study found to be responsible for at least a quite significant number of job losses--and jyst admitt it exist so we can get on with the larger debate.

[Guest]

Mike,

I can't load your post (or at least not the chart/table that seems to be trying to load as an image).

From what I can read from your post and the links you provide, I don't see where the distinction is made between facilities and manufacturing facilties--it's probably in the graphic I'm missing out on.

As to misreading the data, I'm aware there's a lot of cross over between categories, but--if anything--this augers against oil and gas and in favour of manufacturing. Under any upstream cap and trade plan, as Mulcair has proposed, oil and gas would be affected by the cap on the vast majority of the 562 Megatonnes of emissions related to energy (from which all of the numbers I cited are taken). I think it's fairly common sense that manufacturing would be far less impacted than oil and gas.

As Stephen points out that may leave manufacturing with a larger share of a smaller pie and it's impossible to know which effect will dominate, but incorrect to say that the only way there would be an overall increase in manufacturing employment were if the manufacturing sector would be exempted.

[Ginna]

Ianlee is correct that the greatest cost for manufacturers are production inputs, ie cost of materials and supplies. Having worked in mfg management for nearly 20 years, both in Ontario and BC, I heartily agree.

The weird thing about this debate is that no one seems to actually be listening to producers themselves regarding the decline of manufacturing in Ontario. If you read the latest State of Advanced Manufacturing Report from the Canadian Manufacturers and Exporters Association, you will discover some interesting facts.

"Canadian manufacturers were nearly four times more likely to increase production capabilities in Canada between 2007 and 2009 than abroad. In addition, manufacturers are investing in production facilities to increase agility, expand mass customization capabilities, capitalize market niches, and optimize prototyping and new product introductions. More
than twice as many manufacturers increased production capabilities (25%) in Canada between 2007 and 2009 than reduced capabilities (11%)."

The report also points out that some of the most significant issues facing producers are
a) Inter-provincial trade barriers, and labor mobility.
b) Importing/Exporting and border issues.

B is the most significant that I've encountered. Most people in this industry just laugh when you talk about NAFTA. Because importing and exporting goods to the US, let alone Asia or Europe, is completely ridiculous.

Tariffs and duties make up an obscene portion of the cost of goods, especially those imported from asian countries. Duties and levies on low-value items such as microchips or resisters can come to 10 times the cost of the original item. Yes, you read that correctly. 10 times! Sometimes more.

And the administrative overhead. Eeek. This year, the CBSA is now requiring importers to submit advance data electronically for all goods entering the country. Failure to do so ensures that product is stopped dead at the border. Much of the data is simply impossible to provide.

For example, the importer must declare the originating country for every item, and magically supply the correct harmonized tariff code. For an assembled good, like a connector or circuit board, this is virtually impossible. Every border agent applies different rules. The codes and paperwork that worked for a previous shipment are not guaranteed to work again. It's quite maddening!

So there are low-hanging fruit in terms of regulation to address before dividing the country. And I hear now from Ontario producers that the meteoric rise in energy costs, and maybe more significantly the instability of energy costs, has certainly been a factor.

Finally, to address the dollar issue, most manufacturers were impacted by the speed at which the CND dollar rose. Most had longer term contracts in place for both purchase and sale. A few years on down the road, the impact is significantly less. Costs in USD have gone down, in alignment with sales in USD.

[Mike moffatt]

It's not "common sense" at all. You need to consider relative profit margins, for one thing.

Look at carbon pricing in Sweden. There's a reason why these industries get exempted - they'd be wiped out with a stringent price.

[Mike moffatt]

Consider aluminum smelting. Given the margins in the industry, you either have to:

A. Have very low carbon pricing to the point of ineffectiveness
B. give them free permits, so it's not polluter pay in any meaningful sense
C. Exempt them
D. Let them be wiped out

Which is the NDP choosing, and why?

[Mike moffatt]

Err.. To the point of Ineffectiveness. [Fixed - SG]

[Guest]

By "affected" I meant have more emissions covered by the cap--especially because they have both their inputs and outputs are affected by the cap.

In the next paragraph I was referring to Stephen's comment where he assumes, presumably for the sake of argument, that manufacturing employment would have a larger share of the non-services pie.

