true dough

The blog is dead! Long live the blog!

2007-05-07T12:25:00.001-03:00

I plan to revive True Dough and carry on with it when I relocate to DC, USA (!) for an internship.

I’m not sure about the direction this blog will take, so I’ll wing it like everything else. It might turn American for a few months, but as a stranger to DC I might have time to keep tabs on both countries -- or perhaps focus on relations between the two...

Research vouchers for graduate students

2007-02-22T15:01:00.000-04:00

In today’s Toronto Star, Ross Finnie and Alex Usher propose a voucher program to promote quality graduate research. I haven’t formed an opinion yet, but at very least it seems much better than the current system of government-to-institution transfers.

How to expand graduate education in Canada, by Ross Finnie and Alex Usher. Toronto Star (Feb 22):

On the supply side, new money needs to flow in ways that will foster the twin goals of expansion and quality.
Traditional measures, such as increasing government-to-government or government-to-institution transfers, or putting more money into research, would help, but offer limited guarantees that the money will promote expansion of graduate education where we need it most.
An alternative approach would be to attach funding to students directly, varying the amounts with the assessed standing of the student, based on grades, exams and other criteria.
Such a voucher-type system would encourage institutions to improve the quality of their programs as they compete for students, while also giving them the means to expand.
Channelling money through students would incorporate the much-vaunted benefits of the "single-payer" approach that generates efficiencies for our publicly funded health system, while opening up the "market" for graduate education.
In short, an intelligently structured set of transfers to universities based on the number of highly qualified graduate students they enrol would strengthen incentives to offer high-quality postgraduate education. The new resources these transfers brought to institutions would allow expansion of the system precisely where quality was best.
Students, who naturally want to enrol in the best programs they can, would themselves direct the funds toward the higher-quality programs. It is a market-type solution, with market-type efficiencies, though financed entirely with public money.

Epstein on the FDA and drug patents

2007-02-20T13:16:00.000-04:00

I wish I would have heard the latest Econtalk podcast, “Richard Epstein on Property Rights and Drug Patents,” before writing my recent post on Mexico’s generic drug market.

Epstein, in conversation with Russ Roberts, discusses such things as what would happen if the FDA didn’t exist, the problems with long supply chains, the FDA’s orders of magnitude, and the impact of generics in the drug market. (h/t Econlog)

Do tariff reductions reduce welfare?

2007-02-20T08:46:00.000-04:00

James Townsend (University of Winnipeg) has a paper published in the February issue of The Canadian Journal of Economics (subscription required) where he states that relative wages fell in industries where tariff reductions mandated by the Canada-U.S. Free Trade Agreement (CUSFTA) were deepest.

Here’s an excerpt from Townsend’s paper, Do tariff reductions affect the wages of workers in protected industries? Evidence from the Canada-U.S. Free Trade Agreement:

By working with microdata and using hourly wages, I make several contributions to our understanding of how the CUSFTA tariff cuts affected earnings. First, by using hourly earnings and controlling for individual characteristics, I am able to isolate the effect of CUSFTA on the wage rate, which is a measure of the price of labour. Previous studies have worked with average weekly earnings for broad groups of workers. Changes in weekly earnings may come from a combination of price changes, changes in the composition of workers forming the group, and changes in the number of hours worked per week. Second, I am able to compare the response in the union and non-union sectors, which may have important implications for understanding the political economy of trade policy. My results indicate that the CUSFTA cuts resulted in a decline in the wages of those workers in sectors facing the largest cuts relative to the wages of the workers in sectors that already had low tariffs prior to CUSFTA. This result holds for both the union and the non-union sector. Wages in the union sector are also found to be responsive to changes in the industry-specific real exchange rate and to other sectoral shocks; no similar response is found in the non-union sector.

There are two things I wish Townsend would explore (or explore more). One is the annual welfare cost to Canada caused by job protection, the other is the barrier that tariffs build by not allowing the reallocation of resources to their most productive means.

Regarding the first point, the best study I’ve come across is by Gary Clyde Hufbauer and Kimberly Ann Elliott, "Measuring the Costs of Protection in the United States." (1994) For each tariff-protected industry, the authors calculate the number of jobs saved, the consumer cost per job saved, and the resulting annual welfare cost to domestic citizens. They found that consumer costs exceeded worker wages.

Don Boudreaux expressed my second point well at Café Hayek after being motivated by a speech once given by John C. Calhoun. Here’s the best part (or read the whole thing here):

The deep lesson here is that, just as moving to freer trade does indeed upset some economic apple carts, so, too, does protection upset some economic apple carts. Given that both free trade and protection cause some specific job and business losses, protection cannot be justified -- as so many try to justify it -- by pointing to people whose economic expectations will be upset by freer trade. Free-trade advocates can counter with similar accounts.
Of course, free trade's justification cannot, then, be found in the fact that protection upsets some economic expectations. Free trade's proper economic justification is, in part, this: given that both free trade and the "prohibitory system" "destroy" some jobs and "create" others, it's best to let commerce and industry be guided by market signals and consumer sovereignty so that each producer is more likely than under protection to specialize in that occupation for which he, she, or it has a genuine comparative advantage. Thus will grow the wealth of nations.

Townsend's counter-arguement is that perhaps resources shouldn’t be reallocated to a more productive means because the workers from the once-protected industries may not have the skills to get hired in more productive industries. (A recipe for growth, no doubt.)

Since skills cannot be transferred between industries, workers may be better off remaining in a declining industry at a lower wage than they would be by moving to an industry for which they have no skills. As a result, shifts in demand result in persistent changes to the wage.

So long and thanks for the graphs

2007-02-19T07:03:00.000-04:00

I've learned a lot from The Vancouver Housing Blog since I discovered it in December, so I'm sad to see that VHB is exiting the blogosphere ("at least for awhile"). I hope he'll be back.

Mankiw on cross-country growth regressions

2007-02-18T22:24:00.000-04:00

A couple months ago I was debating whether to ask Prof Greg Mankiw about his thoughts on cross-country growth regressions, but I was too shy. I'm excited to see that someone else got to him.

I don’t have anything to add, I just thought it was a good post. Here's a short excerpt, but the whole thing is worth reading.

In...The Growth of Nations, I tried to spell out the reasons for my skepticism [of cross-country growth regressions]. I emphasized three problems, which I called the simultaneity problem (it is hard to disentangle cause and effect), the multicollinearity problem (most of the potential determinants of growth are correlated with each other and imperfectly measured, making it hard to figure out which is the true determinant), and the degrees-of-freedom problem (there are more plausible hypotheses than data points).

Gapminder - didn't you know?

2007-02-17T09:14:00.000-04:00

I hesitated to blog about Gapminder earlier when it occurred to me that many of you might already know about it, but I was shocked (shocked!) when an acquaintance of mine said that Gapminder was "fun for ten minutes." (I forget her exact words.) There's more here than one would suspect from first glance. I recommend watching this demonstration by Hans Rosling, "professor of international health at Sweden's Karolinska Institute, and founder of Gapminder, a nonprofit that brings vital global data to life."

Here’s a link to Gapminder. The site features tutorials.

Addendum: Happyjuggler0's comments to this post make me think that I probably should have also provided a direct link to the new Gapminder Beta (which can also be found near the top of my last link). The tutorial for Gapminder Beta is in the top left corner ("help"). I'm really looking forward to being able to import data into this. What a great tool!

Early regulation: Mexico’s generic & 'miracle' drugs

2007-02-16T23:32:00.000-04:00

What happens when True Dough is confined to a small space? She writes a lot, she copies and pastes a lot, and she evidently refers to herself in the third person (which she would never, ever do in person.)

I’ve been thinking a bit about Mexico’s current mis-information problem when it comes to generic drugs and "miracle" drugs. I’m convinced: there is a solution in free markets, but certain early government regulation, perhaps even temporary, should have been implemented to get Mexico’s undeveloped generic drug market off on the right foot. First, I’ll admit that most of my information on this subject comes from Global Insight economist Ben Shankland, who has been covering the subject for at least the past few months (although none of his pieces have public links -- sorry). Good reporting on this elsewhere seems hard to come by.

Here’s Shankland’s latest from Feb 9, Generics Industry in Mexico Calls for Help:

Consumers’ confusion over generics and non-equivalent copies continues to present a serious challenge to manufacturers of legitimate, off-patent medicines in Mexico…. There are an estimated 120 firms currently producing non-original medicines of varying quality in Mexico.

Here’s Shankland again, this time in "Miracle Drugs" Under the Spotlight in Mexico, Feb. 6:

The Mexican pharmaceutical market regulator, COFEPRIS, has called for the national competition authority PROFECO to help pursue manufacturers of so-called "miracle drugs". In an interview with the Diario Monitor newspaper, COFEPRIS chief Juan Antonio Garcia Villa estimates that the trade is worth approximately US$900 million per year, and that it has been partly responsible for a surge in Adverse Drug Reactions (ADRs) in Mexico from around 300 per year in 2000 to nearly 9,000 in 2006. The rising rates of deaths and intoxications have come despite the fact that effective pharmacovigilance is still "virgin territory" for Mexico, according to Garcia Villa. Significance: After years of crackdowns, legal reforms and forced inspections (see Mexico: 10 June 2005: ), efforts to halt the trade in these products continue to be ineffectual.

What is Mexico to do? The 2006 NBER Working Paper "Regulating Misinformation," by Edward Glaeser and Gergely Ujhelyi addresses the topic of misinformation in the advertising of drugs (h/t Healthcare Economist)

Here’s what the authors have to say about three methods of government regulation:

We consider the effects of three different forms of government intervention: taxes or bans on advertising, counter-advertising and taxes on profits or goods. If advertising is just misinformation, then taxes or bans on advertising yield second best options that weakly dominate all other government interventions. Counter-advertising where the government tries to refute private firms is sub-optimal because it creates a costly advertising response by the private firms. Price caps and taxes on consumption can be welfare enhancing, but they yield less social surplus than directly taxing or limiting advertising. A change in the tax code that stops firms from deducting advertising expenses is equivalent to a tax on advertising and yields similar results.

But evidence suggests that it is likely that none of these regulations would be effective in Mexico without damaging social surplus. First, bans on advertising have proven to be ineffective in Mexico, partly due to the flow of information across borders.

Shankland (Feb. 6):

Both COFEPRIS and PROFECO are members of the Mexico-U.S.-Canada Health Fraud Group (MUCH), a trilateral body that joins competition authorities and healthcare regulators in the three countries in an effort to stamp out bogus medicines. However, despite a constant stream of enforcement actions on both sides of the border, little can be done to stamp out illegal television advertisements for these products in Mexico, with many ads broadcast from U.S. soil. Within Mexico, a more vigorous attitude from PROFECO would be welcome, as the chronically under-resourced COFEPRIS is unlikely to overcome this threat to public health by itself.

Glaeser and Ujhelyi also propose taxes or bans on advertising. As Shankland pointed out after the Mexican senate refused a 15 per cent tax on medicines last month, "any plan that would have involved increasing the retail prices of medicines would have had direct consequences in a market where out-of-pocket spending remains the norm for most consumers of prescription medicines."

Maybe the market has solutions. I stumbled across a WSJ article dated 14 Feb 2005:

Victor Gonzalez has come up with a novel prescription for business success here: cheap drugs, cheap doctors -- and a dose of sex.
Mr. Gonzalez, 57, is shaking up Mexico's health-care system and changing the way drugs are sold here. By spotting gaps in the country's drug market and regulations, he is able to offer low-cost medicines and inexpensive care to millions who lacked both. By raising awareness of generics as an alternative to pricey brand-name drugs, he has revived the fortunes of domestic makers and posed a threat to the U.S. and European pharmaceutical companies that dominate Latin America.

(The "dose of sex," by the way, has to do with the skimpily-dressed models that help sell Mr. Gonzalez’s services and products.)

In 2005, Mr. Gonzalez had 2,550 stores. What ever happened to him and his Farmacias del Ahorro? Doctors and at least one law firm accused him of selling shoddy drugs, but he continues to expand his small empire. "In Mexico, Farmacias del Ahorro accounts for some 25% of the market in unit terms and 6% of sales in value terms" (Global Insight, 24 Jan. 2007). Last month he opened his first outlet in Chile.

So, a final thought: Perhaps there is a free market solution to Mexico’s misinformation problem, and one that doesn’t involve taxes on advertising, etc.; however, it could have been done better. Perhaps early government regulation should be considered when markets are not able to solve for massive negative externalities (in this case, the health and death of Mexicans).

I’m not suggesting that Mexico should follow the blueprint of the FDA. Further, I’m not the only free marketer who advocates early regulation in undeveloped health markets (check out Arnold Kling’s recent admission – see, I’m in good company*). But think of the market solutions in the U.S. For example, Wal-Mart has a program where they offer cheap prescriptions for some 314 generic drugs to more than 14 states.

Mexico’s market solution is very similar, the big difference being that the quality of drugs offered by Mr. Gonzalez is apparently much lower than the drugs offered by Wal-Mart. Still, Mr. Gonzalez accounts for 25% of the market. This means that individuals aren’t getting the proper medicine, and Mexico’s generic market is suffering (doctor’s find it easier to prescribe something from Pfizer, etc). Early regulation (perhaps even temporary) in this undeveloped market could have corrected this before the mess even began.

* -- I should have made clear that Kling is commenting on an entirely different subject, but following the link will tell you this.

Corcoran on Pigovian taxes

2007-02-14T16:10:00.000-04:00

Terence Corcoran doesn’t believe in Pigovian taxes. In his latest anti-Pigovian tax article he reasons that decreased smoking rates don't coincide with increased price rates, therefore we shouldn’t expect gas consumption to decrease in response to taxes on gasoline. Here’s an excerpt from his article in yesterday's National Post:

According to [Prof Greg Mankiw], "economists ... have found that a 10% increase in the price [of cigarettes] causes a 4% reduction in the quantity demanded. Teenagers are found to be especially sensitive to the price of cigarettes: a 10% increase in the price causes a 12% drop in teenage smoking."
In practice, however, the link between price and smoking seems a little less direct and a lot more uncertain. Real cigarette prices in Canada (using Ontario as a measure) have rolled up and down by as much as 80% over the last 20 years, with impacts on smoking prevalence that are far from clear. The link between price and
smoking is certainly far from the mechanical one implied by Prof. Mankiw...
We appear to be witnessing a decline in smoking, including among teenagers, but the movement in smoking rates seems strangely disconnected from price. Teen smoking declined between 1993 and 2001, for example, at a time when prices first fell and then remained flat. We also know that smoking is now subject to the greatest onslaught of regulation short of an outright ban. What role has price really played?
Could it be, in the case of gasoline taxes, that people have a much better idea of the economics of prices and demand than economists? Using price to change behaviour and shift demand forces all individuals to make major compromising decisions. Large numbers would have to continue to consume gasoline at high prices, forcing them to curb their consumption of something else. That's the result planners want, but it is not obvious to consumers that it will work or that it is fair. Look what happened to tobacco.

Not knowing a lot about the tobacco industry, I can’t argue with Corcoran too strongly, but he does fail to take into account the impact of increased cigarette prices on substitutes, something regulations were not responsible for (unless you account for medications to curb cravings, etc). I can think of a few examples. Statistics Canada finds that fine cut tobacco has been used as a substitute when prices are on the rise. As another example, price increases have allowed cheap generic brands of cigarettes to enter the market (even as a non-smoker I noticed their quick market entrance). And finally, how many Canadians attempted to cut costs (say, by purchasing tobacco in the tin and rolling their own cigarettes) rather than immediately quitting? In sum, Corcoran fails to mention that increased prices may have encouraged substitutes to emerge on the market, which is the same affect that a Pigovian tax should have.

Dependence on anything, whether it’s cigarettes or gasoline, cannot be cut overnight, but (to return to the theory on gas taxes), increased costs of gasoline should prompt industries to invest and switch to lower-cost fuel options.

Still, I’m not entirely sold on the Pigovian gas tax. As a low tax it’s ineffective, as a high tax it can be harmful. The only way I can conceive it as having higher benefits than costs is if corporate taxes were slashed and replaced (in part) with a Pigovian tax charged to industries, those most responsive to changes in natural gas prices.

Addendum: Prof. Brian Ferguson has a good post on Corcoran's article.

2007-02-14T06:29:00.001-04:00

Your Views

2007-02-10T10:22:00.000-04:00

Mark Thoma at Economist’s View has a cool new idea. He writes:

I am going to try something. It is based upon The Economist's decision to publish all of their letters to the editor in a blog. I have created a blog called "Your Views." Anyone can post there.

I suspect there are a lot of people who have good ideas for a blog entry but don’t have the time or interest to actually develop a blog. I’m eager to see how this works.

I’ve also started something new. I’ve been filing videos of interest to me on a YouTube channel I call True Dough Tube. I started it because I’m unable to watch videos in their entirety on my laptop; however, I’ve since started saving clips that I’ve seen and enjoy. My "video log" and my "what I’m watching" folder contain econ-related content, while my "favorites" folder may not be of interest to readers here (it's basically my video log with additional non-econ related videos). I’ll continue to post econ-related videos to my video log as I stumble across them. It’s not a major project, but there’s no sense keeping it to myself.

The sticky mess we’re in?

2007-02-08T18:04:00.000-04:00

The quality of Canada’s new and existing jobs is slipping, concludes CIBC economist Benjamin Tal after calculating the latest Job Quality Index (JQI), which is based on compensation (70% of the index) and job stability. Tal suggests that the JQI is slipping because self-employment is rising (not necessarily a bad thing if it’s encouraging workers into the labour force who had previously outsiders) and/or unskilled workers are being used as substitutes for skilled workers because Canadians lack the right skills.

Perhaps an interesting statistic would be the relative "stickiness" of the JQI over time. To the extent that we can expect bad jobs to replace good jobs more quickly than vice versa, stickiness may be somewhat predictable, depending whether the index is rising or falling. But if the JQI quickly rebounds after falling, and if we know which components caused the JQI to fall, this may be telling.

For example, consider scenario A and B in period of time (t), both of which take the JQI to the same level below JQI (t-1). In scenario A there’s weak compensation due in large part to an increase in self employment spurred by individuals inside and outside of the labour market. There’s also weak stability because an increase in jobs in western Canada draws workers (again, from within and outside of the labour market) west to try on jobs until they find a satisfactory match.

In scenario B the situation is similar, only now the greatest weight pulling down the JQI is unskilled workers being used as substitutes for skilled workers when in actuality they are not substitutes. Again, consider that JQI at B is at par with JQI at A.

Would either scenario have a stickier JQI? The significance has to do with our productivity and our ability to rebound from a recession. In scenario A we have a weakish economy but more people in the labour market. In scenario B we have a weakish economy and evidence of more of a mis-matched, unskilled labour market. If we can agree that we're seeing a mix of scenario A and B, perhaps the [edit: greater ] A is, the less sticky we can expect the JQI to be. To be clearer, studies have shown, for example, that "a lack of employment stability, job skills, and occupation-specific experience can impede welfare recipients’ abilities to obtain “good jobs” or transition into them from bad ones."

On a side note, overall I like CIBC's’s JQI as a raw estimate. It has its weaknesses (no pun intended); for example, it's based only on compensation and job stability. However, it also avoids mistakes made by others (eg, CIBC uses data from 100 separate industries, rather than data from industry aggregates).

Skilled immigrants and earnings

2007-02-06T11:56:00.000-04:00

In a paper published by Statistics Canada, Garnett Picot, Feng Hou, and Simon Coulombe suggest that Canada’s policy on points-based immigrant selection and higher educational standards has not lowered the probability that an immigrant will enter a low income bracket; however, it has changed the composition of immigrants in chronic low income.

Basically, the authors show that many skilled immigrants are not able to secure high-paying jobs before their arrival. They saw that once skilled workers entered low income, they only had a slightly higher chance of exiting it than high school educated immigrants, but their relative advantage of exiting low income increased marginally over the period observed.

