State of the Rose: Wildrose vs libertarians redux

A lot happened in Alberta politics during 2011 and had I not been in China for most of the year I would have felt compelled to comment on several occasions. To start by picking just one incident, I'll take note of former federal Libertarian Party leader Dennis Young's disqualification as a Wildrose candidate.

When Daveberta blogged about this on October 19 I could only shake my head. Think of the time and grief you could have saved yourself, Dennis, had you read my blogpost from October 2010 about libertarians' place in the party consequent to the expansion of the caucus in January 2010! At that time I noted that "the fact that Cosh, Johnston, Brock et al have all gone off about this [caucus statement re Ontario prostitution ruling] suggests that these critics are voicing a view that is generally held." Evidently Dennis didn't share this general view or he would have been more circumspect about whether party HQ would support his bid to run in Calgary Hays.

Now it's true that no one in the Wildrose caucus has been as straightforward as US Presidential candidate Rick Santorum (photo at right). In June 2011 Santorum stated that he would "fight very strongly against libertarian influence within the Republican party and the conservative movement." I highly doubt that MLAs Rob Anderson, Heather Forsyth, Paul Hinman, or Wildrose éminence grise Link Byfield would ever say such a thing, not least because of Byfield's view that fiscal and social conservatives need to cooperate in order to win elections. But that doesn't mean that advancing a libertarian agenda within Wildrose wouldn't be a Sisyphean task.

After the 2010 AGM I welcomed Chris Jones' becoming Edmonton director for the party, noting that Chris would be a good advocate for Edmonton on the provincial executive. Apparently, he was too good an advocate for views the party poohbahs aren't inclined to indulge since I've recently learned (not from Chris) that party HQ has stalled on Chris' application to run in Edmonton Millcreek. Evidently headquarters is too busy invoicing the constituency associations for money to be sent to party central. I have to shake my head at the complaint about Chris I heard in 2010 from someone drawing a full time salary from the party that the Edmonton volunteer was too controlling. Who is controlling who here?

Does Wildrose offer the fiscal conservatism libertarians would be interested in? When the party is promising more education spending etc it's doubtful whether the commitment is more than rhetorical. In today's Throne Speech, it seemed that Premier Redford might actually put some effort into honouring her leadership campaign pledge to only route the first $6 billion of natural resource revenue into current spending and have the remainder go into savings. Given that more than $8 billion of non-renewable resource revenue is being spent annually, this leaves a real gap that will have to be closed by either spending cuts or tax increases. Either route is going to be unpopular, and if Redford doesn't try to wriggle out of this one she deserves credit for following through on a deficit fighting promise.

The elephant in the room with regard to spending remains, as I've long argued, the public sector unions. A recent U of Calgary study noted that "since 2000, the province’s public sector wage bill has shot up by 119 percent — almost double the rate of growth in the rest of Canada." Futhermore,

In 2000-01 total provincial revenues were $25.5 billion. In 2010-11 revenues grew to $34.0 billion, an $8.5 billion dollar increase. [meanwhile...] we see an increase in wages of $8.1 billion. In other words, 95 percent of the increase in provincial revenues over the last decade has gone directly into the pockets of public sector employees. The total wage bill rose to nearly 45 percent of total expenditure in 2010 from just over a quarter in 2000.

This is what happens when the public sector unions have the whip hand. I continue to have little faith that the Wildrose party's current leadership has the stomach to take them on. The breaking point for me was when Wildrose Finance critic Rob Anderson claimed that he supported the right to a secret ballot for union certifications despite the fact that at the 2010 AGM, the "caucus" (read Anderson and Forsyth) wanted to delete the party plank calling for a secret ballot. No libertarian should tolerate this interference with the economic freedom of the individual. While Alberta politicians continue to universally avoid any direct criticism of either unions or the salaries and benefits going to front-line public servants, Iowa Governor Scott Walker has put his job on the line with respect to the issue.

the Wikipedia agenda: civil liberties at the expense of the facts

Having returned to North America from several months in China I can only shake my head at the intensity with which the Wikimedia Foundation (WMF) finds an enemy of freedom in... the United States Congress.

The US government has been an enormous friend of Wikimedia Commons. Last year the National Archives and Records Administration contributed over 100,000 historical photographs to the Commons. So why go after a legislative body that has historically passed legislation that has been such a great boon to the public domain?

The short answer is the WMF took its eye off the public domain ball. If the WMF could convince other governments around the world to adopt the US practice of deeming the work of government employees done in the course of their official duties public domain, it would have a huge impact on the amount of free content available on the Internet. For evidence that the WMF is just not interested, look no further than the fact that, instead of setting an example by having the work of WMF staff deemed public domain, it's deemed "all rights reserved".

Over at Wikimedia Commons I've argued on multiple occasions that although the standard uploading tools direct uploaders towards licenses that range from totally free (public domain) to mostly free, the philosophy of the Commons is undermined by evaders who create their own "custom" licenses in order to add additional restrictions or, at a minimum, add language that appears to discourage free re-use. With the WMF itself being one of the offenders here, my arguments have gotten little traction in discussions that are overwhelmingly dominated by content creators who have an incentive to protect author rights at the expense of users.

Is there any chance that the WMF might support a "Keep the Commons Free" effort in the future? At the moment they are not just distracted by their so-called "Keep the Internet Free" campaign but obsessed with it to the point that the rhetorical excess they have engaged in has created a climate of fear and hysteria about supposedly infringed civil liberties.

