EI Changes

Ottawa. Unemployment Insurance (or employment insurance as its ironically called in Canada) is getting its first make over in a while. The Conservative Government has come out with an outline for its proposed EI changes. The government intends to tighten eligibility requirements. The exact structure will be presented in a bill once the governments omnibus budgetary bill has been passed.

The outline roughly sketched out calls for the creation of three categories of unemployment benefit seekers. The first one for long-term workers who enjoy EI benefits the least, another for infrequent EI benefit recipients and the last for chronic EI recipients or EIers. These three groups would see their EI benefits taken away were they to refuse jobs of equivalent pay or equivalent trade, with the long-term workers given the most leeway to choose their next job and repeat offenders the least. EIers will be expected to accept jobs earning as little as 70% of their previous employment remuneration. The government estimates that these changes to EI should only curb eligibility for 1% of current recipients.

There are two kinds if structural unemployments. First there is the natural one, people between jobs, students at various times, people waiting for that perfect job offer before jumping back into work, etc… Than there is the policy induced structural unemployment. Labour market restrictions, credential compatibility issues, high minimum wages, high unemployment entitlements, etc… When the policy induced structural unemployment is reduced it is most often a reason to cheer. Unfortunately government policy corrections not involving the elimination of the underlying policy often add a layer of market distortion.

So here’s hoping the reservation wage won’t actually go up. Because this could certainly be spun into a Nash equilibrium, whereby workers (especially newly active labourers) refuse to take on jobs as they’ll be looking at that 30% discount they’ll have to swallow if laid off. While the effect will surely be smaller than that of reducing entitlement rent seekers, their remains a risk that for certain categories of workers structural unemployment could increase.

The Key to Eurozone Stability Isn’t Monetary

The Eurozone debt crisis has raised important issues in the profession of economics. With regards to monetary integration much knowledge has been developed thanks to the crisis. Economist have virtually all rallied to the idea that  monetary unions exacerbate competitive imbalances. The Proof is in the widening gap of current accounts between the germanic like economies and the profligate periphery economies. Germany has never exported so much while the PIIGS have not suffered so much in a while. While the causes of the crisis are apparent to almost everyone (except maybe the Greeks) policy prescription differences abound. The prevailing view is to infuse massive amounts of liquidity into sovereign debt markets to stop the liquidity haemorrhage. The theory that the Eurozone is in a temporary liquidity crisis has strong proponents such as Paul Krugman or Roger Bootle. While Ireland has a strong growth profile and Italy does have a primary surplus that could justify monetary stopgap policies the problems of the other Euro profligates cannot be tidied over by temporary monetary measures because their issues are of a structural competitive order.

Once monetary policy impotence is accepted two policies approaches remain. The first is fiscal integration. A lot of economist advocate Euro bonds to alleviate market pressures on individual member finances. The obvious problems pertain to moral hazards. One of the causes of the crisis was that the reduction in sovereign interest rates because of decreased currency risk would induce profligacy. Such a phenomenon would be continued and compounded by Eurobonds. A fairness issue would also arise as lower debt countries would pay for the debt spending of others and AAA rated countries would actually pay heftier interest than they deserve. A problem in construction is also obvious. Eurobonds would be a substitute investment for sovereigns, unless Eurobonds replaced sovereigns entirely they would cannibalize demand for sovereigns and might actually help increase sovereign yields as German bunds have done to French Bonds today.

Instead of pooling liabilities to decrease individual sovereign risk, why not pool assets? This might be somewhat more palatable to German hawks. One way of pooling assets would be to federalize Unemployment Insurance. All members could pay into a fund that would back payments of insurance payouts. This would further effectively create an internal counter cyclical government spending stabilisation. As some states power ahead the transfers would automatically alleviate budgets in ailing economies. This already exists in Canada to great inter-provincial budgetary stability, the proof being that Quebec’s yields are at historical lows although the province has comparable debt levels to many PIIGS. Unfortunately as with all insurance schemes moral hazards subsiste, but the idea remains a good way to alleviate massive intra monetary union budgetary differences.

Fiscal integration however will not in the long term eradicate structural problems. The crux of the Eurozone problem is quite simply competitive differences. For a monetary union to survive in the long run productivity must balance out across its membership. Standardizing macro-prudential or regulatory frameworks across the zone is a good idea, but only when the policies standardized across the monetary union are good. Mis-regulation at a central level is worst than at the individual problem, imagine what the Eurozone sovereign debt crisis if everyone had emulated Greece or Spain’s policies. Diversity and regulatory competition is good so long as it leads to emulating of best practices. That countries aren’t emulating Germany is testament to political and not economic issues.

