Why do they call it Dutch ‘disease,’ anyways?

By Stephen Gordon - Tuesday, March 12, 2013 at 6:00 AM - 0 Comments

So Dutch consumers are roughly 10% better off than they would have been, but companies have been able to compete only by paring their profit margins.

“The Dutch disease,” The Economist, November 26, 1977

Talk about burying the lede. That sentence appears at the end of the 10th paragraph of the much-referred-to but rarely read article in The Economist that coined the phrase “Dutch Disease.” In  the normal course of things, a 10 per cent increase in consumers’ purchasing power would be the stuff of banner headlines, but, for some reason, The Economist chose to hide that point deep into the story and qualify it with a caveat about how hard it had become for companies to compete. (The answer to that, by the way, is: “So what if producers are struggling?” What really matters is consumer welfare.)

My take on the Dutch Disease debate can be summed up as follows: Why are we calling it a disease?

The Economist was reporting on the difficulties Dutch manufacturers were having in the wake of the discovery and exploitation of natural gas reserves in the Netherlands in the 1970s. The parallels with the recent Canadian experience are obvious: the surge in the prices of oil and other commodities that began in 2002 has been accompanied by a fall in employment in the Canadian manufacturing sector. (Here I’m going to concentrate on the period 2002-2008; the recession complicates the analysis of the last four years.)

No-one can plausibly deny that the increase in resource prices during 2002-2008 led to a reduction in manufacturing employment. But this shift was part of a labour market adjustment that produced broad-based increases in wages and incomes — and broad-based increases in wages and incomes are good things.

The rest of this post is based on a presentation I gave at a the symposium on Dutch Disease organised by the University of Calgary’s School of Public Policy held in Toronto on March 6-7. (It was there that the University of Alberta’s Andrew Leach drew my attention to that remarkable quote.)

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Public deficit: between shining federal figures and bitumen bubbles

By Erica Alini - Friday, January 25, 2013 at 3:59 PM - 0 Comments

As of November 2012, almost three-quarters of the way into fiscal 2013 (April 1, 2012 to March 31, 2013), the federal deficit stands at $12.4 billion, Finance Department said today. That’s quite a bit below the $15.5 billion shortfall recorded over the same period last year.

Given these year-to-date figures, it’s reasonable to expect that federal deficit for the year as a whole will come in under the $26 billion the Harper government predicted back in its November fiscal update. Sonya Gulati, at TD Economics, for one, expects a $22 billion deficit. In a note to clients this morning she even predicted that “the government’s 2016-2017 deficit reduction timetable could be reasonably be brought forward by one year.”

That’s still not enough to balance the budget by the next election, which will probably happen in late 2015, as the prime minister would like, but it’s far better than what most provincial premiers can say.

It certainly stands in stark contrast with Alison Redford’s “bitumen bubble” speech yesterday.

Lower than expected prices for Alberta’s oil are leaving it with not enough cash and too much of the icky black stuff.

“This bitumen bubble,” she told Albertans in a taped video clip last night, “means the Alberta government will collect about $6 billion less in revenue this year alone.” That’s how much the province spends on education every year, she added.

That will likely be the $3 billion deficit Redford already expects for fiscal 2013, a shortfall that was originally estimated at only $800 million.

The trouble, as you probably know (if you don’t read more here), is that without a convenient and fast way to deliver Alberta’s oil to where it’s needed, the price of Canadian heavy crude is dropping and the spread between it and world prices widening to record levels. As the Bank of Canada noted this week, lower resource royalties will leave provincial governments cash-strapped—and not just in Alberta.

But energy market woes are only part of the problem when it comes to Canada’s provincial coffers: it is Ontario’s credit rating, after all, that’s on the line, not Alberta’s (at least for now). But the more serious, long-term problem for resource-rish and resource-poor provinces alike comes from swelling ranks of seniors and low replacement rates.

Just a few days ago Kevin Page, Canada’s top budget watchdog, reiterated that Ottawa had better start producing periodic analyses of long-term deficit and debts of all layers of government, something the auditor general also recommended.

That seems like a mighty good idea.

