Nullius in Verba

As per Norberg usual, excellent documentary on capitalism’s benefits:

More Klein stupidity:

Government intervention = disaster economics:

Does Government Intervention Work?

Now that the election is over in both Canada and the United States we are facing one of the worst recessions since the Savings and Loan Crisis (S&L) in the late 1980’s and early 1990’s. It is interesting to note that the S&L Crisis was compounded by government intervention, in particular the government bail-out. It is ironic that such and event of a greater magnitude and yet almost identical in forensics could happen again. But it did, and all the same players are involved now as were then including the government structures, Fannie Mae and Mac.

In economics there is a term called moral hazard, an old term which dates likely almost to antiquity but was ressurected through some sort of quasi-convergent natural selection during the Rennaisance’s developing monetary systems. Moral hazard is when someone takes a different action than he normally would because he is shielded from the consequences. The best example of this is probably familiar to any of us who have had one or two friends whose parents were extremely wealthy, these friends would often trash their stuff or cars because they knew their parents would buy them new stuff - they were immune to the consequences of their risk. This is why insurance policies always have a deductible, (known as co-insurance).

As described in a 2006 Federal Reserve Bank Review:

When the interest rate yield curve rose dramatically beginning in the mid-1960s and became inverted (long-term rates exceeded short-term rates) several times for significant periods of time through the early 1980s, the economic value of most S&L institutions vanished. The federal deposit-insurance fund for savings institutions was bankrupted because of the pervasive assetliability duration mismatch that had existed among covered institutions. Subsequent attempts by the federal government to cover up or wait out the problems failed. The resulting taxpayer bailout ended up being even larger than it would have been if the initial devastating impacts of interest rate movements on the asset-liability mismatch had been recognized promptly, because moralhazard and adverse-selection incentives compounded the system’s losses.

Sometimes cutting off the festering limb is better than letting it cause a sepsis that will destroy the entire body.

So what I am going to do over the next little while is examine the trend that the Canadian government, a centrist “Conservative” verses the U.S. government under Barack Obama, a likely left leaning government (though possibly right leaning) is taking. While it appeared that earlier Stephen Harper appeared to be against deficit spending and subsidization, it seems that he is suddenly pulled politcally towards it, Ontario gave Harper its mandate, and you can bet that the manufacturing sector here wants what it always wants: monopoly, protection, and subsidization. Obama on the other hand, is probably not going to be able to subsidize as much as he would like due to both the potential bankruptcy of the U.S. as well as the underlying free market attitude of a large number of Americans.

To start today we will examine an interesting collection of interviews with Peter Schiff put together by someone on YouTube. Schiff is an Austrian Economist* as well as an advisor to Ron Paul, the person I supported as the Presidential candidate for the Republican Party. (I always get flack from conservatives for supporting Paul, especially since a large number of hippies, who when not numb, find his libertarian approach to drugs appealing.)**

What is interesting is how Schiff keeps predicting the fall of the finance and housing market due to the poor quality of the loans as well as a high rate of credit and consumption verses production. It is even more amusing watching the other talking heads laugh at him and his dour predictions regarding this bubble.

Wonder who is laughing now.

Next I will examine the economic evidence regarding government intervention into the Great Depression. What they tried back then and how it failed unintentionally causing the recession to last longer. Perhaps there will be some parallels to our own time.

In 1901 Medicine was Based in Both Scientific and Superstitious Theory. Today We Ask Physicians to Practice with Fact, Do We Ask Politicians?

* I think Austrian Economics has something to offer to Economics because it questions accepted beliefs and theories with logic. Unfortunately it doesn’t usually use data and mathematics to support its points and thus has difficulty becoming mainstream and relevant to people like myself.

