Making Canada Relevant Again- The Economic Super-Thread

[mdh]

Tax Cut and their true Stimulatory Effect
Current economic models (and economists) are absolutely foolhardy in that they ignore the impact of free access to a domestic market.   Quite simply tax cuts are only highly stimulatory and create jobs in a closed-cycle economy. If on the other hand tax cuts are provided that are then spent by consumers on imported goods (let's say Chinese goods), you have instead just taken money out of federal coffers and created a great stimulus in the nation supplying those imports.

I wouldn't call Milton Friedman foolhardy and the attempt to dismiss all current tax cut theory is IMHO unconvincing.   Taking money out of "federal coffers" and returning it to the consumer is almost always more efficient (assuming you believe in the primacy of the market) -- and why would you assume that all tax cuts would be spent on "Chinese goods" anyway?

Tax Cuts and who gets them
There is a traditional economic belief that whoever gets those tax cuts is moot and it is simply a dollar issue.   That is in fact totally false.   As someone with disposable income I am far more likely to save my funds and reinvest in equity (some domestic/some foreign) that someone closer to the poverty line who will immediately dump those newfound funds back into the economy to the benefit of everyone.

Totally false in your view - but hardly a proven case. Tax cuts for those at the poverty line are already an orthodoxy in this country - the real question is why governments won't give the middle class any meaningful tax breaks so they can follow your example and reinvest their own money as they see fit. And you are missing one argument that transcends (narrow) economic theory - namely the moral one. It's not government's money in the first place, but Canadians have allowed themselves to be beaten into submission by a finely-tuned propaganda machine driven by special interest groups (and their media/political allies) arguing that confiscatory tax rates are somehow a signal of "compassion" or a natural feature of being Canadian. They are neither.

The Minimum Wage
Like tax cuts for low income earners, any boost to the minimum wage is immediately recycled back into the economy as those funds are immediately spent.   In essence, a raise in the minimum wage not only creates a better standard of living for those earning the minimum wage, but also for all the businesses who sell to those minimum wage earners, and their shareholders.    You have the added benefit as previously mentioned which is as working becomes more attractive than collecting EI, more individuals will choose to work, lowering the demand for EI, and lowering EI premiums for the rest of us.   Lastly, as you bring people from subsistence to have at least some disposable income, I would argue you greatly reduce the likelihood that family will resort to criminal activity out of desperation (which again due to policing and court costs is another indirect method of reducing taxation on the general public).  

This assumes that businesses will simply magically absorb the minimum wage increase (Something the "traditional" economists at the Canadian Federation of Indepedent Business would take issue with) - usually it's passed on to consumers or the business creates fewer jobs. I'm not sure how that improves everybody's standard of living - it can have the opposite effect of creating structural unemployment. EI has merely perpetuated a cycle of poverty in the regions - most of those populations ought to be encouraged to migrate to find gainful employment. It's kept in place because of political reasons - Martin - in one of his few moments of policy clarity - actually cut EI rates in the mid-90s because this damaging effect was recognized.   It was restored in the late 90s because the Liberal Party was losing support in the Maritimes.

What does effect domestic labour demand is foreign nations with different labour standards who intentionally deflate their currency in order to create a competitive imbalance and corporate entities with no loyalty to either their home nation or their workers as they scour the world in pursuit of higher profits (and the resulting stock option gains).

Much like Canada did through the 1990s.   We pursued a deliberate policy of currency deflation to boost exports at the expense of productivity and now we are paying the price.   Higher taxes, regulation, and escalating minimum wage rates aren't going to help boost productivity. And isn't this an odd position for a securities guy to take? I would expect that companies should "scour" the world for profits and enrich shareholders (of which I am one since I hold stocks in an RSP).

Bottom Line:    If you want to see your tenets of traditional economics at work, have a look at the US economy, and before you point to the most recent number indicating US GDP growth at 3.8%, try calculating that GDP in a bundle of world currencies since the Bush tax cuts went into effect and you will see the US economy in fact not expanded at all, but instead has dramatically contracted....

