Thursday, May 3, 2018

FAKE WATCHDOGS FOR FAKE NEWS


The recent surge in fake news has created the demand for government regulations, mostly out of concern that it influenced the last U.S. presidential elections. Regulations would be warranted only if fake news actually affected the outcome and if it could also be inexpensively identified and eliminated.
Fake news very likely had no effect on the election outcome under the reasonable assumptions that both major parties used it to the same degree and their targeted audiences were equally likely to evaluate it properly. The amount and success of fake news originating in Russia is not known but its existence should prompt policies aimed at it alone, not all U.S. communications. That is because the cost of discovering and eliminating fake news is very high, requiring large and costly banks of computers and sophisticated algorithms. The data in the computers conjure concerns over privacy. Importantly, the interpretation of the algorithms risks that the individuals doing the work will let personal ideological and political preferences influence it.
I have had some personal experiences that illustrate this risk. In 1975, I presented a lecture on the future of the international monetary system to the graduating class of the Diplomatic Academy of Chile in Santiago. To my surprise, I found no evidence of the public protests against the Pinochet regime that I had expected after seeing them regularly on CBC.
To understand the difference between the TV news coverage and reality, I asked Canada’s ambassador to Chile, who said other Canadian visitors made the same observation. He then told me that a few days earlier his people had learned that a CBC TV crew had landed in Santiago without following the normal protocol of informing him of its arrival. He discovered that the TV crew had a pre-arranged meeting with a Chilean group in a poor part of the city. The Chileans arrived armed with anti-Pinochet placards. They waved these placards and chanted slogans while the CBC crew filmed them from an angle that suggested a larger crowd. He said the crew paid the villagers who then stored the placards for later use and dispersed. The day after the performance, Canadians saw on TV a supposedly big demonstration in Santiago protesting the country’s president.
In the 1980s, I saw fake news about South Africa, where I taught economics for a semester at the University of Cape Town. There I befriended a Dutch doctor and his wife. They were interns at the famous Groote Schuur hospital, and their parents in the Netherlands were worried that they might get caught in the deadly riots that Dutch newspapers regularly described. One of their letters included a newspaper picture of a scene allegedly showing the aftermath of such a riot. The scene was of the hospital’s courtyard. The same, landscaped yard the couple saw each day and where staff often ate their lunches and took naps on the grass. It was no riot scene. Something had been faked.
These two episodes illustrate the extent to which supposedly objective media can and do produce fake news slanted by the political views of their managers and employees. We should expect the same from any proposed agencies charged with the objective task of suppressing fake news. For these reasons, it seems better to prevent the likely small cost of fake news by relying on the common sense of the common people rather than rely on the decisions of a few employees of government agencies.
Herbert Grubel is emeritus professor of economics, Simon Fraser University.


The article was published in the Financial Post on May 2, 2018

Wednesday, March 28, 2018

THE FUTILITY AND RISK OF BALANCING US TRADE


President Donald Trump’s policies to balance trade and increase employment will fail because of an iron law of international economics: If a country spends more on goods and services than it produces, the difference has to be imported. This equation summarizes the law:

Imports – Exports ≡ (Investment - Savings) + (Government Spending - Taxes).

Steve Hanke at Johns Hopkins University showed that US data are consistent with this identity. During the years 1975-2016 investment minus savings were $9.6 trillion, government spending minus taxes was -20.0 trillion, which makes the right side of the equation come to -$10.4 trillion. Over the same period Imports minus Exports – the left side of the equation – came to $11.2 trillion. The $0.8 trillion difference between the two sides of the equation represents statistical measurement errors.

The reason why Trump’s import-reducing and export-increasing policies will not create balanced trade is that the existing overspending in the United States causes market forces to appreciate the dollar exchange rate, which leads to higher imports and lower exports until the trade deficit again matches the domestic overspending and the initial effect of these policies has disappeared.

Unfortunately, Trump’s protectionist policies combined with domestic overspending has a possible serious, rarely discussed negative effect on US national income: It endangers the country’s lucrative export of US dollar notes and Treasury securities because it threatens the confidence the users of dollar notes and treasury securities have in the future stability and value of the exchange rate, credit-worthiness of the federal government and the growth and relative size of the US economy in the world. 

As will be documented below, the size of the Euro zone and the stability of its economy in recent years when the US economy was unstable and growing slowly already has increased the world demand for Euro notes and short-term government securities. If and when the growth and stability of the Chinese economy approaches that of the United States, the world might replace US dollar notes and securities with those of China.

The amount of currency notes exported cannot be observed directly. However, in a study published by the Federal Reserve Board of Governors, $550 billion worth of US dollar notes (mostly in $100 denominations) were held abroad at the end of 2011. These dollar notes are used by foreigner as a store of value and in commercial transactions, many of which are likely to involve underground and illegal activities. Considering past growth rates, in 2017 the export of such notes probably was about $200 billion.
Since these notes cost virtually nothing to produce, their export adds to the profit of the Federal Reserve, which is transferred annually to the Treasury and thereby decreases the government deficit as if tax revenue had increased. The sum of $200 billion in 2017 was large enough to cover the cost of four of Trump’s coveted Mexican border walls.

The story does not end there. According to the IMF, governments around the world in 2017 held official reserves worth $9.6 trillion, of which $6.1 trillion were in the form of short-term securities issued by the US Treasury. These securities are very liquid and are held by governments for propping up the value of their national currencies during crises.

