Privatization a bad deal for Ontarians

In addition to the press release we issued, there’s an overview and summary that I prepared on budget day, and a dozen really good detailed issue sheets that different CUPE researchers prepared about the budget and what it does –and doesn’t–do for aboriginal peoples, climate change, early learning and child care, employment insurance, health care, municipal infrastructure, non-profit community and social services, pensions, post-secondary education, privatization, water and women.

Later on, I’d like to comment on the measures in the federal budget taken to tighten up on the stock option tax deduction that I had written about the day before the budget.   I believe their claims of tax savings from this measure are far too high and will come out on the corporate tax side, rather than the PIT side in any case.

And for some entertainment, here is the link to a video, also critically acclaimed on YouTube “The scourge of fair taxes”, that CUPE had done after the 2008 Budget.   Still very relevant and funny after all these years.

It provides a short but decent summary of some different issues affecting labour: macro trends, educational requirements, changing composition, women, immigrants, aboriginal Canadians, older workers, widening income gaps, income security, etc.  

These are a lot of the issues we are familiar with.  I’ve only given it a quick skim, but it is refreshing to see someone else deal with these issues in what initially appears to be a candid way.

Don Drummond will be giving the Sefton memorial lecture on labour issues later this month.   It appears that, as well as International Women’s Day, was the impetus for this report.

As a young woman in Canada, I have not felt discriminated against. Throughout my university career, my gender didn’t seem to matter and professors encouraged me to pursue a PhD and the life of an academic as much as any of my male fellow students. Growing up in Bulgaria was a different story - my own mother stopped me from going to a physics-based high school program at home because she felt that physics in not for women (those were her words). As an electrical engineer herself, she obviously had experienced discrimination and wanted to prevent me from going down that same road.

In Canada, however, I didn’t get any of that. Maybe it’s because I live in Vancouver, but what I hear Canadians tell their girls is that they can grow up to become anything they aspire to — rocket scientists, surgeons or presidents. Many of the young women I meet feel similarly - they feel that they are free to make choices and say they are as much in control of their career paths as their male friends.

Yet, when we look at the numbers, women are not growing up to be rocket scientists, surgeons or presidents. Nurses, teachers and social workers is more like it. Women are woefully underrepresented in “non-traditional” occupations such as high-level management and natural sciences. Even in the public sector, where women make up the majority of the workforce, they’re less likely to hold senior management jobs than men.

Yes, there are some women in leadership positions in areas that were previously closed to our gender in politics, business and academia. But they are few and far between.

So, if young women feel that gender is irrelevant for economic success, then why are women’s average annual earnings for full-time, full-year work in 2007 only 71 .4% of men’s? Why are average hourly wages so different: in January 2010, women got paid on average $20.59 per hour, compared to men’s $24.49? Why do women continue to be overrepresented in low-wage jobs? Over 60% of minimum wage workers are women and the proportion of workers earning under $10 per hour is similar.

It would seem that something happens somewhere along the line between school, when the sky’s the limit, and the demands of real life which pushes women into traditional sectors. The older I get, the more convinced I become that this something is children. Or rather, that it’s the outdated family policy that we have in Canada (and the US) that forces women to choose between motherhood and career or economic success.

Recent studies from the US show that in corporate America, childless women’s earnings are on par with men’s, and the earning discrepancies appear when women start having children. Research by Statistics Canada shows that having children is associated with an earnings loss that persists throughout a woman’s working career. At any given age, women with one child earned about 9% on average than childless women, while those with two children earner 12% less, and those with three or more children earned 20% less. The earning gap was larger for women with higher education than for those who only had high school diplomas. Curiously, this parental penalty does not seem to apply to men - men with children earn more on average than childless men.

The more I dig into the research, the more it seems that women with children earn less because they end up taking years away from work. And the reason that they are often forced to do so is that women remain the primary caregivers for children and we lack the social supports to allow women to work and care at the same time. Changing this would require a concerted effort by governments and the private sector.

What governments have control over is Canada’s family policy, and it is sorely in need of change to catch up to social realities of the 21st century - many women with children work, whether by choice or by necessity, and we need to put in place adequate programs to support these women and their families.

Providing accessible childcare that families can afford is an obvious one. Improving parental leave provisions is another way to improve many women’s lives. Statistics Canada quotes a recent survey showing that 40% of new parents could not take the entire parental leave because their family’s financial situation required them to go back to work. Increasing benefit amounts to reflect costs of living would be a great start.