The only issue remaining is that of markets prevented from punishing political cultures conducive to bad policy. Greece has a political culture conducive to demagogy and fiscal populism. Markets are sending Greeks a message, “change your ways or suffer” that the European Union prevents this pedagogical process from unfolding is the real long term risk to Eurozone stability.

In Defence of Eduardo Saverin

In Defence of Eduardo Saverin.

In Defence of Eduardo Saverin

If a tax evader is someone that actively attempts to minimize his tax burden than Eduardo Saverin is a tax evader. A Facebook co-founder Eduardo Saverin has given up his US citizenship and moved to Singapore. The effective tax rate in Singapore is of only 20% and by giving up his American citizenship before last Friday’s 16 Billion dollar IPO Saverin stands to save hundreds of millions of dollars in capital gains taxes. Whether he admits it or not he is a tax evader. However he is not a tax cheat. What he has done is legal, moreover it is also moral. Avoiding taxes is never really frowned upon until American politicians get involved. Was Bill Gates lambasted in the media for setting up shop in a state with no income tax where he probably saved Billions in dollars in taxes? No he was lauded for helping reserve the US’s hegemony in the information technology sector.

Why has Saverin received no equivalent praise? He was the first investor in Facebook plucking his life savings into an idea that would probably never have developed into the phenomenon it now is. Without Saverin there might never have been a Zuckerberg. Can you imagine the risk involved in putting thirty thousand dollars of your savings into your friends company based on nothing but entrepreneurial faith?

Democrats and left leaning media often like to remind people that they ‘owe’ their wealth to the country that cradled their aspirations, educated them and provided the consumers to underpin their wealth. This whole social contract idea is their main justification for gouging the wealthy with taxes. But should Saverin and Zuckerberg be thanking America for their success or should it be America thanking them? America was built on the entrepreneurial and industrious spirit of its citizens, without entrepreneurs their would be no America, at least not as we know it today. Without taxes dependent on the wealthy there would be no medicaid, medicare, government backed student loans or military, so one could probably be excused for believing that society owes as much to the wealthy as they do to society.

In any case Facebook’s success cannot only be attributed to America alone. Facebook did not receive any meaningful business press coverage or Hollywood interest for that matter, until it reached 500 million users or roughly double the internet population of the US. At almost a Billion users much of Facebook’s success can be attributed to its global reached and not its American footprint. Without Saverin initial investment there wouldn’t be a Saverin to tax.

What is more worrying though is not the accusations of immoral wealthiness but rather the legal ramifications of some political fomentations against the Facebook co-founder. Attempts to legislate against individuals rights to choose their country of residence even for tax purposes is Orwellian indeed. One’s right to vote with his feet is probably the most important right of all. Enshrined in the American Constitution is the right to free mobility, why can this right be stopped at the border, are we talking about the US or the USSR here? Wealth leaving a country is the price to be paid for choosing high taxes that aren’t globally competitive. The price to be paid for imposing mobility restrictions on capital however will be tantamount to putting a stop sign at the borders entries not just exits. Saverin is of Brazilian of origin and chose the US for its perceived liberties commercial and otherwise, how many future Saverins, Sergei Brins or George Soroses will chose Singapore from the get go instead of New York and California.

There will be a high economic price to pay for this liberticide political behaviour and that is the real scandal here!

Dairy Farmers or Wolves in Cow’s Clothing

FDR used to say that the American farmer was the backbone of America. Likewise in many European countries the agricultural lifestyle is considered like a cultural legacy worth protecting. Canada has not escaped this neurotic infatuation with farmers. One needs to look no further than the advertising campaigns by Quebec dairy farmers to get an idea of how important to society they believe themselves to be. In Canada a more governmentally coddled group of individuals cannot be found, nor a less politically bullying. Ever heard of a politician getting elected on a promise to tamper with Canada’s agricultural supply management schemes? didn’t think so. In Canada to produce milk one needs to purchase a milk production quota. A quota cost $25,000 dollars in Ontario giving the average dairy farm owner millionaire status based on the sole value of his quotas.

