Crawl Across the Ocean

Friday, March 02, 2007

Choose Your Own History

The other day, the Globe and Mail ran a story about a study from the Canadian Centre For Policy Alternatives (CCPA) and they even linked to the study itself, shockingly enough.

The study was basically an exercise in pointing out the obvious. Over the last few decades the wealthy have received an increasing portion of income in Canada. Looking at inflation adjusted figures, only the top few deciles have been making ground while the bottom half of society has mainly been treading water despite working longer hours. And this trend has accelerated in the last decade.

Today, John Ibbitson has a column in the Globe and Mail today about how we should dismiss all reports from biased think tanks.
I have to wonder with amusement just how many breathless reports on Frasier Institute and C.D. Howe Institute studies he let pass in silence before deciding now was the time to take a stand, but really, if the CCPA can get people to disregard all think tank reports the left-wing will probably take that as a win, kind of like Rory Fitzpatrick drawing Alex Tanguay into equalizing penalties during a Canucks-Flames matchup.

But what I wanted to write about was this extraordinary passage from Ibbitson:
Governments that took this report at its word would increase upper-income taxes, raise the minimum wage, bolster union rights, and increase subsidies to manufacturers.

Throughout the 1970s, 1980s and early 1990s, governments did all those things. In the process, inflation, unemployment and deficits grew, while recessions came and went and came again.

Desperate, governments began cutting taxes, reining in inflation (through the central bank) and balancing budgets. The results were spectacular. Growth took off, along with the incomes of those who were responsible for that growth: entrepreneurs and highly skilled workers who added the most value to the economy.

The left-wing think tanks ignore this reality.


There's a whole lot of wrongness crammed into these few paragraphs so let's take things slowly. First of all, Ibbitson says that, "Throughout the 1970s, 1980s and early 1990s ... inflation .. grew, while recessions came and went and came again."

Now here's a chart of inflation from 1970-2006 in Canada:


Looking at the chart, keep in mind that the recessions Ibbitson is talking about (e.g. the ones which have afflicted every capitalist society since the dawn of capitalism) occurred in the early 80's and early 90's.

As you can see, far from rising gradually over time as a function of pro blue-collar policies, inflation was introduced into the system in a pair of shocks in the 70's primarily related to oil prices, and probably also related to the U.S. departing from the gold standard and the collapse of the Bretton Woods currency management regime.

After this initial shock, Ibbitson is right that governments, or rather the central banks, reduced this inflation. But rather than being an event which occurred in the mid-90's and triggered growth, as Ibbitson argues, the decrease in inflation was clearly brought about via the two recessions in which interest rate increases (by the central banks) drove up unemployment lowering workers wage claims and reducing total demand, thus leading to lower prices - i.e. less inflation. All this is fairly commonly known so it is surprising that a political columnist for a major paper like the Globe would be unaware of some of the most important economic events of the last 30 years.

Next up, is tax rates. Here is a chart of total taxes as a percentage of gdp from 1970 to 2002 (source - note: I interpolated the figure for1980):

As you can see, contrary to Ibbitson's argument that economic growth in the late 90's was caused by cutting taxes, the record shows that taxes were steady during this period. Only after 2000 (when the Liberals brought in a massive tax cut) does tax as a percentage of GDP begin to decline. Now, if you're thinking that growth started to pick up in the 90's and got stronger after 2000 then this would actually strengthen your case, but we'll get to that in a minute.

Ibbitson also argues that the 'low growth' period of the 70's, 80's and early 90's corresponded with government increases to the minimum wage, whereas the 'spectacular' results from the mid 90's on, presumably corresponded with a decrease in the minimum wage (or fewer increases).

However, as we can see from this report, the 'low growth' period was marked by substantial decreases in the minimum wage, whereas the 'spectacular results' period was when governments arrested the decline in minimum wage rates and began to increase them again.

I don't have the expertise to assess whether the 70's, 80's and early 90's were marked by governments making efforts to 'bolster union rights, and 'increase subsidies to manufacturers.' as Ibbitson claims, but it seems unlikely to me.

Finally let's recall what Ibbitson says happened as a result of all this: "Desperate, governments began cutting taxes, reining in inflation (through the central bank) and balancing budgets. The results were spectacular. Growth took off"

So here's a chart of GDP growth per capita in Canada from 1970-2005. See if you can spot where growth took off:

OK, we dodged technically being in recession in 2000, but growth was pretty weak for a few years there. I'd be hard pressed to agree with an assessment of the last few points on the graph as 'spectacular results' or growth 'taking off.' Note that the weak growth in the 2000-2003 period was in the aftermath of the big 2000 tax cuts.

