With the Ontario election two weeks away, we've just been given a small opportunity to gauge the business and economics savvy of the three main party leaders. It's not reassuring.
One of the joys of living in this Province is a little charge known as an "Environmental handling fee" (or EHF) that's levied on all electronics-related products -- from batteries (where it's a few pennies per unit) to big-screen TVs, where it can add more than $40 to the bill. It was introduced a few years ago and it's wildly unpopular, although the intention of the fee -- requiring consumers to pay upfront for the end-of-life costs of what they buy, in return for the right to dispose of the items without charge at the end of their useful life -- is not a bad one. If people have to pay to dispose of a broken TV properly, it's very likely that they'll just dump it in a ditch.
Anyway, all three party leaders have been quizzed by reporters about what they'd do with the fee if they became Premier after the election. Current Premier Kathleen Wynne said that her party had already introduced legislation to have the fee paid by manufacturers and retailers, so that "it would just be treated the same as the rest of their input costs". This would, I suppose, eliminate the annoyance that people feel when they see the EHF on their bill at Best Buy. However, it doesn't seem to occur to Ms Wynne that companies recoup their input costs through the price they charge consumers, so if the EHF becomes just another input cost, it will be reflected directly in a higher price for the product.
NDP leader Andrea Horwath takes more or less the same position of Wynne. She claims her party has always advocated that manufacturers should pick up the back-end costs for the products they sell. Like the Premier, she seems unaware of the economic maxim that all taxes are ultimately paid by consumers.
Lastly we have Tory leader Tim Hudak. In keeping with his overall anti-tax stance, he'd abolish the EDF outright. He told a reporter that this would immediately result in a $40 dollar reduction in the cost of that 60" curved screen Samsung you've had your eye on. As the reporter on the story noted, there's at least as good a chance that the retailer or manufacturer would seize the opportunity to jack up the underlying price of the good by an amount equal to the fee. And of course, with the fee gone, someone would have to figure out how to pay for the disposal costs of electronic items, many of which contain hazardous materials. Not an issue Hudak seems to have given any thought to. (At a guess, the responsibility would fall to local municipalities: Tory governments always like to download expensive responsibilities, then claim they are cutting costs.)
The Liberals have spent the last several years demonstrating that they couldn't organize a two-car funeral. The opposition parties aren't even in power yet, and they're showing us exactly the same thing.
Thursday 29 May 2014
Wednesday 28 May 2014
The Piketty Verdict
Can I have my life back now, please? I've finally finished Thomas Piketty's "Capital in the 21st century" and am in urgent need of some light relief. I've offered some comments on the book in previous postings, but here are some final thoughts.
The most impressive thing about Piketty's book is the way he has managed to assemble a huge database on international, intergenerational trends in the distribution of income and wealth. What's more, he's put all of the information on line, in the stated expectation that others will be able to improve on it. Needless to say, this has opened the way for those viscerally opposed to Piketty's views (i.e, mainly, the international business press) to try to discredit his work. The London FT, for example, has claimed that Piketty's data are full of errors, but as this article on Slate demonstrates, the paper is wildly overstating its case.
Publishing in a city overflowing with Russian and Middle Eastern billionaires, the FT actually seems not to believe that wealth inequality is growing. Like others who have taken issue with Piketty, it argues that the growth in owner-occupancy of housing has led to a more equal distribution of wealth. This is flawed in so many ways:
(a) anyone making such a comment has almost certainly not read the book, since Piketty talks regularly about the rise in owner occupancy as a factor that mitigated the rise in inequality during the 20th century. His data take that into account.
(b) In any case, in the UK in recent years, the proportion of people able to afford their own homes has actually been declining slightly.
(c) There's a respectable argument, advanced by Willem Buiter amongst others, that the value of the housing stock isn't really part of the national wealth anyway. There can be little argument that financial wealth, as opposed to real estate, is distributed very unequally.
