Category Archives: Economics

Why History Matters

Lyndon-Baines-Johnson1

Published in the Telegraph-Journal 21st May 2013

A strong and activist state is a fundamental precondition for sustainable economic growth. That is not to say that the state is a sufficient condition, but it is a necessary condition. The converse of this fundamental precondition has been illustrated in every age and across geographies. State breakdown can result in civil war or interstate conflict but other, equally malignant versions can bring a slow economic degradation leading inevitably to political and social distress. There is a veritable library detailing the negative consequences for growth that spin off from the decline of the authority, influence or legitimacy of the state and its institutions.

But if the state and its institutions are so critical to the health of economies, why is so much energy being expended on reducing the scope and scale of government and its agencies at precisely the time when they are most needed? And what is the function of strong governance in the face of rapid and relentless change?

Commentators have emphasised that the reasons for the loss of confidence in the state has its roots in the rise of conservatism and libertarianism. Academics have additionally argued that the defining features of liberal and conservative thought have become blurred. Political parties increasingly have  emphasized the importance of employment and economic growth in the face of global pressures while the role of ideology has declined.

An important implication of the resurgence of the conservatism in the late 20th century is not merely that its adherents energetically seek to repeal the fundamental laws of math and economics. This resurgence began with Ronald Reagan in the 1970s. Before he became president and in his first term as governor of California, Reagan froze government hiring, signalling his early commitment to reducing the size of government. Reagan’s move would hardly register on the scale of contemporary conservative and libertarian anti-government initiatives. But in the 1970s, political expectations had been conditioned by the optimism of Lyndon B. Johnson’s “Great Society”, which highlighted the role of government in promoting civil rights, public broadcasting, medical care, environmental protection and aid to education. Johnson’s “War on Poverty” was predicated on the pervasive role of government as the engine of economic growth.

The decline of Johnson’s liberal America has taken generations to take hold. But the weaknesses of liberal thought have always had their origins in history. There is a substantial literature linking good governance to economic growth where governance means institutions building, rule of law and democracy. The problem is that it is difficult to isolate the correlation between governance and growth. Some argue that good governance is the product of economic growth. If that is so, a key explanation for weak governance in some jurisdictions is that they cannot afford the political institutions that backstop strong governance. Others argue that it was good governance that was responsible for growth.

This leaves open the matter of how changes in governance are initiated. The corrosive forces of globalization — trade liberalization, demographic shifts, changing capital flows and rapidly changing technologies — are placing increasing stresses on political leaders to focus on near-term economic solutions, even as societies are at enormous risk as a consequence of global warming. To reduce expenditures now, in the midst of the turbulence of an ongoing crisis precipitated by free-market ideology and that has resulted in widespread unemployment and the destruction of up to a decade of growth, would inevitably prolong the crisis.

The challenges presented by globalization should have precipitated an evolution of political and economic institutions to create new mechanisms of governance. That we have failed to do so speaks volumes about the urgent need to match the political, social and economic challenges of the 21st century with their appropriate governance institutions.

The idea that economics is subject to forces that exist in social and historical context or even that history matters is a recent amendment to the conventional body of economic thought. Only in the past two decades have governance institutions been viewed as worthy of study by economic development historians. And only more recently have institutions emerged to give this field of study the prominence it deserves.

Photo courtesy Yoichi Okamoto.

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Filed under Economics, U.S.Economy

Where’s the Recovery?

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A key reason that the economic recovery has been unable to gain momentum is that our policies have been doing precisely what basic macroeconomics says we shouldn’t do. By cutting government spending in the middle of an anemic economy, we’ve been engaging in a self-destructive process calculated to increase long-term unemployment. Austerity policies are counterproductive not only from the perspective of growth and employment but even in strictly fiscal terms.

Published in the Telegraph-Journal 23rd April 2013

Just when it seemed that the U.S. economy was finally on the right track, it has again lost momentum. And in the process, America’s wobbly economic performance has shaken confidence in the prospect that the world’s economies could rise above the anemic performance that has characterized them for more than four years.

The year started well enough in the United States. In the face of a sizable tax increase on January 1st, employment, retail sales and housing all improved substantially in January and February. GDP grew at an estimated annualized 3 per cent in the first quarter while stock markets reached new highs.

