Category Archives: economics

The Cost of University Tuition in Ontario 2015

03/25/2015 Update: Corrected calculations appear at the end.

Today we look at how much it costs to go to university in Ontario. This topic is frequently in the news and student organizations are always trying to bring attention to the topic. Typically we hear about how much it has gone up since some period in the past or how it ranks compared to other provinces. Today we try to answer a seemingly straightforward question. How much is tuition in Ontario? We are not talking about housing, food, books or booze budgets; we are simply looking at fees paid to the school. This is a numbers post.  There will be no exploration of the value of school or fairness of tuition levels.

I will use one of my old stomping grounds as a starting point, the University of Western Ontario. Undergraduate tuition + fees for a science degree totals $7,296.93 a year for a Canadian citizen.

Of this, $5,975 is actually tuition. The rest is for student organizations, building endowment, etc.

Over four years this means the total amount paid is: $29,188. $23,900 is actually tuition.

Undergraduates in Ontario get a yearly refund from the government equal to 30% of their tuition. This does not include the fees. This refund is therefore $1,792 a year or $7,170 over 4 years.

With this 30% grant the total paid, including fees, over 4 years is $22,018 or $5,504 a year.

Now we can deal with the tax credits which are where there are some options. When you are going to school you can deduct $65 a month for books and $400 a month for living expenses for a maximum of 8 months a year. That is $3,720 a year or $14,880 over 4 years. You can also deduct your tuition, excluding fees.

This means that a university graduate can store up $38,780 in tax deductions over their four years.

Assume the student decides to pay their student loan off over 7 years at 5%. The interest on the loan is also tax deductible. We’ll only take first 5 years of interest deductions in to account here so the real world benefit would actually be a bit higher.

You pay a total of $4,026 in interest on the initial loan. So our total deduction over the 5 years following graduation is (education deductions + interest deductions):


You can use all of these credits while you are in school or you can carry them over until you graduate. The smart student holds them all until they graduate and they are making more money and therefore have a higher marginal tax rate. The benefits to holding these credits depend on how much you make in the 5 years after you graduate. The average university graduate starting wage in Canada is around $50k. Assume the graduate uses equal parts of their deductions each year. They could probably benefit more if they waited until the later years when they were making the most but we will keep it easy. Let’s look a few different scenarios.


Now if you were to save up before hand and pay the tuition as it came up you would no longer have the student loan. This means no interest to pay or deduct.


We have done some quick calculations that show what a person ends up paying to a school for their education.  So now if you want to have a conversation about the fairness of tuition levels you have some numbers to work it.


As pointed out in the comments the minimum tax rate is used to calculate refunds rather than the marginal rate.  The provincial book and educations amounts are also slightly different at $156 and $520.

This gives us $43,650 total provincial deductions at 5.05% refund and $36,898 total federal deductions at 15% for a total of $7,739 in refunds if you take no loans.

Interest is $4,123 for $22,018 at 5% for 7 years. So with loans we have $47,676 total provincial deductions at 5.05% refund and $40,924 total federal deductions at 15% for a total of $8,566 in refunds.

So total per year is:

$3569 without loans

$4394 with loans


Regarding the Bank of Canada Interest Rate Decrease

Stephen Poloz and the Bank of Canada shocked markets this week by dropping the target overnight rate by 0.25%.  In my previous post I spoke about all the reasons that the BoC would likely be raising the rate at some point this year; you can go back and read that if you like.  This is a long post so you might want to go get a beer before you start reading.

Bank of Canada’s Policy Shift and Stephen Poloz
Before we get into the effect this is going to have we should say that on page one, paragraph one of the “How to be a Central Banker” handbook it says do not shock the market.  Mark Carney made a habit of being boring and predictable and everyone praised him for it.  They liked it so much they drafted him into the big leagues at the Bank of England.  Avoiding this shock alone was a good enough reason to delay this rate change.

