Monday, March 30, 2009
There’s a very simple reason for my views. Governments have done a piss poor job of running automakers. Consider the Lada, the disaster forced on Soviet consumers who had the patience to wait for one. Strike one for government controlled auto makers. I know the US isn’t the Soviet Union and Obama isn’t running the Kremlin, I have a couple of other examples.
Next up, the Yugo! Any child of the 80’s can remember that running joke made in communist Yugoslavia. Yugo was launched in the US in 1985 to huge consumer demand. 1500 cars were delivered, but initial orders were for roughly 5 times that amount. Yet but 1989, Yugo America was bankrupt and no cars were imported to the US. Strike two. The remarkable about the introduction of the Yugo to the US, is the link between this and my next grotesque failure.
My last example for today will be familiar to fans for flawed sports cars and Maritime government screw-ups. I’m referring to the New Brunswick manufactured Bricklin, named after Malcolm Bricklin, the same man that brought the Yugo to the US market. This plan to government back auto manufacture in NB was the brain child of Mr. Richard Hatfield. While many still love the Bricklin (a nifty looking sports car with some neat safety features) it was a total failure in sales. The company went into receivership owing the NB government about $23 million dollars. Again a government tried directly invest in an automaker and failed miserably. Strike three.
There are some success stories, of automakers receiving help from governments. Chrysler received help from the US in 1980. Some of the Asian automakers have received a variety of supports from their respective governments. To the best of my knowledge none of them have looked like this.
My suggestion for Mr. Obama is to either prop up GM and keep your mitts off or to let it fail. Direct intervention of this sort isn’t likely to end well for GM or the US.
Sunday, March 29, 2009
What is less obvious is that enrollment in post secondary education rises in recession. This is particularly true of post graduate studies. Enrollment in graduate programs decreases when the economy is doing well and rises when the economy hits bad times. There are a couple of reasons for this.
The first is pretty basic. Grad school is a pretty comfortable way to withdraw from the labour force for a time. You aren’t expected to be looking for a job or maintaining a particularly high standard of living. To top it all off, most of your time is unstructured.
The second reason is a little more positive. While you’re hiding from a nasty labour market you might actually be developing skills that will increase your chance of getting a decent job at a decent wage. You’re making an investment in human capital at a time when the cost (in terms of foregone wages) is low.
This will reinforce a trend in labour markets for some time, credential creep. The minimum requirement educational requirement for a number of different jobs has been increasing over time. Think of the number of jobs that now require a minimum of an undergraduate degree that were being done by someone with a high school diploma 20 years ago.
This trend has already been reinforced by the accrediting institutions in North America. Look at the number of MBA programs that have sprung up at virtually every university campus. Most offer nothing more than a watered down BBA degree. The “economics” taught is generally laughable – a standard intro course is more demanding. This would be fine and add value to society if those taking the programs had no background in business. Remember the original intent of an MBA program was to train engineers and other tech-heads some basic management skills. The problem most of the people in these MBA’s already have a business degree. Result, employers ask for an MBA, not because they expect that any real skills are developed there, but as a way of limiting the number of applications.
The trend isn’t limited to the private sector. There are now a remarkable number of PhD’s working in various government departments. In some cases this makes sense. Government needs people who are capable of keeping up with the developments in various academic disciplines as the findings might apply to policy. I’m not sure how many PhD’s are needed in this capacity how ever? Do you need a PhD to read and get the thrust of a journal article?
What I am sure of is that we’re going to see an increase in post secondary enrollments over the next few years. Universities and colleges will be working exceptionally hard to “accommodate” the extra revenue sources, I mean students. As the number of people with graduate degrees grows, employers will exhibit a stronger preference for those with graduate degrees.
Punch Line: after the current problems are over, the relative value of high school diplomas and undergraduate degrees will be even lower.
Wednesday, March 25, 2009
My current example comes from two articles in the most recent edition of Economist magazine. The first, Taking From The Givers, presents worrying examples discrimination. There is legislation being proposed that would limit tax deductions on charitable giving by some people. I don’t object to this too much. I’ve always felt that if you’re going to give, do so and be done with it. What I object to is treating different people differently. The more worrying issue for is the proposal that charitable organizations must exhibit sufficient “diversity” in their employees (and potentially their recipients) to maintain their charitable status. There are even hints, it is claimed, of quotas for certain groups. These groups would include the usual beneficiaries of such programs. Specifically included are likely to be women, African Americans, and Latinos. Hiring on the basis of reproductive organs, skin colour, or ethnicity is bigotry. Those on the left of the political spectrum have always had a penchant for this particular flavour of bigotry, so I guess I shouldn’t be surprised.
What makes this really revealing is a later piece in the same edition, Don’t Keep On Trucking. This piece documents the proposed termination of a program in the US to allow Mexican registered trucks to haul freight in the US. Canadian trucks already operate in the US. Such openness is specifically required under NAFTA, but anybody who’s heard of softwood lumber knows the US doesn’t always choose to honour its treaties. This action will be damaging to the Latino truckers who were operating in the US and dramatically reduce trade between the two countries. Punch line: fewer jobs for Latinos south of the US/Mexico border and hopefully more jobs for American Teamsters (a group that isn’t noted for its ethnic diversity).
It’s the same political party, the same people in power, undertaking both actions. The hypocrisy is so plain. American firms and organizations must experience higher costs, lower productivity, and higher taxes to support Latino workers. This will transfer wealth to Latinos. On the other hand, American firms and workers must protected from productive Latino workers. Wealth must not be transferred to Latinos. Ummm. I’m confused.
