Cheap Shit Bought on Credit

Travis Fast

When I originally wrote this post I predicted that the debate on income inequality would switch to consumption (see the end of that post). As it turns out those Little Ideological Beavers (LIBs *tm) over at Chicago were already constructing the damn. See this paper. And the debate is now taking its predictable turn with even moderate lefties suckering for the line. See this blog post over at economists view for a rundown.

I do so tire of this debate. Neoliberals lost, it was predictable at the time; the left was right; the right and right moderates were wrong: now go back to defending inequality as an economic good in and of itself or if you are Clintonite/Blarite liberal prattle on about individual responsibility.

You simply can’t argue that the path of relative price differentials between luxury and mundane, cheap and quasi perishable consumer goods makes up for income inequality. First, income and consumption inequality are two separate issues. Second, if I have to buy the same good twice in a year because it is of dubious quality then my actual price is double. Third there are these uncomfortable facts: Fourth, even if we disregard the latter three points it seems absurd to argue that cheap-shit bought on credit somehow vindicates the neoliberal policy paradigm especially when we are in the middle of a consumer credit crisis.

But crisis or no crisis in the credit markets “Cheap Shit Bought on Credit” was not the political slogan of neoliberals although it is perhaps a fitting epitaph for the policy paradigm.

Con’s Savings Plan: Just another ideological gimmick?

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.

The budgetary march to perdition

By Travis Fast

It would be fun watching the Tories engage in populist public policy-making and crass electoral triangulation if it did not make for such a mash of incoherent fiscal policy. Where is the evidence that Canada needs a macroeconomic boost from cutting consumption, income and corporate taxes? And where is the proof that the boom will last forever?

Designing tax policy as a broader part of economic policy should always be guided by what problems you face now and potential problems you face in the future. In the short term Canada is growing at a solid pace with unemployment in many jurisdictions at or under full employment. Hence there is no need for a massive bout of pro-cyclical tax cuts.

At the same time the high dollar which is causing problems in the manufacturing sector and some commodity sectors (forestry for example) was nonetheless potentially set to do the dirty work of cooling some parts of the economy to free up resources for the booming parts of the economy. Whatever the long-run wisdom of this process of adjustment may be (i.e., moving resources and capacity from dynamic manufacturing and renewable resource sectors to non-renewable and highly cyclical sectors like oil, gas and construction) it nonetheless had a certain short-term logic to it. Yet this is now off the table as the government has introduced a highly simulative tax package that will surely blunt whatever depressive effects the high dollar might have had for the overall economy and will do nothing to target those areas where the high dollar is wreaking havoc.

A more nuanced tax package would have been to provide tax relief and incentives for those sectors and segments of society who need it. Why do the top 25% of households need both an income and consumption tax reduction? Why do energy companies need a reduction in their corporate tax rates? Why do financial companies need any more liquidity than they have been given since the unwinding of the silly season? And if they do, surely it need not come in the form of reduced corporate taxes which will simply be passed on as higher shareholder dividend payments and CEO compensation.

This budget is born of ideological idiocy, as much from anti-state populism as liberal economic folk wisdom (which itself has a good dose of anti-state populism). It is not as if, as some would have it, that there is a firm link between, for example, high consumption taxes and savings or between reduced corporate taxes and investment or vice-a-versa (praises be, because that kind of general stimulus heads in the direction of the redline).

Right now the Canadian economy needs a particular kind of stimulus both in the short and long term: productivity enhancing investment with a green tinge. And here there is plenty of heavy lifting for both the public and private sector. The private sector needs to, nay must, in the case of manufacturing raise their productivity to counteract the rise of the dollar. Surely high write-off schedules for targeted sectors, say at 150% of denominated value, for new more efficient means of production would make more sense than a general corporate tax reduction. Surely high write-off schedules for investment in new green technologies would be smarter than general corporate tax reductions which do nothing to direct the pace or direction of investment in such areas.

On the public side: from Halifax to Vancouver there are any number of public investments that need to made: from decaying physical infrastructure to near bankrupt municipalities, through to health care and education. Highly subsidised, efficient and greener forms of public transit could be built over the next ten years enhancing the flow of goods, services and people.

But let me now come to the last point: nothing lasts forever and this now 10-13 year long boom may well have reach its zenith. What is the evidence that the planned reduction in overall taxes will be sufficient to fund existing programs and obligations should the economy start a downturn? Whoever inherits the prime ministers chair in the context of a recession will be forced to choose between two cycle depressing alternatives: cut programs or raise taxes or both. Well there is a third option, a return to the days of massive deficits and a growing national debt.

But none of this seems very fiscally prudent; but then again this budget was not born of even a hint of sober capitalist planning; but rather, political expediency and dismal science. Indeed, it may be the case that Harpers budget is a perfect blend of economic irrationality and irresponsibility both in the short and long term: the road to perdition.

