Making Canada Relevant Again- The Economic Super-Thread

[a_majoor]

Not seizing the wealth. Not redistributing the wealth. Not taxing the wealth. EARNING the wealth (and creating new wealth in the process):

http://inspiringyoutothink.blogspot.com/2011/11/heres-how-i-help-close-income-gapand.html

Here's How I Help Close The Income Gap...And The Left?

US wealth gap between young and old is widest ever

So the left often decries the injustice of income gaps. Got it.  We all want to close income gap's so people can earn more!  What is the left's solution?  Here's a fanatical-right-wing nut's crazy wacky idea in practic: invest in people.  Here's the inside scoop as to what I have been trying to do with our (now 35) employees:

1.  Value people.  Assets have a value...how much more do people?  We value people through focusing on results while providing means/training/thinking to get results.  Work with people and recognize change is a process...where you are willing there is a way. 

2. Handle conflict with humility and an open mind.  The old days of monarchy ruling with an iron fist does not work.  We set our standards clearly and encourage people to operate within them...for all our benefit.  Help people give and receive feedback in a way that advances discussions, not points fingers/accuses and blames.

3. Articulate that giving raises actually helps our company, it does not hurt it.  It is in my best interest to give employees a raise that is deserved!  The free market will either pull them away, or I buck up.  The good news is, the higher the wage of an employee, the more value they add (often)!  I try to destroy the 'stigma' of cheap bosses by striving for results and being excited along with the employee when a raise recognizes their results.  We also provide feedback, reviews and coaching to those who 'are strugglign' to get the results our customers demands.

4. Re-invest profits.  Re-investing profits is sadly viewed as greedy by some (many?) on the left.  Banks get made fun of for their 'winfall' profits.  The reality is, they (in conjunction with profit) provide the capital required to invest in people, machines, structure and innovation...requirements within a free market.  By reinvesting in profits, I have experienced that we create additional area's of responsibility that often require one at a higher pay to properly manage.  By investing in people, we typically hire from within and are able to provide that job at a higher wage, get the results and still make a profit.  It's an exciting win-win!.

Did you notice something that was missing?  I did not cry for the government to be the solution for closing the income gap.  I am practicing a solution (it's working) and that is powerful and exciting.  Join me in being a better, more caring boss.  Join me in being a better employee. Learn more. Think more. Help more. Serve more. We can close this income gap...we just have to work at it.  Now tell me, what is so 'wing-nutty' about this?

Of course it is easy to break the virtuous circle in may ways, imposing taxes and regulations that increase the cost of the employee reduces the value to the employer, who needs to generate something on the order of $200,000/employee to be profitable and successful, rather than treading water. IF the employee's cost to the employer is raised, then the amount of sales would have to go up pretty drastically, or cost cutting will need to be imposed (and what is the greatest single expense?)

 

[a_majoor]

This is very relevant for Canada, we see the same symptoms in Ontario and Quebec, despite its abundant natural resources and educated population is far behind the rest of Canada in terms of economic growth. Comparing BC to Alberta or looking at Saskatchewan before and after the Saskatchewan Party are other indicators. People do make rational choices:

http://warlocketx.wordpress.com/2011/11/14/america-has-gotten-lazy/

America Has Gotten Lazy

14 November 2011 in Definitions and clarifications, Topical

…at least according to the President. (via The Professor)

What this is, is the opening shots in the inevitable decay of a Socialist economy. When productivity starts dropping and there are fewer resources available for redistribution, the leadership notes that the people aren’t working as hard as they used to. The obvious conclusion is that the people have gotten lazy, and the nomenklatura then start on a campaign to get people to work harder and more effectively. Look up some political posters from the USSR of the Twenties and Thirties for examples.

It isn’t true. What’s happening is that people are working more virtuously — in Socialist class-warfare terms.

The fundamental postulate of class warfare is that people who have “more” are to be envied. If they won’t give some (much) of their “more” to those who have “less”, they are Evil. People who are evil should be punished, and one way of punishing them is to take their stuff away.

Productive people always have “more” than unproductive ones, and as a rule feel proprietorial toward it. If they made it or grew it themselves, they feel that it’s theirs and will defend it. That means they don’t want to give it to those who have “less”, and under class warfare that makes them Evil. Nobody wants to be considered Evil, so people avoid doing things that gain them that label. Since productivity always results in the charge, the people choose virtue over evil — and productivity disappears. If there is no production, there is no wealth for the leadership class to control. The leadership class sees that and concludes that the people are lazy, where in reality the people are choosing virtuous behavior in the terms the leadership class have defined.

