The U.S. is doing better in a vision for sustainable energy

This video of Van Jones speaking recently at the Clean Energy Summit in the U.S. shows clearly how the Americans, well, at least the Obama administration, "gets it" about the compound returns from investing in clean energy and energy efficiency. Contrast that with the shotgun economic stimulus that the Stephen Harper PMO has been doling out, and the lack of vision in the 2009 federal budget. So I have to say, Yes, we can do better.

U.S. Neo-Con calls for revenue-neutral gasoline tax

I can't resist bringing attention to this article appearing next week in the neo-conservative journal, "The Weekly Standard". Columnist Charles Krauthammer calls for a "net-zero gas tax", in a rather detailed piece subtitled, "a once-in-a-generation chance". It's ironic, but utterly unsurprising to me, how neo-conservatives (albeit thinking neo-cons) are favouring a policy so close to what Stephen Harper and his supporters tried so hard to trash (Stéphane Dion's Green Shift) this past summer in Canada and during the Canadian election campaign.

When conservatives, liberals, economists, and environmentalists are all pushing for the same thing, you gotta believe there's some validity to it.

Update Dec. 29, 2008: James Hansen calls on Obama to implement a revenue neutral carbon tax at Guardian.co.uk
Update Jan 1, 2009: Financial Times of London uses its first issue of the new year to call on Obama to implement a revenue-neutral carbon tax.
Update Jan 1, 2009: Whoa, so does the Boston Globe in its New Year's wishes.
And even this from an AP story today:

Charles Whittington, chairman of the American Trucking Associations, which supports a fuel tax increase as long as the money goes to highway projects, said Congress may decide to disguise a fuel tax hike as a surcharge to combat climate change.

Transportation is responsible for about a third of all U.S. carbon emissions created by burning fossil fuels. Traffic congestion wastes an estimated 2.9 billion gallons of fuel a year. Less congestion would reduce greenhouse gases and dependence on foreign oil.

"Instead of calling it a gas tax, call it a carbon tax," Whittington said. "As long as we label it as something else we may have the momentum and acceptance to move forward."

Wow - this coming from truckers, the same people who, in Canada, opposed the Green Shift, even with some special provisions for the industry.

Ten weeks later...

Ten weeks ago we read this during the election campaign:

The Conservative official, who refused to speak on the record during a conference call with journalists, accused Liberal leader Stephane Dion of "fear-mongering around the economy for his political gain."

The opposition leaders are "cheering for a recession," the Conservative official charged.

and this

Conservative Leader Stephen Harper accused his Liberal opponent of cheering for a recession as he notched up his appeal for a majority government to run the economy his way.

I've already blogged about how listening to the signals the financial markets are giving is not fear-mongering. Stéphane Dion was willing to listen. Now, long after the signals started flashing red, we have this admission

Stephen Harper has delivered his bleakest forecast yet for the Canadian economy, warning yesterday the future is increasingly hard to read and conceding the possibility of a depression.

"The truth is, I've never seen such uncertainty in terms of looking forward to the future," the Prime Minister told CTV News in Halifax.

"I'm very worried about the Canadian economy."

Get ready for a sweetheart Conservative budget next month!

Selling on the lows, part 2

This is a continuation of my last post on Conservative finance minister Jim Flaherty's plan to sell government assets now, after a historic crash in asset prices, to balance the federal government budget during the coming global recession.

It looks like Prime Minister Stephen Harper has had to backtrack, according to this report from The Canadian Press on ctv.ca:

Prime Minister Stephen Harper insisted Friday there will be no fire sale after his finance minister, Jim Flaherty, said the government is considering an asset sale to raise cash and try and stave off a budget deficit. "The government of Canada will never engage in a fire sale of assets," Harper said prior to heading off to Washington for an emergency summit of global leaders on the economy.

But I think wasn't hard for the CP reporter to find people with credentials to agree that the Conservatives have a bad idea:

"It's hard to believe this is an ideal environment to sell any asset," said Bank of Montreal economist Douglas Porter. "And it raises the bigger issue of just how hard should the federal government press to keep its books balanced. My view is if it comes down to selling the family silver at a discount rate just to make the books balance, that doesn't make sense."

Scott Brison, the new opposition finance critic just appointed by Stephane Dion, is a pretty sensible and knowledgeable fellow:

Brison said Canadians should be especially concerned because Flaherty was finance minister in Ontario when the provincial Conservative government of former premier Mike Harris sold the electronic toll Highway 407 north of Toronto for $3.1 billion in 1999. Three years later, a private investment bank valued the property at four times the sale price. "After three years of bad tax policy, and big spending, Flaherty has put the country in deficit. Now he wants to sell the house to pay for the groceries," said Brison.

There are still groups with tunnel vision, though. The CP reporter was able to count on the Canadian Taxpayer's Federation (CTF) for this quote:

Adam Taylor of the Canadian Taxpayers Federation said the government should do whatever it needs to -- including selling assets -- to balance the budget. "The government owns things that have no strategic value to Canadians and they could be sold," he said. "Property values haven't completely bottomed out and when the government owns thousands upon thousands of acres, there's a legitimate argument for selling a lot of it."

If Mr. Taylor really meant what he said (do whatever it needs to...to balance the budget), he'd advise the government to also consider the possibility of raising taxes (or rescinding promised tax cuts). But that's the last thing the CTF would ever say, so they can't be that serious about balancing the budget, especially since they've been applauding the various tax cuts that helped get us to our current fiscal position.
There are, moreover, a lot of economists who are questioning the rationale for balancing the budget right now (and I agree with them). In a severe recession, balancing the budget may come only at the price of a lot of pain for economically vulnerable Canadians, and reduce the number of options the government has to manage the economy and plan for its eventual recovery.
I see that Mr. Taylor is a market-timer who thinks he knows that, after a sale sometime in 2009 or 2010, property prices will continue to fall. If that's so obvious, I'd challenge the CTF to open a trading account, put its money where its mouth is, and sell some S&P Case-Schiller home price index futures on Jan 1, 2009. Hey guys, bet the house because maybe you'll be right!
Finally, the whole idea of balancing the budget by selling assets is based on their being valued on the government books at old, below-market prices. Any revenue you get from their sale is purely accounting revenue - not real added value for Canadian taxpayers.

On the Harper government's plan to purchase mortgage securities

The $25 billion purchase of mortgages announced by the federal government was described as follows:

From the Toronto Star: "Under the plan, the government is buying $25 billion of mortgage-backed securities to ease the liquidity problems of Canada's major banks. Harper described the securities as solid, government-insured investments..."

From the Ottawa Sun: ' "This is a transaction in which the government of Canada, the taxpayers of Canada will not lose money," Harper said. "Quite frankly, because the costs of our borrowing are lower than the value of these mortgages, we'll probably make money when this transaction is over." '

I'm not an expert in Canadian mortgage securities but here's my simple risk-return thinking:

Let's suppose these mortgage securities have an expected return that is slightly higher than the interest rate on Canadian government bonds, as Stephen Harper says.

Now Harper says that the Canadian government can buy the mortgages, financing the purchase at the interest rate paid on Canadian bonds, and earning the difference between the rates of return on the two legs. A profit for Canada?

But wait, these mortgage securities are probably insured (presumably through the CMHC) by the government of Canada! In this case, if anybody but the government of Canada purchases them, it's a purchase of insured mortgages. But if the government of Canada purchases them, there is no insurance any more for the purchaser. In fact, there is no free lunch. If the government expects to make a little money from this investment, it's only because it is taking on the risk of mortgage defaults because it is insuring its own investments.

I hope that the government takes a haricut on the price of these mortgage securities to account for how much the CHMC mortgage insurance is worth, and the fact that the CMHC is the government. If not, Stephen Harper's claims might be false and misleading. Again, I would caution the reader that I'm not an expert in mortgage securities - just knowledgeable enough to be worried about Stephen Harper's plan.

"buying opportunity": not just an insensitive statement from Harper, but unjustified

Anybody who knows financial markets would know that unless you really do your homework, you cannot say when there is a 'buying opportunity'. Certainly it would be wrong to say that, based on a casual application of the (economically unjustified) notion that stocks always bounce back after they go down, there was a buying opportunity back on Tuesday. That's what Stephen Harper did. Professionals who have done a lot of trades will tell that, unless you have done your homework and understand why a market is not being efficient, you won't make money betting on any simple strategy like mean reversion.

Now this post is not just about Stephen Harper. It's about commentators like Susan Riley of the Ottawa Citizen, who wrote, "...his logic is impeccable: stock markets go down, but eventually go back up", and Andrew Coyne who wrote of, "...Harper’s perfectly sensible observation that the present panic on the stock markets presents a remarkable buying opportunity ". Experience trading in the markets will tell you that, unless you figure out why somebody sold a stock down too aggressively, you don't have a better than even chance betting on it bouncing back. Right now, I'd say very few people, if any, really know exactly how bad the financial crisis is, and certainly not casual commentators who are mainly focused on Canadian politics.

