Worthwhile Canadian Initiative

More Thoughts on a Better Income Support System for the Next Crisis

This post was written by Mike Veall of the Department of Economics at McMaster University.

I appreciated the comments on my earlier post, where I suggested that a small monthly Basic Income system would have the advantage of being able to be scaled-up in a crisis.

Incenting participation in the tax/transfer system is responsive to the work of Anna Cameron, Lindsay Tedds, Jennifer Robson and Saul Schwartz pointed out by Frances even though those authors seek a different, automatic-enrolment approach.

(Advertising: More on nonfiling by Robson and Schwartz is coming out in September’s Canadian Public Policy/Analyse de politiques; CPP/Adp is also currently working on expedited publishing/special issues for pandemic-related articles.)

The skepticism in the comments on my post is well-taken, and if we can get a better emergency benefit delivery system by other means, better is better.

But I would hope it would end up monthly. Especially during an emergency, “monthliness” is much superior to the quarterly delivery of the GST/HST credit and the CWB.

However it is obtained, there is a need for an improved starting point. While COVID policy so far has been the economics equivalent of meatball surgery, it already appears that CERB take-up was under-predicted. I fear overpayment will also prove an issue. While an automatic system with 100% coverage is unrealistic, the alternative has been 7 million CERB applications. With that many, CRA had to rubber stamp, and follow-up has to be at least questionable.

And a pure application system seems to require a lowest common denominator approach with consequent sharp edges. If someone’s 2019 income = $5K, CERB = $8K. If 2019 income = $4.9K, CERB =$0.

Finally, I have been thinking about whether emergency income support to a family could and should be conditioned on rent. Particularly in an emergency, rent looms large, and it varies a lot across the country. I’d be particularly interested in learning the thoughts of others.

A postscript: Privacy concerns sometimes come up, as mentioned in one comment. I think most taxpayers would accept this rather modest incremental risk to their privacy if it means better effectiveness for the substantial tax dollars being spent on programs like CERB.

A Small Basic Income as a Solution to the Magic List Problem

This post was written by Mike Veall of the Department of Economics at McMaster University.

What if in a future crisis there is again a need to distribute money? As Jennifer Robson put it, “government doesn’t have a magic list with everybody’s name and addresses and bank accounts.”

I was reminded of this when thinking about transmitting money to someone in a less developed economy. How can I be sure it will work? I could send a small amount, confirm receipt, and then send more.

The same approach could create a magic list for Canada. Every month the government could send a taxable $20 or $30 to everyone (except children and seniors, already in the system with monthly benefits). It would be enough money that most people would check receipt, at least occasionally, and hence continually test the system. I think this is much more likely to work than an enrolment system or having CRA try to construct a list.

Then, in a crisis, the government can quickly scale up the amounts, put in clawbacks, whatever it decides.

$30 per month can easily be financed by reducing the personal amount on the personal income tax. If desired, implementation could be made pretty close to distribution neutral by also reducing the GST/HST credit and a couple other tinkers. It would be cheap crisis preparation.

This post is about how to make a magic list, not on the desirability of a more sizable Basic Income. But I note that if a sizable BI would be a good policy, a small one could pave an incremental path. And if it would prove a bad policy, trying a small one first could help avoid a mistake.

A Simple Micro/Macro Corona Tax Model

I want something you could teach to first or second year economics students. Using tools they already have in their toolkit.

MICRO

Start with a Demand and Supply model of the market for haircuts.

If we put a $1 per haircut tax on buyers of haircuts, the demand curve shifts vertically down by $1, reducing Q* and P*.

If we put a $1 per haircut tax on sellers of haircuts, the supply curve shifts vertically up by $1, reducing Q* and increasing P*.

If we put a tax on both buyers and on sellers of haircuts, both the demand and supply curves shift. We know that Q* falls. We don't know whether P* rises or falls. It depends on which tax is bigger; and it depends on whether demand or supply is more elastic.

The coronavirus is like a tax. Every haircut bought and sold comes with an extra cost to buyer and seller: the buyer risks getting sick; and the seller risks getting sick. (But the "tax revenue" isn't a gain to the government; it just gets thrown away as a net loss to everyone.)

I've drawn the above diagram with a roughly equal "Corona tax" on buyers and on sellers. Because I don't know which is bigger. But I have drawn a demand curve that is more elastic than the supply curve. Because I think that is roughly right, at least for the Short Run. And if demand is more elastic than supply, and the two taxes are the same, then P* falls.

And if the price of haircuts is sticky, and takes time to adjust to the new lower equilibrium price P*, we would see an excess supply of haircuts.

If the Corona tax is big enough, Q* may drop to zero, and the market for haircuts closes down completely.

Even if the Corona tax is not big enough to close down the market, the government might decide to close it down by law. Because the Corona tax also creates a negative externality, because if the buyer or seller gets sick, he or she might also infect other people who aren't buying or selling a haircut. So the Marginal Social Benefit of buying a haircut is less than the Private Marginal Benefit, and the Marginal Social Cost of selling a haircut is greater than the Private Marginal Cost. So the efficient quantity of haircuts Q^ might be zero, even if the market equilibrium quantity Q* is still positive.

Obviously, this will depend on the particular good. It might be efficient to ban the sale of haircuts, but allow people to buy and sell apples. Some markets close, or are closed; other markets stay open.

MACRO

That was Micro. Now lets do Macro, for those markets that do stay open, all lumped together in aggregate. So we are talking about Aggregate Demand and Aggregate Supply.

Eventually (we hope) the risks of buying and selling goods will go away, or at least get smaller. The Corona tax is a temporary tax. We can avoid the tax, by waiting to buy, or waiting to sell, until it goes away (or gets smaller). And the rate of interest is the extra price we pay for buying goods now, rather than waiting till next year; and it's the extra price we get for selling goods now, rather than waiting till next year. (Strictly, it's the real interest rate, which is the nominal interest rate adjusted for inflation.)

So put the real interest rate on the vertical axis, and relabel the curves "AD" and "AS".

Will the equilibrium rate of interest r* rise or fall? In other words, will the Bank of Canada need to raise or lower the rate of interest it sets to keep AD equal to AS (even though both AD and AS are lower than before). In other words, which curve shifts leftwards more, AS or AD?

That depends, on two things: it depends on whether the AD curve shifts vertically down more or less than the AS curve shifts vertically up (is the Corona tax bigger on buyers or on sellers); and it depends on which curve is more elastic (but here we are talking about intertemporal or interest-elasticity -- on how willing buyers and sellers are to postpone buying and selling until next year).

As before, I don't know whether the Corona tax is bigger on buyers or on sellers, so I've drawn it roughly equal. But I've assumed the AD curve is more interest-elastic than the AS curve, so r* falls, and the Bank of Canada needed to cut r. Because that seems plausible to me, and that is what the Bank of Canada actually did.

One big thing this model leaves out is this: buyers of goods expect to be able to buy a much wider variety of different goods (and services) in future than they can buy now. That also shifts the AD curve leftwards for the remaining goods. It's like they learn that they will be able to buy some fancy new device next year, that they can't buy now, and so want to save part of their current income because there are better things to spend their money on next year. See my previous post.

Update 1: A second big thing this model leaves out is that some sellers get hit much worse than others. Unemployed hairdressers might be borrowing constrained, and unable to buy as many apples as they want, because fully-employed apple producers aren't willing to lend to those with a bad credit risk.

[Update 2: I messed up slightly when drawing the two diagrams. If the "tax" on buyers is exactly equal to the "tax" on sellers, the point where the red S curve crosses the blue D curve should be exactly above the point where the blue S curve crosses the red D curve (same Q for both points). Which is the tax incidence irrelevance thing. Oh well.]

Relative supply shocks, Unobtainium, Walras' Law, and the Coronavirus

Here's the basic idea:

A temporary 100% output cut in 50% of the sectors (what the Coronavirus does) is very different from a 50% output cut in 100% of the sectors (what our intuitions might expect from supply shocks in aggregate macro models).

The former can easily lead to deficient demand in the unaffected sectors; the latter leads to excess demand in all sectors.

Here's the intuition:

(As they say: "Shit just got real". And one of my daft old thought-experiments just got very real.)

As you know, unobtainium is a very desirable good. Everyone wants to buy it. But nobody produces it. It doesn't exist.