Employers will also have to adapt, and we’ve already started to see some of that. More and more employers allow flexible working hours, opportunities to work from home and an increased availability of part time work. These are all changes that make it possible for women to care for children without having to completely withdraw from the workforce for years at a time.

Some companies are even in the business of raising awareness that women have not achieved nearly equal representation on the top of organizations both in the private sector and in government. McKinsey & Company is probably the largest and best-known professional services firm that is calling attention to the shortage of women in leadership positions in America’s businesses. Their reports, Women Matter and Women Matter 2, demonstrate some important relationships between the presence of women in corporate leadership roles and the financial performance of organizations and explore why that may be the case. This is a good start, but more work needs to be done.

The need to support women to work and to care would only become more pressing as the population ages and we start to experience labour force shortages. We need the women to fully participate in the labour market, as workers and as decision-makers. Changing family policy and making workplaces more flexible is the way to do it.

So go ahead and continue telling the girls that the sky’s the limit, but let’s also make sure that it’s really true.

Happy international women’s day to all.

Foreign acquisitions of Canadian-controlled firms, particularly in manufacturing and oil and gas, drove a 10.6% increase in Canadian assets under foreign control in 2007. Canadian assets under Canadian control rose 9.9%, led by the depository credit intermediation industry.

As a result of these movements, foreign-controlled firms accounted for 21.3% of corporate assets in 2007, up slightly from 21.1% the year before.

Foreign investors took over substantial chunks of manufacturing and the oil patch. On the other hand, the banks (which are Canadian-controlled) greatly increased their assets prior to the financial crisis. Therefore, the overall proportion of corporate assets under foreign control did not change much.

Given the controversy around certain foreign-controlled mining companies, I was interested in the data on that industry. Unfortunately, Statistics Canada deems the mining data for 2007 “too unreliable to be published.”

However, the major foreign takeovers in mining occurred during 2006. The Corporations Returns Act publication for 2006 had indicated that foreign-controlled mining assets jumped from $10 billion in 2005 to $39 billion in 2006. In other words, foreign control of Canadian mining rose from 12% to 40%.

Today’s publication for 2007 does include revised figures for 2006, which reveal an even more dramatic story. In fact, foreign-controlled mining assets jumped from $10 billion in 2005 to $54 billion in 2006. So, foreign control of Canadian mining actually rose from 12% to 48%.

If there was any policy recalibration due to prorogation, it was on their photocopier as 94% of this budget’s spending has already been announced.  The problem when you photocopy your work is that you don’t learn anything from the process.  That is certainly true of the Harper government.  The Conservative reforms to EI were meant to help more of the jobless, yet half of all unemployed Canadians still can’t access EI.  The concern last year was that EI recipients would exhaust their benefits before they got another job and that is exactly what is happening.  Last year’s plan isn’t working to address this year’s challenges.

It also appears that the Harper government isn’t seeing what most Canadians are seeing which is plenty of advertising and little actual building of infrastructure.  Instead of cutting red tape to get infrastructure programs moving, the government is cutting regulations on uranium mines.

Government spending is capped more generally with strategic reviews forcing departments to cut 5% of their programs when the review gets to them.  The glaring omission to these caps is the defense department that continues to grow at its pre-established rate until 2012 when the growth rate slows slightly.  Although there is plenty of talk about Canada’s positive role in Haiti and Afghanistan, international development spending that makes that possible has been capped making these types of interventions much harder in the future.

What is little advertised in this budget is that much of the deficits going forward are being caused by the continuing corporate tax cuts worth on average $4 billion a year over the next 3 years.  It is also worthwhile noting that while building stimulus infrastructure ends next year, the tax cut measures introduced as stimulus will continue to erode revenues indefinitely.

The 6% of newly announced programs are more weighted with fluff than actual new spending.  Similar to last year’s stimulus budget, there is no coherent vision for the future.  There is a smattering of small new spending efforts with a lot of padding for government programs that are paid for out of existing funds.  Seniors are given their own holiday, but no action on pensions is taken.  Some small new amounts are spent on university research, but nothing is done to address crippling student debt.

Despite its title, this isn’t a leadership budget, it is an acceleration of Harper’s Americanization of Canada with “race to bottom” corporate tax rates, and an ever expanding military.  The jobless are left to fend for themselves and national planning for the future beyond balanced books is completely off the table.  While the military is exempt from spending caps, addressing foreign policy goals like rebuilding Haiti after the earthquake are a secondary priority as international development funding also gets capped.  All in all, this is much more representative of the Conservatives vision of Canada, unfortunately it has nothing to do with a proactive vision for the future.

