Canada's Place in the Global Economy

[GAP]

Find me a politician with enough gonads to do what you suggest, and you will have to look far and wide for one NOT in office. There is not one politician out there with enough pizazz and gonads to put the system right without buckling down to the almighty vote count....They don't even realize that if they had enough charisma and a well thought out plan the people would back them. (well some anyway.....)

 

[Rifleman62]

Am I correct here or wrong? The manufacturing sector is always for an undervalued Cdn $ as it helps sell Cdn mfg goods to the "world" (approx 85% of everything we produce goes to the USA). Same goes for good old Buzz. It's productivity stupid. Right now, due to the CAW, Canada is the most expensive place in the world to manufacture an automobile. It is either $67 or $69 per hour in a CAW auto plant according to several reports I have read. I don't know if its Cdn or US $ (if it's US $, the situation is worse). With North American auto companies in a mess, what NA auto CEO in their right mind would build a car in Canada? To heck with NAFTA or the 1965 Canada–United States Auto Pact. This is 2008, a new US government, and America in financial difficulty.
A dollar should be a dollar(or darn close to it) for a country to be sovereign. In Canada we keep subsiding low productivity. It's like rewarding failure to get votes/elected.[/bHere are some of the results of this policy:

Federal equalization payments:

Quebec - $8.35 billion
Manitoba - $2.1 billion
New Brunswick - $1.69 billion
Nova Scotia - $1.57 billion
Ontario - $247 million
P.E.I. - $340 million

In the last election, did not the people of Quebec vote to march to the beat of their own drum, AGAIN?

 

[a_majoor]

One reaction to a putative Obama administration might be a John Galtian "strike" (read Atlas Shrugged). If this happens, the economic slowdown will have serious reprecussions, especially for us, since 85% of our exports go to the US. A permanent recession will make life tough for us (and the US recession will hurt all world economies, so there will be no one to take up the slack):

http://pajamasmedia.com/instapundit/

AN ARMY OF JOHN GALTS?

I really do not want to be that "greedy" guy whom Obama so hates. "Greedy," loosely defined in Obamanomics, is 49 percent of voters. For the record, if you make $249,000 per year or less you are fine; somewhere around $250,000 and above, you are officially evil and he is coming after you.

I want to appease the new administration and not be too productive. So, upon Obama's passing his new redistribution plan, I will slow my work schedule, lay off a few people (Obama's got their back) and let someone else bust his tail since I will now be able to get "redistributed wealth" from those poor fools who are ambitious, energetic, work hard and have made good decisions.

I cannot wait, as I need a break. And it will be nice to not be vilified by politicians. It will feel good to be liked again.

Wish me luck for the next few years. I am looking forward to a respite from hard work, taxes and creating jobs.


You sure hear a lot of people saying this kind of thing. So what happens if this stops being a joke and becomes a trend?

UPDATE: A reader emails:


Count me among the ones seriously considering this. I'm in my mid-forties and run a company employing 124 people. Yes, I make more than 250K a year and pay out more than a million in salary and benefits. If my tax burden increases any more it simply isn't worth it anymore and I'm seriously considering cashing out and semi-retiring. I won't be able to live as well I once did, but that's ok because I'd get by. It's simply isn't worth it if I don't have the option of growing my business and just seeing the extra effort go to taxes to a wasteful government. I know it would result in at least half my people losing their jobs, but I couldn't guarantee they could stay even if I did. Frankly, I'm just tired and if there is no reward for the extra effort why should I bother?


On the other hand, reader Dave Holsclaw is less positive:


Trouble is – when the evil folk who earn more than $250K fail to provide the necessary dollars to fulfill the dreams of The One, the sliding scale of evil will appear. Soon, those who earn $175K and then those who earn $105K will be identified as evil and have their property confiscated.

The story is always the same. The socialist/communist/fascist state destroys the productivity of the middle class, confiscates the fruit of their labor and enforces a two class system – the many (who labor to support the State), and the few – The One, his family and his chosen disciples (who enjoy the power, status and wealth that the State provides).

There is no such thing as simply slowing down and enjoying the dole.

The thief comes to kill and steal and destroy. That’s it.


Well, that's a cheerful take.

ANOTHER UPDATE: Reader Scott Brooke writes:


I've been reading with great interest your theories on "going John Galt". I've not read Atlas Shrugged yet, it's sitting on my nightstand with a bookmark about 5 pages in, but I think I get the general gist of it. Perhaps there's more reality in the book but the idea seems preposterous, no matter how appealing it might be to join such a quiet revolution. Successful people can't just turn off their success DNA. They need it beaten out of them. And while I agree that Obama's policies will begin the slow turning of the screws, we're far from getting the beatings. No, successful people crave success, not money, although that often comes along with it. It's part of their "being" to be successful. To think that people can shut that off is as silly as thinking poor people will stop being lazy if the government provides for them.

The tide works its magic over time but almost nothing happens to stop the slow erosion. People only "act" when there's a hurricane. Obama and his "Hope" are a tide, not a hurricane. The best we can wish for is a slow retreat of the tide because without a hurricane, people will continue to be what they are at the core. Successful or lazy but no real change in action.


On the other hand, reader Jeff Stevenson writes:


You think that it hasn't already started to become a trend? Please don't forget that the very people who are saying these sort of things are *not* the sort that just talks. These are the folks who are action-oriented, start businesses and create jobs. They are not the sort to spout off and create "manifestos" and issue propaganda statements, they take action.

I do technology consulting in a high demand field and I have the ability to raise or lower my income, depending on how hard I feel like working. I am setup perfectly to react to the Obama/John Galt issue. I have read Atlas Shrugged and I am already *executing* a plan to work much less next year. Notice that I did not say that I was considering, or talking about, or thinking of. I have already shed customers and lined up a few reliable ones for the next year (and perhaps the one after that) to enable this plan.

I had initially targeted 2009 as an expansion year, hiring new people and growing the business. Now, maybe not so much.

See ya' on the other side.


And Prof. Joe Olson writes: "FWIW, I turned down 3 consulting jobs this Fall (during which I'm not teaching) because the net return wasn't enough for me to disrupt my travel and recreation plans." Presumably it won't get better under Obama's plan.

MORE: Reader Kartik Gada writes:


For many years (especially the last 130 years), people came to America because the goverments of their home countries did not reward hard work or entrepreneurship. America attracted the best and brightest, and benefitted greatly. We drained the brains out of governments too foolish to nurture the full potential of their best people.

Now if America itself becomes a place that is tough for the best and brightest, not only will new immigrants stop coming here, but many US-born people may leave to find a new country with lower tax rates. People can leave America for much the same reason they came.

What if, say, China sets up a 'special economic zone' that attracts branches of major US corporations, and where US expats are courted, and offered a life of low or even zero income tax, good schools, etc. all while working at the same US corporations, just out of the China division? Some Americans would go. A marginal tax rate of 0=12% vs. 50% in California or New York is hard to turn down.

Furthermore, remember that the top 1% of Americans pay 40% of taxes. If that 1% leaves for a greener pasture, won't revenue from income tax drop by 40%? What then?

Some smart country, somewhere in the world, will offer big incentives to over-taxed US private-sector people. Some will go. Many could go. That country will reap the biggest windfall ever. The US will effectively have scared away the geese that lay the golden eggs.


It could be an opportunity for someone.

STILL MORE: Reader Jim May writes: "Kartik Gada hits the nail on the head. I left Canada for the greater opportunity and freedom in America. I never expected Canada to follow me here."

MORE STILL: Reader Rahul Biljani emails:


‘Going John Galt’ is not that easy – Congress quietly passed an ‘exit tax’ earlier this year to penalize any (somewhat) high net worth US resident that decides to vote with their feet.

As quoted in the links below, the U.S. government , through the Heroes Earnings Assistance and Relief Act of 2008 (the HEART bill, for short, and I am not making this up), effective June 17, 2008, imposes an “exit tax” on certain citizens and long-term residents who expatriate or terminate their long-term residency. Such individuals, called covered expatriates, will be deemed to have sold all of their worldwide property for its fair market value on the day before expatriating or terminating U.S. residency, and will be liable for U.S. tax on the amount deemed realized in excess of $600,000 (subject to cost of living adjustments).

Covered expatriates are: citizens and long-term residents who (a) have an average annual U.S. tax liability for the previous five years of $139,000 (adjusted for inflation), (b) have a net worth of at least $2,000,000 on the expatriation date, or (c) fail to certify compliance with all U.S. federal tax obligations for the previous five years.

Link

Link

Maybe the government has thought this out more than we think.


Ouch.

FINALLY: Reader Michael Hauk writes:


I’m sure you are getting boatloads of emails on this subject, but here is one more data point:

I am a physician in a highly paid and understaffed specialty. Many of my colleagues are openly discussing going part-time to lower our tax exposure, should Obama get his socialist wish-list through Congress. I did my medical training in the military, and had frugality instilled in my make-up by parents and grandparents who lived through the (real) Depression. My family and I already live well below our means, and we can live just as well on less. Much, much less.

Obama believes healthcare is a right. Well, good luck fulfilling that promise when those of us who provide it decide it’s not worth it anymore…


They'll be going after slackers, hoarders, and wreckers . . . . More seriously, I don't think the government would see a shortage of doctors as a problem. Instead, it's an excuse to cut costs with wait-based rationing.

 

[Redeye]

I find my odds of winning the lottery to be significantly higher than the likelihood of something like this happening.

One reaction to a putative Obama administration might be a John Galtian "strike" (read Atlas Shrugged). If this happens, the economic slowdown will have serious reprecussions, especially for us, since 85% of our exports go to the US. A permanent recession will make life tough for us (and the US recession will hurt all world economies, so there will be no one to take up the slack):

http://pajamasmedia.com/instapundit/

 

[a_majoor]

I find my odds of winning the lottery to be significantly higher than the likelihood of something like this happening.

While I am delighted at your ability to win lotteries, the "strike" is driven by a combination of the immutable laws of economics (incentives and rewards as motivators to human action) and human nature. The only real question is how many people will take strike action under a putative Obama administration (or even in 2010 under a McCain administration as a Democrat Congress allows the tax cuts to expire), and what sort of action the administration and the Congress will take as tax revenues and economic activities erode?

We will live in interesting times.

 

[Redeye]

Well, given that Obama's tax plans really aren't that drastic, you are not going to see masses of high-income professionals suddenly decide that they no longer have any incentive to work.  To suggest so is utterly preposterous.

In any case, I'm glad it's over and done with - and with what I view to be the best possible result.

While I am delighted at your ability to win lotteries, the "strike" is driven by a combination of the immutable laws of economics (incentives and rewards as motivators to human action) and human nature. The only real question is how many people will take strike action under a putative Obama administration (or even in 2010 under a McCain administration as a Democrat Congress allows the tax cuts to expire), and what sort of action the administration and the Congress will take as tax revenues and economic activities erode?

We will live in interesting times.

 

[a_majoor]

Well, given that Obama's tax plans really aren't that drastic, you are not going to see masses of high-income professionals suddenly decide that they no longer have any incentive to work.  To suggest so is utterly preposterous.

Raising marginal tax rates, removing caps on FICA and other levies and undermining welfare reform by introducing tax credits to people who do not pay tax is pretty radical. The stock market is already speaking (as it reacts to the prospects of future earnings) by dropping 500 points, and continuing down.

We not only need to be ready to react to counterproductive tax policy and protectionist legislation and regulation coming from the Congress and the Administration, but also potential collateral damage as other US trading partners react to protectionism and weakening US markets.

http://www.pajamasmedia.com/instapundit/

Well, the stock market is certainly tanking:


Major indexes have lost about 10 percent since Barack Obama was elected president -- a vote preceded by a steep rally -- and the losses represent the Dow's worst two-day percentage decline since the October 1987 crash.


