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The Progressive Economics Forum

The Conservatives, sound finance and the facts of recent history

Louis-Philippe Rochon

Associate Professor, Laurentian University

Co-Editor, Review of Keynesian Economics

 

With the tabling of a new federal budget on April 21, the Conservatives are trying to reinvent themselves as good economic managers, stalwart of sound finance. But after almost nine years in office, the data simply does not confirm this story. Mr. Harper’s more recent optimistic façade is a smokescreen that hides a dismal record on the economy.

Despite this fact, Conservatives have nevertheless traditionally portrayed themselves as fiscally-responsible tax cutters, job creators, and engineers of economic growth. At the same time, they have painted Liberals and New Democrats as irresponsible, free-spending parties focused on bankrupting the country. But recent history simply does not support the Conservative claim of good fiscal stewards; if anything it paints them as a fiscally-irresponsible party. In fact, on a number of economic variables, the Conservatives report card is worse: Conservatives have mismanaged both our finances and our economy.

Read more »

The Return of the Gilded Age: Consequences, Causes and Solutions

On April 8, I had the honour of delivering the Harry Kitchen Lecture in Public Policy at the invitation of the Department of Economics at Trent University.

I took the opportunity to offer a broad reflection on economic inequality, arguing that while inequality is inherent in capitalism, too much inequality undermines economic as well as social well-being. I also argue that priority has to be given to shaping the distribution of market incomes as opposed to purely redistributive solutions.

Here is the text of The Return of the Golden Age; Consequences, Causes and Solutions.

Budget 2015: A tale of austerity past, present and future

Cross-posted from my blog.

I’ve been banging the drum of “slow-motion austerity” for a while and little in the 2015 federal budget suggests any change from the pattern of death by a thousand cuts. This budget is another is a series of unspectacular austerity budgets. Taken together, however, the cuts rapidly add up and budgets become more remarkable for the tenacity with they’ve made us pay to get to the present.

A long-term view focused on austerity is very different from much of the mainstream coverage of the budget with a tawdry focus on “goodies” for this group or that. While the media should be criticized for too easily swallowing government talking points and dividing people into opposed special interest groups, it would be naive to think of this budget outside the context of electioneering to carved up demographics. On the one hand, this reinforces a neoliberal narrative of each for themselves; on the other, this is also the reality of the on-going neoliberal transformation.

So while this budget may be more politicized than average in light of the fall election, I won’t write about goodies for groups. Instead, I’ll take the opposite tack: look at the election year budget as a continuity of slow-motion austerity past, present and future. Read more »

Budget 2015: Robin Hood in Reverse

Here’s a link to the longer analysis I prepared of the federal budget, now on-line at CUPE’s website, to accompany the press release and notes we put out immediately following the budget.

The entire document may be too long to post here, so here’s the 1st two paragraphs.

The Big Picture: more tax cuts for the rich: nothing for jobs and working Canadians.

The Conservative’s 2015 federal budget demonstrates they have nothing new to offer workers and the majority of Canadians. Once again it includes tax cuts for business and the wealthy, and nothing substantial to create decent jobs or to help Canadians struggling to make ends meet. In fact, it takes money from workers contributed through the surpluses in the Employment Insurance fund to pay for these tax breaks for the wealthy and corporations.

The Conservative’s economic policies and spending cuts are destroying jobs, squeezing workers’ wages, slowing down economic growth and making it harder for working families to get by.

_______________

Economics is the dismal science, but I have to admit that the budget is not without elements of unintended humour–but you have to wade deep in to find them.

Read more »

My “Top Five” Most Outrageous Things About This Budget

With a document whose very timing, let alone content, was so transparently politicized and manipulative, it’s hard to even know where to start.  Among the many galling, short-sighted, and ultimately destructive components of this federal budget, here are 5 that stand out in my view: Read more »

ROCHON on 2015 budget: Conservatives making a mockery of working Canadians

CONSERVATIVES MAKING A MOCKERY OF WORKING CANADIANS

Louis-Philippe Rochon

Associate Professor of Economics, Laurentian University

Co-Editor, Review of Keynesian Economics

 

Today, with great fanfare, Minister of Finance, Joe Oliver, tabled his much-delayed budget in the House of Commons. Despite the government’s best effort to confuse Canadians with tales of terrorism, the economy and job creation remains by far the single most important issue facing hard-working Canadians. Unfortunately, this budget, full of accounting tricks, will do very little to revive Canada’s moribund economy, and it contains far less in terms of good news for working Canadians.

In fact, Mr. Oliver, with Mr. Harper by his side, has managed to accomplish quite the feat with this budget: they showed how the government is devoid of any real vision for Canada’s economy, while simultaneously mocking hard-working Canadians by giving away a panoply of boutique tax breaks … to rich friends and very targeted groups that they hope will vote Conservative in October.

This is less a fiscal budget than it is a shopping list.

Overall, two things stand out most from this budget.

First, the government seems to be oblivious to the fact the economy is essentially dead in the water, despite the government’s rhetoric to the contrary. Bank of Canada Governor, Steven Poloz, admitted as much last week when telling Canadians there was zero growth in the first three months of the year. This will no doubt be followed by another quarter of poor or even negative growth. Mr. Poloz believes the economy will come back to life in the second part of the year, but so far this has been greeted with much skepticism by the private sector and many economists.

But Mr. Poloz deserves some credit at least for taking this threat seriously. For instance, to counter the effects of the oil crisis and other elements ailing the Canadian economy, Mr. Poloz lowered the bank rate in January to 0.75 per cent. Mr. Poloz is keenly aware of the poor and “atrocious” nature of the Canadian economy.

Mr. Oliver and Mr. Harper in contrast appear not to be.

This brings me to the second element that stands out the most from this budget: nothing in it will contribute to resuscitate the economy. Sure, there are some tax breaks, but 1) these do not amount to a consistent and logical approach to fiscal policy; 2) these tax breaks (some announced before the budget – 160 since taking office) will largely go to rich Canadians who really don’t need any additional fiscal assistance.

And tax breaks are never as effective as large-scale fiscal expenditures. There is of course a $1 billion a year in transit spending, but it is so grossly inadequate that is sad. Mr. Harper is simply ignorant of the real needs of Canadians, and of the kind of spending that is really required to get the economy moving again.

When you think about it, Harper’s government has been mired in the great economic and financial crisis almost from the day it has taken office in 2006. Of course, the crisis was a truly worldwide phenomenon and Harper is certainly not to blame for creating it (but certainly his kind of policies certainly are). But we can certainly hold the government to account for how it is dealing with the aftermath of the crisis. What Conservative policies aided it putting an end to the crisis? What Conservative policies contributed to ensure a strong economic recovery? Sadly, not many.

Harper seems to be more interested in letting markets and consumers lead the way at a time when markets themselves are demanding governments take the reign. This cat-and-mouse dance is harmful to our economy: more than ever, the government must take the lead now and propose bold steps to ensure our shared prosperity.

Eight years after the crisis, and the economy is still stalled. This budget would have been the perfect opportunity to inject some life into it with some infrastructure spending. Yet, rather than give Canadians a bold and much-needed vision, the strategy is rather a piece-by-piece approach the aims of which are difficult to understand apart from offering tax breaks to the select few.

There is an important disconnect between Mr. Harper’s rhetoric on wanting to help the middle and working classes, and his actions. In the end, this budget is a gross mockery of working Canadians.

We are left with a set of very inconsistent policies, with the two most powerful policy branches of government working against each other. Whatever good Mr. Poloz is trying to achieve with his expansionary monetary policy is being completely obliterated by Mr. Harper’s restrictive and austere fiscal policy. This is not productive.

This budget has added nothing and will contribute even less to the economy.

