EI Claims Up in September

The bulk of the descriptive meat is here:

“Continued large year-over-year increases in EI beneficiaries in large centres in the West

EI data by sub-provincial region, sex and age are not seasonally adjusted. Therefore, they are compared on a year-over-year basis.

In Ontario, the number of EI recipients more than doubled in 10 of its 41 large centres between September 2008 and September 2009. In the southern part of the province, Hamilton and Kitchener saw the fastest increases in the number of beneficiaries. In Hamilton, the number of EI recipients rose from 4,800 to 10,400, while in Kitchener, the number increased from 3,900 to 8,400. At the same time, the number of EI recipients in Toronto rose from 46,300 to 86,600.

In the northern part of Ontario, Greater Sudbury continued to experience a sharp year-over-year increase. The number of EI recipients rose from 1,500 in September 2008 to 3,900 in September 2009. At the same time, employment in Greater Sudbury declined, mostly in the natural resources sector.

The large centres of Alberta with the fastest year-over-year growth rates were Grande Prairie, Calgary, Medicine Hat, Red Deer and Edmonton. In Calgary, the number of people receiving regular benefits increased sharply from 4,000 to 18,800, while the number of beneficiaries in Edmonton rose from 3,800 to 14,900. These steep increases coincided with year-over-year employment losses for the province in manufacturing; natural resources; and retail and wholesale trade.

In British Columbia, 15 of its 25 large centres had twice as many beneficiaries in September 2009 compared with September 2008. In Vancouver, the number of beneficiaries increased from 12,600 to 31,300, while in Victoria, the number rose from 1,600 to 3,700. During this year-long period, employment losses in the province occurred in a number of industries, with the largest declines in construction; professional, scientific and technical services; manufacturing; and transportation and warehousing.”

The full report is here.

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

Are currency traders and Bank economists dumb as a sack of hammers?

The short answer is no despite what has been argued here and here.  Bank economists may be a comfortable and no doubt arrogant bunch (imagine combining the natural arrogance of economists with the comfy smugness of Canadian bankers… thankfully a cocktail party I will never be invited to).  But do we really believe they do not understand the difference between raising and lowering the value of a currency and the different mechanisms required for each?  I think they probably do.

So does Erin Weir over at the Progressive Economics Forum.  He makes a cogent case why bank economists may be arguing (erroneously) that the BOC does not have the resources to intervene in fx markets to depreciate the CDN dollar.  In a nut-shell Erin argues that the CDN banks are looking to do a little foreign financial asset shopping and that a high CDN dollar makes that prospect even more lucrative.  I like this explanation because it does not rely on bank economists being stupid, but, rather, hard-working employees serving their employers to the best of their abilities.  And I if that requires misdirection so be it.  Let me put it this way: I think they are bank employees before they are economists.

When it comes to economists and bankers I always prefer rational actor models.  But hey ad hoc explanations are always amusing. And insinuating that people are stupid does allow one to feel superior I suppose.

Next comes currency traders.  Are they as dumb as a sack of hammers?  Again I think not.  Aggressive if jittery risk takers…you bet…stupid nope.  They have played this game before and it is called chicken.  I bet they do not think the BOC has the nerve to go into the fx markets in big way, that the BOC does not want the precedent; that it does not want to fuel the notion that the value of the CDN should be set be fiat etc., etc.

Sure, yesterday the loonie lost two cents on Marky Marc’s: “I really mean it this time, I just might do something.”

Today it was back up a cent by noon trading.

The game of chicken is on.

Forget the Bank of Canada: We need an INVITE program to stem appreciation of the CDN Dollar.

If what we are worried about is an overvalued CDN dollar which is caused by speculative flows then why the focus on the Bank of Canada?  Exchange rates are not really in the BOC’s mandate.  Sure in the case where an appreciating CDN dollar is causing further deflationary pressures it could be argued that exchange rates are within the purview of the Bank’s mandate.

But the BOC is a conservative (in both the ideological and cultural sense) institution.  Canada does not face the same structural dynamics (problems) as the UK and the US.  And thus I doubt arguments for non-conventional monetary policy responses are going to get very far with the Bank.  Moreover there are downside risks to pursuing unconventional monetary policy.  We might get a lower exchange rate at the expense of perverse side-effects.  So forget the BOC; leave them out altogether.