Is it really fair to blame this on Obama? I don't know, but those who thought he was going to bring about a stock market rally by being elected have certainly turned out to be wrong.

UPDATE: Reader Jonathan Adams thinks it's fair to blame Obama, and cites this story: China urges Obama to respect free trade, defends currency policy. Adams comments: "If even the Communists worry about Obama’s violation of free trade principles, I think it’s reasonable to put failure to assuage the fears of those who expect and rely upon a free market squarely on his shoulders. Yes, the headline has a distinct Orwellian feel to it, but in context with the pre-election statements and post-election market moves … what if they’re serious?"

ANOTHER UPDATE: The breakdown of denial?

 

[Redeye]

Are the tax credits refundable or non-refundable - I got the impression in a quick read that they are non-refundable so really they just make sure more people at the lower end of the income spectrum come off the tax rolls.

The stock market is finding footing again - and its reactions to the election of Obama being president are difficult to isolate from the various factors impacting market movements.  Historically speaking, markets have done better under Democratic presidents, interestingly.

My biggest concern would be if Obama actually persues protectionist strategies, because you do not have to be a genius in the field of economics to know that protectionism is a bad policy decision.  I'm confident, however, that he will not take too many drastically protectionist steps.  He is not going to abrogate NAFTA, nor would I suspect that he would walk out on any other trade agreements.  I do like the idea of putting some emphasis on labour and environmental standards in future trade negotiations, but I don't see any real scope for renegotiation of existing deals on those grounds.

When it comes to taxes and budgets, clearly there has to be drastic measures and the work ahead is going to be very difficult.  The US Social Security system is unsustainable, the cost of the Iraq war is causing massive deficits, and that cannot continue.  What benefit has the invasion of Iraq created for the United States?  None that I can think of - certainly none that justifies the cost.  Perhaps if the supposed justifications for the invasion had been true (that Saddam Hussein had been in league with Al Qaeda, something anyone with a basic understanding of either would know is unlikely, or that Iraq had an active WMD program), then some benefit could be shown, but that is simply not the case.  As for other policy matters - FICA and such levies have to increase - or the benefits have to shrink.  Otherwise all that's happening is a massive debt is being accumulated that will simply have to be reckoned with by the next generation.  That's why I don't understand why Republicans claim moral high ground on fiscal conservatism, because it was Bill Clinton that balanced budgets and ran surpluses. George Bush doled out tax cuts while allowing spending to get completely out of control, and that has to be reconciled.  At some point the US will have to pay the piper, after all.

Raising marginal tax rates, removing caps on FICA and other levies and undermining welfare reform by introducing tax credits to people who do not pay tax is pretty radical. The stock market is already speaking (as it reacts to the prospects of future earnings) by dropping 500 points, and continuing down.

We not only need to be ready to react to counterproductive tax policy and protectionist legislation and regulation coming from the Congress and the Administration, but also potential collateral damage as other US trading partners react to protectionism and weakening US markets.

http://www.pajamasmedia.com/instapundit/

 

[tomahawk6]

The the most common  tax credit is the Earned Income Tax Credit. You dont even have to have a kid to qualify just less than $12500 in income.

The Earned Income Tax Credit (EITC) sometimes called the Earned Income Credit (EIC), is a refundable federal income tax credit for low-income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.

To qualify, taxpayers must meet certain requirements and file a tax return, even if they did not earn enough money to be obligated to file a tax return.

The EITC has no effect on certain welfare benefits. In most cases, EITC payments will not be used to determine eligibility for Medicaid, Supplemental Security Income (SSI), food stamps, low-income housing or most Temporary Assistance for Needy Families (TANF) payments.

 

[a_majoor]

When it comes to taxes and budgets, clearly there has to be drastic measures and the work ahead is going to be very difficult.  The US Social Security system is unsustainable. As for other policy matters - FICA and such levies have to increase - or the benefits have to shrink.  Otherwise all that's happening is a massive debt is being accumulated that will simply have to be reckoned with by the next generation.  That's why I don't understand why Republicans claim moral high ground on fiscal conservatism, because it was Bill Clinton that balanced budgets and ran surpluses. George Bush doled out tax cuts while allowing spending to get completely out of control, and that has to be reconciled.  At some point the US will have to pay the piper, after all.

The only problem with this analysis is the proposed tax increases are large enough to provide disincentives to work and earn more income, but are not enough to generate the revenue required for the trillion or so in new spending promised by the President elect. The Speaker of the House is now weighing in with more stimulus packages as well. No cuts to benefits seem to be contemplated. By this point, with everyone holding a tin cup out to the new Administration and Congress, deficits and debt will either go totally out of control, dramatic spending cuts will have to be made or wealth will be confiscated in order to pay for it all (the rumblings about seizing 401K accounts might not be wishful thinking by the Left).

All these approaches entail problems, either dragging the US economy down further (and thus the trading partners like ourselves), igniting inflation or creating social chaos. (worst case, we can see all three). Of course the economic disincentives will create a John Galt "strike", even if it isn't a coordinated action; just millions of taxpayers fed up and adjusting their earnings downwards. I would expect the definition of "rich" to constantly be adjusted downwards, and the IRS deploying armies of accountants and police to try and find the money.

While we can all "hope" the Obama administration will "change" into a pragmatic, centrist administration, history would seem to suggest that will not be the case. The Democratic majority in the Congress will be emboldened to push hard, and there is nothing in the President elect's resume to suggest he will push back. President Clinton also tried to lurch left in his first term (and many of his proposals like Hillarycare are suspiciously like what is being proposed now), but his Presidency's record of fiscal responsibility and growth can be traced to Newt Gingritch and the "Contract with America", which provided a Republican majority in the Congress and essentially forced President Clinton's administration to govern as a (real) Republican administration. Too bad those lessons were lost after 2001....