Once he moves beyond the data and into the policy prescriptions, Piketty's book becomes a lot less impressive. His call for an international tax on capital has won him considerable notoriety, and it's a case he makes with both passion and logic. But he must surely realize that it's never going to happen, barring a revolution. He likes to take potshots at economists who devote their time to constructing elaborate mathematical universes that have no relevance to the real world, but one could respond: what's the use of gathering all the data in the world if at the end of it, you produce wildly improbable policy ideas?
The policy section of the book, tucked away right at the end, also includes some off-topic thoughts on the Euro and even a few comments on climate change. These comments are very Euro-centric, which makes it an even bigger surprise that the book has attracted such a following in the United States, where not-invented-here syndrome is usually so strong.
Because it peters out so much in the end, Piketty's tome winds up being slightly disappointing. However, it may still prove to be an important landmark if it succeeds in bringing economics back toward the other social sciences, after a long and largely fruitless march toward becoming a branch of pure mathematics. I was always drawn much more to economic history than to the arcane modelling, and I'm reasonably sure that if I were to apply to read undergraduate economics today, I wouldn't be accepted by any respectable school. If Piketty succeeds in steering the discussion back toward the real world, he'll be doing everyone a big favour.
The most impressive thing about Piketty's book is the way he has managed to assemble a huge database on international, intergenerational trends in the distribution of income and wealth. What's more, he's put all of the information on line, in the stated expectation that others will be able to improve on it. Needless to say, this has opened the way for those viscerally opposed to Piketty's views (i.e, mainly, the international business press) to try to discredit his work. The London FT, for example, has claimed that Piketty's data are full of errors, but as this article on Slate demonstrates, the paper is wildly overstating its case.
Publishing in a city overflowing with Russian and Middle Eastern billionaires, the FT actually seems not to believe that wealth inequality is growing. Like others who have taken issue with Piketty, it argues that the growth in owner-occupancy of housing has led to a more equal distribution of wealth. This is flawed in so many ways:
(a) anyone making such a comment has almost certainly not read the book, since Piketty talks regularly about the rise in owner occupancy as a factor that mitigated the rise in inequality during the 20th century. His data take that into account.
(b) In any case, in the UK in recent years, the proportion of people able to afford their own homes has actually been declining slightly.
(c) There's a respectable argument, advanced by Willem Buiter amongst others, that the value of the housing stock isn't really part of the national wealth anyway. There can be little argument that financial wealth, as opposed to real estate, is distributed very unequally.
Once he moves beyond the data and into the policy prescriptions, Piketty's book becomes a lot less impressive. His call for an international tax on capital has won him considerable notoriety, and it's a case he makes with both passion and logic. But he must surely realize that it's never going to happen, barring a revolution. He likes to take potshots at economists who devote their time to constructing elaborate mathematical universes that have no relevance to the real world, but one could respond: what's the use of gathering all the data in the world if at the end of it, you produce wildly improbable policy ideas?
The policy section of the book, tucked away right at the end, also includes some off-topic thoughts on the Euro and even a few comments on climate change. These comments are very Euro-centric, which makes it an even bigger surprise that the book has attracted such a following in the United States, where not-invented-here syndrome is usually so strong.
Because it peters out so much in the end, Piketty's tome winds up being slightly disappointing. However, it may still prove to be an important landmark if it succeeds in bringing economics back toward the other social sciences, after a long and largely fruitless march toward becoming a branch of pure mathematics. I was always drawn much more to economic history than to the arcane modelling, and I'm reasonably sure that if I were to apply to read undergraduate economics today, I wouldn't be accepted by any respectable school. If Piketty succeeds in steering the discussion back toward the real world, he'll be doing everyone a big favour.
Thursday 22 May 2014
"There's nothing surer....
....the rich get rich and the poor get poorer". (Ain't we got fun, lyrics by Egan and Kahn)
Time for another bulletin from the Piketty coalface. I'm now about two thirds of the way through "Capital in the 21st century". After expounding at great length on the history and sources of inequality in incomes and wealth over the past two centuries, Piketty is finally starting to set out his case for a global, progressive tax on capital.
