Manitoba’s choice

By Kevin Milligan - Monday, April 29, 2013 at 9:00 AM - 0 Comments

Kevin Milligan is associate professor of economics at the University of British Columbia.

Manitoba stands alone in Canada, and not just for its mosquitos and late springs. It also stands alone in resisting a wave of higher provincial income tax rates on top earners—a wave that’s slowly sweeping Canada from coast to coast. Nova Scotia was first on this trend, creating a new higher tax bracket for those making above $150,000 in 2010. Ontario and Quebec announced similar brackets to take effect in 2013, and B.C. looks set to join the others in 2014.

In the chart below, I show the tax rate for high earners across provinces in 2013, along with two potential paths for B.C. in 2014 depending on the results of the upcoming provincial election. The top rates range from 50 per cent in Nova Scotia and Quebec to 39 per cent in Alberta. If the NDP proposal for B.C. is implemented, the top tax rate there will move from 43.7 per cent in 2013 to 48 percent in 2014.

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Is the U.S. economy in for a spring slowdown?

By Erica Alini - Friday, April 26, 2013 at 11:48 AM - 0 Comments

To recap:

• The U.S. economy expanded by 2.5 per cent of GDP annualized in the first three months of the year, below the consensus forecast of three per cent growth but still a much stronger performance than the 0.4 per cent gain registered in the fourth quarter of 2012.
• Government spending cuts were the main drag on the economy, shaving eight percentage points off growth, meaning that GDP would have otherwise expanded by 3.3 per cent. The sweeping federal spending cuts known as sequester weren’t expected to take effect until late March or early April, but some government agencies—particularly the defense department—seem to have trimmed their expenditures preemptively. As more federal agencies follow suit, government spending will likely continue to weigh on the recovery in the coming months.
• Consumers, on the other hand, were the main propellers of growth. Spending by American families grew by 3.2 per cent, above the 2.8 per cent expected. However, analysts believe some of that activity reflects a one-time bounce-back after Hurricane Sandy, which ravaged the north-eatsern U.S. late last year.
• Business investment growth slowed to 2.1 per cent from 13.1 per cent in the previous quarter, but residential investment leaped forward by 12.6 per cent, the second consecutive double-digit increase in six months.
• International trade was a source of drag, with imports outpacing exports and subtracting half a percentage point from growth.

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Note to the NDP (and everyone else): the popular tax hikes don’t increase tax revenues

By Stephen Gordon - Wednesday, April 24, 2013 at 12:10 PM - 0 Comments

“Don’t tax you, don’t tax me, tax that fellow behind the tree” – Russell B. Long

Anti-tax populism is a powerful force in politics: the Conservatives owe much of their electoral success to their staunch anti-tax rhetoric. And the lesson of three election victories in a row — and of three consecutive elections in which the Conservatives increased their seat totals — do not appear to have been lost on the opposition parties. While they may sometimes denounce the Conservatives’ signature tax cut — two percentage points off the GST, worth about $12-15 billion a year in revenues — neither of the major opposition parties dares suggest that they would reverse this measure if elected.

Anti-tax sentiment has sunk in deep enough that political parties who would like to get elected on a platform of increasing tax revenues seem to feel they have little choice but to promise to only increase taxes that no one has to pay. Magical thinking might be smart politics, but it’s not very good economics. Here are the two most popular themes:

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Triple dip? UK in low spirits as official data may put country back in recession

By The Associated Press - Wednesday, April 24, 2013 at 10:19 AM - 0 Comments

LONDON – Recession may just be a word. But in Britain it may become a habit — and a dangerous one at that.

It’s possible that official figures on first quarter economic growth, to be released Thursday, could show the country is back in recession, and tension is building.

Although economists on average expect growth of 0.1 per cent on the quarter, they warn it would take the smallest statistical variation to put the figure in negative territory. That would place the country in recession, typically defined as two consecutive quarters of economic contraction.

Another recession — the third since the 2008 financial crisis — is already being referred to with foreboding in the media as a “Triple Dip.” Experts warn that its confirmation would create a wave of negative media attention that would scare consumers away from spending, feeding into a vicious cycle that has the economy flat-lining.

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Mark Carney’s last stand (before the finance committee)

By Erica Alini - Tuesday, April 23, 2013 at 12:49 PM - 0 Comments

(Fred Chartrand/CP)

When asked about how much debt is too much for a Canadian family, Bank of Canada Governor Mark Carney politely declined to go into the details. Appropriate levels of red ink on private balance sheets depend on a number of factors, and the central bank isn’t in the business of personal finance consulting. The BoC does, though, have a benchmark red line after which—regardless of income level, job security and age profile—it believes anyone starts struggling. That’s when debt servicing costs rise over 40 per cent of after-tax income, the governor said at this morning’s hearing before the House of Commons Standing Committee on Finance, his last such appearance as this country’s central banker.

