Sunday, February 25, 2007

Magic: Destroying Dreams?

Okay, I realize it's only the second entry, and perhaps a bit early for humour, but I am certain that the following is legitimate economic inquiry, and something I have every intention of working on during summer term.

The basic question I ask is what would happen to the economy as a whole were every member of humanity endowed with an amount of magic power, and for simplicity's sake, assume it is manifested in the ability to create a certain dollar value (per day) of goods and services.

The knee-jerk response is to simply count this as an extra accumulation of human capital. It is, after all, analogous to education, granting an ability to produce more each day. But that's not really true. Education confers the ability to produce more with every hour you work. Magic powers, however, would grant a certain amount of earning capacity each day, but per-hour productivity remains unchanged. Any manual on growth would easily inform that long-run per capita growth, especially in developed countries, will depend predominately on productivity growth.

So, we can't say (yet) with confidence that this endowment on humanity would result in long-run growth. It's tempting to say that it will simply afford everyone more lesiure - in the extreme case, if the magic were enough to comfortably subsist, we could see vast migration away from the labour force, with the accompanying stagnation (and perhaps decline) of technological progress and by extension, growth.

Moving on, envision a world where magic gives a nice cushion, and maybe a few luxuries, but can't replace the daily grind. We can't expect people to leave their jobs over, say, ten thousand a year. So assume the labour market is more or less unaffected. Fiscally, magic would certainly ease retirement and unemployment obligations to the government, and open up channels in that manner.

There's an argument to be made for the stagnation of consumption, but the strength of the North American consumer in recent years suggests not. The real impacts would arise from the virtual destruction of abject poverty, which has to be an admirable goal. But the impacts of that much wealth suddenly appearing are definitely beyond this writer, barring further analysis. I'd expect major inflationary shocks, for sure.

It's really an open-ended question. Does the fight in Iraq intensify, with an unstoppable supply of arms and explosives to all involved? Does freeing up people from mundane tasks, such as washing dishes and food preparation start a new era of productivity growth? Will markets open up for magic? Will people become enslaved and their magic powers be harvested?

Either way, as someone who devours fantasy and science fiction, there are more than enough questions to keep one's mind churning. As long as it doesn't end up in killing the dreams of Harry Potter fans.

Saturday, February 24, 2007

Why Quebec Can't Separate

Given that the Quebec provincial budget was recently released, I'd like to take this opportunity to explain, once more, why the economics of reality force Quebec to remain a part of Canada.

Let's start with the interesting fact that federal transfers comprise 17.2% of the provincial government's revenue. Toss in a few dollars to fix the mythical fiscal imbalance, and we're easily looking at 20%. Combine this with the fact the average Canadian taxpayer is unlikely to keep supporting a Quebec that's a nation in more than name, whoever is running Quebec in this hypothetical future has serious fiscal issues to deal with, especially as Quebec already carries the highest debt load in Canada (44% of GDP).

Over the last decade, Quebec has managed the smallest productivity growth of any province, at only 1.3% a year. This is the source of the majority of per-capita growth, since capital accumulation is subject to severly diminished returns, mostly due to the large amounts of capital already in use. However, this is tolerable. But the story isn't finished.

Quebec is in further trouble due to their demographics. Long story short, in less than two decades, they're looking at negative population growth, even barring substantial immigration, which is unlikely. See, for example, Herouxville. Finally, the aging population is going to only increase its already-insatiable demand for health care and other government services.

So, we've got debt, compounded with fewer workers supporting an increasingly elderly population, that would have to voluntarily sacrifice 20% of its revenue to achieve a goal with questionable motives in the first place. This isn't even counting the currency issues and business outflow. Montreal still hasn't recovered in a corporate sense from the referendum scares.

The only thing that makes me hesitant to prescribe a soothing rest for federalists is our history. We have a peculiar habit of venerating a man that did his very best to wreck the economy through truly massive government spending, such that he nearly brought the country to the point of declaring bankruptcy. I speak, of course, of Mr. Trudeau, whose economic record should be enough to make even his fiercest defenders blush crimson.

And he, after all, was from Quebec. Sadly, economic rationale isn't ever going to be a compelling reason on the seperation issue. I would, however, be confident that if Quebec ever does become a nation in more than a symbolic sense, the honeymoon will end quickly with pleas to jump back into the Canadian fold.

Abstract

For those of you who don't know who I am, I'm currently an honours economics student at Memorial University (of Newfoundland), with doctoral ambitions in due course. Hopefully, I'll get around to expressing some of my research and other ideas in the realm of economics on these pages, because most of my friends don't want to read about them in my other blog.

Further interests include running, cycling, video games, D&D, and writing. Research-wise, my previous work has centered around growth theory, though I can't decide between the theoretical endogenous work and empirical studies, except for a strong dislike of distributional issues.