Tuesday, March 22, 2011

Can You Budget Better Than Jim Flaherty?

My budget Simulation from http://www.policyalternatives.ca, 
click on image for larger view in a new window
I found this simulation on Policyalternatives.ca to be interesting, but I'm also aware of the black box aspect of how the results are calculated in simulations. I've done project-level budgeting, so I understand the interrelationship of tasks, cashflows, and timelines. The policies here, which I've named "Investing in the Future," [opens in new window] are meant to be fiscally responsible, but with an eye on increasing the future economic capacity of Canada and lowering unemployment. My budget is informed by economic sociology and an economy of embeddedness and social relations of firms and people, as opposed to following a logic of individualistic atomized agents operating under rational expectations. One might argue that my policies would inhibit growth by increasing taxes. I would beg to differ, which I'll explain below. I would suggest that all of these policies be reevaluated over time, as they are tied to a specific economic context of recovery in a curious state of "Depression era" economics. While the simulation has my budget performing better than the Conservative government's, with lower unemployment and a lower deficit,  I won't make any claims that my budget is superior to Finance Minister Jim Flaherty's budget that's being released today, as the simulation doesn't state what the Conservative accomplishments would be. I also don't believe that the simulation factors in the details of today's budget, although Flaherty's resoling of his shoes supposedly signals his frugality. The themes of my budget are:

  1. Unemployment rate under 7%
  2. A coherent climate change policy {ideally tied to an innovation policy}
  3. Increases in investment in infrastructure, human capital, communities, and productivity
  4. Reducing poverty and stimulating demand
While this looks like a left or centre-left budget, I'm actually factoring in context and economic trajectories. I would definitely suggest different policies under different circumstances.

Increasing childcare and decreasing education costs are policies designed to increase the productivity of the Canadian workforce and creating incentives for higher education, increasing human capital and talents.

Community healthcare, pharmaceutical benefits, housing, and broadband all increase the infrastructure of socioeconomic life. A broadband policy that increases access in the North also works in favour of Canadian Arctic sovereignty. Reducing poverty of children and elderly is also meant to stimulate the economy on the demand side, as well as preventing individuals from being disenfranchised socially and economically.

The investment in First Nations schooling and drinking water is meant to invest in the sustainability of Canadian aboriginal communities by increasing human capital and infrastructure. In the North, the Inuit population is booming with a young population facing a fragile socioeconomic situation. Investment in schools and infrastructure like water and broadband is meant to decrease costs in the long run by increasing knowledge and socioeconomic capacity, while reducing dependence on government funding.

The environmental policies are aggressive, in order to move Canada towards compliance with Kyoto. Moreover, home "ecoenergy" and carbon taxation create incentives for increased energy efficiency and innovations in reduction of power consumption. California's 1990 zero emissions vehicle mandate, although repealed, arguably served to spur and speed the development of new fuel efficient technologies.

Taxation in Canada is fairly close to US fiscal policy, according to 2005 OECD data. Canada is a smaller economy that is tied to the fortunes of the US economy and is more natural resource driven. The fear of increases in taxation will inhibit growth is empirically unfounded. While businesses and global investors do gauge after tax cash flows, reduction of business decision making to just tax policy is shortsighted. In fact, one could argue that a low tax policy can distort markets by allowing uncompetitive enterprises and industries to remain in operation through an indirect subsidy. My take is the "problem" with taxes is that there is a growing sentiment of "conventional wisdom" that states that taxes fund wasteful government. In my opinion, this is an organizational problem, not one of macrostructures. I think the recent financial crisis has shown that the market and the private sector have no silver bullets when it comes to acting in their own best interests—in fact, I would argue that those in control of power and resources game the system for individual gain, i.e., the problem of agency.

The quality of life, human capital base, and social and economic infrastructure and institutional framework are what makes Canada attractive to business and global capital. Rather than rely upon a generous tax policy for sustainable economic growth, government should work on facilitating entrepreneurship of all kinds and reducing bureaucratic hurdles. It should be noted that this isn't a call for deregulation in general, let alone in the financial sector. Jim Flaherty had to reverse his policies that were creating a mortgage debt bubble, which is one bit of a body of evidence that shows the Conservative Party of Canada is not fiscally responsible. Moreover, Stephen Harper has not been true to his Libertarian roots, so one is left to ponder that what drives policy is power over true ideology.

Canada typically has higher unemployment than the US, but has healthcare. I feel this is important, as it serves to reduce "entrepreneurship lock"i.e., staying in a current position for the sake of health benefits. Increasing taxation while reducing military and foreign aid may seem isolationist, but tough decisions need to be made and at the end of the day, Canada role as a global citizen may need to be kept in check for a while. Finally, the tax policies offer relief for those at the bottom through low income carbon tax refunds and EI for the unemployed are meant to keep individuals and families afloat through economic recovery.

It will be interesting what Flaherty's budget looks like and whether the NDP supports it. It looks like some concessions were made to the Dippers. Nevertheless, with the controversies brewing surrounding the Conservatives, I think a spring election is inevitable.

Twitterversion:: [blog] Can You Budget Better Than Canadian Finance Minister Jim Flaherty using @CCPA's interactive tool? Probably.  @Prof_K

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