Holy smokes

Here are some fun figures released by StatsCan today:

Total cigarettes sold in August by Canadian manufacturers decreased 7.5% from July to 2.0 billion cigarettes, down 41.5% compared with August 2005.
Cigarette production in August increased 7.0% from July to 1.9 billion cigarettes, down 40.3% from August 2005.
At 1.4 billion cigarettes, the level of closing inventories for August decreased by 7.9% from July, and declined 69.3% from August 2005.

How much of that decrease is a result of a change in domestic sales? You can find out for $3 payable to StatsCan.

The 43-hour day

I'm not quite sure what I think of a study released yesterday by Yahoo Inc.
The Toronto Star reports:

The average person's day is now effectively 43 hours long.

Technology has us multi-tasking to the point that if we add up all the hours we spend sleeping, working, commuting, watching TV, emailing, text messaging, spending time with family and using the Internet, the average person's number will add up to more than 43. But that is leading to more balanced, satisfying lives and a resurgence in traditional values, say Yahoo Inc. and media communications specialist OMD, which released a study yesterday called It's a Family Affair: The Media Evolution of Global Families in the Digital Age.
***
The study polled more than 4,500 families in 16 countries. The 43-hour day comes from the average U.S. response.

I understand their point: technology can allow individuals to get things done in less time, but a "43-hour day"? I'm curious how they came up with this. Perhaps I'll dig up their paper when I have more time.

The article goes on to quote a cynic of the theory that technology allows people to consume more family/leisure time.

Andy Sherwood, president of the Toronto operation of Vancouver-based Priority Management, a time-management training business, says multi-tasking is "evil."
"Am I seeing technology help in terms of family life? No," he said. "I see the exact opposite."
Priority Management has a 12-step program to overcome technology addiction.
"The first thing we allowed to intrude on us was cellphones," Sherwood said. "Then we allowed BlackBerrys. And it's a badge of honour now of how dysfunctional we are. We brag about the fact that `Here I am in the restaurant at 10 o'clock trying to have dinner with my friend, and look how busy I am, my phone is ringing, I'll have to take this call.' Spare me."
Priority Management teaches that to be "effective" rather than "busy" you must first stop multitasking.

Evil? I would argue that the efficiency of an individual is dependent on the individual. Addictive personalities may not bode well with tech gadgetry but, similarly, an addictive personality might also get a little too much use out of an annual gym membership. As long as there are slaves to the gym, is exercise "evil"?

HSAs and the privatization of pay for health care

At one point I was brooding over the idea that the privatization of pay for health care could work for Canadians (see comments section).

Well, I'm decisive now: such a scheme is not in the best interest of Canadians. Since my last post on this subject I've dropped some hints on how I feel about the application of a free market system on health care services in general.

My research since then is consistently showing me the same result: Canada's labour force and demography is not well-suited for the kind of privatized health care schemes that have been most widely proposed. I've barely scratched the surface of this subject, but perhaps I'll post some of my preliminary research here at some point. That said, nothing should be expected from me too soon -- I'm a nit-picker.

Today I just want to comment on Health Savings Accounts (HSAs). The GAO has recently released a paper which states that HSAs act as tax shelters for the rich (h/t Mark Thoma). I have two comments on this and on HSAs in general.

First, the GAO report isn't too much of a surprise to most people, but it highlights another piece of the wage/productivity puzzle posed by Prof Stephen Gordon (which he later re-visited, as noted on the linked post). He has said that wages are growing at the same rate as worker productivity in Canada, while U.S. wages are growing at a lesser rate than U.S. productivity. HSAs may offer yet another answer for this discrepency between the two countries. Since the U.S. introduced HSA's in 2004, this optional benefit has represented yet another reason for U.S. wages to face downward pressure as deductions on paycheques increase for high-income earners especially.

My second point is closely related and has to do with the distortion of data used to illustrate the rich-poor gap. Consider employer-provided benefit packages held by a range of income earners in the U.S.A. To the highest earners, health fees are an insignificant proportion of their income. They will spend their money on whichever services are best. Mid-to-high income earners are more likely than low income earners to opt for HSAs and accept the greatest possible coverage offered by their employer, most especially if they see this to be beneficial to their individual needs. Meanwhile, studies have shown that low-income earners are less likely to accept the same wide coverage from their employer (although if they work for the same firm as upper-income individuals, they may not have a choice under employer benefit nondiscrimination rules), or they may decline altogether. And, of course, they are relatively less likely to opt for HSA's.

Given this, what do we see? If we forget about the highest income-earners, we should be seeing a decrease in wage differentials once benefits are deducted. Yet studies have shown that non-benefit wage differentials within this group of the population are not decreasing in the U.S., they are increasing. Imagine that employer provided benefits and HSAs were accounted for. What do we see now? I see a magnification of wage differentials. Have I got this wrong?

Economist Marc Lee recently stated on the REP blog:

It is fascinating to me that in the wake of the Chaoulli decision by the Supreme Court private options are becoming more commonplace in Canada, just as more and more sensible people in the US are calling for a Canadian-style universal public insurance model.

I imagine that I'll be nodding my head in agreement more vigorously as I delve deeper into this subject.

Here are a few things that caught my attention today:

1. TD Economist Don Drummond has written “The Economist's Manifesto for Curing Ailing Canadian Productivity.” He says that most economists can agree what needs to be done to boost productivity in Canada, but “poor communication or marketing may be to blame.”
One problem, says Drummond, is that “...governments and business groups tend to speak of prosperity rather than using the word productivity.”