Concerns about high levels of household debt have been a leitmotif of the governor’s tenure, and it looks like that will continue to be the case for his successor. Once keeping up with your debt repayments takes up nearly half of your net income, Carney continued, “there isn’t much margin for error.” If your shifts are reduced—let alone if you lose your job—chances are, you’re defaulting. Right now, eight per cent of indebted households are in such dire straits, the governor said. A spike in unemployment (caused by, say, a slowdown in global growth triggered by another crisis in Europe) could bring that number of “vulnerable” households up to ten per cent. And if the shock is big enough, it can hit the housing market as well, the governor warned his audience. None of that, however, is looming on the horizon, he added—just a scary story central bankers have to include in their modeling exercises, for now. Housing prices are firming up and household debt, which is mostly backed by assets, has been growing at slower and slower rates. It too should stabilize shortly.

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Wall Street is at it all over again

By Charles Reinhardt - Tuesday, April 23, 2013 at 10:45 AM - 0 Comments

David Viniar, former executive vice president and chief financial officer at Goldman Sachs, waits to testify before the Senate hearing on "Wall Street and the Financial Crisis: The Role of Investment Banks" in Washington, April 27, 2010. (Jim Young/Reuters)

On Tuesday, April 16, Bloomberg, the financial news and data giant, filed a lawsuit against the Commodity Futures Trading Commission, one of the most important regulatory bodies overseeing U.S. financial markets. The lawsuit was about new rules governing financial instruments known as swaps—rules, which, according to Bloomberg, will push investors toward new hybrid financial products that “have less regulatory requirements, less transparency, but pose much higher investor risk” than swaps. These adverse and “presumably unintended” consequences, the legal statement goes on to say, are a good enough reason to halt the rule’s implementation.

There’s a feeling lately among long-time Wall Street observers that U.S. financial regulators seeking to tame the industry’s excesses are engaged in a cat-and-mouse chase in which the mouse is often one step ahead.

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On our radar screen this month: Tiger Woods, Dubai, Florida and Google

By Econowatch - Tuesday, April 23, 2013 at 10:30 AM - 0 Comments

• Tiger Woods’comeback hit a snag when he tied for fourth place at the Masters (and suffered a controversial two-shot penalty for an improper ball drop on the 15th hole). But the mere presence of a resurgent Woods at Augusta this year was good for golf, with ticket prices for the famed tournament reportedly selling for $13,820 for a four-day pass on resale websites, up from about $3,675 last year.

• The price of a luxury villa in Dubai soared 20 per cent last year, suggesting a turnaround in the city-state’s high-end real estate market four years after it crashed. Local officials, meanwhile, are intent on reinforcing Dubai’s battered image as a luxury destination. As of last week, they are paying for police to patrol the streets in a $550,000 Lamborghini Aventador, with a Ferrari model soon to follow.

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Good and bad news this month (and why Porter Airlines and Canada Goose rock)

By Econowatch - Tuesday, April 23, 2013 at 9:00 AM - 0 Comments

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The golden quote on gold prices

By Econowatch - Monday, April 22, 2013 at 3:39 PM - 0 Comments

What first-time Vancouver home buyers plan to spend (and other important numbers)

By Econowatch - Monday, April 22, 2013 at 2:53 PM - 0 Comments

The spectacular rise of oil by rail — in 18 months

By Econowatch - Monday, April 22, 2013 at 2:40 PM - 0 Comments

Why the Reinhart-Rogoff glitch doesn’t matter for Canada

By Stephen Gordon - Monday, April 22, 2013 at 10:39 AM - 0 Comments

If you’ve heard about Carmen Reinhart and Kenneth Rogoff’s much-cited conclusion that economic growth rates deteriorate once debt-GDP ratios go beyond 90 per cent, you’ll have heard by now that this result appears to have been produced by a coding error (as Econowatch explains here). My initial reaction was the same as that of any other economist who does applied work: an empathetic sinking feeling. This is the sort of mistake that could happen to anyone.

But my second reaction was to shrug. The Reinhart-Rogoff (R-R) result is was most pertinent in the debates about fiscal austerity being conducted in the U.S., the U.K. and Europe, where people are making the case for fiscal contraction before the recession is over. To the extent that there’s a debate about fiscal austerity in Canada, that’s not the one we’re having.

