Thursday, December 29, 2011

Economics: Food for Thought

I've had a fairly hefty exposure to economics.

Though I am a liberal I'll throw out the following statements:

  • I agree with the theory of competitive advantage and the benefits of trade.
  • Free markets are the most efficient means to allocate resources towards competing demands.
However, I'll also point out some problems in our current systems:
  • Economics does not do a good job dealing with the impact of rapid changes on society.
  • Free markets are not an appropriate way to deal with issues concerning non-financial public good.
  • Economics personalities at prestigious institutions are often paid to write articles that support a lobbying position held by major industries without disclosure.
None of the items above should be a surprise to liberals or conservatives that have been paying attention. So, with that out of the way I'll toss out an economic concept that we can chew on based on the assumption that free markets and economic theory leave room for significant negative events.

We should consider protecting ourselves from shocks to the international economic system.

Yes, of course, I mean Canada, but this would even be more helpful if other protections were in place elsewhere.  For example, during the recent crisis China decided to invest heavily while the world experienced lower resource costs.  While this was not a "protection" per se it certainly had a protective effective in terms of helping to maintain demand and jobs in the Asia-Pacific region.

While I'll assume, perhaps incorrectly, that many people would agree with this concept, I do think there are some important questions to consider:
  • What types of events should we protect against?
  • How much protection can we afford and what will it cost us?
In essence this is really a case of risk analysis and trying to find some insurance to protect against that risk if things go awry. 

Is it possible that a US financial crisis impact our economic status?

The answer is certainly yes, as recent events make clear, but given the scope of our relationship with the US I'm not sure how to protect against this. Perhaps we can make sure we continue to regulate the banking system in a responsible manner so that egregious risk taking doesn't take place? This means we will limit absolute growth potential in good times but avoid some elements of a crisis -- as happened just recently.

Is it possible that a US terrorist event closes our border and halts trade for some period?

I'd like to say no but we live in a world where we can't be sure that the future might bring. What might we try to mitigate in such an event? Trade revenue, jobs, displaced citizens and vital imports would all be thrown into disarray. Should anything be stockpiled? Are there other countries that would be willing to take up additional trade with us under extraordinary circumstances since they would face similar issues?  Difficult to imagine.

Is it possible that a Middle East crisis of some sort drives oil prices up drastically?

This seems plausible. Would very high oil prices limit who could afford to buy our oil? In particular, would we be able to afford to buy our own oil or refined products? Something we could do, if we haven't already, is negotiate an emergency refined products supply level in return for guaranteed access to Canadian oil resources during a crisis. Would a small stockpile be prudent?

Is is possible that open hostilities or trade wars could cut off supplies of vital materials such as rare earths?

Given the rarity of some vital materials it is hard to imagine that this idea will never occur to anyone. Does it make sense for dependent countries to fund research into alternate materials and technologies? I know this goes against free markets in a sense but at the same time this is a situation where there is no market mechanism in place. Again, stockpiles or alternative supply agreements may be appropriate for this risk scenario.

Is it possible to mitigate the impacts of an unspecified crisis on the general public?

Perhaps. It may be possible to encourage the public to be more resilient. Instead of generalized platitudes specific goals could be given for certain types of activities or preparedness. For example, owning winter sleeping bags would help people deal with lack of energy for heating during winter months. Alternately, growing and storing small quantities of food could help reduce the crisis caused by interruptions in food supplies. In theory, it would be possible to promote such self-sufficiency by offering small annual tax incentives for certain types of emergency preparedness items.

Another question that comes to mind is why worry about any of these things?

Well, as should be abundantly clear, a strong and functioning economy is a matter of national security. This implies some level of expense can be justified in the protection of the economy from unexpected events. This also implies that some level of expense might be used to maximize the ability of the public to contribute to the economy effectively. This even implies that education and the resulting increased economic participation could be a good investment in the long run.

In summary, there are gaps in the ability of the free market and armchair economics to handle risks and public good. There may be occasions for which the government can take steps to protect the nation from rapid economic changes. There may also be occasions for which government involvement in the economy is required in order to protect the economy and hence national security.


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