Forward guidance is the term used for when a central bank indicates ahead of time what it is likely to do in the near future and in the long term.  It helps markets decide what they are going to do in response.  Calm, collected responses.  When the US Fed says it will not change rates until unemployment is below X%, that is forward guidance.  Poloz has said that risk assessment is the new way forward for the BoC.  Yes, forward guidance has worked well for us in the recent past but now we are going to try something new.  In October he might have dropped a hint that most people (including myself) missed.

Some of you may be wondering why we aren’t being more specific about the likely future stance of monetary policy. Let me answer by saying that forward guidance remains a key element of the policy tool kit – but one that we will reserve for times when we believe there are net benefits to its use. There will no doubt come a day when we will offer forward guidance again – but not this day.


But more importantly he said this in September.

We have begun putting our growth and inflation forecasts in the form of ranges rather than points, and have given even more prominence to uncertainty and risks in the Monetary Policy Report. We have refined our analysis of financial stability risks and raised the profile of our Financial System Review. And, we have begun to offer a more fulsome description of how those risks are entering our policy deliberations. These changes have brought more transparency to policy decision making, and our policy narrative has shifted from one traditionally seen almost as “mechanical engineering” to one now characterized as “risk management.”

Why is that important?  Well with the rate changes today it indicates that possible or perceived risk is now the most important  thing when the BoC makes policy decisions.   In this week’s announcement press conference Poloz said this.

Accordingly, we decided that it was appropriate to take out some insurance against that downside risk in the form of a lower interest rate profile. Policy insurance is a logical part of our risk management framework. Today’s action is intended to reduce the risk that our inflation path might move materially to the downside, as well as cushion the impact of lower oil prices and facilitate the economy’s sectoral adjustment to its new circumstances. The Bank has room to maneuver should its forecast prove to be either too pessimistic or too optimistic.  

So now interest rates are an insurance policy against possible future risk and this is the new framework, got it.  Also, you will notice that this statement basically says that lower rates are not out of the question.  I would hope at least they have a model that is predicting this and that their nice precise model would tell them how much of a cushioning effect this rate cut would have.  Because thinking that a central bank has a great model that lets them see things that the commoners do not is part of the game they must play.  What does Poloz have to say about this?


Please, for the love of god, STOP CALLING IT INSURANCE!

Although mortgage rates should follow long term bond rates rather than be tied directly to the overnight rate we can expect to see lower mortgage rates sometime next week.  It only takes one bank to set everyone off.  Ratehub is currently showing 2.18% as the best 5 year variable and 2.69% as the best 5 year fixed rate.  This means that we could be seeing sub 2% variable rates.  If you are looking to buy a house this is good news.  If you are at the CMHC and you are trying to cool the real estate market with tighter lending rules, sorry, you can go to hell.  All those predictions of bubbles bursting in Vancouver and Toronto will have to be pushed back again.  Calgary could certainly run into some problems in real estate so maybe his is a good thing for them.

From the press conference this week.

Finally, we discussed the risk that by moving today we would surprise financial markets. We generally prefer that markets not be surprised by what we do, and believe that transparency around our analysis of the economy will minimize the scope for surprises. In that respect, we took comfort from the observation that the consequences of the drop in oil prices appear to be well understood, and that the possibility of a rate cut had begun to enter markets in the last couple of weeks. Moreover, given the magnitude of the shock, we concluded that the benefits of acting now rather than waiting would outweigh the costs of any short-term market volatility that might arise.

Our dollar dropped 3 cents versus the US dollar immediately.  So  the markets had not already priced this in. At all. We are glad you discussed it though.

We will have to wait until this month’s total data is in for the CERI fluctuation but I imagine the Canadian dollar dropped everywhere.  (Less so against the Euro)

Trade and Local Prices
A weaker dollar means that all of our exports are cheaper.  This is good for our GDP.

It means that we will not see gas prices as low because our weaker dollar buys less on international markets.

Inputs to manufacturing are more expensive assuming they come from other countries.  Any capital investments in machinery or other equipment that need to come from other countries is now more expensive.

Almost all consumer goods are more expensive.  Electronics, clothing, some food. Anything not made in Canada is now more expensive.