You could say there's an excess demand for unobtainium, because people want to buy some of it, at any price. Maybe they want to spend half their income on unobtainium. But supply is zero. And if you do say there's an excess demand for unobtainium, and if you also believe in Walras' Law, you get into one helluva mess theoretically, because the excess demand for unobtainium must (by Walras' Law) be matched by an excess supply of other things. So even thinking about unobtainium creates a general glut -- a recession. Which is silly. Because Walras' Law is wrong. Because, as Clower said long ago, it's constrained not notional demands that matter. As I explained in my old post.

But now imagine that someone actually invents a way to produce unobtainium. They can't produce it just yet, but everyone knows they will produce it, and sell it at an affordable price, a few months from now.

What happens when they hear the news? Everybody (or everybody except borrowing-constrained Hand To Mouth agents) suddenly wants to save up to half their income, so they can spend it on unobtainium in a couple of months time. Their money will be worth more in a couple of months than it is now, because they will be able to buy unobtainium with it, and not just all the stuff they can already buy now. We get a general glut (deficient demand) now.

And that is pretty much what's happening with the Coronavirus, in the real world. Half the goods we used to buy are temporarily unobtainium. But we expect to buy them in a couple of months.

It would be very different if unobtainium were a perfect substitute for existing goods, so its invention is exactly like increasing the supply of existing goods in a couple of months. Then we would want to dissave now, like in standard aggregate macro models, because the Marginal Utility of Consumption is high when consumption is low, so we want to prepone consumption from the future to the present. But unobtainium isn't a perfect substitute for existing goods. High intertemporal substitution can beat low cross-section substitution.

(Sure, unlike in my thought-experiment, we used to be able to buy unobtainium in the past. But that's irrelevant; bygones are bygones. It's only the present and the expected future that matter.)

That's why we need temporarily looser monetary and fiscal policy. (Plus, we also need fiscal policy to redistribute between people differentially affected by the Coronavirus, but that's another story.)

Think that's (basically) right.

OK, I've oversimplified (of course). Much of the stuff that's still obtainable is the more essential stuff, like food. But not all. And, at the margin, we still face intertemporal vs cross section substitutibility.

Covid-19, Italy and Lessons for Canada

by Thomas Barbiero, Ryerson University and Livio Di Matteo, Lakehead University

As Italo-Canadese and members of the large Italian diaspora throughout the world, we have found the COVID-19 situation in Italy truly heart-wrenching.  As we write, Italy is the hardest hit country outside of China with over 60,000 confirmed cases and over 6,000 deaths. The hardest hit region is that of Lombardia in the north, which now has about half of the infected population and over 60 percent of the fatalities. The regions where our families originated, Campania and Abruzzo, have also been hit with about 1,500 cases combined. 

Hospitals in the hardest hit regions of Italy are overwhelmed, with mortality rates especially pronounced among seniors over the age 70.  The rapid spread of the virus and the high mortality rates in the last two weeks are particularly disconcerting with important lessons for us in Canada as we ramp up efforts to deal with the virus.  Based on current Canadian case numbers, we are approximately where Italy was in mid to late February. Canada currently has over 1,400 confirmed cases. A crucial difference is that we have had more warning and are taking things somewhat more seriously than they were at the start of their crisis.

We offer the following observations of the Italian situation and their application to Canada.  We believe the severity of the Italian situation is a function of several factors which have come together. 

First, Italy is an open economy heavily dependent on both trade and tourism and substantial international economic and travel ties. It is densely populated country -about the size of southern Ontario with 60 million people -  that receives over 60 million tourists a year. By comparison, Canada receives about 20 million international tourists a year but Canadians themselves are big international travellers especially to the US. Moreover, in just the last few days alone, about one million Canadians have returned home.

Ontario and British Colombia, together currently represent over half of those infected in Canada. Ontario, like Lombardia is an economic heartland with substantial international trade, travel and commercial ties.  B.C. has a thriving trade and commercial sector and again a major international travel destination as well as close links across the border. 

Canada’s decision to limit flights and close borders is an important one given that the virus spreads through personal contact and travel is the key factor in initial transmission and spread. Hopefully, this has not been delayed too substantially.

Unfortunately, Covid-19 spread in northern Italy before the authorities fully mobilized as there was reluctance to admit its seriousness.  A major politician in Italy in February even pronounced that there was no reason for Italians to give up their pleasurable aperitivo with friends in the evening. He was later found to have the virus and is now undergoing treatment.

