Alberta politics in downward spiral

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

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 When I called attention to the fact that the Wildrose leadership's assertion that the PATs are "outdated" or "inadequate" clearly was not coming from either the grassroots or conservative pundits, I pointed the finger at floor-crossing MLAs Rob Anderson and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

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

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

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

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

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

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

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

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

off-balance sheet government

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

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

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

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

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

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

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

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

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

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

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

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

...

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

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

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

- Norwegian Ministry of Finance

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.

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.

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.

land value taxation and the ECCA closure debate: oligarchs in the shadows?

In a comment to my last post about land value taxation, Edmonton Journal columnist David Staples asked me a few follow-up questions of the sort that one would one expect from any good journalist. A good journalist is, of course, an invaluable aide to any politician or pundit who has some useful policy ideas but is short on charisma, eloquence, or just ability to speak plainly and concisely, since the journalist can take the idea, add the missing eloquence, concision, and straightforward presentation, and then present the concept to the public for mass consumption. I'd make a few more asides about the relationship between good journalists and politicians who are long on charisma and eloquence and short on policy substance, but that's an extended topic in itself I'll leave for another day.

So without further ado (I've edited or ignored a question or two; the first lesson successful political candidates learn is to not answer the questions they are asked, but rather the questions they prefer to be asked to the extent that it is possible to do so without getting called on the evasion):

You don't tax the building, just the land, is that it? And you tax the land based on what exactly?

Yes, a given plot of land would be taxed the same by the city regardless of whether there was a skyscraper on it or a dilapidated old shack. The tax payable would be determined by the market value of the land. Just how the market value of the land would be determined could be complicated; suffice to say that this paper attempted to do so and concluded that, for example, for the average property transaction in Clareview a decade ago, 35% of the sale price reflected the value of the land.

Who will pay more and who will pay less under this system?

To continue with that 35% example, if I were a property owner and city assessors concluded that, based on a hypothetical sale of my property at market value, more than 35% of the value I would receive would represent land value, I would pay more. A typical owner who would pay more would be the owner of a single detached bungalow, especially if the building was run down. A typical owner who would pay less would be a high rise condo dweller.

How will it drive people to live in the inner city? Examples?

Offered examples are typical hypothetical since the case for land value taxation hasn't been as developed as an empirical argument as much as as a theoretical one.

By far the biggest and most contentious hypothetical example in the Edmonton context is the city centre airport lands. One of the biggest arguments for closure of the ECCA concerns the opportunity cost of not having more dense development there. Under land value taxation, the marginal tax cost of throwing up a residential high rise or commercial skyscraper on what is now a runway would be zero. These buildings will be more competitively priced to potential occupants than, say, a suburban bungalow (the market will capitalize the present value of a bungalow lot's future tax liability into its sale price).

To leave aside these questions to make some observations about the ECCA debate, note that instead of advancing a call for land value taxation, which would support closure of the airport if it were straightforwardly efficient to do so, most of the advocates for closure have instead called for closure by city council decree. For a lot of people like me who are naturally skeptical of centralized government planning, we are suspicious of the numbers arguments that have been trotted out in defence of the decree. Are costs being fully accounted for? Do the pro-airport councilors really want the buildings, or the tax revenue they hope the improvements would generate? Convert the land to high density residential and, yes, at first glance this should obviously generate a lot more tax revenue for the city than the status quo, but absent tax reform the increased revenues are coming from improvements to the land, an elastic source, and whenever elastic sources are taxed dynamic scoring is required. There is a feedback loop, in other words, that makes any definitive analysis quite complex.

Amidst this complexity and uncertainty, questions about how the incumbent council can come to a definitive disinterested conclusion arise. In 1990, for example, many economists wrote to Mikhail Gorbachev, advising him that "[w]hile the governments of developed nations with market economies collect some of the rent of land in taxes, they do not collect nearly as much as they could..." Land value taxation was nonetheless not adopted in the wake of the collapse of the Soviet Union, because it wasn't in the interests of the would-be oligarchs:

...a least distorted way for Russia to recover was by a tax on economic rent, that is, the value of land and natural resources that exists independently of labor and capital investment. The aim is to untax industry and labor, and make Russia's natural resources monopolies finance the government. But these are precisely the assets that Yeltsin's kleptocrats were the first to grab.