Conspiracy Theory
If I was a journalist (Like, a real one, not a guy with a website) I would probably put in a freedom of information request for all communications over the last few months between the government and the BoC.  Why?

Government delays budget because oil prices are sagging and they need more time to balance the books. If only there was a way to boost exports to pick up the slack from those low oil prices to help reach the promised balanced budget.

BoC drops the interest rate when markets are expecting a hike within the year and what do you know, the currency tanks.  This is good for exports!  What a coincidence.

The BoC would never manipulate the currency like that.  After all in September Poloz said,

A floating loon is a thing of beauty, and so is a floating loonie, at least from this economist’s perspective.

How can you not trust an economist that talks like that?

Household Debt
When interest rates are low, people take on debt.  When interest rates are low for a long time people take on a lot of debt.

That is why on December 10th Poloz said.

Let me just add a few comments specific to the most important risk discussed in the FSR: the difficulty that highly indebted households would have servicing their debt if they were to face a sharp decline in their incomes or a sharp rise in interest rates. This situation raises the risk that a shock to the economy could trigger a correction in house prices. The probability of this risk materializing is low, but if it did occur, the effect on the economy would be severe.This risk would be greater if house prices were judged to be overvalued relative to fundamentals. … Although there is considerable uncertainty around this question, various approaches – including our own – suggest that there is some risk that the housing market is overvalued, and our estimates fall in the 10 to 30 per cent range.

Yeah so Canadians really need to get their debt under control.  Now lower interest rates should allow you to pay down more of your debt but unfortunately most people see it as a chance for cheap borrowing.  But since this is all caused by lower oil prices what did Poloz say about that this week?

 Canadian consumers will spend less on energy, but they could save some of the windfall rather than spend it

Fools!  You are trying to save the money you are not spending on energy since the price in oil dropped? Well that is bad for the economy.  Lower interest rates! Borrow more!

The fact that he sees money not spent on energy as a windfall says a lot here.

Currency War
We’re in one.  More on that in a dedicated post to come later.

Final Thoughts
As mentioned, shocking the market is not a good move for any central banker unless you have a specific goal in mind.  I do not think this is a great move but I do not have access to the data sets or models that the BoC does.  Their 25 page Monetary Policy report reads as if it was written with a rate freeze in mind and then edited at the last minute so it made more sense with the rate decrease. I would really like them to try to justify their decision a little more clearly but then again I think there are only a handful of people that read the MPR when it is released anyway.

Personally, I was floored by the announcement.  I really expected a freeze.  I will be keeping an eye out for lower mortgage rates and if I see something at or below 2% then it will be time to call my banker.

2014 in Review and a Look Ahead to 2015

Once again I am writing my final post of the year at the last minute so please forgive the inevitable grammar and punctuation mistakes. I am just typing it and posting it.

Last year’s predictions ended up being almost entirely wrong.  I had underestimated the ability of the American government to delay things so the Keystone XL pipeline was neither approved or denied.  It is still in limbo. So no predictions there this year other than I think they have to come to a decision.

The overnight rate of the Bank of Canada remained at 1% for the entire year so that prediction held up. We are now looking at 2.1% core inflation which is slightly above the 2% target.  This by itself does not mean that the overnight rate is going to be raised but there are a few other things the BoC will be keeping an eye on.

Oil prices are extremely low as you have probably noticed as you purchased gas 40% cheaper than you did last year.  This will drag the Canadian dollar down with it.  A weaker Canadian dollar means that all of our exports become cheaper to other countries.   Canada does sell a lot of oil but it only accounts for about 3% (in 2009) of our GDP.   Overall, then, we should see a good growth rate for the economy.  This means that companies will start to spend the billions in cash they have been sitting on for the last few years, traditionally this would lead to inflation.   With the inflation rate already over target I expect we will see an overnight rate increase this year.  Poloz (BoC Governor) has made some comments about the strength of the Canadian dollar but that is just central banker talk. It is not the policy of the BoC to try to defend the price of the Canadian dollar so they could not mention that as a factor in the raising of rates. Raising interest rates makes your local currency stronger, but since you are a reader of this blog, you knew that.

Mortgage rates are always a topic of concern in Canada.  People have been talking about the real estate bubble in Vancouver for 10 years. Mortgage rates normally follow long term bond rates rather than the overnight rate but you can expect a rise from the BoC to have a knock on effect on all Canadian lending markets if it done early in the year.

Last year I predicted that Russia would crack down severely on terrorists and that maybe this would lead to some countries boycotting the Olympics.  None of that happened. Instead, Russia annexed/invaded parts of the Ukraine and is still currently involved in fighting there.   NATO has done nothing militarily but did apply sanctions on Russia.  When oil prices dropped so did the Russian currency, by 40% or more.   Their central bank decided the best way to defend the value of the rubble was with their control of the interest rate.  The first move was to 10% and then to 17%, a massive, massive increase.  The currency seems to have stabilized for the moment.  All the Russian companies that are holding debt in Euro and Dollars are going to have a really rough time this year. Expect to hear of at least some defaults.   As a reference, the last time the interest rates in Russia were this high was in 1998, right before the government defaulted on all its debt.

For our neighbours to the south this should be an interesting year.   Democratic Obama now has to deal with both the Congress and the Senate run by the Republicans.  I think we have already got a little glimpse of this plan for the next two years.  If he was smart he would continue to push these huge issues to the Congress and Senate for the next two years.  Education reform , military spending, entitlements.  Huge issues that have been completely deadlocked.  If the Republicans try to block everything he does then they will easily lose the next election.  They will be forced to concede on at least a few issues.  Not only that, the Republicans will have so little time to properly build their feigned outraged narrative and catch phrases for each individual move they will probably have to drop back to some nonsense about King Obama and the only people believing that will always vote Republican anyway.  I really hope they do something positive down there. Their political system has looked pretty ridiculous for a number of years now.  It is time for them to gain some self awareness and fix some of their issues.

Wow, this is getting to be a long post.  Ah well.

There will be a federal election in Canada this year.  Low oil prices will drop a few billion off the revenue side of our balance sheet this year.  The Conservative government has pulled a pretty smart move with their recent income splitting changes.  This will reduce the amount of surplus, if there is even going to be one this year.  This is smart because in an election campaign there is nothing that opposition parties like to do more than to tell everyone how they will spend the extra money that is sitting in government coffers.  Low oil prices and income splitting should eliminate any extra money so any promises made during the election will have to be offset with a cut to another program.  Not that this will stop anyone from making vague statements like “this will be paid for by savings generated by making X process more efficient” but there is not much we can do about that.

That is it for me this year.  Thanks for reading for another 365 days.  Until we meet again in 2015, have a happy new year.

No-Season Tires Revisited. A Solution to the Problem of People Stealing My Time

Last winter I wrote about people with “all-season” tires on their car. Read that post here. Today’s rant will cover the same topic.

The roads have once again become cold/wet/icy/snow covered and so it is time to revisit this issue.  Winter has come a bit early this year and we have had at least three evenings in the last two weeks where the roads have been snowed upon.  My standard drive home is about 30 minutes.  On these three nights my travel time was between 50 minutes and 1 hour 45 minutes.  There were no accidents, no closed lanes, no damaged street lights; just people having to massively reduce their speed because their cars are not prepared for the same winter conditions that come every year.  Every year.

While I was driving home today at between 10-20 km/h there was lots of time to think about a solution to this problem.  Here is the thought process and conclusion.

  • There are negative externalities here that are not being priced into the market.  No-season tire users pay nothing for the massive delays they cause for everyone else on the road. This is a market failure.
  • Even far right conservatives agree that one of the roles of government is to step in when there are market failures.
  • Government goals are better achieved when they influence people to take action rather than forcing them to take action.
  • In Quebec the government made winter tires mandatory. I agree with this but…see the previous thought.

