Economic Issues Report
Matthew Lanegraff
Macroeconomics - ECON 1000
Professor Garth Jensen
Thursday, April 9, 2009
Table of Contents
1.0 Issue One - Brain Drain 2
1.1 Policy 2
1.2 Solution Mechanism 2
1.3 Benefits 2
1.4 Repercussions 2
2.0 Issue Two - Unemployment 2
2.1 Policy 2
2.2 Solution mechanism 2
2.3 Benefits 2
2.4 Repercussions 2
3.0 Issue Three - Recession 2
3.1 Policy 2
3.2 Solution mechanism 2
3.3 Benefits 2
3.4 Repercussions 2
4.0 Issue Four - Trade 2
4.1 Policy 2
4.2 Solution Mechanism 2
4.3 Benefits 2
4.4 Repercussions 2
5.0 Issue Five - Productivity 2
5.1 Policy 2
5.2 Solution Mechanism 2
5.3 Benefits 2
5.4 Repercussions 2
6.0 References 2
Appendix A 2
Appendix B 2
Appendix C 2
.0 Issue One - Brain Drain
The brain drain epidemic has faced Canada for many decades, dating back to the 1960's and 1970's where Canada's trained professionals were leaving the country to find better pay and incentives. The hardest felt shortages of trained professionals were medical staff including nurses and doctors. "The brain drain south was particularly dramatic in the mid-1990s, when country-wide cuts in the hospital sector put many nurses out of work, to the delight of eager US recruiters" (Gray, 1999). Many of these highly trained professionals not only take with them their training and expert knowledge but they take the opportunity for Canada to gain back their subsidized education and their higher tax bracket personal pay (Appendix A). However, many of these emigrants are leaving due to the fact that Canada's high tax rates and lack of incentives compared to the United States. Therefore, the Canadian Government should be enticing newly trained professionals to stay in Canada by creating policies that are competitive to the United States policies.
.1 Policy
The policy I suggest the Federal Government implement in order to slow the emigration out of Canada is a supply-side fiscal policy of regressive tax, by increasing the marginal tax rates of persons earning higher income levels. If we compared Canada to the United State's advantage, we would notice that "the top marginal tax rate in the United States just moved from $283,000 to $285,000. Canada's top rate starts at $65,000 Canadian or $42,000 U.S" (Standen, 1999). Therefore, Canada's current fiscal policy on marginal tax rates is telling trained professionals that "you are wealthy at $42,000 U.S. In America, you're wealthy at $285,000 U.S." (Standen, 1999). This large gap is no doubt enticing Canada's professionals to look elsewhere to earn better incomes.
.2 Solution Mechanism
This supply-side mechanism of regressive tax should inflict a larger burden on the lower income levels than on the higher income levels. Once this is done "maximum benefits are achieved by optimizing the marginal tax rates of those with high incomes and capital investments who are deemed most likely to increase supply and thus spur growth." (Brownlee, 2006). This mechanism will reduce the tax burden on the high tax bracket earners and will shif the burden to the lower level income earners. Canada's college and university trained professionals will be more eager to seek their higher paying jobs in Canada as the higher tax burden will not be on their shoulders. The Federal Government will then be able to earn more taxes on lower tax bracket income earners which will offset the reduction in taxes on the smaller group of higher income earning workers.
.3 Benefits
Lowering taxes for the higher tax bracket income earners will entice professionals to stay in Canada as their taxation levels will meet international standards. Alongside this, trained professionals will have higher demand elasticity on goods and services because they will be receiving more income to save or dispose of. An American study shows that "taxpayers with incomes above $100,000 per year (in 1992 dollars) have an elasticity of 0.57" (Balls), however, people earning "below $100,000, the elasticity is much lower; it is 0.11 for those in the $50,000-$100,000 group and 0.18 for those in the $10,000-$50,000." (Balls). Furthermore, the government's subsidized education of these trained professionals will be taxed back over time instead of having these professionals leave the country and Canada losing this taxable amount.
.4 Repercussions
With good news for some, there are down falls for others. As a lowering of taxes for high bracket income tax earners may stimulate capital investments and consumption, the lower tax bracket earners will have a much heftier tax burden put on them. The lower income earners may decide to save their disposable income rather than spend. Another point to be made is this will not 100% guarantee that trained professionals will stay in Canada, it may smooth the rate of emigration but if other countries offer better services, technology, and incentives Canada's trained professionals ...
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.4 Repercussions
With good news for some, there are down falls for others. As a lowering of taxes for high bracket income tax earners may stimulate capital investments and consumption, the lower tax bracket earners will have a much heftier tax burden put on them. The lower income earners may decide to save their disposable income rather than spend. Another point to be made is this will not 100% guarantee that trained professionals will stay in Canada, it may smooth the rate of emigration but if other countries offer better services, technology, and incentives Canada's trained professionals may still leave. One last point to be made is, with high income earners paying less taxes, Canada will not be able to earn as much taxes off of larger incomes. Instead, the government will depend on the lower level income taxes of the poorer citizens of Canada.