I guess the one commonality of both policies is a reduction in value for money received by people who pay for both services. Maybe that’s the core ideal to which the current rulers of American adhere.
Saturday, March 21, 2009
As I said elsewhere, this is a gamble. There are several reasons why the people of Saskatchewan may not win this gamble. I’ll try and present a few of them.
First, the consumers of potash generally rely on credit to finance their purchases. The current state of credit markets makes demand uncertain at best. This problem will, hopefully, only be temporary. The current provincial government has actually acknowledged this and is banking credit markets returning to “normal” by the fall.
The second major risk is linked to the exchange rate. Like most commodities potash is generally priced in US dollars. This means a low value of the exchange rate is beneficial to the Saskatchewan government. The lower the exchange rate, the more Canadian dollars potash will generate. Even if the world price of potash remains unchanged a rise in the US/CAD exchange rate will mean missing the target CAD price. It seems likely the Canadian dollar will rise in value over the next year as the Fed continues quantitative easing. This is a significant risk in my opinion.
The remaining risks relate to a simple fact. Potash is not an essential input into the farming process every season. Farmers can often defer application to another season or year. This provides a number of ways in which the revenue targets may not be met. First and foremost, the price maintenance may be too successful. By keeping the price high potash when the ability to pay for the output of farmers is low, farmers may reduce costs to meet their own revenue targets. Farmers could reduce applications or not apply at all. So the price prediction may be accurate, but the quantity prediction may not be.
Weather may also play an important factor. If the spring or fall are atypically wet, farmers may not be able to get on the fields, meaning application cannot take place, meaning low demand for potash. Again, the price may be maintained at the expense of quantity.
There is also the possibility that processors of potash, particularly in China, are sitting on large inventories of both raw material and finished product. This would mean they would be able to defer major purchases of the raw material in hopes of a lower price in the future.
The quantity issue is likely to be a short run phenomenon only. The increase in yields with application is too great to allow farmers to avoid purchases indefinitely. The drop in demand will mean difficulty in meeting budget targets and will likely have very large short run political implications. It could work in essentially the same manner as a strike, with each side attempting to “starve” the other into submission.
Putting all of your eggs in one basket is a gamble. Losing this gamble will require the current government to either; cut spending, increase taxes, or run a deficit. All three options have political implications for the party in power and more importantly implications for the people of Saskatchewan. None of the implications are positive and I don’t think potash omelets are likely to be popular. Cross your fingers.
Thursday, March 19, 2009
The provincial budget is relying on the production and sale of potash for approximately 20% of revenues. One dollar in five will come from the production of fertilizer! This really is putting all your eggs in one basket. Normally, I wouldn’t be too surprised by governments producing a lot of fertilizer, but this is a little different. So I did a little bit of digging and talking to a few different folks. Some interesting facts are starting to come to light.
The crown corporation in question controls a significant portion of the market. In fact, it may even have more market power than OPEC (one guess put their market share at around 40%, though the best somewhat official data I could find puts them at about 22% of the market at the end of 2007). The current government seems to have decided to engage in price management, reducing production to stabilize the commodity's price. It seems the fiscal health of the province is going to depend on how successful Potash Corp is in this objective.
There are a lot of implications of this strategy, and many don’t relate directly to Saskatchewan.
First, potash is a critical component of most farming around the world, particularly for things like wheat. The attempts to manage the global price of potash will have a couple of interesting effects on the price of food. First, the projected price for potash in the Sask budget is about $1100. This is significantly higher than historical values, which means higher prices for food. This is particularly important as food demand seems to be growing faster than supply. Price management, if successful, will also stabilize potash prices. This will mean a lot less risk for farmers around the world, and may help to stabilize food prices. Higher but more stable food prices are, on balance, a good thing.
There is something else interesting to note. It’s kind of obvious once you consider the impact on food prices. There will be a “knock on” effect for the province of Saskatchewan. What is the province famous for producing? Food! If the price of wheat rises and stays high, the province’s farmers will be able to reap higher economic rents. These rents take the form of profits from the relatively productive farm land. This profit can then potentially be taxed.
This type of vertical integration thinking reminds me of the economy in another province, but that's for another post.
If the current government has thought the logic through this far, I’m impressed. These guys might just be the type we want running the country. If they haven’t thought it through this far, well, even your typical politician can’t screw up all the time.
Of course the whole thing won’t work. Why and how, is for another yet post.
Wednesday, March 18, 2009
Since I last posted, I’ve left
The move was finally motivated by some of the proposed changes in
So now we (my partner and I) are enduring the joys of a prairie winter. At least we see the sun on a regular basis and it doesn’t snow 3 feet at a time. In all fairness, the move has been generally good for both of us. The work environment I’m in isn’t total dysfunctional (or at least I haven’t found all the dysfunction so I can maintain the delusion) and my better half has been able to tele-commute to a job she really likes, so that side’s pretty good.
We’ve also met some great folks, including a few folks from back east, so socially we’re getting settled. More importantly I’ve found regular ice time. On the other hand there’s no senior full contact football.
I guess the real point of this post is to say
1) I’ll be back – I’ve got the bug again
2) There are goods and bads about every place. I’m trying to enjoy the memories of where I was and the benefits of where I am.
Maybe the second point shouldn’t just apply to geography, but time as well.