Economists love to talk about the theory of comparative advantage, which holds (somewhat counter intuitively) that two countries trading with each other will be better off if each specializes in what it does best, even if one country has an absolute competitive advantage in the production of all goods and services traded.
David Ricardo famously argued that it made sense for England to specialize in the production of cloth and Portugal that of wine, even though Portugal could produce both goods more cheaply.
Unfortunately, the theory has limited application to the real world, and can have pernicious policy consequences.
article originally appeared in the Globe and Mail's Economy Lab.
Photo: teegardin. Used under a Creative Commons license BY-SA-2.0
In the run-up to the delayed federal budget, there is a strange disconnect between fiscal policy and our changing economic circumstances. Balancing the budget seems to remain the key political priority, as if nothing had changed.
But the collapse of oil and other resource prices has changed a lot. Most notably, the Bank of Canada has, unexpectedly, cut interest rates to take out “insurance” against a serious slump in our resource-dependent economy. TD Economics forecast slow growth of just 2.0% this year, and have projected that unemployment will rise by 0.2 percentage points in the next few months.
Meanwhile, Prime Minister Stephen Harper has said that he will not run a deficit unless and until Canada falls into an outright recession, something we would know only in hindsight.
The words “industrial policy” have been virtually banned from polite company, and should certainly never be uttered in the presence of small and impressionable children.
Many mainstream economists and conservative think-tanks believe that governments should seek only to create a favourable business climate through low taxes and light regulation, and should not intervene in the investment decisions of private corporations.
And yet, industrial policy (which should be called strategic economic policy) persists, and arguably has a greater impact on investment and jobs than broad framework policies like deep corporate tax cuts.
The Harper government claims to be good economic managers pursuing a successful jobs and growth agenda.
To be sure, there are many factors other than federal government policy that strongly influence Canadian jobs and incomes, such as resource prices, business decisions, the state of the United States and the global economy, and the actions of provincial governments. No federal government can take all or even most of the credit or blame for how our economy is doing.
Economists take a benign view of the impact of technological change on jobs, dismissing the "Luddite" view that technical progress can be a significant cause of unemployment. The core argument is that higher productivity (output per hour worked) drives increases in incomes so that demand rises, creating new jobs as old ones are destroyed.
That said, it has become the conventional wisdom that there are winners and losers from the new information based, digital technologies, and that these have been an important factor behind rising income inequality since the 1980s. “Skill biased technological change” is held to benefit the highly educated since technology generally complements cognitive skills, while it eliminates many less skilled jobs.
Wages in Canada and the other advanced economies are about as flat as left-over champagne in the glass on New Year's Day. This poses a major threat to a sustained economic recovery.
During the four years from 2009 through 2013, average hourly wages adjusted for inflation rose by a grand total of just 2.3%, or by about one half of 1% per year. Real wages rose by a total of only 0.9% in Ontario and 1.1% in Quebec over those four years, though by a healthier but still unimpressive 4.8% in Alberta.
Posted by NationBuilder Support · December 16, 2014 4:36 PM
The Conservative government ended the 2014 Parliamentary session with another attack on Canada’s democratic institutions with Tuesday’s passage of Bill C-525 in the Senate.
The intention of the private member’s bill by backbench Conservative MP Blaine Calkins is to make it harder for workers in federally regulated workplaces to unionize and easier for a minority of workers to decertify unions.
Twenty-five years ago, the House of Commons unanimously passed Ed Broadbent's resolution to abolish child poverty by the year 2000. We are far from that goal.
Child poverty as measured by the Statistics Canada Low Income Cut Off has fallen since 1989, meaning that the proportion of families forced to spend a well above average share of their budgets on food, clothing and shelter has diminished somewhat.
But it is a different story if we use the low income measure, which looks at the gap between poor children and the middle class, calculating the number of children who live in a family which has less than one half of the income of a comparable middle income family.
One of the perks of the position of the Governor of the Bank of Canada, going back to at least the days of David Dodge, is that it provides a bully pulpit to weigh in on economic issues of wider public interest than monetary policy. This is appropriate given the broad context within which the Bank operates, but, as Stephen Poloz now knows, the ability to gain widespread public attention comes with a downside.
Governor Poloz was widely criticized recently for his suggestion that unemployed young people should volunteer or consider working for free in order to improve their longer term prospects in a poor job market. Outraged youth rightly noted that it is only the children of the affluent who can afford to work for free, and that unpaid internships are often highly exploitative.
The recent collapse in the price of oil begs the question of whether Canada, yet again, is going to enter the bust phase of a classic boom-bust resource cycle. There is much to fear.
Earlier this year, the Canadian Centre for Policy Alternatives released a collection of essays marking the fiftieth anniversary of the publication of a Canadian economics classic, “A Staple Theory of Economic Growth” by Mel Watkins.