Friday, December 05, 2008

A Keynesian Moment, Without a Keynesian Government

The problem with the Conservatives' economic update of a couple of weeks ago is that Finance Minister Jim Flaherty and Prime Minister Stephen Harper didn't seem to be either inclusive of opposition opinion or in tune with international trends. Instead, they talked about restraint--starting with restricting public sector workers' right to strike, eliminating the right to appeal pay equity rulings and and eliminating taxpayer funding for political parties. And the need to balance budgets, possibly by selling off public assets, no doubt at a discount. Were those the right priorities in the face of our economic problems?

The conventional wisdom since the halcyon days of Reagan and Thatcher has been to rely on monetary policy to deal with cyclincal fluctuations: fiscal stimuli were often deemed to be either ill-timed in terms of their effects or difficult to turn off for political reasons, and hence inflationary. The Bank of Canada recently lowered its interest rates another 3/4 of a percent, partly in response to the federal government's lack of fiscal policy: no doubt the prime minister, a monetarist, feels good about himself for that. But what really is the scope for relying on looser monetary policy under these conditions? Even The Economist (on the whole a very neoliberal newspaper) has admitted that it is quite limited, and has called on Western leaders to agree on a fiscal jolt that follows President Obama's lead.

We are in what I call a "Keynesian moment"--a financial crisis (i.e. shortage of capital and liquidity for financing in the private sector, a credit crunch), combined with what is expected to be high unemployment, the worst recession since the 1930s, plus an aged and crumbling public infrastructure that is best attended to while resources are unemployed in the private sector.

All these things point to the need to spend more, and to not be afraid to run 2 or 3 deficits in a row in the neighbourhood of $20-30 billion each. That is roughly the equivalent of what Barack Obama and most of the G-20 countries are committed to doing, but all his adult life Harper has been ideologically convinced that Keynesianism was dead and his reluctance to get with the program is palpable. His talk about "doubling infrastructure spending", for example, is just pure spin. That is only impressive if current levels of spending on infrastructure are close to half of what they need to be---and they aren't. They are there for P.R. during the holidays and leading up to the January 27 budget and confidence vote.

A temporary extension of EI benefits would put money right back into the economy (given the high propensity to consume of EI recipients). I would consider it an essential part of an acceptable budget.

Thursday, December 04, 2008

The Governor-General's Decision to grant the p.m.'s request for prorogation

Governor-General Michaelle Jean was put in a difficult position, and probably made the best decision she could under the circumstances. She felt uncomfortable saying no the the prime minister, because there is no clear precedent for doing so on a request for prorogation. Since the government had not actually been defeated yet, she had one formal advisor to listen to: the prime minister and his government.

But here is the problem. She will have another difficult decision to make at the end of January if the budget is defeated and the prime minister requests dissolution because he wishes to go to the people for another election rather than hand power to the "separatist coalition". If on that occasion she says "yes", then Harper will have succeeded in doing in two steps what he was unable to accomplish in one step (assuming that he would not have been granted dissolution today). Can that be right? That could be a dangerous precedent, one that seriously erodes the constitutional check on the prime minister that the Royal refusal to request for dissolution has been through out the history of British responsible government. Clearly, the Governor-General will need to take steps to limit the scope of this precedent for future prime ministers in minority governments: she can do so by treating the constitutional clock as having stopped on December 4, and by refusing dissolution when the prime minister asks for it 7-8 weeks from now.

Re: Carbon Taxes, including ones on gasoline: I TOLD YOU SO

{Note: you may have heard on the news today that car sales fell 9% in October, due to the looming recession. You may have also heard that SUV and truck sales were UP due to falling gas prices!--MC}

Now that gas is back down to a dollar per litre, and no doubt that worrisome backlog of RVs, SUVs and light trucks are again moving off of car lots, and people are breathing a sigh of relief at being able to heat their homes for the winter without undertaking extensive renovations, I WOULD LIKE TO TAKE THIS OPPORTUNITY TO REMIND PEOPLE OF THE KIND OF CARBON TAX THAT I WOULD LIKE TO SEE.

