Why Economists need to do more Economic Development

I am currently working as an Economic Development Officer in Medicine Hat, Alberta, a job which I had not envisioned myself in 2 years ago.

During school, my educational interests had always been in macroeconomics, financial economics, and national economic development. When I moved back to Alberta from Ontario, I managed to work, for a time with the local Chamber of Commerce here and, since then, have found employment with an Economic Development Association.

My training curve in this position has been steep. While my backgroudn in policy, politics and economics was an asset, Economic Development, at least in the context of what I am doing now, is a far throw from what I was studying in school and how I envisioned development economics might work.

While there are many differences between the two school of thought (here I refer to micro-economic development at the local level and macro-economic development at the national or global level). Micro-Ec. Dev. (or just Micro, for short) is about work, typically one-on-one with business owners, entrepreneurs and inventors to help them work through the way in which they do business. I work with these economic foot soldiers to identify barriers to helping their company or business grow, how to implement new ideas (or even brain-storm new ideas with them), and how to plan for their economic future. I do simple (or at times, not so simple) things like planning events for businesses in our area so that they can learn more about whats going on in their industry regionally or seminars and workshops to teach skills that seem to be lacking across the board. At the broadest level, I do research and analysis to determine potential sectors for investment attraction and cluster development.

Contrasting this, Macro-Ec. Dev. is focused on questions of policy on the overall performance of the economy. How can governments incent or disincent certain types of behavior? What financial tools will improve GDP? Employment? Exchange Rate?

When I made the shift from this latter field of study to the former, I discovered that the goals which I was trying to achieve with the work I was doing was more tangible than the goals of Macro-analysis. Macro work is intent on achieve average increases to "indicators" whereas Micro work is simply trying to improve the lives of business owner and his or her employees.

Herein lies the disconnect that exists between macro analysts and the average person: the disconnect between statistical output and the day-to-day life of an individual business owner. Analysts sensationalize the growth of positive indicators but often lose sight of the fact that these indicators are averaged estimates that give a positive or negative message for how individuals and businesses are doing.

I'm not saying there isn't a place for this type of indicator but a 3% rise in Canadian GDP (a pretty good growth indicator) doesn't necessarily mean that businesses within a particular region feel that the economy is growing. Their own market may be shrinking or their ability to hire the right employee may be becoming harder. Or, as has been a common case in Canada lately, lending money for expansion may be becoming harder and harder to come by.

Today an article in the Financial Post discussed a poll that was recently commissioned by the Economic Club of Canada that considered thow Canadians across the country felt about the economy. The article noted that 70% of those polled (n = 2878) felt that the country is in the middle of an economic recession. This despite the fact that economists would tell you that Canadian indicators are doing pretty well.

Clearly, the majority of this desconnect comes from a few things. First, the polled looked at Canadians across the country. A lot of the strongest growth in Canada has come from Saskatchewan and Alberta where oil has been buoying up the economy whereas the greatest centers of population are in Ontario where manufacturing continues to struggle after getting hit 3 years ago.

At the end of the day, however, economists need to be better at identifying how people act, and see the world. The ivory tower analysts need to spend some time in the grass and get a feel for what life is like for the "average business" which their statistics attempt to describe. Ultimately, this philosophical idea might lead to the development of better indicators. I've talked before about how a growth in GDP doesn't necessarily mean an improvement in the lives of Canadians. It may be the case that it was a more potent indicator in the past (a discussion for another time I think) but our indicators need to involve: even the ones that descibe businesses themselves. Policy analysts, macroeconomists, and government decision makers need to look at things like access to capital and skilled labour, labour retention, access to business support services and the efficacy of those services to get a more wholistic picture of what the "Micro-economy" outlook is.

Alberta Oilsands after Keystone

Hey,

Great article from Todd Hirsch on his blog today. Check out my response to it too.

http://www.toddhirsch.com/1/post/2011/11/albertas-plan-b-and-c-and-d-and-e.html

Back in Action

After a significant absense, I've returned to the world of internet commentary and economic/political analysis. So here it is.

Today's story is a response to an article in today's paper (Medicine Hat News) titled, Canada's economy not looking so hot: slow growth may be best-case scenario . The name says it all. After an estimated contraction of 0.1 percent in April, economists are arguing that Q2 will show some very modest growth. This is largely caused by global trends (earthquake in Japan, etc.) but still affects the bottom line.

"While nothing remarkable, most economists would gladly take such an undramatic outcome. The trouble is, drama is in the air...'You will see a lot of excuses Thursday about April,' says Benjamin Tal, deputy chief economist with CIBC World Markets. 'People will say, 'Oh, don't worry about it, it's just the weather.' The other story is that we are in a really soft period reflecting a very weak American economy and some softness in here in Canada. (But) The fact is we are in a very modest recovery and that's an understatement.'"

The bottom line is, net growth is slow. And it means that our "rebounding recovery" is starting to look like it will be similar to the rest of the world. There are a few key concerns which are valid about this.
1. The article notes that Canada is still carrying a housing bubble. If weak growth continues and causes any more recessionary aftershocks, this could lead to a bursting which would hurt a little.
2. With Greece's flailing fiscal situation still in question (although less so as of late), worries still exist of financial pressures (don't say the "C" word) on Canadian currency which could lead to problems for the BoC. The article explains it better, in case you're economics head has been in a hole for the past 6 months (apparently like mine has)
3. One of this country's long-term shortfalls has been its low worker efficiency. As noted in previous blogs, Canada is in a position to recieve a higher investment flow. With our current exchange situation, we are also in a good position to be importing higher amounts of capital and especially high-tech/tech-sector capital. This combination could result in the development of greater and more niche tech-clusters throughout Canada. This would, in turn, also positively impact worker output efficiency.