HST in the news again

According to the BC Hansard, last November 23 Finance Minister Colin Hansen (right) said that "...the most important piece of information that I saw in the middle of May was a chart that shows the marginal effective tax rate on investment province by province..."

What I find interesting about this is that that chart was generated by Finance Canada as opposed to Hansen's own department. I have included such a chart in my own blogposts before, and I took it directly from the federal department's website. Indeed, in response to a question about the chart's origin from NDP finance critic Bruce Ralston, Hansen stated that "the table .... was prepared by the federal Department of Finance." This was a federal initiative that the province happened to find convincing.

Of current interest to most British Columbians, however, are portions of the rest of the exchange that November afternoon between Hansen and NDP finance critic Bruce Ralston:

Hansen: ... we were [not] in discussion with the federal government with regard to harmonized sales tax [at the end of March 2009 when Ontario announced its 2009 budget].

Ralston: ... from ... January 2009, until after the election ... there was no discussion either by the minister or his officials of the implementation of an HST. Is that the minister's position then?

Hansen: That is correct.... The very first indication that anyone in the federal government would have had that British Columbia was reconsidering its previous opposition to the HST was ... at the end of May. It was only subsequent to that that there were discussions that commenced at the officials level.

This week, emails between BC Ministry of Finance officials and Finance Canada were revealed which some media sources are saying "show that talks between staff in Ottawa and Victoria began on March 26, 2009."

In fact that emails don't show that. On the afternoon of March 26 the acting ADM of Finance Canada's Tax Policy Branch, Louise Levonian, emailed all four provinces that had not indicated an intention to harmonize (BC, Sask, Manitoba, and PEI) saying "I am available to discuss." The BC Finance official who received the email, Glen Armstrong, had earlier advised other BC officials that Levonian had indicated that she was available for a meeting the next day "if we think we need a meeting." There is no indication that any such meeting occurred. Levonian emailed Armstrong again on May 11, the day before the BC election, and Armstrong responded with a substantive question, but even if that minimal exchange constitutes "discussion", this occurred in mid-May, contrary to the media claim that "talks ... began on March 26." Furthermore, Armstrong's response to Levonian's email is hardly evidence that "British Columbia was reconsidering its previous opposition to the HST" coming as it did from an official whose job it is to keep on top of his files as opposed to a politically responsible minister.

With respect to discussion internal to the BC government, I'd first note that internal discussion does not contradict Hansen's remarks, above. It is true that on March 27 Armstrong sent an email to another provincial official saying that the minister should be given an updated brief on harmonization issues in light of the Ontario experience. There is, however, no evidence (in these emails) that the minister solicited this. The memo, or an update to it, may be seen as part of the ministry's general responsibility to keep its minister briefed on the developing issues the ministry identifies.

This isn't to say that there isn't a real issue when a political party makes a major policy move shortly after forming government that it had not campaigned on. It is rather to say no significant evidence has yet been revealed that indicates that the BC Liberals were planning to implement the HST and just hid those plans during the campaign. Minister Hansen's contention is that after the election it was then time to think about long term policy and a consequence of that think was the HST. I see no reason to doubt that aside from the natural cynicism that one may reasonably have about politicians and politics in general. If I am not inclined to indulge that cynicism it is because I have worked on the inside of a finance ministry and seen the extent to which the general public is inclined to a conspiratorial mindset that distorts perceptions of how policy is developed.

I do think the BC Liberals hurt the cause of investment friendly (and therefore consumption "unfriendly") tax reform by not at least musing about the possibility of harmonization during a political campaign. They could have done what Ted Morton has done in Alberta and mentioned it as something that warranted further study and that should not be ruled out. But the BC Liberals are not to blame for the FUD spread by Bill Vander Zalm and his NDP allies. Hansen made it clear that his government was getting about $5 billion in revenue with the old PST and will collect about $5 billion under the new HST regime such that it is a tax reform, not a tax hike.

