The Federal Liberal Government in Action: A Report Card

Acknowledgments

The Fraser Institute wishes to thank the Donner Canadian Foundation for providing the funding for Marc Law's 1996 summer internship. The authors also wish to thank Michael Walker, Victor Waese, Filip Palda, Danielle Smith, Jason Clemens, Craig Yirush and other colleagues at The Fraser Institute for helpful comments and suggestions. The authors, of course, take full responsibility for any errors and omissions.

Preface

Michael Walker

It has been a tumultuous time for public policy in Canada. During the past four years we have proceeded to the brink both with respect to the country's constitutional future and its financial survival. We have dealt with the problems of adjusting to a no-inflation economy. We have begun to live with the most comprehensive and liberalizing international trade agreement in modern history, and we have seen most of the provinces reverse their government debt accumulations. We have also begun to retract the social welfare structure which was allowed to mushroom over the past 30 years and, most importantly, we have abandoned the nanny-state unanimity which used to dominate policy discussion.

Against such a background, it might be difficult to sort out the standard of conduct against which a government should be measured. Fortunately, the current government provided us with the Red Book, a handy guide to what we might expect from it. The authors of this report have used it well as their template for policy assessment.

It has been a particular pleasure for me to read this report card and I think that most readers will find it to be a balanced, even-handed, and helpful assessment of the intended and actual policy performance of the current government. Not only will the reader come away with a detailed knowledge of the policy effectiveness of the current federal government, but also with a clear idea of how current policy could be improved. The recommendations for improvement in every case are derived from solid, theoretical, and empirical research.

This report card is a very important source of information for those who disagree with the current government's policy perspective. However, it is even more useful to those who supported the government's policy course, since it provides a detailed assessment of the policies and their likely impact. Of course, it goes without saying that while a government's policy platform is a political matter, the only interest of the report card is the intended and actual impact of the policies themselves. It is for others to assess the politics of the situation.

In view of the fact that this report, like all of The Fraser Institute's research, was conducted independently and was not subject to preview by the Institute's trustees, the views expressed may not conform to those of the trustees or the members of The Fraser Institute. We are making it available both to assist the federal government in improving its performance, and to stimulate discussion and debate about policy adjustments that would improve our economic condition.

Summary of the Main Policy Recommendations

For more detailed explanations of the following policy proposals, please see the relevant sections in the main text.

Budget Policy: Deficits and Debts

(1)Accelerate the pace of deficit elimination in order to balance the budget by year 2000.

(2)Legislate penalties for cabinet members in the event that deficit targets are not met.

(3)Develop a debt elimination strategy. Legally or constitutionally entrench this strategy.

(4)Entrench in the constitution a balanced budget amendment that would require the federal government to balance the budget over the business cycle (i.e. every 3 years).

Taxation Policy

(1)Replace the current Personal Income Tax with a flat rate income tax.

(2)Replace the GST with a harmonized sales tax.

(3)Reduce payroll taxes.

(4)Entrench in the constitution a taxpayer protection amendment.

Industrial Policy

(1)Stay clear of all interventionist micro-economic policies. End all government-industry partnerships.

(2)Terminate all regional development programs (i.e. WED, ACOA, FedNor, FORD-Q and CQSA).

(3)Refrain from any more "infrastructure renewal" projects.

(4)Push for greater interprovincial free trade.

Social Policy

(1)Limit eligibility for the Seniors' Benefit to seniors whose incomes fall below the Sarlo "basic needs" poverty line.

(2)Privatize Employment Insurance (EI) and operate it as a true insurance program with actuarially correct premiums.

(3)Turn the Canada Pension Plan (CPP) into a fully funded system of mandatory RRSPs.

(4)Discontinue funding of all EI-sponsored training programs.

Health Policy

(1)Repeal the Canada Health Act.

(2)Allot all government funds for health care to consumers directly through a system of Medical Premium Accounts (MPA).

International Trade and Foreign Aid Policy

(1)Eliminate all foreign aid spending.

(2)Expand NAFTA to South and Central America.

(3)Refrain from imposing any environmental or labour "side agreements" on future trade deals.

Transportation Policy

(1)Open all domestic air routes to foreign competition.

(2)Relinquish the ability to regulate transportation prices by amending the Canada Transportation Act.

(3)Avoid any future transportation mega-projects. Do not finance the Windsor-Quebec City TGV.

Labour Policy

(1)Repeal the Employment Equity Act.

(2)Repeal Part 1 of the Canada Labour Code.

(3)Pass Right-to-Work legislation.

Regulatory Policy

(1)Impose a moratorium on new federal regulations

(2)Liberalize compliance by introducing market mechanisms and regulatory alternatives.

(3)Minimize inter-jurisdictional conflict over regulations

(4)Prioritize regulations according to risk. Study economic impact of all proposed regulations before implementation.

(5)Liberalize the financial sector by allowing foreign competition. Eliminate all regulatory pillars in the financial industry by amending the Bank Act.

Agricultural Policy

(1)Eliminate the Canada Wheat Board (CWB).

(2)Phase out all remaining agricultural subsidies, price supports, and tariffs.

Immigration Policy

(1)Reaffirm commitment to maintaining an immigration rate of 1% of total population per year. Restore yearly intake of immigrants to 250,000 to 290,000 per year.

(2)Continue to increase the proportion of independent class immigrants admitted each year.

Cultural Policy

(1)Eliminate the Canada Council and all other federal funding of arts granting agencies.

(2)Repeal all Canadian content regulations.

(3)Privatize the CBC, Telefilm Canada, and the National Film Board.

Justice Policy

(1)Request that the House of Commons Legal Affairs Committee review the client mandate of the Department of Justice.

(2)Do not reintroduce the Pearson Airport Bill.

(3)Put cost restitution into the Young Offenders Act. Remove anonymity protection.

(4)Repeal Firearms Registration Requirement.

(5)Consolidate and reform legal aid funding.

(6)Initiate a substantial civil justice reform initiative along the lines of the Woolf Inquiry in the United Kingdom.

(7)Introduce public tendering for all outside government legal work.

(8)Submit judicial nominations to approval of a parliamentary committee.

Constitution and the National Unity File

(1)Follow the principle of subsidiarity: devolve power to the provinces by way of administrative, as opposed to constitutional change. Engage in a comprehensive review of government.

(2)Pursue more inter-jurisdictional co-ordination so as to minimize overlap and duplication. Abandon all "national standards."

(3)Develop a "Plan B," a contingency plan to hold the rest of Canada together in the event that Quebec should vote to separate.

Introduction: the Federal Liberal Government

In the fall of 1993, the federal Liberals came to power in Canada with a promise to achieve job creation, economic growth, and a rising standard of living for Canadians. Since the 1970s, the Canadian economy has experienced rising unemployment and slow economic growth; over the past three years, the unemployment rate has averaged over 10 percent. The burden of taxes has increased sharply and government budget deficits have exploded; interest payments on the accumulated debt total over one-third of every tax dollar Ottawa spends. In their Red Book of election promises, the Liberals stated that their number one objective would be to fix these problems and get the economy back on track. In fact, in the first chapter of the Red Book, the Liberals declared:

A strong economy is the essence of a strong society. A Liberal government will put jobs and economic growth at the forefront of its objectives. See Liberal Party of Canada, Creating Opportunity: The Liberal Plan for Canada, Ottawa: Liberal Party of Canada, 1993, p. 15.Note

The Liberal government has now been in power for nearly three years. How well has it done in achieving these objectives? Will the policies implemented by the Liberals strengthen the Canadian economy and create jobs or will they make things worse? What policies, if implemented, would bring us closer to achieving the objectives of job creation and strong economic growth? These are questions that can be answered by positive economic analysis. Indeed, these are the questions that should be asked in any rational debate about public policy.

Purpose of the report card

This report card aims to shed some light on the federal policy debate by conducting an economic analysis of the public policies adopted by the Liberal government since it took office in the fall of 1993. It will highlight what the Liberal government has done in each of the major policy areas and evaluate these actions within the framework of positive economics. It is hoped that such an analysis will encourage a more rational debate about public policy, dealing directly with the real consequences of particular policy actions.

The federal Liberal government's proclaimed raison d'etre is to strengthen the Canadian economy and create jobs. Thus, an introduction to this report card could not be complete without a brief discussion on the positive economics of job and wealth creation. Such a discussion aims to make explicit the framework within which this study analyzes and evaluates the federal government's policy actions.

The positive economics of prosperity

Positive economic analysis tells us that the key to the creation of jobs and wealth is economic freedom. A recent collaborative study completed by The Fraser Institute and ten other public policy institutes around the world found that economic freedom-personal choice, protection of private property, and freedom of exchange-is an important condition for economic growth. See James Gwartney, Robert Lawson, and Walter Block, Economic Freedom of the World: 1975-1995, Vancouver: The Fraser Institute, 1996.Note The findings of this study show a clear correlation between economic freedom and prosperity. During the period from 1975 to 1995, no country that had a persistently high economic freedom rating failed to achieve high income levels. Countries that achieved the greatest increase in economic freedom also experienced the fastest economic growth rates; meanwhile, countries that experienced decreases in economic freedom had slow or even negative economic growth rates. The empirical evidence from around the world surveyed in Economic Freedom of the World: 1975-1995 suggests that the way to increase the prosperity of a nation is to increase the economic freedom of its citizens.

Any government that plans to increase the economic freedom of its citizens must restructure itself to ensure the efficient operation of private markets. Operationally, this implies:

(1)Less government spending;

(2)Lower taxes;

(3)Fiscal balance;

(4)Less government regulation;

(5)More private forces in the delivery of public services; and

(6)More decentralization of political decision making.

An ambiguous performance

Since it assumed office in 1993, the Liberal government has adopted a number of public policy initiatives, all ostensibly aimed at strengthening the Canadian economy. A positive economic analysis of the Liberal government's policy actions suggests that their overall performance in this regard has been ambiguous. The Liberals have embraced market forces in some areas, particularly in transportation and international trade, but have implemented fiercely interventionist industrial and cultural policies. Government regulation of the labour market continues to be rigid, inhibiting the ability of the private sector to create jobs, while over-regulation of the economy continues. Some moves have been made towards fiscal balance, but growth in the federal public debt continues unabated. Furthermore, the federal government continues to resist the decentralization in political decision-making that is necessary to hold the country together and to preserve the Canadian economic union.

For this ambiguous performance, the federal Liberal government deserves an overall conditional pass grade of D.

Budget Policy: Deficits and Debt

Grade: B

The politics of deficits and debts For a thorough discussion of the political economy of deficit finance see James M. Buchanan and Richard E. Wagner, Democracy in Deficit, New York: Academic Press, 1977.Note

Rampant government spending and runaway deficits and debts have become pervasive features of Western democracies. As a result of the political pressure to spend without raising taxes, governments in Canada and abroad have run large deficits for nearly 20 years and have only recently started to move towards fiscal balance. Perhaps no greater problem faces governments today than the need to achieve fiscal balance through a regime of austere fiscal retrenchment.

Of course, the political will to achieve this goal is often weak. Few governments like to reduce spending because cutbacks may undermine political support. Tax hikes are similarly unpopular, and there is mounting evidence to suggest that tax increases do not in fact generate more revenue. See Daniel J. Mitchell, "The Impact of Higher Taxes: More Spending, Economic Stagnation, Fewer Jobs, and Higher Deficits," Backgrounder No. 925, Washington: The Heritage Foundation, 1995.Note Deficit reduction is thus inimical to the self interest of a politician whose time horizon does not extend beyond the next general election. Hence, the preferred course of action for the career politician is to stay the course and continue to run deficits.

However, recent evidence suggests that voters may have seen through the fiscal illusion of postponing taxation by running deficits. The success of Premier Ralph Klein in Alberta and Premier Mike Harris in Ontario, and the former Labour government in New Zealand, all of whom won elections on platforms of fiscal retrenchment and deficit elimination, speaks directly to this fact. The responsible politician whose time horizon extends well into the future can take heart; a fiscally responsible economic strategy can be both prudent and politically popular.

The economics of deficit reduction: the need for fiscal retrenchment

The economic case for deficit reduction is straightforward. A deficit is nothing but a deferred tax. To the extent that increases in the deficit are not fully anticipated by households and are not matched by an equivalent increase in the supply of savings, the effect of a deficit is to raise the real interest rate. For a good discussion of the impacts of budget deficits on macroeconomic activity see B. Douglas Bernheim, "A Neoclassical Perspective on Budget Deficits," Journal of Economic Perspectives, vol. 3, no. 2, 1989, pp. 55-72.Note Higher real interest rates increase the cost of borrowing and "crowd-out" private investment. Hence, since deficits reduce productive investment, the long run effect of the deficit is to slow down the accumulation of capital and the rate of economic growth. For the formal proof of this proposition see Peter A. Diamond, "National Debt and Neoclassical Economic Growth," American Economic Review, vol. 55, 1965, pp. 1125-1150.Note

In Canada, there is no evidence supporting the position that increases in the deficit have been anticipated by households and have been accompanied by increases in the level of domestic savings. See Robert Crozier, "Deficit Financing, the Decline of Savings, and the Rise in Foreign Borrowing in Canada from 1970-1994," in Fraser Forum February 1996, Vancouver: The Fraser Institute, pp. 13-17. For U.S. evidence see Edward M. Gramlich, "Budget Deficits and National Saving: Are Politicians Exogenous?" Journal of Economic Perspectives, Vol. 3, No. 2, 1989, pp. 23-36.Note Hence, government deficits have raised both the demand for financial capital and real interest rates. Ibid.Note Furthermore, in recent years there has been a decline in the domestic savings rate. Ibid.Note The coincidence of large budget deficits and a low domestic savings rate has created the problem of "twin deficits:" the simultaneous occurrence of a government budget deficit and a current account deficit. Thus, the full effect of a budget deficit is to reduce our long run growth rate and increase our level of foreign indebtedness since a current account deficit is required to finance the gap between what the government spends and what it collects in tax revenue. It is important to point out, however, that Canada is expected to have an annualized surplus of around $600 million in its current account for the period April to June, 1996. Achieving this surplus is significant in that the country can reduce its dependence on foreign debt.Note

While there may be some agreement among analysts and the public at large on the need to work towards deficit elimination, there is much less agreement as to how quickly the government should work towards achieving a balanced budget. Indeed, many Canadians are concerned that rapid fiscal retrenchment may result in diminished consumer confidence, job losses, and an economic slump. This view is based on fear that a reduction in government spending lowers aggregate demand, employment, and output. See Alexander Macmillan, Macroeconomics in a Canadian Context, Scarborough: Prentice Hall of Canada, 1980.Note While the demand-driven Keynesian economic logic may be persuasive at a superficial level, it fails to account adequately for expectations and leaves the "supply side" of the economy virtually unspecified. For a discussion of the failure of Keynesian macroeconometric models to account for the supply side, see Peter S. Spiro, "The Effects of Fiscal Policy on Canadian Economic Growth and Employment," Ontario Ministry of Finance Macroeconomic Analysis and Policy Branch Working Paper, 1996. For an overview of the fundamental problems with the Keynesian model, see Robert G. King, "Will the New-Keynesian Macroeconomics Resurrect the IS-LM Model?" Journal of Economic Perspectives, vol. 7, no. 1, 1993, pp. 67-82.Note The negative impact of deficit reduction on total aggregate demand is likely to be overstated in a simple Keynesian framework, as recent empirical studies suggest that Canada's fiscal policy multiplier is very small. For estimates of Canada's fiscal policy multiplier see John Helliwell, "What's Left for Macroeconomic and Growth Policies?" Bell Canada Papers on Economic and Public Policy 2, Kingston: Queen's University Press. See also John Bossons, "Issues in the Analysis of Government Deficits," in John Sargent, ed. Fiscal and Monetary Policy, Toronto: University of Toronto Press, 1986, pp. 85-112.Note

A more coherent simulation of the costs and benefits of deficit reduction conducted recently by William Scarth finds that a strategy of deficit elimination does indeed pass the cost-benefit test. See William Scarth, "Deficit Reduction: Costs and Benefits," Commentary No. 61, Toronto: C.D. Howe Institute, 1994.Note While deficit reduction may increase unemployment in the short run, it will reduce structural unemployment permanently by an equivalent amount. According to Scarth, this permanent reduction in structural employment occurs because lower deficits result in lower taxes, lower interest rates, and more investment. Hence, over the long haul, deficit reduction should enhance economic growth and should produce benefits equivalent to a permanent 3 percent increase in living standards.

Experience from other countries reinforces this conclusion. Examining the economic impacts of two severe fiscal retrenchments in Europe, Giavazzi and Pagano found that rapid spending cuts can actually be expansionary under certain

circumstances. See F. Giavazzi and M. Pagano, "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," NBER Macroeconomics Annual, 1990, pp. 75-111.Note That is, the "regime change" signalled by a rapid move toward fiscal balance can change the expectations and behaviour of economic agents and stimulate the economy. Thus, practical experience from abroad suggests that deficit reduction may bring about both long run and short run gains, if economic agents believe that the government's fiscal retrenchment signals a permanent decrease in government spending and taxation. Keynesian policy analysis may thus be both inaccurate and misleading. For a fundamental critique of Keynesian macroeconometric methods see Robert E. Lucas Jr., "Econometric Policy Evaluations: A Critique," in Brunner and Meltzer eds., The Phillips Curve and the Labor Market, Amsterdam: North Holland, 1976. For more misgivings about Keynesian macroeconometrics see Christopher A. Sims, "Macroeconomics and Reality," Econometrica, vol. 48, 1980, pp. 1-40.Note

What was promised

The need to gain control over Canada's fiscal situation figured fairly prominently in the last federal election campaign. The Liberal party stated in their Red Book of campaign promises that, if elected, deficit reduction would be a key element in their economic strategy:

A Liberal government will reduce the deficit. We will implement new programs only if they can be funded within existing expenditure. We will exercise unwavering discipline in controlling federal spending and will reorder current spending priorities to make sure that maximum return is obtained on each investment. Liberal Party of Canada, Creating Opportunity: The Liberal Plan for Canada, Ottawa: Liberal Party of Canada, 1993, p. 19.Note

In the Liberals' view, not only should deficit reduction be a priority in their economic program; it must be achieved credibly and realistically:

The Liberal approach is to set realistic targets and to implement the policies necessary to meet them. This philosophy will do more than any other single measure to restore international confidence in Canada. A Liberal government recognizes the need for economic policies that earn the trust and confidence of international markets. Ibid.Note

However, despite the need to restore fiscal balance and work quickly towards a balanced budget, the only explicit target set by the Liberal party in its Red Book was "to reduce the federal deficit to 3 percent of gross domestic product by the end of its third year in office." Ibid.Note Why such a target was set is unclear since the Liberals also concede in the Red Book that "[a]ny responsible government must have as the goal the elimination of the deficit. That is our goal." Ibid.Note

What was done

Since it took office in the fall of 1993, the Liberal government has worked towards getting its fiscal house in order. The federal budget deficit has been cut significantly from $42 billion (5.9% of GDP) in 1993-94 to $32.7 billion (4.2% of GDP) in 1995-96 with an anticipated $24.3 billion (3% of GDP) in 1996-97. Department of Finance, Budget in Brief, Ottawa: Department of Finance, 1996.Note By keeping to its stated targets and using conservative economic forecasts, the federal government has improved its fiscal credibility.

Furthermore, to its credit, much of the reduction in the federal deficit has been due to cuts to program expenditure. Program spending has fallen from a high of $120 billion in 1993-94 to $113.8 billion in 1995-96; it is projected to fall further to $109 billion in 1996-97. Ibid.Note Meanwhile the federal government's operating balance (i.e. the difference between revenues and operating expenses, exclusive of interest payments) has improved from a deficit of $4 billion in 1993-94 to a surplus of $16.8 billion in 1995-96. Ibid.Note These are all signs of an improving fiscal climate and show that the Liberal government has, at very least, been working in the right direction.

Policy analysis

However, there are still reasons to be concerned. For one thing, as long as the federal government runs a deficit, the accumulated debt of the federal government will continue to rise. According to Ministry of Finance figures, the net public debt of the federal government has risen from $508.2 billion in 1994-95 to $602.7 billion in 1995-96. Ibid.Note Hence, although some spending has been cut and the deficit is lower than before, the public debt of the federal government has risen by nearly $100 billion since the Liberal government took office. Thus, we are still a long way from true fiscal balance, which requires that the deficit be eliminated completely, and that the total federal debt be paid off gradually. Prudence necessitates that spending be cut further and that the federal government target deficit elimination at a much faster rate than it is doing currently.

Indeed, a growing body of evidence suggests that current levels of spending are simply unsustainable. Using a technique called "generational accounting," economists are able to estimate how big the tax burden on future generations will be if we leave the entire burden of stabilizing the debt to these future taxpayers. Two "generational accounting" studies done recently for Canada indicate that young Canadians can expect to pay significantly more in taxes than they receive in benefits if debt stabilization is put off until the future. See Christopher Good, "The Intergenerational Accounts of Canada," Fraser Forum Critical Issues Bulletin Vancouver: The Fraser Institute, 1995. See also Philip Oreopoulos and Laurence J. Kotlikoff, "Restoring Intergenerational Balance in Canada," IRPP Choices Montreal: Institute for Research on Public Policy, 1996.Note Older Canadians, by contrast, stand to gain from a delay in fiscal retrenchment. Hence, given that future generations will be unable to bear such a burden, the government should act quickly to stabilize the debt in order to achieve greater intergenerational equity.

Finally, it should be noted that, contrary to the claims of some social policy activists, reducing government spending will not adversely affect social indicators and bring about an explosion in the so-called "social deficit." A paper recently completed by the International Monetary Fund (IMF) is instructive in this regard. In this study, IMF economists Tanzi and Schuknecht review the empirical evidence on the growth of government in the twentieth century. They find that while the initial increase in government spending in the first part of the century may have brought about improvements in key socio-economic indicators, most of the post-World War II increase in government spending (which coincided with the growth of the welfare state) did not bring about significant improvements in these same indicators. Moreover, nations with small governments fared no worse than those with large governments. Specifically, the authors conclude that:

Though the evidence available is limited, various government performance indicators suggest that the growth in [government] spending after 1960 may not have brought about significantly improved economic performance or social progress. In a sense, this growth in spending was less "socially productive" than that before this period. . . . Improvements in economic and social indicators after 1960 have been quite limited and countries with small governments generally have not fared worse than those with big governments. Real economic growth declined somewhat between 1960 and 1990. . . . Gross fixed capital formation and inflation did not change significantly between 1960 and 1990 and by 1990, they did not differ much between country groups. The unemployment rate, the share of the shadow economy, and the number of registered patents suggest that small governments exhibit more regulatory efficiency and inhibit less the functioning of labour markets, the participation in the formal economy and the innovativeness of the private sector. . . . Social indicators, such as income distribution, literacy, secondary school enrolment, life expectancy and infant mortality improved modestly between 1960 and 1990 in all three groups. . . . In conclusion, the evidence available, while limited, suggests that small governments did not "produce" less desirable social indicators than big governments. Furthermore, they have had better economic and regulatory efficiency indicators. From Vito Tanzi and Ludger Schuknecht, "The Growth of Government and the Reform of the State in Industrialized Countries," IMF Working Paper, 1995, pp. 20-21.Note

The authors thus conclude that government's share of GDP could be below 30 percent without adversely affecting key socio-economic indicators. In addition, such a reduction would be accompanied by faster economic growth. Hence, concerns about the effects of fiscal retrenchment on the "social deficit" are probably misplaced. Smaller government is indeed better government.

Policy proposals

In light of the evidence presented above, the federal government should:

(1)Accelerate the pace of deficit elimination. While the federal government has laudably kept to its targets, it is clear that a deficit to GDP ratio of 3 percent is insufficient. Hence, the federal government should develop a clear plan for deficit elimination by the end of this century. Budget balance should be achieved exclusively through spending cuts, not tax increases. See Robin Richardson and Michael Walker, "How to Balance the Federal Budget and Keep Canada Together," in Fraser Forum, Vancouver: The Fraser Institute, February, 1996, pp. 5-17.Note

In order for this to be achieved credibly, the federal government should follow the lead of the Manitoba government and legislate penalties for Cabinet members in the event that deficit reduction targets are not met. See Government of Manitoba, The Balanced Budget, Winnipeg: Government of Manitoba, 1995.Note This will send a clear signal that the federal government is indeed serious about eliminating the deficit, and will properly re-align the incentives of politicians who tend to overspend.

(2)Develop a debt reduction strategy. Balancing the budget is not enough. If we are to do a service to future generations, the debt must be paid back. This debt reduction strategy, enshrined in the constitution, should mandate that all future budget surpluses be allocated exclusively to paying down the debt.

(3)Enshrine both a balanced budget amendment and a taxpayer protection amendment in the constitution. These amendments should require that the federal government balance its budget over the business cycle (i.e. over a three year period). The evidence from the United States suggests that a well designed balanced budget amendment is the most effective way to curb the tendency of politicians to overspend. For a comprehensive overview of the U.S. experience with legislated and constitutional balanced budget measures see Dean Stansel, Taming Leviathan: Are Tax and Spending Limits the Answer?, Washington: The Cato Institute, 1994.Note By "tying the hands" of our elected officials, a balanced budget amendment will make it nearly impossible for the federal government to create another fiscal crisis.

Conclusion: right direction but insufficient action

The need for fiscal retrenchment has never been as acute as it is today. From its rhetoric and actions, it seems that the federal Liberal government recognizes this fact and has initiated the largest round of spending cuts in recent Canadian history. Finance Minister Paul Martin has kept to his targets and has reduced the deficit according to schedule. We must give the Liberal government credit for making significant inroads towards achieving fiscal balance.

However, a deficit target of 3 percent of GDP is clearly insufficient. If we are to solve our fiscal crisis, the deficit must be eliminated completely and the debt must be gradually paid off. The evidence suggests that rapid deficit elimination can bring about economic benefits through lower real interest rates and lower taxes. Although the Liberal government has been moving in the right direction, it has been moving too slowly. In fact, the federal government occupied the bottom spot on The Fraser Institute's revenue and deficit and debt indices. Only a reasonable performance on the spending index saved the federal government from the bottom spot overall.Note

For this the Liberal government deserves a B.

Taxation Policy

Grade: D

Taxation, incentives and economic growth

Incentives matter. Economic theory, buttressed by countless empirical studies, suggests that by altering the costs and benefits of an activity, taxation can change the incentive structure faced by individuals and firms and can motivate outcomes that would not have occurred in the absence of taxation. For a rudimentary discussion of the effects of taxation on economic behaviour, see James D. Gwartney and Richard L. Stroup, What Everyone Should Know About Economics and Prosperity, Vancouver: The Fraser Institute, 1993. A more theoretical discussion is provided in Henry J. Aaron and Joseph A. Pechman, eds., How Taxes Affect Economic Behaviour, Washington: The Brookings Institution, 1981.Note High marginal tax rates on labour income reduce the relative price of leisure and discourage work effort. For an overview of the evidence, see James J. Heckman, "What has Been Learned About Labor Supply in the Past Twenty Years," American Economic Review, vol. 84, no. 2, 1993, pp. 116-121. See also Robert K. Triest, "The Effect of Income Taxation on Labor Supply in the Uniter States," Journal of Human Resources, vol. 25, no. 3, pp. 491-516.Note Payroll taxes increase the price of labour input and thus induce firms to substitute capital for labour. See Organization for Economic Cooperation and Development, OECD Jobs Study: Part 1, Paris: OECD, 1994.Note Taxation of capital gains reduces both savings rates and aggregate investment. See Lawrence H. Summers, "The After-Tax Rate of Return Affects Private Savings," American Economic Review, vol. 74, no. 2, 1984, pp. 249-253. For a more complete discussion of the issues see Norman B. Ture and B. Kenneth Sanden, The Effects of Tax Policy on Capital Formation, Washington: Institute for Research on the Economics of Taxation, 1977.Note Furthermore, a punitive sales tax can encourage tax evasion and may push individuals into the "underground economy." See Paul Starobin, "The Economy You Can't See," National Journal, June 18, 1994. A more detailed discussion can be found in Edgar L. Feige, ed., The Underground Economies: Tax Evasion and Information Distortion, Cambridge: Cambridge University Press, 1989.Note

International evidence suggests that economies with lower taxes experience more rapid economic growth. In his study for the World Bank, Keith Marsden finds that countries with lower taxes grow faster, invest more, and experience higher productivity gains. See Keith Marsden, "Links Between Taxes and Economic Growth: Some Empirical Evidence," World Bank Staff Working Paper No. 605, 1983.Note Another study by economists Robert King and Sergio Rebelo estimates that a 10 percent increase in the tax burden of a country reduces its annual GDP growth rate by 2 percent. See Robert G. King and Sergio Rebelo, "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, vol. 89, 1990, pp. S126-S150.Note Similarly, William Easterly and Sergio Rebelo conclude that there is "an impressive negative relation between the rate of growth and the ratio of tax revenue to annual GDP growth," as well as a "negative association between growth and . . . the `marginal income' tax rate." See William Easterly and Sergio Rebelo, "Fiscal Policy and Economic Growth: An Empirical Investigation," unpublished manuscript, 1993.Note The economics behind these conclusions is straightforward. Lower tax rates encourage innovation, more work effort, and higher savings rates. Since these activities are instrumental in the growth process, economies that encourage them are likely to grow faster and to create more jobs.

Canada: an unfortunate tax history

Unfortunately, Canada's tax history over the past 30 years has not been favourable. From 1964 to 1994 real federal government spending increased by 304 percent. Canadian Taxpayers Federation, The Taxpayer Protection Amendment: A Constitutional Proposal to Restore Fiscal Responsibility to the Government of Canada, Edmonton: Canadian Taxpayers Federation, 1996.Note Real GDP grew by only 176 percent over the same period. Ibid.Note This massive increase in spending necessarily has led to a similar increase in taxes. Between 1964 and 1994, direct taxes on individuals have increased by 2,501 percent, indirect taxes have risen by 975 percent, and corporate taxes have gone up by 649 percent. Ibid.Note

Another way of looking at this burden is to calculate Canada's Tax Freedom Day, the day when the average Canadian family stops paying taxes. In 1961, Canada's Tax Freedom Day fell on May 3rd. By 1996, it had advanced by 53 days to June 25th. See Joel Emes and Michael Walker, "Canadians Start Working for Themselves on June 25th," Fraser Forum, July 1996, Vancouver: The Fraser Institute, pp. 5-10.Note Viewed from this perspective, it is clear that the tax burden of the average Canadian family has risen dramatically over time.

Furthermore, compared to our major trading partners, our tax burden is relatively high. In Canada, the ratio of total tax revenues to GDP was 37.3 percent in 1991, compared to 30.9 percent in Japan, 29.8 percent in the United States, and 36 percent in the United Kingdom. See Isabella Horry, Filip Palda and Michael Walker, Tax Facts 9, Vancouver: The Fraser Institute, 1994.Note If Canada is to remain competitive with other nations, the burden of taxes on the Canadian economy must be reduced.

Empirical evidence on the effects of taxation in Canada

There is large body of evidence showing that the tax burden is large and growing. Professor Bev Dahlby estimates that each additional dollar of taxes collected through personal income tax costs the economy $1.38 in lost output. See Bev Dahlby, "The Distortionary Effect of Raising Taxes," in W. Robson and W. Scarth eds, Deficit Reduction: What Gain, What Pain, Toronto: C.D. Howe Institute, 1994.Note According to this study, the "shadow cost" of the personal income tax is quite substantial as the tax structure distorts economic incentives.

The effects of payroll taxes are equally negative. Over the past 30 years, payroll taxes have risen from 3 percent to 13 percent of total government revenue. See Livio De Matteo and Michael Shannon, "Payroll Taxation in Canada: An Overview," Canadian Business Economics, vol. 3, no. 4., Summer 1995, pp. 5-22.Note Livio De Matteo and Michael Shannon estimate that a 1 percent increase in average payroll taxes results in a 0.56 percent rise in real wage costs to employers, a 0.55 percent drop in real wages received by employees, and a 0.32 percent fall in employment levels. Ibid.Note This finding is supported by Ron Parker of the Bank of Canada, who finds that the increase in payroll taxes from 10.6 percent of wages and salaries in 1991 to 14.1 percent in 1994 may have reduced employment levels by about 1 percent in 1993. See Ron Parker, "Aspects of economic restructuring in Canada, 1989-1994," Bank of Canada Review, Ottawa: Bank of Canada, 1995.Note It is obvious from these studies that payroll taxes are "job killers."

Furthermore, recent research asserts that rising taxes may be partially responsible for the size of the informal economy, estimates of which range

from a high of 20 percent of GDP See Rolf Mirus, Roger S. Smith, and Vladimir Karoleff, "Canada's Underground Economic Revisited: Update and Critique," Canadian Public Policy, vol. 20, no. 3, 1994, pp. 235-252.Note to a low of 4.5 percent, See Don Drummond, Mireille Ethier, Maxime Fourgere, Brian Girard, and Jeremy Rudin, "The Underground Economy: Moving the Myth Closer to Reality," Canadian Business Economics, vol. 2, no. 4, 1994, pp. 3-17.Note depending on the methodology used. This assertion is supported by Peter Spiro in a paper completed for the Canadian Tax Foundation. Spiro estimates that the advent of the GST in 1992 brought about a tax revenue loss of roughly $2.3 billion to all levels of government in 1992. See Peter S. Spiro, "Evidence of a Post-GST Increase in the Underground Economy," Canadian Tax Journal, vol. 42, no. 4, 1993, pp. 1059-81.Note Thus, part of the impact of high tax rates in Canada (in particular, high sales taxes) has been to encourage the growth of the underground economy and in so doing reduce government revenues.

The Red Book and after: no promises and no action

In spite of the above evidence suggesting that our tax system is both inefficient and uncompetitive, the Liberals made few explicit promises with respect to tax reform in the 1993 election campaign. According to the Red Book:

In the first session of a new Parliament, a Liberal government will give an all-party Finance committee of the House of Commons a 12-month mandate to consult with Canadians and provincial governments and to report on ways to achieve tax fairness. In particular, the committee will be mandated to report on all options for alternatives to the current GST. A Liberal government will replace the GST with a system that generates equivalent revenues, is fairer to consumers and to small business, minimizes disruption to small business, and promotes federal-provincial fiscal cooperation and harmonization. Liberal Party of Canada, Creating Opportunity: The Liberal Plan for Canada, Ottawa: Liberal Party of Canada, 1993, p. 22.Note

While there is a recognition that the GST "is costly for small business to administer and very expensive for the government to collect," and that it may have also "stimulated the underground cash economy," Ibid.Note the Red Book does not mention the need to reform any other tax. In fact, it suggests that the only tax reform needed is sales tax harmonization. No other tax is mentioned. The Liberal government obviously never intended that fundamental tax reform would be a major item driving its economic policy agenda.

Unfortunately, the Liberal government has essentially kept this promise. The tax burden remains high in Canada. Instead of making major efforts to overhaul the system and reduce tax rates, this government has increased some taxes. For example, the Large Corporation Tax was increased, the corporate surtax was raised from 3 percent to 4 percent, and a so-called "temporary" capital tax on large financial institutions was introduced in the 1995 Budget and extended in the subsequent budget to October 1996. Department of Finance, Budget in Brief, Ottawa: Department of Finance, 1993.Note Aside from these increases, little else has been done. While the good news is that the overall tax burden has not increased significantly, the bad news is that the Liberal government is not seizing the opportunity to embark on a fundamental reform of our tax system.

