Making Canada Relevant Again- The Economic Super-Thread

[Brad Sallows]

Burnaby is a well-run city and an excellent community in which to live, but it's past time to see it deal with the tax base consequences of its NIMBY-ism.

 

[a_majoor]

Although this is specifically about the United States, the idea that the government can "stimulate" the economy runs deep in Canada, and most of the regulatory roadblocks to innovation and economic growth exist here as well. Now if we had a government commited to declutering the regulatory environment and reducing the 40-45% tax and fee bite on the typical Canadian family of four, then perhaps we would see changed that we liked, rather than watching the vortex expand:

http://www.hoover.org/research/why-fiscal-stimulus-fails

Why Fiscal Stimulus Fails
by Richard A. Epstein
Monday, February 1, 2016

Over the past several weeks, we’ve once again seen how the Federal Reserve’s stimulus policy has done nothing to help the economy. Fourth quarter growth for 2015 was a disappointing 0.7 percent, and there are no obvious signs of improvement in sight for 2016. Nonetheless, as the U.S. economy continues to smolder, the Fed acts as though pulling levers on interest rates will get us out of this seemingly endless trough.

In December, the Fed thought that the economy was turning around and accordingly raised the federal funds rate from one-quarter to one-half percent, with the prospect of further increases down the road. In January, the Fed let the interest rate remain constant, and there is now an active debate over whether the weak growth numbers will induce the Fed to postpone raising that key rate as widely expected. As usual, the Fed conceives that its mission is to run a delicate balancing act between overall economic activity on the one hand and the job market on the other. Thus the justification offered for the December increase—the first in about seven years—was the “considerable improvement” in the job market, which is in reality far weaker than it appears, given the low labor market participation rate, the rise in part-time employment, and the general stagnation in wages.

Nor is the U.S. exceptional in how it deals with these problems. Labor market problems in Europe are chronic, and the prolonged economic slowdown is of increasing worldwide concern. In late January, nervous central bankers in other major countries adopted stimulus policies more aggressive than the Fed’s. The Bank of Japan, joined by number of European banks, set key short-term interest rates at below zero, in effect charging banks to hold their deposits in order to encourage private lending. Japan’s central bank accomplished this by imposing a 0.1 percent penalty on excess reserves. No longer is there general expectation of a 2 percent inflation rate. Instead the recent central bank decisions presage a new deflationary cycle, which is no recipe for growth.

Clearly something is amiss if the basic stimulus approach of the last seven years has failed to stem the tide of global economic stagnation. In making this claim, I do not think that budgetary austerity will solve most problems either, but think that these poor results, far from being an unexplainable accident, are evidence of systematic blunders and cry out for a top-to-bottom reassessment in the U.S. and elsewhere. Forget the subtle cross-national differences in institutional arrangements. What the world faces today is a basic common mode failure.

The conventional wisdom dubiously holds that a stimulus program is the best way to secure economic growth when the economy falters. The usual story is that low interest rates induce individuals and firms to borrow money, which in turn leads to higher levels of risk-taking, which in turn leads to faster rates of growth—faster, that is, than the anemic growth rates we’ve seen since the financial meltdown of 2008. In a recent speech, Economic Central Bank President Mario Draghi emphasized that although Germany’s low interest rates might encourage excessive risk-taking, he found no indication that these rates have led to financial instability. The boo-birds, Draghi notes, have been proved wrong time and again. The risks of the stimulus program, he concludes, are smaller than the risks of doing nothing.

Draghi’s last sentence is true after a fashion. The key point here is that what needs to be done is not to fiddle with interest rates, but to make major structural reforms in important economic areas, most notably in labor markets. To start with the basic story, there is at best a tenuous connection between the alteration of interest rates and improved productivity in any market in goods and services. Of course, it can be said that the low interest rates will induce people to borrow. But low interest rates reduce incentives for people to lend their money to those potential borrowers. In addition, the low interest rates tend to lead to lower earnings on savings, which means that many people in the economy, especially retirees who depend on the income generated by their basic portfolio, might reduce their consumption today to conserve wealth for consumption tomorrow. These choices between consumption-now and consumption-tomorrow will be made on an individual basis, so it is hard to see any systematic trend toward higher buying today once low interest rates are in place. It goes without saying that retirees and others living on fixed incomes do not have much wealth in reserve to make capital investments. So it looks as though contraction in the supply of available funds should offset the increase in demand.

Indeed if it were otherwise, then why not keep interest rates artificially low in good times as well as bad? To this objection, the Fed answers that the government should only stimulate demand by low interest rates when the private sector is unproductive. Once the private sector roars back, government can take a back seat by letting interest rates slowly rise. That was just the strategy that the Fed embarked on in December before the low growth reports of the fourth-quarter took the air out of the growth balloon.

But why think that the gradualist strategy could ever work? One difficulty with that approach is that short-term improvements have remained below the two-percent increment in gross domestic product for close to a decade. No policy that has failed for so long can become successful overnight. Worse still, this policy faces an irreducible timing risk. Monetary policy cannot rest on some abstract expectation that things will get better soon. It has to make precise judgments as to when. But economies are like large ships that turn slowly in the water, so it is hard to know whether any particular move in one direction counts as a real shift or a temporary aberration. That is exactly the problem that faced the Fed in January when it held off a further rate increase.

There should be no surprise here. The Fed only looks at gross measures of capital market and labor market activity, about which it is easy to make crude guesses that miss the mark. Modifications in short-term interest rates are a form of fine-tuning that neither the Fed nor other central banks can execute with any assurance. It is laudable for the Fed to give advance notice of its intentions. But the benefits of that approach are diminished with each change in course. The constant need to predict what the central banks around the globe will do adds another layer of uncertainty that weighs down the private market. It is one thing for private parties to enter into hedging transactions as part of their overall business strategy. Given that these are voluntary transactions, there is every reason to think that the gains to the two (or more) transactors will exceed the costs of putting them together: otherwise the market would close down. But government efforts to fine-tune interest rates face no such market constraint, so these efforts only feed system-wide uncertainty, which more stable interest rates could effectively combat.