There was a time when it was the political left that had little time for abstraction, laying charges like "that's racist" or what have you based on an immediacy of perception such that appeals to sophisticated argument at all removed from subjective, unfalsifiable "feeling" were summarily dismissed. Today it is the ascendant political right that has no time for concepts that cannot be reduced to a slogan. Self-styled "conservatives" have hijacked and even destroyed essential conservatism by upending its traditional emphasis on responsibility in favour of a self-indulgent demand for tax cuts. Spending cuts are an afterthought, and on the rare occasion when meaningful attention is paid, the typically "conservative" conclusion seems to be that it is spending that affects others, like the young, that should be put on the chopping block. The locus of reference remains circumscribed to me, myself, and I, which I could sympathize with as someone who salts his communitarianism with respect for the individual were it not for the fact that the reference point is not only metaphysically constrained but chronologically constrained: what's good is good for me AND good for me NOW. Saving for tomorrow? That's so yesterday.

update to last blogpost

I penned (ok, typed) "the more we hear from Danielle the better!" comment before I read this story.

"There are some theoretical issues that Professor Mintz and others have identified, and we’re looking at those, and we take them seriously,” [Finance Minister Ted] Morton said [with respect to tax reform].

Frankly I am surprised to hear this. If Morton had said this prior to heading up the Finance department I would have even been downright shocked, since that would have been prior to his being briefed by his department about the "theoretical issues."

Danielle Smith's reaction? "It’s shocking that he wouldn’t rule [a consumption tax] out."

Smith goes on to declare that "[t]hey don’t have a revenue problem. They have a spending problem," which I could not agree with more, but the context of Morton's "musing", if one can call it that, appears to be "looking at all the options we have for smoothing out revenue volatility," i.e. exploring tax reform within a revenue-neutral constraint.

For what it's worth, I agree with U of C economist Frank Atkins that

It's a really tough sell now because we all know that the whole reason that sales tax talk is heating up now is because of the size of the deficit. This is the wrong time for sales tax talk. This is the time for cutting expenditure talk.

As such, it can be reasonably argued that Morton is, indeed, just looking to raise money, not least because he attacked a spending control bill introduced by a Wildrose MLA earlier this year as being too constraining. Furthermore, "we take [the argument for taxing consumption] seriously" is rather at odds with what Morton's government has actually legislated, since the preamble to the "Alberta Taxpayer Protection Act" states categorically that "a general provincial sales tax is not a desirable tax."

But be that as it may, Danielle's position seems to be that it will always be "the wrong time for sales tax talk." It appears to be an a priori rejection instead of a conditional one that allows for a consideration of the evidence.

According the Edmonton Journal's editorial board, I apparently should never be too concerned about what Danielle Smith says, because she is one of those "opposition politicians who can say anything an audience wants to hear without having to worry about having to deliver." But I am concerned on the policy front and frankly I don't get the politics either. A comment by LarryAlberta on the CBC News website, "[e]liminate provincial income tax and then put in a sales tax. User pay is the fairest of all tax systems" currently has more than half again as many thumbs up as thumbs down. I dare say that the party should not refuse to consider supporting a issue with even just 40-some percent support in Edmonton when almost any constituency in the capital city can be won with 40% of the votes cast and the party would be extremely competitive in any Edmonton riding in which its support was running at 30%.

Wildrose AGM review Part 3 - Walter Wakula defeated

Before I launch into a review of the policy, which will be part 4 of my review, I'll make another comment about the executive election and, before that, try and revisit the point I was trying to make about the income trust taxation decision by asking readers to consider another possible example, which is to consider the case of the Harmonized Sales Tax reform being adopted by BC and Ontario.

Where is the argument in favour of the HST coming from? Not only are the governments of BC and Ontario in favour, but so are the feds (both the Conservatives AND the Liberals). If the "people" are so overwhelmingly opposed, how can it be that there is even any debate about implementing the HST? You may currently be convinced that the HST move (which primarily shifts taxation from corporations, which invest, to consumers) would be as dumb an idea to you if you were Alberta's Minister of Finance as it is to you now as a member of an opposition party. But we have two provincial parties (and two federal ones as well, really) who seemed to have taken a more favourable view once in government. Whatever one's opinion on the matter, surely it would useful to try and find out just why this is.

