What might a post NAFTA world look like?

December 13, 2017

It is time to think about life after NAFTA. Since we don’t know what the details will be, all that can be done is to try to map out the factors, other than the revised terms, which could be no NAFTA, needing consideration. For this I refer to the methodology pioneered by Ronald Coase (Nobel Prize Winner in Economics 1991) focusing on how firms organize factors of production.

 

The term supply chain seems to have displaced vertical integration to outline how firms organize the production of goods and services. In general, firms weigh a make versus buy decision for the various goods and services needed, where make versus buy may involve a cross border transaction. An aluminum smelter may source bauxite and alumina from its own operation abroad or from an independent supplier abroad (or domestically). Both involve a transaction between the two stages of production. One is an intrafirm and one an interfirm transaction. Multiply these alternative opportunities for one stage of the supply chain by all the inputs required at different stages of production, and you get a large number of decisions to be made. A firm’s management has to get input from engineers, tax accountants, shipping specialists and others in order to reach the least cost way to organize the supply chain.

 

A similar situation exists when organizing the production and use of services, as opposed to goods. Input from lawyers and accountants, for example are needed to aim for the least cost way of production and distribution for a firm’s supply chain. For both goods and services, tariffs and non-tariff barriers are ingredients to take into account, hence the importance of the terms written into trade and investment agreements like NAFTA.

 

With ongoing technological change, it has become easier and cheaper to undertake crossborder transactions for goods and services, but especially for services such as finance, technology, accounting and advertising. The service alternatives available to many firms provide a similar challenge for those monitoring the operations of firms such as tax collectors.

 

What has this all got to do with the outcome of current NAFTA negotiations? Technological change has given firms more ways to organize domestic as well as international operations. The extent to which a NAFTA with new terms will raise costs for individual firms depends on the numerous alternative ways in which the supply chains can be organized.

 

The items to focus on include the ease with which capital, labour and technology can be moved across borders before and after a new international agreement is reached. At one time, Canadian manufacturing industry was protected by tariffs from imports. This lead to US firms hopping the tariff wall by investing in Canada, and more often than not setting up plants on a smaller less efficient scale in Canada, thereby creating what was called the miniature replica effect (plants that were too small to achieve scale economies in production and distribution). With lower tariffs due to NAFTA, imports could flow across the border in both directions. Similar opportunities opened up to Canadian firms selling into the US market as a result of NAFTA. If lower tariffs are removed, firms could be forced back into less efficient (higher cost) means of production.

 

It is highly likely that the abolition of NAFTA would lead to higher production costs and prices in Canada and the US, but the harm may not be as great as would have taken place a decade ago as firms have developed more ways to reduce costs. Where do these new opportunities exist? A combination of inward and outward investment, inflow of cheap labour (temporary foreign workers), and outsourcing abroad of work are areas to monitor and study.

 

When Ronald Coase researched similar issues, he did it by visiting plants and interviewing plant managers and workers on the shop floor who made the decisions about how to produce and ship goods and buy services. Others tend to do this by examining published statistics which is a step removed from the people actually handling the goods and making the decisions. Alfred Marshall, another economist used a similar methodology in research for his major work Economics of Industry (1879).

 

Of course, the cancellation of NAFTA will raise the costs of production for certain firms and industries, but the consequences may not be as dire as some predict.

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Trumpmania

December 8, 2017

I confess I am addicted to following the antics of Comrade Trump, partly because it is such good theatre with the curtain rising on a new scene almost daily. But partly because events south of the border are already impacting our lives. Regardless of the outcome of the NAFTA re-negotiations, business will delay or cancel investment opportunities for the time being thereby slowing the economy. I am still amazed about why the US stock market is doing so well.

My addiction is fed by watching excerpts from Morning Joe on MSNBC for the anti-Trump view, and Fox News for opposing commentary by pro-Trump supporters. Add a puff of Steve Bannon and Breitbart News and the day can be shot without doing anything else, except to wonder whether Little Rocket Man or Humpty Dumpty (HD) will light the fuse for a nuclear holocaust. The Daily Show is another channel I watch. Hardly a day goes by that host Trevor Noah does not have a clip about the President and his supporters.

