Monday, May 07, 2007

The blog is dead! Long live the blog!

I plan to revive True Dough and carry on with it when I relocate to DC, USA (!) for an internship.

I’m not sure about the direction this blog will take, so I’ll wing it like everything else. It might turn American for a few months, but as a stranger to DC I might have time to keep tabs on both countries -- or perhaps focus on relations between the two...

Thursday, February 22, 2007

Research vouchers for graduate students

In today’s Toronto Star, Ross Finnie and Alex Usher propose a voucher program to promote quality graduate research. I haven’t formed an opinion yet, but at very least it seems much better than the current system of government-to-institution transfers.

How to expand graduate education in Canada, by Ross Finnie and Alex Usher. Toronto Star (Feb 22):

On the supply side, new money needs to flow in ways that will foster the twin goals of expansion and quality.
Traditional measures, such as increasing government-to-government or government-to-institution transfers, or putting more money into research, would help, but offer limited guarantees that the money will promote expansion of graduate education where we need it most.
An alternative approach would be to attach funding to students directly, varying the amounts with the assessed standing of the student, based on grades, exams and other criteria.
Such a voucher-type system would encourage institutions to improve the quality of their programs as they compete for students, while also giving them the means to expand.
Channelling money through students would incorporate the much-vaunted benefits of the "single-payer" approach that generates efficiencies for our publicly funded health system, while opening up the "market" for graduate education.
In short, an intelligently structured set of transfers to universities based on the number of highly qualified graduate students they enrol would strengthen incentives to offer high-quality postgraduate education. The new resources these transfers brought to institutions would allow expansion of the system precisely where quality was best.
Students, who naturally want to enrol in the best programs they can, would themselves direct the funds toward the higher-quality programs. It is a market-type solution, with market-type efficiencies, though financed entirely with public money.

Tuesday, February 20, 2007

Epstein on the FDA and drug patents

I wish I would have heard the latest Econtalk podcast, “Richard Epstein on Property Rights and Drug Patents,” before writing my recent post on Mexico’s generic drug market.

Epstein, in conversation with Russ Roberts, discusses such things as what would happen if the FDA didn’t exist, the problems with long supply chains, the FDA’s orders of magnitude, and the impact of generics in the drug market. (h/t Econlog)

Do tariff reductions reduce welfare?

James Townsend (University of Winnipeg) has a paper published in the February issue of The Canadian Journal of Economics (subscription required) where he states that relative wages fell in industries where tariff reductions mandated by the Canada-U.S. Free Trade Agreement (CUSFTA) were deepest.

Here’s an excerpt from Townsend’s paper, Do tariff reductions affect the wages of workers in protected industries? Evidence from the Canada-U.S. Free Trade Agreement:

By working with microdata and using hourly wages, I make several contributions to our understanding of how the CUSFTA tariff cuts affected earnings. First, by using hourly earnings and controlling for individual characteristics, I am able to isolate the effect of CUSFTA on the wage rate, which is a measure of the price of labour. Previous studies have worked with average weekly earnings for broad groups of workers. Changes in weekly earnings may come from a combination of price changes, changes in the composition of workers forming the group, and changes in the number of hours worked per week. Second, I am able to compare the response in the union and non-union sectors, which may have important implications for understanding the political economy of trade policy. My results indicate that the CUSFTA cuts resulted in a decline in the wages of those workers in sectors facing the largest cuts relative to the wages of the workers in sectors that already had low tariffs prior to CUSFTA. This result holds for both the union and the non-union sector. Wages in the union sector are also found to be responsive to changes in the industry-specific real exchange rate and to other sectoral shocks; no similar response is found in the non-union sector.

There are two things I wish Townsend would explore (or explore more). One is the annual welfare cost to Canada caused by job protection, the other is the barrier that tariffs build by not allowing the reallocation of resources to their most productive means.
Regarding the first point, the best study I’ve come across is by Gary Clyde Hufbauer and Kimberly Ann Elliott, "Measuring the Costs of Protection in the United States." (1994) For each tariff-protected industry, the authors calculate the number of jobs saved, the consumer cost per job saved, and the resulting annual welfare cost to domestic citizens. They found that consumer costs exceeded worker wages.
Don Boudreaux expressed my second point well at Café Hayek after being motivated by a speech once given by John C. Calhoun. Here’s the best part (or read the whole thing here):

The deep lesson here is that, just as moving to freer trade does indeed upset some economic apple carts, so, too, does protection upset some economic apple carts. Given that both free trade and protection cause some specific job and business losses, protection cannot be justified -- as so many try to justify it -- by pointing to people whose economic expectations will be upset by freer trade. Free-trade advocates can counter with similar accounts.

Of course, free trade's justification cannot, then, be found in the fact that protection upsets some economic expectations. Free trade's proper economic justification is, in part, this: given that both free trade and the "prohibitory system" "destroy" some jobs and "create" others, it's best to let commerce and industry be guided by market signals and consumer sovereignty so that each producer is more likely than under protection to specialize in that occupation for which he, she, or it has a genuine comparative advantage. Thus will grow the wealth of nations.

Townsend's counter-arguement is that perhaps resources shouldn’t be reallocated to a more productive means because the workers from the once-protected industries may not have the skills to get hired in more productive industries. (A recipe for growth, no doubt.)
Since skills cannot be transferred between industries, workers may be better off remaining in a declining industry at a lower wage than they would be by moving to an industry for which they have no skills. As a result, shifts in demand result in persistent changes to the wage.

Monday, February 19, 2007

So long and thanks for the graphs

I've learned a lot from The Vancouver Housing Blog since I discovered it in December, so I'm sad to see that VHB is exiting the blogosphere ("at least for awhile"). I hope he'll be back.

Sunday, February 18, 2007

Mankiw on cross-country growth regressions

A couple months ago I was debating whether to ask Prof Greg Mankiw about his thoughts on cross-country growth regressions, but I was too shy. I'm excited to see that someone else got to him.
I don’t have anything to add, I just thought it was a good post. Here's a short excerpt, but the whole thing is worth reading.

In...The Growth of Nations, I tried to spell out the reasons for my skepticism [of cross-country growth regressions]. I emphasized three problems, which I called the simultaneity problem (it is hard to disentangle cause and effect), the multicollinearity problem (most of the potential determinants of growth are correlated with each other and imperfectly measured, making it hard to figure out which is the true determinant), and the degrees-of-freedom problem (there are more plausible hypotheses than data points).