Before jumping to any simple conclusions, I would note that the NDP is opposed to the HST both provincially and federally. In March of 2008, Ontario Premier McGuinty said,

What the Conservatives are asking us to do is to cut corporate income taxes – those are taxes on profitable corporations – by $2.3 billion… That definitely means closing hospitals, firing nurses, cutting education.

and in September of 2008 McGuinty's Finance Minister Dwight Duncan declared that

We don't agree with Mr. Mintz…Our taxes were the ones that were recommended to us by Ontario businesses, not by Alberta academics. That old neo-conservative attitude didn't work.

One could believe that McGuinty and Duncan flip-flopped after making these remarks because they have weak moral characters. But is it not also possible that Professor Mintz's argument for the HST was fundamentally sound such that this argument eventually came to prevail with reasonably-minded statesmen?

What we should all be able to agree on is that both the BC and Ontario governments should have been more upfront about the HST earlier. Perhaps Wildrose could end up in the same position of misleading voters if its policy decisions are too summary?

I'll now make one more follow-up to my last blogpost, and that's to note with some regret that Al Napier defeated Walter Wakula for southern director. Walter has more than 25 years of senior executive and corporate directorship experience and has served on the Senate of the University of Calgary. He also contested that Calgary West federal Conservative nomination against Rob Anders, whose resume prior to being elected as MP primarily consisted of acting as a professional heckler on behalf of the Oklahoma Republican Party. Anders' most recent claim to fame is to instruct our Canadian troops, "when in doubt, pull the trigger." According to the CBC, "Anders' message did not sit well with his constituents in Calgary West." Of course, the constituents of Calgary West could have had Walter Wakula as their MP, but it is not particularly easy to present that choice to the electorate when the federal Conservative party rigs the process. The Wildrose party had an opportunity here to put Walter on our provincial executive, and unfortunately the membership declined (I should note there that members from Edmonton could not vote for southern directors, just as Calgarians could not vote for northern directors). Although Walter was among the very first to get involved with the Reform Party, and has developed solid conservative credentials by dedicating years of service to both Reform and its successor parties, he had the good sense to call for a very well-worded "anti-poverty policy" in the Wildrose platform, a "moderate" policy to be sure that could even be called left wing but a far more defensible "moderation" of the platform than just watering down to platitudes the policies that happen to offend left wing insiders and their well-heeled special interests (yes, I am talking about unions). The truly poor are not an influential lobby in Alberta's legislature or really any legislature, and sadly Walter's anti-poverty plank did not come up for a vote.

Calgary Wildrosers still have a chance, however, to ensure that Walter Wakula is nominated as a Wildrose candidate in the next election. For anyone thinking that Walter isn't a true conservative because he has tangled with the "Conservative" establishment, I would suggest that that very fact may argue in favour of Walter being a true conservative:

ask Calgary West's veteran Reform, Canadian Alliance and Conservative activists and they will say they did not toil in the political wilderness all those years just to put another top-down organization in power. "They've lost their way," one frustrated long-time Reformer said. "This isn't the party we built."
- the National Post

#yegcc: consultant hiring "completely mismanaged" - auditor

Amongst the various gems in the report by Edmonton city auditor David Wiun are the revelations that "consultants are being hired to check with other consultants, and thousands of dollars has been spent on contracts that haven't been completed" and "documents show 25% of consulting contracts cost more than what was agreed upon. And almost 60% of the time, the information submitted was deemed insufficient." Moreover, "contracts were awarded even though no business plan was drawn up detailing what the administration wanted from the consultant, and with several contracts, no final report was ever delivered."

Now one would think that if one isn't delivering a final report, one would lose the city's business to competing consultants (never mind in-house staff, who are even less expensive), but the people in this racket apparently have little to worry about since "only 12% of consulting engagements in [a] sample were acquired through open tender, 68% were awarded through the sole-source process".

Mayor Stephen Mandel explains that city government has grown so much under his watch that city council has to farm out its responsibilities to unelected contractors: "City council is doing more now than we ever have in the past... I think when I first became mayor, we were spending $400 million in capital and now it's up to $1.7 billion last year..."

I'd make two observations here. One, whatever one's opinion of increasing government spending, surely we can agree that the spending that is the most inefficient and vulnerable to abuse should be increased at the slowest rate. Yet consultant spending has soared 30% annually since 2000 to $92 million in 2008. To put $92M into perspective, the Salvation Army's Christmas Kettle fundraising goal is less than half a million, the Salvation Army having raised its goal by one-twentieth of a million this year in order to keep up with a 21% increase in demand for its services.