2. Neil Reynolds reports on Brian Lee Crowley's vision of "Atlantica." I'll have to read more on this, but from my cursory reading it sounds a bit like Robert Mundell's vision of optimum currency areas shared by the U.S. and Canada. Part of Mundell's proposal was that an exchange rate be shared between the two countries where the industries are alike. So, the Atlantic region of each country would share an exchange rate. It's an interesting concept if we could ever overcome political factors.

3. CAW says a new free trade deal with Korea will only harm Canada.
Excerpt from The Toronto Star:

Canada would lose more than 33,000 manufacturing jobs, including 4,000 in the auto sector, under a free trade deal with Korea, according to a union report. The Canadian Auto Workers union says Canada's history in most trade agreements with other countries shows it has been a net loser, and it will be no different with Korea.
"The past experience of Canada's five previous free trade agreements ... suggests that Canada's imports will grow substantially faster than our exports in the wake of a free trade agreement, making the resulting deterioration in the trade balance and consequent job loss much worse," the CAW report said...

"The demonstrated experience of past trade liberalization initiatives - both the free trade agreements which Canada has implemented with other countries and the limited impact of tariff liberalization on trade patterns into East Asia - indicate clearly that North American Free Trade Agreement-style (agreements) will only exacerbate the problem," the report said.

Taxed into a target

“Taxed into a target: A manufacturer says his province has set him up for foreign takeover”
I haven't come across a link to this story from yesterday's National Post, but I thought it was interesting so I'll post the whole (long) thing.

It wasn't so long ago, Robert Hattin recalls, that Hamilton wasn't such a bad place to run his manufacturing business, Edson Packaging Machinery Ltd. Among the best eatures was a competitive corporate tax regime. To borrow from the province's unofficial anthem, Edson believed Ontario was a place to stand and a place to grow.
That was five years ago. Today, Mr. Hattin says, he is not quite so bullish. "It used to be that there were only three other U.S. states with more favourable [corporate] tax rates than Ontario. Ontario is now down in the middle of the pack -- that is how quickly the Americans have changed their tax regimes," says a frustrated Mr. Hattin. "And as an investor you are going to have to decide whether you are going to invest on this side of the border, on the other side, or in another country."
Experts say the higher tax rate -- which incorporates all federal, provincial and municipal levies -- makes it all the more difficult for Canadian firms to build themselves into industry leaders and compete on a global scale. It also dissuades investors from setting up shop in the country, knowing there are other countries or
jurisdictions with more favourable tax treatment.

Without changes at the behest of all levels of government, Mr. Hattin as well as many economists warn, Canadians firms could be ripe for the picking. "We are at risk of becoming an economy of sales agents representing product from somewhere else," Mr. Hattin says.

Is Mr. Hattin exaggerating? Not according to the experts, and not according to the statistics.

The C.D. Howe Institute, a leading think-tank, has calculated Ontario will have the highest effective federal-provincial corporate tax rates for non-resource companies. At 42.2%, Ontario's is also the highest among 36 industrialized economies, except China. The effective tax rate is a measure of tax on business investment and takes into account such things as corporate income taxes, depreciation allowances, inventory cost deductions and investment tax credits.
In addition, the combined federal-provincial corporate income tax rate in Canada stands at about 33% -- five points higher than the average of industrialized countries that are members of the Organization for Economic Co-operation and Development. Moreover, countries such as Norway and Germany have plans to aggressively cut corporate rates further.
Logic dictates that the higher the tax rate, the less available cash companies have to invest, either in capital improvements, to make their operations more efficient and productive, or in acquisitions or employees.
"I think we have a tax system that takes away the capability of investors to be able to expand from a Canadian investment base -- and that leaves us sitting ducks in many sectors for takeovers from international investors who have the big bucks," says Jayson Myers, chief economist for the Canadian Manufacturers and Exporters.
Not everyone shares Mr. Myers' view.

Don Drummond, chief economist at Toronto-Dominion Bank, says the tax system has been only a minor factor behind a recent binge of foreign acquisitions..
"Do I think it is the number one reason? No," he says, noting that there is more direct investment going out of Canada than there is coming into the country.
He adds that Canadian corporate profits, measured as a share of national income, are at their highest peak yet, which undermines arguments for tax relief. "It is not as if
corporations are starved for funds."
Nevertheless, there is a consensus among economists such as Mr. Drummond, business people and federal legislators that fine tuning is required to maintain a Canadian corporate presence.

In its first budget, tabled last May, the federal Conservative government acknowledged there was a corporate tax problem -- something the previous Liberal regime was reluctant to utter.
"Even with the tax reductions proposed in this budget in place, Canada will remain under pressure to improve the competitiveness of its tax system," the government said. "International trends are to lower business tax rates. Many other countries -- including small countries with open economies and generous social benefit systems like Finland, Sweden and the Netherlands -- have more competitive corporate tax systems than Canada."

That budget, which passed last spring, will see the Conservative government reduce the general corporate rate to 19% from 21% by 2010, and the corporate surtax eliminated as of Jan. 1, 2008. It also called for the tax on capital to be killed, retroactive to last Jan. 1. Combined, it is $9-billion of annualized relief.

Besides the standard tax on corporate income, firms face other levies. Perhaps the most frustrating for business is the tax on capital, which the Conservative government has eliminated, but which is still levied in other provinces, most notably Ontario. This is tax applied on investments made by business, such as productivity-enhancing machinery, and on cash raised to acquire assets.

