NORTHERN ECONOMIST 2.0

Friday, 8 January 2021

Why Vetting Political Candidates Properly Matters

In the wake of the events at the US Capitol this week, what sprang to mind for me is a conversation I had nearly four years ago in a New York theatre of all places. We were in New York in late April of 2017 and in the evening at the last minute decided to attend a Broadway musical. It was a production of Bandstand at the Bernard B. Jacobs Theatre. We had about four empty seats beside us but just before the production began a well dressed business person with a briefcase and his partner and their teenage children arrived and took up the seats. We exchanged brief greetings and then the performance began.

When the intermission began, we got up and stretched our legs a bit. As is the case with being in America, Americans are the most friendly, gregarious and open of people and always love to start up a conversation and this gentlemen beside me was no exception. He was apparently a lawyer and when he found out I was an economist asked if I knew Arthur Laffer sparking further conversation. This fellow was apparently on a board in New York with Arthur Laffer - as well as other interesting people it turns out - and he was on several boards and quite active on a number of fronts.

He then discovered I was from Canada and as this was late April and President Trump had just announced trade tariffs on Canadian steel, in characteristic American fashion he came right out and asked what I thought of President Trump. I of course responded with a rather vague circuitous answer somewhat out of the Sir Humphrey Appleby playbook that essentially amounted to "well he is your president and we must respect the people's choice and I'm sure things will work out in the fullness of time..."

He smiled and then basically said that well you know this was not supposed to happen. It turns out this friendly, pleasant and articulate gentleman was also a member of the Republican party in New York and on the committee that was supposed to be vetting candidates. He essentially revealed that when Donald Trump announced he was running for President the establishment did not really take him seriously and he was never properly vetted as other candidates were. While this is something that is pretty much common knowledge now, it was a surprise to me at the time.

Still, the rest is now history. Mr. Trump was a force of nature - the kind that creates natural disasters of course - and his environmental impact continues. His presidency has been capped by the wildest lame duck period in American history and there are still almost two weeks to go. America's role in the world has been much diminished by the Trump presidency and we are all going to pay the price. Still, despite the damage, one cannot but hope that the resiliency of the United States will ultimately prevail and that this sad chapter will eventually be a sad footnote in American exceptionalism.

There are two lessons I draw from this story. First, it is very important for all political parties wherever they may be to never take things for granted and always properly vet all their candidates. Second, New York is still the neatest place in the world because you just never know who you are going to meet at the theater or on the streets. When all of this COVID business is over, it will be nice to go back.

Thursday, 7 January 2021

Why Incentives Matter: An Example from Thunder Bay City Council

It is going to be a busy month at Thunder Bay City Council as the 2021 budget deliberations get underway. The agenda for the meetings on the 19^th of January is quite lengthy with a raft of difficult to read budget documents. However, there is also a meeting on the 11^th and that meeting also has a somewhat lengthy agenda with many items. There is so much going on and little time to digest and comment so one has to be selective.

An interesting item worth looking at for Monday’s meeting is a memorandum from the Manager – Central Support dated November 26^th “containing a motion recommending that City Council establish a loan envelope of up to $1,350,000 to support the Private Lead Water Service Replacement program.” This is a follow-up to the $50,000 in funding in 2020 that was supposed to be a grant program to help replace lead pipes but then transitioned to a loan program because it was deemed “not appropriate to continue to budget an annual contribution from the Stabilization Reserve Fund where the cost to administer the program is lost interest and administrative costs.” Instead, the proposal is for an interest free loan program.

This is all part of Thunder Bay’s complicated 25-year ongoing water infrastructure saga which has seen the move to one source water supply in the wake of the giardia saga on the south side, the rapid increase in water rates to fund all the new infrastructure and maintain the old, the flooding of the new water treatment plant – and surrounding neighbours - the introduction of sodium hydroxide to reduce lead in pipes on the cheap, and the removal of sodium hydroxide in the wake of numerous reports of pinhole leaks and more flooding All of this has also generated several major lawsuits – for flooding in 2012 and pinhole leaks in 2020.