The impressive thing about this book, and the thing that sets it apart from most modern economics tomes, is the amount of trouble that Piketty (long with his numerous collaborators) has gone to in assembling a massive database (the so-called "World Top Incomes Database" or WTID), covering a wide range of countries over a long period of time. Then he has applied some very simple mathematical techniques, most of them little more than identities, to tease out some far-reaching conclusions.
Most notably, he finds that inequality in incomes and wealth has a natural tendency to grow and become entrenched, just as the lyricists observed a century ago. Inequality was very pronounced in the century before the outbreak of the Great War. It became much less so between about 1914 and the 1950s, mainly because of the destruction of capital resulting from the two World Wars. However, it has been steadily increasing in the last few decades, and if current trends persist, could return to or even exceed its 19th century levels within the next few decades.
Inequality grows because, as Piketty shows, the return on capital always tends to exceed the rate of economic growth. Then there are two factors that tend to have a kind of multiplier effect: inheritance (now becoming as big a factor as it was in the Austen and Balzac novels Piketty loves to quote), and size: big fortunes tend to grow faster than small ones, probably because holders of large fortunes can afford better investment advice.
Piketty illustrates this last point in a very interesting way, by analyzing the investment returns of the 800 or so university endowment funds in the US. There's a very clear hierarchy. The largest (Harvard, Yale, Princeton) consistently earn more than the mid-sized (Penn, Chicago), which earn more than the smallest (the likes of Iowa State). For virtually all of these funds, returns on existing capital account for far more of their long-term growth than do new donations.
Piketty acknowledges society's need for capital, but questions whether this can possibly justify the level of inequality that is now re-emerging. In particular, as inheritances start to assume greater importance again (after a lengthy hiatus cause by the destruction of capital by war in the 20th century), he questions whether tolerating rising inequality can possibly be justified by the need to foster entrepreneurial activity. As he puts it, thanks to inheritance, all entrepreneurs eventually become rentiers.
Piketty's advocacy of a wealth tax to stem the rise in inequality has seen him labelled a Marxist by many in the US. He's responded to at least one such accuser by denying that he has ever read Das Kapital, but he clearly doesn't seriously expect us to believe that. The obvious problem with his tax plan is that it would be impossible to get every country to go along with it. From what I've read so far, he seems to believe that even a wealth tax imposed by just a few countries would be feasible and desirable. I'm interested to find out how he thinks this could work, and will no doubt post again after another couple hundred pages!
Time for another bulletin from the Piketty coalface. I'm now about two thirds of the way through "Capital in the 21st century". After expounding at great length on the history and sources of inequality in incomes and wealth over the past two centuries, Piketty is finally starting to set out his case for a global, progressive tax on capital.
The impressive thing about this book, and the thing that sets it apart from most modern economics tomes, is the amount of trouble that Piketty (long with his numerous collaborators) has gone to in assembling a massive database (the so-called "World Top Incomes Database" or WTID), covering a wide range of countries over a long period of time. Then he has applied some very simple mathematical techniques, most of them little more than identities, to tease out some far-reaching conclusions.
Most notably, he finds that inequality in incomes and wealth has a natural tendency to grow and become entrenched, just as the lyricists observed a century ago. Inequality was very pronounced in the century before the outbreak of the Great War. It became much less so between about 1914 and the 1950s, mainly because of the destruction of capital resulting from the two World Wars. However, it has been steadily increasing in the last few decades, and if current trends persist, could return to or even exceed its 19th century levels within the next few decades.
Inequality grows because, as Piketty shows, the return on capital always tends to exceed the rate of economic growth. Then there are two factors that tend to have a kind of multiplier effect: inheritance (now becoming as big a factor as it was in the Austen and Balzac novels Piketty loves to quote), and size: big fortunes tend to grow faster than small ones, probably because holders of large fortunes can afford better investment advice.