Excerpts from StatsCan:

For the purposes of this report, "chronic" low income was defined as being in low income at least four of the first five years in Canada. The report found that nearly one in five (18.5%) of recent immigrants who arrived between 1992 and 2000 were in low income at least four years during their first five years in Canada. This was more than twice the corresponding rate of around 8% among Canadian-born people.
For the group that arrived in 1993, the five-year chronic low-income rate was 20.5%. For those who arrived in 2000, it had declined to 16.2% as the economy improved.
There were two possible reasons for the decline: the more favorable labour market-related characteristics of immigrants entering in the late 1990s, and improving economic conditions (business cycle). The report found immigrant characteristics accounted for virtually none of the improvement; improving economic conditions accounted for the majority.
Overall, the large rise in educational attainment of entering immigrants and the shift to the skilled class immigrant had only a very small effect on poverty outcomes as measured by the probability of entry, exit and chronic rates.
This is because by the early 2000s, skilled class entering immigrants were actually more likely to enter low income and be in chronic low income than their family class counterparts.
In addition, the small advantage that the university educated entering immigrants had over, say, the high school educated in the early 1990s had largely disappeared by 2000, as the number of highly educated immigrants rose.
Changes in entering immigrant characteristics did alter the composition of the immigrants in chronic low income.
Among those who arrived in 2000, 52% of those in chronic low income were skilled economic immigrants. About 41% had university degrees, up from 13% in the 1993 cohort.

And from the report: (pdf warning)

… With respect to immigrant class, immigrants in the skilled economic class were more likely to enter low income than their family class counterparts, possibly because the family class immigrants often entered an already economically established family. This relative disadvantage observed for the skilled class increased significantly over the 1992 to 2004 period, when the number of skilled class immigrants rose. However, this should not necessarily be interpreted as meaning that individuals in the economic class do worse in the labour market (i.e., in term of individual earnings) than their family class counterparts. The opposite has historically been the case.

This is an interesting report because it’s acting as fuel for debates from all sides. On one hand, it can be seen as a call for more friendly policies towards skilled immigrants. (As long as labour regulations create barriers to immigrants, to what extent can we really expect the contributions of skilled immigrants to be greater than lesser-skilled immigrants?) Martin Collacott, on the other hand, has used the report to further his anti-immigration argument (which I don’t buy).

The nation's state

2007-02-05T17:43:00.000-04:00

Here’s a fun map from Carl Størmer that compares the GDP of U.S. states to other nations.

(Click for a larger view)

From what I can tell, it seems like it might be somewhat accurate in terms of ballpark figures. For example, Canada’s 2005 GDP was USD1131.8 billion while Texas’ was USD989.4 billion. What's a couple billion?

Anyway it’s interesting to consider.

Water exports vs. food exports

2007-02-01T07:34:00.000-04:00

What are the chances that Canada will export water to the U.S. in the foreseeable future? Slim, says the Canadian government. But maybe there's a better alternative to the US's water woes: the exportation of water-intensive commodities.

Neil Reynolds explored this issue back in the Jan. 26 issue of The Globe and Mail. I've been meaning to comment ever since. First, here's an excerpt from a paper he quotes from, The Water Footprints of Morocco and the Netherlands by A.Y. Hoekstra and A.K. Chapagain:

Although bulk water itself is not a tradable commodity, agricultural commodities – that generally consume a lot of water during production – are increasingly being traded. As a result, water use within a nation is no longer an appropriate indicator of national water demand, at least not if one takes the consumer’s perspective. ...The water footprint of a country is defined as the volume of water needed for the production of the goods and services consumed by the inhabitants of the country. The internal water footprint is the volume of water used from domestic water resources; the external water footprint is the volume of water used in other countries to produce goods and services imported and consumed by the inhabitants of the country.

Mr. Reynolds draws from this report:

Canada's dependence on U.S. produce, and the water it contains, raises ethical as well as economic considerations. As the Council of Canadians often asserts, the United States is beginning to run out of water. ("We live next to a superpower," says Maude Barlow, who is the council. "And the superpower is getting mighty thirsty.") But the United States uses the bulk of its fresh water in the production of food — more than 80 per cent of water it consumes. And Canadians are principal beneficiaries. We get 60 per cent of the fruits and vegetables that we eat from the United States. Canadians, so to speak, are drinking the United States dry. Is it not in our national interest to replace this precious water — if only to keep the food coming?

…In one academic study published last year by UNESCO, two economists (A.Y. Hoekstra and A.K. Chapagain) looked at this issue from the perspective of the Netherlands… The academic conclusion: "International trade can result in water savings provided water-intensive commodities are traded from countries with high water productivity to countries with lower productivity."

All factors considered, Canada helps save the world's water supply by buying California lettuce and Florida oranges.

If I understand Mr. Reynolds right, he's saying that it's more efficient for Canada to purchase oranges and lettuce from the U.S. rather than from other countries with lower water productivity. Of course, we also have the incentive to purchase these goods from the U.S. because of lower transportation costs and shelf life reasons, so I'm not sure why Mr. Reynolds chooses to spin it this way. I see it differently.

If we're taking a lesson from Hoekstra and Chapagain, Canada (with its greater water supply) should have a comparative advantage in water-intensive commodities that actually grow in our climate and soil. Increased efficiency would result from Canada selling the U.S. certain water-intensive commodities because it would save the U.S. from having to import (or desalinate, or whatever) its water. Therefore, following Hoekstra and Chapagain's theory, the U.S. would help save the world's water supply by buying Canadian water-intensive commodities.

If Canada has a comparative advantage in water-intensive commodities over the U.S., it hasn't been realized. First, the U.S. might enjoy a degree of independence in food production. Second, the market is distorted. If subsidies to farmers were killed, comparative advantage within and across both countries would surely become a little clearer, thus allowing resources to be reallocated to their most efficient means. In other words, as long as farmers in arid lands are being subsidized to water their low-quality soil, regions will not achieve their comparative advantage, resources will not be efficiently allocated, and a vicious circle will ensue (eg. farmers might continue to be dependent on government initiatives such as the Canadian Wheat Board, or perhaps they too will rely on subsidies, if the CWB closes).

Of course, Canada may never have a great comparative advantage over the U.S. in water-intensive commodities. The Financial Times, Jan. 31:

Unlike other big WTO members such as the European Union and Japan, the US cannot sign a Doha deal where it loses benefits for farmers but gains export markets for its manufacturers and service companies. The power of the farm lobby means the US needs new export markets for agriculture to make up for any cuts in subsidies. This puts it on collision course with the "Group of 33" developing countries that want to protect their small-scale farmers.

So much for that. Load up the water.

The sensitivity of industries to labour regulations

2007-01-27T11:55:00.000-04:00

Don Boudreaux over at Café Hayek pointed to an article by Gary Becker and Richard Posner ($) published in yesterday’s Wall Street Journal. Here’s an excerpt:

An increase in the minimum wage raises the costs of fast foods and other goods produced with large inputs of unskilled labor. Producers adjust both by substituting capital inputs and/or high-skilled labor for minimum-wage workers and, because the substitutes are more costly (otherwise the substitutions would have been made already), by raising prices. The higher prices reduce the producers' output and thus their demand for labor. The adjustments to the hike in the minimum wage are inefficient because they are motivated not by a higher real cost of low-skilled labor but by a government-mandated increase in the price of that labor. That increase has the same misallocative effect as monopoly pricing.

Surely, just like the minimum wage, other regulations on labour also have a greater impact on certain industries relative to others. I started thinking about this when another commentator asked why the U.S. doesn’t adopt a 35-hour work week. Here’s most of what I posted in response on Café Hayek:

….regulations on hours worked can be just as painful to certain sectors as minimum wage requirements. First, it does seem odd that 40 hours is considered to be a "natural" and permanent level (although, I think the French have already proven what a failure the 35-hour week can be). Second, I can’t understand how an obligatory set of hours can be optimal for ALL industry sectors. Perhaps regulations on hours of work distorts the ability of each sector to find its own "natural" level through heuristic means, or whatever, thus hampering productivity and efficiency in certain sectors. I’ll explain.
Any strict regulation on hours worked, be it 40 hours or whatever, may not work for all sectors for at least two reasons: i) some sectors are productive in spurts (I’m reminded of a post on freexchange where a reader notes that "anyone building a house or undertaking a project that requires a number of diversified tasks comes up against the brick wall of inefficiency" when faced with regulations on hours worked); and ii) not all sectors have the same firm-size make-up. An IMF report shows that moving from a 40-hour to a 35-hour work week encouraged French workers in "large firms to take second jobs or to move to small firms where the 35-hour work week is not obligatory." In other words, while a 35-hour work week might be optimal for sectors comprised of small firms, it is likely not optimal for larger corporations, the backbone of our economy.

Another reader points out something that I didn’t add, but I should have:

I agree that it should be up to the company how many hours one should work - up to some maximum allowed under law under at-will labor. I mean, as long as you know the terms before you agree to the work, companies should have a lot of flexibility.

I just wanted to take note of the subject of work hour regulations here because I thought it might be interesting to sometime explore its impact on various industry sectors. Perhaps some industries have more to gain from a barrier-free labour market than others. Further, perhaps the existence of certain regulations on labour distorts the "natural" sectoral make-up of a nation's economy.

How the east contributes to wealth inequality

2007-01-25T22:15:00.000-04:00

A fire might have been ignited under western Canada when policy makers implemented a business friendly tax structure, but positive investor sentiment is going to take it from campfire to bonfire before the rest of Canada (hereafter, TROC) even gets its matches out of the box. The combination of two recently released reports makes me believe this.

First, The Fraser Institute released its Canadian Provincial Investment Climate Report: 2007 Edition. In it, they publish something called the The Provincial Investment Climate Index, which has seven components: 1. Corporate income tax (CIT), 2. Fiscal prudence, 3. Personal income tax (PIT), 4. Transportation infrastructure, 5. Corporate capital tax (CCT), 6. Labour market regulation, and 7. Burden of regulation

Here’s an abstract from a press release:

The Provincial Investment Climate Index objectively evaluates the public policies that create and sustain a positive investment climate. It ranks each province on a scale of one to 10.

Alberta earned the highest score, 8.9 out of 10, and was clearly Canada's top province for policies that encourage and sustain a positive investment climate. BC followed in second position but some distance behind with a score of 6.0 out of 10. Saskatchewan is third with a score of 5.3 out of 10. The three western provinces were the only ones with an overall score above 5.0.

Ontario was fourth overall with a score of 5.0 while Quebec, with a score of 3.0, was ninth.

Jason Clemens, a co-author of the report, had this to say:

The low scores for Quebec and Ontario are among the most worrying aspects of this year's report. These two provinces are extremely important to the Canadian economy, yet they have chosen to implement policies that are not conducive to attracting investment.

As the west becomes more business friendly, wealth tends to blow that way. But then there's a multiplier effect that kicks in when wealthy westerners begin investing to a degree that surpasses that of individuals elsewhere across Canada.

Earlier this month TD Waterhouse released a report which claims that “…those living in the west are more aggressive investors with higher expectations and greater use of financial plans and advice than those living in Quebec and Atlantic Canada. Ontarian investors, in accordance with their geography, are somewhat in the middle.”

I would attempt to explain this two ways: i) as individuals in the west become more wealthy and more experienced in investing they become less risk averse in their investment strategies; and, ii) we’re seeing that individuals who have a higher propensity to invest also have it in their interest to move, or remain, where the business climate is most attractive: in the west (whether for wage or salary prospects, or for entrepreneurial incentives).

But studies in behavioural economics suggests that there's more here than simply the fact that wealthy westerners will be getting wealthier by putting their money to work. Westerners will also gain experience ahead of TROC. I'm reminded of a paper by Daniel Kahneman where he explains that experienced traders show less reluctance to trade, almost as if they learn to "base their choice on long-term value, rather than on the immediate emotions associated with getting or giving up options." The parallel to the west seems convincing.

Further, while propensity to invest is rocketing in western Canada, it's also the case that in TROC, it's really, really, not. The TD Waterhouse report tells us that “the most favoured type of investment in Quebec is savings held in a savings account (55%).” Talk about low expectations.

The bottom line is that the longer it takes TROC to become business-friendly (or ditch the welfare state sentiment, in the case of some regions), the greater the division of wealth will be across Canada. This will hurt TROC for obvious reasons, and it’ll hurt westerners who will be pressured into being good sports and promoting equality through transfer payments.

Addendum: Damn-it. My images always come out as good as dirt. I vow to work on that at some point.

Look at me, I read The Economist

2007-01-21T09:51:00.000-04:00

I must be in a strange mood, because I nearly busted a rib laughing at this Onion piece. And yet,... should I have?

h/t The Healthcare Economist

The influence of values vs. remittance

2007-01-17T19:38:00.001-04:00

From "Migrant Power," The Economist, Jan. 16

As migration changes, shorter-term movements will bring migrants home with wealth accumulated abroad and human capital in the form of knowledge and new institutional norms that can improve domestic life. The American experience suggests that, for all the fears that Mexican culture is overwhelming the domestic variety, the influence is more likely to go the other way. Tyler Cowen, an economist who does field work in Mexico, points out that American influences—whether consumer tastes, a greater inclination to give to charity or more enthusiasm for democracy—are stronger there than anywhere else in Latin America. The spread of values, in other words, may be just as influential as the remittance of cash.

Emphasis is my own. This is an interesting way to look at temporary labourers. I've never perceived them as being potential ambassadors of American goods and values.

FYI: did you know that if you use an RSS to access The Economist, you're a click away from free content -- including the premium content that isn't accessible to non-subscribers on the magazine's Web page? Perhaps this is a temporary glitch.

M&M's -- No!

2007-01-14T16:01:00.000-04:00

"Numbers by painting," Forbes, Jan 14 2007:

What if you could auction off a logo at Christie's or Sotheby's (nyse: BID - news - people ) to determine the notoriously tough-to-measure market value of a brand?One prism through which to measure the perceived value of global brands is the contemporary art world, and in particular the sale prices of the works of Wang Guangyi, one of the leading lights of the post-1989 Political Pop Art movement in China ... Wang is the Andy Warhol of the Chinese art scene--at once criticizing commercialism and profiting by including famous brand names in his works.

The rest of the article can be found here.

My favourite Wang (only because I prefer Reese's):

M&M's ("The Great Criticism" series: M&M'S)
Oil on canvas, 1993, Sale price: $180,000 Estimate: $150,000-$180,000, Sotheby's New YorkSale: Contemporary Asian Art, Sept. 20, 2006

Big-box stores, food prices & the CPI

2007-01-14T09:50:00.000-04:00

Abstract from The Impact of Big-Box Stores on Retail Food Prices and the Consumer Price Index, by Ephraim Leibtag (Economic Research Report No. (ERR-33) 41 pp, December 2006)

This report focuses on retail food market dynamics and how they affect food price variation across store formats. The differences in prices across store formats are especially noteworthy when compared with standard measures of food price inflation over time. Over the past 20 years, annual food price changes, as measured by the CPI, have averaged just 3 percent per year, while food prices for similar products can vary by more than 10 percent across store formats at any one point in time. Since the current CPI for food does not fully take into account the lower price option of nontraditional retailers, a gap exists between price changes as measured using scanner data versus the CPI estimate, even for the relatively low food inflation period of 1998-2003. This study estimates that the CPI for dairy products overstates food price change by 0.5 to 2.5 percentage points per year for dairy, eggs, and butter/margarine.

'Stock Markets Contract as M&A Overtakes Equity Sales'

2007-01-13T22:45:00.000-04:00

While the contraction of the stock market due to mergers and acquisitions (M&A) isn’t an entirely new phenomenon, it’ll be interesting to see how Canada, the U.S. and Europe are individually affected in '07 by further M&A. The Bloomberg article I excerpt from below doesn’t mention Canada in specific, but I imagine that M&A will have a greater impact on Canadian investors relative to U.S. investors, as Canadian markets are smaller. This article suggests that companies could end up paying too much as the M&A "fad" jacks up prices.

To put things in context, the value of Canadian M&A deals doubled in 2006 to US$173.6 billion (the number of deals increased by 26%) and European country deals went from US$244 to US$266, while US deals went from US$229 to US$266 billion (Japan actually dropped).

Bloomberg, by Michael Tsang and Daniel Hauck (Jan 8) (Full article here)

Stock markets are shrinking as mergers and acquisitions take shares out of public hands faster than companies add them through equity sales. The value of U.S. shares dropped last year by the most since 1984 and the European market narrowed for the first time, according to Citigroup Inc. Last year's $3.68 trillion in takeovers, led by AT&T Inc.'s $86 billion purchase of BellSouth Corp., outweighed the biggest year for initial public offerings since at least 1999.
The contraction may continue in 2007 as dealmaking accelerates. M&A will rise by at least 10 percent this year, analysts at Deutsche Bank AG, JPMorgan Chase & Co. and Bank of America Corp. forecast. Private-equity investors alone have $1.6 trillion to spend, Morgan Stanley estimates.
"Corporations and the private-equity crowd both appear to still be on a buying spree," said Eric Bjorgen at Leuthold Weeden Capital Management in Minneapolis, which oversees $2.8 billion. "Less supply implies higher prices. That's bullish."
The reductions helped lift the Standard and Poor's 500 Index and the Dow Jones Stoxx 600 Index in Europe to the highest in six years. Stock buybacks also climbed to an all-time high. Last week, the S&P 500 fell 0.6 percent to 1409.71 and the Stoxx 600 gained 0.1 percent to 365.69.
Buyout funds and companies may wind up paying too much as they vie over acquisitions. It may "end badly" for stock investors later this year, said Jason Trennert, chief investment strategist at Strategas Research Partners LLC in New York.
Top Priority
"Given the sheer amount of money that's been raised, it seems to me that there's a chance that this could be taken to an extreme," he said. "Fads tend to take on a life of their own."

The underground economy and the poor

2007-01-09T19:32:00.000-04:00

Neil Reynolds takes a look at the role that the poor play in the hidden economy.

The Globe and Mail (Jan. 5) ($):

How do poor families spend so much more money than they earn? By one measure — the National Council of Welfare — the average poor Canadian family spends $4,855 a year more than the $14,366 it receives as income, a difference of 33 per cent. By another measure — the Fraser Institute — the average poor Canadian family spends $9,370 more than the $9,114 it receives as income, a difference of more than 100 per cent.
* * * * * *
How does Statscan determine the income of the poor? It asks them. How does it determine the spending of the poor? It asks them. What's the source of the "bonus bucks" that the poor spend? Perhaps, in one of its surveys, Statscan should ask them. We can, meantime, only speculate.
Off-the-table earnings. Wanton use of credit cards. Gifts from more affluent family members. Academic scholarships. (Many postgraduate students are, by LICO logic, poverty-stricken.) But Canada's basic information on poverty remains dubious.
No one knows whether the poor, in their reports, minimize the money they either earn or otherwise get. It shouldn't be surprising if they do. Everyone else does it all the time.

I want to make two points. First, nobody is implying that the underground economy is strictly measuring income concealment, as some detractors seem to be charging. In a 1992 report published by Statistics Canada, "the underground economy" is defined as the mean economic activity that is not measured in the system of national accounts. In the past I may have failed to mention other sources of the "hidden economy" when referring to income concealment, but that’s because I was being sloppy and perhaps aiming for brevity.

Secondly I’ve read quite a few papers recently about different approaches to income concealment (ie. ignoring the rest of the hidden economy). The expenditure approach, developed by Pissarides and Weber (1989), seems to be the most well-received, at least according to the literature that I’ve read (please share your opinion here if you have one!). For example, Pissarides and Weber look at the relationship between income and food expenditures for salary and wage earners to evaluate the "normal" relationship between the two. They then compare this relationship to the income/food expenditure relationship of the self employed. If food expenditure appears to be incredibly high relative to the income level for the self employed, involvement in the hidden economy is assumed.

A major assumption is that the wage and salary earners (in comparison to the self employed) have very little ability to conceal their income (again, never mind their total involvement in the hidden economy), because employers document employees' earnings on their T4 slips. Thus, data from wage and salary earners is assumed to be actual. In relation to Reynold's article, this implies that poor families spend more money than they earn not because they are concealing income, but because of credit, loans, etc.