The City has remained tight-lipped on what it is going to do to address the epidemic of pinhole leaks but the connection to sodium hydroxide has not prevented it from once again embarking on the lead connection pipe problem. The memorandum is an interesting example of policy making at Thunder Bay City Hall. The $50,000 program has generated 24 applications which at $3000 per loan has generated a demand for loans totalling $72000. So obviously, more loan money is needed, and the city has set $1,350,000 as the pool of loanable funds which at $3000 per loan means the city can issue 450 loans. How clever. The interest income foregone given current rates over the next ten years is low (apparently $100,000 in the estimate in the memo) and the City can even generate additional revenues by jacking up the fees from turning water on and off when the pipes are replaced. Indeed, I am surprised the city has not yet thought of the latter.

So, here is the thing. There are apparently upwards of 8,000 households in Thunder Bay that still have a lead connection pipe to the City water distribution system. This means that the program is expected to “solve” the lead problem for approximately 6 percent of affected households. A program designed to completely solve the problem would require a much larger pool of funds – 8,000 multiplied by 3,000 – which would be $24 million. And, there is no guarantee most households would take up the city’s offer.

The incentive of a zero-interest loan of $3,000 for a project which based on the pinhole leak water service line replacement examples costs $5,000 to $10,000 is not terribly attractive. Given the current loan program generated only 24 applications and not hundreds given the pool of 8,000 applicants suggests that this program will not be very successful. It is designed as a political solution to convey the impression that the City is doing something about the lead problem especially in the wake of the sodium hydroxide fiasco.

However, economic incentives matter. If the City was serious about addressing the lead connector pipe problem, it would use a cost-sharing grant program. That is, it should pay 50 percent of the costs of replacing the lead connector line up to a maximum grant of say $3,000. It needs a cost-sharing grant because realistically the obstacle to replacing the pipe on the part of homeowners given low current market interest rates is not access to loans but the total cost of the project relative to their household savings or income. It also needs to cap the grant because an open-ended grant creates the incentive to generate escalating cost estimates on the part of service providers.

And, in the process of implementing this pipe replacement program it should also extend the program to city residents who have experienced leaks in their connector pipes in the wake of the introduction of sodium hydroxide. Based on the leaky pipe statistics publicly provided on the Leaky Pipe Club Facebook page, it can be estimated that upwards of 3,000 households have experienced leaks over the last 18 months. Of these, a substantial fraction experienced not only household leaks but the failure of their connector pipe. However, we do not know the official number of leaky pipe households or how many connection pipes have been replaced because the City does not release those numbers. So, using 3000 households as a potential estimate and at $3000 per grant, would result in an estimate of $9,000,000 as the cost of a connector pipe replacement support program for leaky pipe households. And of course, this would be on top of the $24,000,000 estimate for the lead pipe households.

So, a total cost estimate for resolving these water issues comes to $33,000,000. Is it a lot of money? Certainly. However, if we can spend $40,000,000 for a new sports facility and over $50,000,000 for a new police station, obviously money is no object. It is politics. The Mayor and Council obviously do not find the incentive of ribbon-cutting ceremonies for a lead pipe replacement sufficiently attractive events to put on their campaign literature or to attract provincial and federal cabinet ministers to the photo-op. Basic water infrastructure and maintenance is not glitzy enough compared to spanking new water treatment plants or a shiny new turf facility or even a bridge or traffic roundabout.

Thunder Bay is fiscally constrained you say? City councilors and administrators have seen the “light” and are now advocating only 2 percent tax increases so we cannot afford to do all of this? Think again! Along with incentives being important in economic decision making, there is also the concept of the trade-off. The cost of dealing with the water issue – lead and leaky pipes – can be estimated at $33,000,000. The cost of the turf facility and new police station amount to $90,000,000. It is time to choose. And, by the way all this has to be done with tax increases kept as close to zero as possible given the City’s economic situation. Putting forth a 2 percent tax levy increase is only the beginning. It needs to go down from there.

