Not so good anti-anti-stimulus arguments

In a recent post on his blog, Paul Krugman takes issue with the anti-stimulus argument that additional government spending is bad because economic theory says that privately allocated spending is more welfare-enhancing, and therefore tax cuts are preferable. Krugman's claim is that stimulus spending is about public goods not private goods. And, he writes, "there's nothing, even in Econ 101, that clearly favors (sic) private spending on private goods over public spending on public goods."

But, I ask, if it is economically desirable to increase expenditures on public goods, doesn't this imply that current expenditures are already below the optimal level? If this is true then what governments ought to be doing is permanently increasing their spending in those areas. Public goods should be provided at the economically efficient level whether we are or not we are in a recession. So Krugman's argument is not so much an argument for a spending-based "stimulus" as it is for a government that fully performs it's public good function.

When it comes to an actual stimulus, the government should be primarily focused on boosting demand where it has actually fallen. So if the current crisis is mostly a shock to consumer demand, then shouldn't the government be chiefly engaged in re-igniting private consumption? Which is a reason why a temporary GST reduction (with a phase-out!) and an EI expansion are the best policies.

The Madoff Economy

As always, Paul Krugman's insights give you something to think about.

This Week in Economics

After spewing alarmist rhetoric re: the dire state of the economy in an effort to usurp the crown, the Liberals are now criticizing Stephen Harper for his new-found pessimism. Rather hypocritical, but hey! it's the Liberal Party of Canada. What did you expect?

For his part, Harper seems to have surrendered to his political opponents by reversing his previously restrained stance on fiscal stimulus.

Jim Flaherty is also adopting a more concerned attitude (at least publicly). He has recruited an ad hoc "council of economic advisers" to provide input for the new federal budget. The council's members, chosen without much regard to party allegiance, have an impressive combined collection of business experience and acumen. But of the 11 councilors, only one, Dr. Jack Mintz of the C.D. Howe Institute, is an economist. The business community certainly has a lot to offer, but an economic council ought to have economists. President-elect Barack Obama understands this. He has recruited heavily from the ranks of the academic economists. The most notable appointments are Christina Romer of UC Berkeley as the new chair of the Council of Economic Advisers and Lawernce Summers of Harvard as the new director of the National Economic Council.

How do you solve a problem like grand theft auto?

Winnipeg is notorious for it's elevated incidence of car theft. But the city has found a new way to alleviate the problem: the exile of car thieves to Saskatchewan, Canada's dumping ground.

The Transit User's Problem

The New York Times Magazine recently published Year in Ideas 2008. Many interesting ideas were profiled, the more exotic of which include never-ending bubble wrap and spray-on condoms. Amongst the economics ideas, my favourite is the Bus-Wait Formula:

You arrive at the bus stop to catch the ride to work, but the bus isn’t
there. Your destination isn’t very far, so you think, Hmm, maybe I should just
walk. But then you might find yourself halfway between stops when the bus whips
past, which would be deeply annoying. What to do? Should you walk or should you
wait?

This question has plagued commuters for years, but this year three
undergraduate students at Harvard and Cal Tech decided to resolve it. “We were
sick of sitting at a bus stop, not seeing the bus and torturing ourselves over
whether we should start walking,” says Scott Kominers, a Harvard student
studying math, economics and ethnomusicology. So Kominers and his co-authors,
Justin Chen and Robert Sinnott, drew up the problem as a classic game theory
dilemma, began crunching the numbers and, three pages later, had their answer:
You should probably wait — and whatever you do, don’t second-guess
yourself.

Buses, after all, are usually punctual and move much faster than you.
If you start walking and catch the bus halfway through your journey, you might
consider yourself fortunate — but even then you won’t have gotten to your
destination any faster. What’s more, Kominers — like a good economist — points
out that waiting allows you to “optimize” your time, because you could get some
work done while hanging out at the bus stop. There’s also a practical problem
with walking, because people who decide to walk usually pause at each stop to
see if a bus is coming, which drags their journey out. “You think you’re not
slowing down if you stop, but you’re adding a bunch of time each time,” Kominers
adds.

