Categories
Economy Taxation

The Debt

One of the incessant ‘Trudeau must go’ posts includes this feature chart. It pegs Canada’s total debt as $1,163 billion, and each individual debt as $31K. These numbers are supposed to frighten us. But what struck me is how low they are. Compare this, say, with total Canadian consumer debt of $2,200 billion. Average consumer debt is $20K excluding mortgages.

So let’s look at Canada’s federal debt. If I pay $4 tax per day, that stops the growth of the debt in its tracks. If I add, say, a car payment, we could eliminate the debt in four or five years. Redirecting this money would also slow inflation. So why don’t the Conservatives support this?

It’s because they know this level of debt is very manageable. And they know these payments would be even lower if we include things like corporate taxes. That’s the fallacy of “your share of the debt is $x.” It assumes corporations owe nothing, and that billionaires owe (and benefit) the same amount as you. The Conservatives are trying to scare you with a threat that is not real.

The fact is, Conservatives don’t actually want to eliminate the debt. They want to reduce spending on social services and give tax breaks and free money to the rich. But you can’t pay down the debt simply by reducing spending. You have actually pay down the debt. But that’s the part conservative governments never actually get around to.

Here’s another thing: who do we all owe this debt to? Roughly 40% of the total debt, and almost all of the recent debt, is held by the Bank of Canada. About half the remainder is held by Canadians and Canadian institutions. So we owe the majority of our debt to ourselves. It’s not like owning money to the finance company or to a bank, where we never see any value in debt repayment.

As Yannick Beaudoin and Mark Anielski write, “Canada’s debt is not like household debt. The persistent use of the household debt analogy by politicians and media is not only grossly inappropriate; it also harms Canadians’ ability to make informed decisions around ensuring the government spends appropriately, wisely and with accountability.”

Categories
Economy Health

Inflation and The Deal

I heard a pernicious argument from a Conservative commentator on Rosemary Barton’s morning show yesterday. In between condescending remarks (“now look, Rosie”) the argument ran as follows:

We are in a time of inflation so we should not pass measures that increase consumer spending. So we should oppose pharmacare and dental care. By contrast, though, large expenditures like the purchase of F-35 fighters are good because so little of the money remains in Canada. So goes the argument, which is currently being broadcast on all the usual channels.

This is all a part of the Conservative broad front against the agreement made by the NDP and the Liberals whereby the former would support the latter in confidence motions until 2025 so long as key NDP priorities were passed, and specifically, pharmacare and dental care. The budget this week will be the first test of that.

I also read in passing of a plan to offer high speed internet at $20 per month to low income seniors, as well as a tax on the banks, and this too seems to be part of a realization on the part of the Liberals post-pandemic that we need to take care of people who are not in a position to care for themselves. No doubt the Conservatives would oppose this too on the grounds of being ‘inflationary’.

But there is a price to the Conservative argument that they’re not prepared to admit. And it is this: there is a direct correlation between being poor and death. We saw this clearly when poor people died at a much higher rate during the pandemic than the wealthy. The less we help poor people, the more they die. That would be the cost of the Conservative’s anti-inflationary stance.

Of course, that stance is unreasonable in the first place. The poor contribute very little to inflation. The drive to higher prices, when it results from consumer demand, comes from spending by people with money. I mean, d’uh. Creating a more equitable society doesn’t cause inflation. Quite the opposite: the less equitable the society, the more vulnerable it is to inflation.

That said, in the current circumstance, inflation isn’t being caused by high consumer spending at all. Rather, the problem is at the other end of the spectrum: supply. We are, because of the pandemic, and now because of the war, facing shortages. The price of oil is especially at fault here, as it always is during wartime. And the labour shortages are another cause; it’s not only the deaths, but also the people with long Covid, and the people who decided minimum wage isn’t worth risking their lives.

For in the battle against Covid, just as in the battle against inflation, it is poor people who take the brunt. Higher prices don’t really hurt the wealthy; they can just spend their way through it, and perhaps salt a little less in their overseas nest egg. The poor are expected to work, to suffer higher prices and lower wages, and to take the risks. They become desperate, which is music to a Conservative’s ears.

That’s why the deal between the Liberals and the NDP is important. It is a recognition on the both parties that, at least for now, it’s time to put the needs of those most at risk ahead of those with greater means. And the way things have been going, that means more and more of us every day.

Categories
Economy

Macroeconomics

Tyler Cowan offers what he calls are the “the four basic truths of macroeconomics” in a recent column in Bloomberg. It may be paywalled, so I’ll quote liberally here.

