Nullius in Verba

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.

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.

(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.

The English language is one of connotation, and some words like “stupid” should be applied carefully, but when warranted, applied definitively. What Dan Gardner tries to imply in this recent article is that Stephen Harper is stupid, even though he has a degree in Economics, by flogging him with an interview with the renouned Economist, Dr. Greg Mankiw.

Stupid is defined by Websters as acting in an unintelligent or careless manner, or lacking intelligence or reason.

As the old adage suggests, “While leaving the house to call someone stupid, be sure you don’t bang your head into a mirror along the way.”

The MSM is as Stupid as it is Vain

I’m sure no one in this country has missed out on the Liberal Party’s proposed carbon tax, the Green Shift™. While Stephane Dion has been unable to even pronounce it in English, let alone explain it, the mainstream media has done a bang on job of praising this thing whenever or however it can. Still I have yet to hear on the news a basic Economics discussion of the subject, and I have yet to hear from any published peer reviewed literature as well. So when the mainstream media fails us, like it usually does it is time to turn to the blogosphere. And so we being The Green Shift - The Economics Lesson - in Basic for Dan Gardner™. Oh and we’ll include some peer reviewed journal articles as well.

The basic principle of the Green Shift is that by increasing a tax one artificially increases the cost of carbon producing substances or greenhouse gas substances (GGS) so that people consider purchasing substitute goods instead thus lowering the release of greenhouse gasses. Moreover by reducing people’s income taxes by replacing it with the increased tax revenue from GGS one avoids harming people along the way, or causing the much dreaded stagflation. It is worth pausing here, for those of you unfamiliar with economics, in order to read the wikipedia definition of stagflation and note in particular that :

First, stagflation can result when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable.^[5][6][7] This type of stagflation presents a policy dilemma because most actions to assist with fighting inflation worsen economic stagnation and vice versa. Second, both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply,^[8] and the government can cause stagnation by excessive regulation of goods markets and labor markets.

Yep.

Anyway so let us set up a basic economics argument for the Green part of the plan as follows. Here is a supply and demand curve with price (P) increasing to (P’) as we increase or shift the cost or supply curve (S) of gasoline by adding a tax (S’). As you will see the quantity of gasoline demanded decreases from (Q) to (Q’) and the ticker tape ticks, the adding machines add, and all is well in economic pre Christmas land. (D is the demand for gasoline curve)

Ok now let us add the “Shift” into the plan. We’ll give back Canadians this extra revenue in the form of an income tax reduction. So without going into a lot of detail, suffice to state that when one increases the income of a group of people one also shifts up the aggregate demand curve. This is generally because as one has more money in one’s budget one is less constrained by costs. In other words, if we all get an extra $2000 a year in income tax rebates, some of us are going to drive to New York for the weekend like we always wanted to do.

Let’s see the curves shifting.

Whoops! As the demand curve shifts up from (D) to (D’) the quantity of gas consumed increases from (Q’) to (Q). We’re right back where we started! What we have done is simply artificially raised the price of things, but not done a thing to reduce consumption of gasoline or GGS for that matter.

What’s worse is that one has no real idea how these supply and demand curves are going to shift. They could in fact shift in a worse direction than one intended. For example as seen in this graph one could seen the consumption of GGS increase to (Q”) instead. More GGS consumed than before one played God-onomics.

The question comes down to the shape of the real demand curve for GGS. If the demand curve is “inelastic” it is a vertical curve, and this would mean no matter how much you increased the tax, the quantity consumed of GGS will not change as seen below.

Inelastic demand curves are seen when a good has no substitute goods, that is no readily available good with the same function that you can purchase in it’s place. Gasoline is a likely inelastic good as there really is no substitute for your Honda Civic you just bought. It cost $20,000, and unless you are Bill Gates, replacing it with a fusion powered vehicle isn’t going to happen anytime in the near future. Also as North American electricity generation is primarily from GGS, changing to non GGS generation will be a costly step with no immediate realistic substitutes other than Nuclear and Hydro power.

So what does the scientific peer reviewed literature demonstrate in regards to the elasticity of gasoline, the number one GGS? Hughes et. al state that:

We find the short run price elasticity of gasoline demand is significantly more inelastic today than in previous decades.

and

consumers have not significantly altered their gasoline consumption in response to higher gasoline prices.

interestingly

at lower income levels, the amount of travel has already been reduced to the minimum leaving little room for adjustment to higher prices.

In other words the evidence suggests that we’re pretty much locked into buying the gas we need. West et. al suggest that the cross-price elasticity between gasoline and leisure (the optimal tax rate on gasoline without causing external damage) is 35%. This happens to be the current tax rate on gasoline in Canada in most cities already, therefore taxing it more will cause significant burden.

