Debunking McGuintonomics

So last week Alison Redford the Premier of Alberta asked Ontario’s Premier Dalton McGuinty to show some public support for the Oil Sands, currently facing a heap of criticism from environmentalists. No one knows what Mrs. Redford was expecting as a response, in any case the answer sounded a little bit like “If Alberta didn’t exists Ontario would be better off”. His conclusion was based on the popular belief that the Canadian dollar had become a ‘PetroDollar’ and that it’s meteoric rise had crushed Ontario’s manufacturing base. Now because McGuinty and his family seem to be career politicians we will pardon his ignorance of economics and try to fill some of his knowledge gap.

So McGuinty thinks a high dollar is bad. First mistake. Very broadly speaking a relatively high currency is a mark of wealth. Basically the World wants to buy our stuff more than we want to buy the worlds stuff. Okay so foreigners recognize that we are a nice country worth investing in and who’s products look alright, but if you still believe a high currency is killing jobs in manufacturing well that would seem like a mightily expensive accolade. However Ontario is not innocent in this. Unfortunately the worlds appreciation of fiscal virtuousness is quite lagged to reality by a couple crises. So when Canada starts supplying the World with all our AAA rated (and less well rated but ‘made in Canada’ stamped debt) in an environment where some of the deepest debt markets are not nearly as risk free as they used to be, obviously foreign investors gobble it up our debt greedily. What is the effect of that? well essentially the world values our debt more than our goods and services, so when that appetite for financial assets inflates the Canadian dollar, our exports will suffer (see the US current account deficit/reserve currency status/trade deficit quagmire). Now since Alberta doesn’t have any debt and hasn’t issued some for a while they can’t be guilty on that front. So who is exactly contributing to our soaring Looney from a financial assets trade perspective? The feds are! Alright since much of the stimulus package was spent in Ontario (G8/G20 summit spending, carmakers bailouts etc, etc…) maybe McGuinty should move to accuse the second biggest  new Canadian debt emitter… oh wait a minute, that’s Ontario, oops. So McGuinty’s spending problem is partly to blame for a high Canadian dollar not Alberta. Okay in all fairness international financial assets trade is not the only contributing factor to currency mouvements so let’s move on.

The gist of McGuinty’s argument was that Albertan energy sales are increasing the value of the CAD to the detriment of manufacturing. So he is implying that their is a a negative correlation between manufacturing exports and energy exports. That data does not support this claim one bit! When looking at seasonally adjusted and 2002 chained dollars (inflation adjusted) Canadian total energy product sales have risen by 24% since 2000 and total manufacturing (sum of statscan’s industrial goods, manufacturing and equipment, automotive parts categories) have gone down by 14% over the same periode would imply the Premier is right, However when looking at proportions the increase in energy sales is only of 40 billion yearly versus a 125 billion drop for total manufacturing. So basically if there actually was a one-for-one tradeoff between energy and manufacturing exports energy would only be responsible for ~32% of the decline. However when one looks at balance of trade in those subcategories and asks what percentage of net energy exports accounts for the decline of net manufacturing exports the answer is a measly ~4.5%. So to reiterate if there even was causality (which is not proven) it would be weak at best. Now that we’ve lain waste to McGuinty’s foolish idea that Alberta is guilty for his province’s hard times, let’s bring up one more point.

Ontario is now a have-not province. Ontario received upwards of 3 Billion dollars last year from equalization transfers. Alberta paid in over 8 Billion into equalization. Bottom line Ontario got some money from Alberta to pay for its social services. Methinks McGuinty owes Redford and Albertans an apology, don’t you?

Education Is Not a Right!

