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The Progressive Economics Forum

How NOT to Create A Million Jobs

It was almost too painful to watch: Tim Hudak and top Conservative luminaries kicked off their campaign for the 2014 Ontario election in a Toronto music recording studio.  Problem: that studio (like others in the business) is supported in part by recording and production industry grants from the provincial government — exactly the kind of “corporate welfare” that Mr. Hudak routinely rails against.  Reporters asked about this seeming contradiction, and after a couple of kicks at the can Mr. Hudak abruptly walked off the stage — leaving his confused host (studio owner and former rocker Gil Moore) standing alone at the mike like a deer in the headlights.  Here’s the link to Global’s coverage of every awkward bit of it.  Moore later told reporters (not surprisingly) that he fully supports the government’s music industry subsidies (but endorses Mr. Hudak anyway — aging rock stars are known for many things, but consistency is not one of them).

Quite apart from the incredible contradictions of this botched photo-op, a separate claim that Hudak made during the episode is worthy of more serious consideration by Ontario voters — and anyone else concerned with unemployment during this brutal, austere era.  Hudak summed up his job-creation vision with this succinct quote:

“The biggest thing that we can do to actually create jobs in the province of Ontario is to balance the budget.”

This is actually a surprising statement.  The generic claim that fiscal restraint is ultimately “good” for the economy runs through the whole ideology of austerity, of course.  But rarely does a politician directly equate deficit-reduction with job-creation, and with good reason.  How does attacking a deficit and balancing the budget (something that involves belt-tightening, sacrifice, and cutbacks) actually create any jobs at all?

Every macroeconomics student learns the basic national income accounting identity:

Y = C + I + G + (X – M)

At any point in time, output must equal aggregate demand (apart from inventory adjustments) , which is comprised of four major components: consumer spending, business investment, government spending (on consumption and investment), and net exports.  These are the 4 engines of expenditure that drive economic growth (and Canada’s macroeconomic problem right now is precisely that none of these engines are really in gear).  Balancing the budget in the immediate sense requires either more taxes and/or less government spending.  That means either cutting G directly, or else cutting disposable income (and hence C) through higher taxes.  We know which of these options Mr. Hudak prefers; in fact, since he is advocating tax cuts in this election, the ultimate reduction in government spending required to balance the budget will have to be even bigger.

Ontario’s deficit in 2013-14 was $11.3 billion (or 1.6% of provincial GDP — not large, by the way, relative to international or historical experience).  Reducing provincial spending by 1.6% of provincial GDP will inevitably create a reduction in the demand for labour.  Due to knock-on effects on consumer spending, business activity, and other variables, the final reduction in spending is greater than the direct reduction in government spending.  For example, the federal Department of Finance estimates the multiplier impact on GDP of government spending to be around 1.5 (see, eg., their Table A1 in the Economic Action Plan report).  That suggests (all else being equal) a 2.4% reduction in total GDP (1.6 times 1.5), which in turn should translate into a proportional reduction in employment — since workers are hired only to produce GDP.  (In fact, since government programs are relatively more labour-intensive than other sectors, the decline in employment could be more than proportional).

In other words, simply and aggressively balancing the budget (through spending cuts) would eliminate about 165,000 jobs in Ontario (2.4% of the 2013 employment average).  Those spending cuts might be spread over several years, in which case the job losses will also be spread out over several years — but they will still occur.  (The benefit of doing it gradually, is that the job losses resulting from austerity have a better chance of being offset by job-creation occurring in the meantime in other parts of the economy.  The jobs are still lost, but are less visible in the aggregate net data.)  Balancing the budget through tax increases instead of spending cuts would be somewhat less damaging to employment (since the impact of tax hikes on GDP is somewhat smaller than the impact of spending cuts — especially tax hikes for high-income earners and corporations), but the impact on employment of an $11.3 billion tax increase (with no offsetting change in government spending) would also be obviously and strongly negative.

These direct effects of fiscal austerity are the stuff of Macro 101.  The negative side-effects of deficit-reduction on purchasing power and employment are the main reason why even mainstream bodies (like the IMF and the G20) have argued for caution and balance in current deficit-reduction efforts, instead of endorsing single-minded deficit-reduction as Mr. Hudak is proposing.  In fact, these international agencies do not even identify balancing the budget as a priority at all.  Rather, they endorse a more cautious goal: a “sustainable” fiscal balance (usually indicated by a stable or declining debt-to-GDP ratio, which does not actually require a balanced budget).

