Relentlessly Progressive Political Economy

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Travis Fast

I don’t really have much to say about the budget save for just a few comments and mostly about the new savings vehicle for wealthier Canadians.

On subsidies to industry.

I am totally against subsidies to industry. If companies get cash or near cash from citizens then citizens should get ownership certificates (some form of equity). No equity stake, no Steak!

On the Savings Plan.

First, I think progressives should be worried about the distribution of savings. Clearly this plan favors those with a high enough disposable income to save. In general, even if I agree that in some sense investment drives savings the question becomes for whom does it drive savings?

Second concern: I think as is implicitly argued here, that it is rather reckless to argue that stimulating effective demand which is augmented by negative savings –consumer credit– is the way to go for blue and white collar workers regardless of the link between consumption and investment. This is because the more in debt workers are, the more they have to work and the higher the level of flexibility in wages and working conditions which can itself have a deleterious effect on aggregate demand unless augmented by further consumer debt. And then around we go. This is the last twenty years of off-loading the public debt (and macro-economic stimulus) onto to the backs of workers.

Third, I am not sure how increasing the propensity of higher income earners to save helps as a hedge against a possible downturn, as high income earners are likely to have a greater propensity to consume (relative to poorer citizens) in the face of an economic slowdown. This plan could become a negative drag on effective demand. Even if the plan does not kick in until 2009, why would I not start saving money now in the expectation of making a deposit in 2009?

Fourth, and finally I can only conclude that this savings plan was an ideologically driven program with the usual distributional implications. In short more of the same, but far from just a gimmick.

I have to say that an allegedly 1 million dollar life insurance policy to a dying man is little more classy than a paper bag stuffed with cash.  Apparently not as effective though.

But then again the former were just trying to get their chance at power and the latter were trying to save the country and thereby ensure their power in perpetuity.

Here is an idea: stop voting for cats.

This note from the FT’s View of the day is worth reading.

By Carl Weinberg

Published: February 20 2008 14:36 | Last updated: February 20 2008 14:36

The Canadian dollar must be devalued, and quickly, says Carl Weinberg, chief economist at High Frequency Economics.

He points out that the currency has been pushed to record highs on the basis of anticipated oil revenues. However, he says, the windfall on oil exports – which are priced in US dollars, and thus decline in local currency terms as the “loonie” appreciates – must eventually be offset by losses on exports of manufactured goods and services.

“Those losses now exceed the windfall from oil exports, as last week’s report on Canada’s trade balance demonstrates very clearly,” Mr Weinberg says.

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By Travis Fast

Over the last couple of months one could be forgiven for thinking that the world had reverted to those heady pre 1970s days. First, the phrase market failure crept back into to the popular lexicon in the wake of the subprime meltdown; then a concert of central banks stepped in to underwrite and manage financial markets; then growth came to preoccupy central bankers over price stability; then deficit spending became not only acceptable again but was championed by the bastions of fiscal probity; and now alas, a Labour government has nationalized a major financial institution. Indeed, if one could only see the trees and not the forest it would seem as though there was decisive shift in the political economy of macroeconomic management to the left.

Such a myopic vision would however be remiss. Crucially context matters. These are neoliberal times. It is, after all, David Miliband who stalks the halls of New Labour and Whitehall–not his father Ralph. Understood correctly, the litany of events outlined above must be viewed through the lens of system maintenance and crisis attenuation. This is further down the putative «Road to Freedom» and not the  further down the«Road to Serfdom».

Plainly stated, the logic of the present invocation of deficits through to nationalization is not one of system change, but, rather, system stabilisation and crisis management. Deficits are being used to shore up the system–not to undermine its logic; low interest rates are similarly being used reinforce the price floor–not with an eye to full employment; and now nationalisation is being used to ensure that the mother of all market failures does not see the light of day—not to socialize mortgage markets (the mother of all middle-class public goods I should add).

New Labour has been an active architect of the present conjuncture. They have purged every economic lefty in their dogged determinism to be born-again. To that end, New Labour has not merely made their peace with the City and international finance but actively encouraged their deepening influence. The collapse of Northern Rock, and the consequence that would follow in train cannot be merely viewed, as Darling would have it, as the protection of the public purse, but rather, the protection of a financial system and middle England to which New Labour has been so slavishly devoted and used so well to wage its own intercene struggle against old labour.

When it dawned on Darling that he could use that great Shibboleth of the left—nationalisation—in the service of the capitalist class as whole, while wearing the mantle of guardian of the public purse, it must have given him a wry smile indeed. And with some irony it also rather confirmed Ralph Miliband’s instrumental view of the state.

On this view, the nationalisation of Northern Rock and the rest must be viewed in the sober light of continuity not change. If private shareholders want to view this as infringement on their human rights they need only console themselves with the thought that they took one for the team.  Now they know how it feels to be Red Ken and G. Galloway.

As you eat that chocolate attempting to re-kindle those exhausted desires remember that:

Valentine’s Day gifts leave a bitter taste (FT)

Labour rights campaigners will take some of the romance out of Valentine’s Day on Thursday by warning lovers that their traditional gifts of flowers and chocolates are often bought at an intolerable cost to those who produce them.

At a briefing hosted by the United Nations, they plan to highlight the suffering of farm labourers in Africa and Latin America, some of whom work in near slave conditions to supply goods to a ­predominantly western market…

As for me I have made reservations for one at a romantic restaurant where from behind a dull book I will undertake a sociological investigation of Valentines Day in Quebec City.

Overview of Labour Market Trends.

