Tuesday, 16 March 2010

Canadian economics

A Canadian civil service economist writes to 2blowhards:
Although I was born and raised in Ottawa, many of the friends I made in grad school were not. Pretty much all of them, having studied Economics, wound up working in various capacities for the public sector in our nation’s capital. This has given me the unique experience of observing their reaction to finding out exactly what our government does with the mountains of cash it extracts from the productive regions.

Their reaction can be summarized thusly:

If everyone knew what actually happened in this city, no one would ever vote against the Conservatives, ever again.

[anecdotes of slack public service in Ottawa]...

Compared to other public servants, Economists seem to be unduly put upon in terms of workload. Most of my grad school friends are assigned somewhere around 20-40 hours of tasks per week of. One of them even puts in unpaid overtime occasionally. The work we do however, is largely worthless. We write analyses no one ever reads, collect data that no one ever uses, offer input on decisions that never get made. Much of our time is spent “forecasting,” which basically means making a common-sense appraisal of what some indicator or variable will do in the coming years, and creating a statistical model that confirms it. The second step adds nothing of value to the prediction – the math is just there for show, a means of impressing the innumerate by camouflaging shot-in-the-dark guesses in rigorous clothing.
Hmm. I'd have thought that the economists would be the ones most disappointed by the Conservatives; perhaps their expectations were lower than mine.

My impression is that the economists here get a lot more say in policy. Co-blogger Seamus Hogan, who worked for Health Canada in a prior life, may have more useful comments. I do like the quip on forecasting though.

Being far more macro-minded than I am, Seamus may also have more useful comments on this interesting question from Nick Rowe over at Worthwhile Canadian Initiative:
I want to compare the economies of Canada, Australia, and New Zealand over the last couple of years. I know I will get things wrong, and leave important things out. That's what comments are for. Especially comments from Australia and New Zealand.

Why these three countries? Apart from any historical, cultural, and political similarities, all three are small open economies with an inflation targeting central bank. But there's one big difference between Canada and the other two.

The Bank of Canada hit the notorious "Zero Lower Bound" on nominal interest rates (or felt it had). That's supposed to matter. A central bank that hits that constraint cannot loosen monetary policy enough to offset a decline in aggregate demand. The Reserve Banks of Australia and New Zealand didn't even come close to the lower bound. So seeing how the otherwise similar Australia and New Zealand did compared to Canada should tell us if the ZLB matters. Australia seems to have done better than Canada, which fits the theory. But New Zealand seems to have done worse.
Seamus has a comparative advantage in macro; I'll punt on it for now. Seamus, any thoughts?

Scott Sumner usefully comments at Rowe's blog:
Nick, I have to agree with those who point out that there isn't enough information here. Obviously the zero bound didn't matter for Australian and New Zealand, but on the other hand they were impacted by something the US was not impacted by--and exogenous shock of a worldwide recession. So unemployment might rise even with optimal monetary policy. In that sense, of course, Canada is more like Australia than the US. So the only real question here is whether the BOC wanted to do more easing, but felt unable to because of the zero bound. What do they say? At the Fed you had Janet Yellen saying "we should want to do more." Did BOC officials spout any similar nonsense?

Kien's comment is very interesting. I haven't heard Krugman's views on optimal monetary policy in small countries. The zero bound isn't a factor, as they can always depreciate their currencies without limit. Does Krugman say fiscal stimulus never makes sense in small countries? Or can it be optimal if there are international (real) AD shocks impacting the small country
Some comments there suggest NZ had no fiscal boost over the period; that's not quite true. Rather, what fiscal boost we've had has been more permanent spending increases than temporary spending jolts. Labour implemented Working For Families (EITC) in its last term in office; National cut taxes very slightly in its first budget (by much less than they'd promised). And, National's brought forward some infrastructure projects; that spending couldn't really be brought forward enough to have any substantial effect during the worst of the recession. On NZ's stimulus spending, see NZIER, discussion at TVHE which eventually concludes that OECD overestimated the extent of NZ fiscal stimulus; TVHE later wonders whether we really had any substantial discretionary spending increases..

We're now in rather large deficit, mostly due to the permanent spending programs inherited from Labour rather than because of any stimulus push in the current administration. We might expect that National will cut those back a bit after the recession fades, but such expectations don't really make the current spending levels temporary.

I'll punt on the rest for now and see what Seamus has to say on the dark arts of macro....

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