A Conservative Budget

Minister Flaherty scratching his shoe instead of his head

This was probably one of the more tame federal budgets in decades. Although it may be spilling a lot of ink now, expect the upheaval to be very short lived. While the Opposition may pay a little more attention than most to the budget, it is so unremarkable that they will probably return to criticizing such bills as C-10 and C-30 and keep the focus on the Robocalls scandal. As unremarkable as this budget may be, like all budgets it deserves much scrutiny for what was in it, what wasn’t and why its measures are so incremental.

Before we begin scrutinizing the budgets fine print, it must be said that the budget speech had one element in it deserving much praise. Rising up in the house of Commons to deliver his budget, Finance Minister Jim Flaherty spoke often of Canada’s fiscal leadership among industrialized nations. He noted recurring that Canada led the G7 in some manner or form when it came to public finance. Something in the rhetoric changed. After lavishing his government with much praise he proceeded to explain that Canada could not only benchmark itself against the wealthiest nations of the World, but should also compare itself with the ‘fastest’ and most dynamic growing nations of the World. It seems that if anything the conservatives have at least learned that comparing oneself to the wealthiest is no sign of merit when they are the economies that are the most stagnant in the World. This kind of talk can only lead to policy better aligned with the realities of the 21st century World dynamic.

Moving on to some of the less praise worthy moments of yesterday, let’s look at some of the new policies introduced and their short comings. In an effort to fill the glut of job openings in the western provinces the federal government will move to enhance immigration matching. The intentions of the action are praise worthy, the means may also be effective and fair, however one solution has not been explored. Employment insurance in Canada is atomized. While the program is national in scope and the premiums equal in all provinces, the hours contributed necessary for eligibility vary widely across regions, payout lengths are also regionally discriminatory. The result of this is while unemployment remains elevated in eastern Canada, job openings go unfilled in the west. Canada’s EI system encourages Canadians not to move to seek employment it encourages regional structural unemployment. So while the Premier of Saskatchewan is off in Ireland to go recruit that countries skilled unemployed labourers Newfies sit at home cashing in the dole waiting for the fishing season to start again. With standardization of EI across Canada the government could have hit two birds with one stone: reduce lost output in the west because of labour shortages and reduced unemployment in the east because of -job shortages. Than economist say they are puzzled with Canada’s international un-competitiveness, simply shameful.

Another issue Minister Flaherty often raises is the problem of an over heating real-estate market. No signs of cooling down the next Canadian Bubble. While almost all agree Vancouver and Toronto’s markets are over heating and the country is building condos at a breakneck pace, the minister choses to do nothing about it in his budget. The simplest and most efficient way to calm down the real estate market AND reduce the deficit would have been to phase out interest deductibility. This would in a sense incentivise the deleveraging of the entire Canadian economy which could have adverse effects on output if implemented too fast. A measured and gradual elimination of interest deductibility would reduce the tax incentive to speculate with borrowed money hence reducing leverage (bad), speculation, (bad), bubbles (bad) and the deficit (bad). So in fact this could have been a 4 birds 1 stone kind of solution.

One categorically adverse proposition in the budget has to do with the new R&D regime. The current plethora of R&D programs cost Canada $3 Billion or so. The Jenkins Report submitted to the federal government essentially called the money wasteful. The report stated that the money wasn’t helping to foster technology or competitive improvements. While a simple solution would have been to scrap this corporate welfare all together and just drop the corporate tax rate proportionally to the savings, the government decided to go down another path. The Conservatives chose to transform the R&D tax credits into direct subsidies. Completely reprehensible and irresponsible. Not only will bureaucrats start picking winners and losers. The R&D programs will now be open to graft, bribery or political interference as has been seen in other jurisdictions. Canadians often admonish Americans for not emulating their successful policies. Well I think it appropriate for Americans to admonish Canadians for emulating their failures. That the federal government hasn’t heard of Solyndra, a near household name down south, is a testament to narrow vision. At least government intervention, interference and market distortion seems to stop there in this budget.

Corporate and personal taxes not part of the plan, eh? No new corporate tax rate reductions planned. This is probably the Conservatives not adding salt to their unions wounds. Why unions love corporate taxes is still beyond me, but in any case no drops in personal and corporate taxes are envisioned. This is objectionable. The corporate tax remains one of the largest sources of economic inefficiencies  and a double tax on the wealthy and middle class. Any lack of effort on this front is meritorious of its own lambasting post. Canada remains middle of the pack in the OECD in terms of corporate taxes, as the Finance Minister said himself we need to compete aggressively with the up and coming economic powers of tomorrow not the stale economies of the yesterday.

The cuts to government departments’ operating budgets are mild and inconsequential to say the least. As has been mentioned by other commentators, the cuts in civil service employment levels do not even match the Conservatives hirings since 2006. Canada will still be saddled with more bureaucrats than before the Conservatives took office. The planned yearly operating efficiencies of $5.2 Billion. When Canadians were being fed numbers between 4 and 10 Billion dollars the actual number is only conservative in its timidity and aversion too splashiness. In terms of defining themselves as fiscal conservatives, the governments efforts are halfhearted at best. Some of the long term efforts at spending consolidation deserve applause: OAS change from 65 to 67, enhanced OAS benefits after 70 and all civil servants increased pension plan contribution. The short term efforts leave many, including the Canadian Taxpayers Association, short of admiration.

One important announcement, although not budgetary in nature, will surely get greeno Mulcair riled up. The government’s plan to cap all environmental reviews to 24 months (thats two whole years for those not paying attention) is a great boon to Canada. Let’s just admit it their is no reason (even for environmentalists) to want businesses to expand resources, government bureaucrats to waste time and the Canadian economy to lose steam just so that great business projects get merely slowed down by our overly stringent and public review system. That’s not to say that when talking about Canada’s pristine Wild we should all be environmentalist, but when an energy project is good and going to get approved anyway why waste everybody’s time. Seriously Green Peace, the Oil Sands may be bad (I didn’t say are, I said maybe) they’re a bleep in the environments radar, you should be scared of China’s industrialization, not northern Alberta’s botox gone awry.