Thankfully, however, when it comes to exchange rates there are policies available to the government. On such policy could be called an  Investment Inflow Tax Equilibration  program (INVITE).  It would work like this.  A simple 2% tax on all inward portfolio investment (as Brazil just announced) would help stop appreciation in its trax.  Second if we really think much of the dollar’s appreciation is being driven by gas and oil then an additional 2% tax on all oil and gas investment inflows regardless of the type (portfolio or direct) would help further dampen the speculative plays in that sector.  The terminator seed on the INVITE program would be when Canada’s manufacturing sector returned to some degree of health.

Decline in Canadian GDP bodes for an ill-wind

The GDP numbers released on Monday painted a none too pretty picture of the health of the Canadian economy. It perhaps was no shock that the figures released were worse than the BOC had predicted. However, the Globe managed to turn the devastation into hope arguing that:

The glimmer of hope comes from the fact that Canada’s descent into recession last year was faster and deeper than the two previous economic contractions in the early 1990s and the early 1980s.

That suggests a significant portion of the hurt that typically accompanies a downturn has already been felt….

Like Andrew Jackson over at the PEF, I find this alchemy quite odd. Let us actually throw up a graph of real quarterly GDP growth starting with the first quarter 0f 1962 and terminating in the last quarter. First off, as the graph clearly indicates the -0.85% contraction is historically unprecedented for the first quarter of a recession.

Now both the BOC and the wanna-be bulls have argued the steep decline means that we have already absorbed the pain so a quick turnaround is in order. I beg to differ. The recession of the early 80s started with a strong unprecedented contraction in q/q growth and then proceeded to stay in negative territory for the next 5 quarters 4 of which were lower than the initial historically low first quarter drop. The recession of the 1990s started with relatively mild contraction of growth in the first quarter and then snowballed downhill for another three quarters with each quarter being worse than the next.

The example of the early 80s suggests that recession that start with a bang are long and difficult (2 quarters longer), and the recession of the early 90s suggests that recessions that start with a whimper are nonetheless 4 quarter affairs with each quarter worse than the last. Nothing from the last two recessions supports the wanna-be Bulls position.

And quite frankly disseminating overly optimistic predictions is really quite irresponsible. Families are busy trying to figure how to position themselves to shore up their finances and make training and career decision in light of the recession. If families think that in 9 months out the fairytale economy will be back they will fail to make good decisions and suffer all that more hardship than they would have had “experts” and elites provided them with a more cautionary tale.

There is a repeated pattern here: “experts” read business economists, BOC economists and most academic economists have been behind the curve. First clinging to stories of the end of the business cycle, then clinging to fantasies of continentally and globally de-link Canadian economy, then clinging to the story of at best six month slow down, and now clinging to a fairytale turnaround in 9 months. And for the most part the government has gone along for the ride pricing each of the 4 successive stories in and deriving policy accordingly. After getting the optimism wrong for so long is not a little pessimism finally warranted not to mention better fiscal policy?

Mr. Gardner you got some splainin’ to do

Over at the Ottawa Citizen there is worthwhile attempt to keep the economy in perspective.  The watch phrase seems to be “do not panic.”  The implicit premise being that panic is driving bogus assessments of the extent of the turmoil unfolding in the economy and the labour market.  At least that was the premise of Gardner’s blog post:  StatsCan, you got some splainin’ to do .

For my part I am quite happy to the see that someone in the press is actually taking a look at the numbers.  The problem is, in this case, Mr. Gardner does not seem to be generating his own numbers.  He claims that Stats Can erred when it stated that:

This drop in employment exceeds any monthly decline during the previous economic downturns of the 1980s and 1990s.

Mr. Gardner argues that based on the Stats Can press release that reporters went about generating seriously flawed headlines.  I quote:

In one news story after another, we were told that the monthly job loss figure was worse than any in the recessions of the early 1990s or the early 1980s. This isn’t just bad, we were effectively told. This is unprecendentedly (sic) bad.

Mr Gardner goes on to say:

But that conclusion is based on a grade-school mistake: The labour market isn’t the same size today as it was in the early 1990s or early 1980s. It’s bigger. A lot bigger. For the stat to tell us how bad this drop was relative to those in other recessions, it has to take that into account.
Do that and it’s not the worst drop since the data were first gathered in 1976. It’s the third worst.

Now when I first read this I thought that Mr.Gardner’s conjecture was likely right.  The labour force is a lot bigger so all things being equal a large drop-off in unemployment might be relatively less severe than at other periods in the past.  It would have been nice if Mr. Gardner had presented his readers with the data or the formula by which he arrived at his conclusion.

So this morning I took a virtual walk over to Stats Can and pulled three series to be exact: Labour Force 15+; Employment; and Unemployment. All monthly and seasonally adjusted going back to 1976.

Why unemployment when this relates to Stats Can’s claim about employment?  Charity and balance is the answer.