And just how effective is the tax on gasoline at reducing air pollution? Sipes and Mendelsohn demonstrate that:

Our results indicate that if an environmental surcharge is added to gasoline taxes, then the additional tax will decrease gasoline consumption only slightly and, therefore, will have little effect on air pollution.

and more drastically

The results suggest that people with twice the income buy only 10–20% more gasoline. Of course, governments could use the revenues from gas taxes to address equity issues by lowering taxes on poor people or subsidizing services for them. However, in practice, it is not clear that current subsidies for transport actually benefit poor people more than others. Even if the income elasticity estimates in this paper are low, a tax on gasoline would most likely fall most heavily on the poor.

When it is all said and done, the people likely to suffer from the Green Shift are the poor themselves.

Dr. Mankiw is a proponent of the Pigovian Tax, that is a tax on things like GGS which have externalities such as pollution which are proposed to not be included in the price of the good itself. Dan Gardner seems to think that externalities are simply basic economics. They are not. In fact the theory of externalities is extremely complicated, and made more complicated by the question of whether externalities really exist.

At the end of the day, Stephen Harper has to decide a course to take. He doesn’t have the luxury of sitting in an Ivory Tower playing tiddly winks or black board what if’s. We have this Green Shift theory which sounds interesting, but what we don’t have at our finger-tips is the shapes of those curves I drew above. We also don’t really know how much they will shift and where they will equilibriate. The only way to know for sure is to experiment, and the most prudent way would be to experiment slowly, because we really have no idea how things will change - contrary to the apparent thoughts of Dion who thinks we need to act fast to save the planet.

Stephane Dion Uses Sign Language to Describe His Knowledge of Economics

We could easily make greenhouse gas output worse, we could have no effect at all. We could cause a depression, we could cause the worst outcome possible: stagflation. Many of the Canadian banks suggest that Canada is on the brink of a recession, recessions tend to mostly harm the poor, and the journal articles suggest the poor will bear the brunt of a Green Shift.

Therefore seems it would be stupid, Dan, to manipulate the Canadian economy so drastically at this time, that is when one considers the peer reviewed Economic evidence.

(Update: Read part II of the Green Shift)

* The Green Shift plan has no immediate consumer gasoline taxes. However if the plan is to actually reduce GGS it will have to target gasoline in some manner. Gasoline is the number one and major contributor to Canadian GGS. For now they will target producers, who will have to pass some of these taxes onto the consumer, some will be taken out of profits, and some will be taken from the employees of the firms. Once again there are graphs to explain all that, of which we have no idea the slopes etc. In the end gasoline prices will rise, anyone who thinks they won’t is selling you a bridge to nowheresville. 

** It is likely that the effect of Anthropogenic Global Warming caused by GGS on global climate change is low or non-existant as no definitive proof exists, and many peer reviewed articles state there is no evidence.  Moreover it is likely that the current land based data is corrupt.

*** While many economists including myself support a pure consumption tax rather than income tax, all taxes do have harmful effects on the economy and the poor specifically. Consumption taxes have their own side effects and have not been entirely studied.

Our topic today is charity, as befits the season, and I’ll hope to convince you of how today’s modern wise men would effectively prescribe charity. 

It is roughly 2000 years after the birth of Jesus and whether God or Man, if the entire planet followed His philosophy the world would be a beautiful place - but knowing humans that can only be a dream. I am sure some of my dear readers likely think, most incorrectly, due to my so-called right wing beliefs I am the most Scrooge like character on this planet. They are entitled to their beliefs but I would like to hope that should they know me, they would find themselves grievously mistaken.

(Even before the ghosts, Scrooge effectively reduced poverty)

First of all, I am not right wing, I am libertarian. Secondly I’ll leave it up to those who truly know me to figure the second part out. For they say that he who doth protest much…

The fact is, despite the attempts by socialists to portray them as greedy, the group of most generous humans by far are Right Wing Christians from the United States. They are so generous that no other country comes even close to matching private donations per capita made by these people. Ireland comes one third as close, but it is another hot-bed of capitalist Christians. Canada is pretty dismal but they’re way better than the Swedes, and France makes Scrooge look like Santa Claus. Strangely the government doesn’t need to tell these delusional Americans to give this money, they just seem to do it.

Sadly in this day and age, Charity has become Big Business. How many times have you been presented with a glossy expensively printed flier and asked to donate to a certain charity? Where is that money going? For example 18% of your donations to the American Red Cross go to wages alone.

So how can one be more generous more effectively? Perhaps Biological Science can help us. Researchers have concluded that people injected with oxytocin are 80% more generous. However half of us don’t want to run around with painful uterine contractions more than we need to, and the other half of us being big babies (AKA: Men) are plain scared of needles. That one is simply out.

Government will save the poor right? Wrong. Economic Science presents a pretty dreary picture of just how effective governments are in reducing poverty. As we all know, subsidies cause more harm than good, that much is basic. However there is a more insidious creature lurking within that realm called the Tullock Theorem. (Dr. Gordon Tullock is also famous for the theory of rent seeking of which we shall discuss later). Tullock states that the income redistribution process [social programs] is one that yields gains back and forth across the middle class with little gain at the lower end of the distribution due to voter preferences. This theorem has been demonstrated by evidence from Dr. Daniel Slottje and Dr. Gerald Scully of the Scully curve fame.