I have some criticisms of the expenditure approach, only one of which is relevant to Reynold’s article. The expenditure approach often depends on the use of surveys, for lack of other data. But to what extent can we rely on surveys? I have in mind a paper by Elffers, Weigel and Hessing (1987), who found zero correlation between survey results and audits for Dutch taxpayers. If there is zero correlation, even for wage and salary earners (this surprises me), this is a violation of a key assumption of the Pissarides and Weber model.

Further to Elffers et al’s findings, Andrew Jackson at the RPE blog has this to say:

Statistics Canada’s main surveys of consumption patterns are not very reliable, particularly when it comes to measuring the consumption of the very poor. Household surveys (formerly the SCF and the SLID) have been shown by Statistics Canada to produce significantly lower estimates of the incidence of low income than Census and tax data, likely because of under-sampling at the low end of the income distribution. (See Marc Frenette, David Green and Garnett Picot "Rising Income Inequality in the 1990s" in David Green and Jon Kesselman (Eds) Dimensions of Inequality in Canada, UBC Press, 2006.)

While this is a major blow to the expenditure approach (and there are others I won’t bore you with), I have to agree with Mr. Reynolds: i) the data simply does not tell what is hidden; and, ii)if other wage and salary earners are in some way involved in the hidden economy, why assume that the poor are an exception? Jackson’s critical piece on Reynold’s article can be found here.

By the way, if it's ever the case that you're itching to read an available-by-subscription-only article that I refer to, I don't mind emailing it by request.

Productivity and firm size in construction, pt2

2007-01-07T13:51:00.000-04:00

A couple of posts back I asked why Canada’s construction sector is said to be more productive than the U.S. sector, despite having smaller establishment sizes. The gap isn’t huge, but it’s surprising. I don’t know if any single concept can answer this. Instead, I’ve broken it down to two questions: why are the Canadian firms small, and why are they more productive.

On being small…

Small establishments are unburdened from taxes on inventory
If one considers the high taxes that the construction sector faces on inventory, it seems reasonable that large companies wish to unburden themselves of this tax by contracting individuals to do certain services. Perhaps in Canada self employed contractors are more willing to take on the risk of being taxed on inventory (perhaps due to favourable tax scheme on Canada’s self employed, in comparison to the U.S.? I don’t know if this would justify the gap).

Variable taxes, in contrast to flat taxes, keep establishments small, even in Canada’s most populated areas where construction productivity is destined to be highest regardless of establishment size
B.C. has the lowest provincial tax rate in Canada up to a taxable income of $67,500 per annum. Above this income level, the rate rises rapidly and Alberta becomes the lowest personal tax jurisdiction at an income of $88,000 per annum. B.C. has the highest unincorporated self employment rate of all of Canada in the construction sector while Alberta has the highest incorporated self employment rate (see graphics below that I created using StatsCan CANSIM data Table282-0011). Perhaps Canadians are more sensitive to an un-level tax scheme than Americans.

Here's my colour scheme:
self employed unincorporated w/ no paid help,
self employed incorporated w/ paid help,
self employed incorporated w/ no paid help,
and the final pie in lime is self employed unincorporated with paid help.

On being more productive…

Economies of scale are relatively unimportant in the construction sector
Construction is highly labour-intensive, depends on a high proportion of low-skilled jobs and is not considered a high technology sector. Further, I would argue that where economies of scale do matter in the construction sector, they mean less than they once did. Thus, simply being big doesn’t give U.S. firms a greater advantage in this sector.

And yet this isn’t the case with other labour intensive industries. The U.S./Canada "productivity gap is large in other labour intensive industries such as textiles and clothing as well as in fabricated metals, the machinery and computers industry, and the electronic and electrical equipment industry." So maybe this idea is a dud.

The hidden economy
If labour inputs are somehow being underestimated, then productivity (measured in my last post as GDP divided by hours worked, by the way) could be distorted.

For example, John O’Grady (2001) estimated that, on average, the annual underground income in Ontario’s construction industry, in the period 1998-2000 increased to $2.395 billion. This is due to the "hidden economy" composed of self-employed individuals who wish to conceal their income, which we know is easier to do in the construction sector than nearly any other sector.

Also, I think dachisb made a good point in response to my first post: "I would wager that low cost labour (read mexican migrants) drives most of this difference."

Not all construction is made equal
I’m not sure what affect this would have, but I thought it was worth noting that heavy and civil engineer construction is much smaller in Canada then, say, the construction of buildings. Surely many modes of construction have their own unique productivity level, and the compilation differs across countries.

Am I missing anything? Any more ideas anyone?

The rise of necessity entrepreneurs?

2007-01-05T19:20:00.000-04:00

December saw 62,000 new jobs, taking the jobless rate to a 30-year low.

Ahem. Who was it that defied just about every analyst that said the labour market would fall in Q4? I believe it was me. But perhaps I was just lucky. Anyway, I didn’t see it all coming...

Self employment is booming. BMO economist Douglas Porter says December’s job gains were spread across all sectors, except construction was up only slightly. Is there any good reason why all these people with jobs wouldn’t pump up residential construction? Perhaps, if they didn’t have the right jobs. The Globe and Mail reported today that 49,000 of the positions were characterized as self employed.

This reminds me of a previous post where I explored three reasons why individuals might become self employed:

a) self employment is a stepping stone to other work
b) self employment is a stepping stone to retirement
c) self employment persists in periods of poor job growth

As hiring slows down, it might be the case that a) and c) are coming true. Perhaps self employment really is an innate survival skill. I’ll return to this topic at some point.

Also, I haven’t forgotten about my last post on the construction sector. I’ll continue with that tomorrow. Or something.

Productivity and firm size in construction

2007-01-04T20:07:00.000-04:00

Why would Canada's construction sector be more productive than the U.S. sector despite having smaller establishment sizes (ie. fewer employees in each establishment)?

If it’s the case that American construction firms, for whatever reason, have a greater ability/willingness to take advantage of economies of scale (an explanation for their larger establishment sizes), one might expect the U.S. construction sector to be more productive than Canada’s. Empirical evidence suggests otherwise. Canada’s construction sector, despite its smaller establishment sizes, is more productive, says several studies. It also has slightly more capital intensity, but this could mean a few things (ie. low economies of scale; high capital costs).

I have some ideas but I'll sit on this some more and come back to it in my next post.

Source of graphs: Don Drummond, TD economist (2005).

Canada's generous passport policy

2007-01-03T21:14:00.000-04:00

Canadian policy-makers will soon be reviewing the subject of taxes on non-residents and citizenship options. Unlike in many countries, in Canada non-residents do not pay taxes, and yet they have the option to benefit from a number of social programs.

The CD Howe Institute recently published a paper by John Chant, a professor of economics at Simon Fraser University, titled The Passport Package. The passport package, says Chant, is the package of benefit options that non-residents receive. These include easy qualification to healthcare benefits, free entry and exit, resident tuition fees, financial assistance when enroled in postsecondary institutions, and more.

Chant suggests that all non-residents pay a flat passport renewal fee. He compares the "passport package" to financial options.

The theory of financial options provides guidance with respect to setting the level of the passport fee. The value to the holders of the passport package over any period equals the sum of the values of each option in the package. In turn, each option has a value equal to the probability it will be exercised in the period, times the value the holder gains from its exercise. Different holders of the passport package would attach different values to each element. A law abiding citizen who values avoiding a year in a foreign jail at $60,000 would be willing to pay $6 a year for the privilege of repatriation if they have a 1/100 percent chance of spending a year in a foreign jail. Someone more criminally inclined may be willing to pay much more.
Like financial options, the options in the passport package are exercised when they are "in the money"; that is, when the value of the object optioned exceeds the strike price at which the option can be exercised. In the same way, passport options are exercised only when their holders perceive that the benefits from exercising exceed the costs.
Often this will be dictated by events. The benefits from higher education become attractive when a student wants to come to Canada to study; the prisoner exchange becomes valuable to someone facing jail in a foreign land; and the option of evacuation and assured entry to Canada will be exercised in times of war and domestic upheaval. The parallel with financial options goes further: if people fail to renew their passport, the option expires out of the money. To make the package self-supporting, the fees would have to cover the cost of underwriting the exercise of the options. The revenues of the package would depend on the reaction of non-resident citizens. Some would judge that the value of the package exceeds the fee and opt to pay, while others would let their passports lapse and lose the benefits. If 20 percent of current non-resident citizens opted not to pay the fee, a $500 fee for five-year renewals would raise roughly $200 million per year.

This seems reasonable. If non-residents don’t find that the "passport package" is worthy of the price tag, they don’t need to renew their passport. It also seems simple. It’s far less complex than actually taxing non-residents.

Chant adds:

John F. Kennedy’s appeal, "ask not what your country can do for you — ask what you can do for your country" was a high mark for the rhetoric inspired by citizenship. Its message, however, is at odds with reality. People do weigh the benefits and costs of citizenship in deciding which and how many passports they carry. Some become and remain citizens of countries where they never intend to live.

Snickerdoodles and sea creatures

2007-01-03T16:56:00.000-04:00

Tim Haab points to an interesting article:

Researchers at the University of Washington say all that holiday baking and eating has an environmental impact — Puget Sound is being flavored by cinnamon and vanilla.
[...]
So far, the research has turned up no evidence that snickerdoodles are harming sea creatures, but their research does lead to some serious environmental questions. Fish rely heavily on their sense of smell to locate food, for example, and, in the case of salmon, to find their way back to their home stream to spawn.

Tim’s environmental solution:

I propose a Christmas cookie cap and trade system. You are each hereby allocated one dozen cookie permits per month. These permits are fully bankable and tradeable and can be saved for the Christmas cookie season. I will monitor your consumption and be mandated to take any unpermitted cookies off your hands. I will dispose of them as I see fit.

I question Tim’s motives. Why stop at cookies? A true environmental martyr would be happy to monitor the giving of unwanted Christmas sweaters (see below) that are produced (and disposed of) every year.

Given that the textile industry uses toxic chemicals to bleach and dye yarn, perhaps the production of Christmas sweaters is worse for the environment than the vanilla and cinnamon inputs used in household kitchens. The tighter the cap on Christmas sweaters, the better, in my mind.

2006-12-27T15:45:00.000-04:00

I'm off for an outdoor adventure here...

If you guessed that there will be no computers, you're right. But I'll be back and blogging again in four days or so.

Happy holidays and all that jazz!

Traffic accidents and real economic activity

2006-12-24T23:11:00.000-04:00

Health Economics has published a paper by Antonio García-ferrer, Aránzazu De Juan, and Pilar Poncela titled, "The relationship between road traffic accidents and real economic activity in Spain: Common cycles and health issues." The authors say that this study has implications for health policy.

Abstract:

This paper analyses the aggregate relationships between traffic accidents and real economic activity in Spain during the last 30 years. Our general approach is based on two basic assumptions: (1) the number of accidents depends on the use of cars and other exogenous variables, and (2) the level of economic activity affects variation in the stock of cars, as well as degree of utilization. We propose a novel turning point characterization for monthly seasonal data that allows to check whether economic and road accident cycles coincide and, to date the beginning and end of their respective cycles. Empirical results from this section are important in establishing posterior causal models and whether or not economic activity and road accidents have a common component in the long run and a varying lead-lag relationship, depending on the cycles. These models will be the basis to check when Spain will achieve the European Union figures in terms of the fatalities/accidents ratio under different scenarios. Empirical results as well as historical experiences from other European countries proved that reducing fatalities is not only a question of diminishing accidents rates.

American Pie

2006-12-22T01:17:00.000-04:00

CIBC's Avery Shenfield was feeling a little artsy when he published the bank's latest weekly forecast. Here's an excerpt from his rendition of 'American Pie':

A long, long time ago…
I can still remember, how the data used to make us smile
And I knew that if they had the chance
That stores could make the shoppers dance
And, maybe, they’d be happy for a while.

But housing prices made them shiver
With no more tax cuts to deliver
Bad news on the wealth front
It couldn’t be much more blunt
I can’t remember if I tried
To have my VISA charred and fried
But something hit me deep inside
The day, the house boom died.

So buy, buy, the consumer won’t buy
Leaving Chevys at the levee
And Ford sales running dry
And Wall Street boys were drinking Perrier and rye
Singing this will be the day that I die
This will be the day that I die.

More of that here (pdf).

Tax evasion: lessons from Egypt

2006-12-20T14:18:00.000-04:00

In my view, we should be taking a lesson from Egypt when it comes to dealing with tax evasion. I'll explain.

Studies claim that tax evasion among the self employed in Canada is common and the costs are high. What should be done? First, it depends if the government is concerned purely with inefficiency, or if its concern is inequality (which do not need to be trade-offs, as I've argued before here; and I'll point to my view on equality here). I'm going to address the aim of efficiency here, but I'll quickly explain why.

In a welfare state, the objective of an inequality-averse government would be to raise taxes to redistribute incomes, and thus auditing would be useful to protect the tax base. But there are drawbacks to making equality the only major priority. I won't get into the old equality debate again here, but here are a few thoughts: First, when are degrees of inequality aversion sufficient? And, how do we know if such a degree is attainable? Finally, it's worth repeating that, if efficiency is gained, equality does not need to be a trade-off.

My assumption henceforth is that efficiency is the government's concern when it comes to deterring tax evasion.

What actions can the government undertake to increase efficiency? Three possibilities: Do nothing, design an efficient auditing scheme, or cut taxes to a point where the self employed are more willing to pay (and, ultimately, adopt a low flat tax).

Do nothing

If efficiency is the major concern, nothing should be done, claims Simon C. Parker in The Economics of Self Employment and Entrepreneurship (2004: p. 248). Audits are expensive for the government and for the individuals who prepare the tax reports for audits. [edit: My hurried fingers pasted the wrong quote here. Sorry. Intended quote:] "These costs impose deadweight losses on the economy." Parker concludes that a government would be more efficient to not audit.

Design an efficient auditing scheme

Herb J. Schuetze (2002) disagrees. He finds that (at least in Canada) a discriminatory method of auditing would be most effective in reducing tax evasion.

Excerpt from Schuetze's paper "Profiles of Noncompliance Among the Self Employed" (2002, p 19-20) (The entire paper can be found here. Click on "research"):

Even though pre-tax wages will adjust to equalize after-tax wages, too many resources, in terms of efficiency, will be allocated to occupations which provide the greatest opportunities for noncompliance. This result also suggests an obvious strategy for the development of an effective tax audit system. One which targets the self-employed in construction and service occupations is likely to be more effective.
...A tax audit scheme targeting groups which have been found to conceal income the most (such as self employed households headed by younger males or those in the construction and service occupations) is likely to be an effective tool in reducing noncompliance.

He acknowledges a disadvantage:

Clearly, such a policy, if continued for a period of time, would lead to the misrepresentation of occupation and other characteristics by self-employed tax filers to avoid being audited. However, if the information from these audits is used effectively, policies can be designed to reduce noncompliance.

Such a well-designed auditing scheme might be attractive, but perhaps its major disadvantage (other than the one pointed out by Schuetze) is that it's not simplistic. Simplicity in self-employed tax treatment, or any tax treatment for that matter, should be an objective within any economy. By the way, The World Bank agrees with this sentiment (link via The Heritage Foundation) :

Complicated tax systems can lead to high evasion, even when rates are low. ... A better way to meet revenue targets is to encourage tax compliance by keeping rates moderate.

Lower taxes

In my mind, the best solution would be to take a lesson from Egypt. That is, lower taxes to a point where the self employed are willing to pay (zero would be the ultimate). By extension, if taxes for the self employed are to be lower, taxes for all business should be lower. A flat tax seems to be the most efficient, but I digress. Let's get back to Egypt.

Excerpt from "TAX: Abrupt halt to haggling." The Financial Times, Dec. 11:

"The existing culture as far as the tax authority was concerned was a story of predation." says Youssef Boutros Ghali, the finance minister. "Anything the tax authority could squeeze out, it did. But now we have affected a fundamental change of attitude. We have given up predation and established a partnership through a law that is transparent rather than fuzzy and through reducing the tax rate to what people would be willing to part with."
The new law set the top rate at 20 per cent for both individuals and companies, down from 42 per cent. It offered a total amnesty to those who had never filed a return in their lives, regardless of how long they had been earning, if they presented themselves before the end of March 2006.
The law also introduced self-assessment, changing at one fell swoop a system based on the assumption that the tax payer is always a liar, to one in which inspectors have to believe properly-maintained records presented to them, unless they can come up with evidence of wrongdoing.
At the same time penalties for tax evasion have been seriously stiffened. Mr Boutros Ghali says the impact in the first year has been dramatic, with 2.6m returns filed, up from 1.7m in 2005.
The finance ministry had been expecting receipts to drop by 12 per cent in the first year and by 7 per cent in the second before climbing back to their original level at the time the legislation was introduced. Instead, tax receipts have grown by 17 per cent - a reflection of both the wider tax base, and the buoyant economy.
....It is still not uncommon for middle class professionals to argue privately that they should not pay tax, citing examples of official corruption or waste, or to justify tax
evasion by saying that they make no use of the subsidized and generally bad health and education services provided by the government and that, instead, they pay exorbitant fees at private schools and hospitals.
Tax inspectors also say that under-reporting is still rife. One cited the example of a doctor who charged him personally $20 when he went for a consultation, but when he filed his return he listed his fee as less than $4.
No one has any doubts that it will take years for a new tax culture to take roots. But there is agreement that new law is definitely a start.
Now Mr Boutros Ghali says that, with an improved computerised system, and freed of the necessity to check the records of every single taxpayer, his 39,000 inspectors will have more time to chase evaders.

Perhaps we could do better to take our complex tax systems to the trash and keep an eye on Egypt.

Income Splitting Among the Self-Employed

2006-12-19T07:14:00.000-04:00

Which system of taxation on the self employed evokes the greatest tax distortions?

I) An income-splitting system where individuals may appeal to tax non-compliance; or,

II) A system of individual taxation where individuals may simply not report income.

In an interesting paper forthcoming in The Canadian Journal of Economics, University of Victoria professor Herbert J. Schuetze estimates (with a few caveats) that in Canada’s income-splitting system “…approximately one half of a billion dollars in taxes were avoided in 1998 by more than 90,000 businesses.”

An abstract from “Income Splitting Among the Self-Employed:”

Whether the individual or the household should be the unit of taxation is a long-running debate in the economics literature. One potentially important cost associated with a switch to individual taxation, which has been overlooked in this debate, is the impact of such a move on tax non-compliance. In particular, under individual taxation with progressive marginal tax rates households in which the distribution of income among household members is unequal benefit from attributing income from the higher to thelower income household member. The absence of a third party reporting income enables self-employed households to "split" income among family members to reduce income tax liabilities. Using the Canadian experience as a case study this paper sheds light on the magnitude and nature of this activity by developing a unique estimator of the incidence of illegal income splitting among couples. These estimates provide evidence that the occurrence of income splitting is likely non-trivial and suggest that the costs associated with this activity are potentially significant.

Schuetze draws a comparison between the U.S. and Canada. “The current US tax code, which primarily treats the household as the unit of observation, is such that the distribution of income within the household does not affect household tax liabilities.”

His findings:

…the raw reported employment rates of wives of self-employed men in Canada are significantly higher than those of their US counterparts. …. No significant difference in employment rates are observed among husbands…. I find strong supporting evidence that the employment differential found among wives is indicative of Canadian self-employed men attributing income to their wives.

He concludes:

…the pattern of income splitting found above suggest that countries that have high marginal tax rates, unequal wages across men and women and high rates of self-employment may find a system of joint taxation optimal, while for those with low incentives for income splitting individual taxation may be more appropriate.

Perhaps as equally interesting as his findings (at least to me) is the methodology he uses. He attempts to identify hidden behaviours, taking a lesson from Duggan and Levitt (corruption in wrestling) and Jacob and Levitt (cheating among teachers), among others.

Santas and elves: skilled and unskilled?

2006-12-18T07:50:00.000-04:00

Apparently the demand for skilled Santas in Alberta vastly exceeds supply. The problem, says Victor Nevada, headmaster of a Calgary-based Santa School, is that Santas are being paid as though they were unskilled workers. Gasp!

Malls should classify the Santa position as skilled labour, he said, given the job requires skills ranging from acting to psychology.
"Santas encounter stories that cause a lot of emotional distress for Santa and children generally are regarding Santa at that point as psychologist, I suppose," he said. "They're looking to Santa to provide some closure, some comfort and so forth and that's why I say it's a skilled position. If a personal shopper can make $50 an hour I would think that a skilled Santa should also make at least about $50 an hour."

