Dutch Disease

In light of the price of oil collapsing to $36/barrel ($80 is the break even point for most Oil Sands oil in Canada), I thought it was worth revisiting this article on Dutch Disease, originally published in May of 2012. I’ll have more on the Canadian economy and how oil prices are affecting everyone else soon.

It seems a lot of people don’t know what Dutch Disease is. Here’s the short:

Dutch disease is when you sell a lot of resources, which increases your currency’s value. So if you discover a lot of oil, or oil becomes a lot more valuable due to a shortage, but you can produce tons of oil from the tar sands, you can experience Dutch Disease.

The consequence of your currency being worth more is that products you manufacture cost more for anyone outside your country. So, if Americans want to buy Canadian goods, it costs them more when the US and Canadian dollar are trading at about even than when the Canadian dollar cost only 80 cents American.

If something costs more, people will buy less of it, or they will stop buying from you entirely and buy from someone else who is cheaper.

What happened to the Dutch is that their manufacturing sector collapsed. What Canada’s NDP leader Thomas Mulcair is saying is that Canada is suffering from Dutch Disease. He says we are losing manufacturing jobs due to the higher value on the Canadian dollar caused by all the oil from the oil sands we’re shipping out of the country, which raises value of the Canadian dollar.

I observed, many years ago, that the Canadian dollar had become a petro-currency. This is now inarguable.

It is also virtually inarguable that Canada is losing manufacturing jobs due to the higher dollar. It’s just arithmetic. Unless you think price has no effect on sales, you can’t argue otherwise without creating excessive contortions.

Does this mean that Canada is suffering from Dutch Disease? It depends where you put the margin. One study, funded by the federal government, found that:

“We show that between 33 and 39 per cent of the manufacturing employment loss that was due to exchange rate developments between 2002 and 2007 is related to the Dutch Disease phenomenon,” says the study.

I am unaware of studies covering the subsequent period, and I don’t know if the study was correct. Personally, I suspect it’s higher than that, but I haven’t run the numbers myself and I probably won’t (unless the Feds want to pay for my time).

But, again, the argument is simple enough. Unless you don’t believe in higher prices reducing sales, and reduced sales leading to job losses and company closures, you can’t really argue that the oil sands aren’t hurting manufacturing. It’s just that simple.

The next question is: “Should we do anything about it?”

Canada has traditionally had what is known as a “mixed economy.” When it comes to exports, we have both manufacturing and resource sectors, the latter of which oil is just one part. Resources experience boom and bust cycles. There is always another resource bust around the corner. Always. No resource’s prices stay high forever. When resources are doing well, they support our exports.When they’re doing badly, manufacturing takes up the slack.

As with any such oscillating economy, what should be done is that when one is booming, it subsidizes the other. We don’t want manufacturing destroyed during high resource price periods, because there will always be low resource prices in the future. So we tax the high resource prices and we subsidize manufacturing. When resource prices collapse, the manufacturing sector subsidizes the resource sector.

If we allow the manufacturing sector to become badly damaged, it cannot be easily rebuilt when resource prices collapse. Nations built entirely on resources are, and will always be, subject to economic collapse when the resource prices collapse, and, again, they always do–the only question is when.

Mulcair has also talked about value-add and that’s worth discussing. Shipping raw oil, raw logs, and unprocessed fish means you get the lowest prices possible and less jobs. Value-add means you refine the oil in Canada and sell it. You turn the logs into paper or 2x4s in Canada. You can smoke the salmon in Canada. This provides jobs and the end goods sell for more. It may be that processing “in-house” will increase the price slightly compared to outsourcing the processing to the US or China, but that costs less sales than it would for the equivalent manufactured item.

Why? Because resources are finite. There is only so much oil in the world at any given price point. There are only so many salmon, especially wild salmon. There are only so many trees, especially trees that are good for construction-grade timber.  Other countries will generally buy these resources anyway, because there is nowhere else to get the product. Sales may decline slightly, but profit often increases and so do the number of Canadian jobs.

When there is a bottleneck, as there is in oil production right now, especially, you can say, “No, we’re going to process it here.” If other nations don’t like it, tough. They aren’t going to stop heating their houses and driving their cars to their suburban homes. That is not happening.

