How to Respond to Trump's Tariff Threats

At face value there is little sense in President-elect Trump's threat to impose a 25% tariff on all imports from Canada until he is satisfied we have stopped illegal immigration and drug shipments across the border. It may be a negotiating ploy to extract concessions on other issues and it may suit Trump's inimitable need to blame other countries for the serious immigration and drug addiction issues facing the US. But the threat of tariffs won't solve those problems. Major improvements in border control and reductions in illegal immigration and drug supply require serious cooperative efforts by partnering nations committed to the same goals-- not bombast and threats driving people and countries apart.

Even from a parochial American perspective the tariff threat makes little sense because it is a threat to American investors, businesses and people as well as Canadian. It is, as University of Calgary economist Trevor Tombe recently pointed out in some detail, a classic lose-lose proposition. 

A tariff on oil and gas, electricity and other energy products -- by far the biggest component of Canadian exports to the US -- will hurt Canadian industry by putting downward pressure on the wellhead or netback prices producers receive. But it will also hurt US businesses and consumers (not to mention US investors in Canadian oil and gas companies) as the US is forced to replace the reduction in Canadian supply that the tariffs cause, particularly over the longer term as Canadian output falls or is diverted to other markets.

A tariff on motor vehicle parts and production -- the next most important component of Canadian exports to the US -- will hurt the Canadian auto industry, but will hurt the American industry as well because of the highly integrated manufacturing operations. Well-established, efficient supply chains will be disrupted and costs of motor vehicle production in North America will rise for everyone. The only possible winners will be European and Asian producers who will face higher cost North American production in global markets.

Trump's threat of 25% across-the-board tariffs is in short a transparently irrational proposal from the US as well as Canadian perspective. But lack of facts or reason does not necessarily deter Trump, who is attracted as much -- probably much more -- by the political buzz than the real consequences of what he proposes. 

And so the question is: how should Canada respond?

In the short term there is little more we can do than make the case to any and all who will listen -- the imposition of tariffs will hurt Americans and won't help the border control issues Trump says he wants to solve. There are far better ways to work together on those important matters. The same lobbying strategy Canada used to confront Trump's first term foray into lose-lose tariff policy will have to be used here.

But this short term response is the least of what we can and should do. The lesson here is not just that Trump is quite prepared to hurt Canadians even at a cost to his own country.  And the problem is not just Trump. Protectionism is a growing force in the US and Canada cannot count on staying inside its ever-increasing protectionist walls. Nor should we want to. The price will be too high.

The US is by far our largest trading partner and no doubt because of the strong north-south ties, will continue to be. But we need to take seriously the need to lessen our dependence on the American market and assumptions of good faith American policy. We need to be able to respond to tariff threats like the one Trump just made with more than weak entreaties to be exempt.

We need to support the investment in oil and gas pipeline and port facilities that will reduce the cost and increase the capacity to export to offshore markets. Just the option to access those markets will lessen the cost of what the US may do. 

We need to invest in the electricity transmission infrastructure that will support an expansion of interprovincial planning and trade. 

More generally we need to identify and work to eliminate interprovincial barriers to trade. We cannot count on the US to be a reliable trade partner, but we should be able to count on each other.

Of course, even with these and other measures, we will always be dependent on our access to the US market. And so Canada has to develop its own leverage when dealing with the elephant next door. We need to control access to strategic minerals in limited global supply and restrict US government participation in their development. We need to develop a stronger but also much more independent defence policy, particularly in the north where we may have more in common with Nordic countries' objectives and strategies than the US. 

In crisis, they say, there is opportunity. The opportunity for Canada now is to start to address what needs to be done not next week but over the next years and decades. Trump's threats are worrying in the short term, but they will do a great service to Canada if they get us taking seriously what need to be done over the long term. Let's hope our politicians and political debate start to address that.

'It's All About the Money Stupid'

Like the vast majority of my colleagues I support the use of carbon taxes to encourage households and industry to reduce their consumption of fossil fuels. We economists believe in the behavioural impacts of price signals, so of course we support making it more expensive to consume fossil fuels and emit manifestly harmful CO2  and other greenhouse gases into the atmosphere. 

I understand the scepticism that many people have (and cynical politicians exploit) about the need for and effectiveness of carbon taxes. People will materially reduce their consumption of fossil fuels when reliable alternatives are developed, affordable and widely available. It will be technological progress, not marginally stronger price incentives, that will make the real difference.

