Crawl Across the Ocean

Tuesday, February 26, 2008

Federal Budget 2008

The 2008 federal budget is here.

Ideological Right Wing Governments such as the Federal Conservative Party are pretty predictable for the most part come budget time, when they will generally apply the following algorithm:

1) Implement tax cuts which mainly benefit the wealthy
2) If running a national government, increase spending on the military.

Where it gets more interesting is once the Ideological Right Wing Government has been in power for a couple of years and has cut taxes on the wealthy so much that they risk running a deficit.

When George Bush faced this situation, he simply said 'who cares about deficits' and kept on cutting taxes on the wealthy anyway. Back when current Federal finance minister Jim Flaherty was finance minister for Ontario, he and the rest of his party cut taxes anyway and then sold stuff off to temporarily cover up the deficit, most notably selling off near-unlimited tolling rights on highway 407 for 99 years in order to help balance the budget for one year.

The federal conservatives have also engaged in some of this 'selling off the family silverware to buy groceries' style of prudent, conservative, fiscal management, most notably in selling off federal real estate and then leasing it back from the people they just sold it to, but today Flaherty came up with a new option for the right-wing government that needs to cut taxes on the wealthy but just doesn't have the money: Tax cuts for future years.

That, after all, is basically what the new 'Tax Free Savings Account' amounts to. Whereas with an RRSP you can avoid paying taxes now on money you save and instead pay them later when you withdraw the money, the 'Tax Free Savings Account' allows you to pay tax now, but not pay tax when you withdraw the money later. So, it's basically the same thing, and the effect is the same as raising the RRSP limit by $5,000 only that, because you save the taxes later instead of now, the hit to the federal treasury shows up later (once people start withdrawing money from their TFST's) rather than now. Thus allowing Flaherty to give the well-off a tax break without having this further breaking of the bank (estimated at $3B/year once the plan reaches a steady state) show up for a few years (hard to believe this guy was once part of the Harris government!).

And for those who might argue that it isn't a break that will primarily apply to the well-off, I ask who except the well-off is able to save more than 18% (the current RRSP limit) of their annual salary? Right.

One can only imagine the sustainable lives we might be leading if Ideological Right-Wing Governments felt the same need to protect our natural environment that they do to cut taxes on the wealthy, but I digress (since talking about the environment is certainly a digression from talking about this latest federal budget).

The one positive thing of note in the budget (besides a decent amount of debt reduction for this latest year - a feat unlikely to be repeated any time soon if the forecasts are to be believed) was the creation of a new crown corporation to independently manage the Employment Insurance program, and maintain a balance between funds received in premiums and funds disbursed in benefits over time. A good idea.

But the rest is what you get from a government which doesn't have many ideas about what government can accomplish beyond cutting taxes on the wealthy and buying tanks and planes to fight unwinnable wars.


Sunday, February 24, 2008

The New Slums

From The Atlantic, an interesting article on the role reversal underway between suburbs and cities. Where suburbs were once seen as the model of the future, abandoning the rundown, crime ridden cities of the time, now it is the cities and urban-esque walkable areas that are seen as having a bright future, while the suburbs may be headed towards crime and squalor. It's an article about the U.S. and cities never turned into slums as badly in Canada as they did in the U.S., but much of what is said seems likely to apply in Canada as well.

Waterloo's transformation of Waterloo Town Square, its downtown mall built like a suburban mall, back into something which looks more urban (with less of a sea of parking, and more through streets and shops facing the street rather than facing inward toward the mall.) is one example. Toronto has also seen a migration of some of the worst areas from downtown into the fringes of the city, and Vancouver is seeing gentrification of the downtown east side which may lead to the same thing one day.

And I'm no expert on Europe, but from what I hear, this pattern (prosperous cities, surrounded by slummy suburbs) is already somewhat the case there.

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Friday, February 22, 2008

Good Reporting

Here's a link to an excellent article in the Globe and Mail which provides some insight into the interaction between organizational culture, mathematical modelling and risk taking at financial institutions. In case you are interested in that kind of thing.

A few quotes since it will be paywalled soon enough:

"In all financial institutions, there is a daily battle between the risk takers and the risk managers. The takers push for bigger positions to make bigger profits, while the managers push for prudence and caution.

But as their warnings of potential loss were proved false each day by the soaring financial markets, many risk managers lost the ear of management teams focused on the vast profits generated by the people in the business of creating the structures. That led banks to take bigger and bigger bets."


