Ending supply management would not cost $30b

In Canada, the debates over supply management – the system of production quotas and import duties limiting the supply of dairy and poultry products – has intensified in recent years.  For ten years now (literally), I have been writing, testifying and researching this insane system which moves the supply curve leftwards (even if some try to deny it in some non-nonsensical arguments stating that prices would be higher if the supply increased).

One of the groups that has been spewing non-sense is, obviously, the dairy farmers union. In one of their often-made claim, which some politicians are taking up, is that ending the policy would cost $30 billions.

That is incorrect, widely off the mark and not properly contextualized.

First of all, the number relates to the market value of the quotas (see here). Many farmers bought the quotas many years ago at a much lower price and as such, compensation would be slightly below the $30 billions. More importantly, most quotas are acquired through mortgages by farmers. These mortgages represent a value of $30 billions (capital and interest). However, farmers are riskier borrowers than governments. If the government bought back all the mortgages, it would actually become the borrower (it would hold the liability). However, since the Canadian government is at a lesser risk of insolvency than farmers, it can easily renegotiate with banks for a haircut. In fact, banks would easily accept this. They know that the government won’t default on this which means the risks on their balance sheets have just dropped dramatically and they now hold a much safer asset. I guess that they would be willing to negotiate a form of haircut on the assets that would be somewhere between the new (risk-adjusted) value and the old value.

Secondly, who the hell said the quotas needed to be bought back in one shot? Farmers could be offered a choice between many options. First, there would be the option buy-back plan that gives them 50% (in government t-bills) of the value of the share of the mortgage that they paid. The second would be a higher percentage spread out over many years. The third could be over 100% of the value of the permit in tax credits. Basically, if a farmer has paid $200,000 of a $1,000,000 mortgage, the government would commit to pay the difference to the creditor institution and offer more than $200,000 in tax breaks to farmers and their families. For example, a farmer with a tax liability of 25,000$ every year would end up paying no taxes for 10 years (as such, he would 125% of the value of his quota). As such, the cost is spread over 10 years making this a $3 billion expense annually.

And what about the context? Well, according to the famous article (recently published) on the burden of supply management, the cost in higher prices is equal to 0.84% of household income. In short, this means 0.84% of the Canadian economy or $17.3 billion a year or $173 billion over 10 years. Now, this is annually – the savings are recurrent – and the estimates does not account for the fact that productivity gains might finally allow Canadian farms to benefit from the international increase in demand. So, the $173 billion figure is pretty conservative and yet, the inaccurate $30 billion figure accounts only for roughly 17.3% of the benefits. In terms of return on investments, I am pretty sure this qualifies as a great move through which you would not even need to go down the Australian route (imposing a transitory tax for ten years).

I am sorry, but there is no way that the cost of the buyback should be considered a deterrent especially if a buyback plan is spread out over many years.

How dairy farmers unions in Canada are distorting the facts about supply management

Under heat recently as President Trump has criticized supply management in Canada and retaliated against it, the different provincial associations representing dairy farmers have moved on the offensive. To promote the virtues of this system meant to reduce production in order to prop up prices through the use of trade tariffs, production quotas and price controls (how can we call those virtues), these unions have produced numerous infographics to make their case. It is even part of what they dub their These-infographics-show-that-diary-prices-are-lower-in-Canada-than-elsewhere, that milk is still a cheap drink relative to other type of drinks and those prices, supposedly, increase more slowly than elsewhere. All of these graphics are dishonest and must be dismantled.

The most egregious of these infographics – present in the “lobby day kit” – shows the price of milk in Australia (1.55 CAD), Canada (1.45 CAD) and New Zealand (1.65 CAD). They are seemingly using 2014 prices. First of all, they use data that conflicts massively with the reports of Statistics Canada that suggest that milk prices hover between 2.33$ to 2.48$ per liter.  Their data is provided by AC Nielsen but no justification is presented as to why they are better than Statistics Canada. The truth is that it is not better. Participants in Nielsen surveys come from a self-selected pool of storeowners who wish to participate and are then selected by Nielsen to be part of the data collection. Then, they can record prices. It should be mentioned that not all regions of Canada are covered in the data. Although the Nielsen data does have some uses (especially with regards to market studies), it hardly measures up Statistics Canada when comes the time to evaluate price levels. This is because the government agency collects information from all regions and tries a broader sweep of retailers in order to create the consumer price index.

But an even larger problem is that, in their comparison of prices, they don’t mention that New Zealand taxes milk. In New Zealand, all food items are subjected to sales tax, which is not the case in Canada and Australia. Hence, when they compare retail prices, they are comparing prices that exclude taxes and prices that include taxes. One would like to find if they acknowledge this fact in the methodological mentions, but there are none!

