Worthwhile Canadian Initiative

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.

Becoming Sustainable: The Six Stages of Provincial-Territorial Government Health Spending

The Canadian Institute for Health Information (CIHI) has released its 22^nd annual edition of  National Health Expenditure Trends covering the period 1975 to 2018 and the basic highlights are as follows:

• Total health expenditure is expected to reach $253.5 billion or $6,839 per Canadian in 2018.

• In 2018, total health expenditure is expected to rise by 4.2%, a slight increase in the rate of growth compared with earlier in the decade

• Provincial per capita health expenditures vary with total health expenditure per capita expected to range from $7,552 in Alberta and $7,443 in Newfoundland and Labrador to $6,597 in British Columbia and $6,584 in Ontario.

• Drugs expenditure growth is the fastest among 3 largest health spending categories with Hospitals (at 28.3% of spending), Drugs (at 15.7% of spending) and Physicians (a 15.1% of spending) together expected to continue to account for close to 60% of total health spending in 2018.

The bulk of health spending in Canada is done at the provincial-territorial level of government which in 2018 is forecast at $162.7 billion out of $253.5 billion or about 64 percent of total health spending – with remainder being private ($78.7 billion) or remaining public sector spending ($12.1 billion).  While much of the focus by the public on this annual release of health information is the current rate of increase and state of spending, a longer-term perspective is useful given the constant preoccupation with health care system fiscal sustainability. A historical retrospective of the evolution of provincial-territorial government spending since the dawn of Medicare is in order using Statistics Canada data for the 1965 to 1974 period and CIHI data since 1975.

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.

Addressing Ontario's Fiscal Challenges

While 2017-18 saw a surplus of $642 million after years of deficits, the 2018-19 Ontario budget now projects a deficit of $6.7 billion and a net provincial debt of $325 billion with deficits projected to continue for five years afterwards.  If one considers the recent report of the Auditor-General, then Ontario’s deficit may be even larger at $11.7 billion.  Furthermore, the Ontario government has committed to spending more on public infrastructure and as a result can be expected to add at least another $156 billion to its net debt bringing it near $500 billion dollars by 2026-27.  This will add substantially to provincial government debt charges even if interest rates remain at historic lows.  There are a number of measures that Ontario’s provincial government could adopt in an effort to address the sustainability of the public finances over the medium-term.  I recently put out one of the Ontario 360 policy papers run through University of Toronto School of Public Policy and Governance in which I outlined the long-term evolution of Ontario’s fiscal situation as well as outlined some recommendations for change.  Here is a quick summary of the five-point strategy.

Natural Resources, Living Standards and Inequality

Kevin Milligan had an op-ed in the Globe and Mail a few days ago drawing the link between natural resource development, middle class incomes and inequality.  The point essentially was: “Without income derived from the resource boom, Canadian inequality and the well-being of the Canadian middle class would be much worse than we’ve experienced.”  The point was being made with reference to the current pipeline debate and the consequences of erecting barriers to the transportation of resources to market.  Erecting barriers in the end would result in less resource development and by extension fewer good jobs that would diminish “the income source that has best shielded the Canadian middle class from the harsh economic forces that are increasing inequality in other countries. For Canadians concerned with inequality, the equalizing effect of resource development on our economy is too strong to ignore.”

Another Picture That Will Define Ontario Politics for the Next Four Years

Ontario is getting a Throne Speech this week and a budget next week and these events will set the stage for the June election.  In her recent post, Frances drew attention to the province's public finances via the public sector wage bill and the public-private sector wage differential and that cutting the public sector wage bill may certainly be an option pursued in the future.   This is because the province has accumulated a large public debt that given the prospects for an economic slowdown and/or rising interest rates will potentially increase fiscal pressure via debt service costs which in 2016-17 totaled  $11.7 billion or just over 8 percent of total government spending.  That is more than what is being spent to fund the provinces post-secondary education and training system (The Ministry of Advanced Education and Skills Development) which came in at $10.1 billion.

The Balance of the Federation: Canada 1870 to 2016

My contribution to Maclean’s 2018 Chartapalooza was a plot of the federal government’s share of total government expenditure in Canada since 1870.  The chart showed that until World War I, with the exception of period marked by the building of the federally subsidized CPR, the federal share of total government spending in Canada was approximately 40 percent. After the peak of over 70 percent reached during World War I, the federal share came down quickly but went up again during the Depression era and soared during World War II reaching over 90 percent. The federal share of spending came down more gradually after World War II—leveling off at almost 50 percent during the 1970s and 1980s before falling once again to about 40 percent during the 1990s.