So let us see if we can verify Gardner’s claim that Stats Can got it wrong and the press is full of a bunch of gloomsters.

In this graph two measures of employment loss are plotted.  One is the absolute loss of jobs (in black).  Here Stats Can is correct the 129,000 jobs was the most jobs ever shed since 1976.  But what of Mr Gardner’s point about the changing size of the Labour market?  The second measure captures this.  The pink line is the percent change in employment month over month.  Given that employment already accounts for 92% + of the total labour force it is by definition an ok approximation of the relative size of the Labour force.  And here again we are in Historic Territory: the fall in employment was the largest relative fall since 1976.

But what if something really funky was going on with the labour force? That is, what if we used the labour force to generate our relative assessment.  This seems to be Mr. Gardner’s acid test.  Always dutiful I did that too. Here the  change in employment was calculated as the absolute change in employment divided by the labour force.

Here again it would seem, according to the Stats Can data, that January was indeed a unprecedented happening.  No matter how one cuts-it, the Stats Can conclusion that “this drop in employment exceeds any monthly decline during the previous economic downturns of the 1980s and 1990s”  was exactly right.

To be fair to Mr. Gardner we could, however, take a different look at the employment situation and see if one could generate a much less novel conclusion.  For that I took a look at unemployment.  What I did was simply take the monthly unemployment rate and subtract Ti from T-i.  This will tell us if the jump in unemployment in January was higher than during any other time since 1976 (remember this has nothing to do with the Stats Can claim; that was purely about employment).

Clearly by this metric no records were being set (yet). The problem is, however, this metric does not take into account the changing size of the labour force. Well it in fact does, it is just that if the labour force is contracting it understates the unemployment level.

How to account for Mr. Gardner’s claim that if we adjust for labour market size “it’s not the worst [employment] drop since the data were first gathered in 1976. It’s the third worst”?

I must confess I do not really know because Mr. Gardner does not present any data nor the formula he used to arrive at his conclusion.  I am racking my brain to see if I can find some exotic data manipulation exercise  to get to that conclusion based on the Stats Can data.  But even if I did find a way and could manipulate the data I would be far away from dealing with the basis of Stats Can’s claim.

Now, if I’ve misunderstood something, I’d be delighted to be corrected. But if I’m right, I think Mr.Gardner got some splainin’ to do.

Explaining Unemployment: Natural Accelerating Rate of Employment Destruction (NARED *tm)

Travis Fast

In the great labour market policy debate of the mid to late 1990s no end of explanations for persistently high levels of unemployment in the face of recovered GDP growth was trotted out. The infamous NAIRU curiously did much of the original heavy lifting. I say curiously because the NAIRU is ill suited to provide an explanation of persistently high unemployment in the face of strong GDP growth. Indeed, the NAIRU, was designed to put a gloss on the problem of stagflation–poor growth and high inflation. At a higher level of abstract policy thinking however, the NAIRU was part of broader assault on demand determined explanations of macroeconomic phenomena including unemployment. Fighting inflation and ultimately conquering it was said to be the sine qua non of renewed GDP growth.

The renewal of GDP growth was in turn said to be the cure to high unemployment (as we shall see towards the end this is the central determinate of unemployment). Yet, by the latter half of the 1990s the term “jobless recovery” had crept its way into the policy lexicon. Here the NAIRU became near useless as a supply side explanation for the persistence of high unemployment. And it was here (then) that I would argue New Keynesianism played a vital role in the continuance and ultimate dominance of supply side explanations of unemployment and what I have called the solidification of the neoliberal consensus.

To that end two explanations were put forward. The hysteresis/skill spoilage thesis maintained that prolonged periods of unemployment had caused a relative degradation in the skills of the unemployed. This degradation of skills in turn was responsible for the inability of of the unemployed to find jobs. In short, high unemployment was the cause of high unemployment (hysteresis). The insider/outsider hypothesis maintained that the persistence of unemployment was caused by the higher than marginal productivity wages of the employed. In a real bastardization of Keynes, involuntary unemployment was caused by the myopic behaviour of the employed (a refusal by existing workers to take a pay cut). If the two explanations did not readily hold together in a general theory sense they certainly held together at a higher level of abstraction: ultimately the cause of unemployment laid with the qualities of workers: employed or unemployed–on the supply side.

And although the twin New Keynesian hypotheses had a hard time dancing on the same floor they nonetheless were seemingly given credibility by inter temporal comparisons of GDP growth and rates of unemployment. In the graph below five year averages for real per capita GDP growth and unemployment rates are plotted.

