Repeat after me: Alberta isn’t Greece

Last week it was Andrew Coyne; this week it’s Jack Mintz. Seems all the National Post’s favourite conservative commentators have suddenly decided to offer their Very Serious Advice™ to Alberta’s new government. While Coyne made a spurious comparison between raising the minimum wage and instituting a minimum income, Mintz outdoes him with an even more spurious comparison between Alberta and Greece.

Simply put, it is completely disingenuous to compare Greece to Alberta. Greece has seen its economy lose a quarter of its GDP since 2008 – a level of economic crisis unseen since the Great Depression. Unemployment has spiked to over 25%, youth unemployment is over 50% and poverty is widespread. While private creditors who participated in the pre-crisis boom have been bailed out, Greece has been forced into a vicious spiral of austerity driven by an unsustainable debt.

What’s the situation in Alberta? Alberta is still expected to grow, albeit very slowly, in 2015 according to most economists. Unemployment is up by 1% from a year ago, before the oil price crash. In part this is due to firms trying desperately to find efficiencies and cut costs to maintain profits. The picture is not rosy to be sure, but Alberta is in a wholly different category from Greece.

However, not only are Alberta’s problems completely unlike those of Greece, Mintz is wrong about Greece itself. Mintz joins the chorus of mystification that presents Greece as profligate rather than insolvent. It’s not the flow of “unsustainable deficits” but the stock of crushing debt and insolvency that is driving Greece deeper and deeper into crisis–one openly abetted by creditors hoping to make it an example for anyone else in Europe hoping to free themselves from the yoke of austerity. (more…)

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JW Mason on business not investing, still disgorging the cash

This week’s podcast is a bit more economics-focused than usual but gets at the heart of what’s going on in the global economy where interest rates are near, at, or even below zero, but where investment, growth, wages and employment continue to suffer. My one guest, who joins me for a feature-length interview, is J. W. Mason. J. W. teaches economics at John Jay College, City University of New York, blogs at The Slack Wire and is a fellow at the Roosevelt Institute. It’s for the Roosevelt Institute that he wrote a recent working paper, “Disgorge the Cash: The Disconnect between Corporate Borrowing and Investment”, that is the subject of our conversation. In short, the paper traces how, as a result of the shareholder revolution, firms today invest far less, even when borrowing conditions are better than ever, serving instead largely as ATMs for owners happily pumping out cash. This shift has big implications not only for economic policy, but for our understanding of today’s capitalism.

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The outsize (un)importance of the tarsands

It’s easy to overestimate the importance of the tar sands to the Canadian economy. Tar sands and their pipelines are after all hailed by the ruling Conservatives, sections of the business press and the ever-present oil lobby as this young century’s “nation-building” project. Yet, a survey recently making the rounds highlights the relative unimportance of the tar sands to Canada’s overall economy: while most Canadians overestimate the importance of the tar sands and 41% are guess that the tar sands account for 12 %to 48% of Canada’s GDP, the reality is that they directly contribute a mere 2% to our domestic output.
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Forget global superstar, Vancouver’s housing troubles start at home

Vancouver was the star of a recent New Yorker article that shone a light on the city’s lack of housing affordability and linked this lack to an inflow of foreign buyers. Unfortunately, this link is extremely tenuous, as most of the support is anecdotal or based on very limited data. At the same time, there are good reasons to look for the sources of the lack of affordability much closer to home. Articles like that in the New Yorker allow for far-flung conclusions that end up bolstering a fatalist political narrative about the potential for meaningful change.

First, the data. The New Yorker author, James Surowiecki, offers two major sources to back his claims. The first is a Sotheby’s report stating that 40% of buyers of Vancouver luxury homes (luxury homes had an average low cut-off price of $2.8 million or three times the overall average price) in the first half of 2013 were foreign. At the end of his article, Surowiecki also cites Andy Yan’s interesting energy usage studies, the most recent of which showed that somewhere between five and ten percent of the city’s condos may be sitting empty at any given time. Of course Surowiecki cited the sensational statistic that almost a quarter of homes in one Coal Harbour census tract were likely vacant at census time. (more…)

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Austerity and the profitability puzzle: government gives profits a helping hand

This is the third and final post in what has become a three-part series on the puzzle of high profitability and low investment in the Canadian economy. In the first part, I looked at some data that shows the existence of the puzzle and explored a few of the factors that could be behind it. The follow-up post outlined broadly Keynesian and Marxian solutions aimed at raising investment: the former based on stimulating demand, the latter on eliminating overcapacity and increasing the relative profitability of productive capital. Here, I want to continue the thoughts that concluded the second part, namely that the Harper government’s preferred response to the puzzle has been neither demand stimulation nor industrial policy. Instead, it has been austerity – a strategy by no means accidental, but in fact designed to support the status quo of high profitability and low investment.

