Worthwhile Canadian Initiative

The Mary Tyler Moore Effect

In 1970, every Justice on the Supreme Court of Canada was male. Prime Minister Pierre Elliott Trudeau had an all-male cabinet. Canada had never had a female premier - or even a female television newsreader. Little girls across the country were starting to feel the faint stirrings of ambition, often encouraged by mothers who wanted their daughters to live life to the fullest. But they had no idea - how does one be a "career woman"? What does a professional woman even look like?

Then the Mary Tyler Moore Show came along. It showed a woman who was smart, and independent, and made mistakes - and won out in the end. She was successful. She was likeable. She opened up a world of possibilities.

The Mary Tyler Moore Show first aired in 1970, and went off the air in 1977. This is what happened to US female labour force participation rates during this period.

How to write an email that will get you what you want

Most of my day-to-day social and professional interactions take place over email. It's my primary form of direct, one-on-one contact with students, colleagues, and co-authors. Consequently, my impressions of people are shaped by their emails. Are their emails polite or demanding? Clear or confusing? For good or ill, I judge people by the emails they send.

Based on my own personal experience, I am not alone. Others have judged me by the emails I have sent. I once lost someone's friendship because of a misjudged bcc. I am no expert on the right way to send emails.

But I have learned a thing or two from sending and receiving tens of thousands of emails, good and bad. One is that the ultimate goal of most email senders is to ask - clearly, politely and respectfully - for something. This post offers my personal reflections on how to achieve that goal.

Hume's Sailing Ships correcting Samuelson's Icebergs

Paul Samuelson said (PITA gated) that David Hume's price-specie flow mechanism (ungated) was wrong. And I am saying, nervously biting my fingernails, that Samuelson was wrong.

Assume that durable sailing ships are costly to build, but have low (or zero for simplicity) operating costs. Assume apples are the only tradeable good, and one ship can transport one apple per year across the English Channel between Britain and France (the only countries in the world). Let P be the price of apples in Britain, P* be the price of apples in France, and R be the annual rental of a ship, (all prices measured in gold), then R=ABS(P*-P).

In this model, the Law of One Price (P=P*) will only hold if the volume of exports of apples (in either direction) is unconstrained by the existing stock of ships, so rentals on ships are driven to zero. But then no ships would be built to export apples if ship rentals were expected to be always zero, which is a contradiction of the Law of One Price because arbitrage is impossible without ships. But an existing stock of ships represents a sunk cost (sorry) and they keep on sailing even as rentals approach zero. They sail around Samuelson's Iceberg model (sorry) of transport costs.

If you are already familiar with Hume's essay, and have a good economic intuition, the rest of this post should be obvious.

AD/AS: a suggested interpretation

Many macroeconomists don't like the Aggregate Demand/Aggregate Supply framework often used in Introductory macro textbooks. Maybe that's because it isn't explained properly. So I am going to explain it my way.

If you explain the AD/AS framework my way, you will see that it portrays a deep and realistic understanding of macroeconomics that is lost in more "sophisticated" models. If you don't start with the AD/AS framework you are doing it wrong.

The AD/AS framework is useful for thinking about monetary exchange economies. If you are talking about a barter economy, or any sort of economy where people do not use a medium of exchange ("money") to buy and sell all other goods (and assets), then the AD/AS framework is not useful. But that is not realistic.

Money (as medium of exchange) is different from all other assets. There is a flow of money into our pockets (and bank accounts) whenever we sell any other good (or asset). And there is a flow out of our pockets whenever we buy any other good. And so there are two ways an individual can increase the stock of money in his pocket over time: he can increase the flow in; or he can decrease the flow out. But what is possible for each individual may not be possible for all individuals, because one person's flow out is another person's flow in.

Because there are two flows of money (a flow out and a flow in), there are two equilibrium conditions. The AD curve (or AD function) is the equilibrium condition for the flow out (when we buy goods with money). The AS curve (or AS function) is the equilibrium condition for the flow in (when we sell goods for money). The economy is at a point on the AD curve when the actual flow out equals the desired flow out. The economy is at a point on the AS curve when the actual flow in equals the desired flow in.

