Stephen Williamson on the United States, and Canada

He wrote:

….one possible story about the U.S., post-2000, is that there was an important secular sectoral shift that commences around 2000, but was masked by the post-2000 housing boom, which was essentially construction under false pretenses. If the sectoral shift is what was driving what we see in the time series, it had to affect men more than women, the old not at all, prime age workers somewhat, and young workers a lot. This also must have been a sectoral shift that affected the U.S., but not Canada.

In my view the sectoral shift was of two primary kinds.  First, there was a productivity slowdown, though it had weaker employment effects in the sectors with more women.  (For instance, whether or not health care productivity went up a lot, for policy and demographic reasons the demand for nurses was robust.  Here is evidence on how job shifts have favored women.)  Second, Chinese competition and the general rise of emerging economies led to more incipient factor price equalization than we had been expecting, noting however that some of these forces showed up in quantities (i.e., jobs) rather than prices.

Here is evidence for the importance of the credit crunch in explaining the observed structure of losses.

These forces have been revealed only slowly, so the resulting “Great Reset” has unfolded slowly in turn.  Often locked-in older workers have kept their previous situations, but employers have not sought to repeat those patterns by making new and comparable investments in younger workers.  This is most apparent in academia but to a lesser extent this logic pervades many sectors of our economy.  In Silicon Valley they are ruthless but auto manufacturers have moved to two-tiered wage structures, based largely on seniority.  “Spot the two-tiered wage structure” would be an instructive and depressing parlor game to play.  These two-tiered wage structures imply a lot of big future changes — scary for the most part — are already baked into the cake, but again they will unfold slowly.

Canada is different because growing resource wealth, much of it based in demand from China, underwrote their continuing growth.  If anything, Canada is running the danger of becoming a super-unequal, brain-drained, Dutch-diseased resource-based economy.  Albeit at a high standard of living and with generally good policy, albeit while piling up some longer term risks if resource prices were to go very soft.

The Williamson post covers many more topics, most of all labor markets.  Like many of the best and underheralded posts in the blogosphere, it knows not to draw too firm a conclusion.

Comments

How is North Dakota doing relative to Alberta?

Steve, unfortunately Tyler still assumes that countries rather than markets and governments are the critical units for macro analysis of the global economy. For example, to argue that Canada is running the danger of becoming the sort of economy that he describes ignores Canada's layers of governments and how they intervene into markets, some fully integrated into the global economy but others just local and most in-between. If Tyler were paying attention to what is going on in small economies with just one layer of government (for example, Chile) he knew that such a description cannot be applied even to these economies many years after the Chinese shock. It's time to shift the focus of macro analysis of the global economy to the role of the many layers of governments into the workings of thousands of markets with different degrees of integration across Planet Earth. And yes there was a late 20th century Chinese+ shock to the global economy --at least as big as the late 19th century tech shock-- leading to huge changes in the allocation of resources across Planet Earth (and therefore in the distribution of income and wealth). Note: the + means that the shock was not limited to China.

Any comparison of economic performance between the two will have to consider that Alberta's economic performance includes our paying a significant amount of money to the federal government in terms of equalization payments (basically a provincial welfare system in which the 'have' provinces are taxed an extra amount to pay for government services in the 'have not' provinces).

In 2012, Alberta paid $9813 per capita more to the federal government than they received in federal benefits, largely to support the equalization system. Our economic success comes in spite of that drain.

Correction: $9813 is the average from 2004-2008, and that's the per-capita revenue Alberta sent to the federal government, part of which is equalization payments. Alberta received back about half of that in federal services and payments, although that's a number that's a little hard to compute. So we had a net drain of more like $5,000 per year per capita to the federal government during that period.

We should all learn economic lessons from Alberta with respect to learning how to find yourself sitting on a pot of oil and pump it out so fast that you inflate away half the gains. But thx for the contributions. Just wait until the oil economy is over and you can tell us all about the economic genius of the Albertan development strategy then.

Salaries by and large have kept pace with the rise in the cost of living in Alberta. At least for professionals and tradesmen.

As for the "oil economy is over" comment are we safe in assuming we should take Ontario as an example of that post oil, green friendly economy you think is coming?

If you're worked in a highly inflated sector, then yes, your wages will not look as though they are suffering from inflation.

But everyone else sure as heck feels it. Let's say you want to get someone for drywalling. Thought $25 an hour was enough? guess again. Try $40, $50, $60 ... maybe you can't afford the renos after all.

The problem is, the same thing is affecting education, health and all sorts of other areas.