His first point is that “a strong negative shock to demand — a sudden decline, in other words — usually leads to a loss of output and employment.” This is just the law of supply and demand, reworded to spin it a bit, and with some riders attached.

Put more clearly, the principle is this: in a market economy, a reduction in demand leads to a reduction in supply. It doesn’t matter whether the result is a ‘negative shock’ or simply a global disinterest in the product.

The rider in this proposition the the further assertion that this leads to unemployment. Let’s hear Cowan explain: “Nominal wages are sticky, for a complex mix of sociological reasons, and so employers do not always respond to lower demand with lower wages for workers. Instead they lay some people off, and that can lead to a recession.”

OK, first, lower wages can also lead to a recession, so the choice between ‘lower wages or lay people off’ is a false choice. Additionally, when people are laid off, it is not usually a result of high wages for other people, but because there is nothing for them to do.

Cowan calls this “one of the most important discoveries in history”. This may be true of the law of supply and demand, but not of his restatement. And the other half of this ‘most important discovery’ is that it applies only to market economies.

Market economies governed by the law of supply and demand are subject to market failures. One such failure is a drop in demand for a given product. All else being equal, this leads to a collapse of the economy. What saves the economy is intervention from outside the market. In a large company, for example, financial reserves may be brought in to develop a new product line. In a national or global economy, financial reserves may be brought in to build infrastructure, fight a war, or explore and discover.

Let’s move on to Cowan’s second point. It is this: “well-functioning central banks can offset such demand shocks to a considerable degree — or even prevent them from arising in the first place.

This is Cowan’s version of the point I just made, but Cowan limits the sort of intervention needed to one conducted by central banks. It should be obvious, just on reflection of the point, that any intervention that replaces the loss of demand will apply equally well. Wealth does not exist only in central banks.

Cowan continues by narrowing the range of possibilities even further: “The bank can engage in complex financial transactions or simply print more currency to stabilize nominal demand and restore some measure of order.” Again, it should be clear by simple observation that there are many options in addition to ‘complex transactions’ or ‘printing money’.

This limited range of options is essential the set of constraints imposed in a set of responses known as ‘monetary policy’. The core idea of monetary policy is that economic fluctuations are addressed primarily by adjusting the money supply. But governments are more than merely central banks, and there is a range of options over and above monetary policy.

The obvious additional option, and the one we have actually taken, is to borrow money. Borrowing money isn’t the same as printing money, because the money still comes from somewhere – usually from places where it wasn’t being used to create demand, whether hidden in mattresses or stashed away in savings accounts. Another option is to tax this money – admittedly hard to do with cash stashed in the house somewhere, but much easier with unproductive wealth in futures markets or hidden in the Cayman Islands.

The other part of that strategy is, as I suggested above, giving people something else to do. During the pandemic, for example, no amount of money pumped into the economy is going to increase the demand for sit-down restaurants and seats in movie theatres. But there is an urgent and pressing need – one for which the market is not in a good position to address – in basic (but unprofitable) research in vaccines and personal protective equipment.

The second point was only one paragraph in Cowan’s article, not because there wasn’t a lot to say, but because there was a lot to keep hidden.

Let’s move on to his third point: “if central banks go crazy increasing the money supply, the result will be high price inflation. This is the law of supply and demand applied to money. Increase the supply of money, and its value decreases, meaning you need more to obtain the same goods and services. This phenomenon is called ‘inflation’.

This is a ceteris paribus clause, which means, ‘all else being equal’. But all else is never equal, and is is important, because there is an important corollary: if the demand for goods and services is greatly increased, the value of money decreases. This is the cause of some classic market failures. If, say, electricity becomes scarce, but demand is stable, the price will shoot through the roof, resulting (again) in inflation.

This is all the theoretical basis for monetary policy: keeping the value of money more or less in accord with variations in demand, growing the money supply as the economy grows, and shrinking it as the economy shrinks. This approach might work well on the upswing, but it has devastating consequences on the downswing. Just when the economy needs more investment to produce more jobs and more demand, money becomes tight, sending the economy into a downward spiral.

Not surprisingly, this is the policy Cowan suggests will be most effective. “If central banks simultaneously act to decrease the velocity of money,” he writes, “that is, if they take measures to reduce borrowing and lending, then price inflation will be limited accordingly.” Yes it would. At the cost of sending the economy into a tailspin.

But there’s room for a more positive message: inflation happens only if the supply of goods and services remains static. But if that supply increases, especially for new sorts of goods and services (to, say, build fibre networks, develop vaccine programs, explore space, develop alternative energy sources) then increased money supply does not increase inflation.