Réjean Ouimet, a general manager at St Albert Cheese in Ontario, believes that the dairy supply management is the “best thing in Canada”. “For a small co-op it makes life a lot easier, as we don’t have to deal directly with producers, worry about transportation or even quality control standards on farms.” That is reassuring. Essentially supply management makes dairy farmers lives easier. They don’t have to compete with each other, they don’t have to compete with imports too much (given tariffs on imports rising above 300% in certain cases), they don’t have to do anything but push a button or two and voila milk is arrived. Obviously their jobs are more complicated than that but their own testimony seems to imply their jobs could not be easier under any other system. So great, the then thousand or so dairy farm owners of Canada are richer, live easier lives than they would have in a free market but at what cost?

The first to be punished by the system are actually dairy farmers themselves, or at least prospective dairy farmers. On top of buying installation, cows, equipment, land and developing relations with processors dairy farmer wannabes must purchase onerously expensive quotas to start up a farm. Forget about innovation in an industry where the middle finger is flown at the face of all prospective entrepreneurs.

The second group of people to be punished are the consumers and not just in one way but indeed twice over. Firstly they must compose with higher prices. Some will argue that the benefit of high prices is less volatility in those prices, one wonders what your average motorist would say if he was to be guaranteed a litre of gas for his car at  $2 as opposed to a price that fluctuates between $1.25 – $1.50 ? He would be outraged and so should milk drinkers. The second manner in which consumers are miffed is in terms of choice and quality. With import duties being as high as 300% on certain cheeses good luck finding cheeses half the quality as in France at anything under twice the price. While it must be admit that certain cheeses from Quebec are quite good, that should bolster the case for free trade as local fromageries could then surely compete against imports.

While the above arguments are traditional when it comes to discussing the disadvantages of restrictive trade policy their is a much more pernicious cost imposed on Canada because of supply management and that cost is diplomatic. It is virtually universally accepted in Canada that NAFTA was a resounding success. Since then Free Trade Agreement negotiation has become something of a political sport. Canada is already on the road to becoming the first nation to have FTA’s with three of the World’s four greatest economies (US, Japan, European Union). Virtually all economists (outside of academically backward countries like France et al.) agree that untampered and reciprocal free trade is in everyone’s benefit. Canada’s dairy farmers are vehemently against FTA’s that imperils their economic rentiers status. Canada has already been shut out of the Trans Pacific Partnership groupe of free trade negotiating countries on the basis of supply management. How many more FTA’s do Canadians want to deprive themselves of to protect the wealth of a small group of individuals?

Why should Canada have more rather than less dairy farmers. Their is an almost perfect negative correlation between per capita wealth and share of population in agriculture, which means the less agrarian a society is the more wealthy it is. Do Canadians really want to be less wealthy? In any case for those farmers afraid of loosing their livelihoods to a liberalized dairy product market, they can be pointed to New Zealand as an example which became a World leader in dairy product exports, since abandonnement of its supply management schemes decades ago! Few industries hurt Canada as much as dairy farming, it’s time Canadian politicians stopped kissing their butts and started kicking them instead.

Hollande Wins in France

Paris. On May 6th the French people were called to vote in the second round of their presidential election in which Francois Hollande the Socialist Party candidate defeated the incumbent center-right president Nicolas Sarkozy with a 51.7% score. It will be the first time in 17 years that a socialist will occupy the Élysée presidential palace. Hollande was elected on an anti-austerity mandate, which should at the very least make for a tense relationship with Germany’s Chancellor Angela Merkel. Say bye bye Merkozy.

All kidding aside, Hollande’s handling of the tail-end of the Eurozone sovereign debt mess, with Greece’s renewed post electoral turmoil, will test the left’s ability to push forward reasonable and effective economic policy. Greece has over 400 million in debts maturing on may 15th at which point their may be no government to convince the Troika to liberate funds as part of previous debt agreements. Hollande having called for less austerity and more growth must surely now be one of the most popular figures in Greece, remains to be seen whether he can coalesce Germany, Finland and the likes to sweeten their debt repayment conditions.

Followers of the degenerating European situation will now witness an act of political juggling, as Hollande has promised less austerity (but not zero) while stimulating growth with a tax & spend agenda. Needless to say creating growth through taxation with virtually no fiscal stimulus (has he has promised a balanced budget…. eventually) will be a herculean feat! If economics 101 serves as a guide the only way to attain that is through the liberalization of an overly regulated economy. But with Martine Aubry as the expected future Prime Minister, liberalization seems to be off the table, especially given that she is partly responsible for much of that excessive regulation (ever heard of “les 35 heures”).