Mind you, their equation breaks down in extreme cases. If your journey is
relatively short — less than a mile — and you suspect the next bus is half an
hour away, they calculate that you should walk. (Though you should walk
decisively, without dallying at each stop along the way.) But since most trips
involve more-punctual buses and longer journeys, waiting is, far more
frequently, the winning strategy. Or as Kominers concludes with some delight,
“Laziness almost always works.”

This is an interesting problem that I have encountered on a practical level many times in my life, especially since I often have short transfers on my transit journeys. Some comments on the methodology:

(a) The authors suggest that the way to optimize your time is by waiting at the bus stop and getting some work done. How might the analysis change if the benefits of exercise are also considered?

(b) The model should also incorporate the likelihood that the next scheduled bus will simply fail to show up. I was a transit user in Winnipeg for several years and know first hand that during periods of intemperate weather (read: deep freeze), the probability of a bus break-down is much higher. Transit users will consider this when taking decisions. Especially since walking is a more efficient method of maintaining body temperature than standing still.

Bubblegum Psych

Interesting article about the psychological motivation to market crashes.

The Sunny Side of the Bust

Business cycles in action here, and apparently cyclists are in action too, which benefits your health and the environment. So don't sweat the recession, just sweat it out.

Messrs. Premier, tear down these walls!

Here's some good news, especially since we can expect more job losses in the coming months.

And if a house be divided against itself...

Many critics of the Liberal-NDP proposed coalition pointed out that both parties explicitly rejected such an arrangement during the recent election campaign. Now that Parliament has been prorogued and enthusiasm for the coalition has begun to wane, Liberal leadership hopeful Bob Rae has emerged as its champion. I admire Rae's commitment to an alliance which is quickly falling into disfavour among Liberals [Michael Ignatieff, for example, did not refer to the coalition once in today's email to his supporters] as it is an idea to which he has ardently given his support in the past. For example, Rae wrote on his blog this past September: "We need to build a progressive coalition to defeat the Harperites."

However, in the same post Rae scolded the NDP for their self-interested attacks on the Liberals and the Greens. "The point is not to criticize Harper," he wrote. "It is to replace him. And the NDP can't do that, because in the end it will always revert to the Two Themes: class warfare and character assassination."

Bob Rae saves his harshest disapproval for the leader: "Jack Layton thinks he's Obama. What a joke."

One wonders how the Liberal party ever thought it could successfully co-govern with the Dippers when the party's most prominent coalitionist considers "Jack Layton's NDP" to be both inept and delusional. What a joke.

Lakehead's New Motto: "We Play Nice"

In an effort to surpass its rivals Queen's and Carleton in political correctness, the student union at Lakehead University has passed an amendment to its constitution that enforces a "civil atmosphere" amongst its clubs. The new rules state:

• Campaigns must be positive in nature and cannot slander the opposing stance of the campaign
• All club publications shall not have content that may be deemed as offensive or in bad taste to any identifiable group
• Members of the club are not allowed to impose belief(s) or practice(s) of the club to anyone who does not give them consent to outside of the club’s meetings
  

Clubs at the university will be allowed to set up booths but are not allowed to approach students. According to the union, this ensures that no one will have beliefs or views "imposed" upon them. The new rule outlaws unsolicited distribution of material, say an advertisement for club-sponsored charity event or lecture. It is not clear whether the student union wishes to extend the freedom from belief imposition to the classroom where, according to my sources, students are routinely subjected to views, beliefs and opinions.

As to the ban on clubs doing or saying anything critical or offensive, the student union retains the authority to decide what is and what is not acceptable.

A Stimulating Summer

The lack of a "fiscal stimulus" is ostensibly the issue over which the Liberals, NDP, and Bloc have decided to oust the Harper minority and form a coalition government. The Conservatives, the coalition partners claim, did not present a sufficiently bold "fiscal stimulus package" in last week's fiscal update. As such, they failed to protect Canadians from the growing global downturn and the coalition partners have decided to step in and do it for them.