Monday, 4 January 2021

COVID-19 in Ontario and Thunder Bay: The Bad News and Some Slightly Better News

It is the New Year but the old year lingers on in full force as today's COVID-19 numbers for Ontario again topped 3,000. We are now in the second wave of COVID-19 and it shows no signs of reaching a peak yet. Indeed, as Figure 1 illustrates, the second wave dwarfs the first by far and at day 344 of the start of the pandemic in Ontario (based on the date of the first case) is still on a steep upward incline.

The somewhat better news for Ontario (Figure 2) is that while deaths are also on an upward incline, they are not increasing as quickly as during the first wave and have yet to surpass the peak reached during the first wave. However, given the number of cases and the extent to which the virus appears to have become ingrained in the population combined with the stubborn inability of many members of the public to accept the need for taking protective measures and social distancing, we are probably at best a few weeks away from a daily death toll of over 80 - last reached in late April/early May.

As for Thunder Bay, the good news may be that a peak in terms of daily cases may have finally been reached. As Figure 3 shows, the LOWESS smooth does appear to be on a downward trend with the peak occurring nearly three weeks ago. However, the down slope is slow and at the current trend it will take about another three weeks to get the daily count back down to close to zero - barring another super-spreader type event that kicked off the last upswing. The current surge in daily cases largely starts from the pickle ball and teen challenge events in November.

One hopes that appropriate lessons have been learned. So, there you have it. Happy New Year.

Monday, 14 December 2020

Thunder Bay City Council's Increasingly Out of Touch Vision for Thunder Bay

If history teaches us anything, it is that periods of pandemic are ultimately associated with eras of great economic and social change and disruption. One only has to go back to the Black Death or The Spanish Flu to see the effects on labour markets and societal attitudes and ultimately all aspects of life. Much like the wake of 9/11 which saw enhanced security measures entrenched forever, once the pandemic has subsided, there will not be a full return to the world we had before.

This era will be no different and in Thunder Bay all of these changes coincide with an increasing sense of disquiet many residents feel with respect to the direction the City has been taking. Along with continuing high rates of crime, racism and mental illness, the lineups at food banks have been increasing and there seems to be a return to a wild west frontier mentality with the increasing number of people being stopped by police for driving under the influence.

Moreover, there seems to be an increasing sense of detachment from the public by the Mayor, City Councillors and Administrators whose recent decisions with respect to major capital projects such as the proposed Turf facility and new police facilities, the silence on the epidemic of home plumbing issues linked to City water, and a preoccupation with what seem to be superficial issues like tourism signs and future sporting events, all seem to conflict with what appear to be more pressing issues. The discussion of rising taxes when other cities such as Kitchener or Edmonton have decided to keep their increases closer to zero provides another disconnect with residents.

The City is in the midst of major program reviews and yet City Councillors seem to shelve much of the advice provided while continually talking about the cost savings they have generated. They are also being presented with a new master plan on regional paramedic services whose text underlines the ominous future of a city with stagnant population growth and yet ever rising needs for the services of paramedics due to aging as well as a population more prone to a variety of social ills. With the 2021 budget coming, one is left with the impression that ultimately, the Mayor and Councillors are gearing up for another major tax hike to meet all of these needs given their unwillingness to prioritize.

So, the question is what kind of vision is driving the approach of successive City Councils and the Administrators and the policy apparatus in Thunder Bay? One would venture that Thunder Bay City Council suffers from an increasingly stale 50-year old vision of what Thunder Bay needs. That vision could be summarized as follows: Thunder Bay is a regional center and strategically located full-service high-tech urban oasis set in a pristine natural wonderland with a wonderful quality of life on crucial east-west trade and transport routes whose full potential is unrealized. Indeed, the entire City’s potential is unrealized and what Thunder Bay needs is continual infrastructure investment to attract people and effective communication of our potential to convey the message of how wonderful we are. While Thunder Bay may have social problems, they are not any worse than other places and have been blown out of proportion by the national media. City residents need to have a positive attitude, stay the course on this strategy, and we need to invest in the public services and infrastructure to make it all happen.