Time to batten down the hatches

Travis Fast

I gave a friend a solid piece of advice back in June. Call your broker and get him to put you into safe waters if he can find it: low risk, no return is better than what is coming down the pipe. That is the only piece of investment advice I have ever given and perhaps ever will.

Well save for perhaps what follows. If I were a betting man I would do the following:

1.) Take a defensive stance with my investments. Try to meet inflation not beat it.

2.) Work off consumer debt, starting from least flexible and the highest interest rates and progress down the consumer financing chain.

3.) At the same time keep cash on hand. Yes it is time to save your money. Home equity is almost finished as a piggy bank and the banks are not going to take property values at face value for a while.

4.) Adjust your savings so that you have the capacity to finance three months of obligations. We may be headed into a cycle of higher and longer unemployment.

5.) If the economy continues to stay relatively strong and employment continues to hold having completed steps one through four will put you in a sound position to resume spending. OTOH if the real economy tanks it will give you a good night’s sleep to know that you have a Plan B which does not require the liquidation of your assets, a trip to bankruptcy court or slavish devotion to your boss.

NB: the advice given above is free advice, therefore, price it accordingly.

RESP Regressivity Gets Worse

The Registered Education Savings Plan has always been a regressive tax scheme. Simply put, under an RESP, savings can earn interest tax free until the child goes to college/university. The federal government kicks in money in the form of the Canada Education Savings Grant (for all Canadians) and Canada Learning Bond (for “modest earning” Canadians) as an incentive for saving.

But like all private social security mechanisms, RESPs are regressive as those that benefit the greatest are those that have the most to contribute. The Harper government has determined that the RESPs were not regressive enough. They eliminated the $4,000 per year contribution limit and increased the maximum total RESP contribution to $50,000 in their last budget. In examining optimal investment strategies given this change, Rob Carrick of the Globe and Mail found that it was a better move to save the $50,000 at once (e.g., when the child is born) rather than make installments and invest in other ways. Clearly, very few people in this country can do that! The forgone government revenue from this program would be better spent directly in our post-education system.

Ontario Budget: 50 million in Pork to Magna

Travis Fast

Updated: One important fact to keep in mind when reading this: Frank Stronach’s compensation was a cool 40,320,836 last year. Yes, you read that right 40 million and some change. This means the Ontario government (your tax dollars) is essentially covering Frank’s fees. I have yet to hear one squawk from the business press.

The Ontario Liberals earmarked 50 million dollars for a direct grant to Magna. Magna is rapidly becoming like that other Canadian success story Bombardier which was has seen more than its fair share of government subsidies. The question I have is why should we put in 50 million dollars of public money into a company that is notoriously hostile to unions, happy to move jobs outside of Canada and for which “we the people” receive zero direct compensation?

If Magna needs 50 million dollars in investment should not the taxpayers of Ontario receive 571,428 shares in Magna(50 million/ 87.50)? That is, if the government is going to be in the business of investing in Canadian companies why is this happening in the form of grants and not as would any other investor through an equity stake or as a holder of corporate bonds?

This is especially so in light of the fact that Frank Stronach’s attachment to Canada is about as stable as an accountant’s heart. As Frank once said:

To be in business your first mandate is to make money, and money has no heart, soul, conscience [or] homeland”

Given this, surely an ownership stake would not be too much to ask. At least Ontario would have something to sell when Frank’s fickle heart found a more lucrative trough to feed in.

The Disappointment of Election Budgets: Long on Pork Short on Priorities

Travis Fast

From a policy point of view election budgets are always a bit of a disappointment. And this year’s budget is no exception. The problem with an election budget is that it is designed to spread the gravy over the finest pork going.

Why pork? The central issue is this. There are any number of serious structural problems within any given country at any given time. The problem with election budgets is that they do not set a list of priorities and decide which structural issues will be given the necessary attention and resources, but, rather, are driven by the need to placate all the major vested interests: voters, corporations and provinces. The problem is that placation does not equal a comprehensive solution but rather a series of eclectic half-measures that do not add up to a coherent national policy or plan. So while everyone gets a little bit nobody gets enough to solve their fundamental problem: a little for the environment but not enough to even come close to a serious plan; a little for child care but not enough to actually make cheap affordable high quality child care a reality; a little for provinces but not nearly enough to make up for previous years of off-loading and the economic inequalities that it help to create.

The list of course goes on and on. Election budgets are bad because they attempt to mask the priorities of the ruling party and this is exacerbated when speaking of ruling parties in a minority position. I do not have the details at this time but I suspect as the fine print is sifted through and the numbers are crunched this budget is going to be long on smoke and mirrors (and provincial federal relations) and very short on decisive action. And while that might be a good thing so far as Tory budgets go, Canadians would to well to dwell on the fact that this tickle trunk approach to politics and economic development is the kind of monkey business that lead to 15 years of irresponsible liberal and conservative budgets and another painful 15 years to unwind.

And it seems this what we are back to: budgets devoid of vision and a plan but filled to the brim with crass political calculation. Gravy on top of the pork is good but vegetables are better.