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.

Having been recently freed from the shackles of writing my paper (and catapulted into the waiting room for comments) I’ve been reading more about economics lately than I have in months. At some future juncture this will likely lead me to alienating most of my friends by discussing ITQ’s and how they might alter the allocation of water resources in northern Alberta.

For now I’ll  limit my comments to something a little more current and interesting to more people–the recession. However, while there is data that is all very interesting and that deflation scare the Globe and Mail tried to start last week never really took off, there is one piece of news that’s extremely interesting.

When it comes to governing, there’s bad ideas and then there’s BAD ideas. The statements from Ontario’s Economic Development Minister Michael Bryant yesterday about his government wishing to pursue “reverse Reaganism” falls into the latter category.

Governments are good at overcoming market inefficiencies, providing services that are clearly beneficial to society at large and using their stick and carrot act to induce more efficiency from the economy. However, government are pretty terrible at “picking winners and losers.” When the government’s criteria for making economic decisions becomes all about preserving current jobs, it leads to a worse economic future. That’s because resources and human capital are tied up in inefficient industries (likely at wrong levels) and by removing the profit motive from companies (and replacing it with a “keep employment up” one) industries become bloated and don’t respond to consumer demands or the changing needs of Ontario.

So, though this might be a throwaway comment, it’s rather galling that the minister supposedly entrusted with the economic development of Ontario is advocating for an extraordinarily expensive course of action that would instead lead to economic stagnation.

Paper: “The Effects of New Urban Rail Transit: Evidence from Five Cities”
Authors: Nathaniel Baum-Snow and Matthew E. Kahn
Working Paper: Federal Reserve Bank of New York (December 1998)

As inevitable happens as pricing points change or government begin to open up the spending taps on infrastructure projects, the number of news stories on light rail has ballooned since the start of 2008. In most of this recent batch of coverage looking at rail systems from Portland to Edmonton to North Carolina to Ottawa the slant has been almost overwhelmingly positive with the benefits being extolled and upfront costs barely mentioned.

But generally these stories look at surface indicators and assuming that the results are largely correlated with light rail development and not other important factors. In their paper, Baum-Snow and Kahn have availed themselves of the awesome data stores of the Federal Reserve System and developed a unique data set to develop an idea of the true results of light rail development.

After a long break to wind down the term and my full-time employment, I’m returning to blogging. Inspired by the City of Ottawa’s release of their planned downtown transit tunnel, I’m going to examine a paper from 1998 on urban rail systems in five US cities and what results have been seen. It was produced by a couple of Federal Reserve Bank of New York employees and so far is a pretty good read. 

So check back later to see what the paper’s all about and see if I can draw some (abstract) conclusions about what urban light rail might do for Ottawa.

The tabling of the Ontario budget this week brought the news that Ontario will become the most recent (and largest) province in Canada to harmonize its provincial sales tax (PST) with the federal goods and services tax (GST).  For economists this is a pretty exciting move and one that more than a few prominent members of the dismal science have argued for on the basis of business efficiency.

However, as my discussions (and twitter conversations) with people have highlighted, to a lot of people in the province, this move seems like a tax grabbing dud. A point of view not helped much by the relatively poor media coverage of just what this move means or by the provincial Tories hysterics. Is this truly a case of razing taxes during a recession? Not at all, infact it’s better seen as a move to fix the long-term efficiency of the Ontario economy.

First off, apoligies to the six people still checking in on this site with some regularity. The end of an academic year/production year rams up the busy and reduces the free time. As such, despite the mounds of economic news that I have an opinion or thought on, I’m a little short of time.  So,  like the little guy with the penchant for sticking his hand inside his shirt, I shall return.

Being an economist (or an economist to-be) in a recession sometimes makes me feel a little dirty. No, that’s not because there’s a sudden upswing in the market for economists or people actually try to pay attention when I explain something. Rather, it stems from the fact that while everything in the world seems to be falling apart, bringing doom, gloom and unemployment, I find the positives in the recession. Granted, this may lead to me one day being punched out by an angry ex-auto worker, but there’s a massive amount of value in the recession.

A lot of the theory behind this value can be derrived  from the work and theories of the so-called “Austrian School” of economics for whom we must credit the phrase “creative destruction.” Though this phrase isn’t the nicest if you’re in an industry being destroyed, the basic idea here is that in economics and capitalism, companies and industries must fail if the economy is to grow and progress. (This is a very basic understanding of creative destruction, but it’ll work for us for now.) The reason these failures must occur stems from the reason for the field of economics, the allocation of scare resources.

