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.

Tuesday, October 19, 2010

Alberta municipal elections review


Calgary mayor-elect Naheed Nenshi has said he was interviewed by "the evangelical newspaper." Whatever Nenshi was referring to, his remarks - punctuated by giggles -suggest someone who sees evangelicals as an oddity to be humored. I doubt that his rendering of the questions that were put to him were word-for-word accurate; Nenshi's account is extremely plausible for a non-evangelical imagining what evangelicals are like, which is, in fact, what's somewhat concerning for an evangelical. The attitude seems to be, everyone is entitled to their place in the freak show: "they're people too;" evangelicals may be deviants, but let's not marginalize them any more than, say, the cross-dressing community because we're all God's, or Allah's, children.

A harsh hostility to secularism and "diversity" is, of course, not the only alternative to Nenshi's attitude. Instead of just promulgating Nenshi's facile "I'm everybody positive" line, one could try to acquire a knowledge level of the "Other" that approaches that of an "insider" such that one could say, for example, one was interviewed by someone with the Evangelical Fellowship of Canada, or Focus on the Family Canada, or whoever it actually was as opposed to some depersonalized one of them. Fact is, a politician whose language suggested he or she had, for example, read the Purpose Driven Life (by pastor Rick Warren) would receive a lot more evangelical interest even if he or she said, "I don't agree with Rick Warren with respect to X and Y," than a politician like Nenshi, who, being agreeable, might say he agrees with someone like Warren but would never bring up Warren by name since the whole evangelical culture is terra incognita to him.

The situation south of the border is rather different. The PBS documentary God in America is not titled "God in North America." The race for the US Senate seat up for grabs in Kentucky got some increased national attention recently when Democrat Jack Conway (left in photo at right) attacked Tea Party-endorsed Rand Paul (right at right) for his youthful anti-Christian libertarianism in a TV advertisement Jon Chait called the "ugliest political ad of the year." Liberal pundits have jumped at the chance to follow Chait in condemning Conway, since it provides an opportunity to burnish their credentials as independent of the Democratic party. I have to agree with Harvard academic Theda Skocpol that the ad is nonetheless fair game. One would think with all the ads out there that fail basic fact checks, an ad that appears to be accurate with respect to its salient point would not be topping the list for most unacceptable. The Republican establishment advised James Dobson that Paul was a libertarian but Paul's people lobbied Dobson hard to change his endorsement from the GOP establishment candidate to Paul and were successful. Had Paul not done this and even accused his primary competitor of misleading Dobson, Paul's blasphemous college pranks - which Dobson would have taken very seriously had he known - would not be an issue. Ugly might thus better describe Rand's reaction: calling for Conway to be disqualified from standing for election and pandering by substituting the substantive knowledge I suggest above with a "pop culture" quote from scripture.

All this to say that Nenshi's election is indeed contrary to the stereotype of Calgary as Harperite heartland but Calgarians do not demand social conservatism out of their politicians like voters in the US South do. Albertans are not especially fiscally conservative either. Alberta has a far larger government than its personal and corporate tax revenues could possibly support. As MLA Doug Griffiths as pointed out, those revenues wouldn't even cover the Health budget, which is but one department. The province nonetheless enjoys a windfall of natural resource revenues that has fueled government expansion. It's true that "Conservative" candidates win easily across the province (aside from central Edmonton) at the federal level. But this is in large part due to regional alienation sentiments (and a taste for "patriotic" foreign policy that doesn't apply sub-nationally) that cannot be so easily inflamed at the provincial level, and even less so at the municipal level. So it is that candidates who would be "Liberal" provincially and/or federally routinely beat "Conservative" candidates in both Edmonton and Calgary municipal elections.

Nenshi's Masters in Public Policy from Harvard helps him in a race where the electorate is voting for an individual instead of a party, as it should, since the status of high school drop-out that one particularly famous former Calgary mayor held is not especially salutory when Alberta already has one of the highest dropout rates in the country. I should also acknowledge that I would have few Nenshi conversations to take issue with were Nenshi not open enough to not object to a guy following him around with a camera and releasing footage under a minimally restrictive Creative Commons license. While there appears to be some Obama-like hype around Nenshi, it is presently too early to dismiss Nenshi's election a "mistake," as Calgary government MLA Kyle Fawcett tweeted. The way Nenshi won, from relative obscurity to victory in just a few weeks despite not having held office before, should encourage quality candidates to get involved in municipal politics.


