Tuesday, February 26, 2008

Budget Review

You can find stories on the federal budget anywhere, so I'll refrain from linking. Overall, I like it. Like many economists, I wish we hadn't cut the GST, but what's done is done.

Frankly, what I was most afraid of was large handouts to manufacturing, and it looks like that was restrained to $250m. I don't mind at all the tax cuts, and even those are a drop in the bucket.

A fiscal trend that's starting to worry me is that all programs are now created with built-in expiry dates. For example, the Millenium Scholarships ran out the clock, to be replaced by something else. People who want these this year are going to be irritated. The prior allowance for accelerated depreciation expired this year, leaving business with imperfect spreadsheets, etc, etc.

The increasing level of uncertainty being built in to each budget is driving me nuts, especially since two years may not be sufficient time to evaluate a program that had to be created from scratch following budget day.

POSTSCRIPT: Rochester admit, with solid fellowship for five years.

Suzuki's Carbon Tax

In case anyone is wondering, the Suzuki Foundation's carbon tax plan is being exaggerated in their press releases.

First of all, the prediction of $50bn is in 2003 dollars - in 2020, at a carbon price of $75. Given that the economy will be much larger in 2020, $50bn of 2003's purchasing power then isn't as much in percentage terms as it is now. $75/tonne is considerably higher than is being talked about now, as well.

Perhaps more importantly, the entirety of these carbon tax revenues are sunk back into the economy to keep it ticking - one cannot squeeze an extra eleven figures out of the economy without something bad happening - so a carbon tax doesn't give the government all sorts of cash to play around with by sheer force of awesomeness. Depending on just how the carbon tax is returned to the economy, the plan either keeps government revenue neutral, raises it "slightly" or depresses it "somewhat".

Buried deep in the pages of the report, they also cop that the tax would likely be somewhat regressive. Now, I still think it's a great idea - one ideally implemented in tandem with as much of the world as possible, but Suzuki is being a little disingenuous.

Sunday, February 24, 2008

Happy Birthday!

That's right, Stackelberg Follower celebrates one year today. It's been fun, I anticipate continuing, etc etc etc. I don't think much more needs to be said. (I promise that holiday paper will come eventually.)

Thanks to everyone who reads this space.

POSTSCRIPT: Yale reject. Sigh.


UPDATE: Following laptop breakdown, expect sparse blogging until it is repaired at some point in the future.

Friday, February 22, 2008

Government Advertising

I might be the only one, but has anyone else noticed a recent surfeit of government-sponsored ads saying that "a great work experience abroad might be closer than you think"? Seems to be encouraging people to seek work opportunities overseas.

What's the rationale? We don't have surplus labour, and these ads aren't free. Maybe they think there will be a high rate of return to Canada, with accompanying spillovers? Who knows. Personally, I'd axe the program.

NOTE: The ad in question has kind of a sing-song tone; "this could be your friday night....and your monday morning". I'd be indebted for a video link.

Thursday, February 21, 2008

Rethinking Comparative Advantage

I was watching the curling last night when a thought struck me. Our trade theory is generally premised on comparative advantage. This has certain merits. It has certain flaws.

Take two goods, A and B. Korea, China, Egypt, etc, etc, etc, may be able to produce both of them more cheaply than your favourite OECD country. Ricardo would have it that pareto-improving trade occurs as each country produces more of the good in which they have comparative advantage. Blah blah blah blah blah. We've heard this before.

Consider a world economy with a practically infinite number of industries, and firms restrict themselves to a single industry (or a small enough number that the fraction is negligible). Firms are non-cooperative. None of these firms care about comparative advantage - only absolute advantage.

Further suppose that the world is operating at less than full capacity (inside its PPF) - lots of unemployed, poor people with minimal capital. Realistic. Globalization suddenly makes capital less sticky. Each of our firms looks only to its own bottom line and relocates to the poorer, less costly, countries, ignoring the potential comparative advantage relationships. Firms don't care about the global planner perspective, only the absolute view.