Two, perhaps city council would not have to hire so many expensive consultants without documentation, competitive bidding, or even a final report if the people in the council chair had more of a relevant skill set themselves. If one truly can't let city management make the decision, or approve the hiring of the people the city needs to make such decisions, then how about doing more analysis of one's own? One of the many councilors who seem to have no comment about the auditor's report relays information that was provided to him by the city with respect to the cost estimates for expanding the LRT west that cries out for NPV analysis. A Net Present Value calculation is taught in every 1st year MBA program and if the city were run like a corporation there would be no chance that competing billion dollar investments like this would be considered apart from a NPV analysis. Before anyone suggests that Brian Dell is displaying his snobbery again I remind readers of the $92 million in taxpayer resources that were spent on consultants do this sort of analysis and the fact city council does not seem to understand what they are receiving from the consultants (why is it left to the auditor to note the lack of real work done? why haven't councilors expressed dissatisfaction with what they have been receiving as opposed to just a professional expert like the auditor?) This isn't to say that the current council is completely out of its depth (it may compare favourably to previous councils which have included tax evaders, thieves, drunks and wife batterers), but rather to suggest that a gap remains between the typical background of an Edmonton city councilor and the private sector manager of a corporation with comparable revenues.

How can council approve a $3 billion+ LRT expansion decision, which will require double digit property tax increases even with the province and Ottawa carrying half the cost (as admitted by Mayor Mandel on Dec 15), without providing us with estimates of the numerator to a NPV analysis? That is to say, the revenue expected to be generated from the various route choices. This is not just a matter of accountability but demonstrating to the province and the feds that city council knows what it is doing. Besides the fact that operating the LRT along 87 avenue to West Ed is 25% less than Stony Plain Road by the city's own analysis, and that not going the 87 avenue route will mean the NAIT trains will require their own permanent turnaround facility south of Health Sciences, and the fact a whole new sort of "low level" train is to be used for Stony Plain Road, how many of the increasing number of residents living west of West Edmonton Mall are going to be inclined to take trams along Stony Plain Road to downtown relative to the faster 87 ave route? The fact that ETS Planning is proposing just 2-car trains here and ETS wants 5 car trains to the U of A from the south should speak volumes on this point. It is well established that the majority of transit users are commuters, and the idea here is to get cars off the road, no?

At issue here is the added risk of cost over-runs and lower with a new "low floor" system relative to building out the existing system. With respect to revenues, the European experience with trams is not analogous because many more of them do not have a car option to begin with, and the "potential development" of Stony Plain Road's urban stops should be considered in the context where development around the urban stops of Stadium, Coliseum, and Belvedere in Edmonton's northeast has been scarcely comparable to around the more suburban final stop at Clareview. Even the New York Times, the voice of the liberal US northeast, notes that costs for Denver's FasTracks project have soared from US$4.7 billion to nearly US$7 billion since approval in 2004 such that residents are being asked to support another tax hike while the project is mostly still just on the drawing board.

The real head scratcher for me is how this 3 comma expenditure on transit expansion can make sense when the communities themselves don't want it. Both west end councilors (Karen Leibovici and Linda Sloan) voted against the plan that included the Stony Plain Road expansion. This is the route that is supposed to keep west enders and residents from other areas of the city attracted to west end services! How is increased private investment along Stony Plain Road likely when existing businesses don't want this? If 87 ave residents don't want it either than why spend a billion plus to take rail to the west at all? I lived in Ottawa for years and the level of ridership is far higher than Edmonton's, despite the fact its rail network is negligible. If the private sector is skeptical that Stony Plain Rd can be turned into the northwest's version of pedestrian-oriented Whyte Avenue that ought to be a red flag. Dare I add that Whyte became more upscale over the last couple decades without a tram? 87 avenue has long been perceived as the logical route but in recent months Mayor Mandel seems to have concluded that the U of A, the biggest jewel in the city's crown, shouldn't be the anchor tenant of the transit system.