So if you can extract a bit less oil, make more money overall, and have more jobs, why not do so? That’s what Mulcair means by “value-add.”

Finally, let’s move to cap and trade, which is what Mulcair wants to do with the tar sands. Cap and trade means you cap the amount of carbon emissions allowed by oil sands extraction, and you allow people to buy and sell the rights to make those emissions. You also tax those trades and emissions. You then use the money earned to subsidize manufacturing, research, and whatever else will support the future of the country when oil prices collapse, which, again, they will, because resource booms always end, it is an existential certainty.

Once upon a time, the Canadian Maritimes were a resource boom area. They sold fish, but, more importantly, they sold trees which could be made into masts, an incredibly valuable commodity. Today, with pardon to my Maritime brethren, the Maritimes are in semi-permanent depression.

This is the future that Alberta faces. They should want to be taxed, and they should want that money reinvested in other sectors, because those sectors are Alberta’s future long after the oil boom ends. And the massive environmental destruction is incurring massive costs with which future generations will have to contend, long after the boom days are gone.

Canada’s economy has worked, and we have not become Argentina (the country we would have been compared to before WWII) because of our mixed economy. It is worth protecting, and it is necessary to protect, if we want prosperity not now, but ten years, 20 years, or 50 years from now. If we care about our children, or even ourselves 20 years from now, we must deal with the effects that the massive exploitation of the oil sands is having on our economy and our environment.

Dutch disease is just arithmetic. It is real, and it can devastate the future of a country. Non-renewable resources are the epitome of found money, and what you do with found money is invest it in something productive–something that will yield a return, something which will support you once that found money runs out.

This is Canada, and this is our future we’re talking about. If we actually care about the children we claim to love, we’ll acknowledge the simple arithmetic of what a high dollar does, and we’ll act to mitigate the damage.

(Update: Antonia Zerbisias had an article in February on Dutch Disease studies which is worth reading.)

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How Harper and the Conservatives Broke the Canadian Economy

The Canadian economy, since about 1890 or so, ran as follows.

  • When commodity prices were low, we sold manufactured goods to the rest of the world and subsidized commodity producers so they weren’t wiped out.
  • When commodity prices were high, we relied on selling them, and we subsidized manufacturers so they wouldn’t go out of business.

A manufacturer who responds to a lower Canadian dollar by increasing production increases their costs. That means that when the dollar rises, their cost structure is too high for them to survive if they are not subsidized.

There are lots of ways to subsidize manufacturers, including directly, through tariffs, currency manipulation, and so on.

Commodity production doesn’t require as much subsidy, with some exceptions. There are projects which cannot easily restart, and primary processing (canning, pulp and paper mills, lumber mills, refineries, etc.) can have significant start time requirements. This means you don’t want them to go out of business. Fewer employees, with the government supporting the out-of-work employees is fine. Actual loss of capacity is not.

Meanwhile, unemployment insurance (now called EI) is generous to whichever part of the country is in recession due to the commodity price cycle, so people don’t leave and go to the high cost area unless there are actually jobs, while the areas with lots of jobs are less generous so that people who aren’t employable there even in good times are encouraged to go to places with lower costs of living.

This is a fairly simple balancing act, though it can be complicated in detail. It has been made more complicated by restrictive “trade” deals which outlaw many types of subsidies, but it is essential to ANY country with a large resource sector which also wants to have a significant manufacturing sector.

Harper ended this. He did not properly subsidize manufacturing. Those manufacturers who, during the last period of a low Canadian dollar, expanded production, were wiped out. This is bad not just because they were wiped out, but because it means current manufacturers know they shouldn’t expand if it increases structural costs during this drop in the Canadian dollar, because if they do, when the dollar rises again (and it will), they too will be wiped out.

Harper has managed, thus, to eliminate much of the stimulative affect of a low Canadian dollar on manufacturing.  Genius.

Also, being, in ideological terms, an American-style “conservative,” he used their methods for artificially inflating an economy: He encouraged a housing and stock market boom. Canada’s housing bubble did not burst in 2007/8, due to concerted government action. (We basically guarantee almost all mortgages.)