 

 

 

 

Budget Balanced with EI Surplus

Mr. Oliver likes to say that most of the growth in jobs has been high wage, private sector growth. This is simply not true. Two-thirds of net new jobs created between 2008 and 2014 pay below average wages.

Own account self-employment, those self employed workers who have no employees, have dominated growth in self-employment, and account for 1/3 of net new jobs since 2008. Another 1/3 net new jobs are temporary or part-time. And job growth has skewed to older workers, leaving young workers with few opportunities to find meaningful employment.

Proportion Employment Change

Nothing in the 2015 Budget does anything to address these issues.

This budget is literally balanced on the backs of workers, as record low EI coverage rates have meant a surplus of $1.8 Billion in the EI Operating Account. Exactly as the PBO predicted, this money went directly into general revenues, and provided the federal government with enough money to book a tiny surplus.

Workers needed that money to improve access to Employment Insurance, so that families that have been rocked by recent layoffs could make ends meet while searching for another job. Right now, new labour market entrants need 910 hours to qualify for benefits, which is nearly impossible to accumulate when working part-time. These workers often must resort to Social Assistance or borrowing in absence of EI benefits.

Cuts to Service Canada have meant months of delays for workers who need to access benefits, and this includes workers accessing critical training opportunities. One of the biggest barriers for apprentices seeking to complete their training is delays in receiving EI benefits.

This budget was superficially balanced, but under the surface are very real imbalances – a generational imbalance, and environmental imbalance, and an infrastructure imbalance.

This government balanced the budget to pay for tax cuts that primarily benefit the wealthy – instead of investing in Canadians and the communities that we live in.

ROCHON on the IMF and labour market deregulations

LABOUR MARKET DEREGULATIONS NOT WORKING: IMF

See original CBC column here.

Recent — and potentially watershed — International Monetary Fund (IMF) documents have cast doubt on the merits of labour market deregulation of the last three decades, with important consequences for Canada. But will anyone listen?

The last 30 years have not been kind to economic growth and wealth creation.

The economic “successes” of the neo-liberal era, from roughly 1980 to 2007, pale in comparison to the three decades that followed the Second World War with respect to almost every economic variable imaginable.

One of the core arguments of the neo-liberal era, adopted at one time by the IMF and the World Bank, among other institutions, has been a belief in what economists have called labour market flexibility.

Labour market flexibility is aimed largely at making wage settlements more difficult and less generous, labour force reductions easier for the private sector, and labour union participation more difficult.

According to this argument, in a growing competitive global environment, Canadian companies have to remove any inefficiency in the labour market, especially any that could stifle the private sector’s quest for flexibility and profits.

So efforts have taken place over the last three decades to make labour markets more flexible: A push toward term or temporary contracts, a de-emphasis on job security, laws that made participation in unions more voluntary. And the Harper government has been an active and willing participant in this misplaced quest for labour market flexibility.

The private sector labeled labour unions as disruptive and detrimental to their bottom line: Wage gains were too high and unions too powerful, thereby making it too difficult to “restructure” hiring practices to make Canadian companies competitive (a fancy way to say it was difficult to fire people).

In reality, of course, this was an awful idea in terms of economic theory and economic consequence. In terms of building social peace between labour movements and the private sector, it was no good, either. The attack, however, has been carried out largely on the backs of working Canadians. And now we have proof.

In twin reports, the IMF revisits the question of the success of these policies.

In what can only be labeled a gigantic mea culpa, the IMF now claims that these policies have failed — and miserably, at that.

In two reports, the IMF carefully lays out the empirical evidence and it ain’t good.

In one of them, dated March 2015, the IMF argues that the decrease in unionization rates has largely fed the increase in incomes of those at the top.

Subsequently, for its April 2015 edition of the World Economic Output (WEO) report, which featured data from 16 G20 countries, the IMF concludes that there is no evidence that the neo-liberal deregulatory reforms had any positive impact on labour markets and economic growth.

These painful deregulatory policies, often imposed by force, have had no impact on total factor productivity.

It took courage for the IMF to arrive at these conclusions, and it reminds me of John Maynard Keynes, who famously once said, “When the facts change, I change my mind. What do you do, Sir?”

To its credit, the IMF looked at the evidence and admitted they had been wrong.

The IMF reports are just some in a series of recent reports from reputable institutions casting doubt on the whole neo-liberal era. Some of us have been arguing these same issues for years, concluding this era was one colossal failure, not only for the economy as a whole, but also for workers and their families.

In a recent report echoing the IMF findings, the Economic Policy Institute in Washington argued that there is a direct correlation between the decline in unionization rates in the U.S. and the decrease in the share of income going to the middle 60 per cent of working Americans (more or less, the middle class).

Evidence against the panoply of policies imposed on developed and developing countries over the last three decades is growing.

This requires a full rethinking of economics and economic policies, which is already well underway in many countries, led in many instances by students disillusioned with the teaching of economics. For instance, I have just returned from a conference in Vienna hosted by intelligent students looking for better solutions, and attended by over 200 students.

Many political parties in power, however, still refuse to acknowledge these findings, and continue with the same policies that largely contributed to the 2007 crisis.

It’s time we demand an end to policies that work against working Canadians, and in the process, we must demand from our governments better policies that share gains more broadly.

Louis-Philippe Rochon is an associate professor of economics at Laurentian University in Ontario, and the co-editor of the Review of Keynesian Economics.

Bank of Canada Holds Rate Steady

The Bank of Canada released it’s quarterly Monetary Report today, and held rates firm at 3/4 per cent.

The Bank cut growth expectations for 2015, but expects Canada’s GDP to rebound in 2016. Much of this rebound will depend on a growing U.S. and global economy, and on the ability of Canadian exporters to capture a bigger share because of our lower dollar.

The Bank’s estimates for growth also depend on maintaining strong consumer demand, which may be difficult to maintain given high levels of household debt and lingering labour market weakness.

The underlying thinking behind the Bank’s optimism is that the negative consequences of falling oil prices hit quickly, and any benefits from the lower dollar will take longer to appear. So it looks bad now – growth stalled in 2015 Q1, but we’ll rebound eventually.

It’s also worth noting that government will only contribute 0.2% to GDP growth in 2015, pretty measly given the opportunities for public infrastructure investment. Take a look at the FCM pre-budget call for investments in clean water & public transit.

The Harper Record on Jobs, 2006 to 2014

Here is the link to a short study I have done for the Broadbent Institute on the Harper Record on Jobs from 2006 to 2014 based on annual averages from the Labour Force Survey.

Coverage in today’s Toronto Star is here.

The basic findings, that there is still a lot of slack in the job market compared to the pre recession period (especially for youth) and that there has been a heavy tilt to part time work (one in three of the new jobs), will come as no surprise to readers of this blog.

What I found a bit more surprising is that 38% of the new jobs created 2006 to 2014 were in the lowest paid occupational category – sales and service jobs – and a lot of the good jobs created (35%) were in public sector occupations. Table 4 provides a lot of detail.

The Harper government claims that “since the depths of the recession, we have created more than 1.2 million net new jobs—overwhelmingly full-time, good-paying jobs in the private sector.” They hide their poor record by using the bottom of the recession as the starting point, and clearly if we look at their tenure as a whole the tilt is NOT to well-paid private sector jobs.

 

 

 

 

Workers Link $15 Minimum Wage to Decent Work

Wednesday April 15th is a global day of action on a $15 minimum wage and decent work. Actions are happening across the U.S., and in BC, Ontario, and Nova Scotia.

Both in the US and in Canada, workers are making links between decent wages and other employment standards.  The Ontario campaign is named $15 and Fairness, calling for a “$15 minimum wage, and decent hours, paid sick days, respect at work, and rules that protect all of us.”

We thought this would be a great time to release a report written by Gwen Suprovich, a PAID intern at the CLC. The Minimum Wage in Canada reviews the demographics of minimum wage workers in Canada, and the methods that provinces use to determine minimum wages.

Gwen finds that minimum wage earners in Canada don’t fit the stereotype of teenagers in their first job. The majority are over 20, not in school, and one in six have a child at home. The proportion of minimum wage workers employed by large employers (more than 500) has grown from 30% in 1998 to over 45% in 2013.

Gwen notes the lack of federal leadership in setting the minimum wage, and finds that most provinces use mechanisms that are not transparent and lack accountability. While several provinces have review boards, only Nova Scotia requires the board’s reports to be released publicly. (Newfoundland and Labrador and Saskatchewan do release their reports online, but are not required to do so.) Review boards can be effective, but must be transparent and government’s must be accountable to their findings.

In terms of policy recommendations, Gwen finds that the minimum wage should be set at a level that would keep a full-time worker above the poverty line. To reduce the impact on business, increases should be announced well in advance. Once wages reach a livable level, they should be indexed to inflation.

Our case for raising the minimum wage is well supported by a CCPA report out of BC, The Case for Increasing the Minimum Wage, which noted that the minimum wage could be a useful tool for reducing poverty, as long as it was set sufficiently high.

Maybe I’ll see you out in the streets tomorrow.

Jobs Gains Skew Part-time, Over 55

The Canadian labour market added 29,000 jobs in March, beating expectations. Underneath the headline, though, the numbers aren’t as rosy.

A jump of 57,000 part-time jobs masked the loss of 28,000 full-time jobs between February and March.

Given the jumpy nature of monthly LFS data, I’ve decided to base most of my analysis on quarterly numbers. And since most of the job gains were in the 55+ age group, I thought it would be interesting to look at the FT / PT breakdown by age.

Using seasonally unadjusted data, I compared Q1 2014 with Q1 2015. We find that part time jobs dominate in the under 55 age group, and full-time jobs dominate in the over 55 age group. Since more boomers age into that category every day (and will be doing so for the next few years still) the meaning of that is questionable.

JobsQ1

 

In fact, what we see when we look at employment rates, is that they haven’t budged for any age category. So employment growth in all age groups has only just kept pace with population growth, and not made a dent in our stagnant labour market.

 

EmpQ1

Over the medium term though, we have seen an increase in the employment rate of 55+, and a decrease in the employment rate of 15-24 year olds. Using seasonally adjusted data, there has been a steady increase in the employment rate of workers over 55, with nary a blip for the recession.

On the other hand, the employment rate for young workers 15-24 fell 5 percentage points during the recession, and remains 3 percentage point lower than in Q1 2007.

Generations

 

Take away – there’s a stagnant job market for core age workers, and an awful one for young workers.

What we don’t need is more of the same economic mismanagement, focused on cuts rather than opportunities for growth. We need to build a sustainable economy for the future.

ROCHON on balanced budgets

Balanced budget legislation will be disastrous for Canada

Louis-Philippe Rochon

Associate Professor of Economics, Laurentian University

Co-Editor, Review of Keynesian Economics

Twitter @LPROCHON

 

Finance Minister Joe Oliver’s latest muses about introducing balanced budget legislation is the worst policy for Canada, and will doom us to European-style crises and rob future generations of prosperity.

While the details of the specific plan are not yet available, the very idea of forcing governments in good or bad times to have a balanced budget is one of the worst economic ideas this government has had in its 9 years in office. To wit, such a policy has never worked in any of the places it was adopted. It never leads to growth, and in fact depresses economies.

I am currently lecturing in France, where I see everyday the disastrous consequences of austerity and of forcing governments to avoid deficit spending in times of crises. As a result, the government is unable to help young people find jobs, with the youth unemployment rate at 25%; elsewhere in Europe, youth unemployment is more than 50%. Governments are introducing difficult cuts to social programs that are leaving Europeans considerably worse off.

And in Canada, a mere week after Bank of Canada Governor Steven Poloz announces that first quarter growth in Canada will be “atrocious”, the government is forging ahead with plans to bring in balanced budget legislation. This is insensitive. The government seems simply oblivious to the hardship of so many working Canadians, yet at the very same time, introducing income splitting policies that will benefit the rich, and doubling the annual contribution limit for Tax Free Savings Accounts, which will largely benefit once again, Canadians who have the luxury of saving roughly $1,000 a month. How many Canadians, especially among those working two jobs simply to make ends meet, can save $1,000 a month?

But it also smacks of hypocrisy: for 2/3 of its time in office, the Harper government had deficits. In a very important way, imagine what Canada would look like today had this law existed in 2006? The recovery, no matter how weak it is, would never have taken place. It would have doomed up to several more years of crisis.

Not only is it bad economics today, balanced budgets will also doom future generations of Canadians, your children and theirs, to depression-style economics. Why? When governments spend, there are two types of expenditures, what we call current account spending (imagine spending on pencils, desks and government employee salaries, in other words, government’s current spending on goods and services to satisfy current needs) and capital account spending. This latter category is essentially spending on our infrastructure (imagine spending on roads, bridges, sewers, electrical grids and other vital areas); in other words, this type of spending is investment in our future.

This distinction is well-established in national accounting, and with good reasons. Capital spending (also called gross fixed capital formation) is an investment done by the government on behalf of the population, to meet the future needs of Canadians. When the government builds a bridge or new roads, the costs are born out today but the benefits will span several year and even decades.

But the federal government does not distinguish between current spending and capital spending: its’ all lumped in together. Therefore forcing balanced budgets will lead to considerable underinvestment in our infrastructure: it will grossly depress an already-depressed commitment to infrastructure spending in Canada.

So imagine a government wanting to upgrade health care, or our sewers, or electrical grid, or improving our roads and bridges, or increasing social security. Well, under the current proposed legislation, governments won’t be able to deficit spend to improve our infrastructure, unless it drastically offsets the whole amount of the investment. So what will it do? Only two possibilities: 1) nothing; 2) introduce draconian cuts in other areas, like social services, to offset the full amount of the investment. This will have one of two consequences: 1) allow a further deterioration of our infrastructure; or 2) the eventual elimination of our social safety net.

Worse even, it could force the government, in the name of cutting expenditures, to push unto provinces some of the existing federal programs. If provinces don’t want to run deficits because of these extra costs, they will be forced to increase taxes.

If the government insists on carrying out this myopic policy, the least it could do is to propose to balance current spending over the business cycle. An argument can be made that governments should not overspend in buying goods and services for current needs, over the entire business cycle. This would at least leave governments with the ability to respond in times of recession, and to cut back spending when the economy is growing. But constraints should never be placed on capital spending: this is a gross misunderstanding of economics and national accounting.

This policy is one that opposition parties must denounce at once; they must vow to scrap this legislation once they take office in October. Otherwise, this policy has the potential of doing more harm to Canada’s economy, and to push us into European-style crisis for decades to come.

 

*Special thanks to Nick Zorn and Pablo Bortz for some useful comments

ROCHON on the upcoming federal budget (April 2015)

THE FEDERAL BUDGET AND CANADA’S ANNUS HORRIBILIS

See Original post here for the CBC.

Canada’s Finance Minister Joe Oliver announced a new – and long overdue – federal budget for April 21. With the Canadian economy doing so badly, this budget will be crucial.

Will the minister do the right thing and give Canadians a budget that will stimulate the economy? Or will he continue with the government’s obsession of balancing the budget and further doom the Canadian economy to a recession?

The facts about the Canadian economy are not encouraging: increasing unemployment (a real unemployment rate of nine per cent), and economic growth once again in negative territory.