Lest anyone think I am public transit hostile, I have not owned my own vehicle for almost 8 years now. A possible difference between me and a lot of environmentalists is that I am more interested in my own responsibility for emissions and road congestion than in telling others what to do. I wonder if the councilors who approve of a tram stopping every few metres have any idea how the biggest headache for people who depend on public transport on a day to day basis is the time involved.

The overriding problem with Edmonton city council is, as is usually the case with left-leaning politicians, an over-focus on what they want to do as opposed to a focus on how to increase the resources that enable them to do what they want to do. Thinking about all grand things to be done instead of how to pay for them, in other words. The second question is what good politicians concentrate on, in my view, because the first question inevitably gets reduced into how much to steal from Peter to pay Paul. Compare the typical town and its council from the Middle Ages with 21st century cities; the difference between then and now is economic innovation and growth, not coming up with schemes that increased taxes on the businesspeople and merchants in town.

Lowe's, the world's second biggest home improvement retailer, applied in January for a permit to construct and operate a warehouse store in South Edmonton Common, but because Edmonton dragged the approval process out so long relative to Calgary, Calgary will get not one but three stores (along with the corresponding jobs and tax revenue) before Edmonton sees a store. "We believe in the economy of Calgary," said Lowe's Canada president. "As retailers of this calibre choose Calgary as their entry point for Western Canada, it tells the market Calgary continues to be the go-to market," an analyst observed. While business might not have any confidence in #yegcc, consultants enjoy council's full faith and confidence!

If this post weren't so lengthy already, I would call attention to Don Cayo's Vancouver Sun columns on municipal taxation, the sort of the thing that ought to appear in the Edmonton media and occur to #yegcc but does not. One problem at a time!

Paul Romer and innovation

Back on October 19, I said that in the coming months I would

advocate for the following policies:
1) cut the provincial corporate tax rate from 10% to 3% and income tax rate from 10% to 5%, making up the difference in revenue loss with a VAT that excludes all capital inputs. ...
2) adopt an innovation agenda that draws on endogenous growth theory
3) adopt a hedging program for natural resource related revenues

I haven't yet said much of anything about (2) yet, never mind (3). (1) and (2) both address the issue of economic growth, with (1) being concerned with incentives to add to the capital stock. If I own a warehouse but don't own any forklifts, if I go out and buy one that's investment since it adds to the physical stock of plant and equipment. But higher levels of investment are the not the only way to stimulate economic growth, and moreover they can only get one so far.

Stanford economist Paul Romer is generally considered to be one of the most prominent and pioneering contributors to endogenous growth theory. Rather than get overly involved in what "endogenous growth" means, I'll just emphasize the idea that with respect to trying to realize growth by only adding to the capital stock, there is a problem of diminishing returns. Professor Romer gives a 77 minute podcast here on his new growth theory, but I'd note one excerpt in particular where Romer explains this diminishing returns problem:

Think of an activity like moving goods around in a distribution center. Goods come in from manufacturers, and then the distribution center gets them on different trucks and sends them out to stores. You could run a distribution center with 100 workers and just one forklift, and the first forklift would be really valuable for moving the heavy things.

Then you could add a second forklift and that would still add real value. You'd get a lot more done in that distribution center. But by the time you've added the 30th or the 40th or the 50th forklift, each additional forklift is really not helping you very much. So with fixed recipes for how you arrange things while you're adding more and more physical capital, you do run into diminishing returns.

Economies which try to grow by just adding more and more forklifts eventually do run into serious trouble. The Soviet Union tried to grow like that for a while with essentially no innovation but very heavy investment in physical capital. And they grew for a bit because they started out short on capital, but they rapidly ran into diminishing returns from accumulating capital.

So you have to keep discovering ideas.

Ideas are the critical ingredient here. The ideas of interest here are innovations that allow businesses to produce more output per unit of input.

The upshot of Romer's work is an enormous emphasis on education in general and innovation in particular. The Alberta Research Council, the U of A's Technology Commercialization Centre, TEC Edmonton, the Ingenuity Fund, UTI, and Calgary Technologies would all be generously funded if I were in control of the purse strings, and just not because I worked for ARC in the past and "specialization in technology commercialization" is printed on my U of A MBA parchment. It is sound economics, as there are huge positive externalities here.

