By now, countless articles have been written about how, with the NDP's move to the centre and the Liberals' move to the left, the two parties' economic policies have become very similar. Indeed, various journalists have even mused that the Liberals are now to the left of the NDP. While the scope and objectives of the policies proposed by the two parties are indeed similar, Liberal policies tend to transfer money and then let the market do its work, while NDP policies often attempt to weaken market forces (or quash them altogether) in a populist way. That is, the Liberal economic approach is still much more market-oriented than the NDP one. Below are several major policy planks of the two parties that illustrate this distinction.
Helping the Middle/Working Class
- The Liberals are proposing a new top bracket of 33% that would finance a cut to the middle bracket to 20.5%.
- The NDP is proposing a $15/hour minimum wage that would affect a minority of workers in federally regulated industries.
Both of these policies make the system more progressive. They are obviously not targeted to the same people: the Liberals are targeting the middle (and upper middle) class, while the NDP is targeting the working class. The difference I want to emphasize, however, is that the Liberals are proposing to allow the market to clear under rules that favour more redistribution. The NDP, by contrast, wants to push the market farther away from equilibrium (which will likely slightly increase unemployment) by instituting a higher price floor. Note also the populist element of the NDP policy: nobody's tax is getting raised. However, the populism comes at a price: consumers of the affected goods and services will be paying more regardless of their income.
Family Policy
- The Liberals want to increase transfers to most families and make them more progressive.
- The NDP wants to create a new $15/day national daycare program.
Here again, the Liberals are proposing to make the system more progressive while letting people decide how the money is spent. The NDP's answer, on the other hand, is a brand new one-size-fits-all government program. Once again, the NDP is hiding some of the costs of its proposal by requiring provincial contributions that may not be forthcoming.
Raising More Tax from the Rich
- The Liberals would hike the personal income tax rate for incomes above $200,000 from 29% to 33%.
- The NDP would hike the corporate income tax rate from 15% (to a soon-to-be-specified level, probably not above 17.5%).
The populist appeal of a corporate tax hike is clear. However, most economists would argue that, from an efficiency standpoint, personal income taxes are preferable (however, value added taxes, such as the GST, are even more efficient). Moreover, a hike in the corporate tax rate would hit all shareholders: rich investors, yes, but also anyone with stocks (or stock-based mutual funds and ETFs) in their RRSPs, and anyone participating in a private or public pension plan, including the CPP. The Liberal policy is closer to economists' advice, while NDP policy has more visceral appeal at the price of being less efficient and more poorly targeted.
Deficits and Investment
- The Liberals want to fund a lot of additional investments by running a deficit in the short run.
- The NDP wants to fund some additional investments while maintaining a balanced budget.
The deficit issue is probably the comparison that led some to believe that the Liberals are now to the left of the NDP. However, fiscal policy is only one aspect of economic policy. More importantly, the Liberal proposal is more responsive to current market conditions (i.e. extremely low interest rates), and the proposed deficits are small enough that the debt-to-GDP ratio, which determines affordability, is not projected to increase. The NDP position is once again populist and lacks nuance ("surplus good, deficit bad").
Youth Jobs
- The Liberal strategy mainly relies on grants (other than the direct Parks Canada jobs).
- The NDP strategy relies partly on grants, and partly on a requirement to hire youth on infrastructure projects with federal funding above $10 million.
The NDP approach relies more heavily on additional regulation and on a piecemeal, sectoral approach, focusing on jobs linked specifically with public infrastructure projects - not allowing the market to dictate where those jobs are. It requires smaller grants per job than the Liberal plan, but some of the cost is simply hidden in the requirement put on federally funded infrastructure, which will increase the required budget on those projects.
As illustrated above, the Liberals' and NDP's economic platforms are, in fact, quite in line with the parties' respective economic philosophies. (Of course, one can find individual policies that don't fall in line, but the ones outlined above constitute the bulk of the most economically significant ones.) What has changed is that the Liberals are proposing more than they traditionally do, and the NDP is proposing less. But the kinds of policies they're proposing suggest that neither party has fundamentally changed its economic thinking: the Liberals remain more market-friendly, and the NDP remains more statist and populist.
Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts
Wednesday, September 16, 2015
Tuesday, August 11, 2015
ORPP is a Better Deal than the CPP
Stephen Harper is "delighted" to make the implementation of the Ontario Retirement Pension Plan (ORPP) more difficult. At the same time, he is not proposing any changes to the CPP. However, the ORPP is a much better deal than the CPP:
- under the ORPP, workers contribute 3.8% of their earnings (1.9% themselves, 1.9% through their employer) in order to replace 14.24% of their income in retirement;
- under the CPP, workers contribute 9.9% of their earnings in order to replace 25% of their income in retirement.
In order words, for the ORPP to replace 25% of income, workers would only have to pay 3.8%*(25/14.24) = 6.67% of their income rather than 9.9%. Why?
- Part of the reason is that, while neither plans requires contributions on earnings up to $3,500/year and both still pay benefits on those earnings, the ORPP has a higher ceiling ($90,000) than the CPP (around $55,000 next year). But this difference is rather minor: with the same ceiling as the CPP, ORPP could still replace 25% of pensionable earnings with a contribution rate of 6.8-6.9%. There may be other minor design differences (I haven't done a full comparison), but it's pretty safe to say that ORPP could have the same design and pay the same benefits as the CPP with a contribution rate of around 7%.
- So why could ORPP offer the same benefit as the CPP with only 70% as much contributions? The answer is buried in the CPP actuarial report: even while (real) investment returns are assumed to be 4% going forward, the actual return for those born after 1970 is only 2%. This is because CPP contributions were too low for earlier cohorts as a result of inaccurate projections. Thus, younger workers are heavily subsidizing older workers and retirees: since contributions made to the CPP are withdrawn, on average, about 20 years after they are made, that 2% difference per year means that young workers have to pay 40-50% more than what they would pay if they didn't have to subsidize older workers. Lo and behold, that's roughly what you'd tack onto ORPP contribution rates to get to the CPP contribution rates.
In short, roughly 70% of the CPP contributions are actually retirement savings; the remaining 30% is a tax that makes up for insufficient contributions before 2000 - a tax of up to roughly $1,500 per worker each year. By contrast, because the ORPP isn't saddled with past mistakes, it is 100% retirement savings. Therefore, it is highly ironic that Stephen Harper is characterizing ORPP as a tax while doing nothing about the CPP.
- under the ORPP, workers contribute 3.8% of their earnings (1.9% themselves, 1.9% through their employer) in order to replace 14.24% of their income in retirement;
- under the CPP, workers contribute 9.9% of their earnings in order to replace 25% of their income in retirement.
In order words, for the ORPP to replace 25% of income, workers would only have to pay 3.8%*(25/14.24) = 6.67% of their income rather than 9.9%. Why?
- Part of the reason is that, while neither plans requires contributions on earnings up to $3,500/year and both still pay benefits on those earnings, the ORPP has a higher ceiling ($90,000) than the CPP (around $55,000 next year). But this difference is rather minor: with the same ceiling as the CPP, ORPP could still replace 25% of pensionable earnings with a contribution rate of 6.8-6.9%. There may be other minor design differences (I haven't done a full comparison), but it's pretty safe to say that ORPP could have the same design and pay the same benefits as the CPP with a contribution rate of around 7%.
- So why could ORPP offer the same benefit as the CPP with only 70% as much contributions? The answer is buried in the CPP actuarial report: even while (real) investment returns are assumed to be 4% going forward, the actual return for those born after 1970 is only 2%. This is because CPP contributions were too low for earlier cohorts as a result of inaccurate projections. Thus, younger workers are heavily subsidizing older workers and retirees: since contributions made to the CPP are withdrawn, on average, about 20 years after they are made, that 2% difference per year means that young workers have to pay 40-50% more than what they would pay if they didn't have to subsidize older workers. Lo and behold, that's roughly what you'd tack onto ORPP contribution rates to get to the CPP contribution rates.
In short, roughly 70% of the CPP contributions are actually retirement savings; the remaining 30% is a tax that makes up for insufficient contributions before 2000 - a tax of up to roughly $1,500 per worker each year. By contrast, because the ORPP isn't saddled with past mistakes, it is 100% retirement savings. Therefore, it is highly ironic that Stephen Harper is characterizing ORPP as a tax while doing nothing about the CPP.
Monday, September 15, 2014
BCTF vs. BC Liberals: Why Neither Side Has Been Reasonable So Far
The ongoing negotiating blitz is cause for optimism, but up until the parties got together for the current round, neither was being reasonable. (Of course, due to the media blackout, we don't know if either is currently being reasonable.) Here are the main problem areas:
Government
- The court ruled that the teachers have a right to bargain over class size and composition. The government's interpretation of "bargain"? "Accept our offer, which merely asserts the current illegally imposed language." It's not surprising that the BCTF views this as a slap in the face.
BCTF
- The court ruled that the teachers have a right to bargain over class size and composition. Because the 1998 language was the last negotiated language, it got retroactively inserted into past contracts. But the court never ruled that the teachers had the right to keep the 1998 language in future contracts, and in fact explicitly expressed an expectation that class size and composition would be subject to future bargaining. Despite that, BCTF's binding arbitration proposal seeks to avoid bargaining on these issues. Why? If it wins on appeal, the court might decide to insert the 1998 language not only into past contracts, but also into the 2013-2018/9 contract. BCTF is therefore attempting to circumvent the bargaining process and set education policy for the province without the input of BC's duly elected government.
- BCTF demands a $5,000 bonus after going on strike for a month. 'Nuff said.
I have to say that both sides' wage and benefits offers are reasonable. The government's sub-inflation 7% over 6 years offer is obviously stingy, but given the other settlements so far and the massive surplus of teachers (note that there's a surplus even in Ontario, where class sizes are quite small), this is a good-faith offer. Meanwhile, the teachers' demand of 8% over 5 years, which may not even outpace inflation, is obviously modest. It's true that their benefit demands (equivalent to a further 4% increase in compensation) are somewhat expensive, but as far as bargaining tactics go, these proposals are not outlandish and probably just there as bargaining chips.
Sidenote: While there's a surplus of teachers in BC, our teachers are indeed paid less than teachers west of Québec. How can this be? Simple: other provinces, like Ontario, are grossly overpaying their teachers, to the point that a 35-year-old teacher is likely to make as much as a 35-year-old professor. (Professors' wages have more room to grow after that, but they had to give up several years of pay to earn their Ph.D.)
It looks like the following need to occur for a settlement to happen (some of these are from my post from August 31):
1. BCTF needs to accept language on class size and composition that is not as good as what they were given by the NDP in 1998. They need to realize that a right to bargain is very different from a right to keep copy past clauses and paste them in future agreements. Imagine if the government wanted to roll their nominal wages back to 1998 levels!
2. The government needs to make concessions on class size and composition. Their E80 proposal can't be a mere statement of what they illegally legislated. This can come in the form of a meaningful increase to the LIF (not just the $15 million increase in the latest public proposal), or specific language on class size and composition. As I've explained in a previous post, research shows that class size reduction is best targeted at lower grade levels (K-3).
3. BCTF needs to drop their bonus demand. I certainly don't see the government giving more than the $1,200 on offer in June. In fact, the government may well feel that any bonus would send the wrong signal and encourage future strikes.
If they get past these obstacles, I think they can come together on wages and benefits. As detailed in my August 31 post, the government is offering $350M over 5 years, while BCTF is demanding $600M over 5 years in wages, $150M in signing bonus, and $125M per year in benefits. Perhaps the sides can agree on something around $600M over 5 years in total compensation, which equates to about 1.3% per year, or 0% in Year 1 and 2% in each of Years 2-5.
Or at least, once they settle on class size and composition, the government might be more receptive to binding arbitration - the risk to the budget from the court case would become much smaller (just grievances).
Government
- The court ruled that the teachers have a right to bargain over class size and composition. The government's interpretation of "bargain"? "Accept our offer, which merely asserts the current illegally imposed language." It's not surprising that the BCTF views this as a slap in the face.
BCTF
- The court ruled that the teachers have a right to bargain over class size and composition. Because the 1998 language was the last negotiated language, it got retroactively inserted into past contracts. But the court never ruled that the teachers had the right to keep the 1998 language in future contracts, and in fact explicitly expressed an expectation that class size and composition would be subject to future bargaining. Despite that, BCTF's binding arbitration proposal seeks to avoid bargaining on these issues. Why? If it wins on appeal, the court might decide to insert the 1998 language not only into past contracts, but also into the 2013-2018/9 contract. BCTF is therefore attempting to circumvent the bargaining process and set education policy for the province without the input of BC's duly elected government.
- BCTF demands a $5,000 bonus after going on strike for a month. 'Nuff said.
I have to say that both sides' wage and benefits offers are reasonable. The government's sub-inflation 7% over 6 years offer is obviously stingy, but given the other settlements so far and the massive surplus of teachers (note that there's a surplus even in Ontario, where class sizes are quite small), this is a good-faith offer. Meanwhile, the teachers' demand of 8% over 5 years, which may not even outpace inflation, is obviously modest. It's true that their benefit demands (equivalent to a further 4% increase in compensation) are somewhat expensive, but as far as bargaining tactics go, these proposals are not outlandish and probably just there as bargaining chips.
Sidenote: While there's a surplus of teachers in BC, our teachers are indeed paid less than teachers west of Québec. How can this be? Simple: other provinces, like Ontario, are grossly overpaying their teachers, to the point that a 35-year-old teacher is likely to make as much as a 35-year-old professor. (Professors' wages have more room to grow after that, but they had to give up several years of pay to earn their Ph.D.)
It looks like the following need to occur for a settlement to happen (some of these are from my post from August 31):
1. BCTF needs to accept language on class size and composition that is not as good as what they were given by the NDP in 1998. They need to realize that a right to bargain is very different from a right to keep copy past clauses and paste them in future agreements. Imagine if the government wanted to roll their nominal wages back to 1998 levels!
2. The government needs to make concessions on class size and composition. Their E80 proposal can't be a mere statement of what they illegally legislated. This can come in the form of a meaningful increase to the LIF (not just the $15 million increase in the latest public proposal), or specific language on class size and composition. As I've explained in a previous post, research shows that class size reduction is best targeted at lower grade levels (K-3).
3. BCTF needs to drop their bonus demand. I certainly don't see the government giving more than the $1,200 on offer in June. In fact, the government may well feel that any bonus would send the wrong signal and encourage future strikes.
If they get past these obstacles, I think they can come together on wages and benefits. As detailed in my August 31 post, the government is offering $350M over 5 years, while BCTF is demanding $600M over 5 years in wages, $150M in signing bonus, and $125M per year in benefits. Perhaps the sides can agree on something around $600M over 5 years in total compensation, which equates to about 1.3% per year, or 0% in Year 1 and 2% in each of Years 2-5.
