There's always a lot of attention paid to wages and jobs in the oil and gas sector. But what about at the other end of the pay scale? How have Albertans earning low wages fared through the recession and now into the rebound?
Over the last five years, (Feb'13 to Feb'18) workers in the two lowest paying sectors—retail, and accommodation and food—have seen their average weekly earnings increase. But the two have moved in different ways.
Weekly earnings in retail are up 12.2 per cent from five years ago. That compares favourably against the provincial average of 5.6 per cent. However, workers in accommodation and food have barely seen an increase in weekly earnings at all--a small gain of 3.5 per cent. That hasn't even kept up with inflation.
At the same time, total hours are up 0.4 hours for retail workers, and down 1.8 for accommodation and food.
So what's the upshot to all of this?
Trends over the last five years—which involved a nasty recession and a jump in the minimum wage—seem to have been positive for retail workers. They are working a few more hours and earning higher weekly paycheques. But it has been negative for those in accommodation and food. They're working fewer hours on average, and their paycheques have barely risen.
If there's a positive note for accommodation and food workers, it is that there's little evidence to suggest jobs are being lost. Total employment is up 10.3 per cent for accommodation and food compared to five years ago.
International trade gets a lot of attention–and rightly so. Alberta’s international exports and imports added up to $181 billion in 2016. But our domestic trade is also significant with $129 billion worth of goods and services exchanged between Alberta and other parts of Canada in 2016 (Statistics Canada, CANSIM table 384-0038).
Alberta is, moreover, a good customer–buying $4 billion more goods and services from other parts of Canada than they sold to us.
British Columbia’s exports to Alberta, for example, add up to 44 per cent of its total trade with the rest of Canada while Alberta’s exports to BC represent 23 per cent of our trade with the rest of the country. (Statistics Canada, CANSIM table 386-0003 - Note that the most recent statistics on the trade between specific provinces are for 2014).
Our largest trading partner is Ontario. Albertans purchased $35 billion worth of goods and services from Ontarians in 2014 and sold them $27 billion worth in return.
Not surprisingly, Alberta’s main interprovincial exports are “mineral fuels” (a.k.a. oil, natural gas and coal and refined petroleum products such as gasoline, diesel and asphalt. These products account for over a third of our domestic exports. Ontario is the destination of about half of Alberta’s mineral fuel/petroleum product exports followed by British Columbia (17 per cent) and Saskatchewan (15 per cent).
Finance and insurance services such as investment services, life insurance and auto insurance is the single largest category of imports into Alberta from the rest of the country (12 per cent of our total interprovincial imports) followed by wholesale services (11 per cent), professional services (eight per cent) and transportation services (also eight per cent).
A fair amount of food also goes back and forth. Albertans sold $5.4 billion worth of food and non-alcoholic beverages to other Canadians and purchased $5.6 billion in return.
Why does this matter? It’s important to remember that we not only buy and sell from other countries but other Canadians as well and the benefits of free trade apply within Canada as well as on the international stage. We should, in turn, be working to keep this trade as open and efficient as possible. It’s also a good reminder for our friends in the rest of the country that Alberta is a good customer as well as a key supplier of critical products and services.
This post is written by guest writer Rob Roach, ATB Financial's Director of Insight.
We’ve talked before about how economic trends play out differently in different parts of our province. With the recession over a year behind us, it’s a good time to see how the recovery has been unfolding and what the “new normal” looks like in different parts of Alberta.
One way to look at this is in terms of population change. Generally speaking, more is better from an economic perspective when it comes population. Population growth is good for retail stores, for construction companies, for house prices and so on.
When we look at Alberta as a whole, our population is growing and -- for an advanced economy like ours -- it’s doing so at a rapid rate. Alberta’s population is 4.3 per cent bigger than it was in 2014. Canada as a whole grew by 3.3 per cent over the same period and Newfoundland grew by only 0.1 per cent. So we are doing pretty good in this sense.
But not everywhere in Alberta is growing at the same rate. Some places are shrinking.
