17 Posts from March 2011
- Mar 11, 2011
- Posted By: Livio Di Matteo
- Tags: city council, debt, fiscal affairs, taxes, thunder bay
The recent deliberations leading up to City Council’s approval of the 2011 operating budget have focused mainly on expenditure items, tax rates and water rates. Indeed, the approval of a 1.27 per cent increase in the property tax rate coupled with a 14.3 percent increase in water rates at a time when gasoline, food and electricity prices are rising will inevitably cause some distress amongst the city’s citizens but the public’s response has generally been quite muted. Obviously, the rates are not high enough yet, which will only encourage our municipal governors further next year.
What was most disappointing about the budget deliberations was of course the absence of any meaningful long-term discussions of Thunder Bay’s fiscal future given the erosion of the tax base, the growing residential tax burden and the rather large debt load the city has taken on. This debt load is likely to get much larger given the cost overruns on the waterfront park development as well as the proposed Multiplex project, which will inevitably also require some new municipal debt (that will in turn be used to “leverage” some federal and provincial contributions). While such construction projects create jobs, the benefits in terms of employment and company profits are short term while the debt tends to last forever.
Figure 1 below presents a chart on municipal debt per capita from the 2009 BMA Consulting Group Municipal Study for municipalities in Ontario with a population greater than 100,000 and ranks them from lowest to highest. The results show that Thunder Bay is finally ranked number one in something – the amount of municipal debt per capita, which in this report stood at $1,974 per capita. Debt per se is not a serious problem provided that there are reserves to counterbalance them and Thunder Bay’s municipal reserves are substantial – with the city ranking 8th highest among this same group of municipalities. However, at only $1,040 per capita at the time of this study, there is obviously a major fiscal gap here.
Can we deal with the situation by raising more revenue? Well, revenues come mainly from property taxes, user fees and government grants. Government grants are unlikely to see major increases over the next few years given the provincial fiscal situation. As for taxes and users fees, well they have already been raised a lot and indeed much of the tax burden is now on the residential ratepayer given the erosion of the industrial base. Indeed, if one compares property taxes for an average bungalow in Thunder Bay to the other major Northern Ontario cities, Thunder Bay has the highest. The 2009 BMA Group Municipal study places those taxes at $2,991 for Thunder Bay, $2,939 for North Bay, $2,727 for Timmins, $2,434 for Sudbury and $2,301 for Sault Ste. Marie.
City councilors and administrators will inevitably come up with many ingenious explanations about these comparisons that will focus on how unique or special our circumstances are, and that we are comparing ‘apples’ with “oranges”. Indeed, if one added up the frequency this fruit analogy was used by the City of Thunder Bay, one might think that Northwestern Ontario and not the Niagara peninsula was the fruit belt. The point is its time to deal with the long-term finances of the City of Thunder Bay before there is an actual fiscal crisis. One cannot acquire an ever larger amount of debt without there being consequences down the road. Thinking otherwise is simply a fiscal fantasy.
- Mar 11, 2011
- Posted By: Livio Di Matteo
- Tags: amalgamation, building permits, economic growth, economy, thunder bay
Investment spending is one of the most volatile components of Gross Domestic Product and construction activity is a major component of investment. Municipalities issue building permits for new construction and alterations that fall into the categories of residential, industrial, commercial and institutional construction. Building permits are of value as a historical data series because they are a key indicator of past levels and trends of economic activity via their documentation of capital formation. Building permit data for the City of Thunder Bay from 1970 to 2010 as well as the former cities of Port Arthur and Fort William for the period 1910 to 1969 provides a time series that gives us a fascinating snapshot of the ebb and flow of economic activity in Thunder Bay.
The three figures below show the total number of permits issued from 1910 to 2010, their real total value in 2002 dollars and finally their real value per capita calculated by dividing the real total value by the city’s population that year. From 1910 to the 1970s, despite cyclical business fluctuations, the total number of permits (Figure 1) generally rose and peaked in 1977 at 1,805. They then plunged sharply as a result of the 1981-82 recession, recovered and then began a long-term decline from the mid 1980s that only began to reverse starting in 2006. The large numbers of permits particularly in the 1960s and 1970s were fueled by residential permits as some years would see housing starts numbering 700-800 homes.
When the inflation adjusted total value of permits is presented (Figure 2), they show the period from 1910 to the mid 1930s to be one of intermittent growth and decline while the period from the 1940s to the mid-1970s one of increasing activity. The real total value of building permits issued peaks in 1975 at 273.5 million dollars ( in 2002 dollars) and then embarks on a long-term declined punctuated by the occasional upsurge. Both Figures 1 and 2 suggest that the 1970s was a watershed period in the economic history of the Lakehead for the period prior to that decade was one of growth in economic activity as well as population while the period since has been one of decline in economic activity and stagnation in population.
