The Problem is the Solution

According to The Globe and CBC, Stephen Harper thinks that the problem with the EU is a lack of integration. The CBC news story on this that I heard the other day went even further, more or less agreeing with Harper's perspective (well, more likely the reporter simply accepted what he was told by Harper or a Conservative staffer and didn't bother to look it up himself). In effect, the CBC reporter said that the EU was had an integrated economy but lacked an integrated polity. Its goal was to maintain national autonomy on the political level but promote economic integration.

Well, this might be true if we were talking about NAFTA, but even here it would be a statement that is open to debate (as Stephen Clarkson's work on this subject notes). But ... with regard to the EU? The EU has moved much further down the road of political integration then has NAFTA and has a host of common policies on matters like currency, mobility, environmental protection measures, resource redistribution, agriculture, etc. To state that the EU functions, in effect, mystifies how the EU actually functions.

Why would this be important? This is important because if you don't understand how the EU works, you can't understand the character and nature of the solutions and this is precisely what Harper is doing. How much more integration does he feel is necessary? Sure, the EU maintains political autonomy on all sorts of matters (tax regimes, say). But is this  the root of the problem? Is he -- or anyone -- trying to suggest that the problems in the EU would disappear if there were common continental wide policies on just about everything? In Canada, thanks to federalism, we can't get common national policies on a whole bunch of things (education comes to mind as a key example). What right do we have to tell anyone that they should abandon their autonomy when Alberta and Quebec and New Brunswick guard theirs within Canada. My point is not that Canadians are hypocrites; the opposite. Let's assume that the differences within Canada with regard to matters of provincial jurisdiction exist for a good reason and let's assume that that reason relates to the difficulty of tailoring policies on a national level for geographically diverse populations (Newfoundland, for instance, simply needs a different policy with regard to daycare or education then BC).

If this is true, if Canada's decentralized approach actually has some merits, why would we suggest that others abandon the very things that have allowed Canadians to tailor social, education, health, and economic policy (with admittedly more or less success) to the needs of its population. If "one size fits all" does not work in Canada, why would we think it would work in Europe?

But, let's go further ... what has caused the problems in Europe? It is caused by national economies or is it a product of spill-over from national economies caused by increased international integration? In other words, if Europe truly had isolated national economies, I would argue that they would not have the problems they have now because those problems could be isolated in one or two nations. Increased economic integration -- particularly, but not exclusively in capital markets -- are what has created the disastrous spill-over effect (there are other causes, too, to be sure, such as rampant real-estate speculation and serious macro-economic mismanagement).

The argument for increased integration might be that a bigger polity (say, a continent, has the resources to withstand the shocks set out by, say, Greece or Spain). Perhaps, but is that not what is happening now? Are not Europeans responding more or less on a continental level (let's leave aside the question of whether or not we agree with their response)?  If this is the case, what is there to be gained by increased political integration? Could a more united EU have responded faster? Perhaps but that would depend on the system of government they have (doubt me, as yourself how fast the US responded to its health care crisis). Anyone who says big governments are more responsive then small governments has simply failed to study politics. Anyone who has will tell you that the speed of responsiveness is not a factor of size but of organization. Big governments, I'd guess, tend to be a bit slower just because of their size but this point is not universally true. A dictatorship, for example, can be big and can respond very fast. Our concerns with the dictatorship are not in inefficiency but its ethics.

So, increased political integration does not bring more resources to the table (all resources are scare is  rule #1 of Econ 101) and cannot necessarily increase the speed of response. Moreover, it is possible that increased integration in capital markets is at least part of the problem. So, what is the advantage to increased integration?

I raise these questions to point both to this issue and another one: if the argument for increased integration is so unclear ... why would anyone make it? What do they have to believe and at what evidence have they looked to make such a statement.

Economy 101

A great deal of attention has been devoted to Ignatieff and Harper's deal, which preserves -- at least for the summer -- Harper's government and allows the Ignatieff to claim some minor victories and devote more time to party building all the while trying not to look like the Liberals are propping up the Tories. This kind of politics -- who will take the blame for an election no one wants -- is interesting as are the behind the scenes manovering. If one likes this kind of speculative Ottawa-centric political discussion (and, I'll confess that I find it interesting), then this type of national-politics-as-soap-opera is making for good viewing. Is there anything more in it? Should we, as some are doing, debate Ignatieff's sincerity? Should we, as some are doing, try to tar the Liberals with the Tory brush?

I don't know, but there is something important to note in the political manovering that has followed in the wake of economic crisis; that is: the degree to which Harper at least is committed to the very free market, small state policies that created the economic crisis in the first place. Harper, for example, is busy rationalizing the huge public debt his government has run up (as did Mulroney before him) as a short term expediency. Within a year, maybe two, he says, things will return to normal, five years down the line, Canada will again be in the black and governments can resume the policy of cutting taxes and slashing programmes.

Hmmm .... wait, hasn't anything be learnt here? After all, the Canadian debt is remarkably higher then it needs to be because of cuts to the GST that did nothing to increase spending and hence address looming economic problems and -- as I believe I have mentioned before -- how could they? A 2 cent cut on GST does nothing -- and can do nothing -- to alter consumer behavour. This about it like this. Suppose you want to buy a chocolate bar. Does the fact that that chocolate bar is now worth $1.15 instead of $1.17 change your thinking on the purchase? Does the saving of two cents convince you to buy two chocolate bars instead of one? The only thing cuts to the GST did was impoverish the fiscal capacity of the state to address economic problems when these popped up, which is exactly what happened. The cuts to the GST did nothing to help the economy but the loss revenue that the state would have had if all these small two cent purchases had been pooled would have significantly reduced the level of debt Canada is now accuring and hence lessened the amount of time needed to pay it back, perhaps but a year or longer!

Why would Harper and his government make such an elementary mistake? Why would they not want to have the capacity to address problems if they occurred? Why would they not, in other words, want to save for a rainy day, taking a prudent and cautious approach that would create options? After all, they are supposedly conservatives ... should they not love prudence, caution, and saving for a rainy day? The truth is that they don't seem to think of these things. Thus while they are willing to preach them as a recipe to address individual problems, they don't seem to think that it is good policy for the state to plan ahead wearing something other than rose-coloured glasses. What they are telling us is that as soon as they can they will reintroduce the exact same policies that helped make a mess of Canada's national finances in the first place.

Now, this is an important point and my wording here is important. I don't think Harper's government caused the national economic crisis. (Conservative friends of mine who are already saying Dexter's NDP government will hurt the economy ... same thing). The international economic crisis really is an international economic crisis. The issue is not did Harper cause it but ... how did he respond to it? Did his government put any forethought into policies? Did they adopt a cautious approach to finances that allowed the state to maintain capacity to address a problem if one popped up? Problems simply occur. That is the nature of life. The issue is not that they occur but that we learn from that occurence so we don't make the same mistakees again.

Unfortunately, this is where Harper and his government have fallen down. They don't seem to have learnt anything. If I made a set of assumptions that turned out to be wrong and those assumptions cost me a whole pile of money, I'd reconsider my assumptions. Harper and his government have not. And, for that reason alone, they are a dangerous national government. I don't know about you, but I want a government that is not so wedded to ideology that it refuses to consider lessons it can learn along the way.

Don't Cut Taxes

One of the few good things about this recession is that there has been very little discussion of cutting taxes as a way to stimulate the economy. This might be because the US has tried this and it did not work and so public commentators have seen experience and decided against offering this advise (which would be learning from history, also a positive thing) It might be because we are getting some common sense in public discourse on taxes. I don't know. Whatever reason, the old common sense "cutting taxes is good for the economy" seems to have gone away at least temporarily and in its absence we can have a serious and hopefully accurate discussion of what is good for the eocnomy.

Cutting taxes is actually a truly horrible way to stimulate the economy. Few economists actually think it works. The "cut taxes" argument instead comes from public commentators (pundits) of various sorts and journalists. People who actually study the economy have little faith in it. Why? Because tax cuts have little effect on spending habits and what effects they do have can be odd or even contradictory. I'll give you an example to illustrate my point. Suppose that one wanted to cut taxes to stimulate the economy. By stimulating the economy, here, we mean increasing consumer spending in order to increase the amount of goods purchased so that businesses make more money and hence get more stock from their suppliers who in turn have to hire more workers to produce this stock, thus increasing employment. For those with a more detailed knowledge of economics, I know that is a dramatically simplified explanation but it serves its purpose.

