Why are things so much cheaper in the United States?

Here is a view from an Austrian economist on the perplexing question of why prices on many items are some much higher in Canada, than the US even with the currencies at par value. This post first appeared here.

In 2011, Federal Finance Minister Jim Flaherty asked a committee to look into why Canadians are paying more than Americans for the same goods. Last week, the committee’s report came out, urging the federal government to close the price gap by lowering tariffs among other recommendations.
On the heels of a senate committee report on Canada-USA price gaps, Senator Joseph Day, chairman of the committee, acknowledged at a press conference there’s only so much government can do to address price discrepancies: “The government doesn’t determine prices. The marketplace determines prices,” says Senator Day.

To which Acting Vice-Provost and Program Head of Business at the University of Guelph-Humber, Dr. George Bragues, shakes his head.

“He’s being somewhat disingenuous,” says Dr. Bragues. He says that Senator Day is not realizing the full government role by neglecting the fact that while prices are mostly set by the market, the government influences the room in which the market has to operate.

“Sure, the market sets prices, but they do so within the confines set by public policy. And currently, public policy permits retailers to charge higher prices because they don’t have to worry about competition from the United States.”

“Canadians aren’t allowed to freely travel across the border and bring back whatever they want – without having to lie to a customs officer,” he adds.

The Chairman’s response to the problem of price discrepancies was to urge Canadians to bargain more aggressively with retailers for a better price.

Dr. Bragues: “The fundamental fact is, you really can’t be expected to bargain more aggressively for a pair of pants, or for a carton of milk at the store. Prices are set – and that’s just the way we do business in our society.”

Dr. Bragues explains that the leverage that a person has comes from the fact that there exists competitors that they can go to, who will offer lower prices. “That’s the bargaining advantage. And the government can provide that advantage with one simple solution.”

This brings Dr. Bragues to point out what he sees as the missing recommendation in the senate committee’s report.

“[The committee’s] recommendations focused on tariffs. But the key tariff is border crossing. Allow people to go to the United States – and as soon as they cross the border, allow them to bring back, say, $500 worth of goods without duty.”

“I guarantee that would jolt prices down. We would see a very different retail environment.”

Listen to Dr. Bragues’ interview on the same subject on Saskatoon’s CKOM NewsTalk 650

Business Program

Your money: The untold story

I've said many times I am not an economist, but I am interested in economics, as we all should be. 

My daughter posted an interview with a legitimate economist regarding the demise of the penny. Very briefly here is what the main stream media are missing from this story.

Withdrawn from circulation this week, the penny is suffering a battering of name-calling. An annoyance, a pest, a nuisance – a budget document on the penny’s elimination reads “Some Canadians consider the penny more of a nuisance than a useful coin. We often store them in jars, throw them away in water fountains or refuse them as change.”

But according to Dr. George Bragues, Acting Vice-Provost and Program Head of Business at the University of Guelph-Humber, the real story behind the end of the penny is one that has yet to be told.

Throughout mainstream media, the elimination of the penny is being touted as something we’re all happy to see disappear. But what’s the real story here?

The story that many seem to be missing is, Why has the government been compelled to give up the money in the first place? Why has the value of the penny become so minimal? And that story has to do with how the government has managed money.

How so?

The real story is that over the last couple of generations, we have seen inflation increase on average 2-3% per year. Seems minimal - but over time, that adds up.

We know that it now costs 1.6 Canadian cents to produce each one cent coin. To this end, Finance Minister Jim Flaherty declared the penny as “a currency without any currency in Canada.”

Again, this should raise the question – what has happened here? That the price of the copper that goes into the penny is now worth more than the penny itself is an indication of the government’s inflation of the money supply.

So the fact that we’re giving up the penny should be alerting us as to how the government has been systematically cheapening our currency. That tells me that the government has not managed its money as well as it should have.

Obviously not the message the government would want to send out.

Of course, the government has no interest in declaring that. They can’t say, We’ve inflated the currency for the last 50-60 years, so we’re now going to have to go to nickels as the smallest unit of account.

Also, the economic establishment tends to be in favour of the monetary policy we’ve had in the post WWII era – which has essentially been an inflationist policy, where we tolerate 2-3% inflation per year. Prior to WWII, and certainly prior to WWI, that was not the norm. Throughout the 19th century, prices were either stable or declining. But with the Great Depression – the most seminal event of modern economic history – came an interpretation of that event that has shaped our current policy.

The predominant interpretation of that event – what went wrong, where policy makers failed – has led to a phobia of declining prices, or in other words, deflation. This became viewed as economically destabilizing. And now because of this horror, we’ve since gone with this inflationist policy, which basically says we should do everything in our power to keep prices from coming down, which includes increasing the money supply.

Where do you see this headed?