Second, evidence has emerged that infection and mortality rates are higher in older Italian men. Smoking rates in Italian men are much higher than Canada.  Given COVID-19 has major impacts on the respiratory system, this is undoubtedly an aggravating factor.  Moreover, Italy’s population over age 65 is one of the highest in the world, representing almost a quarter of its population, compared to about 16 percent in Canada.  Mortality in COVID-19 is concentrated in the older population.

Third, Italian culture involves substantial social interaction outside of the house.  Italians are always out and about visiting the local bar to have a coffee or play cards, going for a passegiata and gathering on park benches after dinner. Italian culture is highly social and involves substantial physical contact when greeting.  Elders in Italian culture particularly expect the respect of warm physical embraces and greetings, and can be offended if that respect is not shown. Families are close and often get together for meals.

Indeed, the New York Times recently reported that 7 members of an Italo-American family in New Jersey were infected by the virus and 4 of them died Apparently, only one guest at one of the family dinners had the virus and spread it to these other family members.

Finally, Italians have a notorious irreverence for rules and compliance with government edicts, and the resistance to following quarantine and lockdown guidelines has been substantial based on the anecdotal evidence and news stories we are familiar with. Such behaviour has come with a price and is an important lesson to those of us in Canada who still are ignoring the need to social distance.

When it comes to what needs to be done to plank the curve in Canada, Italy in our opinion is a prime example of why “social distancing” combined specifically with “physical distancing” is paramount.  We all need to play our part.  It needs to be done immediately and it is important that the rules be complied with – now.

Rising Health Spending Is Not Just About Seniors

The Canadian Institute for Health Information (CIHI) has released its 23^rd annual report on health spending in Canada - National Health Expenditure Trends, 1975 to 2019.  As a member of the CIHI National Health Expenditures advisory panel, it is always great to see the wealth of data on trends in health spending across Canada.   Total health spending in Canada in 2019 is expected to reach $264.4 billion which represents an increase of 3.9 percent over last year and also accounts for 11.6 percent of Canada’s GDP – a figure also up slightly from last year.  After a period of zero average annual growth in real per capita total health spending from 2010 to 2014, the period since 2014 has averaged about 1.4 percent a year.  This, however is lower than the average annual growth rate from 1996 to 2010 at 3.3 percent.  Health spending growth has resumed but on what seems like a more sustainable trajectory given that real per capita GDP growth is closer to 2 percent. 

Much of the concern about rising health spending has focused on the effects of population aging.  Health spending does rise with age as Figure 1 below shows rather dramatically.  Aside from those aged less than 1-year, average per capita provincial/territorial government health spending is well below $5,000 until the 60-64 age group when it starts to rise above that threshold reaching over $30,000 for those aged over 90 years.  Yet, despite this surge after age 60, what is also interesting is that when the drivers to rising health spending are broken down, in 2019, aging per se only contributes 0.8 percentage points out of the 3.8 percent growth in public sector health spending – about 21 percent – with general inflation, population growth and other factors (eg. Technology and utilization) accounting for the rest.  It does lead one to wonder whether this is because today’s seniors are generally quite healthy compared to the past or perhaps there are unmet needs.

What is also interesting and seldom noted is that while provincial/territorial government per capita health spending is highest among seniors, over the last two decades, the rates of growth in per capita spending have not been for seniors.  Indeed, between 2000 and 2017, the highest average annual growth rates have been for children and youth aged 5 to 19, followed by children under age 1-year and adults aged 35-39 as shown in Figure 2. 

Indeed, per capita spending for adults between the ages of 35 and 64 has been growing at a faster rate than those aged 65 to 89.  While it is true that much lower per capita amounts are being spent on those below age 65, this demographic has been seeing faster growth in health spending.  Again, this leads one to wonder given scarce resources, whether there is an implicit transfer of resources underway away from seniors when it comes to new spending growth or whether younger people today have more health problems or utilize health care more than similarly aged groups in the past.  Given the epidemic of obesity and mental health issues among the young, perhaps this is having an impact on health spending needs and expenditures. 