Therefore, the reasonable conclusion is everyone’s favourite thing, taxes.  The government of Ontario would start imposing a new tax on “all-season” and “all-weather” tires.  The revenue generated by this new tax would be used to subsidize winter and summer tires.  “All-season” tires would become more expensive while both summer and winter specific tires would become cheaper.  It would not even have to be an actual subsidy, just a reduction in the current taxes and levies.This would make it more attractive for people to have the appropriate tires in all conditions.  Better grip on dry pavement or in the rain during the summer and better grip in snow, ice and wet in the cold of winter.

The nice part is that after everyone finally moves to two sets of tires the number of accidents on the road would likely be reduced. This would reduce the cost of emergency workers, repairs on light posts and signs that people smash, etc.  These saving could be used to offset the ongoing costs of keeping the taxes low on season specific tires. The new tax would also reduce the thousands of hours people spend in traffic behind people forced to drive at a snail’s pace by ultra predictable, yearly re-occurring  weather. Problem solved.

So yes, today on the drive home I got so frustrated with people that think that their no-season tires are good enough that I invented a new tax.  You’re welcome.



Temporary Foreign Workers: Explanations and Solutions

Temporary foreign workers (TFW).  Love them or hate them, they are here to stay. The program has been around since 2006 and continues to gain strength.  We will not go over the entire system  because there are thousands of sites that do it in very fine detail.  Wikipedia is always a good source.  What we will do is look at the effect TFWs have on a labour market.  You can see it in the latest Youtube video here.

As in the video, it seems that for most part this program is being used to keep wages down which was not its goal.  The entire system is under review at the moment and one of the current suggestions is to make the program be accessible only to firms in regions that have extremely low unemployment rates.  This is a very good idea. A low unemployment rate is a good indicator that maybe a company legitimately cannot find a Canadian to fill the position. If the region has an unemployment rate of 8% then there is little reason to bring in foreigners to do the work.  That single change would make a large difference.  Although, there have been reports this week that workers are being hired to work in one city and then being moved to another as soon as their application is approved and they move to Canada. This type of behavior cannot be allowed to continue

All cases of worker exploitation must be eliminated.  These workers should have regular check-ins by mail, email, a website or in person by someone from the labour ministry to ensure that they are not being abused or exploited.  They should not be afraid to lose their job if they report abuse of the system.  If abuse is reported and confirmed then they get put on top of a list for the next available position.  Most of the jobs are low skill and if one company in a low unemployment region is having problems finding enough workers there are likely more in that same region willing to take a worker that has already passed through the application process for a discounted or no fee.

There is a lot of red tape in these proposed changes. The costs for the administration should be covered by the fees that firms pay when they apply to hire a TFW.

The next few months will reveal how the government is going to deal with all the recent negativity.  I would like to see them implement the changes listed above and discuss making the TFW process a path to citizenship.

The Current Strength of the Canadian Dollar

I am currently on vacation in Czech Republic so it is the perfect time to speak about exchange rates. Any Canadian that has travelled in the past couple of months has noticed the drop in the strength of our dollar.  In the news and when politicians speak about the dollar is it always measured against the U.S. dollar. This makes sense because, as we have discussed many times, the U.S. buys the vast majority of our exports.  When the Canadian dollar becomes weaker, out products become less expensive to foreigners so it can be a positive thing for exporters.

So here is the relative price of the Canadian dollar to the USD for the last year. I also included the Czech karuna on the right axis for fun.  The lines show how much Canadian you can get for each. So higher means a weaker Canadian dollar.


So the Canadian dollar has fallen in value against the USD as well as the Czech karuna.

Another way to check the strength of currency is to use an index number that takes into account all of our largest trading partners.  The Bank of Canada does this and it is called the Canadian-dollar effective exchange rate index (CERI).  If you would like to know the exact weights that each of our trade partners gets you can see them here.

The graph below shows how the strength of the Canadian dollar has fared in the last year according to the CERI. Higher means a stronger Canadian dollar.


The CERI data tells much the same story. I included the CERI without the USD to see how much difference it would make but it was almost none.

So our conclusion is that if the indexed strength of the Canadian dollar determined my vacation times I would probably going to work tomorrow.  Good thing it doesn’t, na zdravi.

