Author: Vincent Geloso

In a recent paper titled “Well-Being in America” in the Review of Economics and Statistics, Andrew Oswald and Stephen Wu point out that when they “control for incomes (of states), satisfaction with life is lower in richer states”.

I am not surprised, but I don’t believe that we should derive much about inequality and wealth. I know, I just jumped to the guns because I expect people to tell me that this is proof that income distribution is important for happiness. While it is true, as Gore Vidal said, that a part of me dies when my neighbour gets a better car (all though my neighbour gets an ipad and that really really really irks me!), we should be careful in extrapolating conclusions from this study.

This is because happiness is not linked with income; it is linked with getting the income we desire to experience life the way we want. As I pointed out in an earlier post, I really like to get home early and read while my better half works until late in the evening. Yet, we are both happy.

Once I get the revenues I need to buy the books I want and to get the quality leisure time that I desire, I won’t work one more minute! My girlfriend’s happiness is closely linked with her work. In fact, her work is closely linked with what makes her happy because of self-accomplishment.

If we are really interested in “well-being”, should we not use databases to look at changes in hours worked per week and the income derived out of each hour worked relative to changes in expenditures linked to leisure and time spent at home? Not only these expenditures, but how much those expenditures buy (a trip to the cinema is more expensive in San Francisco than in Baton Rouge).

For example, Oswald and Wu point out that Louisiana – a pretty poor state – is happier than California – a much richer state. Considering that Americans move a lot around their country, could it be that those who wanted adrenaline-pumped jobs went to California while those who enjoy free time decided to stick around in Louisiana? Could these geographic differences the result not only of factor allocations but also preference allocations of workers linked with the relative rewards of labour (relative to leisure).

Maybe another idea for a research paper…no idea on how to operationalize though.

Below, you will find an opinion piece submitted to the Financial Post derived from my research on Quebec’s economic history and the transition between the liberal approach of the 1940s and 1950s to the social-democratic setting of the 1960s. I argue in this piece that Quebec’s construction of a welfare state, which is one of the most generous in North America and even more generous than some European countries, would have been impossible without federal transfers.

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How Canada paid for Quebec’s Quiet Revolution

Vincent Geloso

The author is a PhD candidate in Economic History at the London School of Economics (LSE) in London, England.

On June 22nd, Quebec celebrated the 52nd anniversary of the 1960 election that marked the beginning of its “Quiet Revolution” – a period marked by rapid modernization and the elaboration of a modern welfare state. Quebeckers feel pride at the mention of this period of their history and rightfully so since they were not known anymore as the “priest-ridden” province. However, few are those in Quebec who will point out that the rest of Canada contributed largely to Quebec’s Quiet Revolution.

Between 1945 and 1955, the federal government opted to reduce its transfers to Quebec. Indeed, federal transfers to Quebec fell from 101$ per person in 1945 to 37$ in 1955. Relative to Gross Domestic Product (GDP), federal transfers fell from 1.1% to 0.3%. During that period, the provincial government opted to keep its spending under control at around 5.3% of GDP. Its total revenues also stayed stable at 5.5% of GDP. Each time the province ran a deficit, it compensated by a much larger surplus in following years, so that the debt burden adjusted for inflation fell from 1,245$ per person in 1945 to 679$ in 1955. In this era of fiscal discipline, the provincial government opened up the economy to foreign investors and turned the province into one of Canada’s most fiscally competitive provinces. This was quite impressive especially when contrasted to the pre-war period when expenditures rose to 8.95% of GDP in 1938, the highest point it would reach before 1961.

However, this would begin to change in the mid-1950s as federal transfers began to rise. During the 1950s the federal government began to multiply its interventions in the domain of welfare by attempting to fund numerous social programs for the provinces. This drive to insure an equal basket of public services to Canadians – regardless of the fiscal capacity of the province they resided in – led to the creation of numerous federal transfers and ultimately to the equalization program. In spite of its virulent opposition to federal intrusion in areas of social welfare, the province of Quebec did benefit from a huge surge in federal transfers of all sorts. By 1960, federal transfers per person adjusted for inflation had risen to 172$ or 1.5% of GDP.

Throwing fiscal discipline through the window, the provincial government embarked on a spending binge. Between 1955 and 1960, real expenditures per person increased by 51% (to 8.3% of GDP). In fact, 62% of the increase in spending per person for healthcare and education between 1945 and 1960 took place after 1955.

Autonomous revenues– revenues that did not come from federal sources – did not rise during this period. Relative to GDP, the tax burden imposed by the provincial government virtually did not rise between 1955 and 1960 and stayed close to a 5.6% share of GDP.

Some argue that the foundations of Quebec’s Quiet Revolution were laid during the 1950s. Indeed, the vast surge of government spending between 1955 and 1960 for education, health care and social welfare became the foundation upon which Quebec’s modern welfare state would be built. What has been less emphasized in Quebec is how important federal transfers have been in funding those foundations.

The additional layers that were to be attached to Quebec’s welfare state in the 1960s were also funded in large part by other Canadian taxpayers. After 1960, federal transfers to Quebec kept rising without any limit. By 1969, real transfers per person had risen to 581$ or 3.4% of GDP. In that same year, real spending per person reached 2,726$ or 15.9% of GDP. This was the result of Quebec’s drive to build a modern welfare state (both corporate and individual).

In spite of numerous tax increases in Quebec, Canadian taxpayers had to pay a growing share of Quebec’s welfare state. In 1955, they had to fork out a mere 5.6% of Quebec’s revenues. In 1960 and 1969, 20.3% and 22.7% respectively of Quebec’s revenues came from Canadian taxpayers. According to a different data set from Quebec’s department of finances, that share had grown to 26.4% by the first year of the Parti Québécois’ stay in office.

Economically, Quebec has lagged behind the richest parts of Canada for many decades. Hence, its tax base is smaller, but its welfare programs have been amongst the most generous in Canada, since the 1960s. On its own, Quebec would never have been able to construct such a large welfare state. Thanks to federal transfers, Quebec has been able to live beyond its means for decades and that is not a 52nd anniversary gift to be proud of.

A few days ago, I posted a comment on austerity measures as a complement to supply-side measures. One of the economist that I quoted, Daniel Kuehn, has replied in earnest about the 1920-21 recession:

I still wished I had explained the supply shock argument a little better (i.e. – reproduce with ample citation Romer’s excellent treatment and share a few other things on agriculture at the time that I dug up). The tight money policy was an aggregate demand shock, and the tight money policy did really put the economy into a nose-dive, so you have to be careful in talking about it as a supply-side downturn. And there was a good reason why they did that: to bring the price level back in line. The reason why it doesn’t really give us much guidance about fiscal policy is that monetary policy had a ridiculous amount of maneuvering room (which it took advantage of even before Harding came into office), and their was no demand shock to speak of except for the one that Benjamin Strong was already in the process of removing.

It seems that, indeed, I might over-emphasized the role of the drop in aggregate supply in Kuehn’s excellent paper in the Cambridge Journal of Economics. However, I am not convinced that monetary policy had much to do with that recession, the recovery was still “supply-side-led” (if that word exist, I am coining it…) and the austerity measures acted as “credible commitments”.

When one looks at the United States relative to other countries like Canada, we can see how supply-side constraints and shocks led the economy to nose-dive. For example, Canada announced in early 1919 that all price controls would be released and that some taxes would be cut down. The government of Canada also commited itself to austerity and debt reduction via the curtailment of public expenditures. Meanwhile, the Wilson administration announced that it would keep many price controls and actually announced a month after Canada that a Post-War Price Board would be kept to continue price controls. As much as inflation played a role after the war in the US, price controls created shortages and industrial shutdowns (combined with industrial transformation back to peacetime industry) that probably fuelled strikes and lockouts. Moreover, during the war there was  – as Albrecht Ristchl pointed out – the Clayton Act which allowed collective bargaining on a large scale (hence more union power that could collaborate with businesses to hike real wages and reduce employment). It was only after the Clayton Act was invalidated in court and that the Harding and Coolidge Administrations began to eliminate constraints on supply that growth took off. Here, I believe that Kuehn and me agree. So the recession was mostly a supply-side contraction and the recovery was the increase in aggregate demand (and a part of monetary policy).