Still, whatever one's view regarding the importance of its incentive effects, there is a very compelling and urgent case for carbon taxes that I think many people understand and could accept. In the words of former President Clinton, albeit in a different way for a different reason: 'it's all about the money stupid'.

We know that as hard as we try, we will not achieve zero carbon emissions for many years, not in Canada and certainly not globally. And even then it may take years after that to extract carbon from the atmosphere in order to reduce concentration levels to a level that will meaningful reduce greenhouse gas effects. What that means is we can expect the increasing frequency and severity of storms, fires, floods and other climate change-related events to continue. And that in turn means we will need more financial resources -- more tax dollars -- to invest in the very wide range of measures that are urgently needed to reduce risks, minimize damages, compensate victims and rebuild and recover in timely and resilient ways. 

I've heard a number of understandably very distraught people demand that those responsible for human-caused climate change should be called upon to pay compensation for the material damages that climate change-related disasters have. They are thinking of course of the major oil companies and other suppliers of fossil fuels. But who are in fact responsible. It is convenient to target big oil and other fossil fuel companies as the fundamentally guilty parties. And there may be many good reasons to go after those companies for tax, environmental impact or other reasons.  But in reality it isn't the supply of oil, gas and other fossil fuel products that is the problem. It is the demand for oil and gas that drives their production and supply, and it is the use and combustion of fossil fuels that results in greenhouse gas emissions. 

If we want those responsible for greenhouse gas emissions to pay for the increasingly severe climate change-related damages those emissions are causing, it is household and industrial consumers of fossil fuels that we have to target. And that is precisely what carbon taxes do. 

But we need more than the tax. We need to dedicate the revenues that carbon taxes generate to desperately needed compensation funds -- more generally to finance measures that will help to prevent, mitigate, compensate and recover from the climate change-related disasters we are facing and will continue to face for many years..

These are unsettling times. But there is so much we can and should be doing to help communities minimize costs, respond more effectively, support impacted people, business and communities,  and recover in a fulsome and timely way. Commissions of inquiry, resource management agencies, municipal officials, fire protection personnel and others have all set out what needs to be done so the next climate events are not as bad as the last. But they all require major resources and investments, well beyond what normal budgets provide for.  

Government budget constraints should not be the reason we fail to act.  We don't have to revisit needs every time disaster avoidance and preparedness fall short -- we don't have to rediscover winter every winter. We need to commit the funds and make the investments we know are required and increasingly urgent to avoid, minimize and deal with catastrophic climate change-related events. And we need to do that without draining resources from all of the other priorities our society must address. Dedicating carbon tax revenues to the mitigation and compensation of climate change-related events may not be enough in itself, but it can greatly help. It can get us going much more rapidly and effectively with what has to be done. 

We Need a New Level of Commitment and Approach to the Housing Crisis

We know from countless studies that there are severe costs of inadequate, unaffordable housing. Inadequate, unaffordable housing in urban centres limits access for low and medium wage workers.  People cannot work where they cannot afford to live. It significantly adversely affects the local community and economy. And, homelessness, in the extreme, imposes huge social and economic costs on all sectors of society:

-poverty, illness and premature loss of life for those directly affected;

-reduced property values for business and residents in or near outdoor encampment areas;

-disproportionate demand for emergency and other health services;

-extraordinary policing and criminal justice system costs;

-safety concerns for all residents, homeless and sheltered alike.

There have been increased efforts to address the homelessness and more general housing crisis in Vancouver and other British Columbia communities, but these efforts are manifestly insufficient. The problem has been getting worse, not better. There still is not the commitment to what is warranted and required -- a much greater, long term and strategic investment program than is currently taking place.

A fundamentally new level of commitment and approach is required.

First and foremost, investments to improve access to clean, safe and affordable housing cannot be dependent on the success or failure of ad hoc trilateral government negotiations and agreements. Secure, adequate funds must be dedicated to investment in housing and related supports and services to enable large-scale, long term plans to be developed and implemented.

Instead of the city looking to the province, and the province looking to the federal government for more funds for the different specific projects they would like to undertake each year or political cycle, we need the provincial government to create an Urban Housing Authority with a guarantee of funds sufficient to develop and implement long term investment plans that will make demonstrable improvements in:

-reducing and ultimately eliminating widespread homelessness and associated outdoor encampments;

-providing affordable rental or other housing opportunities for low and medium income workers and families in urban centres, reasonably near their places of work or study, housing that the private sector simply is not developing.