Looking at Alberta communities with at least 1,000 people, population change between 2014 and 2017 ranges from a drop of 25 per cent in Northern Sunrise County (which is near Peace River) to an increase of 30 per cent on the Tsuut’ina Nation reserve next to Calgary. Our two largest cities, Calgary and Edmonton, grew by 4 per cent and 6 per cent, respectively.
The hardest hit communities in terms of population loss are those that rely heavily on nearby oil and gas projects. Lac La Biche County, which shrank by 22 per cent, and the Bonnyville District, which shrank by 12 per cent, are prime examples. For McMurray shrank by 1 per cent.
The end of coal mining has also seen the populations of places like Grande Cache, Hanna and Drumheller contract.
The fastest growing places tend to be either First Nations communities or smaller centres located near larger cities. The population of Nobleford, a bedroom community near Lethbridge, spiked 28 per cent. Chestermere, Cochrane and Airdrie near Calgary, Spruce Grove near Edmonton, and Blackfalds near Red Deer posted growth between 18 and 27 per cent.
We see a similar pattern with employment. Smaller centres dependent on oil, gas and coal have fewer people working today than they did in 2014.
Why does this matter? The good news is that Alberta’s population has been growing and will likely continue to do so. The bad news is that not every community is growing with many of our smaller centres dependent on the energy sector seeing an actual outflow of residents. So even though our GDP is up, oil prices are up and the population as a whole is up, rural areas that depend on fossil fuel extraction are still hurting.
This post is written by guest writer Rob Roach, ATB Financial's Director of Insight.
Statistics Canada recently released detailed income statistics from the 2016 Census. What are they telling us?
Alberta stands out with the highest median incomes among the provinces. This is the case across all family types and before and after income tax is subtracted. The median household income in Alberta in 2015 was $93,800. The number for Canada as a whole was $70,300 -- $23,500 less.
Adjusted for inflation, income was up in every province in 2015 compared to 2005. The median household income in Alberta grew by 24 per cent over this period. Only Saskatchewan (37 per cent) and Newfoundland (29 per cent) outpaced Alberta’s growth. The growth rate for the country was 11per cent.
Calgary had a slightly higher median income than Edmonton ($99,600 vs. $94,500) but the Census Agglomeration of Wood Buffalo (which includes Fort McMurray) had by far the highest at a whopping $193,500. The median income of unattached individuals (a.k.a. people who live alone) was $54,400 in Alberta compared to $134,700 in Fort McMurray (it was $38,000 for Canada as a whole). This reflects the large number of unattached Canadians who move to Fort McMurray to take high-paying jobs in the oil patch.
We don’t have income data for 2016, but we do know that the number of earners in Fort McMurray in the top 1 per cent of Canadian earners fell by 43 per cent between 2014 and 2015 from 5,460 to 3,130. The effects of provincial recession of 2015-16 would also have been felt at lower income levels.
These income statistics show once again that Alberta is an economic force and one that has benefited the rest of the country as hundreds of thousands of Canadians have moved here over the years to find good jobs and enjoy higher incomes. Recession or not, Alberta is a place of opportunity.
It's also important to note that median incomes are up since 2005 -- even after taking into account inflation and income taxes. We tend to focus on the negative and it might seem like income and the standard of living it makes possible have been spiralling downward, but the opposite is the reality. This is something to celebrate.
With that said, not everyone in Alberta is raking it in. Many are still reeling from the recession and almost 1 in 10 Albertans lives in a low-income household. We still have a lot of work to do to make sure everyone in Alberta is able to fully participate in the economic opportunities found here. And we can’t forget that our prosperity going forward is far from a given. Hard work, creative thinking and good public policy will be needed to keep Alberta’s economy strong in the decades ahead.
This post is written by guest writer Rob Roach, ATB Financial's Director of Insight.
Todd received an Honorary Bachelor of Arts degree from Mount Royal University on June 2, 2017. He delivered the following address to the MRU graduating class at Convocation.