To claim that a balanced budget is good for employment, the Conservatives and any economists who support them must invoke various indirect channels and side-effects from eliminating the deficit.  Moreover, those indirect effects must be big enough to more than offset the direct contractionary impact of the initial substantial loss of spending power.  For example, an oft-cited belief of budget-cutters is that business investment will increase, thanks to greater “confidence” about Ontario’s “economic fundamentals.”  This is far-fetched: surveys of business executives (such as those conducted regularly by the Bank of Canada) list many factors hampering business investment spending (despite the super-strong state of corporate balance sheets), but the size of the provincial deficit is never listed among them.  (Business lobbyists tend to support austerity, of course — but because they favour the resulting reductions in government programs, not because it will “allow” them to invest more capital.)  Equally far-fetched is the idea (promoted by fiscal fundamentalists from Ricardo to Barro) that consumer spending will increase after governments cut their own spending: super-rational households are assumed to understand that a long-term reduction in tax burdens is the ultimate and beneficial result of austerity, and hence they pre-emptively jack up their own spending.  This theory of “expansionary austerity” makes as much sense as other oxymorons (ethical investment? military intelligence? Progressive Conservative?).  These and other general equilibrium-type behavioural adjustments are abstract, theoretical, and empirically invisible.  But they are the only basis on which Mr. Hudak and others could claim that eliminating the deficit, in and of itself, will actually create jobs.

In short, though it seems like “common sense” given the dominance of austerity ideology in recent years, Mr. Hudak’s simple-minded claim that the best way to create jobs in Ontario is to balance the budget is devoid of economic content and credibility.

Despite all of this, I agree with Mr. Hudak on one point: job-creation is the most important issue facing Ontarians.  The election campaign should focus on job-creation, and voters should carefully compare all the parties’ positions to see which one offers the more credible employment vision.  (Of course, much of what happens in Ontario’s labour market depends on things no provincial government can control: like interest rates, the exchange rate, global developments, and the national macroeconomic condition.)

Ontario’s employment averaged 6.9 million in 2013 (including part-time, self-employment, and other forms of precarious work).  Creating a million jobs 0ver 8 years (as Mr. Hudak promised) would be an increase of around 15%, or an average annual rate of job growth of near 2%.  This would require a significant acceleration of GDP growth: to get 2% employment growth normally requires annual GDP growth in excess of 3% (once productivity growth is added into the equation).  There are times in the last quarter-century when Ontario employment did grow that fast (in the late 1980s, the late 1990s, and occasionally since the turn of the century: in the years 2003, 2007, and 2011).  But for that rate of growth to occur on a sustained basis is unusual; demographic factors (like slower population growth) are making it even harder to rack up such high rates of job-creation.

Meeting this goal would thus require (in my estimation) sustained expansionary measures by government, combined with powerful measures to stimulate business investment and exports (two of the other key engines of GDP that have been especially stagnant — across Canada, not just in Ontario).  The question is, how could that happen?

Beyond his simplistic belief that eliminating the deficit will itself magically create jobs, Mr. Hudak’s original material (subsequently repeated in the party’s first campaign documents) listed five main employment-boosting policies:

  1. reducing taxes
  2. reducing the price of energy
  3. training more skilled workers
  4. expanding trade with Ontario’s neighbours
  5. reducing bureaucracy (which stifles job-creation)

So far he is sketchy on details, promising to release more as the campaign unfolds.  But let’s review the list as it stands.  Number 1 can create new demand and hence jobs — but not very efficiently or fairly (and it makes his deficit elimination task all the harder).  The employment effects of Number 2 are ambiguous.  Some energy-intensive businesses would save money, but would they re-spend it?  What would be the impacts on green energy industries (not to mention on the environment) of abandoning alternative energy plans?  Number 3 on its own creates a few new jobs for the educators hired (presumably through extra government spending?) to do the training.  But training itself creates no new work for those being trained; here Mr. Hudak seems to be buying into the now-discredited idea that employment is actually held back by a skills shortage.  Number 4 is partly correct: expanding Ontario’s exports to its neighbours (the U.S. and other provinces) would certainly create jobs (but increasing Ontario’s imports eliminates them).  How to accomplish that is the challenge: signing free trade agreements isn’t working, what is really needed is active strategies to support Ontario’s export industries and reverse deindustrialization.  But that sounds awfully like “corporate welfare,” and will not likely meet with Mr. Hudak’s approval.  Number 5 is a throw-away bone for business lobbyists.  Business constantly complains about “over-regulation,” and governments of all stripes promise to “cut red tape.”  I have heard this jargon for decades, but it never amounts to anything of significance (in either direction) for the macroeconomy and the labour market.  In reality, governments are forced to regulate due to the irresponsibility of business and the demands of the citizenry for protection.  Hence the only visible employment effect of Number 5 would be on the public servants who would lose jobs in any true bureaucracy-cutting exercise.  On balance, the employment effects of Mr. Hudak’s five policies are ambiguous: some might incrementally support job-creation, others will hurt it.

