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Today's robust reading on Canada's economy boosts expectations of more rate hikes to come this year

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Canada’s economy is proving increasingly robust in the second quarter, with inflation and retail sales coming in ahead of economists’ expectations.

The consumer price index recorded an annual pace of 2.5 per cent in June, the fastest year-over-year acceleration since 2012, Statistics Canada said Friday from Ottawa. Economists in a Bloomberg survey anticipated a 2.3 per cent increase. In a separate report, the agency said the nation’s retailers recorded a 2 per cent increase in sales in May, double the median forecast from economists.

The reports, a reverse of last month’s disappointing sales and inflation data, will bolster expectations for continued interest rate increases this year from the Bank of Canada. The retail sales report in particular, which indicates consumer spending is ticking along, will be taken as a positive signal for the underlying strength of the country’s economy.

Earlier Friday, investors had been pricing in about a 50 per cent chance of a quarter-point rate increase at the central bank’s October meeting.

The inflation numbers will be less of a surprise, given the Bank of Canada had indicated it expects CPI to spike before falling back later this year. The annual increase reflects higher gasoline prices and food purchased from restaurants, the agency said. On the month, consumer prices rose 0.1 per cent in June, versus an expectation for a flat reading.

Core measures of inflation — seen by officials as a better gauge of underlying inflation trends — ticked up slightly to an average of 1.97 per cent, from 1.93 per cent in May.

The retail sales numbers largely reflected an increase in receipts at vehicle dealerships and gas stations, but even excluding autos, the numbers came in well ahead of what economists were expecting. Sales excluding car dealers were up 1.4 per cent, versus economist expectations for a 0.5 per cent gain.

The strength was volume related, with sales up 2 per cent once price changes were factored out.

Other CPI Highlights

The average of the Bank of Canada’s three key core inflation measures rose to 1.97 per cent in June from 1.93 per cent in May.
The “common” and “median” core rates were unchanged at 1.9 per cent and 2 per cent, while the “trim” rate rose to 2 per cent from 1.9 per cent
Inflation for services in June was 2.2 per cent. Goods inflation was 2.7 per cent
Energy prices climbed 12.4 per cent in June, and gasoline, 25 per cent higher, was the biggest upward contributor during the month

Other Retail Highlights

Sales climbed in 8 of 11 subsectors tracked by Statistics Canada Ontario (up 2.6 per cent) and Quebec (up 3 per cent) saw the biggest gains in retail sales in May

With assistance from Kevin Varley

Bloomberg.com

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The idea that action against climate change will 'destroy the economy' couldn't be more wrong

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Protesters march to urge politicians to act against climate change in Paris on Saturday. (Philippe Wojazer/Reuters) (PHILIPPE WOJAZER/Reuters)
Jared Bernstein, a former chief economist to Vice President Joe Biden, is a senior fellow at the Center on Budget and Policy Priorities and author of ‘The Reconnection Agenda: Reuniting Growth and Prosperity’.

October 15 at 6:00 AM

Sen. Marco Rubio (R-Fla.) admitted Sunday that human activity is leading to increased global temperatures and that steps should be taken to mitigate the impact of climate change. But, when pushed for concrete policies, he argued that he’s “not going to destroy our economy.”

This betrays a consequential misunderstanding of not just how economies work but of what economies are. The idea that economies are somehow inherently unable to repel existential threats belies logic and common sense: There is absolutely nothing in the construct of this creature we call an economy that precludes mechanisms to fight global warming. To the contrary, such mechanisms abound, as I explain below.

Rubio is making two big mistakes here. First, he’s defining “our economy” in a way that has little to do with “us” and a lot to do with pay-to-play politics. Second, he’s claiming there is no trade-off that improves social welfare (not gross domestic product, but people’s broader well-being) while enhancing environmental sustainability.

To the contrary, standard-issue economics is extremely clear about the necessity of policies to offset pollution. In fact, the concept is fundamental to classical economics, which places price signals at its core. If a polluter fails to face the costs of her actions, she will generate “negative externalities” that make others worse off. The classical solution is to “internalize the externality” through policies that shift the cost back onto the person or company causing the degradation.