 

[a_majoor]

The Wall Street Journal provides some sound historical perspective on the "Great Depression". The new administration and Congress seem determined to repeat the mistakes of the past, so we, as Canadians, need to start thinking about how we will deal with a large economic downturn and how we can "insulate" our economy from the external shocks that will soon be coming our way:

http://online.wsj.com/article/SB122576077569495545.html

OPINIONNOVEMBER 4, 2008
Five Myths About the Great Depression
Herbert Hoover was no proponent of laissez-faire.

By ANDREW B. WILSON
The current financial crisis has revived powerful misconceptions about the Great Depression. Those who misinterpret the past are all too likely to repeat the exact same mistakes that made the Great Depression so deep and devastating.

Here are five interrelated and durable myths about the 1929-39 Depression:

- Herbert Hoover, elected president in 1928, was a doctrinaire, laissez-faire, look-the-other way Republican who clung to the idea that markets were basically self-correcting. The truth is more illuminating. Far from a free-market idealist, Hoover was an ardent believer in government intervention to support incomes and employment. This is critical to understanding the origins of the Great Depression. Franklin Roosevelt didn't reverse course upon moving into the White House in 1933; he went further down the path that Hoover had blazed over the previous four years. That was the path to disaster.

Hoover, a one-time business whiz and a would-be all-purpose social problem-solver in the Lee Iacocca mold, was a bowling ball looking for pins to scatter. He was a government activist fixated on the idea of running the country as an energetic CEO might run a giant corporation. It was Hoover, not Roosevelt, who initiated the practice of piling up big deficits to support huge public-works projects. After declining or holding steady through most of the 1920s, federal spending soared between 1929 and 1932 -- increasing by more than 50%, the biggest increase in federal spending ever recorded during peacetime.

Public projects undertaken by Hoover included the San Francisco Bay Bridge, the Los Angeles Aqueduct, and Hoover Dam. The Republican president won plaudits from the American Federation of Labor for his industrial policy, which included jawboning business leaders to refrain from cutting wages as the economy fell. Referring to counteracting the business cycle and propping up wages, Hoover said: "No president before has ever believed that there was a government responsibility in such cases . . . we had to pioneer a new field." Though he did not coin the phrase, Hoover championed many of the basic ideas -- such as central planning and control of the economy -- that came to be known as the New Deal.

- The stock market crash in October 1929 precipitated the Great Depression. What the crash mainly precipitated was a raft of wrongheaded policies that did major damage to the economy -- beginning with the disastrous retreat into protectionism marked by the passage of the Smoot-Hawley tariff, which passed the House in May 1929 and the Senate in March 1930, and was signed into law by Hoover in June 1930. As prices fell, Smoot-Hawley doubled the effective tariff duties on a wide range of manufactures and agricultural products. It triggered the beggar-thy-neighbor policies of countervailing tariffs that caused the international economy to collapse. Some have argued that the increasing likelihood that the Smoot-Hawley tariff would pass was a major contributing factor to the stock-market collapse in the fall of 1929.

- Where the market had failed, the government stepped in to protect ordinary people. Hoover's disastrous agricultural policies involved the know-it-all Hoover acting as his own agriculture secretary and in fact writing the original Agricultural Marketing Act that evolved into Smoot-Hawley. While exports accounted for 7% of U.S. GDP in 1929, trade accounted for about one-third of U.S. farm income. The loss of export markets caused by Smoot-Hawley devastated the agricultural sector. Following in Hoover's footsteps, FDR concentrated on trying to raise farm income by such tactics as setting quotas on production and paying farmers to remove acreage from production -- even though this meant higher prices for hard-pressed consumers and had the effect of both lowering productivity and driving farmers off their land.

- Greed caused the stock market to overshoot and then crash. The real culprit here -- as in the housing bubble in our own time -- is the one identified by the economic historian Charles Kindleberger in the classic book "Manias, Panics, and Crashes": a speculative fever induced by excessively easy credit and broken by the inevitable return to more realistic valuations.

In the late 1920s, cheap and easy money fueled a tremendous increase in margin trading and a proliferation of "investment trusts" that offered little in the way of dividends or demonstrable earnings per share, but still promised phenomenal capital gains. "Speculation," as Kindleberger neatly defined it, "involves buying for resale rather than use in the case of commodities, and for resale rather than income in the case of financial assets."

The last thing Hoover wanted to do upon coming to office was to rein in the stock market boom by allowing interest rates to rise to a more normal level. The key to prosperity, in his view, lay not in sound money and rising productivity, but in letting the good times roll -- through government action aimed at maintaining high wages and high stock market valuations.

- Enlightened government pulled the nation out of the worst downturn in its history and came to the rescue of capitalism through rigorous regulation and government oversight. To the contrary, the Hoover and Roosevelt administrations -- in disregarding market signals at every turn -- were jointly responsible for turning a panic into the worst depression of modern times. As late as 1938, after almost a decade of governmental "pump priming," almost one out of five workers remained unemployed. What the government gave with one hand, through increased spending, it took away with the other, through increased taxation. But that was not an even trade-off. As the root cause of a great deal of mismanagement and inefficiency, government was responsible for a lost decade of economic growth.

Hoover was destined to fill the role of the left's designated scapegoat. Despite that, the one place where he and FDR truly "triumphed" was in enlisting the support of leading writers and intellectuals for government planning and intervention. This had a lasting effect on the way that generations of people think about the Great Depression. The antienterprise spirit among thought leaders of this time (and later) extended to top business publications. "Do you still believe in Lazy-Fairies?" Business Week asked derisively in 1931. "To plan or not to plan is no longer the question. The real question is who is to do it?"