Closing out 2013 and looking forward to 2014

Happy New Year to everyone! Since I like to do at least one post a month and I have been slacking in December today I will take a few minutes today and quickly talk about what we can expect in 2014.

In Canada inflation rates are at very low levels. The surge in inflation that many loose-money critics have predicted has not appeared. This is good because it means that the Bank of Canada does not have to decide if we are going to increase interest rates right away. It would be hard to argue that rates need to increase when we are only at 1.1% core inflation and 0.9% CPI. In fact, if the rates start dropping further then the BoC will start worrying about deflation. Despite their constantly optimistic DSGE model, it is possible that they will actually need to decrease rates in the next year, although this is extremely unlikely. The most likely outcome is that the target overnight rate will be unchanged throughout the year. The only thing that could cause an increase is if the US economy really starts to take off. If they start seeing growth over 3% then we could see a small increase of 0.25 – 0.5% by the end of the year.

All of you cross-border holiday shoppers probably noticed that the Canadian dollar is lower than we are used to in the recent past. It is currently sitting at about 93 cents US. Although we have been sitting at near par levels for some time this change is likely caused more by a stronger American dollar than a weak Canadian dollar. We have briefly discussed the CERI in the past; it is the exchange rate index that the BoC uses. Instead of just measuring our exchange rate vs. the US it includes our six largest trading partners and uses the magnitudes of our trades with them as the weights to come up with an index number. This number uses 1992 as a baseline (100 level). The most recent CERI index is 115. For reference, since the beginning of 2010 the CERI has been as low as 113 in February 2010 and as high as 124 in June 2011. So we are currently on the low side of the last three years but it isn’t a disaster.

The good news is that Canada has maintained growth while our currency has been in slight decline. This is a good thing because a cheaper Canadian dollar means that our goods/services/commodities become cheaper for the rest of the world to purchase. With the US buying about 75% of our exports a weaker currency will actually work out quite well for Canada if the US can manage strong growth this year.

With the derailment and explosion of a train carrying crude oil yesterday in North Dakota I think we can expect the Keystone XL to be approved.

The Olympics will take place in Sochi, Russia. Canada will be attempting to defend its “most gold medals” title. With two suicide bombers in the last week in Russia we can expect some major security changes from Russia. Not known for their delicate handling of terrorists, Russia will likely crack down brutally in the months leading up to the opening ceremonies. As a result, it is possible that we will see a few countries drop out in protest of their methods.

As for, it lives on for another year. 2014 should see lots of new posts and videos with a focus on videos covering more advanced economic topics.

This is a type-it-and-post-it kind of day. Please forgive any errors, and I will see you all in the New Year.

Benefits of Trade.Comparative and Absolute Advantage. (Video)

We will soon see the content of the Canada-EU trade deal that Harper has been negotiating for years.  From the few details that have been released so far it seems like a very good deal for everyone involved.  While we wait for the complete text of the agreement you can watch my latest video.  The video explains how even though one country might be extremely large compared to the other the concept of comparative advantage allows both countries to benefit from trade.   Enjoy.

What Happens if the US Hits the Debt Ceiling?

The shutdown continues in the US and now we must consider the possibility that the US government will not only fail to pass a new budget but will also fail to raise their debt ceiling before October 17th.  This is the estimated day that the US will run out of cash to pay for existing programs and debt interest. If congress does not raise the debt ceiling, which is an artificial limit imposed on the maximum amount of total debt the US holds, government spending will need to be cut by about 20% instantly. This is because the US borrows about 20 cents of every dollar it spends.

In Canada when the government passes a budget and spending plan it is automatically authorized to spend that money.  In the US it is a two step process. The government passes a budget in a vote and then must vote to authorize the borrowing that goes along with that spending.

Many people are reporting that if the debt limit is not raised that the US will default on its debts, something that has never happened.  This is not entirely accurate. I do not know the exact number but approximately 7% of US government spending is debt repayment, the rest is spending on government programs.  The government could try to prioritize the debt payments to keep them from defaulting while cutting the 20% elsewhere. The main problem is that the US is a big place and their national accounting is supremely complex. This is the reason why they say that October 17th is most likely the day they run out of funds, the flows of money to and from the government are not constant and are difficult to pinpoint.