I'm sure it's gruelling, but there must be plenty of elves willing to do the job for less than $50.

That would answer the problem from the supply side, but what about demand? No problem. If malls were to treat elves as subsitutes to Santa rather than complements, perhaps supply will create its own demand, as Says Law goes. After all, elves are small (less intimidating) and often more agile (exciting). They can sell themselves.

Perhaps any one of these small people pictured below would have prefered an elf if only the market existed.

If demand is as low as anecdotal evidence suggests, there's no reason for wages to be as high as $50/hour, and thus Alberta's Santas are right to go work on the oil rigs.

Plenty of anecdotal evidence of weak demand sweeping across North America can be found here.

Link fest

2006-12-16T14:16:00.000-04:00

I've made a few discoveries.

1.Bill Goeff's Econ Search Engine (Google Trial III) is a customized search engine that "lets you use Google to search the contents of some 10,000 economics web sites (the URLs are from RFE and EDIRC)." The best part is that you can add his search engine directly to your Google homepage.

How useful is it? Very. For example, if you search for the word "toilet" using Google, you'll find The Home of Toilet Art, Humor, and Fun Facts. But use Bill's Econ Search Engine and you'll be led to worldwide portable toilet sales. Voila. No more humour, fun, and all that crap. Thanks Bill! Log into your Google account, click on Google Gadgets For Your Webpage, and run a search for "Econ Search Engine Google Trial III."

2. I'm really digging the Vancouver Housing blog. Don't let the name fool you. There's a lot to learn here. For example, here, he/she asks if immigration is driving the Vancouver housing boom. And here he/she looks at median family incomes in cities across Canada. And if you need more convincing, it won best Canadian business blog this year. Unfortunately, the author is on a holiday hiatus, but the archives are worth reading for now.

3. I often wish that Canada would catch up to the U.S. and the U.K. when it comes to the frequency in which (some) data is collected, as well as the accessibility of (some) data.

But now we have Swivel available to us, which could possibly, maybe, perhaps improve the data accessibility problem as long as people use it, and use it well. Tech Crunch has an explanation (h/t Statistical Modeling, Causal Inference, and Social Science).

Sources of inequality

2006-12-15T06:34:00.000-04:00

Recently we saw the release of two interesting reports on household wealth: the Canadian household wealth figures for 2005 from Statistics Canada, and a report from the UN University's World Institute for Development and Economics (WIDE).

The WIDE release and the StatsCan release cover a lot of ground. Incidentally, the StatsCan release is the first of is kind to offer such detailed data on Canada's household wealth distribution since their last such release in 1995 (we're a bit behind the U.S. and the U.K. in the frequency in which we collect this particular type of data). An attempt is made to actually isolate the sources of inequality, which makes for a unique (as far as I know) opportunity for cross country comparisons of sources of inequality.

What can we learn about the sources of inequality of wealth in Canada?

One thing we know is that the middle class holds the majority of their wealth in the form of their principal residence .
Graph via TD
For comparison:

Graph source: WIDE

Secondly, the richest Canadians are likely to hold a greater portion of their wealth in stocks, relative to lower classes.

TD economists Don Drummond and David Tulk offer their analysis on this:

A distinguishing feature of the 1999 and 2005 wealth surveys is the decline in the real value of stock holdings. As the wealthy hold a disproportionate amount of stocks, the decline in the real value is the principal reason why the concentration of wealth in the highest quintile did not increase by more. If investment returns rise the trend towards growing wealth disparities will likely intensify. This could be compounded by sluggish wage gains in the low end and the financial challenge of immigrants – the main source of growth in the younger, less affluent population.

The National Post says tomato differently:

Net wealth -- non-financial and financial assets minus liabilities -- jumped to 640% of annual disposable income in 2005 from 527% in 2000 and just 370% in 1995, when the country was struggling to emerge from a recession.
The surge in wealth in 2005 reflects rising stock markets and once again the positive terms of trade shock where a stronger dollar is making imports cheaper while export prices surge.
That appears to more than offset total debt of 126% of disposable income in 2005.

The point is, the source of household wealth differs across classes in Canada.

I have two thoughts on this. First, equality varies across time and space. Placing countries on an ordinal scale seems bizarre (to me, anyway), likewise to drawing conclusions based on "trends." The richest Canadians hold a high portion their wealth in stocks, which vary in their returns across time, therefore "equality" is not a stationary measure. Further, there's of course often heterogenity in the data across regions. Perhaps one of the key benefits of these studies is that they allow us to examine the nature of sources of wealth, rather than pointing us to "trends," or forcing cross-sectional data into ordinal scales where both are inappropriate beyond very general terms.

Second, there are policy implications. By understanding the sources of inequality we can fight the impulse to redistribute wealth based on "trends." Further, it should be perfectly clear to policy makers that the needs of investors should be accommodated (since we know where household wealth is concentrated). Onay oremay orporatecay axestay. Right? Clear.

There's so much to explore on this subject, but I'll quickly note one of the many interesting aspects of equality: tax shifting, which neither study had anything to say about, unfortunately (but perhaps understandably so in the Canadian context). Alan Reynolds from yesterday's WSJ (h/t Greg Mankiw):

As was well-documented years ago by economists Roger Gordon and Joel Slemrod, a great deal of the apparent increase in reported high incomes has been due to "tax shifting." That is, lower individual tax rates induced thousands of businesses to shift from filing under the corporate tax system to filing under the individual tax system, often as limited liability companies or Subchapter S corporations.

As far as I can tell, this doesn't seem like a big problem in Canada. Jack Mintz and Michael Smart (2001):

Canada integrates corporate and personal taxes by providing a dividend tax credit and excluding a portion of capital gains from taxation. At the small business level, the combined corporate and personal tax rate on equity income is roughly equal to the personal rate on employment and interest income, while for large companies combined tax rates on equity income exceed that of other income. When the small corporate tax rate has been changed in the past, governments have typically adjusted dividend and capital gains tax rates to maintain integration at the small-business level, in order to minimize incentives for shifting between corporate and personal tax bases.

The subject of "equality" often makes me want to rip my hair out, but there are surely thousands of useful, interesting ways to look at it, as StatsCan and WIDE have proven. What a thick and intriguing subject. Please, let's stop dissing it.

Defaults and donations

2006-12-14T13:26:00.000-04:00

It's been a news-heavy week on the personal front, but I'm attempting to get back into some kind of routine, which would include catching up with my reading (a futile task) and blogging more regularly.

Here's just a small thought I've been pondering: How can we encourage individuals to commit to donating, including the donation of their money to charity, or the donation of their organs when they die? Maybe we shouldn't. (edit: At least not on an individual level).

First, consider organ donation.

The Edmonton Journal reports, “Health Canada has identified a shortage of organ donors in Canada, noting Canada has one of the lowest rates of organ donation in the industrialized world.”

Consider the ways we can encourage organ donation.

The government can commit to ad campaigns to attract the so-called "altruistic donor." It could also offer a tax deduction of, say, $5,000 or $10,000 off the estate of an organ donator.

The first option can be costly and ineffective. And, a tax deduction? Well, I happen to think that there shouldn't be an estate tax, so I'm not quite on par with this solution either.

Then there are financial incentives beyond tax deduction. Alex Tabarrok explains (2004):

In the minds of many, financial incentives for organ donation means rich people buying up kidneys being hawked on eBay by the desperately poor...Two distinctions are especially important. First, financial compensation for cadaveric donation and for living donation are different ideas and it is quite possible to have one without the other. Indeed, the primary cause of so-called organ tourism—rich people flying to poor countries like India to undergo a transplant from a poor, living donor—is the shortage of organs in the West. By allowing compensation for cadaveric donations we’ll increase the domestic supply and reduce the demand for people to fly to poorer countries for living donation. Financial compensation for cadaveric donation, in other words, is a substitute for both paid and unpaid living donation.

Second, organs are currently allocated according to a point system which is based on factors such as the quality of the match between donor and recipient, the length of time the potential recipient has been on the waiting list, the health of the potential recipient and so forth. It is not necessary to change these criteria in order to make use of financial compensation. Financial incentives can be used to increase the supply of organs without using finance to determine who will receive an organ.

The solution that has my attention is this: change the default. Andrew from “Statistical Modeling, Causal Inference, and Social Science” explains:

Over 99% of Austrians and only 12% of Gernans consent to donate their organs after death. Are Austrians so much nicer than Germans? Maybe so, but a clue is that Austria has a "presumed consent" rule (the default is to donate) and Germany has an "explicit consent" rule (the default is to not donate). Johnson and Goldstein find huge effects of the default in organ donations, and others have found such default effects elsewhere.

What does this have to do with financial charity donations? Andrew goes on:

Lots of research shows that people are likely to take the default option (see here and here for some thoughts on the topic). The clearest examples are pension plans and organ donations, both of which show lots of variation and also show people's decisions strongly tracking the default options.
....My hypothesis, then, is that the groups that give more to charity, and that give more blood, have defaults that more strongly favor this giving. Such defaults are generally implicit (excepting situations such as religions that require tithing), but to the extent that the U.S. has different "subcultures," they could be real. We actually might be able to learn more about this with our new GSS questions, where we ask people how many Democrats and Republicans they know (in addition to asking their own political preferences).
Does this explanation add anything, or am I just pushing things back from "why to people vary in how much they give" to "why is there variation in defaults"? I think something is gained, actually, partly because, to the extent the default story is true, one could perhaps increase giving by working on the defaults, rather than trying directly to make people nicer. Just as, for organ donation, it would probably be more effective to change the default rather than to try to convince people individually, based on current defaults.

I'm not quite sure how changing a default would work with regards to giving money to charity, or giving blood, without infringing on people's freedoms (I don't consider Austria's "presumed consent" rule to be such an infringment), but I like how Andrew is thinking and I'll be pondering his idea more.

The Art of Controversy, Verizon style

2006-12-10T23:59:00.000-04:00

Prof Greg Mankiw points to a recording that “takes a while, and it is not at all edifying.” Go ahead and laugh at the math skills held by a couple of Verizon call center employees, but notice the skill they present on other fronts. Namely, they are natural masters of controversy.

Unable (or unwilling) to see their mathematical error, they've wisely armed themselves with Stratagem XXII, Stratagem XV, and Stratagem XXXVI from Arthur Schopenhauer's Art of Controversy. That is, “Petitio principii,” “Use Seemingly Absurd Propositions,” and (the powerhouse) “Bewilder Your Opponent by Mere Bombast.” Their strategies are classic, and painful to listen to (their greatest strength perhaps). Real slick.

George, their opponent, was left with few options. He thus pulled out Stratagem XXVIII: “Persuade the Audience, Not The Opponent.” Brilliant counter attack. The public release of his phone conversation has surely left the blogosphere entirely persuaded (and amused).

A couple more days of hibernation and I'll be back (with less fluff).

2006-12-03T23:06:00.000-04:00

To anyone who still returns this blog, I really appreciate you being so patient with my increasingly relaxed blogging habits. I'd prefer to be posting more often and I have a few ideas that I'm eager to run past anyone who will listen. The frequency will pick up here again in a week when I return to trying to earn your love (or at least your readership).

Sometimes I think Stanislaw Lec wasn't being so terribly peculiar when he said, "People find life entirely too time-consuming."

Economic growth or flat labour productivity?

2006-12-02T09:29:00.000-04:00

I don't see sunshine and lollipops going into Q4, but November's labour figures make me slightly less bearish than Marc Lee. The fact is, hours worked increased by 1.6% since the end of the last quarter and labour growth still looks healthy (even though much of the net growth in employment was in lower-paying, part-time positions, unlike what we saw from October's net gain in employment of 51,000). Further, as we know, people with jobs spend money.

When October's employment figures came out, I asked why job growth is so out of sync with GDP growth. This still puzzles me, but I'm comforted to know that I'm in good company. TD Economist David Tulk asks a good question:

With just a single month yet to be revealed, 2006 is shaping up to deliver the labour market’s best performance in three years with the expected addition of near 300,000 net new jobs. This stands in contrast to yesterday’s GDP report which shows that economic growth has slowed markedly over the middle quarters of 2006. However, an encouraging development for the final quarter is the pick up in hours worked. Over the first two months of Q4, hours worked have increased by 1.6%, reversing the 0.1% fall observed in Q3. The puzzle is to sort out whether this indicates more economic growth momentum though the fourth quarter of 2006 than suggested by the 0.3% decline in September’s real GDP or a flattening of labour productivity.

Really, the increase in hours worked shouldn't be too surprising, nor should the fact that it hit the right regions in just the right sectors. In October we saw full-time employment rise by 50, 500, putting labour-starved Alberta out of its misery. Well, not quite -– demand is still there -- but Alberta and British Columbia did gain 70 per cent of those new jobs, and November's employment figures tell us that Alberta's woes continue to improve.

Perhaps a productive workforce throughout Q3 and Q4 will be enough to partly offset the economy's bleaker qualities (eg. our less than pretty exports choking on the strong dollar -- which has since improved), and give us less to be bleak about after we witnessed a Q3 GDP growth rate of 1.7%.

In fact, never mind the labour report, maybe the Q3 GDP figure isn't so bad on its own.
Tulk again:

...the details are not as discouraging as the headline number would suggest. While some of the weakness can be traced to the second consecutive quarterly decline in residential investment, the main cause of the deceleration in real GDP growth was a combination of more moderate government spending and falling inventory investment – two of the more volatile components of real GDP. For example, part of the deceleration in government spending from 4.9% in the second quarter to 0.7% in the third was due in part to the one-off effect of the conclusion of the 2006 Census. Meanwhile, the fall in inventory investment likely reflects some unwinding from the significant accumulation in the previous quarter.

As long as firms refuse to fire workers until a recession is in sight, labour growth is a poor indicator of things to come; however, in sum, here's my guesstimate: A slowdown is inevitable, but Q4 has a cushion of labour productivity that some aren't seeing.

Random notes

2006-12-02T09:26:00.000-04:00

1.'The latest jobless rates and what's behind them.'
CBC has updated its nifty interactive tool to reflect November's employment figures.
The west wins again.

2. I'm burning to relieve myself of this. Why does at least one Canadian journalist insist on mirroring U.S. journalists by over-emphasizing the housing market figures when housing is such a smaller influence on Canada's CPI? I'm going by memory, but I believe that housing has a weight of 3.5% in Canada and 30% in the U.S.

Mary (Foley) Doyle, dead at 88

2006-11-29T06:42:00.000-04:00

I thought I would try something new on this blog. After realizing how very few female role models I have, I became convinced that it's only because I'm unaware of the many successful women out there. In an effort to learn more about them, I'll be profiling female economists and business women, maybe once or twice a month, beginning today with Mary (Foley) Doyle.

My group of friends are some of the most magnificent people in the world (I just know it), but when I came across the obituary of Mary (Foley) Doyle, I wished I could have added her to my circle of friends. I want to share this piece, written by her children, which ran in The Globe and Mail last week. She seems like a spectacular woman (a chairwoman in 1956!), and this glimpse into her life is truly inspiring.

Mary (Foley) Doyle
Mother, businesswoman. Born July 5, 1917 in Point Mall, Placentia Bay, Nfld. Died May 23 in St. John's, of heart failure, aged 88. Mary Foley was raised in Corner Brook, far from her parents' native Placentia Bay. Work had lured them west. Her mother was a determined redhead whose genius was to feed and clothe seven daughters and a son on a mill-worker's wage.
Mary graduated from St. Henry's, narrowly missed a university scholarship, and took “commercial.” She soon became a private secretary. One day, offered the rare opportunity to make a long-distance call, she phoned a Water Street merchant in St. John's, replying to an ad. Impressed, he hired her.
Three years later, Mary married Gerald Doyle. He was a widower, 25 years older than she, and living on an eight-acre estate. She stepped into a household with maids, a cook and a gardener — and five young motherless boys. Dinner parties, New York business trips, cruises and summers sailing around Newfoundland: She'd been swept into a world of glamour, travel, and love. When he died in 1956, he left a bewildered 39-year-old with three more small children in the mix. She was thrown immediately into a man's world as “chairman” of her husband's manufacturer's agency, in charge of 50 employees.
Mary Doyle never felt at home with St. John's “society.” She sought company, and found it in the Redemptorist priests: intelligent, urbane men who posed no threat to her widowhood. The mother of our childhood was stunning, decisive, and slightly scary. She wore a sealskin jacket, drove a Land Rover and had two German Shepherds. If a man hesitated when approaching her, she'd exclaim: A man who's afraid of dogs! She was fearless, bought and sold property without advice, and travelled without reservations, including a three-month European tour with kids. Later, she drove around Morocco in an Austin Mini. Fearless, yet. . . she once opened the front door, and ordered a passing teenager to come in and catch a mouse. At 53, her family raised, Mary walked into a classroom of 17-year-olds and began university. She took notes in shorthand, asked smart questions, and wrote A papers. At 57, she crossed the stage to collect a history degree. The photo records a proud and defiant woman.
Mary was anti-Confederate. Returning Canadian? she'd be asked at a border. I carry a Canadian passport. Canadian citizen? I was born in Point Mall. Eventually, a frustrated guard would let her pass. Her rage against Canada dates from 1939 when an immigration officer on a Halifax dock looked down at her seven-year-old Down Syndrome sister. He removed the child to a holding cell and next day handed her back: Entry Denied.
Mary was a fighter. Stacks of yellow paper document responses to injustice. In 1969 she fumed in a church pew on Fogo Island while a priest “harangued his own good people.” She wrote him about what he had “flung with vituperation” to “a captive audience who could not speak back.” She copied the bishop.
Her independence strengthened as she aged. At 77 she was tough enough to cope with the blow of losing a leg. For months her car sat idle in the driveway; she couldn't relinquish this symbol of mobility. In time, she installed a lift which she rode to a waiting wheelchair downstairs. She'd open the garage door remotely and take a cab to the bank. She and her dog carried on through the Newfoundland winters for five years. She moved in briefly with her youngest son then, with courage and insight, made the inevitable move to a home.
She was a rebel, and fires of defiance continued to burn even as her world grew smaller. She hung a bold sign on the door: No admittance after 11:00 p.m.
John, Bill and Marjorie are Mary's children.

The BoC's big obstacle

2006-11-28T08:25:00.000-04:00

The Canadian press is giving a lot of ink to the possibility of the Bank of Canada setting a lower inflation rate in the future and, further, the possibility that it may favour price targeting. Of course, no action would happen until 2011 if it happened at all, but with the next renewal due this December, the subject is a popular one.

If the public doesn't "get it" though, is price targeting worth pursuing? From The Toronto Star:

Inflation target under review (Nov.27)
[UWO prof David Laidler] acknowledged it would be “risky” to change the rules without careful preparation of the public, but proposed a one per cent target, stressing that “a two per cent inflation rate is a far cry from anyone’s (or at least any retiree’s) idea of price-level stability.”
The Bank of Canada raises another, more complex, possibility: targeting a price level. This would mean that periods of above-target inflation — which under the current policy are written off while the bank seeks merely to return to the two per cent level — would have to be offset by periods of inflation below the target to produce stable long-term prices. The bank’s document acknowledges “the difficulty that might be associated with explaining price-level targeting to the general public.”
Officials intend to complete their research “well before 2011 so as to ensure sufficient time for open discussion of the results and their implications.”

I'm beginning to think that one of the biggest obstacles associated with price targeting is the public's confusion over what it actually is and how it would work. Ben Bernanke and Allan S. Blinder could probably write a book or two on this subject by now after Bernanke proposed “the explicit numerical definition for the price stability objective” (I've blogged about the confusion they've both seen here). Bernanke's proposal is something like inflation targeting; still, I think his experience with proposing a new regime, as I wrote about in the link above, says a lot.

2006-11-27T18:48:00.000-04:00

I'm short on time, but I thought I would share a few links that I find interesting.

1. Are husbands like potatoes? Bryan Caplan provides some food for thought in his latest post over at EconLog. His reasoning isn't compatible with my own, but it's laugh-out-loud funny. According to him,

"Once women can become financially independent of a man, they will choose to do so." This is theoretically possible, but only if husbands, like potatoes, are inferior goods.