** I believe a large number of Republicans are actively seeking a person with strong libertarian beliefs like Ron Paul to lead the Republican Party. I think eventually the same thing that happened to the Conservative Party in Canada will happen to the Republican Party in the United States. The Reform/Alliance Party flirted for a brief time with Social Conservatism under Stockwell Day as leader. The consequences almost tore the party to shreds, and almost reduced the party to a fringe party amonst the Canadian electorate as most people in Canada have more libertarian social beliefs. Harper was voted for as leader, including my vote, as he was seen as a moderate in the social area and more of a champion of economic freedom and political reform. The party has been very strong and very relevant under him. Whatever happens in the US is always bigger and more convoluted, but there are a large number of people grumbling about where the old Grand Old Party went, when it used to stand for economic freedom, minimal government, and it’s previously excellent track record on human rights.

It’s time for Stephen Harper to govern like a government. The glaring mis-step in the Conservative strategy this time around is trying to pander to Quebec, they ignored the ancient advice that wars are won battle by battle. Rather they should have focussed strongly on the Atlantic, Ontario, Saskatchewan, Manitoba and British Columbia instead of their tunnel vision on the large number of seats in Quebec.

Newfoundland and Labrador is ripe and ready to vote Conservative, they have an economy that appears by all rights ready to turn around, and have a Premier who holds a lot of sway. Quite honestly even though Harper is right, that Newfoundland and Labrador manages to take much more than their fair share of federal payments, Danny Williams could be a strong ally if an actual effort was made to patch things up.

Saskatchewan is another place ripe to stay Conservative. The Saskatchewan Party has done good work removing barriers to trade, and now it is time for the Conservative Party to closely examine exactly what they can offer Saskatchewan and Manitoba other than just a way out of the contentious Wheat Board.

In Ontario gains are made, but the areas of Mississauga and even Hamilton are ready to go Conservative if the right gestures are made. It’s not Toronto, but it’s close. British Columbia is also an area where gains can be made if the Conservatives focus on more libertarian issues as well as issues of increasing trade overseas, reducing barriers to trade, and cleaning up the disaster that is transit/roads in the Greater Vancouver area. Crime is also a huge issue there, as well as drugs which stretches to the areas of Coquitlam and Burnaby. The Conservatives claim they want to focus on crime, prevention and rehabilitation of drug users so give it a decent shot with a focus on real evidence they can document against the crazy evidence the left cites.

Quebec, in my honest opinion, will not ever be pacified by any particular national party for long any time soon. There is too much animosity and cultural difference. It is not the place to stake your government on.

In my honest opinion that was the failing of the Conservative strategy.

However that being said, the progress the Conservative Party has made is enormous. Encouraging people to change their vote and dump long standing Members of Parliament is not easy to do. Removing the Liberals, who have governed for much of people’s recent memory, is no easy feat. Removing any long sitting MP is by no means easy at all. As Harper himself has said many times, change is incremental.

Moreover the Conservatives have done it during a time when people are more interested in the election in the United States, and most people seem to be behind anything that isn’t related to George W Bush whether valid or not. And against a mainstream media which clearly hates the Conservative Party.

So hold onto the Libertarian values that I think most Canadians innately have, don’t ignore the small battlegrounds where every riding counts, and the Conservatives could have a majority chance.

Predictions:

• Liberals dump Stephane Dion (duh)
• Bob Rae takes Liberal Party Leadership
• Michael Ignatieff defects to the Conservative Party where he belongs
• Harper manages to get some other Liberal libertarians to defect to the CPC bringing in a majority without an election
• Harper then gets screwed by his law which mandates an election in 4 years

A list of newspaper articles demonstrates Stephen Harper’s prescience one year ago.

Stephen Harper was right. This week Harper has been maintained and explained in detail what his Government has been doing over the last year to protect Canada from an economic disaster. The opposition parties all state he should have done “more” or things “differently”. When prodded, they are unable to explain exactly what they mean.

In fact a year ago opposition parties were decrying the notion that Canada could face an international economic disaster, Harper was fearmongering, and that Canada was predicted to only do well.

Here’s what they said:

“Harper ready to give us the squeeze. Tells Canadians to tighten their belts as U.S. financial collapse looms” (Ottawa Sun, December 21, 2007).

“In CTV’s year-end interview with Prime Minister Stephen Harper, he says he’s concerned about the slowdown in the American economy and how it could impact businesses north of the border” (Canadian Press, December 20, 2007).

