Canada's Opposition Parties Vow to Bring Down Government, 1 month into its term...

[KrazyHorse]

But the conclusion doesn't suggest that the stimulus is ineffective, it suggests that it is counter-productive. I'd be willing to accept the conclusion that both types are ineffective, the conclusion that bother are counter-productive is well... odd.

Not particularly. If we assume that people are perfectly aware of Ricardian equivalence then they will be aware that:

a) Government spending involves a deadweight loss (you know better what you want than the government does)

b) The deadweight loss due to taxation rises approximately as the square of the size of the taxes, so lower taxes now at the cost of higher taxes later involves (with these very simple assumption) additional deadweight loss

[KrazyHorse]

would think a higher tax burden might be a good reason why tax cuts are still effective.

A higher tax burden than the OECD average?

[Victor Galis]

Originally posted by KrazyHorse

But if tax cuts lead to smaller GDP, and higher spending lead to smaller GDP, does that mean that governments have found the perfect balance of taxation of spending?

No. Why would you think that?

I don't. Hence the next line:

It doesn't make much sense to have both types of fiscal stimuli not work.

It makes perfect sense.

I don't understand your objection.

If tax cuts shrink GDP, and spending increases shrink GDP, the conventional wisdom is turned completely on its head. I can see one or the other not working for certain values of spending and taxation.

Not particularly. If we assume that people are perfectly aware of Ricardian equivalence then they will be aware that:

But why should we assume that? I guarantee to you that on the day I die no country will have exactly the level of national debt that it does today. I can safely make this statement without knowing either when that day will come or the exact level of debt that countries are in.

In fact, I strongly suspect the US government will effectively default on most of its debt at some point during my lifetime through a massive devaluation of the USD.

a) Government spending involves a deadweight loss (you know better what you want than the government does)

Maybe. I'll not argue with this one because it's probably true more often than not.

b) The deadweight loss due to taxation rises approximately as the square of the size of the taxes, so lower taxes now at the cost of higher taxes later involves (with these very simple assumption) additional deadweight loss

Hmm... but then that implies that the government should tax you heavily now so that they can provide lower taxes in the long-run. I doubt that would actually work in practice.

A higher tax burden than the OECD average?

Apparently we've both been careless, the average is only based on 5 countries: Australia, Canada, UK, US, and Germany. In recent years, the UK and Germany had higher tax burdens, while the US and Australia had lower burdens. I don't know what the numbers look like 1980-2001. At any rate differences don't seem to be that large in tax burdens.

edit: changed rates to burdens in above sentence

[notyoueither]

Originally posted by KrazyHorse

unless the implication is that the OECD average country is so heavily indebted that the best stimulus for its economy would be to pay down its debt

No, it could simply mean that people are rational actors (i.e. they understand Ricardian equivalence).

I doubt it.

Or that economies have become more intertwined (so national fiscal stimulus is less effective). That second reason would go a long way to explaining why the Canadian case is different. As I have previously posted, the Canadian economy seems to have become detached from that of the US (despite greater integration).

I can see that somewhat.

However, it might be pointed out that there are national efforts at stimulus going on in many places at the moment.

I don't believe we should treat this kaboom like earlier rumbles. There's a lot going wrong all at once and I don't see economies just humming along. We can't party like it's 1999.

[Victor Galis]

Also, in regards to Ricardian Equivalence:
I suggest you look at Table 5 in that paper you posted:

Table 5: Cumulative responses to a spending shock

C. Cumulative response of cyclically adjusted taxes
S1 -.13 .27 1.00* .85* .08 -.31 .30* .88* .14* .95*
S2 -.25* -1.02* .34* -.09 .44* -3.47* -.22 -.17 .12 .41*

Ricardian Equivalence seems to hold only in pre-80s Germany over 4 quarters, and approximately over 12 quarters in Canada, the US, and Germany.

It holds nowhere after 1980s over 4 or 12 quarters.

