NORTHERN ECONOMIST 2.0

Tuesday, 10 January 2017

Some Fiscal Issues of Note

Budget deficits have once again reared their head as a major policy issue at the federal level which is somewhat amusing given that not too long ago, the projection was for a new age of persistent surpluses at the federal level. Not only did the incoming Liberal government immediately begin running large deficits expected to continue until the early 2020s, but the forecast has worsened to an even longer run of deficits. The most recent projection by the Federal Finance Department says we are looking at deficits at the federal level until about 2055. For my take on this, see here.

As for budgets, deficits and fiscal sustainability at the provincial level - well, Ontario is still not out of the woods yet. Health spending is a big factor. The province's Financial Accountability Office has just released a report on trends and outlook in the Ontario health sector. Ontario is restraining health sector expense growth in an effort to balance its budget by 2017-18 but according to the FAO's review of the program changes introduced: "if the Province is to meet its 2016 Ontario Budget health sector expense targets, the Province will need to implement additional program changes that result in health sector expense savings of $0.4 billion in 2016-17, $0.9 billion in 2017-18 and $1.5 billion in 2018-19." The FAO also notes that the continuation of 2% annual average growth in health spending - which is what the government is currently doing - may be difficult to sustain beyond 2018-19 if service quality and level are not to be compromised.

Sunday, 8 January 2017

Housing Prices in Sudbury and Thunder Bay: The Boom is Over

A key feature of housing markets in Canada over the last decade is the sustained price increases particularly in larger urban centers such as Vancouver and Toronto. Despite a relatively flat economy and stagnant population growth, even northern Ontario has seen a price surge in its two largest urban housing markets: Greater Sudbury and Thunder Bay. However, while Ontario’s housing price surge especially in the GTA shows little sign of abating, it appears that economic reality may have finally caught up with northern Ontario’s largest housing markets as prices appear set to level off.

Cap and Trade in Northern Ontario

Ontario has brought in its new cap and trade system as of January 1st. Northern Ontario is generally an energy intensive place in terms of its transportation needs as well as its industrial activity so one would expect some impact on costs. Business groups led by assorted Chambers of Commerce apparently would like to see the program delayed. In terms of the general impact on Ontario, I have a short piece here while Margaret Wente has another here. While dealing with climate change and saving the environment are important, doing it in a manner that causes more economic harm than good is not optimal policy but then Ontario has been raising the cost of doing business in the province for years and criticisms appear to be so much water off a duck's back. As for the specific effects on northern Ontario, you can check out this story on CBC regarding northeastern Ontario. Despite the optimism conveyed in this story there is a sense that there will not be a great deal of carbon emission reduction as a result. As for the northwest, another CBC story that also conveys a sense of opportunity despite the rise in costs that are anticipated given our colder winters and longer driving distances. It concludes with a quote from Chris Ragan at McGill that the impact will take a much larger bite out of lower income households.

Wednesday, 4 January 2017

Why No Research Chair in Economics at Northern Ontario’s Universities?

Northern Ontario’s universities are proud of their research intensiveness and success. Indeed, over the last decade they have made an impressive effort to acquire the flagships of research intensity – the academic research chair. Research chairs highlight and foster a specific area of research importance by dedicating specific resources to support the chair holder’s research. Along with budgets for research, these chairs allow a professor to concentrate on research by reducing their teaching load.

Many of the research chairs currently at northern Ontario three largest universities - Laurentian, Lakehead, and Nipissing are funded by the federal government via the Canada Research Chairs program. There are also other chairs that have been funded with partnerships with other agencies and funding groups as well as internal university resources. As noted in a previous post there appear to be 17 such positions currently held at Laurentian University, 16 at Lakehead University, 4 at Nipissing and one at Algoma. Moreover, these research chairs cover a wide range of topics stretching from applied evolutionary ecology to indigenous health and aerial robotics.

However, there is a curious omission when it comes to these many important topics – anything specifically to do with economics. Indeed, three important economic sub-fields given northern Ontario’s economy are nowhere in sight: regional economics, transportation economics and natural resource economics. Such an oversight is troubling especially given the constant use by universities of the words “economic development” or “economic impact” as background context whenever major research projects or research chairs are announced.

Looking Ahead to 2017

Economic historians will view the year 2016 as marking the end of the second great era of globalization that began in the late 1970s and picked up speed after the fall of the Berlin Wall. The year 2017 will usher in continuing significant economic and political change, tumult and adjustment. The three seminal signal events of 2016 - the Brexit vote, the election victory of Donald Trump and the Italian referendum –herald the new era. Global economics and politics will be marked by restraint of trade, reduced mobility, populist politics, more extremism and continuing slow economic growth as a result.

The first great globalization from 1870 to 1914 was marked by the spread of liberal economic and political institutions, industrialization and rapid technological change especially in transportation and communication. The prosperity of the pre-1914 era was marked by the centrality of Europe both economically and politically and combined free markets and trade to create a world economy with liberal legal and constitutional institutions in its primary economies and the British pound as the international currency. Moreover, it was an age of free movement not only for commodities but also in terms of labor with mass migration from the old world to the new.

However, the pace of rapid change and economic integration created strains in a world of nationalism and imperial governments and the result was World War I. The years from 1914 to 1945 marked the start of several traumatic decades in international economic and political history that included revolutions, the rise of communism and fascism, two world wars and the Great Depression. A dominant feature of the period from 1914 to 1945 was reaction to a series of major international economic and political shocks. We are embarking on a similar period – hopefully minus the specter of global armed conflict.

Despite the 2009 Great Recession, the world economy has grown dramatically over the last thirty years. The prosperity of the world economy that has been driven by free markets, technological change and the global institutions led by post World War II America and the US dollar as the international currency has given way to an era of multi-polar economics and politics. The rise of China and Russia led by its business oligarchs has been aided by the liberal economic order, which has helped grow their economies and trade. Indeed, autocratic oligarchs do well in a world of liberal economic and democratic rules that govern everyone's behavior but their own. Russian and Chinese business oligarchs buying property in Europe or North America to safeguard their wealth from their own capricious government action is the most obvious example of such behavior.

The people of the United States have now put in place their own set of oligarchs to counter a world that seems to be increasingly at odds with their own interests. Along with Donald Trump’s own economic status, the composition of his incoming cabinet leans toward ex-generals and billionaires – not much different from say how countries are run in the Middle East, never mind Russia or China. However, once everyone behaves like the oligarchs, growth of the economic pie will suffer. Less liberal regimes in the rest of the world whose economies have benefited from the economic environment maintained by the framework of American diplomacy and power will definitely get more than they bargained for as trade barriers rise. American policy will become even more inward looking and more explicitly self-interested.

The economic and technological progress of the last three decades owes much to the economic policies of the post 1970s – liberal policies ultimately rooted in the European Age of Enlightenment and the political movements of the early nineteenth century. These liberal economic ideas include rule of law, free speech, representative democracy, majority rule but respect for minority positions, property and human rights, and the exchange of goods, capital and labor in free markets. The result was more trade agreements, deregulation and some effort at more efficient government.

While the results of liberal economic policies can be imperfect and the benefits of trade and globalization unevenly spread, it remains that a retreat into populism and tariff barriers will make us poorer in the long run. It will take time and tumult to illustrate the poverty of the road that the world is embarking on. It will also take new ideas and policies on the part of free market and liberal economic advocates on how to better distribute the benefits of economic growth and deal with the labor market trauma of technological and economic change that has stoked populism.

NORTHERN ECONOMIST 2.0