“After almost two years of ‘don’t worry, be happy’, the PM has been raising a caution flag, if not an alarm, about the Canadian economy in the year ahead. ‘I think 2008 will be a more challenging year for the country and for the government,’ he predicted during a recent chat with us at 24 Sussex Dr.” (Greg Weston. Whitehouse Star, December 31, 2007).

“Harper said he’ll be keeping watch on the looming storm on Canada’s economic horizon. ‘We know there is considerable uncertainty in the world economy, in the American economy, and we’ve seen very strong performance from our economy so far,’ he said Monday. ‘So obviously, our wish for the year is we’re able to sustain that momentum and shelter as best we can Canadians from any fallout of global economic problems’” (Canadian Press, December 31, 2007).

“Prime Minister Stephen Harper expects Canada’s economy to suffer next year, buffeted by turmoil south of the border [...]. In a calculated signal to Canadians, Harper said that 2008 will be “more challenging” for his government and the country. “There remains very serious economic uncertainty in the United States and in other parts of the world, and it’s impossible for me to see how Canada can be entirely immune from those developments,” he said in a year-end interview with the Star.” (Toronto Star, December 21, 2007)

“Prime Minister Stephen Harper is warning Canadians to brace for fiscal belt-tightening as a looming economic collapse in the U.S. threatens to make waves north of the border. Looking to an uncertain 2008, [his] government will save for rainy days ahead by foregoing sizeable tax cuts and keeping a tight grip on federal purse-strings in the next spring budget. “[...] We didn’t wait for the spring. We were concerned about the American economy and we thought we had to act quickly,” Harper said.” (CN News, December 20, 2007)

““The [2008] budget will be a stand-pat budget,” he said. “We will be doing what households and businesses do in a time of uncertainty—concentrating on stability and paying down our debt.” And he is braced for unsettling economic times. “It’s hard for me to see,” he said, “how we can continue to have the kind of uncertainty and potential slowdown in the United States and elsewhere without that having some impact on the Canadian economy.”” (MacCleans, December 28, 2007)

ROBERT FIFE (Reporter): As the Prime Minister sat down with CTV to reflect on the past year, he has worries about the next. Top of mind, a threatening downturn in the American economy that will be felt north of the border.
STEPHEN HARPER (Canadian Prime Minister): I believe that 2008 is likely to be a challenging year in terms of the economy… There’s no way we can be completely insulated from what’s going on in the United States or in the global economy (CTV National News, December 20, 2007).

The Liberals and the NDP in December 2007

“[John] McCallum said the government is overstating the risks because many experts expect the Canadian economy to grow by up to 2.5 per cent this year, which would leave room for spending and tax initiatives” (Toronto Star, January 1, 2008).

“McCallum accused Harper of sending a confusing message to consumers by combining talk of a tax cut with a warning the economy could be headed for trouble. ‘This is clearly a triumph of gimmickry over good public policy to announce the GST cut in a store and tell us the cupboard is bare,’ said McCallum. ’I think they’re trying to downplay expectations and then people will be positively surprised’” (Toronto Star, January 1, 2008).

Stéphane Dion recently admitted that ‘It was difficult for us to write a chapter on a U.S. economic crisis when we were preparing our platform’ (Stéphane Dion, Le téléjournal, October 6, 2008).

“NDP leader Jack Layton accused Mr. Harper of trying to ‘create a climate of fear’ to justify government plans for the economy, as he said the government has done to gain support for the war in Afghanistan and to avoid joining the global fight against climate change. ‘If the economy is getting into some trouble and the government’s finances are in some trouble, it’s because Mr. Harper has paid no attention to that issue (climate change) at all,’ Mr. Layton said, adding that his party will continue to vote against the government on no-confidence motions” (Ottawa Citizen, December 24, 2007).

JACK LAYTON: “Well I think he is trying to create a climate of fear, and, you know, that’s been his approach unfortunately on some issues, whether it was the way in which we have gone to war in Afghanistan” (CTV, Question Period, December 23, 2007).

h/t to RDoyle

Anyone else have anymore examples to aid this project? I’ll add them to the collection.