The current policies fail for a second reason. The preoccupation over interest rate fluctuations diverts attention from the urgent reforms needed in regulatory policy. The task here is not to launch a misguided crusade that gets the government out of the business of protecting property rights and voluntary exchanges. These forms of regulation improve market performance at very low cost. Thus the standard forms of verification for many contracts—writings and registration, for example—do not place any constraint on the substantive terms of any contract, whether for the sale of land or the hiring of labor. These simple forms just eliminate a potentially huge back-end uncertainty that bad documentation could produce.

But the whole spate of modern regulation in labor, real estate, and capital markets goes far beyond that modest effort. Far outside the purview of the Fed, a never-ending stream of new regulations and taxes imposes high transactional barriers that kill off voluntary exchange and cooperation. There are many subtleties in each of these markets, but for these purposes, one common element unites them all. The new generation of regulations and taxes are all burden and no benefit. Their consequence is two-fold. They suck out the joint benefits of the transactions that go forward. And they block a whole range of potential sales and exchanges when these associated costs exceed the gains in question. Just that happened when legislative increases to the minimum wage led Wal-Mart to close down 154 retail outlets in the United States at a loss of 10,000 jobs, mostly concentrated at the lower end. Remember that in some markets Wal-Mart has announced wages increases voluntarily. Why use coercion, which fails to differentiate between different local markets?

The same mischief occurs when President Obama signs yet another of his misguided executive orders, this time to require firms to break down wage reports by race, gender, and ethnicity. President Obama claims this burden on employers is designed to combat persistent forms of discrimination, but the method fails to correct for relevant variables such as employment type or hours worked. Statutes like this are bad not only for the harm that they cause, but also for the future enactments that they signal. That message is read not only by large firms, which can cut back on employment, but also by potential entrepreneurs of new or unformed ventures who throw in the towel in light of heavy tax and regulatory burdens that promise to get only heavier.

These direct attacks on particular markets have huge negative effects. It is pie-in-the-sky thinking to suppose that anything that the Fed can do to discharge its jobs mandate can have the slightest effect given all the mischiefs that come at the microeconomic level. But so long as the Fed runs on about job creation, it is an open invitation for federal and state governments to mess up labor markets on the benign assumption that interest rate fluctuations will solve the problem. They cannot. There are major structural flaws that pervade every area of the economy. The Fed’s role should be limited to maintaining monetary stability, broadly defined. The Fed and the ECB should not send the message that their policies can magically improve the economy. Instead, Janet Yellin and Mario Draghi should say something like this:

Sorry folks, you think that we are magicians, but we are only trained in monetary economics. And we are here to tell you that we have shot our wad with a set of stimulus programs that were broken from the outset. Only now the situation is worse. The law of diminishing returns to additional efforts has set in so any measures we take will make our economies worse. The burden is squarely on the political branches to do their part. Deregulation and lower taxation reduces administrative costs and economic burdens. It will allow private firms to increase output. Either your elected officials make structural reforms today, or we shall have another fruitless set of stimulus programs tomorrow.

 

[Jed]

Although this is specifically about the United States, the idea that the government can "stimulate" the economy runs deep in Canada, and most of the regulatory roadblocks to innovation and economic growth exist here as well. Now if we had a government commited to declutering the regulatory environment and reducing the 40-45% tax and fee bite on the typical Canadian family of four, then perhaps we would see changed that we liked, rather than watching the vortex expand:

http://www.hoover.org/research/why-fiscal-stimulus-fails

That is the only way things are going to get sustainably better.  Good luck convincing all the up and coming millenials and die hard NDP types that there is no such thing as a free lunch.

 

[a_majoor]

80%. There's a lesson here for us as well. Too bad the Young Dauphin, Kathleen Wynn or Rachel Notley are not going to be reading this:

http://dailysignal.com/2016/02/08/maine-required-childless-adults-to-work-to-get-food-stamps-heres-what-happened/?utm_source=heritagefoundation&utm_medium=email&utm_campaign=morningbell&mkt_tok=3RkMMJWWfF9wsRovs6vPZKXonjHpfsX56u0uXaKzlMI%2F0ER3fOvrPUfGjI4ASMtnN6%2BTFAwTG5toziV8R7jHKM1t0sEQWBHm

Maine Required Childless Adults to Work to Get Food Stamps. Here’s What Happened.
Robert Rector  /  Rachel Sheffield  / @RachelSheffiel2 / February 08, 2016 / 305 comments

Robert Rector is a leading national authority on poverty, the U.S.welfare system and immigration and is a Heritage Foundation Senior Research Fellow.

Rachel Sheffield focuses on welfare, marriage and family, and education as policy analyst in the DeVos Center for Religion & Civil Society at The Heritage Foundation. Read her research.


One trillion dollars—that’s how much the government spent last year on means-tested welfare aid, providing cash, food, housing, medical care, and social services to poor and low-income individuals. The food stamp program is the nation’s second largest welfare program.
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The number of food stamp recipients has risen dramatically, from 17.2 million in 2000 to 45.8 million in 2015.

The number of food stamp recipients has risen dramatically, from 17.2 million in 2000 to 45.8 million in 2015. Costs have soared over the same period, from $20.7 billion in 2000 to $83.1 billion in 2014.

The most rapid growth in the food stamp caseload in recent years has been among able-bodied adults without dependents (ABAWDs). These are work-capable adult recipients between the ages of 18 and 49 who do not have children or other dependents to support

The Need for Work Requirements

Since 2008, the food stamp caseload of adults without dependents who are able-bodied has more than doubled nationally, swelling from nearly 2 million recipients in 2008 to around 5 million today. They gained notoriety when Fox News aired a documentary on food stamps featuring 29-year-old Jason Greenslate, a Californian who reported that he spends his time surfing and playing in his rock band, all the while receiving benefits from the food stamp program.

>>> Read the full report by Robert Rector and Rachel Sheffield: Maine Food Stamp Work Requirement Cuts Non-Parent Caseload by 80 Percent

In response to the growth in food stamp dependence, Maine’s governor, Paul LePage, recently established work requirements on recipients who are without dependents and able-bodied. In Maine, all able-bodied adults without dependents in the food stamp program are now required to take a job, participate in training, or perform community service.

Job openings for lower-skill workers are abundant in Maine, and for those ABAWD recipients who cannot find immediate employment, Maine offers both training and community service slots. But despite vigorous outreach efforts by the government to encourage participation, most childless adult recipients in Maine refused to participate in training or even to perform community service for six hours per week. When ABAWD recipients refused to participate, their food stamp benefits ceased.

