Friday, 24 February 2017

Canada inflation: a one-time blip

Well, that was certainly unexpected.  Statistics Canada reported this morning that headline CPI rose 2.1 percent year-on-year in January, up from 1.5 percent in December and way above the analysts' consensus for a 1.6 percent annual gain.  This marks the first time the headline index has topped the Bank of Canada's 2 percent target since October 2014.

As seems to happen far too often, the consensus seems to have failed entirely to notice what was actually happening during the month in question.  Both Ontario and Alberta instituted new carbon pricing measures at the start of the year -- a levy in Alberta and a cap-and-trade scheme in Ontario.  Largely because of this, gasoline prices shot up 20 percent year-on-year, accounting for most of the monthly increase in the headline index.  If gasoline is excluded, the year-on-year rise in CPI merely ticked up to 1.5 percent in January from 1.4 percent in December.

Alberta and Ontario's energy levies aren't going to fall out of the index any time soon, but there are still reasons to think that headline CPI will come in lower in February.  The increase in pump prices on the first of the year here in Ontario was wildly disproportionate to the true impact of cap-and-trade -- can you spell "gouging", children? -- and prices have now settled back to levels very close to where they stood at the end of 2016.  So the January data almost certainly do not have any immediate implications for Bank of Canada policy.

The Bank will take further comfort from the performance of the three clumsily-named measures of underlying inflation it unveiled during 2016.  All three of these are below the 2 percent target, with only one of the three (CPI-median) looking even remotely threatening, at 1.9 percent year-on-year in January.  If the Bank really intends to rely primarily on these measures, any increase in its policy interest rate is still many months away.  This implies that the market action after today's release, which saw investors pricing in a slightly higher chance of a rate hike during 2017, will almost certainly be unwound.  

Even so, the Bank's job may become a little trickier in this first year of the Trump era.  The new President has already signalled his desire to renegotiate the NAFTA agreement (though his main target is, for the moment, Mexico) and regularly rails about currency manipulation (though his main target is, for the moment, China).  As and when the Federal Reserve further tightens its policy settings, the Canadian dollar can be expected to weaken as the Bank of Canada declines to follow suit.

Further exchange rate weakness will assuredly lead Washington at a minimum to take a harder line at the negotiating table, and at worst even start to levy accusations of manipulation.  Canadian policymakers seem to be trying their hardest to stay out of Trump's line of sight; it won't be possible to do that forever.

Monday, 20 February 2017

Bill Gates: Luddite? Marxist??

Bill Gates wants to tax robots that displace human workers.  No, really.  You can read about it here.

So, does this mean Gates is a kinder, gentler form of Luddite?  Ned Ludd and his followers famously destroyed weaving machines that he blamed for unfair treatment of workers.  Gates doesn't want to smash the robots, but standard economic theory suggests that if you taxed them,  fewer of them would be used.

Or is Gates coming late to the Marxian labour theory of value?  After all, the word "robot" derives from the Russian word for work.  If all the value in the economy is ultimately created by workers, then the only source of tax revenue must ultimately be those workers, whether they are human or machine.

Let's unpick this a little further, starting with this proposition: all taxes are ultimately paid by individuals. That's obvious in the case of personal income and consumption taxes, but it's also true of corporate profits taxes.  Those are, in the final analysis, paid by the owners of the company, whether they are proprietors or shareholders, because the taxes reduce the amount that can be paid out as dividends.

What we have seen in developed countries in recent decades is a successful campaign by the owners of corporations to reduce the proportion of the overall tax burden that falls on them.  The "race to the bottom" in terms of corporate tax rates has significantly altered the distribution of the tax burden.  While it has achieved some notable successes -- see for example Singapore, or Ireland before the financial crisis -- it has unarguably contributed to mounting economic inequality.

Nor is there any reason to think that the balance is about to be redressed.  Donald Trump, with the full support of the GOP majority in Congress, is set to reduce the US corporate tax rate to 15 percent.  This will inevitably put pressure on other countries (not least Canada) to take similar steps.

So: personal tax rates are much higher than corporate tax rates, and that gap may widen still further. But as robots continue to supplant human labour, the distribution of income will continue to shift from labour to capital.  This means that tax revenues will inexorably fall, which will in turn put pressure on governments to cut social programs in order to forestall massive budget deficits.  Evisceration of social programs may well be the ultimate goal anyway -- see the aforementioned GOP, or the Tory Party in the UK.