"In Canada, if you are a national company and you wanted to raise $1-billion to buy something in the United States, you get hit with $10-million in provincial capital taxes," Mr. Drummond says. "Even though $10-million out of $1-billion doesn't sound like a lot, it is a $10-million bill your foreign competitor does not face, and it changes [potential] deals on the margins."

Besides the federal government, Saskatchewan and New Brunswick have moved to eliminate their capital taxes, by 2008 and 2010 respectively. Ontario has pledged to do the same, but not until 2010 at the earliest if fiscal conditions permit. Otherwise, 2012 is the target date, and observers believe that is not quick enough.

Jack Mintz, former head of C.D. Howe and one of the country's top tax experts, says the country's tax regime, as it stands, penalizes growth and that differs sharply from the United States. As a result, Canada has plenty of small businesses and a good collection of large corporations, but lacks the medium-sized enterprises that are candidates for growth.

"We have tax incentives for small business," he says, "but as soon as you go beyond a certain profit level you lose them. We provide signals that say you are better off staying small. You don't get a lot of growth from small businesses."

Despite the concern and evidence, experts worry governments will continue to put corporate tax issues on the backburner. They point to what transpired last year, when the Liberal government -- fearing the demise of its minority administration -- sacrificed $4.6-billion in business tax relief to secure the support of the left-leaning NDP.

"We have a corporate tax structure that may have made sense in one era when we were reaping the benefits of a resource-based economy," says Mr. Myers of the exporters group. "It is based on the assumption that once businesses set up shop, they are not going to move and they'll make money, and that money can be taxed away.

"That's an outdated model of taxation. It would be hard to say the model suited the 20th century, let alone the 21st."

Biomass and the dismal science

One of my favorite CBC radio shows now has a blog! It's the Quirks and Quarks blog, and they happen to have an interesting post related to economics.
According to Quirks, biomass energy is a feasible and sensible option on many fronts, but there are economic challenges to overcome.

Quarks explains why:

Biomass energy seems to make a lot of sense. There's a vast potential, and the technology for some uses is already there, and for others is nearly there. In this it's a lot like wind energy, but in many ways its a little more attractive than wind because you can still have biomass energy available when the wind isn't blowing. Like wind, it's likely to be more expensive than fossil fuel energy, unless oil prices rise even more. The interesting thing is that very little of this extra cost comes down to the actual fuel being more expensive - in fact biomass fuel is largely going to be free, or close to it.

Some of it will be transportation, because biomass is distributed around the countryside and has to be collected. Even there, however, the difference between what it costs to deliver a tonne of coal and a tonne of straw or wood to a power plant aren't that great. And if you start counting the costs of pollution and global warming - what economists call the "externalities" things start looking a lot better for renewables like biomass. Externalities could include everything from the costs of health care because of pollution, to environmental disruption because of global warming. These kinds of costs are indirect, widely distributed, and notoriously hard to put a concrete monetary value on, which is why they're so often ignored.

Some of the biggest costs and the biggest barriers to these new energy sources, however, are the costs of changeover. If we switch to burning biomass in power plants for electricity, for example, we have to build new power plants closer to the sources of biomass to replace the fossil fuel power plants. At the moment, we have lots of these centralized fossil fuel plants. If these plants are new, then electricity producers won't want to shut them down because they haven't paid for themselves - the capital costs would be a dead loss. If these are old plants, then they're producing energy very cheaply, since fuel like coal costs so little, and earning big profits, and so
producers don't want to shut them down. So replacing operating fossil fuel plants with new biomass plants is going to cost money, unless you wait for the fossil fuel plants to to come to the end of their natural life-cycle. Those life cycles are long - a coal plant can run for fifty or sixty years.

Then there's the cost of adapting the grid. Unlike fossil fuel plants, biomass energy plants are likely to be away from urban areas where most power is consumed. Because biomass isn't dense and concentrated like fossil fuel, you don't want to transport it far. So biomass plants will likely be in farmland, or close to forestry sites. To transport the power from these sites, you'll need to build power lines, transmission towers, transformers, and you'll have to factor in the electrical losses that come with transporting power long distances. It's another large capital outlay, that building a new fossil fuel plant at the site of an old one doesn't face.

There are lots of ways to pay these costs. Direct subsidy by governments is one -- just pay the power producers for the cost difference between using renewable power and fossil power. Carbon taxes are another. If the government put a tax on power generated from fossil fuels and didn't tax renewable power, it might help even the playing field. Most energy economists, however, favour a modified scheme called "carbon emissions trading," a way of trading permission to produce greenhouse gas
for money. The UN has endorsed these, and this kind of system is already operating in Europe, and in a limited way in some parts of North America, but hasn't been officially implemented by Canada or the US.

A lot of the the science of biomass and renewable energy has been done. Now we just have to get the "dismal science" worked out.

The Smokin' Parametric Curve?

The Globe and Mail reports that “British Columbia's highest court has ruled that tobacco companies outside of Canada can be defendants in the province's claims that cigarette manufacturers should be held liable for health-care recovery costs.” B.C. Courts now have jurisdiction over foreign parent tobacco companies, although whether anything is actually enforceable abroad remains to be seen.

Perhaps there's an interesting twist to this story. This is a bit of an aside but it's something I've been pondering.

The increased pressure on tobacco companies that has occurred since the 1950's has created externalities unrelated to the health of the population. As pressure on tobacco companies increases, their profits are redistributed to PR companies, insurance companies, etc.

