The debate about whether or not Canada has "Dutch disease" can never get very far, because there is in fact no clear notion what it is. As far as I'm concerned, the term has by now been stripped of meaning: people are using the definition that is most convenient for their purposes.
So in this post, I'm going to summarise some of the points that have been raised:
1) The rise in resource prices. This has induced a shift of capital and labour away from manufacturing towards resources. This is not a subject of dispute. Some people seem to think that this is what "Dutch disease" is, but this phenomenon clearly does not deserve a pejorative label. HEC-Montréal's Simon van Norden put it very well in the comments in Mike's recent post on the topic:
When the world prices resources at a premium at to manufactured stuff, we export more of the relatively expensive stuff and import more of the relatively cheap stuff.
When it prices manufactured stuff at a premium to resources, we use the same strategy. I think Ricardo called this "comparative advantage."
I don't understand how an income-increasing change in the composition of output and employment can be called a disease.
2) The petrodollar. Again, I don't think that anyone disputes that there's a strong correlation between movements in oil prices and movements in Canadian dollar exchange rate. But this correlation is essentially the result of the Bank of Canada's inflation target; the shift out of manufacturing would have occurred anyway. If the Bank of Canada had kept the exchange rate fixed at – say – 0.85 USD, the prices that Canadian oil producers receive would be about 15% higher than what they get now. The oil sands would be that much more profitable, and would be attracting even more investment than they are now. Indeed, the reason Canada abandoned the Bretton Woods system of fixed exchange rates in the first place was that a flexible exchange rate dampened the swings generated by changes in resource prices.
There's not much point in pointing to the appreciating Canadian dollar as the cause of the reduction in manufacturing sector. If the government saw fit to order the Bank of Canada to force down and hold down the exchange rate, it would only succeed in creating inflation. (Not to mention the shitstorm associated with throwing away a policy that had provided twenty years of low and stable inflation )
3) Hollowing-out. As far as I can tell, the only point where the 'disease' tag really sticks is in the idea that manufacturing is a source of spillovers and other forms of increasing returns. The concern here is that if the manufacturing sector contracts "too much", it will lose its ability to recover if and when resource prices fall. I don't see much in the way of evidence for the notion that we should be using this as a basis of policy.
Firstly, we've seen this all before. As Simon also pointed out in that comment,
Over the past 50 or so years, we've seen a few of these "resource" price cycles. And we've seen the Canadian economy shift resources accordingly. (Remember how Alberta land prices fell in the '80s? and the western banks that went bust?) The ability to do so sounds like a very valuable real option to me.
Secondly, the sorts of manufacturing industries that have been losing employment are not the ones that are generally associated with R&D spillovers. The recent IRPP study that everyone's talking about puts it this way:
[B]ecause the manufacturing sector is traditionally a source of innovations that spill over to other sectors of the economy, the Dutch disease could, by weakening the major sources of innovation, lead to permanently lower growth rates for the overall economy. But the distribution of R&D spending combined with the industry-level analysis of the Dutch disease suggests that this is not a likely outcome in Canada. Almost 80 percent of manufacturing R&D is carried out in just four broad industry groups …, but the empirical analysis in this study … demonstrates than none of them has been severely affected by the Dutch disease.
Moreover,
An important caveat to the notion that the manufacturing sector is the motor of innovation across the economy is that the energy sector itself may provide technological spillovers to other sectors, and these may increase in the context of a resource boom. Even though the energy sector is perceived to be much less R&D intensive than manufacturing, the reality is that R&D spending in the oil extraction sector has tripled since 2003 and now exceeds that of the pharmaceutical sector by a comfortable margin. There is certainly anecdotal evidence that modern extraction techniques are far from “low tech.” Hydraulic horizontal fracturing technologies have vastly increased the amount of proved natural gas reserves in North America, and the oil sands industry has invested billions of dollars in technologies that have lowered the cost of extraction, increased the amount of economically recoverable sources and reduced the industry’s environmental footprint. However, very little research has documented the degree to which these developments have spilled over to other industries.
4) Wages. What amazes me most about the whole debate is that it's being conducted in terms of employment. But as we've been pointing out here on WCI for awhile now, most policy debates aren't about jobs. This is a case in point. In this debate, total employment is best viewed as fixed; what's at stake here are the sectoral composition of employment and wages. And the shift out of manufacturing has been accompanied by an increase in real wages.
5) Environmental implications. (This is a point that Mike has made often; I'm just repeating it here for completeness.) If an effective policy to price greenhouse gas emissions had been in place over the past 10 years, the pace of oil sands development would undoubtedly have been slower. But there's little reason to think that if carbon had been priced properly, more people would be working in the manufacturing sector. Steel producers would certainly have problems absorbing this new cost, and the fact that the auto sector sought and obtained special protection from the mild efforts of the Chrétien government suggests that the auto sector would also be concerned about its ability to absorb a carbon price. It's hard to see how a link can be made between pricing carbon and increasing (or at least, slowing the rate of decrease in) manufacturing employment without some sort of exemption for the manufacturing sector. And if the manufacturing sector is exempted, then it's hard to see how it could be defended against accusations that the carbon pricing policy is simply NEP 2.0. (That last line is also Mike's.)
I think the question "Does Canada have Dutch disease?" has been evacuated of meaning. The only meaningful thing we can do is discuss the effects of policy measures designed to 'cure' it. And we're still waiting for someone to put them on the table.
Worthwhile Canadian Initiative 
‘I began the class by asking students whether they would approve of my carrying out a particular magic experiment. I picked two volunteers…”
You have shifted the debate from an analysis of whether Dutch disease exists or not and why or why not, to a very different normative debate concerning whether students or people more generally, would or ought to support free trade in general.
The answer can be provided – in this context – very clearly. During the last 10 years, the Cdn economy lost 500,000 mfg jobs while creating 2.5 million new jobs in other industries across Canada.
Restated, for every mfg job lost, we gained 5 new jobs in Canada. That is an excellent ROI!
As there are still a lot of mfg jobs left in Canada, using that ratio, at that rate, if we destroy enough additional mfg jobs, we will eliminate unemployment in Canada:)
I forgot to provide the following salient notes from Jason Langrish, (Exec Director of Canada-Europe Roundtable and formerly with Cdn Trade Commission to the EU)
“”Yet in 2011 export growth for passenger cars was two times that of oil, while gold was three times that of oil. In fact, oil export growth was middle of the pack, even when compared to other commodities.””
“”And if oil, for which Canada is the world’s eighth largest exporter, is a driver of Dutch disease, shouldn’t the severe drop in the price of natural gas – a commodity for which Canada is the third largest exporter in the world – also be taken into account? For example, in 2011 Alberta reported that its natural gas royalties dropped to about just 3.6% ($1.4-billion), down from about 15% of provincial revenues ($5.8-billion) in 2009.””
