Getting radical about Canadian debt levels and servicing facilities: Let Canadians tap on the window of the Bank of Canada

There has been some considerable ink spilled over Canadian consumer debt to income ratios (I am not providing the links; that is why god invented google). I am one of these rare (in the aggregate but not rare) Canadians which has a debt to income ration of around 70%. The down side, for both me and my creditors, is that none of it is secured. So I made an appointment with a bank representative to see if there was some way to consolidate all the different unsecured debt into a nice little package with a fixed (low) interest rate and fixed payment schedule with the agreement that I would cancel all but my banks credit card which is unencumbered. The answer was yes it is possible but the interest rate is going tobe on average higher than the different rates on all my debt. About half my debt is at 5.5% the other half at 10% and the consolidation loan was the high end of 9%. All this, in an environment in which the central bank rate is 1%.

That is an 8% spread. If the government really wants to get debt to income ratios down and does not want serious deleterious effects on aggregate demand then it should empower the BOC to offer consolidation loans at 1.5% with the proviso that they are structured over a maximum of 5 years and no consumer credit lines can be taken up by the borrower for the term of the consolidation loan. Further, to back stop against the plaint that these are unsecured, the legislation can be past that effectively secures them. Here is how: take them out of bankruptcy provisions and empower revenue Canada to pursue payments via forfeiture of all tax credits until the balance is paid in full.

So what is the benefit to Canadians? The ability to individually deleverage without killing aggregate demand. This of course is far too pragmatic so it has no chance between two hockey sticks an E and two Ls of getting traction. But it does suggest that there are still some non-revolutionary options left on the table .

Of course we could always just wait for bankruptcy provisions to solve the problem and or a long protracted period of reduced aggregate domestic demand.

David Henderson makes one good point on Canada’s budget triumph

Note, if you are pressed for time just scroll to the last paragraph for the punch-line.

Seems like everyone is picking on poor David Henderson of GMU for his working paper Canada’s budget triumph. The thrust of the paper is that Paul Martin Jr’s 1996 budget proves that through austerity you can spur economic growth. Or simply stated, that austerity = stimulus. As Stephen Gordon–and Stephen is no pinko progressive–pointed out, the paper is disingenuous in two major respects.

First, private sector employment had already recovered by 1996. And second, interest rates had fallen nearly 9% from the onset of the recession prior to the 1995-96 budget. This in and of itself probably helps explain why private sector employment had recovered prior to the 95-96 austerity budget. As Stephen also points out interest rates would fall another 500 basis points after the austerity budget to their lowest level in living memory (exaggeration but close given what counts for memory these days). The culmination of which was a massive depreciation in the CAD dollar such that Canadian exporters got a 10% boost in their competitiveness without having to lift an eyebrow. The bottom line is this: Henderson’s paper is wrong because the austerity budget came after the recovery had well begun in Canada and was further helped along by interest rate cuts and a depreciating dollar.

What Stephen does not explicitly remark on unfortunately–although he does implicitly by including public sector employment in his graph–is that the austerity budget and the cuts to the public sector contained inter alia helped keep labour markets very depressed. Indeed, it would take nearly 8 years for unemployment to drop to its post recession levels.

Paul Krugman picks up on Stephens remarks over at his blog which is fitting given that Henderson specifically tries to link the Canadian experience of 1996 to current American problems. As both Stephen and Paul point out the two simply are not amenable: private employment is not back to its pre-recession levels and the FED has no more room to reduce interest rates. It was a little disheartening that neither Stephen nor Paul chose to ask the question if the 1996 austerity budget nonetheless fit with the Canada of today. That is a more interesting question; namely, will austerity today produce the same results as it did (not) back in the mid 90s. My answer would be no for the following reasons.

Canada has been witness to a steady appreciation of its dollar. This means that much of the capacity in the manufacturing export sector is likely not coming back. To the extent that commodity exports will continue to thrive is of little importance from a labour market point of view because as pointed out in a previous post these sectors are employment lean sectors. That is, you need a 5 % increase in total value added, just to get one percent of growth in employment. So unless agriculture fishing and forestry are driving the commodity exports then resources are not going to make up for the loss of manufacturing jobs.

Second, and related to the first. Commodity markets are relatively strong (that is prices are high). This was not the case back in the 90s. Interest rates are already very low (1%) so there is not much stimulus to be gained there either and the BOC is not talking about funky QE tricks either (which probably would not work anyway). The implication on interest rates is doubly bad news for Canada. Not only is there not much room to cut rates, not much evidence to suggest it would but but there is also thus no instrument (politically viable that is) to depreciate the CDN dollar. The Canadian dollar is thus out of the stimulus picture as well.

The Canadian austerians, from the Federal government (and members of the loyal opposition), to the provincial governments, down to the op-ed pages of the Globe and Mail are busy clamouring for both tax cuts and fiscal austerity. And it looks like the corporate tax cuts are a done deal.

