Wednesday, December 8, 2010

in the news

It's been a week and a half since my last post here and it is likely that blogging will drop off to once every two or three weeks for the next couple months since I will be on the road again after Christmas. I've been meaning to switch to musings of a more philosophical nature, such as a post on equality as a public policy objective, but a few remarks on recent headlines is much quicker:
  • The Globe and Mail reported that according to a Nik Nanos poll, the federal Tories could potentially get a majority government despite weakness in Quebec. Nanos' belief that the Conservatives have mastered the art of "narrowcast[ing] messages to clusters of ridings on a diversity of issues such as crime, the long-gun registry and social issues" (while having nothing to substantive to say on fiscal matters) reminds me of my last post on "client politics."

  • The New York Times recently published a story that notes that "the finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe." A financier is quoted as saying "[i]t seems to me that crying wolf is probably a good thing to do at this point."
    Today the Wall Street Journal notes that California, which has often served as the poster child for budget dysfunction, is running a $6.1 billion budget gap, which represents 6.6% of its budget. Alberta's $5 billion deficit, in contrast, is more than double this fraction of its budget.

  • Yesterday, Environics revealed a poll that found that support for Alberta's governing party was 34%... for the fourth Environics poll in a roll. The Wildrose Alliance gained, however, with the test sample of 252 Edmonton voters indicating that a full quarter of them would support the upstart party, a stunning 9 point gain over the 16% showing in the spring. Since the PCs held steady, this gain had to come from someone else, and indeed the Alberta Liberals were down 7 points in Edmonton (and Calgary as well). Danielle Smith's party polling ahead of David Swann's in the capital city is certainly remarkable, but of particular interest to me is that just 3% felt that "fiscal/budget issues" represented the most important issue facing the province. Meanwhile 47% said health care was #1. This after a spike in health care spending in the last provincial budget that was well into the double digits in terms of year over year percentage increase. The immediate conclusion is that deficits could be run for many years before concern about them would approach concern about healthcare. One would think that taxes could raised, given that just 1% identified taxes as the most important issue, but one has to wonder about the political feasibility of such a move when even the Liberals are saying that revenue is already sufficient.

Saturday, November 27, 2010

client politics

This weekend Globe and Mail Business columnist Derek DeCloet advised us that "it's not all doom and gloom" with respect to management of the US debt burden.

Looking just at the numbers, I have to agree. The numbers indicate that the federal government probably won't be "hitting the wall" until around 2030, when the older boomers will be in their 80s and even the youngest ones retired. Joshua Rauh's paper on state pension liabilities predicts that the day of reckoning on the state level may occur sooner ("many state systems will run out of money in 10-20 years") but it's true that the United States had the superior system 60 years ago and there hasn't been a revolution that has overturned a system that has stood the test of time.

The challenge for America today is that it the competitiveness that ensured an efficient economic allocation in the past has eroded and this erosion is being exposed by inevitable globalization. While US business culture continues to support innovation and competitiveness, it must work within the context of public policy and the US public sector is in need of significant reform.

A large obstacle to reform is the influence of public sector unions; a writer for the Prospect argues that, in fact, federal workers do not receive too much because the average annual compensation of $120 000 is not the wage number: "It's salary, plus the value of health insurance, plus the value of other benefits like pensions." That's purely a marketing argument, of course, because the liability of the taxpayer doesn't change just because that $120K includes a pension element. At the heart of the public sector problem is the fact that, as a public union boss has admitted, "We have the ability, in a sense, to elect our own boss."

The fundamental obstacle to public policy change is nonetheless public opinion in the USA. A commentator to an Economist story titled "America's Deficit: Confronting the Monster" observed:
It is impossible to make [the public] understand that the optimum amount of tax to raise and the optimum way to raise that amount are separate questions. Hence the politician's adage that "the only good tax is an old tax."

The US tax system is so colossally fragmented, it was possible for the deficit commission co-chairs to cut tax brackets significantly and still generate a trillion dollars in revenue just by eliminating tax expenditures. Tax expenditures, as Greg Mankiw explains in this op-ed, are essentially the same thing as subsidies but can be marketed as tax cuts. It's a handout to a politically powerful interest group. Although Republicans are not shy about supporting direct subsidies when it suits them, they generally prefer that handouts be dressed up as (targeted) tax cuts. However one wants to describe it, the phenomenon that created the mess otherwise known as the US tax code is client politics.

The Conservative Party of Canada has imported several US political ideas into Canada, with a notable recent example being the idea that the national census constitutes a violation of privacy. Although the Republicans made an issue out of this just this summer, the real founder of the idea is Michelle Bachmann (R-Minn.), who went after the US census in the first half of 2009. Glenn Beck was left shaking his head but the Harper government seems to have thought the idea was brilliant. There has, however, been times when the federal Conservatives practiced conviction politics, albeit on very rare occasions. An example would be the taxation of income trusts. The move to tax trusts was accompanied with a move to lower taxes on corporations (hence the revenue neutrality of the decision). The tax cut for corporations, however, was much smaller on a per company basis because corporations constituted a far larger proportion of the economy. The stock market impact in a world of rational actors would have been net unchanged, because listed corporations would have risen as much in aggregate as income trusts fell. But the market is not entirely rational and the average voter even less so. The Tories were reminded of the value of client politics and the wisdom of fragmenting the Canadian income tax code (deductions for bus passes, deductions for fees associated with your kids' sports, etc etc).

One could look at the HST uproar in BC through the lens of client politics in two senses. One is that if BC reversed implementation of the tax, Ottawa would presumably get its $1.6 billion incentive back. Yet how many Canadians outside of BC are at all interested in having that $1.6 billion available for spending in their own jurisdictions? There is no meaningful constituency for reversing targeted spending. The other HST reality is that giving a break to corporations is generally giving a break that, by the sheer scale of the number of parties it benefits, is too shallow a benefit to any one of them in particular for any significant number of beneficiaries to lobby for it. It doesn't ultimately just benefit business, of course, since it is a general benefit for the economy, but that benefit is too diffuse to be politically valuable.

In Alberta, besides some "inflation proofing" now and then there has not been any new additions to the Heritage Fund since 1986. The opposition parties have occasionally called for new additions, by having a proportion of energy revenues directed into the Fund. This is an easy demand, because it doesn't address the trade-off of spending foregone. One would think that the more obvious first step would be to just call for a stop to the raiding of the Heritage Fund, with investment returns being retained in the Fund so it could grow (this year alone Finance Minister Morton plans to move close to a half billion from the Heritage Fund to general revenues). But far from demanding that Heritage Fund returns not continue to be directed into general provincial spending, the Wildrose Alliance, which markets itself as "fiscally conservative," has been missing in action. At the annual public meeting last month, MLA Heather Forsyth, who sits on the Heritage Fund committee, had nothing to say. It was left to Liberal MLA Hugh MacDonald to challenge the government on its unwillingness to save. The previous year, Forsyth didn't even show up. The spending that MLA Rob Anderson has challenged concerns not the province's wage bill but the form of spending that is most analogous to savings, namely, infrastructure investment. And why not; - client politics holds that because infrastructure can generally be used a little bit by everyone, the political lobby in favour of it is too diffused to be anything worth worrying about if it's cut.

To return to the political situation in the US, it's apparent that the country is going to have a very hard time improving the competitiveness of its public policy. Amongst the countries with the most efficient tax systems one finds many of the former Warsaw Pact states. This reflects the fact that overthrowing an old system wholesale allowed for the introduction of a new system based on the latest research.

In a perfectly competitive market, there is no "economic profit," there is only "normal profit," because any economic profits are promptly squeezed by out by competitors who instantly appear. In reality, of course, there is a time delay, and the businesses that are truly successful have as their cornerstone an understanding of the temporary nature of economic profits. There is no more reason why the United States should be the dominant global player in 2050 that it was in 2000 or 1950 anymore than the 30 firms that make up the Dow Jones Industrial Average should be the same as 50 or 100 years ago. While the "line workers" of America, Inc. may be as innovative as ever, its management is increasingly unable to adjust.