Paula Simons of the Edmonton Journal has, unsurprisingly, interpreted the re-election of Stephen Mandel (right) and the likes of Don Iveson as meaning the capital city has overcome its "fear of innovation" amongst other things. For someone who has supposedly been liberated to innovate, Simons' analysis is distinguished by its lack of originality. A continued small-l liberal conceit is that conservative finger-wagging about "responsibility" is ultimately reducible to a fear of moving forward. One of David Dorward's (at left, photo credit Ed Kaiser, Edm J) campaign themes was getting the funding for a massive LRT expansion well sorted before jumping into deficit financing and/or years of double-digit tax increases. This point is rather conveniently avoided by the thesis that the municipal vote is reducible to a referendum on the airport or some pie-in-the-sky notion of "how we see ourselves as a city." It's as if only narrow and small-minded people talk about prosaic details like the number of calories in a veggie plate relative to a chocolate sundae. "Think big" ergo "spend big," - tomorrow will take care itself if you see the glass as half full. At bottom it's the same tax-and-spend (non-)argument we've heard for years.

Graham Thomson, meanwhile, uses his column to draw a line from the municipal election to a future provincial crackdown on "freedom of the press." His logic
- the Wildrose Alliance supported Dorward for mayor
- Danielle Smith, Wildrose leader, is running in Okotoks-High River
- William "Bible Bill" Aberhart represented this area in the 1930s
- as premier, Aberhart tried to censor the press and was a hypocrite with respect to MLA recall.
That Thomson should manage to get this absurdity printed in Edmonton's paper of record is a testimony to his skills at sophistry. Perhaps conscious of the enormous chasms his "reasoning" is leaping, he says "readers took me to task" for not drawing links like this earlier and he's just innocently "making the connection as a reminder that sometimes Alberta politics takes dramatic and unexpected turns." Right.

St Albert pundit David Climenhaga muses about the implications of the "decisive defeat" of David Dorward. In fact had Calgary's mayor-elect received Dorward's 34% of the Edmonton vote, Calgary's mayor-elect would still be mayor-elect. In other words, Dorward beat both Ric McIver and Barb Higgins yet few are saying both of those two Calgary contenders went down to "decisive" defeat. Dorward's result was actually reasonably strong given how late his campaign got going and the fact he was on the minority side of the galvanizing airport issue. Incumbents are re-elected close to 90% of the time, such that had the election been at all close it ought to be interpreted as a wake-up call to the incumbent. On that count, Kim Krushell, the well-regarded Ward 2 incumbent, had such a squeaker of a win that it can hardly be said the airport issue didn't have any traction. This ward 2 race is far more suitable for being characterized as a referendum on the airport than the mayoralty race. Also of interest is the fact that former Alberta Alliance candidate Tony Caterina swamped Brendan van Alstine in Ward 7 despite the fact #toncat was only partially an incumbent and Ward 7 is prime NDP territory. Last, but not least, is Kerry Diotte's success in Ward 11. Perennial "almost but not quite" candidate Chinwe Okelu thought his gap behind Diotte would have been tighter that it ended up being. As someone who had some Wildrose support, Diotte's win is another counterpoint to the contention that the tea leaves of the municipal election suggest the Wildrose Alliance will find no purchase in the capital city.

Sunday, October 10, 2010

State of the Rose: not addressing the problem

Since I blogged a few weeks ago about "the marshmellow test", I've looked for bloggers who have linked the concept with macroeconomics and I've come across a column by Christopher Meyer that puts the point rather succinctly:
The US doesn't need to match Vietnam's 42% of GDP invested. Just getting to the level of a Singapore (21%) or Switzerland (22%) would be a huge improvement. But it won't be easy. This quote, of disputed origin, expresses the problem:

A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits....

If you were running for office in a country of marshmallow addicts, what would you do?

A good question. In 2005 David Frum defined a "brokerage party" as "a political entity without fixed principles or policies that exploits the power of the central state to bribe or bully incompatible constituencies to join together to share the spoils of government." Perhaps a political party cannot grow large enough to form a government without becoming a brokerage party.

I believe a starting point on the way to a solution may be to first address policy matters that deal with the mix of national income components as opposed to the expenditure-side mix of consumption and investment. China's undervaluing of its currency, for example, is more than just a consumption versus investment issue: the undervaluation allows the Chinese government to extract a substantial slice of the value of China's exports without distorting the incentives that encourage its people to work so hard and make Chinese labour so productive. Does this remind anyone of the "tax what is inelastic" argument that has been advanced in support of land value taxation? It should.