Don't tell me that if you wait long enough, stocks will bounce back. If you wait, you have inflation to worry about. Look at the inflation adjusted return on stocks in the 1970's. Moreover, you can only wait until you die. In the long run we are all dead, as Keynes observed. For single stocks, consider an extreme example -- look at Lehman Brother's share price. Is it going to bounce back?

No, Stephen Harper's statement was not a sensible or logical statement that was simply insensitive. It was just wrong. As an economist, Harper should know something about market efficiency and how difficult it is to predict whether a stock price will go up or down. But I guess it was just too good an opportunity to try to express to voters his belief that the economy is probably okay.

It's (already) a disaster, not a buying opportunity, Mr. Harper.

A lot of people have already commented but here is my take on Stephen Harper's statement to reporters yesterday (Oct. 7, 2008), "I think there are probably some great buying opportunities emerging on the stock market as a consequence of all this panic" and the statement on the Conservative Party website related to the belated release of their election platform, "The Liberals and the NDP are both a vote for financial disaster" (their emphasis).

Look, it's already a financial disaster (I won't quote somebody else. I'll back that statement up with my past years of experience working in the financial markets). If the Conservatives really believe a vote for the Liberals is going to turn this situation into one, they don't understand what's going on. Maybe they don't want to, or can't. Hey, C's! It's already a disaster guys.

Note how the Conservatives are lumping the Liberals and NDP together so that they can criticize the Liberal Party on economic management. From the Financial Post, Stephen Harper said, "The Opposition proposes raise taxes. In particular, and look at the stock market today -- where the big hits are on energy and commodity prices. And the Opposition proposes carbon taxes. The Opposition proposes to raise taxes on companies in the energy business and other commodity businesses." They have to add in the NDP's plan to cancel planned business tax cuts. They can't simply criticize the Green Shift any more, especially with the publication of the open letter from 230 economists supporting a carbon tax as the best way to fight global warming.

Look, nobody is blaming the financial disaster on the government. This is an international problem, but it is a disaster. Hey, C's! It's already a disaster guys.

The questions Canadians should be asking themselves as they head to the polls on October 14th are, "Who is going to acknowledge the economic crisis as more than a buying opportunity on the stock market? Who has economic management experience? Who will, given that a recession is a near certainty, also look out for the vulnerable members of our society?". That would not be the Conservative Party.

Harper and energy prices

Yesterday, Stephen Harper was quoted in the Globe and Mail saying, "What I worry is this is just the tip of the iceberg if we get a carbon tax on energy." If he is implying that higher energy prices are bad, I have this to say:

Let's forget about taxes (and the fact Harper is yet again ignoring the shift in the green tax shift) for the moment. Hasn't Mr. Harper noticed how much the price of oil and the Canadian dollar have dropped as this economic crisis progresses? That's real dollars lost to Canada as a whole because we are net exporters of oil.

If Stephen Harper only cared about the Canadian economy, especially in the short term, he should be worried about lower energy prices. That would make Canada poorer. If the worst predictions, like those made by bank economists yesterday, come to pass, we might enter a depression where low commodities prices and not high prices would be part of the problem.

But, apparently, he may not care about the economy because he has an election to worry about.

Elizabeth May's book coming out on Oct. 2

I received a notice from amazon.ca that Canadian Green Party leader Elizabeth May's book, "Global Warming for Dummies", part of the extensive "... for Dummies" series, is being released in the middle of this federal election campaign on October 2. Coincidentally, it's the same date as the English language party leaders' television debate, one of two debates that were recently the source of so much public outcry when Stephen Harper and Jack Layton tried, unsuccessfully, to exclude her.

The Economy: Stephen Harper has cast away any intellectual anchor

One claim that Stephen Harper is making on the campaign trail is that he has, "the 'sensible balance' to handle uncertain economic times", according to the CBC.

On the contrary, I would say that Mr. Harper cannot be trusted to be a good manager for the economy because he has cast away any intellectual anchor in that field.

This should have been obvious in his desire to cut the GST (a consumption tax) in the face of the overwhelming opinion of economists that cutting income tax would be better at stimulating productivity and growth. More recently, Mr. Harper also over-ruled his Finance Minister, Jim Flaherty, (who, wisely, is [was] wary of the government choosing investments and trying to pick winners and lowers, a sentiment I seem to remember that is shared by former Saskatchewan NDP Finance Minister, Janice McKinnon) to dangle an election goodie - $80M for a Ford Motor Co. plant.