Saturday, February 17, 2007

Gapminder - didn't you know?

I hesitated to blog about Gapminder earlier when it occurred to me that many of you might already know about it, but I was shocked (shocked!) when an acquaintance of mine said that Gapminder was "fun for ten minutes." (I forget her exact words.) There's more here than one would suspect from first glance. I recommend watching this demonstration by Hans Rosling, "professor of international health at Sweden's Karolinska Institute, and founder of Gapminder, a nonprofit that brings vital global data to life."

Here’s a link to Gapminder. The site features tutorials.
Addendum: Happyjuggler0's comments to this post make me think that I probably should have also provided a direct link to the new Gapminder Beta (which can also be found near the top of my last link). The tutorial for Gapminder Beta is in the top left corner ("help"). I'm really looking forward to being able to import data into this. What a great tool!

Friday, February 16, 2007

Early regulation: Mexico’s generic & 'miracle' drugs

What happens when True Dough is confined to a small space? She writes a lot, she copies and pastes a lot, and she evidently refers to herself in the third person (which she would never, ever do in person.)
I’ve been thinking a bit about Mexico’s current mis-information problem when it comes to generic drugs and "miracle" drugs. I’m convinced: there is a solution in free markets, but certain early government regulation, perhaps even temporary, should have been implemented to get Mexico’s undeveloped generic drug market off on the right foot. First, I’ll admit that most of my information on this subject comes from Global Insight economist Ben Shankland, who has been covering the subject for at least the past few months (although none of his pieces have public links -- sorry). Good reporting on this elsewhere seems hard to come by.

Here’s Shankland’s latest from Feb 9, Generics Industry in Mexico Calls for Help:
Consumers’ confusion over generics and non-equivalent copies continues to present a serious challenge to manufacturers of legitimate, off-patent medicines in Mexico…. There are an estimated 120 firms currently producing non-original medicines of varying quality in Mexico.
Here’s Shankland again, this time in "Miracle Drugs" Under the Spotlight in Mexico, Feb. 6:
The Mexican pharmaceutical market regulator, COFEPRIS, has called for the national competition authority PROFECO to help pursue manufacturers of so-called "miracle drugs". In an interview with the Diario Monitor newspaper, COFEPRIS chief Juan Antonio Garcia Villa estimates that the trade is worth approximately US$900 million per year, and that it has been partly responsible for a surge in Adverse Drug Reactions (ADRs) in Mexico from around 300 per year in 2000 to nearly 9,000 in 2006. The rising rates of deaths and intoxications have come despite the fact that effective pharmacovigilance is still "virgin territory" for Mexico, according to Garcia Villa. Significance: After years of crackdowns, legal reforms and forced inspections (see Mexico: 10 June 2005: ), efforts to halt the trade in these products continue to be ineffectual.
What is Mexico to do? The 2006 NBER Working Paper "Regulating Misinformation," by Edward Glaeser and Gergely Ujhelyi addresses the topic of misinformation in the advertising of drugs (h/t Healthcare Economist)

Here’s what the authors have to say about three methods of government regulation:

We consider the effects of three different forms of government intervention: taxes or bans on advertising, counter-advertising and taxes on profits or goods. If advertising is just misinformation, then taxes or bans on advertising yield second best options that weakly dominate all other government interventions. Counter-advertising where the government tries to refute private firms is sub-optimal because it creates a costly advertising response by the private firms. Price caps and taxes on consumption can be welfare enhancing, but they yield less social surplus than directly taxing or limiting advertising. A change in the tax code that stops firms from deducting advertising expenses is equivalent to a tax on advertising and yields similar results.

But evidence suggests that it is likely that none of these regulations would be effective in Mexico without damaging social surplus. First, bans on advertising have proven to be ineffective in Mexico, partly due to the flow of information across borders.
Shankland (Feb. 6):
Both COFEPRIS and PROFECO are members of the Mexico-U.S.-Canada Health Fraud Group (MUCH), a trilateral body that joins competition authorities and healthcare regulators in the three countries in an effort to stamp out bogus medicines. However, despite a constant stream of enforcement actions on both sides of the border, little can be done to stamp out illegal television advertisements for these products in Mexico, with many ads broadcast from U.S. soil. Within Mexico, a more vigorous attitude from PROFECO would be welcome, as the chronically under-resourced COFEPRIS is unlikely to overcome this threat to public health by itself.
Glaeser and Ujhelyi also propose taxes or bans on advertising. As Shankland pointed out after the Mexican senate refused a 15 per cent tax on medicines last month, "any plan that would have involved increasing the retail prices of medicines would have had direct consequences in a market where out-of-pocket spending remains the norm for most consumers of prescription medicines."
Maybe the market has solutions. I stumbled across a WSJ article dated 14 Feb 2005:
Victor Gonzalez has come up with a novel prescription for business success here: cheap drugs, cheap doctors -- and a dose of sex.
Mr. Gonzalez, 57, is shaking up Mexico's health-care system and changing the way drugs are sold here. By spotting gaps in the country's drug market and regulations, he is able to offer low-cost medicines and inexpensive care to millions who lacked both. By raising awareness of generics as an alternative to pricey brand-name drugs, he has revived the fortunes of domestic makers and posed a threat to the U.S. and European pharmaceutical companies that dominate Latin America.
(The "dose of sex," by the way, has to do with the skimpily-dressed models that help sell Mr. Gonzalez’s services and products.)
In 2005, Mr. Gonzalez had 2,550 stores. What ever happened to him and his Farmacias del Ahorro? Doctors and at least one law firm accused him of selling shoddy drugs, but he continues to expand his small empire. "In Mexico, Farmacias del Ahorro accounts for some 25% of the market in unit terms and 6% of sales in value terms" (Global Insight, 24 Jan. 2007). Last month he opened his first outlet in Chile.

So, a final thought: Perhaps there is a free market solution to Mexico’s misinformation problem, and one that doesn’t involve taxes on advertising, etc.; however, it could have been done better. Perhaps early government regulation should be considered when markets are not able to solve for massive negative externalities (in this case, the health and death of Mexicans).

