NORTHERN ECONOMIST 2.0

Wednesday, 7 October 2020

Is Ontario Really Flattening the Curve?

Well, Ontario's Premier has apparently stated that Ontario is flattening the curve but one wonders where this interpretation of the data is coming from. As the accompanying figure illustrates, the trend smoothing line is on a definite upward trajectory even if the cases over the last few days have hovered in the 500 to 600 range. It remains that we are in the midst of a second wave of infections given that hospitalizations have also been trending up since mid September. So, this does seem to be a pretty upbeat assessment that appears to be at odds with the evidence to date.

Most of the more recent cases appear to be affecting those under age 40 and this explains why deaths and hospitalizations have not soared as previously but again it remains that infection rates are especially high in low income neighborhoods. As well, quite a number of long-term care homes in Ontario are also seeing infections but then that is not a big surprise given the odd protocol that keeps residents safe by requiring family members to gown and mask up after a negative Covid test to enter the home but then allows family members to take residents out for the day and literally go gallivanting around town if they wish without a Covid test. One wonders who in Ontario's health ministry dreamed that one up. But then, consistency has never been a hallmark of Covid regulations issued by the government.

To be fair, the rising infection rate is ultimately not really the government's fault but the public's. Infections are up and so the government response is to appear to be taking action so they tighten the rules and restrictions. However, the only people that seem to follow the new rules were those following them already while those who were disregarding them continue to do so. We live in a society that is not really used to rules and restrictions of any kind. We are relying on common sense and a sense of responsibility to reduce the infection rate but the fact is many people feel that the rules apply to someone else - which is ultimately behavior that can be traced back to our political leaders who say we should do one thing but then privately make exceptions for themselves. And then of course, there are the people who think they are following the rules even when they are not and have convinced themselves that they are and say one thing while doing another. It would appear that we are all politicians at heart.

Saturday, 3 October 2020

A Primer on Recent Municipal Finance for Thunder Bay City Council

Well, it is going to be another fully packed agenda at the meeting of Thunder Bay City Council on Monday October 5^th. There is the usual plethora of reports and decisions to go through most notable of which are yet another vote on the proposed Thunder Bay sign and a report on Thunder Bay’s Centennial Botanical Conservatory recommending substantial re-investment in the facility. Of course, this is contrary to what was recommended in the program and service review which recommended closing it.

For those of us of a certain vintage, we are able to remember that the Botanical conservatory project was a Canadian centennial year project in 1967. It has provided an oasis of greenery during harsh winters here but over the years was allowed to deteriorate to the point where it seemed the facility was on the chopping block. Thunder Bay in general likes shiny new things and once acquired, tends to neglect them.

However, it appears it will be saved after all and the estimated costs for updating facilities at the Conservatory prepared by Gord Wickham, Vice President of Colliers International Projects Leaders sums to about $951,000 and not the estimated $2.8 million to $3.2 million originally stated. Of course, given that the new turf facility will sum to over $50 million by the time it is done, just under a million dollars is a modest amount to invest for a city with a tax levy pushing $200 million annually and growing by about $6 million a year.

The art of good municipal public finance is making decisions that represent good use of taxpayer dollars and reinvesting in the Conservatory would be a good 50^th anniversary project for the City given it also rebuilds something that was built in commemoration of the 100^th anniversary of Confederation. Two birds with one stone so to speak in a city with a lot of targets and not enough stones. More to the point, it is something that would not exist without public sector investment – unlike a turf facility for which there are qualified private investors who would have built on their own but now do not wish to compete with the city.

Of course, not on the agenda is the recent Fraser Institute report on municipal spending and finances in Canada authored by yours truly but also worth a read by the councilors as it represents a nice primer on the forces driving municipal spending. Local Leviathans: The Rise of Municipal Government Spending in Canada, 1990-2018 argues that Canada’s municipalities have increased their spending and employment over the last two decades while maintaining that they are fiscally challenged. Between 1991 and 2018, total real local government revenues in Canada grew from $107 billion to $186 billion—an increase of 74% while real per-capita total revenues have grown from $3,831 in 1991 to $5,024 in 2018—an increase of 31%. Total real property-tax revenue in 2018 dollars grew from $42.2 billion in 1991 to reach $71.7 billion by 2018—an increase of 70%. Meanwhile, revenue from government grants grew from $48.7 billion to $80 billion for an increase of 64%, while all other revenues grew 107%—from $16.6 billion to $34.4 billion. Thus, own-source revenues of one type or another saw the most robust growth.