Such financial games create fake growth–they are based on increasing asset prices un-anchored to actual productive increases or income increases, and transfer money from the young to the old and the poor to the rich.

They work for a time, much as stimulants work on the human body, then the user crashes. The longer one stays stimulated, the worse the damage, and long-term abuse can destroy a person or country.

I should point out (as MFI noted to me privately) that the Canadian Conservative party is actually a radical party of the right. Conservatives preserve the old; the mixed economy strategy was over one hundred years old, and had worked during that time to make and keep Canada one of the most prosperous countries in the world.

Only a moron, and a radical, ends a successful strategy that has not yet failed nor showed signs of failing.

This is the self-inflicted tragedy afflicting Canada today. Let us hope that the Conservatives are not re-elected (due to our first-past-the-post system).

We accept Democracy because it creates legitimacy. It is a way of saying, “That was fair, even if I don’t agree.” This does not meant that democratic methods always produce optimal or even good results. Canada, Britain, and Australia are all discovering this, as are many other countries.

There are many reasons for this, but in the next post, I will discuss is how constituencies for policies and parties really work.

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Fourteen Points on the World Economy as the US GDP Drops .7 Percent

So, while it generally takes two quarters for a recession to be so-called, it may be that the recession is here.

Let us recap the non-recessionary period:

  • The percentage of people employed in the US never recovered;
  • More than the total amount of growth went to the top four percent or so, with most of that going to the top one percent and most of that going to the top .1 percent;
  • The stock market had a huge bull market, even though the economy wasn’t working for anyone but the top few;
  • Outside America, the “south” of Europe never recovered in any meaningful way, and most European nations generally did badly for most of their citizens;
  • Various resource nations did well for a time, but their success was based on demand from developed nations or, more commonly, from China;
  • Chinese demand collapsed some time ago;
  • China has been printing more money than either Japan or the US; much more;
  • Japan’s “unconventional monetary policy” has been a roaring failure–if its intention was to get the Japanese economy going again;
  • The collapse in oil prices last year helped the US briefly, but because the rest of the world has rolled off a cliff and because those gains couldn’t go widespread, it was only briefly (this is as I predicted at the time);
  • Canada’s economy was hurt badly by the oil price crash, and because the mixed economy has been critically injured, there is very little else to hold up the economy;
  • Both Britain (or London…almost the same thing) and Canada have huge housing bubbles, and those bubbles, with the addition of financial games, are all that holds those economies together at this point;
  • Britain never actually recovered either, for the majority of its citizens–just a large enough minority to elect Cameron;
  • Australia has tied itself massively to resource extraction on the back of Chinese demand. There is no meaningful Australian economy whose fate is not tied to China.
  • India’s development is hollow neo-liberalism, and has seen an actual decrease in per capita calories. It is consumptive and limited to a few key areas.

Let me put this another way: The developed world is in depression. It has been in depression since 2007. It never left depression. Within that depression, there is still a business cycle: There are expansions, and recessions, and so on. Better times and worse times.

While cheap solar is a big deal, it is not yet deployed sufficiently to break the “widespread demand will crash the economy through oil price increases” problem, and this is exacerbated the by the deadlock rich elites have on most of the world’s politics and economic policies, since it is not in their interest to solve problems, but only to become more rich.  Not that solving problems is something they mind, if it makes them richer and keeps everyone else poor.

The world still has very few problems we couldn’t solve if we acted on them in a productive way (though some, like climate change and the great die-off, are beyond the point of no return for catastrophic damage), but that’s largely irrelevant while public policy remains in the hands of oligarchs. There is some reason for hope, as left-wing parties rise in Europe, but those green shoots are still nothing but green shoots.

I suggest that my readers who are able to make money do so now, you may soon find that you can’t. This is especially important if your employment is precarious.  Take care of yourselves, and take care of each other, unless you are lucky enough to live in the few rich, social democratic states left, you cannot expect much aid from your governments.

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World Economy Heading for Recession

That seems most likely to me. China has been stalling out for some time, Japan’s “stimulus” didn’t work, Europe has been suffering under austerity for years (despite some minor good news), the other emerging economies are doing badly, the petro-states have been hammered by the drop in oil prices and now the US job market has fallen off a cliff after a few months of excellent results.