Tuesday, November 23, 2010

the business of America is business?

One of the things that struck me about the US deficit reduction plans offered by the co-chairs of the President's National Commission on Fiscal Responsibility, the Domenici-Rivlin Bipartisan Commission, and Jan Schakowsky (a "progressive" Congresswoman) is that all three plans propose taxing capital gains and dividends as ordinary income. Although the Rivlin plan would allow a trifling $1000 capital gains exemption, it not only reverses George W. Bush's tax cut with respect to capital gains (which cut the rate from 20% to 15%), it, along with the other two plans, would increase the tax rate on capital gains to beyond what it was under Clinton by moving it well above 20%. All three plans would also tax dividends as ordinary income. These plans are supposedly from across the spectrum, with Paul Krugman, for example, dismissing the plan proposed by Obama's commission co-chairs, Erskine Bowles and Alan Simpson, as an "unserious" proposal that only the "centre right and the hard right [could] agree on."

That capital income should be targeted in the supposed stronghold of capitalism is both remarkable and it isn't. Having the world's highest tax rates on income from capital is superficially remarkable but further analysis reveals that the US has not been nearly as capital friendly a jurisdiction as popularly imagined for a while now.

In Canada, with the exception of Quebec, eligible dividends are actually taxed at negative rate for incomes below $41 000. In Alberta, even persons making over a million a year have been taxed at less than 15% on eligible dividends (this is increasing to almost 16% for 2010 on incomes over $127 000). One must keep in mind here that dividends are double-taxed, once in the hands of the corporation and then again in the hands of the individual receiving the dividend. But this just makes the difference with the USA more remarkable. The economists in the Finance Department in Ottawa are alive to the fact that corporate taxation is amongst the most economy-unfriendly forms of taxation and that dynamic scoring indicates that cutting the corporate rate is relatively inexpensive. There has been an ongoing effort dating back to when Paul Martin was Finance Minister to cut the corporate rate when possible and effective January 1, 2011 the rate will be 16.5% (with current plans calling for 15% a year later, meaning a combined rate of just 25% in British Columbia). Like most policies that are well founded in terms of evidence, this reduction is consistent with the international trend identified by the OECD. The US corporate tax rate is 35%, for a combined state/federal rate over 39%, the highest rate in the world after (economically stagnant) Japan.

To tax corporate income at this level and then whack it again when dividended out by taxing it as ordinary income under a highly "progressive" income tax regime raises the question, why wouldn't American investors take their money offshore (and themselves along with it) instead. If a company on a listed stock exchange were to announce that it would never pay a dividend, it's intrinsic value would drop to zero overnight: you can't eat a share certificate, and accordingly the only value it has is the present value of its future dividends. Investment decisions around the world utilize a NPV (net present value) analysis; the corporate tax rate reduces the numerator of that analysis, and what's left over is still stuck in the corporate form and not available to investors apart from a dividend.

In response to those doubting my claim that the US income system is highly progressive, note this quote from a paper by the Luxembourg Income Study:
For the 13 countries for which it was possible to calculate income, payroll, and property tax progressivity, the U.S. has the most progressive tax structure; Sweden and Denmark are the most regressive.
Ah, yes, those Scandinavian scoundrels. That best case scenario for Canada that I noted above whereby the corporate tax rate in BC would be 25% in 2012? Denmark is already there, today. And Norway's dividend tax rate is... zero:
dividends from Norwegian companies were in practice tax free on the hands of the shareholder
Meanwhile, Norway has been rated #1 by the United Nations' Human Development Index for years now (remember how the top spot used to be a pride of point for Canada? We're now down to 8th).

I've lived in Scandinavia for more than a year and have noted that while the "welfare state" there remains strong (the tuition for my academic degree there was zero), one does not encounter the anti-corporate hysteria that is so common in North America. When the OECD points out, for example, that
Corporate income taxes appear to have a particularly negative impact on GDP per capita. This is consistent with the previously reviewed evidence and empirical findings that lowering corporate taxes raises TFP (total factor productivity) growth and investment. Reducing the corporate tax rate also appears to be particularly beneficial for TFP growth of the most dynamic and innovative firms.
Scandinavians, and Europeans in general, are prepared to pay attention. In Canada, most people would rather listen to Bill Vander Zalm, and it isn't much different in the States. Consider who has advocated the following:
We must be firmly committed to free trade... opposing all forms of protectionism and removing existing trade protectionist measures... We should substantially reduce trade and investment barriers... and establish an open and free global trading system.
Recognize the words of the leader of "communist" China there? Meanwhile, the "leader of the free world" has assiduously avoided ever calling for free trade. Obama's recent trip to Asia was instead billed as a "jobs mission." Needless to say, the President came back empty-ended from his mission to get something for nothing. At the same time, the war of words between Germany and the US over the US government's spending spree continues. Germany's chancellor recently made the supposedly illiberal claim that "we have too little Christianity. We have too few discussions about the Christian view of mankind." With respect to immigration, Europe is significantly further to the right than North America.

For years the policy mess in the US was masked by the country's ample natural resources and its openness. "The business of America is business," said one President. But that was before FDR. America is now turning inward. As the WSJ reported last month, less than 10% of Americans say free trade agreements have helped the United States, and Tea Party supporters are even more likely to say the US has been hurt by free trade than the general public. The incoming Chair of the House Committee on Agriculture, Republican Frank Lucas, wrote Obama last year to demand that farm subsidies not be cut. Besides direct payments, the US tax code is additionally chock full of subsidies that economists would call tax expenditures, but in Republican rhetoric they are tax cuts.

Monday, November 15, 2010

a sign-off of sorts for Alberta readers

I'll probably be blogging less about Alberta affairs going forward, not least because the ground is fairly well covered by others. Capital Notebook is back, although the most trenchant Leg watching commentary is likely to be found at former Liberal MLA Maurice Tougas' blog. One of the things I found remarkable about Maurice's 2004 run in Edmonton-Meadowlark is that his winning campaign spent less than $5400. I remember a Wildrose conference in 2007 when an experienced PC Alberta organizer advised us that running an urban campaign would require $8000 and a rural campaign $12 000. With Wildrose Alliance operations now dominated by big spending federal Tories, constituencies are probably being told they need to spend $25 000.

The fact of the matter is that the debate of interest to me is the government of Alberta's fiscal situation, and it is a debate that the average Albertan is not particularly interested in. A chasm in perspective between the "wonks" and the general electorate is not unusual of course. I agree with the Fraser Institute that Gordon Campbell is the best fiscal manager of the 10 provincial premiers, but Campbell's approval ratings are in the single digits, a level so low that the BC premier could not continue to govern (he announced his resignation earlier this month). But there isn't much wonk interest in Alberta's finances either. Why? Because the province has simply not been compelled to face the issues that most other North American jurisdictions have begun to wrestle with. A review of the cash on hand held by US states indicates that a large chunk is held by just two: Alaska and Texas. These two states having something in common with Alberta, of course: significant oil and gas royalties.

With a full third of its budget historically being funded by natural resource-related revenues, Alberta can afford to maintain inefficient policy and carry on with an air of self-satisfaction, taking in the spectacle of others grappling with their emerging financial problems with an air of bemusement. The typical Albertan has accepted the convenient explanation that his province's prosperity is due to hard work, a pioneering spirit, and "conservative" values in general.

This "character" myth, is of course, exactly that, a myth, but it would get rather tiring for me to point this out again and again. Over the past couple of years I've essentially said what I have to say: save and invest more, spend less, and consider how budgeting decisions are made as opposed to just the decisions, which is to say wake up to the influence of unions, especially public sector unions, on the public policy process. One can only write so many jeremiads before one has pigeon-holed oneself as, well, a Jeremiah. The more interesting observation I wish to make here is that avoiding a calamitous future would involve a shift in public perception and attitudes that would extend far beyond Alberta.