I could have been more clear about that. My only point was that I don't think you can easily assume that manufacturing employment will decline due to cap and trade unless there is a specific exemption. My understanding of the situation in Europe is that well-connected industry tend to get exemptions.

Just as an example of how this could play out, take this study from the US that found a price on carbon would produce very modest long-term reductions in output in manufacturing (except refining of petroleum products) and significant long-term reductions in oil, coal and gas production (as well as petroleum refining). These are reductions in output, of course, so it is primarily the relative shift that would determine the impact on unemployment. And, being American, this study doesn't even take into account the fact that their oil is not oil sands oil.

http://www.google.ca/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&ved=0CFQQFjAA&url=http%3A%2F%2Fwww.rff.org%2FDocuments%2FPublications%2FRFF-DP-08-37-ExecutiveSummary.pdf&ei=FYi5T5-0CaKX6QG6qLX9Cg&usg=AFQjCNH6jGJWYypIxo84-VoAqx6hlnsB7g&sig2=RrQO2J7UCM3RbZsCnsjmaQ

[Mike moffatt]

That's all nice. But it doesn't answer the question.

[Mike moffatt]

And, secondly, Isn't it "safe to assume" that the, say, Steelworkers would be "well connected" to an NDP government?

[Mike moffatt]

Let's go back to the Aluminum industry. Who represents Alcan workers? Why, it's the CAW!

Again, which of the four options will the NDP choose for the aluminum smelting industry and CAW workers?

[ianlee]

Guest – fascinating analysis. I will limit my response to 3 issues

My point about Krugman (whom I use in my IB courses for new trade theory as he is a brilliant economist) - is that even though he won a Nobel (after all, so did Joseph Stiglitz – but not to diminish Krugman or Coase or Stigler or Williamson et al by that remark), it is legitimate to challenge him.

On the related issue of higher standard of account, I hold the PM and potential PMs to a higher standard than Nobel Prize winners as the policies or non-policies immediately affects the lives of 34 million citizens (notwithstanding Keynes witty quote about the impact of theorists long after they are dead on people devoid of thought).

Concerning the reasons for the job gain, agreed there are many factors operating from productivity to quality of the work force to the stability of the country to GDP growth to taxation levels etc. But multi-causality holds equally true for the mfg job losses - which have been attributed by Mulcair, CCPA, CAW to oil exports. Let us be consistent. If it is multi-causal for the job gains, then it logically follows it is multi-causal for the job losses.

This leads to the issue concerning Germany’s export machine and exchange rates. My point was that just because the currency appreciates is no reason to assume that the mfg sector will then become less competitive. Nor is it a reason to assume – as you did – that Germany must always remain competitive even in the face of an appreciating exchange rate. I provided the example of Germany and Japan to illustrate that during the past 50 years, Germany was NOT complacent (as mfg perhaps was in Canada). German firms - the Mittelstand - continued to reinvest in ICT, M&E and training and moving up the productivity curve year after year after year. BUT if German firms can adopt these firm level strategies concerning capital investment, why cannot Cdn mfg firms adopt similar business strategies?

Side bar: Following Ronald Coase (in his Nobel acceptance) who said that the dark and dirty secret of economics is that economists do not have a theory of the firm - what passes for microeconomics is merely an aggregate production function - I advised Nick Rowe tongue in cheek (I think) that Economics Depts do not teach Micro economics. In fact, they teach Macro and Meso economics – or Industry level economics - while business schools in fact teach microeconomics – only we call it corporate and business strategy or strategic mgmt. (disclosure – I teach these courses in my school and the students are required to research and ID empirical data from OECD, IMF, Bloomberg, Capital IQ etc. to support their arguments).

This point ties to Ginna’s comments. At the FIRM level – not at the meso or macro level – mfg firms do not agree with the analysis provided here or elsewhere by mostly macro or meso-economists. Not a cheap shot – it is a level of analysis issue. I fully agree with the arguments in the rpt from the Mfg & Exporters Association and Ginna’s analysis.

Finally, concerning yours and Mulcair's criticism of subsidies to oil industry, Mulcair is right qua direct subsidies via tax expenditures, because we should not be subsidizing any firms at any time anywhere with public funds (why are we subsidizing wind and solar at 10 TIMES market kilowatt price per hour in Ontario???).

However, if you mean that the failure to capture all externalities is a subsidy, this is true of every industry. We do not charge the auto mfg industry for the billions and billions in dollars to construct and then maintain roads, bridges, bypasses, ferries infrastructure that make cars usable. Moreover, we do not internalize the cost of the emissions from cars via special taxes on auto owners. If we did those two things, we would shut down automobile mfg industry completely. And Mulcair will never do that as he is joined at the hip to the CAW. So, the "subsidy" argument is a fig leaf to cloak the attempt to extend some protectionism to the auto industry by attempting to slow down growth in Cdn oil sector to slow down loonie appreciation.

(At the risk of sounding Marxian) We do not capture the enormous subsidies in education that produce the highly trained workers for all industries. We do not capture the enormous subsidies via the public health system – averaging 45% of provincial budgets and almost $200 Billion or 12% of GDP – BTW, why do progressives call our system “free health care” when it is so incredibly expensive?)

Finally, turning to the oil export data, I agree that a significant number of very capable economists assume that oil exports are driving the loonie's appreciation. I am deeply puzzled, for on the surface the data does not support this (only $58B of $465 B in exports). As you note, maybe we need a new theory. OK. But until I read and understand the yet-to-be-developed new theory, I reject the idea that oil is mostly responsible for the appreciation of the loonie – given the export numbers that show it is a small percentage of Canada’s exports.

I suggest the appreciation of the loonie is due to a multiplicity of reasons including Canada’s important successes in restructuring the Cdn economy for the past 20 years under three govts: Mulroney, Chretien and now Harper – from NAFTA to replacement of PST with GST, elimination of the deficit, GST harmonization, Open Skies, FTAs under way with Europe, India, South Korea, Japan, TPP, tax code restructuring, regulatory streamlining, environmental streamlining, red tape streamlining and yes investments in resource industries.

When the currency and capital markets examine the US or EU – the major free market, rule of law alternatives – they see at a minimum a refusal to confront hard choices with continued worsening of economic conditions. And when they analyze countries including Russia, China, Iran, Ukraine, Mexico, they find no rule of law or serious property rights regime while the leadership and bureaucracies in most of these countries are profoundly corrupt. Then investors and currency traders look back to Canada with enormous resources, highly educated population, rule of law, property rights, no systemic corruption, a growing population due to .3 million immigration annually, and the inevitable conclusion is a strong currency that will appreciate.

[Robert McClelland]

Which is the NDP choosing, and why?

It looks to me like the NDP is choosing option E: Impose a meaningful cap and trade program on them that will be offset by the benefits received from a lowered Canadian dollar.

[Mike moffatt]

Again, look at aluminum. There's simply no possible way to offset carbon pricing through a lower dollar. Margins too low, and aluminum not an industry with a huge net forex exposure.

[Guest]

Ian Lee,

By saying it's unfair to hold a candidate for Prime Minister to a higher standard than a Nobel prize winning work in economics, I'm not suggesting people shouldn't feel free to disagree. I'm saying that the starting point for the conversation should be to admit that these ideas--both theoretically and empirically--are backed up serious, significant economists and facts. I'm saying there should be an upfront acknowledgement that some of these ideas--such as the idea that subsidizing a major export industry puts upward pressure on the dollar or that a high dollar reduces the competitiveness of the manufacturing sector--are basically universally accepted and that this is mainly a debate about the magnitude of these effects.

This is particularly important given that the policy prescription Mulcair is advocating, internalization of environmental costs, is already overwhelmingly supported by Canadian economists (at least those weighing in publicly, at least in theory). I suspect that if the economists who are now criticizing Mulcair didn't dislike the NDP to begin with, the harshest reaction we would see to his comments would be something like this:

"I think the scale of this effect is a bit overblown, though, there's no question this phenomenon exists. Exports drive up the dollar; a high dollar hurts other exporting industries. If manufacturing is being hurt by the upward pressure on the dollar, driven by the oil sands, we shouldn't necessarily be concerned by that--we should consider what's best for the economy as a whole--but in this case Mulcair is saying our dollar is being driven higher by a failure to make polluters pay and--to the degree that that's true--it's a valid point. The fact is, we should make polluter pay regardless of the impact on our currency because that's just good economics across the board."