Then remember that exchange is voluntary, so that actual quantity traded is whichever is less: quantity demanded; or quantity supplied. So actual Y=min{Yd(on the AD curve);Ys(on the AS curve)}. And remember that prices are sticky, so if one of the curves shifts quickly the economy will be at a point off (at least) one of the two curves. And you might want to draw a third curve that illustrates price stickiness (but don't call it a "SRAS curve", because it isn't). And remember that whether the economy ever actually approaches the AD/AS intersection ("full-employment equilibrium") is an open question that must be addressed by macroeconomists, and the answer to that question will depend on many things, the most important of which is the monetary system or monetary policy regime. [Update: Because it is easy to imagine a monetary policy regime which makes the AD curve never cross the AS curve, or slope the wrong way.]

A good simple place to start would be with MV=PY for the AD curve, holding both M and desired V constant. Because it forces us to think about both stocks and flows of money. Then go on to make M and V endogenous, if you wish. (A still better place to start would be with MV=PT, because monetary recessions disrupt all trade (T) and not just trade in newly-produced goods (Y), but that's an argument for another day.)

And if you don't start with money, monetary exchange, and AD and AS, you are doing macro wrong. Because the only thing that makes macro different from micro general equilibrium theory is the fact that macro incorporates the fact of monetary exchange, which microeconomists ignore.

In particular, if you start with saving investment and interest rates you are doing it wrong. And if you start with Y=C+I+G+NX you are not even wrong.

Infrastructure Overbuilds: Past and Present

Thomas Gunton of Simon Fraser University’s Resource and Environmental Planning Program had a piece in yesterday’s Globe and Mail raising the question if the statement of support for the Keystone XL pipeline and the approval of two other pipelines was moving Canada to a situation of surplus capacity when it comes to pipelines? Gunton’s answer was yes.

Tony

Tony Atkinson died January 1, 2017. He was my PhD supervisor when I was at LSE in the 1980s, and we kept in touch occasionally afterwards. What follows are some personal reflections on his life and his work.

In his youth, Tony hitchhiked around Europe. In his later years, he would give lifts to Oxford students thumbing their way into town - and delight in the surprise of those who discovered they were being chauffeured by no less a personage than Sir Anthony Barnes Atkinson, warden of Nuffield College.

Hitchhiking is a fitting metaphor for Tony's attitude to life. It captures his commitment to the practical achievement of a just society. Some people have no access to transport. Others have unused room in their vehicles. Behind the elegant formality of his work on taxation and inequality is a simple idea: if those who have plenty share with those who have less, everyone can get where they want to go.

Happy New Year....Really!

Well, it’s the start of a New Year and traditionally there should be a sense of optimism to a fresh start. Indeed, at least one forecasting company feels that the global outlook for 2017 is at least stable despite the challenges of 2016 and indeed is expecting an uptick in commodity prices. However, given the course of world events over the last twelve months, one might think that there is little to be optimistic amount. On the one hand, the events of 2016 to me seem to mark the end of what can be termed the second great globalization (more detail here on that). It was a period that saw per capita GDP globally grow as a result of technological change, integrated markets and trade much like the first great globalization from 1870 to 1913.

Economists don't get SSHRC money, grad student edition

The other day a colleague was explaining how SSHRC-funded Canada Graduate Scholarships are awarded at my university. "It's mostly driven by GPA," he said. "Grades in economics are so low that your students don't get a look in." 

I spent some time messing around with the SSHRC awards engine. His suspicion that relatively few Canada Graduate Scholarships go to economists is well-founded. Taking all masters and doctoral Canada Graduate Scholarships together, and looking at the total awards over the past three years, fewer than two percent of scholarships went to economics students. SSHRC funded twice as many philosophy students as it did economics ones. Three and a half times as many political scientists. There are almost ten times as many psychology students receiving Canada Graduate Scholarships as there are economics students.

