Quotulatiousness

February 3, 2012

Lemonade stand economics and government accounting

Filed under: Economics, Government — Tags: , , — Nicholas @ 10:14

An amusing illustration of the differences between real world profit and loss and the government’s accounting methods:

Parents, wanting to encourage the idea that working and making money is a good idea, drive around to buy the lemon, sugar, designer bottled water, cups, spoons, napkins, a sign or two, and probably a paper table cloth.

Aside from time and gas, the outing adds up to something north of $10. At the opening of business the next day, the kids find business is slow to nonexistent at $1 per cup. So, they start to learn about market demand and find that business becomes so brisk at only 10 cents per cup that they are sold out by noon, having served 70 cups of lemonade and hauled in $7.

[. . .]

There is a strand of economics, we’ll call it the K-brand, that sees all this as worthwhile. They add together the $10 spent by the parents to back the venture and the $7 spent by the customers and conclude that an additional $17 of spending is clearly a good thing. Surely, the neighborhood economy has been stimulated.

To the family it is a loss, chalked up as a form of consumption. If this were a business enterprise it would be a write-off. In classical economics it is a “mal-investment.”

[. . .]

But that is not how it works in government accounting. While a private business must adjust its books to reflect the losses from an intended investment that went bad, governments never do that.

When a government “invests” in, say, an airport in Johnstown, Pa., all the expenditures for labor and materials are recorded as investments and are additions to national output. Never mind that when it is later discovered that only three people a day want to fly to or from the airport, no adjustment to national wealth will reflect the folly of this “mal-investment.”

If the airport had been financed by purely private, commercial enterprises, the initial expenditures would have been recorded as investment spending, but when reality struck and the entire project was written off as a total loss, the business-profit component of national output would decline. That is, a previous bad “investment” reduces, rather than augments, current national income.

New economic ideas on employment and stimulus

Filed under: Economics, Government — Tags: , , , — Nicholas @ 10:03

Arnold Kling, writing in the Wall Street Journal, explains why (if his new theories are validated) governments have been doing exactly the wrong things to help the economy recover:

… I believe that the process of creating employment is explained not by the theories of Keynes, but rather by the theories of Adam Smith and David Ricardo. Smith famously described the advantages of specialization and division of labor. Ricardo pointed out the gains from trade that come from consuming goods that others produce more efficiently. From the perspective of Smith and Ricardo, real jobs emerge in the context of patterns of sustainable specialization and trade.

Unfortunately, the patterns of specialization and trade that had emerged five years ago were not sustainable. Many jobs in home construction, durable-goods manufacturing and distribution, and mortgage finance were dependent on housing markets with ever-rising prices. In the U.S. and the U.K. in particular, the finance industry expanded well beyond its true economic value. Once the property bubbles burst, these jobs were exposed as not viable. Meanwhile, ongoing creative destruction brought about by the Internet and globalization have continued to allow substitution of capital and emerging-market labor for industrialized countries’ labor in many sectors. Together, these phenomena have caused widespread dislocation.

More government spending will not bring back the days when supposedly triple-A-rated mortgage securities could be fashioned out of dodgy loans to unqualified borrowers. Doing so would not halt the ongoing improvements in productivity in manufacturing and retail trade. It would not facilitate the adjustments that are needed in the mix of skills in the labor force. The necessary adjustments can only be made by the decentralized efforts of entrepreneurs.

[. . .]

The word “sustainable” in “patterns of sustainable specialization and trade” refers to profitability. Patterns that are profitable can be sustained. Patterns that are not profitable must eventually be shut down. That is the problem with patterns of trade created by government borrowing and spending: They are not sustainable, as has been illustrated in the U.S. by the failure of many of the “green energy” companies supported by President Obama’s stimulus package. Moreover, as European policy makers have discovered, there are limits to how much governments can borrow to fund their experimentations in specialization and trade.

February 2, 2012

Is Sino-Forest a typical Chinese company?

Filed under: China, Economics, Government, Law — Tags: , , , — Nicholas @ 09:52

Colby Cosh posted an initial article on the investigation into Sino-Forest’s business back in June:

Timber company Sino-Forest is locked in a fascinating battle for survival against Carson Block, a stock analyst with a mixed record of publicity attacks on Chinese-based enterprises. With professional analysts reluctant to say what they make of Block’s “strong sell” report on Sino-Forest, I’m in no position to endorse it as a piece of financial advice or investigative journalism. Considered strictly as entertainment, however, the report is remarkable.

Block has documented that Sino-Forest operates with extraordinary opacity for a company whose holdings are surely very widely distributed — particularly, one assumes, within Canada. Sino-Forest claims to be doing hundreds of millions of dollars’ worth of sales through mostly unidentified “authorized intermediaries” in China — traders who are apparently happy to let the company buy title to trees, hold them as they appreciate, take on the bulk of the costs and risks in the meantime, and then snap up revenues when the trees are eventually converted into wood products. Block, having poked around a bit in the literal Chinese backwoods, questions whether much if any of the reported underlying activity is happening.

[. . .]

Sino-Forest is refusing, despite intense pressure, to make a full disclosure of the identities of the “authorized intermediaries” who are making its money. The company claims that to do so would put it at a competitive disadvantage, which makes one wonder why its business model ought to depend so heavily on sheer obscurity. One possible answer is that Sino-Forest’s real, fundamental business is some sort of cryptic regulatory arbitrage; that seems like a game potentially worth playing with paper assets in places that have a strong rule of law, but it is surely a dangerous one in a nominally Communist country, where a nationalization could be arranged in the space of an afternoon. (Or where some regional Party functionary could simply be bribed to “lose” crucial paperwork.)

Today, he posted a follow-up report:

Could a curious investor look at actual maps of timber controlled by Sino-Forest agents, you ask? Well, you see, it’s not exactly kosher for foreigners to carry around maps of remote parts of China. You can borrow them from forestry officials if you really need to. Will the local forestry bureaus confirm Sino-Forest’s claims about plantations operated by its agents? Well, sometimes they’ll give you a certificate of sorts, for all the good it might do. “The confirmations are not title documents, in the Western sense of that term,” the committee report notes. (As I understand it, the Western meaning of “title document” is that it gives one an unquestioned, justiciable claim to ownership of something, whether the Party or the Army or the good Lord in heaven approve or not.)

[. . .]

The impression given is that you need influential “backers” to do business in China. The question for the Western investor, though it’s probably now moot, is whether the real role of these backers is to help exploit Chinese resources for the benefit of the Western shareholders or to help fleece Western shareholders for the benefit of Chinese suppliers and bureaucrats.

As Jon, my former virtual landlord puts it, this is a hobby horse I like to ride now and again.

February 1, 2012

The wonders of selection, or why it now takes you an hour to find “just the right item” at the store

Filed under: Economics, Liberty — Tags: , , , — Nicholas @ 11:59

Monty (who just joined Twitter) linked to a Reason article on the glories of choice we have available to us in the western world. Monty’s comment:

The glories of capitalism, as expressed in the salty-snacks aisle of the supermarket. When you have a surfeit of a good or service, the value-add stops being the utility-value of the good and instead becomes esthetics or status. That’s why rich people drive Rolls Royces and Ferraris instead of Toyotas and Fords. As cars, they all do pretty much the same thing and in pretty much the same way; but the value-add of a Ferrari lies in aspects not directly related to the utility value of the vehicle. You can say the same about nearly any other commodity class, from clothes to electronics…to snack foods.

And the A Barton Hinkle article he links to:

But you don’t have to research the past 50 years of product flops to make the case. Just check a vending machine. There you will find every possible combination and interpolation of snack food. In the potato chip category alone — we don’t have time to look at crackers, cheese puffs, corn chips, or cookies — one finds not just barbecue- or cheddar-flavored chips, but chili cheese, cool ranch, ragin’ ranch, habanero, cheddar jalapeno, hot sauce, honey cheese, creamy chipotle, Mediterranean herb, and ketchup-flavored chips.

It’s obvious what’s going on here. Like every other industry, America’s snack-food makers live in deathly fear that the other guys are going to come up with the next “disruptive innovation” first, so everyone is trying to innovate as fast as they can. The poor sots in middle management have been told next year’s raise depends on producing X amount of revenue from new products. But there are only so many truly new products you can think up. Answer? Combine existing products the way you choose from a Chinese take-out menu: one from Column A, one from Column B. …

This seems to be the method at Hammacher Schlemmer — the fine folks who bring you must-have products like the bath mat/alarm clock and the remote-control pillow. It seems to work for them. So why not try it with snack food? Pickle-flavored potato chips, that’s why. Who needs all that ridiculous junk? Your basic potato-flavored potato chip was good enough for our ancestors and by gad sir, it should be good enough for us.

Or at least this is my attitude when standing before a vending machine. Whisk me into an office-supply store, however, and the tune suddenly changes. I am among those who have a weak spot — call it a fetish, call it an obsession — for school supplies. Pens, especially.

University tuition and lower-income student access

Filed under: Bureaucracy, Cancon, Economics, Education — Tags: — Nicholas @ 10:40

In the Globe and Mail (which seems to be having web authentication issues lately), Stephen Gordon points out that lowering university tuition costs won’t actually address the problem it’s supposed to:

There is a well-documented correlation between family income and university participation rates: people from the top quarter of the income distribution are roughly twice as likely to go to university as those from the bottom quarter. An implication of this imbalance is that the population of people who are attending university is far from being representative of the population as a whole: university students from the top quartile outnumber those from the bottom by a factor of 2 to 1. This imbalance is both the problem and the reason why the problem is so hard to solve.

Reducing tuition fees will do very little to close the gap between university participation rates in people from the higher and lower ends of the income distribution. The direct costs of university — tuition and books — account for only a quarter of the total costs (source), and financial considerations explain roughly 12 per cent of the gap between PSE participation rates of youths from upper- and lower-income households.

[. . .]

A far cheaper, more equitable and more effective way of increasing access to universities is to concentrate public funds on providing support to students in financial need (this group also includes those who have debt problems). But these measures would benefit only a minority of students who are already going to university, while tuition cuts would benefit all students.

Student lobby groups such as the CFS have a mandate to represent the interests of all current students, and this group does not include those who might have gone to university if more financial support were available. They have little interest in targeted programs — see, for example, the CFS’ reaction to the Ontario government’s tuition rebate for students from families earning less than $160,000/year.

January 31, 2012

Andrew Coyne on the sudden appearance of Stephen Harper’s “hidden agenda”

Filed under: Cancon, Economics, Government, Politics — Tags: , , , , — Nicholas @ 12:19

We’ve been waiting for it to appear since the 1990’s, so it’s about time that it finally put in a cameo:

At last, the hidden agenda, and not a moment too soon. Vague, indirect and overseas as it was, Stephen Harper’s Davos speech was perilously close to a vision statement, of a kind the prime minister has seldom made until now, and will henceforth have to make often.

It would be nice if he had shared with us his concerns about the ageing of the population, and the threat it poses to our long-run social and economic health, sometime before the last election, rather than joining in the all-party consensus that there was nothing wrong with Canada that could not be fixed with more and richer promises to the elderly.

[. . .]

How serious is the cost side of this conundrum? The president of the C. D. Howe Institute, Bill Robson, has projected the “net unfunded liability” implied by this unprecedented demographic shift — that is, promises to pay benefits out of public funds for which we have made no provision in taxes, “net” of any savings from having fewer children about — at about $2.8-trillion. With a T, ladies and gentlemen: about 160% of GDP. (That’s in addition to the $800-billion unfunded liability in the Canada Pension Plan and its Quebec counterpart — yes, they are pulling in enough each year to meet their current obligations, but that does not mean they are “fully funded,” the prime minister’s claims to the contrary — to say nothing of the $600-billion national debt.)

Germany issues “secret” document to Greek government on debt repayment

Filed under: Economics, Europe, Germany, Government, Greece, Politics — Tags: , — Nicholas @ 09:41

Mick Hume recounts the machinations within the European Union:

One outraged Greek government minister described it as ‘the product of a sick imagination’. Another called it ‘absolutely laughable’. The formal title of the document in question is ‘Assurance of Compliance in the Second GRC Programme’. It is neither a joke, nor a sick fantasy. It reads more like the draft of a death warrant for democracy, first in Greece and then elsewhere in Europe.

This supposedly secret document was issued by Angela Merkel’s German government to its partners in the Eurozone — and then carefully leaked, to ensure maximum impact. It sets out two extraordinary measures that the Germans want to impose to ensure that the Greek authorities comply with the swingeing budget cuts which they promised but have apparently failed to deliver to the markets’ satisfaction.

First, it says Greece must ‘legally commit itself to giving absolute priority to future debt service’. All state revenues must go first to paying debts and interest due, before a cent can be spent on public services. And the Greek government will not be allowed to threaten to default on its debts in future; if it cannot pay, it must accept that ‘further cuts’ will be ‘the only possible consequence’.

Second, the Germans want the Eurozone to oversee the ‘transfer of national budgetary sovereignty’ from Greece to ‘the European level’ under a ‘strict steering and control system’. The plan is for the Eurozone group to appoint a budget commissioner to oversee Greek finances, with the power ‘to veto decisions not in line with the budgetary targets’ set by European and international officials. If that was not humiliating enough, the Greeks would also have to look happy to bend the knee by ensuring that this new system of outside control ‘is fully enshrined in national law, preferably through constitutional amendment’.

To get the Greeks to agree to these unprecedented conditions, the German document also offers incentives — or as we used to call it, threats. If Athens does not accept the compliance measures, then ‘the Eurozone will not be able to approve guarantees for GRC II’. That is the second huge bailout of €130 billion which Greece desperately needs if it is not to go officially bust in weeks. The ‘Assurance of Compliance’ document is a ‘secret’ blackmail note.

Update: Ah, Monty captures the absurd state of the EU perfectly in a throw-away line in today’s Daily DOOM — “Like German porn, the politics of the Greek bailout just keep getting weirder and more complicated.”

January 28, 2012

Conrad Black on Pierre Trudeau and his political career

Filed under: Cancon, Economics, History — Tags: , , , , — Nicholas @ 12:24

Writing in the National Post, Conrad Black discusses Pierre Trudeau’s time in office:

Nor is there truth to the theory that Trudeau possessed any original political ideas. He was a run-of-the-mill 1960s social democrat who wanted big government, the nanny-, know-it-all-state, high taxes, and the confiscation of income from those who had earned it for redistribution to those who had not in exchange for their votes (far beyond what could be justified by the acquisition of votes for federalism in Quebec, where the money transfer was also largely from the non-French to the French).

It was hard to square Trudeau’s professed enthusiasm for civil rights with his friendship with Fidel Castro and other dictators who ruined their countries, such as Julius Nyerere of Tanzania, and his cold-shouldering of Soviet dissidents and other international civil rights advocates, and even the Canadian victims of the Korean airliner the Russians shot down. This was of a piece with his fawning deference to the Soviet leadership and his antagonism to Ronald Reagan, Margaret Thatcher and even Richard Nixon, who all regarded him as little better than a communist fellow traveller (and told me so).

His campaign to reorient the Canadian economy away from exports to the United States was authoritarian rather than based on any fiscal incentivization of competition, and was a fiasco. His pursuit of arms control was chimerical; he disarmed Canada, did nothing to reduce the country’s military dependence on Washington, and produced a nonsensical plan for more conferences to agree on the unverifiable “suffocation” of defence spending.

[. . .]

His elevation to the headship of the party and government continued the grand Liberal tradition of choosing men lately drawn from outside politics (King, St. Laurent, Pearson). He took it whimsically, and much of his record was just idle dabbling, posturing, and the supreme confidence trick of saving Canada with a Charter of Rights that is revocable by each province (and has unleashed the bench on Canadian life like a swarm of hyper-active social tinkerers); and by imposing bilingual breakfast cereal boxes and television programming even in unilingual parts of the country.

It was clever enough that, as the English say, if you put a tail on it, you could call it a weasel: the rights of man and not governments, our (French-Canadian) house is all Canada, and deluges of Anglo-money in Quebec in the name of social justice, gracieusete du Canada. But it was a ruse, made more farcical by the revelation that Quebec’s supreme separatist strategist, Claude Morin, was a spy for the RCMP.

The Quebec nationalists took the bait, as well as the federal transfer payments, and today Quebec is a bovine clerisy of civil servants and consultants on life support from the rich English provinces, and separation is just a romantic delusion. I think that, at heart, Trudeau was a worldly Gallican Catholic cynic who sincerely despised separatism, was bemused to find himself a national saviour, and played the role with courage, brio and success.

Deirde McCloskey on the “Bourgeois Virtues” that sparked the modern world

Filed under: Britain, Economics, History, Liberty, Media — Tags: , , , , — Nicholas @ 00:08

Writing in the Wall Street Journal, Dalibor Rohac reviews some of the key arguments in McCloskey’s recent book Bourgeois Dignity: Why Economics Can’t Explain the Modern World (which I’m currently reading — and very impressed with).

Unlike “Bourgeois Virtues,” “Bourgeois Dignity” makes a historical argument. Modern economic growth, she claims, is a result of an ideological and rhetorical transformation. In the Elizabethan period, business was sneered upon. In Shakespeare’s plays, the only major bourgeois character, Antonio, is a fool because of his affection for Bassanio. There is no need to dwell on how the other bourgeois character in “The Merchant of Venice,” Shylock, is characterized.

She contrasts this with attitudes 200 years later. When James Watt died in 1819, a statue of him was erected in Westminster Abbey and later moved to St. Paul’s cathedral. This would have been unthinkable two centuries earlier. In Ms. McCloskey’s view, this shift in perceptions was central to the economic take-off of the West. “A bourgeois deal was agreed upon,” she says. “You let me engage in innovation and creative destruction, and I will make you rich.” A commercial class that was not ostracized or sneered at was thus able to activate the engine of modern economic growth.

Ms. McCloskey insists that alternative explanations for the Industrial Revolution fail, for a variety of reasons. Property rights, she says, could not have been the principal cause because England and many other societies had stable and secure property rights for a long time. Similarly, Atlantic trade and plundering of the colonies were too insignificant in revenue to have made the real difference. There had long been much more trade in the Indian Ocean than in the Atlantic, moreover, and China or India had never experienced an industrial revolution.

By elimination, Ms. McCloskey concludes that culture and rhetoric are the only factors that can account for economic change of the magnitude we have seen in the developed world in past 250 years.

January 27, 2012

Megan McArdle finds the right word to describe Obama’s vision: Nostalgianomics

Filed under: Economics, History, Politics, USA — Tags: , , , — Nicholas @ 09:41

In her column in The Atlantic, Megan McArdle points out the extremely ahistorical nostalgia that seems to infuse President Obama’s vision:

Surely Obama’s economic advisors have not told him that they know how to replicate the growth of the 1950s — and if they did, surely the last three years have given the lie to this belief.

I think the speech made it even clearer that other speeches have that the president’s vision of the world is a lightly updated 1950s technocracy without the social conservatism, and with solar panels instead of rocket ships. Government and labor and business working in tightly controlled concert, with nice people like Obama at the reins — all the inventions coming out of massive government or corporate labs, and all the resulting products built by a heavily unionized workforce that knows no worry about the future.