Those results were driven almost entirely by the drop in oil prices, but were unsustainable with most of the rest of the world economy in the doldrums.  Low oil prices should be generally good for everyone but oilarchies, but their effect is muted (in comparison to past decades) by the oligarchical and oligopolistic nature of our economy.  Put simply, there are too many barriers to entry for new businesses to arise and even lower oil prices don’t put enough money into ordinary people’s hands to create enough new demand for long enough.

In an economy where individual sectors tend to be controlled by a few companies, and where those companies are already awash with money, more money means little; those with pricing power will simply take it away and add it to the stockpiles of money they already aren’t using for anything productive.

The standard solution to the situation we’re in now would either be to implement very high corporate and individual marginal taxation (if private actors won’t spend, take the money from them) and/or to break up oligopolies and/or to heavily regulate them so that they aren’t sopping up all the excess cash in the economy.  (Why are app stores still allowed to take 30%, for instance?)

Since we refuse to do any of those things, and since we only print money to give to rich people and corporations (thus pooling money at the top, doing little for widespread demand), the western economy (which includes Japan) remains stagnant. You may get a few good months here and there, but that’s all you’re going to get.

Labor Force Participation Rate Graph
Labor Force Participation Rate Graph

Let’s discuss some individual countries and regions. First, take a look at the above labor force participation rate graph. It shows the number of people either looking for work or who have work.  Can you tell that there were a few good months?  That’s how good the American economy is after your few good months. It didn’t really improve much, it just went horizontal.

You need a few years of such job results to make a difference.  And that’s before we get to the fact that most of those jobs were low-paying and that all of the gains of the last economic cycle have gone to the top three to five percent of the population (depending on how you slice it).  And the top 1% has done better than 3%, the top .1% better than the top 1% and so on. This is your economy on unconventional monetary policy.

Japanese monetary base and inflation to early 2015
Japanese monetary base and inflation to early 2015

Ah, unconventional monetary policy. In Japan they call it “Abenomics.”  The idea was to get inflation going in the Japanese economy–get the Japanese to spend and bring Japan out of its 30 year slump. The chart to the right shows how well it has worked.

But don’t think that money has been “wasted!” Abenomics may have done nothing for ordinary people, but it’s helped a lot of rich people become richer. That money went somewhere. In Japan’s case, a ton of it will have gone overseas, with foreigners borrowing for low costs in Japan and then speculating with that money elsewhere for higher gains (or so they hope).

Unconventional monetary policy is, and always has been, about giving money to the rich, wealthy, and corporations. At first, it was about bailing them out after the financial collapse. Now, it’s just about giving them money, lots of money, in a way that the hoi-polloi can’t access.

This brings us to Europe and austerity. Austerity is a wonderful thing, if you’re rich. Public assets are put on the selling-block which you normally could never buy and they are put there for cheap. You get to own more of the economy, your relative wealth increases. While it’s true that one might be richer in a generally prosperous economy, you must remember, this isn’t about absolute wealth. It’s about relative wealth. Better to be somewhat poorer and able to lord it over everyone else, than be richer in a world where the peons don’t have to kowtow to your every whim or don’t have to live miserable, want-filled lives. If the price is a lot more poverty, that doesn’t affect you in any meaningful way.

Not all peons suffer, of course.  A lot of Germans do very well in the current regime.  As the South of Europe suffers under austerity, they’re doing great. The worse the southern economies are, the better for Germany, since it reduces the price of the Euro, increasing German exports. If everyone in the Euro area was doing well, Germans wouldn’t be doing nearly so well. If the price is suicides, widespread poverty, homelessness, and so on, that’s certainly a price Germans are willing for Italians, Spanish, Greeks and Portuguese to pay.

Meanwhile in Canada, there is a housing bubble which kept on going from the point where the US bubble collapsed. Better, inflated prices are guaranteed by the Federal government, so when the bubble bursts, it can cause maximum damage to public finances. With oil prices falling, and with Canada now a petro-state (as I noted almost a decade ago) due to deliberate government policy, those housing prices are looking less and less sustainable.