In short, Mr. Hudak’s initial policy agenda is mostly a recycled business wish list: cut taxes, cut regulations, pay for training, cut energy costs, free trade.  Its logic is 100% trickle-down economics: anything that’s good for business, must be good for jobs and for all of society.  There is no powerful stimulative or expansionary impetus coming from any of those 5 proposals (unlike some other policies being debated in this election, like infrastructure investments and transit programs, which have a logical and direct connection to employment).  And whatever positive employment gains were generated by any of those five measures would be massively swamped by the negative side-effects of the severe fiscal contraction required to achieve Mr. Hudak’s “biggest” job-creating goal: namely, simply balancing the budget.

There is a way in which balanced budgets and job-creation are logically connected — but the direction of causation is exactly the opposite of Mr. Hudak’s argument.  Ontario’s deficit today is overwhelmingly due to the downturn in employment that accompanied the 2008-09 financial crash and recession — recovery from which has been painfully slow and inadequate.  (Remember, for several years before the recession hit, Ontario’s budget was balanced.)  Restoring the employment rate to its 2008 level would mean 250,000 more jobs, and generate billions in additional revenues (through personal income taxes, HST revenues, growing spending, and other streams).  The deficit will take care of itself, if and when we put Ontarians back to work.

Mr. Hudak’s comment at the campaign launch, therefore, should be turned precisely on its head: “The biggest thing that we can do to actually balance the budget in the province of Ontario is to create lots of new jobs.”

Enjoy and share:

Comments

Comment from JJ Gibbons
Time: May 6, 2014, 8:55 pm

Nobody – PC, Liberal or NDP – ever talks about slightly increasing (basically reversing) some of the corporate taxes. How big a positive impact would a 1% increase of corporate taxes have on the budget. Corporations are not investing their tax savings to create jobs. The government, with the help of some slightly increased corporate taxes, could do just that. And, increasing jobs is actually good for business! I do not understand why the Conservatives do not understand that. Except that they are not truly Conservatives – they are just following a discredited ideology.

Comment from Darwin O’Connor
Time: May 6, 2014, 11:12 pm

An epic article.

JJ Gibbons: the NDP have been very open about thier plans to increase corporate taxes by about 2%. They have been critized for using that revinue to pay for every kind of spending plan they have suggested.

Comment from Larry Kazdan
Time: May 7, 2014, 5:17 am

From a 1933 radio debate – John Maynard Keynes

(I believe he is talking about the national budget but still relevant to provincial spending.)

“You will never balance the Budget through measures which reduce the national income. The Chancellor would simply be chasing his own tail – or cloven hoof! The only chance of balancing the Budget in the long run is to bring things back to normal, and so avoid the enormous Budget charges arising out of unemployment…Even if you take the Budget as your test, the criterion of whether the economy would be useful or not is the state of employment…I do not believe that measures which truly enrich the country will injure the public credit…It is the burden of unemployment and the decline in the national income which are upsetting the Budget. Look after the unemployment, and the Budget will look after itself.

http://rortybomb.wordpress.com/2012/03/06/vsp-historical-trip-also-keynes-look-after-unemployment-and-the-budget-will-look-after-itself/

Comment from rcp
Time: May 7, 2014, 10:40 am

1) Using a national accounting identity for a province suggests, charitably, either naivety or lack of rigour. Bob Rae tried running a provincial expansionary policy in the 1990’s and it didn’t turn out well. Ontario does not issue its own currency.

2) I see no reference to the actual outstanding amount of provincial debt. Since the current level of debt could become a big problem if interest rates rose by even 2%, this seems like a pretty serious omission. See:

(http://en.wikipedia.org/wiki/Ontario_government_debt)

Note that the Liberals have doubled Ontario’s debt during their tenure: almost as impressive as Bob Rae, who did it over a shorter time.

3) Short-run and long-run effects of policies can obviously be different and there is no acknowledgement of that in this piece. If you look at the growth rates of Singapore and Hong Kong since 1960, it is clear that a low tax environment can lead to very rapid GDP growth. See:

(http://www.wangyujian.com/?p=3368&lang=en)

Comment from Jim Stanford
Time: May 7, 2014, 6:12 pm

Hey RCP, national income identities are absolutely used and meaningful at the provincial level; that’s why StatsCan publishes provincial economic accounts. For provinces, of course, exports and imports include interprovincial trade (as I indicate).

And I think the experirence of the Asian tigers (especially those that aren’t city states, like Taiwan Korea and now China) proves that active industrial strategy, not low taxes, is the key to development today.

Thanks Larry for the Keynes quote. I didn’t realize I was paraphrasing him so closely!

Comment from rcp
Time: May 8, 2014, 10:59 am

Hey Jim,

1) Using a Canadian _federal_-level estimate of the fiscal multiplier of 1.5 for the province of Ontario needs at least some justification, since it’s widely believed that smaller, more open economies have lower multipliers (and Ontario is a subset of Canada).

2) You did not address my short-term vs. long-term multiplier point at all, even though it’s actually a footnote to the Table A.1 that you quote. Specifically, the footnote says:

“Corporate income tax measures have a limited impact on aggregate demand over the periods displayed
in the table but have among the highest multiplier effects in the long run. This is because they increase the
incentive to invest and accumulate capital, which leads to a higher capacity to produce goods and services.”

And you can find results at:

http://www.bankofcanada.ca/wp-content/uploads/2010/11/wp10-30.pdf

3) The whole idea that the multiplier is always larger than 1 may be wrong. Take a look at Figure 1 in:

http://www.ssc.wisc.edu/~mchinn/Fiscal%20Multipliers.pdf

It gets as high as 1.75 sometimes, but dips to 0-0.25 other times, depending on the regime, if you take the regime into account.

Also look at Table 1 in the article, which strongly suggests that there is a consensus that multipliers are nonnegative, but that’s about it.

4) You did not address my point about Ontario debt at all. Ontario does not have its own currency to devalue, so the debt could at some point get painful to service. Since Ontario’s debt is well on track to reach $300 billion in a couple of years, a 2% increase in interest rates would blow a $6 billion/year hole in the budget – perhaps not right away, but certainly as debt rolled over.

Comment from Larry Kazdan
Time: May 15, 2014, 8:37 pm

Dear rcp,

True that Ontario does not have its own currency, but it does not follow that austerity will reduce the debt. Greece also has a currency it does not control, and has tried to cut government costs sharply with disastrous results:

The Austerity Trap
http://www.progressive-economics.ca/2012/10/25/the-austerity-trap/
>
> The lesson that should be learned from Greece is that its fiscal mess has been made far worse by severe budget cuts.
>
> New data from the European Union, released on Monday and analyzed in The Times by Landon Thomas Jr. and David Jolly, show that countries that have most ruthlessly cut their budgets — Greece, especially — have seen their overall debt loads increase as a share of the economy.
>
> The data provide objective support for what has been clear to just about everyone except pro-austerity German officials and deficit-crazed Republican politicians. Namely, deep government budget cuts at a time of economic weakness are counterproductive, complicating, if not ruining, the chances for economic growth.
.

Comment from rcp
Time: May 16, 2014, 8:29 am

Thanks, Larry, for the Greek data, but Ontario has not been practising austerity. See:

(http://www.fin.gov.on.ca/en/budget/fallstatement/2013/paper_all.pdf)

to see how fast spending has been ramping up.

Comment from David Chester
Time: January 21, 2015, 8:59 am

Surely if the macroeconomy were properly in order, the budget would be in balance. The fact that annually the deficit is always growing suggests that before we can consider further unbalance to “create” more jobs (which incidentally is a fallacy because the tax money would otherwise be used elsewhere for employing others too), we should firstly determine where we are going wrong with our present national management by government.

A stable macroeconomy under the present regime, would appear to have a low capacity for full employment. The question is then why does this occur and what should be done so that the population of useful workers can expand and become completely active.

The answer is in the way that natural resources are allowed to be withheld and the associated speculation in these resources, particularly access to land. When development land is held out of use and the banks encourage the land owners and capitalists to buy it (at inflated prices) by providing loans, then the cost of the produce and of residence on this mostly urban land, becomes prohibitive and there is a reduction in the demand for goods. Unemployment follows and less money is then being circuklated.

So the government should be trying to make this withheld land become more available and to cause its price to become reduced. They can achieve this by making speculation in land less attractive, by taxing its value. Those who hold land would then want either to sell it to somebody else who would put the land to proper use, or to do this activity themselves.

With more useful land available its hire (lease) and/or purchace costs would drop and goods and homes would cease to be so costly to accquire. Speculators in land values would no longer find it worthwhile to continue to hold land unused and so the whole system would grow, especially if thje government reduces other kinds of taxation so as to compensate for what they are now taking in (the economic rent in fact).

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