It’s an honour for me to address the MRU graduating class of 2017. I've been given a few minutes to offer some words that, I trust, will be helpful for you as you leave this chapter of post-secondary education and look towards new beginnings.
You might expect an economist to offer insights into what we can expect for our economy, or maybe some ideas about the hot jobs of 2017.
Instead, I'm going to speak on punctuation.
The secret to a successful career can be summed up in three simple pieces of punctuation common in the English language. It’s how we end our sentences.
The first is the period, or as the British say, the full stop. A period comes at the end of a sentence and signals the completion of an idea. It is time to stop. Pause. Rest.
In your careers and in your life, remember to take the occasional pause. Do nothing. Put away the phone. Be still and mindful. Just. Stop.
You might do this with the occasional vacation or retreat. You may practise daily meditation, prayer or reflection. Whatever you do, do it intentionally. A pause is beautiful when you embrace it—because in fact, it embraces you.
The second piece of punctuation you'll need for a successful career is the question mark, that curly little squiggle that suggests inquiry. Wisdom is not measured by the answers we give, but rather the questions we ask.
Never stop being curious. Explore ideas. Be creative. Conjure your inner three-year-old self by asking, "Why? Why? Why"?
Most importantly, remember to ask questions of yourself. Question your motives, your assumptions, your actions. Are they beneficial to everyone involved? Do they lift up others as they lift up you? Self-awareness requires a steady use of the question mark.
Finally, a successful career employs the exclamation mark. Now, the exclamation mark has changed in our language in a subtle way. It used to be reserved for angry directives. When you employed the exclamation mark, you were shouting -- and not always kindly.
Certainly, there’s a time for anger and shouting. But even this negativity can be harnessed to bring about a positive outcome.
More contemporary English, however, uses the exclamation mark less as anger, and more as enthusiasm. This has been spurred on in our use of social media. You might tweet LOL! Or text your friend "Looking forward to seeing you Friday!" It implies a positive and enthusiastic tone.
Success in life requires enthusiasm. It demands we live our lives each day aware of the possibilities and opportunities--and those situations require the exclamation mark.
So this is the secret to success in the careers that lie ahead of you, boiled down to three simple bits of punctuation:
Yet, there remains a fourth piece of punctuation we must bear in mind. The ellipsis, the three little dots that trail off at the end of a sentence implying that there is something more-- something that, for now, is left unexplored.
There is always more to the story. When you dig in your heels on some issue, or harden your political or religious belief, remember the ellipsis as used in these sentences:
"Have you considered..."
"There are other perspectives..."
"I've given this more thought..."
This isn't to say it's wrong to hold strongly to your convictions. But the ellipsis reminds us that there is always something yet to be considered.
The period, the question mark, the exclamation mark and the ellipsis. Use these liberally as you start your careers and life journeys. All the rest -- the dash, the semi-colon, the possessive apostrophe--are just details. They’re important too, but if you get the others right, they fall into place on their own.
Thank you, and congratulations to the MRU Graduating Class of 2017 !
Special to The Globe and Mail | Published Wednesday, April 5, 2017
It may not feel like it, especially for the unemployed. But by most measures, Alberta’s recession of 2015-16 is starting to lift. Business confidence is slowly returning and forecasters are expecting modest economic expansion this year.
It was a nasty downturn, one that will leave a scar on the province for years. Here are the 10 ways in which Alberta has been changed by the recession:
Empty offices. The description of downtown Calgary as a “ghost town” is an exaggeration. There are still line-ups at coffee shops and rush-hour remains something to avoid. But the shiny office towers that were once iconic of corporate power and wealth are close to 30-per-cent vacant. It will take years for it all to be absorbed.
Reminders of oil dependency. Albertans have a love-hate relationship with the petroleum sector – heavy on the love – but there can also be frustration and disappointment with it as well. Dependence on the price of oil has been underscored by the recession.
Lost jobs, lost dreams. Alberta went from enjoying the lowest unemployment rate in the country to having one of the highest. As pink slips were flying in 2015, the hopes and aspirations of thousands of workers were dashed – at least temporarily. Jobs will slowly start coming back this year, but it may be a few years until the unemployment rate drops back to 4 per cent.