There are obviously a lot of problems with this vision. The first is that this is not what the fifties and sixties were actually like — the government and corporate labs sat on a lot of inventions until upstart companies developed them, and the union goodies that we now think of as typical were actually won pretty late in the game (the contracts that eventually killed GM were written in the early 1970s).

And to the extent that the fifties and sixties were actually like this, we should remember, as Max Boot points out, that this was not actually the day of the little guy. Big institutions actually had a great deal more power than they do now; it was just distributed somewhat differently — you had to worry less about big developers slapping a high-rise next to your single-family neighborhood, and a whole lot more about Robert Moses deciding he wanted to run a freeway through the spot where your house happened to be.

The military model of society — employed by both Obama, and a whole lot of 1950s good government types — was actually a kind of creepy way to live. As Boot says, “America today is far more individualistic and far more meritocratic with far less tolerance for rank prejudice and far less willingness to blindly follow the orders of rigid bureaucracies.” If you want the 1950s except without the rigid conformity and the McCarthyism, then you fundamentally misunderstand what made the 1950s tick.

Is VIA Rail an unaffordable luxury?

Filed under: Cancon, Economics, Government, Railways — Tags: , , , — Nicholas @ 00:02

It hurts me to admit that long-distance passenger rail is an expensive relic of the past, and Canada’s government-owned passenger rail corporation is little more than a drain on the budget. I’m a railway fan: I founded a railway historical society, for crying out loud. I love trains, although I rarely get to use them myself. The freight railway business is doing well and it should continue to do so, as it’s generally much more economical for long-haul bulk cargo than any other option. But unlike in Europe, where population density allows passenger railways to remain a key part of the transportation network, distances and population distribution mean passenger railways can only operate profitably in a few areas (Windsor-Toronto-Montreal-Quebec City, and Boston-New York-Washington, for example).

Lorne Gunter says that recent reports about the federal government looking to sell off some or all of VIA Rail make lots of sense:

Bloomberg reported last week that the federal Tory government is quietly contemplating privatizing some or all of VIA Rail. Good. It’s about time, just as it was about time in 1991 when the Tories under Brian Mulroney thought about selling off VIA, or in 2000 when the Chretien Liberals considered it, or 2003 (Liberals again) or 2009 — the first time the current crop of Tories mulled it over.

It’s easy to imagine that every few years, Transport Canada bureaucrats return to the cabinet drawer marked “Keeping the Minister Preoccupied,” extract the file labelled “Secret Plans to Privatize VIA,” blow off the cobwebs and hand it to their latest boss. Then they sit back and wait for the predictable outcry from assorted special interests and from those few central Canadians who do actually use the train regularly.

Most years, VIA spends nearly twice as much as it makes. In 2010, for instance, VIA’s expenses were $536 million, while its revenues were just $274 million. That left a deficit of $262 million that had to be made up by Ottawa. Put another way, for every dollar VIA charges passengers for tickets, taxpayers put in 96 cents.

Shortly after we got married, Elizabeth and I took the train from Toronto to Halifax and had a great time: it was a very enjoyable trip, and we thought of the train ride as part of the vacation, not just a means of transportation. I’ve always wanted to ride The Canadian all the way to Vancouver, but at no point in the last thirty years have I simultaneously had the time available for the trip (four days on the train in each direction) and the money (right now, with a big seat sale going on it’d cost $2,137 for coach seats or $5,253 if we took a cabin). If that’s only half of what the trip would cost at market rates, there’s no way the service could support itself.

So the annual VIA subsidy amounts to an income transfer from people in most of the country who never use a passenger train to people in the central core of the country who prefer to take the train rather than drive their cars from Toronto to Montreal, but wouldn’t do so if they had to pay anywhere close to the full fare for their trips.

Every time I write about the absurdity of keeping VIA rolling, I get letters from people who insist they prefer the train to flying, driving or taking the bus or who believe trains have a lighter environmental impact or who say they can’t afford other modes. Fine, but why is it taxpayers’ duty to split the cost of your unprofitable preferences with you, 50/50?