In the UK, we also have London’s housing bubble (which is to say, the majority of the actual economy of the UK, if you want to call a housing bubble and financial services an economy, which UK politicians do).  This shouldn’t be a surprise, since the UK hired Canada’s ex-central banker to come to the UK and do what he did to Canada: Blow a nice big bubble. The UK hardly has any other economy besides real estate and financial ponzi schemes, so we’ll see how that works out for them.

In general, understand this: The world bailed out bankers and brokers and traders  and they went back to doing what they were doing before. Blowing bubbles. There are CDOs out the wazoo, there are stock market bubbles, there are real-estate bubbles in various places (they just tend to be more localized now, but they’re still huge).

The economy will NEVER be good for everyone until this is changed, but that doesn’t precisely mean this is unsustainable. The elite’s had one fundamental realization and it was this:

“We can print as much money as we want and as long as we make sure it doesn’t get into ordinary people’s hands it won’t blow up the economy.”

Many people expected that unconventional monetary policy would cause general inflation. It hasn’t because the money stayed in the hands of a very few people and major corporations. It did cause massive inflation in the things rich people buy, but not general inflation.

So the rich, and the politicians and central bankers they own, aren’t worried about the various bubbles because they handled them in 2007 and 2008, and they’re sure they can handle them the same way if they burst again. These bubbles may never all burst at the same time again, because if they show signs of doing so, the elites can always just have the central banks print money and buy up assets before they even become distressed.

As long as there is no actual price discovery (and how can there be), there is no real threat to the only part of the economy that matters: The economy of the people with enough money buying up politicians.

Everyone is addicted to this game, even China, which has printed unbelievable amounts of money (more than Japan, America and Europe combined) and has used it to create vast amounts of unused and unusable housing and other boondoggles. China, granted, wants much of the benefits to get to ordinary people (because the Chinese are still willing to riot extremely violently and the Communist party’s leadership knows their lives are on the line), but they’re still playing the late-capitalist game of credit pumping, rather than the mercantilist game which built the Chinese economy. That makes sense, in a way. As China’s customer-economies stagnate, it becomes harder and harder to create widespread growth for the most populous country in the world through simple exports.

The correct strategy would be to start decoupling and move to a domestic market, and in a sense, the Chinese have tried that, but they’ve bungled it on boondoggles. Capitalism of the variety we do today is terrible at redistribution and redistribution is what the Chinese economy needs, in a huge way, in order to boost widespread demand.

So that, my friends, is your world economy on austerity and unconventional monetary policy.  As I predicted right after Obama put out his worthless “stimulus” program in early 2009, for most people, the economy will not recover for at least a generation. It will only recover then if the population is willing and able to rebel, peacefully or violently. If not, we are in for decades of stagnation and decline, exacerbated by the absolute certainty of catastrophic climate change.

And so it goes…

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Falling Oil Prices Are Mostly Bad News

Yes, it’s nice to play less for gasoline and heating fuel, but while some of the decline in oil prices are a result of the new unconventional oil supplies which have come on line, much of it is that the world is going into recession—demand is down from every major economy.  That’s not good.

Yesterdays’ post showed what happened in the US job market over the last 6 years.  It never recovered for most people.  Remember, in terms of business cycle that was the recovery and the boom.  Those were the good times.

As for oil, the drops are to many conventional oil producers advantage if they can sweat them out. Much of the unconventional oil which came online is not viable below $80/barrel. The viability numbers you see for countries like Saudi Arabia are not their profit break even numbers, pumping Saudi oil costs less than $10 a barrel, rather they are what the Saudi government budget needs.  But the Saudis can handle a few years making less if it send their competitors into bankruptcy.

Remember that in the late 90s oil was under $20 a barrel.  I would want to see oil under $40 a barrel, with excess supply, to expect an economy as good as the late 90s one was.  Remember also that this is not the first time this “run a shitty economy until new sources of oil come on line” play has been tried—while the details were different, this is exactly what Carter, Reagan and the Fed of the late 70s and early 80s did. Temporize waiting for the new oil supply.

But while new oil did eventually come online, notice also that the economy never really got good ever again: you have about 4 good years in the late 90s and the rest is crap (again, for ordinary people.  The wealthy did very well).