Several people have noted that college students today turn up their noses at the prospect of working for private corporations, instead choosing “public service” (a.k.a. Government employment) or NGOs that promote Good Causes. (See also: “Occupy Wall Street”) Working for a corporation would result in the corporation making a profit and therefore having “more” which it doesn’t choose to give to those who have “less”. It is therefore Evil to work for a corporation, and virtuous to work in organizations that attempt to suppress the Evil and distribute the “more” to those who have “less”. People who choose virtue in that context supply two hits to the economy. They do not themselves produce, and they work — work hard and virtuously — to suppress Evil productive activity.

A working definition of “Socialist” might well be “somebody who doesn’t realize that that cycle exists”. No Socialist can recognize the process, because it directly contradicts their ideals. They see that productivity is dropping and that as a result they have fewer resources to redistribute, and have no explanation for the effect. Since productivity is the result of work, they conclude that the people don’t want to work — that they are “lazy”.

But they can go to the factories and mills, or to the bureaucracies that support them, and see people working hard and virtuously. “Lazy” isn’t a sufficient explanation. Something must be preventing production, some malignant force that stops the production of wealth and makes their noble goals unattainable. The obvious candidate for that force is the people who say that Socialism doesn’t work. Those evil bastards must be sabotaging the virtuous folk, reducing production, creating poverty because they like poverty. If they didn’t like poverty, they would overwhelmingly support the actions of the Socialist idealists to eliminate it. It’s sabotage, pure and simple; tossing monkey-wrenches into the works just for the delight of preventing Good Things from happening. You’ll find those posters in the pre-WWII Soviet Union as well, growing more strident as the years pass.

I, personally, give it ’til about the first of the year before Barack Obama starts out on a major campaign against the “wreckers” and “saboteurs” who prevent him from achieving his Noble Goals. He and his sycophants have already started out in a small way, but for the moment the only villains they’ve identified are the “obstructionists” of the Republican-led House of Representatives and Republican Senators. It’s clear, though, that “obstructionism” isn’t sufficient to achieve the effects visible; thus the second step, “laziness”. Look for speeches vilifying “wreckers” and “saboteurs” starting in about January, if not a bit before. If you want to help Obama & Co. out, look up and translate some of Lenin’s speeches from the mid-Twenties. There’s plenty of material there that could go straight to the teleprompter without much more than substituting American idiom for Russian, and the original speeches were fairly effective; no reason to work at inventing something new. After all, that would be productive.

(Update: Reynolds reminds us that “hoarders” should be added to “wreckers” and “saboteurs”. )

 

[a_majoor]

Lessons from Europe that apply everywhere (forward this to Dalton McGuinty...)

http://danieljmitchell.wordpress.com/2011/11/17/five-lessons-for-america-from-the-european-fiscal-crisis/

Five Lessons for America from the European Fiscal Crisis

November 17, 2011 by Dan Mitchell

I’ve written about the fiscal implosion in Europe and warned that America faces the same fate if we don’t reform poorly designed entitlement programs such as Medicare and Medicaid.

But this new video from the Center for Freedom and Prosperity, narrated by an Italian student and former Cato Institute intern, may be the best explanation of what went wrong in Europe and what should happen in the United States to avoid a similar meltdown.

I particularly like the five lessons she identifies.

1. Higher taxes lead to higher spending, not lower deficits. Miss Morandotti looks at the evidence from Europe and shows that politicians almost always claim that higher taxes will be used to reduce red ink, but the inevitable result is bigger government. This is a lesson that gullible Republicans need to learn – especially since some of them want to acquiesce to a tax hike as part of the “Supercommitee” negotiations.

2. A value-added tax would be a disaster. This was music to my ears since I have repeatedly warned that the statists won’t be able to impose a European-style welfare state in the United States without first imposing this European-style money machine for big government.

3. A welfare state cripples the human spirit. This was the point eloquently made by Hadley Heath of the Independent Women’s Forum in a recent video.

4. Nations reach a point of no return when the number of people mooching off government exceeds the number of people producing. Indeed, Miss Morandotti drew these two cartoons showing how the welfare state inevitably leads to fiscal collapse.