If unstable or unsuitable companies and industries were always allowed to be propped up (like say with government money), this eats up some scarce (ie: finite) amount of resources (labour, capital, human capital etc) that can’t be used to create another company or industry that may prosper and drive forward economic growth. This is often a big reason why many economists dislike the idea of government support for failing industries, even though such actions are often immensely popular. However, it’s understandably hard to get people to look past their own devastating losses in the short run and be happy about taking one for the entire economy when it could be only many years (and other failures) later that the resources are combined in a way that creates massive growth. Creative destruction isn’t exactly a positive PR concept.

However, with the current recession the idea of creative destruction (though it’s not often termed that) is showing up in some positive stories. People are changing jobs and doing things they like more, getting more education (aka human capital) so they can do something new and productive or maybe even starting their own businesses. This is creative destruction at work and it is sowing the seeds for the return of a strong economy. Also, since economists also consider people’s utility (aka happiness) as well as their income, the recession may be positive for many people as they trade a well paid job which they loathed, for less well paid (or maybe being paid with less consistency) for a job they love and enjoy doing.

We’re still early in the recession (at least in Canada), but there are always positive signs that the market is rebuilding itself and working towards another growth period. Hopefully the United States can figure out how to get their banking system doing the same thing.

One of the fun things about big pieces of government legislation is that all those pages of dry language often hide a few policy “Easter eggs” that aren’t discovered until well after the bill is passed. It seems that the budget document put forward by the Conservatives and moving towards passage in the house has more than a few of these, many of which are troubling.

One of the most troubling “eggs” discovered so far is the handcuffs that the budget has put on temporary funding increases extended to the funding bodies that provide grants to graduate students whose studies are in the social sciences or arts. Of the new $87.5 million devoted to the three funding bodies, SSHRC (Social Science Humanities Research Council) will receive 20% or approximately $17.5 million dollars in funding. The other 80% is devoted to the health research (CIHR) and science (NSRC) granting bodies, a ratio which does make sense given the much higher costs incurred in these areas because of labs, technology, equipment, etc.

So while the disparity of funds between the granting bodies is not the problem, the handcuffs that have been placed upon this new SSHRC money are. To quote from the budget documents themselves:

…and $17.5 million for the Social Sciences and Humanities Research Council. These funds will provide for an additional 500 doctoral scholarships, valued at $35,000 each per year for three years beginning in 2009–10, and an additional 1,000 master’s scholarships, valued at $17,500 each for one year, in both 2009–10 and 2010–11. Scholarships granted by the Social Sciences and Humanities Research Council will be focussed [sic] on business-related degrees.

Emphasis added is mine.

Now before I continue any further (if my thoughts aren’t apparent enough) let me first acknowledge that I’m a graduate student in Economics and it may be conceivable that when the definitions come out I may be taking a “business-related degree” and potentially be eligible for funding. If I applied that is.

That info aside, this constraint on funding is disturbing, disappointing and irrationally shows that the government doesn’t believe all research and study is valuable. An idiot thought for a number of reasons.

First a number of economic studies show that it is the pursuit and receipt of an advanced degree that increases one’s human capital and contribution to society. There is of course some fluctuation between the types, but not enough to warrant funding solely MBA’s over Sociology and other types of graduate students.

Second is that SSHRC is an amazing resource that allows scholarship to continue in a number of areas that it might otherwise not and there is an intrinsic value in knowledge for knowledge sake. Research and studies might not have an immediate impact when they are written, but later they can provide an important spark for other study.  History is a passion of mine and with the new SSHRC constraints the government is saying there’s no value (or not enough to provide grants) in learning about the history of our country or even say, our economic system so we can avoid repeating the same mistakes.

A final point worth making is that Universities and researchers should be allowed to work and study what ever they want (within some reason, ie: Rancourt is over the line) and governments shouldn’t have the power to direct this. Scholarship of all areas has value to society and by explicitly stating what degrees are eligible for public funding, the government is in a very clear sense violating the ideal of academic freedom. One of the most important tenants of the Canadian university system.

This is a provision that must be amended by committee while the budget is still in play.

I’m still plowing through the CanSim II database and fiddling with a couple of programs to try and work out a similar chart to the one from my previous post. I’m having trouble because the programs are being a little bit finicky which may force me to use Excel which I hate.

However, like so many other tasks, that is on hold at the moment as I’ve departed to Alberta for reading week. Given the amount of time I’ve spent flying and the unfortunate crash in Buffalo, I think this NY Times story is worth a read. The bad economy is increasing the use of smaller regional jet style planes which may have an impact on the number of incidents reported. Perhaps when I find the time that’s another data pool to mine, recessions and aircraft safety does one have any effect on the other? And I almost thought I could forget all my econometrics.