The results of this study indicate that Tullock’s (1986) theorem holds again - government’s agenda is not served by a redistribution to the poor, except perhaps as a secondary effect. - Slottje et al

A natural question is why don’t the low income types vote in candidates who will consistently redistribute income in their favor? The result of such a political process would be a downward trend in income inequality. In point of fact, there is no evidence whatsoever of any trend in income equality over the period. The answer to both questions may be that Tullock (1983, 1986) is on to something. If the middle class voters transfer gains back and forth, the poor can’t gain and they don’t, then the distribution should be stable and is. - Scully et al

Well what then? Economic freedom, first ellucidated by Milton Friedman, has been demonstrated to improve economic redistribution and standards of living in the lower income classes. It consists of defined and enforced property rights, free trade and open borders, little government intervention, low taxes and capital markets. Economic growth also helps the poor but it does so while causing a slight increase in gap between rich and poor, however such gap is a meaningless exercise in relative statistics. For instance compared to Bill Gates I am poor, however I can still afford a house, car, tons of modern gadgets, computers, and three good meals a day for my family while someone living in economic growth poor Africa is lucky if he can score any of the above. The question is how are the poor doing at the bottom, and the evidence doesn’t require an economist to confirm the obvious - yet economists still show that the poor in North America have more now than ever.

In this study, it is found that the amount of economic freedom across nations has the attribute of increasing the rate of economic progress and improving the distribution of market income. That economic freedom is a positive and significant macroeconomic determinant of economic growth is not a controversial finding. The empirical evidence here indicates that economic freedom reduces income inequality (i.e., lowers the Gini). Estimation of the structural model applied to the quintile income shares indicates that it does this by increasing the share of market income going to the two lowest income quintiles and lowering the share going to the highest income quintile. - Scully 2002

Unfortunately, you and I dear reader are not the government of some poor dirtbox nation so we cannot fix their heady problems.

Perhaps there is yet another way. While Bill Gates, realizing his mortality, has donated a substantial amount of his wealth to charity it is likely that his creation of Microsoft has done more to help people than his charity ever will. Especially after the lawyers, socialists and other rent seekers run his money through their greedy mitts. In fact no group of people do more to help other people than those who create business, or in the devil’s language: a corporation. Indeed a profitable corporation actually helps people, believe it or not. You don’t need an economist to tell you that, just drive through Hamilton or Detroit and look at where the old factories used to be.

Walmart has done more to help poor people than the federal government this year. Walmart sells goods at very cheap prices (causing what economists call an increase in consumer welfare) and while doing so provides thousands of jobs to people which includes a dental and health plan, and if you are a doctor worth his licence you have a list of their cheap generic medications under your prescription pad for those low income folks who badly need medication. (I was quite literally stunned the first time I saw a five fold reduction in one generic medication compared to a certain famous pharmacy chain and some colleagues in the U.S. tell me that they see even more, as much as 10 times cheaper - quite literally a difference between spending $10 vs. $100 per month!)

(Long the whipping boy of socialists, a modern day Pontius Pilate would find no fault with Wal-Mart)

Unfortunately not all of us have what it takes to start a corporation and become as beneficial to the poor as Charles Dicken’s Ebenezer Scrooge. What, Scrooge noble? If you’re questioning that you haven’t learned anything. Ironically before his transformation Scrooge had done more for Bob Cratchit than anyone, and Cratchit himself says as much multiple times in the Christmas Carol. Scrooge gives to Cratchit employment and a paycheck something he would not otherwise have as Cratchit is horribly unqualified and very close to the poor house during the depths of the 1843 recession in Great Britain and arguably much of the world. Ironically it is in this year that the Economist is first published espousing free market ideas and it is also during this time that the Poor Laws in Britian are at their peak with the Workhouses being at the height of  depravity.

The Poor Laws, a product of Christian philosophy, were created in the 16th century as a method of dealing with poverty though public taxation and wealth distribution. It can be argued that such a system was well in effect in many Christian communities throughout the last 2000 years, but it was during this time that such a philosphy began to have secular interest. Unfortunately the apparent enlightened thinking had, according to Parliament, very little effect on aleviating povery and by the 1830’s desperate measures were taken to provide incentives for poor people to work. By this time the people handling the money meant for the poor had largely managed to seize as much as they could for themselves, rent seeking in full effect. Moreover some parliamentarians felt that if the Workhouses were made as horrible as possible poor people would have an incentive to work rather than go there adding to the corruption and abuse practised by the people managing the Workhouses. Some parliamentarians idealistically felt that by working some of the poor would learn skills enabling them to gain adequate employment elsewhere.