In any case interesting times lie ahead for France a G8 nation that has been stagnant for much of the last 30 years. With what is plainly an anti-growth political culture now headed by a newly minted socialist par excellence, one may begin to envisage a World where French people may soon have to abandon their already much ridiculed sense of smug superiority.

Air Canada Hates Canada?

As part of this blog’s new series on entrenched special interests and their adverse effects on social welfare, here is the first posting of the series …

One of the great national symbols of Canada was Air Canada. After the pioneering railways and the country binding arrival of the telephone air line travel was the next great medium of communication and transport that was to bind the country together. Until the 80’s Air Canada was seen with other institutions like the CBC, universal healthcare, the Canadian Pension Plan and equalization as a great federalist symbol. Behing the Canadian symbolism that Air Canada represents lays a disingenuous character. Air Canada s now been private for over 20 years but continus to benefit from its past as a crown corporation. This has been made more obvious by the recent Ministerial interventions into the corporations labor relations and past intervention into the company’s bankruptcy process.

It must be admitted that Air Canada’s legacy as a nation building symbol also represents certain business inconveniences. The law under which Air Canada operates does stimulate some relatively significant business impediments such as its stringent linguistic obligations, its obligation to keep its corporate headquarters in Montreal or even its obligation to keep some of its maintenance work in Canadian cities. While these constraints should be unacceptable in a liberal and open economy and presents the company with some competitive handicaps they do not excuse the benefits that are accrued to the airline.

The federal government has now intervened almost half a dozen times in the company’s labor disputes to block legal strikes by its unions and to abort planned lock-outs in the past few years. While the government’s rational for such moves were sensible they create an unfair negotiating environment skewed towards management. Air Canada is thus sheltered from a grounding of its fleet and disruption of service to its clients. How is this bad for Canadians one may ask, the answer is a little convoluted but quite important. Air Canada’s competitors cannot take advantage of labor disputes to advance their market share. Westjet and Porter are stellar exemples of Canadian corporate success. They offer competitive prices with competitive services but they cannot advance their market share because of Air Canada’s monopolistic caracter. Air Canada has the rights to a majority of landing rights at Canadian airports and so long as the company operates under the protection of the government these airport parking slotes aren’t up for purchase. If Air Canada employees want to strike let them do so, if they don’t want to work let their clients flock freely to their competitors.

Air Canada’s monopolistic behavior extends well beyond the local Canadian market, it extends to Canadian international travel as well. Canadians are inhibited from receiving better prices and offers by the company’s thinly veiled lobbying efforts when it comes to international travel. The most gruesome case of such crony capitalism is the government’s refusal to grant landing rights to the many emirate based carriers. Emirates Airlines and Etihad Airways have been refused landing rights at Toronto’s Pearson International Airport. The reasoning is that those airlines have committed the sin of being unfairly subsidized by their state, something Air Canada has never been guilty of! Not only has Air Canada lobbying efforts managed to abort the potential of having a foreign nation subsidize Canadians international travel it has quite simply reduced travellers flying choices and competition. Another costly consequence that Air Canada executives are certainly grieving about, was the Emirates’ closure of Canada’s secret military Airbase, a closure estimated to have cost Canadian taxpayers 300 million dollars.

If that were the only cost inflicted directly to Canadian taxpayers maybe we could forgive the company its bad corporate citizenship (…not), but when Air Canada went into bankruptcy protection in 2003 the company was loaned 250 million dollars to help induce foreign buyers to preserve the company’s employees’ lavish employment conditions. With the recent bankruptcy of Aveos it looks like Quebec City and Ottawa may be dishing out more taxpayer dollars to help float the former subsidiary.

All in all it seems clear that Air Canada benefits from a protective regulatory environment and government labor and financial aid. That Canadian consumers can be ripped off so flagrantly and the country’s international relations jeopardized so flamboyantly for the account of a profit seeking corporation is the definition proper of crony capitalism. Here’s hoping that the government will correct its aim on this file and finally let Air Canada go properly bankrupt so that Canadians can once again enjoy safe and quality travel at the reasonable prices they deserve!