The Toronto Star quotes editor-activist Toby Heap:

Tobacco giant Phillip Morris spends more than $600 million a year on lawsuits, Heaps notes. "The RAND Corp. estimates that, as of 2002, the legal costs of dealing with asbestos litigation had reached $54 billion ... A study by Marsh Inc., the world's largest insurance broker, found that the average cost for liability insurance in the U.S. rose 63.4 per cent in the 12-month period ending Jan. 31, 2003.

Let's concentrate on PR companies. I'm not sure if we can say that a greater proportion of tobacco profits now flow to PR companies (this cannot be assumed because, for example, consider the increased horizontal integration of parent companies that own tobacco firms), but the point remains: there is a redistribution of profits and the PR industry knows this very well.

Here is an excerpt from an article in PR Watch dated 1994:

During the 1950s, tobacco companies more than doubled their advertising budgets, going from $76 million in 1953 to $122 million in 1957. The TIRC spent another $948,151 in 1954 alone, of which one-fourth went to Hill & Knowlton, another fourth went to pay for media ads, and most of the remainder went to administrative costs. Despite TIRC's promise to "sponsor independent research," Only $80,000, or less than 10% of the total budget for the year, actually went to scientific projects.
Hill's work on behalf of tobacco was successful. For forty years now, thanks to Hill and the PR industry, the tobacco manufacturers have staved off serious regulation. Even today, as the annual global carnage amounts to millions of tobacco deaths, the modern tobacco barons are sitting pretty.
Sitting pretty? Yes, because smoking's bottom line is that the industry makes more money off tobacco than ever, and is now opening up the vast Asian market to its deadly addiction. The future for tobacco profits are bright, thanks in very large part to public relations.

I thought it would be interesting to consider this graphically. What would the costs of anti-smoking sentiment (paid by tobacco companies) and the profits (of tobacco companies) look like if they were graphed? If profits were on the vertical axis and society's anti-smoking tenets were on the horizontal curve (a function of anti-smoking campaigns, anti-smoking regulations, increased costs of liability insurance, etc etc) were measured in degree and frequency on the horizontal axis, perhaps we would see a parametric, curve, concave from below.

As the measure of anti-smoking pressure increased over the years since 1950, profits of tobacco companies concomitantly increased (due in part to increases in PR activity, which is not necessarily entirely an effect of anti-smoking sentiment, but would of course be some motivational factor behind increased PR activity). As forces continually work against tobacco companies (ie restrictions on advertising, costly insurance), profits begin to decline (this is after big tobacco pulls all the strings – ie. discovering Asia).

Anyway, this is just speculation based on the data I've seen in articles like the one I've excerpted from PR Watch, but it would be interesting to see if the data suits the shape of the curve I described. The point? Well, er, I don't know. Perhaps the point would simply be the revelation that even in a world driven by capitalism, market power is no match against very strong social disapproval.

Archives from the Royal Society

I just received an email that I thought was worth sharing:

Jilliene Jewell

Publishing Editor, Notes and Records of the Royal Society

Over 340 years of landmark science available for first time, 14 Sep 2006. The complete archive of the Royal Society journals, including some of the most significant scientific papers ever published since 1665, is to be made freely available electronically for the first time today (14th September 2006) for a two month period. The archive contains seminal research papers including accounts of Michael Faraday's groundbreaking series of electrical experiments, Isaac Newton's invention of the reflecting telescope, and the first research paper published by Stephen Hawking.

The Society's online collection, which until now only extended back to 1997, contains every paper published in the Royal Society journals from the first ever peer-reviewed scientific journal, Philosophical Transactions in 1665, to the most recent addition, Interface.

The archive is open here, and access is free until December 2006.

Productivity and wages returned

In my last post I echoed Prof Stephen Gordon's question: “why are wages tracking productivity in Canada but not in the US?”

I gave a brief mention of health care policies and questioned whether employer-provided compensation is one of the drivers between the wage/productivity discrepancy between the two countries. This reasoning seems to carry more weight than my other thought concerning the industry make-up between the two countries. I wish I would have given this more thought before I puked up my last post in a hurry.

The debate on this subject continued at Economist's View, where “Movie Guy” says:

It is essential to understand and address the entire U.S. business model: Increased business competition, U.S. trade policy, other U.S. government policies and regulatory requirements as well as competing foreign policies and requirements, and local lean business operating practices and costs all play roles in impacting the wage earnings and employer-provided compensation benefits provided to U.S. Middle Class and Lower Class employees.

Still, I think the strongest point can be made for employer-provided compensation benefits.

A lot of the attempts to answer the US wage/productivity puzzle seem to share the same flaw. James Galbraith describes this:

....the distribution of pay is important! ...but (to repeat) the distribution of pay is one issue, and the share of wages versus the share of profits is quite another.

Both issues say something meaningful, but they frequently seem to be used to describe the same thing.

Wages and productivity

Prof Stephen Gordon over at Worthwhile Canadian Initiative has me thinking about why wages are tracking productivity in Canada but not in the US. If this is the case, I wonder if these opposing patterns can tell us something about the discrepancy in the type of labour being demanded between the two countries.

In the US the median wage has been falling in proportion to GDP, while the growth of average real wage has slowed. If demand for unskilled workers is increasing in the US and CEO's are receiving a greater share of income, we could expect the national median to be pulled down while the mean real income grows slowly in its proportion to GDP.

In Canada, a great proportion of the jobs being created demand high-skilled workers. For example, positive net employment change in Canada has largely taken place in the high-paying resource sector.