The principle of sales tax harmonization with the provinces is sound, as it will reduce administrative and compliance costs for governments and businesses. Harmonizing the sales tax regime with respect to the tax base and administration will not, however, preclude individual provinces from changing their sales tax rates as they deem fit. The federal government's recent efforts to encourage sales tax harmonization are a cause for concern. In particular, the Liberal government's promise to subsidize the Atlantic provinces by nearly $1 billion in exchange for harmonization is both inequitable and inefficient, as the subsidy ultimately will mean higher taxes for the rest of the country. See Canadian Taxpayers Federation, "News Release: GST Harmonization Plan Will Lead To Tax Increases," April 23, 1996.Note

Policy proposals: what fundamental tax reform should entail

If the current Liberal government is as serious about getting the economy back on track as it claims to be, then it must engage immediately in fundamental tax reform. While, of course, tax reform alone will not solve all of our economic problems, the international evidence suggests that tax reform is a necessary condition for economic recovery. Any fundamental tax reform package should include the following elements:

(1)A flat rate income tax. A single, flat rate tax on personal income will go a long way in enhancing the efficiency and neutrality of our income tax system. The empirical evidence suggests that flat rate taxes encourage more work effort, higher savings rates, and faster economic growth. For a straightforward, general exposition of the merits of a flat rate income tax see Daniel J. Mitchell, "Jobs, Growth, Freedom, and Fairness: Why America Needs a Flat Tax," Backgrounder no. 1035, June 25, 1995, Washington: The Heritage Foundation.Note Furthermore, contrary to popular opinion, flat rate taxes do not penalize the poor. Under a broad variety of flat rate tax proposals, low income families pay less tax than under a progressive tax structure. This point is discussed at length in Daniel J. Mitchell, "Why Liberals Should Support the Flat Tax," F.Y.I. no. 85, February 7, 1996, Washington: The Heritage Foundation.Note Hence, flat rate taxes should be encouraged even by those who wish to promote a more equitable distribution of income.

There are many feasible flat rate tax proposals that have been proposed in recent years, including the Hall-Rabushka and Armey plans in the United States, An overview of the U.S. proposals can be found in Mitchell (1995) op cit. For more details on the Hall-Rabushka plan see Robert E. Hall and Alvin Rabushka, Low Tax, Simple Tax, Flat Tax, New York: McGraw-Hill Book Co., 1993.Note and the Dennis Mills and Reform Party plans in Canada. The two Canadian flat tax proposals are outlined in Dennis Mills, "The Single Tax System: A Proposal for Tax Reform," and in Ken Boessenkool, Herbert Grubel, and Jim Silye, "A Flat Tax For Canada." Both were papers presented at The Flat Tax Conference convened by The Fraser Institute on October 31, 1995.Note Any of the above proposals would be a significant improvement over the status quo. However, any successful flat rate income tax plan should include a single tax rate to any income subject to tax, the elimination of most deductions, credits, and exemptions, and the end of existing double taxation of savings and investment.

(2)A harmonized sales tax. The federal government should work with the provinces to replace the GST and all provincial sales taxes with a harmonized sales tax. According to tax experts Jack Mintz and Thomas Wilson, a simplified, harmonized sales tax would be more efficient than the status quo because it would apply to the same base of goods and services across all provinces, and would impose lower administrative and compliance costs. See Jack Mintz and Thomas Wilson, "Options for the Goods and Services Tax," Canadian Business Economics, vol. 3, no. 1, 1994, pp. 27-36.Note In order to preserve the transparency of the tax, the harmonized sales tax should remain visible so that taxpayers will always be aware of the burden of taxation. Furthermore, no regional subsidies should be offered for agreeing to harmonization as these are both destructive to national unity and costly to taxpayers.

(3)A reduction in payroll taxes. If the current federal government is truly serious about job creation, it must eliminate the ultimate job killer: the payroll tax. Lower payroll taxes reduce labour costs and raise employment. This proposition is well established empirically. See De Matteo and Shannon, op. cit. See also Ted Dixon and Fazil Mihlar, Survey of Senior Investment Managers in Canada: Results for Spring 1996, Vancouver: The Fraser Institute, 1996. In this survey, 67 percent of respondents felt that high payroll taxes and income taxes were the biggest obstacles to employment growth in Canada.Note A reduction in payroll taxes will, over the long run, create far more productive jobs than any national infrastructure rebuilding program.

(4)A constitutionally entrenched taxpayer protection amendment. The evidence from Canada and abroad suggests that there is a built-in tendency for democratic governments to increase their spending. Since this additional spending cannot be indefinitely financed by deficits (and since deficits are simply deferred taxes), higher government spending ultimately means higher taxes. In order to protect taxpayers, we recommend that a taxpayer protection amendment be written into our constitution along with a balanced budget amendment. These would tie the hands of our elected officials and would make it extraordinarily difficult to raise taxes in the absence of widespread public support. For an example of such an amendment, see the Canadian Taxpayers Federation's Taxpayer Protection Amendment. See Canadian Taxpayers Federation, op. cit. For details about the U.S. experience on this topic see Dean Stansel, Taming Leviathan: Are Tax And Spending Limits The Answer? Washington: Cato Institute, 1994.Note

Conclusion: A long way to go

The evidence cited above suggests that Canada's tax system is in need of fundamental reform. Since the federal government took office in 1993, it has made no effort to overhaul the existing tax regime. While taxes have not increased significantly, no attempted has been made to repair our tax system or reduce the burden of taxes on our economy. Given that the federal Liberals were elected on a platform of job creation and economic growth, this neglect of fundamental tax reform is surprising. Such reform is an essential ingredient of any economic recovery strategy.

For this lack of action on a policy area of utmost importance, the Liberal government deserves a D.

Industrial Policy

Grade: F

Neoclassical microeconomic theory and policy

According to standard neoclassical microeconomic theory, the free market will produce an optimal allocation of resources if the market is perfectly competitive. Perfect competition requires complete information, price taking behaviour on the part of economic agents (i.e. consumers and firms take the market price as "given"), constant returns to scale technology, and the absence of externalities and public goods. If any of the above conditions does not hold, the market is said to "fail" and the competitive equilibrium outcome that results will not be optimal. For a classic presentation of this argument see Francis Bator, "The Anatomy of Market Failure," Quarterly Journal of Economics, vol. 72, 1958, pp. 351-379.Note

Market failure, as defined above, is likely to be a pervasive feature of most economies as there are probably few markets which satisfy all of the assumptions of perfect competition. Thus, the competitive equilibrium outcomes which result in most markets are probably not optimal. Traditionally, economists have used this inevitable departure from optimal outcomes to justify government intervention in the economy. The standard argument offered is that, if the market fails to achieve an optimal allocation of resources, then the state should intervene in an effort to promote a more efficient allocation than that provided by the free market. See William J. Baumol, Welfare Economics and the Theory of the State, Cambridge: Harvard University Press, 1965.Note Hence, a host of economic and social interventions have been justified on the premise that markets fail and that governments can and should intervene in order to correct for the inefficiencies of markets and to promote optimal allocation.

Government failure and the theory of the state

However, it is a great leap of faith to jump from the premise that markets fail to the conclusion that government can and should intervene to correct these failures. Experience accumulated from around the world since the Second World War suggests that this leap of faith is a grave error. Government intervention in the economy has not been the panacea that it was initially thought to be. Far from promoting efficiency, much, if not most government intervention has encouraged inefficiency: See Charles Wolf Jr., Markets or Government: Choosing Between Imperfect Alternatives, 2nd Edition Cambridge: MIT Press, 1993. For a very readable discussion of the problem of government failure see William C. Mitchell and Randy T. Simmons, Beyond Politics: Markets, Welfare, and the Failure of Bureaucracy, Boulder: Westview Press, Independent Institute, 1994.Note draconian regulations often impede innovation and productive enterprise; Ibid.Note the growth of the state bureaucracy with its own agenda has encouraged wasteful lobbying and rent seeking behaviour; For a detailed discussion of the economics of bureaucracy see William A. Niskanen, Bureaucracy and Representative Government, Chicago: Aldine-Atherton, 1971. Seminal papers on lobbying and rent seeking can be found in James M. Buchanan, Robert D. Tollison, and Gordon Tullock, eds., Toward a Theory of the Rent Seeking Society, College Station: Texas A & M University Press, 1980; and also in Charles K. Rowley, Robert D. Tollison and Gordon Tullock eds., The Political Economy of Rent Seeking, Kluwer Academic Publishers, 1988.Note activist industrial policies have protected inefficient enterprises and have channelled millions of dollars into politically motivated megaprojects that serve no useful economic function; See Fazil Mihlar, "Picking Winners: A Risky Gamble," Fraser Forum, October 1994, Vancouver: The Fraser Institute, pp. 21-23. See also Terrence Casey, "The Clinton Administration and the Industrial Policy Question," Journal of Social, Political, and Economic Studies, vol. 18, no. 1, 1992. For a critical appraisal of Alberta's experience with an activist industrial policy see Michael Walker, ed., Focus: On Alberta's Industrial and Science Strategy Proposals, Vancouver: The Fraser Institute, 1984.Note regional economic diversification programs similarly serve no efficiency objective. See Donald Savoie, "ACOA: Something Old, Something New, Something Borrowed, Something Blue," in Katherine Graham, ed., How Ottawa Spends: 1989-90, Ottawa: Carleton University Press, 1990, pp. 107-130.Note Such examples of government failure are likely to be more of a drag on our economy than the market failures that intervention was intended to correct.

Fundamental to an explanation of government failure, however, is the fact that government intervention can seldom be efficiency enhancing because successful intervention requires that the state have more information than those who participate in the marketplace. As F.A. Hayek noted long ago, most of the information required for rational economic calculation is specific to time and place and cannot be obtained by a single person or body. See F.A. Hayek, "The Use of Knowledge in Society, American Economic Review, vol. 35, 1945, pp. 519-530.Note The impossible task of acquiring and processing all the information necessary for rational economic calculation essentially precludes the possibility of successful state intervention in economic affairs. Even the most benevolent and enlightened social planner cannot overcome this dilemma. Hence, government intervention in the economy, even if well intentioned, is bound to fail because of informational constraints.

In light of this analysis, the optimal microeconomic or industrial policy of the state is simply to enforce contracts and provide the framework laws necessary for all market participants. There is little else the state can or should do because of the inevitability of government failure and the inefficiencies that result from this intervention.

Enlightened mandarins: an industrial policy for the late 20th Century

Notwithstanding the accumulated evidence documenting the perversities and pervasiveness of government failure, the Liberal Party's pre-election view of the role of the state in microeconomic affairs was decidedly interventionist. Indeed, almost an entire chapter of the Red Book is devoted to a discussion of the kind of activist industrial policy a Liberal government would pursue. According to the Liberals, Canada should embrace an activist industrial policy in which the federal government, in partnership with other levels of government and the private sector, seeks to identify "strategic opportunities" and directs resources towards the realization of these opportunities:

A further task of government in Canada is to help Canadians realize that innovation doesn't "just happen;" rather, it thrives best in countries that consciously understand the process and take appropriate measures to create a national system of innovation. If people are being asked to adjust their attitudes and behaviour, it is vital that they believe that there is such a system and that they see clearly where they fit in. At the local level, community leaders must see how their ambitions dovetail with the national effort. Small businesses must understand how they can relate to and profit from the activities of large corporations. The research community must understand the imperatives of global economic competition.

The crucial role of the federal government in such an innovation system is to work with the private sector to identify strategic opportunities for the future, then to redirect its existing resources towards the fulfilment of those opportunities. Research and development, small business policy, taxation policy, environmental regulation, community economic development, and the availability of venture capital are all areas where the federal government can focus its efforts to achieve strategic economic opportunities and promote economic growth. Our future success will come when we coordinate all these policies with the single-minded goal of producing greater wealth and more good jobs for all Canadians. See Liberal Party of Canada, Creating Opportunity: The Liberal Plan for Canada, Ottawa: Liberal Party of Canada, 1993, p. 44.Note

This is the industrial policy of the late 20th Century-an industrial policy for the information age in which government helps set up a "national system of innovation" and picks the winning high technology firm. The language may be catchy, but the gist is the same. In the Liberal government's view, Canada needs a "national system of innovation" in order to rectify the failure of markets to adapt in a changing technological environment. This is the synoptic delusion that Hayek wrote about: the mistaken belief that all good institutional structures are the product of deliberate human design. For a discussion of synoptic delusion and its influence on modern thought see the first chapter of F.A. Hayek, Law, Legislation and Liberty Volume 1: Rules and Order, Chicago: University of Chicago Press, 1973.Note In the present case, the Liberals believe that the federal government can and should step in to help people "see where they fit in" so that we will have a nation that "consciously understands" the process of innovation. There is, according to the federal Liberals, a missing market in co-ordination.

The Liberal government's industrial policy action plan

Towards this goal, the Liberals aimed to pursue a number of initiatives. They promised to improve the availability of capital to small- and medium-sized businesses through loan guarantees and by establishing a Canada Investment Fund; to encourage more research and development (R&D) activities by continuing to support basic research through stable funding of granting councils like the National Research Council and the Networks of Excellence, and also by establishing a Canadian Technology Network among governments, industries, and universities; and, in partnership with the private sector, to encourage international trade opportunities for Canadian businesses. Liberal Party of Canada, op. cit.Note Additionally, for those less enamoured of high technology buzzwords, the Liberals also promised to pursue a national infrastructure rebuilding program in tandem with provincial and municipal governments as part of a broader job creation and economic growth initiative. Ibid.Note

An activist industrial policy in action

Unfortunately, since it took office in the fall of 1993, the Liberal government has followed through with almost all of the Red Book's industrial policy proposals. Over the past three years, it has raised the share of a small business loan it will guarantee by amending the Small Business Loan Act; See Privy Council Office, Ensuring Opportunity for Canadians: The Record To Date, Ottawa: Privy Council Office, 1996.Note set up a $30 million Atlantic Venture Capital Fund; spearheaded a new federal science and technology plan by establishing a National Technology Network with industries, governments, and universities; Ibid.Note and provided nearly $600 million in interest-free loans to high-technology companies under the much vaunted Technology Partnerships Canada program. See "Qualified Support," The Financial Post, June 15, 1996, p. 6.Note The federal government has also continued to fund regional economic diversification programs like Western Economic Diversification (WED), Atlantic Canada Opportunities Agency (ACOA), the Federal Office of Regional Development-Quebec (FORD-Q), the Federal Development Initiative in Northern Ontario (FedNor) and the Canada-Quebec Subsidiary Agreements on Industrial Development (CQSA), albeit at reduced levels. Some numbers are provided by Gordon Davies, "July Question and Answer: Taxes for Economic Development," Fraser Forum, July 1996, Vancouver: The Fraser Institute, pp. 18-19. The article notes that in 1996-97, Ottawa will spend $3.3 billion on regional development programs, of which $486 million will go to Atlantic Canada, $150 million to Ontario, $369 million to Quebec, and $2.326 billion to Western Canada.Note

In addition, the federal government has spent approximately $6 billion on a high profile Canada Infrastructure Works program to upgrade local infrastructure systems in order to promote economic growth, to enhance "community liveability," and to provide short term employment. See Caroline Andrew and Jeff Morrison, "Canada Infrastructure Works: Between `Pick and Shovels' and the Information Highway," in How Ottawa Spends 1995-96, Susan Phillips ed., Ottawa: Carleton University Press, 1995, pp. 107-136.Note This program was initiated with the co-operation of municipalities and provincial governments and, according to the federal government, has created almost 100,000 new jobs. Ibid.Note Hence, an activist industrial policy is indeed under way. The federal government believes that through increased R&D spending and "technology partnerships" it can pick out successful high-technology firms and micro-manage the economy. Furthermore, it still holds to the belief that it can prime the pump of the economy and create jobs through a "picks and shovels" Ibid.Note infrastructure rebuilding program. Old habits die hard.

Policy analysis: plus ça change, plus c'est la meme chose A rough translation of this French proverb: "The more things change, the more they remain the same."Note

What has been true about government intervention in the economy in the past is likely to be true about government intervention in the present and future: governments simply do not have the information to efficiently micro-manage the economy. That we now live in the so-called "information age" does not change this conclusion. Computer technology does not help us one bit when it comes to "picking winners" and identifying "strategic opportunities for the future" in a dynamic marketplace. Furthermore, self-interested politicians are no less likely in the current age to intervene in a manner which advances special interests at the expense of overall economic efficiency; modern technology will not turn our political leaders into altruists. Therefore, there is every reason to expect that the federal government's activist industrial policy will fail as the state still has neither the resources nor the incentive to pursue an efficient industrial policy.

Regional economic development programs like WED, ACOA, FedNor, CQSA, and FORD-Q are fine case studies in government failure. Designed with the alleged purpose of promoting the economic development and diversification of some of Canada's regional economies, these programs are usually poorly administered and do little to promote either economic development or diversification because the objectives of regional development programs are often too vague to put into operation. In addition, proper assessment of the results of these initiatives is often inadequate. Many of these problems are documented at length in the 1995 Report of the Auditor General of Canada. For example, of ACOA, the Auditor General writes that:

A primary problem is to determine what is being accomplished for the expenditures being made. Without objective assessments of program results, as are required for the ACOA program, the entities cannot answer this fundamental question properly. In our view, in times of serious resource limits, failure to measure and report results is an unacceptable financial risk to the best use of public funds. Auditor General of Canada, Report of the Auditor General of Canada to the House of Commons, Chapter 17, Ottawa: Minister of Supply and Services, 1995, p. 19.Note

In a similar vein, the report asserts that:

The Department [FORD-Q] emphasized primarily the positive aspects and did not report the evaluators' negative comments, such as the fact that the programs had limited impact and that a large number of projects would have gone ahead without the Department's assistance. Ibid, Chapter 19, p. 14.Note

Finally, of WED, the Auditor General writes:

Claims that jobs have been created by the Program are unverified and are based on estimates made at the time of project funding proposals. Combined with the fact that monitoring of projects is limited in both time and scope, this means that the Department has no assurance that the 42,000 jobs projected at the time of proposal actually materialized. Ibid, Chapter 20, p. 22.Note

These quotes highlight government's pervasive failure at running regional economic development programs. Government simply does not have the information to successfully intervene in the marketplace. Furthermore, a quick glance at some of the projects funded by these programs suggests that some of these projects were probably politically motivated. For example, between 1993 and 1996, ACOA offered over $974 million in grants, of which $500,000 went to complete a 9-hole golf course in Newfoundland, $139,035 went towards the construction of a replica Viking Ship, and $13,842 was spent on additional wax figures for the Royal Atlantic Wax Museum. See National Citizens Coalition, Tales From The Tax Trough III: The Liberal Edition, Toronto: National Citizens Coalition.Note Such projects do little to advance the economic interests of the Atlantic region. Moreover, when economic resources are channelled into such inherently unproductive ventures, genuinely viable projects are starved of scarce resources. Hence, not only do regional programs fail to achieve their objectives; they impoverish the regions they are intended to assist by transferring resources from economically viable projects to politically motivated ones.