The bottom line is that this is a timid, non-game changer budget. This is not how to win fiscal conservatives votes. This is not how to improve fiscal or macro-prudential policy. None the less it’s not a terrible budget, there is more good than bad. Let’s hope this budget is popular enough to convince people to let the Conservatives do what they got elected to do: Make government smaller!

Shout out to our Malaysian readers,

Cius

Wildrose in Hot Pursuit

The Provincial election in Alberta is underway. Alberta which has consistently elected majority Tory governments since Peter Lougheed’s Progressive Conservative win over the Social Credit in 1971, may now be flirting with a new sheriff in town. The blog Three Hundred and Eight who’s tracking of polling results tends to shadow actual voting results fairly accurately, is now forecasting a razor thin majority for Allison Redford’s Tories.

While the campaign has barely started, the drama is already quite high. One poll by Forum research is giving the Danielle Smith’s Wilderose party of Alberta  a 10% lead over the PC’s, other polls have either the PC’s slightly leading or in a statistical tie with Wilderose.

Before I pronounce myself for or against either party some due diligence is required, but in the mean time let’s indulge in the fact that competition has returned to Alberta politics, and more competition is always welcome.

Cius

Banks Definitely Need Regulation, Or do They?

Julie Dickson chief regulator of Canada's financial industries

Without getting into the hearsay of who’s guilty about starting the financial crisis of 2008-2009 I think everyone can agree on one thing: Banks pose a systemic risk to all of us. We need not look far to understand the dangers posed by banks becoming larger than their originating countries can handle. The Irish and Icelandic banks are prime examples of the private sector saddling the public with punishing debt loads. While the greatest of economies has managed to turn a buck on some of its bail-outs, even mighty nations such as Britain are having trouble breaking even on their banking rescues. So while the American Treasury might be making some money off of its Citi Group sale and the Fed seems to be making money on its Quantitative Easing the British taxpayer is still short 50% on his Royal Bank of Scotland bail-out or £20 Billion.

The problem facing governments and regulators are numerous and the balancing act daunting. Some of the many stakeholders needing protection are:  the public purse, ordinary savers, businesses in need of credit, consumers in need of credit and investors. Since financial institutions make profit by managing risk, or in other words taking on risk, it becomes very alluring for many to call for a blanket curtailing of risk and profit. However profit being the fuel for inducing lending, curtailing risk has the direct effect of reducing credit, also know as starving the real economy. Most Austrian economists would simply say that individual bankruptcies serve as a deterrent for moral hazard and forces those institutions to stay weary of lax lending practices. While I sympathize with this opinion their remains the little issue of systemic risk, or the possibility that an entirely responsible bank may get infected by a severe crisis of trust. Even Canada’s banks among the safest in the World, were partially locked out of international inter bank credit markets and saw their share prices collapse by 50% in 2009.

So while eliminating systemic risk through global macro-prudential action seems like a tall order, some national systemic risks can be eliminated. Leaving aside some systemically risky banks like RBS, BofA, HSBC and the like, let us look at those banks that posed a threat to their national real economies such as the Allied Irish Banks, Landesbanki in Iceland or Fortis in Belgium.

One often quoted problem is that banks are increasingly international, with assets spanning the globe. So if the asset side of a banks balance sheet collapses because of defaulting foreign assets, the liabilities for the most part remain denominated in the national currency. The problem can further appear unfair when much of the banks capital is raised through deposits at the local level and then risks assumed internationally. A few different options are possible to limit this problem. The first one being the norm in North America is that retail deposits are insured by a state sponsored entity. In North America those entities are the Canadian Deposit Insurance Corporation and the Federal Deposit Insurance Corporation. However this only serves to outsource depositor risk to governments instead of savers, systemic risk remains (if they aren’t accentuated). Another solution is for central banks to act as lenders of last resort (which most are defined to be). However as we have seen in Europe, banks can run out of adequate loan collateral, forcing CB’s to drop their lending standards. Again we are faced with outsourcing risk to government institutions, or risk debasing currencies (through excess monetary base expansion and capital flight) or even worst create zombie banks from which Japanese experience teaches us, the real economy may never escape. So what solutions are left exactly?

Here the Austrian Economics school of thinking has a partial solution. Countries could make corporate bail outs unconstitutional. This promises to protect the taxpayer at large from government softheartedness towards corporate friends and campaign contributors. Governments need to stop assuming the risk of their banks just because they are nominally local. Most banks make profit and pay taxes across many geographies why should local authorities be responsible to those banks creditors? The answer is they shouldn’t. Implicit and now explicit promises to bail-out induce risky behaviour. The first way to reduce systemic risk is to get rid of risk inducing systemic moral hazards.

Depositors tend to be the largest creditors of most banks and many argue it would be unfair for governments not to bail them out. There are no moral reasons why depositors are entitled to more protection than other stakeholders. However one can argue that since the entirety of banking systems may reside on the trust of depositors to receive their capital on demand, it can be argued that the safety of banking can be better assured by preserving this trust. While I agree with the aforementioned proposition, their must however be limits to this banking and political dogma. So how to balance fairness among stakeholders and preservation of banking trust?

