Worthwhile Canadian Initiative

The behavioural economist's dilemma: induction versus deduction

This summer I went to a conference for behavioural economists and economic psychologists. The presentations were entertaining.

Did you know that when coffee is given a fair trade label, people say it tastes better, even if it's just regular coffee? And fair trade coffee, without the fair trade label, doesn't taste as good?*

Did you know that an increase in a co-worker's pay will cause a person to reduce her own work effort?**

But somehow the intellectual excitement wasn't there.

Is the Dreaded Double Dip Near?

Statistics Canada has released the Canadian economic accounts with GDP estimates for the second quarter of 2011.   Overall, real gross domestic product or GDP declined by 0.1 percent in the second quarter following a 0.9 percent increase in the previous quarter. 

2 into 17 won't go

Hans-Olaf Henkel (H/T Larry Willmore) suggests splitting the Eurozone seventeen into two. He wants Germany, Austria, Finland, and the Netherlands to leave the Euro and create their own new common currency. The remaining countries would keep the Euro.

I don't think this would work. (But I agree a lot with the other things he says).

There are two problems with the Euro. The first is the Optimal Currency Area problem. The second is the Lender of Last Resort problem. Splitting the Eurozone into two might help with the first problem. It doesn't help with the second problem.

On trends in employment rates in Canada

I drew attention to Statistics Canada's updated projections for demographic trends a few weeks ago; the reason for being concerned about them is that unless worker productivity and/or rates of return on retirement savings increase dramatically, per-capita incomes are likely to fall as 8-12 per cent of the population ages out of the workforce.

Of course, there's (at least) a third way out: more people could decide to defer retirement. And it looks as though that's already happening.

The Eurozone Tea Party and the Lender of Last Resort

The Tea Party is much more powerful in Europe than in the US. Read Ambrose Evans-Pritchard to see an example. It's just they don't call it the "Tea Party" in Europe. It doesn't seem to have a name over there, but that's what it is.

Is this a liquidity trap?

 

Gold Prices Bubbling Away

Well, I normally do not follow the price of gold or other precious metals but an email from a former student of mind has piqued my curiousity.  My former student is studying medicine rather than economics but has a consuming interest in economics and markets and forwarded me a newsletter on the price of gold and a "model" linking the price to real interest rates.

The case for stealth taxation

According to Rosen et al's widely used public finance textbook:  “…it is generally agreed that visible taxes are preferable to hidden taxes…."

It is, in some ways, a strange assertion. The standard economic analysis of taxation assumes that taxes' superficial aspects - things like who is legally responsible for collecting the tax - are largely irrelevant. Taxes change behaviour because they introduce a wedge between the before tax and after tax price of a good. A tax's impact on economic efficiency is a function of the size of that wedge. A tax's impact on equity depends upon the relationship between an individual's tax burden and his or her income. Neither efficiency nor equity depend upon visibility.

The argument that Rosen et al give in favour of visibility is, in fact, a political one: 

Canadians need to know how much they pay in taxes in order to make informed decisions about the level of public sector spending that they are prepared to support. Public awareness of taxation levels is essential in achieving a reasonable balance between the private and public sectors’ provision of goods and services...

I'm not convinced. Here's why.

The Price Is Too Damn High, Denouement

A follow up to this.  It would appear that the answer is likely, in fact, regulatory-based transaction costs (or at least perceived transaction costs).    Not nearly as exciting as I'd hoped, though I'd need a rigorous study to have any real confidence in the answer.  Anyhow, as a Canadian business person competing with U.S. companies, I'm painfully aware of the differences in cost structure between U.S. and Canadian companies.  However, from the matter of price, it matters not if the law of one price holds.  Of course, it matters to the Canadian retailers, who either have to find a way to compete with U.S. retailers, or die.

This is an issue that will not die.  From yesterday's Globe and Mail:

Popular U.S. fashion chain J. Crew Group Inc. has backed down in the face of a backlash from customers angry about higher prices at its newly opened Canadian store and website.

Starting on Thursday, it is reversing its decision to charge its e-commerce customers in Canada for duties, which raised the final price to as much as 50 per cent above those at its U.S. stores and on its U.S. website.

Still, J. Crew will continue to charge an average of about 15 per cent more in Canada than at its U.S. outlets and website. But to ease the e-pricing pain, it offers a flat $9.95 shipping fee.

I have found a couple companies that charge similar rates in the two countries, including my favourite jeans company Guess, where their in-store products are the same absolute amount in the two countries (89 CAD vs. 89 USD).  Canadian locations of Mexx, on the other hand, list their products in about 8 different currencies, including CAD, but not USD.  Gee, I wonder why?

A friend of mine pointed me to Revolve, where you can toggle between USD and CAD and see that the prices are equivalent after taking the exchange rates into effect (e.g. a product that sells for 204 USD sells for 200.79 CAD).  I haven't seen anyone else do this, though.  It will be interesting to see if Canadians flock to Guess and Revolve and avoid the J Crews and Mexxs of the world.

Updated to Add: A piece that came out today on the J. Crew 'duties and customs' situation: J. Crew price war underpinned by loose duties rules.

Recessions are always and everywhere a monetary phenomena

"Inflation is always and everywhere a monetary phenomenon" was Milton Friedman's slogan. It was revolutionary (or counter-revolutionary) when he said it in 1970, but it's now very widely accepted. After all, we make central banks responsible for keeping inflation on target. We do not make fiscal authorities responsible for targeting inflation (unless they happen to control monetary policy too). And we certainly don't give the Competition Bureau or Industry Canada responsibility for targeting inflation (which would make perfect sense if economists believed, as many did in 1970, that inflation was caused by monopoly power).