Yesterday February the 23rd Montreal was the scene of yet another student protest. An estimated crowd of eight to ten thousand university and pre-university students descended into downtown and blocked some major traffic arteries causing a great deal of distress for the city’s drivers. The students were protesting the upcoming tuition fee hikes that are set to come into effect between this year and 2017. To give some substance to the debate we will take my current university bill as a basis for discussion. My tuition fees for a full course load come in just shy of 2200 per annum, or roughly ~200 per course. These tuition fees are set to go rise by 5% a semester or ~10% a year until 2017. Now I’ve done some spreadsheet tabulating and here are my results: With non-tuition fees currently going up to 789$ and an estimated 80$ book per class my total bill this semester will be 2285$ (give or take a few cents). Now if inflation were non existent and the student demonstration got what they wanted (tuition hike moratorium) the sum of my 3 year faculty of arts economics degree would cost ~13734$, or so says my spreadsheet. At a minimum wage of 9.90 (Quebec rate) it would take me 40.2 weeks of 35 hours (full time employment in Quebec) to pay for my degree. Now, should the government plan be implemented, we would add a 2.5% inflation rate to non-tuition fees and books and the scheduled bi-yearly 5% tuition increase, my semesterly costs would then be uurgh! 3215.5$. This would come out to an eye popping 19272.75$ for the very same degree! or an equivalent of ~45.9 weeks at a then 12$ an hour minimum wage, 35 hour work week.

Admittedly these numbers are for an economics degree where the student is stupide enough to pay all his fees (apparently they’re not all mandatory) and buys all his books new. I feel these numbers aren’t too much of a stretch from the average student so we’ll keep them for now. If the numbers got a little bit confusing here’s the takeaway. A student has to commit to working full time at minimum wage for the duration of his summer just to pay his studies. The added 6.3 weeks of work over a 3 year bachelors program only amounts to an extra 2.1 weeks of work yearly or ~72 hours. This is no reason to go berserk and wild in the streets and causing 2 hour traffic logjams.  The current student loan rate is prime plus one or 4% yearly which means if you covered that whopping 20k of student costs with a loan, it wouldn’t even set you back 800$ yearly. Funding our education today or tomorrow really isn’t the end of the world. Now some people might argue that certain students have god awful parents who kicked them out onto the street with nothing, forcing these poor yet meritorious people to pay for their on schooling…. Excuse me while I wipe a tear out of the corner of my eye… Not! I’ve worked in the restauration business, variously as a Busboy, waiter, bartender over the past 5 years of my post secondary education to the average tune of 45 hours weekly. Guess what I haven’t dropped out of school. If I’d loved my mother a little more and she loved me a little less I could have taken on that budgetary burden 4 times over without even blinking! Of course my liver would have been in a much less precarious state and life might’ve been a little boring.

If somebody can’t find a job in Montreal that pays at least 17$/hour (over 50% more than the minimum) it is because they are lazy sods! If you don’t have a job that pays at least 17$ send me an email I’ll bloody well hook you up myself! In any case the “student life is a hard life” excuse won’t cut it with me it’s a real joke. Most students at the faculty of arts I attend dress poor so much is true, but when they pull out their 60$ a month iphones and 1200$ MacBooks my pity goes down the drain. And don’t even get me started on the thousands of dollars yearly most of them spend on cigarettes, weed and alcohol.

Now that I’ve vented against the stupider argument that is the student budget, let’s turn our attention to some of the more devious affirmations the tuition freeze crowd make. “It’s an investment for society”. Student union leaders will try and convince the populace that for us to pay their schooling will result in a wealthier society. Let’s think about it for a minute. What are the most expensive degrees one can undertake in Quebec? Law, medecine, engineering. These are really costly degrees that are funded in excess of 75% by the Quebec government, these are also some of the degrees that contribute to making some professionals mightily wealthy. They are also the professionals most likely to leave the province for greener pastures once graduated. An estimated 50% of Med graduates have left the province in the last decade… so much for socially responsible investment eh! Some degrees produce graduates that will never out earn the average Quebecer. Did you think anthropology and sociology students really find jobs that pay 60k a year think again. If professionals don’t out earn the average, they don’t positively contribute to taxation either, they end up being a drag on the provincial budgets for years after graduation. So if a student tells you it’s an investment, tell him it’s most certainly a bad one.