The mandate of this Urban Housing Authority would go well beyond the existing BC Housing Corporation with its limited scope and budget, and its complicated relationship with government. The Authority would be a major new developer of housing in BC urban centres, with private sector management and expertise, but very clearly articulated housing policy objectives and goals.

Core funding for the Authority would come from a housing development agreement with the provincial government. Much like BC Ferries which receives annual payments from government in exchange for  contractually-specified service guarantees, the Housing Authority would receive annual payments in exchange for housing development commitments -- commitments that would transparently put the province on a path to reducing homelessness and affordability concerns. The province could negotiate with the federal government and cities to share the cost of these payments, but the timeliness and success of those negotiations would not affect the province's commitment and contractual obligations to the Authority.

Over time, the Authority would develop other sources of revenues. It would be empowered to undertake land assembly and redevelopment schemes in core urban areas with profits used to finance development of more affordable housing units and related services. The Authority would also have borrowing powers through the Municipal Finance Authority or with provincial government guarantees to gain access to low cost capital funds. In this way the Urban Housing Authority would mirror the rationale and mandate of BC Hydro and BC Ferries -- established and empowered to make the investments and provide the facilities and services the private sector would not or could not do. And in doing so it would fundamentally change for the better the urban landscape of BC.

Lessons from Monty Hall

I wasn't the first to get the Monty Hall problem unequivocally and humiliatingly wrong. But I was as incredulous and arrogant as anyone else.

Monty Hall, you may recall, hosted a game show where contestants had to guess the location of prizes  behind a number of closed doors. In the classic Monty Hall problem there were three doors, two with nothing behind them and one with a grand prize. After the contestant chose one of the doors Monty Hall advised which of the other two did not have the prize. There were now only two doors where the prize could be located -- the one that the contestant had chosen and the one of the other two that Monty Hall did not rule out. Monty Hall then gave the contestant the opportunity to change her choice.

The question is: was there any difference in the probability that the prize was behind either one of these two remaining doors.

I, like many others, insisted there was no difference. The facts were clear. After the information Monty Hall had provided, ruling out one door,  there were only two doors where the prize could be located. The chance that the prize was behind either one of them was the same -- one in two.

That still makes perfect sense to me, except it is wrong. It ignores the fact that from the outset when the contestant picked one of the three doors there was a two in three chance she was wrong. To say the same thing there was a two in three chance that the prize was located behind one of the two doors she did not choose. And that didn't change when Monty Hall ruled out one of the two non-chosen doors. The only change was that there was now only one non-chosen door with the two in three chance of having the prize behind it.

So if the contestant stayed with her original choice she would have a one in three chance of winning. But if she changed her choice to the other door she would have a two in three or double the chance of winning.

I know this is a bit confusing and counter-intuitive. My son, or as my wife would say, the brighter and nicer economist in the family, had to construct simple simulations of the game to convince me I was wrong. Pure logic wasn't enough. But after a while it sunk in. And it was a great learning experience -- not so much the mathematical probability part but rather the more fundamental and humbling recognition of how wrong we can be despite the certainty with which we hold to the correctness of our position.

It is, I think, one of the most important lessons that helped shape my economic consulting career.  No matter how carefully we do our analysis and how thoughtfully we develop our conclusions and recommendations we must never forget we may be wrong. We miss or ignore important facts. We fail to recognize  the nature and significance of our assumptions. We sometimes just make mistakes.

I've always been skeptical of those who profess they have the one and only correct answer to difficult public policy issues. That is why I have taught and applied a multiple account approach to the evaluation of policy and project alternatives. Different values and interests can bring different perspectives and often the best we can do is to assess the consequences of different actions -- how things would be different going forward -- in order to define as clearly and meaningfully as possible the nature of the trade-offs different alternatives present. Add to that a real appreciation that we may be wrong in our assessments despite all of our best efforts and it calls for some caution and humility in the work we do.

One of the most unfortunate trends I've witnessed over my consulting career is the exact opposite of caution and humility. Especially in contentious policy and project debates, and the hearings and media frenzy that often go along with them, there is far too much of what I like to call "analysis with attitude". People have a position and shape their assumptions, analysis and conclusions accordingly. There is no room for nuance, recognition and assessment of trade-offs, or simple acknowledgement of all the reasons including typically pervasive uncertainty let alone mistakes, as to why they may be wrong.

After over 45 years I am closing my consulting business. If I can offer anything from my experience it is a plea to those who continue in the very important world of public policy analysis, debate and advice -- stay away from analysis with attitude and the vitriol and intolerance it too often foments. Try to inform and elevate the debate with careful, objective analysis and a fulsome recognition of uncertainty, different perspectives and interests, and the simple fact that despite our experience, knowledge and best intentions there are lots of Monty Hall problems and paradoxes out there. We make mistakes.

Rethinking the Carbon Tax in the Wake of Recent Severe Climate Events

If there was ever a time to reconsider the logic and purpose of the carbon tax, it is in the wake of the severe weather events that have caused so much damage in British Columbia this past week and last summer. 

The proponents of a 'revenue neutral' carbon tax, where the revenues are dedicated to the reduction of income or other taxes, see the carbon tax solely as a means of providing incentives to reduce fossil fuel use and associated GHG emissions. Encouraging households and business to reduce emissions is clearly critically important. And imposing a carbon tax, as virtually all economists will tell you, is an economically efficient way to do that. 

But carbon taxes would have to be an order of magnitude greater than current levels to meet the emission reduction targets that are needed to limit climate change to so-called manageable levels. And a revenue neutral carbon tax won't address the immediate challenge governments face as a result of the climate change we are already experiencing and which is likely to get more severe. 

There are huge expenditures that must be made to deal with the widespread damages caused by severe climate events like the flooding in recent days. And there are huge investments in public infrastructure and services that are required to enhance the preparedness and resilience of utility, transportation, municipal and other government services in order to mitigate the damages of future events.

Right now those expenditures will either come at the expense of other needed and almost universally underfunded health, education and other public services or be funded by increased income, sales or other taxes. That of course raises the obvious question: why shouldn't the costs of mitigating and addressing damages be paid for by the activity most directly responsible -- fuel use and the GHG emissions it causes.

The most obvious logic for and purpose of the carbon tax is to generate the revenues government needs  to pay for the costs climate change is already and will increasingly cause. We shouldn't be asking hospitals and schools to forego needed funds or workers and business to pay higher income taxes to pay for that. We should be expecting those most directly responsible to pay.

We need a carbon tax that is at least as high as required to cover the costs GHG emissions are causing. You don't need economic theory and price elasticity estimates to justify the tax. You just need the common sense requirement that costs must be paid for and those responsible should pay. You might even find a lot more understanding and support for the markedly growing level of tax that is required.

In the Wake of the Horrors of the Residential School System

There is, quite understandably, the demand for accountability and retribution in the wake of the gruesome discovery of unmarked graves in the vicinity of aboriginal residential schools. Even if there were some well-meaning educational objectives, there was a complete failure to provide even the most basic levels of protection, care and respect, resulting in tragic and lasting consequences for residential school students, their families and communities.

But without meaning to diminish the need for the most thorough and transparent accountability building on a 1996 Royal Commission and more recent Truth and Reconciliation Commission, and no doubt to be continued with the discovery of more graves and the release of more institutional documents, it would only compound the tragedy of the residential schools if we go no further than recrimination and demonization of historical leaders for what transpired in the past, and fail to consider what all parties must do in the future.

It is not good enough to recognize that the residential school system was a horrible mistake, The question is what must be done now so that aboriginal children and youth can get the culturally rich and modern education they deserve and need. Because too many are not getting that now and we know from census data and countless studies that without high quality education, employment and income opportunities will be greatly limited and social and wellness outcomes disproportionately poor.

We can rename schools and remove statues of political leaders that bear responsibility for the residential school system, and for some the symbolism of such measures is important. But we can't undo the past and can't gain much by divisive litigation of the intentions and responsibilities of people long since dead. Symbolic gestures won't provide meaningful improvements and opportunities for aboriginal children and youth today. That requires resources, personnel, and well-designed and implemented programs that meet the challenges of what underlies the educational and social outcomes we see today.

It will be up to aboriginal youth, families, communities and governments to determine the best ways of providing the educational opportunities they need. There have been great aboriginal leaders who have led in the education of aboriginal youth, with positive social and economic results. And there have been leaders who have worked on the overhaul of reserve school systems and support for off-reserve children and youth needed for meaningful improvements in educational and social outcomes. That work must be built upon by current aboriginal leadership to determine what is needed for their nations and communities. And those educational plans and programs must be priorities for provincial and federal governments to fund and fully support.