I'm trying to reconcile this with other constraints to see if an 'overshooting' position is possible - whether we can observe in the short run an exodus of production to less developed countries above and beyond what we would in the very long run equilibrium in which comparative advantage holds strongly. This en-masse move of capital will realign factor prices and whatnot, and I think it relies upon very sticky prices/wages in rich countries. Unfortunately, I have no rigorous line of thought, it's all graphs and no equations. Interesting, though.

POSTSCRIPT: I forgot to mention the drawback of the BC carbon tax. If leaving the climate-change file to the provinces leads to a mishmash of different taxes, regulations, etc, that is a problem.

Wednesday, February 20, 2008

Leading Indicators

Statistics Canada's leading indicators report looks good.

Notables include predominately an increase of 3.1% in manufacturing (manufacturing!) orders in Januaray from December, but also an upwards revision to the December data in several unmentioned areas.

The monthly release of the Canadian Economic Observer contains reminders of the good things, but no new data, I think.

Remember the unemployment rate went back down in January, and inflation is down so there's room for monetary stimulus, even if we probably don't need it.

DIGRESSION: On the topic of inflation, there was an interesting paper released by the Bank recently about the cost of pushing inflation down below 2%. One conclusion is that this will result in us flirting with the lower bound of nominal interest rates much more often, with accompanying negative consequences. Hadn't thought about that before.

British Columbia Joins the Pigou Club

Yesterday's BC budget lays down a carbon tax; $10/ton going to $30/ton for 2012.

I approve. They say it will be revenue-neutral, but that's unlikely. I imagine there'll be a bit left over. It's also not clear which types of taxes were cut to return the program income to business and low-income families, but at least they are cutting taxes as opposed to increasing G.

Unfortunately, the carbon tax only applies to fossil fuels directly, which will result in distortions: oil-based plastics, for example, made in China will not be hit by the tax at all, (I think), putting British Columbia business at a little disadvantage. There are some nice tables at the bottom projecting what extra costs will be imposed on drivers, for heat, etc, under the tax.

UPDATE: I'm on the waitlist at Minnesota. "You are currently one of the top students on the list and we anticipate, based on past experience, that we will be able to make you an offer at some point."

Sunday, February 17, 2008

Rate of Time Preference

(Very) oddball idea: How is the value you place on delaying your date of birth related to the rate of time preference?

For example, it's worth a lot to me that I was born in 1986 and not in 1132. A lot. In fact, my willingness to pay is severely distorted because I would be willing to forego considerably more wealth to be born in 1986 rather than 1132 than my current total net worth.

I wouldn't go back for a million. Since (1.0163)^(1986-1132) =~ 1,000,000, does that mean my rate of time preference is at least 1.63%?

Note this calculation is, in my belief, fairly closely approximating the intrinsic nature of the rate of time preference, and not at all the discount rate. Of course, we're invoking ceteris paribus all over the place, particularly when it comes to social aspects.

POSTSCRIPT: Still no admits. :/ No rejects either, though.

Friday, February 15, 2008

Diononomics

It's rare we see (borderline) supply-sidism from the central-left. From The Globe:
Mr. Dion said his windfalls-for-potholes proposal would not disrupt the goal of reducing Canada's federal debt so it only amounts to 25 per cent of economic output by 2012.

”In fact, it may accelerate it by generating economic growth,” the Liberal Leader said.

No. If the government has $10, it can pay down the debt by $10. It cannot spend that $10 on fixing potholes and expect to generate more than $10 (let alone more than $10 in present value) in taxes or other government revenues to "accelerate" the debt repayment schedule.

Admittedly, Dion is hedging a little bit, talking about the debt-to-GDP ratio. Can growth-generating 'fiscal stimulus' actually lower debt/GDP? Well, not sustainably. Presumably nobody believes that infinite government spending leads to a debt/GDP ratio less than some arbitrary epsilon. What about a little bit of fiscal stimulus?