There are many things about this situation on which I could comment. But let's ignore for the moment the fact that the update actually did present some useful measures to lubricate the flow of credit and allowed for further fiscal action in the next budget. And that the true catalyst was probably the removal of party subsidies. Let's also ignore the fact that neither the Liberals nor the NDP, who now wish to rule based on their ability to implement a large-scale fiscal stimulus package in the range of $30 billion, ran on non-stimulating platforms that expressly promised to avoid deficit spending. Let's further ignore the fact that the coalition is as vague about how their $30 billion package will be spent as the Conservatives were about possible future expenditures. Let's also ignore the fact that the economic literature is far from conclusive about the benefits of large fiscal stimulus packages to alleviate short run fluctuations in an economy (like Canada) that has not entered a severe recession. In fact, there are already automatic stabilizers (like employment insurance) at work to provide a "stimulative" effect.

Instead, what I want to point out is this: there may have already been a fiscal stimulus in the Canadian economy. See, the thing about government intervention in business cycles is that the timing is very hard to get right. Frankly any action taken by the Conservatives or the Liberals-NDP will probably not have an impact until near the end of the downturn or when the economy has already begun to recover. It takes time for this type of policy to have the right effect. Ideally, a fiscal package (if needed) would have been implemented long before it was needed.

Indeed, this is exactly what the Conservatives argue, referring to their cut to the GST and their planned cuts to the corporate tax rate. I'm not convinced that either of these policies will have a huge impact. But forgive me a quasi-partisan moment and allow me to make the Conservatives' case for them: their pre-election spending spree may actually act as a stimulus for Canada.

I found this list of spending announcements for the summer of 2008 on the Canadian Taxpayers Federation website. They count over $19 billion of new spending. Not all of the money will be spent in 2009, but many of the items fall into the categories that the coalition now says are possible stimulative expenditures. That is, innovation, infrastructure, skills development, and economic development. Here is a list of some of the bigger items.

Innovation & Research

• Asthma/Allergy Research, McMaster 12 mil
• SSHRC, NSERC, and CIHR 10 mil
• Fuel Efficient Auto Technologies, Ford Motor Company 80 mil
• Landing Gear Technology Research, Heroux Devtek Inc. 27 mil
  

Infrastructure

• City of Calgary transportation 34.5mil
• Baie de Beauport park 18.3m
• Queenston Plaza, Niagara-on-the-Lake 62mil
• Canada-BC Municipal Rural Infrastructure Fund 147mil
• Winfield-Oyama Highway Project 33.6mil
• ontario infrastructure 6.2 billion
• Toronto public transit including subway extensions 731.7mil
• Champlain Bridge, Montreal 1.0 billion
• Ports, Rimouski and Baie Comeau 53.3mil
• Infrastructure, Government of Quebec 4.0 billion
• Highway Improvement, Government of Quebec 231mil
• Highways, Government of British Columbia 163.7mil
• Military Base Expansion, CFB Trenton 500mil
• Infrastructure, Government of Manitoba 718mil
• Highways, Government of New Brunswick 68.75mil

Skills Development

• Roadmap for Linguistic Duality in Canada 2008-2013 1.1 billion (not sure what this is exactly)
  
• Retraining, Government of Newfoundland and Labrador 46mil
• Job Training, Government of PEI 39mil
• Aboriginal Skills and Employment Partnership, various 11.4mil
  

Economic Development and Support

• Various Northen Ontario initiatives 23mil
• Bombardier Inc. 350mil
• Tobacco Farmers bailout 300mil
• Joint Strike Fighter Program, Bristol Aerospace 43.4mil
• Ships, Lockheed Martin, Gatineau, QC 2.0 billion
• Settlement Services for Immigrants 22.2mil
• Ship Building, Nordane Shipping 12mil
• Reopening Ford Motor Company factory in Windsor, 80mil
  

The infrastructure spending is especially impressive. A lot of the money has been given to the provinces for specific projects (Quebec and Ontario in particular!). So to a great extent the provinces have a role in accelerating those projects to provide the stimulus.