In his economic policies and his incessant governmental activism, Hoover differed far more sharply with his Republican predecessor than he did with his Democratic successor. Calvin Coolidge, president from 1923 to 1929, made no secret of his disdain for Hoover, who served as his secretary of commerce and won praise from such highly regarded liberals as John Maynard Keynes and Jean Monnet. "That man has offered me unsolicited advice for six years, all of it bad," Coolidge said. He mockingly referred to Hoover as "Wonder Boy."

With the vitality of U.S. and world economies at stake, it is essential that the decisions of the coming months are shaped by the right lessons -- not the myths -- of the Great Depression.

Mr. Wilson, a former Business Week bureau chief, is a writer based in St. Louis.

 

[Edward Campbell]

Here is more, on the Canadian front, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail web site:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081112.wflaherty1112/BNStory/Business/home

Ottawa pushes to get credit markets working

RICHARD BLACKWELL and HEATHER SCOFFIELD AND JOHN PARTRIDGE

Globe and Mail Update
November 12, 2008 at 9:52 AM EST

TORONTO — Ottawa has announced three new aggressive measures to get Canada's credit markets back in working order.

Finance Minister Jim Flaherty said Wednesday in Toronto the government would add $50-billion to its mortgage purchase program. He has also agreed to slash the price the government is charging to Canadian banks to insure their wholesale lending.

At the same time, the Bank of Canada is injecting another $8-billion into money markets over the next few weeks, in one-month money, through a new Canadian-dollar term lending facility it is setting up.

Mr. Flaherty said the government has already made significant moves to support the financial sector, and credit markets have recently improved, but “we have to expect an extended period of stress in global credit markets.”

This could limit the availability of credit to households and businesses in the months ahead, he said.

Mr. Flaherty said he met with senior bankers Wednesday morning, and his message to them was that “we each have an important role to play. It is up to private sector lenders to keep on doing their job, making loans to credit-worthy people and enterprises of all sizes. It is up to governments to step in when markets are profoundly disrupted, so that private sector lenders can maintain access to the funds they need to keep lending and supporting economic growth.”

The move to buy up more mortgage pools should make consumer and mortgage loans “more affordable and more available,” Mr. Flaherty said. “At a time when GDP growth is slowing down, it will help companies to invest in the new productive technologies we need to move our economy forward.”

Gordon Nixon, chief executive officer of Royal Bank of Canada, the country's largest lender, welcomed Wednesday's changes.

“Mr. Flaherty's announcement was a constructive step in improving the functioning of the financial markets,” he said, through a spokeswoman. “It helps ensure consumers and businesses have access to credit and Canadian banks continue to operate from a position of strength.”

Eric Lascelles, chief economics strategist at TD Securities said the moves should help ease the crunch.

“Canada has stepped up to the plate in a major way this morning, announcing three major new actions today, all designed to crack the nut that is the credit crunch,” Mr. Lascelles said in a note to clients.

Mr. Flaherty's announcement means the government will now buy up to $75-billion of insured mortgage pools from the major banks, up from $25-billion.

He told reporters he made the move because he now expects an “extended period of stress in global credit markets.” The extended mortgage purchase program will earn a “modest” rate of return for the government, but there will be no addition risk for taxpayers, Mr. Flaherty added.

In addition to increasing the amount of money available to buy mortgage debt, the Department of Finance also slashed the price it will charge banks for guaranteeing their loans.

The change in the fees on bank lending insurance will ensure that Canadian banks “are not put at a competitive disadvantage by policy actions in other countries,” said Mr. Flaherty, When he looked at pricing of similar programs in other countries, it became apparent the Canadian program had to be changed to be more competitive, he said.

The two changes in pricing will effective cut the fees for the lending insurance by half a percentage point.

Commercial banks have complained loudly that the loan guarantee program designed by Ottawa a few weeks ago was too expensive to be of much use.

While other countries' banks could buy what amounts to insurance at a low price, Canadian banks were paying higher rates. The program was only useful for banks in dire trouble, and was putting the Canadian financial institutions at a competitive disadvantage globally.

In Ottawa, the Bank of Canada said it will put the additional $8-billion into one-month money markets, spread out in four auctions over the next few weeks, through a newly created Canadian-dollar term loan facility.

The Bank of Canada has hinted heavily in recent weeks that it had further measures in store, to make sure financial institutions have cash on hand to finance their transactions.

Financial institutions can post almost any kind of loan on their books as collateral, in order to take part in the auctions, the bank said.

“By providing greater flexibility for liquidity provision with respect to eligible collateral, the [new facility] will facilitate further improvement in money and credit markets.”

Canadian banks have been pressuring Ottawa to boost their help for the sector, and all countries have been urged, in a series of international meetings, to do much more in order to get the global economy back on track.

While lending spreads in some markets have edged down gradually in the past few weeks, Canada's key spreads have not moved much for a month, suggesting a lingering risk aversion among banks in Canada.

“At a time of considerable uncertainty in global financial markets, this action will provide Canada's financial institutions with significant and stable access to longer-term funding,” Mr. Flaherty said in a statement. “This extension of the program to purchase insured mortgages will further support the availability of credit, which will benefit Canadian households, businesses and the economy. In addition, it will earn a modest rate of return for the government with no additional risk to the taxpayer.”

Mr. Flaherty indicated last weekend that he understood the banks' complaints, and would consider acting. But Bank of Canada Governor Mark Carney said in an interview that Ottawa had carefully designed the program, and suggested Canadian banks weren't at a global disadvantage because they are in far better shape than other banks around the world.

Mr. Flaherty told reporters Wednesday that the government is still on track to report a small budget surplus for the current fiscal year, “and I emphasize small.”

The fall economic update coming in the next few weeks will provide updated numbers, he said.

He also said Ottawa is “monitoring” the automotive industry, but it has not yet decided what action can be taken to support that sector. He said Industry Minister Tony Clement is talking to the auto companies “and we'll see what we're able to formulate for the industry.”