Now some more ideologically fervent students might tell you that some programs provide collateral non-monetary benefits to society. My answer will be brief as this particular line of thinking is most annoying to me. The benefits may potentially exist however the costs aren’t potential or ephemeral they are real and they’re called ‘cold hard cash’ which needs to be taxed out of somebody’s pockets. However this line of thinking leads to the most egregious assertions of them all:”Education is a Right”… I’m sorry I just puked a little in my mouth. A right is something that is god given. Or something that you own that cannot be taken from you. Examples range from property, opinions, thoughts, liberty to exercise your profession, so on and so forth. What these ‘real’ rights have in common is that they stop at someone else’s. You exercising your profession doesn’t stop somebody else from exercising his own. Freedom of speech doesn’t take away someone else’s freedom of speech etc… etc… In other words these rights do not impose limitations of choice freedom or right on someone else that is the key. When somebody says education is a right, he is essentially saying “young people have a claim on societies wealth for the purpose of schooling”. This particular person is telling you he has a right over part of your income, your private property and wealth so that he may enrich himself. Enriching one’s self at the expense of others doesn’t sound like a right to me. In any case even if we all agreed to education being a right, we would simply open the pandora’s box of educational subjectivity. Would going to med school become a right, or simply university broadly? would a bachelor’s degree suffice or would some legitimately claim a right to a PhD? Would students be allowed to block teachers from going on strike, because a teacher’s strike would be seen as a violation of the human right to education? The answer to all of the above is categorically no!

And if that answer doesn’t satisfy you, be reassured that you have a right to buy books any book you lick, or look up Wikipedia. If you want to make education a right go ahead and do it. Just know that education and schooling are two very different things, anyone can have the first without the second but the second doesn’t guarantee the first.

Drummond to Ontarians with Love

Don Drummond ex chief economist at the Toronto Dominion bank, the second largest in Canada, came out this week with a report this week on how Canada’s most populous province could tackle its mounting deficit. since most of my friends are neither Ontarians nor Canadian economic history buffs I feel that the significance of this past week’s event merits a little historical context.

Now this context starts somewhere around the 1800’s but bear with me for a while it won’t be that long. At the inception of Canadian confederacy political and economic clout were concentrated mostly into the two most populous provinces, Quebec and Ontario. These provinces were the bedrock on which Canadian economic growth rested and the springboard for much of Canadian political development. Around the mid 20th century Quebec relinquished its place as a driver for Canadian development leaving Ontario as the sole anvil on which the expansion of Canada could be forged. Business and industry migrated from Montreal to Toronto leading the latter to surpass the former in terms of population, economic output and general clout around the 70’s. As Ontario’s population soared the province became the capital for the financial industry and the center of canadian manufacturing. With its growing presence Ontario played the part of the peace broker in Canadian politics funding welfare programs across the country. 

That’s when things started changing. In the 90’s the cut in transfer payments from the federal government coupled with the pan-Canadian drive for budgetary surplus led to the Harris Year’s at Queen’s Park (unofficial name of the seat of Ontarian government). These years were marked by fiscal consolidation and labour wars with unions. Although mostly recognized as sensible policy actions by most non-union circles, the Harris years created a backlash which ushered in the McGuinty years. This conciliatory leader brought in accrued social spending, bought labour peace and spent his way to three election victories from 2003 till present. This unloosening of the public purse however led to a gaping deficit following the recession of 2009-10. So in 2011 facing an upcoming election and with plenty of deficit and debt accumulation to justify McGuinty called on Don Drummond a well respected economist to propose ways of reforming government expenditure and services to enable the province to return to budget balance by 2017-18 without raising taxes.

A year later here we are, and with the McGunity in government reduced to minority status the Drummond reports has just hit the shelves weighting in at ~320 proposals and 540 pages. To most observers the report while impartially worded comes in as a heavy rebuke to the years of government largess. The headline proposals are to get rid of some of the Premier’s pet projects like supporting alternative energies, all day daycare reform if not get rid of most forms of corporate welfare and finally to steal a page from the Harris playbook and start playing hard ball with the Province’s largest unions.

Unfortunately this is not Italy and the credit markets have not yet come for McGuinty’s profligate head… yet. Hence This technocratic gem of a report will certainly not become law. The government has already announced it will preserve the expensive all day daycare program. Most observers agree the prescription no matter how impartial, how well crafted or how sensible are politically unpalatable for the Liberal Government. So don’t expect Ontario to resume its role of Canadian growth engine anytime soon, much to the contrary expect Ontario to continue to be the drag on confederation it has been for the last 3-4 years, eating up equalization payments instead of funding them.

The picture is gloomy the report itself states that economic growth will not exceed the 2% mark for the foreseeable future and has also stated the deficit isn’t expected to shrink before reaching an all time high and federally comparable 30 Billion C$. So here’s my prediction McGuinty doesn’t fix the finances but let’s them continue on their gradual slide into PIIGS style irresponsibility. So expect to see a Montiesque kind of technocratic government coming in within the next decade to fix Ontario’s rivalry with Quebec for the most shoddily run provinces in Canada prize.