Naturally-occurring goods such as water, air, soil, minerals, flora and fauna are used in the creation of products. Economists call the payments received by the owners of these primary factors of production, which can be generalized as "land", rent.

An unfortunate tendency of influential people in the Wildrose party is to prioritize protection of the interests of "land" owners under the rubric of protecting property rights. Prior to the 2009 AGM, the party platform included a plank that called for "deeded landowners to receive up to 1% of the provincial royalty income generated on their land." I spoke out against the plank, noting that the policy created a "windfall," with the key point being that any cheques written under this policy "would be totally unrelated to any work or capital contribution by the surface owner." Although the plank was deleted after a close vote, the sentiment remains, and we see it in things like Wildrose's obsession with bills 19, 36, and 50, a focus we've seen from candidates like Link Byfield in addition to the leader.

Granted the issue is not directly a taxation issue, but besides unhelpfully encouraging a NIMBY culture, there seems to be little appreciation for the fact that land owners make no contribution to the production process. They instead just prevent others from using that which would otherwise be useful.

National statistical agencies typically break down broad income and expenditure estimates in order to show how the various sectors of the economy interact in their transactions with one another to produce national output. These agencies (and economists) identify more income categories than just employee wages and business profits. As an economy generates wealth, the price of land and other natural resources increases. Because the gifts of nature cannot be produced by human effort and supply cannot be increased to meet demand, holders of land and natural resources are in a position to capture the surplus - economic rent - generated by labor and capital. This rental income is a distinguishable income category of its own, and there is little call to be especially concerned about protecting its share of national income on either a moral or economic basis given that it is a socially generated surplus that is being privately captured. Besides being bad economics to defend this externality-consuming profiteering, it creates a backlash against profit in general, making it that more politically difficult to provide policy relief to productive labour and industry.

I've gone on something of an extended tirade about the state of the Wildrose Alliance here with today's triple post but in fairness it is not clear that the party leadership is offside with the membership. One of the critical issues both in terms of economics and social justice that the province is facing concerns the far weaker pension benefits that private sector workers can expect relative to their public sector counterparts. The solution is not enriching the Canadian Pension Plan, which would mean public sector retirees with Cadillac pension plans get even more, but creation of a non-universal program that acts as a supplementary plan for private sector workers. The Alberta government, to its credit, has explored a "made in the west" solution along these lines in partnership with British Columbia. The Canadian Union of Public Employees (CUPE) has, no surprise, come out in favour of greater CPP benefits. Who supports CUPE's view? Apparently just as many Wildrosers as non-Wildrosers: "[t]wo-thirds of respondents who support Stelmach’s Conservative Party back an increase [in CPP benefits], as do a similar number of supporters of the Wildrose Alliance Party."

UPDATE Tuesday, October 12:

As if on cue, Wildrose leader Danielle Smith is meeting with the Warburg-Pembina Surface Rights Group tonight to speak about the "Wildrose vision" on "property rights issues" while the OECD has published a study that finds that "recurrent taxes on immovable property" are the "most growth friendly" taxes. Corporate income taxes, which Wildrose circa 2010 has been silent about (unlike Wildrose circa 2008), "have the most negative effect on GDP per capita."

Siding with rural landowners, many of whom simply inherited their land, may make a lot of political sense but on a policy front it is completely wrong-headed.

UPDATE Wednesday, October 13:

"Cancelled Power Plant boosts Oakville Real Estate" makes explicit the connection between the market value of privately held property and public policy. Adam Radwanski then makes explicit the connection to business investment: "In terms of energy policy, the Oakville decision raises all sorts of questions... to what extent will such a reactive decision scare off investment by an industry that sees fewer risks elsewhere?"

Earlier today someone tweeted me saying there isn't a parallel to Alberta's power lines debate, but several months ago Wildrose's leader reportedly said, "Landowners must be fully and fairly compensated for the loss of value in their property and nuisance these new lines will cause."

See MLA Doug Griffiths' remarks after 14:25 of this AlbertaVenture interview for why it's difficult to have a substantive discussion about Alberta's fiscal policy.