January 26, 2012

What is really meant by the term “market failure”

Filed under: Economics, Media, Politics — Tags: , , , , , — Nicholas @ 11:10

Posting on the Institute of Economic Affairs blog, Tom Papworth tries to clarify what the term “market failure” actually means, in comparison to how it’s commonly used by politicians and journalists:

Firstly, it seems to blur the distinction between ‘the market’ and ‘the markets’ — a very common error in current discourse. The market is an economic concept that describes the myriad of choices and exchanges that take place between people every day; the markets are the very real institutions created for handling major financial transactions. It is not clear to me that this article acknowledges that distinction. This manifests itself primarily in the title and main theme: indeed, as Jan (and at least one commentator) does tacitly acknowledge, the financial markets are so shaped by government intervention that it would be a surprise if they did correspond to a model market.

And that brings me to the second problem: the suggestion that markets don’t fail when they ‘respond rationally, quickly and often brutally to conditions as they find them’. While that description is true, it has little bearing on the concept of market failure. Market failure typically refers to situations where the effects one would expect to see in a theoretical market economy do not in fact manifest themselves in real life. As the great man himself would be — and perhaps was — the first to point out (though without using these terms) markets fail because of factors such as monopoly and externality — monopolies undermine competition and so markets do not clear; externalities enable costs to be passed onto third parties and prevent all beneficiaries contributing to the production of goods. Information asymmetry is often presented as another source of market failure.

Now, to be fair to Jan, that precision of language is hardly prevalent among the politicians he is criticising. When they speak of market failure, it seems almost as though market success is defined by a number of uneconomic measures such as social justice, or even (that ultimate weasel-word) fairness.

The fate of London’s diesel locomotive plant

Filed under: Cancon, Economics, Media, Politics, Railways — Tags: , , , , , — Nicholas @ 10:38

In the Toronto Star, Martin Regg Cohn (who claims he “is not an anti-globalization crusader”) does his level best to put forward a case for massive government intervention in a labour dispute between Caterpillar and the Canadian Auto Workers:

At the old locomotive plant now owned by U.S.-based multinational Caterpillar Inc., the Canadian Auto Workers union is not even on strike. The CAW has been locked out since New Year’s Day because it refused to sign its own death warrant by agreeing to slash wages in half for most workers from $34 an hour to $16.50.

When a powerful multinational negotiates in bad faith, it becomes a story that governments in Queen’s Park and Ottawa can no longer wash their hands of. To put it in language that resonates with Premier Dalton McGuinty: When a bully tries to humiliate people, you can’t just watch in silence.

When high-paying skilled local jobs can be shredded at the whim of a combative multinational giant, it dramatically undermines all the upbeat rhetoric we hear from McGuinty and Prime Minister Stephen Harper about Canada’s global appeal. It sends a signal that Ontario is not so much open for business as it is closed for unions.

We jump directly from Caterpillar’s demand for wage reductions to an assertion that the company is negotiating in bad faith (I guess, from the union’s point of view, anything other than a wage increase is proof). No indication whether the company’s demand is economically justifed — if sales of the plant’s railway locomotives are as bad as the wage offer implies, then the next step will be closing the plant — just straight over to bad-mouthing the company.

And, of course, it’s merely objective reporting to use pejorative descriptors when discussing the eeeeevil multinational firm. Not content merely to malign the company, he then calls on the Premier to support the union to the hilt:

So what can our anti-bullying premier do?

If I were McGuinty, I would ask myself a simple question: What would Bill Davis do?

The former Tory premier of Ontario wasn’t perfect, but he was always plugged in. He took labour seriously, listened closely to business and wooed foreign investors (remember Renault?). He knew how to leverage the power of the premier’s office to stand up for Ontario’s greater interests.

