Brian Lee Crowley

Careful who you shoot at. They might shoot back, especially on the Super Hornet Interim Purchase.

Chief of Defence Staff Jonathan Vance harumphed when confronted at a parliamentary committee with questioning based on MLI’s survey of defence experts on the issue of the advisability of the government’s plan to purchase an interim fleet of fighter planes. The roughly 75 experts we surveyed agreed by a margin of 88 percent that the purchase was ill-advised and harmful to Canada’s defence interests. In my book, 88 percent agreement may fairly be characterised as a consensus. Less than 7 percent disagreed with that consensus. General Vance, however, dismissively said before the parliamentary committee that he was an expert too. Of course he is, but his reply inevitably invites a discussion of what the experts around him at DND and in the RCAF think. It is not a pretty picture for General Vance’s claims of superior expertise. That’s the case I laid out in an op-ed published in the Winnipeg Free Press on July 3rd. You can read the text of my op-ed here.

Interim Super Hornet Purchase: What the Experts Say

Ottawa’s plan to buy interim Super Hornets will cost more and fail to give the Canadian Forces the fighter it needs. That was the conclusion of a survey of defence experts MLI published in mid-June of this year. On 19th June my co-author David McDonough and I published an op-ed in the Ottawa Citizen laying out the logic of the experts’ large consensus. You can read the text online here.

 

 

Minimum wages: compassion or economic common sense? Why not both!

As I argued in an op-ed for the Ottawa Citizen on 2 June 2017, the Ontario government wishes us to think that raising the minimum wage is a matter of compassion and that opponents have little of that precious commodity. Rubbish. As the column notes, it is entirely possible to have compassion for those genuinely in poverty and working for low wages but that raising the minimum wage is a costly, damaging and inefficient way of doing so compared to, say, raising the Working Income Tax Benefit (WITB). You can read the unedited text below or find it on-line here.

 

My very first job (other than delivering newspapers) was as a busboy at the Spaghetti Factory in Vancouver’s Gastown. The hourly minimum wage (MW) then was $1.50.

Had someone asked me then if the government should force the Spaghetti Factory to pay me more, I would have been all for it. After all, who among us believes that we get paid enough for what we do?

But what I learned later in life is that the price of things (including the price of an hour of my labour, which is what wages are) is not set by the seller, which is why we almost universally feel underpaid and undervalued. Nor is it set by the buyer who almost always thinks he or she has to pay too much to get what they want.

Prices are set by millions of transactions in which buyers and sellers discover at what price supply and demand balance each other. If the price of cars or concerts or tomatoes is too high, there will be unsold stock on the shelves. If the price is too low, sellers will find they can’t keep up with demand and their shelves will be empty. If wages are too high, there will be unemployment; too low and there will be labour shortages. The right price is the one that results in neither surpluses nor shortages.

It is a system that works pretty well. Until, of course, governments come along and think that they can set a better price than knowledgeable buyers and sellers.

These are the folks that think that dairy and poultry are too cheap and created supply management that costs the average family about $400 annually in higher food prices. They overpay for “green electricity” and then have to dump the resulting power surplus in neighbouring American jurisdictions at fire sale prices. They create a lettermail monopoly and then try to charge such a ruinous price for stamps that volumes crash, communication moves to the Internet and the postal monopoly is on death watch. All because they think they know the “right” price for things.

This brings us back to the MW, which the Ontario government is proposing to increase by 30 percent– according to the premier, the largest increase in Ontario’s history, radically above the annual inflation adjustment  their own 2014 expert panel recommended. This will have the same predictable consequences as other government price-fixing schemes.

By definition the MW is a rule that no one shall be employed at less than this wage. But employers only hire workers who produce more than they cost. The MW is therefore a rule that no one shall be employed whose hourly productivity is less than the MW.

A high MW is a law that such people—who are among our most vulnerable– shall be perpetually unemployed. The jobs they used to do as retail clerks, counter servers, parking lot attendants and others are disappearing as technology can easily replace them at this level of MW.

But the MW is an anti-poverty strategy cry its defenders. No.  Ontario’s own study found that the vast bulk of MW earners are not primary family breadwinners but rather supplement other family income with their earnings. Fully three fifths of all Ontario MW earners are teenagers or in their early 20s.  Raising the MW pleases these people but does little to alleviate poverty while creating needless unemployment.