On January 18, the Commons ran a banner protesting the anti-piracy legislation. Is this going to encourage anyone in Hollywood to ever donate something to the Commons in the future? Wouldn't a boost to the Commons just create a bigger platform for future advertising against the content industry's interests?

Also on January 18, all editors were locked out of editing the English Wikipedia. Well, almost all. WMF staff reserved the right to keep editing, and did, in particular WMF Executive Director Sue Gardner. What did they edit? A page the WMF took exclusive ownership of, with no opportunity for community collaboration in its development, and, more importantly, no presentation of dissenting views. How did they edit? In violation of community developed policies that included:

WP:Identifying_reliable_sources

- claim after claim, such as "as around the world, we're seeing the development of legislation that prioritizes overly-broad copyright enforcement laws, laws promoted by power players, over the preservation of individual civil liberties" is made with out a single footnote in the whole screed

WP:Wikipedia is not a soapbox or means of promotion
WP:Wikipedia is not here to tell the world about your noble cause

WP:Wikipedia is not a newspaper

- In the policy it says "Wikipedia should not offer first-hand news reports on breaking stories." Sue Gardner took it upon herself to advise her captive readers that "As of [update time here] PT, January 18, Google [News] has more than 4,600 articles about the blackout. Here are a few: ...."

WP:Wikipedia is not censored

- I couldn't help but notice the outrage some commentators on other websites directed at those who suggested ways of getting around the WMF-enforced January 18 censorship. No irony here if one is able to fully appreciate the "we had to destroy the village in order to save it" mentality, I suppose.

WP:Do not disrupt Wikipedia to illustrate a point

Wikipedia:Neutral point of view

- "NPOV is a fundamental principle of Wikipedia and of other Wikimedia projects. This policy is non-negotiable and all editors and articles must follow it," says the policy. We now know that there's an exception for "Wikimedia projects" that politick for "individual civil liberties" and editors with Wikimedia Foundation logins (which are only granted by the WMF). On the blackout page that the WMF monopolized Sue Gardner directed traffic towards the website of the civil liberties advocacy group the Electronic Frontier Foundation (EFF). Who sits on the WMF's Advisory Board? A former founder and chair of the EFF. Former WMF general counsel Mike Godwin used to be an EFF lawyer.

WP:Polling is not a substitute for discussion

- We're told that "Wikipedians have chosen to black out..." On what basis? A poll, and a poll of a small fraction of Wikipedians. The WMF tells us that "We are doing this for you" but "you", the non-Wikipedian reader, was never asked what you wanted. According to policy, "Elections and votes are only endorsed for things that take place outside Wikipedia proper" yet this "thing" most decidedly occurred ON Wikipedia. The WMF initiated a raw vote (in contrast with the more sophisticated preference rank sorting that personnel elections use) where ultimately the votes of apparent single purpose accounts counted for the same as that of veteran editors. When some editors attempted to steer the proceedings into more of a discussion, a WMF staffer shoved these efforts off into the obscurity of the poll's "Talk" page. That this Talk page was not considered relevant to the "community decision" as far as the WMF was concerned was further evidenced by the fact that the WMF blocked it on January 18 but did not block the poll page.

If Wikipedians have "chosen to black out" a global service and go to war with "Big media" it may be said Americans chose to invade Iraq in 2003. An ABC News/Washington Post poll taken shortly after the beginning of the Iraq war showed 62% support, higher support than for the global blackout of English Wikipedia (which was actually in the minority primarily because so many called for a US-only blackout). The fact of the matter is that the invasion of Iraq was not the culmination of a bottom-up grassroots movement. Likewise, the Wikipedia blackout was the brainchild of Jimmy Wales and the WMF. The editing community went along with it, in large part because they placed their trust in what they were being told.

The truth about SOPA/PIPA

What were they being told? That there was an existential threat to Wikipedia. Wikimedia general counsel Geoffrey Brigham did not mislead the Wikipedia community by painting a demonstrably false picture so much as by painting with strokes that went one way when it served the WMF's desire to politically mobilize the community and with strokes that went the other way when it didn't, such the picture that resulted was misleading and incomplete. He (and many other Silicon Valley-based activists) stretched the language of SOPA/PIPA to the breaking point in terms of breadth of interpretation, while simultaneously interpreting the language of the IRS' prohibitions against non-profit lobbying down to its narrowest. Had an advocate of equal standing been invited to present an alternative view to the Wikipedia community, there would, of course, have been far less reason for concern. Readers could have been pointed to Creative America's "Fact vs Fiction" with respect to the some of the provisions, to take but one example, and invited to draw their own conclusions. Instead, we get Brigham issuing a "call to action" that included directing readers to the virulently anti-Republican website Daily Kos (with DKos in turn directing its readers towards Jimmy Wales' poll). Brigham is also directing Foundation funds towards Washington lobbyists who are registered to lobby not only on "Copyright/Patent/Trademark" which is arguably related to public domain issues (I say arguably because, as I noted at the beginning of this post, there is a lot more that could be done to encourage content owners to voluntarily license their work for re-use as opposed to lobbying for the denial of legal remedies with the result that content owners are forced to allow re-use), but extends to "Civil Rights/Civil Liberties," which has no necessary connection to the definition of the public domain.