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The economy’s potential may be a little lower than we thought

By Stephen Gordon - Friday, April 19, 2013 at 11:27 AM - 0 Comments

The Bank of Canada’s forecasting model (or rather models — Bank staffers use more than one when putting their projections together) has a built-in stability property: projections for GDP eventually return to potential, that is, a level consistent with no inflationary or disinflationary pressures. That was the case in the projections in the January Monetary Policy Report and again in the April MPR. It means that when short-term growth projections are revised down — as they were in January and in again in April — forecasts for growth rates a year or two out are simultaneously revised up so that the economy still reaches potential in the medium term.

But there was an interesting feature of the April MPR that I haven’t seen anyone mention: one of the Bank’s better-known estimates for capacity output was revised down in April, reflecting historical revisions. Current estimates for potential output for the third quarter of 2012 are 0.25 per cent lower than they were in January. So even though the new set of projections still shows convergence to potential in the medium term, this convergence occurs at a lower potential output trend:

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Carney: Household debt, if untamed, could warrant higher interest rates sooner

By Erica Alini - Thursday, April 18, 2013 at 3:38 PM - 0 Comments

(Chris Wattie/Reuters)

Bank of Canada Governor Mark Carney is in Washington D.C. today, where he found the time for a televised chat with reporters hosted by Reuters. Here are some of the most interesting bits:

Expect a rate hike if Canada’s household debt can’t be tamed otherwise. Also, the housing market slump will ideally last two years:

The governor said appeared satisfied with developments in the household sector: consumer debt has slowed “quite nicely.” However, he added, the BoC might hike up interest rates “sooner” if the issue of Canadians’ overstretched wallets isn’t addressed “in a timely way.”

Carney also noted that the housing market, the major driver of Canada’s household debt spree, is “moving in the right direction,” with prices “adjusting” and the pace of new residential construction slowing. The real estate and consumer debt cool-down, he added, is “an adjustment that best takes place over a couple of years.”

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Why justifying austerity just got harder

By Tamsin McMahon - Wednesday, April 17, 2013 at 7:17 PM - 0 Comments

The Internet exploded this week with the revelation that researchers from the University of Massachusetts had debunked the widely-accepted thesis from Harvard professors Carmen Reinhart and Kenneth Rogoff that a country’s economic growth could be pegged to the size of its government debt and that an economy would start to go off a cliff when a country’s debt-to-GDP ratio rose above 90 per cent.

The Massachusetts economists, Thomas Herndon, Michael Ash, and Robert Pollin, crunched data given to them by Reinhart and Rogoff for 20 countries and years from 1946 to 2010 and found that the economists had made a number of calculation errors, namely excluding several years when some countries had both high debt and high growth in GDP (mostly in the years after the Second World War.)

They also found that five of the 20 countries cited in the study had accidentally been dropped from the analysis because of a “spreadsheet error” that essentially involved Reinhart and Rogoff skipping the first five countries of the alphabet.

Correcting for the mistakes, the Massachusetts researchers found that annual GDP growth was, on average, 2.2 per cent for countries with debt-to-GDP ratios above 90 per cent. That is in stark contrast to Reinhart and Rogoff’s findings that GDP would instead fall by -0.1 per cent.

Reinhart and Rogoff are now being skewered by their critics, particularly because politicians (including our own) have repeatedly cited the 90-per-cent threshold when justifying austerity budgets and the mistakes open up the possibility that maybe deep cuts aren’t needed to kick start an economy after all. (“How Much Unemployment did Reinhart and Rogoff’s arithmetic mistake cause,” is how The Guardian newspaper put it.) Reinhart and Rogoff have apologized for the errors, but insist they don’t alter their central conclusions that more debt is bad for the economy.

More important for Canadians is the fact that Canada was one of the countries omitted from Reinhart and Rogoff’s analysis, thanks to being pretty high up in the alphabet. (The others were Australia, Austria, Belgium, and Denmark)

In fact, while the Massachusetts economists found that some countries (namely the U.S.) fit Reinhart and Rogoff’s model quite nicely, Canada doesn’t. Their analysis of 64 years of Canadian economic data suggests a fairly weak link between debt levels and GDP growth in this country. If anything, Canada’s economy actually grew with higher levels of public debt. It slowed when debt topped 90 per cent of GDP, but average growth in those years was still 3 per cent of GDP a year, well above the 2.2 average for the 20 countries in the study.

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U.S. economy grew at moderate pace in early spring, led by housing and autos

By The Associated Press - Wednesday, April 17, 2013 at 4:00 PM - 0 Comments

WASHINGTON – A strengthening housing recovery and robust auto sales contributed to moderate economic growth across the United States in late February and March, according to a Federal Reserve survey released Wednesday.