Or at least, once they settle on class size and composition, the government might be more receptive to binding arbitration - the risk to the budget from the court case would become much smaller (just grievances).
Sunday, August 31, 2014
BCTF vs. BC Liberals: How Far Apart Are They?
Sept 2 Update: As reported by the Vancouver Sun, Peter Fassbender is saying that the parties are more than $300 million apart on compensation (wage plus non-wage benefits). The analysis below shows that the gap between their publicly stated positions is about $770 million ($401 M on wages, and about $369 M on benefits assuming they start fully in 2015-2016). This implies that they were privately willing to make concessions to bridge about half of the compensation gap, and the remaining difference is small ($300 M/5 yrs = $60 M/yr = 2% of current compensation). The real issue remains class size, composition and specialists: the government is offering almost nothing, while BCTF's demand would cost about $1 billion total if it loses the court case, and $1.6 billion PER YEAR if it wins the court case.
Based the following documents by the BCTF and the government, the math works out as follows:
Current wages and wage-related benefits: The government states that BCTF's proposal, which includes a 3.5% increase and three 1.5% increases, will cost $211.1 million in Year 5. This means that the current base is 211.1M/(1.035*1.015^3-1) = $2.566 billion.
Current total compensation: The government states that an increase of $335.8 million would correspond to a 11.2% increase. This implies a current base of $2.998 billion.
BCTF Salary Demand (Total amount above current wage)
Year 1 (2013-2014): $5,000 signing bonus = $150 M
Year 2: 3.5% = $90 M
Year 3: additional 1.5% = $130 M
Year 4: additional 1.5% = $170 M
Year 5 (2017-2018): additional 1.5% = $211 M
Total: $751 million, or $150 million per year on average + 100% economic stability dividend
Government Salary Offer (Total amount above current wage)
Year 1: 0
Year 2: 1%, and additional 2% seven months into the year = $47 M
Year 3: no increase = $77 M
Year 4: additional 1% = $104 M
Year 5: additional 0.5%, and further 1% ten months into the year = $122 M
Total: $350 million, or $70 million per year on average + 50% economic stability dividend
Difference between BCTF Salary Demands and Government Salary Offer (ignoring economic stability dividend)
Total over 5 years: $401 million
Average per year: $80 million (3.1% of wage base)
Ongoing difference at June 30, 2018: $67 million (2.6% of wage base)
Non-wage compensation: BCTF demands an increase costed at $125 M in Year 5 by the government.
Grievance fund: BCTF demands a one-time $225 M fund
Class size, composition, and specialists: Government offers a $15 M increase to the Learning Improvement Fund (LIF), from $60 M to $75 M. BCTF says that this is old money, and demands:
- a further $225 M per year until the court case is resolved, to be continued if the government wins;
- the restoration of the original 2001 language if BCTF wins, costed by the government at $1.67 B in Year 5 (if this replaces the LIF and the $225 M fund, the net cost is $1.37 B).
Difference between Total BCTF Demands and Government Offer:
Total over 5 years: $1.67 billion
Average per year: $334 million (11.1% of compensation base)
Ongoing difference at June 30, 2018: $417 million (13.9% of compensation base)
These numbers assume that:
- BCTF's non-wage compensation and class size/composition/specialists demands are to be implemented in Year 3 (2015-2016). An earlier implementation, during the current school year, would increase the total and average per year cost (but would not affect the ongoing difference in 2018).
- BCTF loses its court case. If it wins, then the total ongoing difference ballons to $1.79 billion in Year 5, or almost 60% of the current compensation base.
- The economic stability dividend is nil (it is likely to be small anyway).
Given these numbers, it's no surprise that Vince Ready declared in impasse. At the end of Year 5:
- the government's proposal costs $159 million per year ($144 M in wages and $15 M for the LIF increase);
- BCTF's proposal costs $576 million per year ($211 M in wages, $125 M in other compensation, $15 M for the LIF increase, $225 M for class size/composition/specialists) if it loses in court;
- BCTF's proposal costs $1.95 B if it wins in court.
Another way to took at this is through the rate of increase of ongoing costs:
- government: 1.0% per year
- BCTF: 3.6% per year if lose court case, 10.5% per year if win court case.
The government's proposal is obviously stingy: it is likely to come in below inflation, which implies a real cut, following two years of wage freezes. On the other hand, other public sector unions have settled for similar increases.
BCTF's demand that if it wins the court case, the 2001 language be restored, is obviously unrealistic, and is probably a bargaining tactic to obtain the $225 million/year fund. A 3.6% annualized increase is normally not out-of-line, but in the context of agreements signed by other unions, it is quite high.
I believe that a reasonable settlement would be along the lines of:
- 1.5% increase per year in total compensation, with no signing bonus. The parties can decide how to divide this into wage and non-wage benefits. The price tag would be $688 M over 5 years, which is slightlyabove below the middle of the government salary offer worth $350 M and the BCTF compensation demand worth $876 M $1.12 B (assuming that the non-wage demands are enacted in Year 3). The total increase would be 7.7%, about zero after adjusting for inflation. This is more than what other public-sector unions got, but likely less than private-sector wage increases. The final ongoing cost would be $232 M per year.
- $200 million one-time grievance fund, but only if BCTF wins in the Supreme Court.
- Increase the LIF to $150 million. This is double the government's proposal of $75 million, and half BCTF's demand of $300 million ($75 M LIF plus $225 M fund).
- Replace the LIF with $225 million annual fund if BCTF wins in the Supreme Court.
Total ongoing cost of my proposal at June 30, 2018:
- If BCTF loses: $322 million per year (compared to $159 M and $576 M)
- If BCTF wins: $397 million per year (compared to $159 M and an unrealistic $1.94 B)
The annualized increase in ongoing funding would be 2.1-2.5%, which I think is a fair outcome for our education system, and right in the middle of the 1.0-3.6% cost of current proposals. It slightly outpaces inflation, and along with a decrease in enrollment, should allow for a modest improvement in services. At the same time, it is less than provincial GDP growth, so this is definitely an affordable plan, even if BCTF wins the court case. The total risk of the court case to the taxpayer, $75 million per year plus a one-time payment of $200 million, is manageable considering that it concerns more than a decade of education funding - keep in mind that the BC government spends over $5 billion per year on K-12 education, and over $44 billion per year overall.
Based the following documents by the BCTF and the government, the math works out as follows:
Current wages and wage-related benefits: The government states that BCTF's proposal, which includes a 3.5% increase and three 1.5% increases, will cost $211.1 million in Year 5. This means that the current base is 211.1M/(1.035*1.015^3-1) = $2.566 billion.
Current total compensation: The government states that an increase of $335.8 million would correspond to a 11.2% increase. This implies a current base of $2.998 billion.
BCTF Salary Demand (Total amount above current wage)
Year 1 (2013-2014): $5,000 signing bonus = $150 M
Year 2: 3.5% = $90 M
Year 3: additional 1.5% = $130 M
Year 4: additional 1.5% = $170 M
Year 5 (2017-2018): additional 1.5% = $211 M
Total: $751 million, or $150 million per year on average + 100% economic stability dividend
Government Salary Offer (Total amount above current wage)
Year 1: 0
Year 2: 1%, and additional 2% seven months into the year = $47 M
Year 3: no increase = $77 M
Year 4: additional 1% = $104 M
Year 5: additional 0.5%, and further 1% ten months into the year = $122 M
Total: $350 million, or $70 million per year on average + 50% economic stability dividend
Difference between BCTF Salary Demands and Government Salary Offer (ignoring economic stability dividend)
Total over 5 years: $401 million
Average per year: $80 million (3.1% of wage base)
Ongoing difference at June 30, 2018: $67 million (2.6% of wage base)
Non-wage compensation: BCTF demands an increase costed at $125 M in Year 5 by the government.
Grievance fund: BCTF demands a one-time $225 M fund
Class size, composition, and specialists: Government offers a $15 M increase to the Learning Improvement Fund (LIF), from $60 M to $75 M. BCTF says that this is old money, and demands:
- a further $225 M per year until the court case is resolved, to be continued if the government wins;
- the restoration of the original 2001 language if BCTF wins, costed by the government at $1.67 B in Year 5 (if this replaces the LIF and the $225 M fund, the net cost is $1.37 B).
Difference between Total BCTF Demands and Government Offer:
Total over 5 years: $1.67 billion
Average per year: $334 million (11.1% of compensation base)
Ongoing difference at June 30, 2018: $417 million (13.9% of compensation base)
These numbers assume that:
- BCTF's non-wage compensation and class size/composition/specialists demands are to be implemented in Year 3 (2015-2016). An earlier implementation, during the current school year, would increase the total and average per year cost (but would not affect the ongoing difference in 2018).
- BCTF loses its court case. If it wins, then the total ongoing difference ballons to $1.79 billion in Year 5, or almost 60% of the current compensation base.
- The economic stability dividend is nil (it is likely to be small anyway).
Given these numbers, it's no surprise that Vince Ready declared in impasse. At the end of Year 5:
- the government's proposal costs $159 million per year ($144 M in wages and $15 M for the LIF increase);
- BCTF's proposal costs $576 million per year ($211 M in wages, $125 M in other compensation, $15 M for the LIF increase, $225 M for class size/composition/specialists) if it loses in court;
- BCTF's proposal costs $1.95 B if it wins in court.
Another way to took at this is through the rate of increase of ongoing costs:
- government: 1.0% per year
- BCTF: 3.6% per year if lose court case, 10.5% per year if win court case.
The government's proposal is obviously stingy: it is likely to come in below inflation, which implies a real cut, following two years of wage freezes. On the other hand, other public sector unions have settled for similar increases.
BCTF's demand that if it wins the court case, the 2001 language be restored, is obviously unrealistic, and is probably a bargaining tactic to obtain the $225 million/year fund. A 3.6% annualized increase is normally not out-of-line, but in the context of agreements signed by other unions, it is quite high.
I believe that a reasonable settlement would be along the lines of:
- 1.5% increase per year in total compensation, with no signing bonus. The parties can decide how to divide this into wage and non-wage benefits. The price tag would be $688 M over 5 years, which is slightly
- $200 million one-time grievance fund, but only if BCTF wins in the Supreme Court.
- Increase the LIF to $150 million. This is double the government's proposal of $75 million, and half BCTF's demand of $300 million ($75 M LIF plus $225 M fund).
- Replace the LIF with $225 million annual fund if BCTF wins in the Supreme Court.
Total ongoing cost of my proposal at June 30, 2018:
- If BCTF loses: $322 million per year (compared to $159 M and $576 M)
- If BCTF wins: $397 million per year (compared to $159 M and an unrealistic $1.94 B)
The annualized increase in ongoing funding would be 2.1-2.5%, which I think is a fair outcome for our education system, and right in the middle of the 1.0-3.6% cost of current proposals. It slightly outpaces inflation, and along with a decrease in enrollment, should allow for a modest improvement in services. At the same time, it is less than provincial GDP growth, so this is definitely an affordable plan, even if BCTF wins the court case. The total risk of the court case to the taxpayer, $75 million per year plus a one-time payment of $200 million, is manageable considering that it concerns more than a decade of education funding - keep in mind that the BC government spends over $5 billion per year on K-12 education, and over $44 billion per year overall.
Wednesday, August 27, 2014
BCTF vs. BC Liberals: Whose Proposal is Best for B.C.?
The school year is supposed to start next week in BC, but the labour dispute between teachers and the government has not yet been resolved. Here are my two cents on the issue.
The parties are not too far on salaries: the government offers 6.5% over six years, while the teachers demand 8% over five years. Given that, in its latest budget, the government is forecasting inflation of 9.4% over five years (9.8% compounded), and that wages generally increase faster than inflation due to productivity gains, the teachers' salary demand is very reasonable.
However, the real difference between the parties is on the issue of class size. The BCTF points out that the Liberals have unfairly increased class size in the past by illegally removing it from the bargaining procedure. It also points out that there is evidence that a class size reduction would improve student performance, and that BC has large class sizes compared to the rest of Canada. The Liberals reply that despite the class size increase, BC students' academic performance remain among the best in Canada. Moreover, the current fiscal situation is tight.
None of these arguments, from either side, get at the real issue: is reducing class size a good investment?
- Perhaps the class size increase was achieved illegally. But if it is the right policy, it should stand, and BCTF should be compensated for past wrongs through more direct and less costly means.
- Even if class size reduction does improve student outcome, if the improvement is small, it may be cost-ineffective.
- BC's classes being larger than other provinces' does not imply that they are too large: it could well be that other provinces are wasting money because smaller classes sound good to voters.
- Even if BC students' academic performance held up (and this is disputed), this is not proof that the class size increase did not have an adverse effect: perhaps if class sizes had remained low, our students would be doing even better.
- The surplus being small and revenues growing very slowly does not mean that we can't invest in education. If the return is high enough, then borrowing is the right thing to do for BC's long-run prosperity.
The following is a back-of-the-envelope analysis on whether class size reduction is desirable in BC, given its costs. The starting point is this review of the evidence on class size reduction, by the Brookings Institute, a highly esteemed non-partisan think tank (think, not Fraser Institute or CCPA) in the US.
- The largest effect of class size reduction found in a well-designed, credible study is as follows: reducing average class size from 22 to 15 for four years (K-3) resulted in an improvement of academic performance equivalent to 3 months of extra schooling. This "STAR" study was done in Tennessee, across schools in different socio-economic settings.
- Other studies have found smaller effects, or no effects at all. Generally, class size reduction is most effective when applied in early grades (like in STAR) and in low-income settings.
So let's assume that the real effect is as measured in STAR. What would be the costs and benefits of such a policy for BC? (Note: Obviously, the class size reduction contemplated in BC is different, but in principle, both the costs and the benefits would scale.)
Cost of 4 years of class size reduction from 22 to 15 students
- Government expense: Reducing class size from 22 to 15 students requires 46.7% more teachers. According to a Statistics Canada report, the average spending per pupil in BC in 2010/2011 was $11,832, 40.5% of which was spent on educator remuneration. Assuming that this class size reduction increases educator remuneration by 46.7% (it might be a little less since educators include some non-teachers), and that no other costs change (obviously in reality, some other costs, like classrooms, would go up), the increased cost per student is $2,236. Over four years, this adds up to $8,945 per student.
- Of course, spending an extra $8,945 per student requires extra taxes (now or later), which would cause an economic loss. It is difficult to quantify such a loss, but fortunately, the Québec government has estimated it for various forms of taxation. In the long run, the most efficient way to raise taxes is via a value added tax, and the economic cost is estimated at $0.54 per dollar of revenue in Québec. The cost in BC could be lower because we start from a lower level of taxation, but it could be higher because we have an inefficient sales tax as opposed to a value added tax. Taking the $0.54 estimate as such, the additional economic cost would be $4,830 per student.