In modern language, welfare given to poor people in return for work is called Workfare. Workfare has been practiced by governments throughout human history, and it is at its most notable during the Great Depression as part of the New Deal policy of Franklin Roosevelt. Ironically most economists view those policies as causing the depression to last longer than it would have. Currently Workfare exists in many countries in the first world. It is one method Sweden uses to hide its high unemployment rates and is a philosphy often bought into by both Right and Left wing governments.

(Our good intentions made this worse.)

Sadly economists cannot find any evidence demonstrating Workfare being an effective means of reducing poverty. While working at even a low income job does increase a worker’s ability to become upwardly mobile in wage through work experience and credentials, it seems that those who partake of welfare have other issues that prevent them from becoming employed or even seeking employment.

Ironically what was at one time deemed charity is now apparently a human right according to that embodiment of failure, the United Nations. Now some people feel that Workfare conflicts with their human right to collect welfare. If you can connect the dots it means some people have a right to your wallet. The Romans tried this, Emperors promising the citizens of Rome daily bread. Unfortunately this removed the incentive for the citizens to learn to work, and created in effect, the mob. It appears the Left, once congratulatory, now think the New Deal is slavery.

So government is a failure when it comes to providing direct means of reducing poverty, so much so that African economists are asking western nations to stop sending aid. Governments can help poor people by providing a foundation of economic freedom so that free enterprise can do what it does best and provide employment. Finally rent seekers are everywhere ready to divert as much money to their own pockets as they can from charities and government initiatives further causing program failures. What can one person do?

In 1848, a few years after Dicken’s The Christmas Carol a German, Friedrich Wilhelm Raiffeisen, designed a system now known as microfinance which successfully provided capital means to German farmers. In the modern age, the economist Dr. Muhammad Yunus took this concept into India using it to the advantage of the poor and winning himself a Nobel Peace Prize in a more deserving manner than Al Goreacle. Microfinance and microcredit is a simple concept where organizations or people lend poor entrepreneurs usually in the Third World small loans which enable them to develop employment opportunties. Unfortunately the economic evidence is still out regarding microfinance’s sum total benefits, but it does appear to be an effective method for enabling people to create sustainable economies.

Indeed not only is it is well established that economic freedom increases economic development, Dr. Ross Levine has demonstrated that the ease of availablity of financing is another positive factor, as reviewed in this paper. That microloans are profitable to both parties is evident by the fact that major banking corporations including HSBC have now entered that market.

So along with the benefit that microloans are not evil subsidies that simply cause more harm than good, they have the benefit of potentially causing economic growth by working with the people who know what they need for their success.

What does that mean to you? Well I have mentioned before that I recently invested in a microloan provider, Kiva.org, where I loaned a small business in a Third World Country some start up money. I have recently received my third re-payment and by all accounts this person is doing well. My small amount of money is a huge deal to this person, it is directly given to them with no rent seeker skimming, I get to monitor how effective it is working, and there is no glossy expensive pamphlet attached.

I’ll leave it up to Eric Thurman to describe his experience with microfinance in this TV Ontario lecture.

And now we have come full circle, from Microsoft to microloans. If you are feeling the need to donate to a charity this time around, consider a microloan. It could be money well spent and poverty well treated.

Merry Christmas

(Wise men seek the evidence before applying charity)

(As Promised, Monthly Blog Update) 

When it comes to the market place the Government is like a fat kid on a teeter-totter. One knows which end is coming down, and its sure to be as balanced as an elephant on ice. But how do governments in a democracy become corrupted? Surely with the voting public and the vociferous media hounding them there is no way for the fat evil merchants of capitalism to stroll in and take things from the collective?

If you have a moment, I’ll tell you how it happens.

It comes from our own best intentions gone wrong.

The latest squawking to come from the Liberals is the revival of the Income Trusts issue. For those of you unaware of what the big deal about income trusts is, I’ll explain briefly. Income trusts are a method corporations use to avoid income taxes. Plain and simple, and while some people will deny this, mature corporations wouldn’t be doing it if it weren’t advantageous to them. As any accountant knows deep down inside, the more convoluted a tax system is, the more loopholes there are. It’s called Langmann’s Law which states: l=n/5, where l is number of loopholes, and n is the number of tax legislative sections or something.

And seriously though, as economist James R. Hines points out, the more government attempts to fix tax loopholes, the more they actually encourage the implementation of new loopholes. This is one of the main reasons the old Reform Party of Canada proposed a flat personal and corporate income tax with your only deduction being your children and the basic personal exemption.

Anyhow, in case anyone didn’t notice, the Conservative government did the unthinkable late last year by taxing Income Trusts and thus slamming the lid down on this particular avoidance strategy. They did this against the promise of not doing this, which is a clear violation and a shameful act. I personally am not completely against governments changing their promises based upon new evidence as long as they were sincere in their previous promise, that the new evidence is decisive,  that keeping a promise will result in a catastrophe, and that their decision isn’t for simple political gain. We must also bear in mind that a government which makes mistaken promises should be taken to the crucible for ineffectively analysing the data. This all being said there is nothing worse than the old Liberal strategy of promising action, not doing anything, and still promising action, ie: Kyoto.