In the first three months after Maine’s work policy went into effect, its caseload of able-bodied adults without dependents plummeted by 80 percent, falling from 13,332 recipients in Dec. 2014 to 2,678 in March 2015.

This rapid drop in welfare dependence has a historical precedent: When work requirements were established in the Aid to Families with Dependent Children (AFDC) program in the 1990s, nationwide caseloads dropped by almost as much, albeit over a few years rather than a few months.

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Government should aid those in need, but welfare should not be a one-way handout.

The Maine food stamp work requirement is sound public policy. Government should aid those in need, but welfare should not be a one-way handout. Nearly nine out of ten Americans believe that able-bodied, non-elderly adults who receive cash, food, or housing assistance from the government should be required to work or prepare for work as a condition of receiving aid.

LePage’s reform puts the public’s convictions into action. The Maine reforms recognize that giving welfare to those who refuse to take steps to help themselves is unfair to taxpayers and fosters a harmful dependence among beneficiaries.

Off-the-Books Employment

The Maine work requirement also reduces fraud. The most common type of fraud in welfare involves “off the books” employment. In food stamps, as in other welfare programs, benefits go down as earnings rise.

But “off the books” employment is rarely reported to the welfare office; hiding earnings enables a recipient to “double-dip,” getting full welfare benefits he is ineligible to receive while simultaneously receiving earnings from an unreported job.

A work requirement substantially reduces welfare fraud because insisting a recipient be in the welfare office periodically interferes with holding a hidden job. Recipients cannot be in two places at once. Faced with a work requirement, many recipients with hidden jobs simply leave the rolls. No doubt, a significant part of the rapid caseload decline in Maine involves flushing fraudulent double-dippers out of the welfare system.

Government data show that many adults without children on food stamps use their own funds counter-productively. Over half of able-bodied adults without dependents regularly smoke tobacco; those who smoke consume on average 19 packs of cigarettes per month at an estimated monthly cost of $111. These individuals rely on the taxpayers to pay for their food while they spend their own money on cigarettes.

The federal government should establish work requirements similar to Maine’s for the 4.7 million able-bodied adults without dependents currently receiving food stamps nationwide. If the caseload drops at the same rate it did in Maine (which is very likely), taxpayer savings would be over $8.4 billion per year. Further reforms could bring the savings to $9.7 billion per year: around $100 per year for every individual currently paying federal income tax.

Some may argue that individual state governments, and not the federal government, should choose whether to require work in the food stamp program. But over 90 percent of food stamp funding comes from the federal government. Since the federal government pays for nearly the entire food stamp program, it has the obligation to establish the principles on which the program operates.

Requiring work for able-bodied welfare recipients was a key element of President Ronald Reagan’s welfare philosophy. It was the foundation of the successful welfare reform in the 1990s. But the idea of work in welfare has fallen by the wayside. It is time to reanimate the principle.

 

[Colin Parkinson]

I had a friend who ended up on welfare for a bit, divorced and looking after 2 kids. Welfare paid for all of the kids health and dental, getting a job meant losing that level of support and a job that would not come close to covering it. She ended up getting off welfare and doing well, but I would say the setup actually punishes people who find work. I would like to see a program where when a person with dependents who has been on welfare finds a job, the amount they are making is deducted from the welfare payments, so their income does not drop and the benefits continue for sometime and perhaps some training and support to continue to increase their skillsets. Gradually reduce the benefits and wean them off the program, at the same time they have built up experience and are better able to improve on their own. 

 

[Halifax Tar]

I had a friend who ended up on welfare for a bit, divorced and looking after 2 kids. Welfare paid for all of the kids health and dental, getting a job meant losing that level of support and a job that would not come close to covering it. She ended up getting off welfare and doing well, but I would say the setup actually punishes people who find work. I would like to see a program where when a person with dependents who has been on welfare finds a job, the amount they are making is deducted from the welfare payments, so their income does not drop and the benefits continue for sometime and perhaps some training and support to continue to increase their skillsets. Gradually reduce the benefits and wean them off the program, at the same time they have built up experience and are better able to improve on their own.

Or how about we just make it illeagal to pay people less than what a welfare user takes in ?  Hell you could even build in a benifits program

 

[Edward Campbell]

Or how about we just make it illeagal to pay people less than what a welfare user takes in ?  Hell you could even build in a benifits program

Then you would be setting a price for labour that is totally divorced from the value of that labour and, in my opinion, you would be making a very serious economic policy error.

How abut, instead, we allow the market to set the price of labour (wages) based on the value of that labour and then massage our welfare systems so that a person doesn't lose all their benefits as a reward punishment for doing the right thing and finding a job. Suppose Mary get $1,000 per month and she, and her baby, (just barely) survives on that. Now suppose she finds a job that pays $500 per month, How about we cut here welfare by, say, $400 so that she actually does better, on a net, take home, cash in pocket basis, by finding a job. Everyone wins: business wins because it can set the price of labour based on its value, Mary benefits because she gets a job, and essential first step up the ladder and she actually makes more money, and society wins because welfare payments drop but people like Mary actually want to take jobs, even menial, low paying jobs, and, eventually, Mary will do better and will, more likely than not, leave the welfare rolls entirely.

 

[Jed]

Then you would be setting a price for labour that is totally divorced from the value of that labour and, in my opinion, you would be making a very serious economic policy error.

How abut, instead, we allow the market to set the price of labour (wages) based on the value of that labour and then massage our welfare systems so that a person doesn't lose all their benefits as a reward punishment for doing the right thing and finding a job. Suppose Mary get $1,000 per month and she, and her baby, (just barely) survives on that. Now suppose she finds a job that pays $500 per month, How about we cut here welfare by, say, $400 so that she actually does better, on a net, take home, cash in pocket basis, by finding a job. Everyone wins: business wins because it can set the price of labour based on its value, Mary benefits because she gets a job, and essential first step up the ladder and she actually makes more money, and society wins because welfare payments drop but people like Mary actually want to take jobs, even menial, low paying jobs, and, eventually, Mary will do better and will, more likely than not, leave the welfare rolls entirely.