A recent analysis on PBS even questioned whether a recession is imminent, and I have gone on record to say 2015 will be Canada’s ‘annus horribilis’.

In light of this economic mess, the government tried to change the channel on us, and focus our attention away from the deteriorating economy to terrorism.

The government wanted to convince us that another attack was somehow imminent and that terrorism is what threatens our livelihood.

Economy is No. 1 priority

But Canadians wanted none of it.

To our credit, we told the government we want jobs. Polls indicate Canadians overwhelmingly see the economy still as more important than protecting us from terrorism.

We have told the government in a strong, unified voice: the economy is still our No. 1 priority. So expect the government to address this matter, for ignoring it will come with some real dangers at election time.

Bank of Canada governor Steven Poloz is trying his best at keeping our economy afloat by lowering interest rates, but this will have little or no effect. When the economy is this depressed, monetary policy becomes ineffective. Mr Poloz can lower rates again but what we really need is more fiscal policy.

So as the economy deteriorates even further, the focus will inevitably be on the federal budget.

Yet, the federal government seems uninterested in helping the economy. Instead, it prefers to give out some tax benefits here and there, with no clear fiscal strategy. And if 21 is anything like the past, there will be nothing in this budget that will stimulate the Canadian economy.

Shrink the government?

So what’s going on? Why is the government so obsessed with balancing the budget?

There are two grand views of how economies work. Some, like myself, see economies as naturally volatile and unstable, and in need of government intervention on a regular basis to prevent the economy from falling into periodic recessions or worse, into crises.

Private markets are driven by speculation that destabilizes the economy. Regulations are needed to keep it orderly.

Others, like Mr. Oliver and Harper, see free markets as wise places, prone to stability. Government intervention is destabilizing and is not welcome.

What is needed, in fact, is to shrink the size of government. This is achieved first by lowering taxes, thereby lowering revenues and creating deficits. Then, to balance the budget, governments must cut expenditures.

These are diametrically opposing views. Which one is right?

To answer this, one can just turn to recent history. Since 1980, governments around the world have dismantled regulations that had kept our markets fairly stable until then.

What happened next is supported by a massive amount of data: increased inequality, higher unemployment, lower wage growth, greater volatility. And now the IMF says lower unionization rates contributed to great income inequality.

In light of this, the problem with the view shared by the prime minster and his lieutenant of finance therefore is that history does not prove them right. In fact, if anything, the ongoing crisis, which began in 2007, is proof of how markets acting on their own can easily deteriorate into a world crisis from which only fiscal policy can save it.

This is the lesson taught to us by John Maynard Keynes: 80 years after he published his great book, the world still needs governments to soothe the savage beast.

So with our economy inching itself toward another recession, will the government still stick to its dangerous ideology of free markets? Or will it recognize that it is in need of some serious stimulus.

I hold little hope the budget will contain any promising news. In the end, the government will tell Canadians: “let them eat cold camembert.”

Transforming Precarious Work

The Ontario government has launched a review of their Labour Relations Act and Employment Standards Act. The premise is that the workplace has changed, and Ontario labour law no longer does as much as  it should to protect vulnerable workers.

The Workers’ Action Centre in Toronto took this opportunity to document the myriad ways that workers are left behind, and make 47 concrete recommendations to improve legislative protections.

What’s unique about this report is that worker’s voices are central. Throughout the report links are made between the lived experiences of workers, current labour market statistics, and thoughtful recommendations to make workers’ lives better.

One huge problem in precarious work is the downloading of risk to workers. This is done through just-in-time scheduling, overuse of part-time and temporary employment relationships, and employee misclassification. Too many “workers” are classified as self-employed, and this practice has spread into a surprising number of sectors.

A 2010 review of the construction sector in Ontario found that misclassified independent contractors cost the province $1.4B to $2.4B in WSIB, income tax, CPP, and EI payments. This doesn’t even begin to touch on the lost wages and benefits to workers. The Workers’ Action Centre report offers suggestions that put the legal onus on an employer to prove there is no employee / employer relationship, which could help stem this trend in precarious work.

Another key issue highlighted by the report is “Equal Pay for Equal Work”. One might be forgiven for thinking that this has to do with the gender wage gap (well, it’s related, as we’ll see). Workers in temporary and part-time positions earn far less money than their permanent full-time counterparts. Workers in temporary positions tend to be young workers, women, and racialized workers (which is a factor in the gender and racialized worker wage gap).

This answers the question of why we care about part-time work when the vast majority of workers ‘choose’ to work part-time. It’s because part-time and temporary workers are overwhelmingly low wage, and along with that tend to have much weaker bargaining power in all aspects of their employment.

ONTwages1

 

I absolutely encourage anyone who is putting together their own organization’s response to read this report, and to support the recommendations found within. Precarious workers are counting on us to make sure the Employment Standards Act recognizes their lived reality. This is not only a show of basic solidarity, but the base upon which all worker’s protections stand.

Homelessness in Canada’s North

Over at the blog of Northern Public Affairs, I’ve written a post titled “Ten Things to Know About Homelessness in Canada’s North.”

Topics covered in the post include the high cost of construction in many parts of the North, the relatively high costs of operating housing in the North, and declining federal funding for social housing in the North.

The full post can be found here.

Will Oil & Potash Put SK Back in Black?

The Sask. Party government pulled out all the stops yesterday to report an ostensibly balanced budget, quite possibly the last one before next spring’s provincial election.

Revenue Assumptions

The drop in oil prices is a huge fiscal blow to Saskatchewan, and one of the ways the government projects continued balanced budgets is by assuming a rebound in oil prices. Perhaps more significantly, it assumes no corresponding rebound in the Canada-US exchange rate this coming fiscal year:

WTI Oil E-Rate
Today $43.88 78.58
2015-16 $57.15 79.16
2016-17 $69.50 81.38
2017-18 $79.00 82.88
2018-19 $85.75 84.25

Source: Provincial Budget, page 50.

Historically, there has been a very close correlation between oil prices and the exchange rate. Yet the Saskatchewan government is assuming that, by 2018-19, the price of oil will recover three-quarters of the way to $100 per barrel while the exchange rate will recover only about one-quarter of the way to parity. Read more »

Primer on Investor-State Dispute Settlement

In light of the latest NAFTA Chapter 11 decision to go against Canada, I was asked to put together some background notes for our Unifor leadership on this bizarre quasi-judicial kangaroo courtsystem.  Here they are, in case they are useful for anyone else getting up to speed on the whole investor-state dispute system.

Some very good and more detailed resources on the subject include:

The latest update from Scott Sinclair at the CCPA, who has painstakingly catalogued all the NAFTA Chapter 11 claims, and documented that Canada definitely hold the “most sued” award.

An interesting report from UNCTAD (referenced below) which highlights the worldwide nature of ISDS provisions, the accelerating pace of claims launched, and the frequency of successful claims.

Here are the briefing notes: Read more »

ROCHON on: A tale of two economies? Making sense of recent US and Canadian labour market data

Louis-Philippe ROCHON

Associate Professor, Laurentian University

Co-Editor, Review of Keynesian Economics

Follow him on Twitter @Lprochon

 

With data on the performance of Canada’s labour market released today, many economists and pundits on both sides of the 49th parallel are arguing that what seems to be emerging is two very clear and different paths for the US and Canadian economies. But that interpretation is not exactly correct.

Indeed, the US economy seems to be outperforming expectations, according to labour market data released last week, according to which the labour market is showing continued strong signs of life. In February alone, the US economy added more than 295,000 jobs, making it the 12th month in a row where monthly job creation is at least 200,000.That seems quite remarkable, especially since job creation is widespread across all sectors and demographics, suggesting a firmly-rooted recovery. Moreover the unemployment rate has shrunk to 5.5%, which is where it stood in May 2008. Finally, as the Secretary of Labor, Thomas E. Perez, boasted last week, February marks the first time in more than 3 decades, unemployment fell in all 50 states.