“”The Canadian dollar is strong for a variety of reasons, of which oil resources is one. The country has a strong fiscal position, its banks are well capitalized, credit is available and the real estate sector has not gone off the rails. These days, there are a shortage of healthy, growing economies in which to invest and prosper. Canada is one, creating a strong dollar.””
“”Dutch disease is not infecting Canada””, iPolitics, May, 18, 2012
Can the shift from manufacturing to resources or vice versa occur too quickly? Or not quickly enough? Isn’t that the main issue? Rate of change?
Stephen,
The term Dutch disease has a very clear meaning: it is a concept explaining the process by which a boom in one tradable sector causes the appreciation of a country’s currency and a corresponding decline in another tradable sector (or other tradable sectors in Canada’s case).
Your point seems to be that this concept should not be saddled with a pejorative sounding label like “Dutch disease”. You make the classic argument that the benefits of a booming tradable sector such as oil and gas must, ipso facto, outweigh the decline in other sectors–otherwise they wouldn’t be generating enough demand to result in an increase in the country’s currency. If that’s the case, I suggest you take that problem up with The Economist magazine, since they coined the term; one can hardly blame Thomas Mulcair for their allegedly poor choice of words 35 years ago.
As to the substance of your contention that Dutch disease should not be considered a problem because the benefits of a booming tradable sector such as oil and gas outweigh the decline in other sectors that may occur as a result of an increase in the value of a country’s currency, I would point you to Paul Krugman’s seminal 1987 paper “The Narrow Moving Band, the Dutch disease and the Competitive Consequences of Mrs. Thatcher “.
http://www.eco.uc3m.es/~desmet/trade/KrugmanJDE1987.pdf
Krugman lays out, quite simply, that the danger of Dutch disease is not, ipso facto, the decline of competing sectors, but that (a) even DURING a Dutch disease-type boom the economy suffers because manufacturing has spillover effects whose benefits are external to currency valuation AND (b) in the case of a boom based on a non-renewable resource, sectors like manufacturing do not bounce back even AFTER the boom (when the resource is exhausted or market conditions change such that the boom in that particular sector ends). The point being that the loss of spillover effects is not the only problem, even in Paul Krugman’s analysis.
Before I go any further, it’s worth pointing out that this specific paper is among the work that won Krugman the Nobel prize. You may disagree with Krugman’s analysis, but it’s a little disingenuous to try to denigrate and dismiss Thomas Mulcair’s economic ideas when they’re based on Nobel prize winning work in economics (the intellectual case, that is; the factual case that this phenomenon is occurring today, in Canada, is purely a question of whether the appreciation of our currency is based on the oil and gas boom and whether a high dollar results in lower exports in other sectors, both of which you seem to have admitted are accurate.)
But there’s also a new element that Thomas Mulcair has added to this conversation: subsidies to the oil and gas industry–mostly in the form of allowing the industry to externalize environmental costs. The idea here is clearly that subsidies to the oil and gas industry not only cost the public and encourage environmental damage, but because they are targeted at a booming export market, they create “artificial” pressure on the Canadian dollar. Since the product we’re subsidizing is being exported in extraordinary quantities, it seems inarguable that this is correct. Mulcair’s argument then becomes essentially that in addition to costing taxpayers and the environment, oil and gas subsidies are also undermining other export industries via the Dutch-Currency-Phenomenon-That-Shall-Not-Be-Named.
Thomas Mulcair lays out these arguments in this speech to the Economic Club of Canada starting at time 8:26 at the link below. I highly recommend you watch it. In other venues Mulcair has also made the point this affects all exporting industries, not just manufacturing.
http://www.cbc.ca/news/politics/story/2012/04/05/pol-mulcair-speech-economy.html
The argument that the correlation between the value of the dollar and the price of commodities “is essentially the result of the Bank of Canada’s inflation target” is also incorrect. The increase in the value of the dollar is due to increased demand for Canadian dollars in foreign exchange markets. Of course the Bank of Canada could raise or lower the exchange rate in a nominal sense by printing more money, but as you alluded to this would be no different–to a first approximation–than adding or removing a zero to or from every currency note, bank deposit and price tag in the country. This would not, as you claim, lead to more investment in the oil sands because the nominal price of oil would be effected along with everything else. And that’s the point, really: that increased demand for the Canadian dollar affects other industries precisely because it makes the REAL price of Canadian goods higher relative to the same goods produced in other countries, not just nominal price.
This is rather basic stuff. I suspect your comment that action by the Bank of Canada to increase the money supply would lead to more investment in the oil sands is based on China’s success in attracting investment by devaluing its currency. But remember, China’s currency devaluation is backed by fiscal policy in the form of buying foreign debt. Very different circumstance.
Finally, the implication that the internalization of environmental costs would not lead to more employment in manufacturing doesn’t seem to be supported by any of the prima facia evidence. As you pointed out “in this debate, total employment is best viewed as fixed”. That being the case, the question is not whether manufacturing would be impacted by pricing carbon, but rather the relative impact. According to the national inventory of greenhouse gas emissions, extraction, refining and leakage from oil and gas produces roughly 149 Megatonnes of greenhouse gas emissions and (according to CANSIM data) directly contributes roughly 3% to our GDP while manufacturing produces roughly 42 Megatonnes of greenhouse gas emissions and (according to the same data) directly contributes roughly 13% to our GDP.
Click to access 2010%20NIR%20Executive%20Summary.pdf
There is one thing you wrote that I agree with: this conversation is irrelevant. Economists agree externalities should be priced into the market; they agree that it is demand for oil and gas that is inflating the value of our dollar; they agree that a high dollar hurts exports. The rest is a matter of degrees.
If you want to argue that the impact of oil and gas subsidies on other industries isn’t as big a deal as Mulcair thinks it is–even though you agree with the need to end those subsidies anyway–then be my guest. But trying to argue that Mulcair’s thesis doesn’t make sense just doesn’t hold up to the facts.
Hear hear!!!
Be my guest, Guest 🙂
rsj:
ok, sorry, obviously size of the economy matters too
Guest
Please forgive my audacity for raising questions concerning anything that Krugman has said. However in my defense, I am still stuck at the empirical level of exports and imports for Canada’s economy.
Per CANSIM Table 380-0027 Exports and imports of goods and services annual (dollars x 1,000,000), 2007-2011
I will only reproduce key points I wish to highlight – anyone can refer to full table
Total CDN exports of goods & services for 2011: $465,407
Total CDN imports of goods & services for 2011: $607,436
Total CDN exports of – 2011 (rounded to nearest Billion)
Agriculture & fish: $37
Energy: $58
Forestry: $27
Industrial goods: $70
Machinery & Equip: $88
Automotive: $78
Other consumer gds: $16
Export – services: $64
IF I understand your argument and your interpretation of Krugman correctly – you are suggesting that the export of $58 B in energy products (to help your argument let us assume it is ALL oil sands oil) is causing the CDN dollar to appreciate significantly (and thereby harming mfg goods exports)
BUT – you implicitly argue – that the CDN export of $70 B industrial goods + $88 B machinery & equipment + $78 B automotive + $16 B other consumer goods + $64 B services = $316 B in exports is not influencing the appreciation of the CDN dollar.