Angry in the Great White North writes about slim shady Garth Turner (a man I mistakenly used to believe was a straight shooter even while he was burning the Conservatives from within) and his grand Canada tour railing against the Conservative actions on income trusts and how the great Liberal party will do all in its power if it gets elected to make everything better for the holders of income trusts and the corporations who created them. Angry points out several interesting flaws in Garth’s argument that the taxing of income trusts hurt seniors and instead points out that income trusts were in some cases preying on ignorant seniors.

However lets look deeper into what is going on. Garth is a member of the Canadian Parliament and within the Liberal Party of Canada’s caucus. Garth is going on a trans-Canada tour who’s theme is how the Conservatives ripped off the poor senior citizens and that we should instead vote Liberal so they can fix this tragety. The sponsor of Garth’s little anti-government tour is an organization called CAITI which is in fact made up on a number of organizations that sell income trusts. Basically what we have here is the direct efforts of a series of corporations to have a government elected that will give them a market advantage simply by setting up legislation. Your vote cast for the Liberals because you feel bad for the poor ripped off seniors is how they get you to vote for their personal advantage.

That is, folks, how corruption happens.

(The Boston Tea Party - A government granted monopoly to the British East India Company culminated to this famous riot, provided evidence for the new liberal philosophy of the proper role of government and created the U.S.A. under a constitution which was supposed to protect people from the government itself)

Milton Friedman used to use the Interstate Commerce Commission as an example of how the government tries to act in the best interests and protect citizens by setting up regulatory bodies but those same bodies end up becoming a direct method corporations use to lobby governments into giving them specific entitlements to markets.

In economics this is known as regulatory capture. In Canada we have several such groups, the Canadian Wheat Board is one currently in the news as the Conservatives try and end that bloated travesty.

How does one prevent regulatory capture of a market? Simple. Define property rights and then stay out of a market no matter how tempting it is. In the case of taxes, a simple flat tax is the best way to prevent loopholes and provide equality.

Update:

I few times I have hinted at ways to responsibly help out other people while not relying on either government ineptitude and/or corporate foundations that steal most of your donated money to pay for employees, computers, or glossy pamphlets. I’d like to point your attention to a non-profit organization I think appears to be doing the kind of giving a libertarian can only dream of.

Kiva.org is a website at which you can set up private loans to other people in third world countries who are trying to better their lives by working and being entrepreneurs. All of your donated money goes directly to the borrower. You can also make a small donation to Kiva to keep them running but its not compulsory. The money gets transferred to a private bank in the borrower’s country. They then pay you back over a period of set time.

So far this looks to be on the up and up. Recently they have been covered by bloggers and media. I have tried it out and I’ll see how it goes. Let’s hope this works out.

Why is Kiva responsible giving? Because you are helping someone become self sufficient and they are paying you back. You’re also watching the borrower’s report to make sure that your investment is being used for what it was meant for. The worst kind of subsidy is one that never gets paid back.

As one of my old friends who was a girl and a planet loving environmentalist can attest, I used to frustrate her completely by saying that: you use more energy and release more bad CO2 by going on a hike than you do driving to Costco. I don’t know if anyone of you out there is familiar with the counter-cultural musical Avenue Q, but I used to bug her about eco-culture like Trekkie-monster bugs Kate-monster about internet porn.

Oh the eco-movement is to make money,
oh the eco-movement is to make money,
grab your cheque and send it quick,
money, money, money!
(sing along)

I completely forgot about this until I was just reminded by strolling over to Small Dead Animals (Kate’s blog that can generate more hits than CTV and CBC). Yes one day completely bored at university back when I was saved from becoming a complete socialist quack by the beginning of the study of the glorious thing called economics, I stumbled upon all kinds of data in the SFU library and one of the databases had a bunch of energy use estimations in them. Being rather bored I calculated up some things and quickly realized that physical excercise was very bad for you, the environment, and every-one else, oh and that all the estimations of the lives we’d save by eating low fat foods, driving with seatbelts, stopping smoking etc. etc. would save more people in Canada from death than Canada actually currently had.

Forget what the Suzuki says about light bulbs, its time to stop eating:

The sums were done by Chris Goodall, campaigning author of How to Live a Low-Carbon Life, based on the greenhouse gases created by intensive beef production. “Driving a typical UK car for 3 miles [4.8km] adds about 0.9 kg [2lb] of CO2 to the atmosphere,” he said, a calculation based on the Government’s official fuel emission figures. “If you walked instead, it would use about 180 calories. You’d need about 100g of beef to replace those calories, resulting in 3.6kg of emissions, or four times as much as driving.

“The troubling fact is that taking a lot of exercise and then eating a bit more food is not good for the global atmosphere. Eating less and driving to save energy would be better.”