This is in essence what has been driving policy in Thunder Bay since amalgamation. Lost in this vision of the future is the fact that since 1970, the City has stayed static in population, its industrial mainstays have largely disappeared, and its grain transportation role fallen to a shadow of its former glory. The fact that people often move to communities because of job opportunities seems lost on Thunder Bay’s governing elites. Anyone pointing out the fact that the City has become a welfare dependency given that over 30 percent of employment is now public sector or tied to government grants is a “Negative Nellie.” While there indeed has been some job creation in the knowledge economy and the health and education sectors that have helped provide a market for some entrepreneurs, it remains that this has been largely a rear-guard maintenance action that has had difficulty keeping pace with the employment losses.

Key to this vision is the level of municipal spending, employment and infrastructure investment designed to keep the economy going via construction projects. This spending is financed by government grants and by tax increases levied increasingly on the residential tax base given the departure of the industrial mainstays who provided the base for the past development of a very generous level of municipal spending. Tax increases are justified by “a build it and they will come philosophy” even though after fifty years we have built a lot and population is still the same. When the point on practically zero population growth is mentioned, the response is to mention that we have large numbers of temporary residents whether they be students or visitors from outlying First Nations who need services. However, we do not seem to have numbers documenting this aside from the numbers City Councillors and Administrators like to throw out - numbers like “20,000 or 30,000 more” during meetings without good empirical evidence. Most importantly, there is the unanswered question as to why municipal ratepayers should even be providing these additional population services out of a local property tax base? Where are the provincial or federal governments in all of this?

When the high level of taxation is mentioned, the response is that yes, the tax rate is higher here but our cost of living is so much lower so it is “okay” to have local residents pay more on their property taxes to provide services comparable to other places. From each according to their abilities, to each according to their needs. However, by cost of living, City Councillors generally mean that we have lower average property prices without realizing that the reason we have lower property prices is because of the lack of population growth and the fact that higher tax rates have been capitalized into lower property values. Indeed, property prices are as high as they are in Thunder Bay because of fairly effective supply management on new home building and low interest rates. Then there is also the need to differentiate between costs and ability to pay for those costs.

Take for example a comparison between Toronto and Thunder Bay. An average property in Toronto now sells for about one million dollars whereas an average property in Thunder Bay is closer to 300,000. Given the average 2020 property tax rates of 0.599 in Toronto and 1.563 in Thunder Bay, the property taxes paid on an "average" property would be $4,689 in Thunder Bay and $5,990 in Toronto – 28 percent higher in Toronto. The problem is that the basis of comparison should be similarly priced properties or similar properties (eg. a three bedroom bungalow in both locations) in which case the Thunder Bay home often pays substantially more. If you have a $500,000 property in Thunder Bay – which many people now do – you are paying as much in property taxes as a property worth three times that in Toronto.

And then there is the ability to pay for those taxes which is financed out of current income. According to the NUMBEO cost of living comparison website, in Thunder Bay, the average monthly salary after taxes is $2,783 while in Toronto it is $4,214 – 51 percent higher in Toronto. Aside from rent and commuting costs, the cost of living for just about everything else is not that much lower in Thunder Bay compared to Toronto.

So, we have an expensive vision of local and regional municipal government spending based on an economic base that no longer exists. That vision is justified by a “build it and they will come philosophy” which after 50 years, has yet to yield results. When the Mayor and Council are criticized – and assuming they choose to respond and do not just ignore you or disparage you as a crackpot - they respond with dubious arguments about how our cost of living and property values are lower thereby resulting in lower taxes meaning they can be raised more because they are a bargain compared to Toronto. Of course, if the cost of living here was truly lower resulting in a surplus for local residents in excess of what they need, why we might not want to keep money in our own pockets rather than simply hand it over to the local municipal-industrial-construction complex is a question that Thunder Bay politicians do not want to answer.

We are now in a time of great change and Thunder Bay will need to adapt as well as deal with the legacy of its past decisions. And yet, the old inflexible vision goes on, and so unfortunately does the sense of alienation felt by many local residents. Thunder Bay needs a new vision and one that is sustainable given the current tax base.

