Disparate Models, Desperate Measures: The Convergence of Limits ∗

This chapter was originally written back in 2003 and published in 2005 in the volume edited by David Coates (god father to a Miliband son I think) Varieties of Capitalism, Varieties of Approaches.  The data contained inter alia is by now stale in one sense.  However in another sense the document holds up for its time and place in the early Anglo-American debates on neoliberalism.  The trends I analyzed–rising income inequality, reduced welfare state effort, eroding quality and conditions of work, and a secular decline in productivity growth–across the rich OECD zone regardless of which model of capitalism was being pursued were in fact, as I noted at the time, secular trends.  At the time, 2003, most academics still had their heads in the ground about inequality and the punitive dynamics of neoliberal labour market policies.   Indeed the  hegemony of neoliberalism was so complete at that time most social democratic intellectuals refused or were incapable of acknowledging the state of affairs.  Even worse many were actively crafting and implementing neoliberal policies.

In the above sense I think the chapter still holds up.  Moreover, it also holds up in terms of its main hypothesis that the advanced capitalist zone, despite being populated by nation states with very different institutions and public policy regimes, was producing increasingly poor outcomes for workers and citizens. For A version of the chapter “Disparate Models, Desperate Measures: The Convergence of Limits,” leave a comment to request the document.

∗This article was originally published in David Coates (ed.) Varieties of Capitalism, Varieties of Approaches. New York: Palgrave Macmillan, (2005). The version of the article reproduced herein may be reproduced on a not for profit basis subject to the GNU Free Documentation License and provided proper citation is provided.

Should Ontario Become an Independent Country?

Ok just forget how crazy the question sounds.  The recent wrangling between Ontario and Alberta over the value of the Canadian dollar, oil output and the decline of manufacturing in Ontario (and other provinces east of Ontario) raises some reasonable questions about the Canadian monetary and fiscal union, aka the Confederation of Canada, aka, British North America, aka Canada.

Critics have long argued that the Bank of Canada’s single minded attention to price stability, i.e., inflation, and to a single policy instrument, i.e., the interest rate, was both too crude and too cruel.  Too cruel because it makes unemployment the site of dynamic economic dynamic adjustment and too crude because it is both geographically insensitive and structurally daft.

Here I will put the cruel to one side and consider the crude.  Interest rate adjustment is a crude way to attempt to manage the macro-economy.  Think about the regional dimensions.  If you exclude Western Canadian growth the beavers teeth look not nearly so sharp, or as long.  The present interest rate regime is probably too low for western Canada and too high for eastern Canada.  Suggesting that, all things being equal, the Canadian dollar is probably too high and too low.  Too low for the resource sector and too high for manufacturing.

Federal tax policy has not helped either.  The unilateral decrease in corporate income tax rates deprived the federal government of resource revenue while having little if any impact on investment in the manufacturing sector.   The west did not need a GST rebate the east did.  And to add insult to injury, the Federal government has decided to move to an austerian footing.  Again viewed through the lens of the west probably not a totally idiotic position to take (countercyclical one might say).  Viewed from the east, however, a completely counter-productive, pro-cyclical policy.

All of which raises the question if Ontario, or indeed if all of the provinces east of Manitoba, would not be better off with their own federal government and their own central bank.

O.k. time to remember how crazy the question was.  Not that crazy after all.  But it is only a sane question because macroeconomic policy (fiscal and monetary policy) is so cruel and crude.

Gordon V Jackson: the corporate tax cut myth

Apparently Stephen Gordon is having a hard time figuring out where Andrew Jackson, the chief economist for the CLC, got the bizarre idea that:

The argument for corporate income tax cuts has been that increased after-tax corporate profits would be re-invested in company operations, boosting economic growth, productivity, and jobs.

Stephen replies in the comments section:

No. That’s not the argument. At least, I’ve never heard anyone make it.

No one, ever, anywhere, has insinuated or made that argument.  Really?  To continue reading and comment click.

A rotting fruit that does not give vent to its own demand?

Given we seem to be stuck in fairly heady economic times it seems worthwhile to me to put out another post on the subject of employment, labour force growth and unemployment. In this post I am going to revisit the question of labour supply and demand and then take a closer look at the related issues of structural unemployment and the rotting skills (hysteresis) and dependency thesis  that has gained so much popularity in policy circles since mid 90s.