This pattern is also documented in the last figure, which plots the real value per capita of building permits (Figure 3). This figure again shows an increase in the real value of permits per person up until the 1970s and then a general decline afterwards – with one glaring exception being the years of the wheat boom from 1910 -1913. During those years, the largest per person values for permits are recorded with a peak value in 1912 of almost 4,000 dollars. This was at the height of the wheat boom era when the infrastructure of the Lakehead as the world’s largest grain port was being laid. In the years that followed, this dizzying height in per capita permit values was never matched and even the peak in 1975 only represents the third highest real per capita value in the years between 1910 and 2010.
The decline in economic activity at the Lakehead that commences in the 1970s is a function of many things such as increasing technological change in resource production that reduced employment in the resource sector, shifting grain markets that reduced the role of the port, and the end of the baby boom that then also ended the construction boom. Of course, one cannot also help noticing that the slowdown begins in the mid-1970s, right after the amalgamation in 1970 of the twin cities of Port Arthur and Fort William along with several of the adjoining townships. One cannot help but wonder if the intense urban competition and rivalry between the former cities of Port Arthur and Fort William was also a factor in spurring growth up until the 1970s. The elimination of that competition in the 1970s may have created an environment where new ideas and change were more difficult to implement because of the lack of jostling for advantage. The creation of a monopoly municipal government at the Lakehead may in the end have been yet another factor in the region’s long-term economic decline.
I am delighted to join the team of Stephen Gordon, Frances Woolley, Mike Moffat and Nicholas Rowe who post at Worthwhile Canadian Initiative, Canada's major economic policy blog. I will be posting economic policy pieces there as well as continuing to post more Northern Ontario themed issues here at Northern Economist. As pieces appear on WCI, I will also post links on this site so you can visit. My first post on WCI: Is Ontario in Decline.
- Mar 5, 2011
- Posted By: Livio Di Matteo
- Tags: charlie sheen, economic rents, marketing, meltdown, publicity
Charlie Sheen’s recent antics may seem indicative of a meltdown but could they also have an economic interpretation? At first glance, his outburst against the producers of Two-And-A-Half-Men may seem to be an economically self-destructive activity given that production on the show is now halted. The show was apparently renewed and slated to run until 2011-12. However, that show is now into its eighth season, which makes the ratings more difficult to sustain (though the show has been performing very well), and given the number of personal issues Mr. Sheen has been having over the last few years the possibility of yet another season was becoming ever more problematic. The recent meltdown and media rants have certainly garnered Mr. Sheen an extraordinary amount of media attention and a rise in his web presence (See the Google Trends graph below). If it looks like you are not going to be able to sustain your activity for the next couple of years due to rehab and other personal issues, why not pull the plug now and try to cash out on the surge of celebrity. Notoriety can also be a source of economic rents. In a sense, Mr. Sheen may be trying to re-invent his career under the mantra that bad publicity is better than no publicity at all. He is apparently trying to negotiate a 10 million dollar book deal and Charlie Sheen will get an animated special on U.S. cable network Spike TV called Charlie Sheen’s Winningest Moments that will premiere March 9 at 10:30 p.m. ET, on the U.S. cable network Spike. Of course, there is no guarantee such a strategy will work but borrowing from the immortal words of Mr. Sheen, if you are tired of pretending you are not special, what else can you do? In Hollywood, being special is what it is all about.
"Charlie Sheen" Google Trends Search
- Mar 5, 2011
- Posted By: Livio Di Matteo
- Tags: canada, deficit, expenditures, federal government, revenues, sustainability
As budget season approaches, a quick survey of Canada’s long-term federal finances is definitely in order. Figure 1 below plots federal government revenues and total expenditures for the entire period 1961 to 2009 using data from the 2010 Fiscal Reference Tables. While the period from 1961 to the mid-1970s was largely balanced budgets, the impact of the post-1973 oil price shock, productivity decline, stagflation and high interest rates is demonstrated in the widening deficit gap which is not closed until the restrictive fiscal policies of the mid 1990s. The new era of budget surpluses lasts until 2008-9 when there is a 5.8 billion dollar deficit followed by 55.6 billion the year after.
As we move towards the March 22nd budget date, the question is whether federal spending is sustainable – that is does the increase in the resource base match the increase in spending? Figure 2 presents the average annual growth rates for federal revenues as well as program spending, debt charges and total spending. The results suggest that federal spending has been largely unsustainable for much of the last 50 years unless there is a concerted effort to rein it in as during the fiscal restraint of the 1990s. For the overall period from 1961 to 2009, revenues have grown at an average annual rate of 7.8 per cent compared to 8.3 percent for program spending and 8.3 percent for debt charges. For the period 1961 to 1990, program spending was sustainable given that it grew at an average annual rate of 10.3 per cent as opposed to 10.8 percent for revenues. However, total spending was unsustainable because of debt charges, which were growing at 15 per cent. The 1990s, because of fiscal restraint, was a sustainable period as revenues grew faster than program spending and debt charges. However, old patterns re-asserted themselves after 2000 as revenue growth has failed to keep pace with program spending. The situation has only not been worse because of historically low interest rates, which have served to reduce debt service costs. For another perspective on the federal fiscal situation focusing on expenditure and revenue composition, you might want to check out Stephen Gordon’s latest piece at Worthwhile Canadian Initiative.