Why should we have to measure US economic performance as a "bundle of world currencies"? Denying the obvious - a 3.8 per cent GDP growth rate - and trying to argue that it's a dramatic contraction sounds - again - rather unconvincing. The US economy remains flexible and dynamic despite the impact of the dot-com recession and the war in Iraq.   Bush's tax cuts are working to achieve renewed growth.

In sum, if I am interpreting your arguments correctly (and If I'm not please correct me), then Germany, for example, ought to be the greatest economic success story in history - it has high minimum wages, lots of regulation, high taxes, aggressive unions, generous social programs.

In fact, it's become an economic disaster with the highest unemployment rates since the 1930s.  

The same goes with France which also practiced the ultimate experiment in a type of extreme minimum wage policy - the short work week.   It has been abandoned as a failure. France continues its slide into economic disaster.

Or if you prefer a home grown example - how about Ontario under McGuinty? - higher taxes have been imposed through the health premium, more red tape is being created with each legislative session, the public sector unions are back in force, the minimum wage has been increased - so why isn't Ontario booming?

If we are going to meet the challenges of a 21st century economy we need to do a better job in encouraging enterpreneurial talent, not engaging in the same old failed policies. And while I understand the need for a "balanced approach" on deficits, the massive surpluses created by the federal Liberals have been used as fuel for renewed expansion of the state - not for tax cuts.

cheers, mdh

 

[I_am_John_Galt]

Tax Cut and their true Stimulatory Effect
Current economic models (and economists) are absolutely foolhardy in that they ignore the impact of free access to a domestic market.  Quite simply tax cuts are only highly stimulatory and create jobs in a closed-cycle economy.

Wrong.

If on the other hand tax cuts are provided that are then spent by consumers on imported goods (let's say Chinese goods), you have instead just taken money out of federal coffers and created a great stimulus in the nation supplying those imports.

By allowing consumers to spend on foreign goods you are increasing wealth both directly and by increasing the velocity of the money supply: money in "federal coffers" does neither (= economic stagnation).

Tax Cuts and who gets them
There is a traditional economic belief that whoever gets those tax cuts is moot and it is simply a dollar issue.  That is in fact totally false.  As someone with disposable income I am far more likely to save my funds and reinvest in equity (some domestic/some foreign) that someone closer to the poverty line who will immediately dump those newfound funds back into the economy to the benefit of everyone.

If you'd studied National Income Accounting (and I presume you have) you'd know that Investment is part of the basic output identity: the only 'drain' on the system is REAL savings (i.e., stuffing bills into mattresses).

The Minimum Wage
Like tax cuts for low income earners, any boost to the minimum wage is immediately recycled back into the economy as those funds are immediately spent.  In essence, a raise in the minimum wage not only creates a better standard of living for those earning the minimum wage, but also for all the businesses who sell to those minimum wage earners, and their shareholders.  You have the added benefit as previously mentioned which is as working becomes more attractive than collecting EI, more individuals will choose to work, lowering the demand for EI, and lowering EI premiums for the rest of us.

Raising the minimum wage means that it is more expensive to get a given unit of work completed.  This invariably means that the firm is less competitive relative to firms with lower labour costs (i.e., foreign competiton).  Less competitive = less output = less demand for labour = less jobs.  In the closed economy you have merely created nominal inflation (i.e., prices will increase with wages and wealth will remain inchanged).

Lastly, as you bring people from subsistence to have at least some disposable income, I would argue you greatly reduce the likelihood that family will resort to criminal activity out of desperation (which again due to policing and court costs is another indirect method of reducing taxation on the general public).

Business owners aren't stupid: they will not employ more people simply because the minimum wage has increased.  Actually, you will only have two possible outcomes: less employment (open economy), or inflation to the point where real incomes remain unchanged (closed economy): I fail to see how either would result in a reduction in crime.

