I just listened to another podcast featuring a debate between a devout Keynesian and a devout Hayekian about whether or not the U.S. stimulus worked or was large enough or even if we can know if it worked. They lightly skimmed over the issue of how and where the stimulus money was spent – mainly that it wasn’t targeted to areas with the highest unemployment or to the sectors that – it could be argued – where demand was the slackest. For example, there was money for research, to extend unemployment benefits, to support public sector wages (a sector with rock bottom unemployment already) while there was relatively litte for sectors like manufacturing (where unemployment is high). They both kind of agreed there was a fear of ‘moral hazard’ where targeting the money to areas that most needed it would be rewarding bad behaviour (like rewarding excessive public spending in California or a housing bubble in Nevada).
Once again, it struck me listening to this how little economists think about economic development as a specific activity. Economists think a lot about macroeconomics – price levels, GDP, inflation, etc. and even microeconomics – cost/price, scale, scope, etc. but I don’t know that too many of them are trained to understand how firms make locational decisions – at a tangible level in a world of unknowns and relationships.
We almost need a kind of behavioural economics at the firm and industry level. This may exist and I just haven’t seen much of it but ultimately I think this is important. I also think we need to foster more understanding of this stuff at a provincial level – in a place like NB – which is part of a national economy and has very porous borders for both people and capital.
For example, the two of my biggest criticisms of the Graham tax cut were:
a) there didn’t seem to be real good thinking about how this generic idea (tax cuts stimulates economic growth) applies at a provincial level – particularly a small place like NB; and
b) the tax cuts were given disporportionately to folks who didn’t need them – in the sense they weren’t going to leave New Brunswick because of high tax rates. I already put forward this notion but to reiterate if you look at the folks with in the top quartiles of income – they are in large part public servants, doctors, lawyers, engineers, accountants, consultants, etc. – all that generate their livelihood here in New Brunswick – entirely. So the argument they will leave or not come because of high taxes is virtually irrelevant because the work is here – if a lawyer leaves because of high taxes – another one will fill the gap. Same with public servants, engineers, etc.
It’s not quite that simple but at a theoretical level I think this should have been taken into consideration.
Now it could be that governments think they will be stimulating the economy by cutting the taxes of those in upper income levels but as I have shown much of that spending will be on goods and services where the value is added elsewhere (TVs in Korea for example) whereas government spending – overwhelmingly – adds its value in the provincial economy (nurses salaries, for example).
This is further compounded by the fact – as I pointed out – that companies with national and international markets are not only taxed in New Brunswick. They are taxed based on a complex formula based on where they generate revenue and where they have operations. For example, a firm in New Brunswick that exports all its product to Ontario will probably have a higher tax burden in Ontario than in New Brunswick.
So, if an economist tries to apply a generic model build for a national economy or a large provincial economy to New Brunswick – it is bound to falter.
This is another reason why we need to have New Brunswick or regional economists looking at these issues specifically from the New Brunswick or regional perspective.
As for behavioural economics at the firm and industry level, I have studied Michael Porter’s work – I saw him speak twice in the past decade – and I like his stuff but even there I think we need to back off some of the hard issues and focus more on the behavioural side of decision making.