While the world’s and Canada’s economic recovery is still very fragile, the Harper government has decided to focus on eliminating the deficit. Creating jobs would help balance the books at far lower cost.

The full CLC Budget Analysis can be found at:

http://www.canadianlabour.ca/news-room/publications/2010-federal-budget-canadian-labour-congress-analysis

And a more condensed version is on rabble at

http://www.rabble.ca/news/2010/03/budget-delivers-cuts-not-jobs

For a document titled Building a Prosperous British Columbia, the 2010 BC Budget is underwhelming in its ambition. Budget 2010 shows a government talking a lot about the legacy of the Olympics but lacking any coherent vision of how translate upbeat sentiments into real improvements in British Columbians’ standard of living.

This budget says “steady as she goes”, but it is not clear where we are going, and whether the budget does enough relative to the challenges that may be ahead. The downside risks for the BC economy are serious: the US economy remains very weak, as is central Canada. The Winter Games are over, and in Olympics past have been accompanied by a drop in economic activity. And even though many feel we are in recovery territory, rising GDP coming out of a recession is typically accompanied by rising unemployment for at least another year. There doesn’t seem to be a clear economic development plan to provide jobs for those who lost theirs during the global recession.

The budget’s priority is to show a reduced deficit for 2010/11, funded by a smattering of spending cuts that will not help the province’s economic situation. This drop in the deficit by $1.2 billion (from $2.65 billion in 2009/10 to $1.4 billion in 2010/11) is partially offset by increased capital spending. So, a check mark for accelerated capital projects that push total envelope to $5.4 billion in 2010/11 for taxpayer-supported projects (up from $4 billion in 2009/10). There is a drop in other (self-sustaining capital projects), but an overall increase in total capital spending to $8.2 billion. Not all of this is well spent, such as $390 million this year for the BC Place roof upgrade.

The budget heralds a return to conservative budgeting practices, with numbers set out in a way that ensures the government will outperform the targets. Barring a major economic collapse, BC will rebalance the budget sooner than the stated 2013/14. For example, the budget estimates a deficit of $145 million in 2012/13, peanuts relative to more than $40 billion in revenues. But if resource royalties bounce back (as higher commodity prices seem to indicate) the shift back to surplus could happen even further ahead of schedule.

A number of ministries saw budget cuts, led by the Ministry of Forests and Range, with a one-year cut of 35% (a drop from just over $1 billion in 2009/10 to $641 million in 2010/11, and this is on top of previous cuts. This will hurt in smaller communities around the province. Other ministries received cuts that were small by comparison, typically in the tens of millions of dollars. Translated into public sector jobs, there is a continuation in the reduction in FTEs from peak of 36,277 workers to 32,000 by 2012/13.

The government introduced a few new spending measures, and health care gets a 4.7% increase above 2009/10, but we remain low among other provinces in terms of health care per capita. For regional health services this means an extra $396 million on the heels of a $360 budget shortfall last year. The new budget does not leave health authorities much room for enhancing seniors’ services or revitalizing support for mental health and addictions programs and other preventative initiatives that would improve the health of British Columbians and reduce long-term health care costs.

That health care is the big winner on the spending side reiterates how popular the program is, but also sets up a narrative that health care increases are eating up everyone else’s share. To show this, the budget makes a commitment to put all HST revenues to health care, yet another budget gimmick that those in the lock-up saw straight through (this is nothing new for BC, as the old PST was properly named the Social Services tax, brought in to fund health care decades ago).

BC families hit hard by the recession will see little from this year’s budget. The new property tax deferral measure announced applies to homeowners only, leaving out a large number of families with children that are priced out of the housing market.

In addition, this new tax deferral measure will just pile on the already high levels of household debt in this province, a two-edged sword. Fundamentally, BC families do not need yet another source of credit. They need jobs that pay living wages, they need affordable housing, high quality accessible early childhood education and care programs for their young children, and enhanced opportunities for their school-aged kids to participate in arts and culture as well as sports programs.

There is nothing in this budget to address child poverty, which is currently the highest in the country and has been so for six years running. Clearly, existing initiatives to support families with children are inadequate, but this budget does not address this gap. Similarly lacking is money to house the homeless or build new social housing. In fact, the Estimates show cuts in the Ministry of Housing and Social Development’s employment and housing initiatives.