What more could you say? Apparently, the US is on course for a strong growth spurt, fuelling fear of inflation, which may convince the Federal Reserve to raise interest rates sooner than expected.

But we mustn’t believe everything the man behind the curtain is saying. As always, statistics can be used to spin any good story. A closer look reveals a somewhat different story, and in fact, a story that is much closer to our own. In the end, both the US and Canadian labour markets are much closer in character than most pundits would care to admit.

Since unemployment rates by themselves do not tell the whole story, we must dig deeper to get a fuller story.

First, there is still too much part-time employment, and the current employment ratio (the ratio of employed individual to the overall labour population) is still low, at 59.3%, a full 3 points below where it stood before the recession (labour participation rate sits at a low of 62.8%). This means that there is still an important number of workers who still desire full time jobs but just can’t get them, and left the labour market discouraged.

As American economist Thomas Palley wrote recently (see here), close to 22 million American workers are still looking to work more. Clear evidence, he says, that the US is still far away from full employment. In fact, Bucknell University professor Matias Vernengo, argues (see here) that if participation rates were at the same level today than at the end of the Clinton boom years (67%), unemployment rate today in the US would be close to 12% and not 5.5% Now that’s a difference story indeed.

And then there is wage growth, which remains relatively weak. In fact, wage increases have averaged 0.01%, well below January’s 0.5% gain. So wage gains may in fact be slowing down. More importantly, February’s paltry wage gain is still way below productivity gains, which means there is no threat of inflation any time soon or on the horizon.

This brings us to economic policy. It is now widely expected that the US Federal Reserve will begin raising interest rates, and possibly as soon as June if not earlier. But would this increase be justified.

Given the relatively weak labour market still, and the lack of any inflationary pressure (some pundits see the inflation threat everywhere), a rate hike now would seem to be premature.

All this brings us back to Canada.

Recall that in January, while labour markets created more than 35,000 jobs (although I expect those numbers to be revised downward), these were all part-time and self-employment, thereby emphasizing the rather precarious nature of Canadian labour market. This followed a December where the economy actually shed jobs.

The latest job numbers for February are far from encouraging. In February, the Canadian economy again shed jobs, albeit less (1,000), but the unemployment rate increased back up to 6.8% from 6.6%. As I said before, we are heading in the wrong direction.

But there is more. I calculated the real rate of unemployment. If the labour force participation in Canada were at the same level as at the beginning of the crisis, then Canada’s real unemployment rate would be closer to 9% today.

This is as far away from full employment as we can get.

It is becoming overwhelmingly clear that both economies are suffering considerably, and both economies are still far from a sustained recovery, although Canada’s economy is doing far worse.

The Federal Reserve should not be raising rates. This is not the time. In both countries, what we need is fiscal stimulus and massive investments in public infrastructure. Unfortunately, ideological and political nearsightedness will prevent that from happening, virtually guaranteeing a prolonged period of misery.

Deficit Déjà Voodoo again in New Brunswick

The Fredericton Daily Gleaner published an op-ed I wrote about how the province doesn’t have a structural deficit, despite the government claiming it does.  The commentary piece is behind a pay wall so I’ve copied it below.

Last month, CUPE New Brunswick also published a paper I wrote on this issue, Deficit Déjà Voodoo: is New Brunswick really headed off the fiscal cliff?  It and a presentation I gave, another blog post and other background material are also available through this post.

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Want to know a secret? There is no structural deficit 

By Toby Sanger

The New Brunswick government is engaged in extensive province-wide consultations focused on finding $500 to $600 million in spending cuts or increased revenues to address what it claims is “a serious fiscal challenge.” It says this is necessary because the province has a “$400 million structural deficit” has “been spending beyond its means,” and additional funds are needed for other initiatives.

There’s just one big problem with this exercise: the province doesn’t have a “structural deficit”. It’s not that the emperor has no clothes: it’s that he’s hiding them and pleading poverty instead.

Read more »

THE EURO, THE DRACHMA AND GREECE: limited options in an impossible situation

Jean-Francois Ponsot

Associate Professor of Economics, Université de Grenoble (France)

and

Louis-Philippe Rochon

Associate Professor of Economics, Laurentian University (Canada)

Co-Editor, Review of Keynesian Economics

___________________

The final agreement between Greece and the Eurogroup is a disappointment for anyone who held high hopes that Greece would have taken away more than a mere extension to the existing deal.

In the end, Greece gained very little and the continued austerity will do very little to close the growth gap. It is difficult to see anything short of a total capitulation. Perhaps the view Greece could walk out with a victory was naïve in light of the formidable power of the Eurogroup and its financial allies.

How could this have happened?

Greece’s biggest mistake in entering these negotiations was to state at the very beginning of the negotiations that under no circumstances was it prepared to leave the Euro. Indeed, Syriza campaigned on putting an end to austerity without abandoning the European currency. This was a mistake. With so much at stake, you cannot enter such high-level negotiations with your opponents already knowing the outcome of the negotiations. This is simply a fundamental fact of politics 101. And with time running out for Greece, the Eurogroup only had to wait it out. With the financial siege firmly established, Greece had no chance.

Yet, refusal to consider leaving the Euro is at best a second-best solution, at worst an agreement to continue deflationary policies. Indeed, critical economists have been arguing even before the creation of the Euro in 1999 that it was an illegitimate currency and was doomed to failure.

The origins of the Euro can be found in the Optimum Currency Area literature, defended by many economists and pioneered notably by Canadian economist and Nobel Laureate, Robert Mundell. Yet, this view is now being vigorously contested today as it is betrayed by the facts of experience, as the on-going crisis has pointedly shown. According to the endogenous OCA, the creation of a unique currency should have resulted in a reduction of economic disparities between member countries.

Yet, this never materialized. In fact, we were told that a common currency would lead to an increase in intrazone trade by as much as 50%, when in reality they rose by a mere 4%.

The immediate issue at hand, however, is not whether the Euro zone constitutes an OCA, but rather to evaluate objectively the original conditions surrounding the creation of the Euro. We can identify two important ones. First, there is the thorny issue of fiscal transfers between member countries in order to deal with shocks and intrazone imbalances, and second, there is the issue of having a common monetary policy alongside a range of fiscal policies, particular to the each member countries.

It is in this sense that the Euro remains an incomplete currency lacking the necessary institutions to support its creation. A monetary union cannot operate without a political union, by which we mean a minimum degree of fiscal federalism.

In light of this lack of completeness, the Euro has exacerbated existing macroeconomic disparities between member countries, who have lost their ability to adequately deal with economic downturns. Indeed they have no exchange rate, no monetary policy, and especially no fiscal policy: since the adoption of the Fiscal Pact, member countries’ fiscal budgets are now under the strict supervision of Brussels.

But the heart of the problem is not only to solve the immediate problems of Greece’s debt and the consequences of austerity, but also to address and hopefully solve the Euro architecture.

At this stage, we believe there are only two possibilities, each fraught with obstacles and consequences that cannot be taken lightly: either complete the Euro project or leave the Euro. Anything short of either solution, like maintaining the status quo, will simply perpetuate the existing deflationary problems.

The first option of completing Euro’s architecture would entail 2 important changes: i) enter into a full union by adopting a common fiscal policy and a common, synchronized tax system; ii) adopt a Canadian-style transfer payment system that redistributes fiscal revenues from ‘rich’ to ‘poor’ countries.

This option, however, remains at best illusive. From a political perspective, it is virtually impossible. Fiscal federalism implies paying European taxes (as opposed to national taxes) – something Europeans do not want, and then redistributing them, which implies financial solidarity, which Europeans want even less. Yet, the obvious problem is that Germans do not want to see their tax money going to the Greeks or to the Portuguese, who they see as the authors of their own misfortunes.