He concludes that demand for husbands is at an all-time high.

A commentator points to a common survey outcome: “married men are the happiest people, followed by unmarried women, then married women, and the least happy people are unmarried men.” I don't know if I'd conclude that men are “inferior goods,” but they do seem to be heading that way. And yet, I can't manage to type this without laughing. Sorry, guys.

2. How do dietary norms affect the economy? I was somewhat surprised when I stumbled across a recently-published USDA report about the American national dietary guide. It explores what the impact would be on the U.S. agriculture sector if Americans changed their dietary habits to meet the dietary requirements suggested in the 2005 guide . Here's an excerpt:

For Americans to meet the fruit, vegetable, and whole-grain recommendations, domestic crop acreage would need to increase by an estimated 7.4 million harvested acres, or 1.7 percent of total U.S. cropland in 2002. To meet the dairy guidelines, consumption of milk and milk products would have to increase by 66 percent; an increase of that magnitude would likely require an increase in the number of dairy cows as well as increased feed grains and, possibly, increased acreage devoted to dairy production.

The way you do I.T.

2006-11-25T13:06:00.000-04:00

Does the degree of success enjoyed by US firms operating in the UK imply that productivity growth may have more to do with superior management/organization rather than simply geographical or regulatory environment? H/t to D.R. for sending this along.

Excerpt from, It ain’t what you do it’s the way you do I.T. (2005), by Nick Bloom, Raffaella Sadun and John Van Reenen; London School of Economics:

Productivity growth in sectors that intensively use information and communication technologies (ICT) appears to have accelerated faster in the US than in Europe since 1995. If this was partly due to the superior management/organization of US firms (rather than simply the US geographical or regulatory environment) we would expect to see a stronger association of productivity with IT for US multinationals located Europe than for other firms. We examine a large panel of UK establishments from all business sectors and provide evidence that US owned establishments have a significantly higher productivity of IT capital than either non-US multinationals or domestically owned establishments. Indeed, the differential impact of IT appears to fully account for almost all the difference in total factor productivity between US-owned and all other establishments. Further, this finding is particularly strong in the sectors that intensively use information technologies: the very same ones that account for the US-European productivity growth differential since the mid 1990s.

Addendum

How comparable is Canada to the UK when it comes to the productivity levels of IT? A recent article from The Financial Times sheds some light on this. The article suggests that the bursting of the dot com bubble may worsen things for both countries.

'Perfect storm' could stifle IT (Nov.22)
In the UK, a report by Lancaster University School of Management and the British Computer Society revealed that applications for computer science degree courses have dropped by half in the past five years. Software engineering applications have fallen by 60 per cent.
In Canada, things are not much better, according to the council organised by the government to monitor and promote the development of IT skills. Canada will need 89,000 new IT professionals in the next three to five years, warns the Information and Communications Technology Council, "yet enrolments in IT courses have dropped by 50-70 per cent because of the negative view of the IT sector," explains Paul Swinwood, president of the ICTC.
****
In Canada, the ICTC is also co-opting private sector organisations and community colleges as close to the client base as possible. "We're bringing together the engineers, the technicians and the technologists; my council, the Canadian Information Processing Society, and your local IT associations," says the ICTC's Mr Swinwood. "We can have a national programme but we need feet on the ground, in the community." Creating a link between high-level policy and direct action is crucial if IT education is to be effective in schools. The difficulties the sector faces in terms of generating appropriate skills are inseparable from its own success.
For many teachers who advise young people, it moves too quickly and unpredictably for comfort. This is why the BCS's Mr Rodd has been horrified to see some teachers advising students against careers in IT, citing the uncertainty caused by the bursting of the dotcom bubble.

Spontaneous order

2006-11-24T16:39:00.000-04:00

Sorry for the lack of posts. I've been ill and unproductive, but I have less to complain about this evening.

Moving on...

Where does spontaneous order exist?

In the response mechanisms of white blood cells?

In the market place? And, by extension, in flight patterns? (h/t Cafe Hayek)
Be sure to read Russell Roberts' explanation of this last video.

These two (short) clips are really remarkable, especially when watched one after another. Well, I think so. It doesn't hurt that they're both set to hot music.

2006-11-22T18:51:00.000-04:00

ugh. I intended to delete a draft but I've deleted my last post as well. I'll have to blame my flu and chalk it up to that. Actually, I really didn't like that post anyway. Perhaps it was a subconscious decision.

'Put our TV bands to better use'

2006-11-19T23:57:00.000-04:00

I'm slow to catch this, but Neil Reynolds had an interesting article in last Friday's Globe and Mail ($). Here's an excerpt.

Put our TV bands to better use: Sell them (Nov. 17):

Pssst. Here's a way to make Canadians a cool $6-billion, cut cellphone costs and simultaneously drive the wireless economy. Simply auction off the country's entire “TV band” — airwaves no longer needed for this redundant purpose.

When U.S. economist Thomas Hazlett looked at Canadian broadcast policy four years ago, he found an enormous waste of a scarce natural resource — the electromagnetic frequencies used by relatively few TV stations to transmit relatively few programs to relatively few people in relatively few cities. In allocating 67 TV channels, he said, Canada had “consumed valuable bandwidth while delivering very little service to the public.” Since federal regulators had given each channel six megahertz of frequency space, we were using up 402 MHz for TV signals alone, “a vast commitment of radio spectrum.” We're using freight trucks, in other words, to deliver carloads of TV programs.

With the same allocation of frequencies as Canada, the U.S. uses its band more efficiently by allowing 1,472 full-power TV stations (compared with 136 in Canada), 210 TV markets (compared with 43) and an average of 7.0 stations per market (compared with 3.1). This sparse use of the TV band meant that the typical Canadian market provided only three over-the-air channels. This didn't matter much to most Canadians — by 2002, 74 per cent of them had opted for cable TV, 7 per cent for Canadian satellite TV and 8 per cent for U.S. satellite TV.
Here is Mr. Hazlett at the University of Montreal in June, 2002: “It is not possible to argue that 67 channels of scarce radio spectrum are optimally used to deliver [only a very few] video channels. The typical Canadian market uses just 4.5 per cent of its allocated bandwidth. The TV band is underemployed throughout the country. There are no offsetting efficiency arguments. This waste produces no social dividend.” Worse still, Canadians had already abandoned over-the-air TV. Only 10 per cent of Canadians still used TV antennas. Four years on, the number must now be even less.

Canada's profligate dispersal of bandwidth for over-the-air delivery of TV programs, long after Canadians had switched to cable and satellite TV, necessitated the country's parsimonious hoarding of bandwidth for New Economy wireless technologies. This is one reason why only 50 per cent of Canadians are using wireless devices — compared with 70 per cent of Americans and 100 per cent of Europeans. It's one reason why cellular phone service in Canada costs much more than it needs to cost. Industry Minister Maxime Bernier will auction off more spectrum next year, specifically for cellular and wireless tasks, which doesn't go nearly far enough.

Once chief economist for the U.S. Federal Communications Commission, Mr. Hazlett is now a professor of law and economics at George Mason University in Virginia. Recognized internationally as an authority on the economics of broadcasting, he serves as director of the university's Information Economy Project, which — in its mission statement — recommends that governments get out of the way and permit the “wireless century” to develop without needless bureaucracy and anachronistic regulation.

In his analysis of Canadian airwave use, Mr. Hazlett cited Italy as an example of a country in which government did get out of the way — though inadvertently. Deregulation, Italian style, occurred in the mid-seventies when courts permitted unlicensed entry into cable TV. The Italians spontaneously extended this liberty to all TV broadcasting. At the time, the country had 90 TV stations. Within 10 years, it had 1,300 — the highest TV station density in the world. (Canada and the U.S. have 0.05 TV stations per 10,000 people; Italy has 1.0). Italian TV stations get 20 times as much use from bandwidth as Canadian or American stations. Cable TV scarcely exists; it was never needed and serves less than 1 per cent of households.

Mr. Hazlett calculated “the enormous economic benefits” that would result were Canada to sell at auction the country's entire TV bandwidth. The country's remaining roof-top antennas would need to be replaced with satellite dishes at a cost of $600-million. But the TV band auction (based on Canada's sale of 40 MHz for $1.5-billion in 2001) would clear almost $6-billion.

Self employment: an 'innate survival skill'?

2006-11-19T10:57:00.000-04:00

Nobel Peace Prize Laureate Muhammad Yunus, Yale's Dr. Robert J. Shiller and others blew me away last week when I heard them speak on microcredit and financial innovation. My perception of poverty in developing countries has bloomed. One thing that struck me in particular from their lectures was the reoccurring theme of self employment.

It's often been repeated that one of the virtues of microcredit is that it's a 'hand up', not a 'hand out.' Essentially, the Grameen Bank offers loans to would-be entrepreneurs, or entrepreneurs who need a supportive push.

The Grameen solution: “...jump-starting self employment, providing the capital for poor women to use their innate ‘survival skills’ to pull themselves out of poverty” (Neff).

Innate survival skills. I like that. This survival concept surely isn't restricted to developing countries. At the risk of sounding like a monomaniac, I'll point out one last time that in periods of recession and poor job growth in Canada, self employment rises. More precisely, low productivity, unincorporated self employment rises.

So why then do we categorize all self employed individuals similarly? Why not group them in the same spirit of methodology that labour economist's use to draw a distinction between economic refugees (those who migrate for jobs), and war refugees (those who arrive only to flee from war and thus have a relatively lower likelihood of perseverance -- ie. if they are met with opportunities or choices which provide them a higher utility level, say, returning home after a war, they'll take it).

My new terminology (subject to change as brighter ideas hit me):

'Economic' entrepreneurs: individuals whose decision to enter business may be influenced by such things as taxes, IT, geography, etc. Such individuals demonstrate the self interest motive at work in the market place and are valued in developed countries.

'Spurious' entrepreneurs: individuals whose drive to be self employed is manufactured by recession or poverty. They tend to depend on heuristic means; they may have little business know-how. Further, after hearing Dr. Shiller speak I would also add (although this is not his idea) that these individuals don't tend to be lured by the profit motive to the extent that economic entrepreneurs are. Tax structures, for example, have little influence on them. Thus, market inefficiencies increase, ceteris paribus, as the ratio of spurious entrepreneurs to economic entrepreneurs increases.

While 'spurious' entrepreneurs offer promise in developing countries, we tend to ignore their potential in Canada because we see the market inefficiencies and low productivity that a high spurious-to-economic entrepreneurship ratio creates. Although, the ratio seems to be declining since the late 1990's and Canada's self employed are doing increasingly well.

I know, I know. It's awfully perverse of me to have absorbed the wisdom of Messrs. Yunus and Shiller with only my self styled ideas to show for it on this blog. For the record, both are doing amazing work and are having a profound impact on people all over the world.

For Dr. Shiller the proof is in the pudding. See here, and here for an interesting read on behavioural finance (Oh, D.R., I've crawled from my rock and I see that you really are on to something good with behavioural economics!).

For Dr. Yunus, the proof is in The Prize. See here and here (in the latter link he suggests that the term 'do-gooders' be replaced with 'social entrepreneurs').

Addendum:

More terminology:

Terms used by GEM (h/t D.R.): opportunity entrepreneurs, necessity entrepreneurs.

Terms used by CIBC economist Benjamin Tal: seniorpreneurs, lifestylers, superachievers

Friedman is gone

2006-11-17T10:01:00.000-04:00

To blog about anything except Milton Friedman's death seems unthinkable today. And yet I have nothing new to contribute. I'll just mark this sad news by pointing to Friedman's obit in The Financial Times (h/t happyjuggler0).

Addendum

Milton Friedman is my hero. After some thought, I do have something to say.

In the comment section of this post I was asked, “So what should the Canadian government be doing, as per your idol Friedman, that it is not already doing?”

My response made me realize two things. I realized how much of an influence Friedman's ideologies have on me, even if some of my opinions aren't consistent with his. I also realized that it's only been over the past four months (since I began this blog) that I've become a libertarian (with the most un-libertarian moniker around). It may have taken even longer, or not at all, had it not been for Friedman's influence.

Despite all of his great contributions to economics, one thing that will continue to influence me is the assertiveness in which he defended his values. The sheer strength of Friedman's backbone gave courage to people to defend their freedom, or to do so more confidently. As George Shultz once said of Friedman when he found himself defending a freedom he felt strongly about, “It's as if he were there with me.”

Here's a post that I enjoyed from Tyler Cowen: When I think of Milton Friedman.

'Economic Liberalism at the Turn of the 21st Cent.'

2006-11-15T16:59:00.000-04:00

This might be one of the most exciting book reviews I've ever read.
From EH.net:

Published by EH.NET (November 2006)
Mark Wynne, Harvey Rosenblum and Robert Formaini, editors, _TheLegacy of Milton and Rose Friedman's Free to Choose: Economic Liberalism at the Turn of the Twenty-First Century_. Dallas: Federal Reserve Bank of Dallas, 2004. vii + 251 pp. $ (hardback), ISBN: Info:0-9763494-1-8
Reviewed for EH.NET by Ranald Taylor and Robert Leeson, Department ofEconomics, Murdoch University.

This book is a collection of papers presented at a conference held at the Federal Reserve Bank of Dallas in October 2003. It is a tribute to Milton and Rose Friedman's _Free to Choose_. The papers have a dominant theme: competitive markets can solve many of the problems associated with education, environmental degradation, taxation, cultural diversity, globalization, financial markets and monetary stability. The book is organized into six sessions, each devoted to particular issues which the Friedmans have raised in _Free to Choose_.
Session one sets the tone of the book by revisiting Milton Friedman's organizing argument: that competition ensures economic freedom and that the appropriate role of a government in a free society is toensure that competitive markets function freely. Eric Hanushek andPaul Peterson examine the coexistence of what they believe to be the declining state of the public school system in the U.S. and risingreal spending per pupil. Hanushek argues for a competitive market-based funding system in the form of vouchers. Resistance to vouchers, he believes, derives from an old ideology. Hanushek arguesthat it is easier to defeat communism than to overcome the education establishment's resistance to meaningful reform of the public school system.
Advocates of 'sustainable development' advocate changes in virtually every aspect of
consumption and production. In session two Terry Anderson and Laura Huggins argue that sustainable development theory is vague and "operationally vacuous" (p. 58).
They challenge the two fundamental pillars of sustainable development: 'running out' of resources will leave future generation with less, and market processes are the causes of these depletions. According to Anderson, Huggins and Richard Stroup, the over consumption of natural resources is primarily linked to ill-defined property rights rather than the operation of the market system.

Property rights, they argue, provide the structures that are necessary for development, innovation, conservation and the discovery of new resources. They maintain that countries with greater economic freedom and rule of law tend to have higher environmental standards than countries where the rule of law is weak.

One of the themes of _Free to Choose_ was that government has grown far beyond the size necessary for the protection of liberty.

In session three, William Niskanen constructs a model to estimate the optimal level of expenditure for government services relative to GDP. His estimate (10 percent of GDP) provides support for smaller governments. Liqun Liu, Andrew J. Rettenmaier and Thomas R. Savingargue that falling birth rates and rising life expectancy have made the current social security system unsustainable. Their analysis ofthe costs and benefits of a transition to a privately-funded system, suggests that during the transition period there would be a costinvolved in the form of lower consumption. However, in the longer term, they argue, the transition would make the country as a whole better off by enhancing the nation's capital stock.
In session four, Tyler Cowen deals with the implications of _Free to Choose_ for culture, diversity and aesthetics. Globalization and free trade benefit both cultural diversity and the creative arts, Cowan argues: periods of greater freedom in international trade tend to beperiods of greater cultural diversity and creativity.
Peter J. Boettke examines the impact of _Free to Choose_ on global movement toward free markets during the period from 1979 to 2003. During this period, communism collapsed in the Second World, theThird World began to reject development planning, and many First World countries reformed their welfare states. Boettke notes thatmuch post-communist privatization was inspired by Friedman's writings.
Gregory Chow uses the central themes of _Free to Choose_ to examinepost-1978 reforms in China, sensing progress in all areas. With reference to education, Chow claims that there is probably a greater degree of freedom of choice in education in China than the U.S. (heargues that about 40 percent of all spending on education in China comes from private sources compared to an average of 12 percent inthe OECD countries).
Session five has a topical immediacy given that the Grameen Bank andits founder, Muhammad Yunus, were jointly awarded the 2006 Nobel Peace Prize. Luigi Zingales argues that access to finance is crucial to promote competition and economic freedom. Zingales describes thefate of two Bangladeshi women (one with access to finance, the other without). The second found it extremely difficult to develop her stool making business; the first obtained a small loan from the Grameen Bank to acquire a Nokia cellular phone. The phone made a huge difference in her life and the lives of her fellow villagers by bringing information at low cost to farmers and tradesman. The phone reduced business costs facilitating profits about twice the average national monthly income.
Zingales argues that although financing is a risky and complexactivity, riddled with adverse selection and moral hazard, it is government intervention that is the main obstacle: "In spite of theenormous challenges intrinsic to the financing activity, human ingenuity, when allowed to work freely, is able to devise many mechanisms to enlarge access to finance. It cannot, however, overcome the power of the government, when this is determined to block finance. Unfortunately, governments are too often captured by rich incumbents, who stand to gain very little and risk a lot from the development of finance" (p. 188).
Allan H. Meltzer itemizes twenty-five specific policy proposals initiated by Milton Friedman (some of which have been adopted and many of which have not) to minimize government intervention. He looks at some of the successes (ending the military draft, floating the dollar, the abolition of interest rate ceiling on bank deposits) and some partial successes (lowering tariff barriers, deregulation various industries in the U.S., the introduction of a school voucher system in certain U.S. states).
Ben S. Bernanke examines eleven of Friedman's key monetarist propositions. According to Bernanke, Friedman's counter-revolution isstill very much alive: "one can check to see if an economy has a stable monetary background only by looking at
macroeconomic indicators such as nominal GDP growth and inflation. On this criterion it appears that modern central bankers have taken Milton Friedman's advice to heart" (p. 213).
The last session traces the relationship between economic freedom and growth performance. The Friedmans believe that economically free countries would grow more rapidly and achieve higher income levelsthan less free countries. To test their hypothesis, they saw the need to develop a scientific instrument that could be used to quantify the degree of economic freedom across a large number of countries. James Gwartney pioneered the construction of indexes to proxy economic freedom. Based on the Economic Freedom of the World (EFW) index (taking into account of private ownership, voluntary exchange,personal choice, and free entry into markets), Gwartney and Robert Lawson report that a one-unit increase in the EFW index enhancedgrowth by 0.71 percentage points over the period 1980-2000: "Friedman was right" (p. 232).

As a conclusion to the book, Raghuram G. Rajan offers somereflections on whether the free market tide may retreat (in LatinAmerica, for example). Rajan argues that the growing backlash againstpro-market reforms is driven by elites who tend to undermine equalityof opportunities by opposing widespread access to markets.
This is a fascinating book -- a must read for Friedman fans. One of Friedman's strengths was (and is) his intense curiosity about the strengths and weaknesses of the arguments and unexamined assumptions of his opponents. Some of those who have documented the progress of his ideas have been struck by the initial lack of reciprocity in this respect (in the early days his ideas were often dismissed as Chicagoeccentricity). Friedman was a dominant figure among the first generation of post-war libertarians: this salute by some of thesecond generation provides an insight into the dynamics of the ideas that he developed and propagated.

Ranald Taylor is the author of "Can Labour-Savings, Capital-IntensiveProduction Techniques Reduce Unemployment Rates in DevelopingCountries?" _Australian Journal of Labour Economics_ (2004). He is currently working on a project tracing the evolution of technological progress since Adam Smith.

Robert Leeson is the co-author (with W.J. Darity and W. Young) of_Economics, Economists and Expectations: From Microfoundations to Macroapplications_ (Routledge: 2004) and is currently editing Milton Friedman's _Collected Writings_.