The mysterious but knowledgeable happyjuggler0 offered a good explanation on this subject over at Greg Mankiw's blog, so I drug up an excerpt from him/her:

Imagine you have a American compensation pool of 3x 4x 5x 6x 7x 8x 9x, with x being some amount of dollars. Both the median and the mean average is 6x.
Imagine that ten years later you have absolutely no improvement in compensation for those same people and thus they are 3x 4x 5x 6x 7x 8x 9x. But due to low skill immigration from Mexico you also have two new people, and they both make 3x. Now the pool looks like 3x 3x 3x 4x 5x 6x 7x 8x 9x.
The median income has now fallen to 5x from 6x! The mean income is a bit better than the median at 5 1/3, but it is still significantly worse than it was ten years ago.

Simple enough. If we were to focus only on the energy-rich province of Alberta, the post-immigration pool might look less like 3x 3x 3x 4x 5x 6x 7x 8x 9x and more like 3x 4x 5x 6x 6x 6x 7x 8x 9x. And Alberta happens to be where job creation is most concentrated in Canada.

Another curiosity: how much of the discrepancy in median growth can be accounted for by increased healthcare costs, since employers provide healthcare insurance in the US while Canadians rely on public health insurance?

I wish I had time to actually look at some data rather than speculate on this post, but I'm running late this morning. I'll return to this subject.

In fact, I find this area to be so exciting that I think I've entered the neighborhood of my undergrad thesis! (Side note to those who may be confused: Yes, I'm a third-year student, but I've crammed my requirements into three years. Therefore, I can jump into my thesis project now). I obviously have some major narrowing down to do; if anyone has any guidance or suggestions for narrowing down a subject in the area in wage/productivity growth, I'd love an email or a comment.

Addendum: Mark Thoma also has a post on this.

UK withholds World Bank donation

Oxfam should be happy with the news coming out of the UK. The UK is holding onto its £50m World Bank donation until issues of conditionality imposed on developing countries are addressed.

The BBC reports:

The UK had taken the stance as it opposed World Bank efforts to impose damaging
policies that force poorer countries to liberalise their markets.

"Most people would agree that if you're invading your neighbour, if you're oppressing your population or if you're taking aid money and spending it on other things, then we shouldn't stand for that and we won't," Mr Benn told the BBC. "Britain doesn't and nor does the World Bank and we should attach conditions in those circumstances."

"But on other issues, particularly economic policy, developing countries ought to take their own decisions and I do believe that this is one of the ways that we can increase the voice of the poorest countries of the world," he added.

Curbing the finance minister's powers

Canada's finance minister holds too much discretionary over the financial market, says economist David Laidler in Grasping the Nettles: Clearing the Path to Financial Services Reform in Canada, a paper recently published by The C. D. Howe Institute.

Laidler talks about the balance between healthy competition in the banking industry and monetary stability. In particular, I find it interesting to read what he has to say about the role of the finance minister on the subject of bank mergers.

Ladler's paper comes shortly after The European Commission's announcement (link to FT):
“Mergers and acquisitions in the European banking and insurance sector will no longer be subject to arbitrary interventions from central banks and national financial supervisors.”

Laidler on the role of Canada's finance minister:

The foregoing considerations are relevant to the merger issue because the fewer tools that are available to increase the banking system’s competitiveness, the stronger become the economic objections to any merger. However, they do not undermine the general presumption, forcefully developed by David Bond (2003), that mergers should always be open for approval, or not, on their economic merits. Unfortunately, in Canada they are not, mainly because of the role currently assigned to the minister of finance in the regulatory process.
Under current rules, any proposed bank merger would not only have to be examined by the Competition Bureau and OSFI to ensure that it threatened neither to reduce competition, nor to create prudential risks for the system. It would also have to face the scrutiny of House of Commons and Senate committees, and then be adjudicated by the minister of finance. This complex approval process is supported by the claim that bank mergers raise unique matters of public interest that require special political attention.
But consider the specific issues that have been identified as falling into this category, and on which the minister would have to pronounce: (a) access to services in rural and low-income communities; (b) choice among providers for small businesses and individuals; (c) growth prospects for the newly merged institution at home and abroad, for its potential customers, not to mention for the Canadian economy more generally; (d) deepening and broadening of the Canadian capital market; and (e) fair treatment of employees. These issues seem either to be ones that the usual regulators would concern themselves with (a, b, and d), or that the institutions themselves would take into account when deciding for or against a particular merger (c, as well as e).
The minister’s ability to act independently of the recommendations of the Competition Bureau and OSFI thus gives him what amounts to a veto power over any proposed bank merger without serving any recognizable over-riding public interest. Its main effect is to provide the minister with space in which to move with whatever political winds might happen to be blowing at the time he comes to exercise his powers. Given the long-standing political unpopularity of the large banks mentioned earlier, his powers introduce a degree of uncertainty into the approval process that effectively prevents any merger proposal being formulated, let alone submitted for approval. This characteristic of the regulatory environment thus seriously limits the options open to large chartered banks as they try to adapt to an economic environment that is changing rapidly, both at home and abroad. Given their central place in coordinating the saving and investment choices of Canadians, and given the critical role that these choices will play in determining the economy’s future performance, this impediment to the financial system’s overall efficiency is far too high a price to pay in order to punish particular institutions for past arrogance, and ought to be removed.

Abolishing the licensing of medical practitioners

Should the licencing of medical practioners be abolished? This is not a new issue, but it's once again being brought into the open by some Canadian economists. Here is Milton Friedman's take on the issue, according to the textbook International Economics, by Appleyard and Field (2004):

[Friedman] has stressed continually the role of individuals, the market, and laissez-faire, even suggesting in his popular 1962 book, Capitalism and Freedom, that licensing of medical practioners should be abolished since it is a barrier to entry and thus to efficient resource allocation.

