That sounds pretty scary. If the total cost triples, with only half as many people to pay it, each Canadian would have to pay six times as much for Old Age Security (OAS)!

The Chief Actuary does estimate that the cost of OAS, in nominal dollars, will almost triple by 2030. But where is Finley getting her population figures?

Even the low-growth scenario in Statistics Canada’s latest population projections has our population increasing from 34.8 million this year to 39.3 million in 2031. Although seniors pay taxes (including on their OAS benefits), Finley may have been referring to the “working age” population.

In the same scenario, Statistics Canada projects that the population aged 20 to 64 will grow from 21.8 million this year to 22.1 million in 2031. Over the same period, the number of Canadians between the “prime” working ages of 25 and 54 increases from 14.9 to 15.1 million. However you slice it, there will be more (not half as many) taxpayers to fund OAS going forward.

The most charitable interpretation of Finley’s comment is that she meant Canada will have half the working-age population relative to the number of seniors. The senior population, and hence the “dependency ratio,” is projected to approximately double between now and 2031.

At best, Finley is counting this increase twice. The near tripling of OAS costs reflects the rising number of seniors plus inflation.

The Chief Actuary’s report (page 9) also projects that nominal Gross Domestic Product (GDP), which approximates the federal tax base, will double between now and 2030. As a share of GDP, the combined cost of OAS and the Guaranteed Income Supplement will rise from 2.41% to a peak of 3.14%. That’s not insignificant, but it hardly warrants reducing or delaying benefits.

While we stamped our feet in the cold, I spoke to Bob Scott, the plant chairman for the CAW Local 27 unit that represents the workers. A pleasant, middle-aged fellow, Scott told me the company had always planned to lock them out and refused to negotiate after the gates were padlocked. Scott seemed  stunned at how Caterpillar had thrown all norms of labour relations out the window. He explained the company had opened a plant in Muncie, Indiana, and the Canadian workers were told they had to compete with the shitty wages Caterpillar was paying its American workforce.

The day after my visit to the picket line, the really bad news came down: Caterpillar was closing the Electro-Motive plant in London for good. It was no accident this occurred just as Indiana was announcing it had become a right-to-work state, making it almost impossible to organize unions there.

Meanwhile, this past weekend, Toronto’s right-wing thug of a mayor, Rob Ford, laid down an ultimatum to the city’s 6,000 outside workers, saying nearly all of their seniority rights would be stripped. It was a take it or leave it deal. CUPE Local 416 caved in and accepted much of what Ford was demanding, allowing him greater ease to contract out jobs.

These are just two recent examples of the growing evidence that capital and its right-wing political minions are determined to eradicate what’s left of organized labour. And it begs the question – is the labour movement, as we currently know it, about to be wiped out?

Unfortunately, it’s not looking good. Labour had been losing ground for decades. In the US, only 11.4% of the entire workforce is unionized, and less than 9% of the private sector. In the 1950s, 36% of American workers belonged to unions. In Canada it’s down to 27.5% of the entire workforce is unionized, with only 17% of workers in the private sector holding union cards.

The current recession and political climate have clearly emboldened capital to finish off what is left of the labour movement.

Unions have been hard hit by a number of forces they’ve been ill-equipped to respond to. In North America’s private sector, free trade deals and new technologies allowed corporations to transplant manufacturing facilities offshore to low-wage, developing-world havens such as China, India and Latin America. National unions like the CAW can do very little but watch when the likes of Caterpillar shut down a plant in Canada and move the production across the border to the US where they can offer desperate workers there wages at half the cost. And do so while racking up huge profits, as Caterpillar is.

While industrial unions were once the backbone of the labour movement, having mass memberships in large assembly plants, automation reduced those workforces to a shadow of their former sizes. Now unions like the CAW and USW have more security guards and stewardesses as members than they do autoworkers and steelworkers.  Meanwhile, with the rise of the service industry, which is usually made up of small workplaces, unions have generally failed in making inroads into that sector (Wal-Mart, for example, remains steadfastly union-free, despite being the world’s biggest retailer). Organizing McDonald’s or Starbucks, even though they are multinationals, is difficult, given the small and transient workforces in such retail outlets.

But labour has been its own worst enemy. What we are also witnessing is the consequence of embracing the so-called “business” model of unionism – the form of trade unionism that sprang up in the 1950s as a result of the anti-communist hysteria of that era. Back then, unions, which had been organized mostly by radicals, adopted a corporatist, Red-baiting mindset that said what was good for the company was good for the union. Unions got into bed with capital and embraced the “motor league” approach to unionism, whereby workers are serviced by staff and not encouraged to embrace more radical notions of workplace activism.

Consequently, workers now judge unions on how well they’re serviced, and dissuaded from taking matters into their own hands. Shopfloor militancy, wild cat strikes and plant occupations declined. Instead, grievances are funneled through the legal process, entailing lawyers and labour boards. Unions have become less and less of a presence in the lives of most workers, which is one reason unions are reluctant to call strikes: they can’t be sure their own members will walk out onto the picket lines.

During the nine years I worked at the CBC, I was a member of the Canadian Media Guild (CMG), which is affiliated with the Communication Workers of America (CWA). The CMG is not a terrible union per se, although it’s a pretty useless one, especially given how much money we gave it. The Guild displayed all the problems associated with the current union model. For example, I never knew who our shop steward was or even if we had one. In all the years I was there, not once did a union rep come by our offices to introduce themselves and talk about the union and encourage us to get involved – despite the hefty union dues we paid. The CBC was adept at getting rid of people by isolating and picking them off individually. And the CMG was pretty adept at not being able to stop them.

In 2005, the CBC locked us all out in an effort to ring concessions, particularly by contracting out our jobs. The Guild, after two months on the picket lines, eventually caved in and signed a concessionary contract, and then proudly proclaimed it as a great victory. It is was far cry from the days when Bob White was refusing to take concessions demanded of him by GM, Ford and Chrysler. Today, unions seem to protest feebly before accepting their employers’ demands for rollbacks.

I would dare say what I saw with CMG is pretty typical of the experience most workers  have with unions. You pay your dues and the union only becomes of interest during contract time, or on the rare occasion you might strike, or should you need to file a grievance. Otherwise they don’t have much of a foothold on the shopfloor.

Which is why unions are now so vulnerable to the onslaught launched against them by corporations and governments.

I predict unions will increasingly become irrelevant as long as they retain the old form of union structure and mentality. A return to a more militant, action-oriented and community-based form of unionism will be the only long-term remedy to the labour movement’s survival. Otherwise, what happened to the Electro-Motive and City of Toronto workers will become the norm and unions will become even more anachronistic than they already are.

(My  exposé of the crimes of Canada’s financial industry, “Thieves of Bay Street” is being published by Random House Canada in mid-April. You can read about it here:

http://www.randomhouse.ca/catalog/display.pperl?isbn=9780307359636

Or pre-order it here:

http://www.amazon.ca/Thieves-Bay-Street-Brokerages-Canadians/dp/0307359638)

But the fact of the matter is that 65 is not the trigger for retirement that it used to be, and that an increasing proportion of older Canadians stay in the workforce well past that age.

Statistics Canada recently reported that, while life expectancy has indeed been rising, the average number of years spent not working  has actually been stable since the mid 1990s due to the fact that more and more seniors are still working.

Data from the Labour Force Survey show that fully one in four (24%) persons, aged 65 to 70, is still working, up from 11% in 2000. The rate has been trending sharply upward for a number of reasons. Some are working longer because they want to, and find work interesting. This is most often the case for higher income workers. Others are working longer due to inadequate retirement savings.

The trend to working well past age 65 will likely continue, and eligibility of OAS would hardly seem to have been much of a deterrent.

But many older workers are unable to continue working — especially those with an illness or disability, itself often caused by a lifetime of hard work. Lower income older workers are likely to be in much worse health than those with higher incomes.

Recent Statistics Canada data — for 2009 — show that 24% of all persons who were fully retired, and 16% of those who had partially retired, did so due to health or disability. “Many older workers will have difficulty remaining on the job due to poor health, even if they are not financially ready to retire.”And 7% of those fully retired, and 6% of those partially retired, reported that they had retired to provide care.

An earlier Statistics Canada study, for 2002, found that one in four (26%) recent retirees would have continued to work if their health had been better.

A significant proportion of persons, aged over 65 and potentially impacted by an increase in the eligibility age for OAS/GIS, will be unable to replace that lost income by working.

The good news in today’s report is that 39,200 more Canadians reported being paid by an employer while 37,000 fewer reported self-employment. Another bright spot was an increase of 10,100 in manufacturing employment, suggesting that the recent rebound in manufacturing output is beginning to translate into jobs. However, manufacturing employment remains near the lowest level ever recorded by the Labour Force Survey.

Many of January’s gains in manufacturing and other goods-producing industries were offset by a loss of construction jobs, highlighting Canada’s vulnerability to a slowdown in housing. Employment plummeted by 44,800 in professional, scientific and technical services, the segment of the service sector that provides the highest weekly earnings. While we do not know precisely which positions disappeared, this substantial loss of jobs in a well-paid area is troubling.

The average hourly wage rose by 2.0% over the past year, not enough to keep pace with inflation of 2.3% (as of the latest Consumer Price Index). Wages edged up by a meagre 1.0% in Ontario, leaving workers in Canada’s largest labour market well behind the rising cost of living.

This uneven data comes as federal and provincial governments are formulating austere budgets. Laying off public-sector workers and cutting public spending that supports private-sector jobs threatens Canada’s soft labour market. Four months of rising unemployment mean that the priority should be job-creation rather than cutbacks.

I tip my cap to Andrew, who beat me by a mile this month.

UPDATE (February 4): Quoted by yesterday’s The National, Postmedia and Canadian Press

As has been widely reported, the most recent OAS actuarial report shows that total program expenditures will rise from $38.8 billion in 2011 to $107.9 billion in 2030. However, the dollar figure reflects, not just an increase in the number of OAS beneficiaries (from 4.9 million to 9.3 million), but also inflation. And the economy will grow over the same period.

As a share of GDP, the program cost is forecast to increase from 2.36% in 2011, to a peak of 3.14% in 2030, after which year the cost will fall. In other words, the cost of the program as a share of national income will increase by 33% from 2011 to 2030, even though the number of seniors will increase by 90% over that period. Growth of costs is slowed by the fact that benefits are indexed to inflation rather than to average wages, which are soon expected to rise at a faster pace than has been the case over the past twenty years and more.

Despite claims that OAS costs will be “unaffordable,” [sic] the Parliamentary Budget Officer has just reported that the federal government’s fiscal position is – admittedly following the new cap down the road on the Canada Health Transfer – sustainable in the context of an ageing society. In fact, they project that the federal government is now on track to eliminate the federal debt and to start running a surplus, all in the context of an aging society. The size of the underlying surplus is put at o.4% of GDP.

It also has to be borne in mind that OAS (but not GIS) benefits are taxable, so the federal government recoups a significant share of what is paid out. In most cases, even GIS recipients will pay some modest income tax on their OAS income.  The amount of OAS recouped by the federal government through income taxes can be estimated to be about 20%. And, of course, retirees pay consumption and other taxes as well.

