Le Québec aime dépenser

Même si le Québec a un PIB par habitant inférieur à 6 provinces et à la moyenne canadienne, il aime dépenser davantage. En pourcentage du PIB, le gouvernement du Québec représente 38.2% du PIB, comparativement à 35.6% pour l'Ontario. Cela est également davantage que la moyenne de l'OCDE. Tous ces chiffres et bien d'autres dans le rapport demandé par le gouvernement du Québec. Rapport qui ne servira a rien bien entendu.

Voici la comparaison des dépenses par domaines, pour le Québec vs l'Ontario (un montant positif signifie que le Québec dépense davantage).

Mais n'oubliez pas, le modèle Québécois est superbe selon Jean-François Lisée.

Eugenics in the Canadian left

In the law few weeks, there has been a few posts on the question of eugenics but I can't seem to find out more and more on the issue through my readings on the Great Depression. I have to add yet another comment on the issue. I have discovered that even the father of canadian Medicare, new democrat premier of Saskatchewan, Tommy Douglas was a fervent eugenist.

He renounced his views later on before being elected, but he still held some beliefs concerning eugenics. But ... hey...the more you know!

Wartime recovery?

A few months ago, I took a class on Canadian military history at Université de Montréal with professors Michel Fortmann and Carl Bouchard which was then followed by a trip in France and Belgium to visit battlefields and cemeteries. It was a very insightful class, for me it was an expedition into a completely new field so I rarely commented unless I had read papers. We were also teamed with professors and students from University of Waterloo and at one point, I don't remember who exactly, someone from that group said that the Second World War had kickstarted the economy. I am always skeptical of that claim. For starters, I don't see why such a catastrophic event as a war would actually increase growth.

But the case of the United States lies apart from the rest of the World when it comes to the Second World War. First of all because the territory of the United States did not change as it did for some countries. Secondly, it was spared from destruction of physical capital at home which is not true for the United Kingdom, France and Germany. Thus, it is easier to look at the effect on the US economy of a gigantic rise in government spending during wartime because there are no effects of destruction.

At first sight, the idea that each dollar spent in defence industry actually got the economy growing seems to hold (using Angus Maddison's data). Taking real GDP per capita in 1913 and giving a 1.95% trend of growth and looking at the difference between observed figure and the expected 1.95% trend, we see that the Second World War is a gigantic increase.

However, we ought to be skeptical. As Karl Popper said, science is not really about proving than it is about raising reasonnable doubt. First of all, when the War started it is reasonable to assume that most of the unemployed went into the armed forces which means that the labour force has been modified. Because of the definition of employement used by the Bureau of Labour Statistics (military are not calculated as employed), you don’t need a model to understand that reducing your pre-war labour force by 22% by dragging them under the flag leads a significant drop in unemployment.

Additionnaly, what defines economic activity during wartime? How do we consider some goods? Are they intermediate goods, are they final goods? It is reasonable to affirm that revisions to the official figures are needed. I did not find a revised figure of GDP, but I did find a revised figure of GNP compared with the official figure. Economist Simon Kuznets did such a revision during the 1960s to include a more realist inflation figure, recalculating for cost of munitions, industrial production and price distorsions from the government to attract ressources to ensure production. So we end up with the following figure for wartime economy. The blue line is the revised estimate by Kuznets while the red is the one from the Department of Commerce in 1990 (quoted in Higgs)


A gigantic difference in which we see that the economy did not perform as admirably as indicated. So what might have happened?

Robert Barro and John Redlick attempt to answer that by estimating the spending multiplier during the second world war. They ended up with a figure between 0.6 and 0.7. That means that while the defence component increased (the main source of increased spending), other components decline. In fact, during the war private investment fell considerably and using the Schwartz-Friedman price deflator, private consumption did not increase at all during the war. This is very telling especially since we can't configure very easily non-monetary "prices" like waiting in line to get that piece of bread that government ticket should get you.

So wartime prosperity is probably exagerated if not false. Sadly, I do not have any figures for revised GDP during the war, but I don't think they would tell a very different story than GNP does (international trade being somewhat minor in World War 2). The Great Depression actually seems to have continued until the end of Second World War rather than being ended by the war. That leaves more perplex, why would growth then return at the war's end after a very slow economic growth between 1933(time at which the economy hit the bottom of the barrell) and 1941 and then declining a little during the war?

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Angus Maddisson. 2009. Statistics on World Population, GDP and Per Capita GDP, 1-2006 AD

Robert Higgs. 1992. Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s. Journal of Economic History

Simon Kuznets. 1961. Capital in the American Economy: Its Formation and Financing : Annex A. National Bureau of Economic Research.

Robert Barro and John Redlick. 2009. Macroeconomic effects from government purchases and taxes. National Bureau of Economic Research.

Payer pour recevoir du courrier?

La Poste Suisse, ainsi que d'autres postes en Europe, envisagent d'introduire une redevance postale. En gros, chaque année, vous devez payer un certain montant pour avoir accès au réseau postal. Tout comme vous payez pour avoir accès à une prise téléphonique chez vous, pourquoi ne pas payer pour avoir une boîte-aux-lettres?