Using prices available at Numbeo.com and Expatisan.com and the exchange rates made available by the Bank of Canada, we can correct for this problem of theirs. Simply changing prices source leads to a massively different result with regards to Australia whose milk prices are lower than in Canada. Secondly, once we adjust for the sales tax in New Zealand, we find that prices in New Zealand are lower than in Canada. In fact they are lower than in one of Canada’s cheapest market, Montreal (let alone Toronto or Vancouver).  So the infographic they show in order to lobby governments is a fabrication.

Table 1: The real price of milk

Using Numbeo.com (regular milk)
Unadjusted Adjusted for taxes
 Australia  $           1.59  $                 1.59
 New Zealand  $           2.26  $                 1.97
 Canada  $           1.99  $                 1.99
 Using Expatisan.com (whole milk)
 Unadjusted  Adjusted for taxes
 Sydney  $           1.82  $                 1.47
 Wellington  $           2.42  $                 2.10
 Montreal  $           2.87  $                 2.87

Source: Numbeo.com and Expatisan.com, consulted May 16th 2014 and the Bank of Canada’s currency converter. Note: using the Statistics Canada price would make Canada’s situation even worse by comparison.

This is part of a pattern of deceit since they also massage data for numerous other graphs that are presented to Canadians in efforts to convince them of the virtues of supply management. One other example is an infographic that presents a figure of nominal milk prices in Australia before and after the abolition of supply management. Given that prices seem more volatile after 2000 and that they increase more steeply, they try to make us believe that liberalization was a failure. This is not the case. Any sensible policy analyst would deflate nominal prices by the general price index to control for inflation. When one does just that using the data from the Australian Bureau of Statistics, one sees that real prices stabilized in the first ten years of deregulation after increasing roughly 15% in the decade prior. And since 2010, real prices have been falling constantly.

Other examples abound. In one instance, the Quebec union of dairy farmers circulated an infographic meant to show that nominal prices for dairy products increased faster in the United States than in Canada. Again, they omit inflation. Since 1990 (their own starting date), prices of dairy products have risen more slowly than inflation – indicating a decline in real prices. In Canada, the opposite occurred – inflation increased more slowly than dairy prices indicating an increase of the real price.

The debate around supply management is complicated. The policy course to adopt in order to improve agricultural productivity and lower prices for Canadians is hard to pinpoint. But whatever position one may hold, no one is well-served by statistical manipulations offered by the unions representing dairy farmers.

Differences in life expectancy within Canada, 1921 to 2011

I’ve been playing around with some data for a paper I have been trying to write about the economic history of Canada in the 20th century. In the process, I assembled the data from the Base de données sur la longévité canadienne regarding life expectancy at birth. Then, I thought that it would be interesting to see how large were the differences between the provinces and how fast did they close. They closed pretty dramatically during the 20th century – see for yourself.

LifeExpectancyCanada

On the reversal of fortune, urbanization and Canada

One of the more famous articles of economist Daron Acemoglu is his 2002 article on the reversal of fortunes where he points out that countries colonized by Europeans in 1500 that were relatively rich then are relatively poor now. In the paper, they use urban density as a proxy for economic development at that point in time.

I was not particularly convinced by this because of the issue of ruralization in colonial economies. I am still not convinced in fact. As many scholars interested in American colonial history point out, the country de-urbanized (ruralized) during the colonial era as cities grew at a slower pace than the general population. As such, the share of the US population in rural areas increased. But Jeffrey Williamson and Peter Lindert documented that in 1774, the United States were the richest place in the world (beating England on top of being more egalitarian). 

This is normal. Economies on the frontier had land to labor ratios that were the exact opposite of those in Europe. The opportunity cost of congregating in one area was high given the abundance of land that could be brought under cultivation. This is why the Americas (North America at least) was the Best Poor Man’s Country. As such, areas with low population density are not necessarily poor (even if urbanization is a pretty strong predictor of wealth).

This is where Canada comes in. Today, the country easily fits in the “relatively rich” group. According to the figures 1 and 2 in the work of Acemoglu, Johnson and Robinson, it would have been in the “relatively poor” group well behind countries in Latin America. However, I recently finished compiling the Canadian GDP figures between 1688 and 1790 which I can now compare with those of Arroyo Abad and Van Zanden for Peru and Mexico. With my Canadian data (see the figure below), we can see that Canada was as poor as Latin America around 1680 (the start date of my data).

GelosoGDP.png

So, Canada was a relatively poor country back which was equally poor (or moderately richer) than Latin American countries. Why does that matter to the reversal of fortune story? Well, with the urbanization data, one shows that the non-urbanized of 1500 are the rich of the today. With the GDP data for the 1680s, we see that the more urbanized countries were also poorer than the less urbanized countries.

Now, my argument is limited by the fact that I am using 1680s GDP rather than 1500 GDP. But, one should simply extend the urbanization series to circa 1700 and the issue is resolved.  In any case, this should fuel the skepticism towards the strength of the reversal of fortune argument.