Dang, ERC. That is far too logical to be implemented. Too many rice bowls will be broken as the new system gets put into place.

 

[larry Strong]

Or how about we just make it illeagal to pay people less than what a welfare user takes in ?  Hell you could even build in a benifits program

Not sure how it works in the CF, however on the street "benefits" are a joint payment by the employer and the employee. And the "Benefits" are not near as good as welfare has, as there is usually a yearly cap on how much money is paid out for sevices......



cheers
Larry

 

[a_majoor]

With thje rise of the "Living wage" movement even here in Canada, the fact that empirical research proves that minimum wage laws kill jobs is more relevant than ever:

http://www.zerohedge.com/news/2016-03-06/chart-no-minimum-wage-supporting-socialist-wants-you-see

The Chart That No Minimum-Wage-Supporting Socialist Wants You To See
Submitted by Tyler Durden on 03/06/2016 11:30 -0500

A new report from JP Morgan Chase & Co. finds that the summer employment rate for teenagers is nearing a record low at 34 percent. The report surveyed 15 US cities and found that despite an increase in summer positions available over a two year period, only 38 percent of teens and young adults found summer jobs.

This would be worrying by itself given the importance of work experience in entry-level career development, but it is also part of a long-term trend. Since 1995 the rate of seasonal teenage employment has declined by over a third from around 55 percent to 34 percent in 2015. The report does not attempt to examine why summer youth employment has fallen over the past two decades. If it had, it would probably find one answer in the minimum wage. 

Most of the 15 cities studied in this report have minimum wage rates above the federal level, with cities such as Seattle having a rate more than double that. Recent data from the Bureau of Labor Statistics seen in the chart show exactly how a drastic rise in the minimum wage rate affects the rate of employment.

Seattle has experienced the largest 3 month job loss in its history last year, following the introduction of a $15 minimum wage. We can only imagine the impact such a change has had on the prospects of employment for the young and unskilled.

Raising the minimum wage reduces the number of jobs in the long-run. It is difficult to measure this long-run effect in terms of the numbers of never materializing jobs. However, the key mechanism behind the model—that more labor-intensive establishments are replaced by more capital-intensive ones—is supported by evidence. That is why recent research suggesting that minimum wages barely reduce the number of jobs in the short-run, should be taken with caution. Several years down the line, a higher real minimum wage can lead to much larger employment losses.

Nevertheless, politicians continue to push the idea that minimum wage laws are somehow helping the young “earn a decent wage.” It is important to remember the underlying motives behind pushes for higher minimum wage rates. Milton Friedman characterized it as an “unholy coalition of do-gooders on the one hand and special interests on the other; special interests being the trade unions.”

Several empirical studies have been conducted over the course of more than two decades, with all evidence pointing toward negative effects of minimum wage rises on employment levels among the young and unskilled. A study conducted by David Neumark and William Wascher in 1995 noted that “such increases raise the probability that more-skilled teenagers leave school and displace lower-skilled workers from their jobs. These findings are consistent with the predictions of a competitive labor market model that recognizes skill differences among workers. In addition, we find that the displaced lower-skilled workers are more likely to end up non-enrolled and non-employed.”

Policy makers who continuously raise the minimum wage simply assure that those young people, whose skills are not sufficient to justify that kind of wage, will instead remain unemployed. In an interview, Friedman famously asked “What do you call a person whose labor is worth less than the minimum wage? Permanently unemployed.”

The upshot: Raising the minimum wage at both federal and local levels denies youth the skills and experience they need to get their career going.

 

[CougarKing]

An opportunity in "de-carbonized oil" for Canada?

Calgary Herald

Watch out Saudis: Canadian oilpatch leaders motivated to lead a future of 'de-carbonized' oil
March 4, 2016 6:00 pm

(...SNIPPED)

Indeed, Canadian companies, after tens of thousands of layoffs, extreme cost cutting, project cancellations and radical policy changes on environmental protection in the past year, are re-positioning themselves to win this market by taking carbon out of their barrels at the same time as reducing costs.

Those who have successfully reshaped their businesses are no longer talking about surviving an oil price war with Saudi Arabia, or resisting the global move toward greener energy.

“The challenge that we got from the Saudi minister was this: Cut your costs or get out of the way,” said Jeff Gaulin, vice-president of communications at the Canadian Association of Petroleum Producers (CAPP). “The (Canadian) industry’s response is quite clear: Just watch us innovate, because we are committed and we will get production costs down and maintain high environmental performance.”

(...SNIPPED)

 

[a_majoor]

This could fit in so many threads, but since these economic foundations won't shift regardless of who is in 24 Sussex Dr, the White House, or the capitals of the other states and powers (Look at places like Venezuela where they did try to ignore reality) this is reference for everyone who cares to use it. Nothing like shining the bright light of empirical research on Economics:

http://fee.org/articles/5-economic-myths-that-just-wont-die/

5 Economic Myths That Just Won’t Die
A persistent set of economic narratives still plagues us
Corey Iacono
Wednesday, November 05, 2014

Most people get their economic information through Internet memes and hit pieces filled with nonsense. A common theme is that the forceful hand of government is all that is needed to make things right.

For example, everyone "knows" that government laws ended child labor, and that the New Deal ended the Great Depression, but are these actually valid claims?

Here are five such myths that too many people just accept as true.

Myth 1. The idea that economic growth helps the poor is trickle-down economics … it doesn’t actually help them.

In a 2001 paper titled “Growth Is Good for the Poor," economists Art Kraay and David Dollar of the World Bank found that when average incomes rise, the average incomes of the poorest fifth of society rise proportionately. This result held across regions, periods, income levels, and growth rates. In 2013, more than a decade after their original paper, Kraay and Dollar explored the relationship between economic growth and poverty again, using data from 118 countries over four decades. They came to the same conclusion. According to the economists,

This evidence confirms the central importance of economic growth for poverty reduction … institutions and policies that promote economic growth in general will on average raise incomes of the poor equiproportionally, thereby promoting “shared prosperity” … there are almost no cases in which growth is significantly pro-poor or pro-rich.

This means that policies that enhance economic growth through methods such as limiting the size of government and lowering barriers to international trade are key to alleviating poverty. Economic growth, not transfer programs, is in fact the primary driver of poverty reduction, and this empirical truth has been proved for a long time.