First, UNLIKE THE NDP, let's acknowledge that small emitters are responsible directly for one half of all greenhouse gas emissions, and indirectly responsible (as the ultimate consumers of aluminum, concrete, plastic, forest and aluminum products) for a lot more. And don't give me that "North America is not Europe" crap. Yes, we are more sparsely populated and probably need to burn a little more fossil fuel. But that doesn't mean that we should be protected from spending just as much of our incomes on energy as Europeans do.

Second, UNLIKE GORDON CAMPBELL, we should not have a carbon tax that simply makes fuel a little more expensive. Instead, it should be used to set a FLOOR PRICE that is high enough to ensure continued modification of consumer behaviour. This policy would actually raise additional revenue that could be spent on fighting climate change. But above that floor price, additional carbon taxes would NOT make gas or home heating fuel more expensive at all; instead, they would merely replace EXISTING EXCISE TAXES. (That would mean that consumers would only pay more than they currently do if they chose dirtier fuels, less if they chose cleaner ones).

Such a carbon tax could in effect be 'revenue positive' to some extent when prices are low (because the floor price would be raising revenues ) and be 'revenue negative' when prices are high (because many consumers would be able to use it to reduce the excise taxes they pay on gasoline, home heating, diesel, etc.). The effect would be counter-cyclical, and stabilizing, in terms of moderating swings in prices and in terms of the income effects on consumers of energy price changes.

I am not a professional economist, and I know that we need to be mindful of prices in neighbouring jurisdictions, so I don't know exactly where that floor price should be. But under current conditions, I imagine that for gasoline I would like it to be in the $1.20-$1.30 range.

My understanding is that about half of existing taxes on gasoline and home heating fuels are spoken for (i.e. are currently dedicated to raod and highway infrastructure and maintenance); the rest goes into general revenue, and it is that latter portion that I am proposing be converted, at least in part, to carbon taxes.

It is unfortunate that we tend to punish well-intentioned and useful experiments in public policy, when we should simply be learning from them. Gordon Campbell and Stephane Dion may have given carbon taxes a bad name, but I am confident that in the long run, we might just get it right.

Wednesday, December 03, 2008

Harper Stumbles

Canadians for Democracy?

Look at this website and ask yourself (1) whether it accurately describes the nature of the coalition being proposed by Stephane Dion and Jack Layton; or (2) whether the coalition constitutes "the overthrow of a democratically-elected government?" This is the kind of misinformation that is rapidly being disseminated all over the country.

Re: The Conventions of Parliamentary Government....

As someone who tries to educate people about the logic of parliamentary government as part of his job, it is frustrating to have a prime minister and a governing party aggressively running ads that play upon people's lack of familiarity with parliamentary coalitions and vague familiarity with American style government in order to paint a deliberately misleading picture of the Liberal-NDP 's supposedly "undemocratic takeover". And probably exacerbating regional tensions in the process.

Prime Minister Harper's televised address of December 3rd made made 4 or 5 references to a "power-sharing coalition with a separatist party", when in fact the Bloc is not part of the coalition government. All the Bloc did was agree not to vote against the coalition in a non-confidence motion for 18 months. This is quite similar to what Mr. Harper was contemplating when he sent a letter to the Governor General trying to replace the Martin government when the Tories were in Opposition in 2004. Mr. Harper has relied on the Bloc for confidence motions (at last count) 14 times, and if he remains in power he will likely do so again.

Mr. Harper should just admit that he blundered, and in addition to withdrawing his ill-timed cancellation of political party subsidies (a strange priority for a budget update by a new government ostensibly trying to set the tone for a conciliatory parliament), he should commit to a program of aggressive fiscal stimulus in line with what Barack Obama and most of the G-20 are already committed to.

Speaking of the Economy.....

Facing the Worst Recession since the 1930s? A country with an ageing, crumbling infrastructure? A financial crisis and shortage of liquidity in the private sector?

It should be obvious to anyone what, in general terms, needs to be done. It is what the leaders of practically every G20 country have already agreed to do--commit at least 2% of GDP to good, old-fashioned Keynesian economic stimulus, even if it means running a temporary deficit.

Obvious to anyone, except perhaps a right-wing ideologue with a Master's Degree in Economics. Proof once again, that a little bit of knowledge can be a dangerous thing......