Archive for the ‘Economic’ Category

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.

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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.

Turbulent Times – A Path to Dictatorship?

August 27, 2017

A rough path to dictatorship is to be elected by a recognized democratic process and then to use the powers to create a dictatorship. Hitler did this in the 1930’s in Germany, while Mussolini and Franco performed a version of this in Italy and Spain. Conditions prevailing in each country determined the particular means to the takeover. Could this happen again?

 

After less than a year in office, 35 percent of the US electorate continue to support the president. Many are people with lower incomes who have not enjoyed the benefits of economic growth enjoyed by the rest of the population. To-date, President Trump has the support of those disadvantaged who are willing to ignore or to forgive him for the erratic way in which he has chosen to govern – the failure to make appointments to key positions, scripted speeches outlining policies (increasing troop deployment to Afghanistan) together with incendiary remarks about the failure of Congress to enact his platform, and possibly a willingness to create turmoil by refusing to fund the government. Another sign of unrest is the number of appointees who have either been fired or resigned their positions in the first eight months of the administration.

 

Presidential power has so far been held in check to-date by a combination of media reporting, the courts and acts of Congress. Should these fail to receive public attention and support then the democratic process flowing from the US Constitution will be in jeopardy. Currently two areas of particular concern are what happens if North Korea (or any other nuclear state) initiates an attack, and what happens if funding to the federal government is terminated.

 

The circumstances today in the US are in many ways unlike those experienced by Germany, Italy and Spain in the 1930’s, but the seeds of dictatorship exist and could still take root. The growth of political and economic uncertainty, both domestically in the US and internationally, is bound to create instability – in what precise ways is difficult to predict.

Personal versus Government Debt

April 12, 2017

Personal debt is relatively easy to understand. A person borrows, often for a specific purpose – house, car, education, vacation etc. –  knowing what the interest cost and terms of repayment will be. Once in receipt of the funds the money becomes fungible and can be used for any purpose including a specified item. The loan may make it possible to purchase the item, but the actual dollars used may come from any source available to the buyer.

 

Repayment is a condition of the loan and can only be avoided by renegotiating the terms, or defaulting on the loan with various consequences. For personal loans, the interest rate will be known at the outset, although there may be conditions for revising it if say the government alters interest rates through changes in monetary policy.

 

Consumers are generally aware of their personal debt situation, and can anticipate what will happen when various circumstances change which affect their ability to repay or service the loan. Use of a loan enhances their ability to acquire goods and services which can differ in terms of what is purchased. A loan spent on a vacation, a meal or attending a concert will have different consequences than if the expenditure is made on a house, car, medical procedure or attending an educational establishment. The latter represent a capital investment that can lead to an enhanced flow of income in the future; the former may give immediate satisfaction but have less lasting benefits.

 

The nature and consequences of personal debt are fairly easy to describe and appreciate. Public or government debt is a different kettle of fish in terms of measuring its size and understanding its ramifications which include these and other factors:

 

  1. Government expenditures are financed by a combination of tax revenues and, if needed, borrowing, the latter becoming part of the national as opposed to personal debt. But that debt becomes personal as it is shared by all Canadians and includes the debt of all three levels of government. If governments make poor economic decisions causing increased deficits, then their, and our, levels of liability increase, and Canadians would be likely to face higher levels of taxation.

 

  1. Public debt does not have to be paid off. A ten-year government bond does have to be redeemed at the end of the decade but usually it can be replaced with another bond. A government’s borrowing capacity is thus greater than that of most individuals. It has a much longer lifespan and a continuous and often growing source of revenue to service its debt and repay past loans.

 

  1. Trying to figure out the size of a country’s national debt and its consequences is extremely difficult, at least for me. An internet search results in different concepts of debt being used. Gross versus net debt is fairly obvious, but different sources will quote different figures for net debt for a country in a given year. News reporting is not helpful with reports merely printing what some source, that is thought to be official and thus reliable, publishes.

 

  1. It is often stated correctly that government debt incurred today will have to be repaid by future generations. Whether this is a bad thing or not depends on what the increased debt is used to finance. If it builds and/or repairs highways, hospitals, airports, ports and educational facilities, this represents an investment for future generations. Failure to make such public expenditures would be a detriment to future generations. Of course, there are limits as to how much borrowing can be done at any time, but these type of investments are different from other items of expenditure.