A default on debt repayment would cause a financial freeze far worse than what we saw in 2008-2009. During that crisis when things were going bad everyone rushed to US treasury bills. The interest rates on these bills are super low because they are considered safe.  That is, the possibility of the US government not paying their debts is almost zero. If default starts to look like a possibility then interest rates on those treasury bills starts to climb.  This causes all interest rates to climb as people start getting worried about risk throughout the market. This means higher mortgage rates, higher personal and commercial credit rates, higher rates all around. This also means that when the US tries to roll over old, expiring bonds into new bonds (this occurs once a month normally) bond holders will either just cash out or they will want higher interest rates.  So the government would be paying higher interest on their current debts which means more government cuts because the ceiling would still be in place to limit borrowing.

So, is it possible that a few Republican crazies will cause the US to hit the debt limit? Yes.  Will it cause a financial apocalypse? Possibly. Even if the government can arrange to prioritize debt payments with their remaining money they will be making massive, instant cuts to government programs. This means tens (or hundreds) of thousand of laid off workers, decreased income tax revenue and an increase the need for social benefits. It would be an economic tranquilizer.

This situation is going to reveal just how much the Tea Party is willing to damage the US in order to push their agenda.  Normally, does not make dire predictions but if they refuse to raise the debt ceiling for any significant period then both the US and Canada will drop into recession. If the ceiling remains in place long term then the US is headed for a depression and Canada will not be far behind.

Broken Window Fallacy: Alberta Flooding

Alberta has recently experienced massive flooding.  If you would like to donate $5 to the Red Cross’ efforts there you can text “ABHELP” to 4664.  It really is an easy way to help out your fellow Canadians in their time of need.

Alberta is one of Canada’s “have” provinces.  What that means, is that they (net) pay money to the federal government rather than receive payments. When the flooding started it was inevitable that people would start talking about how this was going to affect their economy. I thought this would be a good time to talk the Broken Window Fallacy. If you are looking for information on the “broken window syndrome” then you are in the wrong place and you should check out a criminology website instead.

The original idea goes something like this.  A window is broken in a shop and the shop owner needs to call a glazier to replace it. He is, of course, upset that he needs to replace this broken window.  To try and make the shop owner feel better someone points out that if windows were never broken then the glazier would never have any work to do; implying that it is a good thing that the window was broken because it helps money change hands. This ignores the fact that the money would have been better off used on something else rather than on replacing the window.

This is one of the issues with many methods of calculating GDP. If someone remodels their bathroom because they feel like it, then it adds to total GDP as they purchase supplies.  If they need to rebuild their bathroom because it was destroyed by a flood then they are also buying supplies and that too increases the GDP.   In the first case however, the house value is higher overall. Unfortunately, in most cases existing home sales are kept as a separate statistic and it is new home sales that push up GDP. So for this type of GDP calculation it makes no difference that the original bathroom was destroyed.  Flood repair fallacy would seem a more appropriate name in this case.

So the money spent on these repairs is money that would have been spent elsewhere.  That is one downside.  The other thing to keep in mind if you see anyone claiming this will actually boost the GDP of Alberta is that overland flood insurance does not exist in Canada as far as I am aware.  If your drains back up and your basement floods then maybe you would get an insurance payout but if the water comes in through a doorway or window then you will not be covered, this is overland flooding. What this means is that many of the repairs are going to be done with borrowed money.  The money borrowed today is obviously money that cannot be spent tomorrow. So if there is a bump in construction material sales during the rebuilding period you can assume that there will be a slump afterwards as the money that was used to repair everything is being paid back, with interest.

So over the next few weeks or even months keep these things in mind as people talk about the cost of repairs.  Finally, for the $5 donation you made after reading the first paragraph of this post you could also get 5 Wild Rose pink sprinkle doughnuts at Tim Horton’s, the proceeds of which are being donated to the flood recovery. It is unclear where charity doughnuts fall in GDP calculations.