Growth was moderate or modest in all of the Fed’s 12 banking districts, and it accelerated in two — New York and Dallas — from January and early February.

The survey suggested that the economy performed better in March than some government data on hiring and consumer spending had indicated. That could mean the economic weakness might have been temporary.

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With economy weak and at risk, IMF tells Canada to keep supporting growth

By Julian Beltrame - Tuesday, April 16, 2013 at 9:54 AM - 0 Comments

OTTAWA – The International Monetary Fund is advising Canadian policy-makers against pulling too hard on the reins of austerity, saying in a new forecast that the economy remains weak and vulnerable to shocks.

The IMF said Tuesday that Canada’s economy will likely slow to about 1.5 per cent this year from 1.8 last year, before picking up to 2.4 per cent in 2014.

As well, the Washington-based global financial organization warns that the risks for Canada are mostly tilted to the wrong side, with a chance of a weaker outcome should the European crisis worsen, the United States not grow as strongly as projected, commodity prices fall or household indebtedness grows.

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Jobs and other myths about trade

By Stephen Gordon - Tuesday, April 16, 2013 at 9:00 AM - 0 Comments

Politicians and pundits talk a lot about trade policy, but much of what they say either adds nothing to or subtracts from public understanding about trade. Here are a few talking points that are both popular and wrong:

1) Exports are good. Not true; exports are the costs we pay for engaging in international trade. Diverting domestic productive resources to producing more things for foreigners doesn’t increase our standards of living.

2) Imports are bad. This is point one restated: imports are the benefits from trade. The reason we engage in international trade is to obtain goods and services more cheaply than we can produce them for ourselves.

3) Trade deficits are bad. I went though this at length in this post: noting that a country has a trade deficit (or, more properly, a current account deficit) is the same thing as noting that domestic investment is larger than domestic savings. It’s not obvious why this is necessarily a bad thing.

4) Trade deficits are a sign of a slowing economy. The Canadian trade balance is generally counter-cyclical: falling during expansions and rising during recessions. A trade deficit is standard fare for Canadian expansions, not something to get concerned about.

5) Liberalized trade increases employment. Again, this is point one restated. Liberalized trade may increase the number of workers in certain export-oriented sectors. But the effect on total employment in the economy is zero.

6) Liberalized trade reduces employment. Again, this is point two restated. Liberalized trade may reduce the number of workers in certain sectors vulnerable to foreign competition. But the effect on total employment in the economy is still zero.

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A very Canadian housing slump

By Stephen Gordon - Monday, April 15, 2013 at 1:26 PM - 0 Comments

Data from the housing market out today shows that sales were down 15.3 per cent in March compared to the same period last year. Given the events of the past decade, it is natural to worry about the possibility that Canada is headed for a U.S.-style housing meltdown. But I don’t see how that’s likely to happen. It’s far more probable that we’ll see the kind of housing slump we usually see in Canada: a long grind.

The reasons for thinking so are two-fold. The first is that Canadian mortgage underwriting standards are more conservative than they were in the U.S. Practices such as “liar loans” (where borrowers didn’t have to provide proof that they earned as much as they said they did), no-money-down mortgages or negative amortization (where payments didn’t even cover the interest on the loan) never crossed the border into Canada. To be sure, we weren’t entirely immune from the trend towards looser mortgage loan standards — the introduction of longer amortization periods of 30, 35 and even 40 years may have been followed by other “innovations” if the U.S. housing market hadn’t melted down when it did.

The other, related point is that Canadians simply don’t default on their mortgages the way Americans do. This chart graphs the percentage of mortgages in arrears by 90 days or more (Alberta is broken out for reasons that will become obvious in a minute):

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Alberta’s carbon price — if you don’t have an opinion on it, you should

By Erica Alini - Wednesday, April 10, 2013 at 5:12 PM - 0 Comments

Etienne de Malglaive/REA/Redux

So Alberta hasn’t really proposed to increase its carbon price to $40, as reported last week. Speaking with Luiza Savage in Washington, D.C. yesterday, Premier Alison Redford said the much debated 40-40 plan isn’t something “we’ve in any way landed on or proposed.” (Read the full interview here.)

You still need to know about Alberta and its system for pricing carbon. Why? Because it might be the blueprint for federal emission regulations for the oil and gas industry that are expected to — forgive the pun — come down the pipe later this year. Alberta and Ottawa are collaborating “intensely” on the upcoming federal rules for the oil and gas industry, Redford told Maclean’s.

