Selected Central Government Debt Ratios: An image begs a thousand questions

When discussing with my undergrad students why I thought Japan Inc. was bust I trotted out the graph below.  However, this morning while looking at the graph several questions came to mind.

1) From 1998 – 2008 what was average real interest rate in Japan and how does that compare to the ten years previous to 1998?

2) What has been the average level of inflation in Japan since 1998?  Again how does that compare to the 10 years previous to 1998?

I already know the answer to those questions but I would have not arrived there by any HAT (highly accepted theory).

3) Why are we even talking about programs cuts in Canada before it is clear that the world economy and the US economy has started a robust recovery? And why especially when Canada is way below the advanced capitalist curve (in terms of debt to GDP)?

Click for larger image

The War on EI reform Commeth

Conservative economists are up in arms that anyone could suggest lowering the qualification requirements for workers wanting to access an insurance program they are obliged to contribute but for which they do not necessarily have access.

Case in point, Stephen Gordon an economist at Laval was interviewed on CBC and he had the temerity to assert that the opposition parties were purporting to return Canadians to the dark days of UI dependency where workers worked 10 weeks and then took a “vacation” (10-42 which he admits was a small group of “users”).   An honest look at the previous programme would conclude that although there was a small user base of “bilkers” the other group was more a victim of a defunct east coast growth paradigm, entrenched rural local business interests and governments bereft of vision (with some irony what we might call an “industrial policy” the very thing conservative economists hate).  It would in fact take the complete collapse of the fishery to provoke a fundamental rethink of the structural dependence by design aspect of the old UI system. Apparently this is wrong.  They still have not yet arrived at areal solution for the structural dependence on the EI program.

But all of this is beside the point.  No one in the opposition is suggesting a return to UI as a guaranteed income scheme.  Although I do not know why this should disturb a conservative economist?  Conservative economists tend to love programs which enforce some requirement to work.  Let us call this their Victorian vice.  Indeed the reason conservative economists like the WITB is because it gives an incentive to welfare recipients an incentive to work.  It is therefore somewhat perverse that they should prefer to exclude formally employed workers from the EI system so that they can go on welfare and then be incentivised to work through programs like the WITB.  In a bizarre twist during the interview Gordon suggested that while access to the program (which all workers are forced to contribute) should remain restricted those who do qualify should have their benefits increased!  A new moral milestone: not only a distinction between the deserving poor but a distinction of merit between deserving and undeserving workers:  All enough to make a good Victorian blush at the recognition of their Dickensonian sentiments.

But I digress.  Gordon even went further and conceded that relaxing the qualifying criteria would only benefit 2% more of the unemployed.  He went further to say that there were other ways to help the poor: such as beef up the GST rebate.  For a man who does not receive the GST rebate and is woefully ignorant of how much income replacement it would represent it was not only callous it was disingenuous.  It was disingenuous because Mr. Gordon knows full well the EI system should be well funded requiring no draws on general revenue. It was only a fleecing of the program which moved billions from the program to general revenue that voila the program needed extra funding.  As an aside, this is why the finance minister’s suggestion the increased EI payments are partly to blame for the increased deficit ring hollow.  It was that minister who raided EI to make room for his silly tax cuts.

But the point is this, there is no choice between increasing benefits or increasing eligibility if we make an honest accounting of how large the surplus was in the EI fund.  Similarly it is a false choice between beefing up the GST credit or the WITB program or extending eligibility.  The EI fund should be fat; it was raided to pay for silly tax cuts that even the economist in question wrote a long blog post against.  It is therefore disingenuous to turn around and make it a question of where money is best spent.  EI is paid for by employers and employees, the fund was fat, and it was depleted by a raid on what appeared to be its fat in good times.  In short, the trade off can only be posed if one accepts the hanky panky involved in the raiding of the EI fund.

Why is EI different than unconventional monetary policy?

Apparently because bankers are more trustworthy than the newly unemployed.  I would call it irony but that would require a sense of naïveté that even Pollyanna could not manage. So these days we have monetary authorities contemplating negative interest rates but we are suppose to get our collective skirts in a knot over whether or not some workers might take advantage of a relaxed EI system.  So let me get this straight 20,000 workers bilking the system for a billion dollars is a moral outrage but five banks bilking the system for untold billions is good policy?

Monty Python comes to mind. To wit: “who is the king around here?” Demands the newly arrived aristocrat.  Oh “that is simple” says the peasant.  “He would be the one with out shit on him.”

Why don’t you ladies (ahem and gentlemen) finally go to bed?

The False Dichotomy: Minimum Wages Vs WITB

As designed, the WITB (Canada’s version of the US earned income tax benefit) is not structured to increase the minimum annual full time wage.  In most provincial jurisdictions the WITB kicks out just before or just after the minimum annual full time wage is achieved.

For example a single person earning minimum wage working full time of 35 hours a week in Quebec will have an annual gross income of between 14,000 and 15,000.  The WITB for the lower amount is 230$ for the year or 19.16 per month.  The WITB for the higher amount is 30$ a year or 2.50$ per month!

As is clear from the example above the WITB is designed to phase out at the point a full time minimum wage salary is achieved.  The whole point of the program is to make sure that there are not any tax penalties for working.   And it most definitely is not about augmenting the full time minimum wage.

So in sense those that argue in favour of the WITB over the minimum wage as a poverty alleviation strategy simply do not know what they are talking about because full time minimum wages are being used by the government to set the income threshold for the program.  That is, the only way in which WITB can be viewed as augmenting the minimum annual wage is if an individual works less than full time then the WITB kicks to augment the wage but outside of a narrow band not to the full time minimum wage level.

In the illustration above the WITB would contribute 230$ to someone working just shy of 35 hours a week 52 weeks a year. However, for someone working part time at minimum wages in Quebec, the WITB would kick in around 750$ a year effectively increasing the minimum wage by .78 cents an hour.

Hence it is only in the case of a part-time minimum wage worker that the WITB makes a meaningful adjustment to the minimum hourly wage.  However, in the last example provided above, someone working 20 hours a week at min wage including the WITB will have an annual income 8,640$.

Hardly a poverty arrestor.

Interestingly one of the perverse outcomes of the program is that there is a built in incentive for min wage employers to offer less than full time hours because the further away from full time the higher the level of the wage subsidy/premium.  The other perverse outcome (some will say a feature because it targets the worst of the worst off–part time min wage workers) is that unlike increases in the min wage which increase all min wage workers’ salaries the WITB only meaningfully increases part time min wages while doing little to nothing for full time min wage workers.

The left and Cash Transfers to the Poor: A Rejoinder to Slander

This seems so elementary that it should not have to be pointed out. Lately it has not been in my nature to get in the way of an over the top, gross generalization founded on spurious sampling techniques paired with the terrorism of gotcha journalism, however, today I am feeling frisky.

Some Guy (SG) has a blog post up about how lefties hate direct cash transfers to the poor. I can’t make heads or tails of this claim including the two random citations of lefties provided: one an individual the other a think tank (now there is rigour if I ever saw it). Unfortunately even the random citations provided were poor choice because in the one case SG failed to read the article—I suspect he is hoping you will too.

But alas we all now know that economists are to be debated not trusted. Inter alia, Duncan Cameron argued for an increase in direct cash transfers to the working, unemployed and non working poor:

“By any measure, minimum wages, welfare payments, unemployment assistance have all declined since at least the inflationary period of the 1970s. All these programs need dramatic improvements.”

There is then some irony that SG should have given his post the title: “An overlooked anti-poverty strategy: giving money to poor people.” Seemingly for SG, an increase in the cash benefits to the poor, working poor and unemployed do not quality as “giving money to the poor” (I will explain why below). And unintended irony of all irony the research reported on SG”s blog on minimum wages concludes that increases in minimum wages under a 40-45% of an average hourly wages threshold has little to a positive effect on employment. Although having an indeterminate effect on poverty.