Net federal debt = $508.1 billion.
Nominal GDP = $1,321.4 billion.

So what Dion claims is that the debt-GDP ratio would be lower if money was spent rather than applied to the debt, or mathematically, (508.1 - x)/1321.4 > 508.1/(1321.4 + f(x)), where f is our multiplier function. Take x=1, and we can compute Mr. Dion's beliefs about the size of the Canadian fiscal multiplier. We'll give him some more credit than is due and restrict ourselves to short-run thought because he's talking about a 2012 target. I don't think many people believe increased government spending causes long-run higher GDP.

Some calculator work gives me that the multiplier must be at least 2.6 for the above inequality to hold. (Which some calculus-loving folks might note is simply the inverse of the debt-GDP ratio.) This is not a reasonable result.

I'll cut him a little bit of slack, because introductory macro examples always have multipliers around 3, however unrealistic that is. However, there's now solid evidence that Mr. Dion's grasp on economics is less than sound - though there's nobody I know of up there who has a near-spotless economic record.

POSTSCRIPT: Greg Mankiw has a good idea: tax people as individuals, not family units. Not only does this cater to the collapsing defintion of 'family', but it's probably more efficient.

Thursday, February 14, 2008

Self-Discovery

In the development literature, information externalities represent the value of a good idea about what can be effectively produced in a certain region above and beyond what the person who thinks up this bright idea reaps.

Here's an excellent example, appropriate for today. Five years ago, the Ethiopian flower industry exported $159,000 of flowers. In 2008, the industry is projected to export $166,000,000 of flowers. Article here.

In what some will find repugnant, the government had a role to play:
The government offers incentives to both foreign and Ethiopian investors, including a five-year tax holiday, duty-free import of capital goods and a lease price of just $18 a hectare per year for land. The government also offers loans of up to 70 percent of start-up costs.

The free-trader in me thinks this is bad. The competition-lover part of me thinks there's nothing wrong with governments competing to land industrial clusters, especially relevant in light of new research on clusters and spillovers.

If anyone has any bright ideas about what rural Newfoundland could produce (my gut feeling is such products don't exist), feel free to comment.

Tuesday, February 12, 2008

Bad Economic News

Should we be worried? The prototypical countercyclical industry - booze - just posted record profits.

The idea being, of course, is that people will drink just as much, if not more, during a recession to assuage the pain of being forced to listen to economists more than usual until the recession ends.

The other thing I've noticed is that I really dislike the development literature. Growth dynamics? Trade? Love it. Development? No. There's no elegance and I find it very subjective. Perhaps something better left to Rodrik's MPAIDs rather than academic economists. One lesson from the honours project, anyway. More on my dissatisfaction with its direction sometime later, probably if I finish writing it and still feel the same way.

ADDENDUM: Today's Globe (no free access) used the term 'crowding out' in an economic sense today, referencing the public investment in the 2010 games. Hadn't heard that term in the popular press before that I can recall.

Friday, February 8, 2008

Labour Force Survey

Here at what I sometimes think should be called the Statistics Canada Review, we take a break from writing our honour's essay to comment on the LFS release.

Now, you can read all about the fact that it was strong on your preferred newswire. Those who have assiduously followed this blog for some time will be aware of the drum I was banging with respect to labour issues: all the employment is public-sector, by definition unsustainable.

Well, today reversed that. A decrease in public sector employment of 3,800, and an increase in private sector by 76,600. I would regard this as a positive thing. It will be interesting to see if the trend continues, but it's such a strong move in one month that I take a degree of satisfaction in it by itself.

NOTE: Worthwhile Canadian Initiative quotes me liberally on Mark Carney. Worth your time. Will 'Carney put' become as famous as 'Greenspan put'?

Wednesday, February 6, 2008

Sigh

“You all think [economic] growth and change is normal. It’s not.”
...
Suzuki connected the environment to the economy, explaining the trouble he sees in mainstream economists’ call for unbridled economic growth.
...
He criticized the short-sightedness of economists and their constant need for increased growth, which will eventually be impossible. “We live within the biosphere. It can’t grow, it’s fixed!” he exclaimed.