TOTAL COST: $13,775 per student
Benefit of 3 additional months of schooling
This is obviously difficult to measure, but one way to look at it is that this should equal the cost of 0.3 years of postsecondary education.
- Direct cost of education: It is not easy to disentangle teaching from research costs in our postsecondary institutions, so this can only be very approximate. A reasonable estimate is that a year of postsecondary education costs about $15,000 per student. 0.3 years = $4,500 per student.
- Opportunity cost of forgone work: Having to spend 3 extra months in school will result in foregone wages. Assuming that the average starting wage is $20/hour (it's less for high school grads, but more for university grads), this works out to 12 weeks*40 hours/week*$20/hour = $9,600 per student.
TOTAL BENEFIT: $14,100 per student
Obviously, these are very rough calculations, so the conclusion to draw is only that the costs and benefits of reducing class size in K-3 are comparable. There is no strong case for either side. Given that most studies show smaller benefits at high grade levels, it is likely that the costs of reducing class size exceed the benefits in secondary school.
Teachers may argue that reducing class size carries not only academic benefits, but also behavioural benefits. This argument certainly has merit, so the above benefits may be understated. On the other hand, these estimates of benefits are based on the most favourable credible study (at least according to Brookings). So on balance, it is not clear in which way the above numbers are biased.
Moreover, the Brookings summary referenced above mentions evidence that other forms of investment in education tend to yield higher returns than class size reductions.
Based on this evidence, my opinion is:
- I support a targeted class size reduction for elementary schools in disadvantaged areas.
- I am neutral toward a general class size reduction for K-3. Perhaps this should be given as a concession to make up for the government's past illegal actions.
- I mildly oppose a general class size reduction for grades 4-7.
- I oppose class size reductions for secondary schools.
On balance, if the choice is between BCTF's proposal and the government, I would choose the government's, as I believe that current class sizes are fine in most settings. But ideally, the two sides can come together and do the right thing, which is to focus resources on those that would benefit the most: the youngest and most disadvantaged students.
The parties are not too far on salaries: the government offers 6.5% over six years, while the teachers demand 8% over five years. Given that, in its latest budget, the government is forecasting inflation of 9.4% over five years (9.8% compounded), and that wages generally increase faster than inflation due to productivity gains, the teachers' salary demand is very reasonable.
However, the real difference between the parties is on the issue of class size. The BCTF points out that the Liberals have unfairly increased class size in the past by illegally removing it from the bargaining procedure. It also points out that there is evidence that a class size reduction would improve student performance, and that BC has large class sizes compared to the rest of Canada. The Liberals reply that despite the class size increase, BC students' academic performance remain among the best in Canada. Moreover, the current fiscal situation is tight.
None of these arguments, from either side, get at the real issue: is reducing class size a good investment?
- Perhaps the class size increase was achieved illegally. But if it is the right policy, it should stand, and BCTF should be compensated for past wrongs through more direct and less costly means.
- Even if class size reduction does improve student outcome, if the improvement is small, it may be cost-ineffective.
- BC's classes being larger than other provinces' does not imply that they are too large: it could well be that other provinces are wasting money because smaller classes sound good to voters.
- Even if BC students' academic performance held up (and this is disputed), this is not proof that the class size increase did not have an adverse effect: perhaps if class sizes had remained low, our students would be doing even better.
- The surplus being small and revenues growing very slowly does not mean that we can't invest in education. If the return is high enough, then borrowing is the right thing to do for BC's long-run prosperity.
The following is a back-of-the-envelope analysis on whether class size reduction is desirable in BC, given its costs. The starting point is this review of the evidence on class size reduction, by the Brookings Institute, a highly esteemed non-partisan think tank (think, not Fraser Institute or CCPA) in the US.
- The largest effect of class size reduction found in a well-designed, credible study is as follows: reducing average class size from 22 to 15 for four years (K-3) resulted in an improvement of academic performance equivalent to 3 months of extra schooling. This "STAR" study was done in Tennessee, across schools in different socio-economic settings.
- Other studies have found smaller effects, or no effects at all. Generally, class size reduction is most effective when applied in early grades (like in STAR) and in low-income settings.
So let's assume that the real effect is as measured in STAR. What would be the costs and benefits of such a policy for BC? (Note: Obviously, the class size reduction contemplated in BC is different, but in principle, both the costs and the benefits would scale.)
Cost of 4 years of class size reduction from 22 to 15 students
- Government expense: Reducing class size from 22 to 15 students requires 46.7% more teachers. According to a Statistics Canada report, the average spending per pupil in BC in 2010/2011 was $11,832, 40.5% of which was spent on educator remuneration. Assuming that this class size reduction increases educator remuneration by 46.7% (it might be a little less since educators include some non-teachers), and that no other costs change (obviously in reality, some other costs, like classrooms, would go up), the increased cost per student is $2,236. Over four years, this adds up to $8,945 per student.
- Of course, spending an extra $8,945 per student requires extra taxes (now or later), which would cause an economic loss. It is difficult to quantify such a loss, but fortunately, the Québec government has estimated it for various forms of taxation. In the long run, the most efficient way to raise taxes is via a value added tax, and the economic cost is estimated at $0.54 per dollar of revenue in Québec. The cost in BC could be lower because we start from a lower level of taxation, but it could be higher because we have an inefficient sales tax as opposed to a value added tax. Taking the $0.54 estimate as such, the additional economic cost would be $4,830 per student.
TOTAL COST: $13,775 per student
Benefit of 3 additional months of schooling
This is obviously difficult to measure, but one way to look at it is that this should equal the cost of 0.3 years of postsecondary education.
- Direct cost of education: It is not easy to disentangle teaching from research costs in our postsecondary institutions, so this can only be very approximate. A reasonable estimate is that a year of postsecondary education costs about $15,000 per student. 0.3 years = $4,500 per student.
- Opportunity cost of forgone work: Having to spend 3 extra months in school will result in foregone wages. Assuming that the average starting wage is $20/hour (it's less for high school grads, but more for university grads), this works out to 12 weeks*40 hours/week*$20/hour = $9,600 per student.
TOTAL BENEFIT: $14,100 per student
Obviously, these are very rough calculations, so the conclusion to draw is only that the costs and benefits of reducing class size in K-3 are comparable. There is no strong case for either side. Given that most studies show smaller benefits at high grade levels, it is likely that the costs of reducing class size exceed the benefits in secondary school.
Teachers may argue that reducing class size carries not only academic benefits, but also behavioural benefits. This argument certainly has merit, so the above benefits may be understated. On the other hand, these estimates of benefits are based on the most favourable credible study (at least according to Brookings). So on balance, it is not clear in which way the above numbers are biased.
Moreover, the Brookings summary referenced above mentions evidence that other forms of investment in education tend to yield higher returns than class size reductions.
Based on this evidence, my opinion is:
- I support a targeted class size reduction for elementary schools in disadvantaged areas.
- I am neutral toward a general class size reduction for K-3. Perhaps this should be given as a concession to make up for the government's past illegal actions.
- I mildly oppose a general class size reduction for grades 4-7.
- I oppose class size reductions for secondary schools.
On balance, if the choice is between BCTF's proposal and the government, I would choose the government's, as I believe that current class sizes are fine in most settings. But ideally, the two sides can come together and do the right thing, which is to focus resources on those that would benefit the most: the youngest and most disadvantaged students.
Tuesday, January 1, 2013
Happy New Year!
Happy 2013!
Ironic tidbit: the PQ fulfilled its promise to raise taxes on rich Quebecers only partially so that the top tax rate would remain below 50%. However, with the expiration of the Bush tax cuts on high income Americans and the increased Medicare tax, individuals with federal taxable income above $400,000 and married couples with federal taxable income above $450,000 will be paying a marginal rate above 50% in California, New York City, Oregon and Hawaii. Those four jurisdictions have more than 50 million residents! It looks like Québec wouldn't have been so out of whack after all...
Ironic tidbit: the PQ fulfilled its promise to raise taxes on rich Quebecers only partially so that the top tax rate would remain below 50%. However, with the expiration of the Bush tax cuts on high income Americans and the increased Medicare tax, individuals with federal taxable income above $400,000 and married couples with federal taxable income above $450,000 will be paying a marginal rate above 50% in California, New York City, Oregon and Hawaii. Those four jurisdictions have more than 50 million residents! It looks like Québec wouldn't have been so out of whack after all...
Friday, September 21, 2012
Non-Payers in Canada
As you've probably heard by now, Mitt Romney made some disparaging remarks about the estimated 47% of the US that do not pay federal income taxes. A natural question for us Canadians is to wonder how many non-payers there are in Canada. Glen McGregor suggests that the comparable figure for Canada is 34%, but unfortunately, he is comparing apples to oranges. So here's a more accurate answer.
The 47% (actually 46.4%) might refer to the proportion of estimated total tax units in the US that had no federal tax liability in 2011, according to a model by the Urban-Brookings Tax Policy Center. Or it might refer to the estimated 45.9% of estimated total tax units in the US that had no federal tax liability in 2010, according to actual IRS data for filers and estimates of non-filers.
The 34% refers to the proportion of tax filers in Canada that had no federal or provincial tax liability in 2009, according to actual CRA data.
Obviously, the year used in the computations and the data sources are different. But those are not the main problems here.
One issue that will always arise when comparing the US and Canadian income tax systems is that most married couples file a single return in the US. This is why US data refers to "tax units" rather than individuals. But this, too, isn't the main problem, since it's unclear how this distinction skews figures.
A major issue that is easily fixed is that the 34% refers to Canadian filers that did not pay federal or provincial income taxes. But, as it turns out, over a million Canadians that paid provincial income tax in 2009 did not pay federal income tax. The US statistic refers only to federal income tax, so a more comparable figure would be the 38.2% of Canadian filers that paid no net federal tax in 2009.
Another major issue is that the 38.2% refers to the proportion of Canadian filers, while the 47% in the US includes non-filers. The proportion of American filers that didn't pay federal income tax in 2010 was 40.9%. Now, filing requirements are different in the two countries, so even comparing filers with filers is not a fair comparison. Unfortunately, I can't find an estimate for the adult population in Canada at year-end 2009, but the estimates for the 15+ and 20+ population in mid-2009 and mid-2010 are readily available from Statistics Canada. From those, we can estimate that the adult population was roughly 27.0 million at the end of 2009, which means that the proportion of the Canadian adult population that did not pay federal income tax in 2009 was about 41%.
Looking at 33.9% and 46.4% might drive us to think that, proportionately, much fewer Canadians than Americans escape the federal income tax. But when you realize that the comparison should be between 41% and 46%, the two countries look much closer.
In actuality, the gap is probably even smaller. In the US, the child tax credit gets directly subtracted off your income taxes. By contrast, in Canada, the child tax benefit (as well as the GST/HST credit) is provided throughout the year. So a family that owes $400 and gets $1,000 in child benefits would count as non-paying in the US, while it would count as paying in Canada.
In the end, the proportion of Canadians that avoid federal income tax is probably not much lower than the proportion of Americans. Careless interpretation of data in the media strikes again...
McGregor also mentions at the end of his piece that much more Quebecers (38%) than Ontarians (32%) or Albertans (28%) avoid income taxes. But he's looking at provincial and federal income taxes for ON and AB, while for QC, he's only looking at federal income taxes since the CRA does not collect Québec income tax. The actual fractions of filers that did not pay federal income tax in 2009 are:
NL 41.5%
NB 39.5%
NS 39.5%
MB 39.1%
ON 39.0%
BC 38.84%
QC 38.82%
PE 37.8%
SK 37.3%
AB 31.6%
A slightly greater proportion of Québec filers paid federal income tax in 2009 than Ontario or BC filers!
The 47% (actually 46.4%) might refer to the proportion of estimated total tax units in the US that had no federal tax liability in 2011, according to a model by the Urban-Brookings Tax Policy Center. Or it might refer to the estimated 45.9% of estimated total tax units in the US that had no federal tax liability in 2010, according to actual IRS data for filers and estimates of non-filers.
The 34% refers to the proportion of tax filers in Canada that had no federal or provincial tax liability in 2009, according to actual CRA data.
Obviously, the year used in the computations and the data sources are different. But those are not the main problems here.
One issue that will always arise when comparing the US and Canadian income tax systems is that most married couples file a single return in the US. This is why US data refers to "tax units" rather than individuals. But this, too, isn't the main problem, since it's unclear how this distinction skews figures.
A major issue that is easily fixed is that the 34% refers to Canadian filers that did not pay federal or provincial income taxes. But, as it turns out, over a million Canadians that paid provincial income tax in 2009 did not pay federal income tax. The US statistic refers only to federal income tax, so a more comparable figure would be the 38.2% of Canadian filers that paid no net federal tax in 2009.
Another major issue is that the 38.2% refers to the proportion of Canadian filers, while the 47% in the US includes non-filers. The proportion of American filers that didn't pay federal income tax in 2010 was 40.9%. Now, filing requirements are different in the two countries, so even comparing filers with filers is not a fair comparison. Unfortunately, I can't find an estimate for the adult population in Canada at year-end 2009, but the estimates for the 15+ and 20+ population in mid-2009 and mid-2010 are readily available from Statistics Canada. From those, we can estimate that the adult population was roughly 27.0 million at the end of 2009, which means that the proportion of the Canadian adult population that did not pay federal income tax in 2009 was about 41%.
Looking at 33.9% and 46.4% might drive us to think that, proportionately, much fewer Canadians than Americans escape the federal income tax. But when you realize that the comparison should be between 41% and 46%, the two countries look much closer.
In actuality, the gap is probably even smaller. In the US, the child tax credit gets directly subtracted off your income taxes. By contrast, in Canada, the child tax benefit (as well as the GST/HST credit) is provided throughout the year. So a family that owes $400 and gets $1,000 in child benefits would count as non-paying in the US, while it would count as paying in Canada.
In the end, the proportion of Canadians that avoid federal income tax is probably not much lower than the proportion of Americans. Careless interpretation of data in the media strikes again...
McGregor also mentions at the end of his piece that much more Quebecers (38%) than Ontarians (32%) or Albertans (28%) avoid income taxes. But he's looking at provincial and federal income taxes for ON and AB, while for QC, he's only looking at federal income taxes since the CRA does not collect Québec income tax. The actual fractions of filers that did not pay federal income tax in 2009 are:
NL 41.5%
NB 39.5%
NS 39.5%
MB 39.1%
ON 39.0%
BC 38.84%
QC 38.82%
PE 37.8%
SK 37.3%
AB 31.6%
A slightly greater proportion of Québec filers paid federal income tax in 2009 than Ontario or BC filers!
Wednesday, July 11, 2012
1%... Of What?
