Vol.
24 No. 3 September 1998
Articles:
Reflections
on the Role of Fiscal Policy: The Doug Purvis Memorial Lecture
David A. Dodge
This address - the Doug Purvis memorial lecture for 1998 - evaluates
federal fiscal policy over the last 50 years. During the 1950s and
1960s the federal government benefited from high growth and low interest
rates; its share of GDP doubled while, on average, the budget was
balanced.
Things
deteriorated in the 1970s and 1980s; the government was confused regarding
its objectives, and - with lower growth and higher interest rates
- the vicious circle of debt dynamics set in. In the late 1980s, problems
were further compounded by an inappropriate monetary-fiscal policy
mix. Federal fiscal policy has been a success since 1994, in part
because the government has learned some lessons from the earlier years
- such as the payoff of restricting attention to at most one or two
economic objectives at a time. For the coming 15 years, Dodge recommends
small budget surpluses, so that a federal debt-to-GDP ratio of about
35 percent can be reached within that time frame. He further recommends
that the government should focus on stimulating private saving and
investment, not contracyclical policy, and that further research in
the areas of health-care delivery and generalized wage subsidies should
be treated as a top priority.
Is
Hypoinflation Good Policy?
Wayne Simpson, Norman Cameron and Derek Hum
One
argument against a policy to achieve absolute price stability is that
workers resist pay cuts. We examine several Canadian microdata sources
and corroborate earlier evidence of pay-cut resistance, particularly
recently as inflation has approached zero. We then use data on industrial
sectors to estimate that pay-cut resistance reduced employment growth
by from 0.6 to 1.5 percent per annum from 1993 to 1995. We also estimate
a model of wage settlements, treating pay freezes and pay cuts as
censored data, which implies that pay-cut resistance may have increased
the annual unemployment rate by as much as 2 percent during the same
period. In view of these results, the case for very low inflation
targets should be reexamined.
Economic
Instruments and Environmental Policy in Agriculture
Alfons Weersink, John Livernois, Jason F. Shogren and James S. Shortle
Economic instruments can achieve environmental goals at least cost
and provide incentives for further improvements. There are limited
opportunities for the use of such instruments in agriculture where
the pollution problems can be traced as in the case of intensive livestock
operations. However, most environmental problems in agriculture involve
a large number of diffuse pollution sources whose abatement practices
are unobservable rendering it difficult to achieve cost-effetive pollution
control with any single instrument. Rather than relying on firstbest
solutions through economic instruments, the most effective way of
dealing with diffusesource pollution problems in agriculture may be
technological developments and business-led initiatives.
Markets as Predictors of Election Outcomes: Campaign Events and
Judgement Bias in the 1993 UBC Election Stock Market
Robert Forsythe, Murray Frank, Vasu Krishnamurthy and Thomas W. Ross
Economists
believe that markets are efficient aggregators of information. The
1993 UBC Election Stock Market was designed to use this ability to
predict the outcome of the 1993 Canadian federal election. The final
market predictions of vote shares going to the various parties were
very close to the actual results. The market also generated a large
body of data on the standings of the parties at every point in time
during the campaign. This paper makes use of some of these data to
study two sets of questions about trader behaviour. First, according
to the traders and the Market, what were the significant events of
the 1993 election campaign? Second, did UBC-ESM traders exhibit judgement
bias in their trading activity? That is, did they tend to hold shares
in parties that they wanted to be successful?
The
W. Irwin Gillespie Round Tables on Public Policy
I. The Fiscal Dividend: How to Get It and What to Do With It
Federal Debt Reduction: Choosing Paths
William B.P. Robson and William A. Scarth
Abstract:
The federal government's reluctance to set out a strategy for long-term
debt reduction likely arises from disagreements about how rapidly
to reduce debt, how rigidly to translate the long-term debt reduction
path into annual fiscal targets, and how to balance new spending and
tax cuts. We try to narrow the uncertainties around these choices
with Monte Carlo simulation using a model of the Canadian economy
that explicitly incorporates uncertainty about future economic and
financial shocks and about key relationships between the economy and
the budget. We find that a "front loaded" plan, which trades
bigger short-term pain for faster long-term gain, provides far greater
assurance against a rapid return to deficits. A "Keynesian"
approach that allows the bottom line to vary more with economic cycles
stabilizes the budget and, provided that the response to cycles is
symmetrical, involves no loss of credibility. Finally, devoting a
sizeable proportion of each year's interest savings to lower taxes
in the following year appears likelier to boost living standards during
and after the program.