Mr. (Dr?) Suzuki could stand to learn some more economics. Even if you believe that there is limited substitutability between natural and physical capital, see his third point, there's no reason to bash increasingly more efficient methods of turning natural capital into outputs. This is economic growth, and it affords us more consumption while consuming fewer natural resources. If you're against this, well, I'll be polite and simply say that your preferred social indifference map is bizarre beyond redemption.

Now, don't get me wrong. I do think we need to address climate change and maybe even whatever other issues Suzuki currently cares about. But efficiency and economic growth are fundamentally the same thing. Yet, one gets cast as the bogeyman, and the other is praised to high heaven.

Courtesy of McGill Daily, HT: Western Standard.

Tuesday, February 5, 2008

A Matter of Perspective

Mark Carney has been governor of the Bank of Canada for a couple days without making any headlines. This is considerably better than the alternative.

Sure, we all have some questions about the type of central banker he's going to be (among other questions; assuming he didn't take five years for his Master's, how'd he kill time?). But speculating as to his character is fruitless, and he should be given the benefit of the doubt. I want to address a more general question.

I remain unconvinced that investment bankers should be running the central bank.

Now, I don't have a pathological hatred that most of them will likely earn more than I ever will if I end up in academia. But I remain unconvinced that anyone who is fundamentally part of the investment community should be running the BoC.

Maybe I should justify this belief? I'll give it a shot. The investment community is a very small part of the real economy. Yes, financial services are the biggest things in the economy, by market-cap, TSX weight, or whatever. And yes, I'm pretty sure a lot of banks add to the bottom line by playing with exotic trading instruments, but their fundemental strength is derived from the average Canadian who is happy with low-cost index funds and fixed income.

It seems that most investment types take this sort of news poorly. I mean, look at the American whining to rescue equity markets - whining which was indeed sated. Slate has a good article on this: The toddlers who are running the global economy. There is no law that says speculative losses will derail the economy, and I don't think they can, really.

Now, I'm pretty sure even if there come times when Carney caters to the TSX more than I'd personally care for, this doesn't mean the big bad seventies are coming back. By no means. But I'd much prefer someone who can push an agenda I think would be much more profitable in the long run than bailing out Bay Street; things like the stability of the time-path of prices.

(Another reason I'm concerned is that interest rates seem to be trending lower over time: at what point do we start becoming worried that there won't be enough fuel in the tank? Going into macro troubles with the bank rate at, say, 3%, doesn't leave much room for monetary stimulus.)

Anyway, I have no idea whether Mark Carney will use his post to grow investments rather than do other things. But given the nature of his comrades, I can't help but feel there's a much better chance for it than under Dodge.

POSTSCRIPT: I've tried to write this post at least six times by the drafts I just killed, and it's still not how I want it. The drift should be accessible.

POST-POSTSCRIPT: Super Tuesday not proving as decisive as thought, eh?

Riddle Me This

So, I'm happily correcting introductory micro tests while watching the Habs duke it out with the Sens. This test is really bad. 30% or so.

And then, on the last question, instead of answering it, they put down the taylor series expansion for cosine.

No, I don't understand, either.

Blogosphere Update

For those of you who are only here for the economics, you can probably skip this post. Expect commentary on Dr. Carney in the near future, though.

Okay, after a couple of comments and a couple of (angrier) emails, let me clarify. I'm not suggesting I am the proprietary owner of whatever colour scheme Blogger calls this, nor that people should go change their own blogs, nor that my preferences are dominant in what is considered a good blog. We collectively write in order to satisfy our own tastes, otherwise we wouldn't be here in the first place. I can't recall that microeconomics ever passed judgement on people's utility functions, and people are free to write many things that do not mirror my preferences. Indeed, if there was an army of economics bloggers out there producing content I could not criticize, I would not be here. (There was no intent to offend, check the tags.)