Greece! Go Away!

I sometimes shiver with humiliation at the memories of my adolescence and the utter immaturity that characterized them. I comfort myself with the thought that I have outgrown them. I used to believe that people outgrew their baser adolescent instincts of selfishness, laziness and general disdain for responsibility, I could not phantom the possibility that an entire populace could degenerate into a mindless mob of collective adolescents. Greece has proved me oh so wrong. Now before anybody get’s up and antsy about the broad generalization I recognize that not all greeks are in the streets hooded in black and throwing fiery cocktails around. However, the despairing state of the Greek economy is the business of all those people and the general result of their cumulative collective decisions. The guilty parties are, in no particular order: tax evaders, union leaders and members, politicians, savers, voters, anarchists, socialists, wannabe monopolists, retirees, students and anyone silent on the going-ons of the county. That list I believe covers more or less the majority of the people from the small nation that gave the world democracy.

Reading up on the back and forth between Athens, the Troika and various European capitals I’ll admit to a sinking feeling of despair. Berlin’s demands just keep mounting and the absurdity of Greek politics never retreats. German flags are being burned in the streets of Greece, right-wing papers in the country compare Merkel to a Nazi while across the divide any remaining AAA country in the Euro are simply loosing interest in Greece who has proved a most unreliable partner in the battle for economic stability.

I’m no Keynesian but the repeated bouts of austerity demanded by Greece’s Euro creditors are pummelling the periphery’s economies harshly. I don’t believe I’ve ever heard a Monetarist or even an Austrian economist recommend pro-cyclical fiscal policy systemically. Austrians economists might say that recessions are good because they kill bad business models permitting the flowering of sustainable industry. However even the most die-hard fiscal hawks (me) have to admit that at an above 6% contraction yearly with no hope in sight for growth, even good businesses will flounder. That’s why fiscal consolidation in Greece needs to be accompanied by stimulus spending funded by the competitive parts of Europe. Pan-European unemployment insurance is the most sensible proposal that has not gone main stream yet. The moral hazard that will ensue is undeniable but until permanent mechanisms for intra-Euro fiscal transfers can be worked out, the benefits are surely worth the cost.

That said that the money masters’ responses to continued contraction in the periphery are inadequate, the reaction from the patients are increasingly unacceptable. In Italy the unions responses to the Monti plan for liberalization are tantamount to the summum of Human selfishness. While the house is burning the unions are trying to save their clothes while some are still trapped (the unemployed) admittedly while some have already fled (the tax evaders). The retired are equally deserving of blame silent on the whole affaire so long as their golden retirements are not threatened even when these same retirement plans are bankrupting their nation. But while Spain and Italy’s yields come down showing the markets forgiving side, or just the ECB vast manipulation skills, Greece and Portugal edge towards the brink. While tame in Lisbon, reactions in Athens are flaring up to an extreme.

I long ago learned that the most vociferous voices rarely represent or even understand the silent majority. The silent majority in most western countries are hard working middle class and relatively rational voters. Even when they are swindled into voting for a party that ill benefits their country’s these voters always (almost) correct their aim sending back their political systems to the center. This does not seem to be happening in Greece. Not only has the majority let its political leaders lead them to a path of reckless fiscal irresponsibility and stupidity, they now seem unwilling to admit to the wrongness of their ways. For God’s sake Greece’s politicians are asking to be the least trusted west of Tehran. Its anarchist youth are trying to give 80’s Italian terrorist youths a run for their money. To reverse an oft heard insult, the Greeks’ silent majority is about to be hoodwinked into poverty faster than Germans were into Nazism. Greeks have committed the cardinal sin of fiscal profligacy, they have been found guilty by the markets, they are now in a liquidity and solvency jail. The rest of Europe has posted bail, and now has promised to take Greece into a pseudo form of receivership in order to buy the fledging country a little decency and freedom. Greek response to the modest conditions demanded of it, spitting in the AAA’s faces. The audacity and hypocrisy demonstrated in the land of classical drama is baffling to say the least and shockingly amoral.

While I wish a speedy recovery for all of Europe and hope that the beauty of the European project can be furthered, I’d be lying if I didn’t say I believe the Greeks have lost all rights to participate in the next chapter of Europe’s history.