A phone call to Caterpillar’s corporate braintrust would show that Ontario’s premier is no pushover. If that didn’t work, a phone call to Harper — who is still trying to live down the tax breaks he gave the locomotive factory’s former owners a few years ago — might find a receptive ear.

And finally we get to a good point: the foolishness of governments in giving special tax breaks to certain industries or companies. If it’s in the company’s best interests to locate in your jurisdiction, they’ll probably do it. If you have to bribe them with tax breaks, low-interest or interest-free loans, or other special incentives, then once the incentive runs its course, the company has no further requirement to stay in your location.

Update: In the National Post, Kelly McParland has some suggestions for union leaders:

1. A lot of people (the membership figures suggest it’s the vast majority) think unions are concerned solely with their own members and couldn’t give a bird’s turd for anyone or anything else, including other working stiffs, members of other unions, the fortunes of the company they work for or the customers they deal with. When you display a total lack of interest in others, they generally adopt the same attitude towards you.

[. . .]

4. Union politics might consider moving out of the stone age. The world evolves over time, but unions persist in peddling the same trite bromides as if it’s still the dawn of the industrial revolution. The “us against them” mentality; the pretense that all employers exist to exploit workers and can never be trusted; the assumption that every contract must be succeeded by an even richer one no matter the health of the industry, the economy or the company; the fealty to leftwing political parties — all are symptoms of an exhausted, outdated perspective that has barely changed since “modern technology” meant the telephone.

If unions really want to save themselves, they might take a lesson from the market economy. If no one buys what you’re selling, it’s not because they buyers aren’t bright enough. It’s because people see no value in your product.

Update, 3 February: The plant is being closed. Here’s the official announcement:

Progress Rail Services has announced that it will close Electro-Motive Canada’s (EMC) locomotive production operations in London, Ontario.

Assembly of locomotives will be shifted from the London facility to the company’s other assembly plants in North and South America, which will ensure that delivery schedules are not impacted by the closing of the London facility.

All facilities within EMC, EMD and Progress Rail Services must achieve competitive costs, quality and operating flexibility to compete and win in the global marketplace, and expectations at the London plant were no different.

The collective agreement and cost structure of the London operation did not position EMC to be flexible and cost competitive in the global marketplace, placing the plant at a competitive disadvantage. While the company’s final offer addressed those competitive disadvantages, the gulf between the company and the union was too wide to resolve and as such, market conditions dictate that the company take this step.

January 25, 2012

The Cato Institute response to the State of the Union 2012

Filed under: Economics, Education, Government, Liberty, Politics, USA — Tags: , , , , — Nicholas @ 12:00

Gary Johnson responds to the State of the Union address

Filed under: Economics, Government, Liberty, Politics — Tags: , , , — Nicholas @ 11:46

This was sent out from Gary Johnson’s campaign in response to President Obama’s State of the Union speech last night:

“If the idea tonight was that the President would fulfill his constitutional duty to give us ‘information of the State of the Union’, we should be able to expect some truth. I didn’t hear much truth. Truth is that the real unemployment rate is probably still above 10%. Truth is that after all the hand-wringing and deals of the past couple of years, instead of cutting spending, the President and Congress are going back to the well for another $1.2 Trillion debt limit increase. And the truth is we are seeing nothing from either the President or the Republicans that will really change any of those unacceptable realities.

“Only in the twilight zone that is Washington could a President who has bailed out and stimulated our economy to death stand in the Capitol and declare there should be ‘no bailouts, no handouts, and no cop-outs’. Can anyone spell GM or TARP or Solyndra?

“The President said we deserve a government that plays by the same rules as millions of hard-working Americans. Perhaps that should begin with the government not borrowing and printing 43 cents of every dollar it spends — something hard-working Americans can’t and don’t do.

“Until we see a real plan — not a Washington smoke and mirrors plan — that puts a stop to deficit spending and really puts America back to work, all of this rhetoric is just wasted breath.”

Gary Johnson’s campaign website is www.garyjohnson2012.com.

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