What does effect domestic labour demand is foreign nations with different labour standards who intentionally deflate their currency in order to create a competitive imbalance and corporate entities with no loyalty to either their home nation or their workers as they scour the world in pursuit of higher profits (and the resulting stock option gains).

Or maybe they have a greater domestic supply of labour and local wages, while much lower than western standards, pay better than workin' the fields.

Bottom Line:  If you want to see your tenets of traditional economics at work, have a look at the US economy, and before you point to the most recent number indicating US GDP growth at 3.8%, try calculating that GDP in a bundle of world currencies since the Bush tax cuts went into effect and you will see the US economy in fact not expanded at all, but instead has dramatically contracted....

What?

Best Regards ....

 

[I_am_John_Galt]

Letting Bombardier die would be even worse than subsidizing them.

Why?

I do think we should get shares or the loans should get repaid, but every country does this.

Which is exactly why we shouldn't subsidize them: our pockets are simply not as deep as other countries ... we will eventually lose the subsidy game: it's just a question of how much money we send down the drain with it.

The government can do whatever it wants. We have crown corporations in this country that employ over 2.5 million people. Bombardier used to be a bunch of different crown (public) corporations. So was Hawker Siddeley (now BAE systems) in Britain.

What is your point?

The government can also indirectly stimulate jobs by changing economic priorities from low inflation for the rich to job creation. It's almost as if the 1950s and 1960s never happened to some people.

Gimme a break: 'changing economic priorities' is a euphemism for taking money (& jobs) from where they do the most benefit and moving them to where some mandarin wants them (usually for personal electoral and/or monetary benefit).  Check out Bastiat some time: http://www.econlib.org/library/Bastiat/basEss1.html

 

[mdh]

The government can also indirectly stimulate jobs by changing economic priorities from low inflation for the rich to job creation. It's almost as if the 1950s and 1960s never happened to some people.
Gimme a break: 'changing economic priorities' is a euphamism for taking money (& jobs) from where they do the most benefit and moving them to where some mandarin wants them (usually for personal electoral and/or monetary benefit).

I will second JG on this.   Low inflation has not been a policy designed to support the rich - it has had the opposite effect - enabling thousands to enter the housing market (thereby purchasing an important asset) because interest rates (real interest rates) have been low.   Inflation, especially stagflation in late 1970s, was a sustained attack on the Canadian prosperity.   We had to break it through double digit IR and tight monetary policy. (Any one here remember Trudeau's "world of 6 and 5"?)

But Big Government lovers shouldn't worry too much. The next attempt to "change economic priorities" by the federal Liberals is already happening - mainly through the implementation of the Kyoto Accord - possibly one of the greatest instruments of economic intervention ever concocted by Ottawa mandarins.

cheers, mdh  

 

[daniel h.]

Why?Which is exactly why we shouldn't subsidize them: our pockets are simply not as deep as other countries ... we will eventually lose the subsidy game: it's just a question of how much money we send down the drain with it.
What is your point?
Gimme a break: 'changing economic priorities' is a euphemism for taking money (& jobs) from where they do the most benefit and moving them to where some mandarin wants them (usually for personal electoral and/or monetary benefit).   Check out Bastiat some time: http://www.econlib.org/library/Bastiat/basEss1.html

My turn to ask some questions.
 
1. Do you consider constituents (voters) to be a special-interest group? If, for example, the Liberals created 10,000 Bombardier jobs and win an election, is that vote buying or is that voters rewarding a party for doing what is in their constituents best interest?

2. Is it possible that I simply disagree with your priorities? Do you believe in democracy? The right to disagree with those who believe there only one way to do things?


Do you believe that Japan made a mistake by protecting their auto industry, or is having the world's 2nd biggest economy proof that protectionism works? 8)

 

[daniel h.]

Uhh...when you consider that the three cornerstones of the post World War II global economy (of which the US is the hegemonic power) are GATT (which evolved into the WTO), the World Bank, and the IMF, I can't see how the heck you figure protectionism was responsible for making the US a world superpower.

IPE 101 my friend....