I was, however, made aware that there are yet other blogs who share this (or a somewhat similar) colour scheme. Given the passion which has been displayed towards this set of colours by a number of people, perhaps a degree of self-organization might be called for? Maybe someone should think of a snappy shorthand for 'generally amateur economists who blog prolifically using green, orange, blue, and white colours.' Post it on your respective sidebars. Cultivate loyal followers. It's probably more productive than sending me more email.

POSTSCRIPT: A nice statscan paper released in today's Daily. I think I'm going to use it for my honours project.

Monday, February 4, 2008

Again?!

Yet another economics blog steals my colour scheme. (Full disclosure: Unknown to me at the time of founding, the Bayesian Heresy was before me, and maybe there are others.) Seriously, people. C'mon. This one, however, is Canadian.

Of course, this one was also recommended by Marginal Revolution, so I'm sure it's now the most famous Canadian economics blog in the world.

Short review: Could use more economics and a bit more rigour. I doubt it'll make the sidebar. I heartily encourage more Canadian content, though, even if I do loathe the CRTC.

UPDATE: I've also pruned the sidebar.

Saturday, February 2, 2008

Things I Did Not Know

Generally, I abhor posts which are comprised wholly of quoting someone else. Many economics blogs are guilty of such. I hope you'll forgive this indulgence. However, I was entirely unaware of this:
Contrary to popular belief, "the dismal science" did not acquire its name because of Thomas Malthus' gloomy predictions. The title was bestowed upon us in 1849 by Thomas Carlyle, who attacked John Stuart Mill and his fellow political economists for their "dismal" support for emancipation, and their insistence that former slaves, women, even the Irish, were all equal.

That's Tim Harford, writing for Slate.

Not very dismal at all.

Car Sales

Well, I don't particulary pay a ton of attention to many industry-specific statistics when I wonder about where the economy is heading, but Jim Hamilton (of Econbrowser fame) does. Specifically, he has a regular feature where he talks about car sales.

Were he living in Vancouver instead of San Diego, he might be pretty happy about the very strong data on January car sales.

Note that we're talking January 2008. I have no idea how the data were compiled that quickly, but I award props for doing it that fast. Since the US only really started talking recession in January, this might be a better indicator of how much Canada cares than would be the just-released November GDP data.

Apparently, we don't care much.

Friday, February 1, 2008

Microsoft's Discount Rate

Everyone loves the back of the envelope. So, let's make use of it.

Yahoo turned out $205.7m in profits last quarter. So $822.8m a year. Now that means Microsoft is paying $41.7bn. What sort of discount rate rewards this valuation? Well, if it's zero, it's already over fifty years to pay back the investment. Bill Gates (or whoever runs Microsoft) is not buying Yahoo to give the balance sheet a bump in 2060. Trust me on this.

So, what kind of synergies are we expecting from this deal? The Treasury Board of Canada recommends a 10% discount rate for public project evaluation. Let's work with this, even if it's likely an underestimate of Microsoft's discount rate. Microsoft doesn't worry about the rate of time preference. Public policy does.

So, 10%. How far will $2bn in benefits (e.g. $1.177bn in synergies + $0.823bn in profits) go? Well, even if we assume an infinite horizon, the NPV of that stream gets us barely halfway to the price tag. And I'm hesitant to go below 10% discounting. So we're forced to conclude Microsoft thinks Yahoo brings more value. How much?

Well, $3.79bn in synergies, annually. And then we only break even over an infinite period. Raise your hand if you think that Yahoo's assets can produce five billion dollars a year for Microsoft. It's only in that region that the purchase starts looking good.

POSTSCRIPT: Gee, I'm going to feel like a moron if these numbers are wrong. If they are, though unlikely, I blame it on the economics mixer this evening. Drinking and discounting don't mix.

NOTE: Apologies if a degenerate copy of this post ended up in your RSS aggregator. Accidentally posted.