Now those of you who think organic farming is better at saving the air from the hordes of bad CO2, think again:

Organic farming practices generate significantly greater CO₂ emissions while producing less than conventional agriculture. On the other hand, growing genetically modified crops allow the farmer to reduce CO₂ emissions while maintaining yields.

But any economist can tell you that increasing productivity of a good decreases waste. In this case it happens to be food. Farming practices we used in the days of Sumeria will not feed 6 billion humans without causing an environmental decimation folks.

Ahh, but don’t be too quick to join the ranks of the eco-green terrorists out there and start amusing yourselves to death by starting the campaign of culling a few million more people than the eco-socialists are already doing by mandating the third world back to the stone age. You’d better kill the termites first - they release and produce more Greenhouse Gas methane and CO2 than we all do, and there’s only billions and billions more of them every year.

(In Praise of Folly - Erasmus 1515. A satirical work that is considered one of the greatest influences on Western culture and philosphy. If you are interested in modern praises of folly just watch CTV and CBC follow Al Goreacle or the Suzuki around) 

As an aside, it turns out that the investigational work of several bloggers has revealed serious data errors in the NASA calculations of average temperature increases in the United States due to of all things, a Y2K computer error. The hottest year on record is now 1934 instead of 1998, and the recent years have fallen in significance compared to the 1930’s during the dustbowl famine.

(Which one of these things is not like the other, which one of these things is not the same… la la la)

It also appears that many of the environmental sampling stations are more often placed next to A/C units etc. which put out lots of heat increasing the temperatures measured at those stations - which are used to determine if global warming is real or not. A bunch of volunteers have been combing the country taking pictures of the data stations and logging them on the blog: SurfaceStations.org. The problem with peer review is that often it doesn’t replicate the experiments down to the data collection itself, hence faulty data in can lead to faulty data out in a peer reviewed article. Peer review is a good system but it isn’t perfect. (Note at the current time SurfaceStations.org and ClimateAudit are offline subject to Denial of Service attacks by neo-socialist hackers who don’t want the message getting out. And I remember when hackers used to strive for truth.)

There are some potentially valid reasons to buy a Prius or some other hybrid, but saving the world from the hordes of evil CO2 isn’t one of them. But hey, most of the educated people out there aren’t suprised.

Once again yet another group has come out with a study showing that the vaunted Prius uses more energy over it’s lifetime than the gas guzzling Hummer. CNW Marketing Research has produced a “dust to dust” study demonstrating that overall the Prius has an energy-cost average of $3.25 per lifetime mile vs. the Hummer with one of $1.95. Mostly the added environmental damage is from the production of the Prius’ batteries and transport of said product. The other thing that CNW noticed is that people aren’t using the Prius that long before it’s thrown out, hence a lot of fossil fuels has gone into the production of a vehicle that isn’t being well used.

(For those of you who think that the only good carbon is dead carbon, the only thing that will bog a Hummer down is taxes.)

Now, like any economist or other scientist, I can state this as a certainty because I’ve done computer modelling: almost any conclusion can be reached by the construction of a model. (Tell that to the global warming gang). All one has to do is make sure that one adds the variables that will in theory support one’s hypothesis and make up excuses why to leave out the variables that will not. The debate on whether the hybrid is an environmental benefit or boondoggle will rage on and on.

My real suspicion is that if the Hummer and Prius are fairly close on the environmental scale of damage, and one can argue back and forth on this, the fuel efficient and economical cars like the Corolla and Civic must be much better than a Prius.

(Update) Looking at more evidence I’m likely still better off buying the conventional car for quite a while. Lave and MacLean conclude that the benefit from the Prius over the Corolla is negligible especially when considering the costs of production. Lave’s previous work has agreed with he CNW that indeed the production of hybrids results in higher environmental stress than conventional cars, and indeed have only tiny effects on ozone production and yet have increased environmental effects due to battery materials.

Of course Al Goreacle and the Suzuki will continue to push the hybrid on us, regardless, but won’t actually use them to get to their big-expensive speaking engagements.

Anyhow why am I going on about some old news? It only took our friendly Globe and Mail writer Neil Reynolds about two lines to twist this story into yet another anti-Conservative Party of Canada (CPC) story where of course it’s all Stephen Harper, Jim Flaherty, and probably George W Bush’s fault too if you look hard enough. (This is yet another one of those times where Dick “The Dick” Cheney may or may not be at fault, but let me remind you that the Laffer curve we discussed in this post earlier was his fault.) 

Now Neil Reynolds has a very interesting biography, been everything from an NDPer to a Libertarian, has run a variety of newspapers and is very vociferous on his outlook that small government, low taxes, and person freedom are the best way to go and on that I couldn’t agree more. However as he once said about working at the Toronto Star that he isn’t above going with the accepted way of things:

People know all newspapers have biases. Some people read us because they don’t agree with our bias. They get a provocative charge out of being told they’re wrong … I worked at the Toronto Star for eight years, and they were the biggest spinners of all. They had a written policy that ‘everything [Liberal finance minister] Walter Gordon does is front page news.’ I didn’t agree with Gordon, but I followed the policy anyways, with a clear conscience. Everyone knew it was a left-wing rag, and we called it PRAVDA, affectionately. But it was a great crusader, and the best-selling daily in the country.