The increase in operating spending is driven by several factors. Growing revenues from property taxes, intergovernmental grants, and the sales of goods and services are positively related to rising per-capita municipal expenditures. Essentially, one can argue that municipal spending rises to fill the revenues available. Moreover, on the cost side, increases in the number of municipal employees coupled with their pay rates is also a positive driver of rising municipal spending.

This suggests that municipalities in Canada for the most part have increased their spending because of a more than adequate ability to generate revenues to fuel that spending. The municipal wage rate and the number of municipal employees both are positive and significant determinants of per-capita municipal spending. As well, the size of the real per-capita municipal operating surplus is positively and significantly related to real per-capita property-tax revenues and real per-capita grant revenues. Indeed, over the long term, municipalities have played an interesting game. They are required by provincial legislation not to run operating deficits and they have not only managed to balance their budgets but generate operating surpluses most years and potentially add to their reserves. Over the period from 2008 to 2018, the operating surplus for municipalities in Canada ranged from a low of 6.1% of revenues in 2014 to a high of 11.9% in 2017.

Given the significance of both municipal wage rates and employment numbers as positive drivers of spending and negative drivers of the operating surplus, it stands to reason that municipalities need to make more of an effort to address their spending. Only after such an effort, can it be reasonable for municipalities to request additional support from upper tiers of government or increased taxes from their own ratepayers. Municipal ratepayers and provincial and federal governments alike need to be cautious that the current COVID-19 crisis is not used by municipalities as simply an opportunity to finance a long-term enrichment of their spending.

Food for thought but I suppose many councilors are not that hungry.

Monday, 28 September 2020

Will Getting City Data Get Any Easier?

The agenda for the September 28^th edition of Thunder Bay City Council includes a discussion of the “Open Data Portal” whose purpose is: “…is to establish a framework for making City data open and available to citizens, organizations, and businesses by minimizing barriers so that they can benefit from the information and add value to it.” What does this entail? Well, as described by the policy document:

The City will:

· Maintain an open data licence and other relative information on the Open Data Portal.

· Maintain an online Open Data Portal with a listing of all Open Data available and links to download each dataset.

· Proactively make Data available to the public on the Open Data Portal.

· Where available, include Metadata for each Dataset with information such as how the data was collected, when the data was last updated, and the expected update frequency of the dataset.

· Engage in dialogue with the community regarding data needs and requests.

· Prioritize and evaluate requests for Open Data from citizens in accordance with City policies and priorities and based on the readiness and suitability of the Datasets for public release.

This appears to be a sort of Data liberation initiative and if the policy is to be taken at its word, then it should be a welcome addition to the City of Thunder Bay’s website. However, one hopes that there is a discussion this evening that provides examples of what type of data will be released? Will it be aggregate results on a neighborhood level of assorted city surveys that have been done over the years? Will we finally be getting staffing level information on a departmental basis and over time so that meaningful comparisons can be done? What does “machine readable” mean in terms of what the City makes available? Is it only csv or excel files or will some type of proprietary software package be needed that users will have to purchase from the City of Thunder Bay even if the data is “free”? What exactly will the decision process be as to what data to release and what variable swill be made available?

One worries that when governments commit to “open data” the public access will become harder rather than easier despite the intent of any legislation. Indeed, the statement that users: “Not misrepresent the information or its use” sounds like an effort to control what is done and that there will be decisions made based on the "need to know." After all, if someone draws a conclusion from statistical analysis as to what trends are in employment or financial data that City Council or its administrators do not like or agree with, does that constitute differing empirical analysis or “misrepresentation”?

Municipal data is already notoriously difficult to come by. Financial and budgetary information or employment level data even if available is not transparent or easy to understand and one is often left to external sources for data that facilitates comparison of Thunder Bay’s municipal finances to other jurisdictions – such as the annual report put together by BMA consulting. True, one can go onto the Ministry of Municipal Affairs site to access the FIR data on finances, but it is not easy to use either.

So, an Administrative Open Data Committee is going to be established that will decide all of this stuff and it will: “Engage in dialogue with the public and dataset requestors as needed to get additional information and provide status about requests submitted through the open data request form on the City of Thunder Bay Website. Work with the appropriate staff from each department to document, prioritize and evaluate requests for Open Data in accordance with City policies and priorities and based on the readiness and suitability of the datasets for public release.” It would be interesting to know what datasets the city even has?