Out-migration. It’s not unusual for Alberta to see net out-migration to other provinces during a recession, and 2015-16 was no exception. Still, compared to the recession of the 1980s, the volume of people leaving has been a trickle.
Deeper in debt. After having paid off its debt in 2005, Alberta’s government has plunged solidly back into the red. The deficits started nearly a decade ago, even when oil prices were at $100 (U.S.) a barrel. But as prices slumped to $30, the deficit treadmill picked up speed.
Yet while the recession has harmed the province in these ways, there are other changes that have actually made Alberta a better place:
Stirring the entrepreneur. Alberta has always been a “roll-up-the-sleeves” kind of place that rewards the self-starter. When petroleum companies can offer eye-popping paycheques and every second Friday off, many would-be entrepreneurs are drawn into the beige cubicles of corporate work. With the recession, the seeds of entrepreneurial energy are sprouting and creating new opportunities.
Rent is falling. During the boom years, the cost of renting made it difficult to live, especially for those on fixed or low incomes. That’s reversing. The price of rental accommodation is falling as a glut of apartments and condominiums have pushed up supply. And the out-migration to other provinces has diminished demand.
Non-energy sectors gaining traction. The petroleum industry tends to be a gravitational black hole, sucking everything from labour to capital into its orbit when times are good. That makes it difficult for non-energy players to compete. Today, companies in high-tech, financial services, transportation logistics and agri-foods are finding plenty of talented labour and cheap office space.
Rethinking energy. There’s a growing understanding that while hydrocarbons remain core, renewable energy offers a way to diversify the energy sector. There’s much work to be done. Alberta has the talent and ambition to be a world leader in clean energy technologies – all of which will complement, not replace, oil and gas.
Redefining attitudes. During the go-go days between 2010 and 2014, a sense of economic entitlement had crept into some quarters of the province. There was bravado. That’s gone – replaced with a healthier sense that no one is entitled to anything. Salary expectations have notched back to reality, especially among former energy-sector employees who are considering new career options. Earnings in Alberta are still the highest in the country, but the gap is closing. That’s improving business competitiveness.
See ya, recession. You won’t be missed for the pain you’ve caused. Yet through the misery, Alberta has learned and grown. And it’s emerging as a better place.
The Globe and Mail | Published Wednesday, March 22, 2017
If there’s one message on inflation from the Bank of Canada these days, it is this: There isn’t any. In its most recent press release on interest-rate policy, the Bank said, “… three measures of core inflation, taken together, continue to point to material excess capacity in the economy.” That’s an economist’s cryptic way of saying inflation isn’t a problem.
So if inflation is so benign, why don’t Canadians believe it?
This isn’t a question of the integrity of Statistics Canada – no one is implying (at least not to me) that they don’t trust the work of our national statistical agency.
Rather, they simply don’t believe that inflation is a lowly 1 per cent or 2 per cent a year. There are a few reasons why Statistics Canada’s official rate of inflation is so different from what many Canadians feel they are experiencing.
The first factor has to do with our natural tendency to notice the headwinds but ignore the tailwinds. Psychologists call this the “hedonic treadmill” – we may be pleased to notice a 10-cent drop in the price of gasoline, but the pleasure wears off quickly. If prices jump back up by a nickel the next week, we will grumble loudly and feel we are worse off. We simply pay more attention when prices go up, and less attention when they fall.
There may be some evolutionary genetic trait to explain this. A caveman would have experienced extreme duress and alarm when a sabre-toothed tiger threatened to pounce. But he’d have taken proportionately far less pleasure when encountering a rabbit or deer, even if they actually contribute to his survival. We notice threats more than opportunities.
The second factor involves consumer spending on discretionary versus non-discretionary items. Between January, 2007, and January, 2017, the all-items index of consumer prices rose 18 per cent. But that masks a huge disparity in price movements for particular items within the basket of goods and services.