Seriez-vous prêts à payer? Tant qu'à faire, ne devrait-on pas payer selon la région où l'on habite? Acheminez le courrier en Abitibi coûte probablement davantage que sur l'île-de-Montréal avec sa forte densité.

A lead-up to the Great Depression

Lee Ohanian and Harold Cole have been for the last 5 to 6 years on a crusade to debunk the rosy myth of the glorious New Deal. Monetary factors can easily explain why there was a decline between 1929 and 1932, however it cannot account for the long lenght of the recovery. Ohanian and Cole have found that the culprit was the New Deal, mostly the National Industrial Recovery Act and the National Recovery Administration (NRA).

But one of my professors, Albrecht Ritschl and his colleague Monique Ebell goes at it through a different set of lenses. He looks at the lead-up to the depression. His view is pretty simple : you had the juxtaposition of two monopolies.

Imagine that the economy is only about butter and cannons (really old and plain example don't you think?). If you end up with collective bargaining in those two industries, it will tend to mimic the effects of individual bargaining on output and employement if there is a high level of competition. However, as you move towards a more monopolized economy in the economy, output falls if you have collective bargaining and employement soars at the same time. So, you end up vindicating Karl Marx when he said that "only hired workers are served by unions" and that unions "were the worst ennemies of the socialist cause".

Before even the crash of the stock market in 1929, you had a lead up to the juxtaposition of two such monopolies. After World War I, labour regulations favourable to unions were repelled after a Supreme Court Judgment. However, during this period Secretary of Commerce Herbert Hoover was highly favorable to "cartelization" and the Sherman Act of 1896 against trusts was not pursued very thorougly. Now we consider this word to be bad nowadays and even people on the left favour the mission of such institutions like the Bureau de la Concurrence to promote competition, but at the time competition was not seen as such a panacea. It was actually perceived as bad for "efficiency" and industrial concentration allowed for economies of scale.

Combined with the policy of reducing income taxes by Secretary of the Treasury Andrew Mellon who did not agree with Hoover's approach and often criticized Hoover in front of President Coolidge, this policy allowed strong industrial concentration and monopolization. By 1929, before the crash of the stock market, the Hoover administration(Hoover finally became president in 1928) which was recently sworn in, was attempting to find ways to bring back collective bargaining policies to increase wages of industrial workers. After the crash, Hoover pursued that goal and lobbyed industries agressively so that they would not cut wages, which increased unemployement. But the new labour regulations only came about after the democratic Franklin Delano Roosevelt took power in 1933. At the same time, he also pursued

I believe that the story Ritschl and Ebell tells us is very compelling and plausible. The reason for this statement is that I add the Hawley-Smoot Act that passed early into Hoover's mandate. This very protectionnist act allowed industries in the United States to face even less competition (this time from abroad) which would have reinforced the cartelization process put forward by Hoover under Coolidge and continued during his presidency.

I think that his story proposes an ambitious research agenda about economic performance between 1920 and 1950. If we were to look at other markets and countries at the same and analyze them within this theoretical framework, much historical information could be gathered about policy history in that time which could change considerably our reading of past policies and how they affected the economy at the time.

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Burton Fulsom. The Myth of the Robber Barons : 5th edition.

Douglass Irwin. The Smoot-Hawley Tariff: A Quantitative Assessment - The Review of Statistics and Economics.

Albrecht Ritschl and Monique Ebell. Real Origins of the Great Depression: Monopoly Power, Unions and the American Business Cycle in the 1920s. Centre for Economic Performance at the London School of Economics

Se vider sur la vierge Marie?

Looser once, winner now!

Once, there was a country that the British divided arbitrarely in two. Above (north) of that line, individuals would be charged a poll tax (a uniform tax on everyone)and below all income for the state would stem from duties on imports. There were no differences south or north of that line within that country. We are talking about Nigeria and that was in 1910 and that minor differences makes a huge difference now.

The use of the poll tax in the north allowed governance to be more efficient than in the south. So in the north now, population are somewhat happier with their local government and more importantly, polio and malaria vaccines are more widespread than in the south. This increased happinness allows individuals to trust their government and reduce evasion which allows for an efficient tax collection and thus the provision of services like vaccines.

The policy implications are not evident from this paper, however I believe the theoritical implications for policy proposals are clear: institutions still matter. I made the point earlier that the institutions left by colonial masters was more important in determining growth performance than several other factors. And that the level of settler mortality was the determinant of which form of institutions was left. What is more important is that the division we are talking about was actually done because of malaria because the British were afraid of sending one governor that would die because of a malarial mosquito bite.

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Taxes, Institutions and Local Governance: Evidence from a Natural Experiment in Colonial Nigeria. - By Daniel Berger

Which form of free market matters most?