Probably an embarrassment because they base their entire notion of nationalism off the premise that the United States poses a clear and present danger to the existence of Canada.   I don't like to foist "Chicken Little" up as a national hero, despite their achievements....

The U.S. is very protectionist. They import to other countries, but are extremely protectionist when it comes to imports. There is not one U.S. indsutry that is more than 50% foreign-owned. In Canada, more than 30 industries are majority foreign-owned.

It is illegal for U.S. shipping companies to buy ships built in foreign countries. More protectionism.

The U.S. taxes our softwood lumber 27%, beef, bison, mutton, etc., and still people say they aren't protectionist.



As for Mel Hurtig and Carolyn Parrish, you are absolutely right they fear the U.S....why don't you? They simply have too much capital for us to play by their rules. They'll simply buy us out.

The majority have supported Hurtig's BMD stance and Parrish's stance on the Iraq War in polls. The will of the majority used to be seen as a positive thing. Democracy.

 

[daniel h.]

Job creation eh?

See point "b", and ask yourself how many jobs have been created by the billion dollar boondoggle, sending $100,000,000 to "Liberal friendly" advertising agencies, permanent welfare traps in the seasonal industries or all the corporate welfare the various levels of government blow off every year.

The answer is "very few".

If you are in fact concerned with economic growth and job creation, then look south and explain how there is 1/2 the unemployment rate and 2X the economic growth without reference to the low tax and regulatory environment the Bush administration is implimenting. As a control measure, you can also look at the general trends between the "Red" states, which are also implimenting such policies, and the "Blue" states, which tend to be high tax and high regulatory environments.

Empirical evidence from over 70 countries demonstrates that low taxes, limited regulation and free trade are the drivers of economic growth and prosperity. There are other ways to run a country, I happen to approve of using proven policies with positive outcomes over the present way Canada is being run.

Poverty lines do change, and the U.S. has the highest percentage of their population of any country in prison.

 

[TCBF]

" and the U.S. has the highest percentage of their population of any country in prison."

That's because:

1.  They don't execute as many as they should.
2.  There police are better funded and solve more crimes than police elsewhere.  We are closing down RCMP labs - and our crime experts are bailing to the states - and they are expanding their crime labs.
3.  Longer sentences in the USA keep scum behind bars longer - hence, a larger prison population.

Tom

 

[mdh]

My turn to ask some questions.
 
1. Do you consider constituents (voters) to be a special-interest group? If, for example, the Liberals created 10,000 Bombardier jobs and win an election, is that vote buying or is that voters rewarding a party for doing what is in their constituents best interest?

I don't think voters are a special interest group, but I would consider Bombardier a special interest. And while it's true that industries like Bombardier have enormous political and economic clout - that doesn't mean that what's good for Bombardier is good for Canada.  

Why should 10,000 Bombardier workers enjoy the privilege of government subsidization when other private sector workers do not? We have merely created two classes of workers. Bombardier may have better lobbyists than the average Canadian voter - but that's not really an economic question - it's a political one.

And at what point do we say to Bombardier that enough is enough - now you must compete on your own merits?   In the meantime we run the risk of subsidizing corporate welfare and perpetuating inefficiencies and special pleading. Governments need to make sound decisions for all Canadians not select groups.

(However you raise a good point about the power of political interference in making economic policy - elected officials are alway vulnerable to that kind of pressure.)  

2. Is it possible that I simply disagree with your priorities? Do you believe in democracy? The right to disagree with those who believe there only one way to do things?

Disagreement is what this forum is all about - and so is the ensuing debate. No?  

Do you believe that Japan made a mistake by protecting their auto industry, or is having the world's 2nd biggest economy proof that protectionism works?

Japan has suffered through more than a decade of recession, enemic growth, financial mismanagement, and creaking industries (the auto sector being one of them).   China, its great nemesis, has simultaneously established itself as a major manufacturing power by stepping into the void.   So yes Japan has made a grievous error in protecting its industries, and it will continue to pay a price for its protectionist policies.