A first step could be for depositors to have priority of payment in a bankruptcy liquidation (this might already be the case in some countries). Since insolvent banks do not have liquidity by definition, this solution may be partially moot. A more effective and fair step would be to reduce asymmetry of information. Bank regulators could post the settled cash positions of the banks under supervision nightly, letting savers now just how safe their bank is on a daily basis. In that same spirit, regulators could push for banks to post their cash positions and Tier One capital ratios directly on their clients’ internet banking accounts. It would then be up clients to use the information bestowed upon them to choose the safest banks. This in my view both increases banks’ incentives to be safe and  reduces savers uncertainty, thus contributing to preserving banking trust. Banks would naturally revive the concept of reserve requirement. Instead of having a regulator choose the required reserve ratio it would be the market.

Some might argue that the above propositions don’t go far enough in protecting depositors and savers at large. They might propose more stringent regulations. Some argue a global financial transaction tax to help buffer government revenues against bail-out expenditure is the solution. Governments already tax corporate profits to that end. In any case, the crisis essentially stemmed  from a lack of efficiency of transparency, reducing efficiency in the banking industry can in no way assuage the industry’s risk. The Volcker rule has also been proposed to reduce systemic risk. This rule wrongly assumes that proprietary trading is were risk is concentrated. The Irish banks were taken down because their commercial lending portfolios went kapoot not because their prop trading units lost money. Inversely Lehman went bust because it got into the business of lending (albeit indirectly). Lehman lost money because of its sub prime holdings it never even had a deposits and loans unit to separate from. Canadian banks typically have large units of both and are still around, the Volcker rule is at best besides the point and at worst reduces banks ability to diversify risk across business units. Some might, pointing to the Canadian banking system, call for close over sight and control of banks profitability and shareholder payouts. While in practice this seems to work, it relies to heavily on regulators ability keep up with banking innovation. Canadian banks as epitomized by TD’s CEO Ed Clark voluntarily chose not to dabble in sub prime mortgages.

I do not believe myself to be able to suggest the best way to regulate such a vital and risky industry as banking. My experience does permit me to say that regulation will be most effective when it enhances market self correction not when it replaces it. Some countries are moving brashly into zealous regulation which in some cases reduce conservative banking practices and increase moral hazards and risks. Let us all hope that a saner regulatory conversation emerges before we get another banking crisis on our hands.

A Montreal Manifesto

Yesterday I chose to walk home from school. It’s not an entirely short walk, walking from Guy street downtown to Monkland avenue and Girouard street in the Notre-Dame de Grâce neighbourghood will take the common walker an hour to cover the 5 kilometer distance. The walk wasn’t entirely unpleasant from a nationalist economic point of view. Signs of development abounded.

The very beginning of my walk began in the heart of Concordia University’s downtown campus. One is surrounded by the new glimmering Business School building, the slightly aged but just as freshly sophisticated Fine Art’s and Engineering building and the 70’s designed work of horror administrative building, being actively given a contemporary face lift. Walking westwards along Maisonneuve street one eventually reaches just north of the old Seville Theater block. Pausing for a moment I could not help but feel proud of seeing the old decrepit structure vanished, replaced with a massive hole in the ground from which a giant crane was erecting new 10 story condo development. Turning away from the Westmount city hall and walking past the illustrious Selwyn House school for boys I began the St-Antoine street climb. Halfway up the side of Mount Royal, the middle of the island historical mountain overlooking downtown, and peering south down one of Westmount’s steep streets, I caught a glimpse of an army of cranes in the distance.  The next street provided a better view of what is to be one of Montreal’s two Super Hospitals. Half a dozen tall cranes were churning and jostling in the air over the largest construction sight I’d ever laid eyes upon.

Finally reaching my own neighbourghood and the avenue us locals call Monkland Village, looking westwards along Monkland my gaze was met with the sight of not one, not two but three different developments of mixed residential and commercial use. This street which had not seen any change in the last decade, asides from a butchery moving and a store or two closing, was now alive with construction and development. Arriving at my house and picking up the day’s Gazette I hadn’t finished, I read an editorial of a popular and recurring idea in the Montreal media. Montreal is renewing! The editorial listed all the great developments of the city: Two Super Hospitals in the building, extension of the southern belt 30 highway, a new bridge linking Montreal and Laval islands (actually called Isle Jesus), announcement of a Champlain bridge replacement, refurbishing of the Montreal airport and surrounding highway circle, extension of the public transit systems, replacement of the Turcotte interchange, new skyscrapers in the works (none built since 1992) and a great many other examples of urban renewal. However, are these really the mark of a resurgent Montreal?

A few details escaped the description of my homeward walk, so banal they were to the average born and bred Montrealer that I am. The first was that while standing in the middle of Concordia’s campus, staring at its newer features my back was turned to its flagship buildings, the Hall and Library buildings. These buildings are of such a particular ugliness most of us stop looking up as we walk past them. Nor did I pay much attention to the multitude of grey apartment buildings surrounding the campus. It is actually hard not to draw parallels between this part of downtown and Beirut. That resemblance is further accentuated by the massive pot-holes lining the streets ad nauseam, reminding us of Lebanon circa 2006 (apologies to the Lebanese for the hyperbole). Another over looked detail is the neighbourghood hiding in the shadow of the old Seville Theater development, Shaughnessy Village. One of the more depressingly poor and socially ill quarters of town, with its streets strewn with drug users, aboriginal poor and its sad overcrowded women’s shelters. Even Westmount the richest neighbourghood in Montreal as decaying streets filled with cracks and pot-holes.

While the certain media gushes about urban renewal, most journalists and commentators know this to be superficial. Underneath the glimmer and hope of new construction, lays a deep corruption. Montreal’s construction industry is one of the most corrupt in the western world and openly so. Foreigners reading our press may be confused as to whether they are reading a Canadian daily or a southern Italian one on most days. Most city procurement or maintenance contracts are rigged. These problems are small in comparison to the larger issues facing the city. While once the most populous city in Canada and first to reach a million inhabitants, Montreal lost that title to Toronto in 1976. While Montreal used to be a commercially imperial city second in clout only to London in all of the British Empire, Montreal long ago relinquished those epithets to the likes of Toronto, Hong-Kong, Singapore, Sydney, Mumbai and Johannesburg. Montreal also used to be home to some of the greatest corporations in Canada, many of whom have left. Adding insult to injury some of the great names that left were named after the city: Bank of Montreal, The Sun Insurance Company of Montreal.