Myth 2. Free trade doesn’t lead to better economic outcomes in the real world.

Paul Krugman once quipped, “If there were an Economist's Creed, it would surely contain the affirmations 'I understand the Principle of Comparative Advantage' and 'I advocate Free Trade.'" However, critics of free trade, such as development economist Ha Joon Chang, have made very odd statements such as this one:

There is a respectable historical case for tariff protection for industries that are not yet profitable. … By contrast, free trade works well only in the fantasy theoretical world of perfect competition.

Comments like these are puzzling because proponents of free trade don’t assume there is perfect competition. They simply recognize that if one country can produce a product at a lower opportunity cost than another, trade between the countries (or individuals) is mutually beneficial. (This is known as the theory of comparative advantage.)

Economists have examined countless times whether or not freer trade leads to greater economic growth. In regard to trade liberalization — reform that lowers barriers to international trade — the evidence consistently shows that such reforms improve economic performance over time.

According to one study that examined 141 trade liberalizations and compared economic performance before and after liberalization (after controlling for confounding factors), “Per capita growth of countries [after]liberalization was some 1.5 percentage points higher than before liberalization, and investment rates were 1.5–2.0 percentage points higher.”

Subsequent research from Antoni Estevadeordal and Alan M. Taylor took the analysis further by comparing growth rates before and after 1990, when a wave of trade liberalizations occurred. The economists divided countries into an experimental group (the countries that liberalized trade regimes) and a control group (those that did not). According to a summary of their research, the authors “find strong evidence that liberalizing tariffs on imported capital and intermediate goods raised growth rates by about one percentage point annually in the liberalizing countries.” Research has also shown that trade liberalization has caused greater economic performance in sub-Saharan Africa, a region desperately in need of growth.

Reforms that result in freer trade generally lead to superior economic outcomes. This is a well-documented observation. Although there may be situations in which freer trade is undesirable, these situations are not the norm, and free trade policies are still the “reasonable rule of thumb,” as Paul Krugman has put it.

Myth 3. The government ended child labor. In a free market, child labor would still exist.

The assertion that government laws and regulations ended child labor is endlessly repeated and often used as “proof” that without such laws, child labor would be pervasive in the market economy. The Economic History Association (EHA) has shown this is not the case:

Most economic historians conclude that [child labor] legislation was not the primary reason for the reduction and virtual elimination of child labor between 1880 and 1940. Instead they point out that industrialization and economic growth brought rising incomes, which allowed parents the luxury of keeping their children out of the work force.

According to the National Bureau of Economic Research, “While bans against child labor are a common policy tool, there is very little empirical evidence validating their effectiveness.”

Not only is there little evidence supporting the effectiveness of these laws; there is evidence that such laws actually make the families they are intended to help worse off. Research on child labor bans in India found that “along various margins of household expenditure, consumption, calorie intake and asset holdings, households are worse off after the [child labor] ban.”

Myth 4. Countries like Sweden and Denmark prove that high taxes don’t harm economic growth.

Saying that high taxation doesn’t harm economic growth because its effects aren’t superficially visible in one country, or a few, is like saying that cigarettes don’t harm an individual’s health because many young and healthy people smoke them and there are no immediately clear detrimental effects. Many factors affect economic growth. In order to see how high taxes affect growth, researchers control for confounding variables and use large national and international data sets.

According to research published by the European Central Bank that used annual data from 1965 to 2007 for 26 economies, “the effect of an increase in taxes on real GDP per capita is negative and persistent: an increase in the total tax rate (measured as the total tax ratio to GDP) by 1% of GDP has a long-run effect on real GDP per capita of –0.5% to –1%.”

Numerous other studies on government size and economic growth have come to the same conclusion. Furthermore, a study of the macroeconomic effects of Danish taxation found that

Danish taxation generates an overall efficiency loss corresponding to a 12 percent reduction in total income. It is possible to reap 4/5 of this potential efficiency gain by going from a high-tax Scandinavian system to a level of taxation in line with low-tax OECD countries such as the United States.

However, even relatively low-taxed countries like the United States are not immune to the detrimental effects of taxation. A seminal paper by Keynesian economists Christina and David Romer found that taxes are often raised during times of economic expansion and cut during times of economic downturn. This tendency makes it harder to observe the effect of taxes on economic growth. However, the Romers found that they could accurately estimate the effects of tax changes by examining those that were undertaken for reasons unrelated to economic growth. According to the Romers’ estimates, “tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes.” Specifically, they find that increasing taxation by 1 percent of GDP shrinks GDP by 3 percent!

Overall, it seems clear that higher levels of taxation stifle economic growth and that countries with a higher total tax burden have slower-growing economies than countries with smaller tax burdens, holding other things equal.

Myth 5. Capitalism isn’t economically superior to socialism.

A considerable amount of research has examined how a transition from socialism (or a repressed-market economy) to a market economy (or a freer market economy) — a process known as economic liberalization — affects economic growth.

For example, using data from 140 countries over the time period 1960–2000, economists from Bocconi University compared countries that underwent economic liberalization to those that didn’t. After controlling for other relevant variables, they found that

economic liberalization is good along all dimensions: it is accompanied by better structural policies and better macroeconomic policies, and it is followed by improved economic performance. This timing suggests a causal interpretation, at least with regard to economic outcomes.

Subsequent research published in the Journal of Economic Surveys has found that “there are strong indications that liberalization … stimulates economic growth." For a specific example, look no further than China.

Research from Oxford University’s economics department has found that China’s economic growth, which has been driving its massive poverty reduction, was fueled by trade liberalization, rapid privatization, and sectorial changes. As a result of these reforms, China’s GDP per capita grew 4.1 percentage points faster than it otherwise would have, lifting millions out of poverty.

A review of over 40 studies on the relationship between economic freedom and economic growth (with economic freedom measured using the Fraser Institute’s Economic Freedom of the World Index) found that research consistently demonstrates that freer markets are robustly associated with greater economic performance. Studies have shown that economic freedom causes economic growth; the relationship is not a mere correlation.

Empirical research also finds that “countries can increase the utility of their national resources by approximately 45% simply by converting to market-based economies” and also consistently finds that the private sector is more efficient than the public sector.

