Brian Lee Crowley

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.

 

 

Water, water all around — unless you’re landlocked like Alberta

Being landlocked is a bad place to be generally speaking on the international stage. Coastal states are guaranteed freedom of the seas, but landlocked states may not be able to reach the seas and their commercial bounty without having to bribe neighbouring coastal states. Ottawa was created in 1867 to prevent such extortionary behaviour by Canadian provinces. So what gives when BC is yet again threatening to close off Alberta’s access to tidewater? My views on the issue were laid out in my 12th May column for the Globe and Mail’s ROB. You can read the unedited text below or here online.

Geography distributes its bounty capriciously and the results can be extremely painful for those who end up penalised by their place on the map.  The outcome of the recent BC election may be about the deliver an object lesson in this principle to this country’s only two landlocked provinces: Alberta and Saskatchewan.

Internationally, being landlocked is a very uncomfortable place to be. Unless you are a Botswana exporting diamonds (small, light and high value products that can be shipped by, say, plane) you likely need to put your exports on a ship to get them to world markets, thereby realising their highest value.

Because ocean shipping is so vital to economic success, the world’s nations agree that ships engaged in bona fide commerce will not be obstructed. Nations can’t target the shipping of other countries and demand ransom to let it reach its destination. That’s piracy.

The main exception is when military or diplomatic conflict causes countries to throw up embargoes against offending countries’ goods, or to prevent them from receiving shipments of things like arms or nuclear materials. Such exceptions are exceedingly rare when seen against the volume of ocean-borne trade.

But landlocked states face a completely different obstacle: their goods must cross another country’s territory to get to port. International law is of little help, and the 45 such landlocked states must negotiate access with neighbours who may have conflicting economic interests, historical enmities or simply little interest in helping.

What the neighbours universally have, however, is the whip hand in the negotiations. They tend to use that to extort benefits far in excess of the actual economic value of the infrastructure and services needed to get their landlocked brethren’s goods to port. And having to get their products through a “transit country” makes companies reluctant to invest in the landlocked. It injects a level of political risk that is difficult and costly to manage.

Landlocked countries thus tend to be poorer than their economic fundamentals justify. All because of accidents of geography and the political leverage they create.

Before 1867, the various colonies that were to become Canada suffered from the ability of each to impose tariffs on the products of the other as they crossed their territory. A key benefit of Confederation was explicitly to tear down these barriers, turning Nova Scotian or Quebec products into Canadian products that could move freely across the national territory, including to ports for export to world markets.

But as we’re discovering, the thirst of transit provinces for bounty to allow neighbouring provinces to move their products has never gone away.

Our only Pacific province has lately been the most egregious offender, preying on the vulnerability of landlocked Alberta and Saskatchewan in their efforts to get their resources to world markets.

Take the Kinder-Morgan pipeline, intended to bring Alberta petroleum to Asia via the port of Vancouver. Before the just-concluded BC election, the Liberal premier, Christy Clarke, had already shaken down the pipeline company for $1-billion to “allow” the pipeline expansion to be built. The province has no jurisdiction, pipelines being a federal matter, but the province could threaten enough obstructive behaviour that the company could see that peace with the province might be worth a hefty price tag. This is nothing but Third World corruption carried out at the expense of Canadian resources, a corruption only made possible by the arbitrary fact of Alberta’s landlocked geography and Ottawa’s complaisance.

Now BC has doubled down on transit province bounty-seeking, this time targeting thermal coal. The province has threatened a thermal coal export tax, ostensibly to punish the Americans for their softwood lumber machinations, but the result will be to sideswipe Alberta, which might lose as much as $300-million in sales of such coal now going through the west coast. Saskatchewan hasn’t been targeted yet, but they understand all too well that they are no less landlocked, and therefore vulnerable, than Alberta.

Assuming recounts and other factors don’t change the BC election result, the situation will only worsen. With the Green Party, unalterably opposed to Kinder-Morgan, holding the balance of power count on all the parties to vie to outdo each other in environmental virtue and the chauvinistic promotion of BC interests, as if they can be separated from the national interest of all Canadians. Kinder-Morgan is sure to be a flashpoint. This behaviour is a dagger aimed at the beating heart of federalism.

As for the much vaunted new free trade agreement between the provinces, it is silent on this issue, proving yet again what a paper tiger it is. Meanwhile Ottawa, created in 1867 in part to be the guarantor of the integrity of Canadians’ freedom to trade, looks on benignly.