The Occupy movement may not be as active as it was last fall, but the theme of inequality features prominently in the U.S. Presidential Election. It has often been asserted in the media that the top 1% (in the U.S.) are those with incomes above around $350,000. However, income is probably not the right measure here: while for most of the population, purchasing power is mainly dictated by income - most people don't have much savings outside their home and their retirement account - for the rich, wealth matters much more. Unfortunately, statistics on wealth are much harder to come by than statistics on income since wealth is not directly taxed in North America.
The Survey of Consumer Finances (SCF) by the Federal Reserve is probably the best source of information about the wealth of Americans. It is conducted every three years, and the latest survey was done in 2010, with its data released last month. 6,492 families were interviewed; because means are very sensitive to the financial situation of the richest families, these were oversampled and weighed accordingly.
(By the way, there is a Canadian version of the SCF called the Survey of Financial Security (SFS). It is not conducted regularly; the most recent SFS was in 2005, and the previous one was in 1999. Given that the current government does not value data, we might have a long time to wait before the next SFS.)
You can read the Fed's summary of the results here. We learn, for example, that the median family net worth in the U.S. was $77,300. For financial assets alone, which excludes real estate, vehicles, business equity, but also all liabilities, the median (among the 94% of families that have any financial assets) was just $21,500. This includes not just one's bank accounts and CDs, but also retirement accounts, stocks, bonds, mutual funds, etc.
So what about the top 1%? This hasn't been widely reported since the Fed's writeup doesn't include the information, but since the SCF's data is (mostly) publicly available, I decided to take a look. It turns out that the threshold to be in the top 1% of U.S. families by net worth is about $6.82 million. (The average family has 2.7 people, so that would be about $2.5 million per person.)
If you're curious, here are thresholds for other levels:
Top 50% - $77,300, as mentioned above
Top 25% - $301,700 (can be found in Fed's report)
Top 10% - $952,500 (ditto)
Top 5% - $1.86 million (ditto)
Top 4% - $2.20 million
Top 3% - $2.85 million
Top 2% - $4.28 million
Top 1% - $6.82 million
Top 0.5% - $11.2 million
Top 0.2% - $19 million
Top 0.1% - $27 million
At the other end of the spectrum, about 11% of families have negative net worth, and another 2% have zero net worth.
Now, the above data is for all families. A family with $7 million that includes a couple, three kids and two grandparents would certainly be rich, but few would call it better off than a 30-year-old bachelor with $5 million. So rather than a single threshold of $6.82 million for labeling a household "1%," it would be more appropriate to have different thresholds for different types of families. Here are some examples (all in millions of dollars):
- Singles age 25-30 (my group!): 0.43
- Couples with 2 kids, head age 40-45: 6.6
- All couples (with or without kids), head age 60-65: 13.5
(If you're curious, the medians for these groups are, respectively, $13,000, $130,000 and $310,000.)
The Survey of Consumer Finances (SCF) by the Federal Reserve is probably the best source of information about the wealth of Americans. It is conducted every three years, and the latest survey was done in 2010, with its data released last month. 6,492 families were interviewed; because means are very sensitive to the financial situation of the richest families, these were oversampled and weighed accordingly.
(By the way, there is a Canadian version of the SCF called the Survey of Financial Security (SFS). It is not conducted regularly; the most recent SFS was in 2005, and the previous one was in 1999. Given that the current government does not value data, we might have a long time to wait before the next SFS.)
You can read the Fed's summary of the results here. We learn, for example, that the median family net worth in the U.S. was $77,300. For financial assets alone, which excludes real estate, vehicles, business equity, but also all liabilities, the median (among the 94% of families that have any financial assets) was just $21,500. This includes not just one's bank accounts and CDs, but also retirement accounts, stocks, bonds, mutual funds, etc.
So what about the top 1%? This hasn't been widely reported since the Fed's writeup doesn't include the information, but since the SCF's data is (mostly) publicly available, I decided to take a look. It turns out that the threshold to be in the top 1% of U.S. families by net worth is about $6.82 million. (The average family has 2.7 people, so that would be about $2.5 million per person.)
If you're curious, here are thresholds for other levels:
Top 50% - $77,300, as mentioned above
Top 25% - $301,700 (can be found in Fed's report)
Top 10% - $952,500 (ditto)
Top 5% - $1.86 million (ditto)
Top 4% - $2.20 million
Top 3% - $2.85 million
Top 2% - $4.28 million
Top 1% - $6.82 million
Top 0.5% - $11.2 million
Top 0.2% - $19 million
Top 0.1% - $27 million
At the other end of the spectrum, about 11% of families have negative net worth, and another 2% have zero net worth.
Now, the above data is for all families. A family with $7 million that includes a couple, three kids and two grandparents would certainly be rich, but few would call it better off than a 30-year-old bachelor with $5 million. So rather than a single threshold of $6.82 million for labeling a household "1%," it would be more appropriate to have different thresholds for different types of families. Here are some examples (all in millions of dollars):
- Singles age 25-30 (my group!): 0.43
- Couples with 2 kids, head age 40-45: 6.6
- All couples (with or without kids), head age 60-65: 13.5
(If you're curious, the medians for these groups are, respectively, $13,000, $130,000 and $310,000.)
Tuesday, March 13, 2012
Did Robocalls Depress Voter Turnout?
Yes, according to this study by SFU Economics professor Anke Kessler, which finds that polling stations with lower Conservative vote shares experienced a larger decrease in voter turnout in robocall ridings than in non-robocall ridings. The study compares polling stations within ridings (rather than simply comparing ridings with and without robocalls). This gets around the problem that robocall ridings were tighter and thus likely to have higher turnout, which would mask the actual effect of robocalls.
Specifically, the study finds that, in non-robocall ridings, a polling station with 10% more opposition support would experience a 0.46% relative decrease in turnout - this is just the result of the left having a bad night and the right having a good night. However, in robocall ridings, a polling station with 10% more opposition support would instead experience a 0.97% relative decrease in turnout. (All '%' denote percentage points.)
In other words, relative to Conservative turnout, non-Conservative turnout decreased by 4.6% in non-robocall ridings, but 9.7% in robocall ridings. The net effect of robocalls is thus measured to be 5.1%. The study notes that the average riding had about 82,000 registered voters and roughly 60% opposition support, so, in an average riding, the results suggest that a robocall campaign would depress opposition turnout by 2,500 votes, over and beyond what it would have been.
Even fully believing in this result (and ignoring that ridings have different sizes and opposition support levels), however, does not imply that the winner would have been different in all robocall ridings where the Conservative margin of victory was below 2,500 votes: the decrease in turnout is spread among all the opposition parties, and not just the one that finished second.
On the other hand, this study looks specifically at the effect of robocalls on turnout. It ignores the fact that people might have still shown up to the polls, but voted for a different party due to robocalls. Thus, the true impact of robocalls could have been significantly larger.
Specifically, the study finds that, in non-robocall ridings, a polling station with 10% more opposition support would experience a 0.46% relative decrease in turnout - this is just the result of the left having a bad night and the right having a good night. However, in robocall ridings, a polling station with 10% more opposition support would instead experience a 0.97% relative decrease in turnout. (All '%' denote percentage points.)
In other words, relative to Conservative turnout, non-Conservative turnout decreased by 4.6% in non-robocall ridings, but 9.7% in robocall ridings. The net effect of robocalls is thus measured to be 5.1%. The study notes that the average riding had about 82,000 registered voters and roughly 60% opposition support, so, in an average riding, the results suggest that a robocall campaign would depress opposition turnout by 2,500 votes, over and beyond what it would have been.
Even fully believing in this result (and ignoring that ridings have different sizes and opposition support levels), however, does not imply that the winner would have been different in all robocall ridings where the Conservative margin of victory was below 2,500 votes: the decrease in turnout is spread among all the opposition parties, and not just the one that finished second.
On the other hand, this study looks specifically at the effect of robocalls on turnout. It ignores the fact that people might have still shown up to the polls, but voted for a different party due to robocalls. Thus, the true impact of robocalls could have been significantly larger.
Wednesday, May 18, 2011
Economy, Economy, Economy
For any government, the state of the economy is of paramount importance. But it is even more so for the Harper government over the next four years. After all, it is its perceived competence in that matter that drove Torontonians to give it a majority.
The Conservative economic and fiscal platform was basically: we'll make sure the recovery continues; this will eliminate most of the deficit, and we'll make some not-too-painful cuts to eliminate the rest.
Whether the recovery continues or not is, alas, largely outside the incoming government's control. Obviously, Canada has little impact on international factors such as the U.S. recovery. But even on the domestic front, most of the story has already been determined, and we're just waiting to see how things play out.
Indeed, on macroeconomic issues, a government's performance often depends more on the previous government's actions than on its own. For example, Mulroney's poor showing had much to do with Trudeau's economic mismanagement, while foundations of the Liberal success in the 90s were laid by the Tories with the GST and FTA. Similarly, the continued success of the Canadian economy under Harper was mostly a product of Chrétien and Martin's sound policies and Canadians' sacrifices in the 90s.
In many ways, over the next four years, we will find out how good the Tories' management of the economy has been over the past five years. We will have a better sense of whether:
- the government's stimulus plan succeeded in producing a sustainable recovery;
- the Tories spent outside the country's means prior to the recession;
- there is a housing bubble which the Tories should have tried to prevent.
How these issues play out will have a direct impact on Canadians' well-being and on the government's agenda. If there is no housing bubble, the recovery is sustained, and past spending increases were reasonable, then the Conservatives can deliver on their plan to balance the budget with moderate cuts that most Canadians won't notice. However, if we find out that there is a housing bubble (through it bursting), if the recovery runs out of steam, or if the spending growth of the good times was excessive, then the government will have to introduce unpopular measures, show up to the 2015 election with a deficit, or both.
Barring major events in Québec or a major scandal, the Conservatives' fate in the 2015 election may have already been largely determined.
The same cannot be said of the Liberals and the NDP. Obviously, if the economy does well, they have little chance of winning power in 2015. But the NDP can durably squeeze out the Grits if they manage to establish economic credibility over the next four years. Conversely, if the NDP fails to do so, then the Grits could regain the position of government-in-waiting if they get their act together. Of course, since the election, both parties' performances have ranged from disappointing to laughable...
The Conservative economic and fiscal platform was basically: we'll make sure the recovery continues; this will eliminate most of the deficit, and we'll make some not-too-painful cuts to eliminate the rest.
Whether the recovery continues or not is, alas, largely outside the incoming government's control. Obviously, Canada has little impact on international factors such as the U.S. recovery. But even on the domestic front, most of the story has already been determined, and we're just waiting to see how things play out.
Indeed, on macroeconomic issues, a government's performance often depends more on the previous government's actions than on its own. For example, Mulroney's poor showing had much to do with Trudeau's economic mismanagement, while foundations of the Liberal success in the 90s were laid by the Tories with the GST and FTA. Similarly, the continued success of the Canadian economy under Harper was mostly a product of Chrétien and Martin's sound policies and Canadians' sacrifices in the 90s.
In many ways, over the next four years, we will find out how good the Tories' management of the economy has been over the past five years. We will have a better sense of whether:
- the government's stimulus plan succeeded in producing a sustainable recovery;
- the Tories spent outside the country's means prior to the recession;
- there is a housing bubble which the Tories should have tried to prevent.
How these issues play out will have a direct impact on Canadians' well-being and on the government's agenda. If there is no housing bubble, the recovery is sustained, and past spending increases were reasonable, then the Conservatives can deliver on their plan to balance the budget with moderate cuts that most Canadians won't notice. However, if we find out that there is a housing bubble (through it bursting), if the recovery runs out of steam, or if the spending growth of the good times was excessive, then the government will have to introduce unpopular measures, show up to the 2015 election with a deficit, or both.
Barring major events in Québec or a major scandal, the Conservatives' fate in the 2015 election may have already been largely determined.
The same cannot be said of the Liberals and the NDP. Obviously, if the economy does well, they have little chance of winning power in 2015. But the NDP can durably squeeze out the Grits if they manage to establish economic credibility over the next four years. Conversely, if the NDP fails to do so, then the Grits could regain the position of government-in-waiting if they get their act together. Of course, since the election, both parties' performances have ranged from disappointing to laughable...
Monday, April 11, 2011
Tax Fairness and TFSAs
Some people on the left dislike TFSAs because they mainly benefit the rich, and are therefore "unfair." It's definitely true that TFSAs will eventually become a large drain on government finances and that the proceeds will mostly accrue to the wealthy. However, they can also enhance the fairness of our tax system.
To see why, one needs to first understand how our system works without TFSAs. Here's a question: between a single BC resident making $50,000 and one making $150,000, who faces the higher tax rate on the next dollar earned? (Assume for simplicity that both are single with no dependents and only have wage income.)
At first glance, the answer is very simple: the first taxpayer is in the 29.7% bracket (combined federal and provincial), while the second is in the 43.7% bracket. So the richer guy pays more, and all is good.
The above answer is actually wrong. To really determine the tax on that extra dollar of income, you need to know whether that dollar will be saved or not. Suppose that the first (poorer) taxpayer is scrimping and planning to put that dollar away (say for 20 years, at 4% interest), while the second is splurging and would immediately spend the extra income.
The tax rate on the richer taxpayer is of course still 43.7%.
The middle-class worker, however, faces a rate much higher than 29.7% because he is trying to save. Indeed, with no tax, he would receive $1*(1.04^20) = $2.191 in 20 years. With tax, he starts out with $0.703 to invest. But then, each year, his return is (1-0.297)*4% = 2.812% because interest is also taxed (assuming he stays in the same bracket throughout). As a result, in 20 years, he will only have $0.703*(1.02812^20) = $1.224. He is giving up $0.967 out of $2.191 in taxes, or 44.1%. If he saves for 30 years instead of 20, the effective tax rate is 50.2%.
Our tax system makes the scrimping middle-class guy face a greater marginal tax rate than the freewheeling rich guy: it penalizes saving, and this penalty can outweigh the progressiveness of the tax brackets. TFSAs mitigate this problem.
Of course, we do have RRSP's and RESP's where saving is not penalized. But retirement and a child's education are not the two only worthy goals that require putting money aside.
Now, it is true that on average, TFSAs will mostly benefit those that are already rich, since they tend to save more. (But due to features of our retirement system, lower-income Canadians might benefit more than you'd expect.) The solution is simple: pay for them by raising the regular tax rates for the highest bracket(s). This way, all savers will benefit (even the rich ones, since they'll probably save more than the extra tax they pay), while rich spenders will pay. This seems eminently fair to me: what's troubling about inequality isn't that some people's bank accounts are bigger than others', but that some eat caviar in mansions while others starve on park benches.