Instead, we see a lot of dismissal and hysteria.

As far as multi-causal impacts go, absolutely. No one is claiming otherwise. Go watch Mulcair's Economic Club of Canada speech where that's the first thing he brings up when discussing this issue (the portion covering this issue starts around 8:30, but the whole thing is worth watching). Frankly, I think you'd be hard pressed to find another Canadian federal leader speaking this seriously about economic issues. When most politicians try this, as Finance Ministers often do to try to create the appearance of sophistication, it's usually just in nonsensical financial jargon that amounts to nothing more than bromides. Mulcair talks, all be it briefly, about New Growth Theory, for Christ's sake.

http://www.cbc.ca/news/politics/story/2012/04/05/pol-mulcair-speech-economy.html

As far as Germany goes, I certainly wasn't assuming that "Germany must [did?] always remain competitive even in the face of an appreciating exchange rate". My argument was that if manufacturing was driving the increase in their currency, then the situation is not equivalent to the interaction between oil and gas and manufacturing in Canada today. On the other hand, if it was not manufacturing driving that increase in the currency, then no matter how well their manufacturing sector was doing we can conclude it would have been doing better had other factors not been putting pressure on its currency.

You go on to make the point, "German firms - the Mittelstand - continued to reinvest in ICT, M&E and training and moving up the productivity curve year after year after year. BUT if German firms can adopt these firm level strategies concerning capital investment, why cannot Cdn mfg firms adopt similar business strategies?"

To that I say, hear, hear. In fact, IT and training--and high-end manufacturing generally--are exactly the kinds of activities that produce the positive externalities, spillovers and networking effects that loony lefties argue justify pro-active industrial policy using targeted subsidies to account for the fact that many industrial activities pay dividends beyond those that are captured by the market. And this was certainly part of the Germany experience. In Canada, I feel like our debate is more influenced by the "pure market" rhetoric of the US debates, so these kinds of subsidies are seen purely as political chits to be handed out, but in many European countries they are used quite effectively as real economic tools to encourage the type of activity you are suggesting.

As for solar and wind, these are sunrise industries, so it isn't difficult to see how high margina--but low total--subsidies could be used to encourage a first mover advantage in these fields, but I'm not familiar enough with the Ontario provincial policy to know whether this being done correctly or at a magnitude that's supported by pure economic considerations.

I completely agree that the difference between what manufacturing firms and economists prescribe for the sector is based on the level of analysis. The impact of the dollar is often not visible to the individual firm while border issues, for instance, are often not visible to the economist. It's a question of altitude and an astture observation distiled quite well.

As for subsidies, Mulcair has proposed a comprehensive, upstream cap and trade plan. While obviously not all the details were spelled out during his leadership campaign, he may not be so much in the pocket of the CAW as you think he is (the CAW has disaffiliated from the NDP for heaven's sake), or the CAW doesn't share your dire view of carbon pricing. This study from the US, for instance, predicted a very manageable long-term impact on manufacturing from the introduction of carbon pricing. Either way, I think you're underestimating Mulcair; his policy is fairly clear on expanding beyond just the biggest polluters.

http://www.google.ca/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&ved=0CFQQFjAA&url=http%3A%2F%2Fwww.rff.org%2FDocuments%2FPublications%2FRFF-DP-08-37-ExecutiveSummary.pdf&ei=FYi5T5-0CaKX6QG6qLX9Cg&usg=AFQjCNH6jGJWYypIxo84-VoAqx6hlnsB7g&sig2=RrQO2J7UCM3RbZsCnsjmaQ

On this point, "Finally, turning to the oil export data, I agree that a significant number of very capable economists assume that oil exports are driving the loonie's appreciation. I am deeply puzzled, for on the surface the data does not support this (only $58B of $465 B in exports). As you note, maybe we need a new theory. OK. But until I read and understand the yet-to-be-developed new theory, I reject the idea that oil is mostly responsible for the appreciation of the loonie – given the export numbers that show it is a small percentage of Canada’s exports."

This is the biggest problem in economics--theory above observation. If we have direct empirical evidence showing that the exchange rate is being driven by oil exports--caveat below--we should accept that as a fact and work backwards from there. That's the scientific method.

Now I'm sure that one might say "But I have observed empirical evidence as well--that oil exports are only 12.5% of our total exports."

