More fuel to the “evil republican view”

In a previous post, I compared the “ultra liberal Paul Krugmanesque” view of the current economic turmoil of the United States (I am using hyperboles to caricature positions, I don’t think Paul Krugman didn’t deserve his Nobel prize) with the “evil republican view” and I erred that the latter had stronger grounds on which to stand on. This generated some discussion from colleagues of mine and I would like to reignite the issue by posting this graph found via the Wall Street Journal which considers the number of regulation in the United States costing more than 100 millions $ per year. I believe it does reinforce the idea that regulatory uncertainty might be playing a role in prolonging the current economic downturn as it did during the Great Depression.

Got (deregulated and cheap) milk?

When I woke up today, I found the most interesting piece of news that an economist could find. It seems that Quebec’s main regulatory agency for milk prices has decided to deregulate milk prices. I must admit that this is fun news and it reminds me of Alfred Khan’s appointment to the Civil Aeronautics Board of the United States which opened up the road to airline deregulation!  In Canada, the province of Quebec stands as the odd man out with regards to milk price regulations.

On top of the supply management scheme imposed by the federal government which reduces potential entry into the market from both domestic and foreign producers, the provincial government imposes price controls for the entire milk industry in the province of Quebec which results in a prohibition of competition between the few milk producers. Some call it a price support plan for farmers, I call it a legally enforced cartels on production.  Hence, if deregulation was to become reality (if only we could get rid of supply management as well), prices would likely decline as retailers would seek lower prices from producers and producers would compete to increase quality and lower prices for retailers. Moreover, retailers would be able to wage price wars over milk (imagine Wal-Mart coming him and slashing milk prices like a lawn mower cuts your front lawn!) .

I am making my weekly radio column on CHOI radio X tonight on this topic and will argue (evidently) for deregulation. So, in order to buff up my column and because I don’t believe in saying something without any reliable data, I decided to collect data. Well, I didn’t collect them myself, I just used the data collected by www.numbeo.com for cities in all of the provinces of Canada (except PEI and Newfoundland), a few American cities and some British cities. As you can see, Quebec consumers do pay quite  more for a liter of milk on average and the lowest prices found are also quite higher than elsewhere (these prices exclude taxes and are expressed in Canadian dollars for December 27th 2011). One should also consider than Quebec city and Montreal are amongst the cheapest cities in Canada, which tells us something about milk prices at purchasing power parities!

Quebec’s history of bank bailouts!

You think bank bailouts are an “American” thing, think again, the province of Quebec was an early pioneer in the area of bailing banks. In 1923, the Quebec-city based Banque Nationale was on the edge of bankruptcy. After the Great War, it had invested its entire capital reserve ($ 5 million) in a single project based in Montmagny (South Shore of Quebec) which consisted of transforming production from war munitions to farm implements. The 1921 recession destroyed the value of the investment.

As a consequence, the Banque Nationale was bordering on insolvency (some argue that it was simply lacking liquidity to sustain it through debt collections) and this pushed Quebec premier Louis-Alexandre Taschereau to intervene. The premier convinced Georges-Elie Amyot, a Quebec city industrialist, to inject 1 million dollars (a huge sum for 1923 especially that the bank had $ 40 millions overall in value of deposits with 230,000 savers) . In the following months, the premier also convinced other bankers to bail out the Banque Nationale and the bank received a loan of $ 15 millions repayable over 40 years at a fixed five percent interest rates.

Interestingly, the board of the Hochelaga bank which contributed to the bailout was – like that of the Banque Nationale – was predominantly affiliated with the provincial liberal party, the party of premier Taschereau.

Is anyone reminded of TARP here or Bear Sterns? I know I am…

Source: Bernard Vigod. 1991. Quebec before Duplessis: The Political Career of Louis-Alexandre Taschereau. McGills-Queens University Press.

Higher prices for alcohol at the SAQ

As we are approaching Christmas time, I decided to accumulate data on pre-tax prices for wines and spirits to compare how large is the difference between Quebec – which has a government monopoly over retail – and other areas where sales are more liberalized. In my case, I have chosen Britain and the United States. The first because sale of alcohol is virtually unregulated and selling hours are also liberalized. The second because many states have also liberalized retail (and privatized the state owned operator) and because selling wine over the internet falls under the commerce clause. This means that the online retailing of alcohol is virtually liberalized as well, hence making comparisons with Quebec even more valid. What are the results?  Quebec has amazingly higher prices than in the US and moderately higher prices than in Great Britain (all though this might be because of a measurement bias because of purchasing power parities, which would widen the gap even more). In gold you see the difference for spirits and in red, the difference for wines.