If political pressures, rent-seeking, and informational constraints render it impossible to successfully implement regional economic development programs, then surely the same factors should make it difficult, if not impossible, for the state to establish an effective "national system of innovation" and to successfully identify "strategic opportunities for the future." In fact, why Canada should even need such a national innovation policy is unclear. Research done by Kristian Palda, an expert on the economics of innovation policy, demonstrates that Canada's R&D expenditures, when properly measured, are quite adequate and that efforts to raise R&D spending through the instruments of the state are likely to be ineffective. See Kristian Palda, Innovation Policy and Canada's Competitiveness, Vancouver: The Fraser Institute, 1994.Note The Liberal government's belief that Canada needs to spend more on R&D is thus misinformed. Moreover, a casual glance at recent experience suggests that Canadian high-technology firms do quite well in the absence of government intervention; companies such as Corel and Northern Telecom come to mind. Hence, there is little evidence to suggest that Canada needs a government sponsored and co-ordinated "national system of innovation." The "invisible hand" of the free market has already created one.

Finally, there is the Canada Infrastructure Works program, the big ticket item in the federal government's industrial policy gambit. Like the regional economic development programs discussed above, Canada Infrastructure Works probably serves political interests at the expense of economic welfare. It is no accident that many of the projects funded under the rubric of "infrastructure renewal" can only be interpreted as "infrastructure" under the broadest of definitions. For instance, consider the $500,000 Canoe Hall of Fame in Shawinigan, the Prime Minister's home riding. See WED statement for January 27, 1995, Press Conference in Tsawwassen, B.C., Cliff Breitkreuz, M.P. Yellowhead.Note Furthermore, given that the fiscal policy multiplier is very small, See John Helliwell, "What's Left For Macroeconomic and Growth Policies?" Bell Papers on Economic and Public Policies, vol. 2, Kingston: Queen's University Press.Note it is unlikely that Canada Infrastructure Works has contributed significantly to our economic recovery. In an $800 billion a year economy such as Canada's, a $6 billion increase in autonomous expenditure over a multi-year period is just a mere "flash in the pan," even under the most generous assumptions. The federal government's claim that Canada Infrastructure Works is responsible for nearly 100,000 new jobs is patently misleading as it fails to account for all those jobs which would have been created if resources had not been redirected towards "infrastructure renewal."

Policy proposals: a non-interventionist microeconomic policy

In light of the fact that government intervention in microeconomic affairs inevitably fails due to political pressures and informational constraints, the federal government should:

(1)Stay clear of all activist industrial policies. The state is incapable of developing a "national system of innovation" or of identifying "strategy opportunities for the future." The federal government has neither the incentive nor the information to conduct an efficiency-enhancing industrial policy. The federal government should stop attempting to "pick winners" and withdraw its participation in all government-industry partnerships and networks.

(2)Terminate all regional economic development programs. These programs, including WED, ACOA, FedNor, FORD-Q, and CQSA, promote neither economic development nor diversification. Rather, they encourage inefficiency and waste by supporting unsuccessful enterprises at the expense of successful ones, and provide politicians with an avenue for satisfying special interests at the expense of general economic welfare. Indeed, since the very presence of such programs can make socially unproductive rent-seeking profitable, the federal government should declare a moratorium on all future regional development initiatives.

(3)Refrain from indulging in any more general infrastructure rebuilding programs. Infrastructure renewal is simply a euphemism for political patronage and pork-barrelling. We should not rely on infrastructure renewal programs to create lasting employment. This cannot be overemphasized given that the federal government is apparently considering yet another round of spending on infrastructure renewal. See "Cabinet Jobs Hinge on Job Making," The Vancouver Sun, July 11, 1996, A3.Note The only way the federal government can create lasting and meaningful employment is for it to get its fiscal house in order, and to reduce job-killing payroll taxes.

Of course, not all infrastructure renewal is inherently wasteful. Certain federal infrastructure projects may, in fact, need to be rebuilt or repaired. Under such circumstances, the federal government should, wherever possible, contract out these projects to the private sector and operate them on a full cost-recovery basis.

(4)Push harder for interprovincial free trade. Progress in implementing the Internal Agreement on Trade has been slow. Discriminatory government procurement procedures and restrictions on labour mobility remain a fact of life. See Neville Nankivell, "Professionals lead push for effective internal free-trade agreement," The Financial Post, August 20, 1996, p. 9.Note Estimates suggest that interprovincial trade barriers cost Canadians about $6.5 billion per year in lost income. See Filip Palda ed., Provincial Trade Wars: Why the Blockade Must End, Vancouver: The Fraser Institute, 1994.Note If the federal government is truly interested in advancing the economic interests of Canadians, it should act quickly to ensure the free mobility of goods, services and factors of production throughout the nation.

Conclusions: Industry Canada intervention can't solve the problem

Although the federal government now uses the language of the technological age, the fundamental problem of government failure remains the same. Ottawa cannot and should not try to conduct an activist industrial policy. The identification of "strategic opportunities for the future" should be left to private enterprise as government has a sorry history when it comes to "picking winners." This fact rings true regardless of how many experts Industry Canada employs.

For pursuing a wrongheaded industrial policy from the start, and for believing that such a policy could in fact be successfully implemented, this Liberal government deserves an F.

Social Policy

Grade: C

Life without risk? The ideology of the welfare state

The 20th Century undoubtedly will be remembered as the era of the welfare state. During this century, the role of the state in Western nations has been transformed considerably. There are a number of studies that try to explain the growth of the state. For example, see: G. Warren Nutter, Growth of Government in the West, Washington: American Enterprise Institute, 1978; Sam Peltzman, "The Growth of Government," Journal of Law and Economics, Vol. 23, October 1980, pp. 209-87; Allan H. Meltzer and Scott F. Richard, "A Rational Theory of the Size of Government," Journal of Political Economy, Vol. 89, No. 5, October 1981, pp. 914-27; Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of American Government, San Francisco: Pacific Research Institute, 1988.Note Initially concentrating on enforcing framework laws that protected persons and their property, the state eventually assumed most of the responsibilities that were once considered the domain of the family and private charities. The modern state is now expected to provide welfare for the poor, unemployment assistance and job training for those who cannot find work, pensions and old age benefits for the elderly, and universal health care for everyone. In short, the state has become every person's "guardian angel," ensuring that no one "from cradle to grave" is left without its extensive social assistance.

But life is inherently risky . . .

However, in making the series of decisions that led to the gradual adoption of the welfare state, politicians and policy makers failed to consider two important facts about the nature of risk in human life. First, life is an inherently risky venture, and it is virtually impossible to eliminate even just its substantial risks. Indeed, if the state were to try to do so, we would pay dearly for that additional certainty with our individual freedoms. F.A. Hayek, Law, Legislation, and Liberty, Chicago: University of Chicago Press, 1973.Note

The economics of risk elimination: a costly venture

The second fact about risk in human life is that it is grounded in economic logic. While the formal microeconomic theory of information and incentives was only in its infancy when the welfare state was being built, economists have always known, at least intuitively, that if the state tries to eliminate or reduce risk, it is an economically costly proposal. The reason is relatively simple. When the risk involved in participating in a particular activity is reduced, the cost to the individual of being involved in that activity falls. Hence, the reduction of risk changes the incentives that individuals face. To the extent that the state is unable to charge optimal premiums for the reduction of such risks (as is done in private insurance markets), the result of such state-provided risk reduction is to encourage individuals to engage in activities that they would otherwise have avoided. For a more detailed discussion see Chapter 10, "The Economics of Information," in Walter Nicholson, Microeconomic Theory: Basic Principles and Extensions (5th Edition), Orlando: Dryden Press, 1992.Note For instance, consumer advocacy groups have often argued that the state should try to protect drivers and car passengers by enacting strict automobile safety legislation. The standard argument is that with safer cars there will be fewer traffic fatalities and accidents. In contrast, economists have argued that with safer cars, individuals will drive more recklessly as the risk of being in a serious accident is reduced. Economist Sam Peltzman's analysis of the effects of the National Traffic and Motor Vehicle Safety Act of 1966 empirically supports this position. See Sam Peltzman, "The Effects of Automobile Safety Legislation," Journal of Political Economy, vol. 83, no. 4, 1975, pp. 677-725.Note By changing the incentives that individuals face, a well meaning policy of risk-reduction can encourage individuals to make socially costly choices.

The welfare state, risk reduction, and individual choice

Similarly, the instruments of the welfare state have reduced many of the risks individuals face, and have changed the structure of incentives that motivates a wide range of human behaviour. This is because the state, in general, has been unable or unwilling to charge individuals the "correct" premium for this risk-reduction. This premium, if set properly, would neutralize the change in incentives. Activities that are socially costly are encouraged because the changed incentive structure imposed by the welfare state makes them privately profitable. For example, the presence of unemployment insurance benefits without actuarially correct premiums reduces the costs of being unemployed, and encourages workers to stay unemployed, which in turn raises the unemployment rate. Empirical evidence from around the world seems to support this proposition. See, for example: Herbert G. Grubel, Dennis R. Maki and Shelley Sax, "Real and Insurance-Induced Unemployment in Canada," Canadian Journal of Economics, vol. 8, no. 2, May 1975, pp. 174-91; Herbert G. Grubel and Dennis R. Maki, "The Effect of Unemployment Insurance Benefits on U.S. Unemployment," Weltwirtschaftliches Archiv, vol. 112, 1976, pp. 274-99; Dennis Maki and Zane Spindler, "The Effect of Unemployment Compensation on the Unemployment Rate in Great Britain," Oxford Economic Papers, vol. 27, 1975, pp. 440-54.Note Similarly, generous welfare benefits can have the effect of discouraging individuals from finding employment. See, for example, John Richards and William Watson, eds., Helping the Poor: A Qualified Case for "Workfare," Toronto: C.D. Howe Institute, 1995; Organization for Economic Cooperation and Development, OECD Surveys: Canada, Paris: OECD, 1994.Note Finally, the prospect of receiving state funded social security discourages individuals from saving, as they no longer have to provide for their own retirements. See Jagadeesh Gokhale, Laurence J. Kotlikoff, and John Sabelhaus, "Understanding the Postwar Decline in United States Savings: A Cohort Analysis," unpublished manuscript, 1994.Note Thus, well intentioned measures aimed at reducing the risks of unemployment, poverty, or impoverishment in old age may in fact encourage costly behaviour because society at large, rather than the individual, bears the costs of this behaviour. Good intentions are clearly not a sufficient condition for good public policy.

The Canadian situation: a welfare state in fiscal crisis

Unfortunately, the most enduring legacy of the Canadian welfare state is not the "elimination of want," to quote Lord Beveridge. Nor is it the permanent reduction in the risks of life. Rather, it is the most serious fiscal crisis this country has ever encountered: a federal public debt of over $600 billion; See Department of Finance, Budget in Brief, Ottawa: Department of Finance, 1996.Note a yearly federal budget deficit in the neighbourhood of $30 billion; Ibid.Note interest payments that consume nearly one-third of every tax dollar; Ibid.Note and a pension system (the Canada Pension Plan) with unfunded liabilities totalling $600 billion. See Actuarial Division, Office of the Superintendent of Financial Institutions, Special Report for The Fraser Institute, Ottawa: Office of Superintendent of Financial Institutions, 1996.Note Given that the various social services consume the largest non-interest payment portion of the federal budget, it is an inescapable conclusion that the welfare state has played a significant role in bringing us to the brink of fiscal ruin. With this severe fiscal imbalance, there is little choice but to roll back the welfare state and introduce significant reforms. This does not necessarily imply that all social insurance should be eliminated wholesale; the state does have a role to play in helping those who are unable to help themselves. However, it does mean that the federal government, and in fact all governments, must reduce the size and scope of their social programs, and must redesign the instruments of the welfare state so that they are more neutral with respect to the incentive structure faced by individuals.

The Red Book on social policy

The Liberal Party's Red Book states that:

From our beginnings as a nation, Canadians have believed in the principle of shared social responsibility. Over the years, successive Liberal governments have shown their commitment to this value through their actions. Many of the laws and policies that they enacted remain the basis of our system of social support, through which we pool our resources to create programs that benefit all Canadians and help to sustain people through difficult times. This is the framework of fundamental fairness and decency within which Canadians are able to pursue their individual goals.

The Liberal legacy includes universal medicare, unemployment insurance, old age security, the Guaranteed Income Supplement, the Canada Pension Plan, the Canada Assistance Plan, the Canadian Human Rights Commission, and the Charter of Rights and Freedoms. See Liberal Party of Canada, Creating Opportunity: The Liberal Plan for Canada, Ottawa: Liberal Party of Canada, 1993, p. 73.Note

The above quote highlights the Liberals' pre-election attitude towards social policy. Canada, in the Liberal view, is a nation based on the principle of "shared social responsibility." According to the Liberals, the purpose of social policy is to ensure a "framework of fundamental fairness and decency" for all Canadians. This framework is manifested in the "Liberal legacy" of the Guaranteed Income Supplement (GIS), Old Age Security (OAS), Canada Pension Plan (CPP), and Unemployment Insurance (UI) programs.

However, in spite of the importance attached to social policy and the fact that any effort to get the deficit under control (which the Liberals also promised) must imply some restructuring of social policy status quo, the Red Book had remarkably little to say about this. It remains a mystery how, exactly, the federal government intends to redesign our social programs in order to guarantee a "framework of fundamental fairness and decency" while ensuring fiscal balance at the same time. The few specific proposals discussed by the Liberals included vague promises to "ensure that the funds paid out as unemployment benefits are better spent to help the unemployed acquire the skills necessary to find work" Ibid, p. 37.Note and to expand support for child care conditional on the agreement of the provinces. Ibid, p. 40.Note Furthermore, the Liberals displayed no recognition of the flaws inherent in the social insurance system and the extent to which these flaws have contributed to our fiscal problems. Thus, while much was made about the virtues of the Canadian welfare state, very little was said about how it would be funded in circumstances of fiscal crisis.

The federal government's social policy agenda in action

Fortunately, since the autumn of 1993, the federal government has made a few reforms to Canada's social policy network-reforms that will put some (but not all) of our programs on a firmer footing. These changes will enable the federal government to work very slowly towards fiscal balance while at the same time target its scarce resources more towards those who are truly in need. In particular, the Liberal government has:

(1)Proposed that the existing Old Age Security (OAS) and Guaranteed Income Supplement (GIS) be phased out and replaced by a new Seniors' Benefit. Under the Seniors' Benefit, payments will be based on household rather than individual income. Furthermore, assistance will be more effectively targeted to those in need. Couples with yearly incomes of $45,000 or more will receive less; those with lower incomes will receive more. For more details, see Government of Canada, The Seniors' Benefit: Securing the Future, Ottawa: Government of Canada, 1996.Note

(2)Replaced the Unemployment Insurance Act with Bill C-12, An Act Respecting Employment Insurance in Canada. Under this new act, the requirements for eligibility for benefits are based on hours rather than weeks worked. In addition, the "maximum insurable earnings" will drop from $815 per week to $750 per week. Premiums have been reduced marginally and a new "intensity rule" has been introduced in order to reduce the frequency of repeat claims. This rule states that for every 20 weeks of benefits collected over the past five years, a recipient will face a 1 percent decline in the normal benefit rate of 55 percent of insurable earnings up to a maximum decline of 5 percent. See Mary C. Hurley and Kevin B. Kerr, Legislative Summary of Bill C-12: An Act Respecting Employment Insurance in Canada, March 8, 1996, Ottawa; Library of Parliament Research Branch.Note

(3)Increased spending on various job training programs. Under the provisions of Bill C-12, approximately $800 million from the EI fund will be spent on five federal "employment benefits": wage subsidies, earnings supplements, self-employment assistance, direct job creation projects and training. See Hurley and Kerr, op. cit.Note The purpose of these programs is to help the unemployed acquire skills so that they are better able to find work.

From OAS and GIS to the Seniors' Benefit: right direction, insufficient action

The replacement of the OAS and GIS programs with the Seniors' Benefit is a positive development in an effort to gain control of an income support program badly in need of repair. Currently, OAS and GIS account for almost one-fifth of all federal program spending. See Government of Canada, The Seniors' Benefit: Securing the Future, Ottawa: Government of Canada, 1996, p. 24.Note Because Canada's population is aging, the share of program spending devoted to OAS and GIS is expected to rise considerably over the next few years. In order to prevent OAS and GIS from "crowding out" other expenditures, it is necessary for the federal government to reduce the costs of these income support measures.

There are many other problems inherent in the design of OAS and GIS that need to be corrected. For one thing, OAS benefits are calculated on the basis of individual, as opposed to household income. Given that household consumption is a function of combined earnings, rather than individual earnings, it is more efficient and equitable to transfer resources to the elderly on the basis of their overall purchasing power, rather than on the basis of their individual earnings. This problem is rectified under the Seniors' Benefit, where combined spousal income is used in the calculation of benefits. Another problem with OAS and GIS is that a large portion of the benefits paid out go to seniors whose income is well above the Canadian average. However, under the Seniors' Benefit, no couple with a combined yearly income in excess of $78,000 will be eligible for assistance. Couples whose combined income is more than $45,000 will receive less; those with incomes below $40,000 will receive more. Ibid.Note In this way, the Seniors' Benefit will better target our old age income support programs.