(OAS benefits are also clawed back above a high income threshold, currently $69,562, and OAS benefits are completely taxed back above an individual income of $112,772. But this recovery applies to only 6% of OAS beneficiaries, and just 2.3% lose all of the benefit.)

Revenues from income tax on OAS may increase moving forward as a rising proportion of relatively affluent seniors have earnings from employment. The labour force participation rate of persons aged 65 to 70 more than doubled from 11.4% to 23.9% between 2000 and 2011. This is partly due to inadequate pensions and retirement savings, but also to the fact that some persons over age 65 want to work and are able to do so.

Statistics Canada recently reported that, while life expectancy has been rising, the average number of years spent not working  has been stable since the mid 1990s due to the fact that more and more seniors are staying in the workforce longer.

It can be noted that the widely touted option of raising the age of eligibility from 65 to 67 would not, in and of itself, save a lot of money. Average life expectancy at age 65 is 20 years (18.3 years for men and 21.5 years for women) meaning that the average new OAS beneficiary will receive benefits for twenty years.  Raising the eligibility age from 65 to 67 would reduce the cost by 10%, and by even less if life expectancy continues to rise.

The CLC proposal to phase in an increase in CPP benefits, supported by many pension experts and by most provinces, would reduce GIS benefits down the road.  While an expanded CPP would take forty years to fully mature, it would still have a significant impact when we hit the peak retirement years of the baby boomers, the majority of whom are still in their early 50s.

The unemployment rate has been steadily climbing from 7.1% last September, since which time we have lost a total of 67,000 full-time jobs.

The youth unemployment rate jumped from 14.1% to 14.5% in January, and there were significant increases in the unemployment rate in Atlantic Canada and in Ontario (where the unemployment rate rose from 7.7% to 8.1%)

We lost 3,600 full time jobs in January, with the losses concentrated in construction (down 13,700) and in professional, scientific and technical services. (down 45,000.) Many of these lost service jobs are probably linked to activity in the construction industry.

These dismal numbers clearly reinforce the case for a federal Budget focused on jobs rather than cuts.

The full post is available here

Receiving OAS is required to makes seniors eligible for the GIS top up, which provides one in three seniors with a supplement which ensures they have a minimally adequate income in old age.

Raising the retirement age from age 65 to age 67 or higher would impact all future seniors, but would especially impact those who would qualify for the GIS supplement. Many older workers, especially the single, near elderly, already face very high rates of poverty.

As shown in Table 1, the OAS now contributes about one quarter of the incomes of Canadians aged 66 and 67, and the OAS and GIS in combination contribute about one third. The proportion of income replaced by the OAS/GIS is much higher for women and seniors with low incomes, about 70% for those with individual incomes of less than $15,000.

As shown in Table 2, the OAS/GIS makes a huge contribution to the reduction of poverty in old age. OAS/GIS reduces the low income rate (defined by the LIM Before Tax measure) from about 30% to about 12% (more for women than men).

Raising the age of eligibility for OAS/GIS would require future seniors with low incomes — those who would qualify for the GIS — to either save more, work much more hours, or to live in poverty. Saving more is not a realistic option for low income workers. And working longer is not a realistic option for many low income seniors who are in poor health, have a disability, or are providing care.  About one in four current retirees retired due to ill health.

Raising the age of eligibility for OAS/GIS would also mean that non-working, low income seniors on provincial social assistance and disability programs would have to wait to transition to OAS/GIS, raising social assistance costs for provincial governments. Costs of providing drugs and essential services to low income seniors unable to pay on their own would also increase

This decline was driven by reduced energy production, which partly reflected maintenance shutdowns in the oil patch and unusually mild weather. While those factors may not affect future economic growth, their ability to turn it negative in November underscores how much Canada’s economic recovery depended on just one industry. Our petro-economy is now vulnerable to any temporary drop in energy production.

A bright spot in today’s report is the pickup in durable-goods manufacturing. For a third consecutive month, manufacturing output accelerated.

It remains unclear whether this nascent manufacturing recovery will translate into jobs. Manufacturing employment decreased in all three of those months, but bounced back in December.

November was the third consecutive month in which Canada’s overall economic growth rate decreased. The revelation that we fell into negative territory should prompt governments to rethink planned budget cuts. Sharply reducing public investment could push our fragile economy back into recession.

UPDATE (January 31): Interviewed on the Business News Network

UPDATE (February 1): Quoted by the Canadian Press

If the age of eligibility for OAS and GIS is raised, low income seniors on social assistance will see the transition from deep poverty to a bare bones income on GIS postponed accordingly.

And those working but in low income will lose a hefty portion of the OAS/GIS benefits that would otherwise have been paid to them.

It is all too often forgotten that, notwithstanding rising longevity, many of those in lower income groups still die relatively young.

As shown in the Table below, there is a big difference of probability of survival to age 75 by income group, and also by aboriginal status. Those who die at age 75 will receive 10 years of OAS benefits.

Hiking the OAS/GIS eligibility by two years, to take one number that has been speculated about, would eliminate one fifth of the use of  OAS/GIS by the bottom 20% of men.  There is also a big gap in life expectancy between the aboriginal and non aboriginal population.

He all but said that the Europeans had brought the crisis on themselves through trying to live beyond their fiscal means:

 As I look around the world, as I look particularly at developed countries, I ask whether the creation of economic growth, and therefore jobs, really is the number-one policy priority everywhere?

“Or is it the case, that in the developed world too many of us have, in fact, become complacent about our prosperity, taking our wealth as a given, assuming it is somehow the natural order of things, leaving us instead to focus primarily on our services and entitlements?

“Is it a coincidence that as the veil falls on the financial crisis, it reveals beneath it, not just too much bank debt, but too much sovereign debt, too much general willingness to have standards and benefits beyond our ability or even willingness to pay for them.

Canada, of course, is different. And he proceeded to reinforce the difference before his top 0.01% audience by promising cuts to public pensions.

But – does he have a case that the fiscal crisis of the advanced economies, especially the Euro crisis is due to fiscal profligacy and indifference to growth?

No.

Per capita growth in Canada over the past decade has been no faster than in the  EU.  As Jim has just noted, growth under Harper’s recent watch is no better than the OECD average.

Much of the Euro crisis – as is the case with the US – is due to the socialization of bad bank debt by governments which had been reducing public debt as a share of GDP before the crisis.   

The weak US fiscal position is hardly due to above average spending on social programs and public services, but rather due to recession and pre recession tax cuts

Japan has been able to finance a truly massive public debt because they borrow it from themselves .

Many countries with much larger public debts than Canada – the US, Japan, the UK – do not pay higher interest rates than us, for the key reason that they have independent central banks able and willing to backstop the debt.

The Euro crisis is not a crisis of fiscal profligacy, but a crisis mainly caused by the absence of a European central bank prepared to guarantee the debt of weaker members (and even that seems to be changing.)

There is no significant correlation across OECD countries between per capita growth and unemployment rates on the one hand, and the ratio of public spending to GDP on the other.

The two, climate and profit, are very much related. The gains from doing this are “odious profits” that exist only because of massive costs externalized onto third parties (I’m riffing off the term “odious debt” — that incurred by dictators, usually for military hardware, for which the people are forced to pay even after the dictator has been deposed). Anyone who advocates well-functioning markets, as opposed to unbridled capitalism, should see the logic of ensuring that all costs of production are captured in the market price. The huge negative externality associated with fossil fuels is what prompted Nicholas Stern to call climate change the biggest market failure in history.

How much are we talking here? The pipeline itself is a $5 billion investment so it will have to make back a decent annual return. Enbridge’s estimates for toll structure and throughput imply revenues of just under $900 million per year. Based on financial statements in Enbridge’s 2010 Annual Report, profits from pipeline operations (after-tax earnings plus dividends) averaged 34% of revenues over the past three years. At this rate, profits from NGP would be over $300 million per year. These are not trivial amounts, and they do not include “costs” such as lucrative executive compensation – for example, Patrick Daniel, the CEO of Enbridge, made more than $6 million in 2009, and several other executives had more than $1 million in compensation.

Beyond the pipeline itself, we can also include the gain in profits to oil sands producers from higher market prices in Asia, estimated to average $3.6 billion per year by Wright Mansell, a consulting firm whose report is included in the application. So call it $4 billion in annual profits and you can see why a government with no morals would want to cozy up to the pipeline and start calling it ethical oil.

But at what environmental cost? There is a certainty of oil spills from the pipeline itself and tankers on the BC coast. Enbridge pipelines had 800+ oil spills on its pipelines over the past decade and a bit, and the record of other pipeline companies is no better with 5,600 incidencts in the US alone gong back to 1990.

But I’m more interested in the climate impacts. The Northern Gateway Pipeline would transport 525,000 barrels of diluted bitumen per day. The carbon content of this fuel is translates into annual global emissions of approximately 70 Mt CO2e. In addition, there are emissions associated with extraction of the resource (6.5 Mt CO2e, according to Pembina) and emissions associated with the energy needed to run the pipeline and ship bitumen to Asia. Finally, there are emissions from upgrading and refining bitumen into oil and other petroleum products (8-9 Mt CO2e per year, although this emissions-intensive process would happen in the importing country). All in, annual emissions associated with the pipeline could be in the range of 90-100 Mt CO2 per year, and this is not counting emissions associated with construction (manufacturing and transport of steel pipe, and machinery and equipment on-site).

So what is the damage — the negative externality — from all of that carbon? The most credible recent study estimating a range of values for the “social cost of carbon”, with most estimates in the range of $150-500 per tonne of CO2, but possibly as much as $893 per tonne. To put this in more recognizable terms, BC’s $25 per tonne carbon tax translates into less that six cents per litre. Internalizing the external costs of the pipeline into market prices would require a mix of regulation, carbon pricing and removal of any caps on liability in relation to spills. Indeed, the corporate form in practice limits liability to the initial investments made by owners of stock, which could be exceeded in the form of massive clean-up costs for a catastrophic spill.

Based on the numbers above, a low estimate of 80 Mt of CO2 into the atmosphere per year with external costs of $50 per tonne would imply $4 billion per year in externalized costs. Using a higher estimate of 100 Mt at $200 per tonne, external costs reach $20 billion per year. These numbers assume that bitumen would stay in the ground in the absence of the NGP, which may not be realistic given other options, but the point is that the NGP would facilitate the combustion of large volumes of fossil fuel, and doing so imposes very large costs on third parties from future climate impacts.

Bottom line: the Enbridge pipeline makes odious profits and they must be weighed against the costs of GHG emissions and oil spills. Privatize gains, socialize losses. Which is why the industry and their government make no reference to either the profits to be gained or climate change. While there will be some jobs created along the way, they are very small in number. Governments get a cut, too, through royalties and taxes (though the latter are being phased out for people fortunate enough to be corporations), but these are like the royalties on export of blood diamonds.