There is, however, a perfectly sensible programme called the Working Income Tax Benefit that tops up the wages of people whose low income genuinely justifies it, but leaves it to the market to find the wage level that matches available workers with demand for labour. This balances genuine compassion with economic common sense and should be expanded.

The government wants you to believe you can have compassion or economic common sense, but not both. They’re wrong.

Brian Lee Crowley (twitter.com/brianleecrowley) is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.

 

Minimum wages and carbon taxes

At first blush you might think that the minimum wage and carbon taxes have nothing to do with one another. You’d be quite wrong however. That’s because the logic of carbon taxes is premised on the impeccable economic notion that the price of things affects people’s behaviour. Indeed that is the *purpose* of prices: they give people valuable information about the social cost of the things they want to buy and how great the competition is from others who also want those same resources. When prices rise, people tend to economise (i.e. buy less). That’s why Kathleen Wynne is a fan of carbon pricing: it will cause people to buy and use less carbon by harnessing the power of prices.

But why is the premier so unwilling to acknowledge that the same impeccable economic logic applies to wages (which are the price of labour) too? She steadfastly refuses to admit that pushing the minimum wage up to a hefty $15/hr won’t affect employment. As my professor at the LSE used to say, “Bollocks.” I lay out the case in an op-ed published on iPolitics on 9th June 2017. You can read the unedited text below or find it on-line here.

 

At first blush you might think that carbon pricing and minimum wages have nothing to do with each other.

You’d be wrong.

Putting a price on carbon is a strategy inspired by the economic way of thinking. The argument is that carbon spewed into the atmosphere creates costs for everyone else, so the people burning the carbon should in effect have to pay to clean up the damage. Even more importantly the thinking is that the price of carbon, being too low, encourages people to use more carbon than they would do if they were paying its full cost (including cleaning up the environmental damage).

In fact one of the key arguments for carbon pricing is that raising the cost of carbon will make previously uncompetitive energy sources like solar and wind more price competitive as people respond to higher carbon prices by trying to substitute newly cheaper alternatives. That’s what such incentives are for: they reward entrepreneurs and innovators who come up with clever ways to do things in a more economical way than before.

Clearly Ontario Premier Kathleen Wynne believes in the power of carbon pricing. She is collaborating with other jurisdictions on a so-called “cap and trade” system that will use market mechanisms to generate a higher price for carbon to achieve exactly the effects I’ve listed above. She believes that higher carbon prices will reduce fossil fuel use and reward the use of alternatives.

Ergo she must believe in the power of prices to alter human behaviour, just as she must believe in one of the most fundamental propositions of economics, that if you raise the price of something, people will buy less of it. In fact I would make the case that the most powerful thing prices do is to send signals to buyers and sellers about the state of supply and demand.

If the price of something (fuel, clothes, data services) rises, the market is signalling that we should try and reduce our use of those commodities because there wasn’t enough to go around at the previous price. On the other hand, falling prices encourage us to buy more. That’s why prices play a powerful co-ordinating role in human activity because we respond intelligently to the information they are signalling to us.

Here is the problem. If she believes in all these things, as she says she does, she cannot simultaneously believe, as she says she does, that putting up the minimum wage by 30 percent won’t harm those people who work at the minimum wage.

Wages are just the name we give to the price of labour. And anyone who understands the power of prices to affect human behaviour knows that putting up the price of workers at the bottom end of the wage scale will have certain foreseeable consequences.

They are exactly the consequences predicted for putting up the price of carbon.

Seeing that it will be more expensive to hire low wage workers, employers will see a signal that they should reduce their reliance on such workers, especially ones whose productivity will not compensate employers for the wage they must now pay. That means the effects will fall most heavily on the weakest workers, such as those with some kind of productivity-lowering disability or young people with no job experience or new immigrants with weak language skills.

Then there’s that pesky substitution effect. Just as carbon pricing creates incentives for innovators to come up with substitutes for carbon, a higher minimum wage gives incentives to those same innovators to find substitutes for low-wage labour. Previous minimum wage increases have already hastened this process, which is why those low wage jobs that used to be so plentiful have been automated out of existence.

When was the last time you dealt with a parking lot attendant or a car washer, let alone an elevator operator? Soon fast food, which provided a lot of entry-level employment, will be equally heavily automated.

It is these predictable economic effects, falling hardest on those with the fewest employment prospects, that led not one but two Ontario government expert panels to recommend against increasing the minimum wage. The authors of these reports were presumably unimpressed by the arguments of the minimum wage hikers that somehow, magically, people won’t react to putting up the cost of labour in exactly the way the same governments expect them to react to putting up the price of carbon. The Canadian data even put a number on it. For every ten percent the minimum wage increases, teenage unemployment will rise three to six percent.