Consider, for example, trends in healthcare spending. Below is a graph of the annual growth rates in health expenditures in constant 1997 dollars:

Alberta readers might look at the 1993 to 1996 anomaly and reckon that they see the handiwork of the early Klein. But in fact this is a national graph produced by the Canadian Institute on Health Information. The following three graphs from the same source illustrate health expenditure per person in constant 1997 dollars, with the upper line in each representing public expenditure and the lower line representing private expenditure:

One can make a couple of observations about these graphs. One is that the target of limiting healthcare cost growth to GDP growth+1%, as targeted by a draft proposal released by the co-chairs of President Obama's deficit commission, is not unreasonable. Even GDP+0% would not be a flat line in the above charts, because a flat line would result from holding spending growth to inflation and population growth and GDP growth will exceed that (if it didn't, real GDP per capita would not rise over time). The other observation, more germane to this blogpost, is that while the 90s dip is more pronounced in Alberta's case, for all three provinces we see an acceleration in constant dollar expenditure per person from about 1996, creating a notable inflection point given the declining or steady level trend of the previous four years. 2009 and 2010 suggest that public spending may decelerate for Saskatchewan and Ontario relative to Alberta, but these data points are forecasts (and so represented by white dots).

Here's one more chart, which displays spending in the United States by all levels of government as a proportion of GDP:

Note the decline from 1991 to 1999. While there is variation between states and provinces, the overall story is that fiscal conservatism was a North America-wide phenomenon in the 90s. One can draw two conclusions from this. One is that fiscal debates in any given state or provincial legislature do not occur in isolation from the larger "culture." The other is that if most of North America is overspending, any given sub-national jurisdiction has likely succumbed to the same trend to at least some degree.

Sunday, November 7, 2010

further to the last

One regrettable consequence of my last blogpost is that a P"C" party activist or two seems inclined to think my dissatisfaction with the Wildrose Alliance somehow makes the government party a more attractive option. Let's be clear here: if there is a problem with Wildrose people making getting elected an end-in-itself instead of a means to an end, it remains a bigger problem yet with most P"C" party people. As longtime Leg watcher Marc Lisac observed in 2004:
[W]hy would anyone with a solid position in the community want to run for the opposition? The prize for election is putting up with casual insults in question period, being largely ignored by the media, watching government backbenchers earn much more money by virtue of being appointed to this agency or that board, and knowing that one's future employability outside politics is likely being impaired. The most attractive choice is to fight for a nomination in the governing party.

You have to be a saint to run for the ragged, perpetually debt-ridden shells that pass for opposition parties in Alberta. A saint, or someone with the character of a stubborn, defiant buffalo facing directly into a stiff wind coming off the mountains. Most people in public life here are neither. Contrary to the stereotype of the defiant individual, the province is full of people who take the easier path and join the party (literally and figuratively).

There is accordingly a context to my issues with Wildrose. That context includes that fact that the governing party has to take a lot more responsibility for the spending spree of the last decade than the opposition. Also, even if the Wildrose caucus successfully led an effort to kill off the restriction on teachers' right to strike, for some other planks like the right to not associate with a union and the secret ballot, it was "close but no cigar" in terms of getting them eliminated from the policy book. With the P"C" party, in contrast, you have a party that, as a government, introduced legislation that had clauses like section 29 of the Labour Code: "[e]mployees to be union members."

I have regularly returned to the issue of unions because I think how a politician is inclined to deal with this interest group is a far more revealing indicator of fiscal conservatism than nebulous talk about cutting back on spending. Remember how the unions howled at the Klein cutbacks in the mid-90s? What has changed such that spending restraint today wouldn't involve a confrontation with the unions? Premier Stelmach called the limiting of teachers' right to strike which Wildrose used to stand for "draconian," but in New York State ALL public employees are banned from striking ALL the time by section 210 of the Public Employees Fair Employment Act, more commonly known as the Taylor Law. Yet New York unions are still in the saddle. An expert panel hosted by the New York Times titled "Can California and New York be saved?" returns repeatedly to the idea that New York's new governor "has to steel himself for the long run and be prepared for the wave of ads from unions claiming the sky is falling." In Illinois where union muggings of the taxpayer are, if anything, even more egregious than in Albany or Sacramento, the Republican candidate for governor collected more than 1.7 million votes last week, losing by a thread, yet challenged the unions directly. The point being here that "draconian" is relative. As I noted in my last post, although Alberta supposedly has much in common with Rocky Mountain states like Idaho, the province allows closed shops when even the chair of the Swedish Building Workers' Union has said "closed-shop clauses [are] old-fashioned and [are] being removed" in Sweden. (As an aside, I have lived in Sweden more than a year and am a fan of much of the Scandinavian system, which in many respects is not as "left wing" as North Americans presume, e.g. a lower corporate tax rate than the UK and the USA, and perhaps the world's most radically free market in schools, schools that, by the way, privilege Christianity in the curriculum).

As I said before, the key problem is "not how much will be going to the unionized public sector per se" but how Alberta (and North America in general) decides how much is too much. Imagine an audience with some politicians on a stage in front of them. Now randomly pluck one "ordinary person" from the audience and sit them on a stool on the stage. Now invite the politicians to talk about how much that person should be paid and then vote, as an audience, for the politician who has said the most convincing thing and, by this mechanism, determine the pay. That the politicians will engage in a bidding war to pay the most should be as obvious as the fact that studio audiences invariably root for a game show contestant to win spectacular amounts of money. As much of a circus as this hypothetical scenario would be, reality is considerably worse because it isn't nearly as transparent: collective bargaining agreements are not conducted on public television.

Now having said this, if anyone should ask why I quit the Wildrose Alliance, it is not over a policy difference. Nobody gets all the policy they want out of a political party that represents a significant proportion of society. It is rather the way the party made a move that wasn't anti-any particular policy I favoured, but anti-policy period.

For whatever reason, an elected provincial politician, Doug Griffiths, wanted to talk policy, not politics, and Wildrose Executive Director Vitor Marciano (with the possible agreement of others) decided to try and make money for his party off of the uninformed grassroots using that very fact. Talking policy instead of politics is what my whole motivation has been since I left Ottawa's policy shops. Politics is a means to an end. If the end is to try scare politicians like Griffiths out of saying what he has been saying, I'm working for the wrong team. It's as simple as that, really.

Former minister Allan Warrack's comments about bringing an HST to Alberta on Alberta Primetime last Monday hit almost all the bases in terms of a concise defence of the idea. The segment quite likely would have never occurred, and Professor Warrack thus not have been given a soapbox, had Griffiths not made the effort to push the debate into the general culture. Wildrose not only failed to play enabler with respect to bringing a conversation to Albertans that I've made it something of my personal mission to bring, Wildrose actively contributed to trying to marginalize the conversation as unacceptable.

British Columbia doesn't have anything like Alberta's royalty revenues yet, as of this coming January, the corporate tax rate is no higher (10%) than in Alberta and a person earning $45 000 would pay almost $1000 less in income tax in BC than in Alberta. BC's tax on carbon does not bother me at all since I haven't owned a car for more than 8 years and the policy makes it that much less likely that BC would be targeted by a hostile foreign public relations campaign. This while BC, population 4.5 million, spends $40.6 billion and Alberta, population 3.7 million, spends $39.3 billion. The BC deficit is furthermore far more manageable. Calgary-based George Koch, writing in Alberta Venture in October, noted that "we Albertans seem a complacent lot, addicted to our government entitlements," and lamented the lack of leadership, observing that "[f]or the wilful leader, public support is a bank to draw on rather than just a wave to ride." With the exception of people like Doug Griffiths, Alberta's politicians all seem to be out surfing.


Apparently I'm not alone in terms of general frustration. Mike Moffat from Western, Stephen Gordon from Laval ,and Andrew Coyne have been referring to each other's work for a while now and they are all unimpressed with the direction of Canadian politics.

Wednesday, November 3, 2010

why I'm not a Wildrose member

My last post wasn't the first time I've talked about unions and what I thought was an accommodation of union interests by the Wildrose caucus members who joined the party back in January. Support for unions is an understandable stance for the NDP caucus but not, in my view, for a party that I had joined some three years ago on the understanding that its philosophy would be roughly consistent with that of the Wall Street Journal editorial board, namely, "free markets and free people."

