Ian Welsh

Ordinary people hate other ordinary people who are doing better than them.  The politics of envy isn’t about the rich, whom ordinary people almost never see, but about their neighbours.  And Americans want a mean economy, one where everyone has to suffer like they do.  As long  as the union movement is about a few people keeping higher wages, it will continue to fail.  A union movement which is centered around public service unions cannot stand.

in the beginning of next year.  China is heading for a hard landing, Europe is a basket case and once the election is over no one will be propping up the US economy for a while.

Make as much money as you can now, work as much overtime, unless you’re sure your revenue stream is secure.

It seems a lot of people don’t know what Dutch Disease is.  Here’s the short.

Dutch disease is when you sell a lot of resources and that makes your currency increase in value.  So if you discover a lot of oil, or oil becomes a lot more valuable because of a shortage so that you can produce tons of oil from the tar sands, you can experience Dutch Disease.

The consequence of your currency being worth more is that products you manufacture cost more for anyone outside your country.  So if Americans want to buy Canadian goods, it costs them more when the US and Canadian dollar are trading at about even than when the Canadian dollar cost only 80 cents American.

If something costs more, people will buy less of it, or they will stop buying from you entirely and buy from someone else who is cheaper.

What happened to the Dutch is that their manufacturing sector collapsed.  What NDP leader Thomas Mulcair, in Canada, is saying is that Canada is suffering from Dutch Disease.  That we are losing manufacturing jobs because of the higher dollar caused by all the oil from the oil sands we’re shipping out of the country, which raises the Canadian dollar.

I observed, many years ago, that the Canadian dollar had become a petro-currency.  It is now inarguable.

It is also virtually inarguable that Canada is losing manufacturing jobs due to the higher dollar.  It’s just arithmetic.  Unless you think price has no effect on sales, you can’t argue otherwise without excessive contortions.

Does this mean that Canada is suffering from Dutch Disease?  Depends where you put the margin.  One study, funded by the federal government, found that:

“We show that between 33 and 39 per cent of the manufacturing employment loss that was due to exchange rate developments between 2002 and 2007 is related to the Dutch Disease phenomenon,” says the study.

I am unaware of studies covering the period since then, and I don’t know if the study was correct.  Personally, I suspect it’s higher than that, but I haven’t run the numbers myself and I probably won’t (unless the Feds want to pay for my time.)

But, again, the argument is simple enough.  Unless you don’t believe in higher prices reducing sales, and reduced sales leading to job losses and company closures, you can’t really argue that the oil sands aren’t hurting manufacturing.  It’s just that simple.

The next question is “should we do anything about it?”

Canada has traditionally had what is known as a mixed economy.  When it comes to exports, we have manufacturing and we have the resource sector, of which oil is just one part.  Resources experience boom and bust cycles.  There is always another resource bust around the corner.  Always.  No resource has its prices stay high forever.  When resources are doing well, they support our exports.  When they’re doing badly, manufacturing takes up the slack.

As with any such oscillating economy, what should be done is that when one is booming, it subsidizes the other.  We don’t want manufacturing destroyed during high resource price periods, because there will always be low resource prices in the future.  So we tax the high resource prices and we subsidize manufacturing.  When resource prices collapse, the manufacturing sector subsidizes the resource sector.

If we allow the manufacturing sector to be badly damaged, it cannot easily be rebuilt when resource prices collapse.  Nations built entirely on resources are and will always be subject to economic collaps when the resource price collapses, and, again, it always does, the question is only when.

Mulcair has also talked about value add and that’s worth discussing.  Shipping raw oil, raw logs, unprocessed fish means you get the lowest prices possible and less jobs.  Value add means you refine the oil in Canada and sell it.  You turn the logs into paper or 2x4s in Canada.  You can or smoke the salmon, in Canada.  This provides jobs and the end goods sell for more.  It may be that processing will increase the price slightly compared to processing in the US or China, but that costs less sales than it would for the equivalent manufactured item.

Why?  Because resources are finite.  There is only so much oil in the world at any given price point.  There are only so many salmon, especially wild salmon.  There are only so many trees, especially trees that are good for construction grade timber.  Other countries will generally buy anyway, because there is nowhere else to get the product.  Sales may decline slightly, but profit often increases and so do the number of jobs in Canada.

When there is a bottleneck, as there is in oil production right now, especially, you can say “no, we’re going to process it here.”  If other nations don’t like it, tough.  They aren’t going to stop heating their houses and driving their cars to their suburban homes.  That is not happening.

So if you can extract a bit less oil, make more money overall, and have more jobs, why not do so?  That’s what Mulcair means by “value add”.