Although Montreal has been the subject of some renaissance of activity, undeniably the city endures a stagnant state of affairs when compared to thriving cities like Toronto, Vancouver or Calgary. The causes of Montreal’s ‘greatness’ demise are all documented and obvious. The advent of a separatist and anglophobic  mouvement in Quebec’s political life are the main culprit. Separatists have always believed that Quebec and Montreal by extension were great because they are francophone. Nothing could be further from the truth. What makes Montreal great is its bilingual and bi-cultural identities (now more multicultural than ever). The attempts by ethnocentrical separatists to preserve french or more exactly to enhance Montreal’s french heritage has been an attack on Montreal’s very soul. This situation has arisen because governments in Quebec are formed by constituencies outside of Montreal in its francophone heartland. The government’s vicious cultural and economic attacks on the city have been further compounded because the seat of governmental power resides outside of Montreal, where ignorance about the true strengths of the city are rife.

Montrealers need to wake up and understand that what plagues their fair city is the city’s lack of sovereignty. Quebeckers once led political and constitutional battles to become as they would say: “Maitre chez nous!”. Or master in their own house. It is high time Montreal embarked on such a quest for economic and cultural independence. As an anglophone friend of mine was telling me the other day, she is tired of our province’s petty and destructive language wars and she is considering moving to another province for better work and more ‘political peace of mind’. What I heard in her lament was disheartening to say the least. Many Montrealers feel the same, they are tired of having people in Saguenay or in Gaspésie telling them what language they need to work in and what culture they should be instilling in their children. Enough with the outside influence already.

What Montreal needs is to become a Chartered City. Like Hong-Kong being freed from China to pursue its own destiny Montreal needs to be free from the cultural dictatorship that strangles it. Montreal needs to be free from the petty politics of separation. Montreal needs to be free to work and grow in the language that bests suits its aspiration to rival some of the Worlds great metropolises. Montreal needs to free itself from the pervasive anti-business, anti-wealth mentality that corrupts this province. Montreal needs to stop waiting for a distant government to prosecute the criminals that daily rape the islands treasury and tax payers, she must do it herself. Montreal needs to be free from the ineptitude of its provincial political duopoly.

To move forward and become the great metropolis it was destined to become Montreal needs to take back the assets that make it great away from those that would have them be chains. French should have made Montreal greater than just another anglophone city in North America, instead, it has become its greatest drag, a secular dogma weighting it down and prohibiting enlightenment. Montreal must become a “Bill 101 free zone”, it must become a separatist free zone, it must invite the legions of hard working industrious anglos to come back to their native island. It must demand that all infrastructure building and conceptualizing be repatriated away from Quebec City. It must firmly but curtly ask the rest of Quebec to butt out of its affairs. Montreal needs to start thinking of itself as an aspiring city of Lights. Hope and ambition are the greatest fuels for change and progress. Let us together reclaim the spirit that made Montreal the center of the Universe in 1967.

Montrealers could not tell you why they believe their city is the greatest. Montrealers cannot describe why they have faith Montreal will some day erupt into one of the greatest urban cores of the World.  Montrealers wont even tell you about this faith so crazy the notion must seem to outsiders. It is time for us to grab our pride by the buckles, raise our heads and forge ahead to where our true destiny resides. Our mission should be: to never again let an off-islander impose their timidity or apathy on us and to never let one of us leave because the pastures are greening faster on the other side.

New NDP Leader, a Moderate?

The New Democratic Party of Canada has just concluded its leadership convention in Toronto. Thomas Mulcair the avowed moderate in the race, has won the leadership on the fourth ballot with a vote count of 57%. Prior to winning the Leadership Mulcair was the first NDP member to be elected in the Province of Quebec in 2007, foreshadowing the ‘Orange Wave’ of 2011. The long and winding leadership contest to replace the late Jack Layton was described as a contest between the old guard of the party and Mulcair’s lurch to the political center. Candidates like Brian Topp, Paul Dewar and Peggy Nash all from a union background, advocated staying true to the party’s social democratic base while Mulcair was seen as a moderate and centrist. Many described the struggle as a choice between remaining ideologically pure (if politically naive) and becoming centrist enough to be electable for government.

The NDP’s membership apparently chose electability over purity, in hoisting Mulcair into the leadership throne. Mulcair being the only real bilingual candidate as well as being a native Quebecker may well have the best chances of keeping the the 59 seats the Dippers won in the last election. The fact that he is reported to be the most moderate of the field may also serve to expand the NDP’s reach outside of its traditional bastions of support, namely manufacturing workers neighbourhoods. His decidedly pro-environment stance may serve the NDP well in consolidating the vote in environmentally friendly BC and Quebec. However Mulcair seems to be affected by a somewhat pronounced case of antagonistic personality. His forceful ways may raise the ire of Canadians as it is one of their biggest issues with the current Prime Minister Stephen Harper. It remains to be seen if Mulcair can muster enough economic and political moderation out of his party to win seats in vote heavy Southern Ontario. While not explicitly objecting to non-renewable  resource extraction, his pro-Kyoto and pro Cap and Trade stances wont sit well with Prairie voters.