 

  1. National debts are sometimes reported gross and sometimes net with the net figure deducting assets which the government owns such as land, buildings, equipment including military equipment. Some physical assets may be easy to value but how do you value land in Canada’s national parks. These have significant value but since the government would not consider selling them then their only value comes from the revenue generated by visitors less the cost of administering the parks. (A similar private sector situation arises with churches which often find it difficult to borrow money using the building as collateral).

 

I don’t think economists or journalists do a good job of explaining the nature and consequences of deficits and debt except to repeat what each other say. It is not an easy topic to untangle, but if the absurdly low current interest rates on short, medium and long-term government debt persist there are likely to be severe repercussions. Bondholders holding bonds with negative real returns on their investments may turn away from government lending, causing interest rates to rise with consequences throughout the economy.

 

John Cochrane has an interesting article on debt and inflation at

http://www.nationalaffairs.com/publications/detail/inflation-and-debt

What’s special about infrastructure spending?

April 9, 2017

Two economic topics in North America are the return of manufacturing jobs and investment in infrastructure. The first is not going to happen because the nature of manufacturing has changed as automation takes hold. It is similar to what happened to agriculture when tractors and combine harvesters replaced manual labour and horse drawn equipment. Output grew but using a different combination of labour and capital. More farming output is now produced with far less labour, while more labour goes into producing the tractors and harvesters for the way farming is now undertaken. The same is happening today to manufacturing with more labour going into activities like writing software to run the machines which produce goods in place of manual labour.
Infrastructure covers a wide range of items like roads, bridges, railways, airports, harbours and communications facilities. These all require continual maintenance. Failure to do this on a regular basis escalates the the cost of restoring the infrastructure, while the quality of the services provided such as road and rail safety diminishes. The alternatives are spending today to maintain infrastructure or spending more tomorrow. If the latter is chosen not only will the cost be higher, but the service provided by the infrastructure will be of lower quality and impose cost on others. For example, unfilled highway potholes cause the deterioration of motor vehicles.

Much government activity is associated with expenditure on infrastructure such as schools, universities, hospitals, defense facilities and equipment. Failure to replace and renew equipment for the Canadian navy and airforce creates a saving today while placing a burden on future generations. The same is generally the case for other areas of infrastructure spending.

When a government announces that it will increase infrastructure spending, it is frequently the case that it is going to remedy the failure of previous governments to maintain facilities in good working order. Home owners know only too well what happens to buildings if items like roofs and windows are not repaired and woodwork is allowed to deteriorate for lack of painting. It represents a failure to maintain the value of family infrastructure. Governments forced to increase this type of spending are doing what all governments should be doing, but often fail to do on a regular basis. Far too much attention is often given to the cost of new capital expenditures as opposed to the future ongoing costs of maintaining the capital in good working order.

The Shattered Mirror

February 8, 2017

 

 

The Shattered Mirror – News, Democracy and Trust in the Digital Age proposes increased bureaucratic input and public funding for a sector rocked by new technology.

What Uber has done to the taxi business and Airbnb to accommodation, has invaded all forms of media including news reporting and distribution. Daily newspapers are haemorrhaging advertising revenues and many have been forced out of business, or to adopt different means of distribution. Many other sectors are affected by technology such as education with the offerings of online courses. Existing suppliers fight back to maintain at least some semblance of the status quo, often lobbying governments for increased support. Ultimately new technology usually wins and a new breed of entrepreneurs rise to fill any gaps to provide the desired goods and services.

The process is part of Schumpeter’s stages of creative destruction which benefits consumers, and those producers who adapt. Those who lose appeal to the government for support. Such is the case for The Canadian Public Policy Forum’s latest report The Shattered Mirror, News, Democracy and Trust in the Digital Age which examines how technology has affected traditional news media. It argues that the public is poorly served by the new digital news providers and that democracy is at risk with, for example, the reporting of fake news.