The second option favours a negotiated exit from the Euro for Greece and other countries facing insurmountable adjustments imposed by austerity, although no less fraught with its own problems and uncertainties.

Unfortunately, this topic has become taboo, especially in Europe, even among critical thinkers. Yet, it strikes us as odd that a great many critical economists and intellectuals, who once railed against common currencies, are now shunning discussion over a Euro exit. Now, they argue that abandoning the Euro would be too painful for any country, let alone Greece, and that it would be best to continue using the Euro, even if this means an important loss of fiscal and monetary sovereignty.

If there is a silver lining here, it is that this recent deal is only in effect for 4 months, during which time Greece will have the opportunity to recover and regroup. But in order to win the next round of negotiations, Greece must either push for political union and the creation of the appropriate institutions (which we believe is a lost cause), or put a grexit on the table. That will be the only way Greece will gain leverage entering these intense negotiations. In doing so, however, Greece must be prepared to leave the Euro.

Of course, it will not. And now the rest of Europe knows this, and any demands by Greece will be seen by the rest of Europe as a bluff.  For instance, Finance Minister Varoufakis now says that if Europe is not prepared to accept it s reforms, it will have no choice but to call fresh elections or propose a referendum (it is not clear what the referendum would be on). Unfortunately, it is difficult to take these as serious given Syriza’s tendency to bluff and capitulate.

Undoubtedly, there are many challenges and uncertainties in pursuing this strategy, many which go beyond economics. Among the economic challenges, Greece does not have a well-developed export sector (except for tourism), which means any devaluation, voluntary or imposed by outside speculators, would have a very limited impact on growth. There would also be the challenges associated with Greek banks, with the technicalities of introducing a new currency, the cost of issuing new bonds, the needed fiscal and taxation reforms, and many more. Undoubtedly, this scenario may prove too overwhelming to consider, and may justify in large part the desire to stay within a flawed system.

There are also geo-political issues to consider to take into consideration: if Greece left the Euro it would have to leave the EU and would lost considerable benefits from belonging to it. With its proximity to the Middle East, its continued tension with Turkey, there is certainly much to consider.

Despite these challenges and the intimidating political situation, a grexit must be on the table in 4 months. In a recent blog, former Finance Minister, Philippos Sachinidis, recently stated: “Recession in Europe needs to be fought with a federal Keynesian policy, involving a new system of fiscal transfers followed by a consumption increase in the Northern countries along with Europe-wide projects together.” He is correct. The problem, however, is that a Keynesian policy cannot be followed under the Euro’s current architecture, which was precisely the objective of the Euro’s creators, and why Germany and other countries resist any changes. It is in the sense that the Euro is an ideological currency. It must be abandoned for the sake of Europe’s future.

But there are a number of sensible proposals floating around that can make for a smoother transition to sovereignty. One solution is the simultaneous issue of an electronic currency, as was recently done in Ecuador. The central bank introduced a virtual currency tied with the use of smartphones that replaces paper money. Ecuador is a fully dollarized economy that cannot print its own US dollars, has no exchange rate, no independent monetary policy and only a limited use of fiscal policy, not unlike Greece.

 

Why are women leaving Canada’s workforce?

I started producing an e-weekly earlier this year, Eye on the Economy: making sense of recent economic events, as a more regularly complement to the quarterly Economy at Work I also produce.

Each issue contains a main commentary/analysis piece on a topical issue and also a curated round up with about five shorter briefs.  In an age of info overload and never ending tweets, it’s meant to provide a decent summary of relevant economic events.

The main piece from a few weeks ago, on “Why are women leaving Canada’s workforce?” is relevant with international women’s day this weekend.  For me, it’s also a bit of a puzzle — and I’d appreciate comments on this from readers of this blog.

If you’re interested, please sign up here to receive it.  I’ll try and repost relevant here, but I’ve been lousy at doing it so far and can’t guarantee I’ll have the time!

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Why are women leaving Canada’s workforce?

Women left Canada’s labour force in record numbers last year. Who are they and why did they leave?

Over 80,000 women left Canada’s labour force in 2014, bringing their labour force participation rate down to 61.6 per cent from 62.2 per cent in 2013 (all figures annual averages). This is the lowest rate since 2002, and a reversal of decades of gradually growing gender equality through women’s participation in the workforce.

Historical LF partipication rates

If women’s participation rates hadn’t declined in 2014, the unemployment rate for women unemployment rate would have risen from 6.4 to 7.3 per cent. This would have been the highest annual rate in 15 years and even higher than it was during the 2009-10 recession years.  While there was a decline in women’s labour force participation immediately following the recession of the early 1990s, the decline last year comes five years after the recession was supposedly over.

Read more »

Thinking Through the Fall-Out of Lower Oil Prices

Canada’s economic and fiscal debates in recent months have been dominated by the possible impacts of the sudden fall in oil prices since last autumn on growth, employment, and fiscal balances.  Finance Minister Joe Oliver delayed the budget, the Bank of Canada shocked markets with a rate cut, and Alberta Premier Jim Prentice is now promising a shock-and-awe austerity budget unlike any that province has experienced.  And these are just the first-round policy responses.  More drama surely lies ahead. Read more »

Doubling Contributions To The Tax Free Savings Account: Even Nastier Than Income Splitting

The Harper government gives five reasons why Canadians ought to be happy with its proposal to double the maximum contribution to the Tax-Free Savings Account. Examine each of its points more closely, however, and it’s clear that the TFSA carries far higher risks than rewards — for individual Canadians  as well as for the economy as a whole.

Let’s unpack the government’s arguments one by one:

Read more »

Grocery Wars: Lessons from Canada’s Changing Retail Landscape

As Target Canada tumbled into bankruptcy, Loblaw announced that its fourth-quarter profits more than doubled. What can be learned from this tale of two retailers?

The main reason for Loblaw’s surge was its acquisition of Shoppers Drug Mart last March, which turned it into Canada’s largest grocer and pharmacy chain.  Shoppers contributed $3 billion to Loblaw’s $11.4 billion take in sales, a 50% jump. Profits more than doubled from the previous year as Loblaw also saw cost savings from the merger. The irony behind this success story is that it was likely Target’s arrival on the retail landscape  that forced Loblaw to step up their game.

Mergers and acquisitions have become a quick way to grow the bottom line for business. But larger scale isn’t the whole explanation in this case. Loblaw also saw strong growth in same-store sales compared to a year ago, a critical metric for retailers who need to show shareholders they’re building business, not coasting.  Grocery sales boosted revenues, but a big part of that was higher prices, not higher volumes.

How will that extra cash get spent? There’s been speculation that Loblaw is eying some of Target 133 idled locations.   But their CEO, Galen Weston, doesn’t sound too interested, saying it might choose a handful of locations that are “complimentary” to their current holdings.

Frankly Loblaw’s expansion plans aren’t like Target’s. It doesn’t need more stores.  It already has 2,300 outlets across Canada.  Rather, its growth path is following the same formula as Walmart: a wider range of products packed into the aisles at existing locations. Read more »

Harper Conservatives vs the IMF on Deficits

Here is an extract from my column on balanced budgets in the Globe ROB today.

“When it comes to balancing the books, the Harper government is seemingly more Catholic than the Pope. Even the International Monetary Fund (IMF), hardly big fans of high government spending, argue in their latest Country Report released in January that the federal government should ease up on fiscal restraint in the near term to the tune of 0.3% of GDP. They say this should fund “targeted measures to support growth.”