The Heights of French-Canadian Convicts, 1780 to 1830

A few days ago, it was confirmed that my article with Vadim Kufenko and Alex Arsenault Morin on the heights of French-Canadians between 1780 and 1830 was accepted for publication in Economics and Human Biology. In that paper, we try to introduce French-Canadians before 1850 to the anthropometric history literature by using the records of the prison of Quebec City. Stature is an important measure of living standards. As it is heavily related to other aspects of health outcomes, it is a strong measure of biological living standards. More importantly, there are moments in history when material living standards and biological living standards move in opposite directions (in the long-run, this is not the case).

We find three key results. The first is that the French-Canadians grew shorter throughout the era when living standards did not increase importantly (and were very volatile). This puts them at odds from other places in North America where increases in stature were experienced up until the 1820s. Furthermore, stature stops falling around 1820 when economic growth picked up. This places the French-Canadians in a unique category in North America since it seems unlikely that they experienced a strong version of the antebellum puzzle (decline in stature with increases in material living standards which is what the US experienced). The second key result is that the French-Canadians are the shortest in North America, shorter even than Black Americans in slavery. However, they are considerably taller than most (save Argentinians) Latin Americans. More importantly, they are considerably taller than their counterparts in France. The third key result is related to the second key result. Today, French-Canadians are noticeably shorter than other Canadians. However, the gap was more important in the late 19th century and early 20th century. Pegged as a “striking exception” within Canada, we do not know when it actually started. Thanks to our work, we know that this was true as far back at the early 19th century.

The working paper (dramatically different than the accepted version) is here and I am posting key results in tables and figures below.  Moreover, I will be talking about anthropometric history and economic history with Garrett Petersen of Economics Detective Radio this Tuesday (I do not know when the podcast will be made available, but you should subscribe to that show anyways).

Heights.png

Table3.png

On power-display bias and the historians

This is an excerpt from my upcoming book at Palgrave McMillan which discusses Canadian economic history. This excerpt relates to a point that I have made numerous times on this blog regarding the bias for power held by historians and how it often leads them to inaccurate conclusions (here and here):

When the great historian Lord Acton warned that, “absolute power corrupts absolutely,” he was not only referring to imbuing certain fallible humans with excessive powers, but also as a caution to historians for their assessment of politicians. Too often, politicians become known for “greatness” because of their actions, regardless of how much they impoverished society or put in place measures that would ultimately erode their citizens’ quality of life. By the same token, some eminent figures remain unknown, relegated to a footnote in the history books, even though they have contributed in a more significant way to economic enrichment, cultural development, and social cohesion. Grand gestures and large-scale social projects inspired by good intentions do not always yield great results – or desirable ones.

If we truly want to assess the Quiet Revolution and the “Great Darkness” with any clarity, we must consider politicians’ actions in a more realistic scope, and sift through the quantitative and qualitative data that show how people thought and acted in the everyday. Through the use of rigorous tools, statistical methods and economic theories, we ought to consider how things might reasonably have developed otherwise without the Quiet Revolution. This is what I have tried to do in this book. (…)

The discourse on Quebec modernity that emerged along with the Quiet Revolution coincided with the emergence of a strong interventionist State. When we compare Quebec to other Western countries, however, our analysis reveals that the State did not play a major role in modernization here. After all, it was in a period when Quebec’s State apparatus was less active compared to the rest of Canada that it was able to progress in leaps and bounds. Of course, the State must have had some effect in certain areas, but the Quiet Revolution was not responsible for the bulk of positive outcomes that came to term during this period. Analyzing trends, causes, explanations and secondary forces at play in Quebec society’s metamorphosis definitely requires a degree of patience and effort. It would be much less onerous to take the easier path of only looking at the State’s activities as worthy of attention in this regard. If we fail to make these efforts, we risk succumbing to the “Nirvana Fallacy.” In order words, we tend to put the State on a pedestal: it becomes a kind of disembodied entity in a virtual reality where it plays the VIP or starring role. Comparing reality with a utopia necessary leads us to conclude that utopia is better, but this approach is utterly fruitless.

 

How Canada Tracked the US during the Great Depression

Over the last few years, while I continued my research on other fronts, I started spending small amounts of time on a daily basis to read about the Great Depression and more precisely, how Canada lived through the depression.

Since the old adage is that Canada gets pneumonia when the US gets the flu, I thought that it was a worthy endeavor (although Pedro Amaral and James McGee have been working on that front) to try to see what insights we can derive from looking at Canada’s experience during the Great Depression (especially since it had a very different banking system).

In the process, I managed to collect in a datasheet, the Industrial Production Index of Canada (consisting largely of heavy industry with some light industries and utilities, making it a relatively well-rounded index). This is what it looks like.

industrialproduction

Other than seeing Canada’s experienced mirrored in the US experience (except for the 1935-1937 window), I am not sure what to make of it. However, I thought it worthwhile to share that information publicly.