Finally, those fools in places like Canada (my home and native land) who thought the good times would never end and that letting the mixed economy (aka. manufacturing) die, are about to reap the whirlwind.

All Commodity Booms End.  No exceptions.  Always.

Repeat that until it sinks in.

The old Canadian economy ran as follows: during times when commodity prices were high the Canadian dollar went up making our manufactured goods uncompetitive, but we used the money from selling commodities to subsidize manufacturing.  During times when commodity prices were low, the profits from manufacturing were used to subsidize the the resource producing areas of the country.

Harper, that feckless provincial incompetent and neo-liberal ideologue, has broken the Canadian mixed economy, which existed before him for over 100 years.  This is probably because he’s an economist, meaning he was indoctrinated to believe neo-liberal dogma.  Or perhaps he’s just a fool, hard to say.

The only Federal leader who understands the Canadian mixed economy is NDP leader Mulcair (Justin Trudeau, while has nice abs, is not very bright, unlike his father, who was a genius.)

It might not be too late to rebuild Canadian manufacturing during the oncoming recession.  My fellow Canadians, think carefully about who you vote for, especially those of you in Southern Ontario. Your housing values will not stay where they are if Canada’s entire economy is based on boom and bust commodity cycles and there are no jobs except in resource extraction, flipping burgers and finance.  Mulcair tried to warn you, years ago.

Learn.  Or reap the consequences.

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Sweden v. Canada: Taxation and Inequality

Ok, so Stephen Gordon in MacLeans feels compelled to weigh in on taxes, to suggest that the Nordic countries just redistribute money from the bottom 99% to each other to maintain equality and so Canada should increase its GST and give money to the poor and middle classes.

It’s true that Nordic countries redistribute a lot more than Canada does, but let’s examine what that means (these #s are slightly wrong as I’m taking them from different, though recent years, but they are within a percent of correct):

The Social Security tax rate in Sweden is about 30%.  This is paid by the employer, if not self-employed.  This is either a tax on the employee, if one assumes that the employer would have paid the employee this if not taxed), or it is a 30% tax on all labor costs for a corporation, and for most corporations, labor is the largest cost.

Pension insurance costs another 7%.  It’s capped, though, but since Gordon is only dealing with the bottom 99% we can ignore that.

The standard VAT rate is 25%.

70% of workers are unionized.

The top tax rate is 57%.

Corporate tax (I’ll use Gordon’s figures) is 26.3%.

Canada: Social Security (Canada or Quebec Pension) is about 10%, between employer and employee contributions.  Remember, the combined SS and Pension insurance tax in Sweden is 37% of  income.

Harmonized GST, in most provinces runs 10 to 15%.  10 to 15% less than Sweden.

Corporate tax rates, both nominal and effective, are so close there’s no difference (unless, of course, you count that employer paid SS tax, in which case Sweden’s are significantly higher.)

Unionization in Canada is about 31%.  Less than half of Sweden’s rate.

Gordon thinks that the best way to deal with income inequality below the top 1% is to increase the GST (because it does less harm to growth than corporate taxes, he claims).  Note that the GST (a VAT) is regressive, while SS taxes (if they aren’t capped) are not regressive.  So Gordon prefers a regressive tax.

What GST rate would we need to increase to, if we held everything else equal but wanted to to have total taxation, as a percentage, equal to Sweden’s?  Canada’s total tax as a percentage of GDP is 32.2%.  Sweden 47.9%. Canada would need to bring in approximately 49% more taxes to match Sweden’s rate.  VAT taxes made up, as of 2009, approximately 11.5% of Canadian tax income.  To use the GST/HST  alone to increase taxes to the Swedish rate would require approximately quadrupling the VAT taxes.  So, in Ontario, the rate would be about 60%.

That’s not happening.

Gordon’s article only deals with income inequality in the bottom 99%, but he notes that you can’t tax the top 1% to pay for transfers, they don’t actually have enough money.  I’ll just note that you don’t tax the richest (really, the top .1%) at massively progressive rates to get money from them, you tax them so they don’t have money to buy up the system, including both politicians and the market.  The US is the paradigmatic case of what happens to your political system when you allow the rich to get too rich, but the same process is happening in Canada.  (You also don’t allow a few media corporations to own almost all media, for the same reason.)