In a former post I mentioned the surge in labour supply during the 70s and 80s yet the graph I produced was a little underwhelming because it took a look at the underlying demographic growth of potential labour supply and not actual labour supply.  So this time I have have subtracted total labour force growth from total employment growth. Again, a positive reading indicates demand growth is outstripping supply growth and thus a decrease in the unemployment rate.  The inverse is that a negative reading says labour supply growth is greater than labour demand growth and thus leads to an increase in the unemployment rate. Here is the graph:

This is fairly sobering stuff.  The jobs boom of the 60s gave way to the deluge in the labour supply of 70s from which the employment market not to mention the welfare state has never fully recovered.  All that talk in the 90s about the need to reform UI/EI was not really about workers gaming the system it was about a welfare state that could not and would not provide the kind of insurance necessary to cover an over 70 % participation rate in which workers were more likely to be unemployed.  The graph below shows just how ugly it can get.

Clearly the deluge in the labour supply 70s had profound impact on long term unemployment which amounted not to an institutionally determined behavioural switch in workers propensity to work but rather a structural shift in the labour supply curve sans an equally profound shift in the demand curve for labour.  We know for example that for two decades, from the late 70s to late 90s, that real wages were stagnant indicating a loss in the bargaining power of Canadian workers. Yet despite the loss in wage bargaining traction, demand for labour was not forthcoming until the dot com and later housing booms of the late 90s and 2000s.  At the end of the day it was the bubble economies which finally, and fictitiously managed to work through the supply boom of the 70s.

If there is any doubt that demand for labour is the most important determinant of structural unemployment rates we need only look south to our American cousins.  In the graph below I have plotted US long term unemployment rates along side the Canadian rates.

Despite or because of higher US productivity during the 2000s the US had already begun to move towards higher levels of structural unemployment than Canada during the early 2000s something not seen since the mid 70s.  Clearly the severity of the last recession in US accounts for most of the difference in long term unemployment rates.  I have not seen any research which argues that the US has a significantly more generous unemployment insurance system than Canada.

The popular myth promulgated throughout 90s was that structural rates were high because they were high.  In the literature this is called hysteresis.  The basic idea is that the longer  a worker is unemployed the less employable they become because their skills degrade like a piece of fresh fruit on the kitchen table.  The hysteresis argument was used in turn to argue for more restricted access to EI and lower benefits to encourage workers to get back to work before their skills rotted.  This all had the air populist plausibility particularly when combined with the trend toward increasingly individualistic explanations for collective social problems in the social sciences especially economics.  But whatever the strange brew of populist folk wisdom–that workers prefer the dole to working–and academic fads the problem is, as the graph above demonstrates, high structural unemployment and hysteresis seem to magically disappear when there is strong demand for labour.  And that demand, as the graph above also suggests, is determined by the general health of the macro economy and has nothing particularly to do with the supply characteristics of labour.

To put a fine point on the argument what needs to be demanded of the purveyors of the hysteresis hypothesis is just what reversed the rotting of workers’ skills that magically made them employable after 1991-92.  Was there a steady increase in the funding of retraining programs for example?  And what about the US what was going on after 2001 did the Skills of US labour all of sudden just start rotting?

The alternative narrative to the rotting skills / lazy labour thesis is that the 70s was a period of structural realignment in which secular period of decreased GDP per capita growth set in matched by a deluge of labour supply.  The 80s and 90s were thus periods of adjustment to this new reality.  The UK the US and Canada were early supply side reformers which consciously sought to re-enforce the punitive logic of capitalist labour markets in order to assure price stability (tame inflation) and break workers bargaining power.  In other words, neoliberal macro-policy, despite protestations to the contrary, had nothing much to with solving the problem of long term and high structural rates of unemployment.  It was a feature not a glitch that the solution to that problem would have to wait until the supply side reforms delivered up their magic via a tsunami of consumer credit and control fraud serving up a ponzi economy that could approach something close to what could be called full employment.

As this report from the BLS (p.23 A-12) demonstrates long term structural unemployment has gotten worse in the US not better since 2009.  Most sober economists will concede that this has everything to do with the health of the US economy.  But it will not be long before the rotting skills thesis is floated into the stream of policy discourse as a cover for the fact that like with the financial sector the solution is to kick the problem down the road and blame the victims along the way.

*Note that Stats Can defines long term unemployment as 1 year + whereas the BLS defines it as 27 months weeks +.  By using 6 months + which conforms to the format of the data reported by the OECD I have more less deployed the BLS definition.