Partway throught the blackout Sue Gardner noted on the "Learn More" page (that the blackout page linked to) that the blackout page had received 90 million views and that there were more than a quarter million tweets an hour about #sopa. And just what was being tweeted? "If SOPA passes, there will be no more YouTube, Twitter, Google, Wikipedia, Facebook and many more sites you love to use!" or something similar. What happens when a lie is literally repeated more than a million times? Wikipedia, the information storehouse, played critical enabler to this massive misinformation campaign. According to Gardner, "in its current form, SOPA would require Wikipedia to actively monitor every site we link to, to ensure it doesn't host infringing content." Gardner's claim doesn't rise to the level of hysterical falsehood that the tweets rose to, but it's still highly dubious. If passed, these bills would require the search engines to put in some of the effort that Wikipedia currently puts in into avoiding links to sites dedicated to copyright infringement. Wikipedia is not a search engine and even if it was, the effort that is put in on Wikipedia to help protect copyright is more than enough to preclude Wikipedia ever running afoul of this proposed legislation. The only way Brigham was able to manufacture a threat to Wikipedia was by denying that these efforts exist, claiming that linking to the Pirate Bay is a "totally legitimate link" on Wikipedia.

This is not the case. WP:ELNEVER says that "editors are restricted from linking to the following, without exception: Material that violates the copyrights of others..." adding that "Knowingly directing others to material that violates copyright may be considered contributory copyright infringement.... Linking to a page that illegally distributes someone else's work casts a bad light on Wikipedia and its editors." Wikipedia's external links policy goes on identify "content that is illegal to access in the state of Florida (since Wikipedia's servers are located there)." If your internal constraint is to follow the external constraints imposed by the United States government, by definition the government would not be imposing any incremental coercion. The immediate response to this last point, of course, is that Wikipedians have absolute standards. To this I'd make two observations: 1) This is a moral argument, not a legal one, such that Brigham's legal opinion should be downweighted to that of the rest of us 2) Where were these absolute standards before? "Fair use" images are not hosted on the Commons, but they are on English Wikipedia. Why? Because most non-US jurisdictions are more restrictive about "fair use." Where is the protest to shut down various Wikipedias until foreign governments liberalize fair use? This has a direct and indisputable impact on the content of these non-English Wikipedias, yet they have apparently just passively accepted their legal environments.

The Left Coast Agenda

The obvious explanation for this anomaly is that the WMF has a US-centric view. Jimmy Wales insists that the anti-piracy laws would set a "precedent" for censorship yet the Attorney General can already order U.S. Internet service providers to block access to child pornography. As the Boston Herald notes, "thank goodness, Google and Wikipedia have thus far raised no objection [to that]. This week Jimbo told CNN that "this law... at least the Senate version, would include the creation of a DNS (domain name system) blocking regime that's technically identical to the one that's used by China. " First of all, besides the fact that the House dropped DNS blocking from its bill and the Senate bill will eventually have to be rendered compatible the House's bill, the Senate bill's sponsor indicated prior to Jimbo making his charge that he's prepared to drop it, saying "I regret that law enforcement will not have this remedy available to it..." When somebody is waving the white flag in my view the proper course of action is to hold fire and discuss surrender terms. Secondly, see this editorial from December 29 on the DNS issue, which I need not repeat here. Thirdly, while the rest of Wales' claim here is technically true, it doesn't have what I'd call truth value, truth value being that it would support the point trying to be made if all the facts were out there. I walk on two legs. So do the Chinese! Does anything sinister follow from that? For Wales to have an argument it would have to be the case that DNS blocking is somehow exclusive to authoritarian regimes. In fact, the Netherlands, Austria, Belgium, Denmark, Finland and South Korea all engage in DNS blocking. Where was Jimbo and the rest of the WMF earlier this month when two Dutch ISPs were ordered to block access to the Pirate Bay? Out organizing Dutch Wikipedians in order to protect their right to link? Correct me I'm wrong, but the WMF didn't so much as even put out a token press release. Did you know the dastardly Danes censor or ban over 3,500 sites? I do, but no thanks to any WMF awareness raising effort. Where was the WMF when the Sydney Morning Herald reported in late 2010 that Australia's list of blacklisted sites could increase from 1,370 to around 10,000 sites? Or when the "Australian communications regulator [] issued a stark warning that websites who link out to 'banned' hyperlinks are liable to fines of up to Aus $11,000 a day." Why hasn't the WMF complained about Wikipedia's blacklists in the name of free information, e.g. from a unanimous ArbCom decision dated 20 October 2006: "A website that engages in the practice of publishing private information concerning the identities of Wikipedia participants will be regarded as an attack site whose pages should not be linked to from Wikipedia pages under any circumstances"? Is this not censorship?

Answer: in San Francisco. As the Financial Post has reported, after former CBC documentary producer Sue Gardner became Executive Director of the WMF, Wikimedia moved to the west coast "where it would be in close proximity to the bright minds -- and big wallets -- of Silicon Valley." Today, of course, the WMF is furiously denying that these "big wallets" have anything to do with anything. Today CBS News reported that "behind the protests and public posturing, both Hollywood and Silicon Valley spend generously to lobby causes in Washington. According to the Center for Responsive Politics, the movie, television and music industries spent a combined $91.7 million on lobbying efforts in 2011, compared with the computer and Internet industry's $93 million." One of the Q and As the WMF put up on the "Learn More" page that got millions of views today was "I keep hearing that this is a fight between Hollywood and Silicon Valley. Is that true?" "No," we are told. Don't trust these mainstream media reports. We're Wikipedia and we're on the side of the angels! Never mind that there's no citation for this claim. Trust us! It's the little guy vs the Corporate Agenda; that we happen to be pushing Google's interests is irrelevant, as is the fact Google's founder bankrolls the WMF. What's particularly dodgy about this monied interests line is the fact that it would have cost an enormous amount had this colossal PR exercise been paid for by anti-SOPA advocates at market rates. That market value was created by the cumulative, collective effort of an enormous number of editors over several years, a small fraction of whom then decided to follow the WMF and take Wikipedia away from editors like me to use as they saw fit.

The Financial Post story goes on to note that "to many outsiders" Gardner's mixing of fundraising efforts with selected editors and writers of Wikipedia could create dubious optics with regard to how independent Wikipedia's content is. Not a problem, in Gardner's view. Zack Exley, the longtime leftist activist and internet rabble rouser, has the file firmly in his non-partisan hands. Gardner recently cited Exley's activist history as a likely asset in the lead up to today's blackout. For her own part Gardner joined Occupy Wall Street in November and afterwards called on Wikimedia to "copy OWS tactics." In a blogpost she recommended that readers consult Feministing and The Nation, a self-described "flagship of the left."

Given this background, was there any way to stop the WMF initiated propaganda campaign that went down this week? The one opportunity I saw for something of a correction was ensuring some balance in Wikipedia's SOPA and PIPA articles. It was announced on Monday that these would remain unblocked. Concentrating on the PIPA article, I added some of the observations of people who were in a position to have an informed understanding of the bills. I noted that US Chamber of Commerce executive David Hirschmann, who is also President of the Global Intellectual Property Center, said the talk of freedoms and censorship "has nothing to do with the substance of the bills." I added the fact that a 2009 paper by the Information Technology and Innovation Foundation (ITIF) titled "Steal These Policies" formed the basis of the current anti-piracy bills. What I didn't make entirely explicit but independent readers should know is the fact that ITIF is largely funded by Silicon Valley, not Hollywood. I added ITIF fellow Robert Bennett's observation that "[t]he critics either don't understand what the bills do or are misrepresenting what the bills do. There's sort of a hysterical climate of criticism where people are objecting to something the bills don't do and are promoting noble causes like free speech and democracy but there is not much connection between what they are complaining about and what's in the legislation."

There was, of course, still a lot of material from expert sources that were out there that I didn't have time to add before the blackout. For example, Hillel I. Parness, an intellectual property lawyer who also teaches at Columbia's School of Law, looked at SOPA/PIPA back in November and concluded that the US government could not take down a website unless it demonstrated, to a judge, that the intention of the allegedly rogue site was to "willfully" violate one or more specific instances of copyright. Parness has also debunked the notion that the government could "go after YouTube" (even though Google's internal documentation once identified Youtube as "completely sustained by pirated content" and a "rogue enabler of content theft"). On top of this, of course, is the fact that since Parness' review the DNS blocking provisions have become all but defunct.

Parness points out that the legislation proposed here does not break new ground,"Therefore, if there was a risk of abuse, that risk has always been there. And I have confidence in the structure of our court system, that the prosecutors and the courts are held to certain standards that should not allow a statute such as this to be manipulated..."

A question I ask of Wikipedians who want to use Wikipedia for political lobbying is why they have so little confidence in America's prosecutors and judges and so much confidence in the WMF. The WMF's spending has soared since 2007 and less than half of the current spending goes towards the Technology Group. According to Gardner, this blackout "open[s] the door for more advocacy."

If there is to be any pushback against the censorship hysteria that has been manufactured, it would likely come from mainstream media scrutiny, ie some of the same "power players" the WMF denounced today. Why? Because besides the fact the major papers are serious about fact checking, network TV in particular often invites two guests whereby viewers can get both sides of the story.

As one music industry spokesman said, "It’s a dangerous and troubling development when the platforms that serve as gateways to information intentionally skew the facts to incite their users and arm them with misinformation." Just because I entirely agree does not mean I'm in Hollywood's pocket.

UPDATE (January 19):

I asked Sue Gardner, Zack Exley, and Geoff Brigham if they had any corrections to this account. Mr Brigham objected to some quotes, insisting he was "joking." I accordingly removed the quotes as I had not presented them as jokes.

I've asked Mr Brigham if he sees any possibility that the IRS, in reviewing the WMF's tax status, could consider the blackout to be an "in kind" contribution to the anti-SOPA lobby (ie assess the promotion at its fair value in the online advertising market).

Yesterday RIAA CEO Cary Sherman observed that "it's very difficult to counter the misinformation while the disseminators own the platform."

I tried, Mr Sherman. I really did. Even a fat cat executive like you doesn't deserve to be effectively censored. I followed Sue Gardner's editing of the message during the blackout, noting the changes by updating the history page. But I was locked out of editing as was everyone else who wasn't a WMF person.

She owned the platform and I didn't.

UPDATE (January 21):
See Nick Poole's remarks in this comment thread of a Wikipedia blogger.

UPDATE (February 7):
Bill Keller has written one of the most even-handed reviews of this issue that I've seen.

Alberta politics in downward spiral

Although I could continue to blog from China if I bought a monthly subscription to a VPN service, use of Twitter, Blogger, Youtube, Facebook etc is not so essential for me that I can't just wait until I return to Alberta (probably after Christmas) or am visiting somewhere else. Given that I'm in South Korea this particular week, I will seize my chance to note how the Alberta political news that has emerged over the summer has been increasingly depressing.

To begin with the Wildrose, I've noted before that when the party leadership has rolled out what it says is the party platform, it has deviated from both conservative principles and what the party membership has historically supported, an example being the leadership's announcement that provincial achievement tests (PATs), something that the teachers' union has long opposed, should be killed off. As I noted at the time, the move put the party to the left of Red Tory Dave Hancock. As an aside, one has to feel a bit for the current Education Minister, because not only have Hancock's defences of testing now been rendered for naught by Premier-designate Alison Redford's promise to axe the tests (amongst other accommodations of the Alberta Teachers' Association agenda), but he took political fire for deficit easing cuts to his ministry while his new boss Redford scooped the easy political payoff that came with promising to promptly reverse those cuts. When I called attention to the fact that the Wildrose leadership's assertion that the PATs are "outdated" or "inadequate" clearly was not coming from either the grassroots or conservative pundits, I pointed the finger at floor-crossing MLAs Rob Anderson and Heather Forsyth, who showed their hand when they lobbied for union-friendly changes to party policy at the 2010 Wildrose AGM. Given that "caucus" had also elected to attack the party's free speech plank which called for the repeal of Bill 44's section 3 at that time, I am hardly surprised to learn that the recently rolled out party leadership position on human rights essentially caves on this issue as well.

Couple this with reports that party HQ is trying to suck up dollars from the constituency associations to support high spending (and salaries for staff who are hired and fired based on the leader's own counsel as opposed to constituency association recommendations) and I'm also not surprised to learn that several of the most gung-ho party organizers in Edmonton that I knew have finally thrown up their hands in frustration this summer.

Wildrose Finance critic Rob Anderson doesn't seem to be willing to go after health spending, education spending, or spending on unionized civil servants at a meaningful level of specificity. Hence Anderson has directed most of his fire at infrastructure spending, which happens to be the one form of government spending that actually creates economic growth. According to StatsCan, "Between 1962 and 2006, roughly one-half of the total growth in multifactor productivity in the private sector was the result of growth in public infrastructure." If this is how it is going to be, I'd sooner support a Liberal like Kevin Taft. Unfortunately, the Alberta Liberals have taken themselves quite completely out of the running as the thinking man's choice given that new Liberal leader Raj Sherman's idea of opposition seems to be leveling implausible allegations of conspiracy and coverup. Meanwhile Liberal MLA Hugh MacDonald, who earlier this year I identified as "easily the most effective MLA on the Heritage Fund committee," has left the party.

As for the governing party, the leadership vote has proven a grave disappointment. Instead of bringing some vitality to the Liberals or the Alberta Party, many people affiliated with the centre-left apparently decided to instead try to advance their agenda within the PC party, thereby making that particular tent even more suffocatingly huge. Former Liberal MLA Maurice Tougas has described the elevation of Alison Redford to the Premier's office as "a potential neutron bomb" that could destroy the Alberta Liberals.

Supposedly Alison Redford has influenced South Africa's legal system via her work with Nelson Mandela as a human rights lawyer. Although South Africa's 1996 constitution is "widely regarded as one of the most progressive in the world," the level of racial hatred and violence in South Africa is disturbingly high, notwithstanding the fact many liberals are relatively unconcerned because, unlike in the apartheid area, the violence has been privatized. While acknowledging that Redford has been generally effective on the crime file as Justice Minister, one of the classical differences between liberals and conservatives is that liberals are considerably more agitated about state coercion than private coercion and Redford's resume gives little confidence that she would be immune to the classic liberal syndrome of overestimating the extent to which government legislation can improve reality on the ground for private citizens. In 1997 Mandela, Redford's supposed mentor, bestowed one of South Africa’s highest honours on no less a humanitarian than Col. Qaddafi, saying “those who feel irritated by our friendship… can go jump in the pool.”

Redford promised that she will "ensure that caucus understands that their role in the future of government decision-making is critical," yet immediately upon becoming premier-designate she waved off any role, even superficial, for the elected opposition by declaring that the Legislature will not sit this autumn.

Most disturbing, however, is how exceedingly facile Redford's policy positions are. Given that any focus group or poll will tell you that health and education, especially health, are the public's top priorities, it is entirely unoriginal for a politician to say that these are her top priorities. Does she at least have some imaginative ideas for new revenue sources? Apparently not, since we're told she's been eyeing the Sustainability Fund to support her spending promises. This in contrast to leadership contender Doug Griffiths, who has took it upon himself to try to actually lead by challenging the public to think about fiscal sustainability challenges and in particular a retooling and modernization of the tax code. We know what Griffiths would have done with the briefing memos that reached his desk; he'd have been open to their arguments and, if convinced, would've tried to build popular support for moving in an unpopular but necessary direction. Yet the imaginative and intellectually curious Griffiths only managed to get first round support in the single digits. Redford is said to be a quick study, but it ultimately doesn't matter how smart a committed populist is since the policies will still be assessed on their popularity, not the strength of their supporting research or sophistication. How is Redford going to pay for her proposed $1500 Family Recreation Tax Credit, which is essentially another spending program despite its "tax credit" name and further narrows the tax base, a trend that is being widely lamented by contemporary tax economists, including those in Canada.

To those who dispute my line of argument here, I would call attention to Redford's lack of significant support from other elected representatives of her party. Representative democracy is marginally more likely to be fiscally disciplined that direct democracy, simply because representatives as a group are responsible for a coherent budget while general referendum voters can consider spending proposals in isolation. The art of serving as an elected representative is to a large degree the art of getting credit for spending and/or tax cuts while avoiding blame for spending cuts and/or tax increases. Pulling this off as a political party requires a disciplined team strategy, lest individual representatives break ranks to demand more spending or more tax cuts from their party while leaving responsibility for funding these demands on the party instead of themselves. It is this idea that left me distinctly unimpressed with the antics of Guy Boutilier, Raj Sherman, and now Alison Redford. As Sherman and Redford became popular with the public, they were in turn unpopular with their long-time party colleagues.

If it weren't for energy royalties that essentially knock 30% off the price of public services, there would be no way that Alberta could afford Premier Alison Redford.

Romney sells out again

I have been in China for a few weeks and expect to be there for a few months yet. I had worked out a tunnel that allowed access to Youtube, Facebook, Twitter, and Blogger but it has since been filled in (this may be an argument for blogging via Wordpress).

I have made a weekend trip to Vladivostok, Russia, however, and will use this opportunity to quickly state that I have lost what enthusiasm I may have had for the candidacy of former Massachusetts governor Mitt Romney for the Republican 2012 nomination.

Apparently Romney has declared without ambiguity that "I support the subsidy of ethanol." Yet another case of a supposedly conservative politician opposed government spending except when they are for it. Now there are a variety of things which rightly call for some government support, but subsidizing the production of something which encourages the conversion of natural wilderness to farmland (not directly in the North America, but indirectly through the global food chain) is not one of them.

MPT gives thumbs up to Garth Turner

As I noted in my last post, Stephen Gordon has got it right on corporate taxation. Unfortunately he has it wrong, however, when he calls for former MP and financial advice blogger Garth Turner to be corrected with "the math."

I won't say that Garth's latest morsel of financial advice is "right" in all its details, never mind that he's right about the "goal of life" (the grand title of Garth's latest post) being related to achieving some level of financial wealth. But I can say that Dr Gordon is the mistaken party when he says that "variances and covariances and CAPM and stuff" will expose the errors of the former Parliamentarian.

In the comments to Gordon's post, Andy Harless takes a stab at "the math" by offering an example of how adding an asset that is less than fully correlated reduces the variance of a portfolio. In the world of "modern portfolio theory" or MPT, variance and risk are one and the same; a dubious assumption in my view but one I'll just run with for the purposes of this post. So far so so good. But then Dr Harless says, "Now free up a and b so that you can use leverage, i.e., take away the constraint that a+b=1." Sorry, but one cannot take away the constraint that the coefficients add up to 1 without taking away the equation. A weighted average means the coefficients must sum to 1 by definition.

When Garth suggests that people who have a $400K portfolio consisting solely of a house take out a home equity line of credit secured against the house for $200K and use the money for investing in a variety of other assets like financial instruments, he is indeed recommending diversification. The former portfolio contained a sole asset, the house (we'll call this asset X), and its weight coefficient was 100%, ie a = 1. In the new portfolio, a is still 1 ($400K) while the coefficient (say, "b") of the new assets (which we'll call asset Y) is 0.5 ($200K) and the coefficient (say, "c") of the HELOC (asset Z) is -0.5. The coefficient for the loan is negative because one is short the security. Thus a + b + c = 1 + 0.5 - 0.5 = 1.

Since variance is the square of standard deviation ("σ"), the variance of the portfolio is given by

where the CORR functions are the correlations between the subscripted terms (e.g. the first CORR term is the correlation between asset X and asset Y). Now suppose the standard deviation for asset X is 5% and 10% for asset Y, while the expected returns are 4% and 8% respectively. This would mean the house is expected to appreciate at just half the average annual rate of the new assets excluding the loan, but with just half of the volatility as well. Let's also assume the correlation between X and Y is 0.5. The standard deviation of asset Z would be zero if it's deemed a risk-free asset, which is an important concept in MPT. A risk-free asset returns the risk-free rate, which we will assume to be 3% for this example. The loan here may be reasonably defined as risk-free because it is secured by the home: the lender is accordingly guaranteed to be paid. As noted earlier, MPT defines risk as being variance, so the standard deviation of Z is zero.

Plugging these numbers in means the deviation for the new portfolio is 8.66%:

So Stephen Gordon is correct that total risk has been increased. A standard deviation of 8.66% is higher than 5%, which was the house alone. But can it be said conclusively that Garth Turner has "not got it right"? No, because the expected rate of return is also higher, and not just higher, but would be higher after adjusting for the increased risk. MPT uses what's called the Sharpe ratio to measure excess return per unit of risk. It subtracts the risk-free rate from the portfolio's expected return and then divides that by the portfolio's standard deviation. The portfolio's expected return is simply the weighted average of the expected return on its components, ie:

Another way to calculate this would be to take the dollar value of the expected return on the house (4% of $400K or $16K), add the additional $16K one would expect on the $200K investment (that returns 8% per annum), subtract the $6K one would have to pay on the $200K HELOC, and divide the resulting $26K by one's $400K net equity interest in the new portfolio. The Sharpe ratio for the new portfolio is 6.5% - 3% divided by 8.66% or 0.404. For the old portfolio of the house alone the Sharpe ratio was 4% - 3% divided by 5% or 0.2. In sum, while Garth's recommendation does increase risk, it more than compensates in higher expected return.

Now someone may object that the particular numbers I chose produced this result. Before one quibbles too much about that, I could make some observations about some of them such as noting as Garth does that the interest paid on the HELOC is tax deductible because it is considered money borrowed to invest and the investment is not in a tax-shelter. But the full answer is that the proposal is well-founded as a matter of theory and what I've provided is just an example.

MPT is primarily concerned with building mean-variance efficient portfolios. This means finding a portfolio mix on the "efficient frontier." Graphically, the efficient frontier (for a portfolio not including a risk-free asset) can be represented by the left boundary of a hyperbola sometimes called the "Markowitz bullet." One can think of the individual points along the frontier as portfolios of different risky assets in different proportions. The addition of a risk-free asset to the portfolio creates a new efficient frontier called the Capital Asset Line - or Capital Market Line (CML), which is the best possible Capital Asset Line - tangent to the hyperbola at the point where the Sharpe ratio is highest. Shorting the risk-free asset, or using leverage, is represented by the line above this point, which I have indicated in red:

Call the red part of the line the "Garth zone," if you like. All points on the CML have the maximum Sharpe ratio. It shows that just adding cash to a portfolio (represented by the part of the CML that is not red) or deleveraging can improve expected return for a given level of variance just as leverage can.

There are, of course, problems with this model like the fact it assumes that the variance of the assets has a neatly defined probability distribution. But almost all financial models have this problem, which can be loosely described as the "fat tails" problem. Garth Turner is in any case right in a more general sense in my view, since he appreciates the fact that the people who become truly wealthy in their own right through investments almost always use leverage to get there. Garth sums up, "The holy grail isn’t living in a place your friends covet. Then they’re not friends. The object is to posses enough wealth with liquidity to give you options. Freedom, choices." I think this is sound observation; a big house just ties one down, such that what the former Liberal (and former Conservative) politician proposes provides not just diversification benefits but liquidity benefits.

off-balance sheet government

Were the current federal election campaign to come and go without my blogging about it, this blog would surely be given up for dead completely. Hence a few "observations."

My objection to the Harper Conservatives that they aren't really conservative remains, but it is interesting that more of the policy community is cottoning on to how narrow "tax cuts" are actually social programs dressed up at please the smaller government crowd. The centrist Brookings Institute recently hosted a panel discussion on the topic that follows up what Greg Mankiw and other economists having been saying. This afternoon President Obama called for cutting a trillion dollars worth of "tax expenditures", a cut the Republicans will of course describe as a tax hike.

The Tories' March budget continued to fragment the tax code, and the one big dollar proposal the Tories have made to date as a campaign promise, which is to allow more income splitting between couples (after the deficit has been eliminated), continues in that vein.

Income splitting is a broader tax break than most of the other extremely narrowly targeted tax breaks the government has offered, but it is still selective. What matters here is that this revenue loss comes at the opportunity cost of providing tax relief to everyone. What is the economic rationale for not providing relief to individuals as well? What social or equality objective rationale is served by a policy that does nothing for families headed by single mothers? The short answer of course is that it serves a political objective: getting credit for proposing a "tax credit" but then restricting its cost by narrowing its application.

Want to give a handout to an influential interest group but avoid "conservative" ire at your spending? Ask your staff to investigate the nature of that group's tax liability and then structure the handout so as to reduce that liability as opposed to an overt subsidy. Gives the group the same benefit while nominally keeping the "size of government" limited. One can call it moving government off-balance sheet, because although the the size of government is nominally limited, it has still interfered in the allocation of resources across the economy. What does it mean to be an economic "conservative", if not to prefer private markets over central planning?

Aside from this, there's the more obviously non-conservative policies espoused by the Harper regime, like attacking the Liberals for not standing as strongly behind trade barriers (e.g. noting that the “Liberal Party’s platform makes no mention of supply management.”) This is the same supply management, of course, that Harper denounced as "government-sponsored price-fixing cartels" when he was a private citizen instead of a politician.

The Harper government is simply too hostile to complex policy for those who appreciate the need for such complexity for someone like myself to not conclude that working for or supporting them would not be prohibitively frustrating.

In 2008, instead of sending a new Tory backbencher with a legal cloud over his head to Ottawa to represent Edmonton-Sherwood Park, a voter like myself could check off the Liberal candidate and send a PhD in Economics to Ottawa to represent the riding and support a Liberal platform that called for a targeted tax with a sound economic rationale. Although the "Green Shift" was somewhat corrupted as a policy plank, it still aimed to discourage production that created a negative (or possibly negative, which is the minimum that can be said about carbon emissions) externality.

2011 is somewhat different. The Tory attitude in general has hardly changed - consider the statement of Harper's former Chief of Staff that "Politically it helped us tremendously to be attacked by this coalition of university types." But the Conservatives are actually on the right side of the issue with respect to corporate tax cuts, and it appears that this idea was actually allowed to escape from the non-partisan Department of Finance as opposed to being hatched, like most Tory policies, in the brain of a Conservative "strategist"/poller.

I won't repeat all the arguments for a cut in the general corporate rate. Stephen Gordon (photo at right from Laval University), has been making valuable contributions on the Globe and Mail's website that have served as a corrective to some of the claims of labour economists as the topic has developed as a political issue. I say labour economists instead of "progressive" economists because for those who are not on a union payroll, I believe a full analysis would lead them to agree with Laura D'Andrea Tyson, who notes on the NY Times website that "a high corporate tax rate... is also increasingly ineffective as a tool to achieve more progressive outcomes..." Most astute observers understand what the preponderance of evidence and argument supports.

Toronto Star columnist James Travers (photo below) passed away on March 3 and, in keeping with the Star's political lean, was a fierce critic of the Harper regime. Travers nonetheless understood that several "conservative" principles like free trade are well justified. Travers' February 8 column neatly summed the politics of the corporate tax cut issue:

Caught on the slippery slope of a popular proposition, Harper and Finance Minister Jim Flaherty are appealing to voter’s cerebral side. Aided and abetted by conservative economists, they’re constructing the analytical case that corporate tax cuts will pay dividends in jobs as well as productivity and won’t cost the federal treasury the $6 billion annually that critics claim.

...

Watching Conservatives slip and slide trying to push a policy rock uphill is a delicious treat for political rivals, deputy ministers and egghead academics.
For five years now they have been struggling against the ruling party’s populist gravity. ...

In my view, Michael Ignatieff's run to the left wasn't just bad policy but bad politics. Jack Layton is not about to be snookered at his own game of appealing to the anti-"corporate agenda" crowd. The Tories created all sorts of space for an opposition campaign that indicated that it would stay the course economically (or got even more aggressive on deficit reduction) but attacked the government for its contempt for Parliament and its contempt for "university types" in general, which manifests itself in things like manipulating the census, something that disturbed many swing voters. Instead the Liberals have tried to appeal to NDP voters, which is only going to be as effective as Jack Layton allows it to be. Judging from last night's TV debates, I don't think Layton lost any people to Ignatieff, meaning Ignatieff will likely end up ruing the decision to focus on the Liberal/NDP swing vote instead of the Liberal/Conservative swing vote.

leave it to de Bever?

I'm back in Alberta for the next month and should have some blogging opportunities that I haven't had since leaving at Christmas. It has been a month since the Alberta budget was announced and at the time the Wildrose Alliance proposed "saving" $2.41 billion by cutting capital spending in the current year. A point in need of emphasis is that this "spending" is not, in fact, spending in the economic sense because although it would reduce the bleeding down of a line item on the asset side of the balance sheet, the money is going back into another line item on the same (asset) side. The REAL issue is the conversion of investment into consumption, not the conversion of investment into other forms of investment. On that front, Wildrose has had little to say, leaving it to others to take the government to task with regards to REAL spending. On March 19 the Calgary Sun published an op-ed by Marcel Latouche, head of the Institute for Public Sector Accountability, where Latouche observed that "close to 60% of some governments’ operating costs are made up of wages and benefits" and that "the taxpayer can no longer suffer the burden of increasing labour costs while financing the huge pensions required in the coming years as a large number of baby boomer civil servants retire." The Alberta Federation of Labour discovered a provincial politician associated with IPSA, and he wasn't Wildrose but Progressive Conservative. Indeed, the AFL wrote to the premier demanding that PC MLA (and Housing and Urban Affairs Minister) Jonathan Denis "publicly disassociate himself from the IPSA."

But maybe Wildrose still has a point, namely that it is better that public money remain in the form of a financial asset (i.e. a fund managed by Alberta Investment Management) than a physical asset? Perhaps, if Wildrose actually advanced that thesis with some supporting argument. In fact, there is ongoing concern that AIMCo has interpreted its hard won mandate to operate at arm's length from the client (government) to mean its transparency obligations to the client are limited. With respect to due diligence, the record is less than perfect, an example being AIMCo failing to discover until too late the ownership interest that a party to a Mississauga property transaction had despite the fact that the person's sharing of a last name with Mississauga's mayor, who was also pushing the deal, should have raised suspicions that the person was not a "simple real estate agent" but the mayor's son with a conflict of interest.

AIMCo CEO Leo de Bever came to Edmonton in 2008 after two years as Chief Investment Officer for AIMCo's equivalent in Victoria territory, Australia: the Victorian Funds Management Corporation. De Bever was halfway through his contract at the time he left for Alberta. In 2007, VFMC put a billion Australian dollars into a fund that, under a previous name, had been sanctioned by Australian securities regulators in 2002 and 2003 and moreover had several shady directors. A PwC valuation later concluded that the investment had lost more than 40% of its value, and a law firm's review of VFMC's due diligence claimed that "Investigations lacked rigour and consideration of key matters seemed to be superficial or non-existent." Yet an Australian newspaper observed this month that VFMC "made headlines in 2008 when some of the biggest ever public sector bonuses were paid to executives who presided over the losses."

Now in the interests of full disclosure, I've repeatedly applied for positions within AIMCo (not least because they are the dominant employer of financial analysts in Edmonton) and their apparent unwillingness to hire me may lead some to conclude I'm just jealous of those whom AIMCo has hired for big bucks. But given that an opposition member in the Victoria assembly (who is now Treasurer for the territory) once said "we have grave concerns about the way the VFMC is being managed", one has to wonder how an Alberta opposition party can be so unconcerned with the way AIMCo is being managed that it recommends money remain under its managment over being converted into a physical asset and then markets the recommendation as deficit reduction. Is a new bridge certain to still be there for the Alberta's next generation whereas a financial asset would not be? Not necessarily. The point is rather that it this is a question worth considering.

Image credit: Ron Tandberg

UPDATE:

Liberal MLA Hugh MacDonald, who has easily been the most effective MLA on the Heritage Fund committee, questioned the government about the size of bonuses and costs ultimately paid by the taxpayer last December and again this month,