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?

Exploding the Myth of the Total Quality Toyota

The FT has an article which details union concerns that Toyota was sacrificing quality for price competitiveness. This is not in of itself news: it is a constant of the conditions of capitalist production that cost is weighed against quality and market share. What is interesting is that Toyotism has largely been described as a managerial philosophy where among other contradictions the tension between quality of build and price competitiveness need not exist. Of course the hype was always just that hype. Most forms of managerialism which portaray themselves as resolving fundamental contradictions simply serve to repress them only to find them surfacing in other forms, places and times. Worth a look.

Why increasing tuition fees is not the solution to adequately funding university education in Quebec

Quebec need not go down the same ideological road to policy making as English Canada. It is quite nearly always the same plaint: low tuition = low quality university education. With the implicit or explicit always being higher tuition = high quality university education. Indeed this is the form that Lucien Bouchard’s recent pronouncement on tuition fees takes. It is reported that Mr. Bouchard opined:

“Quebec universities are dangerously underfunded compared with those in Canada and North America.…. These precarious finances have now reached a critical stage. If nothing is done, it is students themselves who will suffer first. And surely, inevitably, so will all of Quebec society.”

Pretty ominous stuff. Luckily I have had the pleasure of teaching in universities from British Columbia to Ontario and now Quebec. And luckily, or unfortunately, I was in each province both as a student and then as a professor. So I can attest to the before and after of tuition hikes (well not yet in Quebec). Here is what I observed. While the need for tuition increases was always cloaked in the garb of quality education it has rarely resulted in higher quality university education. In both the cases of British Columbia and Ontario I observed the following:

(1) There was not an increase in professorial pay beyond the CPI (although some funds were made available to attract Stars).

(2) There was not a decrease in class sizes. They either remained the same or were scaled up so that the professor to student ratio was decreased; that is, more students per professor. And this has been at all levels from the bachelors through to the Ph.D.

(3) There was not an increase in the number of tenured faculty. In fact tuition increases were accompanied by an increase in a reliance on sessional faculty. And this is directly related quality. Sessionals get paid much less than their tenured counter-parts they must therefore take on a greater teaching load to make up for the difference; often teaching at two and sometimes different universities during the same semester. How much time do you think they can spend on quality education? Couple this with the increase in class sizes and the picture is less than high definition quality.

(4) Nor did I notice an increase in expenditure on support staff. The consequence of which is that for both students and faculty the level of administrative services is approaching that of Rogers or Bell: that is one level above Kafkaesque.

Nowhere in Mr. Bouchard’s comments was there any indication of what he meant by quality of education save for some vague reference to competitiveness. My suspicion is that what he really was talking about is a move towards greater cost recovery via user fees. That is, he thinks Quebec should be moving towards full cost recovery of the expense of running universities through raising tuition fees. That this much is a standard liberal economists preference is beyond doubt. Indeed, they have been the protagonists of this position across English Canada. And I have no doubt there is a cavalcade of liberal economists earning publicly subsidised salaries ready to throw in on Mr. Bouchard’s side.

Yet that Mr. Bouchard is little confused is evident by the fact that full cost recovery is predicated on the idea that the value of a post-secondary education accrues solely to the individual student (that is education is a private good) and not at all to society in general. Oddly at the same time he wants to maintain that the underfunding of Quebec universities, owing to low tuition, will eventually cost Quebec society in general (re-read the quote above). Either education is a public good with significant benefits flowing to society from an increase in the average age of the citizenry or it is private good in which the individual student captures most or all of the benefits. Mr. Bouchard wants it to be both. This is indeed a circle that is hard to square, although Bob Rae made a valiant effort at such double speak in his commission into tuition fees in Ontario.

Let us however leave the question as to the quality of higher education and the question over its public and private goods nature to one side. Let us assume all benefits of higher education solely accrue to the individual student. Let us further concede that university thus ought to be self financing: i.e., total cost recovery. There still remains the question of how to raise the money to do this.

Mr. Bouchard’s preference is apparently for front end financing a.k.a. tuition increases. But can this position be justified within the framework of a private goods approach to higher education. Normally yes. But the problem is that in Quebec and in the English Canada university education was previously heavily subsidised by the general citizen regardless of whether or not they went to university.

Let us Assume Mr. Bouchard gets his way and the liberals raise tuition next year three fold. On what basis, that is sense of justice, should it be that those who received their university degree this year and years past not be subject to any cost recovery? That is, if I received my degree three years ago I have the benefit of a high subsidy but those graduating three years from now must absorb a much higher percentage of the cost of their higher education. Simply put, I received a benefit the next generation of students will not. There is simply no way to justify this generational inequality of treatment.