And implicitly, you are assuming that other issues such as Canada’s international reputation, strength of its banks, relatively low debt to GDP etc have negligible impact on the value of the CDN dollar
Are you making this claim or have I misunderstood you?
If so, what is unique concerning oil exports in terms of the revenue impact on the value of the CDN dollar? Is money not fungible? Or are the monies received from the export of oil somehow different from the revenues received from the sale of mfg goods or industrial goods – in terms of impact on the CDN dollar?
Your numbers for GHG emmissions, I believe, are too low for both industries. Where are you getting your figures?
For an economy wide comparison, this Pembina data is useful if a but dated:
Click to access canada-2008-summary-v3.pdf
Re GHG and carbon tax issue, a carbon tax will increase the cost of energy.
Please see Industry Canada: Manufacturing Costs Manufacturing (NAICS 31-33)
http://www.ic.gc.ca/cis-sic/cis-sic.nsf/IDE/cis-sic31-33cote.html#cot2
“”Under this topic you will find a breakdown of manufacturing costs by category for the Canadian Manufacturing (NAICS 31-33) sector. This information can be used as a benchmark against your manufacturing costs and can help you to identify trends in particular expense categories””
Manufacturing Costs by Category
“”In general, the three most important categories for manufacturing costs are:
■cost of materials and supplies;
■cost of energy, water and vehicle fuel; and
■production worker wages.””
“”Manufacturing costs in the Manufacturing sector were dominated in 2009 by the costs of materials and supplies. Considering these costs are the major factor in its manufacturing activities, this sector is vulnerable to any fluctuation in the prices of materials and supplies””.
From this report, it is estimated that energy and fuel are approximately 4% of mfg costs.
A carbon tax will somewhat increase the cost of energy to mfg firms, thereby somewhat diminishing their competitiveness.
Restated, Mulcair’s suggested carbon tax will increase energy costs to mfg sector – thereby making mfg somewhat less competitive – as a consequence of the proposed policy.
I thought Mulcair justified his suggestions on the basis he was trying to help – not harm – the mfg sector.
Guest:
1) Krugman’s point is of the form “If A then B”; it doesn’t demonstrate that A is true. My point is that there don’t seem to be spillovers in the sectors that are losing employment.
2) One might also note that the service sector accounts for roughly 60% of the economy and for roughly 0% of GGE. I don’t doubt that one can put together reasonable assumptions that would predict that if carbon pricing were in place, the manufacturing share of employment in the GGE-emitting sector would increase, everything else equal. But I suspect that these assumptions would also predict that the share of employment in the entire GGE-emitting sector would fall. In other words, manufacturing would have a larger proportion of a smaller share of employment – and it’s not obvious a priori which effect will dominate. And if you throw in the declining relative price of manufactured goods, things get messier still.
I don’t know why no one is looking at investment (not just production) from oil sands activity. What are we talking $200 – $500 billion?
Stephen,
1) Krugman’s argument is “if A then B and C” where A is the rise in currency/crowding out of certain industries, B is the loss of spillovers and C is the ghost town effect. C occurs even if B doesn’t. In other words, the fact that manufacturing doesn’t bounce back once it declines is not based on spillovers sepcifically, it’s based on all sorts of networking effects. Think first mover advantage in reverse: we’re ceding the networking effects we’ve built up over time to other countries as they pick up, not only the types of manufacturing they would have crowded us out in anyway, but types of manufacturing that would be competitive in Canada were it not for the high dollar.
I’ll add that in our current context–at a time when even many on Bay Street are calling on us to follow the example of Germany by moving i Ontario towards high-end manufacturing (industrial policy?)–we’re not just talking about losing current manufacturing job. We could also be hindering our ability to make necessary transitions within the manufacturing sector. This is something the IRPP study misses entirely.
Amongst existing manufacturing enterprises, it may be low-end manufacturing that suffers most from the high dollar, but if so that’s because high-end manufacturing can’t pick up and move as easily (human capital, etc.). But what about the new high-end manufacturing markets we should be entering that we’re not due to a high dollar?
Thomas Mulcair has often used the phrase “we’re destabilizing the balance economy we’ve built up since the Second World War.” That’s actually quite a good way to describe the importance of networking effects.
Now I admit that networking effects are difficult to quantify and that might give people pause before crafting policy based on their impacts, but Mulcair is advocating a policy, cap and trade as well as enforcing existing environmental regulations, that is well supported to begin with. He’s just giving us another reason why we should care about a policy we all agree on anyway.
2) Services account for a non-trivial share of GHG emissions, primarily because much of the transportation industry is part of the service sector and transportation accounts for a huge portion of GHG emissions.
Your broader point I agree with, but I would state it in a different way.
The problem with any externalization of environmental costs is that it ultimate misallocates resources (K, L, etc.) to production that cannot be justified at true market prices. It’s true that it’s not just currency impacts that would shift the allocation of capital and labour resources from one industry/sector to another, but the direct market effects as well. That’s actually why the originators of the dreaded Dutch-Currency-Phenomenon-That-Shall-Not-Be-Named models focused not only on whether resources shifted from other sectors to the booming sector (of course they would), but also whether the existence of currency and trade within the model caused an additional shift from non-booming tradable sectors to non-booming non-tradable sector (which it did).
So, yes, we can’t know for sure which effect will dominate, but non-booming tradable industries are currently taking a double hit, non-booming tradable industries with low emissions are taking a triple hit–except perhaps Bay Street which making up the money on the other end (investment flows). The point being, it’s not correct to say that the only way the internalization of environmental costs helps manufacturing employment is to assume an exemption.
I’ll add here one issue that doesn’t get enough play in this conversation: the degree to which the rents from the oil sands are being exported due to foreign ownership. When we see huge dump trucks on TV in the oil sands we tend to think about all the investment and employment oil sands production is creating. But economic data tells us natural resource extraction is actually not very labour and capital intensive.
Why? It certainly seems like it would be.
The reason is that it’s not the numerator (labour costs + capital investment) that’s low, it’s that the denominator (revenue) that’s high, and the reason that the denominator is high is that the value of the oil in the ground is much greater than the value-added in extracting it. In another industry this would not be an issue, but the value of the oil in the ground is set by resource royalties in this market, not by market forces. This won’t be part of the federal debate because it’s province jurisdiction, but the low royalty rates currently being charged by resource rich provinces are, in many cases, effectively padding the profits of foreign-owned corporations, taking that wealth out of the country, with a relatively small portion of total revenue being paid to labour income and capital investment.