2.0 Issue Two - Unemployment
In today's current economic situation unemployment is rising to heights not seen for many years. Recently the Royal Bank of Canada (RBC) reported "Employment fell by 82,600 in February and the unemployment rate jumped sharply higher to 7.7% from 7.2% in January. The weakness was concentrated in Ontario again with another 35,000 jobs lost in February for a total of 106,300 in the first two months of 2009." (Canada Ecotrends, 2009) (Appendix B). This rise in unemployment is known to be caused by the lack of demand for goods and services in our financial markets, consumers, and the global economy. As the economic down turn becomes worse more jobs will be lost. The only way to ease this is by creating policies to help smooth the trend of falling unemployment to where the equilibrium point of supply equals demand.
2.1 Policy
Due to the lack of global demand for goods and services in our country we are witnessing Keynesian unemployment or also known as cyclical unemployment. Many argue that "government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unemployment and deflation" (Keynes, 1936). A suggestion to this problem is using the Keynesian model which would increase deficit spending to stimulate a sense of demand among the economy.
2.2 Solution mechanism
Throughout Canada's history, there have been different techniques used to combat rising unemployment. "Governments play a residual and passive role in tackling unemployment problems, chiefly by providing educational training through community colleges and income maintenance through unemployment insurance" (Harcourt, 1996). The type of spending proposed is to allow the government to support the unemployed in being retrained to make workers more attractive to employers, employment insurance rates will be increased to support those seeking employment, and personal interest rates will be reduced to stimulate spending among consumers. Jobs will be created through additional government spending; this would include massive construction projects to the infrastructure of the country, housing markets and to newly created businesses. The government will obtain their deficit money through borrowing from the world market, and encouraging the Bank of Canada to buy bonds by switching government deposits into banks.
2.3 Benefits
There are many benefits to government spending on creating labour demand throughout the markets. From the policy above, we will see the unemployed being retrained in subsidized education schools, many new jobs will be created through development of Canada's infrastructure and housing market. Along with this, personal interest rates will be cut to allow more spending of the public on goods and services. This type of policy has worked for countries like Sweden where they have a program that assists in matching, "more than one million workers per year with jobs that fit individual needs and abilities" (Harcourt, 1996). The government spending projects will give a sense of demand in the economy; this in return will allow the consumer and financial markets to get a sense of trust back in Canada's economy.
2.4 Repercussions
These labour initiatives by the government are great but there are some downsides to these schemes. "Many individuals suffer long spells of unemployment because they lack either the labour market information required to find work quickly, the marketable skills necessary to qualify for work, or the financial means to relocate nearer work." (Harcourt, 1996). Another problem that always occurs with government spending is a government deficit. The deficit in the long run will have to be paid off by future generations of Canadians as interest rates are raised to balance the deficit.
3.0 Issue Three - Recession
It does not take much to contract a countries economy into a recession as it does in trying to get out of a recession. As reported by the Bank of Canada, "Major advanced economies, including Canada's, are now in recession, and emerging-market economies are increasingly affected." (Carney, 2009). However, this is not a Canadian problem as stated by the TD bank, "this is not a made-in-Canada recession, but the country has certainly imported all the problems surrounding financial market uncertainty, a weakened export market and the plunge in commodity prices that comes with a global recession." (For Whom the Bell Tolls, 2009). A recession can be a difficult situation to get a hold of, especially if it's a global recession. Many governments will respond to recessions by adopting expansionary policies, such as increasing money supply, increasing government spending and decreasing taxation.
3.1 Policy
The policy suggested would be used to smooth out the recession by use of Keynesianism to increase government spending by igniting economic growth. However, "First, there can't be a Canadian economic recovery without stabilization in the U.S. economy and global financial conditions." (For Whom the Bell Tolls, 2009). The policy suggested will help ease the fall of our economy and over time begin to expand again.
3.2 Solution mechanism
There are a number of ways in which the government can spend money to improve the economy, however, the key is to spend it wisely and not over spend. "Canada is clearly being affected by the cyclical downturn in the global economy, with both employment and output now falling." (Canada's Economic Action Plan). When the economy is experiencing high unemployment and output, an increase in government spending on infrastructure and employment initiatives creates a market for business output.