While I am, philosophically, inclined towards a ”hands off, let the market solve itself” view, we are caught in a subsidize everything spiral – approaching the point where well regulated, well managed Canadian banks are being subjected to unfair competition by the high level of US and European subsidies that, de facto, reward incompetent and dishonest management and poorly regulated systems. American and European banks that ought to be in the garbage dump - would be on the garbage dump if the national governments had been even modestly competent – are being given money that will allow them to grow and prosper in markets that would be, in some cases are, improperly, ‘closed’ to Canadian banks by virtue of too much 'easy money' in US and European markets.

 

[a_majoor]

Ayn Rand was right all along.....

http://corner.nationalreview.com/post/?q=YmEzNzFjOTVlM2I2ZmFiYjhjN2U0NzFmYThjY2FkYjU=

At What Point Does Atlas Shrug?   [Peter Kirsanow]

During the presidential election campaign many were dumbfounded upon hearing for the first time that at least a third of Americans pay no income taxes whatsoever. The Tax Foundation notes that in 2006, 45.6 million filers (33%) paid no income tax whatsoever. Under current law, in 2009 47 million filers—representing approximately 96 million individuals— will pay no income tax.

The Foundation maintains that under Obama's tax plan 63 million filers— representing 44% of all returns— will pay no income tax. In contrast, in 1985, just 16.5% of filers paid no income tax. 

It appears Obama wasn't kidding about redistributing the wealth, although he appears to be somewhat late to the game.

At the other end of the spectrum, IRS data show that in 2006 the top 10% of all filers ( $109,000 and above in taxable income) paid 71% of all income taxes. The top 25% ( $65,000 and above) paid 86% of all income taxes.

Exempting huge swaths of the populace from the income tax burden while piling that burden on a shrinking cohort is a prescription for economic, political and social dysfunction.

Eventually, even fans of steeply progressive taxation might be compelled to ask, "Do the top 25%  of filers really access/consume 86% of all government services?" Obviously, the relationship between government and citizen isn't a retail one, but we shouldn't be surprised if the imbalance displayed by the above figures begins to prompt such unvarnished questions around kitchen tables across the country.

Sure, many of those who don't pay income taxes still pay excise, payroll, etc. taxes. But income taxes represent the biggest tax bite by far. The anger and resentment at bailing out Wall Street, Detroit, etc. isn't going to be dampened by the belief that nearly half of Americans won't be doing much bailing at all.

 

[chanman]

One reaction to a putative Obama administration might be a John Galtian "strike" (read Atlas Shrugged). If this happens, the economic slowdown will have serious reprecussions, especially for us, since 85% of our exports go to the US. A permanent recession will make life tough for us (and the US recession will hurt all world economies, so there will be no one to take up the slack):

http://pajamasmedia.com/instapundit/

No strike.  Expect a boom in the underground economy though as the rewards for participating 'off the books' will be higher than before.

 

[a_majoor]

No strike.  Expect a boom in the underground economy though as the rewards for participating 'off the books' will be higher than before.

Chanman, that is the practical unfolding of the strike.

If US political culture is changed because of the Obama Administration, then our and the world's long term prospects are much bleaker. Without the creative drive of the US economy to power the rest of the world, the global economy will stagnate (and us along with it)

http://www.usnews.com/blogs/capital-commerce/2008/11/21/how-tom-daschle-might-kill-conservatism.html

Money & Business

How Tom Daschle Might Kill Conservatism
November 21, 2008 02:00 AM ET | James Pethokoukis | Permanent Link | Print

The GOP strategist had been joking about the upcoming presidential election and giving his humorous assessments of the candidates. Then he suddenly cut out the schtick and got scary serious. "Let me tell you something, if Democrats take the White House and pass a big-government healthcare plan, that's it. Game over. Government will dominate the economy like it does in Europe. Conservatives will spend the rest of their lives trying to turn things around and they will fail."

And it turns out that the fearsome harbinger of free-market doom is the mild-mannered ex-U.S. senator with the little, red glasses, Tom Daschle. He'll be the guy shepherding President Barack Obama's healthcare plan through Congress via his probable role as secretary of health and human services. At the core of Daschle's thinking on the subject is the creation of a "Federal Health Board that would resemble our current Federal Reserve Board" and ensure "harmonization across public programs of health-care protocols, benefits, and transparency." (Forget secretary of state, Hillary Clinton should shoot for chairman of Fed Health and run one seventh of the U.S. economy.) And the subject of that "harmonization" would be a $100 billion to $150 billion a year plan that would let individuals (and small businesses) buy insurance from private companies or from a government plan.

Daschle and the Obamacrats certainly have the momentum: a near-landslide presidential election victory, at least 58 Democratic votes in the Senate, and a nasty recession that will make many Americans yearn for economic security. Already the health insurance companies seem set back on their heels. The industry's trade organization now says it would accept new rules requiring them to cover pre-existing conditions as long as there was a universal mandate for all Americans to have health insurance. On top of all that, Obama clearly wants to make healthcare reform a priority in his first term, as evidenced by the selection of a heavy hitter like Daschle. And even if he wasn't interested, Congress sure is, with Max Baucus and Ted Kennedy readying a plan in the Senate. A few observations:

1) Passage would be a political gamechanger. Recently, I stumbled across this analysis of how nationalized healthcare in Great Britain affected the political environment there. As Norman Markowitz in Political Affairs, a journal of "Marxist thought," puts it: "After the Labor Party established the National Health Service after World War II, supposedly conservative workers and low-income people under religious and other influences who tended to support the Conservatives were much more likely to vote for the Labor Party when health care, social welfare, education and pro-working class policies were enacted by labor-supported governments."

Passing Obamacare would be like performing exactly the opposite function of turning people into investors. Whereas the Investor Class is more conservative than the rest of America, creating the Obamacare Class would pull America to the left. Michael Cannon of the Cato Institute, who first found that wonderful Markowitz quote, puts it succinctly in a recent blog post: "Blocking Obama's health plan is key to the GOP's survival."

