Barcelona Vs Vancouver

What a weird feeling, to come back to Vancouver, a city I know and love, and be struck by how much space there is here. Ok, let’s back up. I was recently in Barcelona. It’s a dense European city, with every block chock full of tall buildings. The buildings are all right up against each other, no access in between. And at street level, it’s all storefronts.

Just being able to see past the immediate buildings in Vancouver felt like a huge change. And it’s no wonder people drive everywhere here, it’s hard to get around otherwise with all this room. Is the abundance of space in Canada a blessing or a curse?

A Note about Defecits

In particular, government budget defecits.  We here in Canada are set to crack a doozy, $50 billion.  The next biggest budget defecit was spun out by Mulroney’s government at $39 billion.  There’s going to be a lot of noise made abot this number, but in the sum, what does a large defecit mean?  Is Canada on it’s way back to the poor house?  Is there something inherently ‘bad’ about a defecit?

I read an article yesterday where the author compared personal finances with government finances.  They made the analogy that personal debt and living on credit is bad, and therefore a country’s debt and defecits are equally as bad.  This is total BS (with a capital B!  .. and S!).  Newsflash, countries and their governments are fundamentally different from an individual citizen!  Countries of the recent past are much longer lived than their citizens, and they can can print their own money.

As an individual, there are times in your life when it is prudent to take on debt and defecit spending.  Starting out into post secondary education on the back of a student loan is one of those times.  It’s a temporary state in order to reap the future benefits of obtaining some higher education.  The plan is to pay off the temporary debt when income is higher in the future.  There is a simislar story when purchasing a house using a mortgage.  You might take on a huge amount of debt, but it’s managable and people seem to enjoy owning their own house, so they do it.

For a government running a country, at this particular time, it is prudent to let the defecit balloon to ease through the recession.  The last time an economic crisis of this magnitude happened was at the start of the Great Depression, and the government response at that time was to raise taxes and cut spending to keep a balanced budget and to erect protectionist barriers to trade.  The collective actions of the world’s governments at the time were enough to send the world economy completely into the shitter.  Much misery ensued.  This time around, it appears as if the collective actions of the world’s governments have prevented catastrophe, and it’s merely going to be a bad global recession.  Governments around the world are heading into budgetary defecits, with the aim of reducing them in the future.

Now, when it comes to carrying debt, individuals are liable, and you don’t want to leave a big mess of debt for your loved ones to deal with when you leave this plane of existence.  Countries in the modern era appear to be sufficiently long lived that this problem doesn’t exist.  Countries could carry debt into the future indefinitely, as long as that country could support carrying that debt.  For this reason, a country’s finances look very different from an individual’s finances.

Lastly, when is a budget defecit not a budget defecit?  This might seem a little strange, but if you are in a period of high inflation, and the defecit is modest, then it may in fact be what economists like to call a ‘real’ surplus.  It’s a real surplus if a country’s gross debt is reduced in percentage of GDP.  I’ll give an example, as it’s not intuitively obvious and requires an economic explanation.

Say inflation is running at 10%.  That means that prices are increasing at 10% every year, so on the whole, GDP in nominal terms will rise 10%, holding everything else constant.  Let’s also say that the government will run a defecit; this defecit will increase the country’s debt by 5% of GDP, but because GDP is rising by 10%, the country’s debt falls as a percentage of GDP.  In this case, a nominal defecit has turned into a real surplus.  Did you follow that bit of magic?   Through inflation, the government has been able to reduce it’s debt load.  Wouldn’t it be great a citizen had the same powers as a government?  It would, but that will never be the case, and people should stop comparing personal finances with a country’s finances.

Simmons on Halladay

Steve Simmons writes for Sun Media, and I read this little tidbit of his this morning, the subject is Roy Halladay of the Blue Jays.

He is the least appreciated, most private, lowest maintenance superstar in Toronto sporting history. All he does is his job. And last night, just as he did all last season, he taught Burnett a lesson or two.

Usually I grown inwardly when reading Simmons’ hyperbole.  He tends to go for big flourishes and classic story lines while writing about sports.  Not much subtlety, but good copy I suppose.  In this case however, I have to agree with his sentiment and his tone.