5. Bailouts don’t work. This also was a powerful lesson. Imagine how much better things would be in Europe if Greece never received an initial bailout. Much less money would have been flushed down the toilet and this tough-love approach would have sent a very positive message to nations such as Portugal, Italy, and Spain about the danger of continued excessive spending.

If I was doing this video, I would have added one more message. If nations want a return to fiscal sanity, they need to follow “Mitchell’s Golden Rule,” which simply states that the private sector should grow faster than the government.

This rule is not overly demanding (spending actually should be substantially cut, including elimination of departments such as HUD, Transportation, Education, Agriculture, etc), but if maintained over a lengthy period will eliminate all red ink. More importantly, it will reduce the burden of government spending relative to the productive sector of the economy.

Unfortunately, the politicians have done precisely the wrong thing during the Bush-Obama spending binge. Government has grown faster than the private sector. This is why this new video is so timely. Europe is collapsing before our eyes, yet the political elite in Washington think it’s okay to maintain business-as-usual policies.

Please share widely…before it’s too late.

 

[a_majoor]

Lord Black on the disintigration of Quebec Separatism. The destruction of the National Socialist BQ is an outcome that was highly desirable, but the economic and political cost was certainly quite high. I suppose the opportunity costs of various other possible outcomes may have been even higher:

http://www.nationalpost.com/opinion/columnists/bought%2BQuebec/5771308/story.html

How we bought off Quebec

Conrad Black, National Post · Nov. 26, 2011 | Last Updated: Nov. 26, 2011 5:06 AM ET

The splintering into factions of Quebec's Parti Québécois, the rejection of the Bloc Québécois in the last federal election, Quebec's declining share of federal MPs, and polls showing a collapse of separatist enthusiasm among the province's youth, all help illustrate the overwhelming and largely unsung success of Canadian federalism.

The federalist strategy, since an outright separatist party emerged in 1976 as a principal force in Quebec, has been to concede symbolic instances of autonomy; massage money over Quebec to make its socialist nostrums more affordable and the province more dependent on the federal state; and engage in endless good-faith negotiations punctuated by upward ratchetings of the technical obstacles to secession, and to asserting an effective veto in Ottawa over federal policy. In sum, Ottawa has assisted Quebec in achieving its social-democratic, post-Catholic, exclusivist French state ruled by the senior bureaucrats - even as Ottawa diluted the possibility of independence being achieved or even desired, and shrank Quebec's influence in the country as a whole.

Canada wins this exchange. It costs $8-billion a year in transfer payments, and billions more in other preferments, but the country is secure, and Quebec has ceased to be a threat to the nation's integrity, or even a serious irritation.

Quebec is a virtual state; its taxpayers file two tax returns; the legislature is called the National Assembly; Quebec has observer status at the United Nations, is a full-fledged member of the French-speaking communauté, and has six delegates-general in some of the world's greatest cities, where friends of the regime in Quebec can go and live well and pretend to conduct international business.

The post-Catholic Quebec state now goes to almost unheard of lengths to incentivize childbirth with generous maternity and paternity leave and benefits, and day-care access. Yet the birth rate has scarcely stirred from its collapsed nadir. The endless petty harassments of non French-speaking people in Quebec have driven 800,000 people out of the province in the last 50 years, and the French-speaking population has tried to sustain itself with airlifts of Haitians and North Africans, most of whom do not have the slightest interest in Quebec nationalism, and certainly not in its independence.

The French of Quebec have the same standard of living as the non-French, and they have driven a silver stake through the heart of the ancient bugbear of North American Anglo assimilation. But they are hooked, haltered and leashed to federalism. Their fiscal incontinence (the province's debt is 95% of its GDP, and it would have to assume a share of Canada's debt as well if it seceded) and gross over-indulgence of the public service would cause an independent Quebec to suffer a Hellenistic capsize on launch. The vanity of the Quebec clerisy is consummated; there is no working class left in Quebec - it is all a happy, torpid bourgeoisie.

Only Canada's money permits Quebec to lionize lethargy and combat recession with endless public sector expansion. An independent Quebec would be under daily audit from the IMF, and would suffer imposed austerity that would generate the greatest public disorder seen in the province since the suspension of Rocket Richard in 1955 by that supreme exemplar of unilingual English-Canadian stupidity, the president of the National Hockey League, Clarence Campbell.

The price Quebec has paid for this nirvana is a constitutional Faustian bargain: It has lost all ability to frighten Canada or assert more than its natural minority influence on the federal state. Prior to this year's federal election, Canada had rarely had a majority government that was not significantly dependent on Quebec MPs. Fifty years ago, Quebec had 85% of the federal MPs of Ontario and 185% of the MPs of Alberta and British Columbia combined; the corresponding percentages will now be 64% and 100%, respectively.