So thanks to Natural Resources Minister Joe Oliver, who unintentionally shone a massive spotlight on this project. The Conservatives would have been better off had he just shut up (though I’m figuring his letter came from central command and he was forced to sign his name to it). Let’s follow the money and have a real debate about the impacts of this pipeline from Alberta to China.

But the obvious question is this: if Canada has been so wonderfully successful, why must we take money away from Canada’s pensioners (let alone all the other blood that’s clearly going to spilled with this 2012 budget)?

The triumphalism of the federal government throughout the global crisis (which is still very much with us, as the IMF powerfully warned the other day) has become increasingly far-fetched, but the Harper government shows no shame in continuing to milk it for all it’s worth. 

A paper I wrote for the Alternative Federal Budget compiles international and historical data to show that there’s no empirical basis for the twin boasts that: 1. the economic damage from the recession has been repaired, and 2. Canada escaped the worst of the downturn (compared to other countries).

Here’s a link to the full paper, released yesterday by the CCPA:

http://www.policyalternatives.ca/newsroom/updates/what-economic-recovery

Adjusting for population growth (a no-brainer when making any historical or international comparisons of absolute variables like GDP and employment), Canada hs not remotely regained the ground lost to the recession.  Per capita real GDP is well below its pre-recession levels (and at least $3000 per person below its potential, given pre-recession trends).  The employment rate has recovered even more poorly: not even one-fifth of the downturn in that crucial measure of labour market well-being has been recouped in two-and-a-half years of non-recovery since mid-2009.

Internationally, if there is one word to summarize Canada’s relative performance through this recession, it should be “mediocre.”  Canada ranks 17th out of 34 OECD countries in real per capita GDP growth since the pre-recession peak, and 17th out of 33 in the cumulative change in the employment rate (see table below). 

Yes, we’ve done better than countries which experienced major banking or financial failures: the US, the UK, Ireland, Iceland, and Greece.  But among industrialized countries which did not suffer bank failures, we rank relatively poorly.  Instead of continually boasting that we’ve done better than the Americans or the Greeks, we should be asking why we haven’t done nearly as well as the Germans, the Koreans, or the Australians in recovering from recession.  The premature cessation of fiscal stimulus, the devastating impacts of currency overvaluation, and the longer-run failure to pursue successful sector-based development strategies, all loom large in answering this question.

The government’s continuing claim that Canada has done so well, is an insult to the many millions of Canadians who have suffered real harm, and continue to suffer real harm, as a result of the recession, and Canada’s incomplete, mediocre recovery from it.

Experts such as former Assistant Chief Statistician Michael Wolfson project that one half of all middle income baby boomers face a severe cut to their living standards in old age. This is due to falling employer pension coverage (down to 25% in the private sector), rising household debt combined with low savings, and the big hit to “fend for yourself” RRSPs which comes from high fees and low investment returns.

The right way to deal with this looming crisis is to expand the Canada Pension Plan now to raise incomes for seniors in the future.

The wrong way is to raise the retirement age for OAS/GIS.

Raising the retirement age will cut a basic building block of retirement security, the OAS pension of $540.12 per month which now goes out to 4.9 million Canadians aged over 65.  Almost all  citizens qualify.

Receiving OAS also makes seniors eligible for the GIS top up, which provides one in three seniors with a supplement which ensures they have a minimally adequate income in old age.

Raising the retirement age from age 65 to age 67 or higher would impact all future seniors, but would especially impact those who would qualify for the GIS supplement. Many older workers, especially the single near elderly, already face very high rates of poverty.

It is often argued that we have to raise the retirement age because Canadians are living longer. But raising the retirement age by 2 years will especially impact low income older workers. People in the bottom 20% of the workforce pass away 5.6 years earlier than those in the top 20%. Half of all low income men will collect an OAS/GIS cheque for only 10 years.

Raising the retirement age would also have a negative impact on those persons age 65 who are in poor health, and cannot continue to work.

What about cost? The latest actuarial report on the OAS/GIS projects that the number of recipients will increase from 4.9 million today to 9.3 million in 2030.

But the increase in total costs that is projected is much more modest, from 2.4% of GDP to a peak of 3.2% in 2030. That is because our economy will continue to grow.

Well under 1% of GDP is a small price to pay to maintain a basic retirement income for all Canadians, and especially the one in three seniors who have low incomes.

(Update – The Global TV video.)

The winner? Potash Corporation of Saskatchewan  with over $5 Billion of surplus cash on its books at the end of 2010 (and that was after a $2 Billion purchase of their own shares.)

The background paper was written by David Macdonald and myself. The summary follows. And there was an op ed from CLC President Ken Georgetti in the Toronto Star today

Here is the Summary:

Due to ongoing corporate tax cuts, corporate income taxes make up a falling share of all government revenues. In fact, by the end of January, corporations will have fully paid their share of taxes.

The general federal corporate income tax rate stood at 28% in 2000. It was cut to 21% under the Liberals, and then cut in stages, from 21% to 15%, under the Conservatives. The most recent cut was from 16.5% to 15%, effective January 1, 2012.

Each one percentage point cut to the corporate income tax rate costs the federal government about $2 billion in annual revenues.

The argument for corporate income tax cuts has been that increased after-tax corporate profits would be re-invested in company operations, boosting economic growth, productivity, and jobs. However, studies have shown that rising corporate after-tax profits have not resulted in increased real investment.

This study looks at the profits and investments of Canada’s largest companies, those listed on the S&P/TSX Composite Index, from 2000 to 2010.

In line with cuts to the statutory federal and provincial tax rate, the effective tax rate (that is, taxes actually paid by Canada’s largest companies to the federal and provincial governments as a share of pretax profits) has fallen from one third in the early 2000s (35% in 2000), to between one fifth and one quarter (24% in 2010).

Companies have used increased after-tax profits to boost dividends paid out to their shareholders. Dividends as a percentage of after-tax profits have risen from 30% in 2000 to over 50% in recent years.

Companies have also chosen to retain higher after-tax profits as financial assets, as cash, and as longer term assets, not counting investments in capital stock.

The study looks at the change in the assets of Canada’s largest non-financial companies. (Financial companies and conglomerates are excluded because they typically hold large financial investments as part of their ongoing business.)

The Top-10 Corporate Hoarders have collectively accumulated $30.7 billion in extra short- and long-term assets between 2000 and 2010, since 2000.  The leading cash hoarder has been Potash Corporation of Saskatchewan, which accumulated over $5 billion in assets over this period.

The Appendix lists Canada’s top Corporate Hoarders.

Cuts to corporate taxes have resulted in a major loss of government revenues, without the anticipated result of higher corporate investment in machinery and equipment, new plants, and other areas of company operations. Instead, we have seen a big increase in dividend payouts and in financial assets.

On fiscal policy they say:

Countries should let automatic stabilizers operate freely for as long as they can readily finance higher deficits. Among those countries, those with very low interest rates or other factors that create adequate fiscal space, including some in the euro area, should reconsider the pace of near-term fiscal consolidation. Overdoing fiscal adjustment in the short term to counter cyclical revenue losses will further undercut activity, diminish popular support for adjustment, and undermine market confidence.

Canada has record low interest rates and the lowest net debt to GDP ratio of the large advanced industrial countries. Maybe we should reconsider austerity.

Today’s new Statistics Canada survey of job vacancies sheds fresh light on this debate. The finding that “there were 3.3 unemployed people in Canada for every job vacancy” confirms that the main problem is a lack of jobs, not alleged disincentives to work or barriers to labour mobility. In other words, policymakers should focus on the demand side rather than on the supply side.

In Alberta and Saskatchewan, provinces supposedly plagued by labour shortages, there were three unemployed workers for every two vacancies. Even in mining, oil and gas – the sector with by far the highest rate of job vacancy – unemployment exceeded vacancies. These figures debunk the view that the solution is simply to prod workers to move west.

UPDATE (January 25): Quoted in The Globe and Mail, Toronto Star, Montreal Gazette and other newspapers. The Victoria Times Colonist had my favourite headline.

. . . investment in machinery and equipment fell slightly by 0.2 per cent between June and September, 2011, prompting Ontario Finance Minister Dwight Duncan to fire a shot across the bow of corporations.

Mr. Duncan said Ontario has the most competitive tax system in North America thanks to reforms introduced by the governing Liberals that have eliminated capital taxes and reduced the corporate rate to 11.5 per cent from 14 per cent in 2010. The rate is set to decline further, to 11 per cent this June and 10 per cent in June, 2013.

“I expect businesses to invest and create jobs,” Mr. Duncan said. “They’ve got to step up to the table and invest here in Ontario.”

As Duncan waits impatiently for a deluge of investment following his recent corporate tax cuts, he should consider that corporate tax rates have been falling for more than a decade. The Ontario Economic Accounts show that we are still waiting for the promised pickup in business investment.

Last week, I presented the following table to the Commission on Quality Public Services and Tax Fairness. It displays Ontario’s provincial corporate income tax rate, the combined federal-Ontario corporate income tax rate, and business investment in machinery and equipment as a share of provincial Gross Domestic Product at market prices. The 2011 figure covers the first three quarters.

The Harris government enacted a schedule of deep corporate tax cuts in 2000, but the Eves government delayed further cuts in 2002. In 2003, the McGuinty government legislated a partial reversal of these cuts as of 2004. In budget 2009, it announced a new schedule of corporate tax cuts, starting in 2010.

Despite the McGuinty government’s inconsistent policy, the overall corporate tax rate for Ontario business declined steadily because of federal cuts. The combined rate has fallen by well over a third since 1999.

Meanwhile, business investment in machinery and equipment is down by more than a quarter, relative to the broader provincial economy. Investment has fluctuated with the business cycle, plummeting during the financial crisis and partially recovering since then.

It would be difficult to conclude from the empirical evidence that the past decade of corporate tax cuts has boosted investment in Ontario. I set out some theoretical explanations for this policy failure in The Ottawa Citizen a few months ago.

A better approach would be for the Ontario government to restore a 14% provincial corporate tax rate and invest the additional revenue directly or fund incentives tied to private investment in the province. With the federal corporate tax rate down to 15% this year, fully reversing McGuinty’s corporate tax cuts would produce a combined rate of 29% – lower than Ontario’s combined rate had been until last year.

They’re all enormous, flexible global companies, given carte blanche by the Canadian government to purchase important long-standing profitable assets here with few if any conditions, who promptly locked out their Canadian workers in an effort to extract historic concessions in compensation and security.

Seems to be a trend.

Here’s my recent Globe and Mail column on the growing popularity of management lockouts.  No matter how tough the unions are, it seems that some form of government intervention would ultimately be required to prevent or at least referee these David-and-Goliath battles.  I mention the Manitoba arbitration legislation at the end; there are other openings for government, too (not least being a far more stringent approach to attaching conditions to these takeovers in the first place).

Can you imagine the governments of Germany, Japan, or Korea tolerating what is happening at Caterpillar today: where a global giant buys an important and profitable industrial asset, no conditions attached, and then attacks so aggressively the well-being of domestic workers and the future of the factory itself?  I can’t.  No wonder those countries are all successful and growing manufacturing jurisdictions (paying far more than $16.50 per hour for high-skill heavy industrial work, by the way), while Canada can no longer make that claim.