For those who weren’t aware, there was a baseball game last night in Toronto.  It was a classic match up.  Doc Halladay, the ace of the Blue Jays pitching staff versus former teammate AJ Burnett, who cut and run from Toronto this past off season for more money.  Burnett now pitches for the evil empire of Major League Baseball, the New York Yankees.  For this game, the Toronto crowd showed up, to boo Burnett (and ARod to an extent), to cheer the upstart Blue Jays, and to watch a master at work.  AJ pitched well too; he’s got awesome stuff, but as he usually does, he lost his composure for an inning and that was all it took for the Jays to get a few runs in and Doc did the rest.  The Jays ended up winning 5-1, with Halladay notching his first complete game of the season.

It was a real gem of a game from the humble superstar.  Simmons got it right this time, no hyperbole required.

The Boys of Summer

Yes folks, baseball is back! The players are smaller, payrolls are down, the Jays have got two rookies in their starting rotation and no chance of making the playoffs; I couldn’t be happier about the start of the season. The reason? I get to watch Roy Halladay pitch every five days. The man is a quiet master, driven to succeed and prepared to the nth degree. He’s a man at the peak of his abilities, feared and respected as the toughest pitcher in baseball. Jays fans will probably get to watch him at this level for another couple of years before either his abilities start tailing off, or he finds a new ballpark to call home. Enjoy it folks, they don’t make ‘em like this anymore.

What’s a recession?

You can’t avoid talking about the economy these days. What started with a banking crisis, progressed to a credit crisis, and now it’s a full blown economic crisis. Worst downturn in 70 years, that sort of thing. Economists don’t actually know if this will eventually end up being the case, but they have projections and best bets and the range of forecasts is glum. However, we won’t know if it’s been the worst economic downturn since the Great Depression until we are out of it, and all the data is in the books. So what’s a recession? And what’s a depression? And where do they come from?

A recession is defined as two quarters of negative economic growth. I’ve had friends chuckle at this definition, negative growth being somewhat of an oxymoron. In plain words, it’s two quarters of economic contraction; the economy gets smaller for six months running. There’s no hard and fast way to define a depression, but loosely it is a severe recession. Wikipedia suggests a depression is characterized by people selling tangible assets in order to fund everyday living, which might be how people on the margins of society operate, but when your neighbour starts hawking family heirlooms to buy bread, that’s a clear indicator.

When an economy is shrinking, and you are participating in that economy (ie, you’re not off in the woods eating berries and bark), then you are necessarily getting a smaller piece of the pie on average. With an expanding population, an economy’s natural state is one of growth. Growth above and beyond what comes from population growth translates into increased wealth for the economy. In a recession, less income and wealth are being generated as less widgets are sold and assets fall in value. If the population was holding steady, or shrinking, this wouldn’t ‘feel’ so bad. But historically, populations expand, so in a recession there are more people looking to earn income from a smaller economy. If you hold onto your job, you might feel like nothing has changed, but somewhere, somebody is looking for work and worried about the future, and soon enough they’ll be willing to do your job for less than you are paid.

Economic downturns have been a feature of capitalism and the market for as long as they have existed. If capitalism is an expression of human psychology and drive, then periods of relative optimism progress into periods of enthusiastic optimism and then there is a painful slide into disbelief and extreme pessimism. Once optimism starts creeping back in, the cycle of boom and bust is starting anew. If we could eliminate this aspect of capitalism, then we would be much happier in general. There would be steady economic growth without the periods of contraction, where people and families are displaced and the feeling that the future is bleak is prevalent.

Next time, I’ll explore the idea of the business cycle and loosely where it comes from and why it produces these periods of boom and bust.

Status Update

Looks like I haven’t posted here for well over six weeks!  That’s a shame, but I am getting loads of inspiration at school these days, so I am hopeful to start posting regularly on economic topics.  In the mean time, my latest post at takeoffeh could easily have been published at The Price Signal.  Stay tuned true believers..