Continued weak growth could ultimately signal to investors that Canada isn't necessarily safe for high-tech sector investment and undermine this potential trend.


So those are the real problems that I'm concerned with in this article. However, keep in mind that it's not all bad. The blanket statistics which are reported in these articles always seem to ignore the fact that this growth is across the whole country. Certain provinces are going to continue to grow. The Oil and Gas exporters (BC, AB, SK, NF) are going to see a bit of a decline in growth with commodity prices pulling back but I believe that their key exports will be largely unaffected and so will their growth.

At the end of the day, I always believe that unless we a plunging as an economy a little recoil is fine as the economy is simply cutting speculative fat. It means that past growth wasn't based on substantive development but on borrowed money (as per the article) and speculated investments.

Layton's First Promise

My first blog post in a while is focused on Jack Layton and his first campaign promise of the year: cap the interest rate that can be charged by credit card companies.

The premise of Mr. Layton's promise: household debt is one of the most serious problems facing Canadians.

While I don't necessarily disagree with his premise, especially as one who is both trying to pay off my debt and who grew up in a fiscally conservative culture (i.e. southern Alberta), I do think that this policy is missing (or simply ignoring) some very important economic principles.

Economists consider the interest rate to be the "cost" of borrowing money. Interest is essentially a fee charged to a borrower that makes lending profitable. If you lower the cost of borrowing, people borrow more. That means an increase in the amount of debt people will have, not a decrease. High interest rates are a large deterent to taking on excessive debt. If you decrease this deterent, people think "hey my minimum payments will be lower, so I can afford to borrow more." In addition, card companies are likely to increase maximum limits so as to maintain profitability.

This actually implies that, in the long run, the average Canadian debt load is likely to increase.

Where reform is needed is in people's understanding of how credit card companies work and transparency within the industry. Hidden fees, rates changes, and the like need to be made more explicit so that individuals and families can make smarter decisions regarding their debt load and internalize the true costs of credit card debt. Layton calls for voluntary practices recently established to become mandatory. This policy would be much more beneficial.

Not so much an economic issue but...

Interesting article today in the paper noted that Hu Jintao the President of China, admitted that his country has a human rights problem and that it needs to work on it.

The article notes that human rights advocates have criticized this confession during the Chinese leader's trip to the White House as being merely words with no confession backing them.

While the criticism rings true inasmuch as China really hasn't done very well at all on this issue, the statement still says an incredible amount about the state of China's policy development.

1. It notes that Chinese leadership, on some level, acknowledges that human rights are a good thing. Regardless whether they have any actual intent to improve their track record, it means that as a public position, they are moving towards an ideal.

2. It also means, again on some level if not to a great extent, Chinese policy decisions are being influenced by international pressure. Be it pressure to maintain relations with the US (for economic reasons) or to develop a better image for more general trade and power purposes.

All this should be qualified by saying that, yes, words are cheap. But there is still some substance to be gleaned from this statement.

More Evidence that We Aren't Out of the Woods Yet

A recent Wall Street Journal Article discusses calls by academic economists at the American Economic Association annual meeting for even stricter reforms on the banking sector beyond what has already been done. Obviously, the experts are suspecting that persistent weakness in the US banking sector provides plenty of reason to suspect that a further bursting of the liquidity buble is possible.

Take this in consideration with a recent post by former IMF economist Barry Eichengreen who points out that internationally there still isn't a significant fallback option for the international monetary system.

Eichengreen notes that the fall of Ireland is spreading contagion, more importantly, he notes elsewhere their "rescue package" is inevitably going to come back to them, adding more stress to the EU banking sector. To top this off, austerity in the rest of the Union will keep economic growth meagre at best and ultimately will prevent the Euro from usurping the USD as the global dominant currency.

He notes that there may be some room for the Canadian Loonie and the Australian Dollar to absorb some of the excess foreign investment but that the majority of it will remain in the US, largely for lack of an alternative place to settle.

That said, if the USD is the best currency available and the reforms called for by the AEA ring true to the continued fragility of the US, what does this say for the next 10 years of global economic recovery.

Perhaps its time to start pushing alternative monetary schemes as a failsafe in the case of another monetary meltdown. Even though it's still viewed as unsustainable, a nation-wide development of regional or local currencies may provide a fallback measure and encourage local cooperation should the current global market crash again.

What are the other options?

Clearly, there are more questions than answers

Re: Economist - Cheerier Growth for 2011

So the Economist puts out a poll of estimates for growth, current account deficits, and inflation next year on a monthly basis.



In case this seems like mumbo-jumbo to yoy, here's the main points.

> all the numbers are positive. Dispite the gloomy scepticism of all the media and commentators is this. At the end of the day, almost every country (a few outliers like Ireland and Spain) has positive numbers under "Real GDP, Percent Change" for 2010 and 2011. That means that their economies have grown both this year and the last year.

> There is concern about Canada's larger-than-expected current account deficit. This (a) shouldn't be surprising considering that the US dollar has been persistently low relative to the Canadian dollar, and (b) shouldn't be too alarming, especially with the relative increase in stability in the US financial market. They got hit hard and are putting in regulations pretty quickly. All that to say, CA deficit, IN THE SHORT RUN, is largely problematic because it represents vulnerability. Our deficit comes from US imports being cheaper and their economy is settling and not too likely to fluctuate rapidly anytime soon. Long run effects may be a problem but I don't think this is the time for CA deficits to be at the forefront of economic policy.