But there is more that government can do than just provide funding and tax incentives. Governments can facilitate the creation of innovation "clusters." One of Romer's many interesting proposals is for Canada to create a "charter city" in Cuba. Bilateral US-Cuban relations being what they are, the US and Cuba could agree to a third party's proposal to administer Guantanamo Bay, with the idea being that the third party could do for Cuba what Britain did for China by administering Hong Kong. After Alberta gets its own policies reformed such that they are truly investment, business, and trade-friendly, the province could cooperate with Ottawa to negotiate the acquisition of rights from the US and make the territory subject to Alberta tax and regulatory policy. A half-baked idea? Maybe. But it might also be a great opportunity for both Alberta and Cuba to advance economically, with the pace determined in part by what Cuba is comfortable with.

Alberta's ministry of Advanced Education and Technology is already well-placed to a do a lot of good things, it just doesn't have the attention it needs relative to competing ministries and there is an inclination on this government's part to set the stage for "picking winners" instead of focusing on the macro policy environment. "Theme 1" of "Alberta's Action Plan", for example, is "Enhancing an already strong tax environment." It is not, in fact, already strong, as tax policy experts have noted. Reference is made to the federal Scientific Research & Experimental Development credits that Alberta also offers, but as the CD Howe Institute observed in 2006,

the federal and provincial governments preoccupation with tax credits targeted at research and development, and relative inattention to the competitiveness of the overall tax regime, is misguided. In effect, the Canadian approach has been to give with one hand, by providing generous tax credits targeted at R&D, and to take with the other, by imposing high taxes on the fruits of innovative activity and entrepreneurship.

The 1998 Technical Committee on Business Taxation even recommended that SR&ED credits be reduced, in conjunction with other reforms.

An innovation agenda that acknowledges the work of people like Paul Romer, who is widely expected to eventually be awarded the Nobel in economics for his ideas about growth, is both supplementary and complementary to investment friendly tax reform.

carbon tax in the news

To continue from a VAT to an even more politically challenging tax reform, I note a post of mine from June:

...Had the Stelmach government understood the situation, they would have gotten ahead of this by signing on to a national carbon tax (something I've long advocated, as readers of this blog would know). A carbon tax would be bourne by Canadians in proportion to consumption, and therefore far more regionally equitable than by production. As an aside to those who believe climate change is a hoax, support for a carbon tax does not necessarily mean support for the idea that climate change requires fiscal action. We have to get taxes from somewhere, right? Why not get it by taxing consumption like on sales of SUVs instead of taxing everyone's personal income? We should be taxing consumption instead of income and investment anyway. Whenever I say I support a carbon tax I mean a revenue-neutral tax.

... Stelmach has tried to impress environmentalists by throwing billions of Alberta taxpayer dollars at the boondoggle of carbon capture. Needless to say, no one has been much impressed...

From Jeffrey Simpson's G&M column of this week:

The best way to spread the burden would have been a carbon tax, applied on both producers and consumers. The tax could have been collected regionally and recycled into the regions where it was collected, thereby easing Alberta's and Saskatchewan's pain.

But those governments had their heads in the sands, hoping the whole issue would subside. So they did nothing in the one area that really counts: putting a price on carbon. ...

Both are big supporters of carbon sequestration, an unproven, expensive method of lowering emissions. In Alberta's case, the taxpayers will spend $2-billion to reduce emissions by perhaps five million tonnes, which is about 2 per cent of the province's total emissions. The world sees this policy for what it is – expensive and inadequate...

no government anywhere, from authoritarian China to semi-authoritarian Russia through all the democracies of the world, believes the climate-change deniers.

Here's a quote lifted from testimony to Congress by Ted Gayer (a former Deputy Assistant Secretary at the Treasury, equivalent to an Assistant Deputy Minister at Finance Canada):

The most frequent criticism of a carbon tax is that it would be politically unpopular. But to quote Milton Friedman, I think my role is to “prescribe what should be done in light of what can be done, politics aside, and not to predict what is ‘politically feasible’ and then to recommend it.”

Economists like fiscal measures like the GST, and most other consumption taxes which would include a carbon tax, in no small part because they are simple and transparent. Yet these are the very qualities that make politicians hate them. Politicians prefer complicated and opaque taxes as those can be hiked in the future with minimal political penalty.