This is important because the greatest danger of inflation doesn’t come from governments printing money. For the most part, governments don’t print money; they borrow. No, the greatest danger lies in the fact that something like half of all global wealth is concentrated and hidden away in banks in Panama and the Caymans and Switzerland by the globally wealthy, and if this money is unleashed on the economy, the value of money will drop.

Finally, let’s look at Cowan’s fourth point: “non-monetary shocks, if they are large enough, can also create recessions or depressions.” For examples he gives us “the oil price shock of 1973, the current pandemic, or bad harvests in earlier agrarian societies.” What he should have said, in my opinion, is that “shocks can produce market failures”.

That is because the market generally, and monetary policy in particular, are not well-equipped to adjust to sudden systemic changes or disruptions to central aspects of the economy. Each of the three examples he gives impacted the market in a different way, but what they all have in common was that there was no market-based means to respond to them.

If we look at the pandemic, then what we saw was that, in addition to killing half a million Americans, the pandemic sharply reduced demand for public activities, thus eliminating the incomes of a wide swath of the population, including especially some of the most vulnerable and, at the same time, the most essential. If we did not address this by borrowing money and replacing that income, and also by developing alternative essential services, and also spending to combat the vaccine, then the economy would collapse.

If we look at the oil price shock of the 1970s, a completely different calculus was at play. The high cost of oil and gas resulted in widespread disruption because so much of the economy – from car production to drive-in theatres – depended on cheap and available fuel. The cost of a wide range of goods and services rose sharply. The short-term cause was the Arab oil embargo, and the crisis was effectively ended with the end of the embargo, which was the result of political agreements with the Arab states and an Israeli withdrawal in Egypt and disengagement with Syria. Longer term, the crisis resulted in increased (and often subsidized) exploration for oil elsewhere.

If we look at the collapse of harvests in agrarian economies, the cause and effect are pretty obvious, since the loss of food results in a loss of demand for pretty much everything else. The term ‘economic collapse’ becomes somewhat meaningless when everyone is starving. The response is found in one of the first of many accounts of socialism in the Bible (Genesis 42): store grain during the seven years of good times, and dispense it during the seven years of hard times. Today we know this as Keynesian economics.

So what sort of conclusions do we draw from all of this?

Well, the first thing I noticed about the article was that it mentioned Clubhouse right at the top, making it part of the non-market interventions being used by wealthier interests in order to stimulate demand for a product. I don’t know whether Cowan was paid for this, or for his appearance there, but I’m sure this reciprocity would not go unnoticed. The wealthy know all about non-market intervention, as use it liberally to tip the scales, drawing on their previously mention half of all wealth in the world.

Another is that in the discussion of economics and monetary policy, we never touch on the actual motivation for any of this, which is to increase human society and to alleviate suffering and hardship. When Cowan talks about, say, “the expected return of public investments,” he elides the point that a lot of government investment is made with no expectation of return – it is, indeed, the antithesis of market policy – because governments are addressing these very human needs. When you lose half a million people in a society, this is far more than an economic issue; it is a human tragedy.

That leads us to our final observation. Cowan says, as a result of these discoveries, that “the only thing worse than living with macroeconomics would be to try to live without it.”

I won’t deny the utility of macroeconomic theory (though I certainly have my doubts about unfettered market capitalism and the utility of monetary policy in a crisis). But it is also abundantly clear that tracking the flow of money, goods and services in an economy is only one small part of a much larger and more complex domain.

It’s like saying “the only thing worse for a human than living with the blood circulation system would be to try to live without it.” This is true – but it is far from the whole story. Focusing only on the blood supply leads to things like blood-letting as a part of medical theory. We need to look at many other things. We need to understand the human condition as a whole, not just as a set of numbers on a balance sheet.

Image: Macroeconomics.

Categories
Economy Energy

Alberta’s Fair Deal

I lived in Alberta for a long time – more than 20 years. I worked in the oil patch, doing seismic processing. I went to university there. I split my time between Edmonton, Calgary and the north. Alberta was very good to me.

So I want the best for Alberta. The people were open to me as a newcomer, embracing my contributions to their growing economy and thriving western culture, and I in turn worked hard to make the communities in which I lived better places.

I cut my teeth in Alberta. It was here I learned computer science, learning as I worked for a division of Texas Instruments, taking night courses at SAIT, developing my skills and building applications. I also became an ink-stained wretch in Alberta, honing my skills as a journalist working with the Gauntlet for six years.