What this all comes down for is that in calling for a tax on the earnings of robots, Bill Gates is really calling for higher taxes on corporations, in order to offset a declining tax take from labour income. But if we recall our proposition that all taxes are ultimately paid by individuals,  this means that Gates is actually calling for higher taxes on the wealthy: the shareholders and proprietors.  He's not wrong, but you wouldn't like his chances of convincing the rest of the 1 percent, let alone Donald Trump.      

Wednesday, 15 February 2017

Alternative facts (economics edition)

According to a new poll reported in today's Toronto Star, 57 percent of Canadians think the economy is in recession.  Considering that StatsCan reported a few days ago that the economy has just posted its strongest half-year of job creation for about fifteen years, that's fairly remarkable.  Even more remarkable is the fact that Canadians have been saying the same thing for the past nine years,  since the onset of the global financial crisis.  The only slightly reassuring thing is that the number of respondents believing there is a recession has fallen -- last year it was a stunning 76 percent!

Evidently there's a disconnect between how economists measure and describe the economy and how the average Canadian looks at it.  For economists, the standard definition of a recession is two consecutive quarters of declining output.  You can argue about whether that's a good definition or not, but it least ensures that most of the time, two economists using the term "recession" probably mean the same thing.

For most people, it's a lot more personal.  There's an old line that says something on the lines of "it's a slowdown when my neighbour loses his job; a recession when I lose my job; and a depression when my wife loses her job".  But as we just noted, the Canadian economy is actually adding jobs, so why the pervasive sense of economic gloom?  Let's consider a few possibilities.

First, there's the nature of the jobs themselves.  Most of the jobs created in Canada over the past year have been part-time, and carry relatively low wages and benefits.  Outside the public sector, the number of workers enjoying well-paid, full-time employment with benefits and the protection of union membership is shrinking inexorably.  The so-called "gig economy", in which an individual's employment life consists of a series of short-term contracts, continues to expand.

I've written here before about the woman who cuts my hair.  A couple of decades ago she had a high-wage factory job and a union wage; now she has to deal with an endless procession of old farts like me every day, in return for minimum wage and maybe a few tips.  I'm pretty sure that if the survey team approached her, she'd say the economy was in recession.  There are thousands like her.

Second, the media may play a role.  I've commented many times before, both when blogging from the UK and now in Canada, about the tendency for the media to put bad economic news on the front page while burying any good news beneath the obituaries.  It's a sound bet that not one in a hundred Canadians is aware of the steady stream of good employment data over the past six months.  Journalists also like to use any excuse to roll out the word "recession" -- it only takes one month of falling output for someone in the business pages to write something to the effect that "if this continues for another five months, we'll be in an official recession".

Lastly, what about the Bank of Canada?  The Bank's low interest rate policy may have been needed as an emergency measure back around 2008, but it may now be doing more harm than good.  What does it do for sentiment, in the business sector as well as among individuals, if the central bank keeps warning that the economy is still in such weak shape that it has no choice but to keep rates negative in real terms?  It's worth keeping in mind that the household sector in the aggregate is in general a net saver, so low interest rates impose a real burden on a large proportion of the population.  This is particularly true both for seniors (the fastest growing age cohort) and for those approaching retirement, whose ability to build a decent nest-egg is severely hampered by low returns.  The so-called Rule of 72 is all but meaningless when savings accounts yield barely 1 percent.*

In short, there are plenty of reasons why the general public might view the state of the economy quite differently from economists.  The stuff I was taught in college all those years ago isn't wrong, but there are times when it just doesn't tell the whole story.

* Who am I kidding?  I still have a small savings account in the UK.  Last week I received a letter advising me that the interest rate is being reduced from 0.05 percent per annum to 0.01 percent!     

Friday, 10 February 2017

Canada employment data -- another positive surprise

Confounding analysts'expectations that Canadian employment would be flat or even slightly lower in January, StatsCan reported this morning that the economy in fact added 48,000 jobs in the month.  Aside from a minor setback in November, employment has been growing surprisingly strongly since August, with an average monthly gain of 40,000.  Remarkably, this is the strongest six-month performance in fifteen years.  Employment has risen by 276,000, or 1.5 percent, in the past year.

As always, there are caveats, although, as the string of above-expectations numbers continues, these are starting to have less force.  The preponderance of new jobs continues to be part-time in nature: such jobs account for 190,000 of the positions added in the past twelve months.  Moreover, the economy continues to rely heavily on the services sector for job creation. As defined by StatsCan, this accounted for 41,000 of the new jobs added in January.  Employment in the goods-producing sector has scarcely budged in the past six months, and jobs in the manufacturing sector have actually edged lower.

