Friday, June 24, 2011

Halifax Mayor Event a Black Swan continued...

Investopedia explains Black Swan - Black swan events are typically random and unexpected. For example, the previously successful hedge fund Long Term Capital Management (LTCM) was driven into the ground as a result of the ripple effect caused by the Russian government's debt default. The Russian government's default represents a black swan event because none of LTCM's computer models could have predicted this event and its subsequent effects.

Halifax metro Mayor Peter Kelly is an elected official who is answerable not to his Council or to detractors who seek his removal based on a preliminary audit report, but to the voters who elected him, expecting him to lead the region and drive needed change to keep the city’s community development alive and vibrant. As such, I suggest the good people of Halifax think long and hard before being stampeded down a wrong path. I’d like to shed a little different light on the Mayor Kelly story. (...Continued)

Let’s review a bit of relevant Keynesian economics.

John Maynard Keynes (1883-1946) was without question the most influential economist of the last century and probably of all time. Some truths he and his followers demonstrated were actually astounding.

The state of belief
Firstly for instance, speaking about the influence of the state of belief, Keynes said, (and I paraphrase) “If business men believe that the return of swallows in the spring will be good for business, then the return of swallows in the spring will be good for business.”

Now to most people, such a statement sounds so silly and unconnected as to be illogical. Yet, its truth we see daily in the crazy ups and downs of the stock markets, wildly responding to the state of belief inspired by every new economic rumour or pronouncement.

Thus investment advisors recommend high quality interest bearing bonds (which are not susceptible to such fluctuations) to seniors, the faint of heart and others who can not afford to take short term losses or “weather the storm” of economic downturn. However, history shows that those who can risk short term losses and wait out downturns always do much better by investing carefully in the more volatile equity stock market. Good, well run business, in the long run will do better than those which are not and you will reap the rewards.

The spending multiplier
Secondly, the contribution of Keynesian Economics also included the spending multiplier. To get a basic or simple understanding of that, think of a dollar you spend in the local corner store. (Now I don’t really know much you can buy there for a dollar anymore but let us pretend you buy four pencila on special at the dollar store.) Part of the money you spend goes to cover the cost of producing the pencils but other parts contribute to its transportation to the store, middlemen charges, the store’s electric and water bills, salaries, and store profit. Those receiving a portion of your dollar in turn go out and spend some of it on their own consumption thus contributing to the economy. And the process continues. Your original dollar is thus split into many parts and is re-spent by others into smaller and smaller portions. Modeled in the economics lab, it can be shown that your original dollar, by the time it works its way through the economy, has had a five dollar effect. The spending multiplier then is 5.

Warning – it’s not really that simple. In the instant case, the Black Eyed Peas likely spent their fees back home contributing to their own economy. That portion would have been lost to Halifax. However, such concerts do require and inspire a lot of related spending in the Metro economy - all the spending on building and tearing down the equipment, the rental of hotel room, spending on parking, gasoline, in local stores and clubs, etc. The spending multiplier works on all these too so it is unlikely that the city’s economy could truly lose in the long run in supporting this type of business venture if it is well run. The economy might lose on a concert that is cancelled or fails to attract a crowd but in the long run, if the promoters and organizers are doing their jobs well, your economy will benefit greatly from the spinoffs.

Now to Mayor Kelly and the questions, “What is the Mayor’s job really?” “Does anyone really know?” On ATV last night someone said, “The Mayor is the face of the city. He opens buildings, cuts ribbons and chairs council meetings” as if that were all there was to the job. And a Halifax blogger paraphrasing words from the Halifax Charter or the audit report described it as, “(a) monitor the administration and government of the Municipality; and (b) communicate such information and recommend such measures to the Council as will improve the finances, administration and government of the Municipality.”

Yes, all part of the mayor's duties, but I’ve discovered that its even bigger.

In reality, modern cities and towns are governed by an elected executive called the mayor, an elected legislative body called the council and by other officers and employees as are provided for by statute or town/city bylaws. The mayor’s job has a unique history. Like medical doctors whose position evolved from barbers, the job of mayor position grew from the Lord’s reeve or tax collector of feudal times.

I’ve never been able to locate a good statement of duties for a mayor. It’s one of those jobs that can not really be defined and written down. There are times in the life of a community when immediate decision or leadership action is required and no one has the assigned responsibility to take it. It is the incumbent Mayor’s duty to rise to the occasion whether that means cutting a ribbon or leading the population through disasters and other unchartered waters. The mayor must also look after the black swans.

You must accept that as part of his duties if you want a major league mayor running your city. My questions now would be to the HRM Auditor. How many times has Kelly participated or somehow been involved in business deals to promote the city’s economic or other development? How many of these ventures succeeded? How many failed and lost taxpayer money? What is his complete track record? We shouldn’t judge him on a single failure.

Here are words from a recent passage written by Richard PĂ©rez-Feria a New Yorker who hated Mayor Giuliani. (
Mayor Giuliani was Johnny-on-the-spot that day. Everywhere the cameras went, he seemed to be there, showing his constituents that he was obtaining the answers we so desperately required. I hated to admit it, but the mayor helped me that day. The man I wanted out of workplace for his cavalier attitude and my-way-or-the-highway mentality was now expertly reassuring this cynical New Yorker with his cavalier attitude and not-on-my-watch swagger. Boy, did I feel like a hypocrite.

As the 10th anniversary of September 11 draws near, I know I’ll relive that terrible day over and over in my head. How could I not? And embedded in those memories was my realization that I genuinely needed Mayor Giuliani that day to tell me—to promise me—that everything was going to be OK. And he did. Damn it, he really did. And that’s what a major league mayor does.

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