I’m not suggesting that Mexico should follow the blueprint of the FDA. Further, I’m not the only free marketer who advocates early regulation in undeveloped health markets (check out Arnold Kling’s recent admission – see, I’m in good company*). But think of the market solutions in the U.S. For example, Wal-Mart has a program where they offer cheap prescriptions for some 314 generic drugs to more than 14 states.
Mexico’s market solution is very similar, the big difference being that the quality of drugs offered by Mr. Gonzalez is apparently much lower than the drugs offered by Wal-Mart. Still, Mr. Gonzalez accounts for 25% of the market. This means that individuals aren’t getting the proper medicine, and Mexico’s generic market is suffering (doctor’s find it easier to prescribe something from Pfizer, etc). Early regulation (perhaps even temporary) in this undeveloped market could have corrected this before the mess even began.
* -- I should have made clear that Kling is commenting on an entirely different subject, but following the link will tell you this.

Wednesday, February 14, 2007

Corcoran on Pigovian taxes

Terence Corcoran doesn’t believe in Pigovian taxes. In his latest anti-Pigovian tax article he reasons that decreased smoking rates don't coincide with increased price rates, therefore we shouldn’t expect gas consumption to decrease in response to taxes on gasoline. Here’s an excerpt from his article in yesterday's National Post:

According to [Prof Greg Mankiw], "economists ... have found that a 10% increase in the price [of cigarettes] causes a 4% reduction in the quantity demanded. Teenagers are found to be especially sensitive to the price of cigarettes: a 10% increase in the price causes a 12% drop in teenage smoking."

In practice, however, the link between price and smoking seems a little less direct and a lot more uncertain. Real cigarette prices in Canada (using Ontario as a measure) have rolled up and down by as much as 80% over the last 20 years, with impacts on smoking prevalence that are far from clear. The link between price and
smoking is certainly far from the mechanical one implied by Prof. Mankiw...

We appear to be witnessing a decline in smoking, including among teenagers, but the movement in smoking rates seems strangely disconnected from price. Teen smoking declined between 1993 and 2001, for example, at a time when prices first fell and then remained flat. We also know that smoking is now subject to the greatest onslaught of regulation short of an outright ban. What role has price really played?

Could it be, in the case of gasoline taxes, that people have a much better idea of the economics of prices and demand than economists? Using price to change behaviour and shift demand forces all individuals to make major compromising decisions. Large numbers would have to continue to consume gasoline at high prices, forcing them to curb their consumption of something else. That's the result planners want, but it is not obvious to consumers that it will work or that it is fair. Look what happened to tobacco.

Not knowing a lot about the tobacco industry, I can’t argue with Corcoran too strongly, but he does fail to take into account the impact of increased cigarette prices on substitutes, something regulations were not responsible for (unless you account for medications to curb cravings, etc). I can think of a few examples. Statistics Canada finds that fine cut tobacco has been used as a substitute when prices are on the rise. As another example, price increases have allowed cheap generic brands of cigarettes to enter the market (even as a non-smoker I noticed their quick market entrance). And finally, how many Canadians attempted to cut costs (say, by purchasing tobacco in the tin and rolling their own cigarettes) rather than immediately quitting? In sum, Corcoran fails to mention that increased prices may have encouraged substitutes to emerge on the market, which is the same affect that a Pigovian tax should have.

Dependence on anything, whether it’s cigarettes or gasoline, cannot be cut overnight, but (to return to the theory on gas taxes), increased costs of gasoline should prompt industries to invest and switch to lower-cost fuel options.
Still, I’m not entirely sold on the Pigovian gas tax. As a low tax it’s ineffective, as a high tax it can be harmful. The only way I can conceive it as having higher benefits than costs is if corporate taxes were slashed and replaced (in part) with a Pigovian tax charged to industries, those most responsive to changes in natural gas prices.
Addendum: Prof. Brian Ferguson has a good post on Corcoran's article.

Saturday, February 10, 2007

Your Views

Mark Thoma at Economist’s View has a cool new idea. He writes:

I am going to try something. It is based upon The Economist's decision to publish all of their letters to the editor in a blog. I have created a blog called "Your Views." Anyone can post there.

I suspect there are a lot of people who have good ideas for a blog entry but don’t have the time or interest to actually develop a blog. I’m eager to see how this works.

I’ve also started something new. I’ve been filing videos of interest to me on a YouTube channel I call True Dough Tube. I started it because I’m unable to watch videos in their entirety on my laptop; however, I’ve since started saving clips that I’ve seen and enjoy. My "video log" and my "what I’m watching" folder contain econ-related content, while my "favorites" folder may not be of interest to readers here (it's basically my video log with additional non-econ related videos). I’ll continue to post econ-related videos to my video log as I stumble across them. It’s not a major project, but there’s no sense keeping it to myself.

Thursday, February 08, 2007

The sticky mess we’re in?

The quality of Canada’s new and existing jobs is slipping, concludes CIBC economist Benjamin Tal after calculating the latest Job Quality Index (JQI), which is based on compensation (70% of the index) and job stability. Tal suggests that the JQI is slipping because self-employment is rising (not necessarily a bad thing if it’s encouraging workers into the labour force who had previously outsiders) and/or unskilled workers are being used as substitutes for skilled workers because Canadians lack the right skills.

Perhaps an interesting statistic would be the relative "stickiness" of the JQI over time. To the extent that we can expect bad jobs to replace good jobs more quickly than vice versa, stickiness may be somewhat predictable, depending whether the index is rising or falling. But if the JQI quickly rebounds after falling, and if we know which components caused the JQI to fall, this may be telling.
For example, consider scenario A and B in period of time (t), both of which take the JQI to the same level below JQI (t-1). In scenario A there’s weak compensation due in large part to an increase in self employment spurred by individuals inside and outside of the labour market. There’s also weak stability because an increase in jobs in western Canada draws workers (again, from within and outside of the labour market) west to try on jobs until they find a satisfactory match.
In scenario B the situation is similar, only now the greatest weight pulling down the JQI is unskilled workers being used as substitutes for skilled workers when in actuality they are not substitutes. Again, consider that JQI at B is at par with JQI at A.

Would either scenario have a stickier JQI? The significance has to do with our productivity and our ability to rebound from a recession. In scenario A we have a weakish economy but more people in the labour market. In scenario B we have a weakish economy and evidence of more of a mis-matched, unskilled labour market. If we can agree that we're seeing a mix of scenario A and B, perhaps the [edit: greater ] A is, the less sticky we can expect the JQI to be. To be clearer, studies have shown, for example, that "a lack of employment stability, job skills, and occupation-specific experience can impede welfare recipients’ abilities to obtain “good jobs” or transition into them from bad ones."

On a side note, overall I like CIBC's’s JQI as a raw estimate. It has its weaknesses (no pun intended); for example, it's based only on compensation and job stability. However, it also avoids mistakes made by others (eg, CIBC uses data from 100 separate industries, rather than data from industry aggregates).

