Thursday, November 15, 2018
Financial Post editorial, May 2, 2018
Politicians have a notoriously bad record predicting the consequences of policies they have adopted. Recent tax increases on the highest income earners in Canada were predicted to raise revenues by $3 billion but in the first year (2016) the amount of taxes these Canadians in the top one percent paid were $4.6 billion lower than they paid in.
Politicians love forecasts of doom, which increases their power and status as they adopt policies to prevent it. Politicians created recycling programs after thein 1972 predicted that the world was running out of natural resources. The was the conventional wisdom around the turn of the century.
As a wit once said, predictions are very difficult, especially about the future. Predictions like those by the Liberal government, the Club of Rome and energy analysts often turn out wrong because of improbable events that could not be foreseen – the black swans discussed by. But predictions also are often wrong because predictable events are not properly considered. History has shown convincingly that high-income earners always shift income through time, space and into low-taxed investments to reduce their tax obligations. Consumers always reduce purchases when the price of a good increases and producers react by increasing supply so that the world will never run out of resources.
The predictions by politicians and pundits about the political landscape in British Columbia resulting from the adoption of a proportional representation system for elections is likely also to be false. The leaders of the NDP and Greens initiated a referendum on this change in the expectation that they would continue to receive at least the same proportion of votes as they did under the old system and thus together would be able to form government easily without precarious majorities as they have since 2017. The Greens believe moreover that they will receive more votes than they did under the old system as voters will realize that they no longer “waste” their votes on a party that has no chance to be in government.
The defenders of the current electoral system predict that the new one will bring into parliament politicians representing existing parties that have never had electoral, such as Libertarians, Communists, Christian Heritage, Cascadia, Social Credit and, until the 2017 election the Greens, all of which were on that year’s ballot. They also predict the formation of entirely new parties with policy agendas that are “extreme right-wing”, “racist-fascist”, “anti-immigrant”, “single issue”, “communist “, “libertarian unlimited immigration” etc.
It is quite unlikely that any of the small existing parties or the expected new parties will get more than five percent of the vote, which will be a threshold required by the proposed new voting system leading to seats in parliament. The votes they receive will come from the supporters of the existing major parties but affect them unpredictably and in the aggregate could lead to major changes in their election platforms.
However, in the above list of parties are absent some, which have large constituencies with strong bonds among voters and a good chance to win seats in future elections. These parties are likely to be rooted in the large ethnic populations living in Richmond, Surrey and other suburbs of Vancouver. Opportunistic political entrepreneurs could gain votes with the promise to get spending programs and regulations benefiting their regions in return for joining a ruling government coalition.
There are also likely to be opportunities for new, populist parties that attract voters who want to see changes in some policies made unchallengeable by the code of political correctness. According to opinion surveys, this is the case for reform of Canada’s immigration and refugee policies. Maxime Bernier has successfully formed a federal party with such a policy as an important part of its agenda.
Bernier’s proposed reforms of immigration policies are widely condemned as racist and fascist by the political elites in Canada. In fact, they are neither but are designed to serve the national interest, just like the federal Liberals policies on supply management, culture and banking. A BC branch of Bernier’s Peoples’ Party under proportional representation might attract enough votes from all three major parties to enter parliament with uncertain effects on the establishment parties
Most of the parties with a chance to gain seats in parliament are unlikely to fit the traditional classification of left or right but they are likely to win enough votes from the NDP, Liberals and Greens to create major changes to the political landscape in British Columbia and with them bring unpredictable new social and economic conditions.
Voters in the BC referendum who do not want to see such changes should vote for the retention of the system that has made the province one of the most prosperous in Canada.
Emeritus Professor of Economics
Simon Fraser University
Published in Vancouver Sun Predicting the political landscape after electoral reform in B.C.
Vancouver Sun editorial, November 4, 2018https://vancouversun.com/opinion/op-ed/herb-grubel-predicting-the-political-landscape-after-electoral-reform-in-b-c
BC Voters will soon be flooded by a growing amount of information about the superiority of proportional representation (PR) over the majority system (MS) presently used for allocating seats in parliament. If the past is a guide to the future, this information will be almost totally about how PR produces a “fair” distribution of seats, avoids having a government whose members in parliament received less than one half of the votes and thus leads to “wasted” votes.
The expected flood of information is likely to provide little detailed explanation the three different types of PR systems under consideration, mainly because the explanation is extremely difficult as each system involves complex, wide-ranging and fundamental changes in the size of electoral districts, the number of candidates in each and the procedures for allocating votes.
The forthcoming information can also be expected to be short on the discussion of important changes that PR will bring to the political institutions and environment.
First, the political environment will be changed fundamentally by the highly likely increase in the number of parties contesting elections. This prediction is based on a review of academic studies byand Taylor Jackson, which showed that the number of political parties is 2.5 in MS countries and 4.6 in PR countries.
Most of the additional parties that BC can expect under PR are likely to represent small groups representing narrow regional, industrial, religious or labour interests and, most disturbingly, members of distinct ethnic populations. The increased number and objectives of the increased number of parties will raise the divisiveness of election campaigns, parliamentary debates and the adoption of laws.
Second, the time it takes to form government after elections is 32 days in MS and 50 days in PR. Such an increase reflects the more turbulent political environment brought about by the enlarged number of parties and will reduce the efficiency of the electoral system.
Third, coalition governments formed under the PR system have shorter life-spans than those under the MS system, mainly because political differences among parties in the coalition after some time turn out often to be irreconcilable. The costs of the extra elections fall on taxpayers and the shortness of the life-span of governments impedes their ability to adopt complex legislative programs.
The forthcoming information campaign will also be short on the effects PR has on economic performance. Thus, the PR system gives small single-issue parties leverage over the passage of legislation that is greater than is justified (or fair) in the light of the share of the votes they received. This leverage arises because large parties need the votes of these small parties to form government, which they get only on the condition that they adopt some of the smaller parties’ legislative priorities.
This problem exists presently in BC, where the large NDP party has formed a coalition with the small Green party to form government. The legislative agenda of this government includes a resolute opposition to the construction of a pipeline, which was the priority of the Green party and played a much less important role in the NDP election platform.
The political agendas of small parties in PR countries often are designed to advance the ideology of the extreme political left, which they have not been able to achieve under the MS system and which explains why demands for the adoption of PR comes from them: more income redistribution, spending on social programs, culture, the environment and subsidies to select economic activities. All these policies result in higher government spending.
The extent to which government spending in PR exceeds spending in MS countries has been studied in a number of academic studies, which were summarized byet.al.: spending as a percent of national income in recent years has been 2.3 percent for MS countries and 2.9 percent for PR countries. Important is the fact that this higher spending leads to correspondingly higher taxes to pay for it and often is financed through deficits, which raise taxes on future generations.
Why should the expected increase of government spending under PR be the focus of the public discussion? As revealed by many academic, increased spending beyond a certain optimum leads to lower economic growth, lower per capita incomes and reduced freedom.
The present levels of spending and taxation in BC have been determined in past MS elections. Voters in the forthcoming referendum should consider that under PR their taxes will go up to finance increased spending that may or may not benefit them.
Let us hope that this fundamental issue will receive the attention it deserves, especially since supporters of PR are highly unlikely to bring it up.
Emeritus Professor of Economics
Simon Fraser University
Published in the Vancouver Sun editorial, October 20, 2018
Thursday, May 3, 2018
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.
The article was published in the Financial Post on May 2, 2018
Wednesday, March 28, 2018
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.