Mike Moffat,
I provided a link. The National Inventory Report.
The difference appears to be there was a drop off in refining in 2010 (high dollar, anyone?).
Click to access 2010%20NIR%20Executive%20Summary.pdf
Stephen,
I forgot, buildings are another major reason that the services sector produces a non-trivial contribution to GHG emissions.
Ahh.. I see where you’ve got it.
You’re misreading the data. Keep in mind, if a plant produces its own electricity (with say nat gas) to power their production, that electricity production falls under ‘energy production’ not ‘manufacturing’.
Look at the data I presented in the other post. The top manufacturing facilities alone have GHG levels beyond 42 million tonnes.
Ian Lee,
First, let’s clear up a couple of things.
Mulcair is not proposing a carbon tax. He is proposing we enforcing existing environmental regulations do deal with issues like toxic sites and a cap and trade system to deal with climate pollution.
Also, with regard to Krugman, I specifically wrote that “You may disagree with Krugman’s analysis, but it’s a little disingenuous to try to denigrate and dismiss Thomas Mulcair’s economic ideas when they’re based on Nobel prize winning work in economics”.
Far from considering it “audacity [to raise] questions concerning anything that Krugman has said”, I made the–fairly inarguable point–that it’s a little bit much to hold candidates for Prime Minister to a higher standard than that of Nobel prize winning work in economics.
Now on to substance…
You make the argument above that in the last decade we’ve lost 500,000 manufacturing jobs, but gained 2.5 million jobs. I’m not sure why this is relevant. Obviously there are many factors at play in terms of job creation in multiple sectors and industries.
You go on to make two arguments more closely connected to the point at hand: (1) that we have seen manufacturing thrive in other countries as their exchange rate has increased and (2) that oil makes up a modest portion of our exports, so how can it be “responsible” for the high dollar?
On the first point, I would say “chicken and the egg” followed by “ceteris paribus”.
In the countries you cite, it seems to be the case that it was the success of their manufacturing sector that drove the increase in their currency. Of course a rising currency didn’t hurt the manufacturing sector in those examples. That would be like me saying that the increase in the dollar caused by oil export is hurting our oil exports!? It’s simple supply and demand–the price of a product increasing as demand increases except in this case the “price” is the currency.
Now, of course, as you point out, one might have said in such a time and place that a high currency caused by some markets within the manufacturing sector was crowding out other markets within the manufacturing and why should we care any more about oil crowing manufacturing as a whole than we care about one element of manufacturing crowding out another?
But this, of course, brings us back to the economic literature on network effects, the ghost town effect, etc. As well as the new element introduced by Mulcair–that because subsidies are driving the oil industry, we’re cutting our noses off despite our face by supporting one industry in a way that harms others.
On the other hand, if we assume that the appreciation in the currency of the countries you cite was based on something other than the success of manufacturing itself, then it’s just a ceteris paribus situation–sure, manufacturing may have been thriving, but not as much as it would have had X, Y, Z not caused the currency to increase.
On your point about the empirical data, I would say several things.
First, I’m aware of the data and it’s certainly interesting.
Second, the reason it has become commonly accepted that oil is driving the high dollar is that we have much more direct empirical evidence on the subject–namely day-over-day, month-over-month and year-over-year sequential correlations in the price of oil and the exchange rate. If we initially find this hard to square with the fact that oil is only a modest portion of our total exports, then we should apply the scientific method and build a theory to match our observations, not the other way around. As far as I’m aware, the overwhelming majority of analyses of these correlations suggests that it is indeed oil that is driving the dollar–so much so that that, as wrote, idea has become common place.
Third, oil could be having an impact on the dollar that’s disproportionate to its contributions to our total exports for two obvious reasons: the elasticity of demand and speculation. The former because it allows for a case in which a modest increase in demand leads to a large increase in price, and the latter because it would lead investors to hedge by moving themselves into Canadian dollars (more than they would otherwise) to protect against high oil prices.
Fourth, even if oil exports do not make a disproportionate contribution to the value of the dollar, it changes very little. Demand for our currency is cumulative, but our concern is with the value of the dollar at the margin leading to marginal increases in the price of our non-booming export markets. Put another way, a 20% increase in the value of the dollar is still huge even if it’s being driven by an industry that’s only 20% of our exports. The entire increase in a currency can be driven by an industry that is only responsible for a fraction of total export, and if that industry is being driven by subsidies then that increase is artificial.
Fifth, oil contributes disproportionately to our exports compared to its overall contribution to the economy. This is relevant for two reasons. First, the networking effects–because oil is a relatively small contributor to our GDP and manufacturing is a relatively large contributor to our GDP, any damage done by currency effects driven by oil risks having an outsized effect on a much larger industry. Second, to the extent that oil is being driven by non-market forces–subsidies and low royalty rates–whatever impact it is having on the currency is disproportionate to its role in the economy.
I don’t want to argue the detail of each and every point I’ve raised above. I’m sure arguments can be made on both sides of each. But the argument that can’t be made is that if you believe the failure to internalize environmental costs is a subsidy (or a defacto subsidy), then the failure to do so effects other industries inclding via our currency. People should stop freaking out abou the magnitude of the problem–whoich an Industry Canada study found to be responsible for at least a quite significant number of job losses–and jyst admitt it exist so we can get on with the larger debate.
Mike,
I can’t load your post (or at least not the chart/table that seems to be trying to load as an image).
From what I can read from your post and the links you provide, I don’t see where the distinction is made between facilities and manufacturing facilties–it’s probably in the graphic I’m missing out on.
As to misreading the data, I’m aware there’s a lot of cross over between categories, but–if anything–this augers against oil and gas and in favour of manufacturing. Under any upstream cap and trade plan, as Mulcair has proposed, oil and gas would be affected by the cap on the vast majority of the 562 Megatonnes of emissions related to energy (from which all of the numbers I cited are taken). I think it’s fairly common sense that manufacturing would be far less impacted than oil and gas.
As Stephen points out that may leave manufacturing with a larger share of a smaller pie and it’s impossible to know which effect will dominate, but incorrect to say that the only way there would be an overall increase in manufacturing employment were if the manufacturing sector would be exempted.
Ianlee is correct that the greatest cost for manufacturers are production inputs, ie cost of materials and supplies. Having worked in mfg management for nearly 20 years, both in Ontario and BC, I heartily agree.
The weird thing about this debate is that no one seems to actually be listening to producers themselves regarding the decline of manufacturing in Ontario. If you read the latest State of Advanced Manufacturing Report from the Canadian Manufacturers and Exporters Association, you will discover some interesting facts.