The authors imply that Friedman is/was in favour of abolishing the licencing of all medical practioners, including physicians. Friedman's general beliefs in the merits of competition and free enterprise are attractive to me, but, as I've expressed before on this blog, I believe that healthcare is a unique market where the rules of supply and demand are not sufficient. I could see loosening the requirements of X-ray technicians or easing mobility constraints on immigrant practioners, but the greater kind of abolishment that some economists are proposing would surely create market inefficiencies and remove an important safety net, especially for low-income earners.
There are four reasons I can think of for arguing in favor of the elimination of licensing restrictions on medical practitioners, but none of them seem sensible to me. I'll argue against these myths here.

Licensing distorts supply and demand.

This view was forwarded last week by economist Nadeem Esmail in a report published by The Fraser Institute.

The elimination of restrictions on physician training will resolve the shortfall in the availability of services that Canadians experience, a fact that is not only predicted by theory, but also borne out in practice.
According to a recently published OECD report, nations with universal access health programs that have traditionally relied on largely unregulated markets for physician
training or who have only recently begun controlling medical training have experienced higher levels and growth rates of their physician-to-population ratios than nations, including Canada, that have controlled intake for many years (Simoens and Hurst, 2006). Put another way, nations that allowed the market to determine the number of domestically-trained physicians have enjoyed greater access to physicians than those nations that, like Canada, have tried to actively manage physician supply.

Yes, decreasing regulations will lead to greater physician-to-population ratios. In other words, a decrease in quality will lead to increases in quantity, but I would only trumpet such a cause-and-effect relationship if I were, say, purchasing silverware, not healthcare services.

Contrary to Esmail's approach, I argue that eliminating restrictions on training requirements would decrease efficiency. The healthcare market is unlike a regular market. Licensing regulations act as a signaling device to assist society in the crack-down on medical malpractice. Why should we care about malpractice? It surely creates distortions in the market if the market has a tendency to clear where prices are higher than they should be for the supply of essential, non-substitutable services. Therefore, licensing requirements could actually ease economic distortions in the health market thereby increasing the efficiency of resource allocation.

David Wessel in yesterday's WSJ (via Mark Thoma) explains that inefficiencies exist in the health market when consumers lack information. His point applies in Canada, too.

It's fashionable these days, particularly in Washington, to argue that the best way to improve the quality and restrain the cost of health care is to make the market for health care more like the market for everything else.
The theory:
Give consumers more information, let them choose the best provider and the resulting competition will help to squeeze out costly waste and ineffective care. After all, markets work pretty well for other goods and services. ... But as a cure, the approach rests on the belief that health care is -- in most respects -- like any other product.
An intriguing new comparison of patient-satisfaction surveys and medical records suggests ... [that] [j]ust because patients say they're very happy with their doctors and the care they're receiving doesn't mean they're getting good care...

Further, A minimum licensing requirement shouldn't impact the quality of healthcare supplied or demanded by middle-income earners and above in a hybrid healthcare system. The demand for higher quality practitioners who meet above-minimum licensing requirements would create supply.

License requirements drive up wages.

Assuming that the license requirements are set as a minimum standard, any practitioner who is not a crackpot would have completed the minimum training already, therefore the wages of skilled practitioners should not face upward pressure if the minimum skills of practitioners are legitimate.

Licensing has a de-mobilizing effect on the supply of practitioners.

This doesn't need to be the case. As long as licensing requirements are consistent nation-wide, labour mobility should not be effected. However, Canada would do well to increase the swiftness in which immigrant practitioners are able to enter the market.

Licensing is a barrier to entry.

I would consider a minimal license requirement to be a good thing in that it is barrier enough to keep out voodoo practitioners. This goes back to my previous point about the capability of minimal licensing to impede distortions. Still, removing barriers for, say, trained immigrants would be a sensible move.

In sum, minimal licensing requirements would be a boon to low-income earners and society as a whole. Low-income earners would get their money's worth, and society could avoid marketplace distortions.

I'm stumped. Why would Esmail, Friedman and others propose such a thing in a market where the natural rules of supply and demand simply do not work (because some health services are necessities and non-substitutable)?

_________________________________________________

On the broader subject of healthcare:

The Cato Institute Web site features a video where Sebastian Mallaby and Jason Furman review Arnold Kling's book, Crisis of Abundance: Rethinking How We Pay for Health Care. Kling's comments follow. I've only heard the first 25 minutes (that's what you get with a 50.6kbps Internet connection and a computer that crashes every 27-33 minutes); however, Prof Greg Mankiw has also recommended this clip, therefore, consider minutes 26 through to 77 to be well-endorsed.

Oilsands, military procurement & the IMF

With all of the well-written commentaries in the Canadian news today, I cannot fight the urge to play the role of messenger.