What remains unclear is whether Canadian Politics generally has come out a winner from this. Will the victory of a ‘moderate’ at the NDP usher in a new era in Canadian politics resembling the current make up of British politics? Will the Tories and Dippers represent the new dueling political oligarchs? Has the once hegemonic Liberal Party ceded its place as Canada’s traditional centrist option? The remaining years of this current government will help answer these questions. As the Liberals finally determine whether Bob Rae will be their next leader or not, Canada’s three main federalist parties will jostle for position for Canadian’s voting hearts. These are interesting times for Canada as its politics continue a period of flux started with the dismantling of the Progressive Conservative Party in the early 1990’s, continued with the rise and fall of the Bloc Quebecois and now characterized with the potential ascent to government of the New Democratic Party.

Obamacare Explained

Some readers might wonder why this blog has not commented on the US Primaries and the Republican leadership race. Very simply because it doesn’t matter yet. American political developments will become interesting with regard to a presidential election, when both candidates are known. A politically and economically interesting development in American constitutional and political life however, is upon us in the form of the Supreme court’s review of the Patient Protection and Affordable Care Act (PPACA). 26 States have joined in an effort to abolish the PPACA and the Health Care and Education Reconciliation Act of 2010 collectively known in Right of center circles as ObamaCare. Many a legal experts and US Supreme Court watchers have dubbed this a once in a lifetime redefining of State and Federal powers. So while ”who will be the next leader of the Free World?” is an interesting topic of discussion, the powers that Chief Executive will wield, seems like a relatively more important issue.

The legal and technical issues at hand are quite complex. The very first complaint against the bill, if I recall correctly, was that it was incomprehensibly long and complicated (even for lawyers apparently). So a quick recommendation: go wikipedia PPACA now, come back and read this post later… Now that you are back with a mild understanding of what ObamaCare attempts to do we can start raising some of the important  issues at stake here. Just in case Wikipedia wasn’t clear enough, the staples of the Acts are:

• The “individual mandate” where all individuals would be required by law to purchase health insurance coverage.
• Insurance providers will no longer be allowed to discriminate against pre-existing health conditions except smoking.
• Medicaid eligibility will be bumped up to 133% of the American poverty threshold.
• Sliding scale of subsidies for insurance purchase for Americans earning between 133% and 400% of the poverty threshold.
• Minimum standards of insurance policy will be imposed
• Penalties for 50+ person firms not offering insurance plans to employees

This healthcare plan proudly embodies the American penchant for convoluted government  market distortions. That the World hasn’t been struck by a wave of micro economists’ heart attacks following ObamaCare’s signing into law, is surprising in itself. The effects of minimum insurance policy standards would have been twofold. One to cover the new costs of the added ‘standards’, insurers would have raised prices. Subsequently health insurance consumers would have less coverage options and would face a higher price, leading to less purchase; less Americans covered. Faced with this prospect the democrats added mandatory purchase of insurance. ”You think insurance is too expensive? BUY some anyways” says Nancy Pelosi in this recurring nightmare libertarians get at night. At some point in 2009 someone must have asked the question: ”Now that we’ve figured out how to insure all Americans (by force), how do we do it without raping low income workers disposable income?”. The Answer was double. First they chose to bump up Medicaid coverage to a fixed percentage of people earning 133% or less of the statutory poverty, and then giving a subsidy to people earning more than that revised threshold. Now that subsidy would help people earning up to four times the poverty threshold. That means people (household of 1 in the 48 contiguous States + DC) earning up to 43,560$, just shy of the median household income, would be eligible for financial assistance. As an example: for a household of four in Alaska, the subsidy would be accessible up to a household pretax income of 111,760 US$.

Now people earning 43,560 US$ represent the cream of the crop of wealth on a World scale. So why would the federal government give subsidies to so many people most of whom don’t even register as poor? The answer isn’t in the fine print it’s actually in between the lines. The high threshold for subsidy eligibility is actually an admission that the basic laws of supply and demand are right. How so? What happens when 30 million uninsured poor Americans suddenly show up simultaneously at their local insurance office with an Uncle Sam signed cheque asking for some premium quality insurance? Insurance companies having struck gold, all jack up their prices. Now, all those Americans on the cusp of middle class status have to compete for insurance products with a crowed of people wielding federal government credit cards, one word, though! So the price of insurance would rise for all, hence the necessity to help people who thought they were middle class.

Knowing the way the American tax code works, we could say that a cleavage has been created, cutting the american population roughly in two, where the top earning half suffers higher insurances prices and higher taxes to help pay for the bottom half’s increasingly expensive healthcare. Is this the only cleavage this legislation creates. No it isn’t. One major component of the legislative package is the clause prohibiting price discrimination. Price discrimination is allowed but only on a geographic basis. What might be the result of that policy. Unable to charge higher premiums for unhealthy individuals, insurance companies will have to charge higher average premiums on everybody including healthy people. So the Portland health nut who bikes to work, eats vegan, works out and lives a balanced lifestyle will have to pay higher premiums so that the overweight McDonald’s inhaling, binge drinking couch potato need not pay the fair value of his unhealthy ways. One might say this legislation is anti model citizen. If you are going to live a long healthy and successful life get ready to be whacked in the wallet.

The essential of this legislation is to create a one tiered healthcare system. Even if some Americans will buy their own healthcare from a private insurance corporation, they will do so on federally dictated terms. No free choice = no free will = no free market = one tiered system. However imposing purchases on consumers creates an inelastic demand (even if only partially), what do businesses do when facing an inelastic demand they raise prices and increase their profits. So what will be the ultimate result of these laws? The United States of America will consolidate its lead as the country with the most expensive healthcare in the World. This continues a long tradition of Left leaning policies to always collaterally benefit somebody already wealthy. Last weak we joked that Francois Hollande’s taxation policies would enrich Swiss bankers and now we follow this up with insurance providers in the US readying themselves for some unimaginatively gluttonous profits.