Two ways of doing so in this context are taxing carbon and regulating production.

Both solutions — which, to repeat, are totally consistent with standard economics — have not only been disallowed by current politics, but, as Rubio’s comment on CNN’s “State of the Union” reveals, also have been prohibited by his perverse definition of “our economy.” In a twist that Orwell would have appreciated, we can’t save our economy because to do so would destroy it.

Status quo supporters arrive at this illogic by conflating human welfare with GDP and then defining anything that might lower GDP as a destroyer. They couldn’t be more wrong.

First, when, for example, we destroy protective wetlands (as in Houston) or degrade clean-water rules, we add to corporate profitability, which raises GDP but reduces society’s welfare relative to a scenario that protects such resources. Worse, when hurricanes destroy property because natural buffers have been destroyed (and warming has intensified the power of storms), any rebuilding adds to GDP. If the folly of such measurement practices with regard to people’s well-being escapes you, just look at any paper on the devastation from Hurricane Michael.

Second, even if we must bow down before GDP growth, there’s no evidence that taxes necessarily lower growth. That’s an outgrowth of the fairy dust known as supply-side, trickle-down economics, in which tax cuts, especially on the rich, boost jobs and growth (and spin off enough revenue to offset their cost). In fact, the U.S. economy has historically grown much faster when taxes were much higher. To be clear, that’s correlation, not causation, but it underscores why you should never accept this “taxes-kill-growth” nonsense.

Third, there is a potential growth dividend to be paid from sustainable investment. While we’re dithering around with tariffs and trade wars, more forward-looking countries (which for now include pretty much all of them) are trying to figure out how they can grab global market share in batteries to store renewable energy. Even a simple regulation like requiring industrial scrubbers in smokestacks leads to more, not less, employment. “Renewable portfolio standards” — state requirements that some percentage of energy consumption comes from renewables by a later date — have been found to generate innovative economic activity to meet the goals.

Finally, when Rubio says “our economy,” he’s not talking about you and me. Paul Krugman put not too fine a point on it, tweeting that “The idea that climate policies would ‘destroy our economy’ is disinformation spread by fossil-fuel interests and right-wingers.” The investigative journalist Jane Mayer has shined bright lights on the dark money the oil-rich Koch brothers have poured into the politics that Rubio’s phrase so perfectly captures.

At this point, someone typically objects that because low-income households spend a larger share of their income on energy, a carbon tax would be unfair to them. But such arguments ignore that these same households also have the least resources to insulate themselves against the consequences of climate change. And here again, economics is well-equipped to deal with this outcome, by crafting policies that rebate a portion of the tax to those hardest hit by it. (Smart carbon taxes change relative prices, not relative incomes; true, they could lower the income of the Kochs, but I’d call that a feature, not a bug.)

Two notable, related things recently occurred in this space: The United Nations’ panel of climate scientists issued a report on the increasing urgency of the problem, and economist William Nordhaus, a longtime advocate of much of the economics discussed above, was awarded a Nobel Prize. You could argue this is some higher power’s synchronous sign that we need to get real about this existential threat, or you could argue that it’s a fortuitous coincidence.

What you cannot argue, no matter how much you’re paid to believe otherwise, is that there is any inherent contradiction between economics, environmental sustainability and not just our well-being, but our very survival.

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Want To Understand Today's Economy? Read These Three Women

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It is often said, with reason, that the world of technology is overwhelmingly dominated by men. Although female figures such as Sheryl Sandberg, Kara Swisher, Jennifer Pahlka and Kim-Mai Cutler are emerging as key Silicon Valley personalities, we’re still a very long way from correcting the gender imbalance in the new digital order. And yet three women, over the course of the past 25 years, have already provided us with key works that make it easier to understand the current Entrepreneurial Age.

Carlota Perez; AnnaLee Saxenian; Mariana MazzucatoS. Robinson; UC Berkeley; Mariana Mazzucato

Carlota Perez, a Venezuelan economist who teaches at several European universities, is the author of Technological Revolutions and Financial Capital. Published in 2002, the book has become a must-read in the venture capital world and should be one in every tech community.