And the way of things is CPC bashing. In his column he writes that Jim Flaherty was mistaken in giving tax breaks for fuel efficient cars and increased taxes on fuel guzzlers.

In his March budget, Mr. Flaherty made fuel efficiency - gas mileage alone - the sole basis for the environmental rating of new cars. He will reward high-mileage cars (with rebates from $1,000 to $2,000) and punish low-mileage cars (with surcharges from $1,000 to $4,000). The program could well be a phenomenal waste of energy. Junk it, Mr. Flaherty. It’s not fit for the road.

Now before all you socialist huggers out there get too excited and start waving placards about yet another frothing trashing of the CPC, lets not forget that Reynolds has a way of being facetious which doesn’t necessarily mean he’s on your side. In fact who really knows what he means, one of his previous suggestions has been to cut the GST on any new car since they are in general more fuel efficient. Probably because he reached the same conclusions I did.

However if there is one thing Reynolds admits to knowing is which way the bandwagon is headed and how to get on. So it’s likely his editors at the G&M were ecstatic with his implications regarding the CPC because the media will continue to lap up anything that windbags with no credibility like the Suzuki and Al Gore will say and yet neglect to do any real research of their own. 

For example, Stephane Dion can recycle some old wine glasses and to the media he’s the greenest guy since Kermit the Frog, yet Flaherty can implement some Suzuki Foundation suggestion and he’s the Genghis Khan of the Greenhouse Gas Horde.

Anyhow the real reason the Hybrid may be better for us all really has nothing to do with CO2. Instead it may, and this is a may, help reduce smog in cities that has been linked to respiratory and cardiovascular diseases in suseptible people as well as cancers. Even the evidence for this is still in some ways weak, but its out there and probably a lot more reliable and relevant than the media-hyped science on CO2. Yet can we get a peep out of them on this? When the CPC announced they were targeting smog as a health issue, the media was speechless. It was like watching an episode of the Simpsons when Homer is told the implications of something and he just blinks a couple times with a blank look on his face. Yet say the word Global Warming and they’ll lead the charge to Jerusalem.

(The War on Greenhouse Gasses is the New Crusade and Global Warming is the New Religion)

So if you’re going to drive a hybrid, it should be because you’re trying to save lil’ Johnny from yet another asthma episode and subsequently another visit to me. If you think you’re any better than the dude in the Hummer that just passed you, think again. You, my friend, are the one making the planet hotter.

Maybe.

Today’s Three points:

1) The fuel efficient cars are likely your best bet if you want to save the world.

2) No matter what the CPC does, according to the media it will always be wrong.

3) The Prius and other hybrids are a good idea in theory because they may reduce the harmful local effects of combustion engine emissions on lung and heart disease, not because they reduce CO2.

Today we are going to discuss why people like Maude Barlow Jack Layton should stay the same distance from economics as a whale should from a desert.

Both look stupid out there.

If there is one word socialists love to hang around their necks, its the word “fair”. They love that word. In fact the simple use of the word can bring at least ten of them into the semblence of a rally at almost a moment’s notice.

Science doesn’t understand the word fair. In fact I don’t think I can come up with any word in science that approximates it. Scientific theory is reason and logic. Do genes say to each other, “Man you’re doing all the work, that’s not fair, its about time the polymerase transcribed me?” No.

Does evolution use fairness in deciding which species becomes extinct, and which traits are inherited? Nope.

Socialists however love fairness. Fairness to them is this utopia where everyone is happy even the street graffiti. In reality fairness under socialist regimes means that money gets stolen from hard working people and transferred to the socialist’s little empires of concern including the bank accounts of their lefty friends.

(Is Justice Based on Fairness or Facts?)

Economics is a science and it doesn’t understand the word fair.

My friend, Darrell, hardly a socialist symbiot mentioned the use of the word in a comment and of course brought out the raging economist in me.

I think I’d be much happier with corporations if there weren’t subsidies and tax breaks for any of the industries. Of course, this would have to be implemented pretty much globally…. Now, the consumers may end up having to pay full price for things, but the corporations would be paying fair share for “living” in a country. I do think it’s kind of neat that a corporation is considered an entity… albeit a mentally-deficient entity that someone, somewhere still needs to claim responsiblity for. So these entities share the resources of a country and so should pay for them too… I know most companies do pay, though not so sure about a fair share - we still have a high rate (36.1%) but we’re better than the states (40%)… but that does compare to a top earners rate (in BC) of about 43%. A benefit of paying full cost for goods is that consumption may actually decrease - and longer lasting products would probably be preferred. 