Dan-

In the United States, some states, such as North Dakota, are huge net winners in terms of federal outlays and taxes. ND nets about $20k per capita in the federal sweepstakes. Per year!

Oddly enough, if every state got back from the feds what they paid in, lib states such as NY and CA would be huge winners.....

they should consider the weather before making those transfers. Perhaps BC should send money to Alberta.

So maybe employers are more compassionate than we think. It would be nice if they created low wage apprenticeship and summer programs and scholarships as well for the young.

It's not the employers responsibilty to train - workers need to show up ready to hit the ground running.

Couldn't possibly be more wrong. Every job has a learning curve; the situation, organization and tasks are never quite the same. Any intelligent employer works to train the employees, reducing the lost productivity initially, and works to retain, preserving those gains to transition the employee into other roles rather than training a new employee at every hire.

Nobody else has this responsibility - it is only short-sighted employers who don't perceive it.

Maybe in the past but workers today need to gain skills on their own. A Company isn't a school , if young workers would get proper degrees they would be job-ready, modern employers know this. Modern HR departments are cleverer than ever at selecting the best candidate efficiently and so young people need to be ready.

What jobs are you thinking about with your comment? It would be applicable to jobs like engineering, less applicable elsewhere. How would education improve for teacher, lawyers, or insurance salesmen? What degree do you get to work in construction? The main problem here is that the decline of American manufacturing and the importation of millions of immigrants has led to the stagnation or reduction of wages for the middle middle and lower middle classes. Education isn't going to change that because it isn't relevant to most of the economy and even if it were large sections of the population are incapable of doing it.

Actually Immigration is what is saving the US economy from total destruction. Seems like you need to read up on basic economics. If the lawyers, teachers, engineers WHATEVER actually paid attention in class I am certain they would be Job ready as the corporate HR departments demand.

All a college degree, even in fields like engineering, means is that the graduate has the ability and self-discipline to learn to do the job the employer wants them to do.

Hmm. False note there. Have you ever been involved in a job doing...anything?

A quick search for entry level professional job requirements will show a minimum of 2 years experience is expected. If this were so unreasonable employers would not ask for it, clearly your view on worker is outdated.

Hmm. That would be a 'no' then?

Experience does not equal education. It shows the individual is capable of actually doing the job.

"Canada is different because growing resource wealth, much of it based in demand from China, underwrote their continuing growth. If anything, Canada is running the danger of becoming a super-unequal, brain-drained, Dutch-diseased resource-based economy. Albeit at a high standard of living and with generally good policy, albeit while piling up some longer term risks if resource prices were to go very soft."

This really isn't correct, as many Albertans will tell you their economy is highly diversified and is a result of the entrepenueral and enterprising spirit of the West. Alberta has long been an economic powerhouse and it's really only lefties who like to pretend it's all about oil and natural resources.

Alberta has always had oil but it hasn't always had rational government. Under Trudeau, the National Energy Program destroyed Alberta's resource economy.

Then we had rational govt and it flourished, and then we elected socialists and while the oil still books the deficit mounts.

Same applies federally. We've had a rational govt for over a decade now. Business taxes are lower than in the US, median income is higher.

Yet, politics and human behavior is never linear. We will inevitably cycle back to nonsense policies when our newfound success lasts so long that we forget how it came about.

Which brings us back to Trudeau. His son - the former substitute teacher - leads the country's most popular party.

The US won't be behind for long.

Sounds like Alberta should just leave Canada. They did all the work of building the oil and now the government just sees an opportunity to tax away.

They built it......

Or should I say "built."

Good riddance.

But you'll need help when the wells run dry. Then you can coming crying back to mommey to help the farmers who suffer from drought, just like it used to be in the old days.

Alberta needs to diversify. This will not happen under a development strategy which almost exclusively focuses on rapid exploitation of oil and gas resources, unless there are explicit efforts to the contrary.

Development strategy?

Alberta's is to exploit oil&gas as rapidly as possible. Damn them all. Especially Ontarians.

Come on. Be honest with yourself, .Doesn't it make you secretly happy to know that inflationary pressures in Alberta put Ontarians out of work?

If you want out, then get out. That's my opinion. The province has corrosive effects on the ethics of the country.

And the oil money is the cause.

Twenty years of bad government, automation in manufacturing and poor investment decisions by businesses as well as a dependence on a weak exchange rate to compensate for production inefficiencies put Ontarians out of work. Nothing else.

As for diversification perhaps Alberta can pick up what's left of Ontario's manufacturing industry as high tax rates and electricity costs drive them out of province. We have a head office environment that provides the professionals to run more than just oil and gas companies.