Tuesday, February 06, 2007

Skilled immigrants and earnings

In a paper published by Statistics Canada, Garnett Picot, Feng Hou, and Simon Coulombe suggest that Canada’s policy on points-based immigrant selection and higher educational standards has not lowered the probability that an immigrant will enter a low income bracket; however, it has changed the composition of immigrants in chronic low income.

Basically, the authors show that many skilled immigrants are not able to secure high-paying jobs before their arrival. They saw that once skilled workers entered low income, they only had a slightly higher chance of exiting it than high school educated immigrants, but their relative advantage of exiting low income increased marginally over the period observed.
Excerpts from StatsCan:

For the purposes of this report, "chronic" low income was defined as being in low income at least four of the first five years in Canada. The report found that nearly one in five (18.5%) of recent immigrants who arrived between 1992 and 2000 were in low income at least four years during their first five years in Canada. This was more than twice the corresponding rate of around 8% among Canadian-born people.
For the group that arrived in 1993, the five-year chronic low-income rate was 20.5%. For those who arrived in 2000, it had declined to 16.2% as the economy improved.
There were two possible reasons for the decline: the more favorable labour market-related characteristics of immigrants entering in the late 1990s, and improving economic conditions (business cycle). The report found immigrant characteristics accounted for virtually none of the improvement; improving economic conditions accounted for the majority.
Overall, the large rise in educational attainment of entering immigrants and the shift to the skilled class immigrant had only a very small effect on poverty outcomes as measured by the probability of entry, exit and chronic rates.
This is because by the early 2000s, skilled class entering immigrants were actually more likely to enter low income and be in chronic low income than their family class counterparts.
In addition, the small advantage that the university educated entering immigrants had over, say, the high school educated in the early 1990s had largely disappeared by 2000, as the number of highly educated immigrants rose.
Changes in entering immigrant characteristics did alter the composition of the immigrants in chronic low income.
Among those who arrived in 2000, 52% of those in chronic low income were skilled economic immigrants. About 41% had university degrees, up from 13% in the 1993 cohort.
And from the report: (pdf warning)

… With respect to immigrant class, immigrants in the skilled economic class were more likely to enter low income than their family class counterparts, possibly because the family class immigrants often entered an already economically established family. This relative disadvantage observed for the skilled class increased significantly over the 1992 to 2004 period, when the number of skilled class immigrants rose. However, this should not necessarily be interpreted as meaning that individuals in the economic class do worse in the labour market (i.e., in term of individual earnings) than their family class counterparts. The opposite has historically been the case.

This is an interesting report because it’s acting as fuel for debates from all sides. On one hand, it can be seen as a call for more friendly policies towards skilled immigrants. (As long as labour regulations create barriers to immigrants, to what extent can we really expect the contributions of skilled immigrants to be greater than lesser-skilled immigrants?) Martin Collacott, on the other hand, has used the report to further his anti-immigration argument (which I don’t buy).

Monday, February 05, 2007

The nation's state

Here’s a fun map from Carl Størmer that compares the GDP of U.S. states to other nations.

(Click for a larger view)
From what I can tell, it seems like it might be somewhat accurate in terms of ballpark figures. For example, Canada’s 2005 GDP was USD1131.8 billion while Texas’ was USD989.4 billion. What's a couple billion?

Anyway it’s interesting to consider.

Thursday, February 01, 2007

Water exports vs. food exports

What are the chances that Canada will export water to the U.S. in the foreseeable future? Slim, says the Canadian government. But maybe there's a better alternative to the US's water woes: the exportation of water-intensive commodities.

Neil Reynolds explored this issue back in the Jan. 26 issue of The Globe and Mail. I've been meaning to comment ever since. First, here's an excerpt from a paper he quotes from, The Water Footprints of Morocco and the Netherlands by A.Y. Hoekstra and A.K. Chapagain:

Although bulk water itself is not a tradable commodity, agricultural commodities – that generally consume a lot of water during production – are increasingly being traded. As a result, water use within a nation is no longer an appropriate indicator of national water demand, at least not if one takes the consumer’s perspective. ...The water footprint of a country is defined as the volume of water needed for the production of the goods and services consumed by the inhabitants of the country. The internal water footprint is the volume of water used from domestic water resources; the external water footprint is the volume of water used in other countries to produce goods and services imported and consumed by the inhabitants of the country.
Canada's dependence on U.S. produce, and the water it contains, raises ethical as well as economic considerations. As the Council of Canadians often asserts, the United States is beginning to run out of water. ("We live next to a superpower," says Maude Barlow, who is the council. "And the superpower is getting mighty thirsty.") But the United States uses the bulk of its fresh water in the production of food — more than 80 per cent of water it consumes. And Canadians are principal beneficiaries. We get 60 per cent of the fruits and vegetables that we eat from the United States. Canadians, so to speak, are drinking the United States dry. Is it not in our national interest to replace this precious water — if only to keep the food coming?
…In one academic study published last year by UNESCO, two economists (A.Y. Hoekstra and A.K. Chapagain) looked at this issue from the perspective of the Netherlands… The academic conclusion: "International trade can result in water savings provided water-intensive commodities are traded from countries with high water productivity to countries with lower productivity."

All factors considered, Canada helps save the world's water supply by buying California lettuce and Florida oranges.
If I understand Mr. Reynolds right, he's saying that it's more efficient for Canada to purchase oranges and lettuce from the U.S. rather than from other countries with lower water productivity. Of course, we also have the incentive to purchase these goods from the U.S. because of lower transportation costs and shelf life reasons, so I'm not sure why Mr. Reynolds chooses to spin it this way. I see it differently.
If we're taking a lesson from Hoekstra and Chapagain, Canada (with its greater water supply) should have a comparative advantage in water-intensive commodities that actually grow in our climate and soil. Increased efficiency would result from Canada selling the U.S. certain water-intensive commodities because it would save the U.S. from having to import (or desalinate, or whatever) its water. Therefore, following Hoekstra and Chapagain's theory, the U.S. would help save the world's water supply by buying Canadian water-intensive commodities.
If Canada has a comparative advantage in water-intensive commodities over the U.S., it hasn't been realized. First, the U.S. might enjoy a degree of independence in food production. Second, the market is distorted. If subsidies to farmers were killed, comparative advantage within and across both countries would surely become a little clearer, thus allowing resources to be reallocated to their most efficient means. In other words, as long as farmers in arid lands are being subsidized to water their low-quality soil, regions will not achieve their comparative advantage, resources will not be efficiently allocated, and a vicious circle will ensue (eg. farmers might continue to be dependent on government initiatives such as the Canadian Wheat Board, or perhaps they too will rely on subsidies, if the CWB closes).
Of course, Canada may never have a great comparative advantage over the U.S. in water-intensive commodities. The Financial Times, Jan. 31:
Unlike other big WTO members such as the European Union and Japan, the US cannot sign a Doha deal where it loses benefits for farmers but gains export markets for its manufacturers and service companies. The power of the farm lobby means the US needs new export markets for agriculture to make up for any cuts in subsidies. This puts it on collision course with the "Group of 33" developing countries that want to protect their small-scale farmers.
So much for that. Load up the water.