The bottom fell out in March. Employment growth, reaching an average of 208,000 in January and February, slowed abruptly to register only 88,000 in March. Retail sales declined as did new construction starts on single-family homes. The dip in housing activity is especially problematic since fundamental determinants, such as low mortgage rates and lean inventories, and an increase in the household formation, had been pointing to continued gains.

Predictably, the economic slump in the U.S. has had its impact in Canada. The Canadian economy lost more than 54,500 jobs in March 2013, according to Statistics Canada. That figure pushed Canada’s jobless rate higher to 7.2 per cent and represents the worst month for Canadian employment since February 2009. In addition to January and February job statistics, the latest numbers show that the Canadian economy has lost more than 26,000 jobs in 2013.

Explanations for the American decline ranged from the possibility that government statisticians failed to adjust the economic data for seasonal effects to the impact of different hiring patterns between large and small firms. Neither of these explanations is persuasive and in any event fail to take into account why economists have been so wrong in their job forecasts over the last 18 months.

The likelihood that the sputtering American economy is the consequence of a single or even a concatenation of misfortunes is extremely low. We are better off to blame global incidents such as those in Cyprus or North Korea or the instability of oil prices, though none of these credibly explain the scope and scale of America‘s weakness.

The more likely culprit is austerity. Stalemates in Congress have resulted in the expiry of a payroll-tax cut and the imposition of higher income taxes on the wealthy which will cost American taxpayers $150 billion in higher taxes in 2013. A similar lack of Congressional resolve resulted in the “sequester” which on March 1st brought across-the-board federal spending cuts worth $85 billion in the current fiscal year. Economists who have been critical of austerity, such as Paul Krugman, have remarked that the American economy may now be less resilient in the face of austerity than it was when austerity measures were first imposed.

Despite the stalling economy, the stock market has, in the main, shrugged off the bad news. This further reinforces the claim that the performance of stock markets bear no relationship to the actual economic experience of most Americans. Moreover, there is emerging evidence that large companies are faring much better than small firms. A substantial number of these large firms operate offshore where the benefits of their growth and profitability do not contribute to the health of the American economy directly. That large firms expend far more lobbying dollars on Congress than their small company counterparts will come as no surprise to critics of Beltway politics.

It is clear that the U.S. economy has not shrugged off the effects of austerity. Instead, it still limps along with growth hovering around 2 per cent. At some point, the evidence that austerity has not achieved its stated objectives will become too difficult to brush aside. For millions of unemployed, this moment cannot come soon enough.

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Filed under Austerity, Economics, Income Inequality, Unemployment

2013 May Not See a Recovery

euro parliament interior

Published in the Telegraph-Journal 14th December 2012

For more than three years, business scribes have been musing about green shoots, economists have been reporting rising output and investors have been realizing sizable returns on their equity portfolios. Aggregate statistics had it that the recession had been beaten and economies were on the upswing even though, for many households, this good news seemed like it was happening somewhere else. Millions of jobs have vanished in the U.S., many permanently. Home-loan defaults piled up and ongoing corporate restructuring rendered the future of many workplaces uncertain. On the eve of 2013, many are asking if the recovery that started in the last months of 2009 will bring more stable relief in the coming year.

The answer may be not be a simple one. It’s true that a temporary lift beginning in 2009 provided some relief. But there were two sources of this upturn. Factories that idled when global demand collapsed sparked to life to replenish inventory. Massive amounts of government monies were partial compensation for weak private sector investment. In conjunction with public spending increases, taxes were slashed and central banks dramatically reduced interest rates. These were band-aid solutions, but they kept the recession from being even more cruel.

In the waning weeks of 2012, warehouses are fully stocked. Production essentially is on hold and waiting for signs that a fulsome demand for appliances, cars and clothing can justify a return to full production. But there is little chance of that happening until nervous consumers reduce their debt and re-establish some optimism. This seems less likely as long as unemployment remains high. In the interim, governments will not be able to fund the recovery much longer. The financial system has been flooded with cash as many central banks have cut interest rates to or near zero. While public spending can remain high, in most countries further increases would not be practical. So 2013 may not be the year of recovery that many are looking for.