If one looks at the five year averages from 65-70 through to 95-00, one cannot help but notice that during the 1980s a transition seemingly occurred whereby similar levels of GDP growth failed to produce similar rates of unemployment. The most stark comparisons can in fact be made. During 65-70, a 3.1 percent average growth in GDP produced and average unemployment rate of 4.5 percent whereas in the 95-00 period a 3 percent average growth in GDP produced an 8.5 percent average rate of unemployment–a full 4 percentage point difference. It was from such facts that, I think New Keynesian hypotheses drew their succour.

Why indeed had GDP growth recovered but not employment? But there were a couple of constraints on the types of explanations that REAL economists were allowed to make . You could not blame technological change, nor could you blame free trade and you certainly could not blame employers sweating more effort out of the existing workforce. The key to a righteous explanation laid with the supply side characteristics of workers. Now I am not arguing that there was some kind of conspiracy. Far from it, I am just arguing that the the new classical victory had been so total and that the terms of war had become so solidly placed on a different terrain that New Keynesians were bound to reach for explanations that jived within the increasingly narrow confines of the debate within mainstream liberal economics. Just think of all those more classically inclined liberals who made the reluctant Keynesian Devil Shift during the Golden Age Illusion. After all, once upon a time Friedman was a Keynesian.

But whatever the cause, those observed facts are not sufficient to explain the seeming disparities between the two epochs. In fact, the same disparities can be witnessed within the same epochs! Notice for example that in the period form 60-65 GDP growth was 4.3 percent but unemployment averaged 5.7 percent–GDP growth and the rate of unemployment being 1.2 percent higher than the proceeding period. Were insiders really more active in the 60-65 period than in the 65-70 period? Were workers skills duller in the 60-65 period than in the proceeding period? The sober answer is of course not. And one could beg the same question of the 95-00 and the 00-06 averages. How is it that within such a short period of time we could move from a 3 percent rate of GDP growth and a corresponding 8.5 percent of unemployment to a 2.1 percent average rate of GDP growth and a corresponding 6.8 percent of unemployment? I suppose if one takes the hysteresis hypothesis at face value we could get to a plausible explanation of the present period but that dog won’t hunt for the initial periods under consideration. And it is not much of hunter in the two most recent periods either.

In the graph below I have hyper-trended the data by superimposing a trend on the five year averages. What becomes apparent is the the close relationship between GDP growth and unemployment. But beyond this shocking truth is the more subtle observation that the early 1990s seemingly marked the end of the long secular slowdown in real GDP growth which began in the mid 1960s (for further confirmation see the last graph for long term trends in GDP growth and Unemployment). This slowdown in turn produced a Natural Accelerating Rate of Employment Destruction (NARED).

It would be perverse in this respect to employ hysteresis effects in skill (de)formation to explain increasing unemployment. Notice, however, that hysteresis effects in the degradation of business sentiment might be a plausible explanation of the duration of the long slowdown. Although I have serious doubts about a 40 year long hysteresis effect on sentiment and rather think that some version of the Brenner/Shaikh/Marxian thesis is necessary.

However, leaving the cause(s) of the structural decline in GDP growth to one side, the other observation that can be made from the two graphs presented above is that it seems as though during the early 1990s a reverse process was initiated whereby increasing levels of GDP growth began to have a cascading effect on the level of unemployment so that by the early 2000s the brief drop in GDP growth was not sufficient to change the momentum in employment creation; or, what I have identified as a Natural Accelerating Rate of Employment Creation (NAREC).

On this reading, the present conjuncture is quite significant. Should GDP growth become stuck at low stagnant levels for a period of time the acceleration effects could revert back to a NARED dynamic whereby high unemployment begets even higher unemployment irrespective of the supply qualities of workers.

This analysis and scenario poses serious challenges to the dominant neoliberal policy paradigm. No amount of retraining, mobility or cuts to the reservation wage can remedy a situation in which the creation of employment is weak. Focusing on the skill set or psychological attitudes towards work on the part of workers simply serves to blame the victim and ignores the cause: weak GDP growth overtime creates higher levels of unemployment. Workers do not retreat from the labour market on mass, as any graph of participation rates can demonstrate, because most workers have no alternative but to seek employment. And I suppose in that last regard unemployment is caused by the unemployed.

Note: Sources

Table 282-0002 – Labour force survey estimates (LFS), by sex and detailed age group, annual.

Data prior to 1976 is from Statistics Canada 11-516-XIE (FREE!) Historical statistics of Canada.

GDP data prior to 1961 is from Madison The World Economy: A Millennial Perspective

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.