Of course, right now might not be the best time to enact a policy that promotes saving because we need strong consumer spending to keep the recovery going. But eventually, Canadians as a whole need to save more. Expanding TFSAs in 2014 or 2015 sounds pretty good to me - especially if it is combined with (or funded by) a progressive measure. Of course, the party proposing the former is quite unlikely to do the latter...
Politically, the NDP is attacking Harper for a policy that "leaves most families behind." The Liberal response has been more muted (and fair), criticizing TFSAs along with other policies for reducing what's available for health care funding. Whether Ignatieff goes further during the debate might be a good indication of where he is in the Big Red Tent - on the lefty side or on the centrist side.
Now, allow me to be a bit fanciful. What if we enact unlimited TFSAs by phasing out all taxation on interest, dividends and capital gains? Such a move would reduce the unfair and inefficient bias toward consumption over saving (you'd also have to kill the corporate income tax to eliminate it). In addition, imagine the drastic simplification of the tax system - no more need for RRSPs, RESPs, complicated TFSA rules, T3s, T5s, a whole bunch of lines on the T1, Schedules 3, 4 and 7, tax planning, etc. All the time, energy and trees we'd save would be worth hundreds of millions every year!
The downside, of course, is that this would be a highly regressive move unless combined with a strongly progressive element. Paying for it just by raising top tax rates would unfortunately make them transparently punitive. (Keep in mind that current top tax rates are, in fact, even more punitive for savers: somebody facing a 45% combined federal-provincial rate actually pays a whopping 71.3% on an extra dollar of saving earning a 5% interest over 30 years. It's just that the actual tax rate is shrouded.)
A better way to go about this would be to enact a $50/ton carbon tax. This would raise roughly twice the revenue currently generated (at the federal level) by taxing investment income and capital gains. The other half of the money could then be used in ways that mainly benefit the poor and the middle class.
To see why, one needs to first understand how our system works without TFSAs. Here's a question: between a single BC resident making $50,000 and one making $150,000, who faces the higher tax rate on the next dollar earned? (Assume for simplicity that both are single with no dependents and only have wage income.)
At first glance, the answer is very simple: the first taxpayer is in the 29.7% bracket (combined federal and provincial), while the second is in the 43.7% bracket. So the richer guy pays more, and all is good.
The above answer is actually wrong. To really determine the tax on that extra dollar of income, you need to know whether that dollar will be saved or not. Suppose that the first (poorer) taxpayer is scrimping and planning to put that dollar away (say for 20 years, at 4% interest), while the second is splurging and would immediately spend the extra income.
The tax rate on the richer taxpayer is of course still 43.7%.
The middle-class worker, however, faces a rate much higher than 29.7% because he is trying to save. Indeed, with no tax, he would receive $1*(1.04^20) = $2.191 in 20 years. With tax, he starts out with $0.703 to invest. But then, each year, his return is (1-0.297)*4% = 2.812% because interest is also taxed (assuming he stays in the same bracket throughout). As a result, in 20 years, he will only have $0.703*(1.02812^20) = $1.224. He is giving up $0.967 out of $2.191 in taxes, or 44.1%. If he saves for 30 years instead of 20, the effective tax rate is 50.2%.
Our tax system makes the scrimping middle-class guy face a greater marginal tax rate than the freewheeling rich guy: it penalizes saving, and this penalty can outweigh the progressiveness of the tax brackets. TFSAs mitigate this problem.
Of course, we do have RRSP's and RESP's where saving is not penalized. But retirement and a child's education are not the two only worthy goals that require putting money aside.
Now, it is true that on average, TFSAs will mostly benefit those that are already rich, since they tend to save more. (But due to features of our retirement system, lower-income Canadians might benefit more than you'd expect.) The solution is simple: pay for them by raising the regular tax rates for the highest bracket(s). This way, all savers will benefit (even the rich ones, since they'll probably save more than the extra tax they pay), while rich spenders will pay. This seems eminently fair to me: what's troubling about inequality isn't that some people's bank accounts are bigger than others', but that some eat caviar in mansions while others starve on park benches.
Of course, right now might not be the best time to enact a policy that promotes saving because we need strong consumer spending to keep the recovery going. But eventually, Canadians as a whole need to save more. Expanding TFSAs in 2014 or 2015 sounds pretty good to me - especially if it is combined with (or funded by) a progressive measure. Of course, the party proposing the former is quite unlikely to do the latter...
Politically, the NDP is attacking Harper for a policy that "leaves most families behind." The Liberal response has been more muted (and fair), criticizing TFSAs along with other policies for reducing what's available for health care funding. Whether Ignatieff goes further during the debate might be a good indication of where he is in the Big Red Tent - on the lefty side or on the centrist side.
Now, allow me to be a bit fanciful. What if we enact unlimited TFSAs by phasing out all taxation on interest, dividends and capital gains? Such a move would reduce the unfair and inefficient bias toward consumption over saving (you'd also have to kill the corporate income tax to eliminate it). In addition, imagine the drastic simplification of the tax system - no more need for RRSPs, RESPs, complicated TFSA rules, T3s, T5s, a whole bunch of lines on the T1, Schedules 3, 4 and 7, tax planning, etc. All the time, energy and trees we'd save would be worth hundreds of millions every year!
The downside, of course, is that this would be a highly regressive move unless combined with a strongly progressive element. Paying for it just by raising top tax rates would unfortunately make them transparently punitive. (Keep in mind that current top tax rates are, in fact, even more punitive for savers: somebody facing a 45% combined federal-provincial rate actually pays a whopping 71.3% on an extra dollar of saving earning a 5% interest over 30 years. It's just that the actual tax rate is shrouded.)
A better way to go about this would be to enact a $50/ton carbon tax. This would raise roughly twice the revenue currently generated (at the federal level) by taxing investment income and capital gains. The other half of the money could then be used in ways that mainly benefit the poor and the middle class.
Thursday, March 31, 2011
More Policies: Tories on Trade, Grits on Pensions, Dippers on Corporate Taxes
The second batch of policy announcements is, on the aggregate, somewhat better than the first, but still unimpressive to me.
The Tories reiterate their support for free trade agreements, which I generally support, but offer few details. They also say that under a hypothetical "Liberal coalition," free trade agreements wouldn't happen. Does this mean that if the Liberals win and propose a trade deal, the Tories would side with the NDP and the Bloc in opposing it? To me, this issue doesn't put too much light between the two main parties: perhaps the Conservatives would be somewhat more proactive than the Liberals in seeking trade agreements, but the Grits are hardly protectionists. Still, this is a much better policy than the ill-conceived family tax cut announced earlier.
I have little to say about funding the hydroelectric project in the Atlantic: I don't know enough details to determine whether it's a good project. If it is a worthwhile investment, the appropriateness of federal funding depends on one's own view of the federation. Although given that Hydro-Québec did not get any help from the federal government over the years, the Bloc is totally justified in hammering this move. (Yes, the Bloc is often too whiny, but not on this one.)
The Liberals want to expand the CPP, allow Canadians to invest more with the CPP, and expand the GIS. I'm generally against the first idea, in favour of the second, and neutral concerning the third.
My opposition to an expansion of the CPP is because my generation is already getting a pretty bad deal out of it because we're effectively subsidizing seniors. While CPP long-term real returns are forecast at about 4%, Canadians born between 1970 and 2000 will only get a 2.2-2.4% return on their contributions according to the latest CPP actuarial report (see page 74). Instead of their money doubling every 18 years or so, people under 40 have their money doubling every 30 years. This is because those born before 1950 are able to enjoy returns above 4%. An expansion of the CPP, even gradual (unless it's done over 40 years), will further disadvantage young workers.
Allowing Canadians to invest more with the CPP is a good idea. Many people might like to save more, but do not know how to appropriately invest their savings. Moreover, asset management fees are often ridiculously high. The CPP would provide a low-cost way for Canadians to benefit from professional financial services. The flip side is that it wouldn't be a personalized option, so each citizen will have to assess whether the CPP strategy responds to their needs - but at the very least, having more choice won't hurt. Because additional contributions are capped at the RRSP deduction limit, this policy probably won't put too much strain on the CPP investment board or squeeze the private asset management industry too much. I'd like to see this policy implemented.
Finally, whether you want to expand the GIS is essentially a moral question concerning your attitude toward redistribution and how responsible poor seniors are for their situation.
The NDP keeps on going with economic policies that sound good, but either won't work or aren't cost effective. Why increase the gap in tax rates between large and small companies? Doing so increases the amount of economic distortion (you're essentially penalizing successful firms that become big), and is a woefully inefficient way of doing redistribution. Indeed, corporations aren't people: their owners/shareholders are. Are shareholders of big firms richer than owners of small businesses? Keep in mind that big firms are often largely owned by pension funds, which represent average Canadians. A much more effective way to redistribute is through the personal income tax system. Unfortunately, at the NDP, when populism and progressivism clash, the former often wins out.
The tax credit for creating new jobs will run into trouble too. Do I get the credit if I fire a worker and hire someone else the next day? The next week? The next month? The next year? Also, you would be penalizing firms that held on to their employees through the recession (because they wouldn't be able to get the credit by "creating" jobs) and paying firms that got rid of workers at the first sign of trouble. Guess what they'd do the next time around...
The Tories reiterate their support for free trade agreements, which I generally support, but offer few details. They also say that under a hypothetical "Liberal coalition," free trade agreements wouldn't happen. Does this mean that if the Liberals win and propose a trade deal, the Tories would side with the NDP and the Bloc in opposing it? To me, this issue doesn't put too much light between the two main parties: perhaps the Conservatives would be somewhat more proactive than the Liberals in seeking trade agreements, but the Grits are hardly protectionists. Still, this is a much better policy than the ill-conceived family tax cut announced earlier.
I have little to say about funding the hydroelectric project in the Atlantic: I don't know enough details to determine whether it's a good project. If it is a worthwhile investment, the appropriateness of federal funding depends on one's own view of the federation. Although given that Hydro-Québec did not get any help from the federal government over the years, the Bloc is totally justified in hammering this move. (Yes, the Bloc is often too whiny, but not on this one.)
The Liberals want to expand the CPP, allow Canadians to invest more with the CPP, and expand the GIS. I'm generally against the first idea, in favour of the second, and neutral concerning the third.
My opposition to an expansion of the CPP is because my generation is already getting a pretty bad deal out of it because we're effectively subsidizing seniors. While CPP long-term real returns are forecast at about 4%, Canadians born between 1970 and 2000 will only get a 2.2-2.4% return on their contributions according to the latest CPP actuarial report (see page 74). Instead of their money doubling every 18 years or so, people under 40 have their money doubling every 30 years. This is because those born before 1950 are able to enjoy returns above 4%. An expansion of the CPP, even gradual (unless it's done over 40 years), will further disadvantage young workers.
Allowing Canadians to invest more with the CPP is a good idea. Many people might like to save more, but do not know how to appropriately invest their savings. Moreover, asset management fees are often ridiculously high. The CPP would provide a low-cost way for Canadians to benefit from professional financial services. The flip side is that it wouldn't be a personalized option, so each citizen will have to assess whether the CPP strategy responds to their needs - but at the very least, having more choice won't hurt. Because additional contributions are capped at the RRSP deduction limit, this policy probably won't put too much strain on the CPP investment board or squeeze the private asset management industry too much. I'd like to see this policy implemented.
Finally, whether you want to expand the GIS is essentially a moral question concerning your attitude toward redistribution and how responsible poor seniors are for their situation.
The NDP keeps on going with economic policies that sound good, but either won't work or aren't cost effective. Why increase the gap in tax rates between large and small companies? Doing so increases the amount of economic distortion (you're essentially penalizing successful firms that become big), and is a woefully inefficient way of doing redistribution. Indeed, corporations aren't people: their owners/shareholders are. Are shareholders of big firms richer than owners of small businesses? Keep in mind that big firms are often largely owned by pension funds, which represent average Canadians. A much more effective way to redistribute is through the personal income tax system. Unfortunately, at the NDP, when populism and progressivism clash, the former often wins out.
The tax credit for creating new jobs will run into trouble too. Do I get the credit if I fire a worker and hire someone else the next day? The next week? The next month? The next year? Also, you would be penalizing firms that held on to their employees through the recession (because they wouldn't be able to get the credit by "creating" jobs) and paying firms that got rid of workers at the first sign of trouble. Guess what they'd do the next time around...
Tuesday, March 29, 2011
Policy Choices So Far: Boo, Meh and Whaaaa?
Each of the three major parties has made one big announcement so far in the campaign.
Conservatives: "Stephen Harper's family tax cut" would allow families with children under 18 to split up to $50,000 in income. As in any income splitting scheme, this will only benefit couples where the two people are in different tax brackets. Clearly, this is a highly regressive policy since it will not benefit at all low-income and many middle-income households.
Worse, even in terms of economic efficiency, this policy's effect is at best ambiguous, and in fact probably negative. The tax cut will reduce the marginal tax rate of the first earner in some couples by effectively putting him/her in a lower bracket. But now the second person in the couple faces higher taxes on his/her labour income. For the vast majority of Canadian families, having at least one full-time earner is necessary - that person will have an incentive to work more, but there's only so much overtime you can do. However, for many couples, whether the second partner works is much more of a choice. Under the Conservative plan, there will be a strong disincentive for that person to work. As a result, the net long-term effect of this policy on the economy may well be contractionary. In any case, it is unlikely to be expansionary - which is pretty sad for a tax cut.
Think about it: a proposal that is regressive, contractionary, and costs money. Boo.
Liberals: The Canadian Learning Passport will provide $1,000-$1,500 per year for up to 4 years to students at post-secondary institutions. Before getting too excited, however, parents and youth should note that this grant replaces the education and textbook credits (the tuition credit will stay). For a full-time student, those credits are now worth $465/mo x 8 mos/yr x 15% = $558/yr, or say $500/yr after time discounting because students often don't have the income to benefit from the credit right away. Therefore, the true benefit of the Liberal proposal for most families is only about half the advertised amount.
It is unclear whether this policy is progressive: although low-income families get more per child, children from high-income families are more likely to go to university. It is also unclear whether it is economically efficient - this depends on how many more kids go to a university as a result (I'm assuming that's a good thing), and on economic distortions generated by the cost. Meh.
NDP: Wants to cap credit card interest at prime+5% (8% currently) and to regulate credit card transaction fees. Just the interest rate cap will nab something on the order of $10 billion from credit card companies. Think about how much we'll all save - a wonderful free lunch! Whaaaa?
The credit card industry may generate high profits, but it also requires lots of capital. The question is how much excess profits it generates - i.e. profits over and above what all that capital would generate if invested elsewhere. The answer is, most probably, much less than $10 billion. After all, if offering cards were that profitable, banks would be falling over each other to give cards with better terms in order to attract more customers.