2) Shrinking government would get exponentially tougher. Republicans would face the same problem with healthcare that they currently do with Social Security, persuading people to trade one in the hand (the current system) for two in the bush (a reformed system). And we see how well that has worked out. Combine Obamacare with plans to take away the tax-advantaged status of 401(k) plans and IRAs and you would end up with government responsible for both healthcare and retirement. The big-government constituency would grow and deepen. And remember that fewer and fewer people are paying the incomes taxes that would help pay for increased government services. That breakage of the linkage between taxes and government "benefits" creates toxic incentives for more of both — and an economy more shackled than ever by taxes, debt, and regulation.

3) Republicans better earn to competently talk healthcare. John McCain's healthcare plan was perhaps the most provocative policy proposal of the entire 2008 campaign. Too bad he could neither fully explain how it worked nor persuasively argue why it was better than Barack Obama's plan. Also too bad since his plan would have smartly reduced healthcare costs by getting companies out of the healthcare benefits business and empowering individuals to buy insurance on their own. This would have helped fix what economist Arnold Kling calls the insurance vs. insulation problem: "Insulation relieves the patient of the stress of making decisions about treatment. The patient also does not have to worry about shopping around for the best price. The problem with insulation is that it is not a sustainable form of healthcare finance."

Another interesting healthcare reform option is highlighted by Ross Douthat and Reihan Salam in the book Grand New Party. Uncle Sam would require individuals and families to put 15 percent of their income into health savings accounts. If you run out of money before year-end, the government steps in. If you don't, you get the money back or it rolls over into a retirement account. Of course, any conservative alternative would be easier to implement if it doesn't first have to kill an existing nationalized health plan. But thanks to Tom Daschle, that is just what might have to happen.

 

[chanman]

Chanman, that is the practical unfolding of the strike.

If US political culture is changed because of the Obama Administration, then our and the world's long term prospects are much bleaker. Without the creative drive of the US economy to power the rest of the world, the global economy will stagnate (and us along with it)

http://www.usnews.com/blogs/capital-commerce/2008/11/21/how-tom-daschle-might-kill-conservatism.html

Isn't it only a strike if you stop working?  Seems to be an unusual way of saying 'widespread tax fraud' 

 

[a_majoor]

Isn't it only a strike if you stop working?  Seems to be an unusual way of saying 'widespread tax fraud' 

The John Galt strike is people stopping working or refusing to put forth all or even most of their energies to create wealth (downsizing companies, laying off staff, refusing to take on new clients or new contracts etc.) If you are not making wealth, then there is nothing for the State to tax or seize from you except your accumulated savings, and there are ways to convert those to forms which are illiquid or otherwise not usable for the State. Widespread tax evasion is a simple form of the Strike, and the growth of the underground economy is an attempt to escape from taxation and regulation. If you had the abilities of the hero's in "Atlas Shrugged", then living undetected in a hidden valley in Colorado might be just the thing for you. Lesser mortals like myself will have to be content with our abilities.

Even the most vicious police state or the most aggressive IRS tax auditors with sweeping powers cannot tax or seize that which does not exist, and certainly there is no known way to force people to work at their full potential (how do you know what a person's full potential is anyway?). A crackdown against the underground economy will simply displace money with barter or other forms of non monetary trade.

 

[a_majoor]

The "New" New Deal will be as effective as the old New Deal (i.e. not at all). This will have pretty predictable effects on us as well:

http://www.washingtonpost.com/wp-dyn/content/article/2008/11/28/AR2008112802370.html

Same Old New Deal?

By George F. Will
Sunday, November 30, 2008; Page B07

Early in what became the Great Depression, John Maynard Keynes was asked if anything similar had ever happened. "Yes," he replied, "it was called the Dark Ages, and it lasted 400 years." It did take 25 years, until November 1954, for the Dow to return to the peak it reached in September 1929. So caution is sensible concerning calls for a new New Deal.

The assumption is that the New Deal vanquished the Depression. Intelligent, informed people differ about why the Depression lasted so long. But people whose recipe for recovery today is another New Deal should remember that America's biggest industrial collapse occurred in 1937, eight years after the 1929 stock market crash and nearly five years into the New Deal. In 1939, after a decade of frantic federal spending -- President Herbert Hoover increased it more than 50 percent between 1929 and the inauguration of Franklin Roosevelt -- unemployment was 17.2 percent.

"I say after eight years of this administration we have just as much unemployment as when we started," lamented Henry Morgenthau, FDR's Treasury secretary. Unemployment declined when America began selling materials to nations engaged in a war America would soon join.

In "The Forgotten Man: A New History of the Great Depression," Amity Shlaes of the Council on Foreign Relations and Bloomberg News argues that government policies, beyond the Federal Reserve's tight money, deepened and prolonged the Depression. The policies included encouraging strong unions and higher wages than lagging productivity justified, on the theory that workers' spending would be stimulative. Instead, corporate profits -- prerequisites for job-creating investments -- were excessively drained into labor expenses that left many workers priced out of the market.

In a 2004 paper, Harold L. Cole of the University of California at Los Angeles and Lee E. Ohanian of UCLA and the Federal Reserve Bank of Minneapolis argued that the Depression would have ended in 1936, rather than in 1943, were it not for policies that magnified the power of labor and encouraged the cartelization of industries. These policies expressed the New Deal premise that the Depression was caused by excessive competition that first reduced prices and wages and then reduced employment and consumer demand. In a forthcoming paper, Ohanian argues that "much of the depth of the Depression" is explained by Hoover's policy -- a precursor of the New Deal mentality -- of pressuring businesses to keep nominal wages fixed.

Furthermore, Hoover's 1932 increase in the top income tax rate, from 25 percent to 63 percent, was unhelpful. And FDR's hyperkinetic New Deal created uncertainties that paralyzed private-sector decision making. Which sounds familiar.

