The One Hundred Buckets of Norman: A Fairy Tale

 

Once upon a time, not too long ago and not too far away, there were two magical kingdoms nestled on the vast shore of a great inland sea known as Lakeland.  Lakeland was an earthly paradise of green woods, towering cliffs and shimmering lakes bounded by a sky so blue, that water and air seemed as one. The waters of the inland sea seemed bottom less and the two kingdoms were surrounded by vast swaths of the most aromatic and verdant pines.  The winter had a crystalline crispness that took away one’s breath with its austere majesty while the summers saw long sultry days with a sun that barely set before midnight. On such summer days, the nobles and their subjects danced together far into the night blissfully unaware of the swirling turmoil in the world around them.

 

Alas, troubled times had come to the Two Kingdoms. A great plague had descended upon the land and the people had retreated with fear into their homes.  Crime and pestilence plagued the once happy peasants and burghers and the High Council of Nobles appeared increasingly at a loss to restore happiness to their domain. They would suggest grand projects and quests to give the people hope but all the people wanted was a return to some semblance of a happier time. The Nobles called upon their most loyal retainer and Chief Warden who went by the name of Norman to suggest a way out of the time of troubles. However, even he was hard pressed to solve all the problems given they had been complicated by the springing of numerous leaks in the town’s aqueducts.

 

Poor Norman faced a dilemma.  His most important role as Chief Warden was denoted by his second title as Keeper of the Palace Buckets. Water from the aqueducts to the palace was kept in many buckets and it was Norman’s role to make sure the buckets were filled and then emptied. However, there was so much demand for water from the Nobles that the task was never ending, and poor Norman constantly juggled buckets that were empty with others that were overflowing and had to be poured into other buckets. Some years there was too much water at the palace while other years there was not enough. 

 

The Nobles were frustrated given that sometimes they had plenty of water while other times there was not enough for their baths and regattas. Norman tried to explain that he had one hundred buckets to fill and even if some buckets had too much water, it was difficult to then fill buckets that needed more on the other side of the palace given the large number of buckets and the size of the palace. Indeed, Norman had too many buckets to keep track of and that was part of the problem. There had been a time of fewer buckets but over the years more and more buckets had been added and that had been Norman’s crafty doing to placate the Nobles.

 

It turns out the nobles were not terribly good at maths.  Even when the total amount of water was the same, the silly Nobles thought there was more water at the palace if there simply were more buckets. So, Norman made ten buckets become 20 and then 50 and then 100. Indeed, Norman was not even sure how many buckets there actually were, but the Nobles were so happy if they had their own bucket and access to many more that Norman was reluctant to change things. Norman thought of trying to manage the buckets better by making a list, but he soon found he just had too many buckets and not enough time or water.

 

So, what was Norman to do?  Well, the responsible thing to do was simply to come clean and tell the nobles there had to be fewer buckets – and indeed – maybe some of the buckets should be consolidated into a few large cisterns. True, some of the Nobles might have to do with less but given all the leaky pipes in the Two Kingdoms, the enormous expense of the plague, and all other troubles afflicting the realm, surely more bath water for the Nobles could wait. 

 

Instead, as Keeper of the Palace Buckets, Norman decided it would be wiser to keep his head from rolling by suggesting that a shining knight on a white charger might miraculously appear and make it rain buckets.  Or perhaps, the Nobles could employ another wizard to cast a spell and conjure buckets and water out of thin air.  Or maybe, the Great Emperor of the Southern Empire could be petitioned for more buckets of water. Or better yet, ask the peasants to provide more water for the Palace.

 

In the end, magical promises could buy time but not fill buckets.  After all, if the demand for buckets exceeds supply, no magic in the universe can change the outcome. The most convenient decision was simply to ask the peasants to provide more water for the palace. After all, what are peasants for if not to provide for their betters in life? One could have asked the Nobles to fill more buckets themselves and dip less but as has already been mentioned, they were not terribly good at math. Sadly, people who are not good at maths are not destined to live happily ever after.

 

The End.

 

 

 

Analysis: Federal Economic and Fiscal Update Fall 2021

 

Yesterday’s federal economic and fiscal update has been lauded as showing an economy doing much better than expected as well as improved federal finances relative to the spring 2021 budget.  In the end, the recovery from the depths of the pandemic has been much better than was anticipated and this has resulted in federal government revenues much greater than was forecast last spring.  Figure 1 shows that revenue is expected to be billions of dollars higher in each fiscal year up to 2025-26. – as much as 20 billion dollars more in some of the years.  Indeed, over the six years from 2020-21 to 2025-26, total additional revenues are expected to total about $106 billion.