“Canadian manufacturers were nearly four times more likely to increase production capabilities in Canada between 2007 and 2009 than abroad. In addition, manufacturers are investing in production facilities to increase agility, expand mass customization capabilities, capitalize market niches, and optimize prototyping and new product introductions. More
than twice as many manufacturers increased production capabilities (25%) in Canada between 2007 and 2009 than reduced capabilities (11%).”
The report also points out that some of the most significant issues facing producers are
a) Inter-provincial trade barriers, and labor mobility.
b) Importing/Exporting and border issues.
B is the most significant that I’ve encountered. Most people in this industry just laugh when you talk about NAFTA. Because importing and exporting goods to the US, let alone Asia or Europe, is completely ridiculous.
Tariffs and duties make up an obscene portion of the cost of goods, especially those imported from asian countries. Duties and levies on low-value items such as microchips or resisters can come to 10 times the cost of the original item. Yes, you read that correctly. 10 times! Sometimes more.
And the administrative overhead. Eeek. This year, the CBSA is now requiring importers to submit advance data electronically for all goods entering the country. Failure to do so ensures that product is stopped dead at the border. Much of the data is simply impossible to provide.
For example, the importer must declare the originating country for every item, and magically supply the correct harmonized tariff code. For an assembled good, like a connector or circuit board, this is virtually impossible. Every border agent applies different rules. The codes and paperwork that worked for a previous shipment are not guaranteed to work again. It’s quite maddening!
So there are low-hanging fruit in terms of regulation to address before dividing the country. And I hear now from Ontario producers that the meteoric rise in energy costs, and maybe more significantly the instability of energy costs, has certainly been a factor.
Finally, to address the dollar issue, most manufacturers were impacted by the speed at which the CND dollar rose. Most had longer term contracts in place for both purchase and sale. A few years on down the road, the impact is significantly less. Costs in USD have gone down, in alignment with sales in USD.
It’s not “common sense” at all. You need to consider relative profit margins, for one thing.
Look at carbon pricing in Sweden. There’s a reason why these industries get exempted – they’d be wiped out with a stringent price.
Consider aluminum smelting. Given the margins in the industry, you either have to:
A. Have very low carbon pricing to the point of ineffectiveness
B. give them free permits, so it’s not polluter pay in any meaningful sense
C. Exempt them
D. Let them be wiped out
Which is the NDP choosing, and why?
Err.. To the point of Ineffectiveness. [Fixed – SG]
By “affected” I meant have more emissions covered by the cap–especially because they have both their inputs and outputs are affected by the cap.
In the next paragraph I was referring to Stephen’s comment where he assumes, presumably for the sake of argument, that manufacturing employment would have a larger share of the non-services pie.
I could have been more clear about that. My only point was that I don’t think you can easily assume that manufacturing employment will decline due to cap and trade unless there is a specific exemption. My understanding of the situation in Europe is that well-connected industry tend to get exemptions.
Just as an example of how this could play out, take this study from the US that found a price on carbon would produce very modest long-term reductions in output in manufacturing (except refining of petroleum products) and significant long-term reductions in oil, coal and gas production (as well as petroleum refining). These are reductions in output, of course, so it is primarily the relative shift that would determine the impact on unemployment. And, being American, this study doesn’t even take into account the fact that their oil is not oil sands oil.
http://www.google.ca/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&ved=0CFQQFjAA&url=http%3A%2F%2Fwww.rff.org%2FDocuments%2FPublications%2FRFF-DP-08-37-ExecutiveSummary.pdf&ei=FYi5T5-0CaKX6QG6qLX9Cg&usg=AFQjCNH6jGJWYypIxo84-VoAqx6hlnsB7g&sig2=RrQO2J7UCM3RbZsCnsjmaQ
That’s all nice. But it doesn’t answer the question.
And, secondly, Isn’t it “safe to assume” that the, say, Steelworkers would be “well connected” to an NDP government?
Let’s go back to the Aluminum industry. Who represents Alcan workers? Why, it’s the CAW!
Again, which of the four options will the NDP choose for the aluminum smelting industry and CAW workers?
Guest – fascinating analysis. I will limit my response to 3 issues
My point about Krugman (whom I use in my IB courses for new trade theory as he is a brilliant economist) – is that even though he won a Nobel (after all, so did Joseph Stiglitz – but not to diminish Krugman or Coase or Stigler or Williamson et al by that remark), it is legitimate to challenge him.
On the related issue of higher standard of account, I hold the PM and potential PMs to a higher standard than Nobel Prize winners as the policies or non-policies immediately affects the lives of 34 million citizens (notwithstanding Keynes witty quote about the impact of theorists long after they are dead on people devoid of thought).
Concerning the reasons for the job gain, agreed there are many factors operating from productivity to quality of the work force to the stability of the country to GDP growth to taxation levels etc. But multi-causality holds equally true for the mfg job losses – which have been attributed by Mulcair, CCPA, CAW to oil exports. Let us be consistent. If it is multi-causal for the job gains, then it logically follows it is multi-causal for the job losses.
This leads to the issue concerning Germany’s export machine and exchange rates. My point was that just because the currency appreciates is no reason to assume that the mfg sector will then become less competitive. Nor is it a reason to assume – as you did – that Germany must always remain competitive even in the face of an appreciating exchange rate. I provided the example of Germany and Japan to illustrate that during the past 50 years, Germany was NOT complacent (as mfg perhaps was in Canada). German firms – the Mittelstand – continued to reinvest in ICT, M&E and training and moving up the productivity curve year after year after year. BUT if German firms can adopt these firm level strategies concerning capital investment, why cannot Cdn mfg firms adopt similar business strategies?
Side bar: Following Ronald Coase (in his Nobel acceptance) who said that the dark and dirty secret of economics is that economists do not have a theory of the firm – what passes for microeconomics is merely an aggregate production function – I advised Nick Rowe tongue in cheek (I think) that Economics Depts do not teach Micro economics. In fact, they teach Macro and Meso economics – or Industry level economics – while business schools in fact teach microeconomics – only we call it corporate and business strategy or strategic mgmt. (disclosure – I teach these courses in my school and the students are required to research and ID empirical data from OECD, IMF, Bloomberg, Capital IQ etc. to support their arguments).
This point ties to Ginna’s comments. At the FIRM level – not at the meso or macro level – mfg firms do not agree with the analysis provided here or elsewhere by mostly macro or meso-economists. Not a cheap shot – it is a level of analysis issue. I fully agree with the arguments in the rpt from the Mfg & Exporters Association and Ginna’s analysis.
Finally, concerning yours and Mulcair’s criticism of subsidies to oil industry, Mulcair is right qua direct subsidies via tax expenditures, because we should not be subsidizing any firms at any time anywhere with public funds (why are we subsidizing wind and solar at 10 TIMES market kilowatt price per hour in Ontario???).