Towards an adult conversation about Canadian labour markets

Have you ever heard the urban legend about how such and such generation of Canadians are lazier than the past generation?  Or the One about how this generation just does not want to work and why we need to make sure EI under-insures job loss to guard against loafers taking advantage of the system?  I have.  In fact I heard that story for all of my adolescent and adult life despite the fact that I took any job that was on offer since the age of 13.  I thought myself to be a rather industrious exception to the layabout tendencies of my generation.  But like most self perceptions and ruling policy narratives it turns out it is, scientifically speaking, unadulterated bullshit.  By which I mean that that the facts neither fit my self stylized superiority  complex nor the policy meme about the need to restructure labour market institutions to deal with the pragmatics of a generation beset by a pampered recalcitrance towards work.  Again, scientifically speaking, by which I mean the facts do not fit the narrative, it is total bullshit.
Here is what the data says .  In the graph below I have plotted two metrics of the propensity to work.  The first is simply the total amount of employment divided by the total population aged 15-64.  The second is total employment divided by total population.  Notice the two series more or less track each other.  Also notice they both trend upwards.  Significance? Let us take the first metric, in 1960 around 58 percent of all Canadians between 15 and 64 were employed in paid labour markets by 2008 around 74 percent were employed.  What does that mean? It means that generationally speaking more of us work than ever before in the history of Canada in paid labour markets.  And this holds true for the second metric (line below the first plot).

Having been disabused of the usual suspects what then accounts for the increasing levels of employment insecurity since the sixties.  In short the answer is the supply of labour and the demand for labour.  Simply put supply has been increasingly outstripping demand.  Don’t believe me then look at the data.  In the graph below I have simply subtracted the growth in employment from the growth in the population between 15 and 64 years of age.  A negative reading means population growth is higher than employment growth.  Take a look at the trend line.

Canadians are supplying far more labour for hire than they ever have.  What has changed is that the economy is simply not absorbing the labour supply available.  So two questions arise.  Why are Canadians supplying so much paid labour and why can’t aggregate demand match aggregate supply?  Answers to those question will have to wait for another post but those are the serious questions.

Note: All data are from the OECD.  Click on graphs for enlarged and clear images

Canada: persistently 2nd worst in class

During the last election much was made about Canada’s relatively good performance during the last recession.  What was conveniently left out of the discussion by all political parties is just how dismal Canada’s macroeconomic performance has actually been over the last forty years including the last decade.  Below are two graphs plotting Canada’s relative macroeconomic performance on three metrics: unemployment and inflation, the so-called Misery Index (MI), and productivity. First the MI (click for enlarged and clear image).

Over the forty years Canada has ranked either the worst or second worst of the seven countries plotted in the graph above.  What is most interesting is that for the last two decades most of that dubious distinction has been earned via high unemployment rates as almost all the differences in the scores in the misery index are attributable to differences in unemployment rates as inflation rates clustered into a tight band between 0 and 3 percent.  So top marks for price stability and low marks for employment creation.  That should help to put a fine point on the topic of corporate tax cuts.

But OK you say so unemployment has been high price stability surely helped bolster Canada’s productivity.  Nope.  There the story goes from bad to pathetic.  Canada has consistently trolled the bottom of the pack.

I guess Canadian policy makers and corporates can take solace in the fact that over the last decade Germany and the Netherlands were also pancaking in terms of productivity but as I will show in later post the other two can at least claim very healthy current account surpluses and in the case of Germany a nonetheless very strong manufacturing sector.  As I will also illustrate in yet another post the bright side is that Canadian profits have been very healthy.  This too will help to put a fine point on the subject of corporate tax cuts.

UBC economist Milligan throws cake at educated, unemployed youth

I tuned into a rebroadcast of this morning’s the CBC’s the Current while cleaning the kitchen this evening which had an unusually good documentary on the problem of youth unemployment; specifically, the problem of university undergrads in finding jobs.  As someone who suffered the 90s recession in spades (really you should see my work history I can sharpen your kitchen knives and the teeth on your chainsaw to a fine edge of efficiency*) I was very much in sympathy with these newly minted baccalaureates.  Personally I pursued my education as an end in itself.  If I had become a logger full time I would a least be able to attempt to make sense of something beyond the hill.  That said I can totally understand why so many of those interviewed in the documentary felt let down: they did what they were told; they followed the path as laid out by parents, teachers and councillors; they volunteered; they studied hard and upon graduation the ambitious among them took jobs as servers.

One of the newly minted graduates arrived to a jobs fair with 40 resumes in hand, another paid a months rent to get a professionally designed CV worked-up.  All for nigh.

In any event a very sobering documentary about the problems facing the educated unemployed youth.  That was until they finally interviewed the economist Kevin Milligan from UBC.  In true Victorian form, Milligan’s bottom line was that however this documentary might tempt you to think something can be done for these wayward educated unemployed forget about it:  Denmark tried it in the eighties and it was a disaster.

Let us just forget about the fact the eighties and early nineties brought all kinds of ideas to the rocks of reality and let us similarly forget that Denmark is a small open economy (this will work in my favour below), what Milligan fails to do and what an economist ought to be able to do and suggest the form that public policy could take to ameliorate the situation.  But that is the rub, the mainstream of the profession takes a do nothing position as the default optimal policy stance with respect to unemployment.  As a nod to their objectivity I suppose I should say their glib nature is not particularly directed at the youth: if the 55+ cohort was suffering above average unemployment rates Milligan’s response would be FIF you too.

Ok so those are the preliminaries.  What Milligan fails to mention is that instead of admitting defeat Denmark learned from its mistakes and doubled down and developed a different strategy to combat youth unemployment.  This time they coupled income support with training and an integration of training with private sector demand.  In short they revamped both their retraining regime and welfare state institutions to match incentives and crucially demand.  So at the height of the down turn in 2009 the youth unemployment rate was fully 4% higher (12 vs 16) in Canada with an overall unemployment rate of 7.2 vs 8.6.  What does that mean? It means with some policy effort that both the general rate of unemployment and the youth rate of unemployment can be lower.  In short, instead of throwing cake, you can have your cake and eat it too.  Serious economists would do well to concentrate their efforts on making the world better rather then resting with lame ideological proclivities to leave it as is; and those of us who pay their salaries would be well advised to demand the same.

Cake just don’t cut it any more.

*In the abstract the sharpest blade would have a length but no width.  It would therefore be a line.

Just ask the English minimum wage laws are job killers

Rarely do we get a chance for something close to a natural experiment in the social sciences and the introduction of the national minimum wage legislation in the UK in 1999 is not one such example (no control group).  But is nonetheless an interesting case.

As everyone knows most economists (less so than before but I would guess still a majority) think that minimum wages reduce employment.  Indeed in the canonical model increasing the minimum wage decreases the demand for labour with the result being unemployment.  For anyone who has not of yet had that model force fed to them in an econ 101 class here it is in all its graphic detail.

I am not going to do the walk through.  Clearly the increase from the equilibrium wage (Ew) to the minimum wage (Mw) causes unemployment.

So much for theory lets take a look at what happened in the UK after the introduction of their first ever national minimum wage in 1999.

NMW  in the graph above is the national minimum wage laws.  Each of three plotted lines tracks a different age cohort of the labour market.  Anyway what is the take away.  For all groups unemployment decreased after the introduction of the minimum wage law.  So what do the other two vertical dashed lines represent.  S-11 is the terrorist attacks and the GFC is the attack of finance aka the great financial crisis.

Moral of the story: terrorists and bankers kill jobs  minimum wages do not.  At least not in the UK anyway.

The 1/10th of 1 Percent Solution: Corprorate Tax Cuts, Investment and Jobs

Yesterday I was consumed by the demand side (Krugman and Rowe are late to the party) today I am consumed by the headline grabbing supply siders supply sider Jack the rain-maker Mintz. The FP quotes Jack Mintz quoting Jack Mintz. In his latest research paper he says that he estimated that 100,000 new jobs will be created by an increase of 30 billion in investment over 7 years owing the decrease in CITs from 16.5 to 15%.

On its own, the final cut to corporate income tax rates, from 16.5% to 15%, would result in $30-billion in additional business investment and 102,500 new jobs over a seven-year period, the paper estimates.

For the sake of argument lets just agree with Jack (how could I disagree I can’t find his paper). What he is saying is that we need an additional 30 billion in investment to create 100,000 new jobs which means that each new job created by the private sector needs 300,000 in new investment.

Notice it will take 7 years for this to happen and that it works out to roughly 14,300 jobs per year. This pretty paltry. Sure I guess every little bit helps but 14,300 jobs is less than 1 tenth of 1 % of total employment in Canada. The price tag for these cuts according to the Department of Finance over the next 7 years is wait for it…31.8 21 billion.

In effect Mintz is arguing that all of the CIT cut will go directly to new investment and generate another 10 billion which is a fairly dubious assumption to make to say the least.

Nonetheless, the best face that can be put on CIT cuts is 1/10th of 1 percent of total employment at a cost of 21 billion over 7 years. You have to ask yourself this: if the government proposed a jobs creation scheme that would not make a dent in unemployment and would cost 3 billion a year would you not be right to point out that government was extremely inefficient or generous? That is, for the price tag, the government could create 14,300 jobs a year with a funding envelope per job at over 400000 200,000$. Read that again.