Since the 1950’s numerous reports have examined the Canadian media including news. They include:

1951 Royal Commission on National Development in the Arts Letters and Sciences (Massey Report).

1961 Royal Commission on Publication (O’Leary Report)

1970 Special Senate Committee Report on the Mass Media, (Davey Report)

1981 Royal Commission on Newspapers (Kent Report)

1982 Report of the Federal Cultural Policy Review Committee (Applebaum Hebert Report)

2006 Senate Report on the Canadian News Media (40 recommendations and 10 suggestions).

 

All recommended measures of protection and support to which The Shattered Mirror adds its contribution. Written by a person who has had a distinguished career in journalism, this almost assures that the recommendations will include further government support for the industry. It succeeds in this regard. It would be the same if dairy farmers were asked for advice on supply management or academics on university funding.

The report contains thirteen proposals. Many require additional administration of funds and rules which in total would require both added bureaucratic overhead and time spent by firms to qualify for the funding.

Two proposals provide the tenor of the report and the tortuous process that would be required to comply with the provisions.

  1. In the proposal to extend provisions of Section 19 of the income tax act to other media. Producers of eligible news will be required to show that: (Recommendation No.1).

At least 75 percent of editorial payroll and 75 percent of their eight most highly paid employees are Canadian individuals or personal-service companies.

At least five percent of the company’s revenue generated in Canada is spent on editorial operations, with a significant amount for civic-function journalism.

 

  1. Creation of a fund managed independently from the government (Recommendation No.5).

Creation of the Future of Journalism and Democracy Fund would provide financing for digital innovation, especially in its early stages, and be directed at those operators who produce civic-function journalism at the national, regional and local levels. To qualify, enterprises would have to be Section 19-compliant and deliver original news on digital platforms that are refreshed at least once a week. The fund would cover a maximum of 75 percent of the cost of a project. The ability of applicants to attract support from other partners would factor into the grant decision.

 

Proposals regarding the CBC fail to note shrinking audiences especially for English language television. CRTC Annual Monitoring Reports (available online) show the CBC’s share of the English language television market fell from 13.2 percent in 1994 to 7.5 percent in 2000 and to 5.1 percent in 2012. While government financing has remained around $1bn, this segment of its mandate has been shrinking, so that on a per viewer basis the funding has been increasing.

If the CBC is to survive, consideration should be given to it being funded only by government and not selling commercials. The latter puts it in competition with private broadcasters, allowing it to use public funds to buy programs like major sporting events. In the UK and Australia, the public broadcaster is funded almost entirely by government, with far less angst being created between public and private broadcasters. A government owned broadcaster, if one is needed, can devote its attention to its public service mandate and have a far lesser concern for audience size.

 

The Shattered Mirror focuses on the importance of civic-function journalism defined as the coverage of elected officials and public institutions, from legislatures, judicial and quasi-judicial bodies and city halls to school boards and supporting public services. That is important, but in a globalized world coverage of what happens outside Canada is increasingly important. Much of this can be accessed online from websites and blogs run by people whose judgement I personally respect in different news related fields, and superior to many traditional news sources. In broadcast media, my preference is for The Agenda on TVO and the PBS Newshour. In both instances the anchors are informed but do not insert their own opinions, unlike what prevails with the CBC and CTV.

There is much more to comment on in the report. As it stands it argues the case for supporting more of the same with increased bureaucratic input. It deserves further discussion.

Services are everywhere, some well and some less well paid

February 4, 2017

Economic policy is being driven by the belief that good paying manufacturing jobs are being lost and replaced by lower paying service sector jobs, and that the manufacturing jobs can be recovered by protectionist trade policies and subsidies.
It is the case that the share of employment classified as manufacturing is declining and that of services increasing, but the reasons and implications need to be understood. This phenomenon is occurring in all developed countries. A similar change took place in earlier times, when the share of employment in agriculture declined while agricultural output increased. The loss of agricultural jobs was offset at least in part by growth in other parts of the economy, especially manufacturing. What needs understanding today are overall changes in the economy and how jobs classified as manufacturing and services are recorded.