Finally, let’s just cut the bullshit. High progressive tax rates do not decrease growth.  There is no unequivocal empirical evidence that they do.  The best growth in the developed world happened in the 50s and 60s, when the developed world had much higher tax rates on both individuals and corporations.  Much, much higher rates, as in 90% on top income earners (pdf – pg. 17) in many cases, and corporate tax rates were much higher as well.

Correlation may not be causation, but causation w/o correlation is extraordinarily rare.

Corporations invest and hire more people when they have a reasonable expectation of more demand for their products and services.  If there is not enough demand, it does not matter if they have money to spend, they will not spend it.  This isn’t even economics, this is business 101.  The poorer someone is, the more they consume as a percentage of their income.  An affluent middle class, heck a working class that has disposable income, creates more demand than rich people do.

Demand alone is not enough, if there are supply bottlenecks, but the supply bottlenecks we are facing right now are not in money. Corporations have record amounts of money and are not spending it.  When individuals, whether corporations or people, won’t spend, it is the government’s JOB to take the money and spend it, and spend it in a way that will get rid of whatever supply bottlenecks exist.

They must also make sure that an actual free market exists and that no one has pricing power. It does no good to redistribute money if all that will happen is that companies with pricing power will just raise prices and take the money away, meaning no real new demand is created, and thus no new jobs and new real economic activity, whatever the nominal numbers show.

On edit: further investigation shows that almost all of the VAT is returned to low income earners.  This means the VAT functions as a luxury tax, starting about about the middle middle class.  Luxury taxes are on the best taxes, and by luxuries we mean “stuff that’s imported, and especially imported stuff ordinary people can’t afford anyway.”

Yes, Canada has Dutch Disease

Or at least, the Bank of Canada thinks so, though they’ll never call it by that name:

Nonetheless, Canada’s current account was in surplus for many years before the crisis, and is now expected to remain in deficit indefinitely.

The main reason? A currency at parity with the U.S. dollar means Canadian exports are at a disadvantage and will be for some time. Indeed, until companies do more to improve their efficiency to offset the effects of the higher loonie, they’ll remain at a competitive disadvantage. Bank of Canada Governor Mark Carney has highlighted this point for more than a year.

No, really, the oil sector is killing non-oil jobs.  And the Conservatives are bringing in foreign guest-workers to do oil jobs.

This is how the prosperity of a country can be destroyed.

Observations on Canadian NDP leader Mulcair and the politics of class

Last weekend, the federal New Democratic Party (NDP) elected a new leader: Thomas Mulcair, an MP from Quebec, who was a minister in the provincial Liberal government there, before he resigned rather than open a park for development.

Mulcair was the front runner, and his victory was hardly a surprise.  Many NDPers thought that he would move to the center and would abandon left-wing principles in pursuit of power, and a number of key members of the prior leader’s team have left.

I had my doubts, but Mulcair has gone a long way to assuage them in just a week.  First, this, in his first day in Parliament:

Speaking to reporters afterward, he laid out his concerns for the state of the Canadian economy and accused the federal government of neglecting workers as it promotes the extraction of natural resources, mainly in Western Canada.

“That’s driven up the value of the Canadian dollar, made it more difficult to export our own goods. We’re killing our manufacturing sector,” he said. “The way the Conservatives are acting has had a devastating impact on good jobs with pensions.”

There was a lot of whining from Alberta about this statement, but it’s just a fact.  The classic Canadian economy was a mixed one, which combined resource extraction and manufacturing.  When manufacturing does well, resources generally don’t.  When resources do, manufacturing doesn’t.  In the old model this was considered a strength, since it meant that part of the economy was doing well, no matter what resource prices were.  And when one sector was up, it was meant to subsidize the other sector.

Resource booms always end.  Every single one.  The oil boom will end, the question is when.  If Canada doesn’t have a manufacturing sector left when the boom ends, we will become a basket case South American country.  And Alberta will become the new Maritimes (remember, the Maritimes was originally a resource boom area.)