Although the Seniors' Benefit is an improvement on the status quo, it still has some problems. Perhaps the most serious of these is that although the Seniors' Benefit will be somewhat less costly for the taxpayer than the OAS and GIS programs, it will still be very costly to support. According to analysts from William Mercer, a benefits consulting firm, the federal government's tax revenue estimates have assumed that wages will rise by one percent above the inflation rate. However, given that real wages have been largely stagnant in the past 20 years, this assumption is overly optimistic. Cited in "Senior Benefit's `perversions' formula for disaster, analyst says," The Vancouver Sun, June 10, 1996, p. C8.Note Furthermore, there is evidence that the presence of such programs discourages savings and investment. Some analysts speculate the Seniors' Benefit makes private pension plans "tax inefficient" because income from private pensions will reduce the size of a recipient's Seniors' Benefit. Ibid.Note Indeed, empirical work from the U.S. suggests that the presence of generous social security programs discourages individuals from saving for their retirements. See Lawrence H. Summers and Chris Carroll, "Why is United States National Saving So Low," Brookings Papers on Economic Activity, vol. 2, 1987, pp. 607-35.Note Since a lower savings rate implies less investment and slower economic growth in the long run, there are reasons to believe that the Seniors' Benefit will have negative longer term aggregate effects. Thus, while the Seniors' Benefit is an improvement on the status quo, there is still much work to be done in this area.

From UI to EI: still not enough

Like the old age security system, Canada's unemployment insurance regime is in desperate need of reform. As discussed earlier, one of the most undesirable features of unemployment insurance is the negative effect it has on the willingness of the unemployed to find work. Because benefits are generous, the relative price of leisure falls, and temporarily unemployed workers have an incentive to remain unemployed for a longer period. See Gene Chapin, "Unemployment Insurance, Job Search, and the Demand for Leisure," Western Economic Journal, vol. 9, 1971, pp. 102.Note Empirical work shows that UI raises the reserva-tion wage The reservation wage is the minimum wage a job seeker must be offered if he is to accept a job offer.Note and the duration of unemployment. See P. Y. Cremieux, P. Fortin, P. Storer, and M. Van Audenrode, "The Impact of Unemployment Insurance on Wages, Search Intensity, and the Probability of Re-employment," HRDC Evaluation Brief 27, 1995.Note Econometric estimates suggest that substantial increases in UI benefits during the 1970s raised Canada's "natural rate" The natural rate of unemployment is the long run unemployment rate that is consistent with a fully anticipated inflation rate.Note of unemployment by as much as 1.3 percent. See Ronald G. Bodkin and Andre Cournoyer, "Legislation and the Labour Market: A Selective Review of Canadian Studies," in Herbert G. Grubel and Michael A. Walker eds., Unemployment Insurance: Global Evidence of its Effects on Unemployment, Vancouver: The Fraser Institute, 1978, pp. 62-88.Note Furthermore, because premiums are set more or less uniformly across all sectors and regions, the unemployment insurance fund subsidizes workers and firms in those industries and regions that have very unstable employment histories, at the expense of those with more stable histories. A small number of firms and industries receive a large

proportion of benefits paid. See M. Corak and W. Pyper, "Firms, Industries and Cross-Subsidies: Patterns in the Distribution of UI Benefits and Taxes," HRDC Evaluation Brief 16, 1995.Note This has adverse allocative effects as it reduces the incentive for workers to move to those regions with the best economic opportunities. The presence of generous UI benefits is perhaps one of the major reasons why there are too many fishermen in the Atlantic region. Thus, while UI does provide assistance to those out of work, the cost in terms of misallocated resources is very high.

By moving from UI to EI, the federal government will reduce some of this inefficiency. Under the new rules, eligibility will be based on hours rather than weeks worked. To qualify for EI, workers will have to work for 420-700 hours, depending on the regional unemployment rate. This will increase the incentive to work and lessen dependency on the system. See Business Council of British Columbia, Submission to the Minister of Human Resources Development and the House of Commons Standing Committee on Human Resources Development: Bill C-12-An Act Respecting Employment Insurance in Canada, April 15, 1996, Vancouver: Business Council of British Columbia.Note Furthermore, the move to reduce the "maximum weekly insurable earnings" and to also reduce the maximum length of time benefits can be collected will reduce costs, provide workers with greater incentive to get off EI, and may enable a reduction in the payroll tax. Ibid.Note Finally, the proposal to reduce benefits marginally for those who collect benefits on a frequent basis (i.e. the "intensity rule") does represent a step in the right direction; without some kind of penalty, there is no incentive for frequent users to stay off the program. Ibid.Note

However, from a wider perspective, it is obvious that these changes do not go very far in addressing the most serious problems with the old UI system. Rather, these changes simply "trim at the edges" and do very little to solve the problems inherent in the design of UI. For example, although the move to hours as opposed to weeks of work may marginally increase the incentive to work, the fact that the entrance requirement continues to vary from province to province The number of weeks one must work in order to qualify for EI benefits depends on the province in which one lives. It is shorter in provinces with above average unemployment rates and longer in provinces with below average unemployment rates.Note means that there is still no incentive for workers to move out of less economically viable regions. Hence, one of the major structural problems of our system remains unaddressed. In addition, the fact that the amount of the premium does not reflect the risk of unemployment means that workers with good employment histories will always be subsidizing workers with poorer employment histories. This is perhaps the greatest inequity of the program as it penalizes those with stable employment. It is also inefficient, as it severs the link between the premiums and the risk, a link which is a necessary component of any viable insurance scheme. For premiums to be set correctly, they must accurately reflect the risk of the person being insured. For example, someone in a seasonal industry who experiences regular spells of unemployment should pay a higher premium, as there is a greater risk that this person will become unemployed. If the insurer is unable to charge a higher premium for this person, the insurer is unduly exposed to risk. This problem is known as "adverse selection." For a more detailed discussion, see Chapter 10, "The Economics of Information," in Nicholson, op. cit.Note Finally, although the new "intensity rule" is a step in the right direction, it will not have much of an impact on the incidence of repeat use of EI, which is known to be considerable. Empirical estimates show that at any given time, up to 40 percent of claimants have had five or more claims. See M. Corak, "Unemployment Insurance, Temporary Layoffs and Recall Expectations," HRDC Evaluation Brief 8, 1995.Note If the federal government is to reduce the chronic dependence of some workers on the EI program, it must reduce benefits by far more than 1 percent for every 20 weeks of benefits received as currently proposed.

The CPP fiasco

Canada's pension system is in crisis. As a result of changing demographics and slower real wage growth than anticipated, the Canada Pension Plan has become unsustainable. When the CPP was first introduced in 1966, Canada's birth rate was very high. It seemed reasonable to operate the CPP on a "pay as you go" basis because of the anticipation that there would always be more young working people than old people. However, contrary to expectations, the birth rate fell significantly in the subsequent decades, real wage growth stagnated, and yet the size and scope of pension benefits increased. A relatively smaller work force must now support a growing population of retired people; this implies a gross intergenerational transfer of wealth from young to old Canadians. At present, the CPP's unfunded liabilities total over $600 billion. Unless significant changes are made to the system, there will have to be a substantial increase in the CPP payroll tax. Indeed, estimates show that with no change in the benefit structure, the CPP payroll tax will have to rise to 14.2 percent of wages by year 2035 (up from 5.6 percent of pensionable earnings in 1993). See Appendix B of Canadian Institute of Actuaries, Canadian Retirement Income Social Security Programs: Report of the Task Force on Social Security Financing, February 1995.Note Since payroll taxes kill jobs, See Organization for Economic Cooperation and Development, OECD Jobs Study Part 1, Paris: OECD, 1994.Note the implications of such an increase for job creation are simply disastrous.

The federal government has held a series of public hearings on the future of the CPP. Apparently, the federal government and the provinces are also considering a proposal to increase the current CPP contribution rate to over 10 percent in order raise additional funds so that the payroll tax will not have to be increased even further in the future. See "Ottawa accused of hiding impact of CPP rate hike," The Financial Post, May 7, 1996, p. 1.Note According to Nesbitt Burns economist Douglas Porter, such a massive increase in the payroll tax could kill as many as 125,000 jobs. Cited in Ibid.Note The federal government is caught in a bind. Unless the pension plan is overhauled immediately, the federal government has no choice but to raise payroll taxes in order to meet its CPP obligations. However, by raising payroll taxes, the federal government will reduce employment opportunities and will undermine political support for the very program these additional taxes are supposed to finance. The status quo is unsustainable; it is both unreasonable and inequitable to expect young Canadians to pay for the CPP when they realize they will not benefit from it.

EI-sponsored training programs: a solution to our problems?

Supporters of so-called "active" social policy programs often claim that the best way to get the unemployed off the EI rolls is to provide them with job training. The standard argument offered in support of this position is roughly as follows: individuals are unemployed because they do not have marketable skills; with job training programs, these individuals will learn the skills necessary to make them attractive to employers. Proponents of such programs also argue that it is up to the government to provide this training as Canadian employers tend to underinvest in skills training. This argument is advanced in Gordon Betcherman, "Are Canadian Firms Underinvesting in Training," Canadian Business Economics, vol. 1, no. 1, Fall 1992.Note

While this argument may sound good at first, a careful look at the evidence suggests otherwise. For one thing, it is not clear that Canada needs to invest more in job training. A study completed by Constantine Kapasalis found that Canadian employers invest as much in their workers as employers from other OECD nations. Constantine Kapasalis, "Employee Training in Canada: Reassessing the Evidence," Canadian Business Economics, vol. 1, no. 4, Summer 1993, pp. 3-11.Note Kapasalis also found that access to training is equally available to all workers, regardless of gender, age, or company size. There is no case for more government intervention in this area because the private sector already invests adequately in skills training. Moreover, evidence from the United States suggests that job training programs are not the panacea their proponents expected. Neither the Job Training Partnership Act (JTPA) nor the Federal State Jobs program was able to get a significant number of people off state welfare rolls. For a review of the evidence on JTPA see U.S. Department of Labor, Employment, and Training Administration, "The National JTPA Study: Impact on Earnings and Employment at 18 Months," Research and Evaluation Report 93-C, Washington: U.S. Department of Labor, 1993. For a review of the Federal-State Jobs program see "Babies making Babies," The Economist, December 11-17, 1993, pp. 27-28. Also see Robert J. Lalonde, "The Promise of Public Sector-Sponsored Training Programs," Journal of Economic Perspectives, vol. 9, no. 2, Spring 1995, pp. 149-168.Note Overall, the evidence shows that EI-sponsored training is unlikely to improve the job prospects of the unemployed.

Policy proposals

In light of the above analyses of the Seniors' Benefit, Employment Insurance, and Canada Pension Plan programs, the federal government should:

(1)Rework the Seniors' Benefit so that it is on a much firmer financial footing. In particular, the federal government must significantly scale down its benefits so that no senior whose income (or no couple whose combined income) exceeds the Sarlo "basic needs" poverty line can be eligible to receive benefits. See Chris Sarlo, Poverty in Canada: 2nd Edition, Vancouver: The Fraser Institute, 1996.Note This is fair because the purpose of the Seniors' Benefit should be to help those elderly Canadians who cannot help themselves, not to subsidize people simply because they happen to be old.

(2)Overhaul Employment Insurance so that it really functions as insurance, and not as an income supplement or a subsidy. In particular, the federal government should privatize EI, and permit its new operators to run it just like any other insurance scheme. This would mean allowing EI operators to charge experience-rated premiums that truly reflect the actuarial risk of insuring particular types of workers; to establish uniform entrance requirements that do not fluctuate between provinces or industries; to impose stiffer penalties and higher premiums for repeat claimants; and to reduce benefit rates so that the incentive to get off the program and back into employment is stronger. Such changes will enable a the EI payroll tax to be reduced, which in turn will help stimulate private sector job creation.

(3)Phase out the CPP and gradually replace it with a mandatory, private RRSP scheme for all workers. Ninety-one percent of respondents to The Fraser Institute's Spring 1996 Survey of Senior Investment Managers in Canada felt it likely or very likely that the CPP will face a major funding crisis over the next 25 years. The most preferred solution to the crisis among those surveyed was to replace or expand the current CPP with a mandatory private RRSP. See Ted Dixon and Fazil Mihlar, Survey of Senior Investment Managers in Canada: Results for Spring 1996, Vancouver: The Fraser Institute, 1996.Note Chile's recent experience with pension plan reform is most instructive in this regard. For a review of the Chilean experience, see Canadian Taxpayers Federation, Towards a Sustainable Pension Plan: A Submission to the Federal, Provincial and Territorial Governments of Canada with respect to the Canada Pension Plan, May 8, 1996, Edmonton: The Canadian Taxpayers Federation. See also William Robson, Putting Some Gold in the Golden Years: Fixing the Canada Pension Plan, Toronto: C.D. Howe Institute, 1996.Note Once operated on the same "pay as you go" basis as the CPP, the Chilean pension system is now a fully funded scheme of competitive, privately operated pension plans in which each individual has his or her own account. The success and popularity of the Chilean system suggests that pension plan reform can be financially viable if managed appropriately. The federal government should stop vacillating on this issue and embark immediately on a major reform initiative.

(4)Discontinue funding for all EI-sponsored training programs. The empirical evidence shows that the private sector already invests adequately in skills training and that government intervention in this area is unlikely to be successful. Job training programs are not a panacea.

Conclusions: a long way to go

The federal Liberal government has started a much needed review of Canada's social policies and has begun to move in the right direction with respect to parts of our old age security system and unemployment insurance network. However, these changes have been mostly superficial, and have done little to address the real structural weaknesses within the existing social policy network. Furthermore, the federal government has failed to properly address the problems with the Canada Pension Plan. Both politicians and policy makers must recognize that the federal government cannot and should not use the instruments of social policy to shield all Canadians from the risks of life. Rather, the purpose of social policy should be to help those who are unable to help themselves.

For failing to accept this fact and for being much too timid in a policy area that needs immediate reforms, the federal government deserves a C.

Health Policy

Grade: D

Economic principles and health care

Economics is often defined as the study of how society allocates scarce resources in the presence of unlimited human desires. Choices about health care-how it should be provided and financed-necessarily involve choices about how to use scarce resources. Whether society should devote more resources to finding a cure for AIDS or to building a hospital is ultimately an economic decision as either option involves choices about resources that have alternative uses. Therefore, any rational debate about the future of Canada's health care system must include a consideration of the principles of economics. Most economists would agree that the best way for society to allocate resources is through the competitive market, because the market produces a system of relative prices that are the most efficient mechanism for coordinating individual human action. See F.A. Hayek, "The Use of Knowledge in Society," American Economic Review, vol. 35, 1945, pp. 519-530.Note However, for the last 50 years or so, competitive market mechanisms have been largely absent in the Canadian health care sector. For political, ideological, and historical reasons, politicians and policy makers have not allowed market forces to play a role in the provision of health care. The standard argument offered is that since health care is such an important service, its provision and financing should be left to the state, as the market cannot be trusted to provide reliable and effective health care to all Canadians. In this way, the principles of economics have been essentially frozen out of the health care debate.

Canadian style health care

Canada's current expanding need for health care, created by our aging population, therefore is occurring in the absence of economic incentives in the health care sector. Faced with rising costs and large deficits, the various levels of government in Canada have been forced to cut their health budgets; as a consequence, many services have been delisted, and long waiting lists have developed for many non-elective procedures. Clearly, the Canadian health care system is in a crisis.

Some myths about Canadian health care

In spite of this, most Canadians continue to cling to the myth that our nation has the best health care system in the world. Indeed, a large number of Canadians still believe that our health care system upholds the principles of the Canada Health Act: universal, accessible, portable, comprehensive, and publicly administered. Even a cursory examination of the evidence shows that these beliefs are misplaced.

Universality requires that all Canadians be covered by our health care system, but in reality, not everyone is covered. For example, in B.C., over 100,000 people are not covered by the provincial Medical Services Plan. Estimate from the B.C. Ministry of Health, cited in William McArthur, Cynthia Ramsay, and Michael Walker, "Improving Health Care for Canadians," in W. McArthur, C. Ramsay and M. Walker eds., Healthy Incentives: Canadian Health Reform in an International Context, Vancouver: The Fraser Institute, 1996.Note So it is incorrect to suggest that Canadian health care covers all citizens universally. Similarly, it is also incorrect to suggest that our health care system is completely accessible. Waiting lists for various medical procedures vary widely across the country, depend-

ing on the province in which one lives. See Cynthia Ramsay and Michael Walker, "Waiting Your Turn: Hospital Waiting Lists in Canada" (6th Edition), Fraser Forum Critical Issues Bulletin, Vancouver: The Fraser Institute, 1996. The survey finds that in 1995, the average time waited from appointment with a specialist to treatment was 9 weeks in B.C., 6.6 weeks in Alberta, 5.2 weeks in Ontario, and 11.8 weeks in Prince Edward Island. Clearly there is considerable regional disparity in waiting times.Note This is a violation of the principle of accessibility which requires that health care be easily available to all, regardless of where one lives.

Canadian health care is not fully portable either. For one thing, it does not completely cover Canadians travelling outside of Canada. Furthermore, it does not cover some Canadians when they are not in their home province. A Quebecer who needs medical attention outside of Quebec must pay for medical services out-of-pocket and is reimbursed later only for the amount that the service would have cost in Quebec. See McArthur, Ramsay, and Walker, op. cit.Note

The federal government and the health care myth

Notwithstanding these facts, in their Red Book the Liberals show the extent to which they, too, have bought into the mythology of Canadian medicare. Consider the following:

A top priority for a Liberal government will be preserving and protecting our universal medicare system, maintaining the values that underpin it while we reinvent the means by which health care services are delivered to people. See Liberal Party of Canada, Creating Opportunity: The Liberal Plan for Canada, Ottawa: Liberal Party of Canada, 1993, p. 74.Note

As one of our greatest national projects, our health care system is a defining element of Canadian society. Medicare has contributed to a quality of life in Canada that is recognized to be one of the best in the world and a comparative advantage in the global marketplace. It represents the best of the Canadian spirit, reminding us of the good that we can achieve together. Ibid, p. 77.Note

A Liberal government will not withdraw from or abandon the health care field. That would be to accept the notion of a two-tier health care system: one for those living in more advantaged provinces, and an inferior system for those living in the less advantaged provinces. Liberals cannot and will not accept a health care system that offers a higher quality of care for the rich than for the poor. Ibid.Note

According to the Liberals, medicare is "one of our greatest national projects" and "represents the best of the Canadian spirit." The federal government is committed to preserving and protecting our "universal medicare system." There will be no two-tier medical system for Canada since such a system, in the Liberal view, would enable individuals who live in richer provinces to get better medical care than those living in poorer provinces, and that would be unacceptable to the Canadian psyche. Thus, the Liberals promised to maintain a firm federal presence in the funding and regulation of Canadian health care.

The federal government's health care plan in action

Under the constitution, health care is an area of provincial jurisdiction. However, during the post World War II period, the federal government began to influence how health care is provided in Canada through the use of its spending power. That is, by offering to finance a portion of a province's medicare expenses, the federal government has managed to influence how provinces deliver medicare.

Since the fall of 1993, the federal government has changed the way it transfers funds to the provinces. Until 1995, federal funds for social programs were provided under the Canada Assistance Plan (CAP) and the Established Programs Financing (EPF). CAP covered welfare and social services while the funds transferred under the EPF were directed to health care and higher education. However, in the 1995 budget, CAP and EPF were consolidated into a single block grant called the Canada Health and Social Transfer (CHST). For more information about the CHST see Thomas J. Courchene, Redistributing Money and Power: A Guide to the Canada Health and Social Transfer, Toronto: C.D. Howe Institute, 1995.Note Under this new scheme, provinces are freer to determine how to allocate their portions of the transfer to the various social programs. The only conditions attached are that the provinces must abide by the Canada Health Act (and hence uphold the five "fundamental principles" of medicare) and that no residency requirement be imposed on welfare recipients. Ibid.Note For now, at least, the federal government has effectively locked our health care system in a time warp since any province that tries to deviate from the present system will be financially punished.

Policy analysis: time for a reality check

The advent of the CHST is a mixed blessing. On the one hand, it is an improvement on the status quo as it enables provinces to determine their own spending priorities with respect to social programs. Since different provinces will have different spending priorities depending on their constituencies and economic circumstances, this is a positive development. Block grants give provinces more flexibility to tailor their spending to the needs of their residents. In this respect, the CHST is an improvement on the old system of program-specific grants since it gives the provinces more spending autonomy.

On the other hand, however, the CHST does little to advance the cause of genuine social policy reform because the provinces continue to be bound by the arcane provisions of the Canada Health Act. As a result, the medicare system will continue to be beset by the problems of too much government control and not enough competition. This is distressing because in the absence of competition and prices, the incentives will never be in place for the efficient delivery of health care services. It is also unfortunate because the Canadian health care industry, as the single largest employer in the country, could potentially be an engine of economic growth if market forces were allowed to play a greater role in the provision of health care.

The federal government's stubborn insistence on maintaining the status quo is destructive. It obscures the fact that virtually every other industrialized nation has a two-tier health care system, and that such systems have not increased the disparity of health care services available to rich and poor persons. See the relevant chapters in McArthur, Ramsay, and Walker, op. cit.Note It also ignores the fact that competition in the health care industry can only improve the quality and affordability of available health care services. Consider the experience of the United Kingdom and New Zealand with respect to health care reform. Until quite recently, both countries had health care services very similar to Canada's. Faced with escalating costs, long waiting lists, and declining service quality, both the UK and New Zealand began to liberalize their health care sectors. Today, government and the private sector compete to provide health care services in both countries. Health care budgets have become more manageable, service quality and choice have improved, and waiting lists have been shortened. Ibid.Note Thus, there is empirical evidence that the introduction of market-based reforms can only benefit our health care sector; this is a reality that the federal government refuses to accept. By rejecting all proposals to introduce more competitive forces into the provision of health care, the federal government does a disservice to Canadians.

Policy proposals

If the federal government is truly interested in improving the medicare system to the benefit of all Canadians, it should adopt the following policy proposals:

(1)Repeal the Canada Health Act. The provisions of the Canada Health Act are badly out of date and make a mockery of our health care system. Medicare is not universal, comprehensive, portable, or accessible. Indeed, medicare will never meet any of these criteria as long as the federal government continues to strangle the provinces with the arcane provisions of the Canada Health Act. If the federal government wants to initiate a process of truly meaningful health care reform, it must start by repealing the Canada Health Act and abandoning its anachronistic health care ideology.

(2)Allot all government funds for health care to the consumer directly through a medical premium account (MPA). For more details about how MPAs work see Medical Savings Accounts published by the Evergreen Freedom Foundation in Washington, 1995. See also John C. Goodman and Gerald C. Musgrave, Patient Power, Washington: The Cato Institute, 1992.Note Under such a system, each individual has a MPA which is divided into two parts. One part is used to fund a catastrophic insurance plan; the other is used to pay for routine medical expenses (i.e., visits to the general practitioner or chiropractor, pharmaceutical expenses, etc). Under such a system, competitive forces can play a role in providing health care. Consumers will have the option to use the MPA wherever they like, which will improve service quality and efficiency since the presence of competition will make the costs of health care more apparent to both producers and consumers. Furthermore, the provision of government-funded catastrophic insurance will ensure that no individual is bankrupted by a major illness.

Conclusions

Medicare has become an ideology in Canada, an ideology based on myths not grounded in economic reality. Unfortunately, the Liberal government has unquestioningly accepted this ideology wholesale, and has steadfastly refused to acknowledge the fact that market-based reform is essential if we are to rescue our health care system from self destruction. Economic principles can and must play a role in any debate about the future of Canada's health care system.

For clinging to the outmoded ideology of the Canada Health Act and for resisting any meaningful change, the federal government deserves a D in its health care policy.

International Trade and Foreign Aid Policy

Grade: A

Free trade as the cornerstone of a sound economic policy

Since David Ricardo's time, economists have overwhelmingly recognized free trade as an essential component of sound economic policy. By exposing national markets to international competition, free trade works to ensure that nations produce goods and services according to their comparative advantage, which encourages the most efficient allocation of resources, and guarantees that consumers have access to the widest variety of products at the lowest possible price. This point is made most emphatically in James D. Gwartney and Richard L. Stroup, What Everyone Should Know About Economics and Prosperity, Vancouver: The Fraser Institute, 1993.Note

No country loses as a result of free trade. One of the most well demonstrated economic theorems is that a country can only be made better off if it moves from autarky to free trade. This theorem is demonstrated in all international trade textbooks. For example, see Peter H. Lindert and Charles P. Kindleberger, International Economics: Seventh Edition, Homewood: Richard D. Irwin Inc., 1982.Note While it is true that individuals in certain industries (i.e. those in which the nation does not have a comparative advantage) may be made worse off as a result of trade liberalization, it is also true that society overall gains from the change in relative prices and the increased allocative efficiency brought about by free trade. Thus, free trade passes the cost benefit test because the long-run benefits of a free trade policy are likely to dwarf the short-run adjustment costs.

The Liberal Party's pre-election attitude

In spite of these well established facts, the attitude of the federal Liberal party towards free trade prior to taking office was generally negative. In the 1988 federal election, the Liberals opposed the Canada-United States Free Trade Agreement (FTA) on the grounds that it would result in the "sale" of Canada to the U.S. However, in their Red Book of campaign promises for the 1993 federal election, the Liberals' attitude toward free trade softened somewhat. While they offered unequivocal support for the multilateral trading system under the GATT, they promised to ratify the North American Free Trade Agreement (NAFTA) with Mexico and the U.S. only if the other two signatories would agree to certain specific amendments to the agreement. See The Liberal Party of Canada, Creating Opportunity: The Liberal Plan for Canada, Ottawa: The Liberal Party of Canada, 1993, p. 23-24.Note

The federal government's actions

However, despite this rather ambivalent rhetoric, the federal government has ratified NAFTA and moved towards establishing more liberalized trading relations with a number of other nations. Specifically, the Liberal government has negotiated a free trade deal with Israel, implemented the Uruguay Round of Multilateral Trade Negotiations, and made moves towards freer trade with Pacific Rim nations. See Privy Council Office, Ensuring Opportunity for Canadians: The Record To Date, Ottawa: Privy Council Office, 1996.Note While none of the above agreements will bring about free trade in its truest sense, they will liberalize our trading arrangements and promote greater efficiency and a higher standard of living for Canadians.

Policy analysis: the miracles of free trade

The positive legacy of free trade speaks for itself. Since the FTA with the U.S. was implemented in 1989, the volume of trade between Canada and the U.S. has increased by 75 percent. See Fazil Mihlar, "FTA/NAFTA: A Win-Win-Win Situation," Fraser Forum, April 1995, Vancouver: The Fraser Institute, pp. 22-23. Mihlar provides a succinct overview of the trade data.Note While the total value of imports from the United States has increased from $88.7 billion to $168.8 billion from 1988 to 1995, the total value of Canada's exports to the U.S. has increased even more, from $102.6 billion in 1988 to $201.7 billion in 1995, an increase of almost 100 percent. Hence, Canada has continued to run a significant trade surplus with the United States. See International Monetary Fund, Direction of Trade Statistics Yearbook 1995, Washington: IMF, 1995; and Statistics Canada, Canadian Economic Observer: Historical Statistical Supplement (1995/96), Ottawa: Statistics Canada, 1996.Note Similarly, after the implementation of NAFTA, Canada's trade volumes with Mexico have grown appreciably. In the first nine months of 1994, our exports to Mexico grew by 16 percent while our imports grew by 32 percent. See Statistics Canada, Canadian Economic Observer: Historical Statistical Supplement 1993/94, (Ottawa: Statistics Canada, 1994.Note Thus, both the FTA and NAFTA have had a significant impact on the total value of our trade.

Furthermore, contrary to the claims of NAFTA and FTA critics, there has not been an outward surge of foreign investment from Canada. Rather, investment in all three countries has risen. In Canada's case, direct investment has increased from $5.9 billion in 1989 to $14.7 billion in 1995. Statistics Canada, Canadian Economic Observer: Historical Statistical Supplement (1995/96), Ottawa: Statistics Canada, 1996.Note In the long run, a higher level of investment will result in a larger capital stock and ultimately, in faster economic growth. Hence, we can expect that, through its impact on investment levels, free trade will raise our standard of living.

Finally, free trade has had a positive impact on the productivity of Canadian businesses. Between 1988 and 1993, those sectors most liberalized by the FTA experienced an average productivity increase of 26 percent. In contrast, other sectors of the economy only experienced a 6 percent productivity increase over the same period. See Enrique Gelbard, "Economic Views: Effects of Economic Integration-FTA, NAFTA and Beyond," Toronto: Economics Department, Royal Bank of Canada, 1994.Note Thus, by plunging firms into a more competitive environment, free trade forces firms to operate more efficiently. In the long run, improved levels of productivity result in higher real wages and a higher standard of living for Canadians.

Foreign aid: some reservations

While the federal government's record on international trade policy has been almost unambiguously positive, its attitude towards foreign aid raises some concerns. In their Red Book, the Liberals made an (implicit) promise to maintain current levels of foreign aid:

. . . a Liberal government will not arbitrarily and without prior consultation cut off aid programs to entire regions of the world, such as east Africa, that continue to face desperate poverty and deprivation. A Liberal government will conduct a comprehensive and public policy review of Canada's foreign aid priorities to ensure that a clear policy framework is in place for distributing Canadian aid. Effective means to manage the ongoing priority of helping countries in Eastern Europe and the former Soviet Union will be part of this review. See Liberal Party of Canada, op. cit., p. 108.Note

While the above quote perhaps shows that Liberal policy makers have the best intentions, sound economic policy decisions are seldom made "straight from the heart." Taken from the title of Prime Minister Jean Chrétien's best-selling autobiography.Note Foreign aid rarely, if ever, succeeds in raising poor countries from the miseries of poverty. More often than not, foreign aid entrenches bad regimes and enables despotic leaders to pursue immiserizing economic policies. For an excellent discussion of the problems brought about by foreign aid see Peter T. Bauer, Equality, the Third World, and Economic Delusion, Cambridge: Harvard University Press, 1981.Note Instead of using aid constructively, political leaders often use the funds to build monuments and buy machine guns. Even humanitarian aid can have negative effects. Dumping large quantities of grain into a poor country drives down the price of food and kills domestic agricultural industries. Large infusions of cash can contribute to higher inflation rates. Clearly, good intentions are not enough when it comes to aid.

On misguided good intentions

The history of the 20th Century is littered with examples of foreign aid gone wrong. Since 1951, India has received over $55 billion (U.S.) in foreign aid, yet in spite of this, the per capita GNP of India has not risen above $330 over the past 45 years. See Thomas P. Sheehy, "The Index of Economic Freedom: A Tool for Real Reform of Foreign Aid," Backgrounder, No. 986, May 6, 1994, Washington: The Heritage Foundation.Note Similarly, Tanzania, which has received $13 billion in aid since 1961, is the second poorest country in the world with a per capita income of $120. Ibid.Note It is obvious that foreign aid does very little to alleviate the plight of the world's poorest people.

To their credit, the federal government has cut spending on "international assistance" from $2.9 billion in 1994-95 to $2.2 billion in 1995-96. See Department of Finance, Budget in Brief, Ottawa: Department of Finance, 1996.Note However, if the Liberal government is truly interested in advancing the interests of the poor abroad, all foreign aid spending should be cut immediately, and poor nations should be encouraged to pursue sound economic policies promoting private property, personal choice, and freedom of exchange. Recent work by The Fraser Institute shows that economic freedom is the most essential ingredient for sustained economic growth. This study found that "no country with a persistently high economic freedom rating during the two decades [1975-1995] failed to achieve a high level of income." From James Gwartney, Robert Lawson, and Walter Block, Economic Freedom of the World 1975-1995, Vancouver: The Fraser Institute, 1996, p. xvii.Note The key to economic development in Less Developed Countries (LDCs) is greater economic freedom. Well intentioned cash handouts will do little in this regard.

Policy proposals and conclusion

In light of the evidence regarding the benefits of free trade and the harm caused by foreign aid, the federal government should:

(1)Eliminate all foreign aid. Canada should not contribute any further to the impoverishment of the world's poor.

(2) Continue to increase trade liberalization. In particular, efforts should be made to open up the NAFTA to more South and Central American states.

(3)Spurn the inclusion of "side agreements" regarding labour and environmental standards in future trade agreements. The empirical evidence suggests that the best way to improve the environmental standards of poorer countries is to make them rich countries. See Gene Grossman and Alan Krueger, "Economic Growth and the Environment," Quarterly Journal of Economics, vol. CX, no. 2. 1995, pp. 353-377.Note Environmental quality is a good like any other; as incomes rise, individuals demand more of it. We do not help the environment by imposing our standards on countries with lower per capita incomes.

In spite of these reservations, the Liberal government deserves credit for having abandoned its previous dislike of free trade. As noted above, free trade is the cornerstone of a sound economic policy. There are few things more damaging to both economic welfare and sound international relations than a policy of protectionism. Protectionism, by sheltering domestic firms from foreign competition, encourages inefficiency and promotes wasteful rent seeking. This point is made very succinctly in Gordon Tullock, "The Welfare Cost of Tariffs, Monopolies, and Theft," Western Economic Journal, vol. 5, 1967, pp. 224-32. More details are provided in: Anne O. Krueger, "The Political Economy of the Rent-Seeking Society," American Economic Review, vol. 64, 1974, pp. 291-303; see also Jagdish N. Bhagwati, "Directly Unproductive, Profit-seeking (DUP) Activities," Journal of Political Economy, vol. 90, no. 5, October 1982, pp. 988-1002.Note The so-called "infant industries" that demand protection never grow up under such a regime. For the historical evidence on why "infant industries" never grow up see Michael Todaro, Economic Development in the Third World, New York: Longman Inc., 1989. See also Terrence Casey, "The Clinton Administration and the Industrial Policy Question," The Journal of Social, Political, and Economic Studies, vol. 18, no. 1, 1992.Note Furthermore, by threatening international trading relations, protectionism encourages conflict among nations. The experience of the 1930s speaks directly to this point. See Tony Howarth, Twentieth Century History: The World Since 1900, Burnt Mill: Longman Group Ltd., 1979.Note

Thus, for promptly ratifying NAFTA and for promoting a more open trading relationship with the rest of the world, this Liberal government deserves an A.

Transportation Policy

Grade: A

A free market in transport

In a large country like Canada where the production, distribution, and consumption of goods and services often occur at great distances from each other, it is essential that people and goods be carried from one destination to another in the most efficient manner possible. It has long been noted by economists that the interaction of supply and demand in free, competitive markets tends to promote efficient outcomes over a wide range of goods and services. See James Gwartney and Richard Stroup, What Everyone Should Know About Economics and Prosperity, Vancouver: The Fraser Institute, 1993.Note In the presence of competition, firms that do not provide the best product at the most reasonable price are forced out of the market. Hence, a viable transportation policy for Canada, one which ensures the efficient transportation of people and goods to, from, and within the nation, is one which promotes market forces and competition. Such a policy will promote a higher standard of living for all Canadians.

Government intervention in transportation markets, however, has been a pervasive feature of Canadian economic history. Since Confederation, the federal government has been involved in the construction, ownership, and control of railways, the regulation of trucking, shipping, and air transportation, the ownership of a national airline, the operations of sea and air terminals, and so on. For an overview of government intervention in the transportation sector see Carman D. Baggaley, The Emergence of the Regulatory State in Canada, 1867-1938, Ottawa: Economic Council of Canada, 1981. See also the relevant chapters in Walter Block and George Lermer eds., Breaking the Shackles: Deregulating Canadian Industry, Vancouver: The Fraser Institute, 1991.Note While this intervention may have been justified in the past on the grounds of natural monopolies and market power, it is no longer justified today because technological change has provided viable substitutes which makes the market for transportation extremely competitive. See Block and Lermer, op. cit.Note

Pre-election promises versus post-election actions

In spite of the importance of a competitive transportation industry for Canada's economic well being, the only reference to transportation policy made by the Liberal Party during the 1993 election campaign was a promise to scrap the Pearson Airport deal. Fortunately, however, this indifference towards transportation policy was not carried into government. Indeed, since it took office in the fall of 1993, the Liberal government has pursued a vigorous, market-driven transportation policy which has carried forward the deregulatory agenda initiated by the Mulroney government in air and trucking transportation.

The federal government's list of achievements in the area of transportation policy is impressive. These achievements have resulted in significant cost savings to the public and will increase the quality and competitiveness of the Canadian transportation industry. The benefits from these changes will spill over to other industries and will thus help other sectors of the Canadian economy as well. Some of the highlights include the following:

(1)The federal government has sold 100 percent of its equity in CN Rail. The proceeds of this privatization, the largest in Canadian history, totalled $2.16 billion. See Transport Canada, "News Release: Proceeds of Sale of Cn$2.16 Billion: Government of Canada Closes Sale of CN Shares," Nov. 28, 1995.Note

(2)The Air Navigation System (ANS), which provides air navigation services to airports and carriers, was sold to Nav Canada for $1.5 billion. As a result of this measure, the highly distortionary Air Transportation Tax (ATT) will be repealed. See Transport Canada, "News Release: Agreement Signed to Transfer Air Navigation System," April 1, 1996.Note

(3)The "Open Skies" agreement was signed with the U.S. This agreement will give Canadian carriers unlimited route rights to any point in the U.S. from any point in Canada. Correspondingly, U.S. carriers will be permitted unlimited route access from any point in the U.S. to any point in Canada. See Transport Canada, "News Release: Federal Government Releases Progress Report on `Open Skies' Agreement," March 28, 1996.Note

(4)Under the National Airports Policy, all airports have been passed over to local authorities who are permitted to introduce user charges. See Privy Council Office, Ensuring Opportunity for Canadians: The Record To Date, Ottawa: Privy Council Office, 1996.Note

(5)As a result of the National Marine Policy, the Canada Port Authority will be abolished and all major ports will be locally controlled under local port authorities. In addition, the Great Lakes-St. Lawrence Seaway will be commercialized. Ibid.Note

(6)Significant cuts have been made to rail transportation subsidies. The Western Grain Transportation Act was repealed, while Atlantic Region Freight Assistance and Maritime Region Freight Assistance were eliminated. Ibid.Note

Policy analysis: right on track

The international evidence on privatization is clear. Following privatization, firms tend to improve their efficiency and their service quality. For an overview of the evidence see Michael A. Walker ed., Privatization: Tactics and Techniques, Vancouver: The Fraser Institute, 1988.Note By privatizing CN Rail, the ANS, and all the airports, the Liberal government has made a significant step towards improving the quality and efficiency of our transportation industries.

The "Open Skies" agreement has somewhat liberalized the air transportation sector, substantially increased consumer choice, and enhanced the competitiveness of this industry. To date, the "Open Skies" agreement has been an unqualified success; over 100 new transborder routes have opened up since it was signed last year and more routes are expected within the next few years. See Transport Canada, op cit., March 28, 1996.Note This bilateral deregulatory initiative will go a long way in promoting consumer welfare.

Finally, the National Marine Policy, when completely implemented, should increase the viability and efficiency of our ports. Currently, port authorities must go through considerable red tape in order to make changes to their operations. For example, it was recently reported that it took 22 months for the Port of Vancouver to get approval from the Canada Port Authority to acquire a new

crane. See "Ottawa moves to keep control of port appointments," The Vancouver Sun, p. A1, A11, June 1996.Note By streamlining operations and removing such regulatory hurdles, the National Marine Policy will enable the Port of Vancouver to improve its competitive position with other ports along the west coast of the U.S., and will help Canadian exporters break into new markets.

A definite "no go:" right off track

However, there are some ominous signals coming from the federal government with respect to its transportation policy that must be addressed. Of greatest concern is the proposal to subsidize a high speed train (TGV) from Windsor to Quebec City. See Richard Soberman, "High Speed Trains for Canada: Technological Excellence, Groundless Conviction, or Bureaucratic Obsession?", in Filip Palda ed., Essays in Canadian Surface Transportation, Vancouver: The Fraser Institute, 1995, pp. 93-140.Note The federal government should most definitely steer clear of this megaproject which is expected to cost upwards of $18 billion. See Canadian Taxpayers Federation, "News Release: Taxpayers Put The Brakes On High Speed Train," June 6, 1996.Note Another area of concern is the federal government's persistence in subsidizing the construction of a fixed-link bridge between New Brunswick and Prince Edward Island. The historical record suggests very clearly that government financed megaprojects usually end up as white elephants. Mirabel Airport in Montreal is a case in point. We recommend that the federal government stay out of any more politically motivated megaprojects as they are unlikely to serve any useful economic function.

In order to bring its transportation policy to its logical conclusion, the federal government should:

(1)Open domestic routes to foreign-owned (i.e. U.S.) air carriers, preferably through another bilateral air agreement with the U.S. This will further enhance the competitiveness of Canada's air transportation sector, and increase consumer choice.

(2)Relinquish its ability to regulate prices through the Canadian Transportation Agency. If free markets are to prevail, government should not be able to override market prices. As a symbol of its commitment to a market driven transportation policy, the federal government should repeal the provisions of the Canada Transportation Act which allows it to regulate prices.

(3)Declare that it will not involve itself in any future transportation megaprojects. This position should be entrenched in law.

Conclusion

The federal government is moving in the right direction with its transportation policy. Since it took office, it has pursued a more consistent free market transportation policy than any previous federal government. Given the long history of government intervention in the transportation sector, this is no small achievement. It reflects a fundamental "paradigm shift" in the way government operates, a shift that should be replicated in other policy areas.

For this achievement, the federal government deserves no less than an A.

Labour Policy

Grade: F

The need for flexible labour markets

In principle, analysis of the labour market is no different from analysis of markets for any other good or service. All other things being equal, the demand for labour falls as the real cost of labour rises. As the per unit cost of labour input increases, firms will substitute relatively cheaper capital for relatively expensive labour as part of their cost minimization strategy. See Allan C. DeSerpa, Microeconomic Theory: Issues and Applications, Newton: Allyn and Bacon Inc., 1985.Note Meanwhile, the supply of labour rises as the after-tax rate of return to labour rises. For a given tax rate, a higher real wage raises the price of leisure and induces households to supply more labour input. Ibid.Note Equilibrium in the labour market is established at the real wage rate which equalizes the demand and supply of labour.

Given this standard partial equilibrium supply and demand paradigm for the labour market, it is possible to analyze, a priori, the effects of government intervention in the market for labour on such variables as the wage rate, the level of labour input employed, and the unemployment rate. For example, minimum wage laws, which set the wage rate above the equilibrium wage rate, will tend to create an excess supply of labour as the high wage rate mandated by the law will reduce the demand for labour but increase its supply. Faced with higher labour costs, firms will substitute capital for labour and employment will fall. Meanwhile, low productivity workers will be unable to find employment since the value of their marginal product is below the mandated minimum wage. See George Stigler, "The Economics of Minimum Wage Legislation," American Economic Review, vol. 36, June 1946, pp. 358-365. The number of studies documenting the negative employment impacts of minimum wage legislation is nearly infinite. See for example: Simon Rottenburg ed., The Economics of Legal Minimum Wages, Washington: American Enterprise Institute, 1981; P. Linneman, "The Economic Impact of Minimum Wage Legislation," Journal of Political Economy, vol. 90, no. 3, 1982, pp. 443-469; Morley Gunderson and Craig Riddell, Labour Market Economics: Theory, Evidence and Policy in Canada (2nd Edition), Toronto: McGraw-Hill Ryerson, 1988; David Neumark and William Wascher, "Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws." Industrial and Labour Relations Review, vol. 46, October 1992, pp. 55-81; David Neumark and William Wascher, "The Effects of New Jersey's Minimum Wage Increase on Fast Food Employment," Unpublished Manuscript, March 1995; and Ernst & Young, British Columbia Minimum Wage Study: Canadian Restaurant and Foodservices Association Final Report, Vancouver: Ernst & Young, 1995.Note Mandatory union provisions that weaken the bargaining position of employers may enable unionized workers to raise the wage rate above equilibrium, inducing a fall in employment analogous to that caused by the minimum wage law. See John T. Addison and John Burton, Trade Unions and Society: Some Lessons of the British Experience, Vancouver: The Fraser Institute, 1984.Note Employment equity laws, which restrict the ability of firms to find qualified workers, increase the cost of hiring workers and induce firms to substitute relatively cheap capital for relatively expensive labour. As a result, employment falls. See the relevant chapters in Walter E. Block and Michael A. Walker, ed., Discrimination, Affirmative Action, and Equal Opportunity, Vancouver: The Fraser Institute, 1982.Note From this brief survey, it seems clear that the general impact of government intervention in the labour market is to introduce rigidities which tend to raise the relative price of labour and reduce employment.

Empirical evidence from around the world suggests that those nations that have the most flexible labour markets adapt more rapidly to technological change, have the best job creation records, and experience the fastest economic growth. See Organization for Economic Cooperation and Development, OECD Jobs Study: Part 1, Paris: OECD, 1994.Note Contrast the recent experience of the United States and the European Union. The United States, with one of the world's most flexible labour markets, has in recent years experienced among the fastest economic growth rates of all industrialized nations and continues to have one of the lowest unemployment rates, currently at about 5.4 percent. Cited in the "Economic Indicators" section of The Economist, June 8th-14th, 1996, p. 106.Note According to a recent study by the McKinsey Global Institute, American labour productivity ranks first in the world and continues to grow rapidly. Cited in "Economics Focus: America's Power Plants," The Economist, June 8th-14th, 1996., p. 82. For more details, see McKinsey Global Institute, Capital Productivity, Washington: McKinsey Global Institute, 1996. Industry specific data showing America's lead in labour productivity over Germany and Japan can be found in: McKinsey Global Institute, Manufacturing Productivity, Washington: McKinsey Global Institute, 1993.Note In contrast, most EU nations, with their inflexible work practices and strong labour unions, have continued to experience very sluggish economic growth and have had relatively high unemployment rates for the past 20 years. Canada appears to share this European predicament of rigid labour markets and low rates of employment growth. Economist Charles Hanson captures the European experience quite succinctly:

What can we learn from the EU? That unduly high wages and work benefits coupled with an excess of regulation can severely damage the labour market and create mass unemployment. From Charles Hanson, "The Economic Impact of Labour Reform: The UK Experience," p. 16, a paper presented at The Fraser Institute's Right To Work Conference convened in Toronto, Ontario on June 21, 1996.Note

Productivity growth in the EU is also abysmal compared to the United States. Given the importance that productivity plays in the economic growth process, See Robert M. Solow, "Technical Change and the Aggregate Production Function," Review of Economics and Statistics, vol. 39, August 1957, pp. 312-20. See also Dale W. Jorgenson, Frank M. Gollop and Barbara M. Fraumeni, Productivity and U.S. Economic Growth, Cambridge: Harvard University Press, 1987.Note it seems clear that the U.S. is better positioned for the future than the EU. While flexible labour markets alone cannot account for all these differences, most analysts would suggest that they play an integral role in the creation of employment and wealth. Hence, if Canada is to avoid the fate which awaits the EU, it must also adopt a flexible labour market policy.

If the goal of labour policy is to ensure that workers are able to find employment suitable to their skills and productivities, the free interaction of labour demand and supply is essential. It is only through such a free and undistorted labour market that meaningful employment can be created. Hence, the optimal labour policy is one that introduces the least amount of rigidities into the labour market. In short, it is one that keeps the labour market as flexible as possible so that changes in labour input can be made in line with economic fundamentals.

The Red Book: nothing explicit

The primary means by which the federal government regulates the labour market is through the Canada Labour Code. The Canada Labour Code applies to all federally regulated parts of the private sector and includes such industries as banking, inter-provincial and international transportation, and telecommunications. Provincially regulated industries are covered by their respective provincial labour codes (for example the B.C. Labour Code, or the Alberta Labour Code). In spite of the fact that the Canada Labour Code introduces several job-killing rigidities into the labour market, primarily through the provision of mandatory union privileges, the Liberals, in their Red Book of election promises, were remarkably silent about labour policy. Given the Liberal's pre-election preoccupation with job creation, this omission was surprising, since reducing the cost of labour is one of the few true and tried ways to create employment.

Labour market interventions to date

However, since it assumed office, the Liberal government has proceeded with a number of initiatives that may potentially raise the cost of labour even further. In the last session, Parliament passed Bill C-64, the Employment Equity Act. According to Bill C-64, all federally regulated firms with more than 100 employees are required to set numerical goals to hire and promote from four groups designated as disadvantaged: women, racial minorities, aboriginals and the disabled. Each firm is required to submit a plan and a timetable for the implementation of these goals.

In addition to passing the Employment Equity Act, in February 1996 the federal government released the first part of its Task Force Review of Part 1 of the Canada Labour Code. The Task Force Review recommended two major revisions to the Code. The first would require employers to give the names and addresses of all off-site workers to union representatives and would grant union representatives authority to access off-site work places. See Government of Canada, Seeking a Balance: Canada Labour Code Review (Part 1), Ottawa: Government of Canada, 1996.Note The second recommends that the use of replacement workers with the intention of undermining the representative capacity of a trade union be declared an unfair labour practice. Ibid.Note Both measures, if implemented, would introduce even more rigidities into the labour market by strengthening the power of unions. Greater labour market rigidity nearly inevitably raises the cost of labour and reduces employment. At the time of writing, the federal government has not decided whether or not to adopt these two proposals.

Policy analysis: the insidious impact of employment equity legislation

As discussed above, flexible labour markets are a key element of any viable job and wealth creation strategy. Employment equity legislation and the strengthening of union power will only increase labour market rigidity and damage job creation and economic growth.

The arguments against employment equity legislation are simple. By demanding power over a firm's staff selection, employment equity legislation undermines the ability of workers and employers to make fundamental decisions regarding employment choices and restricts their freedom to enter into mutually beneficial contracts. This argument is advanced in Richard Epstein, Forbidden Grounds: The Case Against Employment Discrimination Laws, Cambridge: Harvard University Press, 1992.Note Employment equity legislation also imposes high administrative burdens on businesses, increases the size of Canada's already bloated bureaucracy, and, by inducing rigidities into the labour market, hinders the ability of firms to adapt to technological change. Estimates suggest that the administrative burden imposed by Bill C-64 could be between $1.5 to 1.9 billion annually. See Jacqueline Burns and Fazil Mihlar, "Submission to the House of Commons Standing Committee on Human Rights and Status of the Disabled," a paper presented on February 22, 1995.Note Furthermore, employment equity legislation can potentially harm intended beneficiaries by fostering a victim-focused identity within the designated groups and by breeding resentment among those who are discriminated against as a result of the legislation. See Lance W. Roberts, "Understanding Affirmative Action," in Block and Walker, op. cit. pp. 147-182.Note Hence, the total impact of this legislation is both economically costly and socially disruptive.

In addition, the economic analysis of discrimination, pioneered by Nobel Laureate Gary Becker and other economists, shows that in a competitive environment, discrimination on the basis of arbitrary differences among individuals cannot persist because such arbitrary discrimination will not be compatible with a firm's profit maximization strategy. See Gary S. Becker, The Economics of Discrimination, Chicago: The University of Chicago Press, 1957.Note In other words, a strategy of arbitrary discrimination among employees "Arbitrary discrimination" refers to discrimination that is not based on differences in productivity (i.e. non-economic discrimination).Note is not a viable option for firms in a competitive industry for the simple reason that such discrimination is economically costly. Hence, the best policy a government can pursue in an effort to stem arbitrary discrimination in the labour market is to ensure that markets are competitive. This requires, above all, that the labour market be as flexible as possible.

Mandatory unions: a recipe for economic stagnation

The arguments against strengthening the power of mandatory unions are also straightforward. Under a mandatory union regime, all individuals who wish to work in a particular industry must belong to a designated union and/or pay union dues. Mandatory unions thus violate one of our fundamental individual freedoms: the freedom of association. In fact, Nobel prize winning economist and social philosopher F.A. Hayek argues in The Constitution of Liberty that the coercion of individual workers brought about by mandatory unionization is "contrary to all principles of freedom under the law." See F.A. Hayek, The Constitution of Liberty, London: Routledge and Kegan Paul, 1960, p. 269.Note By requiring employers to disclose to union officials the names and addresses of all off-site workers, the proposed amendment to the Canada Labour Code infringes on another fundamental individual right-the right of privacy. Hence, one of the most insidious aspects of the current Code and its proposed amendment is its blatant disregard of the fundamental rights of individuals in a free society.

Moreover, there are good economic arguments against mandatory unions. By entrenching monopoly privileges over who can work in a particular industry, mandatory unions introduce rigidities into the labour market. In fact, it has been demonstrated empirically that strong union powers enable workers to resist technological change and innovation in the production process, changes which are an essential part of the growth process. For example see Brian Becker and Craig Olson, "Unionization and shareholder interest," Industrial and Labour Review, no. 42., 1986, pp. 246-261; D. Maki and L.N. Meredith, "The effects of unions an profitability: The Canadian evidence," Relations Industrielles, no. 41, 1986, pp. 55-67.; Barry Hirsh, "Union coverage and profitability among U.S. firms," Review of Economics and Statistics, 1991, pp. 69-71; and William Boal and John Pencavel, "The Effects of Labour Unions on Employment, Wages, and Days of Operation: Coal Mining in West Virginia," Quarterly Journal of Economics, vol. CIX, February 1994, pp. 241-266.Note Work by Leo Troy, an expert on the economics of trade unions, shows that in recent decades, the trend in many industrialized countries has been towards less unionized work forces. See Leo Troy, Canadian Unionism: The Meaning, and the Measure, the Reality and the Myth, Vancouver: The Fraser Institute, 1995.Note This, in part, is a reflection of the fact that dynamic and innovative economies of the late 20th Century require flexible work places in order to adapt to rapidly changing circumstances. The proposed amendments to the Canada Labour Code, which would make it more difficult to hire replacement workers, can only have negative economic consequences. Under a mandatory union regime, replacement workers are the only means by which an industry can continue production in the event of a strike. Limitations on the freedom of firms to hire replacement workers will result in supply bottlenecks and will render large segments of our economy inoperable. For example, without the ability to hire replacement workers during a port workers' strike, all our export industries will be adversely affected. Indeed, since Canada's export-to-GDP ratio is about 35 percent, See International Monetary Fund, International Financial Statistics Yearbook, Washington: IMF, 1995.Note such a disruption could damage the economy as a whole. In the long run, Canada's competitiveness will suffer as firms decide to relocate in jurisdictions with a more favourable labour regime. It would be most imprudent for the federal government to implement the proposed amendments to the Canada Labour Code as these amendments violate our individual freedom and are inimical to the economic well being of the nation.