If a significant cohort shift in health care needs and utilization is underway is an interesting question. I suppose fully knowing if this is a recent development or has been underway for the last 50 years requires per capita age spending data going back quite a ways - I am only aware of the CIHI data going back to the mid 1990s or so.  This is an important issue.  While an aging population may only be contributing 21 percent of the increase in health spending now , if younger cohorts at present have deteriorating health status or more health issues than in the past, they may be poised to be a more important driver of health spending both now and in the future.

What killed real wage growth?

This is the Project Link chart that most startles me:

What killed the growth in real wages in the early 1970s? I've been trying to come up with an answer to this question, and I think I have one. I'm not entirely sure that it's the correct answer, but I think it's a plausible conjecture.

Project Link update

It's past time for my annual update for Project Link, my attempt to piece together the fragments of Statistics Canada's published data into coherent time series.

Historical Canadian Government Data Sources

I recently received the following message from Ryan MacDonald at Statistics Canada:

“I recently came upon a number [of] scans done by our library to place the historical publications into pdfs.  They can sometimes be a little difficult to search for, so I thought I would pass along a few links that may be of use to you or your colleagues in your research.”

So, I think a good way to further disseminate these historical economic data sources more broadly is to post the links here on WCI. Feel free to share.

Canada Year Book

http://publications.gc.ca/site/eng/9.838186/publication.html

Tables of the trade and navigation of the Province of Canada for the year ... (1850-1908)

http://www.publications.gc.ca/site/eng/9.843286/publication.html

Report of the Department of Customs containing the tables of imports, exports and navigation of the Dominion of Canada for the fiscal year ended Mar. 31 ... (1909-1916, 1918)

http://www.publications.gc.ca/site/eng/9.843294/publication.html

Annual report of the trade of Canada (imports for consumption and exports) (1917, 1919)

http://publications.gc.ca/site/eng/9.852124/publication.html

Trade of Canada = Commerce du Canada (1920-1939)

http://publications.gc.ca/site/eng/9.851960/publication.html

Trade of Canada = Commerce du Canada (1939-1970)

http://publications.gc.ca/site/eng/9.809303/publication.html

Imports, merchandise trade / Statistics Canada, External Trade Division = Importations, commerce de marchandises / Statistique Canada, Division du commerce extérieur (1970-2002)

http://publications.gc.ca/site/eng/9.809322/publication.html

The Hospitalization Life Cycle

The Canadian Institute for Health Information has just released a report on Hospital Stays in Canada which provides a plethora of interesting tables on hospital stays in Canada at a national and provincial level.  Both the age-standardized hospitalization rate (per 100,000 population) and the age standardized average length of stay (in days) in Canada have fallen since 2013-14 going from 8,205 to 7,944 and 7.0 to 6.8 respectively.  The summary graphic for their report lists the top 5 reasons for inpatient hospitalizations as:1) Giving birth (362,700), 2) COPD and bronchitis (93,353), 2) Acute myocardial infarction (71,192), 4) Pneumonia (70,149) and 5) Heart failure (68,972) with the total number of inpatient hospitalizations in brackets beside each reason.  These five causes make up 21.6 percent of total hospitalizations in 2017-18.

Robinson Crusoe and the Carbon Tax Rebate

Suppose I impose a carbon tax on Robinson Crusoe. But I give him a rebate exactly equal to the tax he pays. That tax plus rebate will have no effect on Robinson Crusoe's behaviour. He knows that if he cuts carbon by 1kg, and pays $1 less tax, his rebate also falls by $1, so his net tax (= tax minus rebate) stays the same. He has no incentive to cut carbon.

Now imagine an archipelago of 100 identical islands, each with one identical Robinson Crusoe clone. And suppose I impose the same tax per kg on each of them, but give each one a rebate equal to 1% of the total tax I collect from all.

You might think the result would be exactly the same. But it's now very different.

Each of the clones knows that if he were to cut carbon by 1kg, and pay $1 less tax, while the 99 other clones kept doing the same thing, his rebate would fall by only $0.01, so his net tax falls by $0.99. Which gives him an incentive to cut carbon.

In the new equilibrium (we call it a "Nash Equilibrium") they all cut carbon by the same amount, and so each gets a rebate equal to the tax he pays. But each knows that if he alone were to move away from that equilibrium, by increasing carbon, his net tax would increase by $0.99 per 1kg of extra carbon. Which is sufficient incentive not to move away from that equilibrium. Which is what makes it an equilibrium.