The increased funding for community sports and the arts, $60 million over 3 years, is more than welcome but it falls far short of filling the enormous gap left by the discretionary grants cuts in last year’s budgets, much of which went to funding similar activities.

Funding increases in education and social services are small, barely keeping up with inflation and the increased downloaded costs. There are some additional funds for full-day kindergarten, and an additional $26 mil over 3 years on child care subsidies for low and middle income families, but no new operating funding to enhance the accessibility of child care spaces.

The budget announces additional ministry cuts to the tune of $320 million over the next three years. This comes on top of previous cuts announced last year – a total of $3.3 billion over three years in “administrative and other savings.” BC’s public service is already the leanest in the country as this recent CCPA brief shows and it is wishful thinking to assume that these cuts can be made without compromising much-needed public services.

The main object of the exercise is to explain why so much of the world speaks English. Putting aside the subject empire, English speakers grew sixteen times from 1790 to 1930. And considerable numbers speak Spanish, and Portuguese. Belich thinks this is the big story about the European empires. He writes provocatively: “With all due respect to the rich scholarship of European imperialism, in the very long views most of these European empires in Asia and Africa were a flash in the pan.” The real legacy is the neo-Europes.

In the process Belich casts some light on the venerable staple thesis and suggests for this reader an alternative “city thesis” to complement it.

A literal reading of the staple theory of economic growth is that an increase in exports creates economic growth through spread or linkage effects and can do so strongly by pulling in labour and capital from abroad. By examining the sequence of things for the neo-Britains (defined as the United States, and specifically the American West, Canada, Australia, New Zealand and South Africa) throughout the long nineteenth century of his title, Belich instead finds a recurring pattern. It begins with an explosive, exuberant boom, as people rush into newlands and settlements emerge and capital flows in for infrastructure and imports boom rather than exports. Growth feeds on itself.

It’s too much too fast, and the bubble bursts - Belich refers to “the pyramid-selling character of booms” - and the economy goes into a sharp slump. It is only then that an export base is created around a staple or staples. As time passes and the sequence recurs, new staples are found or old staples made freshly viable. Writes Belich: “The false half of staples theory - that staple exports powered boom - should never blind us to its true half, namely that staple exports rescued most settler economies after their booms had busted.”

With that comes what Belich calls “recolonization” as the settlement is truly integrated economiclly with Britain or, in the case of the American West, with the eastern U.S. Not only has staples become the story but so too has “dependency.” We’re back in the known world of the staple of Canadian fame, but that does not deny the importance of what Belich exposes as to the nature of growth. It is all much more “messy” and “irrational” and “hysterical” then the simple, simplistic, staple model of growth implies.

Belich is aware of the key role of Harold Innis in originating the staple approach before it was reduced to a theory, and what Belich finds in fact fits comfortably into an Innisian world. Innis was aware that economic growth took place with explosive bursts which he called “cyclonic.”

Belich is at his best in putting a primary focus on migration itself as an autonomous force. What had been more like a pattern of exile before the nineteenth century - “Before 1800, most Britons saw emigration as social excretion” - became with the heavy hand of promotion - “The Canadian winter was presented as one long holiday” - more like settlers as pioneers seeking opportunity and finding happiness in the newlands - though there is still the terrible push of the Irish famine. The neo-Britains came to be seem at the centre as part of a Greater Britain and the margins returned the favour - even sending their sons off to be slaughtered in World War I.

Settlements in due course became cities, and Belich reminds us of the extraordinary speed with which that happened. At the beginning of the book, Belich describes the phenomenal growth of Chicago in the nineteenth century as “one of the most amazing things in the history of modern civilization.” And a bit later the U.S. has its Los Angelos, and Australia its Melbourne and Canada its Toronto, and many more “boom-time settler cities” that came out of nowhere, doubling populations in single decades. Toronto (then York), having quadrupled in the quarter century from 1800-25, then grew twentyfold over the next quarter century. As incremental growth that had characterized the colonies up to then morphed into gargantuan growth, the quantum leap in the scale of the “adjustment” imposed on aborkiginal people was their final marginalization.

It occurred to me as I read Belich that when I used to teach North American economic history, the narrative for Canada was around staples from beginning to end, while the narrative for the U.S. was much more around cities, beginning with the intense competition among eastern seaboard cities, building canals and railway, for control of the west.