The old rule of thumb was that the provincial Quebec electorate was 20% non-French federalist, 20% French federalist, 20% conservative nationalist but anti-separatist, 20% nationalists finally induced to come out of the closet as separatists by René Lévesque in the 1970s, and 20% a floating vote influenced by transitory issues and the personalities of the different contending leaders. Only incremental trick questions in 1980 and 1995 that envisioned the negotiation of sovereignty and association, i.e. one cake to eat and one to retain, got the percentage of yes votes in the referenda of those years into the 40s. The Clarity Act now requires a clear question and a substantial majority. All polls show support for Quebec separatism below a third, and failing badly with young voters.

The Canadian settlement of a happy French nanny state made prosperous by Dane geld from Alberta and British Columbia, and with declining Quebec influence in a politically more conservative Canada, appears durable and is a brilliant and typically undersung triumph of the unique, deceptively subtle, methods of Canadian federal governance. The only visible dissent of note is ex-péquiste Jean-Matin Aussant's defection to found Option Nationale, a party of one, unambiguously pursuing independence under the stirring tocsin, "Don't be afraid to lose."

More seriously, the first stirrings of profound reassessment by serious people, businessman Charles Sirois and former PQ minister Francois Legault's Coalition for the Future of Quebec, seems to seek a de-socialization of Quebec and a revival of a more prominent private sector in a nationalist but not separatist Quebec. Aussant is headed for the last (and first) round-up, but Sirois and Legault's project could have legs.

Quebec achieved and has lived the future its elites sought, except the fable of real independence, and it is a comfortable but boring cul-de-sac. Awakening Quebec from its somnolent idyll will require the courage of Dollard des Ormeaux, the eloquence of Sir Wilfrid Laurier and the cunning of Maurice Duplessis. As Dr. (Samuel) Johnson would say, I would not be surprised, but I would be astonished.

 

[a_majoor]

Some structural changes that can be made:

http://www.transparencyrevolution.com/2011/12/renaissance-and-recovery/

Renaissance and Recovery
Posted on December 6, 2011 by Phil

We have written a lot lately about the dismal economy and the prospects for recovery. Where might recovery originate? How can we get there? In his new book, Launching the Innovation Renaissance: a New Path to Bring Smart Ideas to Market Fast, Alex Tabarrok argues that the currently stagnant job market can and will turn around when our economy once again begins to focus on innovation

Tabarrok starts with the story of the Cathedral of Santa Maria del Fiore, which was constructed in Florence between the years 1296 and 1436. As the cathedral neared completion, Arte della Lana (the guild that sponsored the cathedral) had a brainstorm: they offered a prize of 200 florins and the commission to build the dome of the cathedral for whoever submitted the best proposal for doing so. The prize went to Filippo Brunelleschi, who had to invent a number of new tools and construction techniques in order to complete the dome. (His dome represented a substantial technological leap; Tabarrok points out that it was the world’s largest for the next four and a half centuries.) Notable among these inventions was a paddleboat required to carry marble down the river Arnor. For this, Brunelleschi was granted what Tabarrok describes as “arguably the world’s first patent.”

Tabarrok offers renaissance Florence as a model of an innovation-driven economy and builds his book around the five characteristics of Renaissance Florence that the US economy needs to emulate:

    Patents
    Prizes
    Education
    Global Markets
    Cosmopolitanism

The section on patents is particularly eye-opening. Tabarrok argues that our patent system has gone off the rails, and that we need to stop patenting ideas and return to patenting products, pointing out that under current law, Edison would have lost his patent on the light bulb to two earlier patent-holders who only had the idea for a light bulb. William Ed Sawyer and Albon Man would have “owned” the light bulb without ever having done the intense, exhaustive work that Edison went through in discovering the correct filament.

The section on education is good, too, although I have a small quibble. Tabarrok’s analysis of what students are majoring in versus what jobs  are likely to exist, and which jobs are likely to pay better, has been making the rounds in blogs and elsewhere recently. (We noted some interesting findings here.) However, I take Tabarrok’s emphasis on STEM — which he has in common with most of the analysis we see on the web on this subject — with a grain of salt. While I agree that we should be producing more science, technology, engineering, and mathematics majors, and that jobs in these fields tend to be more abundant and pay better than other fields, once again we see the statistics about the “glut” of visual and performing arts majors and psychology majors. Tabarrok suggests that if you want more information on the unemployability of people with these degrees you should “consult with a bellhop.”