Redistributing Smarter: Self-Selection, Targeting and Non-Conventional
Policy Instruments
Robin Boadway
Abstract:
Modern public economic theory emphasizes imperfect information as
the ultimate constraint on redistribution policy: the needy are hard
to identify. To target transfers efficiently, the standard tax-transfer
system with its reliance on self-reporting needs to be supplemented
by other devices designed to separate the needy from the non-needy.
These include the use of in-kind transfers, quantity and price controls,
and monitoring by welfare administrators. The role of such devices
as part of the mix of redistribution policies and their potential
implications for rationalizing the Canadian transfer system are summarized.
The Declining Labour Market Outcomes of the Less Skilled: Can Fiscal
Policy Make a Difference?
Peter Kuhn
Abstract:
Since the mid-1970s, unskilled Canadian men have experienced very
sizeable reductions in real wages, and they now work substantially
fewer weeks per year. This article discusses a wide range of possible
policy responses to this phenomenon, arguing that the best short-term
response is the expansion of earned-income tax credits, and the best
long-term response involves improvements in the basic skills provided
by our education system. At the same time, it argues that drastic
short-term responses are not warranted because (i) recent trends in
male wage inequality have, to a large extent, simply undone a major
compression in male wages that occurred in the early 1970s; and (ii)
these trends may be part of a broader shift in the labour market that
has also produced some important winners, especially skilled women,
whose labour-market prospects have dramatically improved.
II. Payroll Taxes in Canada: Pros and Cons; Ups and Downs
Economics versus Politics in Canadian Payroll Tax Policies
Jonathan R. Kesselman
Abstract:
In recent years the federal government has increased its reliance
on payroll taxes. This approach is revealed most directly in Employment
Insurance premiums but also emerges in planned increases for Canada
Pension Plan premiums. Economic criteria support these moves to the
extent that premiums are strongly linked to benefit entitlements.
However, much of the EI and increased CPP premiums are unrelated to
benefits and thus constitute general payroll taxes. Such taxes compare
favourably in economic terms with some alternative taxes but are regressive
when imposed with a ceiling on taxable earnings. These developments
appear to be driven by political pressures rather than economic criteria.
If the government is politically constrained from raising the rates
of other, more visible taxes (such as income tax and GST), then the
payroll tax changes may be economically optimal choices subject to
the constraint. In the longer run, basic reform of the other taxes
and reduced reliance on general payroll taxes would be desirable.
Experience Rating Employment Insurance Contributions
Louis Beauséjour, Munir A. Sheikh and Baxter Williams
Abstract:
Unless demonstrated to the contrary, the invisible hand of the price
system is the most efficient means to allocate resources and maximize
economic performance. This suggests experience rating of an insurance
scheme for unemployment. Simulation results from a 95-sector general
equilibrium model, developed especially for studying this issue, show
that a move to experience rating has the potential to substantially
reduce unemployment, and increase output, wage income and employment,
both in aggregate terms and in most sectors of the economy.
The CPP Payroll Tax Hike: Macroeconomic Transition Costs and Alternatives
Peter Dungan
Abstract:
The FOCUS macroeconomic model is used to estimate the impact of the
CPP premium increases introduced in 1997. It is found that these will
have relatively severe macroeconomic consequences in the short to
medium term, although they will put the plan on a sound fiscal footing.
Additional simulations explore how the macroeconomic damage of the
CPP rate hikes could be mitigated. One method would be to "privatize"
the CPP such that employers would no longer be taxed. A second alternative
is to cap the CPP premium at the planned 1999 rate of 7 percent in
2000 and beyond, and collect the funds required to finance the unfunded
CPP liabilities through the income tax. A final simulation indicates
that if the current plan for CPP rate hikes is not amended it will
be imperative that Employment Insurance rates be massively reduced
over the next few years.