"But some of the fault also lies with risk managers who relied too much on their tools, the statistical models, which were rapidly eclipsed by the rapid innovation in financial markets that begat complicated structures such as CDOs, so-called CDO squareds and structured investment vehicles (SIVs).

“Risk management tools are blunt instruments, which calls for prudence,” said Louis Gagnon, a former Royal Bank of Canada risk-management executive who now teaches business at Queen's University. “If you know you are driving your car on a foggy evening, you are supposed to go easy on the gas, but it's not necessarily what happens.”"


"Along with correlation, another term has come to haunt risk managers: “tail risk.”

It's an odd name for the statistical chance that returns on any given investment will fall outside the normal probability of events. (When plotted on a graph, the statistically probable events are grouped in a bell curve, but there's a long tail of improbable events that trails off to one side, hence the name.)

In other words, most of the times markets behave normally. But every so often they don't. Those abnormal events fall in the “tail” of the risk curve.

Many risk managers, especially those at banks, use the normal probability concept to develop a yardstick called Value-at-Risk (VaR), which measures the amount a position taken by traders could lose on any statistically “normal” day. Normal is defined as a move of less than three standard deviations from the mean, and the assumption is that normalcy will reign for all but one day in a hundred, or even a thousand. That's when the tail comes into play.

Most banks look back three or four years to determine the likelihood of loss – meaning that just before last summer's blowup they were looking only at years of unnatural calm. Markets fooled the models.

“The tail events happen far more often than we would predict,” Mr. Gagnon said. “But what are the predictions based upon? The normal distribution of events.”

As a result, VaR failed investors. For example, CIBC had a daily VaR in the third quarter of 2007 that averaged $9.9-million, according to the bank's quarterly investor presentations. Yet three times in that quarter, as the credit crunch picked up steam and the bank booked writedowns, it lost more than that in a single day, including one loss of $120-million."

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Thursday, February 21, 2008

Because People on The Internet Are Wrong

(source for the post title is here)

In view of recent events, I think it might be wise to have a little refresher on the basics of microeconomics - don't worry, I am going to keep it simple:

Microeconomics is the study of two things: supply and demand. To keep it simple, I'm only going to talk about demand in this post. With the odd exception, Microeconomics says two things about demand:
1) If the price of something goes up, demand goes down. i.e. People buy less of something when it is more expensive.
2) If the price of something goes down, demand goes up. i.e. People buy more of something when it is less expensive.

Retail stores take advantage of this microeconomic theory when they do things like 'holding sales' in which they lower prices in the expectation that demand will rise.

The classic microeconomic demand curve thus looks something like this*:

You can see that as price goes up (as you move to the right on the chart) demand goes down (the line slopes downward). On the flip side, as price goes down (you move to the left on the chart), demand goes up (the line slopes up to the left).

To make it more concrete, imagine that the line represents sales of big screen TV's. You can imagine, that if the price of a 42 inch LCD TV dropped from $3,000 to $2,000, people would buy more.

Let's make it even more concrete by considering one single person, let's call him Bob, who has the following willingness to buy a 42 in ch LCD TV at various prices.

Price > $1,000 - Bob won't buy
Price between $500 and $1,000, Bob will buy 1 TV
Price less than $500, Bob will buy 2 TV's.

So the demand chart for Bob looks like the following:

You can't see the line past $1,000 because it's at 0 (since Bob buys 0 TV's at that price.

Now, let's imagine a scenario where the government decided the key to the provinces future is that people buy more TV's. Perhaps they've seen the studies that show that people who watch TV spend more and save less and they figure this will boost retail sales, but the motive doesn't really matter. So we'll say that the current price of a 42 inch TV in this example is $2,000 and the government introduces a $200 subsidy so that the price for the consumer drops to $1,800.

Bob might have one of two possible reactions to this news:

1) Well, $1,800 is still too expensive for me so it won't change my behaviour, but I bet that in a province with millions of people, there are some out there who are willing to buy at $1,800 but not at $2,000.


2) Well, $1,800 is still too expensive for me so it won't change my behaviour. So I'd bet this subsidy is too small to have any impact on TV sales.

If Bob's reaction #1 is correct, then the demand curve would like the following:

In this world, any change in price, even a very small one, leads some people to change their behaviour, because there are so many people that there are bound to be some where that price change was their personal tipping point.

If Bob's reaction #2 is correct, then the demand curve would look like the following.

Nobody in the province will buy a TV until the price drops from $1001 to $1000, and then everybody in the province buys a TV all at once.

In my opinion, and in the opinion of every microeconomist in the world, scenario #1 is the correct one.