(As a side note, the great Japanese economic model that had the Michael Crichton camp (and inspiring a mini-industry of "how to" management books to create the North American Happy Worker) so worried in the 1980s evaporated like the mirage it was when the country's speculative bubble burst in 1988.   I haven't seen any paranoid movies heralding the harmonious genius of the Japanese work force in a quite a while.)

cheers, mdh

 

[Edward Campbell]

The will of the majority is always 'right' in a democracy, daniel h. â “ not necessarily smart, just 'right.'  The majority, in Canada, it seems to me, is bent on re-titling Arthur Lower's great book and having us go â ?From Colony to Nation and Back to Colonyâ ? â “ which is exactly what will happen if idiots (not too strong a word) and intellectual pretenders like Hurtig and Parrish have their way.  They want to perpetuate Trudeau's cult of entitlement which is, sure as the gods made little green apples, dragging us into economic, social and political oblivion.

Hurtig and Parrish and their fellow travelers want illusory independence even as they try to deny their countrymen the tools to maintain real, meaningful sovereignty.

Burney is right: Canada has sunk to the status of dilettante amongst nations.  Trudeau did that to us and Hurtig and Parrish and the useful idiots who follow them are trying to keep us there or push us deeper into irrelevancy, until we don't exist as a real, sovereign, nation-state at all â “ just as an American colony, sort of like a snow bound Puerto Rico.

</rant>

 

[I_am_John_Galt]

Well said, mdh! 

 

[I_am_John_Galt]

The will of the majority is always 'right' in a democracy, daniel h. â “ not necessarily smart, just 'right.'  The majority, in Canada

Sadly, I suggest that in Canada it more a case of the largest minority always being 'right'.

 

[Brad Sallows]

>The will of the majority used to be seen as a positive thing. Democracy.

Unless the majority wants the death penalty, or doesn't want same sex marriage, or any one of a thousand other things.  Somewhere there must be a book of rules: "When the Majority Counts".  I haven't found it yet.

 

[daniel h.]

The will of the majority is always 'right' in a democracy, daniel h. â “ not necessarily smart, just 'right.'   The majority, in Canada, it seems to me, is bent on re-titling Arthur Lower's great book and having us go â ?From Colony to Nation and Back to Colonyâ ? â “ which is exactly what will happen if idiots (not too strong a word) and intellectual pretenders like Hurtig and Parrish have their way.   They want to perpetuate Trudeau's cult of entitlement which is, sure as the gods made little green apples, dragging us into economic, social and political oblivion.

Hurtig and Parrish and their fellow travelers want illusory independence even as they try to deny their countrymen the tools to maintain real, meaningful sovereignty.

Burney is right: Canada has sunk to the status of dilettante amongst nations.   Trudeau did that to us and Hurtig and Parrish and the useful idiots who follow them are trying to keep us there or push us deeper into irrelevancy, until we don't exist as a real, sovereign, nation-state at all â “ just as an American colony, sort of like a snow bound Puerto Rico.

</rant>

Don't get me wrong, I don't think democracy always works, but Canadian sovereignty is not the same as everyone voting for public execution.


How will Hurtig push us into political irrelevancy? He pushed Trudeau to develop the FIRA, and our access to the U.S. market was actually greater then then it is now with all the tariffs against us.

39 U.S. states list us as their top export market, and we import more U.S. manufactured goods than Europe and Japan combined. We take their products and we have the resources, so I think we're actually more capable of independence than people think.

Our governments are crying poor even though our production is much more efficient than in the past. If we can't afford anything, perhaps new policies are necessary.

When a superpower bullies you trade-wise, the only way to get the bully to back off is punch him in the nose. Hurtig has illustrated how countervailing oil and gas duties would cause U.S. congress to end our lumber duties in a second, because the U.S. needs the oil and can't afford to retaliate, as we also could block their goods as well.,

 

[Brad Sallows]

Where but the US would you propose we ship our oil and gas if the US simply bites the bullet and pays higher prices to obtain imports from elsewhere?  In case you haven't looked, Canadian ports are not well-equipped to ship those commodities abroad.  If you want to shoot yourself in your economic foot, just quit your job and move out onto the streets; don't try to drag the rest of us with you.

