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“It’s like a tax on silverware”

December 15, 2010

After having previous attempts at copyright reform washed away by prorogation or an election, the Canadian government is once again pushing forward with attempts to update copyright law. While the exact merits of the legislation are open for debate, I’ll leave it for others who are actually experts to comment on the governments proposals.

On item that did catch my attention was the discussion around the creation of a levy on digital music devices, much like the existing levy on blank tapes and CDs. I’m not exactly sure where the Government has picked up its talking point of an “ipod tax” but it seems to have originated with a 2007 proposal from the Copyright Board of Canada to place a $75 levy placed on music devices exceeding 30GB in capacity. Since then it seems to have become a cudgel with which the Government beats the opposition. Again, I’ll leave the political discussion for “experts.”

This levy caught my interest because of a comment made by a friend of mine on twitter commenting that this levy is “like a tax on silverware. [It] [w]on’t affect those who can’t afford it.”

That is a statement I have to take issue with as an economist, because such a levy will affect people who can currently afford an iPod and the retailers in which they might by it. That’s because for a (relatively) cheap consumer good like an iPod, there’s a not insignificant number of people at the margin that will be affected by price change caused by the levy. Rinse. Repeat.

If we assume that the price of other goods broadly stays the same and that people’s preferences across all goods stay the same both before and after the implementation, then we get a number of effects. This is like a $75 price increase of iPods, so people will adjust their consumption away from them all other goods. This will result is lower iPod sales (which could hurt the business that sells them) which could eventually reduce in lower consumption of electronic music, which could result in the levy taking in less money which could result in a higher necessary levy to achieve the projected revenues.

Of course, I’ve extended the substitution of other goods for iPods pretty dramatically above, but over time that could happen. If the levy was only put on iPods above a certain size, that could also shift demand towards smaller players and change demand for file (or song) size produced.

The basic point is that the tax/levy just wouldn’t have an impact. There’s a number of flow through effects of the levy that need to be considered, not the least of which is making people who are currently at the margin and can afford iPods worse off (ie: less happy) since a levy would prevent them from buying an iPod. While it’s hard to say the exact size of this effect because of the different preferences, different marginal propensities to consume and budget sets of Canadians, it does show that things are a lot more complex than my friend assumes.

“Time for some snark”

December 14, 2010

On a day filled with slightly longer commutes and a little more snark because of the weather (at least in the NCR) I feel obligated to pass along a perfectly snarky economics post:

‘Peak Coaler’ just doesn’t have the same ring, but I bet it raises the same vitriol for stupid economists

 

(h/t to Stephen Gordon)

 

Why High Consumer Debt Means the (Monetary) System Works

December 13, 2010

In its recent semi-annual Financial System Review, the Bank of Canada again warned about the perils of the increasing indebtedness of the Canadian household sector. The report also noted that the growth rate of this debt has slowed recently, but it still remains quite high.

While I believe that the BoC is quite right to caution about the possible consequences of a high level of household debt in Canada, I think there’s another important point that these figures convey. The traditional monetary policy transmission mechanism still works quite effectively in Canada. This is a non-trivial point considering the ZIRP (zero interest rate policies) and quantitative easing efforts in other major economies.

Read more…

Current Accounts or: How I Learned to Stop Worrying and Love the Deficits

December 11, 2010

Statistics Canada puts out a lot of data on a regular basis (though not as much as an economist might like). While a lot of these series get hardly any attention (the Farm Product Price Index rarely gets even a sentence or two in the newspapers), there are a handful of data reports that always guaranteed to make the paper, including the report on Canada’s international merchandise trade.

Since changing jobs, I no longer pour over this report like I once did. However, I was forced to give Canada’s current account position some thought this week when I a good friend of mine pointed out a CNBC column to me and asked me if these deficits were a big story.