State of the Rose: Education

What's remarkable about the June AGM shots that Anderson and Forsyth took at selected party platform planks that predated their parachuting into the party is how their chosen targets match those of their PC caucus colleague Gene Leskiw (right). Go after the party's free speech plank calling for the repeal of Bill 44's section 3? check. Complain about the "allow individual workers the choice to determine their membership in labour organizations" plank? check. Leskiw's complaint that "[t]he only MLA in the party speaks of limiting teacher’s right to strike to weekends and holidays" is revealing in that this sole MLA was Paul Hinman, yet in the pre-AGM materials the motion to have this right to strike limit struck was attributed to "the caucus." This suggests that Hinman, the only caucus member to campaign for Wildrose in the last election and, later, be elected under the Wildrose banner, has either been co-opted or marginalized as a "caucus" member by Anderson and Forsyth. What about Leskiw's rant about Wildrose promising "standardized annual testing of students and teacher quality"? "This comes straight from George Bush’s American plans for school improvement," she protests. At the June AGM Anderson and Forsyth essentially spelled each other off as they went to the microphone to speak out against planks the teachers' unions don't like. Although I didn't recognize him at the time, teacher union lobbyists present at the AGM (the Provincial Executive Council of the ATA sent seven of their members) recognized another speaker who wanted to protect the teachers' union right to strike as social conservative John Carpay, now Wildrose's candidate for Calgary Lougheed

Perhaps Anderson and Forsyth would like to issue a press release that comments on this letter signed by more than a dozen US school district superintendents and supervisors, which complains of the "glacial process for removing an incompetent teacher". As an interviewee in Waiting for Superman, which is now showing in US theatres, observes, "[t]he teacher's unions are a menace and an impediment to reform." One can quibble with the film saying it oversimplifies, just as I would quibble with Wildrose's education policies by saying there should be more specificity with respect to using objective data in teacher assessment, such as a call for exploring value-added models (VAM). But the film's main thesis, that the effectiveness of the teacher is the major determinant of student academic progress, is supported by the evidence.
Jay Greene, a fellow at the Manhattan Institute and head of the Department of Education Reform at the University of Arkansas, is but one of several education scholars who have exposed the belief "that vouchers do little to help students while undermining our democracy" as a myth. According to, a paper by Stanford economist and Hoover Institute fellow Caroline Hoxby that demonstrated that competition among public schools benefit students and taxpayers has been cited 689 times. Matthew Ladner has noted that "choice faces formidable political enemies," and indeed it does, when even a Wildrose MLA has called on supporters of this supposed pro-market party to treat vouchers as a "red flag." On top of this, there is a very simple retort to Gene Leskiw's remark about George Bush's No Child Left Behind Act, and that's that Barack Obama's Race to the Top program takes a page from the same "standards" playbook. Is Obama yet another right wing ideologue?

In any case, current Wildrose education policy as recently announced by the leader mentions testing only to say that current provincial achievement tests should be killed off. While an unspecified replacement is proposed, the replacement is to be developed by "working with teachers." To anyone inclined to interpret this as anything but a union accommodation, note that the process of acquiring insight into what politicians really believe (if anything) requires a certain hermeneutics. One must start with the realization that most political decisions involve some sort of trade-off between interest groups, and that politicians will try to minimize the reality of a trade-off as much as possible in order to be all things to all people. One thus needs to suss out who will get the actual concrete result they have lobbied for, and who will get the dog and pony show. In this case, terminating the PATs is a real substantive victory for the teachers union and the key member of their braintrust on the issue Alfie Kohn. Nowhere in the platform that Wildrose members had an opportunity to vote on is it asserted that the PATs are "outdated" or "inadequate", as current Wildrose policy declares. Indeed, for all the talk about how Wildrose is under the influence of right wing think tanks, axing the PATs is directly contrary to what Michael Zwaagstra has called for at the Frontier Centre. A nod is made towards the annual testing called for by the membership-reviewed party platform, but, again, when applying the principles of politi-speak hermeneutics one must look not for who is getting the "yes" (everybody gets the "yes" from a politician), but for who is getting the "no." In this case, it is clear that the party leadership is trying to give the "yes" to the union lobby to the maximal extent possible that continues to allow deniability that the other side is getting a "no". Where's our standardized testing (full disclosure here: throughout my education career standardized tests were a big boost to my academic record and/or reputation)? "Oh, the tests will remain, in fact the fox is in the henhouse right now developing them!" The proof in the pudding here is the fact that testing opponents actually get argued with instead of quietly accommodated in the remarks of red Tory and current Education minister Dave Hancock, with Hancock fingering anti-testing ringleader Kohn as "dogmatic."