There’s more, but you get the idea. And I preface this post this way because I want to warn Alberta against making the sort of mistake it has made in the past.

I lived in Alberta in the 1980s, and for Albertans, that date means the (Pierre) Trudeau government and the hated National Energy Policy (NEP). Spurred by successive provincial governments, Albertans saw the NEP as a raw deal, and never forgave the Liberals for trying to implement it. And, of course, when the Conservatives were elected in 1984, that was the end of the policy.

Now this is important: what the NEP attempted to do was to establish a Canadian market for Alberta oil, building a coast-to-cost network, and stabilizing the price to protect Canadians – especially eastern Canadians – from another oil price shock as was seen in the 1970s.

Albertans – rightly – saw the NEP as an attempt to define Alberta oil as a national resource and as an attempt to help all of Canada benefit from the bounty found underneath Prairie soils. What they didn’t see was what it would do when the other shoe dropped. Which it did. Which it always does.

The NEP was not only a price ceiling. It was also a price floor. It would protect Alberta if the bottom ever fell out of oil prices. But this was a hypothetical benefit. Since the 1970s, oil prices had only ever gone up. And in any case, there was the Heritage Trust Fund to protect Albertans from the impact of variable prices.

So Mulroney was elected in 1984, the NEP was killed, and you know what happened next.

Source: https://www.macrotrends.net/1369/crude-oil-price-history-chart

The bottom fell out of oil prices. A steady slide became a plunge, eventually reaching levels not seen since the 1950s. Alberta, instead of being able to rely on a steady Canadian market, fell victim to world prices. The economy plunged into recession.

Ralph Klein, Calgary’s popular mayor, governed through the worst of it, navigating the province through the severe cuts needed to survive. He also preserved what came to be known as the ‘Alberta advantage’ – a zero percent sales tax, low income tax, and generous corporate concessions, all in the name of preserving Alberta’s economy.

The effect was to gut the Heritage Trust Fund. Instead of being invested, and taking advantage of a world economy that boomed while oil prices plunged, it was spent keeping Alberta afloat during the hard times. Contrast what became of the Heritage trust fund in comparison with how Alaska and Norway managed their funds:

Source: https://albertaviews.ca/heritage-trust-fund/

So, in essence, Alberta not only discarded income security at the exact moment it would have been most useful, it used its savings to take up the slack, squandering what could have been by now a 169-billion trust fund.

So why is all of this important?

Alberta’s new premier, Jason Kenney, is about to make the same mistake. He wants to jettison the security that comes with being a part of Canada’s social safety net, and throw the province under the fiscal bus.

He wants to renegotiate Canada’s equalization payments plan, wherein the rich provinces subsidize poorer provinces. He wants Alberta to collect its own taxes, to manage its own Alberta pension plan, and to ensure municipalities and school boards do not enter directly into agreements with Ottawa. Source.

He can do this, of course. It’s similar to what Quebec has done for decades. And Quebec – partially as a result – has been a net beneficiary from national equalization programs over the years. But the question here is whether he should do it.

What Kenney should be doing right now is asking “what if oil prices don’t go up?” What if the bottom falls out of the world oil prices as a combination of alternative sources and a global demand for zero-carbon energy courses takes hold? What if the bottom falls out of Alberta’s economy and there’s no floor?

The reaction from Alberta politicians suggests that the rest of Canada should be grateful to have it as a member of confederation and ready to bend over backward to support Alberta’s needs. After all, Alberta contributed $611-billion to Confederation between 1961 and 2017. Source.

But paying money is not by itself enough to generate a feeling of gratitude. For one thing, Ontario – the province where I grew up and where I live now – paid $723 billion in the same period of time – and even more between the years 1905-1961, when Alberta was a basket case. And Ontario made these contributions without the benefit of pool of oil sitting just under the surface.

And Ontarians (like Quebeckers, and the rest of the country) pay their fair share of taxes. Conservative news coverage depicts equalization payments as some sort of hypothetical ‘cost’ to individual Alberta families, but take no account of the free ride Albertans have granted themselves as a result of the oil boom, and take no account of the benefits Albertans could have accrued had the province not thrown away the opportunities offered by Canada in the past.

If Jason Kenney decides to cut the province out of the benefits of the Canadian tax system, pension system, health and education benefits, and presumably other benefits as well, it will be difficult to find a sympathetic ear when the province really needs Canadian support to make the Alberta-first approach work.

British Columbia, when being asked to support an expanded pipeline to salt water, cannot be faulted when it recalls that Ralph Klein’s solution to provincial poverty was to provide poor people with one-way bus tickets to Vancouver. Source. Provincial governments have been happy to export Alberta’s problems and to lay the blame at Ottawa’s feet, but in fact, most of their misfortune has been the result of their own short-sightedness.