In effect, the IMF have said that there is no need to quickly balance the federal budget given that growth will be hit hard by the slump in oil prices. They have not said, as has Prime Minister Harper, that we must fall into a recession before we should run a deficit”

Here are the relevant extracts from the report,  to be found here.

21. Federal authorities should consider adopting a neutral stance going forward. Given the strong deficit reduction achieved in recent years (about 2 percent of GDP cumulative improvement in structural balances in 2011–14), the federal authorities should consider a slower pace of adjustment after 2014. Adopting a cyclically-neutral stance would imply a small fiscal easing in the near term but still be consistent with achieving their low public debt objectives by 2021. As the economy gradually approaches potential, this would still allow automatic stabilizers to operate fully if growth were to weaken should further downside risks materialize. Moreover, in terms of the policy mix, a neutral fiscal stance would help monetary policy to rebuild policy space further as the recovery proceeds.
22. Available fiscal resources could be used for targeted growth-friendly measures. Against the backdrop of lackluster business investment (despite very low interest rates) and productivity, such measures could focus on providing further support for R&D, SMEs, venture capital, and strategic infrastructure projects, with little risk of crowding out private investment. Reducing federal taxes could provide more space to raise revenue at the provincial level, given that federal and provincial governments ’co-occupy’ the same tax base.
Relative to current policies, maintaining a cyclically-adjusted primary surplus (at the federal level) broadly constant at its 2014 level would amount to some 0.3 percent of GDP fiscal impulse over 2015–17, but would still be consistent with the authorities’ debt reduction target of 25 percent debt-to-GDP ratio by 2021.

Low-carbon urban infrastructure: a view from Vancouver

I have a new case study (full pdfsummary article from the publishers) out as part of the Economists for Equity and Environment‘s Future Economy Initiative. I look at the City of Vancouver’s Neighbourhood Energy Utility (NEU), a low-carbon district energy system that hits a sweet spot of clean energy, local control, and stable prices at competitive rates.

The NEU arose as part of a vision for redevelopment of former industrial land into a mixed-use community in the Southeast False Creek area of Vancouver. The first phase included construction of the False Creek Energy Centre and service to the Athletes’ Village for the 2010 Winter Olympic Games.

At the core of NEU operations is a hybrid system of sewage heat recovery (SHR) backed up by natural gas boilers to deliver thermal energy to buildings in the service area. The NEU targets a key GHG mitigation opportunity in buildings through shifting away from fossil fuels for space and water heating.

While the system is not fossil fuel free (due to the natural gas component), GHG emissions were reduced by approximately 56-77% in 2012 and 44-61% in 2013 relative to development that did not include the NEU. This decline in performance between 2012 and 2013 is due to new buildings being added to the existing system, which increase the system’s reliance on natural gas. Planned new SHR capacity is added in 2018. Future mitigation opportunities for the NEU could include biomass as a substitute for natural gas.

Capital costs were supported by a federal grant, low-interest loans and self-financing from the City. The NEU’s rates are modeled on a traditional regulated utility, with revenues obtained entirely from its customer base. Because the eventual customer base will be built out over more than a decade, the city implemented a rate structure that under-recovers capital costs, running deficits in the early years. Cost competitiveness is a key objective, and the NEU rate structure compares favourably to other DE systems and energy providers.

The NEU is a modern example of public sector innovation. It challenges a paradigm of centralized energy distribution, and links and expands municipal services in a novel way. To reduce risk and achieve economies of scale, the City requires mandatory connection of all buildings in the service area.

As a highly capital-intensive utility, most of the job creation occurs during the construction phase, which involved approximately 50 FTE jobs over a three-year period. Ongoing expansion of the network to new buildings ensures continuing construction work. In NEU operations, there are 3.5 FTE jobs, and these are highly-skilled engineering jobs. While these numbers are relatively small, it represents only 24 buildings and a very small percentage of total energy demand in the city.

The NEU has environmental and economic attributes that could be replicated in other cities (and it is already having an influence in other parts of Metro Vancouver). A key challenge is upfront capital costs, which could be ameliorated by senior government support and through the development of green bonds. But the NEU case also shows how a public utility model can be developed for low-carbon district energy, even in the absence of subsidies.

ROCHON On Greece once More

LOUIS-PHILIPPE ROCHON

Associate Professor, Laurentian University

Co-editor, Review of Keynesian Economics

Follow him on Twitter @Lprochon

________________________

As I have said before (see here) and will say again: any solution to Greek’s tragedy, which involves keeping the Euro as a currency is a second-best solution, unless the appropriate institutional changes are adopted. Anything short of this will simply maintain the Euro straightjacket and perpetuate the policies of deflation. Austerity has proven a disastrous and unsustainable policy that has revealed the weaknesses of the Euro. Indeed, without political union, the Euro remains an incomplete (and illegitimate) currency, and the sooner it is replaced with a set of national currencies, the better it is for all countries in Europe.

Interestingly enough, there is virtual unanimity among heterodox economists about the shortcomings of the Euro, yet a deep division exists on whether Greece should leave the Euro or push for institutional reforms, like political union.

Of course, a grexit would carry important short-run costs that cannot be minimized (sudden and large devaluation that can lead to imported inflation, among other problems; and since Greece is not an exporting country, devaluation will not help that much). No one, including myself, is denying the potential destabilizing effects of abandoning the Euro and of leaving the EU. But since the possibility of political union is nil under current governments, the only possible solutions are the status quo or the abandonment of the Euro.

Hopefully, a grexit would be accompanied by a number of urgently-needed policies such as capital controls for instance, and strict limits on bank withdrawals in the period in between the transition from the Euro to the drachma (a number of other measures would also be necessary). It is impossible to estimate how long this transition period would last, but I maintain that the long run benefits of gaining fiscal and monetary sovereignty outweigh these short run costs.

But the current Syriza leadership has stated quite unequivocally that abandoning the Euro is not a policy they are considering, largely I presume, for political reasons as the Greek population heavily favours remaining within the EU and the Eurozone. Of course, this does not negate the possibility that Greece will be pushed out. This is becoming I think an increasingly real possibility. L’enfant terrible of Europe is being seen increasingly not as much as a liability, but as a nuisance, and some are arguing that they would rather be rid of it now and suffer the short run consequences than to keep Greece and try to make it happy. I am convinced, although I have no real proof, that contingency plans have already been drummed up outlining possible scenarios and strategies in case the inevitable becomes reality.

Of course, one cannot but shake his head at the irony: Greece has the first democratically-elected mandate to put an end to austerity, but such a will is being tested and challenged by the political and ideological elites who make a mockery of democracy.

But for now, let us put these scenarios aside. And for the sake of argument, let us take a grexit off the table and consider Greece’s second-best solution for its debt woes.

To get a good understanding of the current desperation, consider some basic facts: the Greek economy now stands 30% below pre-crisis levels; unemployment has skyrocketed to over 25% (more than 60% for youth unemployment), and Greek debt is now more than 170% of current GDP.

What comes immediately to mind is that for now, Greece needs some much-needed breathing room to try to get its economy back on track. To do so, and by keeping its international commitments, it needs to put its debt problems on hold, or what has been called a burdge. It has become clear that a debt write off or any type of haircut is now officially off the table as well. So Greece needs to deal with its entire debt.

A number of possible solutions exist but they cannot all be discussed in such a short space, so I will concentrate on what I consider perhaps two of the most promising ones. First, Rob Parenteau has proposed what is called “tax anticipation notes”, which essentially allows a government to deficit spend and issue notes (tax credits) that guarantee repayment once the economy recovers (see here).

This is an interesting idea that already exists in some US states, but I fear the idea would be too foreign to be taken seriously in Europe.

The other proposal, backed by Stephany Griffith Jones, among others, is to tie Greece’s debt repayment (interest plus amortization) to the (real) growth of its economy, and to transform its existing debt into GDP-linked bonds. This would act in a sense “like a hair cut”, without really being one.