In the photo (right) that Alberta Union of Public Employees' Committee on Political Action released of COPA's meeting with the "Wildrose caucus" on February 23, conspicuously missing is principled conservative Paul Hinman. Heather Forsyth featured in an AUPE press release to help make the union's case against the PC government and at about the same time Rob Anderson appeared in a United Nurses of Alberta release. In January, Danielle Smith had her own meeting with AUPE's president (photo left), with the AUPE subsequently asserting that the Wildrose leader "was receptive to union concerns." In order to advance his thesis that a Wildrose government would take a hard line on unions, AUPE communications person and St Albert-based blogger David Climenhaga was reduced to drawing on a statement by the loser of last year's Wildrose leadership vote, Mark Dyrholm. The result? Wildrose's rise having such a negligible impact on public policy that the union lobby declared victory after the government's February budget: "The budget is something of a victory for [our] coalition"

With respect to Wildrose's post-secondary education policy, it's more financial obligation on the government, less on those who consume a government-subsidized service, and fewer resources for the in-deficit provincial Treasury. The policy calls for mandated tuition caps, a philosophy rather at odds with the idea that the market should determine price levels. A consequence of the cap is that either our universities will have their funding reduced, or the Alberta taxpayer will have to contribute more. Increased tax breaks for private donations are also talked about, but donations of securities, for example, are already tax free.

Don't get me wrong here: there are problems with just demanding more standardized testing, amongst other things. But what's missing is any sign that the union lobbies, and more generally those with claims on the public purse, are going to be challenged.

State of the Rose: Wildrose vs libertarians

In mid-October 2009, the membership of Alberta's Wildrose Alliance Party elected Danielle Smith as its new leader. Since then the party, which was polling 7% in April 2009, has never polled below 25% across the province, while the official opposition Alberta Liberals have never polled above. Wildrose has so sidelined the Liberals as primary opposition to the governing PC party that a newspaper editorialist has contended that Wildrose is fighting a proxy war against the governing PC party in the upcoming municipal election in Edmonton. Ms Simons' opinion piece has to be taken with a grain of salt: her previous columns suggest that she would like nothing more than to see Wildrose humiliated in the capital city, and a possible route to that end would be to render as a verdict on the party the October 17 municipal vote, which should see the incumbent mayor Stephen Mandel win at a canter. The proxy war narrative also fits it rather too conveniently into Mandel's ranting about provincial politicians interfering in Edmonton's affairs. But whether the thesis that Wildrose has what military strategists call force projection capability to contest the most Wildrose-unfriendly territory in the province on a proxy basis is well-founded or not, there is no denying that Danielle Smith has a significantly higher profile both provincially and nationally than Official Opposition leader David Swann.

Writing about my view of the state of the party this weekend is going to be lengthy chronicle of woe, sad to say. As such, I'm dividing it into three parts: 1) the regrettable and unnecessary falling out between the party and libertarian pundits at the Western Standard and Macleans 2) Wildrose's education policies, which on at least one unsettling point are more teacher union friendly the PC government's policies, and 3) a broader view of the fundamental policy problem that North America in general faces and how the "conservative" parties are failing to address it.

Ms Smith' convincing victory in the race to become Wildrose leader was seen by many "libertarians" who supported her as the membership's endorsement of a libertarian positioning for the party. Danielle told the Edmonton Journal's Capital Notebook that she was "libertarian and pro-choice." Matthew Johnston, owner of the Western Standard, says that at his e-magazine "we aim to be fiercely and openly loyal to libertarian ideas" and in April 2009 Johnston described Danielle as close to the "perfect candidate". Johnston co-hosted a reception for Danielle with federal Libertarian Party leader Dennis Young in Calgary in June 2009, shortly after Danielle declared her candidacy for the party's leadership. The blogger "CalgaryLibertarian" volunteered to help the party win the Glenmore by-election later that summer. While organizing for Wildrose in Edmonton's south-west late last year, I tried to get a 20-year old Edmonton libertarian on to a constituency board in order to ensure that the voice of young people was heard and although this student had to decline because of school commitments, he said he was very interested in getting Danielle to speak to his local libertarian meet-up group.

I'm not a libertarian, I'm a paleo-con, but I nonetheless feel that, in general, libertarians are a valuable part of any conservative movement not least because their enthusiasm for what is largely an abstraction makes them less susceptible to partisanship on any particular issue. Earlier this summer Western Standard writer JJ McCullough noted an "important" fact that is "largely forgotten or unfashionable to recall in the present day," namely, that "[t]he 1993-2003 Liberal government of Jean Chretien embarked on a remarkable agenda of fiscal conservatism." Another Western Standard contributor, Mike Brock, uploaded to Youtube a video of Andrew Coyne blasting the Harper Conservatives.