Each day Humpty Dumpty on Twitter offends someone personally, and as soon as the reaction gets out of hand he changes the channel –  from the charges laid against former campaign manager Paul Manafort, to Michael Flynn’s guilty plea, to testimony to Robert Mueller’s investigation, to the meeting of son Donald Jr with the Senate Committee on Russian election interference, to the decision to move the embassy in Israel from Tel Aviv to Jerusalem, to name a few. What will it be tomorrow?

The news media grab any story involving the President and his cabinet, and we the audience dutifully follow assuring that network audiences remain high. After a year in office, I conclude that one needs to watch both sides, in my case that is MSNBC versus Fox News with a touch of Breitbart. If one only listens to the MSNBC viewpoint then one misses the reason why HD won the election (OK with fewer votes), and why it is that over 30% of the electorate continue to support him, and apparently quite strongly. The majority of the electorate is fed up with the way Washington is run and support him as someone who could shake things up. Unfortunately, he is doing it for the benefit of his wealthy friends, not for the masses.

Michael Moore was one of the few people outside the President’s close supporters who called the election correctly. Moore spent time attending rallies for both candidates, noting that Clinton often had small and unenthusiastic audiences. And when Sanders’ supporters were asked if they would vote for Clinton, if Sanders was not the candidate, they often said no. Twenty-five years of Bill and Hillary in Washington was viewed as enough by many. And when Obama later accepted $400,000 for a speaking engagement five months after his term ended, this seemed to reinforce the need to drain the swamp.

HD is now behaving like a dictator. He asks the head of the FBI to drop the inquiry on Russian interference in the election; his legal advisor says he is above the law; his son claims client-counsel privilege when neither of them are lawyers; and he tweets his feelings daily. One hopes that the adults around the White House can keep him in check. They are mainly military men who must be wondering why they took their jobs. Tillerson from head of Exxon has become little more than an errand boy. Males groping females has now become headline news with the resignation of Al Franken, and the forgotten news that a president boasted about his groping.

These stories fill the headlines, and there will be more. Meanwhile important events are taking place in Europe and Asia which could ignite economic and political tumult around the world. Today our attention is drawn to the resignation of Senator Al Franken for behavior that HD boasted about. What will it be tomorrow?

Sapiens, A Brief History of Humankind – A Review

December 7, 2017

Yuval Harari, Sapiens, A Brief History of Humankind (McClelland and Stewart, 2014)

 

There is no need to read this review of Sapiens by Yuval Harari as there are many excellent ones to read online, with praise offered by notables such as Barack Obama, Bill Gates and Jared Diamond. Harari is an historian at the Hebrew University of Jerusalem, with a doctorate in history from Oxford. The author traces the origins and evolution of humans (homo sapiens) from 13.5 billion years ago, the Big Bang. Emphasis is placed on the past 200,000 years as humans are traced from Africa and their subsequent spread throughout the world. All inhabitants of North America, for example, are migrants from different times starting about 50,000 years ago.

Anyone who remains convinced that the Book of Genesis contains the genuine account of the creation of man and the universe should not bother with this book. The same goes for other religious beliefs about the universe’s beginnings. Accepted scientific findings to-date explain the origins in terms of the Big Bang.

Homo sapiens is one type of animal belonging to the genus homo. It has happened, largely by luck, to have become top-dog, so to speak, among other homos such as chimpanzees, gorillas and orang-utangs.

Harari traces the evolution of man through three stages, the Cognitive Revolution (about 70,000 years ago), the Agricultural Revolution (about 12,000 years ago) and the Scientific Revolution (500 years ago). How this is likely to end is the subject of another book Homo Deus to be reviewed later.