However, if you mean that the failure to capture all externalities is a subsidy, this is true of every industry. We do not charge the auto mfg industry for the billions and billions in dollars to construct and then maintain roads, bridges, bypasses, ferries infrastructure that make cars usable. Moreover, we do not internalize the cost of the emissions from cars via special taxes on auto owners. If we did those two things, we would shut down automobile mfg industry completely. And Mulcair will never do that as he is joined at the hip to the CAW. So, the “subsidy” argument is a fig leaf to cloak the attempt to extend some protectionism to the auto industry by attempting to slow down growth in Cdn oil sector to slow down loonie appreciation.
(At the risk of sounding Marxian) We do not capture the enormous subsidies in education that produce the highly trained workers for all industries. We do not capture the enormous subsidies via the public health system – averaging 45% of provincial budgets and almost $200 Billion or 12% of GDP – BTW, why do progressives call our system “free health care” when it is so incredibly expensive?)
Finally, turning to the oil export data, I agree that a significant number of very capable economists assume that oil exports are driving the loonie’s appreciation. I am deeply puzzled, for on the surface the data does not support this (only $58B of $465 B in exports). As you note, maybe we need a new theory. OK. But until I read and understand the yet-to-be-developed new theory, I reject the idea that oil is mostly responsible for the appreciation of the loonie – given the export numbers that show it is a small percentage of Canada’s exports.
I suggest the appreciation of the loonie is due to a multiplicity of reasons including Canada’s important successes in restructuring the Cdn economy for the past 20 years under three govts: Mulroney, Chretien and now Harper – from NAFTA to replacement of PST with GST, elimination of the deficit, GST harmonization, Open Skies, FTAs under way with Europe, India, South Korea, Japan, TPP, tax code restructuring, regulatory streamlining, environmental streamlining, red tape streamlining and yes investments in resource industries.
When the currency and capital markets examine the US or EU – the major free market, rule of law alternatives – they see at a minimum a refusal to confront hard choices with continued worsening of economic conditions. And when they analyze countries including Russia, China, Iran, Ukraine, Mexico, they find no rule of law or serious property rights regime while the leadership and bureaucracies in most of these countries are profoundly corrupt. Then investors and currency traders look back to Canada with enormous resources, highly educated population, rule of law, property rights, no systemic corruption, a growing population due to .3 million immigration annually, and the inevitable conclusion is a strong currency that will appreciate.
Which is the NDP choosing, and why?
It looks to me like the NDP is choosing option E: Impose a meaningful cap and trade program on them that will be offset by the benefits received from a lowered Canadian dollar.
Again, look at aluminum. There’s simply no possible way to offset carbon pricing through a lower dollar. Margins too low, and aluminum not an industry with a huge net forex exposure.
Ian Lee,
By saying it’s unfair to hold a candidate for Prime Minister to a higher standard than a Nobel prize winning work in economics, I’m not suggesting people shouldn’t feel free to disagree. I’m saying that the starting point for the conversation should be to admit that these ideas–both theoretically and empirically–are backed up serious, significant economists and facts. I’m saying there should be an upfront acknowledgement that some of these ideas–such as the idea that subsidizing a major export industry puts upward pressure on the dollar or that a high dollar reduces the competitiveness of the manufacturing sector–are basically universally accepted and that this is mainly a debate about the magnitude of these effects.
This is particularly important given that the policy prescription Mulcair is advocating, internalization of environmental costs, is already overwhelmingly supported by Canadian economists (at least those weighing in publicly, at least in theory). I suspect that if the economists who are now criticizing Mulcair didn’t dislike the NDP to begin with, the harshest reaction we would see to his comments would be something like this:
“I think the scale of this effect is a bit overblown, though, there’s no question this phenomenon exists. Exports drive up the dollar; a high dollar hurts other exporting industries. If manufacturing is being hurt by the upward pressure on the dollar, driven by the oil sands, we shouldn’t necessarily be concerned by that–we should consider what’s best for the economy as a whole–but in this case Mulcair is saying our dollar is being driven higher by a failure to make polluters pay and–to the degree that that’s true–it’s a valid point. The fact is, we should make polluter pay regardless of the impact on our currency because that’s just good economics across the board.”
Instead, we see a lot of dismissal and hysteria.
As far as multi-causal impacts go, absolutely. No one is claiming otherwise. Go watch Mulcair’s Economic Club of Canada speech where that’s the first thing he brings up when discussing this issue (the portion covering this issue starts around 8:30, but the whole thing is worth watching). Frankly, I think you’d be hard pressed to find another Canadian federal leader speaking this seriously about economic issues. When most politicians try this, as Finance Ministers often do to try to create the appearance of sophistication, it’s usually just in nonsensical financial jargon that amounts to nothing more than bromides. Mulcair talks, all be it briefly, about New Growth Theory, for Christ’s sake.
http://www.cbc.ca/news/politics/story/2012/04/05/pol-mulcair-speech-economy.html
As far as Germany goes, I certainly wasn’t assuming that “Germany must [did?] always remain competitive even in the face of an appreciating exchange rate”. My argument was that if manufacturing was driving the increase in their currency, then the situation is not equivalent to the interaction between oil and gas and manufacturing in Canada today. On the other hand, if it was not manufacturing driving that increase in the currency, then no matter how well their manufacturing sector was doing we can conclude it would have been doing better had other factors not been putting pressure on its currency.
You go on to make the point, “German firms – the Mittelstand – continued to reinvest in ICT, M&E and training and moving up the productivity curve year after year after year. BUT if German firms can adopt these firm level strategies concerning capital investment, why cannot Cdn mfg firms adopt similar business strategies?”
To that I say, hear, hear. In fact, IT and training–and high-end manufacturing generally–are exactly the kinds of activities that produce the positive externalities, spillovers and networking effects that loony lefties argue justify pro-active industrial policy using targeted subsidies to account for the fact that many industrial activities pay dividends beyond those that are captured by the market. And this was certainly part of the Germany experience. In Canada, I feel like our debate is more influenced by the “pure market” rhetoric of the US debates, so these kinds of subsidies are seen purely as political chits to be handed out, but in many European countries they are used quite effectively as real economic tools to encourage the type of activity you are suggesting.
As for solar and wind, these are sunrise industries, so it isn’t difficult to see how high margina–but low total–subsidies could be used to encourage a first mover advantage in these fields, but I’m not familiar enough with the Ontario provincial policy to know whether this being done correctly or at a magnitude that’s supported by pure economic considerations.
I completely agree that the difference between what manufacturing firms and economists prescribe for the sector is based on the level of analysis. The impact of the dollar is often not visible to the individual firm while border issues, for instance, are often not visible to the economist. It’s a question of altitude and an astture observation distiled quite well.