However, my point is that austerity is not a measure for short term recovery. It is a measure for sustaining growth rates. Most of the spending cuts occured indeed in the Wilson years, but were mostly linked with returning troops being “laid off” and military spending returning to pre-war levels. However, the Wilson “cuts” returned spending to a higher steady path than prior to the war. Economic actors saw this and their expectations were negatively affected (see 1920: The Year of the Six Presidents for a discussion of the events and people of the time). The austerity measures of Harding combined with tax cuts provided what we can call “a credible commitment” to an institutional setting in which actors could steadily form expectations, invest and expand their activities.

The reason is that  I don’t think individuals in the US at the time lived via Ricardian Equivalence. They had expected the government to return to prior size and commit to reduce the debt by not using higher taxes. The Harding-Coolidge commitment was believed and the “return to normalcy” was seen as credible. In a sense, “austerity measures” had an impact on expectations.

P.S. : My friend John Gent of the LSE made a similar point with regards to William Pitt’s sinking fund and the return to the gold standard as a credible commitment after the Napoleonic Wars to reassure financial actors.

À force de parler de la Grande Noirceur, j’ai reçu des courriels qui affirment que mes chiffres sont trompeurs puisqu’ils sont des aggrégats qui ne différencient pas entre anglophones et francophones. La critique est valide, mais elle ne change pas la narration que je présente. Premièrement, les salaires augmentent dans toutes les industries et même en comparant les salaires des travailleurs non-spécialisés du Québec à ceux de l’Ontario ou du Canada, le rattrapage du Québec est très présent. Pour ajouter à mon argumentaire concernant le bien-être des Québécois pendant la Grande Noirceur, je pense que les accidents sont une excellente statistique à utiliser.

Considérant que la majorité des travailleurs employés dans des secteurs à risque d’accidents de travail grave étaient francophones, il est pertinent de regarder l’évolution du nombre d’accidents de travail au Québec. En 1945,  l’ancêtre de la Commission de la Santé et Sécurité au Travail a rapporté 23,24 accidents par 1,000 Québécois. La même année, l’Ontario avait une proportion de 29,56 accidents par 1,000 Ontariens. En 1960, la proportion avait diminuée au Québec mais avait augmenté en Ontario. Les travailleurs Québécois bénéficiaient donc non seulement d’une meilleure sécurité au travail que les Ontariens mais ils ont vu leur travail devenir encore plus sécuritaires au cours de la période allant de 1945 à 1960.

In a recent paper in the Cambridge Journal of Economics, Daniel Kuehn storms into the face of austerity hawks by arguing that the 1920-21 recession – heralded by many as a poster-boy for austerity measures – is not applicable.

Strangely, even if I am an austerity hawk, I agree with his view. In short, Kuehn that the recession of 1920-21 was the result of a contraction in the aggregate supply caused by a series of strike and the reallocation of ressources following the end of the Great War which was hampered by numerous regulatory and fiscal controls.

Kuehn is right that it was indeed an issue linked with liberating aggregate supply from the chains that held it back.  Indeed, Nicholas Crafts and Kent Matthews, in their respective studies of the Great Depression in the United Kingdom, found that it was the ability of the supply side to adapt rapidly (mainly in housing construction) which allowed the country to exit the recession earlier than the United States.

However, when he claims that austerity measures probably had no effect in the short run, they surely had an effect in the long run.  The fiscal consolidation that began under Harding and continued under Coolidge sent a strong signal to financial markets about the commitment of the government with regards to its huge debt obligations and the fiscal environment it would create to repay them. In the long run, the austerity measures allowed to liberate resources in the private economy and reduce tax rates. In turn, this allowed the economy to grow even more.

In short, as I have argued elsewhere (albeit in French), austerity measures are not a driver, they are complements to supply side liberalization in order to sustain long term growth. Rather than arguing about austerity measures, we should argue about where to cut first in complement with liberalization policy.