None of this will be easy. But in the wake of the horrors of the residential school system it is essential to move forward -- not just look back -- if the intergenerational cycle of poverty and despair that plagues far too many is to be meaningfully broken.

We know education can be delivered exceptionally poorly -- arguably criminally in the case of residential schools. The challenge is to focus as much as possible on how it can be delivered exceptionally well.

The Political Economy of John Maynard Keynes - Then and Now

John Maynard Keynes was the brilliant British economist who upended the laissez faire economic policy that prevailed in the early1930's -- the notion that the economy self-corrects and the best government can do is to get out of the way even during economic crises like the Great Depression. He developed the theoretical foundation for counter-cyclical economic policy --  the need for government spending and other measures to stimulate the demand for goods and services during downturns in order to restore business activity closer to full employment levels.  

But as Zachary Carter writes in his recent biography of Keynes and sweeping history of economic thought from pre-WWI to the financial crisis of 2008 (The Price of Peace: Money, Democracy and the Life of John Maynard Keynes), Keynes was much more than the 'fiscal therapist' he is set out to be in the sanitized version of Keynesianism taught in economic departments throughout North America and Europe. He was a  great philosopher of war and peace who challenged the very basis of limited government, free-market economies.

For Keynes, the crisis facing European and North American countries leading up to and during the Great Depression was not simply cyclical downturns and collapse of economic activity. That no doubt was a central concern, especially after the crash of 1929. But the larger issue for Keynes was the suffering in the general populations throughout Europe -- suffering exacerbated by wars, ill-conceived terms of the peace, the Depression of course -- but most fundamentally brought about because of a failure of free-market economies to foster the government support and investments needed to meet essential community and societal needs.  It wasn't just the economic instability and insecurity that concerned Keynes; it was the  political instability it gave rise to -- political instability manifested clearly in the rise of Bolshevik and Fascist extremism, leading directly to the unthinkable Second World War.

The irony of Keynes is that he developed what was then considered and some still think is a radical prescription -- aggressive government intervention to address the failure of free-market economies to provide the counter-cyclical and social investments a healthy society needs -- for quite conservative goals. He wanted to save liberal, western society from the oppression wrought by left and right wing populist extremism and the global chaos that inevitably follows.

Keynes' academic and political battles were fought in the period from World War I through to the end of World War II. The 'Keynesian' issues have mostly been resolved -- most economists and governments accept the need for government intervention to restore economic activity during recessions, albeit with conservatives and monetarists favouring tax cuts and low interest rates to stimulate demand and with liberals and progressives favouring government spending.  But the bigger issues raised by the political economy of Keynes are as relevant and contentious today as they were in Keyne's own time. 

The question remains -- can free-market economies, even with reasonable counter-cyclical fiscal and monetary policies, provide the support and investments needed to meet essential community and societal needs. And if that support and investment isn't there, can we expect a resurgence of left and right wing extremism with all the pain that can bring, as occurred in Europe between the two world wars.

John Kenneth Galbraith directly addressed this issue in his book, The Affluent Society. In his acerbic attack on the tax-cutting, limited government policies of  conservatives, Galbraith wrote: "what is the advantage in having a few more dollars to spend if the air is too dirty to breathe, the water too polluted to drink, the commuters are losing out in the struggle to get in and out of the cities, the streets are filthy, and the schools so bad that the young perhaps wisely stay away".  

The specific concerns Galbraith raised may not all be as relevant today, but the general issue certainly is. Do we or do we not need public sector investments to address the scandalous conditions of homelessness, poverty and substance abuse afflicting so many in our urban centres; to support workers and communities who bear the largest costs of the necessary transition away from fossil fuel industries; to make investments in high quality child care and education services for children of all backgrounds and family means; to support culture, art, public libraries and all of the social infrastructure that enrich our lives. The list could go on. 

One of the interesting themes in Carter's biography of Keynes is the notion that in modern times the central problem is not scarcity -- it is not the classic economic question of how we can utilize labour, capital and natural resources most efficiently to maximize what we produce. The question that Keynes raised and is still so important today is not 'how' but rather 'what' should we produce and 'for whom'. 

The Price of Peace: Money, Democracy and the Life of John Maynard Keynes is a long read, but well worth the trouble. It is great history both of Keynes and the leading economists who followed, and provides critically important background to understand the debates we are or at least should be having in the present, and the future we may be heading for if we repeat the mistakes of the past.