By the way what do you think about Tyler accusing Canada of having Dutch-Disease? I hate to say this but that sounds like a bunch of mood-affiliation to me, and dangerously left-wing.

It's the oil.

And also the money from the oil.

Maybe the reason Canada has been doing relatively better recently is because we haven't elected a communist drone murderer to lead the country...

And what is exactly is wrong with drone us in military applications? The communist part I conceed is true.

Using drones to kill people without any due process. Including American citizens. That is OK with you?

And how many civilians in Yemen, Pakistan, etc? Thousands?

Can't wait for the international arrest warrant to be issued...

So you would rather us old fashioned bombers where there would be a lot of collatoral damage? Oh that's really humanitarian.

How about a so-called leader walking up to the bad guy and personally dispatching him? Real leaders lead by example, not from a bunker.

Not trying to defend the Obama administration overall but the policy is correct

I don't think its the drone part he's worried about, but go ahead and ignore the "without any due process" point he made if it makes you feel better.

No we haven't elected a communist leader, but this centrist wonders if we'd be better under one.

For that matter, with various voter suppression tactics, it's not even all that clear that we elected the leader who stands before us today. Their majority is only by a few seats.

Spot the two-tiered...

Start with people who aren't retiring. We may have originally supposed that this was due to better health in older years, or perhaps the high cost of retirement, but perhaps it is also related to the relatively high wages increasingly afforded only those older workers. The rewards for the continued effort are so high that leaving those posts is less sensible.

Plausible? Needs data.

Working in the STEM sector in Canada, I am beseiged by American applicants who want to come north. Research and funding opportunities in the US are dismal. Brain drain is a serious issue: for the US. People want off the sinking ship.

Canada has benefited from the continued strong demand for beaver pelts, which enabled the country to weather the storms of the maple syrup theft scandal. The United States should be so lucky.

masked by the post-2000 housing boom, which was essentially construction under false pretenses.

Seeing as how there was no housing boom

http://thefaintofheart.files.wordpress.com/2013/07/excuses-galore_3.png

I'd say that Williamson is full of sh*t. Once again.

Why the hell are people who are paying attention to such a patented idiot ?

Maybe because of the patent? Most people aren't nearly so original in their idiocy.

he wrote an excellent textbook which among other things championed the view that macroeconomic theory should have microeconomic foundations.

This was revolutionary. This was Canadian. And Canadian economists are putting it into practice worldwide, because there is no work at home.

If you look at the terms of trade stats, only Nova Scotia's have worsened. This suggests the dutch disease is fairly peripheral. Even Ontario, which is seeing rapid manufacturing decline, import prices have fallen faster than export prices.

The resource boom has had its toll, but there are long term secular trends that are at play too. If anything the high dollar is just making the reset come a bit earlier. A few provinces are even mulling the problem of high unit labour costs, with the German precedent in mind.

I don't think Western nations should be involved in manufacturing. It goes against the logic of comparative advantage. Canada should focus in it's comparative advantage of resource extraction - specifically oil. With the correct pro-business incentives places like Nova Scotia could be incentivized to move into oil exportation.

Nova Scotia is developing its off-shore oil. The Conference Board is forecasting NS as the 2nd fastest growing province in 2014 and I think the 3rd or 4th in 2015.

What should America do that it has a "comparative advantage" in? Right now we get buy with exporting dollars, we all know that can't last forever.

The logical endpoint of globalism is the reduction of America's wages to be "competitive" with places like China and the third world.

Financial Services are America's Comparative Advantage

Hard to beat that comment in terms of stupidity and shortsightedness. Your others, that America would be a wasteland without immigrants, looking at Japan perhaps, or whatever you said about corporate boards, come close.

And aircraft carriers. In fact, there is a lot of complementarity between air supremacy and financial supremacy.

Meh...Europe has more international banks. Chinese banks are bigger. US banks deal with huge amounts of money, but only for American citizens. American financial services are kind of boring.

Americans are still damn good at tech. They dominated the PC operating system era, and are dominating the mobile operating system era. Wikipedia, Twitter, Facebook, Google, Apple, Microsoft, Qualcomm, Amazon, IBM, etc etc. Whether they are successful by virtue of having a huge home market or due to genuine quality is up for debate.

And what will its comparative advantage be when the oil runs dry or when a competitive alternative fuel source hits the market?

Probably manufacturing would have declined almost as much from international competition regardless of any competitiveness issues relating to the petro-driven aspects of the currency, so I don't particularly "blame" it in that sense. I think it's more the loss of human resources to high-paying oil jobs that relatively decreases other aspects of development/modernization/innovation/whathaveyou in the economy.