The bigger point is that right now we probably could do with some heavier lifting in terms of labour market policy. Whether this should be through direct job creation (surely we can find someone in the private or public sector that can create a job for less than 200,000$ a year) or an increase in the pool of eligible workers for EI is an open question. And a much more interesting election topic than the 1/10 th of 1 percent solution currently on offer.

PS. You might also want ask yourself which service cuts or tax increases you want to pay for a worlds most costly job creation scheme.

The Fraser Institute thinks deficits should be the cause celeb of Canadian elections. Do you?

Maybe. But it all depends on how the issue is framed. Over at the FP online Niels Veldhuis and Jason Clemens are all sweaty under the collar from working overtime on trying to convince us that slaying the deficit is the single biggest issue facing Canadians and the conservative government. In their subtly* titled comment “Cut spending now” they argue provocatively that the government must reduce the deficit to zero not some time in future but over the next two years.

A true austerity plan aimed at balancing the budget would have taken a page from former prime minister Jean Chrétien and finance minister Paul Martin’s 1995 plan. The reforms by Chrétien/Martin eliminated a deficit much larger than the current one (4.8 % of GDP compared with 2.8%), within three years.

Chrétien and Martin’s 1995 plan proposed cutting program spending by almost 9% over just two years to get a handle on federal spending. These weren’t reductions in spending growth. These were actual reductions in spending.

Even more impressive is that Chrétien and Martin outperformed their goal and reduced spending by 9.7%.

This represented a remarkable fiscal transformation that, in part, made Canada the envy of the developed world. Spending reductions, balanced budgets, and debt repayment contributed to our outstanding economic performance from 1997 to 2007.

To emulate this success, Canadians need a serious commitment to balancing the books. The sooner the government gets its fiscal house in order, the sooner it can take action to reduce taxes and improve the country’s competitiveness. To that end, Mr. Flaherty should put forth a true austerity budget that actually cuts spending to balance the budget over the next two years.

It would be sad indeed if the Fraser Institute and the National Post succeeded in making a balanced budget in two years the frame of the fiscal debate and the central issue in the upcoming election. Here is why. Scale the deficit out of GDP and the miraculous Canadian recovery does not exist. In fact without the deficits run by the provincial and federal levels of government nominal GDP would still be at Q4 2007 levels. Nothing makes the point more poignantly then a graphic.

The deficit hawks want to make the case that we are in perilous times, that immediate and austere, tough manly action is required tout de suite within the next two years to drive the governments’ fiscal houses into balance and then some.

But what about the macroeconomic balance: just where is the stellar private sector growth of +/-  3% of GDP per year over the next two years going to come from to make up for the decline in government spending?  Analysts over at Scotiabank have a nice little table in their Global Forecast Update estimate that in 2011 and 2012 that without federal deficit spending real GDP growth is going to be 0.7% of GDP and 1.5% respectively.  None of this of course takes into account what would be the real implication of a 3% reduction in aggregate demand in each of 2011 and 20012.  If there is any multiplier at all to deficit spending those forecasts would have to be adjusted even further southward.

This is not 1995, debt to GDP is lower and so too is the deficit.  Further it looks as though that it was only in Q4 2010 that the Canadian economy managed to climb back to its q3 2008 level which was only achieved by deficit spending.  And even with that deficit spending we are nowhere near back to 1995.  So why all the hand waving and warmongering over the deficit?

Much of it is a genetic trait of neo-conservatism, much of it do with the lack of originality in the Canadian conservative movement in that it seems only capable of echoing is conservative cousins south of the border, and much of it has to do with a certain amount of nearing or in retirement age sub-urban idiotic ranting myopathy.  I am not convinced they can even divine their own narrow self interest at this point.

The fact is we do not even hear the private sector clamouring for public restraint at this time.  Business knows that without government deficits into the near future revenue growth is going to be anaemic.  Sure they are protesting to keep their scheduled tax cuts but that is about who is going to pay for the stimulus not about deficits per se.

Should deficits become the cause celeb of the Canadian elections they should only be so in two ways.  Do we need to commit to higher projected deficits in the short term to get the unemployed and underemployed back to work? And who is eventually going to pay for them?

* I say subtly titled because they, unlike my undergraduate students, had the sense not to throw an exclamation mark on the end which demonstrates a little restraint on their part… so credit where credit is due. Pun intended.