Hard-pressed manufacturers, realistic wish list

2006-11-14T10:34:00.000-04:00

Extra, extra! Firms realize that government spending is not a solution to their economic woes! Today's Globe and Mail highlights the response from the manufacturing sector as it suffers a slowdown like no other sector of late:

Hard-pressed manufacturers seek Ottawa's help; Wish list calls for tax breaks, but sector says bailouts can't fix underlying woes
Canada's manufacturers are turning up the heat on Ottawa to help them out of their deep economic troubles, but the wish list is surprisingly timid given the extent of their woes.
That's probably because there's little that the federal government can do about the underlying cause of most of their troubles, economists say.
“Why aren't they asking for more? It may be the realization that a lot of their problems are way beyond the control of the Canadian government,” BMO Nesbitt Burns economist Doug Porter said.
The manufacturers will launch their lobbying effort today, publicizing a letter they recently sent to Prime Minister Stephen Harper that asks for lower corporate taxes, less red tape and better tax credits for research and skills training.
The hope is to win some commitment on manufacturing issues in next week's fiscal update, followed by concrete measures in next year's budget.
While lower corporate tax rates could be expensive for Ottawa, the manufacturers merely request the government keep its promise to reduce the corporate tax rate to 18.5 per cent by 2011, and then go a step further to 17 per cent by 2012.
As for tax credits, they want Ottawa to make its research and development regime more relevant, but not necessarily enrich it. And they want a new tax credit for training.
The most immediate and expensive request would have Ottawa allow capital investments to be written off over two years (instead of the eight to 10 years it now takes) — a proposal that would immediately improve the cash flow of companies investing in new technology, but one that would cost Ottawa about $1.5-billion in the first year.
The manufacturers have made no mention of handouts or lump sums of money, despite the painful restructuring the sector is enduring. So far, 83,000 jobs have disappeared in the sector this year, and about 200,000 since the end of 2002. Manufacturing output is flat compared with a year ago, and profit growth has slowed to a crawl. In Ontario, profits are falling.
“These are not issues that bailouts will fix,” said Jayson Myers, chief economist of the Canadian Manufacturers & Exporters.
Rather, the proposals would put Canadian manufacturers on a level playing field with other countries for taxes and investment incentives, he said.
Manufacturing in most developed countries has been under intense pressure for the past few years because of the rise of cheaper competition in China, but Canada faces some unique issues, Mr. Porter said. In the short term, Canada is particularly exposed to the slowdown in the U.S. economy, he said. In the medium term, the quick appreciation of the Canadian dollar is a serious issue other countries' manufacturers don't have, he added.
But manufacturers should probably not hold their breath for immediate action by the federal government. Next week, Finance Minister Jim Flaherty will unveil a Conservative economic road map aimed at making Canada a more powerful player in global markets. The economic agenda will not contain tax cuts or fiscal measures, but will lay out a direction for next year's budget and beyond, he said.
“This is a document that we hope will be a plan for the next 10 years or so,” Mr. Flaherty said Sunday.
“We are going to talk about, as part of the plan, about our direction in tax policy for our country, our direction in skills training and postsecondary education.”
The long-term economic plan will make the case for measures to boost Canada's productivity, although the Conservatives are expected to eschew the term in favour of Main Street friendly phrases such as “increasing opportunities” for Canadians. The agenda will argue for more investment in education, research and infrastructure, such as highways and border crossings, as well as a big role for the private sector in financing the latter.
In some respects, the Harper government is now moving closer to its Liberal predecessors in its economic focus. Sources have said the Tories are drawing on the 143-page “Plan for Growth and Prosperity” paper that former Liberal finance minister Ralph Goodale's department released just two weeks before his government was defeated.

A new inflation target?

2006-11-13T10:38:00.000-04:00

With the expiry of the inflation-control agreement held between the Bank of Canada and the Government of Canada arising this December, people are talking.

Some background from the BoC:

In February 1991, the Government and the Bank introduced targets aimed at reducing the rate of inflation. The objective was to achieve a 3 per cent inflation rate by the end of 1992 (the lowest inflation rate in almost two decades) and to gradually reduce the rate of inflation to 2 per cent by the end of 1995. The targets were extended twice—first from the end of 1995 to the end of 1998 and then from the end of 1998 to the end of 2001. Both extensions involved maintaining a target range of 1 to 3 per cent with a midpoint of 2 per cent.

Graph Source: Government of Canada

Pierre Fortin, an advocate of the theory of downward nominal-wage rigidity, says it should be raised to three per cent (Fortin, P. 2001. "Inflation Targeting: The Three Percent Solution." Policy Matters 2: no.l, Institute for Research on Public Policy). This is unlikely to happen though. The BoC maintains that “the argument for the effects of downward nominal-wage rigidity is not a persuasive one in deciding on an appropriate inflation target.”

David Laidler of UWO says the rate should be lowered to one per cent.

This is more likely. In fact, there's been some speculation that the BoC is considering a target of zero. I found this to be surprising. Two things interest me in particular: the probability of hitting a zero floor on interest rates, and the impact of deflation.

An excerpt from a 2001 BoC document:

The Zero Floor on Nominal Interest Rates
A number of authors have argued that the zero floor on nominal interest rates prevents real (that is, inflation-adjusted) interest rates from falling far enough when inflation is below its target, thus leading to a prolonged period in which the economy is weak and inflation remains below its target. After reviewing the evidence, including importantly Black, Coletti, and Monier (1998), and the papers in Fuhrer and Sniderman (2000), Bank economists Amirault and O'Reilly (2001) conclude that most researchers would estimate the probability of hitting the zero floor as negligible for an inflation target of 2 per cent. Moreover, although this probability rises at an increasing rate as inflation falls, their evaluation of the empirical literature is that there would be only a slight increase in the probability as one moved down to a 1 per cent inflation target. This latter conclusion is less widely held. Some authors are more cautious regarding the proposition that the probability increases only slightly, in contrast to Parkin (2001). As well, Parkin notes that the work of Reifschneider and Williams (2000) shows that explicitly taking into account (in various ways) the zero floor in the central bank's reaction function for setting interest rates significantly lowers the cost of hitting the zero bound in the unlikely event that it is hit.
Potential Risk of a Costly Deflation
Mishkin (1997, 2001) has emphasized the importance of avoiding deflations because of their cost. It is important to distinguish at the outset, however, between an unexpected price decline (of, say, one year in duration) and a persistent deflation. It is also necessary to note that there are costs whenever consumers, firms, and financial institutions are adversely surprised. An unexpected price decline of, say, 2 per cent with an inflation target of zero is no more costly than a temporary drop in the inflation rate to zero for a year with an inflation target and expected rate of inflation of 2 per cent. On the other hand, a deflation with some persistence will be more costly than a reduction in inflation of the same size if it causes problems to arise either from hitting the zero floor on nominal interest rates or from downward nominal-wage rigidity. For example, persistent deflation at 2 per cent per year when the inflation target is zero would be more costly than inflation persisting at zero when the inflation target is 2 per cent only to the extent that its persistence becomes more prolonged because of those two problems. But it is important to note that central bank targeting of a specific inflation rate provides a high level of protection against persistent deflation.
We conclude from this analysis that the serious problems come from persistent deflation, that they stem from the first two factors discussed in this document, and that they are unlikely to arise under explicit inflation targeting.

Consumer rationality and Buy Nothing Day

2006-11-12T09:19:00.000-04:00

Kalle Lasn, a Vancouverite and the founder of Adbusters magazine, believes that consumers are irrational precisely because they consume too much. He claims that over-consumption has consequences on the environment, the political atmosphere, and so on.

He proposed Buy Nothing Day (the last Friday in Nov.) as a course of action, and he's now taking things further with Buy Nothing Season, which would extend over the Christmas holiday season.

Wait a minute. How irrational are consumers?

Here's David Altig's view, which may be a popular one:

A great deal of individual behavior appears to be perfectly rational; Most of that which does not appear so rational has small consequences for the individual decision maker (with the "irrationality" tending to disappear over time); There are always some people who persist in making apparently irrational, and costly, choices.

Altig adds that there are “plenty of behavioral anomalies...And it may not be the case that small deviations in individual rationality add up to small consequences for collective actions.”

Kalle would wag his finger at Altig. He might say that a great deal of individual behavior is imperfectly irrational. A consumer may see the consequences of her actions (eg. environmental degradation) yet irrationally assume that her independent action will not bring her dis-utility. In effect, individuals discount their actions and consequently cheat themselves, so to speak. Further, when they witness other individuals cheating, they persist in making irrational, and costly, choices forever after. It's of no surprise then that Kalle is an advocate of individualism and responsibility.
But Kalle is an extremist, an anarchist even, and his ideas go much further (case in point: Buy Nothing Day/Season). Does he believe what he promulgates or does he overshoot his message to encourage individual thought?

I agree with Kalle much less than I once did; however, I have a big soft spot for the guy who gave me my first real work experience. His passion is contagious and his ideas are fun to entertain, even if they're economically unsound (ouch, it hurts to say).

Here's Kalle, cheery as ever, speaking about Buy Nothing Day/Season on CNN (scroll to bottom of link).

Altig points to some good reading by Richard Thaler et al on the subject of anomilies in rationality and choice models.

Kids and Canadian native reserves

2006-11-11T07:59:00.000-04:00

There are very few things that outrage me, but watching kids grow up on squalid native reserves does the trick.

The costs for the kids are great and the benefits are few. Even when I was a kid I recognized that the youth being bussed to school from the neighbouring native reserves had a rougher life than the rest of us, as was evident from their bad diets, misappropriate clothing for the weather, and behavioural problems. The promotion of Attikamekw, Oji-Cree and other languages is the only benefit I can see.

I've highlighted some numbers from the Statistics Canada 2001 Consensus for the Cold Lake Indian Reserve #149. Cold Lake is not unique, as a quick browse around this link to StatsCanada shows.

2006-11-08T08:50:00.000-04:00

1.
'The latest jobless rates and what's behind them.'
CBC has a nifty interactive tool offering a very general idea of what's going on with employment in each province.

2.
Q: What do you get when you mix obnoxious attitude, grammatical errors, anonymous hacks and a respectable news magazine?
A: The new blog from The Economist magazine. Hip hip!

Patterns in self employment

2006-11-07T23:03:00.000-04:00

Addendum II: Et voila! Not only is this graph clearer, but it contains more data. (Thank you Ms. D.L.! I knew blogging would pay off!)

Addendum: I'm looking at this graph from a computer with less resolution than my own and it's fuzzier than I observed earlier. Double the apology! I'll have a clearer graph to post here in the coming days.

Many people dream of being their own boss, but is this why Canadians become self employed?

Some other possible reasons that have been theorized:
a) self employment is a stepping stone to other work
b) self employment is a stepping stone to retirement
c) self employment persists in periods of poor job growth

I produced the graph here using data from Stats Canada's Labour Force Survey. Clicking on the graph will take you to the raw data ($ or affiliation req'd). Sorry for the poor quality, but I'll have to leave it for now and learn my lesson for next time.

I was hoping that periods of recession would be observable, but no such luck.

One interesting observation is that the gap between the per cent of the total self employed and the nonfarming self employed (both unincorporated) is closing. I'm missing a stream of data prior to 1987, but when I plotted data calculated in accordance with the System of National Accounts, the pattern looked similar (with smaller percentile values) and it illustrated a progressively shrinking gap from 1976 to 1987 and onwards.

Notice also that the per cent of total unemployed bottoms out during Canada's great boom beginning in 1987. This is inconsistent with other booms though. Perhaps other factors are at play.

Nothing too exciting here I guess. Sorry for the lack of posts. School has been keeping me busy and uncreative.

The labour growth puzzle

2006-11-04T13:28:00.000-04:00

Grrrr. I've switched to beta blogger and it's not being kind to me, hence the reason this post disappeared. One more time...

I'm stumped by this contradiction: October's net gain in employment was a whopping 51,000 (more than double expectations) despite poor GDP performance. What's up?

What analysts are saying isn't making sense. Here's CIBC's Avery Shefield:

Typically, employment growth lags the initial turn to slower economic activity, as businesses hoard labour for a while before bearing the costs of layoffs. That could be behind the stubbornly healthy trend in hiring of late, one that contrasts with poor GDP growth in Q2 and Q3.

Are we really seeing a case of job hoarding? Maybe in select businesses (construction), but elsewhere evidence suggests otherwise.

First, a quick backgrounder: 67,600 of the new jobs created were full-time jobs, while part-time employment fell by 17,100. Gains were both in goods (construction mostly) and services (educational services, business, building and other support services). The big dives occurred in manufacturing and the resource industry.

Here's why I can't understand how the 'job hoarding' reasoning stands.

1. The strongest reason (I think): A lot of the job gain in the service industry has been in educational services, support services and health services, resulting from an injection of provincial spending. It doesn't seem to me that these industries are hoarding labour.

2. We're seeing a sectoral shift to more productive sectors where hires seem long term. For example, the self-employed sector, typically made up of less productive low-wage earners in Canada, shrunk in the last two months as entrepreneurs joined other sectors.

3. The fabric of Canada, small and medium size enterprises (SME's), can sustain an economic downturn as cost burdens drop while incentives improve. SME's have reported their biggest burdens to be insurance premiums, less youth in the labour force, and the inability to find cheap part-time labour. Well, they must be cheering then. First, insurance is more favourable. Second, StatsCan says “full-time growth for youth was strong in October (+36,000)...” Third, downward pressure on wages will be a boon. Fourth, SME's have reported not being affected by external fluctuations, such as fluctuations in international trade. The businesses tied to external fluctuations (manufacturing) have already been cutting labour. In short, SME's are doing the hiring, and they're doing well.

5. Overall, firms are in a strong position. TD analysts in September:

One of the main reasons for this aggregate strength is that relative to previous periods of economic slack, the balance sheets of Canadian firms are extremely healthy and the level of operating profits remains near the record high set in the fourth quarter of 2005. As a result, the vast majority of firms are in a much better position to weather this economic downturn without resorting to layoffs or job cuts.

In sum, surely a small drop in labour can be expected (eg. in the construction industry), but not to the extent predicted in the next quarter or two. The problem is, if I'm right, and businesses aren't hoarding labour, why else would job growth be so out of whack with GDP growth? A new job growth equilibrium?

Anyone who regularly reads this blog knows that I break promises. I say I'll return to a subject and then I leave it for dead. I'll be coming back to this one when November's employment figures come out though. I promise.

Income trusts, optimism, AIC

2006-11-01T09:45:00.000-04:00

This morning I blogged about the recently announced tax on income trusts. I've since been out running and a thought hit me that I can't shake from my mind.

I don't know much about investment or mutual funds, but optimism really does pay off some times. At least it did for Michael Lee-Chin of AIC, a mutal fund firm.

I remembered reading that Lee-Chin decided to avoid high yielding income trusts. This stumped me at the time. Bloomberg reported: “AIC plans to stick with its holding in Loblaw, Canada's biggest grocery chain, even after the stock dropped 30 percent in the past year....AIC also plans to keep its shares in Amvescap, the London- based owner of the Aim and Invesco mutual funds. The stock has lost more than 60 percent of its value in six years.”

His optimism served him well. I guess he wasn't enjoying himself too much though, because he stepped down as CEO of AIC shortly after. Here's Bloomberg's original file from Oct. 6.

Slapping a tax on income trusts

2006-11-01T08:28:00.000-04:00

Surprise! Income trusts will be taxed. Minister of Finance Jim Flaherty made the announcement yesterday of a phase-in over four years. The plan includes an attempt to soften the blow to seniors by offering a tax break. Details on the MoF web site.

The economic benefits of income trusts that I explored in a previous post aren't popular with many, but this announcement is a surprise all the same.

Some individuals felt that the trusts were a Trojan horse for corporate tax cuts. Well, in a small way they are. The Liberal government previously dropped taxes on corporate dividends to entice individuals away from income trusts and into stocks. Now the Conservative government is coupling its tax on income trusts with the announcement of a ½ per cent drop in corporate tax in 2011.

Obviously some poor suckers felt that income trusts had a future.

From Reuters:

One of the largest Canadian trusts, CI Financial Income Fund (CIX_u.TO: Quote, Profile, Research), savaged the surprise move.
"This is the most bizarre, Third-World policy that I could imagine," CEO Bill Holland told Reuters. "It doesn't even make sense to me -- how can they keep changing the rules?"

----
“I think this is a huge, huge surprise. Huge. I don't think they consulted with anyone," said Calgary lawyer John Brussa, considered the father of the income trust format.
"To do this seems quite troubling, and for a government that's supposed to be encouraging of business. This arbitrary action is not very conducive to business. This is going to cost a bunch of people a lot of money tomorrow."

I'm not going to try to predict what will happen at the bell, but I highly recommend that the loudspeakers play the beautiful 'Funerarius for Michael Wise Esquire' by Orlando Addleston, as can currently be heard on the NPR web site.

Some facts from Reuters:

- More than 220 income funds are now listed on the Toronto Stock Exchange and TSX Venture Exchange, with a total market capitalization of about C$200 billion ($180 billion).
- More than one million Canadians own units in income funds and several million more invest in income trusts through their mutual funds.
- Large institutional investors, such as the Canada Pension Plan and Ontario Teachers' Pension Plan Board, invest in income trusts on behalf of their clients.

'Thousands seek Alberta jobs at St. John's fair'

2006-10-31T09:36:00.000-04:00

I don't have time to comment on this, but I wanted to share the most exciting news I've stumbled across in a while.

From the CBC:

Thousands of job seekers packed into a modest St. John's hotel Monday, overwhelming Alberta employers who had come east on a recruiting mission. Prospective employees lined up for hours outside the Capital hotel on Kenmount Road, with cars parked along the nearby Team Gushue Highway. Inside, employers said they were deluged with resumes.
"It's been like a zoo," said Dominic House, a recruiter with oil giant Syncrude, whose
perks included a $20,000 moving bonus to Fort McMurray and two months of free
housing.
"They're lined up all around the building and up on top of the hill. It's absolutely amazing."
Estimates of attendance ran as high as 5,000.

Now that's good news (with no subsidies required, I might add). I'm looking forward to seeing how this evolves.

How to win the lottery

2006-10-31T09:18:00.000-04:00

I have a dream. It starts with a job in the service industry, and it ends with a sophisticated drink on a stretch of beach. Apparently a suspicious number of retailers and clerks are winning lotteries in Ontario.

Excerpt from the CBC:

The Fifth Estate reported that retailers in Ontario won large prizes nearly 200 times in the past seven years. There are roughly 60,000 lottery ticket sellers in Ontario.
A University of Toronto statistician, who crunched the numbers for the television show, said the chance of retailers winning that often is "about one chance in a trillion, trillion, trillion, trillion," and estimated the number of wins should be closer to 57.

Ha! How do you like them statistics? As ombudsman André Marin is quoted as saying, perhaps the lottery is not so much a game of luck as it is a game of trust.

Oil profits and the binary equation

2006-10-30T08:35:00.000-04:00

Should Alberta emulate Norway?

It's been said that no two OECD regions are as comparable as Alberta and Norway. A week ago, Globe and Mail correspondent Doug Saunders forwarded the idea that Alberta should look to Norway for ideas on what to do with its oil profits (subscription required).

Doug reports that Norway's politicians are in disagreement. They're debating whether to save (so that future generations can enjoy today's oil profits), or whether to invest in infrastructure. Those are the two big choices at the table, says Doug. Currently, Norway's government is saving heavily. Should Alberta emulate Norway?

Norway and Alberta share many attributes, but a couple things strike me about Norway: its investment into R&D and its investment in human capital. I've read three articles on the Norway-Alberta comparison lately, none of which give lip service to R&D or investment into human capital. What's going on?

I was eager to gain Doug's insight, since he's sojourning in Norway right now and knows more about this than I do. Here's his response:

I hope I didn't create the impression that this is a strictly binary equation. This is the impression that Norway's political parties, particularly the far-right Progress Party, are trying to create. But even they are not talking about spending all the oil revenue. Quite the contrary: they'd raise the spend-it-now level from the current average of 4 per cent per year to some higher level -- maybe 15 or 20 per cent. This is fiscally unsound in an economy that has 2.5 per cent unemployment and a very overheated currency, but it's what they want.