Nice gig that pays $$? Farmer.

By Erica Alini - Wednesday, May 23, 2012 at 1:49 PM - 0 Comments

Looking for a good gig that pays over 60K? Consider farming.

No, seriously. After a long period of stagnation, net farm incomes are rising. Net operating income for the average Canadian farm was over $65,000 in 2011, up a whopping 35 per cent from an average of roughly $42,000 between 2006 and 2010. Only in 1995, that figure was below $30,000:

Agriculture and Agri-Food Canada, based on Statistics Canada figures and projections

“The economics of agriculture are coming back,” says Jeff Grubb, a Regina-based lawyer with expertise in agricultural law. “In the 1980s and 90s farm families needed to have some source of off-farm income,” at least in the prairies, recalls Grubb, who is himself the owner of a 700-acre farm. That’s less and less the case today, though, he says–courtesy of steadily climbing commodity prices and ever-larger farms.

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Big pain at the gas pumps

By Jason Kirby with Chris Sorensen - Wednesday, May 25, 2011 at 10:05 AM - 12 Comments

Sheila Boardman/CP

When gasoline prices in Central Canada hit record highs in early May, Industry Minister Tony Clement did what he always does when consumer rage boils over: he donned his populist cape and channelled citizens’ fury against a shadowy adversary—in this case, Big Oil. Standing in the driveway of a Toronto home, flanked by black and white Volkswagens and facing a wall of TV cameras, Clement bemoaned the lack of transparency in how pump prices are set. He then vowed to summon executives from the refining, distribution and retail industries to Ottawa for hearings. “All I know is that prices are going up and down and sideways and no one really knows why,” he said.

He was partly right, in that prices are zig-zagging wildly. At the start of May, oil and gasoline prices reached punishingly high levels, rekindling dark memories of the spike in energy costs that tipped the global economy into recession in 2008. Then, in the span of just a few days, oil prices, along with most other commodities, went into free fall. Gas prices have begun to drift down too, though not nearly as fast. But by the time MPs actually get around to holding hearings several months from now, the price of crude may well have fallen to the point that this most recent bout of pain at the pumps will have been forgotten—or it may have soared so high that the only affordable way anybody will be getting to Parliament Hill is by bicycle.

But where Clement was wrong was in his contention that nobody can explain what’s behind the extreme price movements. On the contrary, a growing number of experts in the industry as well as academia have come to the conclusion that excessive speculation by traders and investors, aided by ultra-low interest rates and easy money, is severely distorting the market. “You simply can’t explain these levels of volatility by supply and demand because market fundamentals don’t shift that quickly over such a short period of time,” says Michael Greenberger, a law professor at the University of Maryland who, in the 1990s, was in charge of the trading and markets division at the Commodity Futures Trading Commission, the U.S. government agency that regulates commodity futures. “Most observers now believe speculators are actively manipulating oil prices.”

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'The great copper heist'

By Julia Belluz - Wednesday, February 9, 2011 at 11:48 AM - 0 Comments

An already delayed hockey season was dealt another blow in Lambton Shores, Ont., after a thief broke into the town’s still-under-construction Legacy Arena in January and gutted the building of $12,500 worth of copper pipes and wires. Since then, Mayor Bill Weber says security around the building has been ramped up. “The contractors have hired overnight guards to police the site,” explains the wary mayor.

Copper theft isn’t just a problem in Lambton Shores. Edmonton officials recorded more than 50 cases of copper-wire heists over the past several years, including one recent robbery that left 640 Telus customers in the city without phone service after thieves swiped 500 m of copper cable near their homes. In Windsor, Ont., a Chrysler assembly line worker was arrested this month for allegedly executing a nine-month plan that involved smuggling $85,000 (or 5,800 lb.) worth of copper out through the plant gates.

Metal theft in general is on the rise, leaving commodities analysts to wonder at “the great copper heist” unfolding around the planet. In the U.K., metal theft is becoming the fastest-growing crime. South of the border, metal bouquet vases have disappeared from graveyards, and last summer, a thief used a forklift to steal other forklifts in Portland, Ore., which were then sold for scrap.

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