Anyway, here’s the G&M piece:

Labour Relations Shoe is Now on the Other Foot

Business lobbyists used to express grave concern about the economic impact of strikes.  Those concerns were always overstated.  Time lost to work stoppages of all kinds amount to about one-thirtieth of one percent of total working hours, down 90 percent from the 1970s.  Nevertheless, companies complained loudly that work stoppages undermine output, productivity … and, of course, profits.

Recently, however, business leaders have warmed decidedly to work stoppages.  In the modern bargaining environment, companies (especially multinational firms) hold most of the cards.  And executives are increasingly willing to precipitate their own work stoppages – through management lockouts – to enforce demands for lower wages and benefits.

Two New Year’s Day lockouts highlighted this increasingly popular strategy.  U.S.-based Caterpillar Inc. locked out 450 locomotive builders in London, Ont., demanding wage cuts of 50 percent and other dramatic concessions.  The same day, Rio Tinto, the U.K.-based mining giant, locked out 755 workers from an aluminum smelter in Alma, Que.  That company’s demand to outsource all future bargaining unit openings would attain an even larger cut in future wages.  In both cases, what’s at stake is nothing less than the future of middle-class incomes in high-value manufacturing and resource industries.  And in both cases, executives are willing to lock the doors, unless and until workers swallow their pill.

These lockouts are just the latest in a growing trend by employers to lock out workers as needed to roll back wages and benefits with unionized workers.  U.S. Steel (another foreign giant) used a 50-week lockout to dismantle the defined benefit pension plan for workers in Hamilton.  Canada Post played the lockout card last spring to precipitate one-sided back-to-work legislation from an obliging Harper government.  The City of Toronto is contemplating an unprecedented lockout of 30,000 civic employees, that could start next month, in an effort to wrest job security and other concessions from those workers.

Other recently locked-out Canadians include bus drivers in the Maritimes, longshore workers in Montreal, and warehouse workers in Ontario.  In every case, employees were told to not bother reporting for work until they accepted management’s agenda.

Suddenly, business seems blithely unconcerned about the economic losses of long work stoppages.  Of course, most employers would rather have no union to deal with at all; that way they can dictate painful rollbacks to the workers, no muss, no fuss.  But for those stuck with a union, work stoppages –even long ones – are a small price to pay in the drive to drive down labour costs and boost profit margins.

No matter the economic and social consequences of these hard disputes, don’t hold your breath waiting for government to intervene.  In the Caterpillar case, for example, a federal official stated “this is a dispute between a private company and the union and we don’t comment on the actions of private companies.”  That’s quite a change from the Harper government’s philosophy toward work stoppages at Air Canada (another private company).  Government worries about the economic consequences of work stoppages only when they might produce gains for the workers – rather than losses.

The new popularity of management lockouts reflects the dramatic tilting of the labour relations playing field in recent years.  When workers use work stoppages to make progress in wages and benefits, employers hate them.   But when unions are on the defensive, a work stoppage is a small price to pay.  Global firms have been particularly aggressive, given their ability – ratified by free trade and investment agreements – to shift production and capital seamlessly, playing off workers against another.

This lopsided trend is troubling, and not solely because of its negative impact on fairness and equality.  It also raises macroeconomic concerns.  As employers ratchet down compensation, income shifts from consumers (who spend every penny of it) to corporations (who sit on a growing pile of uninvested cash).  Unions serve an important stabilizing function during times of protracted economic weakness, preventing a cycle of deflation in wages and prices that undermines recovery.  If employers’ current strategy is ratified, that stabilizing force will be weakened.

Politicians should not sit back and watch this growing line-up of confident employers use long lockouts to drive down labour compensation.  Manitoba has a legal provision giving its labour board the authority to intervene in long disputes, settling them through arbitration when an impasse has been reached.  It’s been rarely invoked, but it’s been important in preventing the outbreak of all-out industrial warfare that’s been declared by the likes of Caterpillar and Rio Tinto.  This is a good time for other jurisdictions to consider a similar direction.

Greg Fingas and Verda Petry have already refuted Wall’s call for further healthcare privatization.

On Employment Insurance, Wall implies that eastern Canadians are collecting excessive benefits funded by western Canadians. He goes even further than the old Lotto 10-42 stereotype, alleging that people can work for just over 10 weeks and collect almost 52 weeks of benefits.

The number of benefit weeks available depends on the regional unemployment rate and on how many hours the unemployed individual had paid EI premiums. As far as I can tell, Wall or his staff picked out the minimum number of insurable hours and the maximum duration of benefits from the highest-unemployment regions. Of course, as I point out in today’s Regina Leader-Post, someone with just the minimum hours would not get the maximum benefit:

No labour shortage

As reported in the Jan. 11 story “Wall wants health innovation cash,” Premier Brad Wall stated that federal Employment Insurance (EI) “discourages Canadians from moving here” despite “a serious labour shortage.”

Far from a labour shortage, Saskatchewan has thousands of job seekers who cannot find work. The provincial unemployment rate has jumped to 5.2 from 4.1 per cent since October.

Wall inaccurately claimed, “In some regions, a person can work just over 10 weeks and receive almost a year’s worth of EI benefits.” In regions with the highest unemployment rates, including northern Saskatchewan, the minimum threshold to qualify for benefits is 420 insurable hours (10.5 full-time weeks). But someone with just this minimum could not collect benefits for the maximum of 45 weeks.

Most unemployed workers do not get EI. The percentage receiving benefits is 34 in Saskatchewan and 39 nationally.

Rather than making EI more accessible to Saskatchewan workers, Wall’s stated goal is to make it even less accessible elsewhere to prompt more migration. How small a minority of jobless workers does he think deserve benefits?

The premiers should endorse the Canadian Labour Congress proposal to lower regional eligibility thresholds to a common national standard. Doing so would help the growing number of unemployed workers, reduce provincial welfare costs and remove the supposed incentive to stay in regions with high unemployment.

Erin Weir, Toronto
Weir is a Saskatchewan expatriate and economist with the United Steelworkers union’s Canadian National Office.

Wall goes on to argue that, by subsidizing poorer provinces, “Canada’s Equalization system works similarly to discourage labour mobility in a way that hurts the national economy.” There may be some legitimate technical debates about how the Equalization formula measures hydroelectric revenues and the property tax base. But Wall’s attack on the program is a bit strange given that the Saskatchewan government was receiving Equalization until the relatively recent run-up in global commodity prices.

His claim about labour mobility also misses the issue of fiscally-induced migration. Imagine someone offered jobs paying $50,000 in a rich province and $55,000 in a poor province. The national economy would be best served by them taking the higher-paid job (which would be more productive in a neoclassical economic model).

But what if the poorer province must levy 20% taxes to fund its public services, while the rich province can charge only 10%? The financial incentive would be to take the lower-paid job in the rich province ($45,000 vs. $44,000 after-tax). By allowing all provinces to provide roughly comparable services at roughly comparable tax rates, Equalization helps ensure that migration is based on actual economic opportunities rather than on fiscal differences between provinces.

There may be problems with “the same old dynamics of federalism,” but Wall does not hit them.

 I find this interpretation pretty unconvincing for the same reasons as Hacker and Pierson in their recent book on the political determinants of soaring income inequality in the US. (Jacob S. Hacker and Paul Pierson, Winner Take All Politics, Simon and Schuster, 2010.) Any rising pay gap between the college and non college educated in the US cannot possibly explain the huge wage gap between the top 1% and top 0.1% on the one hand and the many highly educated workers to be found below the extreme top end of the income distribution. And SBT cannot explain the hyper inequality of the US as compared to many European advanced capitalist countries similarly exposed to the big economic forces of globalization and technological change. (The US top 1% now grab 16% of income vs 13% Canada, 6% in Sweden and 10% in Germany.)

 Hacker and Pierson argue that the key underlying cause of the winner take all US economy has been winner take all politics – the growing political power and then ascendancy of the very rich, dating back to about 1980 precisely when the income share of the top 1% began to rise. Economic policies have increasingly reflected their interests and their interests alone, and have not counteracted any structural economic forces increasing inequality.

 As they argue, it is far too narrow a view of the role of government to look just at changes to tax and transfer policies which directly shape the distribution of income (and which have indeed contributed to growing inequality, especially through tax cuts for the rich.) Even more important is what governments have done, or not done, to counter increased inequality of wages and soaring returns to capital.

 One key example they cite is the huge impact of the decline of US unions, which represented one in four workers in the private sector in the late 1970s compared to one in fourteen today. Declining union density and bargaining power not only led to stagnant wages for middle class workers, but also to a much weakened political voice for the middle class.

 Unions were, of course, a key force behind the New Deal and remained a major force in Washington until the early 1980s, championing pocket book issues and supporting Democratic dominance of the House and Senate. But labour was unable to secure labour law reform even with Democratic majorities in Congress, laying the basis for the frontal attack on union rights and influence which began under Reagan and then gathered pace.

 Unions brought their members into sustained engagement with politics. Ordinary voters, Hacker and Pierson argue, need narratives to interpret day to day political issues. The decline of labour eclipsed class based narratives for the middle class. And no organized force has replaced unions as grass roots organizations pressing for equality increasing policies and acting as a counterweight to the strongly organized interests of the rich. The new social movements which have become increasingly influential in the Democratic party did not replace the organizational muscle of labour on the ground, and do not focus on pocket book issues, leading much of the working class to become alienated from politics (and allowing the Republicans to gradually capture the South and the social conservative vote on cultural rather than economic issues.)

 Hacker and Pierson document the rising power of US business in politics, especially in terms of ideological influence, lobbying, and campaign finance. With that rising power, corporate elite interests more or less completely captured the Republican Party, and all but neutered the Democratic party as a counter-weight. While somewhat less beholden to the top 0.1%, Democrats did little or nothing to counter the forces of rising inequality by, for example, regulating the rise of finance or taxing the stock options and capital gains of the corporate elite. Wall Street Democrats continue to determine the economic agenda of the Obama Administration.

 Hacker and Pierson make a pretty convincing case that dominant class interests have captured the US political system, and ensured that economic policies respond to their interests rather than middle and working class economic interests. Call it the class politics hypothesis. Search for it in vain in the mainstream economic literature.

Tame inflation leaves room to lower interest rates. If unemployment continues to rise, the Bank of Canada should reduce interest rates to boost the economy and create jobs.

The modest inflation rate still exceeds the 2.2% average increase in hourly wages. Sluggish wage growth is another sign of a weak labour market, which calls for stimulative fiscal and monetary policy.

Although the overall price level decreased, shelter costs rose in December. Statistics Canada noted that higher electricity prices powered the increase in shelter costs, especially in Alberta.

These figures could generate more debate about regulating electricity prices in that province and removing the HST from electricity costs in Ontario. Broader discussions about housing affordability are also needed across Canada.

UPDATE (January 21): Quoted by Postmedia

It’s a quaint and vivid description, but it’s not appropriate.  Money is fungible—it can be shifted around with relative ease—while feathers in a goose are not.

And it’s this shifting around of money between forms of income and between countries that explains a lot of the “elasticity of taxable income”.

Globe columnist Neil Reynolds also frequently uses the Laffer curve argument—when tax rates are lowered, revenues sometimes increase—and attributes this to the unleashing of entrepreneurial activity.   But most of this is due to the magic of tax accountants rather than the magic of the marketplace.

Studies found that after top personal income tax rates were cut in the United States in 1986, most of the increase in reported individual income of high-income households was due to timing and particularly shifting of income—for example, from the corporate tax base to the individual tax base—and not from additional labor supply.

The opposite has happened in Canada.  With federal corporate income tax rates at 15%, almost half the top federal personal rate of 29%, it’s profitable for those with the means to channel and retain income through a corporation instead of through personal income.  Viola! It appears corporate revenue has increased as a result of tax cuts, but much of it is merely shifting of income.

Money isn’t just fluid, it’s also got a sense of gravity, seeking out lower tax rates.  This is why a fundamental principle of good tax policy is that income from different sources should be taxed at relatively similar rates and loopholes should be minimized.  “A buck is a buck”, as the Carter commission put it forty years ago.   Unfortunately, this principle was too often ignored as governments became infatuated with supply-side economics.   As a result, much effort goes in tax shifting and tax accounting, which may profit a few but are deadweight economic losses to society.

Of course there are limits to how high tax rates can go.  If taxes are too high, opportunities are available, and taxes are considered unfair, avoidance will become widespread.   Inequitable tax rates and turning a blind eye to tax havens undermines the credibility of a fair tax system, encouraging more avoidance.

A recent paper by Nobel-prize winning economist Peter Diamond and Emmanuel Saez, The Case for a Progressive Tax, acknowledges the phenomenon of tax shifting, distinguishing between elasticity of taxable income and elasticity of economic activity.   Using data from the United States they estimate an optimal marginal tax rate for the top 1 percent in the 48 to 76 per cent range, higher than the top marginal rates in much of Canada.

But just who are these 1 percent or 0.1 percent who have acquired an outsized share of income gains over the past decade?   If tax rates are increased, will they really start working much less?   Will millionaire hockey players play fewer or lower quality games?

As Laura D’Angelo Tyson, Clinton’s former chief economic advisor, and  Paul Krugman recently pointed out, a majority of the 1% and about 70 percent of the top 0.1 percent are finance professionals, executives, lawyers or in real estate“: corporate suits”, essentially.

If higher tax rates lead to less resources going into high profit mergers and acquisitions on Bay Street and more into productive investments on Industrial Avenue, and less money going into CEOs salaries and more into workers’ wages, is that really a bad thing?

Given projections of very weak economic growth and a real  unemployment rate which is much higher than before the recession and still stands at over 10%, it is hard to support the case that we face generalized labour shortages anytime soon.

Demand for workers can be readily filled from the ranks of the unemployed, discouraged job seekers, and the involuntarily part-time and self-employed. Unemployment and under employment are especially high among the echo baby boomers entering the work force, recent immigrants trapped in jobs well below the level of their qualifications and experience, and aboriginal Canadians.

Despite a slack overall job market, many employers claim that there are significant shortages of at least some kinds of workers across the skills spectrum. Accordingly, they have pressed successfully for a major expansion of the temporary foreign worker program which now accounts for the majority of entrants to Canada, and also for changes to the regular immigration program which would much more closely align immigrant intake with the perceived needs of employers and the job market.

Do employers have a point?

It is not hard to be skeptical. Many employers want to increase labour supply via the immigration route, especially the temporary worker route, rather than raise wages, improve working conditions, and increase woefully low levels of Canadian investment in training  of the current work force.

On the other hand, there is fairly compelling evidence of some specific skills shortages by occupation and region, such as skilled trades workers for major construction projects in Alberta, and some health care professions in many parts of the country. And we know from the detailed work of sector councils that some occupations will be hit much harder and earlier than others by the aging of the current workforce.

It is crucially important to get a handle on these kinds of current and emerging shortages so that we can respond through education, training and active labour market programs as well as through our immigration program. (To be clear, filling labour market needs is not the only purpose of our immigration programs, but it is certainly an important component.) Young people deserve to know what education and training programs are likely to lead to employment in good jobs, and unemployed and under employed workers need to be retrained in the skills which are demanded by employers. A good labour market information system would also allow workers to change jobs in an informed way.

As Lars Osberg has emphasised, knowledge of any labour and skills shortages is also essential to sound macro-economic policy.  Monetary and fiscal policy should push unemployment down to eliminate cyclical unemployment, while active labour market policies are needed to address any structural  mismatch between vacant jobs and the skills of the unemployed.

But we lack a good labour market information system, and do not even have the basic building block of a national job vacancy survey.  Surveys of employers to determine the level of vacancies are common in other countries, but the last Canadian survey was eliminated in 1978.

As I have argued before, building on an important ten year labour market outlook report by HRSDC which largely rejects the generalized labour shortages argument,  we need details of skills shortages by detailed occupation, and by locality.  Such shortages can, in principle, be identified if unemployment by occupation and by region is very low, and if wages are rising much faster than average. Reports from employers are also important.

We have to distinguish between undesirable labour and skills shortages which result in foreclosed economic opportunities and stretched public services, and the desirable state of tight labour markets which deliver low unemployment, growing opportunities for workers to rise up the skill ladder, and real wages rising at least in line with productivity… . in short, the kind of labour market which we have not seen in Canada since the early 1970s.

Fortunately, we will be getting some basic Statscan data next week based on an add-on question to the monthly business payroll survey which has now been asked for several months

This is an important start. However, this release will only give us a count of vacant positions by industry, by province and by size of firm. There will be no detail on occupation, nor on what employers tried to do to recruit workers.

While new information is welcome, I fear we can anticipate a lot of unhelpful employer and business media commentary on supposed labour shortages even at a time of high unemployment.

Fortunately, Statscan will be in a position to provide much more detailed data from the new Workplace Survey  further down the road (the release date has not yet been set.)

Credit should go to HRSDC for funding Statistics Canada work on job vacancies, which was one of the key recommendations of the Drummond Task Force on Labour Market Infomration.

The trend is a dwindling number of beneficiaries among a growing pool of jobless workers. An implication is that EI recipients are exhausting their benefits without finding jobs.

The proportion of unemployed Canadians receiving EI benefits fell to 38.6% in November (i.e. 539,010 beneficiaries out of 1,394,700 unemployed workers). Statistics Canada reported an especially large decline in Ontario, where just 27.0% of unemployed workers received benefits (i.e. 156,330 beneficiaries out of 579,800 unemployed workers).

The administration of EI has recently attracted negative attention. While administrative improvements are undoubtedly warranted, more substantive policy changes are needed to increase the accessibility and duration of benefits for workers unemployed due to global economic factors beyond their control.

At the risk of imposing a proofreading burden on communications staff, that sentence is missing the word “an.”

I first heard this idea at a meeting of the OECD’s Regulatory Policy Committee, where the British government representative was touting the “One-in, One-out rule.” Canada’s Conservatives have just renamed it the “One-for-One Rule.”

At best, this rule is a gimmick. At worst, it will delay or prevent the implementation of needed public-interest regulation.

The issue is not, of course, the sheer number of regulations. It obviously makes sense to review existing and proposed regulations. But an honest review should be open to the possibility that more regulations are warranted, if that is what the evidence indicates.

The One-for-One Rule will create perverse incentives for federal regulators. They will maintain and husband unnecessary regulations so that they have something to remove when they need to introduce new regulations.

For your reading pleasure, here is what I and others submitted to the OECD.

UPDATE (January 21): This letter is in today’s Globe and Mail (page F8):

Regulation roulette

It obviously makes sense to review existing and proposed regulations (Tories Seek To Cut Red Tape Wrapped Around Businesses – Jan. 19). But an honest review should be open to the possibility of increasing regulation, if the benefits outweigh the costs.

Requiring the elimination of an existing regulation for each new one creates perverse incentives. Regulators will husband unnecessary regulations so they have something to eliminate when new ones are required. If not, the “one-for-one” rule could impede needed public-interest regulation.

Erin Weir, economist, United Steelworkers

In 2011, the “real” rate averaged 10.6%, up significantly from the pre recession low of 8.6% in 2007.

The increase in the “real” rate for workers aged 25 to 54 has been fairly modest, up 1.6 percentage points from 7.2% to 8.8% compared to 2007.

But the increase in the “real “rate for young workers compared to 2007 has been stunning: up 4.3 percentage points from 15.4% to 19.7% (from 16.2% to 21.0% for young men, and from 14.4% to 18.2% for young women.) The “real” youth rate has slipped only a touch from the high of  20.3% in 2009.

So, to state the blindingly obvious, we are very, very far from a meaningful recovery for young workers.

He defends Caledon’s proposal for temporary non EI income support for the unemployed as a clear improvement over welfare , and stresses that it is not intended to undermine EI as a social insurance program.

I read the Caledon paper – there is a link in Michael’s comment – after commenting on the Mowat Report. Their proposal is certainly worthy of discussion given that a lowering of entrance requirements would  indeed still leave many unemployed workers out of the EI system.

I continue to find it unfortunate that the Mowat Report made no recommendations on the basic parameters (the entrance requirement; the duration of benefits) within the single national EI system they call for to replace the current grid based upon local unemployment rates. Such vagueness reasonably leads many people to suspect what Mowat have in mind is an erosion of the EI system in at least the higher unemployment regions. And people will look at the Job Seekers proposal in that context.

The papers comes out at a time when all Canadian provinces face significant pressure to reduce the rate of growth of health spending while continuing to improve access and quality of care but when there is no agreement on the specific changes needed to ensure that public healthcare dollars are more efficiently utilized. As a result, individual provinces are experimenting with a variety of reforms. In BC, the two major policy options being introduced are an activity based funding (ABF) model for hospital surgical procedures; and an integrated model for caring for people with chronic conditions and complex needs in the community. Though both of these are formally priorities of the Ministry of Health, ABF is receiving the vast majority of the financial resources and technical expertise.

Our paper raises serious concerns that the current preoccupation with reforming hospital funding is simply too narrow to effectively address BC’s most pressing health care challenges, many of which have roots outside the hospitals (in our inadequately funded community care system). This is why we titled our report Beyond the Hospital Walls: Activity Based Funding Versus Integrated Health Care Reform.

The current focus on ABF is a reflection of the conventional, hospital-centric model of health care that our system was built on. While this worked well to meet the health care needs of Canadians in the 1960s, it’s outdated in the 21st century when chronic disease management — which is better handled in the community, not the hospital — is increasingly becoming a pressing concern.

But what’s worse is that ABF is not just a distraction from the real problems in our health care system: it may actually reinforce the silos and fragmentation within the health care system, hindering efforts to improve overall system integration and coherence (this stand in the way of priority #2). This is why jurisdictions where ABF has been in place for a number of years are increasingly looking to move away from it towards funding mechanisms that incentivize integration across the system (among hospitals, family doctors and community care services like long term care and home support).

The paper outlines a strategy for health care reform that is timely, practical and evidence-based, and that will address the root causes of problems in our health care system.

Our review of the international evidence on health systems reform suggests that the best performing systems are the ones that have developed mechanisms to collaborate and share accountability across services and providers. The key to their success is understanding the patient experience across the continuum of diverse health services the patient needs at any one time. High performing health systems are organized in a way that allows providers to be jointly accountable for providing cost-effective care in whichever venue is medically appropriate – the patients’ home, the family doctor’s office or the hospital. There are many examples of how this can be done, both internationally and from our own backyard (Northern Health Authority is a leader in this area). All that’s needed is for the BC government to show leadership, look at the evidence, and actually implement the initiatives that have proven successful province-wide.

We hope that Canada’s Premiers’, who are currently meeting to discuss health care in Victoria, find a way to avoid getting bogged down into narrow issues like hospital funding reform and engage in a broader discussion of how to improve quality, increase access and ensure the cost effectiveness of the overall health care system.

—

Originally posted on PolicyNote.ca.

BHP executive Tim Cutt stated, “We will not market through Canpotex. We talked to the premier (Brad Wall) about that. He understands that.”

Concerns that BHP would undermine Canpotex were a major objection to its takeover bid for the Potash Corporation of Saskatchewan. Indeed, Premier Wall’s speech rejecting BHP’s proposal invoked “Canpotex” ten times in eight pages, as a source of pricing power for Saskatchewan’s resource and of jobs in British Columbia’s ports (as opposed to BHP’s plan to use the port of Vancouver, Washington).

It seems strange that Wall would now be happy to accept BHP’s plans to circumvent Canpotex. Maybe BHP is willing to develop the Jansen Lake mine only if it can bypass this agency? Perhaps the benefits of developing this new mine outweigh the costs of eroding Canpotex’s pricing power? If Wall has come to that conclusion, he should say so rather than allowing BHP to speak for him.

Now the even the 0.0001% are getting concerned.   Experts polled for the Global Risks Report for this month’s meetings of the World Economic Forum in Davos –one of the most eleite gatherings of the powerful in the world — selected severe income inequality as the most likely global risk to manifest in the next ten years. 

The report notes that “shrinking tax revenues have deteriorated the fiscal position of governments and reduced their ability to ease social hardship with welfare and counter-cyclical spending”.  It acknowledges that the “growing sense that wealth and power are becoming more entrenched in the hands of political and financial elites”.  It warns that a lack of social mobility and hope, especially for youth, could feed more social unrest as we’ve experienced from the U.S. to the Middle East.  If not addressed, it could feed a vicious cycle and “potential slide into dystopia”.

Scary prospects prospects indeed, even for the elite–including Prime Minister Stephen Harper–gathered in the rarified confines of Davos.

In Washington, Alan Krueger, Chairman of Obama’s Council of Economic Advisors delivered a  speech yesterday highlighting the real problems of the Rise and Consequences of Inequality in the United States. 

There’s some interesting material there: he makes the strong point that rising inequality has hampered economic growth.  He says ”there’s no sign.. that the tax increases in the early 1990s had an adverse impact on growth” and “there is little empirical support for the claim that reducing the progressivity of the tax code has spurred income growth, business formation or job growth.” 

He cites studies showing that “a more fair distribution of wages would be good for business because it would raise morale and productivity”.    Krueger also highlights some of the excellent work by Ottawa professor Miles Corak and his “Great Gatsby Curve” showing that rising inequality is associated with lower intergenerational mobility.    Horatio Alger no more.

These issues and concerns certainly aren’t new to Krueger, who did ground-breaking work on the impacts of minimum wages, but they may start to spook the Davos crowd.   The question is: what are they going to do about it? 

Krueger has some decent though modest suggestions aligned with his his boss’s policies.   The solutions suggested for Davos are even more self-serving and far out to sea: “equipping youths with the skills  to succeed and enable them to move to where their labour labour is most needed through safe well-managed migration channels” (!) 

Time for them to man the lifeboats!

The pipeline is a $5 billion investment, according to Enbridge (technically $5.5 billion but $500 million is a contingency reserve). The number thrown around by pipeline proponents is 63,000 person-years of employment, which sounds pretty good (National Energy Board document here). Careless journalists and cynical politicians sometimes blur a person-year of employment with a job, in which case I’ve been at my current job for 13 person-years.

In terms of hard numbers, though, Enbridge figures there will be an average of 1,850 workers building the pipeline over the three-year construction period, peaking at 3,029 in the third quarter of 2015. They note that all of these jobs may not be filled locally, and in construction of large projects workers typically move around to where the action is. It is also worth noting that these workers would not all be unemployed if the pipeline did not go a head; the vast majority would likely be working somewhere else. There is some case to be made that these jobs would reduce unemployment based on the current stagnation in the economy, though by 2014-15 this may no longer be the case, and we may have excess demand for skilled construction workers.

So how do we get from an average of 1,850 workers for three-years to 63,000 person-years of employment (construction only)? To answer this question we have to understand input-output models, which use GDP data to proxy the flow of income through the economy. Modellers “shock” the I-O model to estimate an increase in economic activity. The important pieces are (a) that direct expenditures on the pipeline also lead to employment in upstream industries that provide the goods and services that are inputs to construction and operations (called “indirect employment”); and (b) income to workers, whether direct or indirect, support jobs in the local economy on food, housing, cars, entertainment and so forth (called “induced employment”).

Neither of these impacts is particularly controversial, and the early description of such in the application to the NEB is consistent with normal practice. But when the numbers are presented a massive over-estimate of job creation results. The main juice for indirect jobs comes from sourcing the manufactured pipe domestically through Canadian steel mills – this is assumed to happen, and should if the project goes ahead, but I have yet to see a firm commitment that this will be the case. Anyway, the purported impact of purchasing inputs is misleadingly labelled “direct input purchases” and is counted as “direct employment” rather than indirect employment. This employment from “direct input purchases” is estimated to about three times the person-years as “on-site employment” (17,227 vs 5,537 person-years), which seems overstated to me given how labour-intensive construction is.

The problem comes in what is normally considered “induced employment” but is labelled as “indirect employment” leading to 13,251 person-years of employment (figures in Table 4-9). This can be seen in Table 4-10, which purports to show direct and indirect employment effects by industry category, but clearly includes induced employment in the form of, for example, 137 person-years of arts, entertainment and recreation employment, and 401 person-years in information and cultural industries, 95 in crop and animal production, and 423 person-years in government (as if the latter is going to happen federally, in BC or Alberta where public service cuts have been on the order books!).

Finally, a second run of the model is undertaken using all of this new employment income as the shock to come up with what they are calling induced employment, adding 26,679 person-years of employment. This leads to a stated estimate of 39,930 person-years of “spin-off employment” by adding 26,679 and 13,251. The total number represents 64% of the claimed employment gain of project construction. Such a number is truly incredible as it suggests that for every job created in actually building the pipeline and its inputs leads to two spin-off jobs; whereas in typical I-O models you get one induced job for every new direct or indirect job.

One problem with the induced numbers is, as stated above, we cannot assume that those workers would have been unemployed, so some portion of the income driving induced employment may be defensible but not all. Also it is assumed that tax revenues going to governments get spent on public services, which a lovely thought but pretty far from reality federally, Alberta or BC. So the induced numbers should be heavily discounted, because they are as if 36,000 new skilled workers just showed up out of nowhere, earning $68,000 per year, and paying taxes to governments that were interested in supporting public services.

Also, those numbers are just the construction phase. On a permanent basis, the number of jobs is quite small, estimated by Enbridge at 217 workers on the pipeline and terminal facilities. The vast majority of employment for the project comes during the construction phase, which is consistent with an industry that is one of the most highly capital intensive. They then estimate that the 217 permanent jobs increase five-fold to 1,146 total jobs per year in Table 4-14, seemingly with the same estimation issues as with construction. Total jobs are likely to be about half of what Enbridge claims, based on standard I-O multipliers for pipeline transportation.

The danger in all of this is that a number gets established, and then becomes pasted into various summaries, briefing notes and so forth, and few people go and check the math, and any assumptions and caveats associated with the number are left out of the summary.

[AFTERNOON UPDATE] OK, I had a call with Statscan and they are not able to release the study they did for Enbridge to me, so I will have to wait on my request from Enbridge. I was able to talk through multipliers for direct, indirect and induced broadly for the Oil and Gas Construction Industry sector, that provide a rough estimate. They lead to about 3,000 fewer direct, 11,000 more indirect, offsetting 11,000 fewer induced person-years. The same caveats about induced jobs would still apply, though, even with the lower number.

Still, while the total jobs is about 3,000 person-years fewer than the Enbridge, they are in the same ballpark. So I am scratching my head a bit, in particular as it relates to direct jobs and how all of those reported indirect jobs could include such large numbers of in far-flung industry categories. There is some kind of flaw in how this is being modelled but without deeper information I cannot get at it. It could be that Oil and Gas Construction Industry [code 2300D0] in the I-O Model is broader than pipeline building (in the NAICS, 23712, Oil and Gas Pipeline and Related Structures Construction).

This Statscan table lays out foreign ownership in Canada’s oil and gas sector. In 2009, foreign corporations controlled 35% of the assets of the sector, received just over half of the revenues, and more than two fifths of the profits.

Summers is the consummate insider neo liberal Democratic economist. A  leading academic,  he was chief economist of the World Bank, acolyte and then successor to Robert Rubin as the US Secretary to the Treasury under Clinton, a key member of the Obama economic team until late 2010, and a former President of Harvard. Along the way he has angered environmentalists, feminists, progressive Democrats, and the faculty of Harvard who ousted him in a vote of non confidence.

This strange piece argues that the current travails of capitalism “can be addressed with proper fiscal and monetary policies” and that calls for fundamental reform of the system are off base.

He argues that problems of high unemployment and rising inequality are “real and profound” but that there is “no obvious solution at hand.”  Apparently structural unemployment and the rise of the top 1% have nothing to do with the operations of market capitalism. “The roots of the problem lie deep within the evolution of technology.”

Similarly, while he states that “citizens of the industrial world who believe they live in progressive societies are right to wonder why increasingly affluent societies need to roll back levels of social protection”, this is inevitable because public services are just inherently more costly than market services because of higher relative labour costs.

In short, we face a future of high unemployment, rising inequality and deep cuts to social programs. But that’s not because of market capitalism. So  “a radical change of direction … is somewhat beside the point.”

No wonder the guy commands such high speaking fees.

Canada’s rate of labour force growth will indeed be slowing. Everybody gets one year older with every year that passes, and the large baby boom generation will indeed stop working some day. We do already see some shortages of workers with specific skill sets in specific areas of the country.

But it is worth underlining that the immediate issue – and the issue that will last for several more years at least  – is high unemployment,  NOT  generalized labour shortages. We do not have enough jobs to employ both the baby boomers who are putting off retirement, and their children who are still entering the work force in large numbers.

If we look at the data for older workers for 2000 to 2011, we see two things. The number and proportion of of older workers aged 55 and over has been increasing as the population ages.  This depresses the labour force participation rate to some degree, as older workers are less likely to participate than core age workers aged 25 to 54. But, and this is a very big but, the participation rate of older workers has been steadily and quite dramatically rising.

As shown in the Chart below, the participation rate of all sub groups of older workers has been rising steadily since 2000, from 62.7% to 73.0% for persons aged 55 to 59; from 36.2% to 51.1% for those aged 60 to 64, and from 11.4% to 23.9% for those aged 65. to 69.  The increase has been especially pronounced for women. In 2011, the participation rate for women aged 60 to 64 was 44.5%, up from 27.0% in 2000, and the participation rate of women aged 65 to 69 was 18.2% compared to just 7.1% in 2000. (Data from CANSIM Table 282-0002.)

While the leading edge of the baby boom generation are now entering their 60s.,  the bulk of them are just entering the 55 to 59 age group, and many seem set to stay in the workforce for many years, particularly if the labour force participation rates of those in their 60s continues to increase in the future as it has in the past decade.

No one can forecast the future trend with certainty, but but it can be noted that there was an especially big jump in the participation rate of older workers after the stock market collapse of 2002. (The participation rate of those aged 55 to 59 jumped from 63.8% to 67.7% between 2003 and 2011.)  The decline of defined benefit pension plan coverage combined with big hits to retirement savings because of  low interest rates and depressed equities seem to have definitively killed “Freedom 55.”

In sum,  the work force may be aging, but not enough to stop us from worrying about unemployment.

For instance the stock option deduction, which allows CEOs and executives to pay tax at half the rate of ordinary working income, is estimated to cost the federal government $725 million last year.

I’d written about this major problems with this tax preference a number of times before.  Not only is it highly inequitable, but it also fuels speculative behaviour and short-term behaviour.

Now even Roger Martin, dean of U of T’s Rotman School of Management, says they should be eliminated, while well-known McGill business prof Henry Mintzberg wrote in the Wall Street Journal that they ” represent the most prominent form of legal corruption that has been undermining our large corporations and bringing down the global economy.”

Hugh Mackenzie’s annual report on CEO incomes for the CCPA shows just how much stock options provide as part of total compensation for CEOs.  Even the Globe and Mail’s conservative columnist Margaret Wente has argued that they should be eliminated.

Analysis of the CRA’s income tax statistics for 2009 shows that over 95% of the value of this tax preference went to the 2% of taxfilers with incomes of over $150,000 and close to 90% went to the less than 1% of taxfilers with incomes of over $250,000.

The cost of related tax preferences for capital gains also continued to increase.   The half tax rate for capital gains in relation to personal income was estimated to cost $3.6 billion last year while the similar half tax rate for capital gains from corporate income is estimated to cost the federal government $3.9 billion last year.    In total, the stock option deduction and preferential rates for capital gains cost the federal government over $8 billion a year.   These tax preferences also cost provincial governments billions as they generally use the same tax base.

These tax preferences for stock options and capital gains were largely rationalized because it was argued that  they would boost investment and thereby productivity and economic growth in the economy, as supply-side economist Herb Grubel argued a decade ago when the inclusion rate was reduced from 75% to 50%.

That clearly hasn’t happened.   It’s time that the stock option deduction is completely eliminated and that capital gains are taxed at the full rate, after adjusting for inflation, as the CCPA’s Alternative Federal Budget has argued for many years.

If the federal government followed the advice of AFB and these esteemed business professors, it would be many billions better off — and we’d have a more equitable, stable and productive economy.

The Strategy surprised a lot of observers, especially in light of the fact that it was announced in December 2008, just as Ontario was entering a recession.  Its focus was almost exclusively child poverty, and at full implementation (i.e. 2013), it will result in $300 million in new annual spending.  This is equivalent to 0.3 percent of total provincial spending in Ontario, which is roughly $100 billion.

One stated goal of the Strategy is to reduce child poverty in Ontario by 25 percent over five years, based on StatsCan’s Low Income Measure.  And a major feature of the Strategy is an increase in the Ontario Child Benefit (OCB).  The OCB, at full implementation, will be worth up to $1,310 per child per year .  The Strategy also includes the implementation of “full-day learning for four- and five-year-olds.”

A Cabinet-level committee has been charged with implementing the Strategy.  Every year since the Strategy’s announcement, the provincial government has issued a progress report, which is publicly available.  The Strategy’s legislation stipulates that, every five years, there will be a new Strategy (very possibly with a different theme each time; in 2013, for instance, the theme/focus could be Aboriginal poverty, or social assistance, or housing).

Partly in response to advocacy by such people as Cheri DiNovo and PEF Blogger Jim Stanford, the McGuinty government has also increased the Ontario minimum wage from $6.85/hr. to $10.25/hr.  Though not officially part of the Strategy, this marks an important move nonetheless.

There have been some important outcomes from the Strategy.  For example, even though we have just come out a recession, Ontario’s Minister of Children and Youth Services recently reported the following:

The poverty rate for children in Ontario declined from 15.2 per cent in 2008 to 14.6 per cent in 2009…As well, the poverty rate for children living in deep poverty declined from 8.5 per cent in 2008 to 7.3 per cent in 2009…Poverty rates for children in single mom-led families dropped most dramatically, from 43.2 per cent in 2008 to 35.2 per cent in 2009. It is important to note that data from Statistics Canada lags by 18 months. This means statistics for our income-based indicators are available for only the first year of the strategy.

Let’s not kid ourselves though (pun intended): the Strategy has its shortcomings.  First, 0.3 percent of total spending is a relatively modest spending boost when it comes to poverty.  Because of the modest new spending made available for the Strategy by the McGuinty government, the Strategy didn’t even attempt to make inroads with respect to Ontario’s lack of affordable housing; that was left to a separate Strategy, which, now complete, did not announce any new social housing units, even though more than 150,000 Ontario households currently sit on housing wait lists.  Nor did the Poverty Reduction Strategy attempt to increase social assistance benefit levels, even though single adults without dependents on welfare in Ontario currently receive less than $8,000 a year; rather, it announced the creation of the Commission for the Review of Social Assistance in Ontario.

I think the McGuinty government deserves praise for showing some leadership, most notably with respect to children’s anti-poverty initiatives and the minimum wage.  I also think Deb Matthews (the Minister who oversaw and tabled the Strategy in 2008), her staff and advocates in the 25 in 5 Network (which played a watchdog role) deserve praise for making the most of an important opportunity.  But I think there are two essential ingredients required if Ontario is to aspire to someday eliminate poverty.

First, the role of the federal government in poverty reduction is crucial, especially with respect to job creation, affordable housing and income assistance.  Gilles Séguin  has done an excellent job of keeping tabs on the Harper government’s non-interest in this here. 

Second, provincial tax rates—both personal and corporate—have come down a great deal in Ontario since the mid-1990s.  When the McGuinty government came to power in 2003, tax reductions by the Harris-Eves government had reduced Ontario’s fiscal capacity by roughly $18 billion a year.  The McGuinty government has not made a serious attempt to restore this lost fiscal capacity; in fact, Mr. McGuinty signed an agreement with the Canadian Taxpayers Federation in 2003, effectively stating that he wouldn’t.  Over the long term, any Ontario government that claims to be serious about poverty reduction should seek to restore at least some of the province’s lost fiscal capacity.

A recent article in The Pie News looks at the recent decrease in international-student recruitment at Australian universities. An industry analyst quoted in the article blames the decrease in large part on the “high costs of student accommodation and public transport in major Australian cities.”

I think there are lessons here for Canada.

One way to reduce the cost of student housing in Canadian cities would be to increase the amount of student housing that his owned and operated by non-profit entities, rather than private entities.  I’ve blogged before about the extent to which this keeps rent levels for tenants down over the long term.  And one way to keep the cost of public transportation down for students would be to increase the availability of universal student transit passes, which I plan to blog about later this month.

Capping a very weak last quarter, Canada’s job market ended 2011 badly as the national unemployment rate rose from 7.4% to 7.5% and we lost 25,500 full time jobs.

While part time employment gains offset the losses in full time employment, this was only because of a strong rise in usually low paid and insecure self employment. The number of employees fell by 13,600.

The recovery in the job market ground to a halt in the last three months of 2011 as the national unemployment rate rose from 7.1% to 7.5% and as we lost 63,000 full time jobs.

There is now a clear need for the federal government to shift its focus from cuts to jobs.

Job losses in December were concentrated in construction (down 12,800) and health and social service (down 9,200). The number of public sector employees fell by 17,300.

Indeed, part-time work accounted for all of December’s supposed employment gains: 43,100 additional part-time jobs masked the loss of 25,500 full-time jobs. Meanwhile, 31,100 more Canadians reported self-employment as 13,600 fewer were actually paid by an employer. With fewer unemployed workers receiving Employment Insurance benefits, one suspects that much of this self-employment is involuntary.

The average hourly wage rose by 2.2% over the past year, not enough to keep pace with 2.9% inflation. (We do not yet have the Consumer Price Index for December, but the inflation rate was 2.9% in October and November.)

Canada’s weakening labour market argues for our central bank to keep interest rates low or reduce them. Federal and provincial governments should prioritize employment-supporting public investment over austerity to quickly balance budgets. Reducing the deficit will not create jobs, but creating jobs would help reduce the deficit.

UPDATE (January 6): Interviewed on the Business News Network

UPDATE (January 7): Interviewed on The National (at 1:50) and The Lang & O’Leary Exchange (at 15:10)

I would infer from the above that, insofar as Canada moves towards increased privatization of its health care system, our own PSE institutions will face increased financial challenges.  Very likely, this would result in both tuition fees and student debt rising even faster than is currently the case.

For many years the author believed that Canada’s weak productivity performance reflected inappropriate public policy. Despite most of the public policy agenda that was put forward to improve productivity being implemented. productivity growth in this country since 2000 has actually deteriorated. This suggests that the private sector bears more responsibility for Canada’s productivity malaise than previously thought.

It is indeed striking that growth of labour productivity in the business sector in Canada 2000-2010 averaged just 0.74% percent per year, about the lowest of any advanced industrial country and weak enough to drag us down to only about 70% of the US productivity level (compared to over 90% in the early 1980s.)

As corporate taxes have been cut, as free trade deals have expanded, as inflation has been firmly contained and as public debt has fallen, so has the growth rate of productivity slowed.

Drummond proceeds to call for a micro economic research agenda focused on firm behaviour.

That seems a trifle weak.

I commend to his attention the many past posts on this blog on the productivity issue (including this one on an earlier TD Bank productivity study from your’s truly.)

Our dismal productivity performance post 2000 is not puzzling at all when set in the context of the inherited weaknesses of our industrial structure:  the structural weakness of advanced manufacturing and associated  low levels of investment in innovation, high levels of foreign ownership, and a tradition of low value-added resource dependency. These weaknesses – which have been thoroughly explored and documented within the rich analytical tradition of Canadian political economy – have been exacerbated since 2000 by a new wave of de-industrialization, our reversion to a low value added energy and minerals driven economy, an over-valued exchange rate, and “Dutch disease.”

Above all, our dismal productivity record reflects a consistent refusal by governments to directly intervene in the economy to raise investment and shape comparative advantage.

The solution lies less in more research than in the promotion and development of active sectoral development and managed trade policies of the kind which Don Drummond has hitherto refused to contemplate.

Well, after many years in the wilderness, it looks like one of the chief MMT protagonists has gotten the attention of The Economist: http://www.economist.com/node/21542174 while the community at large has gotten the attention (and admiration) of at least one senior person at CNBC: http://www.cnbc.com/id/45765009

While these are far from perfect representations of MMT, they offer reason for hope that in 2012, we might see a more reasoned discussion about fiscal and monetary policy emanating perhaps, dare I dream big, from within the NDP or perhaps even in the Liberal Party.  Finally, for those who want to get real insight into MMT, check out the New Economic Perspectives primer series at: http://neweconomicperspectives.blogspot.com/2011/06/modern-money-theory-primer-on.html)

All the best for 2012 everyone…

If you feel a hand grabbing at your wallet next week, calling the cops won’t do any good because it’s the federal government picking your pocket.

It’s that time of year again when tax collectors at the Canada Revenue Agency, at the behest of their political masters, siphon more from the pay stubs of Canadians while giving corporations a New Year’s bonus.

The New Year’s Day hike will see employers and employees pay more into employment insurance and the Canada Pension Plan for a combined total of $306 a year in additional payroll taxes for working stiffs, says the Canadian Taxpayers Federation.

There are, of course, two sides to social insurance programs.

Starting in January,  CPP benefits – indexed to inflation – rise by 2.8% to a new monthly maximum of $986.67.  (You can’t say that about far too many defined benefit pension plans, and there is no inflation indexing of other pensions.)

Reflecting the rise in maximum insurable earnings, the maximum weekly EI benefit goes from $468 to $485.

The amount of earnings replaced by both EI and CPP will increase, giving rise to a premium increase in non inflation adjusted dollar terms. But, by the same token, there will be no fall in the real amount of income replaced by EI and CPP benefits during a spell of unemployment or when retiring.

Meanwhile, CPP premiums are unchanged as a percentage of earnings, and the employee EI premium contribution rate is up by an eye watering 5 cents per week per $100 of earnings.

I wonder why the mainstream media highlighted only the cost as opposed to the benefits of these programs?

Normally – as outlined in annual debt management reports – the government follows a strategy which is intended to achieve two main goals -  low overall debt servicing costs, and stable and predictable bond markets.  Since the yield curve is normally upward sloping – ie long term bonds carry higher rates of interest – the government issues a mix of treasury bills (t bills) and shorter and longer term bonds to balance the trade-off between cost and risk,  and the projected mix for the coming year is announced in the debt management strategy section of the annual federal budget. Borrowing needs for the coming year essentially consist of financing most of the annual deficit, plus refinancing current debt as earlier bond issues mature.

The latest debt management report (for 2010-11) tells us that the term structure of federal market debt has remained broadly stable since early 2008, before the financial crisis.  The share of treasury bills rose in 2009 as the government used this source to fund much of the sharp increase in the deficit, and it has since been run down by shifting from t bills to shorter term bonds.

But the share of long term bonds has remained quite steady at about 40% – 20% for ten year bonds, and 20% for very long term bonds (30 year bonds and real return bonds.) (See Chart 2.) The average term to maturity is just under 6 years.

The debt management strategy in the last Budget tells us that the government intends to continue reducing the overall share of t bills over the coming year,  but will maintain the share of long term bonds over the next ten years at about 40%.

As one would expect as a result of very low interest rates in the wake of the financial crisis, the average cost of servicing federal market debt has fallen to a low of 2.8% in 2010-11. But there would seem to be a strong case for shifting the term structure to long term bonds.

As of today, interest rates on long-term federal government bonds are just above record lows – 1.94% for ten year bonds, 2.5% for 30 year bonds, and 0.5% on real return bonds (ie 2.5% if inflation is 2%.)

Obviously the government and the Bank of Canada should not cease issuing t bills which are required to conduct monetary policy and to to maintain a stable bond market, but there is surely an opportunity to lock in ultra low interest rates for a very long period of time.  Why are we not taking advantage of it?

Unfortunately, Santa Flaherty seems to have got his Christmas list all mixed up.

The “privileged few” with expensive toys who haven’t been working too hard are in line for another big present, while the bill will be paid by hardworking Canadians through reduced services, higher unemployment, lower wages and slower economic growth.

First thing in the New Year, Flaherty is giving profitable corporations another big tax break, reducing the corporate income tax rate from 16.5% to 15%.   That’s considerably less than the marginal rate most Canadians pay on their income from working – and it’s also far less than corporate tax rates in the U.S.   This additional tax cut will be worth about $2.5 billion a year for profitable corporations.

One of the big winners again will be banks and the finance sector industries: the additional 1.5 percentage point tax cut will increase their after tax profits by about another $500 million.   Not too bad for a sector where the big banks reported over $6.1 billion in profits in their fourth quarter alone, a 36% jump over last year.

For companies in oil and gas, mining, and petroleum and coal refining, this additional tax cut will increase their after tax profits by about another  $300 million – also not too shabby for a sector that already benefits from about $1 billion a year in tax preferences  and subsidies.

And who’s going to pay for this additional $2.5 billion tax cut?    Flaherty has made it clear it will come from cuts to public spending.   The last federal budget announced another set of $4 billion in program cuts on top of cuts announced in previous budgets.  Federal departments were told to provide lists with cuts of 5% and 10% from their budgets – and it looks like they will be going for the deeper cuts.

It’s not just civil servants who will feel the impact: the cuts will be felt by other Canadians through reduced services, and lower demand with less spending and higher unemployment in the private sector as well.   Standard economic multipliers reported in Flaherty’s own 2009 Budget and also used by private sector economists show that the economic and job impact of public spending is about five times that of corporate tax cuts.

Using these multipliers, we can calculate that cutting public spending by $2.5 billion to pay for a similar amount in corporate tax cuts will lead to a net loss of approximately 30,000 jobs and a decline in our economic growth by about 0.2%.

Corporate profits in the first three quarters of this year are 40% higher than they were  two years ago, but business investment is only up by 14% during that time.   No matter how much Flaherty, Bank of Governor Carney and others entreat and urge them, businesses are quite understandably not going to invest their $500 billion in excess cash back into the economy if no-one is going to buy their goods.

Meanwhile the “hardworking people who pay their taxes and play by the rules” (that his party pledged to stand up for against the “privileged few” when it was elected six years ago) are paying the price for their mixed up priorities.   There are 1.4 million Canadians unemployed and looking for work, not including those who have given up looking for work or involuntary part-time.    Those who are working have seen their real wages and standard of living decline.   Spending cuts and the resulting higher unemployment will make the situation worse next year.  Slower economic growth will also mean lower revenues – and so the cycle will continue.

But there is still time to get things straight.

Santa Flaherty should listen to some of his brightest economic elves who now seem to realize that things have been mixed up for a long time.   And while they still may not have articulated how to set things right, he should go outside his kingdom for some advice from those who have warned about these problems for many years.

Technical notes:  economic multipliers from Finance Canada, Statistics Canada and elsewhere show that $1 in public sector spending increases economic output by an average of about $1.50 while $1 in corporate tax cuts increases economic output by only ~$0.30.   Average employment multipliers for these measures are roughly proportional:  public spending generates an average of 15 jobs per $1 million, while corporate tax cuts generate about 3 jobs per $1 million.

This means $2.5 billion in corporate tax cuts would generate about 7,500 jobs and increase economic output by about $750 million.  Meanwhile cuts to public spending of $2.5 billion would lead to a loss of about 38,300 jobs and a decline in economic output of about $3.75 billion – for a net impact of -30,000 jobs and -$3 billion in economic output.

These multipliers include direct and indirect impacts, but they don’t include induced impacts (further spending by households).   The 2009 budget with these multipliers had a footnote saying that corporate income cuts have a limited impact on aggregate demand in the short run “but have among the highest multipliers in the long run… because … they increase the incentive to invest and accumulate capital”.   Multipliers showing strong impacts from corporate tax cuts generally come from what are called “computable general equilibrium models” that have little relevance to reality, as they assume no unemployment, etc. etc.  It’s clear that corporate tax cuts haven’t done much to increase the incentive to invest so far – and aren’t likely to as long as we’re in a “prolonged period of deficient demand”.

• Rising inequality is hurting our economy
• Labour rights, unions and the 99%
• Canadian economy bleeding jobs; public sector cuts to intensify
• Recession and cuts hit Aboriginal and racialized workers hardest

It also has sections with summaries of Canadian and provincial forecasts of main economic indicators, and discussions of  developments in inflation and wages increases by major sector and province.  It picks up on a number of discussions that have taken place on this blog.

The final figures aren’t in yet — and there are different ways of measuring it– but it looks like real wages will likely decline by the greatest amount since 1995.

A number of relevant reports came out after this publication went to translation.  These include:

• Mark Carney’s  recent speech where I was heartened to see him emphasize that the problem we face is one of prolonged deficient demand.  (It was also interesting to note that one of the rationales cited for a lower than zero inflation target in the Bank of Canada’s Background document on renewal of the inflation target was it could provide workers with real wage gains when nominal wages are sticky.)

• The IMF report on Canada issued published yesterday also raises concern overvalued house prices and the impact a correction would have on the economy through the wealth effect.  I wrote a piece on this in the Economic Climate publication four years ago.  At that time, my estimates were that Canadian real estate was overvalued by about 20% or $500 billion: with a housing wealth effect (MPC) of 6% as estimated by the Bank of Canada, that means that a correction would reduce GDP by about 2%.   The more sophisticated calculations in the IMF report are that house prices in Canada are overvalued by about 10% and that the MPC related to housing wealth is 4.3%.  As a result they report a smaller impact on GDP.

• It is also good to see Don Drummond has an open enough mind to now issue a mea culpa about the economic policies he implemented and espoused for years, summarized just five years ago in his Economists’ Manifesto for Curing Ailing Productivity Growth.  At that time, he said there there was broad consensus among economists for those policies.  I suppose  he wasn’t reading this blog.

This Christmas goose egg should come as a wake-up call to economic policymakers. It follows Labour Force Surveys showing two consecutive months of job losses and higher unemployment.

The Prime Minister recently stated that deficit reduction will be his top priority in the New Year. Instead of cutbacks, the top economic priority should be to support growth and create jobs through renewed public investment.

Just a few months ago, the C. D. Howe Institute was lobbying the Bank of Canada to hike interest rates. Today’s GDP report confirms that, if anything, our central bank should consider reducing rates. The Canadian economy needs accommodative monetary and fiscal policy, not austerity.

UPDATE (December 24): Quoted in today’s Globe and Mail (page B5), Toronto Star (page S15), St. John’s Telegram (page C2) and Waterloo Region Record (page E1)