3.3 Benefits
There are two distinct benefits in government spending that will help ease the recession. Explained as the spending multiplier, a government expenditure program will work if: "The people who receive this money then spend most on consumption goods and save the rest." (Hughes, 2003). Secondly, "this extra spending allows businesses to hire more people and pay them, which in turn allows a further increase consumer spending." (Hughes, 2003). Creating work will encourage consumers to spend, creating more demand for business supply. This in turn raises the real Gross Domestic Product (GDP) and the employment of labour, therefore, lowering the unemployment rate.
3.4 Repercussions
Along with the many benefits of government spending there are many negative repercussions of this type of spending too. "Standard Keynesian models showing large "multiplier" effects from deficit spending typically assume economies are closed to trade (else much of the spending "leaks" out to imports), and expectations of the future are blind, for an example, consumers and investors do not worry about the long-run consequences for debt, taxes and ultimately for inflation of running large deficits." (Coyne, 2009). Ultimately the deficit spending will mean higher taxes and interest rates for future generations of Canadians to help pay off the deficit.
4.0 Issue Four - Trade
Canada is currently finding their trade levels, falling due to economic contraction. This is a problem that occurs when an economy is in a recession, but there are ways a country can exit this falling trade problem. The ecotrends report by RBC bank stated, "imports falling $2.8 billion (-7.9%) as exports fell an even greater $3.1 billion (-9.0%)." (Canada Ecotrends, 2009) (Appendix C). This shows that Canada must support their financial markets in order to assist with the growth of the country's economy. There are a few ways in doing this, all which involve creating a policy or modifying regulations.
4.1 Policy
To create an upward battle in the trade market of Canada's economy, Canada must come up with a bold complex policy. The policy suggested to use is a Keynesian government spending initiative to stimulate growth in trade in the economy. Canada has been investing in trade by "working to encourage trade by helping Canadian firms export to new markets and expand their trade in existing ones." (Budget 1997).
4.2 Solution Mechanism
The government spending program to increase the trade market will be a huge bonus to the country and the economy. The government will initiate spending on, "pursuing new trade agreements in Asia and the Americas, as well as with the European Union, to increase the ability of companies to access investment opportunities both in Canada and abroad." (Sosnow & Aubrey-Horvath, 2008). Another spending initiative can be, "investments by the government in new world-class research facilities." (Sosnow & Aubrey-Horvath, 2008). Along with these important initiatives, Canada can reduce trade barriers and provide much needed support to some of Canada's key manufacturing sectors, such as the auto sector. This deficit government spending will be costly but the cost will be returned as the increase in the trade market occurs.
4.3 Benefits
The benefits of this policy are, trade and demand will be increased allowing manufacturers to increase their output. Also, it will allow Canada to compete better on the international trading market.
4.4 Repercussions
One of the most significant repercussions Canada may face from government spending on the trading market is not stimulating enough investment and growth. Canada would be dealing with other countries to encourage trade relationships, but if other countries are facing economic recessions or poor production, Canada may not find the level of trade they are hoping for. This than can result in not enough interest coming back from the different trade sectors due to the lack of trade in government initiatives. In other words, if trade initiatives do not work, Canada may not receive deficit repayments back from the trade sectors because the trade demand did not increase significantly enough.
5.0 Issue Five - Productivity
Productivity and the economy go hand in hand to keep the country growing and healthy. When a recession occurs in Canada, one of the main factors could be the productivity rate where unemployment may rise due to the lack of demand for goods, thus forcing businesses and services to cut staff to the level of demand they are receiving from buyers. A good indicator is the labour market of Canada, where TD bank reports, "Canada's labour market was hit hard in early 2009 as the weakening demand late last year resulted in businesses cutting their payrolls." (For Whom the Bell Tolls, 2009). In order for Canada to counter the growing lack of demand and rising unemployment, the government must intervene and assist in the recovery of these sectors.
5.1 Policy
There are different policies that will work to stimulate growth in Canada, but many of them have their up sides and down sides. The chosen policy to implement is a Monetarism Supply-Side tax cut along with increasing the national money supply. I have chosen this policy by a statement by Milton Friedman. "He argues that "cutting tax rates alone would be sufficient to cause GDP to grow, lift tax revenues and balance the budget. Friedman, however, retained a more conventional monetarist view, believing that while tax cuts were on the whole desirable, money supply was the crucial variable." (Stigler, 2003).
5.2 Solution Mechanism
An increase in money supply will promote banks to lend money to people and businesses, allowing more demand to occur by consumer or labour. The cut in taxes will help increase economic growth by further allowing businesses to afford the additional staff and the consumer to afford more goods and services. The tax cuts will increase labour hours as businesses can afford extra workers due to fewer payments on taxes. This in return will increase personal income, thus, an increase in personal tax along with extra consumer spending will be collected to offset initial tax cut. The increase in labour and consumer demand for goods and services results in a slow increase in productivity over a long period of time.