Which brings us to the carbon tax introduced in the B.C. budget. Here, instead of reducing the price of TV's in order to increase demand, the government is increasing the price of carbon emissions in order to reduce demand.

Again there are 2 possible reactions:

1) This small increase is likely to change the behavior of those people who were near the tipping point for changing their behavior already.


2) Nobody will change unless the price of carbon is increased by some greater amount, at which point everybody will all of a sudden change. The situation is exactly analogous to the TV example. Except, that where nobody (I hope!) would argue for scenario 2) in the TV case, I have seen any number of otherwise sensible people arguing for #2 in the carbon case.

Some examples:

Stehpen Rees (who I'll give credit to for at least admitting that it is a start): "Most commentators agree that in order to influence consumer behaviour a carbon tax has to be around $30 per tonne."

Sacha (who does include the weasel-word materially, on which he might mount a weak defense): "I do not believe that 7.23 cents per litre of gasoline will materially change people’s behaviours toward consuming gasoline (presumably through driving)."

Raphael Alexander
: "Shorter answer: carbon taxes of this size are too insignificant to reduce anything but the cash flow of the poorest working Canadians, while creating no incentive to reduce emissions"

(credit to MarkCH in the comments on Alexander's post, for laying out the marginal argument, even if nobody actually engaged his comments).

Robert (responding to Mark): "These taxes will have a marginal effect on consumption among marginal consumers.

If by marginal you mean none, then I agree."

And of course, you can always rely on the National Post to be the most clueless of all, with a headline that reads: "B.C.'s carbon tax won't change consumer habits"

Maybe people are just trying to say that the increase is so small that the impact really will be immaterial, or maybe people are disappointed because they thought that the first implementation of a carbon tax would be so huge that it would immediately force everyone to make drastic changes to their lifestyle (or vote out the government which implemented the tax, get the tax removed and carry on), but it comes across to me as thinking that there is some magic threshold which has to be crossed before anything changes, and that is simply not the case.

One other comment I have, which Rees makes as well, is that people really don't seem to get the idea of a revenue neutral tax. I've heard many many folks talking about the increased costs from the carbon tax and how they will be passed on to the consumer, but almost nobody who mentions the flip side which is that with other taxes dropping to offset the carbon tax, those businesses with a small carbon footprint (the ones we want to encourage to grow) will have lower costs, which they too will presumably pass along to customers.

Back to my main point, this is certainly not the first time I've encountered this widespread inability to grasp the concept of marginal changes in behaviour, it seems to arise regularly on both the left and right wings whenever someone wishes to claim that a government policy will not have any impact. I've never really known what to make of this blind spot, but I was reading Steven Pinker's excellent book, 'The Stuff of Thought' last year, and he made a point which I think might at least provide a partial explanation:

"Humans have a primitive concept of number, which distinguishes only one, two and many, though they can estimate larger quantities approximately. They use this coarse way of quantifying not just when tallying objects (as in 'singular', 'dual' and 'plural') but also when locating things in space (as in 'at', 'near' and 'far') and when locating things in time (as in 'the present', 'the recent past', and 'the remote past')." (from p. 429)

Perhaps it is this instinct to classify things in a discrete fashion ("at" or "near" )rather than a continuous fashion ("1 metre away", "10 metres away") which leads people to reason that a policy or tax is either "enough" or "not enough" to change behaviour, as opposed to the change in behaviour scaling with the magnitude of the size of the carbon tax. Who really knows, but it's a possibility.

Anyway, yeah, this post is a little obnoxious, but we're pretty much doomed, and we're extra doomed if politicians get nothing but grief when they come out and do the right thing. And sure, a carbon tax which totals $30/tonne won't be enough on its own to cause the necessary reductions in greenhouse gas emissions, but nobody, including the government, is claiming that it is. It's a start, it's a precedent, it's a part of a larger framework of initiatives, and it's something people should support if they're serious about fighting climate change.

* Actually, in microeconomics they usually put price on the y axis and quantity sold on the x axis, but I'm used to seeing the independent variable (price, in this case) on the x axis and the dependent variable on the y axis so I flipped the axes.

Tuesday, February 19, 2008

B.C. Budget 2008

The intro page is here.

The table of contents for the budget details is here.

My opinion? This is a pretty good budget. The main element is a carbon tax to be phased in over the next few years (starting at $10/tonne of CO2 and rising to $30/tonne) and offset by reductions in the bottom two income tax brackets and lower business taxes. The neutrality (i.e. not increasing the total tax level) of the tax is protected by a legislative requirement that each budget contain a three year plan for making sure that increases to the carbon tax are offset by reductions in other taxes. There will also be a carbon tax rebate (up to $100/year) for low income individuals so that the poor don't suffer too much from the new tax.