Clever, but this ignores the fact that there have been structural changes to the job landscape, driven in part by the ascendance of the Web, and in fact there has been massive growth in demand for artists, designers, performers, and even people with a background in psychology. As I noted here (and in line with what Arnold Kling had to say a couple of weeks ago), what we perhaps need is more “artsy” majors who understand STEM, and more STEM majors who have honed their artistic and communication skills. (Plus, everybody needs to be good at selling.)

The section on prizes is very interesting, particularly the information on pharmaceuticals and how some innovative prize models might solve the problem of getting much-needed vaccinations to the developing world.

I believe that prizes, used properly, could be the catalyst for many more positive developments on a number of fronts. Consider the amazing innovations that have occurred in private space travel as fueled by the X Prize. As Tabarrok points out, the X Prize is helping to give birth to a whole new industry. I would like to see prizes driving structural changes to education, health care, and energy. I suspect we will start seeing this before too long.

I won’t bother to try to synopsize Tabarrok’s thinking on globalism, cosmopolitanism, and the coming boom. His TED talk from a couple of years back does it better than I ever could.

Tabarrok argues that, though we have significant challenges, things are uniquely converging to put us on course for a renaissance of innovation and productivity (and ultimately jobs). His last bit of advice is key: “stay optimistic.”
About Phil

Phil Bowermaster thinks, writes, and talks about emerging technologies, emerging possibilities, and the future. He brings 20+ years of management experience in the telecom and software industries to bear on opinion and analysis about how transparency is truly revolutionizing the way organizations are run. Phil is the Chief Futurist and Strategy Guy for Zapoint.
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[Edward Campbell]

See my comments in "Grand Strategy for ~."

Alex Tabarrok is enunciating a grand strategic 'vision' that is properly grounded in America's history, geography, economic and culture. It is, essentially, a soft power proposition. Some of the salient points look remarkably like what China is doing right now.

Soft power can work only when there is commensurate hard power supporting it. The hard power need not be used very often, but it must, always be there and everyone, friend, foe and competitor alike, must know that it can and will be used. This was the key error in the Trudeau/Axworthy soft power initiatives: neither understood soft power nor how to apply it, they just disliked and mistrusted nationalism and hard power and wanted something, anything else. Thus they ruined our (Canada's) hard power capabilities without getting anything at all in return - what a waste.

Bill Clinton and George W Bush, on the other hand, understood hard power and used it, albeit by flailing about somewhat aimlessly at all and sundry, but neither understood soft power so both squandered America's wealth and power and gained SFA in return.

Tabarrok's ideas can work if, and it's a big Big IF, America can get its domestic political and economic house in order - ordering America's house will, without a doubt, in my opinion, require large (in the order of 25%) cuts to the Pentagon's budgets (my guess is that a 25% cut in budget could lead to a 5% cut in capabilities if waste and corruption, by which I mean real fraud and political pork barreling, are cut instead of ships and units).

 

[a_majoor]

In this case I was looking at the article as inspiration for how the economic underpinnings of Western nations like Canada could be improved.

Hard and soft power requires resources, so anything that we can do to expand the economy and place more resources in the hands of the citizens translates to more resources available to for both hard and soft power (both in scale and scope). It is also much easier to execute your grand strategy when you intelligently manage your resources, I have used historic examples in the past to demonstrate how cultures that support individual freedom, free markets, property rights and the rule of law do better than those that do not. (In relative terms, the "free" examples might not be Liberal Democracies, but were much freer than their opponents

Athens was able to marshal her resources and not only become the leading power of Greece, but continue to fight against the Peloponnesian League (backed by Persian money) for almost a decade after loosing the flower of her army and fleet in Sicily.

Elizabethan England had neither the manpower nor resources of Hapsburg Spain, yet was able to defend herself and continue to advance English interests during the Elizabethan Age.

The Serenìsima Repùblica Vèneta had similar issues yet was able to keep ahead of the Ottoman Empire and the multitude of rival Italian city states for several centuries.

The small Asian "Tiger" economies can rival the "Dragon" (China) despite a huge mismatch in size, manpower and resources.

