Worthwhile Canadian Initiative

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.

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.”

Is the Russia-America Global CoDominium About to Begin?

In the wake of the Putin-Trump Helsinki summit, there is much speculation about what was actually said between Putin and Trump behind closed doors and the uncertainty spread throughout the American government about whether agreements had been reached on issues such as Syria and the Ukraine.  The subsequent invitation to Putin to visit the White house in the fall – probably just before the November elections – has resulted in further uncertainty especially after Putin’s statement that he proposed to Trump holding a referendum to resolve the eastern Ukraine issue.  So, what is really going on here?

Quite frankly, we have all been scratching our heads as the behaviour in some respects is reminiscent of 18^th and 19^th century monarchs gathering to decide the fate of wide swaths of the world in private meetings.  Putin is an autocrat and Trump is a business autocrat who admires political autocrats, so their personal level diplomacy may indeed be a series of moves designed to remake the world and return it to an age when Russian and American led blocs were the only game in town. Both the Russians and the Americans have seen their political influence decline in a multilateral world led by growing Asia-Pacific economies and both countries have been less than comfortable with the rise of China.

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.

Grain Transshipment at the Lakehead: A Canada Day Celebration

“Two towns stand on the shores of the Lake less than a mile apart.  What Lloyd’s is to shipping, or the College of Surgeons to medicine, that they are to the Wheat.”

Rudyard Kipling, Letters of Travel

Just in time for July 1st, there was a short ceremony and plaque unveiling today at the Western Grain By-Products Elevator Site on Kingston Street in Thunder Bay held by the Historic Sites and Monuments Board of Canada and Parks Canada. The elevator is the former Fort William Elevator No. 10 which was built in 1913 at the peak of the Canadian wheat boom. The plaque is the outcome of a long period of lobbying and work by the Friends of Grain Elevators (check out the site for some spectacular overhead shots) and commemorates the role of the grain elevators and the grain shipping industry at the Lakehead twin cities of Fort William and Port Arthur in facilitating Canada’s role as a leader in the international grain trade.

Public Debt: A Global Perspective

There is much international preoccupation with debt at the public sector, household and corporate levels and the upward creep in interest rates does apparently keep central bankers - including our own Mr. Poloz - awake at night.  Given the problem is an international one, sometimes it is useful to try and get a global perspective on the numbers.  One report from a relatively new  outfit known as the Institute of International Finance (IIF) recently pegged the total amount of global debt at $237 trillion (USD) or well over 300 percent of the world's annual economic output. According to one of their slides, in 2017 financial sector debt was $59 trillion, household debt $45 trillion, government debt $64 trillion and non-financial corporate debt $70 trillion.  This would make global public debt about 27 percent of the global debt total in 2017 and household debt about 19 percent with the remaining 54 percent from the corporate and financial sectors.

Donald Trump is a Mercantilist

A lot of ink is being spilled on Donald Trump and his America First approach to trade negotiations which has generated considerable trepidation and angst in both Ottawa and Mexico City as NAFTA appears headed for termination. Donald Trump is obsessed with the concept of trade deficits – which the United States does have on an overall basis. If one is to take President Trump at his word, he believes that if the United States sold more to the rest of the world than it imported from them, the country’s economy and manufacturing sector would be better off.

He appears to feel that the trade deficit is bad for the economy even though the evidence over time demonstrates that US GDP has grown at the same time that its trade deficit has grown. True, some sectors have done better than others and manufacturing employment has suffered but overall, per capita GDP and total output in the United States has grown in an environment of free trade – or reciprocity – if one feels like using a nineteenth century term. In the end, there seems to be an absence of evidence based decision making going on here but that does not mean Donald Trump is not making decisions based on some type of economic theory. It clearly seems to me that Donald Trump is simply a Mercantilist.

Capital flows vs Kapital flows (simpler version)

Let me try to make the intuition of my previous post simpler and clearer.

Suppose a country wants to invest more, because the profitability of investment has increased. It wants to increase the stock of kapital (machines) in its factories. There are three ways it could do this:

1 Divert some of its own production away from producing consumer goods towards producing investment goods, and consume less (save more).

2 Divert some of its own production away from producing consumer goods towards producing investment goods, but keep consumption (and saving) the same by importing consumer goods.

3 Import more investment goods, keep its own production of consumer and investment goods the same, and keep consumption (and saving) the same.

A closed economy can only do 1. And this will require an increase in the rate of interest (or something) to persuade households to postpone consumption. And it will require an increase in the price of investment good relative to consumption goods, to persuade firms to switch from producing consumption to investment goods.

An open economy can also do either 2 or 3. In both 2 and 3 there will be what economists call "capital flows" (borrowing from abroad, a surplus on the capital account of the balance of payments, matching a deficit on the current account). But only 3 has what I will call "kapital flows".

And the difference matters, because when we talk about "perfect capital mobility" in international finance/macroeconomics (and draw a horizontal BP curve in the Mundell-Fleming model and say a small open economy has the real interest rate pinned down by arbitrage at the world rate we are talking about capital flows (international borrowing and lending) and not kapital flows (importing or exporting machines).

Capital flows vs Kapital flows (very wonky)

This is only partly a response to Paul Krugman's posts. Mostly it's me trying to get my own head clear on something. This is a difficult topic, and this post is not as clear as it should be. So I don't expect many, or any, to fully understand it. I don't properly understand it myself. You have been warned.

What we call "international capital flows" (borrowing and lending across borders) aren't the same as what I shall call "international kapital flows" (flows of produced means of production -- like machines -- across borders). Yep. But they can go together, if kapital goods are tradeable goods.

But interest rates aren't the same as returns to kapital either. They are only the same in a one-good model, where the kapital good is also the consumption good.

I'm trying to bring some "kapital theory" into the picture of "international finance". And the easiest way to start out doing that is to start with a model with no kapital, only land. Land is just like kapital, except we have forgotten how to produce more. And when we do remember how to produce more land, so land becomes kapital, we get Dutch Capital Theory.

The exchange rate and net exports "contribution" to growth

This post is about national income accounting, and its dangers. Reading Simon Wren-Lewis' post about Brexit and real wages made me finally decide to try to get my head clear about something I've been meaning to get it clear about for some time. I think Simon might be wrong about something (I'm not sure though, and will wait for his response).

Take an extreme case, to make it simpler and clearer. The Brits produce only apples, because they can't produce anything else. But they never eat any apples; they only eat bananas. So each year they export the apples they have produced, swap them for imported bananas, and consume the bananas. Investment and government expenditure are always zero. And Brits' savings are always zero too (they swap all of their apples for bananas to be eaten immediately, and never swap any apples for IOUs).

By construction in this "model", the value of net exports is always zero. Because the value of exported apples is always equal to the value of the bananas they are swapped for.

Now suppose the price of apples (in terms of bananas) is too high, so the Brits are unable to sell all the apples they produce. The unsold apples rot on the ground, and don't get counted in GDP. The real exchange rate (the price of apples in terms of bananas) being too high causes real GDP to be too low. Then something causes the real exchange rate to fall, so the Brits are now able to sell all the apples they produce (in exchange for bananas), and so real GDP (measured in apples produced) rises to the "full employment" (of apple trees) level.

By construction, the depreciation of the real exchange rate is what caused the rise in real GDP, but net exports remain at zero and so net exports' "contribution" to GDP growth is zero.

Understanding Softwood Lumber: Another View

As we move into the latest iteration of the ongoing softwood lumber dispute with the United States, I thought it might be useful to look at some data to see if any additional insight can be gained. The conventional wisdom on the story is that the disagreements have been over the way the two countries treat their respective lumber industries. In Canada the provincial governments mainly own the resource and the harvesting price or stumpage fees are set by administrative regulation. In the US the resource is owned privately with harvest prices set by markets. The United States claims that the stumpage fees in Canada are set too low and constitute a subsidy – hence the source of the dispute.

150 Years of Canadian National Defence Spending

Canada’s federal government is going to deliver a new defence policy that is expected to guide Canada’s military for the next generation. While in the works for months, it comes in the wake of President Donald Trump’s recent exhortation at the NATO meetings that NATO members are not spending enough and Tuesday’s speech by Minister of Foreign Affairs Chrystia Freeland that Canada must rely more on itself for defence signaling that today’s defence policy release will involve a significant rebuild of Canada’s military. If that is the case, moving to a foreign policy where Canada will have both “good manners” and “strong muscles” will mark a significant shift in Canadian policy – if of course there is follow through. 

Hume's Sailing Ships correcting Samuelson's Icebergs

Paul Samuelson said (PITA gated) that David Hume's price-specie flow mechanism (ungated) was wrong. And I am saying, nervously biting my fingernails, that Samuelson was wrong.

Assume that durable sailing ships are costly to build, but have low (or zero for simplicity) operating costs. Assume apples are the only tradeable good, and one ship can transport one apple per year across the English Channel between Britain and France (the only countries in the world). Let P be the price of apples in Britain, P* be the price of apples in France, and R be the annual rental of a ship, (all prices measured in gold), then R=ABS(P*-P).