[embalmer42]

And on it goes.....

http://www.torontosun.com/news/canada/2008/11/30/7585391.html

News Canada
Tories to unveil budget Jan. 27
By KATHLEEN HARRIS, Sun Media

Last Updated: 30th November 2008, 5:00pm
Email Story Print Size A A A Report Typo Share with:
Facebook Digg Del.icio.us Google Stumble Upon Newsvine Reddit Technorati Feed Me Yahoo Ma.gnolia Simpy Squidoo Spurl Blogmarks Netvouz Scuttle Co.mments Sitejot + What are these? OTTAWA - The Conservative government is rushing to table a federal budget and promising new measures to stimulate the economy in a bid to help the economy and avert a constitutional crisis.

And one day after the Tories reversed a contentious plan to kill tax subsidies for political parties, Finance Minister Jim Flaherty also announced Sunday that the government won't proceed with a temporary ban on strikes for public sector unions.

In a teleconference with reporters, Flaherty confirmed he will table a federal budget Jan. 27 — the earliest date "in modern times." Without offering specifics, he also said a stimulus package is on the way.

"There will be further stimulus to the economy — that's an inevitable given the continuing challenges that we're facing in the economy. We're going to deal with the automotive issue, obviously," he said.

The Conservative government is facing a crisis of confidence in the House of Commons and could fall as early as Dec. 8. Opposition parties say they have no faith in the government's ability to steer the economy after it delivered an economic update that failed to offer an action plan and aid for struggling sectors like auto manufacturing.

Flaherty said financial aid is on the way, but the government won't throw "tens of billions" across the board.

"We are not going to take the American approach, and if the opposition parties want to use a shotgun approach, spraying money across the economy and hope that something works somewhere, we have a good example this year in the Unted States of that not working except in one quarter," he said.

Flaherty reiterated permanent measures already taken to stir the economy, including tax reductions and plans to accelerate infrastructure spending. He hinted aid could soon flow to the auto sector, noting Friday is a deadline for submissions.

But Flaherty's concessions and plans don't appear to be affecting moves by opposition parties to topple the government and form a coalition of power.

"The Conservative government's continued panic-mode governing further undermines Canadians' confidence in its ability to manage our economy in a time of crisis," said Liberal House Leader Ralph Goodale. "Canadians are facing a serious economic crisis, and the Conservatives are governing on the fly. (Saturday), they reversed their position on political financing, and today they're announcing they'll move up the budget date. How can Canadians trust this government to get our economy back on track when it's all over the map?"

Meanwhile, CTV News is reporting that NDP Leader Jack Layton had a "secret deal" with the Bloc Quebecois Leader Gilles Duceppe to defeat the Conservative government and replace it with a Liberal-NDP coalition long before the Tories delivered their economic statement. CTV said it has a tape of Layton speaking to his caucus and saying the deal with the Bloc was locked in a long time ago.

[KrazyHorse]

If tax cuts shrink GDP, and spending increases shrink GDP, the conventional wisdom is turned completely on its head. I can see one or the other not working for certain values of spending and taxation.

???

Do you not understand that these are increases in government expenditures/decreases in revenues without concommitant changes on the other side of the balance sheet?

It say nothing about what would happen if you BOTH decreased spending and taxation OR increased both. In fact you could approximate the change due to such a change by the DIFFERENCE between the two multipliers.

[KrazyHorse]

But why should we assume that? I guarantee to you that on the day I die no country will have exactly the level of national debt that it does today. I can safely make this statement without knowing either when that day will come or the exact level of debt that countries are in.

It's called intergenerational charity. If people leave a higher tax burden to their children they will attempt to leave higher inheritances to them as well.

[KrazyHorse]

Hmm... but then that implies that the government should tax you heavily now so that they can provide lower taxes in the long-run. I doubt that would actually work in practice.

No, it implies that the government should attempt to maintain consistent levels of taxation. Please think before posting.

[KrazyHorse]

Originally posted by notyoueither


I doubt it.

They don't have to "understand" it in the rational sense; they simply have to act, in aggregate, like they do.

I can see that somewhat.

However, it might be pointed out that there are national efforts at stimulus going on in many places at the moment.

So we should freeride off other people's efforts.

I don't believe we should treat this kaboom like earlier rumbles. There's a lot going wrong all at once and I don't see economies just humming along. We can't party like it's 1999.

I don't remember 1982, but I do remember 1990. That was pretty terrible for Canada (much worse than in the US). There are no indications that it will be close to that bad for us this time around.