Part One: Labour Market Slack and Economic Stagnation

By Travis Fast

There is a growing confidence that the Canadian economy has in fact de-linked from the US economy. The faith that somehow the Canadian economy can avoid falling into a recession despite a recession in the US is to my mind fanciful thinking. In the wake of NAFTA a monumental rationalisation of the North American economy was undertaken which served to further integrate the three economies not insulate them from one another. As they say: only time will tell all; so for the moment let me leave the argument about de-coupling to the side.

Some analysts of the Canadian scene have posted graphs like this one:

This graph from Stephen Gordon purports to provide evidence that Canada has delinked and that the Sun will keep on shining. But the de-linking story critically hinges on the capacity of the Canadian economy to keep expanding. So let us assume that the likely path of US demand is inconsequential to Canadian prospects; and instead inquire about any endogenous barriers to growth that may serve to check Canadian economic expansion over the near term.

Asking the question from this angle turns what initially looked like an optimistic empiric (Gordon’s graph above) into a picture of pessimism. Canadian labour slack is now at an all time low measured by any metric you care to name. As Gordon’s graph clearly shows, employment rates are at an all time high (his graph goes back to just to 2000 but the numbers I have plotted go back to 1976). The problem with the employment rate is that it is deceptive insofar as it is of the most extreme unlikelihood that the employment rate would ever = 1. That is, such a metric is a bad indicator of labour slack because a reading 0.64 gives the impression that there is an abundance of labour supply yet to be had.

To capture labour slack we can only use the historical record to estimate where the likely ceiling to labour supply rests, and hence the degree of labour slack. Take a look at this graph plotting three measures of labour slack.

Click for larger image

The first being the most often cited and familiar: the unemployment rate. The next two (Slack A and Slack B) are interesting because they attempt to control for labour force participation rates—among other things– which can play havoc with unemployment numbers (that is why economists prefer the employment rate metric because it is calculated without reference to the size of the labour force as determined by the Labour Force Survey, but, rather, to the absolute potential pool of workers, that is, the Canadian population 15 years of age and over).

My two additional measures attempt to capture something slightly different. First Slack A is a simple plot of the participation rate minus the employment rate. We can think of this metric as another measure of unemployment. Slack B measures the differences between the unemployment rate and Slack A. Each of these metrics is interesting because they all have an absolute floor of zero. But the last metric is interesting because it tells us something about the relationship between employment rates, participation rates, and the historical degree of slack in the labour market. And by this metric we are at an all time low of 1.9%.

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The last two metrics tells us that labour supply has become a potential barrier to future growth. The conditions for the long boom both in the US and Canada were partially set by the massive labour reserves and subsequent traumatisation (Greenspan’s phrase) of workers expectations that built up from the early eighties until the early 90s. Those reserves have now been worked-off. As to the post-traumatic stress of worker’s who knows.

And all of this brings us to policy. What little room is left for an expansion of labour supply can only, at this point , be addressed by policies that would have had to have been adopted some time ago. Namely, a robust active labour market policy focussed on (re)training and geographic mobility. What unemployment that exists in Alberta, for example, is purely of the supply side kind, i.e., a skills mismatch and workers seeking better employment. And this is much the same story across the West. As for the East, it is true there is more labour slack than in the West, but there has already been a massive migration West. With labour markets this tight, and with much of the unemployment explained by a skills mismatch and geographic disequilibrium it is simply not likely that market forces will be sufficient to bring the quality of supply into existence nor deliver it where it is needed.

In Sum, operating at these low levels of labour slack requires robust active labour market programs alongside a robust skills planning and forecasting regime. None of which exist at either the federal or provincial levels. And all of this brings us back to the idiocy of general, non-targeted tax cuts. They do not serve to direct economic activity either towards depressed sectors and spaces or dampen activity in over-heated sectors and spaces. Coarse tuning, such as general tax and interest rate cuts, is likely going to make things worse and may actually induce a higher rate of inflation then needs be the case.

Now of course the kind of subtle fiscal and monetary policy this brief analysis suggests cannot be readily developed let alone deployed. And this is why I think it is wishful to think that the Canadian economy can continue to expand. Crucially because all that can be done in the short term is boost the number of hours individual workers are working and this too has limits, for not even an economist can assume there is more than 24 hours in a day.

Political Animal, Economic News Junkie, Cosmopolitan Kid?

We have begun to assemble a list of links to newspapers from across the globe.  Click on the news tab (top right).  If you have a link suggestion please post in the comments section and we will update the list.

Travis Fast

Ft just posted an article about Wal-Mart’s disappointing sales numbers. Same store sales only rose by 0.5%. Relatedly Cisco had some timid sales projections of its own. Taken together that means declining business investment coupled with declining consumer demand. All of this coupled with the news that the fiscal stimulus package has stalled out in the senate and that the Europeans and Japanese have no intention of opening the fiscal spigots means that the picture for global demand is gloomy.

If I were the liberals and the NDP, I would not be looking to knock the Cons out of power until after the recession migrated north. I can just see the headline: Complacent Cons Get Turfed for Dismal Macroeconomic Management.

By Travis Fast

Click here for the full audio of his speech to the Bucknell Forum.

It is quite breathtaking to listen to this speech by Cramer. He canvasses everything from Greenspan’s bubbles to the great boondoggle of ethanol through to the capital gains tax structure surrounding hedge fund managers’ salaries that in effect gives them a lower tax rate than those making 30,000$ a year. His final slam on good corporate citizenship and private governance is very good. But what does Cramer know he is no economist.

In the end he calls for basically an American social democracy premised on state enforced corporate responsibility. It is a start. And from where we sit now it would require a revolution. That my social democratic friends is what makes us comrades.

“Do not be fooled by the sirens of Laissez Faire. Be wise enough to see that government regulation is a necessary evil. To curb the viciousness and callousness of the market place which sacrifices the common good on the alter of daily profits and does so on a daily basis.” –Jim Cramer