The NDP and Liberals joined the CTF at the time in criticizing the Conservatives for their handling of what were previously balanced public finances. There were a ton of items on the list (the CTF's document is 19 pages long) and so there is more than a little validity to accusations that the Conservatives were trying to spend their way to a majority.

But the point of this post is that the Conservatives, in spending an incredible amount of money this past summer, may have inadvertently provided some sort of stimulus package during the high-rolling summer. And the summer was exactly the right time for any necessary fiscal action to take place.

To stimulate or not to stimulate?

The rhetoric out of the coalition camp makes it seem as though every other major economy is injecting billions of dollars into their economies. Not so. For good or ill, Germany is also showing fiscal restraint during the global downturn.

Of course, it's not exactly true that the Harper government is presiding over a stimulus-free zone. I did a very brief Google search and found a few examples of pre-election spending that would be very much like the stimuli the LPC-NPC will propose (but probably better researched). There are probably more but I don't feel like looking.

• $80 million cheque to help Ford reopen a mothballed engine plant in Windsor which had been making V-6 engines and will now begin manufacturing small, fuel-efficient engines
• another $80 million to help Ford develop an R&D centre in Windsor as a part of a new policy called the Automotive Innovation Fund
• deal that will invest a whoppping $4 billion of federal funds into roads, bridges, and other public infrastructure projects in Quebec

Indeed, federal infrastructure spending is due for a massive increase in 2009. The Conservatives also claim that their planned permanent tax cuts (e.g. corporate rate rollback) are part of the stimulus plan. I don't know whether these expenditures were intended to be part of a "stimulus package". But yes or no, the timing was at least correct.

Hot for teacher? Not exactly.

Ontario's elementary school teachers have rejected the province's contract offer (which includes a 12.55% raise over the next four years), obstensibly over unequal per-student funding and the gap in preparation times relative to their secondary school counterparts. The elementary school teachers want funding and prep time equalized. The current offer stipulates that elementary teachers receive 240 minutes of prep per week while secondary teachers receive 375 hours. All other teacher unions have approved the contract; the failure of the elementary teacher's union to the same by Sunday's deadline rescinds the offer and replaces it with a new one that involves a raise of just 2% for each of the next two years. This observer wonders whether there is any practical reason other than self-interest to equalize funding and preparation time across levels of education (surely high school sports and band programs are more expensive than elementary music and field day programs!). But my interest is not really in these negotiations. Rather, the story has motivated me to comment on a broader issue in the labour market for teachers.

There seems to be a wide consensus that workers should be paid according to the perceived value that society places on their (combined) output. Teachers, who are responsible for the education of our children, are highly considered workers and therefore viewed as "underpaid". Skilled athletes, whose performances entertain rather than sustain, are frequently viewed as "overpaid". But in a market economy, wages are not determined solely by the willingness of employers to pay. The relevant economic concept is "SUPPLY and demand", not "demand". If the market functions properly, wages adjust so that the supply of labour is equal to the demand for labour.

Why am I bringing this up? To point out that current compensation of teachers, driven by the unionized bargaining process, has generated a surplus of qualified teachers. The Ontario College of Teachers most recent Transition to Teaching report states that "by 2006 the excess of new teachers beyond retirement needs had reached 7,000 annually". The story is similar in other provinces. It is now common for newly licensed teachers to wait several years before finding regular, full-time work. Most people in their mid-20s know several education grads who have struggled to find a permanent position.

This surplus of teachers is not spread evenly across various subgroups. French-language and math/science/technology teachers tend to fare better in their search for work relative to English-language primary/humanities teachers. For example, only 1/3 of the English-language Primary-Junior teachers in Ontario's class of 2005 had found regular work two years after graduation whereas 3/4 of French-language teachers from the same class had been hired into permanent positions. [The fact that the market for elementary teachers is more over-supplied than that for secondary teachers makes their union's demands all the more untenable]

There are two ways to fix this chronic over-supply of teachers.