Employment data by firm and industry are collected on a plant and enterprise basis where the enterprise may consist of several plants. Each plant typically employs a combination of manufacturing and service sector personnel. The former include assembly line workers and the latter accounting, legal, secretarial and others. While the latter appear in national statistics as employees in the manufacturing sector, they are actually providing service-type employment.

If a firm decides to contract out the accounting and legal work to service sector firms which specialize in these activities, then manufacturing employment declines and services employment increases. Overall employment may remain unchanged.
(By the way a similar phenomenon occurs when plants and firms are allocated to industries. If a plant produces mainly automobiles but some bicycles, it will be allocated for reporting and data collection purposes to the industry where most of the production occurs, in this case automobiles. The bicycle industry will in turn under-report production of those bicycles produced in the automotive industry).

The loss of jobs in manufacturing can occur because manufacturing firms reorganize their operations by outsourcing service sector jobs. The reverse may be true if they insource certain services. The former case may be one reason for the loss of manufacturing employment. As technological change occurs, manufacturers are continually changing their production processes. The use of robots for humans on assembly lines will reduce the number of assembly line manufacturing workers, but increase the number of workers required to service the robotic equipment, positions that did not previously exist.

The services-manufacturing dichotomy means that a worker who uses a wrench on the assembly line is classified as a manufacturing employee, while a worker who programs a computer to instruct the robot to do the same work is a service worker. The distinction between what is considered manufacturing and services work can be messy.

Magnus Lodefalk, who has studied this issue for both Sweden and other industrialized countries, notes the following: (Review of World Economics (2014) 150:59-82)

Manufacturing in industrialised countries is intensifying its use of services, and there are indications that the share of services in total turnover is rising. On the input side, the ratio of bought-into value added services has increased since 1995 across all manufacturing industries, and in-house services production has also expanded. The manufacturing sector increasingly employs mathematicians, engineers, computing professionals and business professionals. Services used or produced by manufacturing firms include research and development (R&D) services but also extend to knowledge or intangible capital services more generally, as well as to services such as telecommunication and transport. On the output side, the share of services in total turnover also has grown since the mid 1990s for some countries. Regarding export, Lodefalk studies Sweden and finds that manufacturing’s service exports have more than doubled between 1998 and 2006. There are arguments for the ability of services to support exports in manufacturing. Services may help firms to overcome costly informal barriers, such as asymmetric information, in international trade. Changes on the demand side in industrialised countries are also likely to favour manufacturing firms that increase the services content of their offerings.”

 

 This is not to ignore the simultaneous growth of low paid service sector jobs in food and beverage operations and homecare businesses among other. What is happening is the simultaneous growth of highly paid skilled jobs in manufacturing and some services, and the growth of low paid service sector jobs in certain areas. The medium skilled jobs are in decline or growing slowly. A TED lecture by David Autor (Dec.2016) is worth viewing as it sets out how the skill structure of the labour force changes and is always changing.
The implications include the need for retraining existing members of the labour force and assuring that young people, new entrants, get the right skills. There is nothing new about such advice except that the speed of change may be faster now and educational and training institutions slower to provide the required skills. People can expect this to happen throughout their working lives.

Security versus Abundance

January 9, 2017

Economics is a discipline often introduced by focussing on scarcity, the scarcity of resources to satisfy human and animal wants, although the latter are usually ignored. An alternative approach is to focus on underutilized resources as illustrated by Uber and Airbnb. Both illustrate the absence of scarcity. Cars spend much of their lives parked and not providing transportation services, except as an option good for people to use when it suits them. Uber arose as owners decided that they could use their cars to make money when they were not needed to provide the owners transportation. The cars were underutilized resources and a way was found to make use of them. Scarcity was not the issue underutilization was.

The same could be argued for Airbnb where owners had space in their homes for others to use. Scarcity of living space could be reduced if not overcome in many societies if a process of sharing was organized. Bed and breakfast arrangements have been around for years and Airbnb is just a way of extending these hotel-like activities.

Anything which is a public good tends to be underutilized such as the text of a book, an empty park, road or beach. At home, wardrobes and chests of drawers hold clothing which is not being used. A surplus rather than scarcity is the issue because people want choice and are prepared to use their incomes to create options, but these require creating access to a surplus of clothing on hand.