When President Truman accused the WSJ of being the "Republican's Bible," the paper’s then editorial page editor responded that "our loyalties are to the economic and governmental principles in which we believe and not to any political party." In an editorial titled, "A Newspaper's Philosophy," William H. Grimes, who won the WSJ's first Pulitzer Prize for his editorial commentary on business, the economy and labour, wrote:
On our editorial page, we make no pretense of walking down the middle of the road. Our comments and interpretations are made from a definite point of view. We believe in the individual, his wisdom and his decency. We oppose all infringements on individual rights, whether they stem from attempts at private monopoly, labor union monopoly or from an overgrowing government.

I've returned to the issue of labour union monopoly on a regular basis this year in part because in the future it will be a critical driver of another problem Mr Grimes identifies, "overgrowing government." A growth in government is not necessarily objectionable in-and-of-itself: if starting from a sufficiently low base such that additional investment would not be subject to significantly diminishing returns, government investment in roads, schools, bridges, university laboratories, and other factors that generate positive externalities and may be bequeathed to the next generation may well be a net good. But with an aging and "what's-in-it-for-me" society, most government expenditures will be used to support non-workers' private consumption and a politically powerful non-business-owning middle class. In the case of private sector retirees, the promised entitlements may be appropriate. But for the public sector, there is a growing problem of sustainability and the biggest problem in my view is not how much will be going to the unionized public sector per se but the anti-competitive, unaccountable way the allocation decisions have been and apparently will continue to be made. This is not to say that corporate lobbyists don't also work the halls of legislatures in shadowy ways but rather to make an issue out of the fact that union lobbyists, unlike corporate ones, want to extend the reach of this tax-and-spend allocation system.

Each time I return to the issue, however, there is the tendency to make the point a little louder, such that there is increasing danger that I may be "crying wolf." And on the point, there is the possibility that I have mischaracterized the views of Wildrose caucus.

Rob Anderson has advised me that when Wildrose party leader Danielle Smith said in Red Deer in June that the passing of an AGM resolution suggested a maturation and "sophistication" of the membership's views, the Tweeter who associated that comment with the passing of a particular resolution that the teachers' union wanted passed was mistaken. When I stood as a candidate myself in 2008, amongst the lessons I learned is that, while the general public may be overestimating the magnitude of media bias, the public likely underestimates the frequency with which the media can get minor facts wrong. In this case, I don't recall the twitterer's view being confirmed by another source, hence I'll take at face value Rob's view that Danielle was referring to the gun rights resolutions(s) (there were two, an uncompromising one which failed to pass and a milder affirmation of gun rights which did) and stand corrected.

That doesn't mean I'm satisfied with what the party leader has said elsewhere, of course. While Education Minister Dave Hancock has defended the Provincial Achievement Tests against union interests that want them eliminated, Danielle has agreed with union interests that the PATs should go. She does say that the PATs should be replaced with "something", but apparently that something has to be "better for teachers" than the status quo and would be developed by "[w]ork[ing] with teachers" (who, if the unions are any guide, generally oppose all standardized testing). At the last Wildrose AGM, MLA Heather Forsyth used most of her microphone time on the floor to either speak out in favour of the P"C" government's free speech limiting legislation or against Wildrose policy planks opposed by the teachers' union. I might add that
  • a motion that proposed eliminating the "School Choice" section from the Wildrose party platform in favour of language that made no reference to choice,
  • a motion calling for replacing "[a] Wildrose Government will institute methods to hold educators accountable for performance" with "[a] Wildrose Government will promote innovation..." and
  • a motion that wanted to delete the plank prohibiting closed shops and the plank preserving the right to a secret ballot
were all "PROPOSED BY CAUCUS" and that, as a caucus member, the MLA for Calgary Fish-Creek supported all these motions. I accordingly do not believe that I have been misleading readers in my characterization of Ms Forsyth.

With respect to the right to a secret ballot, Mr Anderson currently says,
I clearly support “right to a secret ballot.” In fact, that topic never even came up at the convention - there was never a resolution vote on it.
On May 5 Vitor Marciano issued "Executive Director's Memo #3" to the membership which included as an attachment some 85 policy resolutions that Vitor wanted whittled down to a more manageable 40. One of the resolutions concerned section II "Economy" Part G "Labour" and "Moved that II G 1 and 3 be deleted and replaced..." This motion was "PROPOSED BY CAUCUS".

What were the two planks that the "caucus" wanted "deleted"?
II G 1 read:
A Wildrose Government will allow individual workers the choice to determine their membership in labour organizations.
II G 3 read:
A Wildrose Government will extend to workers the democratic right to a secret ballot vote on labour organization certification under the Labour Code and ensure that the same rule apply for decertification as for certification.
These deleted planks were to be replaced with "[a] Wildrose Government will review labour laws to ensure fairness for all Alberta workers whether employed in union or non-union settings," a plank that is, of course, so vague as to be entirely equivalent to nothing for a MLA who does not want to be held to a policy resolution.

This motion, and all of the other union-related motions proposed by caucus, made their way into the green sheets that constituted the resolutions for debate at the AGM and I accordingly stand by my last blogpost. I was at the AGM and do not recall Mr Anderson saying that he wished to retract the part of the motion that called for deletion of II G 1 and/or II G 3. I might add that if it were necessary to do further "research and consultation" in this area, the results of the research and consultation could have been presented to the membership for the membership's review. As I recall the membership was instead advised at one point to "trust" the caucus with the party's policy platform.

As it was, the vote was very close, going to a count, and II G 1 and II G 3 survived, but I think this should be of limited comfort when the caucus has revealed its hand as not wanting to be held to the provisions. Relevant here is the history of Wildrose Executive Director Vitor Marciano. When controversial Calgary West MP and former professional heckler Rob When in doubt, pull the trigger" Anders told the Canadian Press, "I would fight shoulder to shoulder with [Marciano] in any battle," this apparently included a battle between himself as a caucus member against his own Conservative constituency membership. When the board of Calgary West EDA voted in favour of asking riding members if they wanted to hold a new nomination meeting, Marciano, who represented Alberta on the National Council, approved a top-down takeover of the local board. 19 members resigned from the disempowered board, leaving behind 7 a number of whom had not been elected at the board's previous AGM. This recent incident came after the candidacy of Walter Wakula for the Calgary West nomination was rejected in 2006 and Rob Anders acclaimed, an acclamation that was ultimately overturned via the intervention of a Court of Queen's Bench Justice, despite the objections of Andrew Constantinidis, Wildrose's recently nominated candidate for the provincial riding of Calgary West.

Wakula isn't the only Wildrose member to have a run in with the federal Tory machine. John Baloun, Wildrose Alliance candidate for Edmonton-Rutherford in 2008, found out how MP James Rajotte's board plays ball when he tried to challenge Rajotte for the Edmonton-Leduc nomination. I had my own encounter with Rajotte's people a year ago, when myself and someone who had served on David Kilgour's board were attempting to organize Wildrose members in Edmonton Whitemud. We both ended up resigning from the newly formed constituency board, realizing that Rajotte's people, who were backed by Eleanor Maroes who was in turn backed by a member of the provincial executive, didn't much want us (and I was going to be out of the country for a few months). It will be interesting to see how the nomination in the new Edmonton South West constituency will be managed given that, with popular incumbent Dave Hancock almost certain to run for re-election in the old Edmonton Whitemud, this very suburban open seat is likely the only riding within Edmonton city limits that Wildrose HQ would consider a realistic pick-up for the party.