And this brings me to the one thing Henderson got right in his paper (pp17-19) but Stephen and Paul failed to note. Namely, Martin RAISED taxes including corporate and capital gains taxes but not personal income taxes in the 93 and 94 budgets. So I guess you can raise taxes on capital and not retard private sector employment growth. Who knew?

Carney and the likely path of inflation and interest rates

I find the notion that we are transitioning to a significantly higher interest rate regime a little unconvincing for several reasons.

First, the appreciation of the CDN dollar should have a deflationary effects. To the extent that increasing interest rates in Canada will provoke a higher FX (assuming the US remains stuck in a liquidity trap alongside a moribund political discourse surrounding budget deficits and thus near zero interest rates) there will be a 2 for 1 punch against inflationary pressures.

Second, there are several indications that China is moving towards a tighter monetary regime.

Third, the world is awash in excess capacity with the European and American consumers on the sidelines. How do you get inflation in a world where everyone is trying to either export or austere themselves back to economic health?

Fourth, on the subject of unions, workers and wage growth, there is not going to be significant wage-push component inflation in the near to medium term. The public sector (understood in its broadest sense) is being hammered; and workers in the private sector have little collective bargaining power. All of this is in the context of slack labour markets: neither bodes well for rapid consumption growth nor inflation.

So, where Carney conjures his present of near to medium-term inflation bogeyman from I do not know.

I should also say I have material reasons to WANT to believe we are headed into a higher inflation / higher interest rate regime as the performance of my pension fund depends on it. But unlike my union executive I won’t be engaging in magical thinking.

It should also be said that, at least, Carney acknowledged that growth was going to be much less robust than the Conservatives have budgeted on. That said, it makes the commitment not to commit to low rates rather odd.

It could be that Carney is trying to jaw-down the property market (bubble?). Throwing uncertainty into the likely future path of interest rates is an important part of altering home-buyer confidence.

Or it could be that Carney knows his models are junk, at this time, and his gut tells him that this is an extremely difficult market to call so he his battening-down the hatches and leaving the widest range of policy options on the table.

For further analysis see Erin Weir”s post over at the PEF

Canadian Central Bankers Past and Present: IgNoble Truths

What an odd week. David Dodge wants an adult conversation about tax levels and the quality of public services. This clearly runs afoul of the conservative meme that less is always more. But the big show- stopper had to be Carney’s remarks on Canada’s abysmal productivity record. Carney bluntly argued that the business community had been showered for some time with a pro-business, pro growth policies but had failed to deliver the goods as it were. A Globe column by Kevin Carmichael and Iain Marlow nicely captured the essence of it:

Insulting or not, Mr. Carney’s comments represent a certain frustration among policy makers who feel they have done everything the business lobby says is necessary to encourage better productivity and innovation – only to see executives sit on piles of cash and avoid the risks taken by companies in countries where productivity is higher, such as the United States.

For example, Canada’s corporate tax rates are among the lowest in the world, thanks to a near-universal acceptance on the part of federal and provincial governments in recent years that this is necessary to spur investment.

Clearly the business community is miffed because someone, and not just an anybody but a somebody, finally asked the relevant question: After a GENERATION of giving corporate Canada public policy, hand delivered on a silver tray, where pray tell, for the love of all that is profane, are the results?

Over at the Post, no surprise, Terence Corcoran, attempts to exercise the intellectual side of his brain. Inter alia he dusts off Hegel in an attempt to preserve The World Historical Spirit; aka the right of private property owners to do what they want; aka, naked capitalism (this is Corcoran’s reading of Hegel).

As for productivity, even Mr. Carney’s review of the causes of Canada’s poor performance failed to come to any clear conclusions. Maybe it’s this, maybe it’s that, maybe it’s lack of competition, too many small firms, lags in investment results, to few high-tech innovators. Even in finance, supposedly Canada’s global trump card, Canada severely lagged the United States in productivity growth. And maybe nobody has a clue.

One thing is certain, no business makes investment decisions to achieve national productivity goals set by the Bank of Canada. Even Hegel got it. In Philosophy of Right, he wrote: “Wealth, like any other mass, makes itself into a power. Accumulation of wealth takes place partly by chance, partly through the universal mode of production and distribution. Wealth is a point of attraction.” The message, perhaps, being that central banks have nothing to do with it.

Productivity as divine mystery not even as divine revelation! What a glib Hegelian Corcoran is. And what an odd twist he throws on Hegel too. Increasing wealth for Hegel, as later with his student Marx, comes along with increasing poverty. Knowing this we can appropriately re-read Corcoran’s conclusion:

Wealth and poverty are something the central bank has nothing to do with.

Self serving, de-politicizing, obfuscating clap trap.

What seems to have Corcoran so exercised is that Carney made a big mistake: he pointed out that business has not delivered productivity. That is, he politicized the issue. What Corcoran and the other ciphers of private privilege do not get is that sooner or later public officials and institutions have to provide outcomes that preserve and increase the general good. Neoliberals like Corcoran error when they think they cling to to the meme that private gain always translates into public betterment and will never be asked to pony-up. It is as if he, Corcoran, is angry that Carney betrayed the IgNobel Truth: increases in private privilege are accompanied, more often than not, by increases in private deprivation.