Understandably a majority of States are worried. They are reportedly on the hook for less than 5% of the estimated 500 billion yearly added healthcare spending. Now the Obama Administration has repeatedly said that States may opt out of the plan. However that option is conditional on states finding their own way to newly cover as many uncovered constituents as the federal plan would have. Here lies the States assertion that the legislation is coercive. In previous rulings it was found that over excessive inducing does represent undue coercion. Coercion in itself being an attempt against States’ constitutional sovereignty. Now this blog being about economics and not law, a different argument shall be posed. While assuming that opting out of the plan includes opting out of the plans funding a fundamental inequity subsists. The Congressional Budget Office has opined that the healthcare proposals are not fully funded. That is to say the federal government will incur more costs to the program than the proposals projected revenues. So this deficit will have to be covered by revenues from other sources such as income and corporate taxes levied nationally. This means than should States opt out of the plan as proposed they still run the risk of bearing the burden of cost without seeing any of the benefits. This surely represents an undue coercive reality all states are aware of.

Is it not strange that a constitutional law expert (Obama) would behave as though the Residual power were granted to the federal government instead of the states. What ever happened to respecting not just the letter of the law but also its spirit. More importantly where were the American micro economists when this legislation was being adopted? Canada with a one-tiered system has cheaper healthcare. France with its ultra comprehensive two-tiered system has cheaper healthcare. Instead of moving in the direction of making healthcare cheaper for all Americans Obama is moving in the opposite direction! with the caveat that the 15% of uninsured wont be anymore. Whether for personal rights, constitutional or economic reasons, ObamaCare leaves much to be desired.

Shout out to our Lithuanian readers!

“Francois Hollande” or “Homo Economicus Has Left the Room”

Many people may be forgiven for forgetting that France is one of the Worlds great nations. Let’s gloss over some of France’s economic credentials. Fifth largest nominal GDP, ninth largest in PPP adjusted terms and second largest economy in the European Union. Fifth largest exporter in the World, with over half a trillion of exports annually. Member of the G8 countries, G20 group, OECD, third highest military spending in the World and second largest gross foreign aid provider. Needless to say this stature and success has arisen because of the hard work, industriousness, and entrepreneurial spirit of the French people. The French people while reveling in their stature externally are much more cynical about their successes at home. Most Frenchmen speak of the “Glorious Thirty” and the “Pitiful Thirty” years, eras of post-war economic boom and subsequent economic stagnant malaise. Much attention and commentary is dedicated in political and intellectual circles to restoring the lost equilibrium of previous times of plenty. Much media analysis revolves around the stagnant fortunes of the French way of life and the middle class’ dwindling standard of living.

The French are also quite the political people. A country were successive constitutions have put the onus of wealth creation on governments and on individuals but only through their political choices. France thus, has seen successive ideologies and political currents wrestle with the central question of balancing collective wealth and well being with that of the individual. One might assume that through its rich political and governmental experiences certain lessons of history might have been learned. Moreover, the French being great internationalists and multilateralists, one might further assume that the country strives to benefit from the experience of its fellow nations with regard to its great equity dilemma. One would, seemingly, be wrong to assume these things. The popularity of France’s current presidential candidate front-runner would leave any Homo economicus perplexed.

The first big splash by the ‘Parti Socialiste’ presidential candidate came when he announced on live television that he wanted to impose a 75% top marginal income tax rate for revenues over a million euros. Other policies announced supposed to reduce ‘inequality’ were; a maximum lowest paid worker to CEO salary ratio of 1 to 20 and a new tax bracket from 150 000 euros to 1 000 000 at a higher 45% marginal rate (currently standing at ~41%). In Hollande’s campaign platform other musings are added to the effect of reducing income tax deductibles for the wealthy. Now, what might be the effect of such policies? (aside from giving Swiss bankers a collective orgasm). One effect would be to vilify the wealthy, to the point where many might leave, if not most. Since most wealthy people (first generation at least) are entrepreneurial and industrious business builders, maybe the intention is to reduce wealth and job creation? One French daily has aptly called the phenomenon of geographical tax jurisdiction arbitrage “Fiscal Exodus”. If the Laffer curve central thesis remains correct, all other things equal, the number of wealthy Frenchmen in Brussels, Geneva and London may well continue to swell.

Ultimately these measures are only for show. They only serve the populist and demagogic purpose of insuring the poor and disenfranchised vote with the socialist. A Hollande aide confessed that the measure might only bring in 250 million extra euros to the treasury, a paltry sum compared to the economic damages the policies will wrought. A policy that is sure to impact the treasury much more severely will be the promise to return the minimum legally insured retirement age back to 60 years of age. The present right of center French administration pushed through an increase in the minimum legally guaranteed retirement age to 62 from sixty back in 2010. The measure was put into place to more or less avoid a Greek fiscal fiasco when baby boomers begin to retire ‘en masse’. Francois Hollande plans to jettison that law, because he believes, apparently, that for every 2 years worked in one’s life, one deserves a year of retirement on average. Add on to that policy his intention to re-tinker the corporate tax rate (35% for large co.’s and as low as 15% for very small enterprises) this would cement France’s third place in the highest corporate tax rates for industrialized nations category. Combine the fact that progressiveness in corporate tax rates is just an incentive for small corporations to generate a maximum of dividend by not reinvesting profits into growth and the fact those marginal rates are going up and it would seem the French Socialist Party is on a war against international competitiveness!

While the above policies don’t really hold up to current economic thought standards, they can be forgiven as staples of the Left’s campaigning and showmanship. The policies that really drive me up the wall are Hollande’s policies towards the Euro. The first policy is one of negotiating a new fiscal treaty where Euro bonds would be issued. With benchmark French 10 year bonds yielding over 90 basis points over similar maturity German Bunds, the trans-Rhine cash grab is barely veiled. No wonder Angela Merkel does not want to meet her greedy potential counterpart. The second Euro Zone focused policy is even more morally hazardous than the first. The socialist candidate wants the ECB to adopt a dual mandate of inflation targeting and growth promotion. Never mind the moral hazard of bailing out broke Euro members, has nobody in the socialist party opened a Monetary Policy introductory book in the last 20 years? Since the early 1990’s central bank after central bank have shifted their monetary policy objectives from currency targeting and growth maximization to inflation targeting with invariably positive results. For a leading candidate to the highest public office of one the greatest nations of the World, to have such a crass and laymen understanding of fundamental economics is astounding to say the least.

So, while arguably the most archaic central bank of them all (the Fed) moves towards greater transparency and is subtly shifting its policy onus from a balance between inflation and growth towards inflation targeting, the French socialists want the ECB to move 20 years backward and forsake its stellar inflation record. Hollande could just as well shout out “To hell with responsibility and orthodoxy”. So let us recap. While the American Left embodied by the democrats and President Obama talk of lowering corporate taxes (to 28% at last check) and encourage the Fed to be more contemporary, the French Left embodied by Hollande wants to turn back the clock of time to a time were symbolism and intentions matter more than results, where its central bank would be ‘nicer’ to poor countries and its corporate tax rate would be higher. Let’s hope that sober economic thought prevails at the end of this campaign, because so far it’s only been mired in intellectual mediocrity. France has always wanted to go against the grain of conformity, who would have know that being conform even in success was so distasteful.

Shout out to our Ghanaian readers!

Cius

End of a Monopsony, Beginning of a New Era?

Canada is getting rid of one of its oldest market distorting institutions, the Canadian Wheat Board’s monopsony. Since its inception in 1935 the Canadian Wheat Board has been the only buyer of albertan, saskatchewan and manitoban barley and wheat. True to its electoral promise the conservative government is voting away the CWB’s market exclusivity. Western Canadian grain growers will now be free to market and sell their own products or choose their own intermediaries. While the move is not universally approved not least of which by a majority of the affected agricultures, it remains well worth celebrating.

Before moving to unilaterally de-monopolize the CWB the conservatives had organized a plebiscite of the farmers to seek political cover. The plebiscite was marginally defeated by wheat farmers and soundly defeated by barley farmers. Hence the wait for a majority government to move forward with the plan. Armed with a majority government the Conservatives have moved legislation to de-monopolize the Wheat Board by August 1st, 2012. Farmers will effectively be able to sell their produce on the open market or contract the grain marketer of their choice.

With the Conservatives 2010 move to block the hostile takeover of Potash Corp of Saskatchewan using the Investment Canada Act and the Conservatives public endorsements of Canada supply management schemes for poultry and dairy products, faith in Canada’ openness to foreign investment was on the skids. However, recent musings by ministers have been more encouraging. The governments bid to join the Trans Pacific Partnership is a case in point. Canada has seen its bid to enter the multilateral agreement  blocked based on its intransigence with regard to its agricultural policies. Prime Minister Stephen Harper has however indicated a willingness to put “everything on the table” in order to join negotiations. The file of Canadian-European free trade seems to be moving briskly as well with negotiations on the Comprehensive Economic and Trade Agreement. CETA is speculated to open up Canadian municipal procurement. While a few unions and entrenched interest will cry foul as they always do, it remains obvious to most that more trade only means more wealth on average.

The move to open up western Canadian agriculture to more competition was an easy move politically, as the conservative vote remains quite entrenched in the prairie provinces. Opening up poultry and dairy industries to more competition however is a much harder sell. Most of the poultry and dairy industries are concentrated in Ontario and Quebec, provinces containing ~60% of the Canadian population and vote. Political backlash from well organised farming syndicates from these provinces has turned discussion of liberalizing agriculture into a taboo. While Canada has traditionally been a positive element and proactive participant in international multilateralism, its stance on agricultural trade has prohibited it from helping the Doha round of trade talks escape collapse. On top of giving Canada a bad rap internationally, these two industries who’s members don’t even represent a single percent of the Canadian workforce, have been gouging consumers for decades without pity.

So it is time that the federal government brought down the gavel of justice on the heads of these special interest. It is time for Canada to liberalize its trade relationships. It’s time for Canadian entrepreneurs to start exporting increasingly competitive products to the rest of the World. It’s time Canadians began enjoying the fruits of trade which are higher quality products from home and abroad at cheaper prices. It’s time Canadian municipalities began running budget surpluses thanks to better priced procurement products and contracts. It’s time Canada did its part in alleviating World poverty not by splurging more resources on fruitless foreign aid development campaigns but rather by opening up its borders to the labour, services and goods of all nations and peoples of the World. It’s time for Conservatives to live up to the esteem that Canadians have bestowed upon them based on a fleeting impression that the CPC represent good economic stewardship! Riding Canada of an inefficient monopsony was a first step towards greater competitiveness and wealth, let CETA be the second but not the last.

Cius,

Many thanks to the readers of this blog from Vietnam!

Aveos Bankruptcy Watch

Well well well. Looks like another ex-Air Canada entity just went bust! Today, Aveos Fleet Performance Inc. locked out its employees at three different sites in anticipation of a bankruptcy filing expected this week. The commercial aircraft maintenance, repair and overhaul company has hangars and shops in Canada, the US and a low cost facility in El Salvador. The company reports that while having been in the red since the companies spin-off from Air Canada, its closings actions were precipitated by dwindling contracts in recent months from its main customer, Air Canada. 

Now this one cannot be brushed off as managerial incompetence, or be blamed on sky-high fuel prices. This one is plainly the fault of a union who just didn’t want its employer to be competitive. Since the company operates in a labour intensive industry only one thing can fully explain its financial woes. Un-competitive labour costs. 