Even so, the rest of Canada will still lend a sympathetic ear. That’s why Justin Trudeau spent $3 billion of our money to buy a pipeline project for Alberta, even though he probably knew it would not gain him a single vote in the west. And it’s why the rest of Canada continues to support economic basket cases in eastern Canada, not because they are particularly well-managed, not because we think that they will One Day become successful, but because they are part of us, and that’s what Canadians do.

Before they cut too many economic ties, I would recommend that the people of Alberta look at the benefits of being Canadian. It goes beyond what we have – and world – provide by way of support, and equalization payments, and a stable and prosperous home market. We have shared both the risks and benefits of prosperity, and even though it is an approach Albertan voters have mostly eschewed through the years, it has nonetheless served them well.

Categories
Economy Environment Labour

The Plant

By now it has become apparent that GM is unyielding in its plans to close the plant in Oshawa as it shuts down this and some US facilities in order to move production to Mexico.

The response of our provincial government has been to shrug its shoulders and say “whatevs”. The response from the federal government has been silence. The response from the progressive left has been protest and (on the part of the union) strikes.

At least the left is doing something, which is more than can be said of our governments. But none of this is likely to be effective. We need to rethink this.

A country’s investment in manufacturing and industry is sometimes referred to as its ‘plant’. And as a result of this and similar shutdowns in the past, the plant in Canada is shrinking. We are led to believe that this is inevitable, as companies will always seek lower wages and less stringent labour and environmental regulations elsewhere.

But if this were simply true, then manufacturing in places like Germany and Japan would be shrinking as well. What is it about these nations that protects their industries?

There are many factors, but I want to highlight one: the close involvement of employees in the determination of corporate policy. In Germany this is called ‘codetermination‘ and you can see the impact in everything from education to industrial policy. In Japan, there is separation of ownership and control, boards selected from within the company, and a process of decision-making by consensus.

This is a stark-contrast to the North American model where – as we have seen with the GM example – decisions are made at the senior leadership level, where the interests of shareholders are prioritized over all else, and are imposed on the company without pretense of democracy or consensus.

The result is that these companies have no loyalty to their employees, and they feel free to shut down plants, close companies (and eliminate pensions), and take other actions that are injurious to the communities in which they are located. And as we have seen, the result has been the overall reduction of the plant in Canada.

And it’s not just old-economy sectors like manufacturing and retail. Even the high-tech sector has been hit hard. And we have lost significant capacity in the failures of companies like Nortel, Backberry and Corel (some of which exist, but are shadows of their former selves). The list of defunct Canadian companies is long and includes every economic sector.

So, when faced with something like the GM shutdown, what should we be doing instead?

Let’s be clear, first of all, about the fact that GM is creating a cost to the economy as a whole, both in the reduction in Canada’s plant, and in the accommodations that need to be made in the communities that depend on that plant. This cost is all the greater when we consider the investment the Canadian public made, via corporate subsidies, to keep GM operational in the past.

Second, we should take the position that it is unacceptable to simply shut down effective and reliable plant infrastructure in Canada. The plant is a part of social infrastructure, and while it is operated by GM, it belongs in a certain sense to the community as a whole.

If GM is not willing to continue operating the plant, then the community and the nation should be prepared to step in to keep the plant operational, if not as a part of GM, then as something else (which could include being a competitor to GM).

We should take over and convert plant that is being abandoned into plant that is organized for, and run by, employees and members of the community. It should not be an option for GM to simply close it and sell it for parts. The cost of closing a plant in Canada should include the cost of replacing it with an equally viable plant under new management.

As a part of a progressive industrial policy, we should be looking to convert Canadian production from an industrial model to a cooperative model, from a model based on wealth and power to one based on community and consensus.

And we should be investing in these strategically.

For example, imagine what could have been done had Doug Ford not painted himself into a doctrinaire corner on environmental issues. Imagine the positive response that would have resulted had he announced that carbon tax money would be invested in saving the GM plant and investing in environmentally-friendly transportation technology.

An entire plant with equipment, infrastructure, and thousands of skilled employees is already at our disposal to make a significant impact in both protecting Canadian industry and acting as responsible environmental stewards. But Ford can’t fix this without admitting that maybe he was wrong.

So instead he shrugs his shoulders and says “meh”, and meanwhile, thousands lose their jobs and a key piece of Canada’s economy, Oshawa’s industrial capacity, is crippled.