But is Alberta’s setup the model the nation should follow? Here’s what you need to know to start making up your mind:

1. Provincial vs. federal regulations, a bit of history.

In 2006 Ottawa let it be known via the Canada Gazette that it intended to regulate greenhouse gas emissions. The approach the government had in mind was the following: target the largest polluters, those with emissions over 100,000 tonnes per year, and use “intensity targets.” That would limit the amount of GHGs per unit of output rather than putting a cap on aggregate emissions. However, the government added, such targets should be “ambitious enough to lead to absolute reductions in emissions and thus support the establishment of a fixed cap on emissions.” (A big hat-tip to University of Alberta professor Andrew Leach here, who wrote this paper.)

Deeds, however, did not follow those words speedily, and a few provinces have since pressed ahead with their own rules. Alberta was the first to put a price on carbon in 2007; a few months later, Quebec imposed a carbon levy on energy producers and a cap-and-trade system in 2011. B.C. followed suit in 2008 with a carbon tax on gasoline and other fuels.

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A message for the NDP: profits are people, too

By Stephen Gordon - Wednesday, April 10, 2013 at 11:46 AM - 0 Comments

The preamble of the NDP’s constitution contains this passage:

The principles of democratic socialism can be defined briefly as:

That the production and distribution of goods and services shall be directed to meeting the social and individual needs of people within a sustainable environment and economy and not to the making of profit; …

This sentiment — usually summarized by the slogans “People before profits” or “People, not profits” — is a ubiquitous theme in politics. But it reflects a fundamental misunderstanding of the role of profits in the modern economy, and the NDP would do well to follow through on the proposal(s) to remove it when the party convenes in Montreal this weekend.

Firstly, profits aren’t sent to another planet once they’re paid out: they stay among the people of Earth. I don’t suppose that revelation surprises anyone — the presumption supposedly is that profits are for the rich.

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Canadian investors flock to high-risk debt

By Tamsin McMahon - Monday, April 8, 2013 at 5:21 PM - 0 Comments

The appetite for risky debt is growing in Canada as investors search farther afield for ways to boost their portfolios, according to Royal Bank of Canada, the country’s largest corporate debt underwriter.

The bank told Bloomberg it predicts issuances of high-yield debt will hit $95 billion this year, led by a boom in mortgage securitizations, foreign bond purchases and below-investment grade junk bonds. High yield bond issuances climbed 32 per cent in the first quarter of the year, compared to 11 per cent in the U.S., according to Bloomberg data.

Large Canadian investors are increasingly looking at riskier debts as a way to hit their annual targets, which have been hammered by persistently low interest rates. That trend is expected to continue for the next few years, with RBC predicting Canada’s junk bond market would hit $35 billion in 2016, compared to $11 billion this year.

Economists: Canada’s trade deficit matters more than slowing job creation

By Erica Alini - Friday, April 5, 2013 at 11:38 AM - 0 Comments

To recap:

• Canadian employment dropped by 55,000 jobs in March, roughly as much as it had risen in February. The unemployment rate climbed up to 7.2 per cent from seven per cent in the previous month. Most of the jobs lost were full-time and from the private sector. Manufacturing was the biggest losers, shedding 24,000 positions, the third consecutive month of declines.
• Canada’s trade deficit widened to $1 billion in February, up from a revised  $746 million in January. Exports dipped 0.6 per cent, reversing two consecutive months of growth. Imports inched up 0.1 per cent. In terms of volume, exports declined 0.6 per cent and imports 0.4 per cent.
• U.S. employment posted a modest gain of 88,000 jobs in March, the smallest increase in nine months. The reading was in line with other economic indicators out last month hinting that the bout of growth of the first three months of the year is coming to an end. Unemployment declined to 7.6 per cent from 7.7 per cent, but the dip was driven by more Americans giving up on the job search and thus dropping out of the government’s unemployment head count.
• The U.S. trade deficit narrowed to a better-than-expected $43 billion in February 2013 from a revised $44.5 billion in January. In terms of volume, exports were up 0.2 per cent and import down 0.3 per cent.

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The Conservatives don’t mind big government if it’s cheap

By Stephen Gordon - Thursday, April 4, 2013 at 11:37 AM - 0 Comments

Adrian Wyld/CP

If asked, the Conservatives will tell you that they favour a smaller government that intervenes sparingly in the functioning of the market, and it’s been pretty well-established that a medium- and long-term goal of the Conservative government has been to reduce the share of Canadian GDP that is taxed and spent by the federal government. But lower taxes and lower levels of spending are not the same thing as a smaller government.

Here are the highlights (sic) of the “Strengthening the Competitiveness of the Manufacturing Sector” section of  Chapter 3.2 of the budget plan: Continue…