But nobody strictly believes the full quote from Milton Friedman. I bet hardly anybody even knows the full quote. "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." Nobody believes that last bit is strictly true.

What about my own slogan (though it might easily have been Friedman's): are recessions always and everywhere a monetary phenomena? And if so, in what sense?

Another Canadian economics blog! And yet another!

The University of Victoria economics department has provided us with two - count 'em, 2 - new economics blogs in the last few months.

David Giles' Econometrics Beat has been up for a while now, and he is to be congratulated for writing a blog on the required course that almost all economics students would much rather avoid if they could. (The reason they can't is that econometrics is incredibly important. You students out there: trust me on this.)

And today I learn that Chris Auld has just started QuantEcon. It's still new, but he has already come up with (among others) this gem about how David Suzuki simply doesn't understand what is arguably the most important concept in environmental economics.

The Canadian econ blogroll on the right-hand side has been updated - attentive readers will have noticed that David Giles' blog had already been included. Go read them.

Update: And yet another! HEC-Montréal's Martin Coiteux has been blogging for a year or so. Those of you who can read French would do well to check it out.

Apples, wheat, and haircuts: output and demand

What happens to output when the quantity of output demanded suddenly and unexpectedly falls below and stays below the existing level of output? (And prices either do not or cannot adjust to bring the two into balance).

I'm going to sketch three different economies, which give three different answers to that question. In an "apple economy" output stays the same. In a "wheat economy" output falls with a lag. In a "haircut economy" output falls immediately.

There is nothing fancy here. It's just a simple point, that seems worth making, even if many people already understand it. And I've got a question: is the economy moving towards a haircut economy or an apple economy?

British Tuition Hikes: A Canadian Opportunity?

Last Thursday, about 300,000 British secondary school students (England, Wales & Northern Ireland) received their A-level results, which are a key determinant of whether or not they will receive a place at a university of their choice.  This year, the number of applicants to British universities was about 684,000 but the number of spaces was 480,000. 

Employment growth in Texas

This post was written by Simon van Norden of HEC-Montréal.

In normal times, people could care less about employment growth in Texas. But times are strange enough that our neighbours to the south are suddenly making an issue of it. (It’s even in the New York Times! (1) (2))

An academic integrity policy for faculty?

Carleton University has a 14 page academic integrity policy governing student conduct. It describes in detail the various types of unacceptable behaviour, the process for investigating allegations of misconduct, and the various consequences a student might face.

There is no parallel policy for faculty.

Perhaps that's because no such policy is necessary. After all, faculty don't violate the principles of academic integrity, do they?

The Price Is Too Damn High, Canadian Edition

About five years ago, I was on a trip to Manhattan and I bought a Baltimore Orioles cap.  It is easily the best hat I've ever owned - it fits my head like a glove.  Unfortunately it's getting pretty worn from heavy use.  I decided to see if I could find another one just like it, but perhaps from a different team (I only bought the one I have because I was going to a Yankees-O's game).

I went to Lids.ca and sure enough they had 54 in the same style all for $31.99 (Canadian), including a nice 1949 New York Giants model.  Before placing an order, I went to Lids.com and did the same search.  They have 53 in that style (which one are they missing?), including my Giants cap.  All for... $24.99 US.  Even if you assumed an exchange rate at par, Canadians are paying 28% more for the same product.  This April Douglas Porter found a similar price difference  (link goes to PDF).   And that's before we take into account differences in sales taxes.

Thinking About Economics

As part of my fall teaching load, I will be teaching what economists sometimes refer to as “History of Thought” but which is more correctly termed the “History of Economic Thought” or perhaps “Evolution of Economic Theory and Analysis”. 

I=S

There's a lot of people wandering around the internet who are very confused about Investment = Saving. Maybe they have been mistaught, or maybe they have mislearned? I don't know. But I'm doing this as a public service, even though it's a thoroughly boring job for me. Someone's got to do it. And since I've done it almost every year for the last 33 years, it might as well be me. "Ours the task eternal" is Carleton's motto.

Substituting Capital for Labour, Radio DJ Edition

Say hello to Denise:

Her name is Denise and at first glance she's kinda hot.  But she's actually less real than a Penthouse Pet.

Instead, Denise is a James Cameron wet dream, a virtual non-human AI radio DJ.

Built by a company called Guile 3D, she was designed to be a virtual assistant.  In that guise, she can check email, do web searches, answer phone calls and various other tasks.  But then she was bought by a radio person named Domique Garcia for $200 and programmed to be a radio DJ.

I Dissent (FOMC Edition)

This post was written by Simon van Norden of HEC-Montréal. 

Last week’s FOMC decision to signal looser monetary policy seemed to boost US stocks, as it was designed to. But the decision was a tough one: three of the eleven voting members dissented, which is as high as dissent on that committee has gotten in recent years. In recent years, the dissenters have consistently been the “inflation-hawk” Regional Fed Presidents; this time it was Richard Fisher (Dallas), Charles Plosser (Philadelphia) and Narayana Kocherlakota (Minnesota). I’ve written about Richard Fisher before; he’ll tell you openly that he is one of the weakest economists on the FOMC. You can’t say that about Kocherlakota or Plosser, both of whom are bright men with distinguished research publication records, among other things. (Okay, maybe not as good as those of Peter Diamond, the MIT Nobel Prize winner who Republicans deemed unqualified to serve on the FOMC….but I digress.) So I was interested to understand why they dissented.

Fortunately, Kocherlakota issued a statement explaining his reasons. He puts it this way: