By Goodwin Ginger

The head of the Bank of Canada David Dodge sent our bullshit detector into the red when he uttered this rather unintelligible defense of Income Trusts:

“The work we have done in terms of capital markets, per se, is that probably, on balance, income trusts make capital markets somewhat more complete and somewhat more efficient.”

Hardly convincing. Dodge must have had to dig deep way back to his school boy days at Princeton to come up with this half hearted defense of income trusts. Just re-read that sentence: per se …on balance…somewhat more complete and somewhat more efficient.”

Lets take this from a probabilistic point of view. As completeness is really a property of efficiency we can rewrite the sentence to read: ‘The limited work we have done on capital markets is that probably on a balance (.51) trusts make capital markets somewhat (.50) more complete and therefore somewhat more efficient.’ The probability that Dodge thinks that income trusts make the capital markets more efficient can be calculated by multiplying the values (.51) X (.50) = (.2550). So even if we just disregard the fact that this finding is based on limited research and as such means that the conclusions are not robust (i.e., you cannot generalize from them) there is still only a one and four chance that Dodge believes income trusts will improve the efficiency of capital markets. Not much of a commitment from Dodge.

How the Globe and Mail managed to translate this into the headline “Dodge touts trusts’ benefits: Bank Governor says they make markets more efficient,” we do not know. Maybe they already have trust in trusts as an efficient mechanism for the intergenerational preservation privilege. Not usually a measure of market efficiency but hey if stretched you could fit it in to the definition.

Indeed if the Bank of Canada has been doing any research on how income trusts increase capital market efficiency you could have fooled us. At their website they list all their Working Papers going back to 1996 way before Dodge ever got the top job. There is exactly one paper which deals with income trusts and the question of the efficiency of capital markets is not raised let alone assessed in one of those prevaricating models so beloved by academic economists and so detested by the real world. It gets even worse. In the past 48 issues of the Bank of Canada Review (dating back to 1994) there has been only one article (not issue but article) on capital market efficiency and income trusts do not even make a salutary appearance. So if the Bank of Canada has been doing any research on the implication of income trusts on capital market efficiency it is the best kept secret since the days when they were targeting inflation without telling us what the target was.

How do you know when an orthodox economist is prevaricating? When he or she speaks like a politician. Per se, on balance that is somewhat our position.