For example, over the last 10 years, prices have fallen for flat screen TVs (down 60 per cent), audio equipment (down 36 per cent), women’s clothing (down 17 per cent) and household appliances (down 4 per cent). New cars and trucks have shown statistically no price increase. These favour higher-income Canadians with more discretionary dollars to spend.
But price increases have been unrelenting for other items, many of them non-discretionary. Parking fees (up 51 per cent), child-care services (up 43 per cent), tuition fees (up 40 per cent) and public transportation fees (up 37 per cent) top the list. Other things, such as food from grocery stores (up 27 per cent), and electricity (up 33 per cent) have also outpaced the all-items inflation rate.
So, if you are a low-income household spending disproportionately more on basic necessities, your inflation rate is anything but low and benign.
Finally, there are dozens of prices that Canadians face which are simply not captured by the consumer price index [CPI]. The price of a home, for example, is not included (although many costs associated with home ownership are, such as mortgage insurance and maintenance and repairs). Inflation does not feel low, particularly for property buyers in Vancouver and Toronto.
Other costs are similarly not covered by the CPI survey: fees for students’ field trips, tipping in restaurants (the standard has risen from 15 per cent to 20 per cent), paying for food on airplanes, and even being asked to give an extra dollar or two “to charity” at the check-out in certain retail stores. These things are typically optional, but have become customary and expected costs, eating into consumers’ budgets.
Our national statistical agency does a great job in providing data each month on consumer prices. Yet, the low inflation reports don’t convey the reality faced by Canadian households. It’s not that the figures are incorrect. It’s just the way we naturally pay attention to price movements – and the growing list of expenses that most of us are facing.
Special to The Globe and Mail | Published Sunday, March 12, 2017
Call it sibling rivalry.
For more than a century, Canada’s twin sisters of Confederation – Alberta and Saskatchewan – have always loved to compare themselves. The two became provinces on the same day in 1905, and for the first half of their lives Saskatchewan was the over-achiever. In the 1920s and 1930s, it boasted more than twice as many people as Alberta and was the preferred destination of waves of European immigrants.
By the second-half of the century, however, Alberta kicked into high gear and easily outperformed Saskatchewan in economic growth and political influence. Saskatchewan looked on with jealously of her twin who had left her in the Prairie dust.
More recently, with the nasty recession that gripped Alberta in 2015 and 2016, the tables have turned. Alberta is once again looking at her sister with some envy; there’s a notion that Saskatchewan is outperforming her. Saskatchewan’s current unemployment rate of 6.4 per cent is much lower than Alberta’s 8.8 per cent. And unlike Alberta, Saskatchewan has not recently changed its provincial government. Some in Alberta are crediting the small “c” conservative policies of the Brad Wall government for Saskatchewan’s stronger economic performance.
But is it true? Is Saskatchewan’s economy actually outperforming Alberta’s? A closer look at the data would suggest that it is not – at least not with respect to jobs. Employment in both provinces has fallen over the course of the past few years by the same amount.
The graph below shows the annual year-over-year per-cent change in total employment. Because monthly data can jump up and down erratically, the data are smoothed using a 12-month trend line. This shows how closely the labour markets in both provinces have moved.
Back in 2012 when Alberta and Saskatchewan were enjoying a petroleum-induced boom, employment was growing steadily by about 3 per cent annually – more than twice the national average. But even before oil prices started to drop in mid-2014, job growth in Saskatchewan started to stall. Alberta’s, on the other hand, remained solid until the end of 2015, at which point it started to drop steeply.
From the record-high level of employment a few years ago to January of this year, both provinces have seen precisely the same drop of 1.9 per cent. That fact runs counter to the narrative that Saskatchewan’s job market has fared any better than Alberta’s.
Given this, how do the jobless statistics make sense? If both provinces have seen employment shrink by precisely the same percentage, why is Alberta’s 8.8-per-cent unemployment rate nearly a third higher than Saskatchewan’s?