The telling of American economic history has always had room for staples, notably cotton in the South. Canadian economic history, it now strikes me, would benefit significantly from a city focus, where cities, whlle having a symbiotic relation with their hinterlands and themselves linked to the megacities of London and New York, breed the busines classes and urban masses that become a dialectic of history.

Today we have a staples narrative and an abstracted neo-classical economics narrative that, whatever its merits - and they are real but limited - is mostly just boring even to economics students. We could use a city theory of economic growth where, as Belich shows us, the New World is, in its own distinct way, explosive. Put a city narrative together with a staple narrative, which is at heart of what Belich is doing, and there’s a good chance of telling a very good story.

Belich devotes much of his space to the American West and Australia. (This encyclopedic volume also includes Siberia, Argentina and Brazil.) For Canada we could usefully pick up from where he leaves us. And we could take advangtage of Jane Jacobs’s insight - not noted by Belich though it would fit well into his theory - that cities and their surrounding economies, can be seen as growing from replacing imports with domestic production. Jacobs thought that was more important to growth than exports though that may make insufficient allowance for the distinctive character of New World cities because the New World is dintinct in its staples bias.

My contention is that there is little impact on efficiency, growth or investment from corporate income tax cuts. There are theoretical arguments that corporate taxes have negative efficiency impacts but this is not settled in the least empirically. It is not that we should ramp up corporate taxes to 70% or anything, but there is no reason why recent corporate tax cuts – that have taken Canadian rates well below US ones – should not be repealed. And to the extent that there are efficiency impacts of corporate taxes they must be weighed against the beneficial impacts of any associated public spending. If spent in a pro-growth manner corporate income tax increases may have no efficiency losses whatsoever. But I still think within the range of taxes we have seen in recent years, efficiency impacts will be extremely small.

Most corporations in Canada have to be here to access the Canadian market, or resources they want to exploit. And there are many more other aspects to investment decisions than just CIT rates. Cheap electricity in BC or Quebec overwhelms most differences in CIT rates. These subtleties are almost never captured in empirical studies, so on balance Toby is right to be skeptical of them.

Finally, if you do want to cut CIT rates you must increase top marginal personal income tax rates or else you give windfall gains to the wealthy (I cite Jon Kesselman on this).

I did my own review of this literature a few years ago. Here’s a pertinent passage related to the corporate tax claims above. I still have yet to see any real economic evidence to the contrary:

Another group of studies often cited by advocates of smaller government comes from computer simulations that find that an extra dollar of government revenue actually costs the economy something like $1.38 or more in lost economic activity (see Dahlby 1994). It is important to note that these results are not derived from real-world data. They are quasi-empirical studies that start with a theoretical model where taxes impose large deadweight costs to the economy, then put some real numbers to the model to enable them to simulate what the cost of extra taxation is at the margin. They are “educated fiction” based on the virtual reality of computer models (Lindert 2004).”

So that is the back story. Stephen rebuts by citing an unpublished paper, which starts by listing a series of studies initiated by Dale Jorgenson. But it is precisely those models that are what Peter Lindert calls educated fiction. They fit numbers to a model that assumes corporate taxes have large impacts on efficiency, then guess what they find …

The unpublished study Stephen cites is interesting but deeply flawed. Interesting because it finds that corporate taxes are not significant for investment. But they are significant for FDI, which makes sense given that the study has 85 countries and is thus treating the corporate tax rate in Ghana as an equivalent data point to Canada. Looking more closely at the data, on a simple correlation in Figure 1, they point to a loose linear relationship, but the observations are basically a blob that suggests little. For FDI, Figure 2, the relationship is stronger but heavily influenced by developing country outliers, with most observations tightly clustered together.

Which explains why this study has some of the lowest r-squared values I have ever seen reported in an empircal study (like .03 to .12). In case you missed the econometrics class on r-squared, low values mean poor goodness of fit. So basically no reason to believe their estimates have any traction at all. There is a later one that gets up to an r-squared high of .39, around the level one might actually start to pay attention, but this is for a simple regression that only includes corporate taxes as the determining factor behind investment, and is only based on 16 observations, which makes it a very weak estimation.

There is more to it, but econometrically this study is a dud. Anyway, for Canada, the main source of FDI is the US. But here the authors find no significant relationship for US FDI abroad vis-a-vis foreign tax rates!

For this, I get chastized by Stephen: he is “very, very disappointed” in me for not having done my homework and knowing that this unpublished study was out there. But I’m disappointed in him for coming back with such a weak piece of evidence. The jury is not convinced.

So I go back to my original contention: As far as I have seen there is no conclusive econometric evidence that lower corporate tax rates lead to higher rates of investment, GDP growth or productivity growth — not one unpublished study but many credible ones that come to the same conclusion. There are some cross-country and historical comparisons that small open economies with high levels of GDP per capita and decent productivity growth (ie the Nordics) do tend to rely less on corporate income taxes and more on consumption taxes, so we should take those lessons about tax mix seriously — that you should not have corporate taxes that are way out of line.

So I’m not saying there is zero impact of corporate taxes, but you would be looking at fairly large changes before there was,  and that would vary greatly by sector and by country. Empirically, in the lit reviews I have seen, investment is mostly driven by demand side factors not supply side ones. To imply that lowering corporate rates will lead to increases in investment and thus faster growth is seriously misleading.

So if you are on the fence about increases taxes on, say, Canadian banks, back to the levels they paid a decade ago, you need not fear an economic collapse.

            On one level, this is a noble and useful exercise.  The more Canadians are wary of financial shysters and payday loan-shops, the better.  If financial literacy means a balanced introduction to finance (how it works, as well as how it doesn’t work), and if it covers all components of Canadians’ financial well-being (including public pensions, income security programs, employment and unemployment, home ownership, wages and inflation, etc.), then I’m all for it.

            But there’s a risk that financial literacy initiatives go off track in unintended and damaging directions.  Some so-called financial education is in fact a disguised advertisement for the mutual fund industry - shilling for government-subsidized investment vehicles and the magic of compound interest.  The chair of Mr. Flaherty’s Task Force is CEO of Sun Life Financial; the vice-chair is head of BMO Nesbitt Burns.  We might be forgiven for worrying that a self-serving sales pitch or two might just sneak into their recommendations.

            Worse yet is the temptation to blame the victims of financial chaos for their fate - implying that if Canadians had read the fine print, they wouldn’t have bought those sub-prime mortgage bonds after all.  This, of course, is nonsense.  It takes strict regulation, not “buyer beware” consumer education, to stop the manipulative, unproductive practices that were at the core of the latest meltdown.

            In the buyer-beware vein, for example, the Task Force report claims “a financially educated population will be better able to weather economic downturns.”  How, exactly?  If I lose my job, and I don’t qualify for EI, understanding the pitfalls of credit default swaps will hardly help.

           After all, it wasn’t mom and pop investors who caused the Great Financial Panic: it was self-dealing, manipulative, and immoral financial executives.  Perhaps it’s they, not average Canadians, who need the financial primer.  To that end, I’ve taken the liberty of preparing a simple curriculum for a brand new course.  Here’s a child’s guide to financial literacy - targeted at the bankers and brokers who need it most!

Lesson 1:  What goes up, must come down.  Brokers love to boast about “creating value” whenever the stock market rises.  But the financial casino depends more on mood swings and collective psychology, than on real wealth.  The herd never runs one way or the other for long.

Lesson 2:  You can’t build a house out of paper.  Paper is useful for writing letters, for decorating walls - and always comes in handy in the bathroom.  But for the whole house to remain standing, the foundation and pillars must be made of stronger stuff.  We should never confuse exuberance in the paper markets with real prosperity.

Lesson 3:  Buying paper is not a real “investment,” anyway.  The Task Force encourages Canadians to save more - which is odd, since our sudden increase in national saving is both a consequence and a cause of the current recession.  What the country actually needs is more investment: not buying paper securities, but spending on real capital (both private and public).  We need bankers to focus less on their own trading (the source of most of their recent profits), and more on financing real economic growth.

Lesson 4:  When the music stops, find a place to sit down.  Lehman Brothers, and others like it, collapsed when the daily paper chase suddenly seized up - leaving them holding the wrong paper.  It wasn’t a classic “run” on the bank; instead, the sudden paralysis of confidence revealed that there was nothing holding the whole thing up.  With less leveraging and speculation, we’d have banks that can stop for breath, without collapsing entirely.

Lesson 5:  In tough times, turn to the nanny state.  Ironically, the Task Force’s goals include “promoting self-sufficiency” and “reducing pressure on social programs.”  Yet during a crisis to which their own greed and irresponsibility very much contributed, Canadian financiers were saved by a $200 billion government backstop.  Luckily most survived (and are now again paying themselves billions in bonuses).  But today’s bankers should know better than most that every society needs a strong social safety net.

            That’s the kind of practical knowledge that could truly protect Canada against the next great meltdown.  Because without a change in behaviour at the top of the pyramid, all the financial literacy in the world won’t save us the next time the music stops.

These and other key points are made in an excellent article by Andrew Watt of the European Trade Union Institute. (His columns on the Social Europe site are well worth following.)   http://www.social-europe.eu/2010/02/a-greek-tragedy-or-a-european-farce-time-to-re-write-the-script/

See also this piece by the European Trade Union Confederation economist Ronald Jannsen.  http://column.global-labour-university.org/2010/01/greece-bashing-is-hiding-obvious.html

And today’s Globe features Ben Bernanke going after Goldman Sachs for their role in the Greek crisis.

http://www.theglobeandmail.com/report-on-business/fed-eyes-insurance-contracts-on-greek-debt/article1480901/

Budget 2009 (see Table A2.2 on page 255) indicates that federal corporate tax cuts since 2006 will reduce annual revenue by $14.9 billion in 2013-14. (By comparison, the two points removed from the GST will cost a little less: $14.6 billion.)

Taking Finance Canada’s numbers as given, the federal government could collect an additional $47.7 billion over the next four fiscal years by reversing all of Harper’s corporate tax cuts. By 2013-14, this approach would add $14.9 billion to annual revenue.

Estimated Cost of Federal Corporate Tax Cuts ($ billion)

However, this package included reducing the “small business” tax rate from 13.12% in 2007 to 11% since then. No party has the political will to reverse that corporate tax cut.

The package also included accelerated capital cost allowances for computers and manufacturing equipment. These measures are temporary, affordable and targeted to new investment.

By far the most costly measure is slashing the general corporate tax rate from 22.12% in 2007 to 15% in 2012. Simply restoring this rate to its pre-crisis level would generate $41.8 billion over the next four years and regain $13.7 billion of annual revenue by 2013-14.

Another option would be to keep the general corporate tax rate at its 2010 level of 18%, rather than cutting it to 16.5% in 2011 and 15% in 2012. Just maintaining the status quo would save $14.4 billion over the next four fiscal years and $5.8 billion of annual revenue by 2013-14.

In the short-term, funds retained by cancelling corporate tax cuts should be redirected to more effective stimulus, such as targeted tax measures or public works. In the longer-term, restoring the general corporate tax rate to its 2007 level would collect more than enough revenue to wipe out the annual deficit of $11.2 billion that Finance Canada projects for 2013-14.

While the report maintains it provides an impartial assessment of the benefits and drawbacks of using P3s, it is astoundingly superficial and biased in its analysis.  

A major flaw with the report is that it takes the superficial “value for money” reports produced by P3 agencies at face value without questioning of their assumptions or methodologies for its claim that P3s have delivered efficiency gains.  

In doing so, it also completely ignores recent reports by provincial auditors general that have been highly critical of the value for money methodologies used by these agencies.  For instance, in his report from just last November, the Auditor General of Quebec stated that the value for money methodology used by Quebec’s P3 agency was essentially useless.  This well-publicized report and other P3 scandals put the province’s P3 agency and approach in disarray, but it is completely ignored in the Conference Board report, as are other auditor general reports critical of P3s. 

On the other hand, in its examples for its case studies, the Conference Board report makes good use of conventionally procured projects that were reported on by auditors, and so are likely to have major problems.  There’s also a fair amount of misinterpretation of evidence in this report.

And there’s no analysis of the two really crucial issues in valuation of P3s: discount rates and risk transfers.

Even though the report’s authors interviewed over 30 people for the report, they don’t appear to have interviewed one person from a public auditor’s office. With the exception of one academic, all the people interviewed were from P3 companies, P3 promotion agencies, government officials in this capacity, from agencies directly engaged in delivering P3s, or on the record in supporting P3s.

There are many other flaws with the report, which I’ve summarized in the following critique on CUPE’s website.  The Journal of Commerce in Western Canada also published a good article critiquing the Conference Board study.

It should be no surprise that this Conference Board study was entirely funded by the federal and provincial P3 promotion agencies.  The source of the funding shouldn’t necessarily disqualify the research, but in this case, it appears to be clearly crafted for the interests of its sponsors.

There’s a very cosy world of provincial P3 agencies and companies engaged in P3s in Canada.   On more than one occasion, we’ve been offered seats on the boards of these agencies in an attempt to get us to quiet our criticism of P3s.  

And certainly some unions aren’t critical of P3s.  If they can ensure their members are still employed and their pension funds can benefit from the high rates of return, it can seem like a win-win proposition. 

The problem is that somebody loses out, and that is future generations.  P3s create massive and growing liability payments for future years, which is largely being covered up by the creative accounting of P3 agencies–and by reports such as these, which also ignore this problem

One can go on and on about how difficult it is to spot a bubble. But, as Dean Baker has often argued with reference to the supposedly hidden US housing bubble which inflated after the collapse of the dot com boom, such apparent sophistication should not distract attention from the evolution of some key ratios - such as the rate at which housing prices are rising relative to all prices, the ratio of house prices to incomes, and the ratio of house prices to rents.

The average resale price of housing as reported by the MLS - the key measure monitored by CMHC - shows a rise from $158,145 in 1999 to $303,594 in 2008.  http://www.cmhc-schl.gc.ca/en/corp/about/cahoob/data/index.cfm If the average house price had risen in line with consumer price inflation, the 2008 price would have been just $191,225. In short, house prices have clearly been rising much faster than the overall price level - up 92% 1999-2008 instead of 21%. That big fact remains true even if you account for the fact that the MLS price series is not ideal compared to the Case/Shiller index in the US and note that price increases do vary a lot in regional terms.

As Toby notes in his fine blog post, the Vanier Institute of the Family report notes that the increase in house prices has far outstripped the growth of family incomes. In fact, Chart 10 of the report shows that the average MLS price has risen from 3.2 times average household income after tax in 1999, to 5.o times average household income today (end of 2009.)  The ratio had been stable in the 1990s before exploding from the turn of the millennium. http://www.vifamily.ca/library/cft/famfin09.pdf

CMHC provide data showing that the real disposable income of homeowners rose only very modestly from $53,100 in 1999 (in 2006 $)  to $57,700 in 2006 (the last year in the series.)  2007 and 2008 are unlikely to have changed that picture of very modest real income growth much.

The huge gap between real income growth  and the rise of house prices has, of course, been filled by the growth of mortgage debt.

What about the ratio of house prices to rental housing? CMHC reports that the average rent of a two bedroom apartment in metropolitan areas rose by 28% between 1999 and 2008, or just a little ahead of inflation.

A quick examination of these key ratios indicates ample support for the view that there is a Canadian housing bubble. When it explodes - as it will when we experience rising interest rates in combination with a still very slack economy - the result will be a nasty erosion of real household wealth, reduced spending, and a squeeze on jobs.

Unlike the US, this is unlikely to prompt a banking crisis. The high ratio mortgage debt is insured by CMHC and the federal government and, unlike the US, Canadian families hold recourse mortgages - which means that the banks can step in and take non housing assets in the event of default. But many families, especially younger families, will be in deep trouble.

http://themarknews.com/articles/948-still-in-recession

The first few paras follow:

“While the situation is not quite as daunting as in the U.S., Canada’s job market is still mired in deep recession. Chances are that it will take a long time to climb out of the hole into which we have fallen, unless governments give job creation the priority it deserves in the upcoming round of budgets.

Economic growth has resumed, but the consensus of private sector economists recently canvassed by the Department of Finance is that the national unemployment rate will average 8.5 per cent this year, and fall only slowly next year.

Our economy has to grow at an annual rate of at least 2 per cent to put a dent in unemployment. This is because the labour force is growing by 1 per cent per year as echo baby boomers still enter the job market in large numbers, and because labour productivity – output per hour of work – usually rises by at least 1 per cent per year.

If we are to stop the unemployment rate from rising, the economy has to generate about 350,000 jobs per year. On top of that, if we want to return to the unemployment rate we had before the Great Recession began in October 2008, we have to create about 500,000 new jobs – and that would still leave over 1 million Canadians out of work.

In January, the economy added 43,000 new jobs, but they were all part time. The national unemployment rate stood at 8.3 per cent, a bit down from the recession high, but the “real” unemployment rate is much higher.

A Statistics Canada measure adds to the number of unemployed those people who have dropped out of the labour force because no jobs are available, and the lost hours of people who want to work full-time but can find only part-time jobs. The unemployment rate by this measure is still over 12 per cent, or one in eight workers.

A significant proportion of the lay-offs that occurred during the recession and even before, especially in manufacturing and forestry, are permanent. We face a severe social and poverty crisis as tens of thousands of workers who are unemployed through no fault of their own exhaust their Employment Insurance benefits, and find that few if any jobs are available in hard-hit communities across the country.”