Check it out

Canadian political commentary available here at Scott’s blog and my recent post at takeoffeh.wordpress.com.  Nothing like some intense politics to get me writing!

Al Gore Changes His Mind?

I picked this up at the Daily Dish this morning.  It’s a reference to a post by Shellenberger and Nordhaus at The New Republic on how Al Gore, in a recent missive to president elect Obama, has subtly changed his message regarding climate change and carbon emissions.  The shift is in priority, away from putting a price on carbon to emphasising investment in green technology.  This strikes me as a tactical decision by Gore.  In order to retain relevancy in an uncertain economic environment, he has shifted his rhetoric away from taxation and regulation towards the ever hopeful idea of new technologies.  In this case, he might have been taking notes from the recent federal election in Canada where Dion’s carbon taxing initiative was a political  millstone; it confused voters, was hard to explain and difficult to justify to the public how a new tax was necessary.

The writers at the New Republic have picked up on Al Gore’s shift as it fits their world view and their belief that new technology is necessary and simultaneously the best way to deal with the problems of climate change and carbon emissions.  I am ever hopeful in new technology as well but, historically, new technologies that deal with old problems, well, they tend to develop problems that are unique and troublesome in their own right.  To paraphrase that old expression, technology happens.

Here’s a response and a criticism of that piece over at The Bellows by Ryan Avent.  He suggests that regulation is already happening in a rather awkward and scatter shot way, by various levels and branches of government.  He also criticizes Shellenberger and Nordhaus.  The money quote,

But it should be clear that pricing and investments ought to go hand in hand. Pricing provides information about where and how to invest and incentives to adopt new technologies, while investments in research ease the transition off fossil fuels as carbon prices slowly ramp up over time. That’s the necessary carbon policy. And it’s hard to see how we get to where we need to be without both.

I am fully on board with what Avent is saying here.  There’s not one solution, there are many and they need to be explored simultaneously.  Government investment in technology is problematic in that you have people making decisions about what to do with the dollars involved.  If those people are subject to lobbying, you might get questionable bridge technologies such as ethanol.  Using markets to find what is desired at a societal level removes decision making from potentially flawed individuals in favor of what is going to work in the market.  With a properly designed price environment, the market will find solutions to the problem.

As a matter of political signalling, I find the whole situation to be fascinating.  I have not examined the leanings of these writers, but I am assuming the writers at the New Republic are on the right.  Indicative of this is their fear of regulation, the holy belief in the saving power of technology, and the uncertain embrace of state sponsored spending bailouts and investment that is sweeping governments around the world. 

Alternately, Avent appears to be more left leaning than Shellenberger and Nordhaus, but he’s the one advocating for using the power of markets (historically the domain of the right) and the effective pricing of externalities, in this case carbon emissions.  This just goes to show, when dealing with a complex issue, ideas of left and right are quite useless.  A complex problem requires complex solutions, with contributions from all over the spectrum.

So, did Al Gore change his mind? I don’t think so. It looks like this is case of some writers wanting to say “I told you so!”, when all Gore wants to do is to keep the issue on the front burner before it’s relegated to the dustbin by current economic events.  Avent is more in tune with what is necessary to move forward on climate change and carbon pricing, but Gore has got a message and a speaking tour to maintain.

On Canada

I’ve recently picked up John Ralston Saul’s new book, A Fair Country – Telling Truths About Canada.  An early push of the book examines how Canada deals with the integration of numerous cultures into a relatively harmonious melting pot.  Canada is held up as having got it pretty much bang on, a positive example, where other countries, such as France, are stumbling on integrating immigrants.  Ralston Saul’s idea is that this is not a recent development based upon effective immigration rules and policies but is in a fact very old reality, and is based on First Nations practices.  Indeed, the thesis of the book (so far as I have read), is that Canada is a Metis civlization, with the First Nations as the founding and most senior pillar of our country.  It’s a significant and sober departure from accepted analysis of Canadian history, as far as I am aware.  So far, his arguments are compelling and inspiring.  More to follow.

A New Post

Check out my new post over at a group blog, Takeoffeh! which is just getting rolling.