The Conservatives should use these newspaper articles to make an advertisement. I think it would ring truth in the minds of voters at the current time. Pointing out the other guy’s faults, your forewarning, and then a few of your prudent actions: that is the stuff killer election advertisments are made of.

(Some Oracles are More Substance, Others are Not Leaders)

Now that it looks like the Liberals have a chance…

Stephane Dion states that “Stephen Harper squandered the surplus on.” Then he goes on to insert either tax cuts, innovation spending, the GST or whatever is appropriate for the moment. This leaves me to ask, what exactly would Dion do with the surplus’ which, if I may remind him, come from you and I, and not some magic place. There is no macro economic plan I know of which proposes government keep surpluses accruing over years. Wait, actually there is a plan, its’ one where a dictator puts all that money in his Swiss Bank Account, but I digress. Even companies will invest profits or provide dividends while keeping a small amount to use as a contingency plan - something Paul Martin borrowed from the business world. So what did Harper do with the cash? Three billion spent on the military, which even the outgoing Liberals were planning on doing to refurbish a dying Canadian institution. Four billion spent on Health Care, on which has actually resulted in a reduction in waiting lists according to surgeons I have spoken with (we’ll see the big numbers). Six billion was used to lower the GST, while not the favorite of Economists, Harper was correct in stating that this is a regressive tax which harms the poor more than the rich - something every Economist knows, but the media won’t report (Harper has done more for the poor than the Liberals in 10 years so far).

So what would the Liberals have done? Probably nearly the same thing if in that situation. Or do they suggest not spending on Health Care or the desperate military, which was launched into Afghanistan by the Liberals in the first place?

What depresses me the most is not that Dion can say these things, in fact its what every opposition member would do. It is that the Mainstream Media isn’t all over Dion about this every time he opens his pie hole. Why don’t they ask about the Health Care spending, like “Hey Dion would you not have spent on Health Care, old boy?” There is a bias.

I think it is time to review these articles on the Green Shift, and how it will not reduce emissions but is likely to increase emissions, and moreover how even Jack Mintz, the Economist who helped write the plan, thinks it isn’t necessarily going to work.

Secondly let’s consider the NDP’s plan to increase corporate taxes. During a time when it is even more necessary to reduce taxes to make us more competitive against other leading countries (Stephen Harper plans to reduce our corporate taxes to the lowest in the G-7), Jack Layton wants to raise them. The OECD summarized the findings of the harmful effects of corporate taxes which I describe briefly in this article. In an open economy, Layton will only succeed in helping the blue collar workers lose their jobs. Right now Canada is rated to lead the G-7 in growth, albeit slow growth.

Yes, many economists describe a Keynsian style system of government spending through recessions, but Harper is correct in saying that once you go down that path it is hard to come back. Keynsianism is easy to understand, and lefties like that, but Robert Lucas and Milton Freidman have rightly critisized it and many have pointed out its failures. As both an economist and a politician I think he has good insight into the problems of Keynsian economics, what do you fund? Who gets funding? Are you picking winners and losers? Once a subsidy is given, it is not easy to take it away. Are you pouring money down the drain? Will the public go for it? It is easy as an economist to describe the best methods of targeted subsidies, but the public is as likely not to agree! You are constrained by public foolishness and corporate greed or seeking legalized monopoly establishment. Soon I will describe the critical paper that demonstrated government action extended the Great Depression.

Its not really useful if you read these, get your lefty friends to read the evidence. Or let them know the evidence. They believe in fairy tales.

An interesting tidbit in the Prime Minister’s discussion with Amanda Lang at Business News Network regarding the direction he is taking with Canada’s economy . He plans to reduce federal and corporate business taxes to the lowest level in the G-7 by 2010. (It is worth watching this interview as opposed to the stupidity of the usual media, ie: CTV, when it comes to discussing economics, this is a refreshing discussion).