The Cognitive Revolution describes how sapiens evolves as hunter-gatherers to provide food and shelter for their families; the Agricultural Revolution sees the creation of a division of labour as family members specialize in certain tasks, with males undertaking farming activities on fixed plots of land, as opposed to wandering around gathering food, and females mind things on the home front; and the Scientific Revolution sees the development of new sources of power as, for example, steam power and later electricity and atomic power substitute over time for horsepower and manual labour. The outcome is today’s industrialized political economy found in many parts of the world.

Evidence of life in Cognitive times is found today in aboriginals living in Australia and in tribes travelling in the Amazon rainforest and places like Papua New Guinea. And examples of the Agricultural Revolution are found throughout Africa, and parts of Asia.

The book is written in clear non-jargon prose. Harari developed it for a course in world history and listened carefully to the feedback from students, the questions they asked and the clarification that was needed. Would that other textbook writers did the same thing. Aside from history, the author has a good grasp of economics, sociology and politics.

One set of concepts used throughout the book are terms like imagined order and myths to explain ways in which societies are organized. Formal education and family life teach people about the merits of families, the state, religions and things like paper money. The last is based on the belief that others will accept it in exchange for goods and services even though the paper notes have no intrinsic value. The structure of societies and their interaction is based on beliefs, which are accepted truths by people that things will happen or people will behave in a certain way. There is nothing concrete about these norms of behavior, but societies operate as though they should be followed. Laws are passed and attempts made to enforce them. When they are not accepted then conflict is likely to occur.

There is no substitute for reading this book. I have read it twice, and will use it as a reference in the future to explore a wide variety of topics covering different disciplines.

Canada in the age of Trump

November 25, 2017

A year in the reign of Comrade Trump, what might it mean for Canada? Except for cabinet level appointments, the Trump administration has achieved very little with a nominally Republican President aided and abetted by majorities in both Houses of Congress. The reasons appear to be a combination of the following:

 

  1. Public support for the President comes from a combination of traditional Republican voters, and those who feel they have been shafted by previous administrations, Democrat and Republican. Supporters of Democrat leaning Bernie Sanders join with Trump supporters in their distrust of Congress. There is widespread reluctance to support anyone named Clinton.
  2. This unusual coalition is responsible for the President maintaining the support of about 35% of the electorate despite his erratic behavior and failure to get legislative approval for his policies.
  3. At the time of writing, the President is mired in a swamp of sex-related scandals. In Alabama, an arch accused misogynist is running for a senate seat under the Republican banner and could well be elected. The Republican branch of the party in Washington would like to disown this Alabamian, while the party in Alabama supports him. The President does not want a democrat elected and says the alleged misogynist has denied the charges and should be believed.
  4. The President is an admirer of leaders with dictatorial credentials, Putin, Duterte, Erdogan, Xi Jinping and probably Mugabe, Basher Al Assad, and Poroshenko.
  5. Trump tries to turn the dial to focus on the peccadilloes of democrats, especially former President Clinton and sitting Senator Al Franken. But by so doing Trump resurrects his own wayward behavior towards women, thereby throwing an unwanted spotlight on himself and the party that is labelled Republican, and which is trying, with a slim Senate majority, to pass legislation. During the course of the year, aside from appointments and cabinet orders, Trump’s administration has achieved almost nothing, and the future prospects look bleaker every day.
  6. If US voters nation-wide are saying to the parties a plague on both your houses and the institutions you inhabit, then the prospects for both national and global leadership by the US are in jeopardy. All this at a time when there are risks arising in Asia, the Middle East, and with foot-loose terrorism in many places.

 

This background of factors and their consequences may alter very quickly – perhaps within a week – leading to grounds for a revised assessment of the future. Where does Canada stand in this whirlpool of cross-currents?

The threats for Canada include:

  1. Military action on the Korean peninsula leading to the use of nuclear weapons.
  2. Breakdown of the tripartite NAFTA negotiations.
  3. Terrorist attacks.
  4. Populist political movements gaining strength in Europe.