On the other hand, the left-wing coalition government isn't just investing it internationally. A lot of it does end up spent on things like R&D. Norway is actually a success story, by Northern European standards, in this area. It has superb research universities, and a high-tech economy that is doing extremely well. I've seen figures that show Norway's R&D investment to be among the highest in Europe. Now, there are areas for improvement: People say that it's very hard to start a small business, and that the benefits tend to flow to larger firms (a Europe-wide problem).

But Alberta certainly could learn from Norway in the area you mention: It could use some of its money to create top-class universities. Norway has the highest rate of university-degree completion in Europe (and probably in the world), and the world's highest educational attainment in general. This certainly helps during economic bust times: People are educated enough to find employment elsewhere or to start companies. It's a model worth emulating.

Surely the public realizes the benefit of returns to R&D and human capital just as well as Doug does, but there's no harm in repeating the fact that Alberta's options extend far beyond any spend-vs-save 'binary equation' would suggest. I wish this notion would arise more in mainstream discussions.

Back next week!

2006-10-24T10:27:00.000-03:00

I received some very nice emails since I announced my break from blogging. I don't know where you all came from, but I'm convinced that none of the messages I received are the product of a prank (although, my friends are certainly of the type...) . Thank you kindly.

I thought it was only fair that I post a quick note: I'll be back next week. Please return!
I am not about to pull a Captain Oates.*

* Note to those who don't subscribe to Quote of The Day for whatever bizarre reason: Captain Lawrence Oates' last words were, "I am just going outside and may be some time." Oates never came back.

Hiatus

2006-10-20T07:37:00.000-03:00

This blog is going on a bit of a hiatus. My schedule has become more hectic and I'm finding it a challenge to throw anything creative or interesting up here. Until that changes, there won't be any new content here. Thanks to everyone who reads this blog.

The economics of blogging

2006-10-19T09:25:00.000-03:00

What is the worth of a hobbyists' blog? The benefits derived from such a blog seem to be related mostly to utility. The cost, one might argue, is the productivity that would otherwise be created if the blogger weren't blogging.

First, there are a billion ways that blogging could raise an individual's utility. Ben Casnocha does a fantastic job expressing one such way (h/t Marginal Revolution).

...I recently had a great solo dinner in Rome. I had a terrific companion (newspaper) and good food. About 1/4 of the way through this thought crossed my mind: "This is an awesome meal. I'm going to blog it." I did. I was committed in my mind to making it a positive night overall, and it did end up that way. In sum: when I know I'm going to blog an experience, I'm committed to making it a positive experience, and since intention and reaction mostly define the quality of an experience, it usually turns out positive. True, I could always commit to having positive days each day, but knowing I will blog something introduces a weird form of "public accountability.

For whatever reason, blogging satisfies an individual's demands when no substitutes exist. Blogging raises my utility because it helps me connect my work life with my school life in the least damaging environment. My work requires me to do cursory research on current events, while my studies require me to gain a rigorous understanding of economic principles and theory. In my experience, the two don't often welcome each other. In the blogosphere I can force principle and practice to unite, which gives me the satisfactory feeling that I'm in control of my own learning experience outside of the institutions I belong to.

What are the costs associated with blogging? The nonpecuniary cost of maintaining a blog can be reasonable when the opportunity cost is small. Ninety per cent of the posts on this blog are written during the thirty minutes or so that it takes me to cool off from a morning run. In the time I spend blogging, few things in the world are better companions than my laptop, my coffee and my Shreddies (none of these things will hold my sweat and smell against me). When the opportunity cost is low to reasonable, a blogger needn't necessarily be an unproductive member of society.

Also, the nonpecuniary cost can also be affordable when the effort that it takes to produce a blog is reasonable. The effort extended to maintain this blog is (for the most part) already sunk. Since 80 per cent of the content on this blog involves material that I've researched or learned about for work or school, the marginal cost of producing each post is mostly just the effort that it takes me to reflect on what I have already read, heard, seen or studied.

While the benefits to blogging might not outweigh the costs for everyone, the net result is surely highly dependent on the blogger. This is an interesting area that I wish would be explored more. Questions lurking in my mind: Why do the Japanese have the highest propensity to blog? Further, why do Americans have a higher propensity to blog than Canadians? Is the net cost significant?

A case for income trusts

2006-10-17T09:52:00.000-03:00

When BCE joined Telus in its decision to convert to income trusts, people became skeptical, including Marc Lee over at the REP blog. Marc invited his readers come up with reasons why income trusts might have economic benefits. I couldn't resist taking the bait.

In defence of income trusts:

1. Income trusts allow firms to maximize profits because they encourage the convergence of objectives held by management and ownership. In other words, income trusts increase the likelihood that management will act as profit maximizers rather than risk averse agents.

This point hadn't occurred to me until I came across it in The Globe and Mail.

What started as a way for small companies to cut their tax bills has become something else — a tool for shareholders to reclaim some of the discretion that once belonged almost exclusively to CEOs and directors, and at the same time address one of their deepest concerns: a lack of faith in corporate executives to spend their excess cash wisely.
Trust conversions, in other words, may come to represent one of the biggest power shifts between investors and management that Canada has witnessed in a generation.

2. This point is related to the last. As management begins to make profit-maximizing decisions, the nation as a whole should benefit. Productivity and returns should be expected to increase over time.

3. Detractors of income trusts argue that income trusts will erode the tax base. Perhaps this concern is inflated, considering that the majority of provinces are currently running a surplus.

4. Income trusts have offered an attractive payout to investors and also to the securities industry. Canadians investing in income trusts are bringing in a nice profit. Large firms simply are not the only ones profiting.

5. Evidence from The Bank of Canada shows that income trusts may enhance financial market completeness "by providing diversification benefits to investors and a source of financing to firms that might not otherwise have had access to markets.” Although the BoC suggests that income trusts are not without faults (eg. liability and lack of transparency), their report implies that these problems can be corrected.

The bottom line is that Canadian firms are feeling over-taxed and income trusts are the upshot of this. To be honest, I still haven't completely formed an opinion; however, I don't think the benefits I've cited are really so minor. I'm not ready to write off income trusts just yet.

Efficiency vs. Equity: Maine and NB

2006-10-15T10:31:00.000-03:00

As reported in The Globe and Mail last week, and addressed by Greg Mankiw earlier, two economists have published a paper that compares the extraordinary employment gap between Maine and New Brunswick.

If you provide very generous unemployment insurance, you may end up with more long-term unemployment. That's what economists Peter Kuhn and Chris Riddell find when they compare the long-term impact of a highly generous unemployment insurance (UI) program in the Canadian province of New Brunswick with the more modest UI program in the neighboring state of Maine. In Maine's northernmost countries, about 6.1 percent of employed men worked fewer than 26 weeks (half a year) in 1990. Across the Saint Croix River in New Brunswick, the comparative figure was more than three times as high, 20.8 percent. The more-generous UI program in New Brunswick accounts for about two-thirds of this difference, the authors estimate.

The central message from this study is difficult to argue with: the design of a UI program has a major affect on disincentives to work. It's easy enough to question whether Riddell and Kuhn held all the right factors constant (political and social institutions, taxing policies, nature of industries etc etc). I won't address these here. Further, for the most part, many such concerns seem to be unimportant to the undeniably strong central message.

I have just two comments.

The first is in response to the comments expressed on Greg Mankiw's blog. Several people forwarded the opinion that there is a trade off between equity and efficiency. This annoys me.

A well-designed UI program that promotes efficiency and productivity is promoting equity. Equity has many definitions, but my favorite is this: “a career of hard and responsible work should earn a higher pension than one of slacking or routine casual work.” Thus, equity, according to my favorite definition, encourages efficiency if we assume that individuals are rational and would prefer to earn a higher wage.

In relation to Riddell and Kuhn's findings, I would argue that even a well-designed UI program is destined to produce a poor efficiency and equity outcome in an economically challenged region like N.B. If we accept Okun's Law, it takes 2.5% points of growth above the trend growth rate (which, in N.B., averages 2.25 per cent in the annual real rate over the past five years up to 2005) to lower unemployment by one per cent. With this in mind, efficiency and equity without the promotion of migration is a high goal to set. I don't see how 35,000 unemployed in a labour force of 385,000 in an inviable province signals otherwise. Can equity be achieved in New Brunswick? Well, not through endless ill-efficient subsidization. In sum, the efficiency-equity tradeoff has little grounds.

My second point is this: to what extent does path dependency have an affect on the figures that Riddell and Kuhn arrive at? To explore path dependency, consider the ways that the unproductiveness of the New Brunswick labour force is self-perpetuating. For example, in the time period that members of the New Brunswick labour force are unemployed, their unproductiveness is increasing. Further, the attractiveness of New Brunswick to businesses seeking to establish themselves is decreasing. What is the effect? If such historic trends matter, it must be the case that the 2.5 percentage points of growth necessary (above a declining trend growth rate to put a damper on unemployment by one percentage) is facing upward pressure. How can this not be the case when employment is drastically subsidized, the labour force is decreasing, and the ratio of unemployed to employed is increasing?

A third and a fourth point have popped into mind, but I'll exercise will power and pursue something more productive. This is such a rich subject that I could rant on it forever (at the full risk of contributing nothing new, I might add).

Random observations

2006-10-13T19:51:00.000-03:00

There's a heated debate going on right now at Wikipedia. No one can agree on a definition for “Classical Liberalism.” Further, they can't agree on whether to merge Liberalism with Classical Liberalism. Here's a sample:

I'm leaving Classic Liberalism separate just in case the socialists try and destroy Classical Liberalism like they did the liberalism page. - Gibby

Why those rotten socialists. I know, vandalism of the Wiki is a disgrace to the commons, but this is an interesting episode.

Second random observation:

Everyone in economics circles has by now read half a dozen articles about Edmund Phelps winning the Nobel Prize in Economics. This gives me the excuse to move off the topic of economics and point to a splendid post by Ars Mathematica about the Nobel Prize in Physics.

Canada-Chile FTA: 'Discouraging?'

2006-10-12T13:07:00.000-03:00

Is the The Canada-Chile Free Trade Agreement (CCFTA) a flop? Christina Campbell, a contributor to Canadian Business magazine, says the CCFTA “has some discouraging lessons to offer would-be bilateralists.”

Detractors of the CCFTA have their reasons. Some focus on the fact that exports haven't received a major boost since the agreement was signed. Others say that Chile's collection of bi-lateral agreements makes the CCFTA meaningless, or that Chile simply isn't large of an economy to make an impact on Canada.

Others say the treaty meets its objective. This is a minority view in the CB article (although, for what it's worth, I have a suspicion that a technical glitch is preventing readers from viewing the final portion of the on-line article).

Christina Campbell, Canadian Business magazine:

If there are voices in favour of the CCFTA, they speak toward the guarantees the accord provides to Canada's investments in Chile, particularly in the mining sector. "It eliminates a lot of the uncertainty that would otherwise be there," says Scotiabank's James Callahan, who also heads the Chile-Canada Chamber of Commerce. The turbulence of Chilean politics--starting with the leftist Allende regime of the early 1970s that nationalized many foreign companies, followed by the unsavoury Pinochet military dictatorship--left lasting uncertainties about the country's dependability. Dymond says concerns about Canadian mining investments ($6 billion at last count) were the real motivation behind the CCFTA. "It's not really a trade agreement at all," he says. "It's an investment agreement."

"The success story of FTA is in investment," says Sylvain Fabi. According to him, Canadian investments in Chile have nearly doubled since the CCFTA was introduced. Fabi still holds out hope for Canadian exports. "We believe the agreement is still underused," he says. "We still have work to do in conveying to Canadian business the opportunities in Chile." To help foster this trade, embellishments to the agreement are still taking place. A chapter on government procurement is waiting to be ratified and discussions have started on a financial services agreement.

According to DFAIT's Web site, “investment has increased to a total of $5.69 billion, making Canada the third-largest investor in Chile.” I wonder if this figure speaks for Canada's motives.

Another argument is that the “failure” of the CCFTA in the trade arena could really be a reflection of a strong dollar and other economic conditions.

I'll admit to not knowing a lot about the historic success and failure of Canada's bilateral agreements, but the Chile-Canada example seems to say a couple things. First, the impact of a bilateral agreement isn't simple to isolate. Second, if Chile's lack of demand for Canadian exports is really a disappointment, perhaps our expectations were too high. What did we expect?

Mental 'backward screening algorithms'

2006-10-11T09:00:00.000-03:00

I once asked a diligent news editor how he organizes his information. He gestured his hand across a seemingly unkempt office with bountiful stacks of papers and, worse yet, stacked open books (The poor spines! Doesn't he know a book cannot live without one!). “This is how,” he said (unembarrassed, I might add). There must be a better way.

I'm always interested in learning how others organize their information. How does an individual read all of those papers, blog entries, news articles, etc etc, and remember them three months later? The substance is easily left to be forgotten when it holds nothing of great significance to the reader, but then there always arises some piece of knowledge that would fit oh so nicely with that tidbit from three months prior! If only it can be remembered, and then found!

Yuejing shares her method:

...build a "tree structure" of knowledge, i.e. first divide all material into some parts, then further divide each parts into subsections, blablabla, until reach the small enough part to give out the details. This is actually a "multi-split" knowledge tree.
I found that if I could organize my knowledge in such a tree structure, basically I understand the whole material. If the knowledge in my head is still piece by piece, then even if I understand it when I study it, I'll definitely get lost some time after. It is so important to see the link between different pieces of knowledge rather than the details, since you'll never remember every detail but you have to preserve a good knowledge structure in your brain so that whenever you study something new, you can do a "backward screening algorithm" to link this piece of knowledge on your general knowledge tree.

It seems so simple, yet so thoughtful and useful.

Demographic shifts & education

2006-10-08T16:10:00.000-03:00

The Toronto Star reports (no link):

More than half of Canadians - and more than 60 per cent of Ontarians - believe immigration is the biggest issue affecting the education system today, a new poll finds.
The poll, conducted in August for The Learning Partnership as part of its demographic study, also found that one in five Canadians believe rural-to-urban migration is also affecting public education.

Random fact of interest: Don Drummond, TD economist, is head of The Learning Partnership steering committee.

Here are a couple excerpts from the group's recent report, The Changing Face of Canada’s Public Education System :

At the Learning Partnership, we believe that major demographic shifts occurring in our society pose challenges and opportunities for the public education system. Those changes are occurring in the areas of immigration, aboriginal population growth, and rural/urban migration. The ethnic, cultural, linguistic and socio-economic characteristics of our students are changing, in many parts of the country.

Other countries are also experiencing demographic changes, and the results have in some cases torn the fabric of those societies. This spring, we watched cars burn and disenfranchised young people riot in the streets of Paris, in part over proposals to cut back on the social contract France has with its citizens. In Germany and Japan, two developed countries with aging populations and less expansive immigration policies than Canada, there is growing concern that immigrants are marginalized and disenfranchised. Here in Canada, the crisis in the Middle East sparked an outcry over what it means to be a Canadian, as some voices questioned the costs and the responsibility of our government to rescue dual citizens from war-torn Lebanon. In Caledonia, Ontario a community is rupturing along racial lines as residents line up over the issue of land claims and property rights. In more remote communities, far from the headlines, aboriginal young people continue to face an epidemic of poverty with suicide and unemployment rates that dwarf the national average.

* * * *

A 2002 study for Human Resources Development Canada concluded that women, visible minorities, Aboriginals and people with disabilities make up more than 50 percent of Canada’s skilled population. (Close to 80 percent of all immigrants to Canada are visible minorities). But many of these groups face barriers that keep them out of the labour market, or under-utilize their skills. The cost to Canada of those barriers is between $72 billion and $236 billion a year: the equivalent of six to 20 percent of our Gross Domestic Product. A recent University of Toronto Rotman School of Business study states that Canada would have an additional 75 billion dollars a year for important programs if the US/Canada productivity gap could be closed.

The low down

2006-10-07T17:43:00.000-03:00

Given the shoddy job that I did on a couple exams last week, these images make me feel at least a tad less depressed, even if they're fake. Poor Peter (h/t Statistical Modeling, Causal Inference and Social Science).

Rubin et al on stocks (Rated 'G')

2006-10-07T08:16:00.000-03:00

Jeff Rubin, chief economist at CIBC, has been said to be half entertainer, half economist. What I was personally told is, “He's a walking circus.” Given the partial transcript of The Toronto CFA Society's annual forecasting dinner, I conclude that he at least has color.

The National Post says, “Here is a transcript of the highlights, edited for space and to remove jibes and insults.” No jibes?!! Bullocks, daddio. I did a search for jibes, ludity etc etc, to no avail. The transcript may be clean, but it's still an interesting read.

The speakers quoted below are Ralph Acampora, managing director of Knight Equity Markets in New Jersey; Bruce Campbell, chief executive and chief investment officer of Pyrford International PLC in London; Jeff Rubin, chief economist and strategist at CIBC WM.

Excerpt from The National Post:

Q: On the general direction for the stock market?

Acampora: I think in the next 12 months it's going to be a major rotational theme. I think commodities in general peaked a while ago. I think they're going to be under pressure, money comes out of those sectors of the market and goes into things like large-cap blue-chip stocks: healthcare, technology, telecommunications, stocks like At&T.

Campbell: Down.

Rubin: There's only two issues out there. Is the U.S. housing market going to have contagion effects ... and the second issue is, if the U.S. economy does blow up, is it going to bring down the global economy and by implication commodity prices and I would argue the Fed is going to do whatever it takes to limit the contagion effect and the U.S. economy, unlike the 1990s is no longer driving the global economic bus and sure as hell isn't driving the global economy.

Q: Biggest contrarian call for 12 months' time?

Campbell: Gold at US$999, if not sooner.

Rubin: Oil will set new record highs in
2007.

Acampora: Crude has a very sharp decline that most people are not expecting ... to US$40-US$45.

Q: Speaking of oil?

Rubin: Reality is yes, we are getting new increases in supply but when we're drilling 35,000 feet in the Gulf of Mexico or we're schlepping a tonne of sand to get a barrel of oil the supply curve is a little bit different. I think we're going to see oil prices continue to rise. The only obstacle in the face of higher oil prices is a global recession, and I don't see that on the horizon.

Campbell: Despite having a sneaking regard for what Jeff said, I'm not bullish on the price of oil at all in the next 12 months. A significant U.S. recession might be reasonable odds on. If there's a significant U.S. recession it will take three or four million barrels off the table, but if we don't see a significant U.S. recession we could easily see the price of oil back at US$70.

Acampora: I believe equities lead the commodities and I want to challenge anybody to answer why are most drilling stocks reaching monthly lows, multi-lows and large oil companies like Conoco-Phillips breaking down in price? I think it's a harbinger, at least on a short-term basis, at least for six months, there will be pressure on crude.

Q: On metals?

Campbell: Unlike oil, I can't see any reason at all for metal prices in aggregate to rise. There's been far too much leverage and speculation in the metals and it's unwinding.

Rubin: When you look ... China is 160% of world copper consumption ...

Acampora: Jeff everybody knows that.

Rubin: You Americans think it's all about [you] but that's BS because exports to the U.S. from China are the grand total of 8% of its GDP. Last year China produced 6.5 million motor vehicles, not one single motor vehicle was exported to the United States. What we have here is that we are guilty of a very Americentric view of the world. We think that China's rapid growth of 10-12% is all about supplying customers in Little Rock, Arkansas. And that just ain't where it's at. It's not trade-linked to the U.S.; it's exploding domestic demand.
Acampora (deadpan): If it wasn't for the U.S. consumer, the world would stop.

I have to step in and say that Rubin has lost me here. I don't think it's any secret that trade between China and the U.S. is unbalanced. There's nothing “Americentric” about the fact that U.S. consumption is monstrous. Moving on...

Q: If there's so many risks out there, including the U.S. current account deficit and housing, why are stocks going up?
Campbell: Well, they shouldn't be should they? Stocks are actually overvalued.
Rubin: What you talk about as value investing, I regard as fluff. Last year, the energy index was up 61% and if you were overweight energy you beat the market and if you were underweight energy you lost to the market. I wasn't in favour of energy stocks because of the management at Imperial Oil or Canadian oil sands or Suncor. Management is irrelevant. I look at commodities. You get the commodities price right you can have all kinds of management. As far as the long run versus the short run, I think Lord Keynes had the best comment about the long run -- in the long run we're all dead. The long run is a continuum of short runs, you get the short runs right the long runs will look after
themselves.