US income is created through the foreign holdings of these securities by the fact that they are short-term and require the Treasury to pay low interest rates while the money they raise can be used to buy longer-term bonds or make direct investment at home or abroad. Assuming that the short rate is one percent and the long rate is five percent, the $6.1 trillion of US short-term securities held by foreign governments currently brings the Treasury an implicit annual return of $244 billion and reduces the deficit correspondingly.

In the 1960s Valéry Giscard d'Estaing, who was then the French Minister of Finance suggested that the world’s use of dollar denominated securities and currency notes conferred on the United States an “exorbitant privilege”. At the time, French politicians were particularly upset about direct US investment in the country’s profitable industries, which they considered being financed by the same money they had provided America when they acquired US short-term securities for their official reserves.

The profitable export of US currency notes and securities is the result of the world’s need for a universally accepted standard of value, the efficiency-enhancing use of dollars in trade and the properties of US short-term securities that are highly liquid and have a low risk of default. These properties of the dollar developed spontaneously after the end of the Second World War together with the status of the United States as the world’s largest and open economy with a solid record of political and economic stability. Protectionism and chronic domestic overspending bring the risk that these roles of the dollar will be diminished and ultimately lead to the use of other countries’ short-term securities in their reserve portfolios.

This development has already begun. Between the third quarter of 2016 and 2017, dollar denominated reserves held by foreign governments rose 13.3 percent from $5.4 trillion to $6.1 trillion. Over the same period Euro-denominated assets increased 18 percent from $1.6 trillion to $1.9 trillion while reserves denominated in Yen, Pound Sterling, Australian and Canadian dollars together increased 20 percent from $1.0 trillion $1.2 trillion.

Advice to Trump coming out of the preceding analysis: Do not pursue protectionist policies. They will not succeed and they threaten your government’s business of supplying the world with dollar notes and short-term securities. Remember that this business in 2017 brought a profit of $444 billion, which is much more than enough to finance your Mexican wall and increased defence spending without having to raise taxes.

Monday, March 26, 2018

In praise of real estate speculators


Throughout history, politicians and the public have hated speculators on the grounds that they create scarcities, raise prices and cause hardships for consumers. This view is behind the recent decision by the B.C. government to impose a tax on unoccupied housing presumed to be owned by speculators and which is expected to lower the cost of housing.
The implementation of this policy has run into a number of problems that can be solved by some tweaking of the law, but it will do nothing to reduce prices in the long-run. Speculators raise house prices when they buy and keep them empty or rent them out. The speculators realize profits only when they sell them later, at which time they lower prices. In effect, speculators do not add to the demand for and cost of housing, but only smooth it through time. The real cause of the high and rising cost of housing is a continuous excess of demand over supply.
The excess demand in Metro Vancouver is determined by the high level of immigration, which in recent years has brought 250 families to the region every week. Under the policies announced by the current government, by 2020 this number will be 375 families a week. Adding to this demand are the housing requirements of foreign students, who in 2017 numbered 130,000 and are expected to grow substantially in the future.

In principle, in a market economy the supply of housing should keep up with the growth in demand. However, as the record shows, this has not happened. The reason given by the construction industry is that it faces delays and cost-increasing obstacles due to the scarcity of building sites, zoning restrictions, regulation affecting building codes, and a shortage of skilled workers. Another reason explaining the scarcity and high cost of rents is the existence of rent controls, which lower returns from investment in rental units over their lifetime to levels at which investors are staying away in troves.
Neither demand nor supply are likely to change soon. Politicians will not reduce demand coming from immigration. Their electoral success depends too much on the votes of immigrants and on the financial support from the real estate industry, employers of cheap immigrant labour, and producers and retailers whose markets are increased by immigrants. Any politician proposing the end of rent controls faces sure electoral defeat at the hands of renters subsidized by the existing law.
Neither will there be a decrease in the number of foreign students. Public universities increase their financial resources through the tuition paid by foreign students. Many private educational institutions depend entirely on income from foreign students.
Given the prospect of future growth in the demand for and continued limits on the increase in the supply, the public will have to live with these facts unless they show their displeasure at the ballot box with the policies of Canada’s virtue-signalling elites who are lobbying for ever-larger numbers of immigrants in the future but show little concern for the blight of ordinary Canadians facing a housing affordability crisis. Asking these elites for taxes on speculators, empty housing and tougher rent controls will not do the job.
Published in the Vancouver Sun on March 25, 2018


Wednesday, December 13, 2017

Canadian Immigration Policies: Blueprint for Europe?


Abstract: In Europe discussions about immigration policies have been wide-spread and heated ever since a flood of illegal immigrants have reached Europe’s shores and caused problems with labour markets, housing, fiscal, social and cultural institutions. Some commentators see the solution to some of these problems in the adoption of the Canadian model for the selection of immigrants. This paper contributes to this discussion by a description of current Canadian immigration policies and a discussion of the negative economic and social effects it has produced. It concludes with a presentation of reforms of the existing system that have been proposed and speculates why politicians have been unwilling to adopt any of these reforms.

Note: I thank Martin Collacott and Patrick Grady for their helpful comments on an earlier draft of this paper, a summary of which has been published in German in the Swiss magazine Weltwoche on December 30, 2017. The article has been accepted for publication in the ifo DICE Report - Journal for Institutional Comparisons,  Forum on the special topic “Labour Migration Policies” scheduled for publication in March 2018 by the ifo Institut - Leibniz-Institut fuer Wirtschaftsforschung an der Universitaet Muenchen. DICE Reports can be found at www.cesifo-group.de/DICEreport.