As always, the devil is in the details. Statistics Canada is notorious for starting and then abruptly ending data series making it difficult to construct consistent time series. One wonders if the City is planning to provide more detailed data on things like properties in tax arrears, or how many complaints come in with respect to certain issues. For example, I would be interested in knowing how many reports have been made of pinhole leaks to the City of Thunder Bay? Surely, knowing how many reports have been received per month over the last two years is not something that does not “respect the privacy of individuals whose information is reflected in the City Datasets.”

My guess is that this Open Data Committee is going to take a long time to set the parameters.

Friday, 25 September 2020

Canadian Universities and COVID-19: Apocalypse ... Not?

The academic year at Canada’s universities is well underway albeit in a mainly online/remote format. It has been an extraordinary transition on the part of faculty and staff accomplished on fairly short notice. Developing or converting materials from a classroom lecture format to a more structured online delivery system has been very time intensive. An online course requires substantially more time on the part of instructors for organization and development and it is also more work for the students taking the course. Unlike a classroom environment where the instructor can tailor the pace of weekly delivery to accommodate progress and needs, the weekly online modules once set with their materials, schedules, quizzes and assignments, can move forward quite relentlessly.

Interestingly enough, universities have been pressuring their faculty for years to do more online because of the supposed flexibility it affords students and the anticipated “efficiencies” but this year’s rapid transition has revealed the mixed blessing that online university teaching is. It turns out that doing online teaching well is a bit more complicated than simply piling everyone into Zoom lectures. It helps to have infrastructure that does not collapse when too many users sign on. It also helps to have supports for faculty and staff doing the teaching like proper computer equipment, but six months in everyone is pretty much still on their own at home improvising as they go along. And it turns out Zoom lectures and Zoom office hours are about as well attended as regular classes - I will leave that to the reader to interpret as they wish.

Of course, much of the interest this year has focused on the apparent financial effects on universities from COVID-19. In the spring, there was much widespread speculation that enrolment was going to collapse as domestic students stayed home and international students were unable to come back into the country and some institutions began pre-emptive action. It turns out that this did not exactly come to pass. Across the country, enrolments appear to be stable or even higher than anticipated at many universities and even international students have been able to register for courses online. Even at Lakehead, overall enrolments are stable as the accompanying figure showing recent numbers to date suggests. Indeed, the bigger long-term problem is not overall enrolment collapse but universities competing with themselves for students by expanding online enrolment and poaching students from each other.

With the enrolment apocalypse over for the time being, the media doom frenzy is focusing on other financial effects like “half-full” residences and “shuttered” food services and the “decline in public funding”. However, with fewer students on campus, there are also fewer costs particularly in staffing like food services and cleaning much of which has been contracted out. Moreover, with everyone working from home, heating, air conditioning and hydro costs are reduced. And, as for the decline in public funding, that has been underway for some time. Governments have wanted universities to reduce their dependence on public funding and as a result universities have raised tuition fees, recruited more international students and branched out into research and ancillary fees for additional revenue.

Essentially, our universities are really no longer publicly funded but publicly assisted and the bigger question is why some of our universities have not simply taken a leap and gone completely private? Part of the answer is probably that governments cannot leave things well enough alone. Even if universities went private, governments would probably continue to regulate tuition for political reasons as they do now thereby ham-stringing university operations just as they do now.

The other interesting development is that our governments are continually telling us they have your back and how they are there to support you and yet despite a nearly $400 billion dollar deficit at the federal level and multi-billion dollar deficits provincially - shoveling all types of money out to individuals and businesses – still no real support package for universities. Given that universities have held their own on enrolment, one might expect a little help to deal with fixed costs and the decline in revenues from ancillary services. Public funding for universities peaked in 2010-11 and has declined since, a little bit of help during the pandemic is not unreasonable.

Yet, it appears that universities are on their own. Governments generally do not like things they cannot fully control and recruit for their political purposes and university academics generally fall into that category. Governments have been given carte blanche in their approach here because the public supports them. The general public essentially perceives academics as public school teachers with a longer summer vacation. It still amazes me how many people ask me every September if I have gone back to work. I have given up explaining what I do – it is a lost cause.

At the same time, the public perception is understandable. University employment is a good job. Academics like their work and that probably does generate envy given that many people do not enjoy their jobs. However, what academics do is still work and just because faculty like their job should not represent an opportunity to make them miserable. Indeed, academics are not the only ones with good jobs at a university – they are actually outnumbered by staff and administrators who also have nice jobs and working conditions because students come to the university to take courses taught by academic faculty. Which brings me to my next point…

Compounding all of this is the opportunity that COVID-19 has provided to university boards and administrations. Despite the fact that enrolment is stable or rising at many institutions in the wake of COVID, the continued doom mongering is a useful tool for extracting concessions. Indeed, during a pandemic, one might expect a pull back from mercenary behaviour, but it appears that across the country, those university faculty associations unfortunate enough to have their contracts expire during the pandemic are facing particularly brutal demands for concessions on the part of university administrations. Apparently, despite the theatrical performances of our prime ministerial soliloquist in chief in Ottawa, we are not all in this together.

Monday, 21 September 2020

Deficits, Inflation and Interest Rates: A Very Simple Analysis

The immediate impact of COVID-19 on Canada’s economy - like many others - has been a drop in GDP and a massive ramping up of government deficits given the collapse in revenues and in increase in emergency spending and benefits. At the federal level, the deficit for 2020 is anticipated to be closer to $400 billion. In the wake of Wednesday’s Throne Speech there should be a fiscal update or budget that will provide further fiscal details. In the meantime, it is worth thinking a bit about what the ultimate impact of such large deficits will be not just in Canada but on the world economy.

The traditional aggregate demand(AD)-aggregate supply(AS) framework for looking at fiscal and monetary policy suggests that large deficits will shift AD to the right and raise price (P) and output (Y). The increase in prices then triggers inflationary expectations which shifts the aggregate supply curve upwards starting a wage-price spiral. Bringing inflation under control ultimately then requires tighter monetary policy that raises interest rates and brings down aggregate demand and inflationary expectations. It all seems simple enough except since 2008-09, the massive deficits incurred around the world do not seem to have done any of this. Indeed, inflation is low and interest rates have gone lower. The world is awash in cheap money. And, Modern Monetary Theory (MMT) has been gaining ground with arguments that we can stimulate demand practically forever by having sovereign governments with their own currency increasing the money supply.

I think if we had to draw a picture of the global economy under the current situation, it looks something like this (Figure 1):

If we think of the world economy as a giant AD and a giant AS curve, the AD curve has a traditional downward slope, but the AS curve is flat rather than upward sloping or vertical. That is, world aggregate supply as a result of integrated international supply chains, trade, increasing capital mobility, technology and digitization – essentially the results of globalization since the 1990s – has become perfectly elastic. As a result, even with deficits and cheap money shifting that aggregate demand curve repeatedly to the right, there has been no inflationary pressure. Supply has expanded to accommodate demand and hence inflation has stayed low and there has been no upward pressure on interest rates.

This means that in a sense we are going to be able to both have our cake and eat it for some time. Inflation will probably not rear up its head anytime soon and interest rates are going to stay low and probably below the rate of economic growth meaning that governments will not face immense debt service or debt burdens from their massively expanding debt. However, I think eventually, the global economy is going to more likely start to resemble Figure 2 down below:

While one can argue that the economy has always been global, modern economic history has been marked by two distinct periods of globalization: 1870 to 1914 and 1990 to 2016. The first great globalization coincided with the hegemony of the Pax Britannica, the industrial age and the liberalization of the world economy which came to a crashing halt with World War I and which then took decades to resume. After the shocks and trauma of trade restrictions, world wars, political extremism and the Depression, the post-World War II era saw slow steps to more trade and the fall of the Berlin Wall marks the start of the second age of globalization and trade liberalization which moved together with the internet and rapid technological change in communications, and China’s rapid industrialization and development. Much of this growth of trade occurred under the hegemony of the Pax Americana and included shifting of production to lower labour cost environments. This age was dealt a blow by the 2008-09 recession and came to an end with the rise of populism and trade restrictions which officially begin with the election of Donald Trump in 2016 and the American retreat from a more global role.

The second great globalization essentially flattened the aggregate supply curve which is why inflationary pressure has been muted. Because of technological change, improved transport and communications, the shifting of production to the cheapest spot with integrated supply chains, and freer trade – the aggregate supply curve became perfectly elastic and able to accommodate rising AD at an almost infinite pace. However, we are now in a volatile transition period that has been aggravated by the pandemic. Since 2016, there have been more trade disputes, concern and push back against China’s seeming unwillingness to play by the rules of a more liberal-democratic world economic order, and trade disruption by populist politicians. The end result of this will be an AS curve marked by higher costs of production with output expansion – in other words, more of an upward sloping curve.

The result of expanding demand with an upward sloping AS curve will be rising prices and hence the return of inflation. Combine this upward pressure on prices with eventual competition for borrowers to take on more and more government debt and there will be a rise in interest rates. The events of the last five years have ensured that interest rates will rise – it is not a question of if but when.