 

[daniel h.]

" and the U.S. has the highest percentage of their population of any country in prison."

That's because:

1.   They don't execute as many as they should.
2.   There police are better funded and solve more crimes than police elsewhere.   We are closing down RCMP labs - and our crime experts are bailing to the states - and they are expanding their crime labs.
3.   Longer sentences in the USA keep scum behind bars longer - hence, a larger prison population.

Tom

You have the right to your own opinion.  I simply find the idea of a private prison a bit creepy.

 

[Bruce Monkhouse]

They are not all private, and we have a large one right here in Ontario and lots of youth places.[in fact, most]

 

[Brad Sallows]

>Do you believe that Japan made a mistake by protecting their auto industry, or is having the world's 2nd biggest economy proof that protectionism works?

Japan proved that protectionism can work if your major export destination is sufficiently magnanimous to not retaliate in kind.

 

[daniel h.]

I don't think voters are a special interest group, but I would consider Bombardier a special interest. And while it's true that industries like Bombardier have enormous political and economic clout - that doesn't mean that what's good for Bombardier is good for Canada.  

Why should 10,000 Bombardier workers enjoy the privilege of government subsidization when other private sector workers do not? We have merely created two classes of workers. Bombardier may have better lobbyists than the average Canadian voter - but that's not really an economic question - it's a political one.

And at what point do we say to Bombardier that enough is enough - now you must compete on your own merits?   In the meantime we run the risk of subsidizing corporate welfare and perpetuating inefficiencies and special pleading. Governments need to make sound decisions for all Canadians not select groups.

(However you raise a good point about the power of political interference in making economic policy - elected officials are alway vulnerable to that kind of pressure.)  


Disagreement is what this forum is all about - and so is the ensuing debate. No?  


Japan has suffered through more than a decade of recession, enemic growth, financial mismanagement, and creaking industries (the auto sector being one of them).   China, its great nemesis, has simultaneously established itself as a major manufacturing power by stepping into the void.   So yes Japan has made a grievous error in protecting its industries, and it will continue to pay a price for its protectionist policies.

(As a side note, the great Japanese economic model that had the Michael Crichton camp (and inspiring a mini-industry of "how to" management books to create the North American Happy Worker) so worried in the 1980s evaporated like the mirage it was when the country's speculative bubble burst in 1988.   I haven't seen any paranoid movies heralding the harmonious genius of the Japanese work force in a quite a while.)

cheers, mdh

I want you to know that I do agree that Bombardier is a spoiled child.

Personally, here's what I would do with Bombardier: 1 - possibly make it public again like Canadair was formerly, and Hawker Siddeley was for a while in Britain beofre it become BAE Systems, OR,

2- make Bombardier pay loans back like Canada did with Daimler Chrysler, or 3 - force Bombardier to give the public shares when we give handouts so we get some benefit when the company bounces back.


Regarding Japan, I realize they have problems like political malaise (liberal party in power for over 40 years) and one thing people don't talk enough about--low birth rates. Way to low.

 

[daniel h.]

Where but the US would you propose we ship our oil and gas if the US simply bites the bullet and pays higher prices to obtain imports from elsewhere?   In case you haven't looked, Canadian ports are not well-equipped to ship those commodities abroad.   If you want to shoot yourself in your economic foot, just quit your job and move out onto the streets; don't try to drag the rest of us with you.

We are the biggest U.S. supplier and we they couldn't afford to go elsewhere. Right now we are sending huge amounts of oil to the U.S., getting few taxes, and no royalties. We're not getting much wealth at all, so we might as well send it east-west in Canada, and save the excess supply for a rainy day when we actually need it. We don't need the money and with foreign ownership most of the wealth leaves the country anyway.