Piketty illustrates this last point in a very interesting way, by analyzing the investment returns of the 800 or so university endowment funds in the US. There's a very clear hierarchy. The largest (Harvard, Yale, Princeton) consistently earn more than the mid-sized (Penn, Chicago), which earn more than the smallest (the likes of Iowa State). For virtually all of these funds, returns on existing capital account for far more of their long-term growth than do new donations.
Piketty acknowledges society's need for capital, but questions whether this can possibly justify the level of inequality that is now re-emerging. In particular, as inheritances start to assume greater importance again (after a lengthy hiatus cause by the destruction of capital by war in the 20th century), he questions whether tolerating rising inequality can possibly be justified by the need to foster entrepreneurial activity. As he puts it, thanks to inheritance, all entrepreneurs eventually become rentiers.
Piketty's advocacy of a wealth tax to stem the rise in inequality has seen him labelled a Marxist by many in the US. He's responded to at least one such accuser by denying that he has ever read Das Kapital, but he clearly doesn't seriously expect us to believe that. The obvious problem with his tax plan is that it would be impossible to get every country to go along with it. From what I've read so far, he seems to believe that even a wealth tax imposed by just a few countries would be feasible and desirable. I'm interested to find out how he thinks this could work, and will no doubt post again after another couple hundred pages!
Thursday 15 May 2014
Austenomics and Balzaccounting
Economists are not supposed to base their conclusions on anecdotal data -- though most of them do, at least occasionally. It's always nice when anecdotal evidence confirms your hypotheses, and besides, it's much more fun gathering anecdotes than hard data.
Anyway, Thomas Piketty, in "Capital in the 21st century", has blown right through that taboo and into a whole new level: fiction! In trying to reconstruct the returns on capital from two centuries ago, he quotes extensively from both Jane Austen (especially "Mansfield Park") and Balzac ("Pere Goriot").
Piketty argues that it was well-known in the early 19th century that inheritance rather than work was the only way to attain wealth. Further, he cites his two authors as evidence that "everyone" knew that the annual real return on capital was about 5 percent. So, when Mrs Bennet in "Pride and Prejudice" keeps drooling that one of her daughters' suitors "has ten thousand pounds", she means that his capital of that amount will bring in an annual income of 500 pounds, more than enough to keep any of the young Misses Bennet in the style that their mother deems appropriate.
Piketty can get away with this because he has collected so much hard data on wealth and income. Those statistics clearly show that Austen and Balzac's characters had it about right: over the long term, annual returns on capital do indeed average very close to 5 percent, with surprisingly little variance across countries.
Not all of Piketty's pop culture references are from two centuries ago. Tarantino gets a shout, and the animated movie "The Aristocats" helps him make a point about the Belle Epoque. Piketty's dogged insistence on establishing his main points beyond any reasonable doubt can be a bit tedious at times, so these quirky little asides provide some welcome light relief. He's definitely not your average economist.
Anyway, Thomas Piketty, in "Capital in the 21st century", has blown right through that taboo and into a whole new level: fiction! In trying to reconstruct the returns on capital from two centuries ago, he quotes extensively from both Jane Austen (especially "Mansfield Park") and Balzac ("Pere Goriot").
Piketty argues that it was well-known in the early 19th century that inheritance rather than work was the only way to attain wealth. Further, he cites his two authors as evidence that "everyone" knew that the annual real return on capital was about 5 percent. So, when Mrs Bennet in "Pride and Prejudice" keeps drooling that one of her daughters' suitors "has ten thousand pounds", she means that his capital of that amount will bring in an annual income of 500 pounds, more than enough to keep any of the young Misses Bennet in the style that their mother deems appropriate.
Piketty can get away with this because he has collected so much hard data on wealth and income. Those statistics clearly show that Austen and Balzac's characters had it about right: over the long term, annual returns on capital do indeed average very close to 5 percent, with surprisingly little variance across countries.