Friday, 11 December 2020

Input Into the Federal 2021 Budget Process

I had the opportunity to present via Zoom at the House of Commons Standing Committee on Finance today. It was a very good experience with interesting questions and discussions afterwards. Here is the prepared text of the remarks I delivered during my five minutes:

Dr. Livio Di Matteo

Professor of Economics, Lakehead University, Thunder Bay, Ontario

Presentation for House of Commons’ Standing Committee on Finance, Pre-Budget Consultations in Advance of the 2021 Budget, December 11^th, 1-2pm

Good Afternoon:

Thank you for the invitation to speak at these Pre-Budget Consultations in Advance of the 2021 Budget. I commend the Committee for reaching out into the academic community of economists for public input on this important process.

It has been said many times that the COVID-19 pandemic is an unprecedented event in recent history, and this context frames my input into the federal budgetary process.

The Fall 2020 Economic Statement documented the unprecedented effects and response to the COVID-19 pandemic. For fiscal year 2020-21, real per capita revenues in $2014 will have declined by 20 percent from year previous while spending is up by 70 percent. In real terms, this is the highest per capita amount ever spent in Canadian fiscal history (nearly $16,000 in 2014 dollars). As a share of GDP, the projected deficits will be the second largest in Canadian fiscal history- exceeded only by World War II.

The Fall Statement reveals spending eventually declining and a deficit approaching one percent of GDP by 2025-26 but also a federal net debt rising to $1.5 trillion and a net debt to GDP ratio remaining in excess of 50 percent. Despite current low interest rates making current debt look manageable, it remains that any sudden future shocks – to the economy or even interest rates - could be more difficult to manage as debt burdens rise.

The size of the initial fiscal response to the onset of the pandemic in the February to April period of 2020 was appropriate. However, the continuing unprecedented fiscal response generated results that have not paralleled the fiscal support provided. The fiscal assertiveness of the federal response to the pandemic was not matched by assertiveness in targeting the response as might have been afforded under the federal spending power or the power of quarantine that exists under the Constitution.

Moreover, much of the spending went to individual income transfers in excess of the pandemic generated income losses. After all of this unprecedented response, we are now in the midst of a more severe second wave that threatens the economic recovery that began over the summer.

The Federal 2021 budget must learn from the past and better target any additional projected fiscal response with a view to long-term economic recovery and growth. The additional spending must be directed towards productivity boosting investments. Even prior to the pandemic, the business investment to GDP ratio had been faltering. While the short-term income support provided at the peak of the pandemic was important, if we are to continue to spend at these record levels, then there must be more to show for it.

Government spending priorities should be directed towards initiatives for boosting our long-term productivity via investment in physical and human infrastructure. Public infrastructure in roads and transport, bridges, communications, schools, health care, water, sewer and environmental systems require investment. Education has taken a major blow during the pandemic and we need to ensure that students at the elementary, secondary and post-secondary level, do not fall behind in educational achievement and opportunities and reduce future labour productivity growth.

Then, there is the matter of our national defense and security in a more multi-polar and unstable world that requires equipment and resources and vision. And there is a need for private sector investment in sectors producing goods and services that we can export and continue to earn our way in the world. If our export markets falter and our incomes drop, there will be no international emergency response benefit payments offered to us. The federal government, therefore, should work with the private sector in assessing its investment needs.

Historically, excessively large amounts of government spending are not well correlated with long-term economic growth. It is not that government cannot help the economy. However, effective government requires knowing when to spend and when not to spend and more importantly, what to spend the money on.

If we are to embark on a program of infrastructure spending, we must ensure that projects with the best return are selected. Assorted public projects should be assessed by an arms-length panel of key leaders with expertise in business, accounting, engineering and economics who can make recommendations in areas of national interest. It would be extremely unfortunate if federal infrastructure money flowed to community or sports centres rather than say roads and sewers simply because "shovel ready" plans exist for the former but not the latter.

Thank you.