There is the slippery slope argument – that this will inevitably lead to a recession or even a depression and the next thing you know you’re the new Zimbabwe.

I share the view that at certain times, like now, increasing the money supply out of fear of deflation leads to bad policy. I would argue that this fear of deflation led to the financial crisis of 2008 – and has since led to an excessively easy monetary policy that has put too many people into debt, particularly in the United States and around the world. I fear that the policy now, where we’re pumping up the money supply while having 0% interest rates, is going to create the same sort of distortion – perhaps not in the real estate market, but may appear elsewhere.

Originally posted here.

Rounding OUT the penny

Beginning this week Canadian currency will be penniless, or should I say, 'less the penny.' That's right the penny is passé, about to be rounded out of existence.

For many Canadians, the penny has so little value it's looked upon as an annoyance, an unnecessary weight, for me, a strange way to view money. For the Canadian Mint, the penny is worth less than it costs to make (currently 1.6 cents).

The beginning of the end of the penny is Monday, February 4th, though we have known about it for some time now.  On Monday the mint stops distribution and businesses are encouraged to round all cash transactions up or down to the nearest nickel. As a result the Canadian government will save about 0.004% of its total budgetary expenses by not producing pennies. Apparently they believe 'every penny counts,' a phrase also destined for extinction.

The rounding of cash transactions will likely end up costing everyone just a bit more. Think of how many prices currently end in the number NINE. Lots, it's a gimmick to get customers, so, no more 99 cent sales for CASH transactions. Will 99 cent sales be kept for non-cash transactions? Will that discourage cash transactions in favour of debit or credit? Or will businesses start pricing things that end with '2 cents' -  which will be rounded down to encourage cash transactions, to make people think they are getting a deal? Who knows?

Either way, this is inflationary, and of course it is inflation, the debasement of currency, that caused the disappearance of the penny.

Is this just a Canadian problem? No. The Americans are in the same boat, and according to some sources both the US penny and nickel are in jeopardy. Am I getting carried away when I worry about the revaluation of our money? Well, maybe not in the near future. The Canadian dollar has actually appreciated considerably in recent years compared to its American counterpart. But many think that the US dollar and Euro are doomed. We trade with them, how can we not be affected?

The lesson of history is that the fall of nations is presaged by the collapse of their currencies. It's happened over and over, no fiat currency has survived the foibles of corrupt government practices. This time it's our turn.        

Climate (or is it weather) Consensus

Years ago, whenever Groundhog Day rolled around, the official word for predicting the arrival of spring came from Pennsylvania, the town of Punxsutawney. That was the place made famous in the 1993 classic movie starring Bill Murray.

First of all, its difficult to believe that it (the movie) was 20 years ago, and second, (if I'm not mistaken, and I could be) it was shortly after that movie that prognosticating groundhogs started popping up all over the place like, well, groundhogs.

Wikipedia has a list of some 15 big rodent celebrations, including the largest and original one from Punxsutawney, and many much smaller ones. I guess people saw it as a way to cash in on once-a-year notoriety, and bring in tourists during the dead of winter.

So, I was amused today when my local all-news-radio station announced that a "consensus of groundhogs" agreed on a prediction, 2-to-1 in favour. I'm not certain if it was to be an early spring or six more weeks of winter, but to me that is six-of-one or half-a-dozen of the other, no difference.

Groundhog Day defenders claim that the furry creatures have uncanny accuracy, 75% accurate 90% of the time, which I think means being right about two-thirds of the time, not bad. However a Canadian study (who would pay for that?) claims only 37% accuracy in about 40 cities.

When I heard the news report of a consensus of groundhogs, I thought immediately about the UN and IPCC claims of catastrophic global warming (a measure of my deep respect for this claim). Now, I'm not really equating the IPCC scientists with groundhogs (as much as I'd like to), but their consensus opinion in some ways resembles any consensus opinion, even a groundhog's. 

If the premise on which the opinion is based is faulty, it doesn't really matter how many are in the group that makes up the consensus. They could all be wrong. The problem with catastrophic global warming is, that trying to reverse it by eliminating CO2 as a waste gas, by severely cutting back on fossil fuel use, seriously impacts those of us that live in places that are too cold and or too hot. That includes a lot of people. Then, saying that climate impacts will be felt in 50 years or so, well, that just means I won't see it, and those young enough now to appreciate the dilemma (if there is one) will be seniors by then. 

So, even if we humans are somehow unknowingly tinkering with the climate to some degree, is it worth the pain of slowing the warming? We did not start the warming, the ice age glaciers began melting while our ancestors were using spears to kill mammoths. The warming has continued and is ongoing, and possibly we are hastening the event, but like groundhogs we really don't know whats going on. What I'd like to know is this, do the groundhogs predict weather or climate?