Looking forward, there will likely be a great deal of pandering to the rural vote over the coming year that would not be to my taste and looking back I'm not interested in supporting a party that imports the Conservative Party of Canada's hardball culture into its operations or caucus members who want to delete a party plank allowing "individual workers the choice to determine their membership in labour organizations." Stop maneuvering and finessing and stand and fight for the plainly stated principle.
I don't mean military courage or civil courage, or any special kind of courage. I mean just that inborn ability to look temptation straight in the face - a readiness unintellectual enough, goodness knows, but without pose - a power of resistance, don't you see, ungracious if you like, but priceless - an unthinking and blessed stiffness before the outward and inward terrors, before the might of nature, and the seductive corruption of men - ...
- Joseph Conrad, Lord Jim

Having said all this I would consider returning to involvement with the party if changes occurred and I should make it clear that I do not know Rob Anderson, Heather Forsyth, or Vitor Marciano personally. I met Rob for perhaps a minute at the Wildrose AGM but of course I was already rather prejudiced at that point based on my dissatisfaction with the "terms," or absence thereof, surrounding the floor crossing the January and the policy that the new caucus was proposing in May, policy I couldn't imagine Paul Hinman supporting. Anderson should be congratulated for the way he puts unmanipulated videos of himself speaking as an opposition member in the Legislature online and further makes his views on various matters available on his website. Our elected officials are generally well-meaning people trying to reconcile the contradictory policy wishes of the electorate and far too many people want to blame politicians for everything they see as wrong with society when, really, the enemy is us. Democracies generally get the government they deserve. At the PC AGM this past weekend, the results of a survey of Albertans were passed around. It found that "65% say the province should base spending decisions on the public’s need for services, not on the government’s ability to pay." No business or household could make spending decisions without reference to ability to pay but popular opinion, here in supposedly "conservative" Alberta, is what it is.

I just happen to think that politicians could deal with this in the way PC MLA Doug Griffiths has tried to deal with this. As Parliamentary Secretary to the Finance Minister, he has access to some information that the man in the street does not. Griffiths has been trying to communicate with the electorate, asking people to re-examine their assumptions. As I said on Sunday, it was the fact that Marciano reckoned Griffiths' party should be attacked for Griffiths' independent effort to start an adult conversation that was the last straw for me.

The fact is that no one party has a monopoly on the sort of politicians we need more of. During the 2008 provincial campaign there wasn't an all-candidates forum in my riding and when I tried to contact the other candidates to try and arrange one there wasn't any interest. So I did the next best thing and kept a look-out for any sort of city-wide forum that came up. I then ended up speaking at a forum hosted by a local Ukrainian group. A young Liberal candidate sparred with me on several issues and afterwards we agreed we should go for coffee sometime. In the audience were a few other Edmonton area candidates. John Baloun gave me some tips on public speaking. A distinguished older gentleman came up to me and quite impressed me although it might partly have been because he flattered me suggesting that I should consider joining his party. He was the PC candidate in Edmonton Gold Bar and during the recent mayoralty race I realized that he must have been David Dorward.

Monday, November 1, 2010

PC Alberta AGM weekend: unions flex muscle (again)

Section 29 of the Alberta Labour Relations Code explicitly allows unions to demand collective agreements whereby "all the employees... are required to be members of a trade union." Only employees who convince the Labour Relations Board that their "religious belief" prohibits them from being a union member are exempt from this coercion, in which case an employee could potentially get his or her union dues directed to a charity instead of the union.

When Edmonton McClung introduced its motion to bar unions from forcing Albertans to pay dues that are then used for political purposes, the constituency association noted that Alberta is one of the few jurisdictions in the world that denies individual employees the right to opt out of having to pay mandatory union dues that are then used for political messaging.

In early 2008, in the lead up to the March 3 provincial election, an outfit calling itself "Albertans for Change" but in fact run by union bosses ran a series of TV and radio attack ads paid for by forced union dues. When the Merit Contractors Association and the National Citizens' Coalition called attention to the fact that this astroturf group was using mandatory dues for activities unrelated to the core union activities of collective bargaining and grievance administration, the Alberta Federation of Labour responded saying Merit Contractors and the NCC were "simply trying to further their union busting agenda" and cited a 1991 Supreme Court of Canada case, Lavigne v. OPSEU. However, Mr Lavigne was not a member of and not required to join a union, unlike the case in Alberta where union membership is often forced. Indeed, when the Canadian Civil Liberties Association intervened in the case to support the union position, the CCLA concluded that "Lavigne's protection is in his right to join or not to join" a union. Remove that protection and the Lavigne case is distinguishable.

Alberta Union of Public Employees spokesman David Climenhaga trotted out the "but the courts say" argument on his personal blog after the Wildrose Alliance AGM earlier this year to contend that passing a particular "right to work" law would be "a pointless gesture." The McClung members who proposed the motion here anticipated this sort of retort, however, by attaching a legal opinion solicited by Merit Contractors from a Calgary law firm.

I might add that, in specific response to blogger Ken Chapman's claims that the facts cited by the motion's supporters were "unsubstantiated" and in need of "proof," the union practices at issue here are prohibited in New Zealand, Australia, the United States, and the 47 countries of the Council of Europe. While far left Canadian judges like Claire L'Heureux-Dubé have held that freedom of association implies no freedom to not associate, Article 20(2) of the Universal Declaration of Human Rights clearly affirms that negative right: "No one may be compelled to belong to an association."

The European Council of Human Rights, perhaps the most famous of the Council of Europe's bodies, ruled in 1981 by an 11 to 3 vote that a 1975 agreement between British Rail and three trade unions requiring union membership as a condition of employment violated Section 11 (freedom of association) of the European Convention on Human Rights (to which all Council members are a party). The 2006 case Sørensen & Rasmussen v. Denmark made it clear that a "closed shop" is still in violation even if it were made clear to a prospective job applicant in advance that union membership would be a condition of employment. "[T]here is little support in the Contracting States for the maintenance of closed shop agreements," the Court added. The 2007 decision Evaldsson et al v. Sweden prohibited the use of union dues from non-members for non-bargaining (ie political) purposes, with the Court disapprovingly noting that "they had to pay the fees against their will to an organization with a political agenda."

Although it is currently the case that in the United States unions can spend a member’s dues on politics, members have the right to opt out, a right that is currently denied in Alberta. Unions are currently in a panic about Republican gains in elections tomorrow because of fears that the GOP will change the obscure opt out procedure to an opt in requirement for dues union leaders want to spend on politics.

At this weekend's PC Alberta AGM, union supporters tried to shout down opponents. When the vote was taken, it appeared close enough that some called for a count, a contention supported by the Edmonton Journal which described the margin as "narrow", but the moderator dismissed a count as unnecessary and the union supporters declared victory. According to CTV, "[d]ozens of people, apparently union members, bought party memberships specifically for that vote and defeated the motion much to the dismay of many long-time party members." The number of "Ten Minute Tories" might well have been significantly higher. In 2006, the Journal reported that a coalition of unions "apparently plans to buy as many as 10,000 Tory memberships" to get their man into the premier's chair. As it is, the current chair of the government caucus, Robin Campbell, is a former union boss. South of the border in New Jersey, the AFL-CIO spends a quarter million per year running a "candidate school" to get their (Manchurian) candidates elected, and with considerable success given that this union school "has groomed more than 160 current officeholders."

I nonetheless take some comfort in the fact a few grassroots PC members came to the AGM prepared to get their battle on against this economic phenomenon known as a labour supply monopoly or, in popular parlance, a union. At the Wildrose Alliance AGM during the summer, there was essentially no floor battle to speak of since the unions had, in effect, pulled off an inside job. After cordial meetings with Alberta unions during the months leading up to the AGM, floor-crossing MLAs Rob Anderson and Heather Forsyth spent essentially all of their microphone time on the convention floor lobbying for closed shops and the killing of party planks like the one that protected "the democratic right to a secret ballot," thus precluding the need for more transparently union-affiliated speakers to make the case. Party leader Danielle Smith, who had previously had her own tête à tête with AUPE's boss (photo above at right), told media outside the convention room that the union coddling constituted a display of "sophistication."