The paper can be found at the Social Science Research Network website   http://ssrn.com/abstract=3084989 

JEL Classification: F21, F22, J6, O4, O5



The European Community and its member countries are searching for solutions to the problems caused by the ongoing flood of migrants from abroad. One solution discussed widely involves the adoption of the system used by Canada in the determination of the number and characteristics of migrants admitted (Slater 2015 and Meardi et.al. 2016). In considering the adoption of the Canadian model, policy makers need to know that while it promises many benefits in theory, in practice it is seriously flawed and might not serve Europe well.

The model has the following basic features. The government annually submits an immigration target for the year to Parliament, which is routinely approved without debate. In 2017 the target was 300,000, up from 280,000 the year before and 240,000 on average during the years 2006-2016. It is slated to rise to a 350,000 by the year 2020. Since the mid-1980s, the target has been set to have immigrants represent about .75 percent of the existing population.

The immigrants are selected by Canadian officials from a large pool of applicants and are granted visas after assignment to four different categories (Government of Canada (1)), the largest of which represents “Economic immigrants”, who are mainly skilled workers but also includes their accompanying spouses, partners and children, investors, the self-employed, caregivers and entrepreneurs. The economic immigrants make up 58 percent of the total.

The second class are the “Family class immigrants”, one quarter of which are parents and grand-parents and three quarters are the spouses, partners and children of immigrants who had not accompanied their spouses when first they settled in Canada. They made up 28 percent of the total while “Refugees” (also known as Refugee Claimants) 13 percent and “Others” one percent of the total.

The economic migrants are selected through the use of a points system (Immigration Canada (2)) that assigns a maximum of 25 for the level of education, 24 for language proficiency in English or French, 21 for work experience and 10 each for age, arranged employment and adaptability. For admission, the economic migrants need to have at least 67 out of 100 possible points and, like all immigrants, must meet health and security requirements. A small number of economic immigrants are admitted without use of the points system by provincial governments to meet special local needs.

Recently, this system has been modified (Semotiuk 2016) through the creation of a class of applicants with “Canadian work experience”, which in turn was modified by the introduction of the class qualifying for “Express Entry”. The main goal of these modifications has been to enable a large number of foreign students who have completed a university education in Canada to receive immigrant visas more easily and quickly since through their educational achievements they have demonstrated their knowledge of English or French and likelihood of economic success.

Applicants in the investor class (Government of Canada (3)) do not have to pass the points test and until 2014 were admitted if they could show that they have business experience, a net worth of at least CAD $1.6 million and will invest at least CAD $800,000 in Canada. A new program (Canada Visa (No date)) requires that they have a net worth of at least CAD $10 million and the funds to invest CAD $2 million for 15 years in the Immigrant Investor Venture Capital Fund.

Parents and grand-parents are granted immigrant visas if their offspring already in Canada commit themselves to cover their cost of living and medical care and the annual quota allocated by Parliament is not exhausted.

Canada’s handling of its international obligation for the admittance of refugees (Historica Canada No date) should be of particular interest to Europeans. Canada supports refugees escaping the turmoil of civil wars and unrest indirectly through financial grants to international agencies that operate refugee camps abroad. The idea is that these types of refugees will and should return to their home countries after the end of hostilities, where they have strong ties. It is believed that if they settle in Canada, they are likely to remain and are lost to their native countries’ reconstruction efforts.

Refugees who flee persecution, torture and the threat of death and reside in the international camps are interviewed by Canadian officials who travel to these camps. Under the 2017 plan, immigration visas are granted to 40,000 of the neediest of them. Refugees asking for acceptance at Canada’s airports have been very small in number relative to those resettled from camps abroad because of effective agreements with airlines to prevent boarding of potential claimants without a visa.

Canada has no problems protecting its borders from illegal immigration of the sort that plagues Europe. Canada’s long coast lines are difficult to reach by small boats from overseas and past experience shows that large ships will be turned away so that none have attempted access for many years. Agreements with international airlines have been used successfully to limit severely the arrival of asylum seekers at Canada’s airports.

The land border is in principle protected from the inflow of asylum seekers by the Safe Third Country Agreement with United States (Government of Canada (4)) under which refugee claimants can be turned back on the grounds that they are leaving a safe country and are shopping for access to more generous social assistance programs.

Canada’s government is proud that its policy of selecting immigrants without regard to their ethnic, racial or religious backgrounds. 

What Lessons for Europe?

So what aspects of the Canadian model could be used in the design of a rational and publicly acceptable policy for the European Union and its members?

The Canadian model has no information that could help in the design of dealing with Europe’s pressing problem of how to more effectively protect its borders from asylum seekers, how to deal with the perceived threat to its religious and cultural institutions and practices and to protect the public from terrorism.

The main appeal of the Canadian model to European policy makers stems from its presumed success in selecting immigrants who benefit their countries by raising the income of their populations, tax revenues and contributions to social insurance programs.

The first effect is the subject of much disagreement among economists. Conventional price theory suggests that the pay of immigrants equals their marginal contribution to output and as they use their income to buy an equal amount of goods and services, the incomes of native workers are unchanged. Some economists argue that the native workers benefit because immigrants offer them the opportunity to trade and by complementing them at work raise their productivity. The value of these effects is very difficult to estimate but at best is very small relative to the fiscal burden caused by the Canadian immigrants in recent decades.