As for subsidies, Mulcair has proposed a comprehensive, upstream cap and trade plan. While obviously not all the details were spelled out during his leadership campaign, he may not be so much in the pocket of the CAW as you think he is (the CAW has disaffiliated from the NDP for heaven’s sake), or the CAW doesn’t share your dire view of carbon pricing. This study from the US, for instance, predicted a very manageable long-term impact on manufacturing from the introduction of carbon pricing. Either way, I think you’re underestimating Mulcair; his policy is fairly clear on expanding beyond just the biggest polluters.
http://www.google.ca/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&ved=0CFQQFjAA&url=http%3A%2F%2Fwww.rff.org%2FDocuments%2FPublications%2FRFF-DP-08-37-ExecutiveSummary.pdf&ei=FYi5T5-0CaKX6QG6qLX9Cg&usg=AFQjCNH6jGJWYypIxo84-VoAqx6hlnsB7g&sig2=RrQO2J7UCM3RbZsCnsjmaQ
On this point, “Finally, turning to the oil export data, I agree that a significant number of very capable economists assume that oil exports are driving the loonie’s appreciation. I am deeply puzzled, for on the surface the data does not support this (only $58B of $465 B in exports). As you note, maybe we need a new theory. OK. But until I read and understand the yet-to-be-developed new theory, I reject the idea that oil is mostly responsible for the appreciation of the loonie – given the export numbers that show it is a small percentage of Canada’s exports.”
This is the biggest problem in economics–theory above observation. If we have direct empirical evidence showing that the exchange rate is being driven by oil exports–caveat below–we should accept that as a fact and work backwards from there. That’s the scientific method.
Now I’m sure that one might say “But I have observed empirical evidence as well–that oil exports are only 12.5% of our total exports.”
The problem is that that isn’t observed evidence of the impact oil exports have on our currency. The assumption that that represents the impact oil exports have on our currency is based on a theory. The empirical evidence from the actual foreign exchange market data is direct evidence of the impact on the exchange rate, it requires no theory to accept that it is true.
(Caveat: Now, of course, the many analyses of this data may still be wron, but as I have argued there are other reasons I don’t think that matters much to this debate, but we don’t need to revisit those arguments.)
Mike,
I’m sure you may be right about aluminium. There no doubt cap and trade would produce shift within sectors as well as between sectors. My only point was that you can’t assume manufacturing will loss jobs overall unless it gets an exemption. The study I linked–which suggests a much bigger impact on oil and gas with out a major shift to services–seems to suggest the opposite is true. But whichever ultimately turns out to be true, I just think you can make any such assumptions.
Mike,
I’m sure you may be right about aluminium. There’s no doubt cap and trade would produce shifts within sectors as well as between sectors.
My only point was that you can’t assume manufacturing will lose jobs overall unless it gets an exemption.
The study I linked–which suggests a much bigger impact on oil and gas with out a major shift to services–seems to suggest the opposite is true, but whichever ultimately turns out to be the case, I just don’t hink you can make any such assumptions.
ianlee,
Firstly, the Dani Rodrik article is entirely relevant to in a discussion about trade matters notwithstanding Stephen making a normative point about allocative efficiency by quoting Simon van Norden in point 1 that you yourself quote.
Secondly, as guest and I have been trying to point out if the appreciation in currency for Japan/Germany is due to increased demand for there manufacturing exports this is not the same thing as an appreciation caused by increased demand for oil exports. Case 1 – Suppose demand for German/Japanese manuf. exports increase, German/Japanese manuf. exports INCREASE, EURO/YEN appreciates as a result. Case 2 – There is boom for Canadian oil. Demand for oil exports increase, loonie appreciates effectively increasing the world price for Canadian manufacturing exports (even though no other exogenous factors e.g. productivity or consumer preference shocks). As a result Canadian exports DECREASE. In both cases, the currency appreciates yet in the first case exports increase while in the second exports decrease. So your point that the appreciation in currency doesn’t matter for competitiveness is incorrect, the reasons for appreciation matters.
Now you rightly point out there can be multi-causal reasons for job losses/gains, however the Dutch disease model is saying that even after taking into account other causal reasons, including productivity shocks, an appreciation can cause even greater declines in the manufacturing sector if capital inflows is caused by another export sector. Your example of German/Japanese manufacturing productivity gains is irrelevant to this point because Dutch disease occurs independently of productivity shocks.
Third, your argument that the oil export data contradicts loonies’ appreciation is logically fallacious. Absolute figures tell us nothing, what matters is at the margin. It doesn’t matter if oil exports compose 0.000001% or 99.99999% of total exports. Holding constant other exports, if ex-post oil exports value increase by $1 the loonie will appreciate.
Maybe before proposing alternative theories understanding existing ones is in order?
I need to add an addendum:
‘Your example of German/Japanese manufacturing productivity gains is irrelevant to this point because Dutch disease occurs independently of productivity shocks.’ This statement is incorrect. It should be ‘Dutch disease occurs independently of productivity shocks to foreign competitors’. The whole point of Dutch disease is that a productivity shock in one exportable sector can cause a decline in every other exportable sector.
I still fail to see why that’s a problem.
Stephen,
As I was trying to point out in comments earlier, it depends on which side of the boom you are on. If you’re export manufacturing specific-labour then I think you would care very much. Of course this is a normative point, but what point isn’t normative when you’re discussing economics? (Apologies, I’m being facetious).
Also, if you read my earliest two comments, I’ve pointed out policy responses can be non-protectionest and sector-agnostic.
“My only point was that you can’t assume manufacturing will lose jobs overall unless it gets an exemption.”
I’m not assuming anything. I’m analyzing the data and coming up with my best estimate.
And I’m still waiting for an answer to the aluminum smelting question.
I still fail to see why that’s a problem.
It’s not if the price for oil stays at the top end of the graph:
Ginna: great post from the micro level. Though the fact that” Cdn manufacturers increased … four times …” isn’t meaningful as such. That you swin harder than you ever did isN,t proof that the ship is still afloat. Maybe the contrary.
Money is fungible? Not necessarily. When you generate rent, you break the transmission mechanism as the value is not equal to the marginal cost of the resources needed to produce the stuff. You produce value without resource, not to be confused with profit or entrepreneurship. It’s great if you are the owner of the resource. But the industrial resources (workers blue-, white – or pink collars, capital owners, etc) are not the owners. There is no way they can benefit.
Germany and Japan population grew relatively more slowly than other developped nations as they are still under the influence of the late unpleasantness (so is Russia). The unemployed were never born.
Guest: please stay!
And I’m still waiting for an answer to the aluminum smelting question.
Given your response to my general theory it appears you’re asking for something that is far too specific to be answered. In general though, there probably will be a few casualties of Mulcair’s policy that would have to be dealt with on a case by case basis. In these instances I’d surmise any of the four options you present–and possibly a few more–could be used depending on the importance of these companies to Canada’s or a regional economy.
“Given your response to my general theory it appears you’re asking for something that is far too specific to be answered. In general though, there probably will be a few casualties of Mulcair’s policy that would have to be dealt with on a case by case basis. ”
And those would be done how, exactly? What’s the plan here? I think these are fair questions. The fact it’s impossible to get an answer shows how poorly this has all been thought through.