The answer to that lies in the size of the labour force in each province – and the fact that workers continue to move from Saskatchewan to Alberta. Over the past four years, Saskatchewan’s labour force (i.e., the pool of adults working or looking for work) grew by less than 1.3 per cent annually, while Alberta’s expanded by 2 per cent. And between October of 2016 and January of this year, Saskatchewan’s labour force has actually fallen, while Alberta’s continues to grow. It is the growing labour force – not job loss – that has pushed Alberta’s unemployment rate to close to double digits.
Even more contrary to the belief that Saskatchewan is the star performer, Alberta still enjoys a net positive inflow of migration from Saskatchewan. It has averaged a net gain of about 600 people each quarter over the past eight quarters (roughly the period of recession). This isn’t an enormous gain, particularly compared to the tidal wave of inter-provincial migration that has traditionally flowed from Saskatchewan to Alberta. But it is still positive.
Many sisters love to compete, perhaps even more so when they are twins. But in terms of employment in Alberta and Saskatchewan, there’s more comparison than contrast. Both provinces have been hit by precisely the same amount. Alberta need not look east across the border with jealously.
But if Alberta looked west across its other border to the job market in British Columbia … now there’s some serious fodder for rivalry!
Special to The Globe and Mail | Published Wednesday, February 22, 2017
You’d be hard-pressed to find a sensible economist who’d deny the benefits of trade. The cliché that a rising tide lifts all boats seems to fit. The problem is, it hasn’t happened. Not only have some boats not been lifted by globalization – they’ve been bashed against the rocks, stranded and left to sink while the rest of the world sails on.
Globalization is under threat, most notably in Britain and the United States, where recent referendums and elections have moved those economies into greater isolation. The boats that haven’t been lifted are the millions of workers who’ve been replaced by either cheap labour elsewhere or automation. No one can blame them for being angry. The economy has failed them. They feel hopeless and afraid, and they’ve connected with political messages that the problem is global trade.
When the United States flung open its borders to trade with China and Mexico, economists underestimated the speed at which entire industries would be ravaged. The devastation started in the 1970s and 80s, but it accelerated in the 90s and 2000s. Now, it’s resulted in a U.S. President elected on a platform of building walls and tearing up trade deals.
Canada – apparently one of the last bastions of open, liberal economics – is still willing to forge ahead with new trade agreements. But Prime Minister Justin Trudeau got it right when he warned the Europeans in a speech last week about the dangers of the Canada-EU Comprehensive Economic and Trade Agreement (CETA). “Now we need to make it work, for your people and mine,” he told an audience in France. “If we are successful, CETA will become the blueprint for all ambitious, future trade deals. If we are not, this could well be one of the last.”
So how do we do this? How do we prevent boats from sinking as the global tide rises?
The first answer has to be education. Literacy and numeracy skills, the ability to learn new information and a greater understanding and appreciation of different cultures will help Canadians create new opportunities in the global economy. Jobs and industries that don’t even exist yet will crop up – but only if we’re smart enough to identify them. And education starts in early childhood. We can’t wait until students show up at college or university ill-equipped to learn and expand their minds.
Skills development and retraining displaced workers is another common policy response, and it can be helpful. But there are limits to its efficacy, particularly when workers are unwilling or unable to be retrained. And then there is the problem of identifying appropriate skills and industries. Retraining mature workers for industries that don’t exist in their economic region isn’t going to succeed.
But a third way to prevent sinking boats is strong communities and connectivity. Education and skills upgrade will be limited if people are not in community with others. We have no good way of measuring it (although certain economists have suggested counting the number of bowling alleys in a region as a rough measure of how connected people are). But the importance of interpersonal connections and soft skills cannot be underestimated.
There are plenty of reasons some individuals fall into lives of desperate isolation and loneliness: mental-health issues, substance abuse, an inability to build healthy relationships. Not everyone who is living in poverty is lonely, of course. But loneliness and social isolation is a good predictor of someone’s ability to succeed economically – even more so in a global economy that is shifting and morphing quickly.