I'm curious, though, just how much royalties propped up the federal budget. It's definitely not all bad, and loads of people have been able to get high paying jobs in the oil & gas industry.

Dutch disease is one of those things that shows that if an idea doesn't sound like it makes any sense, it probably doesn't. The essential mechanism is that by raising the cost of labor and capital within a nation it makes it's exports less "competitive" with other nations, because they have to pay their laborers and owners of capital more. This "problem" is a good problem to have because your laborers and owners of capital get more money. Some try to make the claim that by having labor cost more money the "economy" is prevented from "growing." Of course if that were really true, then the problem would eventually resolve itself, other countries would see more growth and their wages would rise equalizing wages among the countries.

Canada's newfound success couldn't possibly have anything to do with the fact that we have cut corporate taxes, capital gains and dividend taxes, and reduced the size of the government by over 20%. Or that we're on track to have a balanced budget next year and a surplus the year after. Or that we've reduced our federal debt from 70% of GDP to 30%. Nah. Must be something else. Because otherwise someone might think that 'austerity' actually works.

I'm sure it doesn't have anything to do with the fact that we've risen to #6 in world economic freedom rankings, while the U.S. has dropped out of the top 10. Must be something else.

And Alberta is by far the most economically successful province in Canada. That couldn't have anything at all to do with the fact that we've been ranked the most economically free political jurisdiction in North America. Nah, must be just due to resources.

Quebec is an economic basket case, despite receiving more money per capita in transfer payments from the rest of Canada than Alberta earns from its resources. It couldn't be because it's also got the most left-wing governance in Canada. Nah, must be something else.

As for the brain drain - we used to have a severe problem with that back when the U.S. was more free and Canada was mired in government planning and high taxes. That trend has since reversed, and if anything Canada is benefiting from a brain drain from other countries into Canada. A lot of our immigrants are highly educated. Of course, we encourage highly educated people to immigrate here, whereas the U.S. likes to prevent immigration of talented people while maximizing immigration of unskilled workers.

I think we need to keep digging to find the real source of Canada's success. Because it just can't be any of the things listed above. Too many heads would explode.

Listen buddy, You Canadians just suck icicles.

Exactly. And yet when the NY Times recently reported on the US now lagging Canada on median income, it couldn't locate any if these reasons, and instead waffled on about the decline of US unions and other nonsense.

I blame high quality education and a healthy population for Canada's success. Strong cohorts of immigrant talent have probably helped out a lot.

I doubt that the tax system had much to do with it. We don't have many major businesses which could exactly have gone elsewhere without losing the best part of their workforce.

chuck martel May 9, 2014 at 11:15 am

How about a so-called leader walking up to the bad guy and personally dispatching him? Real leaders lead by example, not from a bunker.

I bet you have someone like Vice President Cheney -- Americas most yellow-bellied coward -- in mind.
You know what the first thing the US did after 9/11 -- build a bunker under the Vice Presidents residence.

In Viet Nam if some second Lt. had hid in his bunker and orders his men out like Cheney did, the Corp would have him out of there, court marshaled, stripped of his commission and in the brig so fast it would make your head swim. Yet, Cheney was too busy to serve in Viet Nam.

As a point of note Canadian exports to China across all sectors come to a sum of less than 5% of our exports as compared to the US at over 70% of the total. The current government has actually been called out repeatedly for not doing enough to broaden trade with China rather than the reverse.

Brain drain wise Calgary Alberta last I checked (disclosure I'm a resident who works in the oil patch) has a median family income of about 95k per annum and one of the top five degree per capita ratios in North America. If there is a brain drain it's very much regional as opposed to national.

There's a route planned through BC to get more gas to Asia, but I think a) BC is not obliged to allow Alberta to transport it through their territory, and the premier has been firm in pressing this point, and b) agreements/treaties must be made with First Nations groups on any planned route.

I'm OK with all that, since I don't see the rush. It's also the only effort I'm aware of where the federal government is currently promoting something specific to increase trade with Asia.

Oh, giveaways to Korea and maybe TPP. That's not marginal :)

You're confusing natural gas with bitumen I think.

That aside BC will have to deal with the First Nations and export terminal issues themselves if they want to further develop gas exports from the Montney formation unless all they want to do is ship gas to Alberta for use in SAGD operations.

Ultimately BC is a resource economy themselves so once the get used to the idea Alberta will probably just end up piggy backing on that shift in focus over the mid to long term.

I'm sure Albertans would love to convince BC that it is in fact a land of resource exploiters, and to forget about all that lovey dovey history of stewardship of nature.

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