The main cause of this fiscal burden is that Canadian immigrants who arrived after 1986 in the year 2005 had average incomes equal to only 70 percent and pay income taxes equal to only 54 percent of the average paid by other Canadians, while at the same time they absorbed the same amount of government services as did other Canadians in the form of free health, educational and social programs and through spending on the protection of persons, property, the environment and the many other spending programs characteristic of modern industrial countries. This information about the performance of recent immigrants is provided by Statistics Canada and is used by Grady and Grubel (2009) to consider their implication for government policy.

The difference between the taxes paid and benefits received by the average recent immigrant has been estimated in the Grady-Grubel study to come to about $6,000 per year. Considering the total number of immigrants in 2013, this difference implies that they imposed a fiscal burden of about $30 billion on other Canadians that year. This burden increases with the arrival of more and increasing numbers of immigrants.

The $30 billion equals about five times what Canadian governments spend on foreign aid and foreign affairs and equivalent to 70 percent of what they spend on the military and the protection of persons and property.

The idea that immigrants can prevent the pending insolvency of unfunded public pension program is illusory. Immigrants reduce the unfunded liabilities while they are young but increase them once they are retired. Computer simulations show that immigrants can reduce unfunded liabilities only if their numbers increase continuously to offset this aging effect. For immigrants to offer a solution to the problem of the unfunded liabilities, the annual inflows would soon reach unsustainable levels (Bannarjee and Robson 2009).

What Explains Failures of the Model?

One explanation of the poor economic performance of the system is that in 2015 only about 30 percent of all immigrants, the so-called principal applicants have passed the points test. The other 70 percent consist of their spouses and children, parents and grand-parents, and refugees whose economic prospects have not been assessed.
 
Investors, who might be expected to have high incomes and pay high taxes, fail on both grounds because many of them invest their money in housing rather productivity-enhancing business capital, continue to live in their native countries and pay income taxes only there. Their spouses and children live in the houses they have purchased and live on non-taxable transfers from the investor while they use Canada’s free health, education and other social programs.

Because of these problems, the system described above was changed in 2014 to where investors now face much stiffer requirements to qualify for a visa, which has led to a dramatic reduction in number of investor immigrants and the damaging practices described.
   
Another explanation of the poor economic performance of recent immigrants is that the quality of their education and skills required by the Canadian government (Government of Canada (5)) do not actually meet Canadian standards because the foreign institutions of higher learning used to document the immigrants’ educational attainment levels themselves have lower standards.

For example, Canadian employers with immigrants who have an engineering degree from an Asian university often use them only to prepare engineering drawings rather design buildings and bridges. Another example involves immigrants with certificates qualifying them to work as medical doctors. Most of them are unfamiliar with Canadian institutions, practices and pharmaceutical products and take a long time to pass Canadian examinations qualifying them to practice medicine in the country.

Further adding to the poor economic performance of immigrants admitted on the basis of their high selection points is that some may have used forged certificates of educational and language attainments (Green 2009). No reliable estimates exist of the magnitude of this problem but may be inferred from the fact that many small shops located around the Canadian High Commission in Delhi are doing a thriving business selling such certificates and the internet offers many business addresses for the purchase of fake certificates (Diploma Company (no date)).

Labour market discrimination has been cited as an explanation of the low incomes of recent immigrants. Such discrimination may exist, but its importance is diminished by the fact that for some time many businesses in Canada have been run by immigrants who according to the work of Nobel laureate Gary Becker (summarized by Murphy (2015)) may be expected to hire underpaid immigrant workers to maximize their profits but who in the process raise the wages of the workers suffering from discrimination by other Canadian employers.

Other Problems with the Canadian Model

Canada’s immigration model has had some other effects that do not increase the well-being of the general population. Thus, as the data on incomes show, immigrants have increased the supply of low-skilled and low-paid workers, many of which filled jobs that Canadians are unwilling to accept at existing wage levels. This fact is praised widely, but it also has an important down-side.

These immigrants depressed the wages of all low-skilled workers and increased the incomes of employers and professionals. Abdurrahman Aydemir and George Borjas (Aydemir and Borjas 2007) concluded that immigration decreased the earnings of Canadian high school dropouts relative to the earnings of workers with at least a college diploma by at least 12%. As a result, the inequality of Canada’s income distribution has increased significantly.

The hiring of low-skilled and low-wage immigrants has had an additional negative effect. It reduced the incentives of employers to invest in labour-saving capital and technology. Such investment would have raised the productivity and wages of Canadian workers and made them more willing to accept the jobs that previously they had shunned because they paid them too little. These benefits could have been attained while the profits of employers remained unchanged.

Absorptive Capacity and Parliament

Parliament’s setting of the annual number of immigrants has not worked well for Canadians as there are important indications that it exceeds the country’s economic and social absorptive capacity.
Most of the immigrants have settled in Montreal (14 percent), Toronto (40 percent) and Vancouver (15 percent) to join communities of people from their home countries (Metro Vancouver (no date)). Virtually none have settled in Canada’s vast, thinly populated areas because they are not well suited for human habitation and have been losing jobs and residents since farming has become increasingly mechanized. 

Every week about 250 immigrant families have been adding to the demand for housing in the Greater Vancouver area and 400 in Toronto (Government of Canada (2)), (Statistics Canada 2017). This added demand has contributed significantly to the increase in the cost of housing in these two cities, which is viewed by many to have reached a crisis level. Speculators, who are often blamed for these price increases merely are anticipating their continuation and move forward in time the expected future excess demand for housing and price increases caused to a considerable degree by the large number of immigrants.

