Wednesday, November 16, 2016


According to Nobel laureate and influential public intellectual Joseph Stiglitz, “In the US, the bottom 90% has endured income stagnation for a third of a century. Median income for full-time male workers is actually lower in real (inflation-adjusted) terms than it was 42 years ago. At the bottom, real wages are comparable to their level 60 years ago.”
These statistics drive much of the current political debate in the United States, Canada and most other Western democracies. The trouble is that they measure the wrong thing. Wages and incomes determine the amount of market goods and services consumers can buy. But through time public demand has shifted increasingly to the provision of non-market goods that determine well being and are supplied by governments: the stability and predictability of income, the quality of the environment and characteristics of national culture.
Politicians have responded to these demands with a vengeance. There now are public insurance programs that make incomes more stable and predictable: government-run insurance against the results of personal ill health, accidents, unemployment and retirement. For the entire economy there are regulations for the prevention of financial instability, global warming and harm to the safety of consumers and workers.
The public has also demanded policies that affect its sense of well being by making it feel good: policies to clean the environment; make the distributions of incomes and wealth more equal; create racial and gender equality; accept large numbers of immigrants and refugees and create a multi-cultural society.
There are several aspects of these government policies, which bear directly on the problem of low wages and incomes discussed by Stiglitz. First, the benefits from social insurance programs involve the redistribution of incomes. The value of the programs to society is assumed to be equal to the governments’ cost of operating them, which means that these programs can never increase the productivity of labour and capital and lead to higher average incomes and wages.
Second, policies aimed at the delivery of other non-market goods result in ephemeral, non-measurable benefits at an uncertain time in the future that cannot be recorded in wage-increasing current income, as is the case with policies preventing of global warming or financial crises.
Third, while these non-market benefits are not recorded in national income, their creation results in the use of labour and capital that is withdrawn from the production of market goods. The value of resources used by regulatory agencies and by private firms complying with regulations has been estimated to be worth $1.8 trillion in the United States in 2015.
In addition, some regulations reduce economic growth by imposing costs and delays on entrepreneurship and innovation. Some regulations actually lower growth, as will happen if the efficient use of fossil fuel is replaced by the less efficient use of renewable sources of energy to create electricity. (The US Supreme Court has in fact stopped this replacement on the grounds that the costs are too large.)
In effect, these economic consequences of regulations show again that there is no such thing as a free lunch. The more the public wants greater security in all aspects of their lives and more feel-good policies, the smaller will be incomes and wages that can be used to buy market goods.
These public preferences can also explain the vexing puzzle why since 2008 interest rates near zero have not generated economic growth. The reason is that reduced incomes and wages of the public have lowered the demand for private goods and the need for growth-generating investments by so much that even the very low interest rates are insufficient to induce private sector investment and cause cash-rich companies to buy back shares or their competitors.
The shift of the public demand from market to non-market goods has profound implications for economic policies. Expansionary monetary and fiscal policies to stimulate the production of market goods must fail because the stock of labour and capital are finite and already utilized fully in the production of market and public goods. In addition, expansionary monetary policy will create inflation and expansionary fiscal deficits will eventually become unsustainable. Both pathologies can be cured only by recessions and fiscal austerity.
The preceding analysis does not imply that the growth in the production of non-market goods has failed to increase the well being of the public. However, it does suggest that the public needs to be aware that it is impossible to have both, more market and non-market goods and that asking politicians to ignore this fact will lead to inflation and austerity in the future and possibly much more instability and lower levels of income and wages.

Published in the Financial Post on November 9, 2016, page FP7.

Sunday, November 13, 2016

Why Trump won: Two different explanations

Why Trump Won:
The limited shelf life of governments and Obama’s ideological overreach