If only credit cards with 8% interest and low transaction fees can be offered, then:
1. there will be a lot fewer of them;
2. those that exist will have little or no rewards, and high annual fees.
Canadians will then have two choices:
- pony up that big annual fee up front; or
- use debit, keep checking their chequing account balance to make sure balance doesn't run low, and go through the hassles and uncertainty of getting a personal loan when a little extra is needed.
My guess is that few would choose the former option, so the NDP proposal would essentially kill credit cards in Canada. Most Canadians would simply end up losing the convenience of revolving credit and probably paying a bunch of extra bank fees instead of credit card interest. The NDP is probably smart enough to know this. Part of the party may even think that getting rid of credit cards is a good thing, though I would hope that the majority is not that paternalistic. Most likely, they are banking (probably rightfully so) on enough Canadians being naïve enough to support this policy, knowing full well that they'll never get a chance to implement it.
Conservatives: "Stephen Harper's family tax cut" would allow families with children under 18 to split up to $50,000 in income. As in any income splitting scheme, this will only benefit couples where the two people are in different tax brackets. Clearly, this is a highly regressive policy since it will not benefit at all low-income and many middle-income households.
Worse, even in terms of economic efficiency, this policy's effect is at best ambiguous, and in fact probably negative. The tax cut will reduce the marginal tax rate of the first earner in some couples by effectively putting him/her in a lower bracket. But now the second person in the couple faces higher taxes on his/her labour income. For the vast majority of Canadian families, having at least one full-time earner is necessary - that person will have an incentive to work more, but there's only so much overtime you can do. However, for many couples, whether the second partner works is much more of a choice. Under the Conservative plan, there will be a strong disincentive for that person to work. As a result, the net long-term effect of this policy on the economy may well be contractionary. In any case, it is unlikely to be expansionary - which is pretty sad for a tax cut.
Think about it: a proposal that is regressive, contractionary, and costs money. Boo.
Liberals: The Canadian Learning Passport will provide $1,000-$1,500 per year for up to 4 years to students at post-secondary institutions. Before getting too excited, however, parents and youth should note that this grant replaces the education and textbook credits (the tuition credit will stay). For a full-time student, those credits are now worth $465/mo x 8 mos/yr x 15% = $558/yr, or say $500/yr after time discounting because students often don't have the income to benefit from the credit right away. Therefore, the true benefit of the Liberal proposal for most families is only about half the advertised amount.
It is unclear whether this policy is progressive: although low-income families get more per child, children from high-income families are more likely to go to university. It is also unclear whether it is economically efficient - this depends on how many more kids go to a university as a result (I'm assuming that's a good thing), and on economic distortions generated by the cost. Meh.
NDP: Wants to cap credit card interest at prime+5% (8% currently) and to regulate credit card transaction fees. Just the interest rate cap will nab something on the order of $10 billion from credit card companies. Think about how much we'll all save - a wonderful free lunch! Whaaaa?
The credit card industry may generate high profits, but it also requires lots of capital. The question is how much excess profits it generates - i.e. profits over and above what all that capital would generate if invested elsewhere. The answer is, most probably, much less than $10 billion. After all, if offering cards were that profitable, banks would be falling over each other to give cards with better terms in order to attract more customers.
If only credit cards with 8% interest and low transaction fees can be offered, then:
1. there will be a lot fewer of them;
2. those that exist will have little or no rewards, and high annual fees.
Canadians will then have two choices:
- pony up that big annual fee up front; or
- use debit, keep checking their chequing account balance to make sure balance doesn't run low, and go through the hassles and uncertainty of getting a personal loan when a little extra is needed.
My guess is that few would choose the former option, so the NDP proposal would essentially kill credit cards in Canada. Most Canadians would simply end up losing the convenience of revolving credit and probably paying a bunch of extra bank fees instead of credit card interest. The NDP is probably smart enough to know this. Part of the party may even think that getting rid of credit cards is a good thing, though I would hope that the majority is not that paternalistic. Most likely, they are banking (probably rightfully so) on enough Canadians being naïve enough to support this policy, knowing full well that they'll never get a chance to implement it.
Tuesday, August 17, 2010
How Rich Is Canada Relative to the U.S.?
According to Statistics Canada, Canada's real GDP per capita is catching up to America's: it went from 82% in 1999 to 92% in 2008. However, according to the IMF, during the same period, it went from 81% to 82% (other international organizations, like the OECD and the World Bank, show similar numbers). What's going on?
The reason why these estimates have come to differ so greatly is that Statistics Canada estimates that the purchasing power of each Canadian dollar was 90 U.S. cents in 2008, while the IMF reckoned that it was only 81 cents. In contrast, in 1999, both agencies pegged the CAD's real value at 0.84 USD. Of course, this begs the questions: why did the difference arise, and who's right?
Statistics Canada gives two reasons for the diverging figures, both of which suggest that its numbers better reflect the relative standing of the Canadian economy:
1. The International Comparison Program (ICP) is the main reference for establishing the true purchasing power of various currencies. It does so by collecting prices for a variety of goods in each participating country. The last round of the ICP was carried out in 2005, and determined that the CAD's purchasing power was about 0.82-0.83 USD. However, Statistics Canada used extra data and recomputed the figure by tweaking the basket of goods being compared, so that it better reflects North American consumption and investment patterns. The adjusted value was 0.87 USD.
2. After the 2005 benchmark, these statistics are adjusted every year to reflect differences in inflation between countries. For example, if inflation is higher in Canada than in the US, then the relative purchasing power of the CAD would decrease. Question: inflation of what? If Canada and the US did not trade at all, the answer would be easy: the inflation of all goods and services in each economy. But due to international trade, the G&S produced in a country do not correspond to the G&S consumed in that country. What basket of goods and services should be used depends on the purpose of the calculations:
- If one is trying to figure out economic (i.e. real GDP) growth for a given country, one should use production prices: the goal here is to compute the change in the volume of G&S produced. The relative prices of imports and exports are held constant.
- If one is instead interested in international comparisons of material quality of life, the consumption prices are the relevant ones. The relative prices of imports and exports follow changes in the market.
In Canada's case, this makes a big difference: as energy prices have risen considerably, a given volume of Canadian exports is now worth more imports than it used to. This has not been the case for the US. Thus, since 2005, while Canada's economic growth per person has roughly matched America's, Canadians' material quality of life has been increasingly more rapidly than Americans'. This is the second reason why international organizations, using the former measure, do not show Canada catching up, while Statistics Canada does.
(By the way, the second measure above - the trade-adjusted value of GDP - is sometimes termed Gross Domestic Income (GDI). Every year, GDP=GDI at that year's prices, by definition: your income is the value of what you produce. But because the previous year's GDP and GDI are not generally the same at current prices, real GDP and real GDI growth rates differ. So point 2 is simply saying that the international organizations' estimates reflect Canada's real GDP growth rather than its real GDI growth.)
To make a long story short: there is good reason to believe Statistics Canada's findings that Canadian economic standards are catching up to American ones (although I'm bit skeptical about the point 1 adjustment being so large)! This is consistent with the mood in the two countries, even during the 2003-2007 expansion: while Canada and the U.S. posted similar growth rates (and had similar population growth rates as well), Canadians were much more upbeat than Americans about the economy. After the next round of the IPC in 2011, international organizations will recognize part of the catch-up (the portion related to point 2), as the exercise will update the relative prices of all goods.
Interesting side note: although Statistics Canada puts the CAD's purchasing power at 0.90 USD, it is lower for private consumption goods and services (what you and I actually "feel") - only 0.84. The numbers vary wildly across categories of goods: food, alcohol and tobacco are a lot more expensive in Canada, while health care (even the private portion, like eye care and dentistry) and education are a lot cheaper. However, for government purchases and capital investments, the values are 1.01 and 0.98. The former reflects cheaper health care in Canada, while the latter may be partially due to Canada mainly using value-added taxes instead of sales taxes.
The reason why these estimates have come to differ so greatly is that Statistics Canada estimates that the purchasing power of each Canadian dollar was 90 U.S. cents in 2008, while the IMF reckoned that it was only 81 cents. In contrast, in 1999, both agencies pegged the CAD's real value at 0.84 USD. Of course, this begs the questions: why did the difference arise, and who's right?
Statistics Canada gives two reasons for the diverging figures, both of which suggest that its numbers better reflect the relative standing of the Canadian economy:
1. The International Comparison Program (ICP) is the main reference for establishing the true purchasing power of various currencies. It does so by collecting prices for a variety of goods in each participating country. The last round of the ICP was carried out in 2005, and determined that the CAD's purchasing power was about 0.82-0.83 USD. However, Statistics Canada used extra data and recomputed the figure by tweaking the basket of goods being compared, so that it better reflects North American consumption and investment patterns. The adjusted value was 0.87 USD.
2. After the 2005 benchmark, these statistics are adjusted every year to reflect differences in inflation between countries. For example, if inflation is higher in Canada than in the US, then the relative purchasing power of the CAD would decrease. Question: inflation of what? If Canada and the US did not trade at all, the answer would be easy: the inflation of all goods and services in each economy. But due to international trade, the G&S produced in a country do not correspond to the G&S consumed in that country. What basket of goods and services should be used depends on the purpose of the calculations:
- If one is trying to figure out economic (i.e. real GDP) growth for a given country, one should use production prices: the goal here is to compute the change in the volume of G&S produced. The relative prices of imports and exports are held constant.
- If one is instead interested in international comparisons of material quality of life, the consumption prices are the relevant ones. The relative prices of imports and exports follow changes in the market.
In Canada's case, this makes a big difference: as energy prices have risen considerably, a given volume of Canadian exports is now worth more imports than it used to. This has not been the case for the US. Thus, since 2005, while Canada's economic growth per person has roughly matched America's, Canadians' material quality of life has been increasingly more rapidly than Americans'. This is the second reason why international organizations, using the former measure, do not show Canada catching up, while Statistics Canada does.
(By the way, the second measure above - the trade-adjusted value of GDP - is sometimes termed Gross Domestic Income (GDI). Every year, GDP=GDI at that year's prices, by definition: your income is the value of what you produce. But because the previous year's GDP and GDI are not generally the same at current prices, real GDP and real GDI growth rates differ. So point 2 is simply saying that the international organizations' estimates reflect Canada's real GDP growth rather than its real GDI growth.)
To make a long story short: there is good reason to believe Statistics Canada's findings that Canadian economic standards are catching up to American ones (although I'm bit skeptical about the point 1 adjustment being so large)! This is consistent with the mood in the two countries, even during the 2003-2007 expansion: while Canada and the U.S. posted similar growth rates (and had similar population growth rates as well), Canadians were much more upbeat than Americans about the economy. After the next round of the IPC in 2011, international organizations will recognize part of the catch-up (the portion related to point 2), as the exercise will update the relative prices of all goods.
Interesting side note: although Statistics Canada puts the CAD's purchasing power at 0.90 USD, it is lower for private consumption goods and services (what you and I actually "feel") - only 0.84. The numbers vary wildly across categories of goods: food, alcohol and tobacco are a lot more expensive in Canada, while health care (even the private portion, like eye care and dentistry) and education are a lot cheaper. However, for government purchases and capital investments, the values are 1.01 and 0.98. The former reflects cheaper health care in Canada, while the latter may be partially due to Canada mainly using value-added taxes instead of sales taxes.
Wednesday, August 11, 2010
Republicans, Democrats and the Past 40 Years of the US Economy
Figures below refer to US median household income, in 2008 dollars, and come from the US Census Bureau.
How a Republican would see it:
1978: $45,625 one year after Carter takes office
1983: $42,910 (-6% in 5 years) two years after Carter leaves office
1989: $48,463 (+13% in 6 years) the year Reagan leaves office, and just before Bush Sr. betrays Reagan by raising taxes
2004: $50,535 (+4% in 15 years) three years after Clinton leaves office
2007: $52,163 (+3% in 3 years) just before the financial crisis caused by government intervention in the mortgage market
How a Democrat would see it:
1969: $43,557 the year Nixon takes office
1976: $43,649 (0% in 7 years) the last year of the Ford presidency
1979: $45,498 (+4% in 3 years) the 3rd year of the Carter presidency, just before the Fed got serious about inflation
1993: $45,839 (+1% in 14 years) the year Clinton takes office
2000: $52,500 (+15% in 7 years) the last year of the Clinton presidency
2008: $50,303 (-4% in 8 years) the last year of the Bush presidency
The truth, of course, is somewhere in the middle. Nixon/Ford were unlucky to face the Oil Crisis; the Fed's inflation fighting destroyed Carter's record and gave Reagan an artificially low base to start from; Bush Sr. had to raise taxes due to Reagan's deficits; Clinton probably benefited from Reagan deregulation; Bush Jr. cannot be held solely, or perhaps even mainly, responsible for the financial crisis, which had roots in the Reagan reforms and in the Fed's actions mitigating the bursting of the Clinton tech bubble.
Given this history, you can be sure that 25 years from now, people will still be arguing whether the sluggishness of the current recovery is Bush Jr.'s or Obama's fault.
How a Republican would see it:
1978: $45,625 one year after Carter takes office
1983: $42,910 (-6% in 5 years) two years after Carter leaves office
1989: $48,463 (+13% in 6 years) the year Reagan leaves office, and just before Bush Sr. betrays Reagan by raising taxes
2004: $50,535 (+4% in 15 years) three years after Clinton leaves office
2007: $52,163 (+3% in 3 years) just before the financial crisis caused by government intervention in the mortgage market
How a Democrat would see it:
1969: $43,557 the year Nixon takes office
1976: $43,649 (0% in 7 years) the last year of the Ford presidency
1979: $45,498 (+4% in 3 years) the 3rd year of the Carter presidency, just before the Fed got serious about inflation
1993: $45,839 (+1% in 14 years) the year Clinton takes office
2000: $52,500 (+15% in 7 years) the last year of the Clinton presidency
2008: $50,303 (-4% in 8 years) the last year of the Bush presidency
The truth, of course, is somewhere in the middle. Nixon/Ford were unlucky to face the Oil Crisis; the Fed's inflation fighting destroyed Carter's record and gave Reagan an artificially low base to start from; Bush Sr. had to raise taxes due to Reagan's deficits; Clinton probably benefited from Reagan deregulation; Bush Jr. cannot be held solely, or perhaps even mainly, responsible for the financial crisis, which had roots in the Reagan reforms and in the Fed's actions mitigating the bursting of the Clinton tech bubble.
Given this history, you can be sure that 25 years from now, people will still be arguing whether the sluggishness of the current recovery is Bush Jr.'s or Obama's fault.
Sunday, July 4, 2010
G7: Good Comparison Group for Canada?
Canada likes to compare itself to other G7 countries on economic matters. Our fiscal situation is better than all 6 of our peers, and our material standard of living is better all but America's. For a decade, no Minister of Finance has seemingly ever missed an opportunity to remind us of this (especially the former). Given that we don't want US-style inequality, there really isn't much to improve, is there?