Saturday, January 27, 2007

The sensitivity of industries to labour regulations

Don Boudreaux over at Café Hayek pointed to an article by Gary Becker and Richard Posner ($) published in yesterday’s Wall Street Journal. Here’s an excerpt:

An increase in the minimum wage raises the costs of fast foods and other goods produced with large inputs of unskilled labor. Producers adjust both by substituting capital inputs and/or high-skilled labor for minimum-wage workers and, because the substitutes are more costly (otherwise the substitutions would have been made already), by raising prices. The higher prices reduce the producers' output and thus their demand for labor. The adjustments to the hike in the minimum wage are inefficient because they are motivated not by a higher real cost of low-skilled labor but by a government-mandated increase in the price of that labor. That increase has the same misallocative effect as monopoly pricing.
Surely, just like the minimum wage, other regulations on labour also have a greater impact on certain industries relative to others. I started thinking about this when another commentator asked why the U.S. doesn’t adopt a 35-hour work week. Here’s most of what I posted in response on Café Hayek:

….regulations on hours worked can be just as painful to certain sectors as minimum wage requirements. First, it does seem odd that 40 hours is considered to be a "natural" and permanent level (although, I think the French have already proven what a failure the 35-hour week can be). Second, I can’t understand how an obligatory set of hours can be optimal for ALL industry sectors. Perhaps regulations on hours of work distorts the ability of each sector to find its own "natural" level through heuristic means, or whatever, thus hampering productivity and efficiency in certain sectors. I’ll explain.

Any strict regulation on hours worked, be it 40 hours or whatever, may not work for all sectors for at least two reasons: i) some sectors are productive in spurts (I’m reminded of a post on freexchange where a reader notes that "anyone building a house or undertaking a project that requires a number of diversified tasks comes up against the brick wall of inefficiency" when faced with regulations on hours worked); and ii) not all sectors have the same firm-size make-up. An IMF report shows that moving from a 40-hour to a 35-hour work week encouraged French workers in "large firms to take second jobs or to move to small firms where the 35-hour work week is not obligatory." In other words, while a 35-hour work week might be optimal for sectors comprised of small firms, it is likely not optimal for larger corporations, the backbone of our economy.

Another reader points out something that I didn’t add, but I should have:

I agree that it should be up to the company how many hours one should work - up to some maximum allowed under law under at-will labor. I mean, as long as you know the terms before you agree to the work, companies should have a lot of flexibility.

I just wanted to take note of the subject of work hour regulations here because I thought it might be interesting to sometime explore its impact on various industry sectors. Perhaps some industries have more to gain from a barrier-free labour market than others. Further, perhaps the existence of certain regulations on labour distorts the "natural" sectoral make-up of a nation's economy.

Thursday, January 25, 2007

How the east contributes to wealth inequality

A fire might have been ignited under western Canada when policy makers implemented a business friendly tax structure, but positive investor sentiment is going to take it from campfire to bonfire before the rest of Canada (hereafter, TROC) even gets its matches out of the box. The combination of two recently released reports makes me believe this.
First, The Fraser Institute released its Canadian Provincial Investment Climate Report: 2007 Edition. In it, they publish something called the The Provincial Investment Climate Index, which has seven components: 1. Corporate income tax (CIT), 2. Fiscal prudence, 3. Personal income tax (PIT), 4. Transportation infrastructure, 5. Corporate capital tax (CCT), 6. Labour market regulation, and 7. Burden of regulation

Here’s an abstract from a press release:

The Provincial Investment Climate Index objectively evaluates the public policies that create and sustain a positive investment climate. It ranks each province on a scale of one to 10.

Alberta earned the highest score, 8.9 out of 10, and was clearly Canada's top province for policies that encourage and sustain a positive investment climate. BC followed in second position but some distance behind with a score of 6.0 out of 10. Saskatchewan is third with a score of 5.3 out of 10. The three western provinces were the only ones with an overall score above 5.0.

Ontario was fourth overall with a score of 5.0 while Quebec, with a score of 3.0, was ninth.

Jason Clemens, a co-author of the report, had this to say:

The low scores for Quebec and Ontario are among the most worrying aspects of this year's report. These two provinces are extremely important to the Canadian economy, yet they have chosen to implement policies that are not conducive to attracting investment.

As the west becomes more business friendly, wealth tends to blow that way. But then there's a multiplier effect that kicks in when wealthy westerners begin investing to a degree that surpasses that of individuals elsewhere across Canada.
Earlier this month TD Waterhouse released a report which claims that “…those living in the west are more aggressive investors with higher expectations and greater use of financial plans and advice than those living in Quebec and Atlantic Canada. Ontarian investors, in accordance with their geography, are somewhat in the middle.”

I would attempt to explain this two ways: i) as individuals in the west become more wealthy and more experienced in investing they become less risk averse in their investment strategies; and, ii) we’re seeing that individuals who have a higher propensity to invest also have it in their interest to move, or remain, where the business climate is most attractive: in the west (whether for wage or salary prospects, or for entrepreneurial incentives).
But studies in behavioural economics suggests that there's more here than simply the fact that wealthy westerners will be getting wealthier by putting their money to work. Westerners will also gain experience ahead of TROC. I'm reminded of a paper by Daniel Kahneman where he explains that experienced traders show less reluctance to trade, almost as if they learn to "base their choice on long-term value, rather than on the immediate emotions associated with getting or giving up options." The parallel to the west seems convincing.
Further, while propensity to invest is rocketing in western Canada, it's also the case that in TROC, it's really, really, not. The TD Waterhouse report tells us that “the most favoured type of investment in Quebec is savings held in a savings account (55%).” Talk about low expectations.
The bottom line is that the longer it takes TROC to become business-friendly (or ditch the welfare state sentiment, in the case of some regions), the greater the division of wealth will be across Canada. This will hurt TROC for obvious reasons, and it’ll hurt westerners who will be pressured into being good sports and promoting equality through transfer payments.
Addendum: Damn-it. My images always come out as good as dirt. I vow to work on that at some point.

Sunday, January 21, 2007

Look at me, I read The Economist

I must be in a strange mood, because I nearly busted a rib laughing at this Onion piece. And yet,... should I have?

h/t The Healthcare Economist

Wednesday, January 17, 2007

The influence of values vs. remittance

From "Migrant Power," The Economist, Jan. 16

As migration changes, shorter-term movements will bring migrants home with wealth accumulated abroad and human capital in the form of knowledge and new institutional norms that can improve domestic life. The American experience suggests that, for all the fears that Mexican culture is overwhelming the domestic variety, the influence is more likely to go the other way. Tyler Cowen, an economist who does field work in Mexico, points out that American influences—whether consumer tastes, a greater inclination to give to charity or more enthusiasm for democracy—are stronger there than anywhere else in Latin America. The spread of values, in other words, may be just as influential as the remittance of cash.

Emphasis is my own. This is an interesting way to look at temporary labourers. I've never perceived them as being potential ambassadors of American goods and values.
FYI: did you know that if you use an RSS to access The Economist, you're a click away from free content -- including the premium content that isn't accessible to non-subscribers on the magazine's Web page? Perhaps this is a temporary glitch.

Sunday, January 14, 2007

M&M's -- No!

What if you could auction off a logo at Christie's or Sotheby's (nyse: BID - news - people ) to determine the notoriously tough-to-measure market value of a brand?One prism through which to measure the perceived value of global brands is the contemporary art world, and in particular the sale prices of the works of Wang Guangyi, one of the leading lights of the post-1989 Political Pop Art movement in China ... Wang is the Andy Warhol of the Chinese art scene--at once criticizing commercialism and profiting by including famous brand names in his works.

The rest of the article can be found here.

My favourite Wang (only because I prefer Reese's):

M&M's ("The Great Criticism" series: M&M'S)
Oil on canvas, 1993, Sale price: $180,000 Estimate: $150,000-$180,000, Sotheby's New YorkSale: Contemporary Asian Art, Sept. 20, 2006

Big-box stores, food prices & the CPI

Abstract from The Impact of Big-Box Stores on Retail Food Prices and the Consumer Price Index, by Ephraim Leibtag (Economic Research Report No. (ERR-33) 41 pp, December 2006)

This report focuses on retail food market dynamics and how they affect food price variation across store formats. The differences in prices across store formats are especially noteworthy when compared with standard measures of food price inflation over time. Over the past 20 years, annual food price changes, as measured by the CPI, have averaged just 3 percent per year, while food prices for similar products can vary by more than 10 percent across store formats at any one point in time. Since the current CPI for food does not fully take into account the lower price option of nontraditional retailers, a gap exists between price changes as measured using scanner data versus the CPI estimate, even for the relatively low food inflation period of 1998-2003. This study estimates that the CPI for dairy products overstates food price change by 0.5 to 2.5 percentage points per year for dairy, eggs, and butter/margarine.

Saturday, January 13, 2007

'Stock Markets Contract as M&A Overtakes Equity Sales'

While the contraction of the stock market due to mergers and acquisitions (M&A) isn’t an entirely new phenomenon, it’ll be interesting to see how Canada, the U.S. and Europe are individually affected in '07 by further M&A. The Bloomberg article I excerpt from below doesn’t mention Canada in specific, but I imagine that M&A will have a greater impact on Canadian investors relative to U.S. investors, as Canadian markets are smaller. This article suggests that companies could end up paying too much as the M&A "fad" jacks up prices.
To put things in context, the value of Canadian M&A deals doubled in 2006 to US$173.6 billion (the number of deals increased by 26%) and European country deals went from US$244 to US$266, while US deals went from US$229 to US$266 billion (Japan actually dropped).

Bloomberg, by Michael Tsang and Daniel Hauck (Jan 8) (Full article here)

Stock markets are shrinking as mergers and acquisitions take shares out of public hands faster than companies add them through equity sales. The value of U.S. shares dropped last year by the most since 1984 and the European market narrowed for the first time, according to Citigroup Inc. Last year's $3.68 trillion in takeovers, led by AT&T Inc.'s $86 billion purchase of BellSouth Corp., outweighed the biggest year for initial public offerings since at least 1999.

The contraction may continue in 2007 as dealmaking accelerates. M&A will rise by at least 10 percent this year, analysts at Deutsche Bank AG, JPMorgan Chase & Co. and Bank of America Corp. forecast. Private-equity investors alone have $1.6 trillion to spend, Morgan Stanley estimates.

"Corporations and the private-equity crowd both appear to still be on a buying spree," said Eric Bjorgen at Leuthold Weeden Capital Management in Minneapolis, which oversees $2.8 billion. "Less supply implies higher prices. That's bullish."
The reductions helped lift the Standard and Poor's 500 Index and the Dow Jones Stoxx 600 Index in Europe to the highest in six years. Stock buybacks also climbed to an all-time high. Last week, the S&P 500 fell 0.6 percent to 1409.71 and the Stoxx 600 gained 0.1 percent to 365.69.

Buyout funds and companies may wind up paying too much as they vie over acquisitions. It may "end badly" for stock investors later this year, said Jason Trennert, chief investment strategist at Strategas Research Partners LLC in New York.

Top Priority

"Given the sheer amount of money that's been raised, it seems to me that there's a chance that this could be taken to an extreme," he said. "Fads tend to take on a life of their own."

Tuesday, January 09, 2007

The underground economy and the poor

Neil Reynolds takes a look at the role that the poor play in the hidden economy.

The Globe and Mail (Jan. 5) ($):

How do poor families spend so much more money than they earn? By one measure — the National Council of Welfare — the average poor Canadian family spends $4,855 a year more than the $14,366 it receives as income, a difference of 33 per cent. By another measure — the Fraser Institute — the average poor Canadian family spends $9,370 more than the $9,114 it receives as income, a difference of more than 100 per cent.

* * * * * *

How does Statscan determine the income of the poor? It asks them. How does it determine the spending of the poor? It asks them. What's the source of the "bonus bucks" that the poor spend? Perhaps, in one of its surveys, Statscan should ask them. We can, meantime, only speculate.

Off-the-table earnings. Wanton use of credit cards. Gifts from more affluent family members. Academic scholarships. (Many postgraduate students are, by LICO logic, poverty-stricken.) But Canada's basic information on poverty remains dubious.

No one knows whether the poor, in their reports, minimize the money they either earn or otherwise get. It shouldn't be surprising if they do. Everyone else does it all the time.

I want to make two points. First, nobody is implying that the underground economy is strictly measuring income concealment, as some detractors seem to be charging. In a 1992 report published by Statistics Canada, "the underground economy" is defined as the mean economic activity that is not measured in the system of national accounts. In the past I may have failed to mention other sources of the "hidden economy" when referring to income concealment, but that’s because I was being sloppy and perhaps aiming for brevity.
Secondly I’ve read quite a few papers recently about different approaches to income concealment (ie. ignoring the rest of the hidden economy). The expenditure approach, developed by Pissarides and Weber (1989), seems to be the most well-received, at least according to the literature that I’ve read (please share your opinion here if you have one!). For example, Pissarides and Weber look at the relationship between income and food expenditures for salary and wage earners to evaluate the "normal" relationship between the two. They then compare this relationship to the income/food expenditure relationship of the self employed. If food expenditure appears to be incredibly high relative to the income level for the self employed, involvement in the hidden economy is assumed.
A major assumption is that the wage and salary earners (in comparison to the self employed) have very little ability to conceal their income (again, never mind their total involvement in the hidden economy), because employers document employees' earnings on their T4 slips. Thus, data from wage and salary earners is assumed to be actual. In relation to Reynold's article, this implies that poor families spend more money than they earn not because they are concealing income, but because of credit, loans, etc.

I have some criticisms of the expenditure approach, only one of which is relevant to Reynold’s article. The expenditure approach often depends on the use of surveys, for lack of other data. But to what extent can we rely on surveys? I have in mind a paper by Elffers, Weigel and Hessing (1987), who found zero correlation between survey results and audits for Dutch taxpayers. If there is zero correlation, even for wage and salary earners (this surprises me), this is a violation of a key assumption of the Pissarides and Weber model.

Further to Elffers et al’s findings, Andrew Jackson at the RPE blog has this to say:
Statistics Canada’s main surveys of consumption patterns are not very reliable, particularly when it comes to measuring the consumption of the very poor. Household surveys (formerly the SCF and the SLID) have been shown by Statistics Canada to produce significantly lower estimates of the incidence of low income than Census and tax data, likely because of under-sampling at the low end of the income distribution. (See Marc Frenette, David Green and Garnett Picot "Rising Income Inequality in the 1990s" in David Green and Jon Kesselman (Eds) Dimensions of Inequality in Canada, UBC Press, 2006.)
While this is a major blow to the expenditure approach (and there are others I won’t bore you with), I have to agree with Mr. Reynolds: i) the data simply does not tell what is hidden; and, ii)if other wage and salary earners are in some way involved in the hidden economy, why assume that the poor are an exception? Jackson’s critical piece on Reynold’s article can be found here.
By the way, if it's ever the case that you're itching to read an available-by-subscription-only article that I refer to, I don't mind emailing it by request.

Sunday, January 07, 2007

Productivity and firm size in construction, pt2

A couple of posts back I asked why Canada’s construction sector is said to be more productive than the U.S. sector, despite having smaller establishment sizes. The gap isn’t huge, but it’s surprising. I don’t know if any single concept can answer this. Instead, I’ve broken it down to two questions: why are the Canadian firms small, and why are they more productive.

On being small…

Small establishments are unburdened from taxes on inventory
If one considers the high taxes that the construction sector faces on inventory, it seems reasonable that large companies wish to unburden themselves of this tax by contracting individuals to do certain services. Perhaps in Canada self employed contractors are more willing to take on the risk of being taxed on inventory (perhaps due to favourable tax scheme on Canada’s self employed, in comparison to the U.S.? I don’t know if this would justify the gap).

Variable taxes, in contrast to flat taxes, keep establishments small, even in Canada’s most populated areas where construction productivity is destined to be highest regardless of establishment size
B.C. has the lowest provincial tax rate in Canada up to a taxable income of $67,500 per annum. Above this income level, the rate rises rapidly and Alberta becomes the lowest personal tax jurisdiction at an income of $88,000 per annum. B.C. has the highest unincorporated self employment rate of all of Canada in the construction sector while Alberta has the highest incorporated self employment rate (see graphics below that I created using StatsCan CANSIM data Table282-0011). Perhaps Canadians are more sensitive to an un-level tax scheme than Americans.
Here's my colour scheme:
self employed unincorporated w/ no paid help,
self employed incorporated w/ paid help,
self employed incorporated w/ no paid help,
and the final pie in lime is self employed unincorporated with paid help.

On being more productive…

Economies of scale are relatively unimportant in the construction sector
Construction is highly labour-intensive, depends on a high proportion of low-skilled jobs and is not considered a high technology sector. Further, I would argue that where economies of scale do matter in the construction sector, they mean less than they once did. Thus, simply being big doesn’t give U.S. firms a greater advantage in this sector.

The hidden economy
If labour inputs are somehow being underestimated, then productivity (measured in my last post as GDP divided by hours worked, by the way) could be distorted.
For example, John O’Grady (2001) estimated that, on average, the annual underground income in Ontario’s construction industry, in the period 1998-2000 increased to $2.395 billion. This is due to the "hidden economy" composed of self-employed individuals who wish to conceal their income, which we know is easier to do in the construction sector than nearly any other sector.
Also, I think dachisb made a good point in response to my first post: "I would wager that low cost labour (read mexican migrants) drives most of this difference."
Not all construction is made equal
I’m not sure what affect this would have, but I thought it was worth noting that heavy and civil engineer construction is much smaller in Canada then, say, the construction of buildings. Surely many modes of construction have their own unique productivity level, and the compilation differs across countries.

Am I missing anything? Any more ideas anyone?

Friday, January 05, 2007

The rise of necessity entrepreneurs?

December saw 62,000 new jobs, taking the jobless rate to a 30-year low.

Ahem. Who was it that defied just about every analyst that said the labour market would fall in Q4? I believe it was me. But perhaps I was just lucky. Anyway, I didn’t see it all coming...
Self employment is booming. BMO economist Douglas Porter says December’s job gains were spread across all sectors, except construction was up only slightly. Is there any good reason why all these people with jobs wouldn’t pump up residential construction? Perhaps, if they didn’t have the right jobs. The Globe and Mail reported today that 49,000 of the positions were characterized as self employed.

This reminds me of a previous post where I explored three reasons why individuals might become self employed:
a) self employment is a stepping stone to other work
b) self employment is a stepping stone to retirement
c) self employment persists in periods of poor job growth
As hiring slows down, it might be the case that a) and c) are coming true. Perhaps self employment really is an innate survival skill. I’ll return to this topic at some point.
Also, I haven’t forgotten about my last post on the construction sector. I’ll continue with that tomorrow. Or something.

Thursday, January 04, 2007

Productivity and firm size in construction

Why would Canada's construction sector be more productive than the U.S. sector despite having smaller establishment sizes (ie. fewer employees in each establishment)?

If it’s the case that American construction firms, for whatever reason, have a greater ability/willingness to take advantage of economies of scale (an explanation for their larger establishment sizes), one might expect the U.S. construction sector to be more productive than Canada’s. Empirical evidence suggests otherwise. Canada’s construction sector, despite its smaller establishment sizes, is more productive, says several studies. It also has slightly more capital intensity, but this could mean a few things (ie. low economies of scale; high capital costs).
I have some ideas but I'll sit on this some more and come back to it in my next post.

Source of graphs: Don Drummond, TD economist (2005).

Wednesday, January 03, 2007

Canada's generous passport policy

Canadian policy-makers will soon be reviewing the subject of taxes on non-residents and citizenship options. Unlike in many countries, in Canada non-residents do not pay taxes, and yet they have the option to benefit from a number of social programs.

The CD Howe Institute recently published a paper by John Chant, a professor of economics at Simon Fraser University, titled The Passport Package. The passport package, says Chant, is the package of benefit options that non-residents receive. These include easy qualification to healthcare benefits, free entry and exit, resident tuition fees, financial assistance when enroled in postsecondary institutions, and more.
Chant suggests that all non-residents pay a flat passport renewal fee. He compares the "passport package" to financial options.

The theory of financial options provides guidance with respect to setting the level of the passport fee. The value to the holders of the passport package over any period equals the sum of the values of each option in the package. In turn, each option has a value equal to the probability it will be exercised in the period, times the value the holder gains from its exercise. Different holders of the passport package would attach different values to each element. A law abiding citizen who values avoiding a year in a foreign jail at $60,000 would be willing to pay $6 a year for the privilege of repatriation if they have a 1/100 percent chance of spending a year in a foreign jail. Someone more criminally inclined may be willing to pay much more.

Like financial options, the options in the passport package are exercised when they are "in the money"; that is, when the value of the object optioned exceeds the strike price at which the option can be exercised. In the same way, passport options are exercised only when their holders perceive that the benefits from exercising exceed the costs.

Often this will be dictated by events. The benefits from higher education become attractive when a student wants to come to Canada to study; the prisoner exchange becomes valuable to someone facing jail in a foreign land; and the option of evacuation and assured entry to Canada will be exercised in times of war and domestic upheaval. The parallel with financial options goes further: if people fail to renew their passport, the option expires out of the money. To make the package self-supporting, the fees would have to cover the cost of underwriting the exercise of the options. The revenues of the package would depend on the reaction of non-resident citizens. Some would judge that the value of the package exceeds the fee and opt to pay, while others would let their passports lapse and lose the benefits. If 20 percent of current non-resident citizens opted not to pay the fee, a $500 fee for five-year renewals would raise roughly $200 million per year.

This seems reasonable. If non-residents don’t find that the "passport package" is worthy of the price tag, they don’t need to renew their passport. It also seems simple. It’s far less complex than actually taxing non-residents.
Chant adds:

John F. Kennedy’s appeal, "ask not what your country can do for you — ask what you can do for your country" was a high mark for the rhetoric inspired by citizenship. Its message, however, is at odds with reality. People do weigh the benefits and costs of citizenship in deciding which and how many passports they carry. Some become and remain citizens of countries where they never intend to live.

Snickerdoodles and sea creatures

Tim Haab points to an interesting article:

Researchers at the University of Washington say all that holiday baking and eating has an environmental impact — Puget Sound is being flavored by cinnamon and vanilla.
So far, the research has turned up no evidence that snickerdoodles are harming sea creatures, but their research does lead to some serious environmental questions. Fish rely heavily on their sense of smell to locate food, for example, and, in the case of salmon, to find their way back to their home stream to spawn.

Tim’s environmental solution:

I propose a Christmas cookie cap and trade system. You are each hereby allocated one dozen cookie permits per month. These permits are fully bankable and tradeable and can be saved for the Christmas cookie season. I will monitor your consumption and be mandated to take any unpermitted cookies off your hands. I will dispose of them as I see fit.

I question Tim’s motives. Why stop at cookies? A true environmental martyr would be happy to monitor the giving of unwanted Christmas sweaters (see below) that are produced (and disposed of) every year.

Given that the textile industry uses toxic chemicals to bleach and dye yarn, perhaps the production of Christmas sweaters is worse for the environment than the vanilla and cinnamon inputs used in household kitchens. The tighter the cap on Christmas sweaters, the better, in my mind.

Wednesday, December 27, 2006

I'm off for an outdoor adventure here...

If you guessed that there will be no computers, you're right. But I'll be back and blogging again in four days or so.

Happy holidays and all that jazz!

Sunday, December 24, 2006

Traffic accidents and real economic activity

Health Economics has published a paper by Antonio García-ferrer, Aránzazu De Juan, and Pilar Poncela titled, "The relationship between road traffic accidents and real economic activity in Spain: Common cycles and health issues." The authors say that this study has implications for health policy.

This paper analyses the aggregate relationships between traffic accidents and real economic activity in Spain during the last 30 years. Our general approach is based on two basic assumptions: (1) the number of accidents depends on the use of cars and other exogenous variables, and (2) the level of economic activity affects variation in the stock of cars, as well as degree of utilization. We propose a novel turning point characterization for monthly seasonal data that allows to check whether economic and road accident cycles coincide and, to date the beginning and end of their respective cycles. Empirical results from this section are important in establishing posterior causal models and whether or not economic activity and road accidents have a common component in the long run and a varying lead-lag relationship, depending on the cycles. These models will be the basis to check when Spain will achieve the European Union figures in terms of the fatalities/accidents ratio under different scenarios. Empirical results as well as historical experiences from other European countries proved that reducing fatalities is not only a question of diminishing accidents rates.