Finally, let’s move to cap and trade, which is what Mulcair wants to do with the tar sands.  Cap and Trade means you cap the amount of carbon emissions allowed by oil sands extraction, and you allow people to buy and sell the right to make those emissions.  You also tax those trades and emissions. You then use the money earned to subsidize manufacturing and research and whatever else will be the future of the country when oil prices collapse, which, again, they will, because resource booms always end, it is an existential certainty.

Once upon a time, the Canadian Maritimes were a resource boom area.  They sold fish, but more importantly they sold trees which could be made into masts, an incredibly valuable commodity.  Today, with pardon to my Maritime brethren, the Maritimes are in semi-permanent depression.

This is the future that Alberta faces.  They should want to be taxed, and they should want that money reinvested in other sectors, because those sectors are Alberta’s future long after the oil boom ends.  And the massive environmental destruction is leaving massive costs which will have to be cleaned up for generations to come, long after the boom days are gone.

Canada’s economy has worked, and we have not become Argentina (the country we would have been compared to before WWII) because of our mixed economy.  It is worth protecting, it is necessary to protect, if we want prosperity not now, but 10 years, 20 years or 50 years from now.  If we care about our children, or even ourselves 20 years from now, we must deal with the effects that massive exploitation of the oil sands is having on our economy and our environment.

Dutch disease is just arithmetic.  It is real, and it can devastate the future of a country.  Non-renewable resources are the epitome of found money, and what you do with found money is invest it in something productive, something which will support you once the found money runs out.

This is Canada, and this is our future we’re talking about.  If we actually care about the children we claim to love, we’ll acknowledge the simple arithmetic of what a high dollar does, and we’ll act to mitigate the damage.

(Update: Antonia Zerbisias had an article in February on Dutch Disease studies which is worth reading.)

(This is discarded text from the non-fic book I’m working on, and should be treated as such.  I offer it because I think my regulars might find it interesting.)

When we say humans are weak, what we mean is that they tend to do what they’re told to do, and tend to follow the roles and norms of their society and peer group. We’ll explore this by touching on two famous experiments: the Milgram electroshock experiment and the Stanford prison experiment.

In the Milgram experiment subjects were told to administer painful electrical shocks to another person when that person answered a question wrong. Each time an answer was wrong, the amount of the shock was increased. Sixty-three percent went all the way up to a 450 volt shock, continuing after the person being shocked started screaming, begged them to stop and told them they had a heart condition. With variations, the number who would go all the way could be increased to 91% or go as low as 28%. This result has been replicated time and again since the original experiment in 1963, and has been found to be true in multiple cultures

The sixty-three percent compliance rate was a surprise to psychologists when the result was first published, despite the world having recently seen the Nazi death camps. Perhaps this is because death camp guards were under military discipline and could expect harsh punishment for refusing orders. Or perhaps it is because Americans assumed it was a cultural thing: Germans would do it, Soviets would do it, but Americans wouldn’t.

The students in the Milgram experiment were American and faced no consequences for refusing to shock a screaming man. Most of them shocked the man anyway.

Americans would. People of every culture would.

Milgram’s subjects almost all felt that shocking the subject was wrong. They did it anyway.

Most people will do something they believe is wrong if told to by a figure in authority.

If you read the results of the variations on the Milgram experiment three things stand out. First, that you can get the compliance rate very high, to the point where about nine out of ten people will torture. The second is that no matter what you do, you can’t get everyone to continue shocking victims. The third is that even if you do everything you can to make rebellion more likely, some people will still shock the subject as often as they can.

People will do things they know are wrong if told to do so by an authority figure. After the financial crisis, firms hired hourly wage employees and had them sign documents stating that homeowners were in default of their mortgage, that the bank owned the mortgage, and that the person signing had reviewed the necessary documents to know this well enough to swear to it. The people signing had not reviewed the documents and thus could not swear. They signed anyway, at a rate of about 30 seconds per signature.

As a result, people lost their homes. It was wrong, the people doing it had to know it was wrong. They did it anyway, and for very little money.

Let’s move on to our second experiment. In 1971 Phillip Zimbardo set up a mock prison and divided eighteen college students into nine prisoners and nine guards. The guards had never been prison guards, the prisoners were guilty of nothing.

The experiment was due to run two weeks. It had to be stopped in six days. As Zimbardo himself says, “our guards became sadistic and our prisoners became depressed and showed signs of extreme stress.”

Why, specifically, did it end after 6 days?

First, we had learned through videotapes that the guards were escalating their abuse of prisoners in the middle of the night when they thought no researchers were watching and the experiment was “off.” Their boredom had driven them to ever more pornographic and degrading abuse of the prisoners.

Second, Christina Maslach, a recent Stanford Ph.D. brought in to conduct interviews with the guards and prisoners, strongly objected when she saw our prisoners being marched on a toilet run, bags over their heads, legs chained together, hands on each other’s shoulders. Filled with outrage, she said, “It’s terrible what you are doing to these boys!” Out of 50 or more outsiders who had seen our prison, she was the only one who ever questioned its morality.