Moreover, it's getting worse. There is a gradual downwards trend in the number of Canada Graduate Scholarships going to students studying economics. 

No Health Deal. Now What?

Well, I just finished watching the federal health and finance ministers discuss the failed federal transfer health deal on the news.  I suppose coming just a few days before Christmas, a dispute over federal health transfers can become a new sort of Canadian holiday tradition given it has happened before with the December 2011 unilateral transfer decision announced by the federal government.  

Staghunt and (the) IRS

"IRS" stands for "Increasing Returns to Scale". It means if you double all the inputs, you more than double the output.

I first worried that US readers might think "IRS" stands for Internal Revenue Service (the US tax people). Then I realised that I want it to stand for that too.

Staghunt is a simple game with two players. Each player alone can catch one hare each; both players together can catch one stag, which they share. Staghunt has two Nash Equilibria: both hunt hare alone; both hunt stag together. (If the other hunts hare you want to hunt hare too, because you can't catch a stag alone; if the other hunts stag you want to hunt stag too, because half a stag is better than one hare.)

Staghunt exhibits increasing returns to scale technology, because two hunters producing one stag is more than double the meat of one hunter producing one hare.

Staghunt is also a model of society. We gain by cooperating, but it only works if we trust others to join in. It's different from Prisoners' Dilemma, the alternative model of society, because Prisoners' Dilemma has only one (bad) Nash Equilibrium, and so needs a Leviathan (which can be interpreted many ways) to enforce cooperation.

Staghunt is also a model of a "network externality". The individual who joins the network (hunts stag, buys a telephone) creates a positive externality for others already in the network, and increases the incentive for others to join the network. (That second effect should strictly be called "strategic complementarity", or "positive feedback", because it is not an "externality" in the strict sense. See my old post for the distinction.)

So Staghunt is a very good model with which to examine Brad DeLong's recent thought-provoking post.

New CIHI National Health Expenditure Numbers Out

The Canadian Institute for Health Information has released the latest version of its annual report on public and private health expenditure at both the provincial and federal levels. As always, the CIHI provides a wealth of health data and information resources and its site is an enormous asset to health researchers, health care administrators and policy makers across the country.*

Understanding Banks and Two Monetary Policy Instruments

Sometimes I write posts about things I don't understand and want to understand. (Or don't understand very well and want to understand better.) This is one of those posts.

Suppose the government nationalises all the commercial banks, and merges them into the Bank of Canada. And suppose the Bank of Canada abolishes paper currency. So everyone has a chequing account at their local branch of the Bank of Canada, and they use that chequing account to buy and sell everything else. No other financial institution is allowed to offer an account with chequing (or debit card) privileges, just like no other financial institution is currently allowed to print paper currency that could compete with the Bank of Canada's paper currency.

In that imaginary Canada the Bank of Canada has two monetary policy instruments. First, it can vary the quantity of money by buying or selling IOU's (bonds, loans, etc.). Second, it can vary the rate of interest it pays on chequing account balances (and it can make that rate of interest negative if it wishes). [It could also vary the limits placed on overdrafts; and could also vary the spread between the interest rate charged on overdrafts and paid on positive balances. But let's set all those other instruments aside.]

I understand how monetary policy would work in that imaginary Canada (at least, I think I do). Increasing the quantity of money (holding the interest rate paid on money constant) shifts the LM curve to the right/down. Increasing the rate of interest paid on holding money (holding the quantity of money constant) shifts the LM curve left/up. Done.

It's a crude model of an artificial economy. But it's a helluva lot better than a simple New Keynesian model where money (allegedly) does not exist and the central bank (somehow) sets "the" nominal interest rate (on what?).

What I do not understand well enough is how well that thought-experiment translates into the real Canada, where only the commercial banks issue chequing account money for the public, and only the Bank of Canada issues paper currency, and paper currency always pays 0% interest. But the Bank of Canada still has those same two instruments: it can buy and sell IOU's; and it can vary the interest rate paid on the commercial banks' chequing accounts at the Bank of Canada.