The problem with tax cuts is that it does not do this. Suppose, for instance, that the government wanted to stimulate the economy through a tax cut. And further suppose that there are about 20 million tax paying Canadians. A $100 tax cut for each tax-paying Canada would cost the government $2 billion, a fair piece of change. There seems to be some logic here. I happened to win $100 at a basketball tournament recently (the ever present 50/50 draw, as those who frequent minor basketball tournaments will know). What did I do? I spent it. I took my wife and daughter out to dinner (my son was off with his friends), picked up a couple of extra things for the house, splurged on one of those fancy coffees at the local coffee shop, etc. Three days later my $100 was gone, right into the economy. Should not a $100 per tax payer cut work like this and stimulate the economy but instead of Andrew Nurse spending his windfall, you'd have 20 million other Canadians doing the same thing?

No, because tax cuts don't work like this. Instead of getting $100 on a Saturday evening right before supper, what you do is pay less taxes throughout the year. Most people are paid twice a month so they get 24 pay cheques (or, electronic invoices as we do here at Mount A), So instead of having $100 in my pocket I have an extra $2 and change in my bank account every 15 days. Will that $2 change the way you spend? What will you add to your grocery list for $2? Will you go out and buy your spouse a snazzy new gizmo with that $2? Or, will you get your friend a more generous Christmas present or drop a bigger donation than you otherwise would have in the plate at Church? (Sidenote: I have been trying to create an argument that Churches are good for the economy because they are ruthlessly efficient spenders. Everything that comes in one door goes out the other to support food banks, educational programmes, youth groups, drop-in centres, clothing drives, missions, etc., but I have not gotten that argument worked up yet.)

It is unlikely. My daughter might spend the $2 if she discovered she had it but she's nine and $2 is a fortune to her. My son, who is 15 would not. He'd pocket the change. Most adults would ignore it. It is simply not large enough on an individual tax-payer basis to change consumption -- spending -- patterns.

What about a bigger cut? OK, let's double it, now you have $4 every two weeks going into your bank account and the government is now in the hole $4 billion. What big ticket item would you buy because of this? You might buy an extra coffee at Tims but that won't make any difference because Tims will not need to hire anyone extra to serve you. The server just needs to pour one extra coffee or two or three. How long does it take you to pour three extra cups of coffee in a two week period? You might buy an extra chocolate bar while grocery shopping and if that were done on a mass scale it might have some minor effect, but I suspect most people will keep to their regular grocery list. Certainly, no one is going to take the family out to dinner one extra time because they have an extra $2 week (in our best case scenario). Will you buy a new car or refinance your mortgage for an addition because of this? Will you take an extra vacation to PEI this summer (I love going to PEI) because of this money?

Again, we are in a situation where the tax cut is ineffective and we have cost the government -- which means we taxpayers who will need to pay this back someday -- a lot of money. So .. why do people continue to argue for tax cuts as some supposed holy grail of economic stimulation? Well, as I said, in part they don't. The disastrous record of the Bush administration and the silly GST cutting policies of the Harper government -- in which the state's capacity to respond to economic problems was zapped for purely political reasons -- have thrown some measure of cold war on the idea. In other instances, those continuing to argue for tax cuts do so from the perspective of ignorance. They either don't know their economics or have not done their math or both. Whether because of bad math or bad economics, their advise should be disregarded. I suspect those who continue to argue for tax cuts do so out of an ideological predisposition, which again, is good reason for care in heading their advise. Ideology detached from reality is ... well ... fantasy. And, does anyone want to put something as important as the national economy in the hands of someone who lives in a fantasy world?

The good news, as I said at the beginning, is that we are now getting past the fantasy world. We can now have a serious and hopefully effective discussion about the balance between the state and the market, what each can and should do, what is more effective and efficient. Canadians should welcome a more realistic debate even if it is the unfortunate fallout of failed economic ideas.