Some economists see a much darker potential future that may involve the dissolution of globalization. The euro zone is at the heart of this bleak picture. The euro zone’s GDP is forecast to move forward by less than 0.5 per cent in 2013 with Germany and France barely advancing. The economies of Greece, Spain and Portugal have been shrinking for more than four years. One consequence of this global disaster is that anger continues to mount with political leaders, even in those countries not directly experiencing the harshest elements of the recession.

“The really worrying thing is a 40 percent chance the euro zone might break up altogether…over the next couple of years or so,” said Robin Bew, editorial director and chief economist at the Economist Intelligence Unit.

European banks have traditionally been the source of approximately 80 per cent of trade financing in emerging markets. In the shadow of the financial crisis, Europe’s undercapitalized banks are being forced to repatriate that capital. It is not clear that U.S., Japanese or Chinese banks are in a position to fill the gap. Capital scarcity combined with the need for banks to retain more capital is inhibiting global trade financing. This in turn threatens to accelerate the process of deglobalization.

In the U.S. economy, these adverse conditions do not provide the economic environment necessary to achieve the level of robust growth required for full employment. More disturbingly, the increase in economic and political stress resulting from the weakening of globalization serves to increase investor uncertainty. The increase of investor nervousness has made the financial environment even more risk averse.

Globalization, with all its faults, drawbacks and shortcomings, has been at the centre of prosperity creation for more than thirty years. There have been suggestions that the globalization model may already be obsolete in the United States, where exports are less than 15 per cent of total trade and where rapid Chinese wage inflation, automation, robotics, new software-based cost-cutting manufacturing technologies and the precipitous erosion of the power of organized labour has created conditions not yet fully understood. This phenomenon should set off alarm bells everywhere. Globalization is at risk of destruction, with no replacement in sight.

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Filed under Economics, Euro Zone, Fiscal Policy

Have We Started to Consider the End of Outsourcing?

Outsourcing Page_16229722

Published in the Telegraph-Journal 7th December 2012

In recent interviews with business media, Apple revealed that it will begin to manufacture computers in the United States for the first time in years. “Next year we’re going to bring some production to the U.S.,” said Apple CEO Timothy Cook. This announcement comes on the heels of decisions made by companies such as General Electric which are moving some of their manufacturing operations back the U.S. after years of outsourcing their production offshore to countries such as China and India.

Reversing the offshoring trend —insourcing— to bring manufacturing back to the U.S. addresses a number of challenges: transportation is simplified and less expensive, intellectual property is more easily protected and costs can be managed with greater transparency closer to home. Companies are better able to manage innovation and productivity because they are more involved in the key elements of production. But these developments don’t mean that the era of outsourcing to offshore locations is over. Nor does it mean that jobs that have been offshored are coming back to North America in large numbers.

Many offshore outsourcing decisions were based on the single determinant of dramatically less expensive labour. In many cases, offshore labour was so cheap—fifty cents an hour against as much as $20 an hour in North America—that it compensated for higher costs and risks in other areas. Labour arbitrage may have been a determining factor for many firms seeking to reduce costs, but there are other advantages to countries such as India and China. Offshore labour generally lacked troublesome unions, and safety and environmental conditions tended to be less onerous than in the West.

There is another reason that many U.S. companies are reconsidering their commitments to offshore production. Any one of four critical risks can torpedo an outsourcing relationship: economic fundamentals, behaviour, execution and relationship management. Reviews of outsourcing relationships increasingly reveal that many were not well managed. Relationships frequently lacked common, shared metrics which then led to disagreements about quality. Overlapping operational and contract management roles contributed to interpretations of metrics that were overly dependent on management of the day. With no agreed objective measurement of performance, misunderstandings about success were often difficult to avoid. Maintaining an effective outsourcing relationship requires conscious ongoing investment of management expertise as well as financial. Since the rationale for offshoring was cost cutting, some firms were unwilling to contribute to that investment. Poor economic fundamentals often were unresolved.

Changes in the global economy have caused many firms that had been committed to offshoring to reconsider their options. The cost of fuel is one of those key changes. Shipping cargo is much more expensive than even ten years ago as oil prices have tripled. The cost of wages in China has increased exponentially and is forecast to rise at more than 15 per cent per year in the medium term. In the U.S., labour unions have become more compliant if not more acquiescent in the wake of the 2007-2008 financial crisis. Unions are more agreeable to making deals that reduce the costs of wages and benefits to corporations. Productivity has increased substantially in the U.S. largely as a consequence of robotics, computerized inventory control, voice recognition and online commerce. This trend has accelerated during the current recession with the result that productivity increases have compensated for higher labour costs. Labour has become a smaller proportion of the total cost of finished goods.