Hence, I suppose the need for direct cash transfers of one form or another. Like uhm maybe an increase in cash benefits for welfare and EI recipients as Duncan argued? No No No No! Shrieked the vanilla economist! I will explain why further on.

In order to solve this murder mystery we will have to return to the scene of the crime. What seems to have stuck in the quick of SG was this offending remark by Duncan on EITCs as a generalized strategy for poverty reduction:

“Not even the Toronto Star editorial board seems to have noticed the problem is much wider than the working poor, and the solution greater than an earned income tax credit — aka a handout — so that lousy employers can continue to pay poverty wages.”

Clearly EITCs are SG’s preferred poverty reduction strategy—no matter that EITC’s do not have robust evidence to support the claim that they reduce poverty. In the US for example, where the program is much more robust than in Canada, the maximum benefit is around 2,700$ per year for a family with two children and around 500$ for a family without kids. And here is the kicker the EITC is phased out fully at 37,000$ for a two child two working parent family and 24,000$ for two individual no children family. I find some irony in the fact that my middle class baby manual tells me that children cost around 10,000$ a year. Therefore the idea that a 1,300$ (max) a year per child EITC in the US could be held up as major strategy to combat poverty is well simply farcical—albeit better than a kick in the ass I suppose. In any case, this is clearly where the unintended irony of a virgin gives way to self-satirisation—hardly edifying.

But the more important question is why would an economist be flogging EITCs as (a) the only form direct cash transfers should take; and (b), at the same time misrepresent the scheme as a poverty reduction scheme? The second is easier (i.e., more simple) to explain than the first. Classic misdirection—the first learned trick of magicians, pick pockets and con-artists (all of which I have infinite respect for outside of the academy).

However, the first question is more painfully answered. You see back in some early graduate seminar vanilla economists (well actually all economists because all economists have to be able to converse with vanilla economists but the reverse is not true—although some vanilla economist are capable of cross paradigm conversations) are given a tutorial on welfare policy analysis. The problem is that traditional cash transfers from say welfare or EI create an incentive for poor people not to work. All things being equal, why work if your welfare benefits will be clawed back and your earned income will be taxed? The basic thrust of the EITC is that it makes it so that work pays. And this is the real thrust of the EITC—making sure the incentive structure is designed so that the poor have an incentive to work and not layabout on the dole. It is about getting people off of welfare—which may or may not be a good thing—but it is not about poverty alleviation.

As an aside it was this I think Duncan was reacting to. Somewhat perversely, EITC’s act as a subsidy to minimum wage employers in two ways. On the one hand, they increase the labour supply of minimum wage workers thereby ensuring increased slack in their labour markets and thus downward pressure on average minimum wages. And on the other hand, they provide a subsidy to employers because the tax credit mitigates workers demand for higher wages. Perhaps this is why the program enjoys such bi-partisan support in the US.

In sum, EITCs are politically palatable because they “reward hard work” and shun the welfare system while giving the appearance of a concern about poverty. they keep in tact and rejuvenate that old Victorian separation between deserving and undeserving poor (never mind that the welfare system already reproduces this logic through extensive monitoring and what has been over the last twenty years increasing paltry benefit rates with increasingly restrictive qualification criteria).  They are, if taken in isolation as the only tool, a politically expedient, ideologically driven, and an ineffective poverty alleviation strategy sometimes garbed up in progressive rhetoric.

I welcome an honest conversation about a robust poverty alleviation strategy for Canada.  If only vanilla economists would try to meaningfully participate by jettisoning their predetermined policy preferences and erroneous characterizations of other members of the policy community. I for one am ready for a new conversation on poverty reduction in which everything is on the table–and not just facile ideological preferences masquerading as the new true social science.