More positively, the majority of the jobs added in January -- about 33,000 -- were in the private sector, with an additional gain of 8,000 in the number of self-employed. Moreover, the unemployment rate edged down to 6.8 percent, despite a second straight strong increase in the size of the labour force, which likely indicates rising confidence on the part of job-seekers.

How long can this continue?  Donald Trump all but took personal credit for the strong US jobs data that were released last week, but his impact on the Canadian economy and jobs market may prove less benign, if he follows through on his threats regarding NAFTA.  Prime Minister Justin Trudeau is heading to Washington this coming Monday for his first face-to-face meeting with Trump.  Thus far, the Trudeau government's approach has been to avoid unnecessarily poking the bear.  Trump is by all accounts a lot less abrasive in private than he affects to be in public, but Trudeau will need to walk a fine line between politeness and docility as he attempts to protect Canada's all-important trade relationship with the US.  

Wednesday, 8 February 2017

Flight into danger

It's been more than a year since Bombardier held out the begging bowl for handouts from the Federal and Quebec governments.  Quebec (and its pension fund) ponied up quickly, putting a total of C$ 2.5 billion into the company's aerospace and rail divisions, in return for a substantial ownership stake.  While bragging about its business turnaround and its strong cash position, the company continued to seek a further billion dollars from the Federal government.

A deal was finally announced on Tuesday, with the Feds providing $373 million in interest-free loans, to be repaid as Bombardier sells its passenger and executive jets.  The fact that the amount is so much smaller than the company first requested suggests that the Federal government tried to drive a hard bargain in order to protect the interests of taxpayers; the fact that the deal was announced late in the business day suggests it may not have been too proud about making any deal at all, and was hoping to minimize media coverage.

If that's the case, the plan was largely successful.  Coverage so far has been limited and largely non-judgmental -- this story from the CBC website is fairly typical.  However, as the headline notes, Brazil has been quick to complain to the WTO about the deal, fearing the impact on its own  aircraft manufacturer, Embraer, which competes directly with Bomber in the small passenger jet market.

A challenge from Brazil is one thing, but one wonders how carefully the folks in Ottawa have considered the possibility that the US will also take umbrage.  It's a well-established fact that every country finds ways to subsidize its airline industry, but at least the US is a little bit subtle about it, favouring Boeing through wildly biased procurement policies, primarily for the military.  A direct loan such as that to Bombardier is pretty blatant, and seems certain to raise hackles with the protectionists surrounding Donald Trump, whom Prime |Minister Trudeau is to meet next week in Washington..

An opinion poll in the Toronto Globe and Mail says that Canadians want Trudeau to stand up to Trump, even if that leads to a trade war.  Injecting free money into Bombardier is one way of ensuring that that's exactly what we get.

Tuesday, 7 February 2017

Bill Morneau's laundry list

Canada's Federal Finance Minister, Bill Morneau, is busy with his mandarins, pulling together the Liberal government's second budget, due in the spring.  As usual there are plenty of rumours and trial balloons out there.  It's being hinted, for example, that the current year's fiscal deficit might be a bit smaller than some of the recent data have suggested; if true, this might mean that the government has room to provide still more stimulus this time.

There has also been a suggestion that the government, in its zeal to raise revenues by closing loopholes, might start to tax medical benefits.  This prompted a firestorm of protest from those lucky enough to enjoy such benefits, and the idea has quickly disappeared.  If there is to be any loophole closing in this budget, it's likely to target the favourable tax treatment of stock options.

One set of ideas that is likely to make its way into the budget, in whole or in part, is the latest report from Morneau's Advisory Council on Economic Growth.  The executive summary can be found here, and it's a treasure trove for connoisseurs of on-trend babble.  A "more inclusive growth path"?  Check. Government as "convenor/catalyst"? Check. The "innovation ecosystem"?  Check.

If we look behind this stylistic gobbledygook, what substantive ideas do we find?  The Council offers three detailed recommendations, as follows:

* Unlocking innovation to drive productivity and help new companies scale up more rapidly, including five sub-recommendations to improve the innovation ecosystem 

* Accelerating the building of a highly skilled and resilient Canadian workforce by establishing a “FutureSkills Lab” 

* Unleashing the growth potential of key sectors such as the agfood sector

These sound very fine, but all past experience suggests that it's very difficult for governments to make any real difference in these areas.  The Council wants governments to be "first customers" for Canadian innovations, something the Province of Ontario has tried in the public transit sector with disastrous results. The "FutureSkills Lab" sounds like exactly the kind of effort to pick winners that governments everywhere are really bad at -- and with a suggested budget of $100 million per year, looks like a massive boondoggle just waiting to be plundered.