Conclusion

It is often assumed that government is a tool for creating better economic and social outcomes, but what if government is actually an obstacle to these ends? The evidence cited here suggests that governments cannot simply legislate problems out of existence. In fact, intervention often exacerbates the problems it was meant to solve.

Furthermore, the assertions that traditional economic theories don’t apply to reality are false. Research shows that taxes do distort the economy, growth is good for the poor, and freer trade does lead to greater economic performance.

 

[a_majoor]

Interesting article in "The Economist". As a follower of both classical and Austrian school economics, I have my own views of where the problem is, but it is rather fascinating to see the various views of where the lack of productivity comes from:

http://www.economist.com/node/21695071

Doing less with more
Low wages are both a cause and a consequence of low productivity
Mar 19th 2016 | From the print edition

COUNTRIES grow richer when they learn how to produce more valuable stuff per person. Sadly, many advanced economies seem to have lost the knack. Except for a brief spurt around the turn of the millennium, productivity has grown painfully slowly in rich countries over the last four decades (see chart)—a factor, economists reckon, that has contributed to stagnant pay. Labour productivity in America fell at a startling 2.2% annual pace in the fourth quarter of 2015; growth of 0.6% for the year as a whole was better, but hardly impressive.

Orthodox explanations for the problem tend to fall into one of three categories. The first, championed by Robert Gordon, an economist at Northwestern University, suggests humanity has run out of big ideas.* Recent technological advances, the argument goes, lack the transformative power of the inventions of the 19th and early 20th centuries. Electricity and indoor plumbing, in Mr Gordon’s view, altered lives in a far more fundamental way than the digital revolution has managed. We were promised flying cars, to paraphrase Peter Thiel, a venture capitalist, but wound up instead with social networks.

There are several inconsistencies in this story, however. Recent developments in artificial intelligence and robotics look at least as transformative as the gains in software and computing that powered the productivity boom of the late 1990s. The breadth of the productivity slowdown also poses a problem for Mr Gordon’s thesis. Productivity growth has slumped not just in the rich world, but also in developing countries such as Mexico and Turkey, which should be able to boost efficiency easily by adopting the productivity-boosting technology that is already in use in wealthier places.

Some optimists argue instead that the problem is one of measurement. Technological progress often raises productivity in ways that statistical agencies struggle to detect. The tumbling cost of digital media (vast amounts of which are in effect free) subtracts from measured GDP, for example. Meanwhile, huge improvements in the quality of goods like smartphones can be difficult for statistical agencies to capture.

Yet mismeasurement probably plays only a small role in the slowdown. Chad Syverson of the University of Chicago estimates that the productivity slump has cost America about $2.7 trillion in lost output since 2004, or about $8,400 for every American. That is far more than most estimates of the unmeasured gains from information technology. New research presented at the Brookings Institution, a think-tank, by David Byrne and John Fernald of the Federal Reserve and Marshall Reinsdorf of the IMF suggests there is little reason to think that the official data are worse now than in the late 1990s, when measured productivity growth was much higher. Indeed, the data ought to have improved, since the smartphones and computers that give statisticians such headaches are no longer made in the rich world.

A third, more worrying possibility is that ossifying rich economies are getting worse at shifting people from obsolete firms and stagnant towns to more productive ones. In America, for instance, the rate of startup formation has fallen steadily since the late 1980s, according to work by Jorge Guzman and Scott Stern of MIT. That is not as disconcerting as it sounds: the authors find that the American economy is still producing plenty of the right sort of firms, with lots of growth potential. Worryingly, however, fewer of those firms seem to grow big.

A few, high-growth startups account for most new jobs created in the private sector. But over the past 15 years America’s high-growth companies have not expanded much faster than their plodding peers. Flagging competitive pressures could be to blame. Profitable firms are increasingly likely to bank their earnings than to plough them back into the business. Regulation may also be a problem. Messrs Guzman and Stern find that entrepreneurial potential in some places, such as San Francisco and its hinterland, is far larger than in others, such as Detroit. Yet restrictions on construction constrain the movement of people from stagnant places to dynamic ones. A paper published in 2015 by Chang-Tai Hsieh of the University of Chicago and Enrico Moretti of the University of California, Berkeley, suggested that if it were easier to build in and around San Francisco, and thus cheaper to live there, employment in the area would rise by more than 500%, while many cities in the Rust Belt would all but vanish.

Waste not, want not

Orthodox economics suggests plenty of ways to nurture productivity growth—and, with luck, wages—such as boosting support for research and cutting red tape. But some in the profession are also beginning to ask whether the link between low productivity and low wages may run in both directions. Low pay allows firms to employ workers profitably in marginal jobs and to continue to use workers even though robots or software could replace them. Investments in automated checkout machines, for example, are less attractive when there are lots of cheap humans around.

Some economists, such as João Paulo Pessoa and John Van Reenen of the London School of Economics, reckon low British wages, which tumbled during the Great Recession, help account for weak productivity growth during the subsequent recovery, since firms felt less pressure to economise. Similarly, abundant, cheap labour may help explain how the American economy has managed to produce the unusual combination of soaring employment and weak wage growth in recent years.

By allowing economies to operate with lots of labour-market slack and by relying on falling pay to boost competitiveness, governments have enabled firms to make careless use of low-wage labour. By prioritising a return to full employment, politicians could give a much-needed kick to both wages and productivity.

Sources:

“The Rise and Fall of American Growth: The US Standard of Living Since the Civil War”, Robert Gordon, 2016.

“Challenges to mismeasurement explanations for the US productivity slowdown”, Chad Syverson, NBER Working Paper 21974, January 2016.

“Does the United States have a productivity slowdown or a measurement problem?”, David Byrne, John Fernald and Marshall Reinsdorf, Brookings Papers on Economic Activity, Spring 2016.

“The state of American entrepreneurship? New estimates of the quantity and quality of entrepreneurship for 15 US states, 1988-2014”, Jorge Guzman and Scott Stern, 2016.

"Where has all the skewness gone? The decline in high-growth (young) firms in the US", Ryan Decker, John Haltiwanger, Ron Jarmin and Javier Miranda, NBER Working Paper 21776, December 2015.

“Why do cities matter? Local growth and aggregate growth”, Chang-Tai Hsieh and Enrico Moratti, NBER Working Paper 21154, May 2015.