In this model, the Law of One Price (P=P*) will only hold if the volume of exports of apples (in either direction) is unconstrained by the existing stock of ships, so rentals on ships are driven to zero. But then no ships would be built to export apples if ship rentals were expected to be always zero, which is a contradiction of the Law of One Price because arbitrage is impossible without ships. But an existing stock of ships represents a sunk cost (sorry) and they keep on sailing even as rentals approach zero. They sail around Samuelson's Iceberg model (sorry) of transport costs.

If you are already familiar with Hume's essay, and have a good economic intuition, the rest of this post should be obvious.

Happy New Year....Really!

Well, it’s the start of a New Year and traditionally there should be a sense of optimism to a fresh start. Indeed, at least one forecasting company feels that the global outlook for 2017 is at least stable despite the challenges of 2016 and indeed is expecting an uptick in commodity prices. However, given the course of world events over the last twelve months, one might think that there is little to be optimistic amount. On the one hand, the events of 2016 to me seem to mark the end of what can be termed the second great globalization (more detail here on that). It was a period that saw per capita GDP globally grow as a result of technological change, integrated markets and trade much like the first great globalization from 1870 to 1913.

Why the USA Has A Trump and We Don’t (Yet...)

In the wake of the US presidential election and Donald Trump’s ascension to the mantle of “leader of the free world”, one is left pondering the factors that differentiate Canada from the United States. When I was a young boy and visited relatives in Italy, much to my confusion we were invariably referred to as, “I Americani” and no amount of explanation seemed to be able to alter this perception. Needless to say, from the historical perspective of the land that contributed both Christopher Columbus and Amerigo Vespucci to the history of the New World, I suppose that Canada and the United States are one and the same. Yet, two societies and economies have evolved over time and the border between the two countries is a separation line that does mark differences.

Another Foray into Data: New Macro-Financial Data

I think Stephen Gordon's Project Link and its piecing together of fragments of Statistics Canada data is a solid step in the right direction.  If our national statistical agency is not going to provide long-term consistent data series, then I suppose its up to the researchers to lead the way.  Another case in point is the recent public release of a no-cost open access macro-financial data set by Òscar Jordà (Federal Reserve Bank of San Francisco, UC Davis), Moritz Schularick (University of Bonn, CEPR) and Alan M. Taylor (UC Davis, NBER, CEPR).

The Brexit-News Boom?

Start with a bog-standard second-year textbook Mundell-Fleming ISLMBP model. Start in equilibrium at Y*, then hit it with a negative shock to Net eXports. The IS curve shifts left initially, at the previous equilibrium exchange rate. But the central bank is sensible, and allows the exchange rate to depreciate sufficiently to shift the IS curve right again so the new ISLMBP equilibrium is back at Y*.

Now make one small change. The shock hits Net eXports next year, not this year. But people learn about the shock this year, one year in advance. It's a news shock.

If people expect that next year's exchange rate will be (say) 10% lower than they had previously expected (before hearing the news), that means the BP curve shifts up by 10%. Which means the ISLM intersection is now below the BP curve, which means the exchange rate depreciates today. It would take a 10% depreciation of today's exchange rate (relative to the previous equilibrium) to preserve uncovered interest rate parity and bring the BP curve back down to where it was before the news shock. But that depreciation of the exchange rate shifts the IS curve rightward today. And remember, the negative shock to Net eXports hasn't hit yet, so the rightward shift in the IS curve will cause a boom. Unless the central bank takes offsetting action by tightening monetary policy.

Second year textbook macro can be quite useful.

Is it Banking Crisis Season?

One really has to wonder if having the season move into “fall” is correlated with the fall of the financial sector. While some time in the making, the 2007-08 subprime financial crisis moved into crisis mode during August of 2007 and by early fall central banks had moved to lower discount rates and pump liquidity into the system. From my casual observations, it seems that as we move into autumn, the global financial sector is about to enter another period of instability and uncertainty with the focal points of concern being China and Italy.

Central Bank Coordination as BS; Targets vs Instruments.

Imagine you are at an international policy conference. Someone says "Central Banks need to coordinate their monetary policies better". You nod your head wisely in agreement, along with everyone else. Because you know that what one central bank does affects not just its own economy but the economies of other central banks, so there are externalities, so they need to cooperate to escape a Prisoners' Dilemma equilibrium of Beggar Thy Neigbour policies. International policy coordination sounds really good, especially at an international policy conference.

Or maybe it's all BS.

I want to think about the alleged "Central Bank Coordination Problem" very abstractly. Is it a real problem? And if so, under what conditions? The important distinction is between monetary policy targets and monetary policy instruments.