 

 

 

However, as Figure 2 illustrates, that is being accompanied by a parallel process on the federal expenditure side.  Aside from 2020-21 which has turned out to have about $6 billion less spending than expected, the other years will see higher additional expenditures than originally forecast ranging from $7 billion to $15 billion.  Over the entire six-year period, the federal government will be spending an additional $54 billion than was laid out in the spring budget.  So, about half of the new revenues are going into additional spending while the other half enables the government to have a smaller deficit than planned in each of the years ahead.  

 

 

 

Whereas the spring 2021 budget saw a deficit (including actuarial losses) in 2021-22 of $154.7 billion, it is now forecast to be $144.5 billion.  By 2025-26, the deficit (including actuarial losses) is now expected at $13.1 billion whereas before it was going to be $30.7 billion.  Naturally, smaller deficits down the road will result in a smaller net debt and smaller net debt to GDP ratios given the projected GDP growth.  So rather than a net debt of $1.529 trillion by 2025-26, it should only be $1.359 billion.  The world should last so long.

 

Two things have been left unsaid about the updated numbers.  First, when all is said and done and the COVID-19 spending bubble wound up circa 2022-23, spending will be about 22 percent higher than it was in 2019-20.  Put another way, COVID-19 aside, federal spending will have grown at just over 7 percent a year.  The pandemic in classic Peacock-Wiseman fashion has provided an opportunity for the federal government to expand its spending and there has been an upward shift or displacement that is going to remain permanent. 

 

Second and more disturbing is if one accepts the average federal government inflation forecast over the next five years of 2.6 percent and adds in population growth of just over 1 percent annually, then the average nominal GDP growth of 4 percent from 2022 to 2026 is eaten up by inflation and population growth such that real per capita GDP after the post COVID rebound is essentially going to be flat after 2022.  If inflation turns out to be higher at say in the 4 to 5 percent range, then we are looking at a decline in real per capita GDP over the same period. There is not going to be any real growth.  That is the disturbing aspect of this update.  There is going to be a permanent enrichment of federal spending but not in the actual real economic growth of the economy. 

Inflation and Unemployment

 My most recent post on the Fraser Institute Blog dealt with an international comparison of inflation and unemployment. Enjoy.

Unemployment and inflation—Canada’s worrying numbers

— December 3, 2021

With the inflation debate in Canada focusing on whether this inflation is transitory or not, we’ve seen little discussion about how our inflation compares with other advanced economies.

The International Monetary Fund released its update of the World Economic Outlook Database in October and there are now updated estimates for 2021 and beyond. While monthly consumer inflation in Canada (according to Statistics Canada) is currently pushing 5 per cent, our consumer inflation for 2021—as estimated by the International Monetary Fund (IMF) using consumer prices—is expected to be closer to 4 per cent.

For the major 35 IMF advanced economies, consumer inflation in 2021 is expected to average 2.8 per cent, putting Canada well above the average. The rates are expected to range from highs of 7 per cent for Estonia and 5 per cent for the United States to lows of just under 1 per cent for Switzerland and Japan. At 3.8 per cent, Canada’s inflation rate for 2021 is expected to rank 6th highest of the 35 IMF advanced economies.

Of course, some might argue that a little inflation might be just the lubricant needed to help pandemic-stricken economies rebound given the traditional macroeconomic relationship (provided by the Phillips Curve) between inflation and unemployment, which posits an inverse relationship between the two variables. That is, high inflation rates have been associated with low unemployment rates whereas lower inflation rates have often been accompanied by higher unemployment rates.

This would suggest that across these countries, if Canada has a higher inflation rate, then it should also have a markedly lower unemployment rate.

However, that does not appear to be the case. Again, the IMF estimates for 2021 reveal an average unemployment rate for the 35 IMF advanced economies at 6.2 per cent with Canada again above the average at 7.7 per cent. The highest rates are just over 15 per cent for Greece and Spain while the lowest are expected in Japan and Singapore at just under 3 per cent. Indeed, Canada is expected to have the 8th highest unemployment rate of these advanced economies.

Higher unemployment and higher inflation—once termed “stagflation”—is a truly miserable macroeconomic outcome. Indeed, the sum of the inflation rate and the unemployment rate has been dubbed the Misery Index and a quick calculation of this index for these advanced economies puts Canada in the 6th highest spot. As the chart below illustrates, the most “miserable” advanced economies in 2021 are expected to be Spain, Greece, Estonia, Latvia, Italy and Canada with the combined sum of the inflation rate and the unemployment rate ranging from 17.9 per cent to 11.5 per cent.

 

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At the bottom in terms of misery are Taiwan, Singapore, Switzerland and Japan ranging from 5.4 per cent to 3.5 per cent.

For Canadians, the adage that misery loves company will be cold comfort given the higher costs of food, energy and rent that have marked the last few months. While many might argue that our inflation is not as severe as that of the U.S., with our unemployment rate remaining higher than other countries (including the U.S. at 5.4 per cent), Canadians are indeed left wondering if 2022 will be better or worse.