“The UK productivity and jobs puzzle: Does the answer lie in labour market flexibility?”, Joao Paulo Pessoa and John Van Reenen, Centre for Economic Performance Special Paper, June 2013.

 

[Kilo_302]

When discussing the deficit the Liberals are going to run, it's helpful to consider what the banks are saying about it.

http://www.theglobeandmail.com/report-on-business/top-business-stories/analysts-on-tomorrows-budget-deficit-paranoia-is-mind-bogglingly-stupid/article29308661/

Awaiting the budget

Canada’s new government is expected this week to unveil a stimulus budget with a deficit in the area of $30-billion.

That would count as bad news for some who crave balance. But for others, it may not be enough given the sluggish economy and unemployment that refuses to drop below 7 per cent.

Finance Minister Bill Morneau has already adjusted the outlook amid the oil shock, projecting a deficit of $18.4-billion in the 2016-17 fiscal year, not including the Liberal government’s promised spending initiative. When you add it all together, it’s looking like about $30-billion.

Besides infrastructure spending, Canadians can expect to see a new child benefit, changes to the jobless benefits program and a tweak to tax rules governing stock options.

Economists aren’t waving red flags over what they expect to see, and some observers would like even greater stimulus spending than Mr. Morneau will probably unveil.

They’re not suggesting throwing caution to the wind, but they do note that Canada is able to handle what’s expected.


Here’s what some observers say:

“Deficit paranoia is mind-bogglingly stupid. … Even a $50-billion deficit wouldn’t endanger the long-term outlook for the public finances, however. The bigger risk is that if fiscal policy doesn’t take up the slack, the economy could slip into a prolonged downturn. It would be a tragedy if, after watching Europe nearly destroy itself, Canada made the same mistake.” Paul Ashworth, Capital Economics

“Expect the outcome of the next budget on March 22 to show cumulative deficits over the next two years well above $50-billion (roughly 1.3 per cent of GDP) if the stimulus promised during the election campaign is implemented. That should hardly scare off foreign investors. Even with such deficits, the debt-to-GDP ratio should remain low relative to other OECD economies. In our view the government has the flexibility to provide fiscal stimulus to a Canadian economy that badly needs it.” Marc Pinsonneault, National Bank Financial

“Timely, targeted and temporary fiscal initiatives will provide a much-needed filip for the economy over the near term while potentially also improving long-term growth prospects. … In periods of weak growth, fiscal deficits have a role to play in lessening the damage to the economy. However, prudent fiscal management requires that initiatives provide clear benefit to growth in the short and long term. As well, the funds spent will need to eventually be repaid with the upcoming budget expected to provide a game plan as to how the federal government plans to return to fiscal balance.” Craig Wright and Laura Cooper, Royal Bank of Canada

“Our Canadian [economic growth] forecast incorporates our recommendation for federal fiscal stimulus of $20-billion, equivalent to 1 per cent of GDP, implemented during the second half of 2016 and the first half of 2017. This stimulus would be over and above the deficit resulting from weaker economic conditions. … The stimulus should be designed to: deliver a rapid economic impact; raise Canada’s economic capacity and thus our longer-term growth prospects; and, facilitate adjustments in the provinces most affected by weak commodity prices.” Aron Gampel, Bank of Nova Scotia


“Canada still warrants a triple-A credit rating, and Ottawa can afford a moderate fiscal boost – especially for hard-hit regions. However, the deterioration in medium-term finances from weak commodity prices, less-favourable demographics, and softening provincial credit ratings suggests that Ottawa should proceed with prudence. To reiterate: Canada is facing a structural shift from the commodity shock, and that’s not something that can be quickly countered or fully mitigated by a big fiscal boost.” Douglas Porter and Robert Kavcic, BMO Nesbitt Burns

“The 2016-17 deficit will be nearly $30-billion if the Liberals stick with their election platform, but they could add additional stimulus to either that year, the outgoing fiscal year, or 2017-18, to enhance the planned lift to growth. Canada’s federal deficit will still be well below the U.S. federal government as a share of GDP, and a stimulative fiscal plan is a preferable option to having interest rates even lower for longer given existing household debt levels.” Avery Shenfeld, CIBC World Markets

“In evaluating the increase in the deficit, size is not all that matters. The composition will matter for growth. As such, an increase tilted towards investment in infrastructure would be viewed as more pro-growth than an increase due to increased tax credit. The reason is that, while the propensity of middle-income households to consumer is considered to be high, the record level of household debt will likely mean that most of the tax credit will be saved rather than spent.” Charles St-Arnaud, Nomura

 

[SeaKingTacco]

Of course bankers like debt. How do you suppose they make money?

QED.

 

[Kilo_302]

Of course bankers like debt. How do you suppose they make money?

QED.

That's definitely an element to this. But in the long run, the banks need economic growth just like everyone else.

 

[Oldgateboatdriver]

Of course bankers like debt. How do you suppose they make money?

QED.

Actually, SKT, banks invest very little, if anything, in government debt instruments, other than the minimum that banking laws imposes on them as minimum "safe" investment holdings. And why should they? As AAA or AAA+ rated debt, it pays very little in interest as it is always at the low end of the interest rates spectrum and it does not qualify for asset leveraging.

The real way banks make money is on the multiplication effect of leveraged assets: by increasing the amount of deposits people make at their bank (why do you think they work hard at convincing you to open accounts at their bank vs another one?).

Here's how it works: I open an account and deposit $1000 at the bank, increasing the bank's assets by that $1000. Because it is now in the bank's assets and the "reserve" obligations of the bank are set at 10%, that bank may now borrow from the central bank $10,000 at the central bank prime rate. They then loan that $10,000 to various borrowers at various rates going from their prime rate (always higher than the central bank prime rate) to well above. Assuming an average of 3% differential and that they are paying me 3% on my deposit, they have now made $270 on my $1,000 deposit at year end ($300 - $30 they pay me): That's 27% rate of return on my money. They are not allowed to do that with government debt instruments, as government does not allow borrowing as against its own debt.

So they do like debt, but consumer and commercial one, not government debt instrument.

The financial institutions that like government debt instruments are usually the insurance companies and the pension fund/ asset funds managers.