[KrazyHorse]

Originally posted by Victor Galis
Also, in regards to Ricardian Equivalence:
I suggest you look at Table 5 in that paper you posted:

Table 5: Cumulative responses to a spending shock

C. Cumulative response of cyclically adjusted taxes
S1 -.13 .27 1.00* .85* .08 -.31 .30* .88* .14* .95*
S2 -.25* -1.02* .34* -.09 .44* -3.47* -.22 -.17 .12 .41*

Ricardian Equivalence seems to hold only in pre-80s Germany over 4 quarters, and approximately over 12 quarters in Canada, the US, and Germany.

It holds nowhere after 1980s over 4 or 12 quarters.

Nobody's claiming that it holds exactly. Government spending and tax cuts DO have some effect. It's just that the effect is NOT NECESSARILY what your naive Keynsianism (much different than real Keynsianism) would predict.

[CrONoS]

Regarding the "Ricardian Equivalence":

KrazyHorse you seems to think that we have demonstrated the existence of this concept. But, I remember one of my teacher having said that study were non conclusive, or at least, the effect existed but was weak.

Have you more information than I have?

[notyoueither]

Originally posted by KrazyHorse


They don't have to "understand" it in the rational sense; they simply have to act, in aggregate, like they do.

But how will people behave when they expect public action?

I can see how rising public debt no matter the circumstances could encourage people to modify behaviour to guard against the state presenting them with the bill they are unprepared for.

I don't think you will get the same reaction given the right circumstances, like when unemployment is high and growing, the money spent would be employing people in useful jobs who would otherwise be unemployed, and the product of their labour is useful to the broader community.

I don't think we are there yet, but temporary deficits for public works could be a useful measure if things get serious enough.

I can see that somewhat.

However, it might be pointed out that there are national efforts at stimulus going on in many places at the moment.

So we should freeride off other people's efforts.

Sort of like defence, then?

Only problem is we already have agreed to pitch in.

I don't remember 1982, but I do remember 1990. That was pretty terrible for Canada (much worse than in the US). There are no indications that it will be close to that bad for us this time around.

We're still on the trip down, and what's going on internationally is a bit more severe, I think. Although, the early 80's were crazy with the 20% interest rates. In some places it was a lot worse than others due to other things going wrong as well.

[Victor Galis]

Harper cancels opposition day!

http://www.cbc.ca/canada/ottawa/story/2008/11/28/fed-govt.html

Harper moves to avoid political showdown
Last Updated: Friday, November 28, 2008 | 10:00 PM ET Comments4405Recommend1616
CBC News
Prime Minister Stephen Harper makes a statement regarding the opposition's plan to form a coalition government, in front of the House of Commons on Friday. (Tom Hanson/Canadian Press)

Prime Minister Stephen Harper has temporarily stymied a Liberal plan to bring down the government and propose a governing coalition with the New Democrats, delaying the opportunity for a no-confidence vote by one week.

In an address delivered from the foyer of the House of Commons on Friday, Harper said the government should be empowered by Canadians — not through deals negotiated in the shadowy halls of Parliament.

"While we have been working on the economy, the opposition has been working on a backroom deal to overturn the results of the last election without seeking the consent of voters. They want to take power, not earn it," Harper said.

The prime minister has cancelled Monday's opposition day, which the Liberals intended to use to introduce a motion to topple the Conservative government on the grounds that it has failed to recognize the seriousness of the economic downturn.

Harper said the next opposition day will be set for Dec. 8.

Party standings:
Conservatives 143
Liberals 77
Bloc Québécois 49
NDP 37
Independent 2
"The Liberals campaigned against a coalition with the NDP, saying NDP policies were bad for the economy. And now they want to form a coalition saying that this will strengthen the economy," Harper said.

He also cancelled a vote on a ways-and-means motion that had been scheduled for Monday night, a confidence vote that would have given the opposition another chance to bring down the government. That motion deals with the government's fiscal update, which has prompted the current political crisis.

Pointing out that the Conservatives received a renewed minority mandate last month to guide the country through the worst financial crisis in decades, Harper said his government has taken several steps since the Oct. 14 vote to bolster the economy — including injecting billions of dollars of liquidity into Canada's credit markets.

The Official Opposition disagrees, saying the government hasn't offered any serious plan to assist workers and businesses in hard-pressed sectors such as manufacturing, the automotive industry and forestry.