Importantly, these large additions to the population in these large cities have also taxed the capacity of the cities’ road, water, sanitary, transit, recreational, medical and educational facilities to where traffic congestion, wait-times for medical treatment and access to public recreational opportunities facilities impose great economic costs and inconveniences on the population.

Advocates for the present level of immigration argue that all of the costs just described would disappear if the supply of transportation infrastructure, housing, hospitals, schools etc. kept up with demand. These advocates blame governments’ inadequate funding and excessive regulations for the existing problems (Lammam 2017). This proposition is valid but misses the point that the political system has now proven for many years that it is incapable of providing the funding and of deregulating the construction industries to prevent the housing crisis and crowding of public facilities. In addition, the fiscal burden caused by recent immigrants contributes to the scarcity of funds for government spending on housing and infrastructure.

Yet, the solution to, or at least alleviation of these costly burdens on Canadians could be achieved by a number of policy changes, which were suggested to me in an email by James Bissett, a former Ambassador and former head of Canada’s immigration service run by the federal government:

“Replace the judgement of civil servants in the selection of immigrants with that of Canadian employers who have powerful incentives to hire only applicants whose wages match their productivity, but who, in order to ensure that the taxes they pay at least match their use of public services, are required to hire only immigrants whose wages are at or above the average in the region in which the employers are located. Investors should be required to put their funds into productive business investment and pay taxes on their incomes abroad. In the future, parents and grand-parents should not be granted immigrant but only visitor visas.”

Another suggested solution would be to reduce temporarily the number of annual immigrants significantly to, say 50,000, which would cease mass immigration but allow the beneficial flow of migrants that have skill sets they can use to serve the interest of the economy and society. After the construction of housing and infrastructure has caught up with demand and the absorptive capacity of the country has been determined in the light of recent developments, the number of immigrants per year can be changed to the optimum level.
 
Politicians have ignored the call for the kinds of reforms suggested by Bissett and for the temporary reduction in immigration levels that would make immigration policies properly serve the public interest. Why have politicians ignored these suggestions for reform? The answer is found in public choice theory (Lee 2012): Politicians are afraid that powerful and highly motivated interest groups will reduce their financial and electoral support and thus threaten their parties’ election chances.

These interest groups consist of immigrants who want to see their communities grow in numbers and political influence; employers wanting cheap labour and larger markets for their output; the construction and real-estate industries benefiting from the growth in the residential housing market; the owners of homes who enjoy large capital gains on the property; the builders of transportation infrastructure facilities who are needed to deal with traffic congestion; the professionals who enjoy the larger markets for their services as supervisors in businesses teachers and professors; the civil servants and welfare workers who are paid to serve the needs of immigrants and the vocal groups of idealistic individuals who believe that it is Canada’s responsibility to reduce poverty and suffering in the developing world and whose views are spread widely by the media.

Lined up against this collection of powerful, rich and idealistic supporters of the present immigration policies are the overwhelming numbers of Canadian voters who are too busy working and caring for their families to have the time to inform themselves about the burdens immigrants impose on them, especially since the interest groups and politicians with the help of the media are very effective in hiding or denying the damage mass immigration is doing to their interests (Munger 2017).
    
Canada’s first-past-the-post electoral system discourages the foundation of an anti-immigrant party of the type found in a number of European countries where proportional representation has allowed such parties to achieve substantial electoral successes and seats in parliament and which have influenced the debate over and the design of immigration policies. Canada’s immigration policies will remain unchanged at least until a reform of the electoral system, which the present government has promised in its election campaign but has failed to implement after two years in office.

References
Aydemir, Abdurrahman and George J. Borjas (2007), “Cross-Country Variation in the Impact of International Migration: Canada, Mexico, and The United States”, Journal of the European Economic Association, June, 5 (4): 663-708
Bannerje, Robin and William Robson (2009), “Immigration’s Impact on the growth and age structure of Canadian Workforce”, Chapter 7 in Grubel (2009).
Canada Visa (no date), “Canada Business Immigration - Investor Category” found at https://www.canadavisa.com/canada-immigration-investors.html, accessed December 1, 2017
Government of Canada 1 (no date), “Do you want to come to Canada, or extend your stay” found at https://onlineservices-servicesenligne.cic.gc.ca/eapp/eapp.do, accessed December 1, 2017