By being frequently found outside established brokerage parties, Libertarian pundits serve as a conscience check of sorts, and so it was that I thought that Matt Johnston's view should have been given some consideration when early this year he warned against floor-crosser Heather Forsyth being "given prominence in the party that could put her in a position to shape policy." I, myself, was more concerned about Rob Anderson, writing to a Wildrose executive member on January 4 to warn that Anderson is "a communications risk for going off message on social issues." The idea of "prominence" that Johnston refers to is an important one: floor-crossings are not all created equal. If crossers are going to justify not running in a byelection with the argument that they were elected as individuals instead of as representatives of a party, if post-crossing those individuals are presented more as individuals than as party representatives, the hypocrisy is minimal. More than a year ago I had written to the same Wildrose executive member to express my concerns about floor-crossers in light of the then rumours, noting that accepting the crossers into the party is one issue and "[w]hether we want them to step into what would amount to commanding positions in the Wildrose Alliance is another issue."

So when, just a month after I blogged here that "the less we hear from caucus... the better," caucus puts out a "Wildrose statement" that provokes Matt Johnston to write, "I feel sick about this. I really thought Danielle would be different," I don't know whether to laugh or cry. It is, of course, not just Johnston that is upset. Mike Brock has waved the "I told you so," finger as well, saying "[a]s I predicted, the libertarians must compromise." My former high school classmate Colby Cosh, writing for Macleans, deemed the press release evidence of an anti-evidence-based social policy and perceived Forsyth's idiosyncratic policy concerns in the text. In my view, whether or not a politician makes "extreme" remarks is unrelated to how accountable that politician is. An elected politician who makes idiosyncratic policy announcements, however, is necessarily insensitive to accountability considerations to at least a degree because an accountable politician keeps in mind the fact that the people who volunteered their time and money to elect him or her did not do so in order to advance a particular person's ambitions and personal agenda, but to advance a general agenda. De-particularizing one's platform is correlated with removing one's particular self such that getting elected becomes a team effort. The fact that Cosh, Johnston, Brock et al have all gone off about this incident suggests that these critics are voicing a view that is generally held. What's especially headshaking here is the fact that Forsyth and Anderson have used the soapbox given to them by Wildrose and funded by the Alberta taxpayer (through the MLA office allowances) to go off about a court decision in Ontario, calling on the federal government to wade into a provincial issue.

As a non-libertarian, I am not as disturbed by the substance of the policy issue here, prostitution, as the Western Standard writers. The legalization of prostitution was one of the weekly Economist debate forum topics in September and I think the "con" speaker helpfully raises some of the fallen nature arguments that libertarians, who have have little time for depth psychology, all too often give short shrift to. I also think that that if Johnston, Brock, and Cosh were true libertarians as opposed to anti-social conservatives, they would have reserved their greatest indignation for when "the caucus" (read: Anderson and Forsyth, since I can't believe it was Hinman's idea) took their very nearly successful run at the policy planks that said Wildrose "will allow individual workers to voluntarily determine their membership in labour organizations" and "will extend to workers the democratic right to a secret ballot vote" at the party's AGM in June. I would think that the right to freely buy and sell labour in general is more fundamental that the right to freely buy and sell the human body. But the fact that more than three quarters of Economist readers should think prostitution should be legalized shouldn't surprise anyone and this sentiment was not confined to the upscale readers of the Economist either, if the comment threads on the CBC and Globe and Mail websites are any guide.

Libertarians are something of a fringe group and evidence for this is the fact that the caucus press release at issue here was uncontroversial in the eyes the mainstream media. But as a fiscal conservative I have to wonder how fiscal conservatives would fare under a Wildrose government. Mike Brock writes:
It's time, as I've been saying for a while, for libertarians across the country to withdraw our support for conservative parties across this country.

Even though we are a small minority in the movement, we played a big roll in the media, within the party establishment and on the ground shilling for conservatives over the past decade. What have we gotten for this?

Insults by the prime minister, who used to identify with classical liberalism. A complete abandonment of fiscal responsibility. More regulation. Bigger government. More military spending. Intensification of the drug war.

Oh, and some token tax cuts. At the expense of the biggest deficit in history, mind you.

No. I call on libertarians from all over to withdraw their support and do their damnedest to sabotage the conservative movement by playing to it's hypocrisies on economic issues, in particular.