The Liberal motion reads: "In light of the government's failure to recognize the seriousness of Canada's economic situation and its failure in particular to present any credible plan to stimulate the Canadian economy … this House has lost confidence in this government and is of the opinion that a viable alternative government can be formed."

Governor General making plans to return

The Bloc Québécois would not be part of any coalition government, but has expressed support for the idea as long as the coalition provides economic help for Quebec's forest and manufacturing sectors.

Gov.-Gen. Michaëlle Jean has been travelling in Europe for the past few days. She's shown here visiting the monument of Hungary's 1956 anti-communist revolution martyrs with her husband Jean-Daniel Lafond in Budapest on Wednesday. (Karoly Arvai/Reuters)"What's happening in Ottawa right now is there are negotiations going on between the Liberals and the NDP about what that government would look like," CBC's Margo McDiarmid reported from Ottawa.

It's still unclear who would lead a coalition, though the Canadian Press quoted a source as saying the opposition parties have agreed that outgoing Liberal Leader Stéphane Dion would lead the government for the next few months. Dion is set to step down in May when a new leader is selected.

If the no-confidence motion passes, the Liberals and New Democrats would visit Gov.-Gen. Michaëlle Jean to request her permission to try to form a coalition government.

There are reports the Governor General's office has made contingency plans to cut short her trip abroad. She is on a four-country tour of eastern Europe and isn't expected back until Dec. 6. The Canadian Press quoted aides as saying she is being briefed on the situation.

The Governor General would have the option to call on other parties — perhaps the coalition being discussed between the Liberals and New Democrats — to form a government.

Dion has no right to take power without election: Harper

Former Liberal prime minister Jean Chrétien wouldn't comment on his meetings with former New Democratic Party leader Ed Broadbent while on his way to his office in Ottawa on Friday. (Tom Hanson/Canadian Press)

The opposition is entitled to defeat the government as it sees fit, Harper said Friday, but Dion himself does not have the right to take power without an election.

"They want to put in place a government led by one party which received its lowest popular vote since Confederation," he said.

"They want to put in place a prime minister who was rejected by the voters of Canada only six weeks ago."

Former NDP leader Ed Broadbent had confirmed earlier in the day that he had been in talks with former Liberal prime minister Jean Chrétien about the possibility of a coalition stemming from disagreement with measures proposed in the government's fiscal update, delivered Thursday.

"I've talked to Mr. Chrétien. He and I both discussed what would be a good situation here for the people of Canada, for Parliament, and we'll see what happens," Broadbent told CBC News. He called the Conservatives' update a "joke."

All three opposition parties — the New Democrats, Liberals and Bloc Québécois — have criticized the Conservatives for not including in their fiscal update a stimulus package to help boost Canada's slumping economy.

Finance Minister Jim Flaherty has said a stimulus package is still in the cards if the economic situation doesn't improve.

Also at issue was a proposal to save money by cutting public subsidies for political parties, but Kory Teneycke, director of communications for the Prime Minister's Office, said Friday that the subsidies won't be tied to the fiscal update set for a vote on Monday.

That measure would cut the $1.95-per-vote each party gets to fund such things as staffing and research. Removal of the subsidies would harm the opposition parties more than the ruling Conservatives, who have been more successful at raising money privately.

Under the mini-budget, the government would also sell $2.3 billion in government assets and save another $2 billion through salary controls for public servants, MPs and senators. It includes a proposal to deny federal public-sector unions the right to strike for the next three years.

[KrazyHorse]

Originally posted by CrONoS
Regarding the "Ricardian Equivalence":

KrazyHorse you seems to think that we have demonstrated the existence of this concept. But, I remember one of my teacher having said that study were non conclusive, or at least, the effect existed but was weak.

Have you more information than I have?

What is your question? Whether, ceteris parebus it has been demonstrated that people tend to save more when the government runs bigger deficits? Or whether this effect is exact?

There are all sorts of distributional, intertemporal and intergenerational effects which muck up pure Ricardian equivalence. Not to mention that disaggregating it is a difficult task. I'm simply offering it as a fairly compelling hypothesis for why you can't trust a naive analysis like "if the government spends more than it takes in there is a net macro stimulus"