Income inequality and disparity of opportunity will be the greatest economic challenge for industrialized countries in the 21st century. And while Canadians like to think we are unlike our U.S. neighbours, we are not immune from anger, fear and frustration. If we ignore it, we will suffer the outcomes that other countries are now experiencing.
Education, skills upgrading and retraining all play a significant role. But community building and social connectivity is just as important. Faith communities, social agencies, volunteer organizations and sports-and-recreation clubs play a part too. We can’t just wait for the government to roll out a new program. As we enter into CETA and continue to uphold the benefits of global trade, it’s up to Canadians to make it work. That means global trade must work for everyone – especially the boats that risk being capsized by the rising tide.
Special to The Globe and Mail | Published Thursday, February 9, 2017
An old joke around university economics departments pokes fun at the hypothetical realm in which the discipline lives.
A chemist, a physicist and an economist are stranded on a desert island, with no provisions other than a case of canned beans. Lacking a can opener, the three professors set out to solve their problem. The chemist attempts to create a corrosive salt water solution to eat away at the lid of the can, but fails. The physicist devises an elaborate slingshot using palm trees to smash the cans against a boulder, but fails as well.
The economist steps forward. “My friends, this problem is easy to solve.” The other two academics sit up with interest. “First, assume we have a can opener …” he starts to explain.
Economics at the academic level is full of conjecture and assumptions. Most students of the discipline will recognize the hypothetical questions posed on their exams. The questions all start by asking them to assume an imaginary situation – one that doesn’t exist in reality, but is useful to consider in the abstract because it broadens our understanding.
But today, events are moving out of the realm of the imaginary and onto the pages of the business section. Consider three questions that could show up on any undergraduate final exam.
Question 1: Assume Country A, the world’s largest economy, has a massive trade surplus with Country B, the second largest economy. Now, assume a 45-per-cent tariff is imposed on goods coming into Country A. Describe what will happen to prices, exchange rates and wages in Country A.
Such a situation is imaginable in theory – yet unobservable in practice because no country would possibly do this. But now, of course, we might indeed see this implausible situation play out between the United States and China.
In a few years, scholars could have data on what happens when ridiculously high tariffs are imposed in the global economy of the 21st century. This will enrich our understanding and provide even greater evidence of the benefits of trade – as well as the extreme drawbacks of protectionism.
A second plausible exam question from monetary theory asks students to analyze a situation that, until now, would have been conceivable only at the abstract level.
Question 2: Assume a central bank starts charging (rather than paying) institutional depositors to hold their cash – that is, interest rates are negative. What are the short- and long-term implications for such a country on capital flows, currency exchange rates and inflation?
The idea of negative interest rates lived only in our imaginations a few years ago. Academics would have mused curiously about them in concept, but had no factual evidence on which to build better theories or models because negative interest rates didn’t exist. But as some central banks have run out of rope on which to pull aggregate demand higher, we are now down a rabbit hole that was previously the stuff of wild make-believe.
The third exam question, one closer to home, comes from a course on Canadian Public Finance.
Question 3: Assume oil prices plunge by 70 per cent, and as a result Alberta, Saskatchewan and Newfoundland and Labrador are thrown into recession. Describe the impact this will have on the federal Equalization Program and calculate how Ottawa’s transfers to the have-not provinces will be curtailed in a few years time.
Since the formula to calculate payments is based on the average per-capita revenue available to all provinces, the drop in oil prices will bring the average down. (As a bonus question, the students could be asked to describe the howls of complaint that will arise from many of the have-not provinces, particularly ones with mayors who oppose oil pipeline construction.)
All of these hypothetical economic situations are about to move out of the world of make-believe and into reality. This will produce observable data sets with which we can hone our models and thus improve our understanding of the economy.
The world is a shaky place right now. Plenty of question marks hang ominously over the economy, and businesses, politicians and taxpayers all have reasons to feel anxious. Not much good is likely to come from these developments in global trade, monetary policy or Canadian regional transfers.
But the academic economists should be pleased. At least in theory.