--------------------------- 2 (no date), “Recent Immigrants in Metropolitan Areas: Canada – A comparative Profile based on the 2001 Census”, found at https://www.canada.ca/en/immigration-refugees-citizenship/corporate/reports-statistics/research/recent-immigrants-metropolitan-areas-canada-comparative-profile-based-on-2001-census/partg.html, accessed December 1, 2017
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--------------------------- 5 (no date), “Have your education assessed – Skilled Immigrants”, https://www.canada.ca/en/immigration-refugees-citizenship/services/immigrate-canada/express-entry/become-candidate/eligibility/education-assessed.html, accessed December 1, 2017
Diploma Company (no date), “Fake Diploma India, Can$ 252.13”, found at https://www.diplomacompany.ca/order-fake-diploma-india.html, accessed December 1, 2017
Grady, Patrick and Herbert Grubel (2015), Immigration and the Welfare State Revisited, Vancouver: The Fraser Institute https://www.fraserinstitute.org/sites/default/files/immigration-and-the-welfare-state-revisited.pdf, accessed December 1, 2017
Green, Norma (2009), “Fake Documents Flood Canada Visa Office in India”, Immigration Watch Canada, found at http://immigrationwatchcanada.org/2009/02/09/fake-documents-flood-canada-visa-office-in-india/, accessed December 1, 2017
Grubel, Herbert, editor (2009), The Effect of Mass Immigration on Canadian Living Standards and Society, Vancouver: The Fraser Institute, https://www.google.ca/search?q=grubel+the+effects+of+mass+immigration&rlz=1C1GCEA_enCA751CA751&oq=grubel+the+effects+of+mass+immigration&aqs=chrome..69i57.13918j0j7&sourceid=chrome&ie=UTF-8, accessed December 1, 2017
Historica Canada (no date), “Refugees”, The Canadian Encyclopedia, found at http://www.thecanadianencyclopedia.ca/en/article/refugees/, accessed December 1, 2017
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Lammam, Charles and Hugh MacIntyre (2017), Myths of Infrastructure Spending in Canada, Vancouver: The Fraser Institute, found at https://www.fraserinstitute.org/sites/default/files/myths-of-infrastructure-spending-in-canada.pdf, accessed December 1

Lee, Dwight R. editor (2012), Public Choice, Past and Present: The Legacy of James M. Buchanan and Gordon Tullock, Springer Science & Business Media, Dec 9, 2012

Meardi, Guglielmo, 
Antonio Martín Artiles and Axel van den Berg (2016), “A Canadian Immigration Model for Europe? Labour Market Uncertainty and Migration Policy in Canada, Germany and Spain”, in Jon Erik Dølvik, Line Eldring(ed.) Labour Mobility in the Enlarged Single European Market (Comparative Social Research, Volume 32) Emerald Group Publishing Limited, pp.99 – 124
Metro Vancouver (no date), Immigration and Diversity, found at http://www.metrovancouver.org/services/regional-planning/PlanningPublications/Census2006_Immigration_Bulletin_6.pdf#search="immigrants", page 2, accessed December 1, 2017
Munger, Michael C. (2017), “On the Origins and Goals of Public Choice Constitutional Conspiracy?”, Independent Institute, June 29 found at http://www.independent.org/issues/article.asp?id=9115, accessed December 1, 2017
Murphy, Kevin (2015), “How Gary Becker saw the scourge of discrimination”, Chicago Booth Review, found at http://review.chicagobooth.edu/magazine/winter-2014/how-gary-becker-saw-the-scourge-of-discrimination, relatively low standards of
Semotiuk, Andy J  (2016), “Immigration Minister Should Restore The Canadian Experience Class”

Slater, Joanna (2015), “Germany looks to Canadian model for immigration policy inspirationThe Globe and Mail, March 9
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Canada’s Housing Strategies in Perspective


The federal government’s newly announced housing strategy is a sham. It will do nothing to end the rapid rise in the cost of housing because it does not address excess demand, which according to the iron law of economics, drives up prices. The excess demand has persisted for many years because the supply of housing produced by the private sector has been insufficient to meet the demand.

This failure of the private sector is due mostly to municipal regulations that require the completion of red tape and use much costly time to issue building permits, prevent the creation of greater population density and the construction of housing on land dedicated to other uses like agriculture and parks. Municipal politicians are aware of this problem, but easing them has been prevented by the political opposition from influential voters.
 
Municipal politicians have faced less opposition to the imposition of taxes on speculating foreigners, who have no votes in elections, but this policy has no impact on supply. Speculators typically hold their purchases for only a limited time since they have to sell their investments to realize their profits. As a result, speculators merely move forward in time price increases that would otherwise have taken place later.

At the same time municipal politicians maintain rent controls, which protect them from the loss of votes by renters but which reduce the supply of housing
Municipal politicians unwilling to deregulate the housing sector or eliminate rent controls have pressured the federal government to end the housing crisis by adopting policies that increase supply. The response by Ottawa has been the adoption of a “housing strategy”, which was announced with great fanfare. It promises to lead to the construction of up to 60,000 new homes over the next 10 years, the repair of up to 240,000 existing community homes and the payment of rental subsidies of up to $2,500 annually to 300,000 needy families.

The policy adds only 600 new houses a year to the supply in all of Canada, which is shown below to be trivial given the annual additions to demand. The renovation of existing stock will not increase supply and subsidies to renters will, if anything, increase the demand for housing.

The federal housing strategy is silent on the demand for housing, which is determined mostly by the growth in population through natural increases (birth minus deaths) and immigration from abroad. In recent years the growth in population has been dominated by immigration, which during the years 2006-2016 (net of emigration) has increased Canada’s population by 240,000 annually, which is equal to 65 percent of the total increase of 3.8 million (http://www5.statcan.gc.ca/cansim/a47).

Assuming that on average three immigrants make up a family requiring housing, immigration policies have added an average 81,126 housing units a year to the country’s demand. This figure will rise to 120,000 a year by 2020, when immigration will reach the government target of a maximum 360,000. That year the federal housing strategy will provide 6,000 housing units above those created by the private sector, which clearly is a sham.