The problem is that that isn't observed evidence of the impact oil exports have on our currency. The assumption that that represents the impact oil exports have on our currency is based on a theory. The empirical evidence from the actual foreign exchange market data is direct evidence of the impact on the exchange rate, it requires no theory to accept that it is true.

(Caveat: Now, of course, the many analyses of this data may still be wron, but as I have argued there are other reasons I don't think that matters much to this debate, but we don't need to revisit those arguments.)

[Guest]

Mike,

I'm sure you may be right about aluminium. There no doubt cap and trade would produce shift within sectors as well as between sectors. My only point was that you can't assume manufacturing will loss jobs overall unless it gets an exemption. The study I linked--which suggests a much bigger impact on oil and gas with out a major shift to services--seems to suggest the opposite is true. But whichever ultimately turns out to be true, I just think you can make any such assumptions.

[Guest]

Mike,

I'm sure you may be right about aluminium. There's no doubt cap and trade would produce shifts within sectors as well as between sectors.

My only point was that you can't assume manufacturing will lose jobs overall unless it gets an exemption.

The study I linked--which suggests a much bigger impact on oil and gas with out a major shift to services--seems to suggest the opposite is true, but whichever ultimately turns out to be the case, I just don't hink you can make any such assumptions.

[DavidN]

ianlee,

Firstly, the Dani Rodrik article is entirely relevant to in a discussion about trade matters notwithstanding Stephen making a normative point about allocative efficiency by quoting Simon van Norden in point 1 that you yourself quote.

Secondly, as guest and I have been trying to point out if the appreciation in currency for Japan/Germany is due to increased demand for there manufacturing exports this is not the same thing as an appreciation caused by increased demand for oil exports. Case 1 - Suppose demand for German/Japanese manuf. exports increase, German/Japanese manuf. exports INCREASE, EURO/YEN appreciates as a result. Case 2 - There is boom for Canadian oil. Demand for oil exports increase, loonie appreciates effectively increasing the world price for Canadian manufacturing exports (even though no other exogenous factors e.g. productivity or consumer preference shocks). As a result Canadian exports DECREASE. In both cases, the currency appreciates yet in the first case exports increase while in the second exports decrease. So your point that the appreciation in currency doesn’t matter for competitiveness is incorrect, the reasons for appreciation matters.

Now you rightly point out there can be multi-causal reasons for job losses/gains, however the Dutch disease model is saying that even after taking into account other causal reasons, including productivity shocks, an appreciation can cause even greater declines in the manufacturing sector if capital inflows is caused by another export sector. Your example of German/Japanese manufacturing productivity gains is irrelevant to this point because Dutch disease occurs independently of productivity shocks.

Third, your argument that the oil export data contradicts loonies’ appreciation is logically fallacious. Absolute figures tell us nothing, what matters is at the margin. It doesn’t matter if oil exports compose 0.000001% or 99.99999% of total exports. Holding constant other exports, if ex-post oil exports value increase by $1 the loonie will appreciate.

Maybe before proposing alternative theories understanding existing ones is in order?

[DavidN]

I need to add an addendum:

'Your example of German/Japanese manufacturing productivity gains is irrelevant to this point because Dutch disease occurs independently of productivity shocks.' This statement is incorrect. It should be 'Dutch disease occurs independently of productivity shocks to foreign competitors'. The whole point of Dutch disease is that a productivity shock in one exportable sector can cause a decline in every other exportable sector.

[Stephen Gordon]

I still fail to see why that's a problem.

[DavidN]

Stephen,

As I was trying to point out in comments earlier, it depends on which side of the boom you are on. If you’re export manufacturing specific-labour then I think you would care very much. Of course this is a normative point, but what point isn’t normative when you’re discussing economics? (Apologies, I’m being facetious).

Also, if you read my earliest two comments, I’ve pointed out policy responses can be non-protectionest and sector-agnostic.

[Mike Moffatt]

"My only point was that you can't assume manufacturing will lose jobs overall unless it gets an exemption."

I'm not assuming anything. I'm analyzing the data and coming up with my best estimate.

[Mike Moffatt]

And I'm still waiting for an answer to the aluminum smelting question.

[Bill]

I still fail to see why that's a problem.