Each gives rise to a different set of issues. Together they create uncertainty for governments and especially for the economy. Allies and enemies of the US are drawn into the morass caused by chaotic political conditions in the US.  Business, for example, will hold back on new investment due to the uncertainty. For Canada, regardless of the outcome for NAFTA negotiations, new business investment will be placed on hold.

The US political structure may be sturdy enough to withstand one term of a Trump administration, but a second would likely cause political and economic instability and make things difficult for Canada. Proximity and a fair degree of dependency has in the past worked well for Canada. The future may be different and will likely reignite nationalist economic policies which would add to the harm that might be inflicted on the Canadian economy.

When the Leader Stumbles

November 18, 2017

“The US is in the middle of a political meltdown, unable to manage a domestic agenda or a coherent foreign policy. The White House is in turmoil; congress is paralyzed; and the world is looking on in astonishment and dread.” (Jeffrey Sachs, 2017)

 

Trump manages to capture the headlines on almost a daily basis. Future readers will wonder what important news items did not get covered as Trump feeds the media raw meat, and the public eagerly devours it, partly because it tastes so good. The President has the knack for drawing attention to some new issue especially when the questioning on others gets too uncomfortable. His information sources appear to be cable news channels and a coterie of close advisers who themselves have had little experience of governing, although some, as military leaders, may have had impressive careers. As the days pass, the hope is that these don’t get fed up and decide to leave early, although in many countries the citizens shudder when the generals take over.

 

It will be interesting to see who was offered senior positions in the Trump administration and refused, who accepted jobs and their respective qualifications. It seems clear that senior levels of the US federal bureaucracy are being weakened by a failure to make appointments and the selection of poorly qualified people.

 

Canada’s proximity to the US is seen by most Canadians as offering enormous economic benefits. Arch nationalists may disagree, but many countries, at least in the past, would have eagerly swapped places with Canada in order to have ease of access to US capital and other markets. Now our neighbor is a flailing (failing?) nation with the attributes described by Jeffery Sachs.

 

In today’s world there are trained suicide bombers returning from the Middle East, others home-grown who never leave home and can learn details of their trade from the internet. Drones can be purchased from Costco and toy stores; trucks are available to rent. It is surprising that terrorists have not struck more soft targets like stadiums, bus and train stations and airports.

 

Managing these situations requires cooperation and trust between governments. Unfortunately, this is not what is happening as turmoil mounts in the US with isolationist forces on the rise, while the threats require international cooperation. Similar populist pressures advocating isolationism are growing in Europe both with Brexit and in individual countries. There are no easy solutions to the issues that give rise to these pressures, but it would be nice to know that mature grown-ups are trying to manage them. US observers tell us this is now not the case.

Sapiens – A brief history of humankind – A review

November 15, 2017

If the author or authors – some think it was Moses – of the Book of Genesis had had the evidence provided by manned and unmanned missions to space, would they have given a different account of the origins of the universe and of humans. Space exploration over the past fifty years has expanded our understanding of the universe but with many questions still answered. Anthropological research has increased our knowledge of the evolution of humans.

 

Along comes Israeli historian Yuval Harari, author of first Sapiens: A Brief History of Humankind, and in 2015 Homo Deus: A Brief History of Tomorrow. The first traces how humans got from then to now, while the second speculates about their future. Both challenge our views of the world and our place in it past, present and future. Here I comment on Sapiens.

 

The time span of world history stretches from 13.5 billion years ago, while the story of Sapiens deals with the last 70,000 years, a small fraction of this period, when our forefathers emerged out of Africa and spread throughout the world including across the Bering sea from Asia to the American continent. All inhabitants of today’s Canada and the US, for example, are migrants from some time past. Even the first settlers were immigrants travelling south and west through today’s North, Central and South America.