5.3 Benefits
The benefits of using the supply-side tax cut and an increase in money supply will increase economic growth and production. Businesses will begin hiring with lower taxes allowing for less to be unemployed or laid off. The consumer will be more trustful in the economy; therefore, a increase in consumer spending will occur. Also, with more people employed, the personal taxes being collected will offset the cost of the initial tax cut to the economy. Even though demand will be affected, consumers may use the extra tax cut money to save it and decide to use this savings to encourage investment spending. The increase in money supply will allow loans to be made available from banks to consumers and businesses. This in return will increase production at a faster rate than just a tax cut to the economy.
5.4 Repercussions
There is not a 100% guarantee that personal income and consumer spending will pay for the initial tax cut. If tax cuts are too small they will remain ineffective to increase consumer demand. If the tax cuts are too deep, productivity may increase but personal and corporate taxes may not be enough to repay the deficit of the initial tax cut.
6.0 References
Balls, A. (n.d.). High Income Taxpayers are More Responsive to Marginal Tax Rates. Retrieved
April 3, 2009, from National Bureau of Economic Research: http://www.nber.org/cgi-bin/printit?uri=/digest/jul00/w7512.html
Brownlee, E. (2006). Fiscal policy in the Reagan administration. In E. Kopcke, G. M. Tootell, &
R. K. Triest, The macroeconomics of fiscal policy (pp. pp. 117-204). Cambridge, MA: MIT Press.
Budget 1997. (n.d.). Retrieved April 4, 2009, from Department of Finance Canada:
http://www.fin.gc.ca/budget97/job/job1-eng.asp
Canada Ecotrends. (2009, March 31). Retrieved April 2, 2009, from RBC Economic Research:
http://www.rbc.com/economics/market/pdf/ecotrend.pdf
Canada's Economic Action Plan. (n.d.). Retrieved April 3, 2009, from Department of Finance
Canada: http://www.fin.gc.ca/pub/report-rapport/2009-1/cepfor-eng.asp
Carney, M. (2009, January 22). Monetary Policy Report Update. Retrieved April 3, 2009, from
Bank of Canada: http://www.bankofcanada.ca/en/speeches/2009/state09-1.html
Coyne, A. (2009, January 26). Can Deficit Spending Help Us out of Fiscal Crisis? Retrieved
April 2, 2009, from Maclean's Magazine: http://www.thecanadianencyclopedia.com/index.cfm?PgNm=TCE&Params=M1ARTM0013338
Dorn, J. A. (1996, September 13). Ending Tax Socialism. Retrieved March 31, 2009, from
CATO Institute: http://www.cato.org/pub_display.php?pub_id=6297
For Whom the Bell Tolls. (2009, March 12). Retrieved April 3, 2009, from TD Economics:
http://www.td.com/economics/qef/qefmar09.pdf
Gray, C. (1999, October 19). How Bad is the Brain Drain? Retrieved March 31, 2009, from
CMAJ: http://www.cmaj.ca/cgi/content/full/161/8/1028
Harcourt, M. J. (1996, January 1). Unemployment reduction in Canada: lessons from Japan and
Sweden. Retrieved April 3, 2009, from All Business: http://www.allbusiness.com/human-resources/workforce-management/562612-1.html
Hughes, D. W. (2003). Policy Uses of Economic Multiplier and Impact Analysis. Retrieved April
3, 2009, from Choices: http://www.choicesmagazine.org/2003-2/2003-2-06.htm
Hutt, W. H. (1974). A Rehabilitation of Say's Law OHIO UNIVERSITY PRESS. Athens.
Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. Basingstoke,
Hampshire: Palgrave Macmillan.
Sosnow, C., & Aubrey-Horvath, K. (2008, 11 24). Canada's Trade and Investment Agenda.
Retrieved April 4, 2009, from Blakes: http://www.blakes.com/english/view.asp?ID=2710
Standen, K. (1999, November 13). Brain drain will ruin Canada. Retrieved March 31, 2009,
from The Ottawa Citizen: http://www.canadiansocialresearch.net/taxes2.htm
Stigler, G. (2003). Memoirs of an Unregulated Economist. In G. Stigler, Memoirs of an
Unregulated Economist (p. pg. 34). University Of Chicago Press.
Appendix A
Table 1
http://www.statcan.gc.ca/pub/81-003-x/81-003-x1999003-eng.pdf
Table 2
http://www.statcan.gc.ca/pub/81-003-x/81-003-x1999003-eng.pdf
Appendix B
Table 3
http://www.rbc.com/economics/market/pdf/ecotrend.pdf
Table 4
http://www.td.com/economics/qef/qefmar09.pdf
Appendix C
Table 5
http://www.rbc.com/economics/market/pdf/ecotrend.pdf
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Issues 17