Such a proposal has considerable merit, and would tie the repayment to the growth of Greece’s real economy, thereby making such payments more manageable. Debt repayment would therefore vary according to GDP performance. To be clear, this is not a haircut, but haircut-like: Greece would eventually honour all its debt, but would do so on much easier terms.

There are a number of advantages for Greece, such as the counter-cyclical nature of this policy, allowing Greece to reduce its repayment when the economy slows or goes into recession. This would therefore give Greece more room to deficit-spend (European rules allowing) and reduce the scourge of austerity.

It would also stabilize the debt by lowering the possibility of a Greek default.

Of course, such a policy would have to be tied to much-needed reforms on the ability of Greece to raise revenues in the future, and therefore cut on tax evasion and fraud. International investors would have to have the assurances that Greece is serious about raising revenues. This should not be difficult to adopt, although implementation is another issue.

 Regardless of the solution chosen, the debt imbroglio is only the first step toward a full Greek recovery. Greece then has to wage an all-out war on growth, and get its economy back on some firmer ground. At this point, it will take considerable time and energy, and nothing short of a New Deal (see Theodore Koutsobinas’s blog here).

Of course, there remains the question who how Greece will pay for some a New Deal. But if GDP-linked bonds were adopted, this would precisely free considerable fiscal room and allow Greece to pursue expansionary fiscal policy that would hopefully rebuild the Greek economy. Greece would have to invest in its infrastructure, in education, in its youth, and more.

But again, this strategy simply brings to the fore the Euro carcan, as countries cannot deficit spend their way out of recession, no matter how severe.

In the end, the democratic expression of the people cannot be thwarted. Anti-austerity feelings are running high, and Europe must be careful on how it deals with Greece. Because we risk starting all over again in Spain, with the Podermos Party, which are now leading in the polls in that country. Any attempts at isolating democracy in Greece will only fuel the desire for change in Spain.

Will Nova Scotia Implement a Carbon Tax?

There is some discussion in Nova Scotia about the possibility of the government introducing a carbon tax in the next budget. In this blog post I will introduce the context within which these discussions are taking place, and make reference to other blog posts in this forum that provide insights into how the province might best approach a carbon tax policy.

First, I believe Nova Scotia’s low-carbon transition does not receive the attention it deserves. The province is expected to generate 25% of its electricity from renewables in 2015, and has a target of 40% by 2020 (largely due to plans to import hydroelectricity from Newfoundland and Labrador). The province has become a leader in energy efficiency, led by Canada’s only non-profit “energy efficiency utility”. It has also introduced hard caps on GHG emissions from the electricity sector. Much is made of Ontario’s dramatic reductions from the phase-out of coal-fired electricity, but Nova Scotia has made similar percentage reductions since 2005. Nova Scotia’s emissions reductions are driven by policies that can put the province on the path towards even lower emissions. (In contrast, New Brunswick’s large decrease seems to be mostly due to higher oil prices reducing electricity exports from an oil-fired power plant). (Of course I have to admit my bias here, since I was involved in NS energy policy during the introduction of many of these policies, as a consultant or environmental advocate).

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NS Electricity Mix

 

 

 

 

 

 

 

 

 

Nova Scotia’s example is important to the rest of Canada because it is a carbon-intensive province, with an electricity system based on coal, undergoing a significant energy transition. Many of the other progressive climate policies in Canada come from the less carbon-intensive provinces of Ontario, Québec, British Columbia, and Manitoba. If Nova Scotia were to implement a carbon tax it would fit nicely with its existing policy mix and contribute to a real transition away from fossil fuels towards a more efficient and clean energy system.

The idea of a carbon tax came from a report written by former Ontario cabinet minister, and new Nova Scotia resident, Laurel Broten. Her review of the tax system recommends a carbon tax that is “revenue-neutral”, with revenue earmarked for low-income support as well as corporate and personal income tax cuts.

Broten points towards the success of BC’s carbon tax. As demonstrated by Sustainable Prosperity, BC’s carbon tax has decreased emissions. The predictions that the tax would harm the BC economy have also not come true. BC’s GDP growth, relative to the rest of Canada, has been largely unaffected by the tax. The report also notes that recycling the revenues of the BC carbon tax towards tax cuts means that BC has some of the country’s lowest personal income and corporate taxes.

While one cannot claim that BC’s carbon tax has harmed the economy, nor is it possible to claim that these lower tax rates have helped it. As noted by Jim Stanford’s recent blog post, BC is not a bastion of economic prosperity (measured by GDP per capita) or social welfare (the province has below average per capita spending on health, education, and social assistance).

In Nova Scotia, the larger economic context is important to consider in the carbon tax discussions. A year ago a “Commission on Building Our New Economy” (also called the Ivany Commission after its chair) authored a report called “Now or Never”. The report sounded an alarm bell on the province’s economic situation and called for a “province-building” project. The Commission report cast a wide net and could be used to justify anything. The commission supported the province’s continued transition towards a green economy. Some in the province have used the Commission’s message to call for government downsizing, austerity, and tax cuts. Hence, the interest in the “revenue neutral” carbon tax seems to be linked to some people’s interpretation of the Commission’s message.

Nova Scotians would do well to consider Marc Lee’s case against a revenue-neutral carbon tax. Lee notes that there is little evidence that personal income tax reductions benefit the economy by increasing the incentive to work. Even in neoclassical theory the economic impact of a tax cut is ambiguous because the increase in real personal income could make people engage in more leisure. Practically, there are a number of structural issues (like fixed work hours) that make it hard for people to increase their hours of work on the margin, as suggested by neoclassical theory.

From Iglika Ivanova’s recent post we can see that BC’s tax cuts have not resulted in better labour market performance or a quicker recovery from the recession. BC has not returned to pre-recession employment levels. In addition, total hours worked are now lower in BC than they were in 2008 (the year the BC carbon tax shift was introduced). Other provinces have seen a larger relative increase in hours worked since 2008. Clearly something other than income tax levels, and the trade-off between work and leisure is influencing the job market.

In Atlantic Canada there is the traditional issue of people “Going down the Road” to find work in other parts of Canada. But this is not because of a lack of incentives to work instead of engaging in leisure. It is because of a lack of job opportunities.

What about corporate taxes? These tax reductions seem to only be contributing to cash hoarding by corporations. They are not encouraging investment (See Erin Weir). An industrial innovation strategy reliant on tax incentives seems doomed to fail.

So here are some takeaway lessons as Nova Scotia considers implementing a carbon tax. First, such a tax will help decrease GHG emissions and hopefully complement other climate change and energy policies in the province. Second, if what is really needed is a “province building” project, it makes sense for Nova Scotia citizens to have a fuller discussion on how the carbon tax revenue could be used for this purpose. For instance, the tax revenues could be used in a targeted way to facilitate an industrial transformation towards a green economy, to increase community innovation and economic development initiatives, to really tackle energy poverty, and to enhance energy security by accelerating the move away from imported fossil fuels with more energy efficiency and renewable energy.

Stay tuned to see what happens in Nova Scotia.

3 worrisome facts about BC’s job market on the eve of Budget 2015

2015 marks the sixth year of BC’s recovery from the recession. But it’s been a slow and largely jobless recovery in BC.

1. BC needs 93,000 more jobs to return to our pre-recession employment rate (the proportion of working age British Columbians who have jobs).

BC job market_Small

Only 71.2% of working age British Columbians have jobs today. This is practically the same share of workers with jobs as when the BC Jobs Plan was launched, and has barely improved since the recession. In other words, the new jobs created in BC since 2009 have just kept up with population growth without replacing (or recovering) the jobs lost during the recession. Read more »