[Remember that commercial banks can pay interest in kind, like when they reduce fees for balances above some amount. And remember that when a commercial bank makes a loan it is buying the borrower's IOU.]

John Cochrane On Neo-Fisherianism, again

First I am going to give you the intuition behind the model in John Cochrane's new paper. It's a very good paper, though I confess I've only skimmed it, because it's very long, and I don't understand all the math. Then I'm going to explain what I think is wrong with it. Then I'm going to explain why I think my model works better.

You start a company, financed by issuing non-voting shares. The total market value of those shares (the market cap) is equal to and determined by the expected present value of your company's profits.

There are two sorts of shares: Fixed-Dividend shares (F-shares); and Variable-Dividend shares (V-shares).

Dividends are not paid in cash; they are paid in newly-issued V-shares. They aren't really dividends; they are annual (or daily) stock splits.

You set up an independent Finance Office to choose dividend policy for the V-shares. The Finance Office can also decide the financing mix between F-shares and V-shares by trading one for the other in the stock market.

Suppose the Finance Office increases the dividend rate on V-shares by 1%. What happens?

If there were only V-shares, and no F-shares, the answer is easy. It's an ongoing additional 101 for 100 annual stock split, so the V-shares will now depreciate at 1% per year relative to the counterfactual of an unchanged dividend policy.

With both types of shares the answer is a little more complicated. Clearly the F-shares will instantly fall in value relative to the V-shares when the new dividend policy is announced, because their dividends don't increase. But the (weighted) average share price will not change immediately, because the number of shares hasn't changed yet, and the present value of the profits hasn't changed at all. Therefore the price of V-shares must instantly rise when the new dividend policy is announced, and only thereafter begin falling at 1% per year (relative to the counterfactual).

Got it?

How to make mine operators pay for the mess they make

When an Ontario cemetery operator sells a burial plot, they must side aside 40 percent of the money they receive into a "care and maintenance account". This is a way of solving a grave moral hazard problem: operators might sell plots, and then walk away from their maintenance obligations.

The same kind of moral hazard problem exists in resource extraction industries, and is solved in a not-entirely-dissimilar way.  Operators are typically required to post bonds, or contribute to an "orphan well fund" or a "mine financial security program." If an company walks away from a toxic waste site once operations have ended, the funds from the security program can be used to pay for site clean-up. 

The only problem is that the amounts in these clean-up funds are typically tiny relative to the potential costs of site clean-up. This point has been raised by the Pembina Institute, in their report on How Albertans Could End Up Playing for Oil Site Mine Reclamation. It's been raised in an expert panel report on Environmental and Health Impacts of the Oil Sands Industry, commissioned by the Royal Society of Canada. It has been noted by the Auditor General of Alberta and the BC Auditor General.

The risks associated with future toxic waste from the oil sands are, in some ways, more worrying than the much more widely known global warming ones.  Humans could possibly adapt to a warmer climate. But the arsenic-laced water around the NWT's Giant Mine? That's unequivocally, inevitably lethal. The issue is more pressing than ever this year, given the federal government's decision to approve the Trans Mountain Pipeline, and their announcement that they will be welcoming more foreign investment (if it's hard to stop a Canadian operator from walking away from a toxic waste site, how will it be possible to stop a foreign one?). 

Why hasn't more attention been paid to the environmental risks of resource extraction? My theory is that the human brain is just not very good at processing low-probability, ultra-high-cost events. We can't differentiate, at an emotional level, between someone defecating on our driveway, and someone contaminating the entire Athabaska watershed. We just can't grasp - or don't want to grasp - the enormity of the environmental disaster the oil sands could create.

My contribution to this year's Macleans "chart of the year" competition attempted to convey the environmental risks of the oil sands in a way that made them intelligible to the typical educated and informed Canadian. The chart and the post follows below. The graphics aren't great. Here are the raw numbers: Download Oil sands v tar ponds. I would welcome suggestions for alternative and better ways of presenting this data.