India has transformed from a poor socialist nation to an expanding economic power after ditching the "Permit Raj", a transformation in many ways far more remarkable than China's. (On a micro scale, Saskatchewan has experienced and economic boom when the NDP was replaced by the small "c" conservative Saskatchewan Party).

While the Tigers and India are not in the business of displaying or deploying "hard" power (for now anyway), they certainly have the foundation with which to build both hard and soft power tools and use them if desired.

For Canada, if each province could produce an average of $3 billion/year more in revenue for the Federal government, then the deficit would be pretty much eliminated without any spending cuts at all (and politically it seems that meaningful spending cuts are just as toxic to Stephen Harper as to any previous Prime Minister). So structural changes to unleash more economic activity will have downstream benefits as well.

 

[a_majoor]

Pissing away our tax dollars: Ontario spends and incredible $27.7 billion in subsidies to for profit business. The Government of Canada spends that amount for the entire nation (and you know how I feel about that!).

"Since the early 1990s, Ontario governments of every partisan stripe have used tax dollars to subsidize private for-profit businesses. For anyone who paid income tax in 2008, the cost of corporate welfare was $424 per Ontarian (or $848 per dual-income couple)."

So that's $848 that I don't have to spend on my family, or invest in a compay that I deem fit, or put away for my retirement, fund car repairs, spend on medical expenses etc. The ongoing cases of crony capitalism in the US (and the way the Ontario Liberals have run their "Green Energy" program) doesn't do much to convince me that I am simply being forced to pay for politcal favours to supporters of the Ontario Liberal Party either.

Read more here:

http://www.fraserinstitute.org/uploadedFiles/fraser-ca/Content/research-news/research/publications/ontarios-corporate-welfare-bill-27-billion.pdf

 

[Edward Campbell]

This, a recent speech by Bank of Canada Governor Mark Carney, is relevant to the topic at hand - it is about how Canada can, indeed must, survive the lean years ahead which are the result of many years of muddled economic and social politics in America and Europe. We, Canadians, were part of the muddle - that began in the 1980s (see Chart 1 in Governor Carney's presentation, page 2).

Prime Minister Mulroney "set the table" for deficit reduction by balancing the "operating" budget (i.e. the Government of Canada took in more in revenue than it spent of programmes) but he was afraid to tackle the deficit and debt, but he "spread the alarm" and warned Canadians about the dangers of debt. Prime Minister Chrétien, helped by the Wall Street Journal which (in 1995) dubbed our dollar the "Northern Peso," took the unpopular actions necessary to slay the deficit dragon. Other countries should have followed suit; too few did.

Now we are in a near global crisis. Governor Carney's prescription for surviving the crisis and being "relevant" in the world is on pages 10 and 11. But it is a prescription that requires Canadians to do something for and about themselves and their own, personal finances so that they can survive the changes which will happen around and to them. I doubt most canadians have the "smarts" to do as he says.

 

[a_majoor]

Putting a fork in Keynes by following the argument to its logical conclusion. Of course the more serious issue is this is also the conclusion that arises from classical economics as well:

http://econlog.econlib.org/archives/2011/12/wages_must_fall.html

"Wages Must Fall!": What All Good Keynesians Should Say
Bryan Caplan

When Keynesians want to gloat, they often point to the overwhelming empirical evidence in favor of nominal wage rigidity.  For the latest example, see Krugman on the Irish labor market.  Their unemployment is 14.5%, but the nominal wage index has only fallen by about 2.5%.  Krugman's conclusion:

    It is really, really hard to cut nominal wages, which is why reliance on "internal devaluation" is a recipe for stagnation and disaster.

The gloating is easy to understand.  After all, nominal wage rigidity is the driving assumption of the Keynesian model.  Unemployment is just a labor surplus; since wages are the price of labor, the fundamental cause of unemployment has to be excessive wages.  And as long as the wage rigidity is nominal, you can neutralize it by printing money or otherwise boosting demand.

What's hard to understand, though, is Keynesian neglect of - if not outright hostility to - the logical implication of their argument: Wages must fall!  If they're right about nominal wage rigidity, it seems like "Wages must fall!" would be the mantra of all good Keynesians.  But few words are less likely to escape their lips.

Why would this be so?

1. Keynesians could say that nominal wage rigidity is such an intractable problem there's no point discussing it.  That's why Krugman emphasizes that "Ireland is supposed to have flexible markets -- remember, before the crisis it was hailed as an example of successful structural reform."  If wages won't even fall in laissez-faire Ireland, what hope does the rest of the world have?