So let's recap:

1) Ibbitson agrees that the CCPA is accurate in it's conclusions ("His [the authors] conclusions are (a) correct")

2) he agrees that the conclusions are worrying, ("middle-income manufacturing jobs do appear to be getting relatively scarcer, which we all need to think about.")

3) however, based on an interpretation of the last 35 years of economic history which is wrong both in its effect ('stagnation followed by spectacular results') and in the cause of the non-existent effect (steadily rising inflation, union power and minimum wages followed by cuts to taxes and minimum wages) Ibbitson concludes that governments would be crazy to act on the report's recommendations.

which all leads to 4) 'we should dismiss the latest study from the Canadian Centre for Policy Alternatives. [because they] simply troll statistics in search of numbers to buttress their prejudices'

OK then.

10 Comments:

  • In the early 70's, the federal government cut taxes, despite what intuition would suggest. Inheritance tax, basic exemption, inflation adjusted tax brackets and corporate taxes...most of which was undone in the 80's.

    By Anonymous Anonymous, at 4:16 PM  

  • Excellent analysis Declan.

    Thanks.

    Just goes to show, once again, that no matter what they try to tell us, we most definitely do not have to vote against our own best interests to keep the price of George Foreman grills cheap at Best Buy.

    By Blogger Gazetteer, at 4:51 PM  

  • Great post Declan. Mark Lee over at Relentlessly Progressive Economics tears Ibbitson a new one too.

    And if you go over to Political Staples, you can see them gushing over Andrew Coyne proclaiming that the study is wrong. Because political columnists know much more than economists...

    By Blogger Mike, at 4:59 PM  

  • It may be an argument from authority, but political columnists don't have much of any specialized policy knowledge. They know their own particular horse race reasonably well (albeit not much better than the average half-decent internet commentator), but apart from that? Of course, while we're dissing Coyne, we mustn't ignore Margaret Wente, whose notion of journalistic depth entails taking to a few people who agree with her preconceived notions.

    By Blogger Josh Gould, at 7:43 PM  

  • Man, I'm glad somebody else can not only do the heavy lifting but show how to back up their points!

    Thanks for the post!

    By Blogger Thursday, at 6:58 PM  

  • I'm not sure I trust the Taxes as % of GDP chart. Is there another way of representing tax load that doesn't tie it to the wealth of the country? I think "actual taxes" (or some such) would make more sense, no?

    By Blogger Andrew, at 4:58 AM  

  • Andrew: No, "actual taxes" (unadjusted tax receipts or similar) would be a much worse measurement. That doesn't take into account inflation, population growth, or (yes, you'll hate this) the size of the economy and its relative ability to support a tax bill.

    Using raw revenue figures is the province of dishonest pricks like Ezra Levant when they want to claim that tax revenues increased by some-ridiculous-percentage over the course of a decade, ignoring all of what I've just mentioned above. You can't honestly claim a 1992 dollar is the same as a 2006 dollar, or ignore what happens when you increase the number of people paying taxes -- but some commentators (mostly right-wingers complaining about taxes) do just that.

    By Blogger Ian King, at 6:54 PM  

  • Anon - Good point.

    Gaz - thanks.

    Mike - thanks for the link, that was good post by Mark. W.r.t to
    Andrew Coyne's column, linked at Political Staples, I think he is doing a fair bit of spinning of his own although he makes a few food points.

    Josh - hey there's no need to use the W word in what was a perfectly
    polite
    coverstation...

    Thursday - no problem.

    Andrew - You could chart taxes in real dollars if you wanted. If
    anything that would just contradict Ibbitson's point even more severely, by showing that during the period where growth 'took off' taxes were still rising.

    The topic of which makes more sense (taxes (adjusted for inflation and population growth) or taxes as % of gdp) as a general measure of taxation is an interesting one, I
    href="http://crawlacrosstheocean.blogspot.com/2007/01/measuring-spending.html">wrote
    about it
    a couple of months ago, generally I agree with what Ian wrote.

    By Blogger Declan, at 10:19 PM  

  • Excellent analysis! I really appreciated your use of charts, showing so well what I remembered of those times. Ibbitson needs a memory check for him to say spectacular growth happened only after the early 1990s. The late 1980s may not have showed spectacular growth, according to your chart, but it was a boom time after the recession, and people spent money like water. Growth seemed to have no end back then.

    By Blogger talk talk talk, at 5:19 PM  

  • I hope you sent this analysis to the G&M.
    All of your charts are from the same source data?

    By Anonymous Arwen, at 6:04 PM  

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