But what I want to mention today is that Mr. Harper has even cut his intellectual links with free market titans like Milton Friedman. Friedman said, "The legitimate role for government is, in so far as it can, to control and check negative externalities." Polluting for free, greenhouse gas emissions in particular, is a perfect example of a very serious negative externality that threatens the planet. On this, Friedman continues with, "...government should be involved by setting a fee on the activity concerned. And that is something else that has increasingly developed. You have markets now in pollution abatement."

Now, what did Mr. Harper have to say about Stephane Dion's Green Shift? He simply dismissed the Green Shift (after misrepresenting it by reducing it to a carbon tax) by saying that it would, "screw everybody across the country", in complete opposition to almost all economists, even ones that might be considered libertarian, right-wing, or conservative.

Where is Mr. Harper's intellectual anchor when he's thinking about the economy? What are his terms of reference? Perhaps he's just out to get votes? What else could there be? If economic times are uncertain, a guy like Stephen Harper is not a good person to rely on for sound management of the economy.

Stephen Harper and the conversation the Governor General needs to have with him

Her Excellency, the Governor General (HE), needs to have this conversation with Stephen Harper (SH) when he comes to visit Rideau Hall later this week (in the style of Andrew Coyne):

HE: Mr. Harper, you've come to ask us to dissolve parliament and call a new election, we are told.

SH: Yes, your excellency.

HE: We trust that you are not doing so because you think you could win a majority in the next parliament?

SH: Oh no, your excellency! Certainly not. That would be against the spirit of Bill C16, the fixed election date legislation that my government proposed and parliament passed last year. No, parliament is dysfunctional. It's dysfunctional now. That's why I'm here. We passed a bunch of legislation before but now, now it has become dysfunctional.

HE: We are glad to hear that you are respecting the spirit of Bill C16. We suspected as much when we read what you said, "My expectation would be that we will have another minority. I think that's the reality of the current political environment," when you visited Tuktoyaktuk. Pray tell Mr. Harper, how do you know that parliament is dysfunctional now?

SH: Well, your excellency, I've just had meetings with the leaders of the three opposition parties. We disagree so much on the issues that I believe our government doesn't have the confidence of parliament.

HE: But what if we get another minority government? What will have changed?

SH: Like I said in Tuktoyaktuk, I want to get a fresh mandate out of an election, even if it's another minority government.

HE: But, assuming you win a minority government, the opposition leaders will still be the same, and they will still have the same disagreements with you.

SH: Your excellency, parliament will be different. There will be new MPs, new ministers, new critics, new committees. Parliament will be different.

HE: But you haven't consulted parliament. You've only consulted the party leaders. Mr. Harper, perhaps we should consult with this parliament before we spend $300 million on another election just so that you can empty the opposition parties' coffers, and so leave them in the position of not being able to threaten to go to the polls. (Yes, we have been reading Mr. Flanagan's exposition of your battle plan.) Is that what you really mean by a "fresh mandate"? We are going to have to think about all of this for a few days before we would be able to grant your request to dissolve parliament.

My Suggestion to Her Excellency the Governor General of Canada

The amendment to the Canada Elections Act of 3 May 2007 (Bill C-16) sets a fixed federal election date of roughly four years after the preceding election. The purpose of this Act is to take away the power of the governing party to call an election when it is to its own advantage to do so. The amendment begins, however, with an affirmation of all of the powers of the Governor General, including the power to dissolve parliament at his or her discretion. By tradition the Governor General also acts on the advice of her prime minister.

What is expected to happen in Canada shortly is that the prime minister, Stephen Harper, will ask the Governor General, Michaëlle Jean, to dissolve parliament and call a new election before the next fixed election date of October 19, 2009. He will claim that the current parliament is "disfunctional", a matter of considerable dispute and, I would say, if true, then certainly caused by his own party who, for example, wrote a 200 page handbook for its members on how to disrupt parliamentary committees.

Mr. Harper will be at least circumventing the spirit of his own government's newly passed law, if not breaking it.

I don't know if Her Excellency the Governor General would consider this transgression sufficient to justify denying the prime minister's request, but I would suggest that she at least assert her long-standing role as the ultimate safeguard against abuses of the law and abuses of our democratic system by taking a few days to "consider" her prime minister's request before granting it.