There are two big problems with this story.  (a) Even if it's true, Keynesians should still militantly oppose any government policy - like the employer health care mandate - that increases labor costs.  (b) Government doesn't face a binary choice between conventional labor market regulation and laissez-faire.  There's a third choice: Low-wage interventionism.  If wages won't adjust on their own, why don't Keynesians ask government to actively push them down?  If that sounds too brutal, see Singapore for clever ways to numb the blow.

2. Keynesians could say that monetary and fiscal policy are easier to promote than wage cuts.  But Keynesians are the first to insist that fiscal policy is a valuable supplement to monetary policy.  Why not hail wage cuts as a valuable supplement to both?  At minimum, Keynesians should heatedly resist any government policy that pushes labor costs in the wrong direction - and remind us that "wrong" = up.

3. Keynesians could - and often do - retreat to the view that wage flexibility is a self-defeating solution to the problem of wage rigidity.  The idea is that wage cuts reduce demand, which in turn exacerbates unemployment.

But this argument is full of holes.  As I've pointed out before, there are strong reasons to think that wage cuts will increase aggregate demand, making this solution doubly attractive.  Consider: Labor income equals wages multiplied by hours worked, so the effect on labor income is ambiguous; and as a matter of pure arithmetic, lower wages imply higher profit income.  In any case, if nominal wage cuts really are as rare as a blue moon, what makes Keynesians so sure that wage cuts would backfire if tried?  Without lots of empirical counter-examples, they have every reason to stick to the common sense position: "If wage rigidity is the cause of unemployment, wage flexibility is the cure."

At this point, Keynesians could just bite the bullet: "Wages must fall!"  But in my experience they don't - and I don't think they're going to start now.  The reason, I'm afraid, is politics.  Keynesians lean left.  They don't want to say, "Wages must fall!" They don't want to think it.  "Wages must fall!" sounds reactionary - a thinly-veiled reproach to centuries of anti-capitalist intellectuals and militant unions.  After all, doesn't it mean that every "pro-labor" regulation and "victory for the workers" has an ugly downside - more workers unable to find any job at all?

Keynesians are right to ridicule people who deny the reality of nominal wage rigidity.  But they'd be a lot more persuasive if they put leftist qualms aside and focused on the logic of their own model.  Keynesians have every reason to rant against excessive wages.  They have every reason to rant against regulation that increases labor costs.  They have every reason to rant against unions.  And there hasn't been a better time to rant since the Great Depression.  Oh my Keynesian brothers and sisters, let us rant together.

P.S. I'm doing a Stossel taping in NYC tonight (12/15).  The show won't air until January, but I'm hosting a meet-up after the show at 10 PM, at Becco - 355 West 46th Street.  Hope to see you there.

Of course wages are "sticky" because people don't want to give up what they already have, so the answer in the 20th century has been to reduce wages through inflation, which has pretty huge negative consequences of its own. Places where there is a degree of wage flexibility, such as "Right to work" states have shown better outcomes in terms of employment and job creation.

Two places where "stickyness" is an issue are government unions, who will be very disruptive if forced to take wage and benefit reductions (although this is inevitable given the deficit and debt situation; the other alternative is to fire them and contract out non essential jobs to lower paid non union workers, or drop these jobs altogether); and people dependent on government aid (not just welfare, but subsidies and other government handouts). These people are generally well organized 1% groups who have been able to manipulate the government and public for decades, and will fight to the last taxpayer to keep the gravy flowing.

 

[Kirkhill]

Another way in which "keynesian's" have reduced wages in fact is through the imposition of reduced working hours: vis the 35 hour work week in France and much of the rest of Europe.

Of course your average Euro worker didn't squawk too much as many of the goods and services that he couldn't buy, due to the lack of income, were dosed out directly from Colbert.  His family didn't suffer. 

Unfortunately Colbert couldn't collect enough taxes from an FDH populace (Fat, Dumb and Happy) so he had to go out and borrow money from those nasty Saxon brothers of his who had sided with the Angles and migrated to the first of many offshore taxhavens.  Eventually those bills came due and Colbert suddenly found himself unable to continue borrowing money due to a lack of lenders. 

All of a sudden his FDH (and idle) populace, staring the prospect of 10 Euro wine in the face, looked a whole lot less FDH.