 

[a_majoor]

Schadenfreude is a wonderful word:

 

[a_majoor]

A commenter on NextBigFuture gives an amazing smack down AND an Econ 101 lesson at the same time. This should be required reading for anyone in Canada who advocates for "living wage" legislation, supports the LEAP Manifesto or otherwise indulges in magical thinking. OF course their response wold not be to logically parse the argument and try to find the flaws, but maybe answer "because 2016" instead. As for the main post, the reason we are in a global economic meltdown is because of the massive debt and credit bubble built up since the 1960's. F.A Hayek described this a long time ago, but no one is apparently paying attention :

http://nextbigfuture.com/2016/04/global-economy-faltering-from-long.html

ShrillaryForPrison2016 NBF Elder in reply toeripefJust saw the news that USA now...more » 3 hours ago
Just saw the news that USA now only has 5% unemployment, pretty close to full employment

Then please explain why labor force participation levels are at their lowest since the Great Depression? Why are they despite the 'low unemployment'? Because the unemployment figures are totally rigged Chinese-style, that's why.

It's like how the Chinese are claiming that their GDP growth is over 6% yet their rail freight volume has collapsed down to 2007 levels and staying there. Other collapses in commodity imports that were a sign of lots of economic activity as well have collapsed and are not going back up any time soon. Just ask the Chileans dealing with the loss of copper exports to China and the Aussies the same thing with other mineral resources. Some 6% 'growth'.

Detecting the truth about economic stats is thus a lot like finding exoplanets: One finds what is out there by inference and other indirect means.

But because they were all low-paying jobs, they did not create growth.

More trumpet calls from the Economically Ignorant. Jobs do not create economic growth -- investment does. Only Keynesians 'believe' otherwise despite centuries of empirical evidence that proves them wrong. More jobs created are the outcome of more investment...at least until the robots wipe out the need to employ human labor for the most part.

Econ 101

"Growth starts with investment and ends with consumer spending."

First, you can’t create a new business or sustain an existing one without the seed corn and nourishment of capital investment.

Second, only businesses create jobs. You can’t have a job without a business.

Third, jobs create all incomes, including middle-class incomes.

Fourth, incomes create family and consumer spending. Okay?

This is not complicated. It’s common economic sense.

GDP always equals 46% times non-residential produced assets (equipment, machines, structures, computers, etc.), plus 7% times residential produced assets. Accordingly, every additional dollar of capital investment in plant and equipment increases the stock of non-residential produced assets by a dollar, and this, in turn, generates 46 cents more GDP…every year! There is no better game in town. So much to the Realtards brainwashing (highly successful, I might add) of everyone in society into believing that 'housing is vital to economic growth'.

Maybe a higher minimum wage is the next step.

Why don't we raise the price of gasoline to $15/gallon also? What would happen with supply and demand for gasoline if we did? What happens to the demand of EVERY commodity (and labor is a commodity) in general when you artificially raise the price of it beyond what natural market demand is for it? T-H-I-N-K.

<sidenote>
artificially raise the price of it beyond what natural market demand is for it -- key distinction I made. Some of the more wealthier local economies can thus 'absorb' higher min wage jobs better because the natural market determined job rates are closer to it. Others, not so and it is devastating. So in California, a $15/hr min wage would thus be more easily absorbed by Silicon Valley while it would be devastating out in Bakersfield and the rest of the Central Valley and norther parts of California. The biggest proven disaster that backs this up currently is Puerto Rico and the rest of the federal territories experiencing widespread job losses because the federal min wage was way higher than the local economies could support. Meanwhile, federal benefits are also greater and since a lot of the newly created-by-libtard-intentions jobless have to go on them anyway in those territories, most of the working population ends up on them in one form or another. But hey! What's a little reality to get in the way of fantasy, eh?</sidenote>

Since the average job is supported by roughly $210,000 of non-residential produced assets, to create -- say -- 15 million average jobs, a little more than $3 trillion of private sector capital investment is needed. Raise the min wage and you cut the maximum amount of jobs generated with the same productive investments. Period. Yet the Left isn't interested in really creating jobs as we can see regarding the Min Wage Exemptions.

EVERYWHERE the min wage has been or is going to be increased, the local unions ask for -- and most receive -- exemptions from the law for union jobs. This is because they have their Democrat cronies write in the min wage laws provisions for unions to do so. Why is that? Why do they want that and ask for it? BECAUSE THEY WANT TO FORCE EMPLOYERS TO HIRE UNION MEMBERS BY MAKING NON-UNION EMPLOYEES UNCOMPETITIVE VIA THE LAW. By having a min wage at $15/hr and a union job for $10/hr, employers will be forced to take on union employees to get a cost break from the min wage law. THIS PROVES that Leftards really DO NOT believe that min wages do not cost jobs. It proves that they REALLY believe the opposite.

And your post proves that they are really, really good at cultivating Useful Idiots to go on NBF and other forums to push this fraud. Stop drinking the Kool-Aide dude! Wise up and learn.

Tell me: Why is it EVIL (not to mention illegal) for businesses to pay below the min wage because it SUPPOSEDLY hurts workers when the unions get a total Free Pass to do it, eh? What happens to employees who refuse to unionize in those situations? They lose their jobs or don't get the same job opportunities to find new ones that union employees who aren't getting the min wage are. So much for the Left caring about the 'little guy' not earning a 'fair' wage and all that BS.

 

[CougarKing]

Please note the highlighted portion about Chevron seeking to sell off its facilities in Burnaby, BC:

Reuters

Global oil majors look to shed refineries as crude prices rebound
By By Jessica Resnick-Ault | Reuters – 9 hours ago

NEW YORK (Reuters) - Global oil majors Chevron Corp and Royal Dutch Shell Plc are putting small refineries on the auction block as they look to trim lower-margin assets in the face of headwinds from rising crude oil prices.

Chevron, the second largest U.S. oil company, is soliciting interest in its Burnaby, British Columbia, refinery and gasoline stations, the company told Reuters. Shell is looking for buyers for its Martinez, California, refinery, two people familiar with the situation told Reuters. Shell declined to comment.

These two companies, along with peers Exxon Mobil Corp and BP Plc, have sold more than a million barrels per day of U.S. refining capacity in the past three years, according to Stratas Advisors, a Houston-based consultancy.

(...SNIPPED)