 

Today’s humans have evolved from the genus Homo of which there were many types whose known origins are traced by anthropologists to about 2.5 million years ago in Africa. The evidence used is the carbon dating of stone tools. Fast forward to 200,000 years ago when Homo sapiens is traced to east Africa – sapiens being one species of the genus Homo. We are not alone but one part of this genus.

 

While there were and are several species of the genus Homo, the interesting puzzle is to find out why Homo sapiens survived and why many but not all of the others became extinct. Sapiens belongs to the same genus as gorillas for instance. Harari describes how three revolutions have lead humans to the so-called civilized state we enjoy today – the Cognitive Revolution (70,000 years ago) and the emergence of language, the Agricultural Revolution (12,000 years ago) with the domestication of plants and animals and the emergence of farming to replace the hunter-gatherer; and the Scientific Revolution (500 years ago) of which the Industrial Revolution (100 years ago) is one part.

 

In the broad scheme of things, the present day is a small part of human evolution and will likely pass to another stage which Harari discusses in his second book Homo Deus (to be reviewed later). There are many excellent reviews of Sapiens, all favourable except for the odd academic who wants to quibble with some issue to reveal his or her brilliance…..usually his.

 

What struck me was the short space of time that humans have existed, and the recognition that this could and is likely to come to an end; that we are closely related to gorillas and chimpanzees, and that in certain environments they would survive and we would not. This is aside from extinction of all forms of life resulting from a nuclear holocaust due to the madness of politicians. Today’s politicians make the “Madness of King George” look like a fairy tale. One of my ancestors was an ear doctor who may have hastened his demise. This book makes it difficult for many religions to retain their account of the origin and nature of the universe which is continuing to expand.

Is Trump a modern day Luther?

November 13, 2017

Fifty years hence will people describe the political rise of Donald Trump as having similarities to the career of Martin Luther (1483-1546)? Of course the details are different in numerous ways, but the general circumstances giving rise to both men have similarities. Both had a following united by what they felt to be injustices or wrongs being committed by those in power. Luther was considered to be a royal pain in the arse by the Catholic hierarchy in Rome as well as church leaders in other parts of Europe. Trump claims to champion those in the US  who have been left behind in the economic growth of the past three or four decades, estimated at 35-40% of the population. The circumstances of these people are described by Michael Sandel, Professor of Politics at Harvard and J.D.Vance author of Hillbilly Elegy.

The personalities of the two men are quite different, but the conditions giving rise to their success have similarities. Luther was appalled by the corruption perpetrated by the leaders of the Roman Catholic Church such as the sale of indulgences, and set about creating the Protestant faction of Christian believer. Given the times, it is surprising that he was not imprisoned and/or executed.

Trump plays to the support of those left behind in the prosperity enjoyed by people with higher incomes, and the growing spread between the very rich and the rest. While his tactics do not appeal to many because while he also legislates in favour of the rich, and behaves in unconventional ways, at least he manages to keep the support of about one-third of the population.

How long Trump survives politically is moot at this time, but looking back it may be seen, that like other political rabble rousers, he was adept at identifying sensitive points of the establishment’s behaviour. His use of Tweets may come to be seen as similar to Luther’s authorship of the “ninety-five theses”  containing a critique of the church and the need for reformation.

The Swamp in Canada

October 28, 2017

So, Trump’s support has fallen to 38% from the mid-forties. That seems to me like a considerable chunk of voters including I suspect some, who in the run up to the election liked Sanders. Both appealed to voters who felt they had been dealt a raw deal and had few future prospects. That group still exists. Do similar circumstances exist in Canada?

To many voters Trump’s appeal was his promise to drain the swamp of lobbyists and hangers-on who benefit from the operations of government. In the process he has managed to fill the swamp with his own noxious creatures rather than to expel those already there. A Bannon is there to destroy the legislative process, at least the way it has operated to-date. Past dictators have used similar means to gain power for themselves and for those supporting their views.