Not all of Piketty's pop culture references are from two centuries ago. Tarantino gets a shout, and the animated movie "The Aristocats" helps him make a point about the Belle Epoque. Piketty's dogged insistence on establishing his main points beyond any reasonable doubt can be a bit tedious at times, so these quirky little asides provide some welcome light relief. He's definitely not your average economist.
Tuesday 13 May 2014
Gas pains
One of the odder sidebars to the ongoing mess in Ukraine is the suggestion that the country would be much better off if it could arrange a "reverse flow" of natural gas from Europe to reduce its dependence on supplies from Russia. Norway is a big gas producer, and Poland is starting to frack, but if most of Europe had any supplies of its own, it surely wouldn't be importing so much from Russia, would it?
That's a rhetorical question, of course, because as this recent piece from the New York Times explains, what Ukraine wants to do is to import back from Slovakia gas that the latter has imported from....Russia! (via Ukraine, of course).
You wouldn't think that the Russians would agree to that, but as the article states, Gazprom has no problem in principle with the reverse flow proposal, though it doesn't seem inclined to make it easy. One can only guess that the reason Gazprom might be prepared to play along is that Slovakia, unlike Ukraine, would actually pay for the gas it took. Sounds like a win-win deal, at least until the Slovaks realize that Ukraine is no more able to pay them than it is to pay Gazprom.
That's a rhetorical question, of course, because as this recent piece from the New York Times explains, what Ukraine wants to do is to import back from Slovakia gas that the latter has imported from....Russia! (via Ukraine, of course).
You wouldn't think that the Russians would agree to that, but as the article states, Gazprom has no problem in principle with the reverse flow proposal, though it doesn't seem inclined to make it easy. One can only guess that the reason Gazprom might be prepared to play along is that Slovakia, unlike Ukraine, would actually pay for the gas it took. Sounds like a win-win deal, at least until the Slovaks realize that Ukraine is no more able to pay them than it is to pay Gazprom.
Friday 9 May 2014
Canada's economic travails
It's hard to find much good news about the Canadian economy these days. Just a week after the US revealed unexpectedly strong employment gains in April, Canada today reported a sharp decline in employment in the same month. And the anecdotal evidence suggests more of the same to come...
* despite the recent fall in the exchange rate, manufacturing continues to shed jobs. The latest announcement is that a Unilever processed foods factory near Toronto is to close, with the loss of 250 jobs. Those jobs are moving to Missouri.
* Ontario-based auto parts giant Magna is opening 23 new factories in the next few years -- none of them in Canada. The company cites high electricity prices in Ontario, and the Liberal governments plans for a provincial pension plan, as reasons for its unwillingness to expand further.
* Hyundai, now the fourth-largest auto seller in Canada, baldly states that it will never consider manufacturing cars here, citing much the same factors as Magna. And why should it? It will be one of the biggest beneficiaries of the recent Canada-Korea free trade agreement. The big winners on the Canadian side appear to be artisanal cheesemakers and ice wine producers.
* The energy sector, on which the Federal government has pinned much of its economic strategy, is looking distinctly shaky. The Keystone pipeline into the US increasingly looks like a dead man walking, undermined by soaring US energy production and unceasing environmentalist opposition. Other ways of moving tar sands crude to market seem equally problematic.
Will there be a policy response? Bank of Canada Governor Stephen Poloz always seems to be on the brink of cutting interest rates, but as the depreciation in the exchange rate has been ineffective to date, it's not clear what he could hope to accomplish. And the Federal Tories will just mouth platitudes about their "Economic Action Plan", which, as large roadside signs brag, is currently squandering tax dollars on a completely unnecessary roundabout near my home.
Of course, there's an election under way in Ontario, home of much of the beleaguered manufacturing sector. Provincial Tory leader Tim Hudak says he has a "million jobs plan", to be executed over a ten-year period. Today he fleshed out some of the details: if elected, he's going to fire 100,000 public servants. Guess he needs a bigger plan.