First, Financial Post contributor Terence Corcoran commends Alberta's out-going premier, Ralph Klein, for allowing the markets to play their role throughout the oil boom. Klein did so despite on-going pressure from "Klein growth critics" (as Corcoran calls them) who have frequently called for government intervention and the artificial redistribution of oil profits. Here is an excerpt from his wonderfully accurate piece (unfortunately, none of The Financial Post articles have links at this time, but perhaps I'll add the links as they become available):

Why would Mr. Klein, ending a spectacular political career in the midst of a great economic expansion, cave in to the idea that the expansion was not only a mistake, but his mistake? Not much of an economic theorist or principled thinker himself, Mr. Klein seems to have abandoned the populist/commonsense view of things that made him such a political success. He instead has allowed his opponents and critics to define his record, set his legacy.
Mr. Klein may well have been swayed by frequent recent criticisms from Peter Lougheed, former premier and now ancient statesman who has come out of his lair to issue goofy pronouncements on the Alberta economy. In an interview with L. Ian MacDonald, editor of Policy Options magazine at the Institute for Research on Public
Policy, Mr. Lougheed harrumphed the he would have "managed" the growth and the economy much more effectively. Among other things, Mr. Lougheed called for limits on oilsands development. "What's the hurry? Why not build one plant at a time? I hope the new government in Alberta will reassess this and come to the conclusion that the mess, and I call it a mess, that is Fort McMurray and the tarsands will be revisited."
Ever the government activist wolf in Conservative sheep's clothing, Mr. Lougheed would have the province act as central planner, managing and directing resource development, housing, infrastructure, schools, labour force flows and everything else. The government needs a "plan," and Mr. Klein failed to have one.
Natural gas should be sold on the market, he says, not used to develop oilsands projects. The oilsands and other resources are "owned" by the people of Alberta, and the current royalty arrangements are depriving Albertans of full profit return on that "ownership."
He seemed to be implying that capital cost overruns in building plants are being used by the oil industry to avoid paying royalties.
Along with others, Mr. Lougheed sees all the natural economic benefits of a major economic boom, including rising local prices for housing and labour, as economic curses.
"Inflationary," said Mr. Lougheed. "The cost of living and the cost of houses is higher than it should be." Should be? Under what circumstances? The market reason for higher wages and prices is to attract workers and investment to supply what is needed to meet rising demand. Ireland went through a similar price experience during the 1990s, a product of Ireland's economic rebound. Prices rise because demand is good, and supply of housing and whatever follows in time. What Mr. Lougheed seems to want is $75 oil that feeds all the money to government so it can plan and supply what the economy needs when the government thinks it should be needed.
Most of the other Klein growth critics are political opportunists, mayors with schemes and inadequacies of their own, opposition critics and the usual band of statists who see all opportunity as a crisis in need of government intervention. Alberta may indeed be struggling with labour shortages, rising prices and inadequate social services and infrastructure. But isn't that how the West was won?

Another good commentary comes from Martin Lawrence in The Globe and Mail. Lawrence shines some light on military procurement issues, which have been getting surprisingly little attention. Here's an excerpt:

If there are bureaucrats needed to check huge Defence Department spending outlays, they are not to be found. This year a staggering $13-billion in new military aircraft contracts are being, or have been, awarded without serious competitive bidding. It marks the biggest military bonanza since the Second World War days of munitions minister C.D. Howe.
Defenders say the sole-sourcing is needed to save time and will result in contracts that benefit the Canadian economy, offsetting any losses that may stem from the non-competitive process.
Critics say the sole-sourcing is costing taxpayers a fortune — up to $2-billion in unnecessary costs, and that no one is raising a peep about it.

Thirdly, The Financial Post has a commentary by Gordon Brown, Chancellor of the Exchequer (once again, no link at this time).
Brown explains his two major proposals to the IMF: the proposition to expand international trade by making improvements to infrastructure (such as transportation); and the proposition to encourage agricultural barriers imposed by developed countries. Here is an excerpt of Brown speaking on agriculture:

Developed-country agriculture remains the barrier, and here too we can make progress in Singapore.
The truth is that Europe could and should now go considerably beyond its initial offer of a 39% cut in agricultural tariffs. It even could go beyond the 51% now mooted. Similarly, the United States could and should go beyond a 53% cut in trade-distorting domestic support for its farmers.
Brazil could and should go beyond its pledge to reduce tariffs on industrial goods to a maximum of 30%, with India responding on services.

*****
It is one of the great ironies that the greatest damage to globalization today is not being inflicted by the demonstrations and running protests that have marked trade negotiations over the years. The wound is self-inflicted, caused by our failure, as the world's wealthiest countries, beneficiaries of globalization, to agree to trade liberalization.

Rising tuition: fact or fiction?

The Educational Policy Institute claims that rising tuition fees are partly a myth.

Roma Luciw, The Globe and Mail:

The new research shows that once government tax credits are taken into account, undergraduate university students, especially those from middle-income and wealthier homes, have little to complain about when it comes to tuition fees. In fact, students in provinces such as Ontario, Manitoba and Alberta have actually seen a decline in net tuition costs.
“We all hear stories about how rising tuition is creating a crisis,” said Alex Usher, author of the report and vice-president of the Educational Policy Institute, a think tank with offices in Toronto.
“The fact of the matter is, once inflation and tax benefits are taken into account, average costs are up by only 25 per cent in the 10 years, and not at all since 1999-2000.”

Emphasis is my own.
I'm in the same position as a student who fired off a letter to the editor. I work part-time, I rely on loans and I'm not eligible for the tax credits. This study is as weak as the tax credit plan.

Are we there yet?

You're going on vacation. You have two kids, four activities packed, and X miles to drive. Will you survive the road portion? Depends upon your calculations.

This is an equation put forth by a maths professor, Professor Dwight Barkley, as published on BBC News (way back, although I've only just discovered it).
According to BBC News:

A maths professor has worked out an equation to calculate how long into a car journey it takes a child to ask: "Are we nearly there yet?”
The equation for the time it takes for a child to ask the question is: one, plus the number of activities to do, divided by the number of children in the car squared. To get the final answer, that figure is then added to the time it took the family to get into the car and set off on their journey.