(a) Restrict the number of teaching licenses that are awarded. This could be done in several ways. For example, a simple cut to the number available spots. That is, limit the number of openings in teachers' colleges. Not only would this decrease the surplus but it may also act as a signal to prospective education students, causing less enthusiastic applicants to look elsewhere. But this may not be ideal as it would involve additional evaluation costs and/or unfair rationing. There could instead be new measures to emphasize the needs that exist, i.e. science and technology, in the application process. Another possibility would be to increase tuition in teacher's college (especially for the most over-supplied groups). A sufficient increase in fees will divert students away from education.

(b) Allow wages and benefits to adjust downward. The fact is that the high levels of compensation given to teachers have drawn an excessive amount of labour into the market. Were the free market allowed to operate, wages would decline leading some potential teachers to exit the market. As wages fall schools will also be more inclined to hire more teachers. The process ends when equilibrium is restored.

Option (b) is the preferred market-based solution to our problem. The end result would be higher employment, smaller salaries, and fewer struggling entrants. Is that better than the current situation? Presently-employed teachers and their union would say no because they would be net losers. But those on the outside looking in would definitely gain. And everybody (public included) would benefit from lower student-teacher ratios. But, as mentioned, the labour market for teachers is unionized, and so option (b) is unlikely to occur. The provincial government, then, needs to find a way to ensure that fewer students enter education programs. The incentive structure is flawed and the surplus will only grow as the fertility rate declines. If nothing is done, this flagrant misallocation of resources will continue unabated.

Of course, the Ontario government may not agree that the surplus of qualified teachers is a problem.

UPDATE: The Province of Ontario has extended the deadline for the Elementary Teachers' Federation to sign the contract offer until Friday.

Misc. Thoughts

It's been a while before I posted anything here. Before I start doing so again, here are some thoughts on some issues from the past few months. I'm sure I had a lot more opinions to share with you my beloved audience but these are the ones I remember, in chronological order.

Olympics: When it comes to sports, we are a country of drama queens. We bemoan the lacklustre efforts of our athletes when no medals are forthcoming and demand increased funding. Demands which, invariably, will be forgotten only weeks later. Nobody cares about our swimmers and rowers between Olympics. Of course, the disappoinment of the first week is forgotten once we start winning medals in the events where we are actually expected to perform well.

EU-Canada FTA: Great announcement from Foreign Affairs. Liberalizing trade with the EU is a great thing for Canada. The Canadian goverment has started a trend of signing bilateral free trade agreeements (Chile, Israel, Peru). Let's hope it continues. The Doha Round has demonstrated the futility of multi-lateral agreements.

Election 2008: What a boring election campaign. I can't believe a few hundred million dollars of arts funding is the most exciting issue. Have the Conservatives said anything about their platform?

Financial Crisis: Where do these people get off predicting a downturn on the magnitude of the Great Depression? Even if they are eventually proven correct (which I doubt very much) we are far from the point where the term 'depression' applies. The alarmists on the Left especially are having a field day with this. Eric Hobsbawm, for one, is calling this a dramatic shift away from the capitalist paradigm. Surely one of the 20th century's most celebrated historians should know that his craft is best practiced in retrospect.

Queen's/Carleton: I was ashamed of my personal connection to Queen's for a few days after the introduction of the Stasi as official campus police (I wonder if the squads will be as relentless in stamping out careless blasphemies - somehow I think not). That is until everyone's attention was drawn to Carleton and their racist/sexist student union. I suspect the majority of student unions have similar tendencies but at least most of them have the decency to keep it under wraps. I just hope that the recent ridiculousness will deflate the sails of the political correction movement a little. And maybe the public outrage will even spillover against those funny human rights commissions. One can always hope.