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.

1 comment:

Anonymous said...

Brian Dell, you fail for cheering against Tony Caterina, how many more Alliance type people are you going to go against who have to prove you wrong?

Paul Hinman, Tony Caterina, who's next?