I relate the disturbing ties between the Wildrose caucus and union lobbyists in order to note that apparently every elected politician is either running scared from the unions or in their pocket. In the US, the Associated Builders and Contractors (a merit shop coalition) noted a study last year that found that union slush funds had contributed more than $1 billion to contract bidding schemes that increased the cost of construction projects for taxpayers. The equivalent slush funds in Alberta, known as MERFs or "Stab funds", were finally targeted by the Alberta government in 2008 by Bill 26, which also aimed to put a stop to the union practice of "salting" (having their people respond to hiring ads and then, after having been hired just in time to vote to unionize, walking off the job to leave the employer both short manpower and unionized). The schemes Bill 26 corrected were so outrageous the union bosses knew they could not organize popular protests against the bill, but provincial lawmakers were still so afraid of union muscle they passed the bill as the very last measure of the spring 2008 sitting and at 3:15 AM in the morning. Legislature personnel were furthermore so intimidated that security guards at the Leg were placed on high alert.

There are four major political parties in the province (five if you include the Alberta Party) and the leadership and/or caucus of none of them seems prepared to make an issue out of the fact that Alberta tolerates closed shops where Europeans do not, and that provincial legislation adds insult to injury by allowing unions to pile mandatory dues to be used for political lobbying on top of mandatory membership. The PC members who voted against the McClung proposal giving workers a right to opt out of having mandatory dues used to fund leftist causes are ultimately traitors when you consider the fact that in 2008 such money was used to fund a media assault on the PC Party, but "traitor" implies an allegiance that can be betrayed.

Albertans are entitled to a political alternative. The NDP accordingly has a good excuse for, say, not supporting the 29 Old Dutch employees whom the UFCW union and the Alberta Labour Relations Board say should be fired for refusing to pay union dues. For 38 years the UFCW and Old Dutch collective bargaining agreement provided for a voluntary dues check off. In the wake of a lengthy labour dispute, however, UFCW demanded that the dues be made mandatory. Even though mandatory dues are virtually cost free to employers, Old Dutch did not agree. The obvious solution in the union's view then became getting the government to step in and amend the Alberta Labour Code. This summer, the Stelmach government indicated that it would side against the 29 workers. Perhaps the Wildrose Alliance could have said something about this instead of going on about legal disputes in other provinces.

Sunday, October 31, 2010

PC Alberta AGM weekend: last chance for tax reform?

The Edmonton-Whitemud "B" resolution calling for the saving of non-renewable resources was more serious that most such resolutions because A) it called for retaining the savings in an escrow account instead of sending them to the Heritage Fund or some such fund that could be raided for operations spending and B) it got specific about the cost of more savings by calling for a value added tax to make up the difference.

The resolution nonetheless was soundly defeated.

Just a week earlier, Bruce Bartlett, who is otherwise known for calling "starve the beast" "the most pernicious fiscal doctrine in history," penned a column that noted that the reaction to VAT talk south of the border constituted "a good illustration of how Republicans enforce party discipline, create ideological rigidity, disdain rational debate, wallow in self-delusion, and consciously make government unworkable just to achieve partisan objectives." Bartlett was referring here to the reaction to Indiana Governor Mitch Daniels' (right) floating of the VAT idea a few days earlier. Grover Norquist, the Torquemada of the GOP anti-tax synod, described Daniels' musing about a value added tax as "outside the bounds of acceptable modern Republican thought... [a]bsent some explanation, such as large quantities of crystal meth, this is disqualifying. This is beyond the pale."

In August, the Economist noted that "[w]onks have long revered Mr Daniels" and described him as having "a reverence for restraint and efficacy," neither of which are much revered in America in general these days. "He is also unlikely to fire up tea-partiers," observed the British weekly, quoting him as saying “Didn’t somebody say in a different context, ‘Anger is not a strategy’?"

In fact anger may well be a strategy... for fundraising. Just a couple days before the VAT proposal was shot down at the PC AGM, the Wildrose Alliance sent out a fund raising letter that blasted MLA Doug Griffiths for, as Griffiths put it, questioning the "sacred cow." One would think Wildrose would be a bit circumspect about attacking the PCs in general for the one time the party disciplinarians let an individual MLA go off the manufactured message and for specifically going after one of the most fiscally conservative MLAs in the Leg. Given that the letter was signed by former Harperite and Rob Anders ally Vitor Marciano, however, it could just be another example of "just win" federal Tory tactics being imported into the Wildrose Alliance. Under the "Conservative" government we have in Ottawa, we've been bounced from Trans-Pacific Trade talks because of our protectionism, were told by Dubai to abandon a military base there after Ottawa refused to allow a Dubai-based airline to land in Calgary and thereby threaten politically-connected Air Canada's monopoly, and are rated 39th out of 48 in openness to foreign direct investment by the OECD. It is impossible for non-insiders to know just what Marciano believes, if anything, since his Twitter feed and his blog are restricted and his public pronouncements are few and far between. Am I bitter? Yes, I am: the party membership never got an opportunity to provide input on whether they wanted Marciano, Rob Anderson, and Heather Forsyth to take over the party. "You have to get elected to enact your agenda" presumes that one has an agenda beyond just getting elected.

Not that I even understand Marciano's strategy for getting elected. Stelmach told his assembled flock this weekend that "[w]e want founding meetings for the new constituencies to be completed by the end of the first quarter of 2011 and candidate nominations completed by the end of June," whereas the latest I've heard about Wildrose's plans for the new constituencies is that there are no plans for at least the next year.

The "Stelmach's new tax on everything" bogeyman is, of course, a misrepresentation of the premier's stated position (since the premier has no more courage on the issue than Wildrose's controlling minds). It's the dodgiest move I've seen from the Wildrose to date and the last straw for me. If run as a political ad, a network might well refuse to carry it on the grounds that it is unsubstantiated, but since it is just being used to raise cash off of the party's own supporters, the only likely complainants are ex-members like myself. It is essentially now impossible for Wildrose to implement a tax on consumption going forward since otherwise anyone who donated on the basis of this latest fundraising letter would rightfully be outraged. There is no point in my continuing to direct any arguments for tax reform that shifts the burden off of enterprise and onto consumption at Wildrosers since the bridge is now well and truly burnt. As for any other policy ideas, one has to be alive to the possibility that Marciano could throw them under the bus in the name of political expediency at any given moment.

The fundraising letter contains the usual line that "Alberta doesn't have a revenue problem - it has a spending problem." Wildrose HQ, of course, is not so dense as to not understand what Griffiths is talking about when he says "the exercise wouldn't be about raising more money" since other taxes - on work and/or investment - could be cut so that "the whole thing could be revenue neutral for government," it's just inconvenient to understand.

The unfortunate reality is that Wildrose is not to be taken very seriously with respect to cutting spending. In February Rob Anderson got up in the house to denounce the Tory budget. One would think that if Anderson were really so incensed by the spending, he would have sought the Airdrie Wildrose Alliance nomination at the beginning of 2008 and gone door-knocking through the February snow preaching fiscal conservatism. Anderson says he could cut a $7.55 billion deficit down by $2.79 billion by spreading the capital budget "over 4.5 years rather than three years." This is, of course, just an accounting gimmick analogous to moving the mortgage from a 10 year plan to 15 years and claiming that significant monthly economies have thereby been realized. Anderson also called for restricting growth in Health and Education operational spending to inflation plus population growth for $1.33 billion in savings. Yet the United Nurses signed a bargaining agreement in June that would give them an increase in 2012 in excess of this guideline (so that some nurses will be making over $50 an hour), not including additional lump sum payments, and Anderson and the rest of the caucus had, apparently, no objections. Spend taxpayer money on medical equipment and that might conceivably lower my wait time for a procedure. Spend it on a public servant's salary and I get next to nothing since the public servant would presumably be doing the same job anyway, and if it goes to a pension it could well get spent in Florida such that Alberta taxpayers don't even get a local demand benefit from the expenditure.

The idea that Wildrose would have actually cut Healthcare spending by more than 10% relative to the PCs in the last budget is really a pipe dream given that the party hasn't shown any indication that it would stand up against populist pressures to spend. The Pew Center on the States and pollsters in Canada have found that healthcare and education are the two areas that the electorate is most resistant to cutting. A target of less than 5% annual increases for healthcare spending is not realistic (healthcare spending has been rising at an average annual rate in the double-digits since at least 2001), but 5% would still represent a far more sustainable pace that the 14% increase the government brought in with this last budget. The rest of Anderson's ideas for cutting the deficit add up to less than one-thirteenth of the $7.55 billion deficit the province is allegedly running this year. Wildrose is reduced to calling for efficiencies (except for efficiencies like more efficient taxation, of course), just like left-leaning Liberal leader David Swann.