It's like a competition, where each entrant has to put the same $10 into a pot for prize money, and the total pot is divided between them in proportion to how quickly they each run. That creates an incentive for each to try to run faster relative to all the other competitors. Only if they all collude, and collectively agree to walk the race slowly, and none cheats on the agreement, would the incentive fail. Except the carbon tax works in reverse, because they pay money into the pot in proportion to how much carbon they create, and share the pot equally. So they compete to create less carbon.

What is true for each of the parts is not necessarily true for the whole, and vice versa, even if each part is identical to the others. What is individually rational is not necessarily collectively rational, and vice versa, even if each individual is identical to the others. Prisoner's Dilemma is one example that illustrates this point. My carbon tax example is another.

This post is not really about the carbon tax. I know nothing useful about the carbon tax, except for this one point. It's about teaching economics. The point I am making above is true and important, but it is not obvious. Teaching is hard.

Maybe what non-economists don't get is not income effects vs substitution effects; it's the Fallacy of Composition and the difference between individual rationality and collective rationality. Free riders, collective choice problems, and all that. (If there were no difference we wouldn't need a carbon tax anyway.) And the best way to explain the difference is in a representative agent model, because the difference is at its starkest and clearest in a symmetric equilibrium.

[Update: I changed the title from "Robinson Crusoe and the Carbon Tax". Because it dawned on me that it's about the rebate, not the tax.]

Guest Post: Comparing Technological Change in the Health and Taxi Industries

Well, here is a guest post forwarded to me by Ruolz Ariste - a colleague whom I originally met during my annual interactions with the CIHI and with whom I have co-authored.  Ruolz Ariste is currently pursuing a PhD in Industrial Relations in a program run by run jointly by Université Laval and Université du Québec en Outaouais.  Enjoy.

Canada's Gross Domestic Income and trading gains: An update and estimates for the provinces

This builds off an earlier post about the terms of trade, trading gains, and Gross Domestic Income and it extends the analysis to the provincial level. It's probably a good idea to take a look at it before continuing on.

Hopefully, Tomorrow Won't Be Yesterday

A short quick post.  Yesterday’s job numbers for Canada were greeted with surprise.  With 55,900 jobs added in February, the sentiment as best summarized by Doug Porter, Chief Economist with BMO Capital Markets is that: “The economy clearly is not falling off a cliff by any means, arguably quite the opposite”.  This is despite what seems to be a slowdown in the Canadian economy as indicated by consumer spending, exports and capital investment by business in 2018.  The more entertaining headline was by BNN Bloomberg which led with the Canadian labour market is off to its best start since 1981 as “The two-month gain is the best start to a year since 1981.” Of course, if the economy is doing so well one wonders why we are holding off on interest rate increases but I digress.

More to the point is what those of us with more historical memory remember about 1981.  Take a look at Figure 1 which plots seasonally adjusted monthly employment gains from January 1980 to December 1982.  January and February 1981 were certainly the two biggest consecutive gains in that period and quite impressive at 66,500 and 76,800 jobs respectively.  But look at what happened next – employment shrank in March of 1981, growth resumed for a few months afterwards and then – well, the economy fell off a cliff into the 1981-82 recession which saw unemployment rates soar to peak at 13.1 percent in December of 1982.

 

 

If we compare monthly employment in the year leading up to January February 1981 to a similar range for January-February 2019 as in Figure 2 one sees that it is not inconceivable that we are again about to fall off a cliff especially given the accompanying aforementioned economic indicators for 2018.  However, a big difference between now and then is monetary policy and interest rates which peak at their post war high about this period.  We are currently still at pretty historic lows for interest rates.  However, based on what happened to employment in 1981, we should know by the end of summer if we are in store for some employment drops.

NAFTA - The “Worst” Trade Deal Ever

With time on my hands over the last week of the holiday season, I spent a bit more time than usual surfing news channels and watched a press conference by U.S. President Donald Trump in  which among other things he again reiterated how the United States had been hard done by NAFTA and that it was the worst trade deal ever.   Needless to say, while he has pronounced from the mount on this matter numerous times, for some reason it particularly annoyed me this time, so I decided to see what simple evidence could be mustered to weigh in on this point.