Who speaks for Canada? Answer came there none.

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.

 

 

 

Provincial “free trade” is anything but

In my 14th April column for the Globe’s ROB I lovingly debunk the notion put about by Ottawa and the provinces that the latter have somehow torn down the barriers to trade within Canada that they themselves have created. The unedited text I sent to the Globe read as follows:

2017 is a big year for Canada. The country was founded 150 years ago in an act of supreme statesmanship. It is the 100th anniversary of the battle of Vimy Ridge, where we came of age in a sustained act of courage, heroism and determination. Governments in Canada are now claiming that their recently announced Canada Free Trade Agreement (CFTA) deserves to keep such exalted company and will come into force on July 1st, Canada’s 150th birthday.

 

Does the CFTA deserve such hoopla? On the contrary. While it represents some modest incremental progress on creating a national market open to all Canadians on equal terms, this progress has much to be modest about. Moreover the sordid backroom horse-trading that gave rise to it, in which rent-seeking interests allied to various governments saw many of their unfair advantages maintained, was the very opposite of what the founders of Canada thought they were conferring on their posterity.

 

Yes, it’s very nice that every field of economic activity is now covered by CFTA, as opposed to the old dispensation where only those fields specifically included were covered. But the price the provinces exacted for this was well over 100 pages of exemptions and exceptions to the principle of free trade within Canada.

 

The really tough areas, such as liquor, financial services and regulatory harmonisation?  Well they have promised to study those some more. Don’t try and sell milk or eggs or any other “supply-managed” product across provincial boundaries. The barriers that forced Newfoundland and Labrador to sell their electricity to Quebec at a fraction of its value remain and nowhere I can find do the premiers promise to give up their latest fad: claiming the right to veto pipelines that cross their territory. Alberta is already considering creating a Crown corporation to handle government construction projects to escape the opening of government procurement they just agreed to.

 

Finally, on actually enforcing the rules of free trade our political leaders raised the monetary penalties for non-compliance. Again, very nice. But they’re hoping you won’t notice they have essentially maintained their Rube Goldberg mechanism in which the complaints of businesses and individuals about unfair actions or practices will be the subject of endless intergovernmental consultations and panels whose decisions will come long after the original business opportunity has died from neglect, starvation and exposure. God help you if you want to get the courts to intervene to make governments follow their own rules, because the governments have made it clear they don’t want those bolshie judges sticking their nose in the provinces’ business.

 

It didn’t have to be this way.

 

The very purpose of Confederation, we often forget, was in large part about freeing Canadians to carry on their profession or business across provincial boundaries. As George Brown famously described the vision its authors had of Confederation: “the proposal now before us is to throw down all barriers between the provinces — to make a citizen of one, citizen of the whole.” Such freedom was explicitly to be a matter of shared national citizenship.

 

Responsibility for achieving Brown’s vision was granted to the national government in a broader federalist arrangement. The essence of federalism is, after all, the creation of a unified national economic space while buttressing local identities, be they linguistic, cultural, ethnic or religious.

 

 

Matters of nation-building or common interest – such as the functioning of the national economy – were thus to be entrusted to the newly-created national government rather than provincial or parochial interests.  That’s why it got jurisdiction over peace, order and good government, trade and commerce and national infrastructure. That’s why there is a national open market clause (Section 121).

 

But that’s not what happened with the CFTA. There the federal government continued the appalling tradition of its predecessors in neutering federal power in order to appease the provinces and territories. The result is not only another bad deal for Canadian businesses, workers, and consumers, it’s a disavowal of Confederation itself.

 

The founders gave Ottawa responsibility for the national economy because they expected provincial governments to speak for provincial interests. That’s precisely what happened. Someone needed to speak for Canada.  Instead the silence was deafening.

 

The sheer number of CFTA exceptions is a by-product of how ill-suited the provinces and territories are to protect and strengthen the economic union. Provincial and territorial ministers naturally care more about the interests of Ontario wineries, Quebec funeral directors, Nova Scotia fur harvesters and PEI architects than about the national interest.

 

The CFTA is not evidence, as its authors claimed, that “Canada works.” On the contrary, it is eloquent evidence of Ottawa’s unwillingness to face down the provinces when the national interest requires it. Ottawa exists for a reason; that reason is not, as one former prime minister tartly observed, to be headwaiter to the provinces.