However if the cost of higher education were to be financed through higher marginal tax rates then this disparity could be fully mitigated through a general tax increase on professional incomes (say above 70,000). To simply increase tuition amounts to an inter-temporal (intergenerational) transfer of wealth. Using the progressive tax system however would ensure that those who most benefit(ed) from a university education pay a proportionate share.

This also has two added benefits. First, those students who choose to go into lower paying professional jobs like k-12 education, social services, etc., are not unduly burdened by student debt. And second that the prospect of arduous student debt does not deter those from lower income families from pursuing higher education. Well it may be true well targeted bursaries for lower income families could ameliorate this problem to some degree. However in practice the calculation of lower income is not so easily defined and when coupled with the first point the raft of bursary programs necessary to compensate is unduly complex when compared to the relatively simple instrument of progressive marginal tax rates. That Mr. Bouchard has only thought the matter through to the extent of increasing tuition rates suggests that he, like the liberal economists he appears to be taking his crib notes from, is unduly burdened by a simplistic ideology when what is really called for is a pragmatic and realistic approach to policy making.

If we take both of these points together we can conclude that the demand for higher tuition fees has little to do with higher quality post-secondary education and everything to do with cost recovery. This being the case it stands to reason that all the generations which benefited from a higher education degree should shoulder the burden and not just the future crop of university students.

Quebec need not go down the same ideological road to policy making as English Canada.

Lunacy on Loonie spreads to the Department of Finance via the Bank of Canada

At some point we are going to have to throw in the towel and conclude that there is a concerted effort to promulgate the noble lie.  It was one thing when the business press argued that the BOC faced technical limits to their capacity to retrench the value of the Canadian dollar, and yet another thing when almost every commercial bank economists pushed the same fallacy.  But now no less than the BOC and the Department of Finance, respectively incarnate in Carney and Flaherty, are pushing the same argument.  The FP reports:

Bank of Canada Governor Mark Carney said on Tuesday that foreign exchange intervention did not usually work without complementary policy moves.

“I agree with what the governor of the bank said yesterday …. that it is a limited tool,” Mr. Flaherty told reporters.

At least Carney was smart enough to add the vague qualification “complimentary policy moves.”  Flaherty of course stripped it down to the most elegant version of the Nobel Lie.  For those looking for further detail about why it is simply not true that the BOC is constrained in its capacity to devalue the dollar go over to worthwhile Canadian and read the series of posts on this subject.

So I am curious why would the BOC who most definitely knows what Worthwhile Canadian knows be misleading the public?  The only thing I can come up with (because I do not assume people are dumb) is that the neither the BOC nor the Canadian government has any interest in a policy that would be largely regarded as one of competitive devaluation.  So instead of fight the policy issue out in public on its merits they are attempting to smother it under a “technically not feasible” argument.  That is, they are doing what the BOC always does.  Depoliticize and dispense .

The most noble lie

Today’s Big Question

Today’s big question is will bond holders take an equity stake in GM or risk a severe hair cut in bankruptcy court. I have no particular experience in Corporate US bankruptcy law so I am hard pressed to see the angles. It strikes me though that given the union has already accepted a swap and the Government the Bond holders are in a precarious state as the major principles have agreed to make the swap. Yet in this ideological climate where the non-governmental financial sector in the US has a huge sense of entitlement and there still exists tremendous ideological support for a certain noblesse oblige in official quarters when it comes to private finance I just can’t come to good sense of what the bondholders know that the rest of us don’t.

Canadians have a particular interest in all this because both the feds and the provinces have stepped in to provide financial support and the unions at Chrysler in any event are posed to take it on the chin. I personally find a debt for equity swap appealing; or in the case of workers a concessions for equity alternative more appealing than the gun of bankruptcy court.

It does beg the question, from a strategic point of view, if the CAW would not be smart to be making a concessions for equity play so that in the event that Chrysler did end up in bankruptcy they would appear to have already been willing to take on the risk and cast the bondholders in a dim light.

In some corners workers taking equity stakes in a context in which they do not enjoy control is a sticky wicket. I am sympathetic to this position, but I think with a little savvy they could play their equity stakes for bigger control. And the sticky wicket argument assumes that if workers take a stake they end up over-identifying with the company and its future viability as a capitalist enterprise and thereby internalise the boss’ voice in their head. That is likely true, but they do so independent of an equity stake in times such as these. So the real question becomes are auto workers capable of running a car company? I think the answer is yes and further I think they are capable of running better car companies than management. Line workers in tandem with engineers could do incredible things from better product design to better assembly design.

There is the argument to be made that when workers take the step towards managing themselves they take a step towards managing their economy.  And I can’t help but think that workers with better sense of how things work at each stage of finance production and distribution would be a useful paliative to today’s malaise and the glib attitude of our ruling class.

Perhaps a more aggressive stance around the bargaining table would enhance the opportunities for workers self control and direction. Perhaps not…but that is the really big question for today.

Open Thread: Unemployment and Fiscal Policy

Harper: Global Canadian Financial Domination

Remember back before the “there will be no recession or deficit” election when Harper mused about the excellent buying opportunities?  Well he thinks he finally found them. .. err well for Canadian banks that is.  The PM’s latest bout of market savvy was reported in the FT:

Canada’s banks should capitalise on the relative strength of their balance sheets by acquiring assets in the US and other countries, Stephen Harper, Canada’s prime minister, told the Financial Times on Monday….

Mr Harper indicated Canada’s banks could lead an eventual charge toward consolidation, and said he would support such efforts as “an opportunity for Canada to expand its role in the world financial sector”.

“I’m not going to try running banks, but I hope our banks will see this as an opportunity to build the brand – the country’s brand, their own brand – and to expand their scope and profitability over time,” Mr Harper said.

That’s the ticket!  An over bloated financial sector in Canada.  Just the kind of globally stretched, politically corrosive on the body politic, economic crap producing juggernaut that Canada needs as the cornerstone of its economy going forward.

Because it turned out to be such an impressive success for the UK and the US right?

I particularly like the line: “I am not going to try running banks.”   Buddy,  if you can not imagine running a bank why do you imagine you can run a country?

Who is this pie-eyed chruch mouse and why is he our PM?

The Sword of Damocles hangs over their head

Well they may not use the word but they are on the train to, de-facto, doing so. Nationalization of the Big American banks. Discuss amongst yourselves.

Back to Reality: Conservatives already in Ideological Bind

Drowned out by the federal election was the news that the Conservatives were planning to further backstop the banks by extending the initial offer to buy 25 billion in mortgages to 255 billion.  In their attempt to avoid the obvious ideological contradiction of having to nationalize the Canadian banks, or the mortgage market, the expansion of the program is now being painted as a necessary evil brought about by the unintended consequences of government bail-outs in other national jurisdictions: The Flaherty explained the situation thus:

Finance Minister Jim Flaherty indicated yesterday he would be willing to offer more support for Canadian banks in order to ensure they remain on a level playing field with rivals around the world.

“In Canada, we will continue to work in a co-ordinated fashion with our G7 partners and take appropriate actions to support our financial system, including whatever steps are necessary to ensure that Canada’s financial system is not put at a competitive disadvantage,” Mr. Flaherty said in a statement following weekend meetings with other G7 finance ministers.

He added that the government is prepared to take “appropriate action to avoid unintended consequences from policy measures by other countries that would put wholesale borrowing in Canada at a competitive disadvantage.”  Globe and Mail

This just increases the ideological bind for the conservatives.  Here is why.  At first they painted the initial 25 billion dollar partial nationalization of the mortgage market as a way to provide Canadian banks with access to liquidity.  A partial nationalization in the furtherance of financial stability.  Not an ideal ideological position to be in but hey these are hardly ideal times.  Not to mention that the Canadian business press refused to call the plan what it was: a scheme to partially nationalize of the mortgage market.

But, and here is the important point, with bailout plan mark II (225 billion) the conservatives are justifying the plan not under the guise of liquidity but rather framing it as a necessary evil to keep Canadian Banks COMPETITIVE  in the face of subsidies by other national jurisdictions.  That is they are selling it under the rubric of the protection of the Canadian financial sector’s competitive advantage.  In effect a direct subsidy to improve the competitiveness of Canadian Banks.  Now if I am sitting in the auto sector why I am I not going to ask for help?    The US auto sector just got a huge “loan” from congress why shouldn’t autos in Canada get the same help.  Or, for that matter, any other sector where it can be demonstrably shown that in other national jurisdictions those same sectors are getting support.

This ideological bind is going to play itself out in this parliament.  How can the cons promise 225 billion worth of support to the banking sector and not others?  They are now in a damned if they do and damned if they do not bind.

Welcome to governing in tough ideological times.