As for the "agfood sector", much of Canada's agriculture is currently heavily protected and supply-managed, which is why I pay three times as much for eggs and milk here as I would just across the border.  Any renegotiation of NAFTA is sure to see the US demanding freer access to the Canadian food market, which suggests "agfood" might not be the best place to be looking for higher growth.

The same goes for the first of the two broader recommendations offered by the Council, which are:

*  Positioning Canada more effectively as a central global trading hub 

*  Tapping into our economic potential through broader workforce participation  

Canada's continuing strong commitment to free trade is starting to look almost quixotic in a world of closing borders.  Trade is a good thing, but it may not be the best place to be looking for growth right now.  As for workforce participation, the specific ideas floated by the Council include one that corresponds exactly to the Trudeau government's election platform -- a national daycare program -- and one that directly contradicts it -- raising the pension age in order to "encourage" older workers to stay in the workforce.

Morneau has already shown that he takes the Council's work seriously.  In its first report last year, it suggested the establishment of a national infrastructure bank.  Morneau duly established this, with seed capital provided by the government, in its first budget.  Since then, very little has happened. No doubt some of this latest set of proposals will end up in the budget, but it's hard to be confident that they will succeed in setting the economy on a sustainably higher growth path, as the Council hopes.  

Thursday, 2 February 2017

Who'd be a central banker?

There was nothing very surprising about yesterday's FOMC statement, or about the Fed's decision to keep rates on hold for the time being.  The fact that the statement portrays monetary policy as still accommodative, and that the Fed expects labour market conditions to tighten and inflation to move closer to 2 percent, suggests that further modest tightening is still on the cards for this year.

However,  comments from President Trump and his economic team make things much more complicated.  Quite early in the election campaign, indeed before he had even won the GOP nomination, Trump stated that he would likely fire Fed Chair Janet Yellen for the simple reason that she is not a Republican.  Now the administration is suggesting that what it sees as a strong US dollar is no longer in America's best interests.  This change of stance has led directly to some weakening in the USD against the Euro, but it also sets the stage for a possible clash between the administration and the Fed.  If the White House wants a weaker dollar, it is hardly likely to tolerate any further tightening moves, or even hawkish language, on the part of the Federal Reserve.

Uncertainty about the policies of the new administration and about the Fed's next move are, of course, having a direct impact on the Bank of Canada.  Despite the threat of US protectionism, the Canadian dollar has held up well since the Presidential election.  Both the Bank and the Canadian business community have been generally hopeful about the impact of the new administration's policies. However, if the likelihood of further Fed easing diminishes, the exchange rate is likely to strengthen further, something the Bank of Canada definitely does not wish to see.  If that happens, would the Bank be prepared to court the wrath of Trump and his team by easing rates further, a move that might be seen in Washington as currency manipulation?

Things are no simpler across the Atlantic.  Bank of England Governor Mark Carney's reputation has suffered from the fact that the UK economy has so far not collapsed in response to the Brexit vote, as the Bank had feared it might.  Indeed, the Bank has just revised its growth forecast for 2017 sharply higher.  However, the Bank's task is not about to get any easier.  This week's passage of the bill that allows the government to trigger Article 50 and start the formal process of leaving the EU removes some of the uncertainty over timing.

Still, the White Paper setting out the government's specific plans for Brexit is not much more than a wish list.  It appears that the UK wants to keep many of the economic benefits of EU membership, including a new free trade deal,  while reclaiming control over immigration.  The EU has explicitly rejected this type of cherry-picking in the past and is unlikely to react positively.  The longer the uncertainty over the shape of the final deal persists, the harder Carney's task will be -- and the more likely it will be that his pre-referendum gloom will come to pass.

Lastly we might have a moment of sympathy for the folks running the ECB.  As well as contemplating the impact of Brexit, they also have to deal with this year's heavy slate of elections in major EU member states.  In both France and Italy, anti-EU parties are likely at the very least to increase their share of the popular vote, while in Germany, Angela Merkel's grip on the Chancellorship has never looked so shaky.  Add in the fulminations coming out of Washington about the strength of the dollar, and the task facing the ECB's leadership this year looks truly daunting.

In short, who would want any of these jobs right now, as the global wave of populism continues to build?