There is a dawning realization in many U.S. firms that management failures have been chiefly responsible for the reversal of commitment to offshoring and outsourcing of all kinds as the economics have changed in favour of bringing jobs back. Although much of American manufacturing many never return, the rebirth of even a portion of manufacturing will require a rethinking of the critical role of management to the survival of the firm.

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Filed under Economics, Foreign Direct Investment, Innovation strategy, Job creation, Labor force management, Offshoring

Praising the Value of a Maritime Community

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Published in the Telegraph-Journal 27th November 2012

In the last few weeks, in response to dire predictions about the region’s economic future, there has been a flurry of interest in the concept of a Maritime Union. The University of Moncton’s pre-eminent public policy scholar and serial provocateur Donald Savoie recently reiterated his long-standing proposal that a Maritime Union would be a solution to the region’s economic malaise. This time around, a trio of senators from PEI. Nova Scotia and New Brunswick have come forward to support the cause.

Almost immediately, opponents of the concept have emerged to criticize it as unworkable, unrealistic and unnecessary saying that a Maritime Union would receive insufficient support within the Maritimes to make it workable, a merger would take years to accomplish, it would run into vested interests which would defeat it, and it would require constitutional reform the likes of which is not imaginable today.

Few elected politicians have expressed support for such a merger. PEI Premier Robert Ghiz has ridiculed the idea, claiming that a merger of Maritime provinces would actually result in less representation in both the House of Commons and the Senate than under the current provincial model. He stated that three provinces gives the Maritime region “more clout when it comes to dealing with the feds, or dealing with other provinces.” There are other misgivings. A solution to the region`s economic challenges involving a political union rests on the cardinal assumption that bigger is better, and that the unique nature of each of the provinces was less relevant than economies of scale. This assumption is largely untested although one of the proponents of a recent proposal supporting Maritime Union, Senator Mike Duffy, characterized volume purchasing power as one of the concept`s potential advantages in much the same way that big-box stores are able to offer lower prices.

It is likely that neither Canada nor the Maritime region is ready for a merger of political institutions under one umbrella. It is also likely that it would require years of negotiations to secure a bargain among the provinces by which time their respective economies will have declined even further.

But there is another model that provides a better blueprint for what could practically be achieved in the near term. Created by the Treaty of Rome in 1957, the European Economic Community (EEC) was an international organization whose objective was to bring about economic integration, including a common market, among its six founding members: Belgium, France, Germany, Italy, Luxembourg and the Netherlands. It gained a common set of institutions that promulgated economic and environmental policies. Although these policies carried social implications, the EEC had limited power to change its members` political and cultural institutions.

Under this model, a Maritime Economic Community would have the advantage of being a vehicle to transform economic practices and institutions involving limited political risk. Such an Economic Community would establish the competition rules necessary for the functioning of the internal market of the three provinces, securing open trade of goods, services and people. This is today long overdue. This Economic Community would establish common services and institutions, not by selling them, but by taking them public, with the Maritime Economic Community maintaining control by holding 51 per cent of shares of the institution. Which services, institutions or infrastructure would go public would be decided by a governing council of the three Maritime provinces, perhaps modeled after the current European Council. This governing council would be responsible for the development of policy direction and set out general objectives and priorities. A key objective would be to ensure that the federal government is integrated into the Maritime Economic Community. Some socioeconomic solutions – most notably, a national drug plan or seniors strategy – are best achieved by national initiative.

The details are less important than whether the objectives and goals are desirable from an economic, political and social standpoint. And critically, the transformations involving the Maritime version of an Economic Community are possible to achieve with current political institutions and within today`s constitutional framework.

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Filed under Economics, Maritime Economic Community

We Need More Debate On Fiscal Issues

fiscal drawing

Published in the Telegraph-Journal 27th November 2012

Coming soon

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Filed under Economics, Fiscal Policy

What Are the Limits of Government Spending Cuts?

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Published in the Telegraph-Journal 20th November 2012

Coming soon

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Filed under Economics, Fiscal Policy