Last year, Professor Jack Mintz calculated that Alberta would have to raise taxes by more than 8% per year from 2012 to 2030 to avoid running deficits. This despite the fact royalty revenues have provided more than 30% of government revenues since 1998.

PC Alberta AGM weekend: free speech? free commerce?

Of the various policy resolutions that came up for a vote in this weekend's annual general meeting of the Progressive Conservative Association of Alberta, four were of particular interest:
1) a motion to strike those elements of the Alberta Human Rights Act that grant government broad discretion to limit freedom of the press
2) a motion calling for official adoption of an industrial policy re bitumen upgrading
3) a motion calling for a fiscal policy shift towards savings from consumption
4) a motion that would bar unions from spending forced union dues on political lobbying

I'll comment on (1) and (2) in this post and address (3) and (4) in two separate follow-up posts.

With respect to (1), readers may recall that Maclean's story about corruption in Quebec that the head of the sovereigntist organization Société Saint-Jean-Baptiste de Montréal called "hateful and defamatory." The House of Commons in Ottawa passed a motion expressing "profound sadness at the prejudice displayed" by the magazine. Whatever the truth of the Maclean's allegations, the Harper Conservatives supported the motion (take that, Andrew Coyne!), which meant that it could be passed unanimously (after being reintroduced once the objecting André Arthur, an independent Quebec MP, had walked out of the House). The powers that be in Alberta are not limited to such symbolic condemnations, since it is currently the case that a person who "issues" a "statement" or "publication" in Alberta that is "likely to expose a person or a group of persons" to "contempt" is breaking the law. Although truth is a recognized defence to charges of defamation under the common law, the legislation at issue here does not recognize any such defence.

The PC caucus dutifully spoke out in favour of the restrictions on expression. Freedom of speech must be "balanced", contended MLA Fred Horne, against the sensitivities of the "vulnerable." As someone who was elected to the same PC caucus, MLA Heather Forsyth performed a similar role defending the government legislation earlier this year at the Wildrose Alliance AGM. With no apparent sense of irony, last year Jennifer Lynch, Chief Commissioner of the Canadian Human Rights Commission, lumped together opponents of the legislation as hailing from the (presumably contemptible) "far right." The Sheldon Chumir Foundation, which takes its name from an Alberta civil liberties lawyer and former Liberal MLA, would presumably object to this characterization since it also opposed the legislation, and the Foundation's President has indeed objected. In any case, the resolution was defeated and it does not appear that anyone currently sitting in the Leg will take up the dropped gauntlet in favour of free speech.

The Edmonton Whitemud constituency association proposed two resolutions which are at such polar opposites ideologically the submissions constitute good evidence that the constituency association is both large and diverse. One motion called for conservative fiscal policy and the other called on the government to step into the province's production decisions by requiring more bitumen upgrading in Alberta. The economic interference motion passed by a large margin, never mind the fact that industrial policy, which has been defined as a "declared, official, total strategic effort to influence sectoral development and, thus, [a jurisdiction's] industry portfolio" has been largely discredited. It would be one thing if the proposed dirigisme had the potential of developing a positive externality, like government support for R&D. But in this case more upgrading in province would magnify negative externalities. One analysis, for example, of the environmental impact of the bitumen upgraders that were planned for the Edmonton area concluded that they would consume about 10 times as much water as the City of Edmonton and use more electricity than is produced by the entire EPCOR Genesee operation. Never mind the additional carbon emissions. Josh Lerner, a Harvard B-School prof and entrepreneurship policy expert, has noted that industrial policy frequently ends up "boosting cronies of the nation's rulers or legislators" and "[t]he annals of industrial policy abound with examples of efforts that have been hijacked in such a manner."
Alberta Treasury Branches has been a popular vehicle for government cronyism in the Foothills province. In 1994 Tory ministers had ATB extend $353 million in guarantees and loans to West Edmonton Mall which eventually provoked a furious legal battle with WEM's developers, the Ghermezians; another battle with Peter Pocklington in the wake of Gainers' bankruptcy ended with ATB writing off more than $70 million. A March 1988 Speech from the Throne announced that "[a]n important step in Alberta's diversification plan is the construction of a new magnesium plant near High River, expected to begin this spring. This plant will provide 600 person-years or more in construction jobs and a permanent work force rising to at least 250 by 1994." By 1991 the plant had already been already closed and Alberta taxpayers left on the hook for a loan guarantee of more than $100 million. As Calgary Herald columnist Deborah Yedlin said when Edmonton Whitemud MLA Dave Hancock came out in support of bitumen upgrading last year, "the musings of the Alberta government smack more of populist politics than they do of robust, long-term economic policy."

Saturday, October 23, 2010

how it's all going wrong

This is a long post, but it functions as something of a capstone to what I've been building up to throughout the year.

A few weeks ago, the Troubled Asset Relief Program, popularly known as the bank bailout, quietly expired. TARP effectively extended a $700 billion line-of-credit to the financial industry, of which just a portion was activated. Bloomberg's post-mortem number crunch attempted to determine how many cents on the dollar US taxpayers recovered on the $309 billion deployed. The answer? 108 cents. In other words, a $25 billion profit.

Addressing this result, President Obama said:
We've managed TARP so well that, in fact, most of the money never even got spent and whatever is remaining will help reduce the deficit. But it doesn't solve our big problem. Solving the big problem will require us making some much more significant adjustments when it comes to big-ticket items. And that's a debate that Republicans really don't want to have....
the big-ticket items are Social Security, Medicare, defense. The entitlements in defense take up about three-quarters of the budget. So you can't cut your way through education or parks programs or the Environmental Protection Agency, because that's not where the money is.
I wouldn't have voted for Obama. In July 2008 I explained why I'm for McCain and took particular exception to Obama's support for rent controls while an Illinois legislator, a disturbing and revealing policy error that got little attention from a MSM that was more interested in what I'd call the bedazzling but policy-irrelevant "Obama narrative." But in his remarks above the President is entirely correct. This year I have directed a lot of "friendly fire" at those who would normally be my political allies, but the basic reason for this is that I'd rather have a liberal who was no talk and no action when it comes to spending than a conservative who was all talk and no action. As I noted a month ago, Republican Senate leader Mitch McConnell loudly advocated the establishment of a deficit commission until Obama called his bluff at which time McConnell bailed. I consider it something of an outrage that the conservative "elite" has just let this slide.

Perhaps I'm just incurably quixotic. At right is a scan from the Edmonton Journal from the last Alberta election campaign. "Reduce government spending" as my #1 priority? This is the sort of platform that gets a candidate 2.7% of the vote. Far more common is the sort of priorities identified by Chuck Farrer, who is looking to unseat Gene Leskiw on Wildrose's behalf in Bonnyville-Cold Lake:
When asked about his top priorities, Farrer said, “Healthcare’s a real big one, the seniors is paramount, and the property rights. ...
Farrer and Sobolewski were asked about the possibility of a provincial sales tax, something both were opposed to.
Healthcare spending soared an utterly unsustainable 16% in the provincial budget announced in February (and in a deficit environment) and this Wildrose candidate STILL isn't happy? Now I understand that Wildrosers will tell me that this isn't fair because the party's view is that when "questions exist about the system’s future financial sustainability, the answer lies in squeezing more inefficiencies from the system," but I do note that I have just quoted a line from Jeffrey Simpson's Friday Globe and Mail column that was written in sarcasm.