Unfortunately, G7 comparisons may lead us to unwarranted complacency. Out of 28 OECD countries (there are 31 OECD countries total, but no data for Chile, Mexico and Turkey), Canada ranks a middle-of-the-road 12th for lowest net debt as a percentage of GDP, projected for 2011. All 6 other G7 countries are among the 10 worst offenders. Do we really want to compare ourselves to them?
Most Scandinavian countries, as well as Korea, Australia and New Zealand, have little or negative net debt - the latter meaning that they actually set aside assets over and above their gross debt in anticipation of population aging. We're in a good fiscal position, but with looming increases in pension and health care costs, we're definitely not out of the woods.
In terms of GDP per capita, out of the 33 advanced economies identified by the IMF, Canada ranked 11th in 2008. That's still good, but doesn't sound as great as "second only to the US". (It looks like we stayed 11th in 2009 - Australia passed Canada, but Iceland fell behind - and the IMF thinks we'll still be 11th in 2015.)
Of course, Canada is not quite as resource-rich relative to its population size as Australia or Norway, and there is no way our financial sector could be as large relative to our population as Hong Kong's, Singapore's, Luxembourg's or Switzerland's. We don't want the instability of the Irish model or the inequality of the American model.
But the other two countries in front of us - the Netherlands and Austria - as well as Denmark and Sweden, which closely follow us, can probably provide some lessons: all 4 of them have much larger government sectors than Canada, and yet their economies are just as vibrant as ours. This suggests that Canada has room to become more egalitarian without sacrificing output, or to become richer without sacrificing social justice.
Moreover, Korea and Taiwan, which are rapidly catching up (they are already at Western European standards), have small governments and relatively little inequality (though the latter is increasing there as well). How do they achieve that? Just chalking it up to culture might prevent us from learning valuable lessons.
By all means, the Canadian economy is among the healthiest in the world at this moment, and we can all be proud of that. But although G7 comparisons may suggest that we're head and shoulders above everyone else, we need to remember that the world is more than just the G7, and a few other countries - mainly small Germanic and East Asian ones - have an economic and fiscal situation just as enviable as ours. Complacency is therefore to be avoided if we want to keep Canada among the top. Remember that the next time you come across an international comparison from the Department of Finance!
Unfortunately, G7 comparisons may lead us to unwarranted complacency. Out of 28 OECD countries (there are 31 OECD countries total, but no data for Chile, Mexico and Turkey), Canada ranks a middle-of-the-road 12th for lowest net debt as a percentage of GDP, projected for 2011. All 6 other G7 countries are among the 10 worst offenders. Do we really want to compare ourselves to them?
Most Scandinavian countries, as well as Korea, Australia and New Zealand, have little or negative net debt - the latter meaning that they actually set aside assets over and above their gross debt in anticipation of population aging. We're in a good fiscal position, but with looming increases in pension and health care costs, we're definitely not out of the woods.
In terms of GDP per capita, out of the 33 advanced economies identified by the IMF, Canada ranked 11th in 2008. That's still good, but doesn't sound as great as "second only to the US". (It looks like we stayed 11th in 2009 - Australia passed Canada, but Iceland fell behind - and the IMF thinks we'll still be 11th in 2015.)
Of course, Canada is not quite as resource-rich relative to its population size as Australia or Norway, and there is no way our financial sector could be as large relative to our population as Hong Kong's, Singapore's, Luxembourg's or Switzerland's. We don't want the instability of the Irish model or the inequality of the American model.
But the other two countries in front of us - the Netherlands and Austria - as well as Denmark and Sweden, which closely follow us, can probably provide some lessons: all 4 of them have much larger government sectors than Canada, and yet their economies are just as vibrant as ours. This suggests that Canada has room to become more egalitarian without sacrificing output, or to become richer without sacrificing social justice.
Moreover, Korea and Taiwan, which are rapidly catching up (they are already at Western European standards), have small governments and relatively little inequality (though the latter is increasing there as well). How do they achieve that? Just chalking it up to culture might prevent us from learning valuable lessons.
By all means, the Canadian economy is among the healthiest in the world at this moment, and we can all be proud of that. But although G7 comparisons may suggest that we're head and shoulders above everyone else, we need to remember that the world is more than just the G7, and a few other countries - mainly small Germanic and East Asian ones - have an economic and fiscal situation just as enviable as ours. Complacency is therefore to be avoided if we want to keep Canada among the top. Remember that the next time you come across an international comparison from the Department of Finance!
Thursday, July 1, 2010
Is it the Time for Austerity?
Most mainstream economists' views either fall into one of these camps, or mix a few of these arguments:
1. Yes: Keynesian economics is wrong, and there was never a need for fiscal stimulus.
2. Yes: The recovery is underway, so governments can now withdraw stimulus.
3. Yes: Governments can't afford to keep stimulating the economy, either because: a) investors will soon balk at lending them money; or b) when the recovery gets underway, interest rates will rise, and big debts will prove too large a burden.
4. Yes: Monetary policy can still do more to stimulate the economy, and should do the job now that the initial fiscal stimulus has prevented a depression.
5. No: With short term interest rates at 0%, monetary policy has hit its limit, so fiscal policy is needed.
6. No: For many countries like the U.S., Canada and Germany, governments can borrow very cheaply. Thus the benefits of austerity are little (investors won't balk at lending them any time soon), while the costs could be tremendous if fiscal restraint thwarts recovery.
7. No: The governments that can borrow cheaply now should take advantage of the situation and invest in the future (education, infrastructure, etc.).
I'm not a macroeconomist, but I do know a thing or two about this topic. Of these arguments, I'm most sympathetic to 3 and 5. Basically, I'm torn: the economy is still way below potential, and the recovery in most countries does not look robust. Monetary policy can probably do more by driving down long-term interest rates, but I don't think that's enough. I do believe that fiscal stimulus works, but there are two major drawbacks to it:
- If too much debt is accumulated, that can nip recovery in the bud: when the economy turns up, interest rates will rise, and the government will run into huge trouble. So even though interest rates are low now, fiscal stimulus still carries a large cost.
- If intense stimulus lasts for too long, the structure of the economy may shift toward sectors that cater to the government; this would slow recovery, as structural change back to "normal" would be required. Stimulus through tax cuts rather than spending can mitigate this problem, but tax cuts fail if people simply save the money.
Overall, since the recovery is fairly strong in Canada, the government should probably adopt a wait-and-see attitude, which it seems to be doing. However, the right policy for Canada is probably not the right one for the rest of the Western world, so Harper may have erred in urging restraint from other countries...
1. Yes: Keynesian economics is wrong, and there was never a need for fiscal stimulus.
2. Yes: The recovery is underway, so governments can now withdraw stimulus.
3. Yes: Governments can't afford to keep stimulating the economy, either because: a) investors will soon balk at lending them money; or b) when the recovery gets underway, interest rates will rise, and big debts will prove too large a burden.
4. Yes: Monetary policy can still do more to stimulate the economy, and should do the job now that the initial fiscal stimulus has prevented a depression.
5. No: With short term interest rates at 0%, monetary policy has hit its limit, so fiscal policy is needed.
6. No: For many countries like the U.S., Canada and Germany, governments can borrow very cheaply. Thus the benefits of austerity are little (investors won't balk at lending them any time soon), while the costs could be tremendous if fiscal restraint thwarts recovery.
7. No: The governments that can borrow cheaply now should take advantage of the situation and invest in the future (education, infrastructure, etc.).
I'm not a macroeconomist, but I do know a thing or two about this topic. Of these arguments, I'm most sympathetic to 3 and 5. Basically, I'm torn: the economy is still way below potential, and the recovery in most countries does not look robust. Monetary policy can probably do more by driving down long-term interest rates, but I don't think that's enough. I do believe that fiscal stimulus works, but there are two major drawbacks to it:
- If too much debt is accumulated, that can nip recovery in the bud: when the economy turns up, interest rates will rise, and the government will run into huge trouble. So even though interest rates are low now, fiscal stimulus still carries a large cost.
- If intense stimulus lasts for too long, the structure of the economy may shift toward sectors that cater to the government; this would slow recovery, as structural change back to "normal" would be required. Stimulus through tax cuts rather than spending can mitigate this problem, but tax cuts fail if people simply save the money.
Overall, since the recovery is fairly strong in Canada, the government should probably adopt a wait-and-see attitude, which it seems to be doing. However, the right policy for Canada is probably not the right one for the rest of the Western world, so Harper may have erred in urging restraint from other countries...
Friday, June 25, 2010
A New Economic Era
Here's a simplistic description of the North American economy since 1945:
Late forties, fifties, sixties: Post-war boom due to pent-up demand (forced saving during the war), rebuilding in Europe. Artificially extended into the 60s by overly lax monetary policy.
Seventies, early eighties: Instability due to inflation - it's a hangover from the 60s' overheating - compounded by the oil shock. Would have been much more painful if it weren't for favourable demographic circumstances (baby boomers trickling into the labor market).
Mid and late eighties, nineties, naughties: Boom due to favourable demographics (baby boomers form a large experienced workforce) and a large technological shock. Moderated in Canada by sky-high federal deficits, which hurt investment. Artificially extended into the 00s by debt run-up.
So what happens now? Just like during 1970-1983, we'll have to mop up a mess. Except this time, it's not inflation, but debt. The issue is different, so the policies will differ as well, but the big picture is the same: we've front-loaded growth in the past decade, and now's the time to pay for it. On the plus side, we won't necessarily have to endure a crisis like the Oil Shock to make things worse. But the minus side dominates: rather than favourable demographics, we'll have terrible ones, as baby boomers start retiring.
Some random predictions - surely some of them will be wrong, but the big picture should hold:
- 3% growth will not be standard anymore: the new normal will be closer to 2%. (To be sure, during the recovery, we may grow for a while at 3% or more, but it won't be sustained.) In Europe, it may be 1-1.5%.
- Health care costs will keep exploding for a decade or so, but will eventually slow. This is because eventually, governments around the world will not be able to afford year after year the slew of new expensive treatments we now invent annually. Health care innovation will therefore slow due to lack of demand, or at least partly shift from seeking to prolong life to seeking to cut costs. So while the current catastrophic long-term cost projections won't come true, neither will the long-term life expectancy projections.
- Current government pension and/or health care promises cannot be fulfilled to their full extent (maybe not in Canada, where the pension system is on relatively firm footing, but in many other Western countries). One or more of the following types of political upheaval will occur in most countries:
1. Prescient politicians try to prevent this, and encounter fierce resistance (e.g. France, even though the proposed rise in retirement age is actually just a timid first step);
2. Young workers realize this, and there is a generational struggle, possibly causing a political realignment;
3. Crisis point is reached, and these benefits are abruptly reduced, causing much pain to those that didn't see it coming.
- Unless we end up like Japan, real interest rates will rise sharply at some point: in the next 20 years, a lot more people will be running down their retirement savings in the West. Moreover, in China, the coming generation of workers at the top of their earning potential will save less due to cultural change, and the Central Bank will (very gradually) let its currency rise and stop buying foreign assets as quickly as now. As that happens, stocks will do poorly, until interest rates stabilize at their new, higher level. At that point, stocks should turn up, but that might be too late for some.
- Once interest rates rise (or if we end up like Japan), investment, and therefore innovation will slow. That 2% growth norm may endure even after we finish mopping up this debt mess.
- There will be another bubble, but it won't be as big because there will be less easy money floating around.
- Some governments will be tempted to inflate their (and their citizens') debt away. Those that do so modestly may get away with it. Those that are too overt about it may lose control over inflation, though the countries most at risk of doing that are in the Eurozone, so they can't do it. The U.S. has some leeway due to its reserve currency status, and if inflation returns while unemployment stays high, the Fed will likely let inflation rise to 3-4% (instead of 2-3% as it has done over the past 20 years).
How places around the world might do in the next decade:
- The U.S. will have persistent high unemployment, a slow recovery that won't feel like one, followed by slow growth that will feel like a prolonged recession.
- Canada's growth will also be slow, but a bit less so than America's, and the gap in GDP per capita may diminish.
- Québec leaders will try some timid reforms, encounter disproportionate public protests, and back down some of the time.
- French leaders will try some ridiculously timid reforms, encounter completely disproportionate public protests, and back down most of the time.
- Italy, Greece and Portugal will stagnate.
- The British Isles will stagnate for a few years, but then slow growth will resume.
- It's a crapshoot whether Spain will look like Italy or the UK.
- Germany shouldn't stagnate, but might anyway due to their obsession with austerity.
- Japan will have a third lost decade.
- Korea, Taiwan, Hong Kong and Singapore will keep growing smartly (if a bit slower than before). By the end of the decade, HK and Singapore will be richer than the US (on a per capita basis - some say Singapore already is), while Korea and Taiwan will be richer than Western Europe for the first time since at least the Middle Ages.
- Australia will also keep growing at a healthy clip, and will become richer than Canada.
- China's growth will slow. It will also still be among the fastest in the world. China's trade balance will narrow, the yuan will very slowly appreciate, and in 10 years, the phrase "Chinese consumers" will often be heard in Western newscasts.
Late forties, fifties, sixties: Post-war boom due to pent-up demand (forced saving during the war), rebuilding in Europe. Artificially extended into the 60s by overly lax monetary policy.
Seventies, early eighties: Instability due to inflation - it's a hangover from the 60s' overheating - compounded by the oil shock. Would have been much more painful if it weren't for favourable demographic circumstances (baby boomers trickling into the labor market).
Mid and late eighties, nineties, naughties: Boom due to favourable demographics (baby boomers form a large experienced workforce) and a large technological shock. Moderated in Canada by sky-high federal deficits, which hurt investment. Artificially extended into the 00s by debt run-up.
So what happens now? Just like during 1970-1983, we'll have to mop up a mess. Except this time, it's not inflation, but debt. The issue is different, so the policies will differ as well, but the big picture is the same: we've front-loaded growth in the past decade, and now's the time to pay for it. On the plus side, we won't necessarily have to endure a crisis like the Oil Shock to make things worse. But the minus side dominates: rather than favourable demographics, we'll have terrible ones, as baby boomers start retiring.
Some random predictions - surely some of them will be wrong, but the big picture should hold:
- 3% growth will not be standard anymore: the new normal will be closer to 2%. (To be sure, during the recovery, we may grow for a while at 3% or more, but it won't be sustained.) In Europe, it may be 1-1.5%.
- Health care costs will keep exploding for a decade or so, but will eventually slow. This is because eventually, governments around the world will not be able to afford year after year the slew of new expensive treatments we now invent annually. Health care innovation will therefore slow due to lack of demand, or at least partly shift from seeking to prolong life to seeking to cut costs. So while the current catastrophic long-term cost projections won't come true, neither will the long-term life expectancy projections.