Guilty of nothing. Put in solitary confinement, held in prison even when they begged and wept to be let go, made to push ups while someone sat on them, deprived of food, sexually humiliated, a boy sobbing unconrollably while other prisoners chant he is a bad prisoners.

And only one outsider finds anything wrong?

Something else: when the experiment ended most of the guards wished it hadn’t. Zimbardo felt the guards fell into three groups: the ones who seemed to enjoy using their authority, the ones who went by the rules the guards had agreed on, and the guards who tried to treat the prisoners well, especially when other guards weren’t around.

People don’t just do what they’re told to do, they do what they’re expected to do. We all know various roles: we know how to act like a brother, a sister, a student, a teacher, a father, a mother. We know how to act like a prisoner, a prison guard, a husband, a wife. We know how to act while on a plane, while going through pre-flight screening, while being questioned by a cop. We know how to be an employee and we know how to be a boss. We know how to do many of these things even if we’ve never done them before, because we’ve seen other people doing them, or we’ve seen it on TV or read of it or know people who have done it. And if we don’t know, then we follow the cues of the people around us, and we do what we’re told to by those in authority over us.

The findings of social psychology about compliance, rebellion and role-playing take up many books, and those books are worth reading, but let’s go back to our initial comment on human nature, that people are weak.

Weak doesn’t mean bad. If you were to take those same 9 boys who played prison guards in Zimbardo’s prison experiment, and you were to put them down in the middle of a disaster where people needed help and they could choose to help or they could choose to loot, most of them would help. If you were to give them medicine and medical training and put them amongst injured people, they would heal. We know this, too, because studies of great disasters show that people spontaneously come together and help those in trouble (which, as an aside, is why forbidding civilians from helping disaster victims is a bad idea).

Told to be prison guards, they acted like most prison guards and became brutal. Told instead to be a nurse, most would act much more kindly (though a few would abuse the power nurse’s have.)

Some people are bad. Some people are rotten. Some people will do the wrong thing whenever given the least chance. And some people are good. Some people won’t shock another person, no matter who tells them to. Some people will risk their lives to create an underground railroad for slaves or will hide Jews and Gypsies so they can’t be killed by Nazis, even at great risk to themselves. Some people will see boys being treated horribly, and will speak up even though they’re only a recent Ph.D. and the person they’re telling off is a professor.

But both the truly good, who will do the right thing if at all possible and sometimes even if not, and the truly bad, who enjoy hurting other people, are fairly rare. From reading the psychological literature I’d put each group at somewhere between five to fifteen percent of the population.

The rest of the population is weak. They do what they think they’re expected to do. They can be good, and do good, if that’s what is expected, and they can be bad, and do evil, if that’s what is expected of them. If there is a bias, I think it is slightly to the good. Most people think of themselves as good, and would rather do good. But this bias is slight, and people will do the wrong thing if it is encouraged.

And, generally speaking, when it comes to economic activity, we encourage bad behaviour.

This starts with our every-day economic ideology. Economic activity is primarily carried out by two types of organizations: governments and corporations. Our explicit ideology for corporations, which is codified in law, is that a corporations only responsibility is to maximize profit. Greed is good. We could go into a long discussion of the rise of this ideology and talk about Calvinist predestination (if God loves you he’ll make you rich) and misunderstandings of Adam Smith, as if the man who wrote an entire book on morality thought that greed was a good thing except under very limited and accidental circumstances, but the point is, this is our ruling economic ideology in the West: maximize profits.

It isn’t even, any longer, “maximize profits so long as you stay within the law.” The run up to the financial crisis saw widespread fraud, including the use of what were, at the time, called liar loans. After the crisis we saw companies hiring people to sign affidavits which would cause homeowners to lose their homes, and systematically lying on those affidavits (the so-called robosigning scandal.) Companies attested they had properly transfered ownership of mortgages when they hadn’t. Companies sold financial instruments to clients whom they had a fiduciary responsibility to while betting those instruments would fail, and in their private emails called those clients idiots.

The rule today is that you break the law if breaking the law maximizes profits and you won’t go to jail as a result. Fines are considered a cost of doing business, the legality or illegality is irrelevant.

This flows from the very top of our society. It is how our CEOs and executives think, and as our politicans and prosecutors refuse to investigate or charge those who are guilty of widespread fraud, it is clearly how our political and legal class thinks.

Authority, in other words, says that it’s all right to do illegal and immoral things in pursuit of profit.

Well, so long as you’re told to do so by someone important.

Humans are weak. They do what authority figures tell them to do, they do what their peer group values, they do what the incentives reward.