Austerity is not an isolated Canadian phenomenon nor is it a new one. The neoliberal era that began sometime in the 1970s has seen austerity in one form or another applied worldwide. Economic crises have especially provided governments with excuses to institute or continue austerity policies that would not have been difficult to institute otherwise. While Canada did not experience the latest economic crisis to the same extent as a number of other countries, it has seen a more moderate version of many of the same trends – such as slower growth and lower employment. The crisis was large enough to allow the Harper government to continue and deepen a tentative austerity regime. While Canada has not pursued austerity programs as spectacular as some, for example the UK or Spain, the Conservative government has, nevertheless, succeeded in substantially reducing the size of government, small cut by small cut. While Canadian austerity policies predate the crisis, the crisis has only helped to entrench them and further orient them towards propping up profitability.

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Demand or destruction: Two ways out of the profitability puzzle

In my previous post, I outlined the disconnect between profitability and investment in Canada’s private sector.  While businesses are doing well and profits have rebounded quickly after the global financial crisis of 2007, investment has continued its slow and steady 20-year decline.  This decline is especially visible when investment is related directly to profits. Slightly more than 60% of gross profits are currently being re-invested, down by a third relative to just two decades ago.  Such a gap between strong profitability and dismal investment does not correspond with standard accounts of how the economy functions.  According to standard accounts, strong profitability should encourage investment, not depress it further.  This theoretical relationship is not borne out in recent Canadian experience.

While the last post also examined a few factors that could have been at play in creating this odd state of affairs, here I want to move in the opposite direction and look at two competing pictures of how to revive low private-sector investment.  The first picture comes from Keynes, the second from Marx.  I am particularly indebted to Michael Roberts, who has written extensively on the crisis from a UK perspective and who used a similar framework in a recent article (on the adoption of the idea of a permanent slump by mainstream Keynesians).

The two pictures agree on a diagnosis of on-going stagnation – with low investment being just one feature.  Indeed, the lack of sustained recovery across much of the developed world has led increasing numbers of mainstream economists to declare that the current slowdown is permanent.  Paul Krugman, likely the most prominent Keynesian economist, recently wrote that we may have entered a “permanent slump.”  Even the more hawkish Larry Summers has added his voice to the chorus, referring in a recent speech at the IMF to a period of “secular stagnation”.  Many Marxist and other radical economists have, of course, been making the same point for years, citing a variety of structural changes and imbalances in the economy, particularly those that characterize the neoliberal period that began in the 1970s when the great post-war boom lost steam.

While their diagnosis may be similar, Keynesian and Marxian economists see the way out of the current long-term slump rather differently. (more…)

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Canada’s profitability puzzle

Most developed economies continue to experience fall-out from the financial crisis of 2007-8. The Eurozone has been most ravaged, but the US and UK have not fared much better.  After the initial rebound from the most severe crisis, growth in many economies has been decelerating to the point that some are once again contracting in real terms.  At the same time, unemployment remains high – hitting record levels among youth in Europe for example – real incomes are flat for the vast majority, inequality is on the rise and austerity programs targeted at social services are eating further into living standards.

Canada has partly bucked these trends.  While the overall growth rate has not returned to pre-crisis levels, it has not done nearly as poorly as that in Europe or even the US.  Other measures of economic well-being do not suggest the level of alarm felt in harder-hit economies.  To give two examples, the Canadian unemployment rate has grown relatively modestly and the distribution of gains since the crisis has not been skewed towards the very top to the extreme that it has been in the US and elsewhere.  The financial press is increasingly optimistic – just this past week cheering newly-released above-forecast quarterly growth figures – and the Conservative government remains steadfast in touting our supposed economic prudence and resilience.

Finally, but not least, Canadian corporations also have had it relatively good since the crisis.  Other than a sharp dip around 2008, profits have remained high and growing.

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