Friday, April 29, 2011

Can Taxes Actually Foster Innovation in Canada?:: Contrasting the NDP & Conservatives on Carbon Policy

Jack Layton, back in the day, from The Hour
Stephen Harper is getting worried that the NDP surge isn't going to just split the left and allow his party to go up the middle. I think if you look at the electoral map and patterns of support, this effect is overstated and Harper should be concern. I also believe that the NDP is no longer a fringe in the Canadian political zeitgeist. Harper is warning that Jack Layton and a NDP-led coalition will spell disaster for Canada::
"So these are big hits -big hits on consumers, big hits on jobs. It will stop our recovery in our tracks and it would send a message overnight that Canada is not a place to invest. Overnight."
The problem is that the Conservatives are trying to sell a "stay the course" message that has had few payouts for Canada. Case in point, innovation spending in Canada has historically lags behind other industrialized nations and under Harper it's gotten worse-even before the Big Recession. This is despite a generous tax treatment that's been in place since the Chretien years. The problem is that cutting taxes to incentivize innovation isn't a sure thing because of context.

Stay the Course:: Harper and the Old Paradigms
Harper is trying to reinforce an economic dogma that low taxes and what's good for business is what's good for Canada. Unfortunately, Harper and his Finance Minister Jim Flaherty are making it up as they go along. Flaherty eased mortgage restrictions in the heady days of the US subprime-fueled housing bubble, only to tighten things up earlier this year over concerns about too much consumer debt. The ratio of household debt to disposable income in Canada is now at 1.48, on part with that of the U.S. Is this a policy flip-flop or a shrewd reaction to market forces? It's the former. The Conservatives are hiding the elephant in the living room:: Canada's weathering of the Big Recession is a function of a sound banking sector that wasn't deregulated thanks to the Liberals and record low interest rates. The Conservatives were betting on bubbles and still are, but the growth is smoke and mirrors::
"The country's recent growth has largely been driven by super-low interest rates. With relatively cheap borrowing costs, prices have surged for housing -- nearly doubling in the past ten years nationally -- and for commodities, which make up nearly half of Canadian exports."
When Harper talks about stability and low taxes, he's trying to prop up global investment and maintain and/or foster asset valuation bubbles.
"So this would be just an enormous bad signal. Now, ultimately what we're saying is that such a government, an NDP-led coalition, would be unstable and wouldn't last very long. But no one should underestimate the damage it would do to Canada's reputation and credibility and economy in the meantime."
It's all he has, since Canadian productivity is lagging, which is the real economic albatross, and he's really doing nothing to remedy this. Stephen Harper represents an economics orthodoxy that's both outdated and swayed by politics. Fostering asset bubbles, deviating from his free market stance with Potash, propping up the asbestos industry in Québec, and his unyielding commitment to purchasing the F-35 despite fiscal concerns indicate a economics approach that is haphazard and isn't going to lead to increased productivity.

NDP, Layton, and Carbons:: Taxes and Regulations as Incentives for "Creative Destruction"
Harper also went on the offensive attacking Layton on how his plan to reduce carbon emissions will result in higher gas prices with University of Calgary economist Jack Mintz estimating a rise of 10¢ a litre.  The catch is that, Mintz's work is based on erroneous assumptions about the NDP plan.

Moreover, this OECD post goes beyond Mintz's energy economics that underestimates shifts to new production modes using newer technologies by stating there is a role for tax policy in environmental economics that features innovation::
"But using the tax system merely to encourage the supply of innovation for the environment simply will not be sufficient. If there is no cost to polluting, why would a firm adopt environmental innovations, however technologically advanced or cheap, that helps it to pollute less? Some firms may benefit from undertaking “green” innovation for customer or investor relations purposes but, as a rule, environmental innovation is different from other types of innovation: stimulating environmental innovations will see little uptake by polluters, unless matched by measures to stimulate demand for those innovations."
Taxes create a demand for new technologies that emit less carbons by imposing costs on pollution. Will this harm the economy? The NDP's plan is to impose an initial $45 per ton of carbon emissions tax over a set limit for big industrial polluters, not everyday consumers.

Governments can set other policies that spur innovation. California created a 10% zero-emmissions vehicle mandate in 1990, which was responsible for accelerating the development of hybrid technologies. While the policy may have been optimal if it focused on pollution reduction targets, rather than a technological quota {zero-emmissions vehicles}, the size of the California market was significant enough for auto manufacturers to respond. Increasing fuel efficiency requirements and other regulations that restrict the use of polluting technologies or increase incentives for the development of green technologies are in policymakers' toolkits to shift production to a new technological curve.

Another key issue is a recurring theme on this blog of late— open innovation, which the NDP supports in the area of "open source" {definitions}. Open innovation embraces the idea of widely distributed knowledge, as opposed to silos of knowledge housed to protect intellectual property rights. Open innovation follows the ideas of Schumpeterian economics and the idea of creative destruction—new paradigms destroying the old.

Jack Layton and the NDP argue that their policies will ensure consumer welfare isn't harmed and is open to price regulation of gas. Tax policies can be crafted that don't shock markets are cause a dramatic rise in prices. Fearing taxes on this basis alone is shortsighted to say the least.

Stephen Harper will of course threaten that increased carbon taxes will uniformly drive business away or harm consumers. In a sense, this type of policymaking is tantamount to not only subsidizing pollution, but can subsidize old and inefficient ways of doing things that inhibit Canadian competitiveness. The policies of the NDP are interesting, as they are moving Canada towards a logic of a new paradigm that can finally break Canada out of the productivity trap.

Twitterversion:: [blog] Can Taxes Actually Foster Innovation in Canada? Contrasting the #NDP & Conservatives on Carbon Policy @Prof_K

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