Bear Stearns? Broker a merger. Lehman Brothers? Death sentence. The $700 billion is for cleaning up toxic assets? Maybe not. Writes Russell Roberts of George Mason University:

"By acting without rhyme or reason, politicians have destroyed the rules of the game. There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing. Everything is up in the air and as a result, the only prudent policy is to wait and see what the government will do next. The frenetic efforts of FDR had the same impact: Net investment was negative through much of the 1930s."

Barack Obama says that the next stimulus should deliver a "jolt." His adviser Austan Goolsbee says that it must be big enough to "startle the thing into submission." Their theory is that the crisis is largely psychological, requiring shock treatment. But shocks from government have been plentiful.

Unfortunately, one thing government can do quickly and efficiently -- distribute checks -- could fail to stimulate because Americans might do with the money what they have been rightly criticized for not doing nearly enough: Save it. Because individual consumption is 70 percent of economic activity, St. Augustine's prayer ("Give me chastity and continence, but not yet") is echoed today: Make Americans thrifty but not now.

Obama's "rescue plan for the middle class" includes a tax credit for businesses "for each new employee they hire" in America over the next two years. The assumption is that businesses will create jobs that would not have been created without the subsidy. If so, the subsidy will suffuse the economy with inefficiencies -- labor costs not justified by value added.

Here we go again? A new New Deal would vindicate pessimists who say that history is not one damn thing after another, it is the same damn thing over and over.

georgewill@washpost.com

 

[tomahawk6]

China devalued the yuan by 70 basis points and is expecting growth next year of 7-9%.

 

[a_majoor]

This effect will have more fall out for Canada as the US economy has to digest this mess, but should also serve as a warning to the "Coalition of the Inept" and their supporters about the dangers of "stimulating" the economy:

http://www.rep-am.com/articles/2008/12/07/opinion/384217.txt

Government bubble bursting

Remember in the 1990s when speculators irrationally bid up Internet companies' stock prices? They created the dot-com bubble, which burst in 2000 triggering the Dick Blumenthal Bear Market and 2001-02 recession.

Bubble is a word heard a lot nowadays to describe the artificial inflation and disastrous deflation of the housing and credit markets. Starting with the Community Reinvestment Act of 1977, the government made it its business to make home mortgages more available to low- and moderate-income people who couldn't afford them, despite prescient warnings the act would distort credit markets and lead to unsound lending by public and private institutions.

Thanks to political pressure from Sen. Christopher Dodd and others, the act later was expanded while less-restrictive federal regulations were enacted and tougher ones were rejected. All this led housing and credit markets to grow too large for the economy to sustain; when economy inevitably tanked, the bubbles burst. And despite Sen. Countrywide's assurances that all was well, Americans soon found themselves in the throes of the worst recession in decades.

However, the racket arising from the Wall Street crash and the collapse of the housing and credit markets is muffling the pop of the government bubble, the dire consequences of which are only beginning to appear. The government bubble is inexorably tied to the rapid economic expansion and steep stock-market advance fueled by the housing and credit bubbles. For years, governments were awash with surpluses. Politicians naturally spent every cent to make Big Government bigger even as they borrowed against future tax windfalls, cemented new "fixed costs" and put government growth on autopilot.

The collapse of the housing and credit bubbles will mean a painful, protracted period of economic contraction. But what happens when government bubbles burst? Politicians patch the hole with more debt and higher taxes, and government continues growing.

Such is the insidiousness of Big Government, and Connecticut is the prime example. As history has shown repeatedly, budget surpluses pile up in good times, allowing politicians to spend freely. They create new social programs and expand existing ones. They pad public payrolls, build more government edifices and otherwise squander the people's hard-earned money. But they dismiss talk of returning the surpluses to taxpayers because it's contrary to their philosophy of, to borrow a phrase, spreading the wealth around.

Since this government growth is incremental, its ruinous cumulative effect isn't fully apparent until the economy goes south and government revenues plummet. But in bad times, politicians vigorously defend their empire as more necessary than ever and argue further expansion is imperative if they are to help the people hurt by recession. This inevitably leads to tax increases that, to borrow a phrase, fan the flames of recession. But after the economy rebounds and surpluses return, the tax increases remain because politicians need the revenues to scratch their insatiable spending itch.

Last week, the nation's governors were in Philadelphia pleading with President-elect Obama to help them reinflate their government bubbles with a federal bailout for the states. Best-case scenario: He and Congress agree on a package that creates busy work for Democratic constituencies, rewards more bad actors, encourages sloth and provides token aid for deficit reduction, but produces little in the way of permanent or even meaningful "revenue enhancement."

The governors would be better to admit, as New York's David Paterson did last week, that "we spend too much." Then, they might recognize that just as the housing bubble produced a glut of houses, so, too, did the government bubble produce a glut of unaffordable programs and unnecessary expenses. And just as the housing bubble is spawning a record number of mortgage foreclosures because millions of people borrowed beyond their means, so, too, has the government bubble spawned record deficits because politicians spent beyond what is fiscally sustainable.

Connecticut has never faced a fiscal crisis of this magnitude. This year's budget is springing leaks faster than our state "leaders" can fill them; conservatively, the state faces more than $10 billion in deficits over the next three years. The government bubble has burst, but with disaster comes opportunity. Gov. Rell and lawmakers have a once-in-a-decade chance to tame the Big Government beast. It's not nearly as difficult as they're making it out to be. They can roll back the mindless mandates that needlessly add untold billions in costs borne by state and local governments. They can eliminate the wholesale duplication of services. They can remove their cronies from make-work jobs. They can streamline government to bring it more in line with what the state Constitution requires or allows.

We hope to be proven wrong. But the players crafting the response to this unpreceded fiscal meltdown are the people chiefly responsible for it, and they are fully invested in Big Government's perpetuation, so reinflation of the government bubble — by far the more fiscally, economically, socially and culturally destructive choice — seems inevitable. In fact, it's already begun. And as always, Connecticut's resulting economic and population losses will be other states' gains.