I have to agree completely that self-styled conservatives need to be exposed for their "hypocrisies on economic issues", with the prime minister being offender-in-chief. Boondoggles like the Atlantic Opportunties Agency are getting as much taxpayer money as ever. It seems to me that what Brock and I have a common problem with is PARTY conservatives. Principled conservatives need to stop drinking the kool-aid, especially the kind labelled "citizen's initiatives", which the worst of the demagogues, like Bill "indicted-by-the-Conflict-of-Interest-Commisssioner" Vander Zalm, exploit for their own purposes. Consider the chain of the events that led to this latest incident. It was ultimately set into motion by a decision that was made, not by ordinary voters who elected Anderson and Forsyth to represent Wildrose, or by a grassroots membership vote to take a positioning that would alienate libertarians, but by an extremely small group of insiders at the top of the party under conditions of negligible transparency. That the financial interests of the floor crossers was reportedly taken into consideration as well (note the potentially "without an income for six months [if the crossers resigned to run in byelections]" quote in that link) just underlines how the fateful decision was made in the best traditions of back room politics.

Brock in fact has it wrong when he contends that the libertarian supporters of the party ended up with a "compromise" outcome they find unsatisfactory. Were that the case, as someone who doesn't hail from that wing I would have no objection. The real problem is that how libertarians would perceive the caucus press release on the Ontario court decision was simply never even considered.

Sunday, October 3, 2010

China's friends in Alberta

On September 8, a fishing boat from mainland China rammed two Japanese coast guard ships near some uninhabited islands northeast of Taiwan, known as the Senkaku islands to the Japanese and Diaoyu islands to the Chinese. The islands have been under Japanese administration since 1895 (excluding the US occupation of Okinawa from 1945 to 1972) but in the latter half of 1970, when potential petroleum resources became a consideration, the governments of China and the Taiwan began to advance claims to the islands. Japan released the trawler's crew but detained the captain, Zhan Qixiong, intending to prosecute him under domestic law.

The Chinese reaction was, in the words of the New York Times, "swift and angry," and included a block on exports of rare earth elements, which are critical to hundreds of high tech applications. Eventually Japan buckled and released captain Zhan, who returned to a hero's welcome in China (photo below credit: ChinaFotoPress / Getty Images).

According to the state-controlled Xinhua News Agency, captain Zhan's grandmother "died from shock upon learning of his detention." China Network Television, CCTV's online archive, reported that
Japan's move was a serious violation of, and a brazen challenge to, China's sovereignty over the Diaoyu Islands and their adjacent islets which have been an integral part of China since ancient times, said Chinese diplomats and experts.

As a mouthpiece of the Chinese government one of CCTV's favourite tactics is to interview sympathetic experts who say what the Politburo wants said. The channel hasn't been shy about taking on its critics. It's distributed a story by the Communist Party-controlled English language newspaper China Daily alleging that Reporters Sans Frontieres (RSF) has "sowed and fueled hatred toward China and Chinese people anytime and anywhere using whatever ignoble ways they could conceive." CCTV has also carried Xinhua stories attacking rights groups, finding a "human rights expert" to claim that an "Amnesty International report, similar with those issued by other foreign rights organizations, had 'evident logical errors'."

In early 2009, 22 Chinese academics and lawyers published an open letter to announce their determination to boycott CCTV in protest of its "brainwashing propaganda." It's not a boycott that University of Alberta political scientist Wenran Jiang has been inclined to participate in, as Professor Jiang has been a frequent interviewee for Communist Party-controlled media outlets.

In June Jiang appeared on CCTV to complain about the US military's presence in both Japan and South Korea, insisting that "the cold war is over," (13:17) - an interesting claim given that TIME has just published a story titled "Asia's New Cold War" - and stating "I hope they are not working towards a containment framework [towards China]" (20:56). Comments like these are no doubt a reason why CCTV News seems to invite Jiang on to its show every time he is in Beijing, which appears to be frequently. While Dr Jiang worries about a possible containment strategy and Taiwan's military (Jiang arguing that US arms sales to Taiwan "may in fact lead to instability and a new arms race"), think tanks in the UK and the Pentagon estimate that the PRC's military expenditure has increased 20-fold over the last 19 years. Japanese military spending has declined over the last decade.

The Economist lamented this past month's Senkaku islands incident, observing that "the ferocity of the Chinese response has harmed China ultimately, by undermining confidence in China as a responsible stakeholder in the region," But in 2008 Professor Jiang contended that China was trying to exhibit "Smile Diplomacy" towards Japan despite Tokyo being "confrontational."