However, this is not the end of the story. Immigrants tend to settle predominantly in the metropolitan areas of Vancouver, Toronto and Montreal, which in 2011 have received 14, 37 and 15 percent of all immigrants, respectively (http://www.metrovancouver.org/). For the Vancouver area this means that during the 2006-2016 period an average 11,357 immigrant families have settled there, which means that they have demanded 947 housing units per month or about 237 per week. The analogous figures are 625 for Toronto and 257 for Montreal. By 2020 these numbers will rise by 50 percent as a result of the announced higher level of immigrants.

The implication of the foregoing analysis is that to prevent the development of an ever increasing housing crisis, municipal governments will have to relax existing regulations to increase the supply of housing. Increased federal subsidies would help, but to be effective they would have to so high as to add intolerable amounts to the fiscal deficit.

Therefore, the only federal policy with any chance of dealing successfully with the housing crisis is to reduce immigration levels to perhaps 50,000 or 100,000 a year for a limited time. Once the private supply of housing has eliminated the backlog and prices have stabilized, immigrant numbers can be raised again to levels reflecting the economy’s absorptive capacity and their contribution to the well-being of Canadians.


Thriving Nationalist/Anti-Immigrant Parties in Europe Why not in Canada?


The German federal elections on September 24, 2017 produced an electoral earthquake. The country’s ruling coalition headed for 12 years by Germany’s Chancellor Angela Merkel lost its majority, mainly because of the success of the nationalist/anti-immigrant party Alternative for Germany (AfD), which won 97 seats, up from zero in the preceding elections. On November 16th, Merkel made unprecedented announcement that she had been unable to form a new governing coalition and refused to head a minority government, preferring a new election instead.

Nationalist/anti-government parties in other important countries of Europe also have gained much support from voters. The percentage of the total vote and the number of seats gained in these countries after the most recent elections were:

Switzerland 29.4 and 65/200; Denmark 21.1 and 37/179; Austria 26 and 51/183; Finland 17.7 and 38/200; Norway 15.2 and 27/169; Netherlands 13.1 and 20/150; Sweden 12.9 and 49/349; Germany 12.6 and 97/631.

In France the National Front in 2017 received 13.2 percent of the votes, more than the percent gained by the AfD, but because of the country’s electoral system gained only 8 out of 377 seats in parliament. In Poland the Law and Justice party received 37.6 percent and with a majority of 235 out of 460 seats has formed the government. Nationalist/anti-immigrant parties have also been successfully attracting votes in the Czech Republic, Hungary, Bulgaria, Latvia and other former communist countries of Eastern Europe.
Voters dissatisfied with their countries’ immigration policies also played important roles in the victory of the British referendum that led to Brexit and of President Donald Trump in the United States.
The platforms of the nationalist/anti-immigrant parties in Europe appealed to voters who had personal experiences and learned from media reports that immigrants were responsible for many growing social and economic ills in their lives: the number and scope of terror attacks and criminal acts; threats to cultural and religious institutions and practices; the cost of housing; the crowding of schools, hospitals and public spaces and the scarcity of jobs taken by immigrants.

The establishment politicians in the countries with strong nationalist/anti-immigrant parties obviously have not been able to counter these views by claiming that their supporters are  racist, xenophobic and fascists and that they do not understand the large benefits brought by immigrants: the elimination of labor shortages; reductions in the financial problems of social programs; increases in global solidarity with needy people in the rest of the world and the benefits of greater cultural and religious diversity.

Canadian politicians and intellectual elites have been ignoring the growth of nationalist/anti-immigrant parties in Europe. The current government has instead increased the planned annual number of immigrants from the recent 250 thousand to a high of 360 thousand by the year 2020.
It seems that this policy is out of touch with the views of the public. An Angus Reid poll in the middle of 2017 found that 57 percent of Canadians agreed with the statement that “Canada should accept fewer immigrants and refugees.” The latest annual poll by the federal Department of Immigration reported in November 2017 that increasing numbers of Canadians hold negative views about the current level of immigration.

Why the persistence of the difference between government and public views on immigration policies? The answer is that Canada uses the first-by-the-post system to allocate seats in parliament. In Europe most countries use proportional representation to assign seats, which enabled the creation and success of the nationalist/anti-immigrant parties.

Canada’s establishment parties will not abandon the present electoral system. Their assured protection from anti-immigrant parties brings them too many opportunities to use immigration policies to buy the votes of employers of cheap immigrant labor, the firms and professionals wanting larger domestic markets for their output, the real estate and construction industries, the communities of recent immigrants and the immigration industry of lawyers and consultants – even as they know that the public disapproves of the mass immigration they create.


The majority of Canadians who want to see fewer immigrants will have to wait a long time before they get their way.

This essay has been published in the Vancouver Sun on December 8, 2017:
https://www.pressreader.com/canada/vancouver-sun/20171208/281681140215066

Monday, October 23, 2017

SUPPLY MANAGEMENT AND THE INTEREST OF CONSUMERS AND FARMERS


This article has been published in the Fraser Institute Blog found at SUPPLY MANAGEMENT AND THE INTEREST OF CONSUMERS AND FARMERS

A leading politician recently explained to me why the last Conservative government in Ottawa did not abolish supply management: “It was not in the party’s interest”, implying that in fact it would have been in the public interest to have done so.
   