Darrell makes two effective points. One is that subsidies of select industries and tax breaks (just a subsidy in disguise) really end up selecting out losers and often end up creating failures out of once profitable industries. The argument can also be made at least at the municipal level that corporations should face some sort of taxation as they end up using factors of production from municipalities, ie: sewage, transportation. Ironically municipalities are also corporations and so it makes some sort of quasi-sense.

With all due respect to Darrel, who is a good scientist, there is no such thing as “fair” in reference to corporate taxes. Rather corporate tax schemes are on a holistic sense simply another government revenue source. Moreover and tragically, it is politics on a fundamental level that has defined corporate tax rates in the majority of countries, believe it or not, and not economic theory. Ask an economist what is a fair tax rate and he’ll stare at you blankly because the point of a tax is what your objective goals are, not a subjective goal of fairness. Subjective goals simply harm people and have unintended consequences. 

Unfortunately Maude Barlow and Jack Layton are a reflection of the thoughts a lot of people have been told to believe. Somehow there is a fair tax out there waiting to be discovered.

Whereas in the 1960s, Canadian citizens and business contributed 50-50 to tax revenues collected, today Canadian citizens account for 92 percent of all tax revenues. Business contributes only 8 percent. - Says Maude as if any of what she is saying is scientific.

For all you budding theives out there who want to work for the government machine as a politician, I’ll lay out two examples of basic corporate tax strategy for you to ponder from a scientific point of view.

The First Strategy is called “Getting as Much as You Can“. If the point of your tax strategy is to raise the highest revenue from corporate taxes then consider the Laffer Curve. This principle of economics has been known of for a long time, but was put into popular use by Arthur Laffer, an economist of note during the Reagan years. (Don’t worry all you leftbot conspiracy wingbutts, Dick Cheney WAS actually involved with this.) The Laffer curve basically states that an increase in the tax rate will raise tax revenue up to a certain point, at which tax revenue falls due to decreasing incentive to work. An extreme example is a 100% tax rate, at which point no one would work because there would be no return from it. The Laffer curve is limited in the scope of economic growth and likely is influenced by a third factor, time, but this has not been well studied. For income taxes in countries like Canada and US the tax rate likely is not high enough to approach the peak and be on the right side of the curve. There is some evidence in countries with a high income tax like Sweden that they are on the right side of the curve (Note: Sweden has a low corporate tax rate).

There is some evidence though, that in an open world economy a small market country (like Canada) faces the constraints of a Laffer curve in regards to corporate tax rates.

(Click to enlarge)

The optimal rate for revenue maximization appears to be 33%. Why might this be so? Kimberly Clausing states that:

Corporations respond to taxation in several ways. First, corporations may simply reduce their overall economic activity due to the tax disincentive. Such a response implies a resulting loss of national (and world) income.

Second, corporations may reduce real investments in high-tax locations in favor of investments in low-tax locations. While this response may reduce world income somewhat due to a sub-optimal allocation of capital, the loss of income would be less than in the first response.

Third, firms may undertake the same real investments in each location, but increase the shifting of income across locations through transfer price manipulation and other techniques. Such actions need not affect the magnitude of real economic activity across countries, although the measurement and reporting of that activity would change. Finally, even domestic firms can respond to increases in tax rates by increasing tax avoidance efforts, and such efforts can take many forms.

All types of responsiveness would generate the downward portion of the parabolas charted in this paper.

The problem with “Getting as Much as You Can” is that one can often kill the golden goose, hence the Second Strategy is called “Not Shooting Yourself in the Head While Doing It“. It is generally accepted that higher corporate tax rates lead to decreased economic growth over the long run. There are many theories that account for this, for example lower corporate taxes may encourage increased capital spending or investment in training. Young Lee and Roger Gorden show that the decrease in corporate taxes is an incentive to invest personal income into entrepreneurial activity. From studying 70 countries, they calculate that a reduction in the corporate tax rate by 10 percentage points can result in an increase in economic growth by 1.1%. Contrary to what left-bots like the esteemed economist David Sukuzi think, economic growth, not subsidies, is what helps poor people get wealthy. Ellen McGrattan and Edward Prescott show that decreasing corporate taxes directly leads to increasing corporate equity and value. Thus investments such as retirement portfolios are much better off. So if you’re one of those crazy people who wants to get a job and put money away for retirement then corporate taxes are a bad thing. In fact you’d probably want corporate taxes to be 0% (Where it should be).

So we’re really in a bind here, on one hand the government wants to get as much as it can, but doesn’t want to shoot itself in the head while doing it. Luckily these factoids don’t seem to trouble the government or general population that much as corporate tax rates are set on a mostly political basis. (Except for the last decision the Conservative made on income trusts.) At the end of the day, greedy Daddy Warbucks needs to pay.

Because its all his fault. And that’s what we call fair.

(With One Sign, Stephane “Dat’s Not Fair” Dion, Sums Up His Knowledge of Economics and Shows Us How Much Money We’ll Have Left on Our PayChecks When He’s In Charge.)