As I noted on the thread on Global Economy I have come to better appreciate the value of the flexibility inherent in a Fiat currency, ultimately an IOU based economy grounded in trust.  The Gold Standard, like today's Euro, or the 1990's idea of adopting the US Dollar in place of the Canadian Dollar, would force that kind of wage disruption that the article addresses.

And if a 65 cent dollar stressed society, imagine the effect if 35% of the labour force were unemployed, or everyone's pay packet were cut by 35 per cent.  Although it can be argued that that is exactly what happened based on the external economy the impact on GDP was not nearly as great because of the internal economy.

Our Government is not charged merely with Economic Good Governance but also with maintaining Peace and Order.  And by comparison to Greece, Italy and France I would suggest that in the worst days of Jean-Claude Parrot and the Scots Git that preceded him, our government(s) have done a better job than most at operating within the Upper and Lower Control Limits.

 

[Edward Campbell]

I am sure the Supremes got it right - Supreme Court rejects Ottawa's bid for national securities regulator: the federal proposal to centralize securities regulation in one, national office is unconstitutional. I am also sure that the Fathers of Confederation and the constitution writers in London, circa 1867, got it wrong. I do not argue that provinces should not be strong and I believe it is right and proper to invite Ottawa to "butt out" of matters of provincial jurisdiction but the national economy is, constitutionally, muddled and muddle is not good policy. Ottawa should play a major role in promoting and policing the economic union, which is impaired by provincial non-tariff barriers, restrictions on labour mobility and patchwork regulations. A national securities regulator would have been an important first step toward creating a sea-to-sea regulatory environment watched over by the federal government. But my guess is that it is not to be and I also guess that the provinces will, eventually suffere for that as securities trading gravitates, more and more, to one, single exchange, the TSX, so that corporations need deal with only one regulator: the OSC (Ontario Securities Commission).

 

[Infanteer]

The article is a tad misleading as the court did not reject the idea outright - the Supreme Court gave the Federal Government enough wiggle room to produce some legislation regarding national securities regulation providing it recognizes the constitutional responsibilities of the provinces.

 

[Edward Campbell]

The article is a tad misleading as the court did not reject the idea outright - the Supreme Court gave the Federal Government enough wiggle room to produce some legislation regarding national securities regulation providing it recognizes the constitutional responsibilities of the provinces.

Yes, but, Finance Minister Flaherty says, "We have the decision and we will respect it. It is clear we cannot proceed with this legislation ... We will review the decision carefully and act in accordance with it.”

Maybe there is a wee tiny bit of wiggle room there but my guess is that the Conservatives will let the markets do it all for them.

 

[GAP]

I don't see this issue the Cons are prepared to fall on their sword over.....like ER says...the markets will put paid to it.

 

[a_majoor]

Why Quebec is not an economic superpower:
http://www.youtube.com/watch?v=SWzbEn-aXMQ&feature=player_embedded

(In case the linkmis taken down, we see a public service union employee driving a snowplow down a sidewalk on a clear day, with absolutely 0 snow anywhere to be seen....).

Your tax dollars at work.

 

[Sythen]

http://www.ctv.ca/CTVNews/TopStories/20111224/donations-national-debnt-111224/

Would you donate to pay down national debt? Some do

More on link. Can you imagine of all the things you could donate to? lol

 

[cphansen]

Why Quebec is not an economic superpower:
http://www.youtube.com/watch?v=SWzbEn-aXMQ&feature=player_embedded

(In case the linkmis taken down, we see a public service union employee driving a snowplow down a sidewalk on a clear day, with absolutely 0 snow anywhere to be seen....).

Your tax dollars at work.

Interesting video. You're right Dec 21, 2011 no snow to be seen, and not just one public service union employee but two of them working as a team on both sides of the street but is it really wasted money, or is someone grabbing an oportunity for a little OJT by taking the snow plow into the area which will be his primary responsibility to keep clear. This would allow him to practice on his machine and familiarize himself with the terrain while none of the terrain is obscured by snow. After all even snow plow drivers need to practice their skills and learn the terrain.

 

[a_majoor]

OJT? Perhaps, but it doesn't seem likely. Doing training could take place in the yard, and doing daily maintenance is probably a better use of time/resources. Walking the route or driving in a pickup truck to learn the route is also faster, easier, cheaper...

The wear and tear on the machine should also be considered when driving around w/o snow.

 

[GAP]

The wear and tear on the machine should also be considered when driving around w/o snow.

and with the blades down....think of the damage that is doing to the blade edges, and to the sidewalk infrastructure....