Now of course the high Canadian Dollar makes US or Latin American based maintenance groups more competitive. However international competition has been ferocious for everyone and Canadian workers are neither disadvantaged or advantaged in this regard. Structural trade deficits, often signals of overvalued currencies, exist in many regions of the world and workers should just get used to it! So while not wanting to spite on the newly unemployed, they probably could have picked or formed a less confrontational union, accepted lower wages & benefits and kept their jobs.

Union members of Canada beware, heed the writing on the wall that is the Aveos bankruptcy proceedings.

Cius,

And on this March 19th, thank you to our Ethiopian readership

Bretton Woods Stress Disorder Again?

Did you hear? China is manipulating its currency to enrich itself on America’s back. Were you not aware that the Euro was actually German machinations so that it could out-compete the area’s periphery for its own gain?

There is a lot of talk out there of currencies being used as a form of weapon in the 21st century’s new form of favourite international warfare; economic warfare. Everybody seems to be guilty of partaking in this ‘non-violent’ form of confrontation. China has an undervalued currency pegged on the US dollar. To be fair, over a dozen other countries do too. Half of western African countries have pegged to the Euro as well as a few notable others. Accusations have been leveled against Germany for unduly profiting from the competitive weakness of its monetary partners since the 1992 Maastricht Treaty (and especially since the Euro crisis of 2011). Various central bankers and government officials around the World have called quantitative easing intentional currency manipulation, essentially accusing the US of cheating (the Bank of England and European Central Bank would also be guilty of this in such a framework). Essentially there has been a lot of posturing and indignation flying around focused on this one issue of currencies. I think remembering what a currency really does for an economy could help cool the air.

Some people like to say that currencies function as market mechanisms. Now nothing could be further from the truth. Just because there is a semi-unregulated currency market does not mean currencies are free market instruments. Just like a carbon market is not a liberal concept because trading is free. The collapse of the Bretton Woods system occurred because nations couldn’t compete in a relatively free trade environment. Certain nations were more competitive and the others did not have the political will to increase national competitiveness. A new system arose quite naturally whereby a floating currency did all the work of correcting competitive imbalances. As a nation comparatively slid into economic incompetitiveness its currency would be reevaluated downwards by a free currency market to insure a semblance of equilibrium of balance in trade terms. Essentially governments outsourced the responsibility of putting into place national competitiveness to the markets to avoid labour disputes and imposing fiscal rectitude to national budgets.

So when China pegs its currency to the US’s it is in fact just returning to a Bretton Woods type formula. If a trade balance exists between the two countries it is because the two governments do not share the same appreciation for macroeconomic rectitude. While the US splurges as a nation China saves. While in the US labour movements have the legal upper hand on business (see GM, Chrysler bankruptcies and Boing labour conflicts) in China pro business policies abound (sort of). In essence, the Chinese government does not shy away from imposing strict macro prudential policies on its economy, America elects Democrats instead. So the US’s complaint really resides in its political dithering with regards to economic policy. China’s currency policy is just one of limiting the risk to business of currency volatility. A policy US corporations should be in total agreement with if unclouded by nationalistic sentiment. To sum up a free floating currency is just a political tool to avoid hard decisions domestically.

Let’s remind ourselves of the cost of a free floating currency when a country is profoundly uncompetitive like Greece and even the US. When a country runs successive and deep current account deficits it means the country is chronically living above its means. A free floating currency would drop to correct this phenomenon. Increasing the price of foreign goods to impose a contraction in national living standards. So a country would in theory spend less on imported goods (food, clothing, cars and other discretionary items) to afford overspending in other goods (typically healthcare, education and other entitlements). So next time you see your native currency drop, odds are good that to afford government social programs you and all other individuals will need to buy cheaper food, flimsier cars and smaller houses. I wonder if electors aware of these dynamics would so liberally demand government services if they understood it meant less beer Friday night and less outings to the restaurant. Now some social democrats might argue it’s the price to pay for equity. Remind the next one you see that poor people are disproportionately affected by increased inflation on consumption goods. If they think value added retail taxes are regressive tell them government services induced current account deficits are more so (lost jobs, lost buying power).

So if one believes the Chinese won’t give up the peg and the Euro will survive (both highly likely outcomes) another solution is necessary. The US to take as an example, are doubly guilty of digging there own grave. The US worker remains the most productive of the World by any metric, so why does does the Chinese worker out-compete him (as demonstrated by the gaping trade deficit between the two countries). The reason is because the Americans are doubly competitive. How so? One of the US’s greatest exports with which virtually no country can compete is its government debts! No other financial instrument is more prized than the US’s Treasury Bonds. While the merchandise and trade balances can be negative the balance of payments always equals zero.

So all countries are faced with a straightforward choice; export goods and services or export financial paper (of which government is generally the largest component). Since the US issue so much debt that everybody buys the money cannot be spent on goods! If Barack Obama really wants to double exports in 5 years he can do it in a heartbeat by refusing to sign the next debt level increase legislation to hit his office. Obviously this implies hard political choices which I don’t mean to discount so caricaturally. China’s peg works by purchasing US financial assets, stop issuing them and China will not be able to buy them. The peg will then collapse without outright adoptions of the US dollar. Since China is so hell bent on controlling its internal economy, sacrificing the totality of its monetary policy sovereignty to another country is probably not in the cards.

The lesson while somewhat different for the PIIGS is essentially the same. Get competitive or get punished “à la Grecque”. Stop living above your means. Whether in a monetary union or even in a free floating currency regime, free lunches don’t exists, you’ve got to pay the piper someday. So Brazil and Canada pipe down will you, stop blaming your woes on currencies that refuse to act conveniently to your politics. To the US, ”Buy-American”, quantitative easing et al. are really cheap tricks. To any and all thinking of tariffs and quotas, please look at what happened last time that was tried. So to all China haters in the US or Germanophobes in Greece and the like, blame yourself for being ungovernable first, everybody else is just trying to do their jobs, time you started doing yours.

Cius