Premier Wynne can either believe in the power of raising carbon prices or she can think rising minimum wages won’t cut employment. She cannot, however, believe both at once.

 

 

 

Don’t look at unemployment, but rather employment to understand Donald Trump

In what turned out, alas, to be my last regular column for the Globe’s ROB, I point out that unemployment statistics hide more than they reveal. What tell us a lot more are the data for the shae of the population in paid work or looking for work, know as the labour force participation rate. Focusing on this number tells you lots about politics, the state of the economy, and even some of the roots of Donald Trump’s presidential victory. You can read the unedited text below or online here.

 

What do we know about the people who Donald Trump turned into such a potent political force in the last election?  US unemployment is well below five percent; surely there was no objective basis for the economic insecurities that drove the “basket of deplorables” to vote for the Republican candidate.

Consider, though, that one of the best places to seek insight is not the unemployment rate, but the “labour-force participation” or LFP. The LFP shows the share of working age people who have jobs or are actively seeking jobs in the US. In other words it is also a pretty good measure of how many people have left the workforce because they are discouraged and feel there are no opportunities for them. What do we know about them?

Trump’s election coincides with the US LFP rate hitting its lowest level in more than 30 years. The state-by-state figures  provide even more insight into Donald Trump’s political resonance.

Nine out of 10 states with the lowest LFP rates voted for him. Of the five states that went from Blue to Red in 2016, three – Florida, Michigan and Ohio – experienced a drop in their participation rate relative to 2012, meaning a smaller share of people worked and were looking for work compared to four years earlier. The other two states had no increase in the share of people working despite several years of modest economic growth.

By contrast, the years of Bill Clinton’s presidency coincided with a high LFP rate, a time when workers were prepared to give Bill “I feel your pain” Clinton the benefit of the doubt about how trade would improve Americans’ standard of living and those harmed would not be left behind. No more. That good will is gone.

New research from the centre-right American Enterprise Institute think tank shows that millions of American men are jobless and have given up looking. The share of men 20 and older without paid work is nearly 32 percent. That bears repeating: basically a third of all men in America who are over 20 have no paid employment. Two economists at the centre-left Brookings Institution have now added that the LFP rate of prime-age women has stagnated and also declined. People collecting disability benefit has increased markedly.

This doesn’t just affect their job prospects. Other research, including by a Nobel laureate, shows that the life expectancy and health of these displaced and discouraged workers has gone into a tailspin thanks largely to illnesses related to drug and alcohol abuse and other “lifestyle” factors. As one analyst said, these people are dying of despair, with over half a million needless deaths being attributed to bleak job prospects.

So looking solely at the unemployment rate causes us to lose sight entirely of a major part of the population. This segment is not just constituted of men–and now increasingly women–left behind by economic change. It also includes their parents, friends, and colleagues, who see these people they care about left on the shelf and are angered that opportunities for them seem so few and far between. This starts to be a significant part of the population—and the electorate.

It is no answer to say that these people have misdiagnosed their plight when they follow Trump in seeing trade and immigration as the cause of their problems. Yes, the problem is far more down to automation and other productivity-enhancements, meaning that manufacturing requires fewer and fewer poorly-educated, relatively low-skilled workers. Yes, Trump is wrong when he says that America doesn’t make things anymore and needs to return to this economic vocation. The truth is that America has never made more things than it does today. It just doesn’t require many workers to do so.

But the fact that the diagnosis is incorrect misses the key point about Trump’s voters – they vote for him chiefly because they feel he is the only political leader who doesn’t simply dismiss their fears and anxieties as misguided and ill-informed and doesn’t tell them condescendingly that their problems will disappear if only they get a university degree or if the government institutes a guaranteed annual income and basically writes them off as contributing members of society.

A pervasive feeling has taken hold in many parts of American society that ordinary people are being made to pay the price of the ideals of the elites. Free trade is one such ideal, one in which I happen to believe, but also one whose highly-concentrated destructive effects are undeniable and frequently easier to identify than its widely-dispersed benefits. That is why free trade can only be sustained when the winners use the extra wealth created to compensate the losers – something we, like the Americans, have done poorly and unimaginatively.

Brian Lee Crowley (twitter.com/brianleecrowley) is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.

 

 

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Brian Lee Crowley
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