In Perez’s model, every technological revolution since the Industrial Revolution has been divided into two very different phases. The first, called the installation phase, is when entrepreneurs and financiers call the shots as they’re the ones investing in a new technology that has barely emerged and that very few people understand yet. Then comes the deployment phase, in which society as a whole is shaped by the new paradigm. This is when governments, in particular, must take charge and build the institutions that can render the new way of living more sustainable and inclusive.

Apart from the strength of the argument and the breadth of the historical narrative, the fact that Perez’s book was published in 2002 explains a large part of its success. That year, after all, was just 18 months after the bursting of the dotcom bubble. Most people thought that it was all over and that things would settle back to normal. But those who read the book at the time realized that a bubble bursting, in Perez’s breathtaking history of technological revolutions, doesn’t mean that the revolution is over. Instead, the burst always marks the inflection point between installation and deployment.

What Carlota Perez’s work doesn’t explain, however, is why exactly Silicon Valley emerged as the core of the new age of computing and networks and became for today’s economy what Detroit was to the age of the automobile and Pittsburgh was to the age of steel.

The key contribution in that regard is AnnaLee Saxenian’s diptych Regional Advantage and The New Argonauts. The former, published in 1994, discusses what made Silicon Valley so successful as compared with the Route 128 ecosystem in Boston. The latter, published in 2006, details the relationship that was built between Silicon Valley and other regions of the world by way of constant immigration flows.

While Perez provides us with a historical perspective on the rise of computing and networks, Saxenian offers a more qualitative discussion of what exactly makes a region prosper in the new age. According to her, the key to succeeding in the age of computing and networks is to have a dense ecosystem in which the circulation of resources – talent, capital, ideas – between firms is encouraged rather than repressed.

That may sound obvious now, but before Silicon Valley emerged as the core of the new age, most parts of the economy weren’t organized like that at all. The Boston area, as discussed in Regional Advantage, was all about big, vertically-integrated minicomputer companies that had very few interactions with each other. Likewise, Detroit had been dominated by three giant industrial powers—GM, Ford, and Chrysler—that made it impossible, by way of non-compete clauses, for their most talented engineers to hop from one car company to the other.

Nothing of the sort existed in Silicon Valley, where the spirit of the frontier led to people ignoring the status quo, and where the state of California made it illegal to enforce non-compete clauses. Thus talented employees were effectively encouraged to leave their employers and start their own firm—in which their former bosses, rather than suing them in court, would gladly invest as angel investors. And this approach to doing business, history tells us, is what makes an ecosystem thrives in today’s economy.

Mariana Mazzucato, finally, is here to rectify the false impression that we could derive from reading all those extraordinary tales about great entrepreneurs and their financiers.

In her landmark book The Entrepreneurial State (2013), Mazzucato reminds us of that innovation is not just about the private sector developing new technologies and creating vibrant regional ecosystem. Rather it involves the state building up the infrastructures and core technologies that entrepreneurs need to succeed, and then staying involved with its unique capacity to shape markets and impose a direction for innovation. Only the state, because of its size and extraordinary resources, is able to tackle the large-scale missions that are winning a war, developing a lagging economy, and solving wicked problems that cross various fields.  

And so what we need to rediscover, as Mazzucato argues in her latest book The Value of Everything, is the value that the state creates. When the private sector is left alone to explore the frontier, it ends up favoring short-term financial results rather than tackling difficult missions. And when the state goes missing in times of radical change, problems such as unaffordable housing and climate change can become mortal threats for the economy as a whole.

Knowing the history of technology, understanding innovation clusters, and remembering the critical role played by the state: this what we owe to these three great authors and thinkers that every policymaker, as well as every member of the tech community, should be reading with the utmost attention.

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Bridgewater's Prince Says US Economy Could Turn `Mediocre': FT

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[unable to retrieve full-text content]

  1. Bridgewater’s Prince Says US Economy Could Turn `Mediocre’: FT  Bloomberg
  2. Bridgewater warns Fed could turn ‘hot’ economy to ‘mediocre’  Financial Times
  3. World’s largest hedge fund warns US economy faces looming deceleration  Xinhua
  4. Full coverage



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