However, this chart can be improved upon in two ways.  First, it would be useful to include not only the federal government but also provincial and local government expenditure shares over the period 1870 to the present.  As well, if one is going to include federal, provincial and local governments, it would be useful to take transfers to lower tiers into account and look at spending shares net of those transfers.  So, this is what I attempt to do in the accompanying chart  where I present federal, provincial and local expenditure shares net of transfers – at least for the period since 1933.

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.

The Long Restructuring of Ontario's Health Spending

Ontario’s hospital sector has made a submission to the provincial finance committee making the case that overcrowding has become so serious that there is a need for more funding.  They are seeking a 4.55 percent increase in operating funds for the 2018-19 fiscal year in their pre budget submission.  According to numbers calculated from data from the Canadian Institute for Health Information(CIHI), over the period 2010 to 2017, the average annual growth of nominal provincial government hospital spending in Ontario has been 1.9 percent while provincial government health spending as a whole has averaged 2.6 percent.

Part of what is going on here is the usual maneuvering for more funds as part of any budgetary process which this year is expected to be a bit more active given that Ontario is apparently out of the deficit woods and balancing its books.  This should provide fuel for any number of claims across the province that there is a crisis and more funding is needed. The provincial government health care sector has seen its nominal spending growth since 2010 restrained to just over 2 percent annually (compared to about 7 percent annually between 1997 and 2009) as part of the Ontario government’s attempt to slay its deficit.  However, a look at the longer-term numbers also suggests that the hospital sector in Ontario has borne a disproportionate share of spending restraint over the last few decades.

So What Happens in the Next Recession?

I’m not a macro economist by any stretch of the imagination and yet I cannot help wondering what is going to happen in terms of policy response the next time Canada goes into a downturn.  It is not a question of whether there will be another recession, only when. By policy response, I am of course wondering about the traditional tools used to affect aggregate demand such as fiscal and monetary policy.

Provincial Government Health Spending: The Force Awakens?

The Canadian Institute for Health Information (CIHI) recently released its 2017 edition of its National Health Expenditure Trends and its worth a trip to its website for the downloadable data on all things related to health spending.  I've been on an advisory group to the CIHI with respect to its national health expenditures for a number of years now and I always enjoy the release of the product and the assorted materials provided that can shed light on recent trends in health spending. 

The last few years have seen a flattening out of real per capita ($1997) provincial government health spending and a fall in growth rates as Figures 1 and 2 show.  However, after a decline from 2010 to 2014 that saw real per capita provincial government health spending fall from $2,589 to $2,508 - a drop of 3.1 percent - spending is expected to increase to $2,585 by 2017 for an increase of 3 percent since 2014.

Health Spending and System Characteristics in Canada and Spain

I gave a talk at Memorial University in Newfoundland & Labrador last week sponsored by the Department of Economics and the Collaborative Allied Research in Economics Initiative (CARE). My talk was based on joint research currently underway with David Cantarero Prieto at the University of Cantabria in Spain comparing the determinants of government health spending in Canada and Spain and particularly the role of physicians as a factor in that spending.

Looking for a University President

“Some people think that a college president’s life is full of joys and a host of friends. I know that he frequently walks in sorrow and alone because of the times he must do what seems impossible.” Paul V. Sangren (1948) “What a President Learns” Journal of Higher Education, 19, 6, 287-288.

Well, my university is looking for a new President and Vice-Chancellor and the process of consultation has begun in terms of establishing what opportunities, issues and challenges awaits the new President as well as what characteristics and experience they should possess. A search company has been selected so if you are interested feel free to contact Laverne Smith and Associates Inc. at LakeheadPresident@lavernesmith.com. In the interim, a few thoughts come to mind about what being a university president might entail these days.

Balancing Ontario's Budget...In 1875

We often long for simpler times and search for them in our not so distant past. As an economist that does public finance and economic history, the public accounts of the past can offer me an interesting diversion. Governments, at any time in history always take in revenues and make payments and the budgets and public accounts of the past offer insights into what the pressing issues of the time were. A case in point, the public accounts of Ontario in 1875.

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 Federal Consumption Taxation

In the run up to Canada Day and the 150^th anniversary of Canadian Confederation, here is another in a line of recent snapshots of the federal government – this time its consumption tax revenues. Why consumption taxes? Well, economists like to make the case for more emphasis on consumption taxation relative to income taxes, which can have incentive effects on work effort, savings and risk taking. In a very simple model of the economy, you can do only two things with your income – consume or save it. A consumption tax is on the flow of spending and by taxing consumption you raise its price relative to saving thereby fostering more saving resulting in greater investment in productive capital and higher long-term economic growth. The onset and implementation of the federal GST nearly 25 years ago was partly sold on this theory.