In addition to the new tax there is a wide scattering of environmental measures, the most important of which might be provincial sales tax exemptions for energy efficient / energy saving products and appliances.

Aside from that it is mainly more of the same, with most new funding going to health spending, as you might expect.

On a personal note, I appreciate that the decision to scrap the auto rental tax ($1.50/day) for rentals of 8 hours or less, rather than retroactively applying it to carsharing organizations. Is there any good reason (other than squeezing tourists, I suppose) to have a special tax on auto rentals anyway?

There's even good news for right-wing folks - once B.C. gets hit by the recession and housing downturn which is inevitably coming no matter what we do, they can blame it all on the carbon tax.

My two main concerns (somewhat inherently contradictory although not really, I think taxes should be higher in the upper brackets) are that a) the government should be reducing our debt, not increasing it (the budget forecasts total government debt rising from $37B to $42B over the next 3 years), while economic times are still pretty good, but the debt load has declined under the Liberals so far and they have followed the revenue-lowballing example set by Paul Martin and generally have ended up with larger revenues than forecast, so this is not a crisis situation, just a wish for a different emphasis...

...and b) that there isn't much here to change the fact that B.C. ranks near the bottom of the country in terms of how it treats the poor and on social indicators in general.

Overall though, this is a job well done, and the implementation of a revenue neutral carbon tax sets a valuable precedent which other jurisdictions will hopefully follow.


Monday, February 18, 2008

Spring Cleaning

I've been on a spring cleaning/consolidation kick lately. I've been spending years worth of accumulated gift certificates, I tossed (almost) all the paper in my office at work, I cleaned the apartment - even going so far as to clean the windows(!), gave away an old TV, took some stuff to various recycling/donation depots, re-organized my work and home email folders, consolidated all my files to a single external hard drive (with backup!), and so on. What's motivating this push, I'm not sure - mainly I think that as I get older I find there's enough clutter in my head so I can't tolerate as much in my surroundings, but that's just a guess.

Anyways, I'm extending the spring cleaning push to the blog with a plan to either complete or delete the fairly large number (I think - I was afraid to look prior to writing this post) of draft posts I have left unfinished like old, rotten apples in a desk drawer. Of course, none of these old unfinished posts are likely to still be all that relevant (I guess we'll see) but then it's not like we're always on top of the latest story here anyway.

And yes, I appreciate the irony-risk of embarking on a project to complete unfinished projects, but I guess we'll just see how far I get. The posts under this project will get the label 'spring cleaning' so you'll know which posts are completions of earlier started ones (at least, you will if I get around to updating the template to show the labels - Greg did it, so how hard can it be?).

P.S. 10 degrees and sunny this weekend in Vancouver and the blossoms will be out soon, so stuff your 'eastern' whining about how it's not spring yet....


Friday, February 15, 2008

These Are Not Serious People

From today's Globe business section:

"While Canada should weather the deepening U.S. slowdown, Jim Flaherty said he's increasingly concerned about Ontario, the country's largest economy. And he urged the provincial government to curb spending and cut taxes to spur economic activity."
[emphasis added]

You know, you won't find many topics that pretty much every economist agrees on, but the concept that cutting spending does not help you fight an economic downturn would certainly make the list.

What Flaherty said may not immediately sound crazy, thanks to the constant droning of one-track-mind folks who think there's no problem that can't be solved by spending less money on health, education, research and infrastructure, but it really is pretty crazy. You might as well have the head of the Canadian Medical Association explain how his patient had a fever so had to do some old-fashioned blood-letting, and you'd be at about the same level of professional competence. And this Flaherty clown used to be Finance Minister of Ontario which was a total disaster which won't fully be undone until the end of the highway 407 contract (in 2098, maybe your kids or grandkids will be alive to see it). This is a guy who locked his province into a terrible deal for 99 years, who managed to pile up a huge deficit during an economic boom - and what happens? He goes on to become Finance Minister for the whole country.

Let's face it, we're screwed. If George Bush's 8 years of being the worst president in the history of the United States proved anything, it's that having incompetent people run your country has serious consequences. Let's just hope we don't have to learn the same lesson quite as painfully.

The whole situation puts me to mind of this classic old Kung-Fu Monkey post on how he missed the good old days when the local right wing party was actually made up of grown-ups with serious opinions about things based on knowledge and evidence.

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