Politically speaking, this is also smart, because the NDP just isn’t going to get a lot of MPS out of Alberta in specific or the Prairies in general.  If attacking the tar sands, and calling for Canada to add value to resources before shipping them out of the country costs votes there, so be it.  The battleground is not Alberta.  Alberta went all in with the Conservatives, and they have to live with that.  There’s no point in pandering to Albertans, it would take a huge shift in voting to gain many more seats.

The places in play are the Maritimes and Ontario, and it is there that the election will be won or lost.  It is Ontario which has been losing its manufacturing due to the high dollar, and the Maritimes has been treated shoddily by the Conservatives as well.  So on both politics and economics Mulcair’s stance is a good one, which appeals to the regions where the NDP can make gains and pisses of people who would never vote NDP anyway.

Then there was this, yesterday, when the Tory austerity budget was unveiled:

“The Conservatives have caused the problem by gutting the fiscal capacity of the government,” Thomas Mulcair, the newly crowned NDP leader, said Wednesday.

“Now they’re saying, oh, gee whiz, no more fiscal capacity in the government, we know what we’ll do, we’ll start cutting the services of the government.”

Oh my, pointing out the obvious.  Conservative tax cuts and reckless spending caused the defict.  But tax cuts for rich people are sacrosanct, so old folks will have to wait till 67 to retire.

And this:

“Everything indicates the Conservative budget will be synonymous with cutbacks and job losses. A few months ago, the Prime Minister promised textually, in this House, that he would not touch pensions, would not cut health transfers to the provinces, would not touch services to the population?” Mr. Mulcair said. “Will the Prime Minister live up to his word, or will he break his promise?”

And then, Harper cut pensions and cut health transfer to the provinces.

Ouch.  That had to smart.

Yeah, I’m liking Mulcair.

One of the things which has distressed me most about the West is that no one on the left has really been willing to hammer the politics of class.  Mulcair, who has also hit inequality, shows some signs of doing so.  It is conventional wisdom that tax increases won’t fly, but the polling data doesn’t support that, at least not if you want to tax the rich and make that clear.  Heck, if even Globe and Mail readers (the primary business newspaper in Canada) want tax increases and more spending, I think we can conclude that it’ll fly (yes, I’m aware of the limitations of that particular poll).  But even the upper middle and lower upper class think that the true rich should pay their share.  Coming out of Quebec, which is somewhat insulated from the political culture of the rest of North America, Mulcair seems willing to play class politics, and seems to know how to do so.

So far, so good.  And as for the budget, Prime Minister Harper isn’t going to get the cuts he wants from the public service without causing great pain.  Nor is cutting other forms of spending going to help the economy.  Harper better get down on his knees and pray to God that there isn’t a major downturn in China, because he’s betting everything on resource prices.  If they crumble, the Canadian economy will go with them.  And so will Harper’s job.

This is opposition politics 101: whatever the government does, you oppose. If Harper’s bet on the resource economy works, then the Conservatives will get another term.  If it doesn’t, the NDP needs to be seen as the party which opposed his policies.  Mulcair is positioning them for that, and doing so in a way which allow him, if he gets in power, to put in place policies which will reward the constituencies he needs to win—everyone not attached to the oil teat.

Meanwhile In Canada the Stimulus Has Already Failed

So yeah, more jobs have already been lost that the 40 billion stimulus bill was expected to create by rather optimistic estimates.  For reference for Americans, the general rule is to multiple everything by 10, so an equivalent stimulus in the States would have been 400 billion.  In other words, the Canadian stimulus was about half Obama’s stimulus.


Ontario in particular is in a world of hurt, because Southern Ontario, Canada’s manufacturing heartland, has been in recession for years.  First it was because of the high Canadian dollar, then it was because of the Big 3 auto companies woes, but either way it’s turning into an industrial wasteland.  The Harper government has no real idea what to do about it (hint: small motors are good for micro generation, lads.  Get on it.)  Nor has the Ontario government been all that useful, though to be fair they don’t have 40 billion to throw at ths solution (about 20 billion of which should have gone to Ontario, since Ontario is taking about half the job losses.)

The US isn’t losing jobs at quite the same rate, but the fate of the American stimulus bill will be essentially identical, since just like the Canadian one it’s too small and put together very badly, because neither Harper nor Obama believe in liberal economic policies in any significant fashion.