Canada is usually referred to as a small open economy. The evidence for this usually lies in the high export to GDP and import to GDP ratios. Exports in particular are extremely important as they allow us to earn a substantial portion of our income. Over the last thirty years, the export to GDP ratio has averaged almost thirty percent, which means that their absence would essentially amount to a 30 per cent pay cut for the Canadian economy.
The two accompanying figures present a long-term perspective on our export sector. The first figure plots the export to GDP ratio from 1886 to 2010 (it is actually GNP rather than GDP for the period before 1975) using data from Historical Statistics of Canada and Statistics Canada. The results are intriguing as they document the rise of our export sector – particularly since 1960. Although Canada has always been an exporting nation, it was only with the First World War that Canada’s export to national income ratio rose above 20 per cent only to collapse with the onset of the Great Depression. The ratio again rises with the Second World War and then declines in the immediate post-war period but starting in the 1960s starts to climb peaking in the year 2000 at about 40 percent. Since the year 2000, Canada’s export to national income ratio has declined from this dizzying height to reach about 25 per cent. We appear to be back where we were before the onset of the Free Trade Agreement with the United States.
Figure 2 suggests that if we are to see a rise in the export to GDP ratio in coming years, we may have to look beyond the U.S. market. This is not necessarily a surprise as Canada’s trade patterns have shifted over time. The United Kingdom used to be the most important destination for our exports and that was eventually replaced by the United States. However, the last decade has seen the share of our exports going to the United States also decline – from a peak of 84 percent in 2000 to only 73 percent in 2010. This has been made up by an increase in exports to the UK (from 4 to 5 percent) and most significantly, to All Other Countries (from 12 to 22 per cent). Canada’s trade patterns appear to be diversifying away from the United States and we are now heading back to territory we last occupied in the mid-1970s. In 1975, the United States accounted for about 66 per cent of our exports, the UK had seven per cent and All Other Countries 27 percent.
Our exports dropped significantly in 2009 due to the impact of the recession but began to recover in 2010. The total value of Canadian exports in 2010 rose by 9.5 per cent. However, exports to the United States rose by 9.2 per cent while exports to Japan rose 9.5 percent and exports to the other OECD countries rose 9.9 percent. And as for the UK, exports to the UK rose by 36 percent in 2010! It would appear that when it comes to trade patterns for Canada, tomorrow is yesterday and the Empire has struck back. However, we will need to wait and see if this trend persists and the UK share of our exports returns to the levels of a century ago.
Statistics Canada Daily has just reported on an article on the prevalence of adult obesity in Canada and the United States. In the United States, the National Health and Nutrition Examination Survey (NHANES) has been gathering measured height and weight data for years. In 2007, the Canadian Health Measures Survey (CHMS) began collecting direct measurements of height, weight, body mass index (BMI), skinfolds and waist circumference from a nationally representative sample of the population. The nature of these surveys has created an opportunity to compare rates of obesity among adults in Canada and the United States. The results show that from 2007 to 2009, the prevalence of obesity (defined as a BMI of 30 or greater) in Canada was 24.1%, over 10 percentage points lower than in the United States (34.4%). Among men, the prevalence of obesity was over 8 percentage points lower in Canada than in the United States (24.3% compared with 32.6%) and among women, more than 12 percentage points lower (23.9% compared with 36.2%)
The interesting question is what may account for the difference? Is it lifestyle? Cultural preferences? Given the similarities between Canada and the United States, it is difficult to see what major cultural or lifestyle differences could account for such a difference. One major difference between the two countries is economic – the difference in per capita GDP. It could be differences in the material standard of living as captured by GDP affect the resources available for food consumption. However, the relationship between income, food consumption and obesity need not necessarily be positively correlated, as it would also depend on whether food is a normal or inferior good. Moreover, income and education are also correlated and it could be that countries with higher incomes have better educated populations and therefore are more knowledgeable about health and food consumption meaning the relationship between BMI and income could be negative rather than positive.
This relationship is checked out using health data for selected OECD countries: those for whom a recent estimate is available for both the percent of population that is obese - that is had a BMI greater than thirty - as well as per capita GDP. The per capita GDP is in U.S. purchasing power parity dollars. The results are presented in Table 1 for 14 OECD countries including Canada and the United States and are ranked by obesity. The United States tops the list at 27.5 percent of the population as obese while Italy is last at only 9.9 percent. When a graph (see Figure 1) with a trend line is plotted between income and the percent obese, the results show a negative relationship. That is, higher income is generally associated with a lower BMI – with one obvious outlier. The United States, with the second highest per capita GDP of these 14 countries (Norway was first) also has the highest percent of obese population and its data point is off on its own in the northeast corner of the graph. These results suggest that in general, the relationship between income and obesity at the national level is negative. The United States is definitely exceptional in being a high-income country with high obesity rates.