Given that aluminum smelters are often subsidized by the provinces through electricity rates that are below market, one suspects a similar response would occur to maintain profitability.
Bill: I suspect so as well.
Guest and DavidN:
From Stats Canada, Age of Public Infrastructure: A Provincial Perspective
by Mychèle Gagnon, Valérie Gaudreault and Donald Overton,
Investment and Capital Stock Division
They find that bridges and roads are 59% or $170 Billion of all infrastructure in Canada while bridges and overpasses are another 8%.
This 67% of all infrastructure in the hundreds of billions represents an enormous subsidy to the automobile and truck mfg industries.
Given Mulcair’s and your concern for the allegedly unfair subsidies for the oil industry, should these multi billion dollar externalities be internalized through, for example, user pay road tolls on all highways and bridges, and a separate car tax for all municipal infrastructure?
Is it likely that Mulcair will propose such a policy?
Summary
http://www.statcan.gc.ca/pub/11-621-m/11-621-m2008067-eng.htm#t2
Like many other developed countries, Canada invests billions of dollars a year to repair, upgrade and expand its public infrastructure. Whether it involves paving roads, renovating bridges or upgrading sewer and water systems, all levels of governments and the private sector work together to ensure that Canada’s public infrastructure is safe and meets the needs of a growing population and economy.
Five public assets are covered in this study: highways and roads, bridges and overpasses, water supply systems, wastewater treatment facilities and sanitary and storm sewers. Gross stock in these assets amounted to $286.2 billion in 2007, 5.3% morethan in 2001. Combined, they accounted for more than 80% of all engineering infrastructure owned by federal, provincial and municipal governments in 2007.
Highways and roads, the largest component of the five public assets, were worth $170.1 billion in 2007, representing 59% of the total. The average age of roads in Canada increased steadily since the beginning of the 1970s to a peak of 16.9 years in 1994; by 2007, it had shortened to 14.9 years. Since 2001, the average age of roads has diminished in all provinces, except Prince Edward Island and Newfoundland and Labrador. Quebec alone accounted for more than half the drop during the six-year period.
Bridges and overpasses accounted for 8% of total public assets in 2007. Unlike roads however, investments in bridges have been under the level required to hold their age constant. Hence, the average age of this asset rose by 3.2 years from 21.3 in 1985 to 24.5 in 2007. Bridges have a mean service life of 43.3 years. This means that Canada’s bridges have passed 57% of their useful life, compared with 53% for roads. The ratio for bridges was the second highest of the five assets, after wastewater treatment infrastructures. It hit 66% in Nova Scotia and 72% in Quebec.
What’s the plan here?
Phase 1: open up a discussion on the subject.
Phase 2: craft a basic plan based on what was learned from that discussion.
Phase 3: sell said plan to the public in order to win enough support to form government.
Phase 4: expand on the basic plan using government resources to fill in missing details as well as an implementation schedule.
This is how the process works and must work because no opposition party has the resources to craft a detailed plan academics like you won’t nitpick apart.
Mike,
I’m a little confused about 59% being “bridges and roads” and 8% “bridges and overpasses”–bridges twice–but lets just say we’re talking $180-$190 billion. That’s the total asset value.
Federal and provincial government’s take in about $15 billion a year in tax revenue from excise/sales taxes on gasoline and diesel. Now fuel consumed is not a perfect measure of road usage, but since fuel use is often driven by weight and weight affects repair costs, it is closer than you’d think.
The asset price above doesn’t include maintenance, of course, and is not an annual figure. I’d be interested to see how much Canada spends in total on the construction and repair of roads, bridges and overpasses each year. I imagine it’s higher than $15 billion, but there are other factors to consider as well.
Roads are not a strictly rival good. As such, tolling them all would lead to a catastrophic economic loss, much of which would serve only to exclude those who could use these assets with virtually no additional cost to anyone else. This is a classic case of where government spending is absolutely called for because the product in questoin does not meet the definition of a strictly private (in this case fairly excludable due to new technology, but not very rival) good.
On the other hand, it’s not hard at all to find lefties who support congestion pricing now that it’s becoming technologically feasible. Just like it isn’t hard to find lefties who support smart meters.
One would have to decide whether that’s the issue one wants to focus on–and this case we’re talking about something that is both most under provincial jurisdiction and relatively unpopular compared to the potential benefits–but there’s plenty of support for such measures on the left.
That was Ian’s post, not mine.
Robert: Open up a discussion? Ed Broadbent was talking about this issue in 1982! How long does it take?
ianlee,
If you’ve read my comments on this post you will see I’ve never raised the issue of subsidies to the oil industry (as I’m unfamiliar with the issue).
However, in response I think there is a big difference between a sector specific subsidy and public goods. Manufacturing (and other sectors) benefit from having an educated workforce, law and order, national defence, health care infrastructure etc. etc. as well. Should we charge them for that as well? No, because clearly public goods benefit everyone without public provision may not have been provided and making the manufacturing sector pay for these goods in addition to corporate tax, personal income tax, and consumption tax would be a form of double taxation.
(#2)”…and it would be a tough argument to make as most of the labor force (in advanced nations) will be providing services.”
Services nebulous. Breaking up different jobs, assembly line and petroleum engineers et al, are still pretty big nuggets of the workforce. Petro has Chindia but assembly lines have somewhat modular embedded capital (I think). The building for diesel trucks, wind turbines and natural gas turbines, assembly lines, I think is modular (Scotland successful tidal test today). Have to buy new metal working equipment for new parts, but not retrain much? If a mine or coal seam dies or is bought out, is Klondike.
(#4) Rod, different mines/metals have different labour and capital intensities. Coal labour intensive until black lung. I think a lot of mines =…oil no, tar, I think not. Dividing employees by revenue is easiest non-insider way.
“Having said all that, contrary to what Stephen suggested above, there are policy responses that don’t require direct central bank currency manipulation.”
Yep, DavidN, our arms length B of C has an industrial development component that could do what Provincial Trusts or uninsulated uncarbon-taxed factories don’t.
I expect 10% of Earth electricity from wind in 20yrs (same for tidal and offshore wind in 30-50yrs), and very little from tar or coal; tar is pulp and paper industry but with profits. Ianlee, gotta do the change in exports, say from 2002. The 2011 totals just give you an exhchange rate snapshot. And yes, alot of it is just USA cratering. A carbon tax would’ve attracted Tata and Toyota teeny car plants in 1990s. Electricity is a big cost argument works both ways. Can reduce footprint most industries. It is like being forced to buy an annuity: a carbon tax.
AB’s $3B towards agri R+D is good to attract long-term China exports to.
Yes, the post above was in reponse to Ian Lee’s post.