It's not if the price for oil stays at the top end of the graph:

http://www.wtrg.com/oil_graphs/oilprice1970.gif

[Jacques René Giguère]

Ginna: great post from the micro level. Though the fact that" Cdn manufacturers increased ... four times ..." isn't meaningful as such. That you swin harder than you ever did isN,t proof that the ship is still afloat. Maybe the contrary.

Money is fungible? Not necessarily. When you generate rent, you break the transmission mechanism as the value is not equal to the marginal cost of the resources needed to produce the stuff. You produce value without resource, not to be confused with profit or entrepreneurship. It's great if you are the owner of the resource. But the industrial resources (workers blue-, white - or pink collars, capital owners, etc) are not the owners. There is no way they can benefit.
Germany and Japan population grew relatively more slowly than other developped nations as they are still under the influence of the late unpleasantness (so is Russia). The unemployed were never born.

Guest: please stay!

[Robert McClelland]

And I'm still waiting for an answer to the aluminum smelting question.

Given your response to my general theory it appears you're asking for something that is far too specific to be answered. In general though, there probably will be a few casualties of Mulcair's policy that would have to be dealt with on a case by case basis. In these instances I'd surmise any of the four options you present--and possibly a few more--could be used depending on the importance of these companies to Canada's or a regional economy.

[Mike Moffatt]

"Given your response to my general theory it appears you're asking for something that is far too specific to be answered. In general though, there probably will be a few casualties of Mulcair's policy that would have to be dealt with on a case by case basis. "

And those would be done how, exactly? What's the plan here? I think these are fair questions. The fact it's impossible to get an answer shows how poorly this has all been thought through.

[Bill]

Given that aluminum smelters are often subsidized by the provinces through electricity rates that are below market, one suspects a similar response would occur to maintain profitability.

[Mike Moffatt]

Bill: I suspect so as well.

[ianlee]

Guest and DavidN:

From Stats Canada, Age of Public Infrastructure: A Provincial Perspective
by Mychèle Gagnon, Valérie Gaudreault and Donald Overton,
Investment and Capital Stock Division

They find that bridges and roads are 59% or $170 Billion of all infrastructure in Canada while bridges and overpasses are another 8%.

This 67% of all infrastructure in the hundreds of billions represents an enormous subsidy to the automobile and truck mfg industries.

Given Mulcair's and your concern for the allegedly unfair subsidies for the oil industry, should these multi billion dollar externalities be internalized through, for example, user pay road tolls on all highways and bridges, and a separate car tax for all municipal infrastructure?

Is it likely that Mulcair will propose such a policy?

Summary
http://www.statcan.gc.ca/pub/11-621-m/11-621-m2008067-eng.htm#t2

Like many other developed countries, Canada invests billions of dollars a year to repair, upgrade and expand its public infrastructure. Whether it involves paving roads, renovating bridges or upgrading sewer and water systems, all levels of governments and the private sector work together to ensure that Canada’s public infrastructure is safe and meets the needs of a growing population and economy.

Five public assets are covered in this study: highways and roads, bridges and overpasses, water supply systems, wastewater treatment facilities and sanitary and storm sewers. Gross stock in these assets amounted to $286.2 billion in 2007, 5.3% morethan in 2001. Combined, they accounted for more than 80% of all engineering infrastructure owned by federal, provincial and municipal governments in 2007.

Highways and roads, the largest component of the five public assets, were worth $170.1 billion in 2007, representing 59% of the total. The average age of roads in Canada increased steadily since the beginning of the 1970s to a peak of 16.9 years in 1994; by 2007, it had shortened to 14.9 years. Since 2001, the average age of roads has diminished in all provinces, except Prince Edward Island and Newfoundland and Labrador. Quebec alone accounted for more than half the drop during the six-year period.

Bridges and overpasses accounted for 8% of total public assets in 2007. Unlike roads however, investments in bridges have been under the level required to hold their age constant. Hence, the average age of this asset rose by 3.2 years from 21.3 in 1985 to 24.5 in 2007. Bridges have a mean service life of 43.3 years. This means that Canada’s bridges have passed 57% of their useful life, compared with 53% for roads. The ratio for bridges was the second highest of the five assets, after wastewater treatment infrastructures. It hit 66% in Nova Scotia and 72% in Quebec.

[Robert McClelland]

What's the plan here?

Phase 1: open up a discussion on the subject.
Phase 2: craft a basic plan based on what was learned from that discussion.
Phase 3: sell said plan to the public in order to win enough support to form government.
Phase 4: expand on the basic plan using government resources to fill in missing details as well as an implementation schedule.

This is how the process works and must work because no opposition party has the resources to craft a detailed plan academics like you won't nitpick apart.

[Guest]

Mike,

I'm a little confused about 59% being "bridges and roads" and 8% "bridges and overpasses"--bridges twice--but lets just say we're talking $180-$190 billion. That's the total asset value.

Federal and provincial government's take in about $15 billion a year in tax revenue from excise/sales taxes on gasoline and diesel. Now fuel consumed is not a perfect measure of road usage, but since fuel use is often driven by weight and weight affects repair costs, it is closer than you'd think.

The asset price above doesn't include maintenance, of course, and is not an annual figure. I'd be interested to see how much Canada spends in total on the construction and repair of roads, bridges and overpasses each year. I imagine it's higher than $15 billion, but there are other factors to consider as well.

Roads are not a strictly rival good. As such, tolling them all would lead to a catastrophic economic loss, much of which would serve only to exclude those who could use these assets with virtually no additional cost to anyone else. This is a classic case of where government spending is absolutely called for because the product in questoin does not meet the definition of a strictly private (in this case fairly excludable due to new technology, but not very rival) good.

On the other hand, it's not hard at all to find lefties who support congestion pricing now that it's becoming technologically feasible. Just like it isn't hard to find lefties who support smart meters.

One would have to decide whether that's the issue one wants to focus on--and this case we're talking about something that is both most under provincial jurisdiction and relatively unpopular compared to the potential benefits--but there's plenty of support for such measures on the left.

[Mike moffatt]

That was Ian's post, not mine.

Robert: Open up a discussion? Ed Broadbent was talking about this issue in 1982! How long does it take?

[DavidN]

ianlee,

If you’ve read my comments on this post you will see I’ve never raised the issue of subsidies to the oil industry (as I’m unfamiliar with the issue).

However, in response I think there is a big difference between a sector specific subsidy and public goods. Manufacturing (and other sectors) benefit from having an educated workforce, law and order, national defence, health care infrastructure etc. etc. as well. Should we charge them for that as well? No, because clearly public goods benefit everyone without public provision may not have been provided and making the manufacturing sector pay for these goods in addition to corporate tax, personal income tax, and consumption tax would be a form of double taxation.

[The Keystone Garter]

(#2)"...and it would be a tough argument to make as most of the labor force (in advanced nations) will be providing services."

Services nebulous. Breaking up different jobs, assembly line and petroleum engineers et al, are still pretty big nuggets of the workforce. Petro has Chindia but assembly lines have somewhat modular embedded capital (I think). The building for diesel trucks, wind turbines and natural gas turbines, assembly lines, I think is modular (Scotland successful tidal test today). Have to buy new metal working equipment for new parts, but not retrain much? If a mine or coal seam dies or is bought out, is Klondike.
(#4) Rod, different mines/metals have different labour and capital intensities. Coal labour intensive until black lung. I think a lot of mines =...oil no, tar, I think not. Dividing employees by revenue is easiest non-insider way.

"Having said all that, contrary to what Stephen suggested above, there are policy responses that don’t require direct central bank currency manipulation."

Yep, DavidN, our arms length B of C has an industrial development component that could do what Provincial Trusts or uninsulated uncarbon-taxed factories don't.
I expect 10% of Earth electricity from wind in 20yrs (same for tidal and offshore wind in 30-50yrs), and very little from tar or coal; tar is pulp and paper industry but with profits. Ianlee, gotta do the change in exports, say from 2002. The 2011 totals just give you an exhchange rate snapshot. And yes, alot of it is just USA cratering. A carbon tax would've attracted Tata and Toyota teeny car plants in 1990s. Electricity is a big cost argument works both ways. Can reduce footprint most industries. It is like being forced to buy an annuity: a carbon tax.
AB's $3B towards agri R+D is good to attract long-term China exports to.

[Guest]

Yes, the post above was in reponse to Ian Lee's post.