But, to me the shrinking trade surplus with the US (lowest since September 1992) and the large current account deficit doesn’t strike me as a big story and really isn’t even that’s surprising. As for why, well let’s begin with a basic identity used to discuss the component parts of GDP. That is:

Y= C+I+G+(X-M)
Where:
Y is GDP
C is Consumption
I is Investment
G is Government spending
(X-M) is net exports (with X = exports and M = imports).
When we’re talking about the current account deficit, that’s the (X-M) section of the identity. Unlike the other components, the size/value of (X-M) is not something that can be simply be determined domestically, rather it’s heavily influenced by the global economic situation. According to the October report, Canada was reported as having a trade deficit, meaning that M > X. To think of this in a slightly different (and a little simpler way), this can also be thought of as meaning that in October  Canadians bought more from the rest of the world than the rest of the world bought from Canada. Given the economic and financial situation in the rest of the world, this is hardly a surprising fact.
At the moment Canada has a relatively strong economy right now while our traditional trading partners (chiefly the US, but also Europe) are troubled economically/fiscally and China is beginning to see inflation across its broader economy. Compared to the problems faced in these other countries, things in Canada are pretty good, leaving Canadians with a higher economic confidence, which makes them more willing spend. Also, this strength/stability of the Canadian economy has caused the loonie to hold strong against other major currencies. An important part when it comes to trade discussions, because a stronger loonie means that goods other countries cost less, so they’re more attractive for Canadians to buy.
So, when you combine the confidence that Canada has (which our trading partners lack) and the stronger currency (which makes foreign goods cheaper for Canadians, but Canadian goods more expensive for foreigners) then it’s not a shock that Canada has a trade deficit or that the surplus with the US has narrowed. A quick reading of economic conditions says this should be the case.
Also, it’s not a given to me that having a short-term trade deficit (as Canada has had since the recession began) is a bad thing. Most high tech machinery and equipment is manufactured outside Canada (in the US, Germany, etc). So one thing that could be happening now is the with the stronger dollar, the M&E (which increases productivity typically) is cheap for Canadian business to buy, so they’re buying them right now (when the M&E is comparatively cheaper) to get higher future returns. This is a good thing for the Canadian economy and this investment is something that actually showed up in the Q3 GDP numbers.

***This post is an edited and amended version of an email.***
***Thanks to my friend for the question, gave me some much needed inspiration for the post.***

Target Practice in the BoC’s Future?

October 25, 2010

With my previous employer one of the more interesting days on the calendar was when the US Federal Reserve bank announced the results of its meetings and its monetary policy decisions.  Vaguely worded and conveying sentiments rather than hard numbers, Fed statements were poured over by the markets (and us) like a Delphic oracle prophesy as people tried to wring out meaning about the US and global economies from the lean text.

None of this anticipation or interpretation accompanied the days where the Bank of Canada released its monetary policy stances.  Partly this was (and still is) a result of the fact that the BoC doesn’t have the global importance of the US Fed, but mostly it was because the Bank of Canada’s releases are always bound to be boring. But not in the same way that Canadian TV is boring compared to its American counterpart.

Instead, the BoC is far more boring than the Fed because everyone knows what it’s trying to do. Since 1991 when it moved to an inflation target, the BoC has managed monetary policy to keep core inflation low, stable and predictable around an annual rate of 2% (the middle of a control range of 1%-3%). So, when the BoC goes to make a decision, the markets (and economy) broadly know where the Bank is going. Since most of the economic data (including the CPI) used by the BoC to make its decisions is released publically, people generally have a reasonable idea how far things are from target and how drastic the actions of the Bank might need to be. Add to that the Bank of Canada’s move to incorporate hard numbers and forecasts in its policy releases and Monetary Policy updates (not just the feelings or sentiment the Fed largely expresses its forecasts in) and the level of uncertainty about their actions is further reduced.

So while on occasion the Bank might break form changing interest rates or move a little more aggressively, people don’t get terribly excited. It’s the equivalent of the Bank stopping for milk or taking a short cut on the drive home, everyone knows where there eventually headed so there’s no reason to panic if they take a slightly different route.  It also makes the BoC pretty boring.