How do you insure the survival of free markets and are there different forms of free market? Let me start simply by explaining that defenders of free markets like myself believe that liberty is not about the inexistance of a state or some form of institutions but rather that liberty is about constraints on liberty to maximise it. Thus we all agree that we should not be free to shoot Bryan and he is not to do the reverse (even though I believe he must be thinking about it since the last few days after those pranks I pulled on him) . We find ways to restrict our capacity to exerce such actions. Now without those institutions, no trade can occur and no exchanges can take place. Thus there are no free markets. In very large societies, its a form of organized state that promotes formal law.

But here is a question, in large societies we need to be able to fund such legal systems. A good way for me to illustrate this is the British Industrial Revolution. The reasons why the Industrial Revolution began in the United Kingdom are very simple : it had well integrated internal markets and well protected patent laws that allowed inventors to capture a greater part of the social benefits of their inventions. The use of patents in Great Britain was made possible by an easily workable system for inventors who chose to patent their inventions, even if it was costly.

So to fund such a system, we have to dispel the myth that Britain was a free trading country. We often think of England as the capital of free trade because of its very well publicized 19th century abolition of the Corn Laws which were tarifs on foodstuffs and clothes. However, Britain never was the gold-standard of international free trade in the 19th century, France was. It was mostly on items which were considered crucial for the needs of workers that tariffs and excises were reduced. Indeed, even after the abolition of the Corn Laws by Prime Minister William Peel, several tariffs and duties were maintained on a wide variety of goods (including alcohol) to fund government expenditures. These tarrifs and duties were the source of funding for the laws that I mention above.

Usually indirect taxes on selected goods like excise taxes and customs do harm by distorting relative prices, causing a misallocation of resources. When we talk about funding the government (at whatever level we prefer), we think of direct taxes on income and wealth thate are more efficient mechanisms to generate revenues. However, the transaction costs of collecting revenues with such mechanisms were so high in England at the time that fiscal institutions articulated in that sense would have been inefficient relative to indirect taxes.

Even though indirect and distorting taxes like duties and tarifs are considered more harmful in general, in this case they actually served the British Empire very efficiently in its pursuit of law, order, peace and good government. Thus the legal system that ensured patents could exist and benefit inventors that were crucial to the Industrial Revolution that we described above.

I am not making a case for protectionism, far from that. I am making the case that since what seems to matter are internal markets and property rights to ensure the regulation and protection of trade, international free trade during the British industrial revolution would have deprieved the very small Victorian State from it main source of funding to protect property rights. In a sense, I am saying that there are different form of free markets and that what matters most are institutions like property rights (I do consider property rights as a form of economic freedom if they are well defined and well enforced).

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Allen, Robert. 2007. « Pessimism Preserved: Real Wages in the British Industrial Revolution ». Oxford University Department of Economics Working Paper 314. Oxford: Department of Economics of Oxford University.

Mokyr, Joel. 1990. The Lever of Riches: Technological creativity and Economic progress. New York: Oxford University Press.

North, Douglass. 2005. Understanding the process of economic change. New York: Cambridge University Press.

Nye, John. 2007. War, Wine and Taxes: The political economy of Anglo-French Trade, 1689 to 1900. New York: Oxford University Press.

Saved by trade!

We were created by economics. I am perfectly aware of how ridicule this may sound at first, but hear (or read) me out. From Adam Smith to Milton Friedman, trade has been presented as a way to promote the growth of civilization. But we rarely hear the case that we were created by trade.

In a paper from the Journal of Economic Behavior and Organization titled "How Trade Saved Humanity from Biological Exclusion: an economic theory of the Neanderthal exclusion", an economic approach to the rise of the homo sapiens and the fall of the neanderthals is provided.

The usual explanations are that even though cranial size was greater, the brain of the neanderthal was less evolved in terms of neural development. They did however practice hunting and gathering activities which shows a certain degree of specialization and they did live successfully for two hundred thousand years before ... well...our arrival.

But humans did also specialize, but we had to compete for a very limited pool of exploitable ressources with neanderthals. The paper constructs a model where everything is equal for humans and neanderthals, except the capacity of humans to trade and specialise which was greater. This allowed humans to collect more food ressources than neanderthals which drove an increase in population (humans basically outbred neanderthals). The finite amount of ressources left (considering the nomadic living mode) was reduced and the neanderthal population went into decline for that very reason. They just progressively got less numerous than humans and ultimately disappeared. They actually disappeared very quickly.

I have to say I enjoyed the concluding remarks from the auhtors of the paper which sum up my personal view on the nature of evolution:

(...)our rise to power depended on an exceeding number of exogenous factors including the Cambrium explosion, comet and meteor hits and the demise of dinosaurs, leading Gould to conclude that we are a “wildly improbable evolutionary event” (Gould 1989, p.381). If we rewind the tape of history and run it again, he wrote, the chance of human domination is exceedingly small.(...)the fate of humanity may have been even more uncertain..even on the current and improbable trajectory leading to human domination, interaction with contemporary rivals some 40,000 years ago could have been fatal to humanity. We did not enter a vacant niche in ecological system..we had to conquer it.

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R.D Horan, E. Bulte and J.F Shogren. How Trade saved humanity from biological exclusion: an economic theory of neanderthal extinction. Journal of Economic Behavior and Organization. 2005, 58: 1-29