Other examples illustrate not-scarcity, a surplus or underutilized resources include:

Cars being driven with no passengers, only the driver.

Truck owners try to avoid dead-heading by arranging full loads for their lorries travelling in both directions between two points.

Shops with unsold goods, especially when expensive and held for a long time. Annual sales are one way of disposing of surplus goods.

Buildings such as schools and universities which are only used for part of each day, and part of each year. Accommodation and lecture rooms are often hired out for other uses.

Empty warehouses and buildings of all kinds.

Trained workers unable to find paid work. OK, scarcity of jobs is the flip side to unemployment.

Underutilized resources occur with the sun in terms of both heat, light and energy as well as with wind, tides and waterfalls.

Recycling is a way of reducing scarcity by making more intensive use of resources.

This is not to suggest that scarcity is unimportant in examining economic issues, but to note that especially in high income societies, the issues are also often those of coping with underutilization not scarcity. If the focus is switched to developing countries, then there is obvious scarcity related to items like health, education, housing, safety, food, and water. And in developed countries examples of scarcity can be found. It just seems misleading to initiate the study of economics without noting that scarcity is not the only issue to address. Where scarcity is paramount is in the finite number of hours in the day, but these too can be underutilized.

Meeting with remarkable men – one occasion

January 3, 2017

In July 1966, I was fortunate enough to be introduced to and have lunch with Ronald Coase, the 1991 Nobel prize winner in economics. His citation included two articles, The Nature of the Firm and the Problem of Social Cost. Coase was a close friend of Basil Yamey his colleague at LSE and my PhD supervisor.

Coase and Yamey had undergraduate degrees in accounting and business before pursuing academic careers as economists. Both were interested in how firms worked and how and why transactions took place. For Coase, theory was derived from observation, and while he was not averse to mathematics, he felt it should come after studying actual agreements and how conditions and obligations were established.

In 2003, at age 93, Coase gave the Coase Lecture at the University of Chicago Law School. He said that he found it odd to be giving the Coase Lecture as every time he spoke it was a Coase lecture. What is of interest to economists today is his description of how the Nature of the Firm evolved, first as an undergraduate essay in 1929 which was turned into a published article in Economica in 1934, but which in 2003 he considered an undergraduate essay. At the time, he said the article drew no attention unlike his second famous article The Problem of Social Cost.

As a student while studying business and accounting at LSE Coase was awarded a travelling scholarship to the US where he visited a number of firms observing how production was organized at the plant level as well as at head office. A combination of lectures, onsite visits and interaction with other students, Coase viewed as a recipe for the development of both theories and policy alternatives. One implication today is the importance of both the school you attend and the calibre of fellow students. The two are probably related.
The lecture is posted on the University of Chicago Law School website under 2003 Coase Lecture.

Clumpout one day to go

November 6, 2016

Be grateful to Trump for the favour he has bestowed. Regardless of the outcome, along with Bernie Sanders, Trump has mobilized about half of the US electorate to tell us that the American political system, at least in Washington, is malfunctioning and in need of major repair. No matter who wins on November 8th, that toxic situation will remain and is now visible to all.

The next administration will have a difficult time of governing depending on the membership of the House and Senate, and appointments to the Supreme Court. The elected members no longer belong to two parties, at least on the Republican side, where the Tea Party gang is willing to shut down the government by failing to authorize funding for government operations. And for Democrat supporters there are now two branches of the party, represented by those who in the primaries supported Clinton and those who supported Sanders….in a sense there are now four parties not two.

My guess, with one day to go, is that Clinton will win the presidency, and perhaps the Democrats the Senate but not the House. But the electorate has a way of surprising the country as shown recently, for example, by Brexit in the UK, and the large number of Liberals elected in the last Canadian federal election.

In an election where both candidates are unpopular, some voters will stay at home. Democrats who don’t vote will be giving support to the Republican candidate, and vice versa for stay at home Republicans. For this reason, pre-election polls are frequently wrong, and because voters don’t want to reveal their choices. While the outcome is uncertain, what is clear is that Washington is in bad need of a makeover, and that while this happens Canada and other countries are likely to be sideswiped, especially as trade liberalization is no longer a popular goal.