Given this history and stability, it’s interesting that the BoC (according to its Governor) is open to changing its policy instrument to price level targeting.

Price level targeting is similar to the inflation targeting regime currently in place, but when it’s used  higher (or lower) than targeted growth in one year is offset by lower (higher) growth in the next to keep on the target. For example, if the BoC chose to target a price level of 2% and inflation was 3% in this year, next year the Bank would seek to keep inflation at 1% to achieve its target.  This is a very Keynesian policy because during periods of recession, when inflation tends to fall sharply, the BoC would have to undertake very expansionist monetary policies to get the price level back up to target. Conversely, during boom periods the BoC will need pretty restrictive policies to stay near its target.

This would represent an interesting policy shift for the Bank and make its actions even more transparent to the market. The mechanics of implementing the policy, the “grace period” the Bank would allow itself to make up for missing the target and the level of the target all still need to be clarified. If implemented though, it could stand to make the Bank even more predictable and boring, which isn’t a bad thing when it comes to monetary policy.

 

(HT to Worthwhile Canadian Initiative since I know they had a post on price level targeting a while back. It provided a deeper look at it, but their post got me thinking about the practical means of price level targeting)

Well then, where were we?

October 18, 2010

Though it’s been more than a year, I believe it’s time to revive this little corner of the internet. It wasn’t my intention to let it go fallow last year, but I was waylaid by the economics of everyday life.

While there were a few factors, the largely took the form of having to allocate my very scarce resources (time, sanity, the limited number of words I can use each day) to satisfy some nearly unlimited demands (blogging, completing my thesis, continued existence). Like a good little rational actor that exists largely only in textbooks I managed to satisfy my most pressing demands while a number fell by the wayside.

But, having completed my thesis and recently transitioned into a new job which allows me the freedom to write (and be wrong) again, I figured I’d reboot this little endeavor. So dear reader, you’ve been warned.

 

BC Signs Onto Harmonization

July 23, 2009

It’s been more than a decade of stagnation on the harmonized sales tax since many of the Atlantic provinces combined their GST and PST into a single HST. However, with the federal budget backing up a dump truck of inducements to the provinces, there’s been a relative torrent of changes. Or what ever one can categorize 2 of 9 provinces switching over as.

As I’ve written about before Ontario has decided to move to an HST on July 1 2010. Well today comes the news that British Columbia will also be moving to an HST on the same date.

This is good news, but to prevent myself from rehashing why I’ll just point you to my previous post on the issue, linked above in the Ontario case. But there’s an extra wrinkle that makes the BC move even more interesting and a better idea. BC is next to Alberta. While this is a rather obvious point, this creates two important challanges for BC on tax policy:

1) Alberta does not have a provincial sales tax. So locating a business in that province (all other factors being equal) means you face a lower effective tax rate than locating in BC because the intermediate costs levied by the PST don’t exist. For many companies this can be tens of thousands of dollars a year (or more) in revenue that simply moving one province over saves. By harmonizing sales tax, this competitive advantage of locating in Alberta is going to disappear.

2) This is likely a point a little less familiar to some, but Alberta and BC have combined to form the largest internal trade bloc in Canada. Thanks to the TILMA (Trade, Investment, Labour Mobility Agreement) signed by both provinces earlier this decade, a number of barriers (needing to be re-certified as a teacher/nurse/etc in both provinces, re-registering company in each prov, etc) have been removed making it incredibly easy to move people and businesses between the provinces. Much easier than say moving from New Brunswick to Ontario or anywhere else. By moving to an HST, the entire TILMA region now no longer faces the intermediate business taxation which makes the BC/AB region an incredibly attractive place to locate. Given that the agreement is the first of it’s kind in Canada (after much discussion reaching back to 1992 about barriers to internal trade) it will be interesting to see how the harmonization affects business creation and movement within the region. With the ease of movement and sensible set up of taxes, its hard to imagine harmonization doing anything but help.

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