Australian Economic Growth in Longer Term Perspective

A recent issue of The Economist highlighted the stellar economic performance of Australia – or as it was termed, “The Wonder Down Under” – arguing its economy is most arguably the most successful in the rich world.  Australia has apparently not seen a recession for 27 years, seen its median income has grown four times as quickly as the United States and has low public debt.  The Economist attributes some of this to good luck – natural resource endowments – as well as proximity to Asian markets particularly China.  However, policy decisions are also seen as important with key ones being the reform of social spending – health care and pensions – shifting more of the burden of these systems onto users as well as a more enthusiastic immigration policy which has brought in many skilled migrants.

This Australian resurgence is quite interesting given the ebbs and flows of Australian economic performance over the long run.  According to Ian McClean, in the late 19^th century, Australian incomes per capita were on average actually 40 percent higher than those in the United States with this advantage the result of high labour force participation rates, higher labour productivity and of course natural resource endowments.  Yet, by 1914 this lead over the United States had evaporated as a result of the transitory nature of these advantages.  In particular, “periods of weakest Australian growth, relative to benchmark economies, occur when the resource-based sectors of the economy have languished.”

Tracking the Bank of Canada's staff projections through the 2008-9 recession

The Bank of Canada has released an archive of the staff projections prepared for the Governing Council for the quarterly Monetary Policy Reports. There's a five year lag, so the most recent set of projections are the ones prepared in 2013Q4. While these projections don't answer the question "What was the Governing Council thinking?", it does answer the question "What projections were the Governing Council looking at?"

Why do we care about the labour share of income?

And by 'we', I mean 'Canadians'.

A lot has been said and written about the decline in the labour share of income, usually calculated as total employee compensation divided by nominal GDP. This decline is generally regarded as a negative development: the reduction in the share of income going to workers is interpreted as a symptom of suppressed wage growth and of increased income inequality.

I don't doubt that this is a useful narrative for understanding what has been happening in many countries, the US in particular. But I can't see how it fits the Canadian experience. Movements in the Canadian ratio of wages to national income  appear to be a story of the denominator, not the numerator.

Military Spending in the G7: A Quick Post NATO Summit Comparison

Well, the Disruptor-in-Chief, US President Donald Trump is at it again.  At today’s NATO summit he demanded that the members of NATO need to quickly increase their defence spending not only to meet the committed target of 2 percent of GDP but to also double their commitments to 4 percent of GDP.  Needless to say, all of this presented an opportunity to try and take a look at some of the numbers to see where things actually stand and to put the numbers into some kind of longer term perspective.

So, I have put together data on military spending, GDP and central government expenditure for the G-7 countries.  For Canada, I have data from Historical Statistics of Canada, the Urquhart and Statistics Canada GDP numbers and the Federal Fiscal Reference Tables.  For the other countries, the numbers for 1950 to 2000 are taken from the Correlates of War Data Project while those from 2001 to 2017 are from the World Bank database.  Note that for Germany, it is military spending for both East and West Germany from 1955 to 1989 and GDP also is combined for both countries for the 1955 to 1989 period. Why only the G-7 and not all of NATO? Well, time is money and as I do not have much of either I have opted for a truncated comparison.

Project Link update

I've just updated Project Link, my attempt to piece together the bits and pieces of published Statistics Canada data into a coherent history of the post-war Canadian economy. (The introductory post is here, and a post on the first update is here.)

Here are the main elements:

1. Incorporating Statistics Canada's long-awaited publication of its expenditure accounts from 1961-1980. As you may recall, when they revised the GDP numbers back in 2012, the new series started in 1981 instead of 1961. (This is what I had in mind when I fumed that "Statistics Canada must be the statistical only agency where the average length of its time series gets shorter from one year to the next.")
2. Pushing back the starting date for the LFS and SEPH employment numbers to 1946, along with unemployment rates and average weekly wages. The CPI and CPI inflation have also been pushed pack to 1946.
3. Including the income measures of the economic accounts : GNI (what we used to call GNP), NNI and disposable income. I've also gone out on a limb and tried to construct measures of Gross Domestic Income consistent with StatsCan's methodology, and that's covered in a separate post.

More details below the fold.