I will be discussing this tommorow on CHOI radio X (www.radiox.com) with Dany Houle at 6PM.

Stimulating demand or cutting the regulatory burden?

The title says it all: to boost growth, should we stimulate demand (lets call this the Krugman option) or cut regulations and taxes (lets call this the “evil republican option”)? The Krugman option would mean that firms and investors have poor outlook on the future and hence that they fear poor sales, hence they constrain their investment. The logical solution is stimulate demand. The “Evil Republican Option” which is attacked from all sides in the media as a communications gimmick to attack the Obama administration for being allegedly anti-business. According to this option, the logical solution is to attack the problem of uncertainty caused by changes in regulatory and tax burdens.

Putting aside ideological differences (even though I confess being, deep down, a conservative), lets look at the polls regarding uncertainty. Every month, the  National Federation of Independent Business (in the US)  produces a survey of “business optimism” within small and medium businesses. At first, the Krugman case might seem interesting since there is in fact a decline in “optimism” (see page 4) since the beggining of 2011. But this could also be proving the case of the “evil republican” side.

Hence, lets look at the idea of poor sales. On page 18, we see that in October 2011, poor sales was the single largest problem that firm faced (with 26% reporting). However, lets not jump six feets high yet! Relative to the same time last year, that figure has in fact dropped 4 %. Hardly a strong case. The “evil republican option” gains ground in fact when we amalgamate tax and regulatory burden, 37% of firms reported that government-imposed burdens (taxes and regulations) were their single largest problem, a figure which has not moved compared to the same time last year! The “evil republican” side could in fact add the inflation as part of the government-imposed burden, which would bring the total to 43%.  

I am not saying that I am a partisan of the all the republican rhetoric, but maybe its time to tone down comments like those made by Rachel Maddow, which are more of the partisan kind since there does seem to be evidence favoring the “evil republican”

The case for privatizing the Port Authority of Montreal

A few days ago, La Presse revealed that the corruption allegations at the Port Authority of Montreal would be dropped. Obviously, members of the opposition criticized the “political back-scratching” that might have occured between the Office of the Prime Minister (via Dimitri Soudas) and some dubious businessmen. Anyways, politics aside, if one really wishes to avoid corruption in the future why not look at the option of privatizing the Port Authority?

The privatization of Port Authorities is – contrary to one might believe – a policy which has yielded very positive results. As a World Bank paper noted back in the late nineties, privatization and liberalization of Port authorities in Colombia

(…)resulted in large and rapid improvements in productivity, lower fees for port users, and very attractive returns for the concessionaires. Productivity levels are higher than in most newly privatized ports in other Latin American countries—where in many cases the ports have been privatized with limited competition. The improvements have been realized with low initial investments, though recently the port societies have gone beyond investing in shoreside equipment and are starting to invest in infrastructure expansion.

The privatization of the Port of Bristol in the United Kingdom by the Thatcher government transformed the port from a loss-making venture to a profitable one in the early one in the early nineties. Hence, taxpayers were not responsible of paying the losses via subsidies. Moreover, this amazing turnaround occured in spite of a relative decline of the importance of Bristol to other British ports.

Maybe its time to look into such a policy course for Montreal, if its private hands, there is little place for political jockeying for positions…

 

 

Supply Management: the grinch who ruined xmas?

Last year for the Christmas edition of my weekly radio column at CHOI, I calculated the cost of supply management in Canada. This policy is basically one where the government gives production quotas (which can be traded, but whose number is fixed by decree) to farmers of poultry and dairy products. The intent of that policy is to reduce supply in order to increase prices for farmers. Who pays? Consumers (who have no choice because there are import tariffs of up to 298% on certain goods under supply management)!

So I decided to compare the prices in the United States and transposed them in Canada for the same item. Last year, some claimed that my results were produced by the fact that the exchange rate was favorable to my case (44% more expensive in Canada). However, this year, the exchange rate for the period selected is on near parity (1.01$ to the CAD). The gap for all items has indeed dropped, but most of that gap is caused by the change of the exchange. The remaining gap still accounts for 31% of the difference! This is a huge difference which could amount to hundreds of dollars in extra costs to families.

Considering that the demand for food items is quite inelastic, those who are ill-suited to afford these higher prices are the poorest in Canada! When you’ll be leaving milk for Santa Claus this Christmas, remember that supply management is the Grinch that makes the holidays harder to enjoy for many of us!