Is this amusing? To me, yes.
Precise? Maybe.
Accurate? Not likely.

Of course, the inputs can't be considered homogenous. When I was six I leapt from furniture like a retarded ninja, and yet my neighbour's baby crosses her legs in her stroller. Further, I can't imagine that children find all activities equally amusing. Would you behave if this were placed on your lap?

Still, this discovery beats the weekend Bizarro strip hands down.

Freedom with true abandon

Brian Ferguson from Canadian Econoview has linked to my post, “Can a Central Bank be too Transparent?” where I commented on the Freedom of Information Act (FOIA). He has this to add:

Her comments brought to mind something Frank Dunlop said in Yes Taoiseach, his memoir of his career in Irish politics.

The Taoiseach is the Irish Prime Minister, by the way. According to Dunlop, these days when civil servants want to give their ministers comments on memoranda they don't write comments in the margins, as they once might have. Now, because of Freedom of Information laws, they write them on Post-it notes which can be removed if the main memorandum has to be released to the public.

So the FOI requesters get less than they hoped for and future historians will also get less information about how decisions were made. Not, perhaps, a win-win situation.

Egad! Certainly a conflicting outcome. Here's another one for you, Brian. This one came in my email (thanks Dr. T). Apparently the U.S. Federal Open Market Committee (FOMC) stopped publishing a portion of its minutes altogether after the FOIA was introduced. I sense a pattern.
I found more on this in a document on the Federal Reserve Bank of St. Louis Web site.

Originally, the minutes of the [FOMC] meetings were not made public. In response to passage of the Freedom of Information Act, which became effective in 1967, the FOMC divided the minutes into two documents. One was called the Memorandum of Discussion, which was released with a five-year lag.
The other was a shorter document called the Record of Policy Actions, which was released with relatively little delay. The Memorandum was a set of complete minutes, identifying speakers, but not in the form of a verbatim transcript. The Record of Policy Actions reported the Committee’s decisions and provided a summary of the Committee’s deliberations. However, the Record did not identify by name which FOMC members took which positions.
In 1976, in response to a court suit challenging the legality of delaying the release of the Memorandum, the FOMC discontinued publication of that document. The Committee continued to publish the Record of Policy Actions but in 1993 changed its name to “Minutes of FOMC Meetings."

Defence economics: The unfolding of miscalculations

When it comes to academia, departments of political science, philosophy, English, chemistry, international development studies, and even gender studies offer something vital and modern that most economics departments do not: course offerings in the area of defence, peace and security. Unfortunately, defence economics has been left to military institutions and generally has not found its way to civilian-attended universities. As a reflection of this there are only a handful of defence economists today, my favorites being Todd Sandler and Keith Hartley (these two seem to be behind just about everything good about the field).

Two things strike me on this topic.

The first I've already alluded to. Even though defence economics can be considered an umbrella subject encompassing so many disciplines, it really is vastly ignored in the civilian academic sector. The serious thought in defence economics is being done by defence institutions (with a few universities in the UK being the exceptions), and the knowledge-sharing appears to stop there.

The second thing that strikes me is the appearance of vast discord on the application of defence economics, likely related to the lack of economists devoted to the subject. The disarmament theories that have been given serious thought over time range from utopian visions, to game theories, to some fairly modern theories of resource reallocation. They are voluntary or compulsory; global and/or regional. Some are based on the notion that disarmament reinforces peace, and some paint disarmament as a panacea. Others are hybrids.

The lack of consensus doesn't just imply that disarmament theory is altering over time. Take for example Africa today and the lack of consensus evident amidst an on-going disarmament program. The program involves the collection of arms in exchange for cash payments. It's a mess!

Let's make an example of this particular program. The first challenge it faces is inflation, which seems self explanatory.

Second, a gap in military capability is growing between two factions. This would be defined in defence economics as a threat. By increasing the threat to a large degree, factions are essentially concerned about committing social suicide, at a minimum. The dilemma is worse though: they could be left unable to protect themselves against threats from those who don't commit to the voluntary program.

A third problem of the cash for arms program is one pointed out in a Toronto Star article:

The handouts can also lead to feelings of hostility from non-fighters. "They feel you're rewarding impunity," Isima said. "They say ... 'They've killed our families and now you're giving them money?'"

My intention here isn't to criticize the program in itself (it has its merits), but to point out that disarmament is a complicated issue that should raise flags to economists; this is not “development as usual,” as Graciana del Castillo would say.

Mark Thoma recently pointed to a paper: The Rules of Reconstruction, by Graciana del Castillo, Project Syndicate:

When wars end, countries confront a multi-pronged transition. Violence must give way to security for inhabitants; lawlessness and political exclusion must give way to the rule of law and participatory government; ethnic, religious, or class/caste polarization must give way to national reconciliation; and ruined war economies must be transformed into functioning market economies that enable ordinary people to support themselves.

These multiple tasks make economic reconstruction fundamentally different from “development as usual.” To succeed, the transition to peace requires demobilization, disarmament and reintegration of former combatants, as well as reconstruction and rehabilitation of services and infrastructure.

Indeed, this is not “development as usual.” Del Castillo's entire paper is well worth reading.

So, when civil war exists all over the globe, why does economics not follow the lead of other academic disciplines? If the demand exists in other departments, what's stopping it from existing in civilian-attended economics departments?

In The Guns of August (1962) Barbara Tuchman said, “War is the unfolding of miscalculations.” It's unfortunate when a botched plan for peace is the unfolding of miscalculations, too.