Stiglitz: Capitalism is Characterized by Big Bubbles and more

Stiglitz is one of the few (liberal) economists who is not suffering from a massive bought of cognitive dissonance owing to the GFC. This hour long interview with Joseph Stiglitz is well worth watching. Don’t have an hour? Then watch the first fifteen minutes.

Greek Socialists need to think BIGGER: as in too big to fail

Oh my it looks like the Greek socialists are caving to, albeit monumental, pressure. Was a time when socialists knew how to play brinkmanship. It would be nice to keep things in perspective. Greek real GDP is somewhere around 350 billion, at 12% of GDP that equals around 42 billion. But it would be a mistake for Greece to think that it was NOT too big to fail. It is, and it should act appropriately: No concessions, no-oversight, business as usual with the Greek prime minister receiving 17 million euro bonus for savvy. Indeed such savvy should be rewarded.

Is Greece going to be the Europeans’ Lehman Brothers?

See: Europe cannot afford to rescue Greece.

The Euro: A perfect case study in political economy: Krugman vs the other Gordon

One of the problems with economics is that it tends to narrowly parse its objects of inquiry. That is, it suffers from a deranged elegance: too few factors are considered and the ones that are get so rendered that they rarely resemble the original beast. It is curios in this respect that Paul Krugman should play the church mouse and Stephen Gordon the Scrooge. But hey I come from an Anabaptist tradition so what do I know. Between simply getting for free through a culture of potential heresies in the margins and a culture of perfecting the reformed holy writ something almost always creeps in.

Shit happens and in this, the Euro, Gordon is closer to the mark than Krugman.

As Gordon (Stephen not to be confused with the other venerable Gordons: different breed I gather) argues:

The euro project had much more to do with advancing the goal of promoting an ever-close political union than implementing a sensible monetary policy. As the current crisis has shown, a common currency is hard to sustain without a central government that is able to redistribute income from one region to the other. It seems to me as though the people who pushed the common currency hoped that by the time the euro was put under pressure, the central government with the necessary powers of redistribution would be in place.

I think Mr. Gordon is on to something but he does not go far enough. Both right and left in Europe feared the Euro was part of a broader project of cajoling EU countries towards a more neo-liberal policy paradigm (perhaps one which Gordon would support). The point was to force an independence between the central banks and potential or actual “political” interference (again something Gordon would probably support). Note that in Sweden the fight over the adoption of the Euro played itself out in somewhat this way. Interestingly, both the social democrats and the “bourgeois” parties wanted the Euro. The popular left did not because despite the functional independence of the SCB the popular left wanted the possibility of a bank that could be capable (if forced) of taking everything from exchange to inflation rates into consideration.

The other side of the Euro debate was the desire to make sure that the EU was not plagued by beggar-thy-neighbour monetary policy–reasonably understanding that a race to the bottom could be negative sum. And I think this is why the putative left establishment in Europe supported and continue to support the Euro.

Krugman is thus naive; the Euro was never a mere technocratic exercise designed to reduce transaction costs. Yet Gordon is equally naive for different reasons. The Euro was only in part about transaction costs and only in part about redistribution (although as Gordon notes redistribution is the spoonful of sugar that was supposed to make the medicine go down) it was also in large measure a plan to take the perceived candy jar away from the children–politically accountable national central banks.

In this regard Canadian central banking works because politically speaking it is free to rest just above whatever the FED decides. Thus this why the BOC never goes offside: it takes its cues and dues from the FED not parliament. The EC could not guarantee this unless all were brought to heel: thus the Euro.

If we had a less independent central bank in Canada I suspect Gordon would be singing a different tune.

Japan 17 years of increasing gov debt and what do you get?

Apparently not inflation nor very high real interest rates.  It strikes me that the chart below provides no safe harbour to new-Keynesians like Krugman nor old land-locked curmudgeons.

Source Data: IMF.

UPDATE: over at the PEF blog an interesting article on Japan and debt has been posted

Is there a housing bubble in the works?

Scotiabank hints at housing bubble

“Canadian house prices are rich no matter how one looks at it,” Scotia economists Derek Holt and Karen Cordes said in a report titled Is There a Canadian Housing Bubble? Of the many ways of gauging the health of a real estate market, affordability is one of the least useful because any measure that essentially compares income with mortgage payments is dependent on interest rates, Holt said Tuesday. Rates are at record lows at the moment, as the Bank of Canada’s benchmark rate sits at 0.25 per cent. Comparing current and past prices is more useful, the report says, and under that metric, Canadian housing prices are in eye-opening territory. The U.S. S&P/Case Shiller index rose 100 per cent between 2000 and its peak in mid-2006. The Canadian equivalent is up 86 per cent during the past decade. Looking at real estate on a price-to-rent perspective also suggests speculative activity, as the ratio of housing prices to how much the spaces could bring in rental income has more than doubled since 1981.