Why all governments since the inception of the system in the 1970s allowed the party over the public interest to dominate is easy to explain. The beneficiaries of the system spend large amounts of money lobbying politicians to retain it and punish those who do not. On the other hand, for the vast majority of voters the existence of supply management and the costs it brings are of relatively little importance and politicians would expect few electoral gains from ending the system. In fact, the results of a recent Angus Reid poll revealed that 58 percent of Canadians had “no idea” and 38% “knew little” on how the system works and therefore how much it costs them.[1]

However, the status quo is now threatened by President Donald Trump’s demand for an end to Canada’s supply management system during the renegotiation of the NAFTA treaty.[2] As a result, Prime Minister Justin Trudeau’s Liberal government faces a problem. If it insists on maintaining the system, US negotiators will demand reciprocal concessions that decrease Canadian exports, the exchange rate, employment and economic growth. 

If, on the other hand, the Liberal government agrees to abolish supply management, consumer prices will fall and the present level of US restrictions on Canadian exports will be maintained or even lowered and bring other benefits to the middle class the Liberals have promised to help.

The loss of the current electoral and financial support from the beneficiaries of the system can be made up by a government program explaining to voters why this policy is in their interest. The focus of such a campaign should be the simple explanation of how this system operates and how it affects their cost of living.

The explanation[3] should start by pointing to a very important and simple fact: Anyone in Canada who wants to produce or import dairy products, poultry and eggs and sell them must buy a quota from other farmers or face persecution resulting in fines or jail. With the ownership of the quota comes the right to sell a specified amount these products at prices fixed by a government-sanctioned association of producers.

By controlling the quantity of quotas in the market, this association determines the total amount produced and thus the prices at which demand equals supply in Canada. These prices are supposed to allow farmers to pay their capital and running costs and earn a normal profit. In fact, however, they are higher by amounts farmers need to pay the interest on the loan they had to take out to purchase the quota. Recently, according to a non-profit organization that represents Alberta’s dairy producers, the cost of a quota in Alberta came to $36,000 per cow or $3.9 million for an average-sized dairy herd of 108 cows.[4]  

The very existence of the quota price, which is found on the internet,[5] is incontrovertible evidence that consumers in Canada pay more for dairy products, poultry and eggs than it costs farmers to produce them and that without supply management consumer prices for these products would be lower. How much lower would these prices be? According to one recent peer-reviewed publication[6] the average family in Canada would save $444 annually. This burden is greater for the poor and families with children smaller for the rich and childless.

One reason why politicians may have been reluctant to end supply management in the past is that it will conflict with Canadians’ sense of fairness and will bring financial hardships or even bankruptcy to farmers whose income is curtailed but whose debt obligations remain, all caused by governments and for reasons beyond their control.

The government can deal with this problem by creating a financial adjustment program, the basic features of which are found in Australia’s recent experience.[7] That country in 2000 had ended supply management and assisted farmers through quarterly payments over eight years. Farmers leaving the industry were paid a lump sum.

An important feature of the program was that its cost was covered not by funds drawn from general government revenue but by the imposition of a surcharge of 11 cents per litre on the buyers of milk scheduled to last eight years. These costs in effect are an investment lasting eight years, which will bring a return of lower milk prices into the indefinite future.

It was not easy to design a compensating package that was fair to all Australian farmers and it would not be easy to do so in Canada, especially since the termination of supply management will impact farmers differently, depending on the time and price at which they had obtained their quotas. Some had received them free of charge when the system was created in the 1970s while the rest have enjoyed gains in the ever increasing value of their quotas depending on the time of their purchase. Most seriously hurt would be farmers who had bought their quotas recently.

However, these issues of compensation can and will be overcome simply because ending supply management will bring large and lasting benefits to Canadian consumers and in addition, will remove one of the greatest irritants in Canada’s relations with its global trading partners, increase economic and personal freedoms and allow free market forces to improve through time the quality, variety and costs of all agricultural products.

References:

Alberta Milk (2017), “How much does quota cost for a 108 cow dairy?”, found at https://albertamilk.com/ask-dairy.../how-much-does-quota-cost-for-a-108-cow-dairy/

Canadian Dairy Information Center (2017), Monthly Milk Quota Exchange, found at http://www.dairyinfo.gc.ca/index_e.php?s1=dff-fcil&s2=quota&s3=qe-tq

Cardwell, Ryan, Chad Lawley and Di Xiang. 2015. “Milked and Feathered: The Regressive Welfare Effects of Canada’s Supply Management Regime.” Canadian Public Policy 41(1): 1-14.

Edwards, Geoff (2003), “The story of deregulation in the dairy industry”,  The Australian Journal of Agricultural and Resource Economics, 47:1, pp. 75–98 *
Globerman, Steven and Christopher Sands (2017), The Fate of NAFTA: Possible Scenarios and their Implications for Canada, The Fraser Institute, found at https://www.fraserinstitute.org/sites/default/files/fate-of-NAFTA-possible-scenarios-and-their-implications-for-canada-execsum.pdf
Grubel, Herbert and Richard Schwindt (1977), The Real Cost of the BC Milk Board, The Fraser Institute, found at https://www.fraserinstitute.org/sites/default/files/real-cost-of-the-bc-milk-board.pdf

Reid, Angus (2017), “Supply Management: Most Canadians say scrapping system should be on the table during NAFTA talks”, found at http://angusreid.org/supply-management-nafta-renegotiation/



[1] See Reid (2017)
[2] For a discussion of the demand and broader issues surrounding it see Globerman and Sand (2017).
[3] For an early study of supply management and its cost see Grubel and Schwindt (1977)
[4] See Alberta Milk (2017)
[5] See Canadian Dairy Information Center (2017)
[6] See Cardwell et al (2017)
[7] See Edwards (2003)