Some blame the checks and balances built into the US constitutional structure. They forget that it was set up to offset what was seen at the time to be the failure of British rule by an hereditary monarch and elected parliament. It is more likely that all representative political systems develop flaws and weaknesses over time, as politicians learn how to work the system to the benefit of certain groups and the expense of others. This seems to be the case in the US where income has become redistributed to the top 5% of the population.

Figures for income inequality by country show 46.1 for the US and 33.7 for Canada, where a higher figure shows greater inequality. (Figures of inequality by country can be found in Wikipedia under “List of countries by income inequality”). This does not mean that Canada is swamp-free, but more likely that it may be less infested than south of the border, and may have different inhabitants.

Canadian interest groups are adept at lobbying not just for basic needs such as education and health care, but for low-cost (subsidized) transit fares, free on Wednesdays in Ottawa for seniors like myself, doubtlessly a deserving group, and attractive to politicians appealing to an increasing older population. Students lobby provincial governments to abolish fees for higher education without taking into account how it might be financed and what it might do to the quality of the service provided. Canada has its own swamp but with different residing creatures than south of the border. A weakness of any democracy is that voters learn how to play the system.

The Politics of Resentment

October 18, 2017
After watching and reading about Trump during his first ten months in office, I have gone from thinking him dangerous and mentally unstable to a feeling that he has a personality disorder. This still makes him dangerous because of how people may react to his antics and statements.
While no psychologist, I find his behaviour as petulant and childlike. But while a child can be disciplined and quarantined, this is not the case with an elected politician in a democracy. Hitler and Mussolini were elected via a democratic process and then overturned it. I am not sure about Franco and Stalin, but both had a core of strong supporters.

A mistake now is to focus too much on the man rather than on his supporters. After ten months, between 35 and 40 percent of the US electorate continue to support Trump. Many are not traditional Republican voters but people who feel that they have been getting a raw deal from their elected politicians. Like Hitler’s supporters, they are willing to follow a leader who offers them prospects, because it can’t be any worse than their present situation. The party label of the leader matters much less to them than the promises made. Eventually they may feel betrayed by their leader; the alternative could be a more extreme leader or a manning of the barricades as in Les Miserables.

What motivates the 35 percent is that over the past few decades their real incomes have declined, and the gap between the top 10 percent of families and the rest has widened with few prospects of better times. They are willing to support someone who offers better times ahead even if his manner is a bit rough up close. Of course if he does not deliver they may switch their support, perhaps to someone with more radical views and exhibiting more outrageous behaviour……caveat voter.

Trump connects with the 35 percent by understanding and appealing to their feelings of resentment. He feeds off it and so do they. I found the works of Michael Sandel, Professor of Politics at Harvard, and J.D.Vance author of Hillbilly Elegy provide good explanations of the American scene. The electoral success of right wing parties in Europe manifest similar political forces.When the Economist considers that Jeremy Corbyn could be a future UK prime minister you know something is afoot. Canada has a version of this with the Ford brothers in Toronto.

University Funding

October 7, 2017

A generous donation to Carleton University by the Nicol family is to fund a new commerce building to house the Sprott School of Business. One has to wonder whether this is the best use of the $10 million input to a $48 million building. Throughout universities many faculty offices are occupied only a few hours a week, as faculty work at home connected worldwide with their own computers. This has been the case since the early 1970s. University office sharing is an option as takes place in many businesses.

Another practice is online teaching which, while it will never altogether replace in class attendance, is increasingly being used in many disciplines. Check the Khan Academy website for one online example. Over time schools and universities will learn how to grant diplomas and credits which employers will recognize. This trend also works against creating more university space.

There will be no lack of suggestions as to how the Nicol donation could be used. An obvious one, at least to me, is financial support for students. Rising fees and reduced government funding increases the burden on students and their families. Nicol Fellowships could be created thereby spreading and perpetuating the Nicol name over numerous recipients rather than one building. Fulbright Fellowships, established in 1946, were named after Senator Fulbright. Although he provided none of the funding, his name lives on with fifty-four Fulbright alumni going on to win Nobel prizes.