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.

 

Celebrating Sir Wilfrid Laurier, the founder of modern Canada, on his 175th birthday

Last November 16th MLI issued my talk in celebration of the remarkable life and achievements of Sir Wilfrid Laurier, the founder of modern Canada and one of my personal heroes.

Laurier deserves a venerated place among the historical figures responsible for making Canada the great country we live in today.

As I argue in the piece, “Sir Wilfrid dwells among us through the wisdom and energy with which he shaped politics, institutions, and especially the ideas underlying modern Canada”.

Laurier’s “courage and vision” are largely responsible for some of Canada’s major achievements during a period where he won four federal elections: Opening Western Canada to mass settlement, welcoming unprecedented numbers of immigrants and unleashing a manufacturing and resource boom across the country.

But outside of those accomplishments, Laurier is worthy of our praise for building a foundation of progress and freedom on which Canada today rests.

Premiers once again fail internal trade test. When will Ottawa step up?

As I argue in my March 26th column for the Ottawa Citizen and other Postmedia papers, the Liberals have chosen internal trade liberalisation as the one issue where they see eye to eye with the Tories in looking to the provinces to tear down those barriers. Yet the premiers’ own self-imposed deadline of mid-March for an extensive new deal has come and gone without a peep from any of them. The truth is that the provinces are too busy protecting local interest groups to protect Canadians’ rights in this area. Ottawa alone has the authority and legitimacy to do it, but not yet the will despite the fact that it is Canadians’ rights at stake. Bipartisanship in Ottawa deserves a more worthy standard-bearer than this.

The Iran nuclear agreement: how not to do a deal

John Kerry and Barack Obama are travelling the US and the world vaunting their nuclear deal with Iran. Yet while any sane person hopes that this agreement will do all its negotiators claim, I think there is every reason to doubt that it will. In my July 17th column for the Ottawa Citizen and other Postmedia papers I lay out the case for thinking the US played a strong hand poorly and Iran came out of these negotiations the winner.

The Great Game and the Greek crisis

In the so-called Great Game, in which Western powers seek through espionage as well as soft and hard power to counter the influence of disruptors and adversaries like Russia, Greece is now an important pawn. There is little question that Greece has repeatedly abused its obligations to repay its vast debts. But, as I ask in my July 10th column for the Globe’s ROB, in a world where Russia seeks actively and unashamedly to extend its power and influence, can Western powers really afford to close the door on its troubled ally?

Saving is spending: The One Percent, investment and innovation

MLI hosted a debate earlier this week about whether Canadians should worry about income inequality. One of the common economic fallacies that found its way into the debate was the idea that people low down the income scale spend all their income and therefore stimulate the economy, whereas the rich can only consume a part of their income and therefore the potential economic activity that cvould be generated by the unspent income is somehow vapourised.

Au contraire!

The excess not consumed must be invested. That’s why saving is a particularly useful and powerful sort of spending. In the hands of the One Percent such capital accumulation has driven many innovations in technology, space travel, corporate management and much much more. That’s pretty much the summary of the Globe column the debate inspired me to write for the ROB’s Economy Lab.

Took the Occupy Movement et al about 5 minutes after the column appeared to launch a Twitter campaign accusing me of everything but eating babies (but then the day is young!). Just spell my name right, folks….

All Japan all the time!

Thanks to the generosity of the Japanese government I have just returned from two weeks in the land of the rising sun. A fascinating visit that gave me a week’s briefings with government officials, think tanks, academics and others, plus a few moving days in Hiroshima and about 5 days in Kyoto, all during the time that cherry blssom season was slowly gathering way.

I put some of my impressions in two columns published last week.

In the first, written for the Economy Lab feature in the Globe’s ROB, I wrote about my assessment of the chances of success of Abenomics. The summary: losing 250,000 people every year is a huge sheet anchor for the Japanese economy to drag along as the government tries to stimulate it into resurgence. And, well, Keynesianism on steroids is, after all, still just keynesianism, and its track record is dubious at the best of times.

In the second, written for the Ottawa Citizen and other Postmedia urban dailies, I struck a more positive note, delving into the arguments behind my conviction that Japan remains a better partner for Canada in Asia than China.

 

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Brian Lee Crowley
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