Q: Worried about hedge funds?

Campbell: It is a concern to us. Our office is in hedge fund alley, Mayfair London, where they open a 100 a week and close a 100 a week. If you ever want cheap furniture you just wander around the streets. There's a lot of stuff going on ... that we can't quantify and there will be some major financial accidents in the next few years ... and it will be tough to bail out the financial system when it happens.

Q: Best money-making idea for the next year?

Acampora: Oracle, AT&T, Qwest, Baxter Healthcare.

Campbell: Boring old large caps. A gold-mining stock in Australia called Newcrest.

Rubin: I believe uranium oxide will be at US$70 per pound and if certain companies would stop hedging the next 200 years of production I might make some money. But I think we are looking at a renaissance of nuclear power around the world. No. 2 would be oil if you can separate natural gas from oil (Suncor, Canadian Oil Sands.) and the financial sector [on expectations of interest rate cuts].

Wages rise fastest in non-oil sectors

2006-10-06T19:39:00.000-03:00

Could the energy sector be responsible for an increase in the median wage in Alberta? Maybe not. At least, it's not directly responsible for average wage gains in the province, according to a report by Steve Chan, a TD Bank economist. Nurses, farm hands and hydro workers have benefited more, says Chan.

From The Financial Post (sorry there is no on-line link; I'm subscribed to a database):

TD bank report: Alberta's oilsands the catalyst for a boom in other fields in province, By Jacqueline Thorpe (4 October):
"It's a perfect inverse relationship," said Steve Chan, economist at TD. "Wage gains have been the slowest where employment is growing the fastest and fastest where employment is the slowest."
Alberta's overall labour market has been on fire, with cumulative gains over the 2002-2006 period totalling 17.4%. That compares with just 10% for the rest of Canada.That rise took Alberta's average hourly wage to $20.99 in the second quarter, catapulting it to to first place as the province with the highest wages from third only four years ago.With the boom being driven by the oil, gas and commodities sectors, many would expect wage gains in the so-called "rainmaker" natural resource sector to be outstripping all others. But this is not the case.
Wages for oilsands workers and miners have skyrocketed by a massive 42% or $6.80 an hour since the boom -- vastly outpacing the rainmaker industry average -- but wages in the natural resource sector overall, where employment has risen 39.4%, have gone up only 4.7%.Wages in industries that are direct beneficiaries of the rainmakers -- construction, manufacturing, building and professional services, etc., -- meanwhile, have risen 16.3%. Jobs growth here has been a more modest 12.9%.Wages for indirect beneficiaries such as agriculture, utilities, educational services, health care and social assistance where employment has expanded only 10.2%, have risen the most, experiencing a 20.1% gain over the period.
Mr. Chan said it was a classic case of demand outstripping supply. Rainmakers already offer the most competitive of all wages -- on average $25.50 per hour in the second quarter -- so workers gravitate there.Other sectors have to fight for a diminished pool of workers, so they have to raise pay more substantially. In addition, with money flowing into provincial coffers, the government has had the wherewithal to increase wages for public sector workers.
"With respect to wages, the strength in Alberta's resource sector has been a tide that lifts all boats," Mr. Chan added.

Sectorial relations and labour productivity

2006-10-05T20:27:00.000-03:00

In previous posts (here and here) I've contemplated whether sectorial industry shifts have been more favourable to the median wage in Canada than in the U.S. Perhaps this idea is worth considering further. In fact, it seems like sectorial shifts are often ignored as a possible reason for the difference in the median wage between the two countries.

Case in point: a paper recently released by StatsCan (h/t Brian Ferguson in the comments section of this blog; link via the excellent Worthwhile Canadian Initiative) has isolated the manufacturing sector in an attempt to determine the contributions to labour productivity in Canada in the 1990's. The authors of Competition, Firm Turnover and Productivity Growth conclude: “the competitive process that shifts market share towards more productive firms accounted for about two thirds of aggregate labour productivity growth in Canadian manufacturing from 1989 to 1999.”

Here is my comment (this is a slightly edited version of what I wrote in the comments section of this blog, but I'll repost it here in the hopes of gaining some feedback from others):

One thing that I'm caught up on is how the StatsCan authors isolated the manufacturing sector.

Their argument seems straightforward: increased competition between firms in the manufacturing sector led to reorganization by more efficient means and labour productivity increased. At the same time, incumbant firms were forced to reorganize themselves to attract increased market shares - this is considered another source or increased labour productivity caused by between-firm competition.

However, the authors also briefly address sector-to-sector shifts:
About 45% of firms that were in operation in 1999 are new firms that entered the manufacturing sector during the period 1989 to 1999. These entering firms account for 34% of output and 39% of employment. Most firms that enter the manufacturing sector are greenfield entrants, accounting for 37% of the firms. But their shares in total output and employment are smaller than the shares of merger entrants as greenfield entrants are much smaller than merger entrants.

The authors imply that merger entrants coming from outside the manufacturing sector accounted for a source of labour productivity growth. If so, I can't help but wonder to what degree vertical integration between sectors is a contribution to labour productivity growth through increased profit shares. Yet the authors ignore this possibility in their decomposition. How do they justify this?

In our decomposition, we assume that greenfield entrants replace close-down exits and merger entrants replace divestiture exits.

I wonder if the decomposition in this paper over-emphasizes the impact of turnover by ignoring the change in profit shares earned from emerging sector-to-sector relations (such as vertical integration).

Spontaneous order, self interest and Adam Smith

2006-10-03T09:04:00.000-03:00

In my last post I wrote about spontaneous order and the role that nature plays in creating spontaneous order. I'd like to revisit this because I overlooked an interesting insight.

I previously cited a comparison of the Japanese psyche and the American psyche from a study conducted by a sociologist. From my last post:

...the vast sample of Japanese who participated in her research over a period of years appeared to have lost their childhood memories at an earlier age than the Americans in her study. The reason, speculated the sociologist, could be that Japanese adults were brought up less self-absorbed and less introspective.

The sociologist's use of the term “self-absorption” is not only not as crude as it might seem, but it runs parallel to a theory that Adam Smith developed on the subject of human nature and free markets. Of course, Smith used the term “self-interest.” “Self-interest” should be distinguished from “selfishness,” but is perhaps close cousin to “self-absorbed.” Smith said it was a necessary (but not sufficient) condition for a successful free market system.

From The Wealth of Nations:

Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.

After citing the example of the Japanese-American psyche, I asked in my last post how a cause and effect relationship can be defined in this context. Perhaps I can answer my own question now. The cause is self-interest (which is found in nature), and the effects include the predomination and relative success of capitalism in America, and (perhaps) the recollection of childhood! Perhaps memories and capitalism can both be considered the product of “spontaneous order”!

Spontaneous order in economics

2006-10-02T09:38:00.000-03:00

I've been thinking lately about the organization, structure and evolution of economic systems, so I was excited to see the excellent conversation that came to life on the HES (History of Economics Societies) mailing list. Diana Weinert, a PhD student, has put forth an invitation for examples of "vast spontaneous order." She cites Leonard Read's essay I, Pencil, and Adam Smith's example of a woolen coat.

Spontaneous order is an engaging subject, but how can one tackle it when the definition of dis-organization is so flexible? Further, why do we care to make the distinction between spontaneous order and centralization?

Humberto Barreto, in his response to Weinert, does an excellent job articulating why decentralized systems are of interest to us. He also points out that patterns shouldn't be confused with centralization.

Here's part of his reply:

I think we do have a predisposition to be more impressed by decentralized systems than hierarchical ones. A marching band that spells out the school's name is not that interesting since we know the individuals have practiced and practiced under the direct control of the band director. A flock of geese flying in a V is much more interesting than the marching band because there's no head goose. The spontaneous order, the pattern that is the V, is, as Smith said, "an end which was no part of his intention." You have to admit that figuring out why there is a pattern without top-down control is a mighty appealing question. Plus, add to that the fact that many people will deny that a decentralized system could work at all, while others will confuse any decentralized system as automatically generating a pattern and you've got grist for the mill for pretty much 'til the end of time.

Another example, which Michael Perelman posits, is an orchestra that plays without a conductor. I won't quote his amusing comment on this blog, but it's worth reading.

Perhaps it's trivial of me, but I can't help but wonder if Weinert could add clarity to her project if she focussed on nature, including human nature. Nature, I would argue, is an aggregation of spontaneous order. Through this aggregation, organized systems are formed. In an attempt to make my reasoning clearer, here's an example using human nature:

A few years ago I heard a sociologist share some interesting insights about the psychology of a Japanese individual versus that of an American. Not only do I forget her name, but I forget the exact details of the study. Ironically enough, her research was on the subject of memories. Anyway, the vast sample of Japanese individuals who participated in her research over a period of years appeared to have lost their childhood memories at an earlier age than the Americans in her study. American teens and adults could recall events which happened to them at an earlier age than the Japanese. The reason, speculated the sociologist, could be that Japanese adults were brought up less self-absorbed and less introspective.

What is the cause and what is the effect? Are the Japanese by nature different than Americans? If so, has human nature been responsible for the differences in the heuristic methods between each country? I might do well to put an end to my uneducated speculating here and instead invite the opinion of one of the most engaging profs I've ever had: a professor of environmental philosophy.

Anyway, this is an interesting area. I truly hope Weinhert keeps HES informed with the results of her project!

Back to the productivity puzzle!

2006-10-01T19:48:00.000-03:00

I've just noticed that Tyler Cowan quoted me on Marginal Revolution, one of my favorite blogs! Thanks Prof Ferguson and happyjuggler0 for the kudos over there!

Previously, on this blog and on Mark Thoma's blog, I expressed the idea that the wage/productivity discrepancy between Canada and the U.S. could have something to do with the different make-up of the industries in each country. Here was my response to Mark Thoma's post, which Tyler chose to quote:

Positive net employment change in Canada is most concentrated in the high-paying
energy sector in Alberta. A great proportion of the jobs being created demand high-skilled workers. I wonder how much of the discrepancy in median incomes between Canada and the US can be explained by the increase in job creation in Canada's energy sector relative to the type of job creation occurring in the US. Entry-level workers in BC and Alberta are getting paid big bucks.

Tyler adds:

Might the United States have experienced sectoral shifts which are unfavorable for median wages but favorable for wages at the upper ends of the distribution? Another factor is that rising health care costs in the U.S. are absorbed into benefit costs but in Canada these costs are socialized to greater degree. In any case economists have yet to get to the bottom of this mystery...

Tyler is the first not to dismiss my idea! But, I'll admit, the more I think about it, the more I feel that rising health care costs are the greatest culprit. Anyway, it was interesting to see that Tyler entertained my idea.

This is an aside, but once every week or two I decide to quit blogging (I wasn't entirely saddened when my blog completely vanished this weekend); however, it always picks me up when I discover feedback, good or bad, from others. Thanks to those who email me and post to this blog!

Holy smokes

2006-09-29T21:59:00.000-03:00

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

2006-09-27T08:48:00.000-03:00

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

2006-09-23T09:04:00.000-03:00

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.

2006-09-20T08:21:00.000-03:00

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

2006-09-20T08:12:00.000-03:00

“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

2006-09-19T07:41:00.000-03:00

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?

2006-09-18T08:27:00.000-03:00

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

2006-09-17T18:16:00.000-03:00

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

2006-09-17T08:53:00.000-03:00

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

2006-09-16T09:30:00.000-03:00

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

2006-09-14T09:04:00.000-03:00

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

2006-09-13T18:34:00.000-03:00

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

2006-09-08T11:14:00.000-03:00

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

2006-09-07T09:34:00.000-03:00

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?

2006-09-04T13:53:00.000-03:00

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?

2006-09-03T12:32:00.000-03:00

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

2006-09-02T21:22:00.000-03:00

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

2006-09-01T19:00:00.000-03:00

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.

Tampering with FDI

2006-08-30T09:54:00.000-03:00

When it comes to the effects of foreign direct investment (FDI), Canada's policy makers have been an indecisive bunch. Our fickle policy stance has been a reflection of that. Surely this comes at a cost.

From The Globe and Mail (28 August), “Bernier backs bureaucrats on foreign investment”:

...Some Canadians view almost any foreign takeover as bad for Canada. Mel Hurtig, a publisher and noted economic nationalist, said foreign investment is almost always a purchase of an existing business, not an investment that creates a new operation. In the past two decades, he said, Investment Canada has reviewed $620.7-billion in foreign investment and that 97.1 per cent of that involved acquisitions. "Foreign investment is not good for us,” Mr. Hurtig maintains.

I'm of course making an example of an extreme view. Hurtig sees FDI as zero-sum and fails to recognize the ambiguous effects of FDI. Hurtig, who argues that FDI is invariably bad, is not alone with his view; however, surely he is the minority among economists. Still, this doesn't stop the media from pandering to them.

The point remains: over the years, policy makers have been indecisive about the effects of FDI. Canada's irresolute policy stance is a reflection of that. Never mind the inherent costs associated with FDI, surely a nation's indecisiveness comes at a cost, too.

Lucie Laliberte, “Globalization and Canada's International Investment Position,” Canadian Economic Observer (1993):

The Foreign Investment Review Agency (FIRA) was created in 1974 to screen new
foreign investment and to review foreign acquisitions of existing assets. This was followed in 1980 by the National Energy Program, which, among other things, also monitored the extent of foreign control in the energy industry. The foreign control ratio dropped dramatically from a peak of 36% at the end of 1971 to 23% at the end of 1986, largely through Canadian takeovers of foreign controlled companies. In 1985, Investment Canada was set up with the mandate of promoting, among other things, [FDI] in Canada. Subsequently, the foreign control ratio rose to 28% at the end of 1991. The recent gain in foreign control was widespread in non-financial industries except for two sectors (food, beverage and tobacco; electrical and electronic products) where foreign control declined.

Another paper points out, “Canada agreed to stop imposing performance requirements, such as requiring an investor to export a certain amount of goods, and) beginning in 1992, to stop screening U.S. direct acquisitions of Canadian assets of less than C$150 million (in constant 1992 Canadian dollars).”

The actions that Canada undertook (to allow FDI, and later to prevent FDI, and even later to promote FDI ...) occurred all the while that economic conditions varied (eg – changes in the exchange rate regime, increases in efficiency, changes to tariff structures). This makes the impact of FDI in Canada all the more difficult to account for. This only adds to the uncertainty about the merits of FDI.

One thing we can assume is that tampering with FDI policy (for example, performance requirements), is not a good thing. Never mind the costs associated with FDI in itself, it's surely not unreasonable to hypothesize that all of the potential volatility caused by Canada's indecisiveness could possibly be more costly. If the benefits of FDI are relatively greater in the long run, stylized fact would lead us to believe that turning the FDI tap on and off will damper the benefits the nation could reap. Studies have shown that with the proper performance requirements in place (when necessary, such as in certain cases in the mining industry) the benefits of FDI in Canada generally outweigh the costs (such as the loss of control of domestic policy) in the long run.

We can't agree on the merits of FDI, but surely Hurtig would agree that inconsistency hurts.

Capturing commodity prices

2006-08-29T12:45:00.000-03:00

Yesterday Pierre Duguay, Deputy Governor of the Bank of Canada (BoC), gave a speech to the Canadian Association for Business Economics in Kingston.

He offered a (too short) introduction to the new model that the BoC uses (named ToTEM) to study how changes in terms of trade and the subsequent economic adjustment affect the economy. Duguay explains that the uniqueness of ToTEM is that it incorporates a separate commodity sector. He promises the BoC will issue a paper on the subject this fall. Until then, here is what he had to offer on the subject:

In contrast to the Bank's previous model, which treated economic activity as a single aggregate, ToTEM—which stands for Terms of Trade Economic Model—makes explicit the distinction between raw materials or commodities, and manufactured goods. This distinction is crucial for two reasons. First, commodity production represents a sizable proportion, some 11 per cent, of Canadian GDP, and commodity exports account for nearly 45 per cent of the dollar value of our total exports. Second, the commodity sector and the manufacturing sector are characterized by different technologies and different competitive structures, which have important implications for the behaviour of inflation.
For instance, the production of commodities is more capital-intensive and more price-inelastic than the production of other goods and services. Moreover, commodity prices are set in world markets, whereas manufactured goods are subject to product differentiation and to a greater degree of price-setting influence by firms.
In ToTEM, the key driver of consumer prices is the marginal cost of producing consumer goods. Consumer goods are produced using four inputs: labour, capital, an imported intermediate good, and commodities. In this framework, the marginal cost can be expressed as a function of labour costs (including the costs of hiring and training), as well as the price of imported intermediate goods, the price of commodity inputs, the price of investment goods, and the rate of capacity utilization.
ToTEM is a clear improvement over the previous model in its ability to capture the response of the Canadian economy and the Canadian dollar to changes in commodity prices. That's all I'll say about ToTEM for now. But this fall we'll be publishing an article in the Bank of Canada Review that will discuss this new model in some detail.

Yesterday's state-owned oil, today's debt

2006-08-28T09:45:00.000-03:00

The Economist recently highlighted the problems of state-owned oil firms, namely how they influence prices and supply, and “...are prone to over-staffing, underinvestment, political interference and corruption.” From The Economist (August 12-18) “Oil's Dark Secret: National Oil Companies [NOC's]” (subscription req'd):

Few of the princes, politicians and strongmen who wield ultimate authority over these firms can resist the urge to meddle. At best, this leads to the sort of inefficiencies found at most state-owned firms: overstaffing and underinvestment. At worst, the business of pumping and selling oil is entirely subsumed by politics. In ither case, national oil companies produce less oil, more expensively, than they should.

The Economist may as well have been criticizing Canada for its fiasco with Petro-Canada, an experiment of the '70's in which we still have a debt to show for. Instead, the article gave Venezuela centre stage and spared Canada. We didn't deserve that. Not when more than 20 per cent of Canada's national debt is attributable to what we still owe for Petro-Canada, as reported by Neil Reynolds (“Petrocan debt has taxpayer over a barrel,” The Globe and Mail: Aug. 25 -- $ subscription req'd).
Here are some excerpts from Reynold's piece:

How much did Canadians pay for Petro-Canada? David L. Yager, a Calgary oil field service industry executive, asks it in a different way. How much are we now paying? The federal government sold its last Petrocan shares a couple of years ago, and you may have thought that we had finished with this sorry 1970s experiment in state-owned oil companies. Not so.
We sold off the assets for less than we paid, then kept all the debt. By Mr. Yager's calculations, a detailed spreadsheet that covers 25 years, we now owe $80-billion for Petrocan — more than 20 per cent of the national debt. At 5-per-cent interest, we're paying $4-billion a year for an enterprise we don't own. This is slightly less than we pay for national defence; slightly more than we spend for foreign aid.
***
Liberal prime minister Pierre Trudeau established Petrocan in 1975. In its first direct acquisition, the company paid $342.4-million for Atlantic Richfield (1976). It paid $1.4-billion for Pacific Petroleum (1979) and $1.4-billion for Petrofina (1981). It paid $347.6-million for Gulf's upstream assets (1982) and $1.8-billion for Gulf's downstream assets (1985). Along the way, it accumulated 10,000 people on the payroll, twice as many as it needed. Although oil prices collapsed in the mid-eighties, Petrocan kept spending. As Mr. Yager observed: “With its move into refining and retailing, Petro-Canada's original mission (security of supply) was forgotten. The new marketing slogan was ‘It's Ours.'
***
We'll never know the entire public investment but it had certainly exceeded $6-billion when Conservative prime minister Brian Mulroney put the company on a path to privatization.
For his calculations, Mr. Yager made two assumptions — that the funds for Petrocan's acquisitions were borrowed (and remained borrowed) and that the debt compounded in the normal way. He used the current value of the money in the years in which it was borrowed, then expressed the accumulated debt in 2005 dollars. He used the Bank of Canada rate (on each successive Jan. 1) plus one percentage point to determine interest charges. On the gargantuan balance, he says: “We'll continue to pay interest on this debt all of our lives. Rest assured that it is ours.”