* despite the recent fall in the exchange rate, manufacturing continues to shed jobs. The latest announcement is that a Unilever processed foods factory near Toronto is to close, with the loss of 250 jobs. Those jobs are moving to Missouri.
* Ontario-based auto parts giant Magna is opening 23 new factories in the next few years -- none of them in Canada. The company cites high electricity prices in Ontario, and the Liberal governments plans for a provincial pension plan, as reasons for its unwillingness to expand further.
* Hyundai, now the fourth-largest auto seller in Canada, baldly states that it will never consider manufacturing cars here, citing much the same factors as Magna. And why should it? It will be one of the biggest beneficiaries of the recent Canada-Korea free trade agreement. The big winners on the Canadian side appear to be artisanal cheesemakers and ice wine producers.
* The energy sector, on which the Federal government has pinned much of its economic strategy, is looking distinctly shaky. The Keystone pipeline into the US increasingly looks like a dead man walking, undermined by soaring US energy production and unceasing environmentalist opposition. Other ways of moving tar sands crude to market seem equally problematic.
Will there be a policy response? Bank of Canada Governor Stephen Poloz always seems to be on the brink of cutting interest rates, but as the depreciation in the exchange rate has been ineffective to date, it's not clear what he could hope to accomplish. And the Federal Tories will just mouth platitudes about their "Economic Action Plan", which, as large roadside signs brag, is currently squandering tax dollars on a completely unnecessary roundabout near my home.
Of course, there's an election under way in Ontario, home of much of the beleaguered manufacturing sector. Provincial Tory leader Tim Hudak says he has a "million jobs plan", to be executed over a ten-year period. Today he fleshed out some of the details: if elected, he's going to fire 100,000 public servants. Guess he needs a bigger plan.
Monday 5 May 2014
Don't vote, it only encourages them
Ontario's minority Liberal Government, faced with the certain defeat of a budget it introduced only last week, has called a provincial election for June 12. The attitude of most of the electorate is well summed-up in this quite brilliant cartoon from Sunday's edition of the Toronto Star:
For those of you unfamiliar with Ontario politics -- and aren't you the lucky ones? -- the three "runners", from left to right, are:
*Andrea Horwath of the supposedly left-leaning NDP. Her party has been propping up the Liberals for the last couple of years but has decided to pull the plug now, even though the aforementioned budget was very progressive. Her party may well pay a heavy price on voting day.
* Tim Hudak of the Conservatives. Keen on the type of union-bashing that Margaret Thatcher loved so much, and campaigning on the need to get the province's deficit in order -- i.e., to cut social programs.
* Kathleen Wynne, the Liberal leader and current premier. She seems like a very nice person, but she can't escape the long shadow of her scandal-plagued predecessor, the awful Dalton McGuinty. Based on their track record in recent years, her party couldn't organize a poker game in a casino.
It's going to be a tedious few weeks, and it's going to cost tens of millions of dollars. And the likely outcome? Based on the opinion polls, it'll be another minority Liberal government!
For those of you unfamiliar with Ontario politics -- and aren't you the lucky ones? -- the three "runners", from left to right, are:
*Andrea Horwath of the supposedly left-leaning NDP. Her party has been propping up the Liberals for the last couple of years but has decided to pull the plug now, even though the aforementioned budget was very progressive. Her party may well pay a heavy price on voting day.
* Tim Hudak of the Conservatives. Keen on the type of union-bashing that Margaret Thatcher loved so much, and campaigning on the need to get the province's deficit in order -- i.e., to cut social programs.
* Kathleen Wynne, the Liberal leader and current premier. She seems like a very nice person, but she can't escape the long shadow of her scandal-plagued predecessor, the awful Dalton McGuinty. Based on their track record in recent years, her party couldn't organize a poker game in a casino.
It's going to be a tedious few weeks, and it's going to cost tens of millions of dollars. And the likely outcome? Based on the opinion polls, it'll be another minority Liberal government!
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