Reduction in corporate taxes has proven overall benefits, and something Canada could learn from the Nordic countries like Sweden, Finland, Denmark etc. Canada has been making steady progress over the last several years in the right direction and we are reaping the benefits of it in terms of stability. In a large part this is due to the work of the Reform party, giving the Liberals no real stress in regards to doing what they inherently know is correct. Imagine if the NDP was the official opposition during the deficit crisis.

(Side Note: Read the Green Shift Critique Series)

A recent OECD article discusses the evidence for lower taxes equating to higher economic growth. In particular corporate taxes:

Increases in productivity: A second option is to reform corporate taxes, as they influence productivity in several ways. Evidence in this study suggests that lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth. It also appears that corporate taxes adversely influence productivity in all firms except in young and small firms since these firms are often not very profitable. One possible implication is that tax exemptions or reduced statutory corporate tax rates for small firms might be much less effective in raising productivity than a generalised reduction in the overall statutory corporate tax rate. This reduction could be financed by scaling down exemptions granted on firm size as they may only waste resources without any substantial positive growth effects.

Investment: Corporate income taxes appear to have a particularly negative impact on GDP per capita. This is consistent with the previously reviewed evidence and empirical findings that lowering corporate taxes raises Total Factor Productivity (TFP) growth and investment. Reducing the corporate tax rate also appears to be particularly beneficial for TFP growth of the most dynamic and innovative firms.

I supposed I should have known more about his economic goal, but it has been flying under the radar for some time, except that is, those times it has raised the ire of Premier McGuinty who cannot comprehend such economic logic. However the Conservative Party of Canada (CPC) is horrible when it comes to getting its message across. While they bear a considerable amount of blame, much can also be attributed to the Mainstream Media which is relentless in its mission to frame the CPC in as bad light as possible. The MSM still has not explained that a reduction in the GST benefits poor people.

(When the Pharisees objected to Jesus’ meeting with tax collectors rather than the righteous, Jesus replied that it was the sick who need a physician, not the healthy (Matthew 9:9–13) )

Read the Green Shift Series Here

Remember when I said that the Liberal Party’s Green Shift could raise emissions by 7.15 Mt? Well, the Liberals state Economist Jack Mintz, of CD Howe fame is 100% behind the Green Shift since he wrote part of it. But really is he? I’ll show you that from what he actually says he sounds quite dubious, and honestly I doubt his true comprehension of the very complicated work being done in the area of the double dividend. That being said, I do respect him as a renowned economist.

(The Green Shift Raises Emissions by 7.15 Mt [Click Image to Enlarge])

His words 2006:

However, the [carbon] tax approach may achieve little in the way of environmental objectives. The demand for such products as gasoline and heating fuel is less sensitive to price, since the tax also falls on necessary, almost essential, services such as heating and transportation. The carbon tax is also a highly inflexible tool since it cannot be easily adjusted for changing emission levels. Further, governments become reliant on the revenue and are less willing to adjust the tax rates downward when emissions decline. For these reasons, some experts have argued that regulations that limit emissions, including tradable permit regimes, can be more effective and more flexible.

And his words in the National Post 2008:

While the price for carbon is certain under the tax, the ability to achieve targets becomes uncertain as much depends on how households and businesses will respond to the tax. [I show you how households respond with my analysis here - langmann]

Personal tax reductions will provide some relief to all Canadians although the anti-poverty measures tend to support poorer provinces. The benefits of corporate reductions go primarily to Ontario (43%), followed by Alberta (22%) and Quebec (20%).

Where the Liberal proposal is weaker compared to the Conservative plan is that the latter is more directed at reducing carbon. The Liberals should have distributed more of the carbon tax proceeds to fund investment tax credits in new carbon-reducing technologies and less in anti-poverty measures. While it is appropriate to provide relief to low-income Canadians, the broadening of refundable income-tested tax credits could ultimately push up marginal tax rates on some low-income Canadians trying to get ahead. Thus, the Liberal plan is not as successful in improving competitiveness as it could be.

[comments in brackets and bold text is mine - langmann]

Jack Mintz does not sound as supportive of the Liberal Green Shift as the Liberals make him out to be. What I would like to note two things. In terms of the tax itself, Mintz does not seem to think the Green Shift would obtain the targets the Liberals need to obtain to meet the Kyoto Accord. Secondly Mintz seems to think that the Conservative plan is much more effective at the real goal of meeting the targets themselves.

Some criticisms of Mintz however. Number one is that he ignores the entire proposition of the double dividend (the idea that shifting taxes to dirty stuff and reducing taxes on income increases GNP and welfare). Instead he suggests funding industrial upgrades. The evidence from Europe behind the double dividend is not great and in my honest opinion inconclusive with some articles stating that the double dividend is real and others finding no effect. Mintz ignores the only evidence that suggests some benefit and throws the money at industrial upgrades of which no benefits are proven.

The other interesting aspect of the European carbon tax to note is that many industries are exempt from carbon the tax itself and hence still polluting as much as before, and secondly many of the Nordic countries have politically directed energy policies at alternative sources of energy production in the form of Nuclear Power and Hydro. I have not seen any great evidence yet that the carbon tax itself has reduced pollution in Europe, and I am still looking.

(When the Russians Came Only the Fool Was Worried as the Court, in Bliss, Danced)

I have created a graphic to demonstrate how the Green Shift raises CO2 emissions by 7.15 Mega tonnes. The economic evidence I used includes peer reviewed articles from economic journals. This is described in a post that attempts to make it easier for non-economists to understand. The Green Shift II. Stephane Dion likes to refer to the Nordic countries as a carbon tax success, but that is not entirely true as this Wall Street Journal article points out.

Theme: Oh crap, we’re living in a fragile economy!

Everybody Say: Quick government, tax us and give more money to car companies so they can produce more cars no-one wants.

Dion: I dream, plan 30 points. First carbon tax, then economic summit to think way out of foolish tax.

Layton: Oil companies are evil. Antichrist. What do you mean average people work for big oil? You mean they might lose their jobs due to my crazy ideas, blue collar workers? SARS! I’m from Toronto.

May: When you’re done, Dion, don’t forget the money you owe me for raking Harper over the coals. Didn’t get it done. Not a leader.

Duceppe: What do you mean? Why the hell shouldn’t the rest of Canada pay for Quebec to have more artists?

Harper: I can’t believe I just said laissez-faire is bad. Don’t they know the housing crisis was caused by government? Oh wait I’m in government and I am the Prime Minister of these 4 imbeciles. How did it end this way?

(Please read the previous Green Shift article first if you haven’t already)

How the Green Shift Causes More Greenhouse Gas Production and is Worse for the Environment

In the 16th Century St. Paul’s Cathedral garnered the displeasure of much of London’s population, protesting against the control of religion and human rights by a foreign power in Rome, the cathedral was pillaged and nearly destroyed. God Himself made His feelings known when He joined with the mob, and destroyed the tower with a lightening bolt, the awesome display quickly sobering all sides in the debate.

During this time and afterwards, the well protected St. Peter’s also known as Westminster Abbey, had remained untouched, and money donated to that cathedral was siphoned off to pay for the maintenance of St. Paul’s, of which we have just stated caused much unrest and finally resulted in catastrophe.

It is from this situation the old English idiom “Robbing Peter to Pay Paul” came into use.*

The problem, as many have found out the hard way, is that quite often both Peter and Paul lose out when the unintended consequences of the enlighted action lead many and money astray. 

(Stephane Dion Could Not Convert Canadians As Only the “One” Converts St Paul on the Road to Damascus)

As I indicated in the previous article on the Green Shift, an unintended consequence of the shifting may actually result in more production of the supposed greenhouse gasses by consumers. In essence this has to do with the price elasticity of demand as well as the income elasticity of demand. These are influenced by the unfortunate fact that there are no real substitute goods for gasoline or many fossil fuels for that matter, as well as the fact that these substances are involved in almost every human endeavor.

To define it simply, the economic definition of elasticity is the ratio of the percent change in one variable to the percent change in another. The price elasticity of demand is therefore the percent change in quantity demanded divided by the percent change in price. Gasoline is a very inelastic good, meaning that changes in the price of gasoline will have very small effects on the quantity demanded.

In simple terms, the price elasticity of demand defines the percent people will decrease their consumption of a good if the price is increased. The income elasticity of demand is the percent people will increase their consumption of a good if you increase their income.

Alright so lets start with a very basic example. On a simple microeconomic scale, if Peter is spending 100 dollars on fossil fuels and the government taxes it by 20 more dollars, he will reduce his consumption of gasoline by the price elasticity of demand. In layman’s terms he will cut his use of gasoline by a certain amount based upon his budget. If the price elasticity of demand is inelastic because Peter cannot find another fuel source for his car, Peter may end up spending 118 dollars on gasoline with the government pocketing the 18 dollars and Peter reducing his quantity of gasoline by the small amount he can while sacrificing his spending on other more unnecessary things in his budget.

If the government then gives Peter back the 18 dollars it took then Peter may use the extra income to spend some of that money on gasoline depending on his income elasticity of demand. In layman’s terms as his income increases he will spend more of his budget on gasoline for example by making that extra trip to the video store, or out to dinner etc. More than likely he will use the extra money to buy some of the unecessary goods he gave up before the price increase once he has satisfied his gasoline requirements.

Think of what you would do in this simple situation, if you were only buying the amount of gas you absolutely needed before the tax, and then after the tax you got your money back. You will more than likely try and be back where you started. This is why on a micro-economic level, I think the Green Shift is flawed when it comes to greenhouse gas reduction. Soon I will show you the numbers, or the money as they say.

But what happens if the government gives you more money than you started with? This is the situation where you might actually end up buying more greenhouse gas producing products than you ever did before, and also where you might indirectly switch from using friendlier natural gas to deadlier gasoline. 

The problem is that the consumption taxes and income taxes are not directly linked.

Let’s set this up. The Green Shift proposes the impossible, that it will only target non-gasoline fuels for taxation. According to Natural Resources Canada data, residential natural gas contributes to 32.2 Mt of CO2 per year. It is a large segment of of the total residential production of CO2, on par with electricity. Oil is minor with only a 6.8 Mt contribution and will be ignored in this simple estimate. The estimated long run price elasticity of demand of natural gas is -0.36 according to the U.S. Department of Energy. The Green Shift will increase the price of natural gas by ~18.0% at the end of four years. Therefore the reduction in CO2 production is calculated to be 2.09 Mt (18.0%*(-0.36)/100*32.2 Mt).

According to the Green Shift somehow the majority of Canadians are going to get more money back due to income tax reductions. You only have to go to their website to see that somehow you are coming out ahead after playing with their calculator. (The plan implies the wealthy will not but in actual fact it will likely be the poor who suffer most.) Government projections have the revenue from National Personal Income Taxes in four years at roughly 143.375 billion dollars. Increased personal income due to Green Shift, 7.54%**. The income elasticity of demand for gasoline has been calculated to be on average to be 0.88 from a meta analysis by Espey. Natural Resources Canada has greenhouse gas emissions at 89.4 Mt CO2 for gasoline transportation. The increase in CO2 use from the increased income spent on gasoline is 5.93 Mt.  

Income elasticity of demand will also effect the consumption of natural gas. Income elasticities of demand differ between countries widely, and are greater in Europe. Ashe et al. in the Energy Journal show a 1.3 to 6.1 income elasticity of demand for natural gas in the long run between Europeans. I will use a more conservative number calculated by David Brightwell at Texas A.M. of 1.46 as it is likely an underestimate of Canadian elasticity. The increased consumption of natural gas due to increased income is 3.31 Mt ((32.2 - 2.09))*(0.0754*1.46)).

The Green Shift alone results in an increase in CO2 greenhouse gas production by consumers of 7.15 Mt (5.93 + 3.31 - 2.09 Mt).

Limitations to this analysis include the cross price elasticity of coal, oil, natural gas, and gasoline. In simple terms by making one more expensive relative to another there may be a consumer switch to the cheaper fuel. As has been shown by many authors substitution effect between any two is very small if not insignificant, except for the substitution between natural gas and oil, and natural gas and gasoline for some reason. Either way, the cross price elasticity would make the increase in CO2 production from the Green Shift larger if at all. Another obvious limitation is the increase in over-all fossil fuel use due to increasing incomes as GDP rises over the next four years. This would change the numbers somewhat, but more important to note, would increase fossil fuel use overall and greenhouse gas production. It is also important to consider the linearities, in this case the differences in elasticities faced by people with different incomes. People in the low income bracket tend to have a more inelastic price elasticity for necessities and a higher income elasticity. This is due to the fact that the richer you get the less likely you are to spend any more money on gasoline. In essence you reach a point where you are using as much gasoline as you like. Therefore while I have used average elasticities, it is likely that my number is an underestimate as most of the apparent Green Shift income transfers are to the low income bracket who are more likely to buy more fossil fuels than the middle income bracket.

A note to those in British Columbia who face a gasoline tax based carbon tax. It is likely that due to the income elasticity of demand you will also see an increase in greenhouse gas production.  

A Shocking Mystery

There exists a mystery in regards to the Green Shift. No where in the pdf can I find any mention of household increased electricity costs due to their increased tax on coal. Coal plants produce a large share of electricity in North America. Obviously electricity contributes a significant household cost. Considering that with the income tax decrease most Canadians are barely ahead adding the increased cost of electicity would certainly put most Canadians into the red.

Why do Economists Like the Green Shift?

Economists do not necessarily like the Green Shift. Many economists favor a change in our tax strucure from income taxes to consumption taxes. I agree with this but have some reservations, one of which is that the change has not been well studied with real occurances. Basically the theory is that by reducing our focus on income taxes, taxes that cause a negative strain on productivity and employment, we will increase GDP. Moreover by taxing pollution we will account for the negative externalities caused by consumption and increase GDP. This is called the double divident effect. The argument out there is whether this effect is real, weak or strong.

An economist who I respect, Dr. Ross McKitrick, has calculated the GNP rise due to the double dividend in Canada to be positive, (0.6%) with a 21 dollar (1989) per tonne CO2 tax. I don’t know whether he factors in the income elasticities into his reduction of CO2 model or whether he simply accepts a reduction. 

It is also important to note other studies such as by Carraro et al. that show that in the short run the double dividend effect can increase employment, but in the long run has no effect. Dr. Stephen Smith presents a review of the possibilities of the double dividend and its possible negatives and concerns.

Some of my concerns regard the implications of a shift from capital to labor in an open market. If labor is made cheaper relative to capital it may occur that the productivity of labor relative to other countries decreases. Essentially this is due to the disincentives to reinvest in productivity. As productivity falls, so does wages and Canadians may become poorer relative to other countries. Other concerns regard to the increased costs of energy and it’s obvious effects on production, manufacturing, industry, and even the service sector. Fossil fuels are an integral input in almost any good or service.

Many of the people who advocate a Green Shift use Finland and Sweden as an example of success. Fortunately for the Fins and Swedes, they have alternatives or substitutes in the form of nuclear power and hydroelectricity respectively. Finland is expanding its reliance on nuclear power and Sweden has placed its reduction on reliance on nuclear power on hold as they have come to realize the the difficulties of renewable energy. Sweden has 44% of electricity  produced by hydro and 47% by nuclear energy, total 91%. In comparison Canada has 24% of it’s electricity generated by CO2 producing sources, and this doesn’t appear to be changing as provincial governments have no real policies for energy production.

Mt = mega tonnes 

* It is likely that the idiom “Robbing Peter to Pay Paul” has been in the vernacular for much longer, and may indeed hark to the 12th century latin vernacular. However the event must have well suited the expression for those aware and cynical enough to turn it to English.

** It is hard to know, reading the Liberal Green Shift plan, which year the dollars are adjusted for due to inflation. I am assuming 2008 dollars. I hope they thought of inflation.