Pace Stats Can, annual labour productivity was up 1.4% for 2010 which was a level not seen since 2005. In the Canadian context that makes the latest release noteworthy. Sad really. Even more so given the bulk of the gains in the last quarter came from retail which means productivity was not driven by investment but rather by good old fashioned labour sweating or what Marx called absolute surplus vale extraction.
Canadian capitalism same as it ever was.
Last odd thought before sleep. What if we think of investment as a lifetime investment function akin to the lifetime incomes hypothesis? How would that change the standard view on corporate income tax and investment rates?
Let us assume that investment is a constant function of output. Thus investment today is a function of long term output growth in each sector. This fits the facts: in Canada manufacturing investment is pretty stable around 4 and 5.5 % of output over the last thirty years. Let us also assume that investment is not directly related to profits. This also fits the facts as investment as a percent of profits is highly volatile and negative. What then accounts for the fluctuation in investment rates as a percent of output?
If as I have above that investment is a near constant of output then we might be tempted to write:
I = A + q * 1-Y
Where I is investment, A is a fixed independent part (the amount that needs to be invested to maintain medium run growth rates) q is a proportional share of un-anticipated output growth (Y) for the sector.
This tells us a couple of things. Investment decisions today are determined by commitments made at t-1 and the actual level of output growth realized from those investments. So if present realized output levels are higher then expected investment levels increase, if lower than expectations they decrease.
This is a nice formulation because it actually gives a material explanation to investment rates with respect to output and anticipations.
But what does all this have to do with corporate taxes. Quite a bit. Given capital depreciations allowances, corporations can write-off investment in plant and equipment and as such their decision to invest in expanding production is only tenuously related to tax rates. What however will induce corporations to invest is an exogenous increase in demand for the sectors output given by q * 1-Y.
Within limits, corporate tax rates are therefore of little consequence on investment decisions.
Update to conclusion: If CIT cuts permanently increased demand then they would lead to a permanent increase in investment.
Warning this post contains scenes of graphic illustration, it is not intended for short attention spans or people who can not locate coordinates in two dimensional space. Viewer patience is therefore highly advised.
The debate on corporate income taxes brings out a really nice teachable moment in that it provides an occasion to clarify the terrain of past present and likely future debates on macroeconomic policy. In what follows I will hew closely to the standard story, but what I intend to show is that even within the terms of the conventional collective memory there is an important contradiction that helps clarify what the real debate over corporate cuts ought to be about. Let me see if I can deliver.
The conventional account of history runs something like this. By the 1970s and early 80s unions had become too strong, unemployment insurance and welfare programs too generous and together they produced highly distorting macroeconomic outcomes: high unemployment, high inflation and low output (referred to at the time as stagflation). Let me just accept this account for argument sake because I think it represents the story in the back of the head of most policy makers and economists over forty. Let us represent this conventional story by line A in the diagram below. Notice the oscillating line around A. That represents the economic cycle. From the vantage point of policy makers and economists over forty the problem with the Keynesians is that they were preoccupied with stabilizing those oscillations when they should have been preoccupied with moving the economy towards line B. Line B represents an equilibrium in which both employment creation and output proceed in a balanced manner.
Point Y represents the bad equilibrium that Keynesians were unwittingly fixated. In their drive to stabilize the macro economy via employment they gave short thrift to output and thus created an inflationary environment which produced increasing high levels of unemployment, low levels of output and high levels of inflation. In time policy makers and economists shifted their attention away from cyclical stabilisation to structural change . That is, from attempting to smooth the oscillations around line A to moving the macroeconomic trajectory from line A to B.
Notice that point Y does not entail a lower level of employment but rather a higher level of output. And this was what was so seductive about the supply side arguments of that time. What they in fact said was that it was possible to maintain employment and increase output provided the appropriate structural reforms were undertaken. Everybody and I mean everybody wanted lower inflation and higher employment. And in the face of stagflation the punters got onside and away we went.
My argument is simply this. After the largely successful attack on trade unions was accomplished, after the reform of both welfare and unemployment insurance programs were completed and within the context of free trade and capital mobility the real impact of he structural changes was to move the economy to line C point Z. That is to say, even granting neoliberalism was not some radical attempt to reconfigure income and wealth distribution between economic classes the structural reforms were more successful than its antagonists imagined and thus instead of landing on trajectory B point Y we landed on trajectory C, point Z.
When therefore there is the call to cut corporate income taxes it explicitly assumes that the Canadian economy is still stuck on trajectory A point X. But if in fact we are on trajectory C, point Z; we are thus in fact stuck at a bad equilibrium. The move to further juice up output without a commitment to juice up employment is like the Keynesians of yore trying to smooth the oscillations around a bad equilibrium. But this time around it is employment which is lacking not output capacity.
What does this have to do with corporate tax cuts? Corporate income tax cuts are suppose to be a stimulus to increase the output capacity of the Canadian economy over the medium to long term. But if as is widely recognized output is not the problem but employment why are we even talking about supply side measures (i,e. corporate tax cuts)?
I think economists are still fighting the last war and not the war we are in. And as any historian of war will tell you an army that does so will loose.
Update: this is not as radical an idea as it may appear: see this article in the business section of the Globe online. The difference with Canada is that I think are debt growth is papering over the underlying bad equilibrium.
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.
Relentlessly Progressive Political Economy 