Herbert Grubel
Professor of Economics (Emeritus)
Simon Fraser University

If you are not fed up with the repetitive and self-reinforcing flood of pundits’ explanations on why Trump won, you may want to read my own two explanations that are different from the ones in the main media.
            My first explanation involves a powerful law of politics: Governments have a limited shelf-life because their appeal to the public inevitably deteriorates with time, much like that of food on grocery shelves. In politics this deterioration is driven by the fact that every policy a government adopts makes some voters unhappy whiles another set of voters becomes unhappy because the government did not pass policies they had wanted.
            Through time these two sets of disgruntled voters grow inexorably and after eight years typically their numbers have become so large that they determine the outcome of elections. This explains why since 1981, every eight years Americans switched between the election of Republican and Democratic Presidents. The only exception occurred when in 1989 Republican President George Bush Senior followed the Republican President Ronald Reagan, which might be considered evidence of the working of the law of limited shelf-life.  
            The existence of large pools of disgruntled voters every eight years suggests that the optimum strategy of candidates for election is to have their campaign platforms dominated by the promise of change, which captures the support of voters disgruntled by policies adopted by the past president and of voters who expect to see their preferred policies enacted by the next. This strategy was successfully used by candidates Barack Obama’s with his slogan “hope and change” and Donald Trump’s with his slogan “complete change”. To her disadvantage, presidential candidate Hillary Clinton could not use this strategy because she had to support the Obama policies she had helped to create as an administration insider.
            The second reason for Trump’s win involves what Charles Krauthammer considered to be “the most overlooked factor in the election”: the historic and never ending battle between the political right and left in which “Obama overreached ideologically”. The American system of governance has prevented presidents from moving the lines of battle too much, even as it has moved through time in small incremental steps to the ideological left.
            Obama’s overreach involved the pursuit of policies in the tradition of the political left, which sees a large role for governments in the fields of national health care, climate change, foreign policy, income redistribution, immigration and strengthening the rights of minorities. The evidence that these policies represented an ideological overreach is found in the fact that starting in 2012, four years after Obama took office, every election brought to Washington more Republicans who had campaigned on the promise that they would stop these policies, which ultimately led to Republican majorities in both Houses of Congress.
            Obama disregarded the signal these election results had sent and pressed ahead with his legislative agenda with few changes or compromises, forcing Congress to prevent the passage of most of his legislation and producing the infamous Washington stalemate. Obama responded by using executive orders to advance his agenda.
            The American public became increasingly more angered by Washington’s left politics that they believed caused unemployment, kept down wages, worsened domestic and foreign security and interfered with their traditional cultural and religious practices. Shortly before the election, the loss of employment in coal-producing industries and regions and increases in medical insurance premiums effectively reminded voters of this problem while large numbers of voters dealt daily with the annoying and costly regulations affecting their work on farms, as fishermen, in financial institutions, doctors’ offices, hospitals, schools, accounting offices, manufacturing and many other forms of employment.  
            Trump’s appeal to voters was due to his promise to end the Obama’s ideological overreach by dealing harshly with the Washington establishment, which had failed to respond to the message the voters had sent through the election of a Republican majority of Congress. Clinton lost because she had no choice but to promise continuation of the hated Obama policies. She was part of the establishment that had created them, as Obama reminded voters throughout the campaign.

            In sum, Clinton lost in spite of Trump’s confrontational and politically incorrect campaign and style resented by many voters simply because she could not overcome the law of limited shelf-life of governments and the widespread resentment caused by Obama’s ideological overreach. 

Wednesday, November 2, 2016


Recently Terry Corcoran, Dominic Barton and Andrew Coyne have advocated that Canada raise the number of immigrants to 450,000 a year and a population of 100 million in 2100 on the grounds, in Coyne’s words, “it would add to our clout in the world...our ability to project our interests and values on the world stage.”
     The advocates of the higher immigration levels called the Century Initiative believe that Canada is the shining model of a tolerant, caring, egalitarian, democratic, open and economically successful society, the projection of which to the world will be leveraged by the country’s increased size. Canadians will be proud to be citizens of a country able by its example to create a better world. The public intellectuals behind the idea already bask in the praise of their ideological peers everywhere.
     The ability to gain enough clout to engage in such a projection requires a reality check. According to the latest UN Projections, in 2100 the world’s most populous nations will be (in millions): India (1,660), China (1,004), Nigeria (752), USA (450), Republic of Congo (389), Pakistan (364) and Indonesia (314). If the proposed immigration policy will be enacted, Canada’s population in 2100 will be to .97 percent of the world’s total population, double the present .48 and what it would be without the larger annual number of immigrants. 
     Will such a projection take place and be successful? If history is a guide to the future, the outlook is not promising.  In 2100 all countries will continue to have serious problems of their own. The need to combat income inequalities, religious, racial, regional and international tensions will continue to exist. These political realities plaguing countries like India, China and Nigeria are too well known to need elaboration.  They also afflict all the middle sized countries of Europe, Asia and South America as well as the small countries in all parts of the world. For politicians in these countries studies of Canada’s shining success are likely to be very low on their list of priorities.
     It is also possible that by 2100 Canada itself will cease to be the model for the world. The 100 million citizens will have required housing and economic and social infrastructure, the provision of which will be costly and divisive and will be in conflict with policies to combat global warming, preserve the environment and finance the governments of the First Nations. It remains to be seen whether dealing with these problems will be possible without changes in Canada’s ability to be the tolerant, caring, democratic, open and economically successful society it now is.
     These problems will be aggravated if Canada changes from a first-past-the post to a proportional system for the election of its politicians.  Under this system groups Canadians united by common national origins and cultures will form political parties dedicated to fight for their interests. Elected politicians in Ottawa will no longer spend most of their time on the design of the best policies for increasing national output but will instead engage in fights over the distribution of national output among the groups of Canadians represented by their parochial political parties.
     Even in the absence of the proportional system for elections, the very size of Canada’s population resulting from the proposed 450,000 immigrants is likely to create ethnic enclaves where alien languages and cultural institutions dominate life and where, like in Richmond, BC, it is virtually possible to be born, educated, entertained, work, retire and die without knowing a word of English. These enclaves will gain increasing influence on government policies that advance their interests at the expense of the broader public interest. Perhaps public policies can prevent the development of enclaves and their exercise of political power, but it is by no means certain that they can.

    All of the above observations are made before even considering that most of the economic gains expected from the 100 million in 2100 are unlikely to be realized. The discussion of these issues will have to wait for another article.

This article was published in the Vancouver Sun on Saturday, November 12, 2016, page E5 under the title "Canada a beacon at 100 million? That's doubtful. History doesn't paint a rosy picture"