Price Level vs Inflation Rate: semantic clarity

I write this for journalists, first year economics students, and the general (non-economist) public. Yes I'm being pedantic. But I hope it helps. I'm trying to clear up a very common confusion in how we talk about inflation.

Your car has an odometer, which measures kilometers driven. And your car has a speedometer, which measures kilometers per hour.

The CPI price level is like the odometer. It tells you how high the price level is (compared to some arbitrary base year, which is set at 100 for convenience).

The CPI inflation rate is like the speedometer. It tells you how quickly the price level is rising (usually per year).

[OK, assume your car is a vertical rocket ship, or at least pointing uphill, if that helps. And the CPI is just the price of a basket of goods, so it averages out the prices of the individual goods.]

The only difference is that Statistics Canada only checks the odometer once a month. And the speedometer (usually) measures how many kilometers traveled per year, compared to the same month last year (so they don't have to worry about seasonal adjustment). And the speedometer can record a negative speed, which means the car is going in reverse and the odometer is going backwards (remember Ferris Bueller?)

If you say "the Consumer Price Index (CPI) rose by 1.2% in November, compared to 0.9% in October and 1% in September" that actually means something quite different from what you probably think it means or meant to say. [That's an actual quote from a UK newspaper, except I have substituted the actual 1.2% for the 1.1% economists had predicted.]

From ISLM to NK Macro

Let me try it this way. This is written for macro students, and their teachers. But it's aimed at researchers too. It's about the role of money in macro models.

Ignore what New Keynesian macroeconomists say about their own models. Listen to me instead.

Start with the second-year textbook ISLM model. The price level P is fixed, so real and nominal interest rates R are the same thing. The nominal money supply M is also fixed. Which means the real money supply M/P is fixed too, and the LM curve slopes up. And the IS curve slopes down.

How could we convert that standard ISLM model into a New Keynesian model?

Financial Assets > Liabilities

Take Bitcoin for example. It's a financial asset to whoever holds it. To whom is it a financial liability? I suppose you could say "it is a liability to the whole community of those who accept Bitcoin in exchange for goods". But that answer seems like a desperate attempt to salvage the assets=liabilities dogma. Nobody is obligated to accept Bitcoin.

Here's the right way to think about it. It's quite simple really. Very basic economics.

Suppose I sell you my car for $2,000. That would only happen if I value my car at less than $2,000, and you value my car at more than $2,000. So when I sell you my car, it must mean that the value of the car increases.

Green Bitcoin vs Red=Green LETS: Nominal Anchor vs Needs of Trade

Both Bitcoin and LETS are monetary exchange systems.

There are many differences between Bitcoin and LETS. I am going to ignore all of those differences except the one I want to focus on. Those other differences are off-topic.

[Yes, this post is not really about Bitcoin vs LETS. I am just using Bitcoin and LETS as two real-world examples to illustrate extreme versions of one aspect of alternative monetary systems that I think is important.]

Bitcoin is a pure green money system. LETS is a pure red=green money system. Let me explain what I mean by that.

Why I=S is a bad place to start doing macro, again

I was reading Philip Cross's article "The Limits of Economic 'Stimulus': How monetary and fiscal policy have sown the seeds of the next crisis". I came to this bit in the Executive Summary:

"Low interest rates also depress savings and therefore investment."

It is clear from the context that he is talking about the Bank of Canada setting low rates.

Most macroeconomists will freak out when they read that sentence. I freaked out too, initially. But let me try something that might be more constructive. Let me tell you about a world where what Philip Cross said is precisely correct.

Will legalization reduce youth marijuana use?

Rates of teen marijuana use in Canada are among the highest in the world. Legalization advocates blame high use on criminalization: "the ready availability from dealers with no scruples about targeting youth, and the cachet of forbidden fruit—or rather, buds." Indeed, the first objective of the Canadian federal government's marijuana legalization agenda is to "Protect young Canadians by keeping marijuana out of the hands of children and youth.

Yet can legalization actually reduce youth marijuana use?