- Current government pension and/or health care promises cannot be fulfilled to their full extent (maybe not in Canada, where the pension system is on relatively firm footing, but in many other Western countries). One or more of the following types of political upheaval will occur in most countries:
1. Prescient politicians try to prevent this, and encounter fierce resistance (e.g. France, even though the proposed rise in retirement age is actually just a timid first step);
2. Young workers realize this, and there is a generational struggle, possibly causing a political realignment;
3. Crisis point is reached, and these benefits are abruptly reduced, causing much pain to those that didn't see it coming.
- Unless we end up like Japan, real interest rates will rise sharply at some point: in the next 20 years, a lot more people will be running down their retirement savings in the West. Moreover, in China, the coming generation of workers at the top of their earning potential will save less due to cultural change, and the Central Bank will (very gradually) let its currency rise and stop buying foreign assets as quickly as now. As that happens, stocks will do poorly, until interest rates stabilize at their new, higher level. At that point, stocks should turn up, but that might be too late for some.
- Once interest rates rise (or if we end up like Japan), investment, and therefore innovation will slow. That 2% growth norm may endure even after we finish mopping up this debt mess.
- There will be another bubble, but it won't be as big because there will be less easy money floating around.
- Some governments will be tempted to inflate their (and their citizens') debt away. Those that do so modestly may get away with it. Those that are too overt about it may lose control over inflation, though the countries most at risk of doing that are in the Eurozone, so they can't do it. The U.S. has some leeway due to its reserve currency status, and if inflation returns while unemployment stays high, the Fed will likely let inflation rise to 3-4% (instead of 2-3% as it has done over the past 20 years).
How places around the world might do in the next decade:
- The U.S. will have persistent high unemployment, a slow recovery that won't feel like one, followed by slow growth that will feel like a prolonged recession.
- Canada's growth will also be slow, but a bit less so than America's, and the gap in GDP per capita may diminish.
- Québec leaders will try some timid reforms, encounter disproportionate public protests, and back down some of the time.
- French leaders will try some ridiculously timid reforms, encounter completely disproportionate public protests, and back down most of the time.
- Italy, Greece and Portugal will stagnate.
- The British Isles will stagnate for a few years, but then slow growth will resume.
- It's a crapshoot whether Spain will look like Italy or the UK.
- Germany shouldn't stagnate, but might anyway due to their obsession with austerity.
- Japan will have a third lost decade.
- Korea, Taiwan, Hong Kong and Singapore will keep growing smartly (if a bit slower than before). By the end of the decade, HK and Singapore will be richer than the US (on a per capita basis - some say Singapore already is), while Korea and Taiwan will be richer than Western Europe for the first time since at least the Middle Ages.
- Australia will also keep growing at a healthy clip, and will become richer than Canada.
- China's growth will slow. It will also still be among the fastest in the world. China's trade balance will narrow, the yuan will very slowly appreciate, and in 10 years, the phrase "Chinese consumers" will often be heard in Western newscasts.
Wednesday, June 23, 2010
Canadian Dissonance
Canadians want courageous politicians that lead us toward our goals. Or do we?
1. We want to be prosperous in the long run. This means fostering economic growth while remaining fiscally responsible. In other words, we need to raise taxes or cut spending (though one can argue with the timing) while hurting growth as little as possible. (Fortunately, thanks to previous austerity, we don't need to do so nearly as much as any other ex-G7 country.)
2. We want to maintain our system of public universal health care. Since health care innovation and population aging push medical costs up faster than nominal economic growth, over time, a greater portion of our income will have to go toward health care. Thus, even if our governments cut other spending, it will be difficult to cut spending overall.
Combine 1 and 2, and it's clear that our governments need to find a way to raise taxes without choking the economy. Apart from Pigovian taxes (taxes on activities that hurt bystanders - we'll come back to that in a second), consumption taxes are widely considered by economists to make less damage per dollar raised than taxes on other things (e.g. wages, investment income, profit, trade). And among consumption taxes, designs that treat all sectors of the economy equitably (i.e. that do not tax certain goods twice and exempt others) cause less harm.
3. We want to leave a decent environment to future generations. If the scientific consensus is correct, this will involve drastically cutting our carbon emissions. Although Canada doing so on its own is unlikely to make a difference, if we find a way to aggressively cut our emissions, we may inspire other countries to do so. After all, if small European countries had not already taken action, the large ones would likely be farther away from doing so, and the U.S. might not even be talking about it!
The problem with carbon emissions is, of course, that if polluters and their clients gain from a transaction, they will engage in it even if everyone else loses. If the loss outweighs the gain, that's a bad thing for overall welfare. The solution is clear: incorporate the costs borne by others into the transaction, and then, automatically, only transactions where gains outweigh losses will occur.
The two solutions that I'm referring to above are, of course, value-added taxes (i.e. GST/HST) and carbon taxes. We all know what happens to politicians that enact/increase those levies. Why?
Surely, we Canadians are not sabotaging ourselves willfully. We should also be smart enough to understand what's going on: we do have one of the world's best elementary and secondary school systems, and some other countries (mainly small ones in Northern Europe) did get it. Maybe we're so smart we found something better? If that's true, I must be out of the loop.
No, most Canadians simply do not get what's going on. Why?
1. Too many Canadians are lazy with regards to their civic duty. Canadians are also very cynical about politics. But cynicism can be a good thing - pushing people to think critically about what the politicians are saying. Unfortunately, that cynicism is coupled with laziness. Result: "I don't trust that politician AND I'll too lazy to find out if what he says is right. So I'm just going to go with my gut feeling." Of course, other than spoiled food and serious emotional distress, taxes rank right up there in things that don't sit well with the gut.
2. Our media are lazy. You want to read a serious article about the costs and benefits of consumption and carbon taxes? Good luck. Either you will not find anything more than 5 paragraphs long, or you will find a seemingly deep article until you realize that 90% of the sources are either unqualified or have a stake in the issue. On the HST debate, the CBC's approach was to mostly invite politicians and their staff, people affiliated with organizations/think tanks aligned with political parties, or, in one occasion, a "marketing expert" (who, from the looks of it, may have failed Econ 101) to analyze the likely effects of harmonization. Neutral economists? "Nah! They're kind of boring, don't come to us, and may take multiple calls or emails to get a hold of. So why bother?" And of course, the pundits spend 5 times more time talking about how complex the policies are and what the political ramifications might be than it takes to actually break down and explain the main pros and cons.
What's going on in Ottawa now? Probably at least two thirds of our politicians (and certainly all the leaders) know that raising the GST and/or instituting a carbon tax would benefit the country by reducing the deficit, creating room to cut other taxes and/or raising money for government programs at relatively low cost. Not a single one of them is going to champion these ideas anytime soon, and all will pounce on anyone that might be foolish enough to do so.
1. We want to be prosperous in the long run. This means fostering economic growth while remaining fiscally responsible. In other words, we need to raise taxes or cut spending (though one can argue with the timing) while hurting growth as little as possible. (Fortunately, thanks to previous austerity, we don't need to do so nearly as much as any other ex-G7 country.)
2. We want to maintain our system of public universal health care. Since health care innovation and population aging push medical costs up faster than nominal economic growth, over time, a greater portion of our income will have to go toward health care. Thus, even if our governments cut other spending, it will be difficult to cut spending overall.
Combine 1 and 2, and it's clear that our governments need to find a way to raise taxes without choking the economy. Apart from Pigovian taxes (taxes on activities that hurt bystanders - we'll come back to that in a second), consumption taxes are widely considered by economists to make less damage per dollar raised than taxes on other things (e.g. wages, investment income, profit, trade). And among consumption taxes, designs that treat all sectors of the economy equitably (i.e. that do not tax certain goods twice and exempt others) cause less harm.
3. We want to leave a decent environment to future generations. If the scientific consensus is correct, this will involve drastically cutting our carbon emissions. Although Canada doing so on its own is unlikely to make a difference, if we find a way to aggressively cut our emissions, we may inspire other countries to do so. After all, if small European countries had not already taken action, the large ones would likely be farther away from doing so, and the U.S. might not even be talking about it!
The problem with carbon emissions is, of course, that if polluters and their clients gain from a transaction, they will engage in it even if everyone else loses. If the loss outweighs the gain, that's a bad thing for overall welfare. The solution is clear: incorporate the costs borne by others into the transaction, and then, automatically, only transactions where gains outweigh losses will occur.
The two solutions that I'm referring to above are, of course, value-added taxes (i.e. GST/HST) and carbon taxes. We all know what happens to politicians that enact/increase those levies. Why?
Surely, we Canadians are not sabotaging ourselves willfully. We should also be smart enough to understand what's going on: we do have one of the world's best elementary and secondary school systems, and some other countries (mainly small ones in Northern Europe) did get it. Maybe we're so smart we found something better? If that's true, I must be out of the loop.
No, most Canadians simply do not get what's going on. Why?
1. Too many Canadians are lazy with regards to their civic duty. Canadians are also very cynical about politics. But cynicism can be a good thing - pushing people to think critically about what the politicians are saying. Unfortunately, that cynicism is coupled with laziness. Result: "I don't trust that politician AND I'll too lazy to find out if what he says is right. So I'm just going to go with my gut feeling." Of course, other than spoiled food and serious emotional distress, taxes rank right up there in things that don't sit well with the gut.
2. Our media are lazy. You want to read a serious article about the costs and benefits of consumption and carbon taxes? Good luck. Either you will not find anything more than 5 paragraphs long, or you will find a seemingly deep article until you realize that 90% of the sources are either unqualified or have a stake in the issue. On the HST debate, the CBC's approach was to mostly invite politicians and their staff, people affiliated with organizations/think tanks aligned with political parties, or, in one occasion, a "marketing expert" (who, from the looks of it, may have failed Econ 101) to analyze the likely effects of harmonization. Neutral economists? "Nah! They're kind of boring, don't come to us, and may take multiple calls or emails to get a hold of. So why bother?" And of course, the pundits spend 5 times more time talking about how complex the policies are and what the political ramifications might be than it takes to actually break down and explain the main pros and cons.
What's going on in Ottawa now? Probably at least two thirds of our politicians (and certainly all the leaders) know that raising the GST and/or instituting a carbon tax would benefit the country by reducing the deficit, creating room to cut other taxes and/or raising money for government programs at relatively low cost. Not a single one of them is going to champion these ideas anytime soon, and all will pounce on anyone that might be foolish enough to do so.
Friday, July 24, 2009
Where the jobs actually are
The New York Times argues in this editorial that "with low-wage work expected to be the most plentiful in the years to come, raising the minimum wage and growth opportunities should be a priority of the White House." (Quote is not in the article, but in the snippet provided when I shared this article on Facebook.) It states that "according to the Labor Department, 5 of the 10 occupations expected to add the most jobs through 2016 are 'very low paying,' up to a maximum of about $22,000 a year. They include retail sales jobs and home health aides. Another 3 of the 10 are 'low paying,' from roughly $22,000 to $31,000, including customer-service representatives, general office clerks and nurses’ aides."
This seemed fishy to me, so I went ahead and checked out the actual Labor Department data. It turns out that by definition, low-paying job categories tend to be larger. To see why this is a problem, consider the following example. Suppose for simplicity that there are 1M low-paying jobs divided into 10 categories, and 1M high-paying jobs divided into 100 categories. Also suppose that the low-paying categories are projected to grow by 5%, and high-paying ones by 20%. Then each low-paying category would add 5,000 jobs, while each high-paying category would only add 2,000 jobs, so by the NY Times' methodology, we'd reach the false conclusion that low-paying industries are expanding faster.
The actual data is not as stark, but the pattern is definitely there. In fact, “very low” paying occupations are projected to add 3.65M jobs from 2006 to 2016, “low” paying 3.38M, “high” paying 3.34M, and “very high” paying 5.22M. These classifications are quartiles, each containing occupations representing 1/4 of workers in 2006. So as you can see, the data cited by the NY Times actually undermines their point, since "very high" paying jobs are projected to grow the fastest, with all other categories growing about equally fast. Sadly, this statistical sleight of hand forms the basis of much of their argument, so the entire editorial is pretty worthless.
This is not to say that I oppose a higher minimum wage in the U.S. or Canada: I haven't made up my mind on the issue. But what this data suggests is that, in fact, education needs to be a high priority in the U.S., since it is jobs in the top quartile, i.e. those that require the most skills, that are going to be created the fastest over the next few years. And I doubt that the situation would be very different for Canada. In fact, in the long-run, education is the best tool for combating inequality: increasing the supply of high-skill workers and decreasing that of low-skill workers will automatically reduce wage differentials without economically distortionary government interventions.
So, thanks to the NY Times for pointing me to that interesting data, but FAIL for reaching the wrong conclusion. (Again, I'm not saying that higher minimum wages are bad, just that the facts mentioned by the NY Times do not support their case.)
This seemed fishy to me, so I went ahead and checked out the actual Labor Department data. It turns out that by definition, low-paying job categories tend to be larger. To see why this is a problem, consider the following example. Suppose for simplicity that there are 1M low-paying jobs divided into 10 categories, and 1M high-paying jobs divided into 100 categories. Also suppose that the low-paying categories are projected to grow by 5%, and high-paying ones by 20%. Then each low-paying category would add 5,000 jobs, while each high-paying category would only add 2,000 jobs, so by the NY Times' methodology, we'd reach the false conclusion that low-paying industries are expanding faster.
The actual data is not as stark, but the pattern is definitely there. In fact, “very low” paying occupations are projected to add 3.65M jobs from 2006 to 2016, “low” paying 3.38M, “high” paying 3.34M, and “very high” paying 5.22M. These classifications are quartiles, each containing occupations representing 1/4 of workers in 2006. So as you can see, the data cited by the NY Times actually undermines their point, since "very high" paying jobs are projected to grow the fastest, with all other categories growing about equally fast. Sadly, this statistical sleight of hand forms the basis of much of their argument, so the entire editorial is pretty worthless.
This is not to say that I oppose a higher minimum wage in the U.S. or Canada: I haven't made up my mind on the issue. But what this data suggests is that, in fact, education needs to be a high priority in the U.S., since it is jobs in the top quartile, i.e. those that require the most skills, that are going to be created the fastest over the next few years. And I doubt that the situation would be very different for Canada. In fact, in the long-run, education is the best tool for combating inequality: increasing the supply of high-skill workers and decreasing that of low-skill workers will automatically reduce wage differentials without economically distortionary government interventions.
So, thanks to the NY Times for pointing me to that interesting data, but FAIL for reaching the wrong conclusion. (Again, I'm not saying that higher minimum wages are bad, just that the facts mentioned by the NY Times do not support their case.)
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