In March an analyst for the U.S. Army’s Foreign Military Studies Office noted that "China controls approximately 97 percent of the world's rare earth element market" and that in 1992 Chinese leader Deng Xiaoping declared, “There is oil in the Middle East; there is rare earth in China." One of the most important uses of rare earth elements is magnetic technology and in 1986 General Motors established a new division, called Magnequench, to produce NdFeB magnets, which also have critical military applications. In the late 1990s, the Chinese made a move on Magnequench and the US government cleared the acquisition, provided Magnequench remained in the US for 5 years. The day after the deal expired in 2002, however, "the entire operation, along with all the equipment, disappeared. All employees were laid off and the company moved to China." China also bid for Australia's rare earth resources but backed off after Australia’s Foreign Investment Review Board asked the Chinese to seek only a non-controlling interest. Professor Jiang nonetheless echoed the People's Daily to tell the Australian Broadcasting Corp that the West shouldn't worry so much because the production of many raw materials is nonetheless "controlled and owned by foreign multinationals inside China." (after 5:47) A former senior strategic trade adviser at the Defense Department is not reassured. "The Pentagon has been incredibly negligent," says Peter Leitner. “There are plenty of early warning signs that China will use its leverage over these materials as a weapon.”

A notable exception to what Jiang sees as unwarranted China skepticism coming from western governments is Alberta. In 2008 Jiang appeared beside former Alberta PC MLA and current "Official Representative of the Province of Alberta to the U.S." Gary Mar on a panel in Washington DC to state that he had been in discussion with Mar about cooperating with China on various issues at the sub-national level (1:03:00) and alleged that Ottawa has not been "friendly at all towards China," further suggesting that Mar agreed with him but could not speak freely since Mar is working out of the Canadian embassy in DC (1:10:50).

This wasn't the first time Jiang has taken the federal Conservatives to task. He's written an CanWest op-ed dismissing the "self-congratulatory, moral statements regarding China's human rights record" that Canada has made and penned a Globe and Mail piece that reckoned that the offering of an honorary Canadian citizenship to the Dalai Lama, amongst other things, constituted "grandstanding"

According to Professor Jiang, "there's no excuses for China to make on the foreign policy area [because there's nothing requiring an excuse]" (37:37 of this TV Ontario panel) and he is entitled to his opinion, of course. Less clear is whether the Alberta government should have set up a Beijing apologist with $24.5 million as Founding Director of the China Institute at the U of A (in photo below from left to right: Mar, Jiang, and Minister Gene Zwozdesky; photo credit University of Alberta) instead of, say, a scholar who signed Charter 08, a manifesto initially signed by some 300 Chinese intellectuals and human rights activists to promote political reform and democratization in the PRC and since signed by more han 8000.

In his latest New York Times column Paul Krugman levelled several charges against the PRC that I can't disagree with, such as "China’s government has shown no hint of helpfulness and seems to go out of its way to flaunt its contempt for U.S. negotiators" and "U.S. policy makers have been incredibly, infuriatingly passive in the face of China’s bad behavior." Krugman's prescription, however, which appears to be risking a trade war, has a lot of economists shaking their heads. Indeed, tariffs could prove disastrous.

There is a happy medium between trade restrictions and the love-in going on between Alberta policy-makers and the Chinese, which is of concern primarily not because of trade and investment issues but because of a remarkable nonchalance that seems to prevail with respect to technology transfer to the PRC. If "Chinese companies have the bad habit of siphoning off technical expertise from their German partners," according to Germany's Chancellor, what is so special about Albertan partners that the same doesn't apply to them? The Alberta government has announced various technology collaboration agreements and funded "research... in State Key Laboratories and/or National Laboratories throughout China." In 2009 Ross Terrill's expert testimony before the U.S.-China Economic and Security Review Commission warned that "the large numbers of Chinese students entering the United States would include many students either encouraged or intimidated by the government into seeking out technological acquisitions on behalf of the PRC." Chinese students are often outstanding (the secret weapon of the top performing school in New South Wales is quite simple: lots of Chinese, Vietnamese, and Korean students) but this is an issue for the U of Alberta in particular that seems to have received little attention, in contrast to, say, down under, where the foreign editor of The Australian has written about how the "reliable pro-China gang" in his country is "centred on the Australian National University." If Albertans were more curious about the gap that exists between Edmonton and Ottawa on China policy, perhaps there would be more interest in the security of University of Alberta research and in the question of whether our trade and investment policies have been subject to foreign influence.