Economic theory according to Jack Mintz
Jack Mintz and I have been friends for many years. I admire what he has accomplished and I enjoy reading his work. But this does not mean that we always agree. I also enjoy taking the occasional pot-shot at him. Neither of us has shied away from criticizing each other’s views. And we have not allowed any disagreements to affect our friendship since we are both strong supporters of academic freedom, which includes the right to disagree.
So let me take a few more pot-shots at Jack. But I can just as easily do the same with any number of other prominent economists.
Just over two years ago, Jack published the results of his study of the potential impacts of the March 2009 Ontario Government budget. He predicted that the combination of corporate tax reductions and the adoption of the federal GST would generate 591,000 net new jobs in Ontario over the next 10 years.
The beauty in making this type of prediction is that no one will be able to prove you wrong. For that matter, it also will be very difficult to prove the prediction right. But who will remember in 10 years’ time, and will anyone care at that time? The prediction was good for headlines, and it reinforced the myth that lower corporate income tax rates will stimulate higher levels of investment spending by companies.
In a December 5, 2011 column in the Financial Post, Jack dealt with “municipal mythologies”. He started the column as follows: “The refrain goes as follows. Canada has an immense infrastructure deficit. Property taxes, the major source of municipal revenues, are the worst of all taxes and cannot be increased. Municipal governments need manna to fall from heaven (manna being federal and provincial dollars). It is a tiresome refrain.”
While there are several arguments that I could select to discuss, I will focus only on two. First, Mintz suggested: “federal governments should fund border and interprovincial linkages…Similarly, the provinces should fund inter-city linkages…On the other hand, municipalities should fund local infrastructure, such as residential roads and bridges, local urban transit and cultural institutions”.
Setting aside the fact that municipalities are the creation of provincial governments and the responsibilities allocated to them are determined solely by the provincial governments (the constitution is silent here), the problem with his argument is that local roads and bridges comprise the last mile – the connections between the inter- and intra-provincial road networks and the final users. There are significant externalities as a result. Thus, it makes perfect sense for the federal and provincial governments to fund the construction and maintenance of local roads and bridges. Without adequate investments in this infrastructure, the productivity of the inter- and intra-provincial roads is greatly reduced, and so too is the productivity externality for the private sector.
Second, Mintz argued: “The most efficient and fair revenue source is tolling to better price major roads and bridges…A gasoline tax is less effective in pricing roads for use and congestion compared to tolls – increased toll levies should therefore result in some reduction of fuel taxes for this reason.”
Setting aside whether municipal governments should even raise revenues to pay for these investments, Mintz does not offer any reason why a gasoline tax should not be the preferred option. Increases in existing gasoline taxes can be introduced very quickly by the federal and provincial governments. I suspect however, that since Jack is in Calgary, any tax on oil and/or oil products is entirely verboten. Heaven forbid, an increase in the gasoline tax might lead to a carbon tax!
Finally, in his December 21, 2011 column, Jack suggested, “the United States is too big too fail”. He added: “If special policies deal with large banks, what rules could be imposed on countries that are ‘too big to fail’? After all, what is sauce for the goose is also sauce for the gander.”
Unlike banks, governments have the ability to raise additional revenues by increasing tax rates. It’s nice to be a monopoly with taxing powers. More importantly, there is no evidence thus far that investors are concerned about the state of the finances of the US Government. The interest rate on six-month US Treasury bills is 0.05%. The rate on 5-year bonds is 0.91% (down from 1.72% at the beginning of 2009). The long-term, real rate of interest is 0.48% (down from 2.59% at the beginning of 2009). The real rate of interest on 5-year, inflation-indexed bonds is -0.73% – yes a negative real rate. At the beginning of 2009, this rate was 1.97%.
No, investors do not seem to be running away from US Government debt.
The opinions expressed in this blog are personal an do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs