Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Wednesday, July 27, 2005

US-Born Economist, Teaching in Ireland, Takes Krugman to Task about Canada

When I started writing this item, the most frequently e-mailed piece from the NYTimes was Paul Krugman's column about why Toyota chose to locate its newest North American assembly plant in Canada rather than in the U.S. It may still be...

In a recent posting on The Atlantic Blog, Bill Sjostrom dissects Krugman's column very effectively.
He tries two lines of attack. One is to claim that American workers have lower productivity because of low government expenditure on schooling.

... Krugman's implicit claim is that more government spending improves schools. The difficulty here is that the evidence for this assertion is at best spotty, and there is a good deal of evidence that spending more makes little if any difference (see, for example, the work of Eric Hanushek of Stanford and Jeff Grogger of Chicago).
So why are Canadians/Ontarians reportedly more productive than, say, Alabamans or Texans? Is it our puritan work ethic? I honestly don't know, and I'm not convinced that it is due to our already-established manufacturing base because if it were, other places in the U.S. might be just as productive. Perhaps this is an instance in which a company's public statements should not be taken at face value but should be interpreted instead as a statement by Toyota to prospective employees: We expect you to work hard and produce a lot because you will be fired if you don't.
His other line of attack is to assert that Canada's national health insurance system gives Canada an advantage.

When Toyota sets up in Canada, it has to attract employees, either from other employers or by getting them into the labor market. Since everyone gets the health care the government provides, it follows that Toyota will still have to pay Canadian market wages. From the point of view of health care, the only advantage to moving to Canada is if the Canadian system can supply health care at a more advantageous combination of cost and quality, a doubtful proposition.

But Krugman is not trying to praise Canada, he is trying to get Americans to sign up for Canadian style national health care. Suppose the US created a Canadian style system. Then everyone would get the government health package regardless of whether they were working. To get employees to work for Toyota (and any other employer), the employers would have to compensate them for the wages lost to the extra taxes.
In other words, Krugman has raised the same issue that has been raised in the softwood lumber wars and has committed same error (or falsification, depending on your perception of the biases involved). It is inappropriate to talk about Canada's alleged subsidy to employers via gubmnt-funded health care without talking about tax levels and the costs from health care waiting times at the same time.

Let's also not ignore the massive subsidies offered to Toyota by every level of gubmnt. Maybe Texans and Alabamans are just smarter than Ontarians in their decisions not to subsidize major companies.
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