As I have noted with some regularity this year, Wildrose policy makers have a rather mixed record with respect to advancing policy that most economists would recognize as efficient. The most important measure would be shifting tax burdens off of businesses and on to consumers, but the party does not have a whole lot to say to business on this front. Prioritizing individual landowners' rights is anti-business, if anything, since businesses - at least the constructive kind - are interested in controlling inputs merely as a means to producing outputs, and giving those who are fortunate enough to begin the game with control over raw inputs more leverage over those inputs makes it more difficult and/or expensive for producers. The one raw input Wildrose seems prepared to make more easily and cheaply available to value-adding business is oil & gas, which happens to be the one input where the externality problem is of least concern (since the economic rent is being captured by a public owner instead of a private one). There are some potential future Wildrose MLAs who may be more sensitive to the needs of business , of course, for example the talented corporate lawyer Shayne Saskiw who will be running in Lac La Biche and Andrew Constantinidis, an internationally experienced C-level executive with a listed company who will be running in the very promising constituency of Calgary West. But the decisive proof that Wildrose hasn't been doing much for business may be the fact that the party has not raised money from the corporate sector like it did during the 2008 campaign when a cut to the corporate tax rate was part of the five point platform. In 2009, corporate donations represented less than a quarter of Wildrose donations received - an even smaller share than for the Alberta Liberals - versus 69% for the PCs.

My favorite modern Presidential candidate for a major US party is not, in fact, Ronald Reagan but Barry Goldwater. In the 1980 Presidential election, independent candidate John Anderson (right) took 7%, running on a platform that included some wonk-friendly measures like a 50 cent per gallon gas tax. During the election debate, Reagan said, "John Anderson tells us that first we've got to reduce spending before we can reduce taxes. Well, if you've got a kid that's extravagant, you can lecture him all you want to about his extravagance. Or you can cut his allowance and achieve the same end much quicker." This may be been the first high level articulation of the pernicious "starve the beast" doctrine. In 2003 Milton Friedman repeated Reagan's contention, writing, "How can we ever cut government down to size? I believe there is one and only one way: the way parents control spendthrift children, cutting their allowance." What this misses, of course, is the fact that a kid can go borrow, and if he can't currently borrow a financial industry will develop that will allow him to shift his consumption from the future to the present. A study by the libertarian Cato Institute gets right to the point: "Starve the beast just does not work."

If deficits finance a significant fraction of government spending, then citizens experience government services as discounted off the full price. The same level of government spending would be less popular were taxpayers charged full fare. By this analysis, in order to build popular support for smaller government the first step ought to be to raise taxes. Indeed, the Cato study found empirical support for the theory that higher revenues constrain spending. In Alberta, of course, the problem is exacerbated because even when not running a deficit, corporate and personal tax revenues pay for only a small fraction of government spending. Other revenues, of which windfall energy revenues are particularly significant, support the bulk of the provincial government's bulk.

Goldwater (right) was a true economic conservative and Cold Warrior, who prioritized spending cuts over tax cuts because true conservatives don't run up deficits. Yet Goldwater went on to lose to Lyndon Johnson by one of the largest landslides ever; LBJ's 1964 victory was the only instance between World War II and the present that the Democratic nominee for President has received a majority of the white vote.

Now having said all this, spending per se is not the only problem or even the central problem. In early 2008, the Alberta Liberal leader condemned the overspending and even a NDP MLA said, "with all the spending they've been doing, I don't think the budget is going to be pretty." Since then Ted Morton has taken over as Alberta's Finance Minister, and Doug Griffiths has been made Parliamentary Secretary to Morton (not worth much really but better than nothing). This may provide some restraint or at least reflection going forward. There's also the fact that not all spending is created equal. As the TARP example showed, some spending is investment that may help raise revenues over time. Upgrades to physical infrastructure and government contributions to R&D can potentially serve as a squirreling away of sorts of current revenue, depending on costs.

Spending on civil service salaries and benefits cannot be deemed investments, however. They are privately captured and by economic actors with high marginal propensities to consume to boot. Even worse is the way these expenditures are competitively negotiated, or more precisely uncompetitively negotiated. Unions and consumer advocates are ultimately the biggest enemies of investment.

When politicians sit down to "negotiate" with the civil service unions, immediately there is an agency problem, such that the politicians are not dealing with their own money. More to the point, however, is the fact that the vast majority of politicians are going to be thoroughly outclassed by a union economist like Erin Weir. Weir recently noted that since "2005, business investment in Saskatchewan increased by 55% through 2008. During the same period, investment rose by only 27% in Alberta and 32% in BC." This is used to argue against cutting corporate taxes in Saskatchewan. But would Weir point to these facts in an Alberta context? Highly unlikely, as it doesn't serve the desired narrative; some other statistics would be found.

Contrary to popular perception in Canada, Republican Congressmen from John McCain on down proposed a number of alternatives for US healthcare reform prior to Obamacare. But these proposals went after the fact that the cost of healthcare benefits were exploding as a share of the economy because said benefits were untaxed. The unions blocked/watered down/deferred any removal of the tax exclusion for employer provided healthcare benefits, and they did so because negotiating healthcare benefits like regular wages wouldn't play to their negotiating strengths. Funding for Obamacare - to the extent it was funded - then had to come from taxes on super-high earners instead of high earning union members and this fact more than anything else was the reason GOP support was non-existent.

If provincial and municipal negotiators were to try to bring more of the present value of future benefits to the actual present, the transparency of what public employees are actually getting would be that much clearer to distracted taxpayers and taxpayers wouldn't stand for it. The unions know this and accordingly want benefits deferred so that when reality, and crunch time, arrives, they can say "a contract is a contract," which is a powerful bargaining chip they don't have before something has been signed. As Steven Green has noted while talking about his book, Plunder!: How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation, once a deal is granted, it doesn't matter if the union presentations to government are later exposed to have underestimated the present value of the future costs, the benefit has vested and cannot be retracted.

There is a parallel here in the consumer credit bubble. A significant enabler was the sheer complexity of the system that obscured pricing fundamentals, a complexity that the MBAs had no incentive to reduce to the point that MBA-level expertise was not longer required. There is also a parallel in terms of the agency problem, such that mortgage originators lost the incentive to monitor by spinning out their liabilities to relatively disinterested and uninformed external investors (not unlike politicians retaining little incentive to monitor after spinning out liabilities for pension agreements on to relatively disinterested and uninformed taxpayers).

Consider this multi-choice question: who first busted the state of New Jersey for improper and incomplete disclosure of its civil servant pension liabilities?
1) a taxpayers watchdog
2) a conservative politician
3) buyers of the state's debt who could lose their investment in the event of default
4) another government entity
The answer is (4). The SEC ended up prosecuting New Jersey (perhaps to the chagrin of both Tea Partiers south the border who want more sovereignty passed to the states and to Alberta politicians north of the border who oppose a national financial regulator). The fact is that municipal and provincial politicians do not have the expertise to run a net present value analysis on the union benefit packages they negotiate and even if they did, it's their successors who will have to deal with the negative consequences of pushing costs into the future, and even if the costs came due today, it's not their own money. If there is one behaviour that my colleagues in "high finance" engaged in that I found especially objectionable, it was the dog and pony shows that they put on for governance boards in order to get even more money to manage. Complexity increased not because of a real economic demand but because it served as a barrier to entry. In many cases the value of financial wizardry was merely in the appearance of it. Word on the grapevine is that Alberta Investment Management (AIMCo) has pulled the wool over the eyes of its governing board by snowing it with an impressive song and dance about benchmarks that mean bigger bonuses for the investment team on a more or less permanent basis. Don't expect any politicians or taxpayers' associations to do anything about something they would understand even less than the board.

Unions may argue that their influence has been declining, pointing to declining levels of unionization in the private sector. But in fact numbers don't matter. Union membership in France has declined from 20% in 1960 to 8% today, which is even below the US at 12%. Would anyone deny that French unions have significant clout? In large part because taxpayers have been mugged by public employees in state houses and city halls, quite outrageously so in places like Bell, California, cash-strapped cities are switching off streetlights, states are furloughing children from school, and counties are ripping up pavement. It is but the early stages of a civilization in decline; an October 14 Economist article is titled, "Public-sector pensions: Three-trillion-dollar hole" with the byline "American states have promised their employees benefits they can’t afford."

This problem did not "just happen." It is a consequence of a weak governance structure and, ultimately, a weak culture.