Right-to-Work laws: a necessary condition for job creation

Furthermore, the empirical evidence from around the world suggests that Right-to-Work (RTW) laws, by improving the flexibility of labour markets, enhance employment growth, productivity, and economic growth. Several U.S. states, in addition to New Zealand and the United Kingdom, have introduced RTW laws and the results have been astounding. Here are some of the highlights:

(a)Between 1988 and 1993, 77 percent of all new high paying manufacturing jobs in the United States were created in the 21 RTW states. (Note that all RTW states combined only account for 35 percent of the U.S. population.) Furthermore, RTW states attracted 57 percent of new and expanded corporate facilities in 1992. Cited in Fazil Mihlar, "The Economic Benefits of Right-to-Work Legislation," Fraser Forum, September 1995, Vancouver: The Fraser Institute.Note

(b)The most definitive study of the impacts of RTW legislation in the United States conducted by Thomas Holmes of the Federal Reserve Bank of Minneapolis shows that manufacturing employment increases by one-third between a non-RTW state to a RTW state. Holmes also found that between 1947 and 1995, RTW states increased their manufacturing employment by 170 percent, more than triple the 54 percent increase in non-RTW states. See Thomas J. Holmes, "The Effects of State Policies on the Location of Industry," Staff Report No. 205, Minneapolis: Federal Reserve Bank of Minneapolis, 1995.Note

(c)In New Zealand, during the five years following the enactment of the Employment Contracts Act (a RTW act), 150,000 new jobs were created while the aggregate unemployment rate fell from 11 percent to 6.6 percent over the same period. Empirical work by economist Tim Maloney suggests that at least 1 percent of the employment growth rate (of 4.4%) during that period can be attributed to the Employment Contracts Act. See Tim Maloney, "Has New Zealand's Employment Contracts Act Increased Employment and Reduced Wages?" Department of Economics Working Paper, University of Auckland, July 1994.Note

(d)Work by Charles Hanson shows that, following the enactment of RTW legislation in the UK, the number of working days lost due to strike activity and worker disruptions fell very sharply. See Charles G. Hanson, Taming the Trade Unions, London: Macmillan/Adam Smith Institute, 1991.Note

(e)RTW laws play a pivotal role in the location decisions of firms. A survey by Fantus Company shows that half of all businesses considering relocating will not even consider moving to a non-RTW state. Cited in David Kendrick, "National Institute for Labor Relations Research: Jobs Up in Right to Work States: Evidence from State Borders," March 22, 1996.Note Furthermore, a study completed by the Center for Business and Economic Research at the University of Tennessee found that firms consider RTW legislation to be even more important than low taxes, tax concessions, or government support for site acquisition in new site location decisions. See David A. Hake, Donald R. Ploch and William F. Fox, Business Location Determinants in Tennessee, Knoxville: Center for Business and Economic Research, College of Business Administration, University of Tennessee, 1985.Note

Policy proposals

In line with the evidence demonstrating the need for a more flexible labour market and the negative impacts of both employment equity legislation and stronger mandatory unions, the federal government should:

(1)Repeal the Employment Equity Act. While such measures are no doubt well-intentioned, the whole philosophy behind employment equity legislation is fundamentally flawed. This legislation will do nothing to advance the interests of those it is intended to benefit. Instead, it will entrench inefficiencies in the production process and will foster attitudes of resentment and victimization among the general population. Nothing short of the complete repeal of Bill C-64 would be sufficient.

(2)Repeal Part 1 of the Canada Labour Code. By guaranteeing mandatory union privileges, Part 1 of the Canada Labour Code entrenches precisely what anti-trust legislation is supposed to eliminate: monopoly. If monopolistic firms are considered to be inefficient and undesirable, then surely the same analysis applies to monopolistic labour unions. Furthermore, mandatory unionization violates both the freedom of association and the freedom of contract. If the federal government truly believes in individual liberty, it must eliminate mandatory unionization.

(3)Enact right-to-work legislation (RTW). Under RTW, all unions are forced to become voluntary organizations because such legislation allows employees to negotiate contracts with employers or seek other representation on an individual basis. From the perspective of individual liberty, this would be a vast improvement on the status quo as RTW respects both freedom of contract and freedom of association.

Conclusion

Given the importance that the federal government attaches to job creation and economic growth, it is mystifying why it has adopted a labour market policy that will only calcify an already inflexible labour market. The Employment Equity Act and the proposed changes to Part 1 of the Canada Labour Code will not eliminate discrimination in the work place or create viable employment opportunities for Canadians. Rather, they will hinder economic growth and violate our individual freedoms.

For pursuing such a misinformed labour market policy, the federal Liberal government deserves an F.

Regulatory Policy

Grade: C

A background to regulatory policy

Perhaps the most important but overlooked challenge to Canada's competitiveness comes from unfair and unreasonable regulatory burdens that federal, provincial, and municipal governments impose on businesses. By raising the costs of doing business, regulatory burdens introduce inefficiencies into the production process, reduce productivity and investment, and impede job creation. However, since these costs are not easily detected and are not noticed by the public at large, the impact of the regulatory burden is often overlooked in the policy process. As an "invisible" barrier to wealth and job creation, regulation is potentially the most insidious of all forms of government intervention.

An April 1993 report by the Treasury Board of Canada suggested that governments regulate in order to improve economic efficiency and welfare. See The Treasury Board of Canada, Responsive Regulation in Canada, Ottawa: Ministry of Supply and Services, 1993.Note However, if it is ill-conceived or poorly designed, regulation may set back our economic welfare by making it more difficult for business to generate the productivity improvements upon which the advancement of our standard of living ultimately depends. Ibid.Note Indeed, most current regulation is inherently uneconomic and, ironically, anti-consumer. So-called social regulation is simply unwise economic intervention. It is a substitution of the "Ottawa way," the public way, in place of the free market way, the private way. In the name of protecting the "public" and the consumer at large, government regulation often hurts the consumer. In the name of preserving competition, governments effectively undermine choice and competition with an ever-increasing number of regulations.

The number of regulations affecting people and businesses in Canada has escalated sharply over the past two decades. Between 1975 and 1994, over 100,000 federal and provincial regulations were passed. Data collected from various provincial governments and the Privy Council Office in Ottawa. See also the relevant tables in Fazil Mihlar, "Regulatory Overkill: The Cost of Regulation in Canada," Fraser Forum Critical Issues Bulletin, Vancouver: The Fraser Institute, 1996.Note On average, the federal government has passed 1,086 new regulations per year throughout this period. Ibid.Note From 1993 to 1995, over 2,200 regulations were enacted by the federal government. Ibid.Note The regulatory burden continues to increase unabated.

From rules restricting or eliminating a business' ability to hire workers, to new definitions of wetlands that prevent the development of whole parcels of land, regulations significantly impede the ability of firms to do business in Canada. The need for framework laws is not in dispute. Framework laws include competition law, bankruptcy and corporation laws, intellectual and private property laws, and the criminal code.Note However, inadequate attention to how these rules are made and enforced in Canada has resulted in a proliferation of ineffective and inappropriate regulations, a stifling of entrepreneurship, and a slowdown in economic activity. In the end, Canadians pay the cost of inappropriate and ill-advised regulation.

The Red Book on regulation

In their Red Book of pre-election promises, the Liberals identified regulation as a major impediment to job creation and economic growth. The need to reduce the so-called "paper burden" on business thus figured prominently in their election platform. Consider the following quote:

One of the barriers to growth-job growth in particular-for small and medium sized business is the burden of regulatory compliance and reporting. The volume of paperwork required for compliance represents a drain on entrepreneurial energy. In a survey conducted by the Canadian Federation of Independent Business, 62.3 percent of small businesses reported that they spend over three hours each week on government paperwork, thus inhibiting innovation, job creation, and growth. See Liberal Party of Canada, Creating Opportunity: The Liberal Plan for Canada, Ottawa: Liberal Party of Canada, 1993, p. 52.Note

Towards this goal, the Liberals promised to work closely with other levels of government to "reduce, streamline, and eliminate overlap in regulations." Ibid, p. 53.Note They also promised to enhance regulatory reform exercises currently under way in several federal departments in order to ensure that reforms result in "maximum efficiency without any compromise in Canadian standards." Ibid.Note In this way, the Liberals' 1993 election platform committed them to a limited amount of deregulation.

Regulatory reform under the Liberal government

Since it took office, this federal government has made some timid steps towards regulatory reform. For example, Regulatory Affairs at the Treasury Board in Ottawa has undertaken a number of regulatory reform initiatives including an insistence on the Regulatory Impact Assessment Statement (RIAS) and tighter scrutiny of proposed new regulations from the line departments. In addition, regulatory departments and agencies now have to review and justify all existing regulations as part of the federal government's program review exercise. See Treasury Board Secretariat, A Note On Current Treasury Board Regulatory Reform Activities, Ottawa: Treasury Board of Canada, April 1996.Note Unfortunately, despite their best efforts, the Treasury Board failed to get the proposed Regulatory Efficiency Act passed by Parliament, an act that would grant firms more flexibility in meeting regulatory requirements. So Canada's federal regulatory regime continues to be rigid.

Furthermore, the federal government has recently released a White Paper on reform of financial services regulation. It was widely anticipated that the White Paper would break up the traditional barriers separating the various segments of the financial services industry and open up the sector to more international competition. But the White Paper was a disappointment. Under political pressure from various interest groups, the federal government backed down; its White Paper merely called for "more study" of the issues. See "Financial white paper verdict: more study," The Financial Post, June 20, 1996, pp. 1-2.Note Thus, regulatory reforms to our financial sector remain on hold as the federal government waits for another task force to be set up in the fall. A final verdict is not expected for another 18 months. Ibid.Note

Finally, the federal government has recently announced that it will allow cable and telephone companies to compete directly in the provision of voice, video, and data services. See "Ottawa opens doors for cable-telecom convergence," The Financial Post, August 7, 1996, pp. 1-2.Note Traditionally, these two arms of the telecommunications industry have been regulated separately and firms have been prohibited from operating in both the cable and telephone sectors. The proposed changes will break down these regulatory barriers to competition. More competition will increase consumer choice. In addition, it will foster more technological innovation in the telecommunications industry as telephone and cable companies will now be able to offer a wider array of products.

Policy analysis: the costs of regulation

Government intervention in the form of regulation has often been defended on economic, social, and political grounds. However, simply because regulations appear warranted in a particular situation does not mean that government-imposed controls will necessarily lead to better results than would occur in an unregulated market. See William C. Mitchell and Randy T. Simmons, Beyond Politics: Markets, Welfare, and the Failure of Bureaucracy, Boulder: Westview Press, Independent Institute, 1994; see also Charles Wolf Jr., Markets or Government: Choosing Between Imperfect Alternatives, Cambridge: MIT Press, 1993.Note There are many instances where government intervention has resulted in less efficiency or equity than was created by the original "imperfection" in the market. Indeed, the very presence of regulation can make rent seeking possible, which creates a deadweight loss for society. See Gordon Tullock, "The Welfare Cost of Tariffs, Monopolies, and Theft," Western Economic Journal, vol. 5, 1967, pp. 224-232.Note

Markets coordinate human action by taking advantage of an individual's self-interest. As Adam Smith pointed out two centuries ago:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages. From Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, edited by R.H. Campbell and A.S. Skinner, Indianapolis: Liberty Fund, 1776, 1981, pp. 26-27.Note

Public interests are furthered not from social conscience, but from those people pursuing their private interests. If individuals are not contributing to the common good there may be a defect in the system brought about by regulatory intervention. Charles Schultz writes:

In most cases the prerequisite for social gains is the identification, not of villains and heroes, but of the defects in the incentive system that drive ordinary citizens into doing things contrary to the common good. From Charles Schultz, The Public Use of Private Interest, Washington: The Brookings Institution, 1977, pp. 18.Note

The positive impacts of most regulations are hard to ascertain. A recent survey of most of the existing cost-benefit studies of U.S. regulation found that some environmental and highway safety regulation does produce net benefits. See Robert W. Hahn and John A. Hird, "The Costs and Benefits of Regulation: Review and Synthesis," Yale Journal on Regulation, vol. 8, no. 1, Winter 1991.Note However, even in these two areas, there is evidence that equal or greater benefits could be achieved at a relatively lower cost to society by using market mechanisms. See Vivien Foster and Robert Hahn, "Designing More Efficient Markets: Lessons From Los Angeles Smog Control," Journal of Law and Economics, vol. 18, April 1995, pp. 19-48; and Robert Hahn and Gordon Hester, "Marketable Permits: Lessons from Theory and Practice," Ecology Law Quarterly, vol. 16, no. 36, pp. 361-406.Note Thus, the evidence suggests that regulation may well cost society more than it is worth.

Indeed, in a recent study completed by The Fraser Institute, the cost of regulatory compliance to Canadians in 1993-94 was estimated at approximately $85.7 billion, or roughly $2,882 per person. See Fazil Mihlar, "Regulatory Overkill: The Cost of Regulation in Canada," Fraser Forum Critical Issues Bulletin, Vancouver: The Fraser Institute, 1996.Note Of this total, approximately $48-$50 billion can be attributed to federal government regulations, with provincial and municipal regulations taking up the remainder. In 1993-94, the federal government spent over $2.8 billion enforcing and administering its various regulations. Thus, at first pass, it seems that the regulatory burden in Canada imposes significant costs on the Canadian economy.

In fact, the above estimates probably underestimate the size of the regulatory burden in Canada. This is because regulation also imposes indirect, hidden costs that are not easily estimated. For example, by distorting input prices and the incentive structure firms face, regulations can induce firms to make input choices that are inefficient (i.e. do not minimize costs). Thus, regulation can introduce "technical inefficiencies" into the production process. See Chapter 11 of Economic Council of Canada, Reforming Regulation, Ottawa: Supply and Services, Canada, 1981. See also H Averch and L.L. Johnson, "Behaviour of the Firm Under Regulatory Constraint," American Economic Review, vol. 52, December 1962, pp. 1053-69; and Robert M. Spann, "Rate of Return Regulation and Efficiency in Production: An Empirical Test of the Averch-Johnson Thesis," Bell Journal of Economic and Management Science," vol. 5, no. 1, 1974.Note Regulation can also impose costs on society by inhibiting the processes of innovation, technical change, and capital formation. See for example: Chapter 2 of Robert E. Litman and W.D. Nordhaus, Reforming Federal Regulation, New Haven: Yale University Press, 1982; Sam Kazman, "Deadly Overcaution: FDA's Drug Approval Process," Journal of Regulation and Social Costs, vol. 1, no. 1, (Sept.), pp. 35-54; Henry G. Grabowski, Drug Regulation and Innovation, Washington: American Enterprise Institute, 1976; Michael Hazilla and Raymond Kopp, "Social Costs of Environmental Quality Regulations: A General Equilibrium Analysis," Journal of Political Economy, vol. 98, no. 4, August 1990, pp. 853-73.Note This is because resources must be directed away from productive activities and towards unproductive regulatory compliance. Since technical change, capital formation, and innovation are at the heart of the growth process, the long run effect of regulation is to slow down improvements in economic welfare. Thus, the true total cost of regulation in Canada is probably much higher than the total estimated in The Fraser Institute study.

Policy proposals

If the federal government is truly interested in reducing red tape and easing the regulatory burden in Canada it should write a single law that will reform all federal regulations across the board. For more detailed proposals see Mihlar, op. cit.Note This new law should have the following provisions.

(1)There should be a moratorium on all new federal regulations for a three-year period. This step will stem the tide of regulations that has engulfed Canada. This rule should, of course, have a few exemptions for extraordinary situations such as war, earthquakes, major epidemics, and other natural disasters.

(2)This law should encourage market-driven responses. It should rely on alternatives other than regulation wherever possible. The federal government should encourage market driven responses through statements of intent and through specific legislative language. Regulatory alternatives include economic incentives, performance standards, negotiated compliance, and information techniques. See Brian Mannix, Improving the Cost-Effectiveness of Government: Alternatives to Command-and-Control Regulation, Paris: OECD, 1994.Note

(3)A committee should be set up under the Treasury Board Secretariat to review, eliminate, and amend existing regulations within a three year mandate. The onus should be on the various ministries to support the need to retain any regulation. Furthermore, the evaluation should be zero-based, to allow for total objectivity in designing an effective document from scratch.

(4)Regulators should prioritize regulations. All regulatory agencies should use risk assessment to help set priorities for achieving greater protection of health, safety, and the environment in the most cost-effective manner. Not all risks are of equal magnitude; the federal government should therefore focus on the most serious risks. See Harvard Group on Risk Management Reform, Reform of Risk Regulation: Achieving More Protection at Less Cost, Boston: Centre for Risk Analysis, Harvard School of Public Health, 1995; also see Tammy O. Tengs and John D. Graham, "The Opportunity Cost of Haphazard Societal Investments in Life-Saving," in R. Hahn ed, Improving Risk Management: Risks, Costs And Lives Saved, Oxford University Press, 1996.Note

(5)Study the economic impact of proposed regulations. Economic impact statements should include an assessment of the proposed regulation's impact on firms' competitiveness in the sectors where the majority of the compliance costs are expected to occur. The assessment should also consider the effect of the regulation on the number of jobs by sector, region, household, disposable incomes, and the competitiveness position of the major sectors with our major trading partners.

(6)There should be provision for "sunset review" for all regulations. Regulatory agencies should include in all regulations a sunset clause repealing the regulation on a three year cycle unless the committee, after conducting a review, specifically approves its extension.

(7)Minimize inter-jurisdictional conflicts. Regulatory agencies proposing new rules should be required to identify and take action to minimize inter-jurisdictional conflicts and confusion.

(8)With respect to the financial services sector, the federal government should amend the Bank Act in order to eliminate all regulatory pillars within the industry. Furthermore, more international competition should be permitted by liberalizing restrictions on the ability of foreign financial institutions to operate in Canada.

Conclusion

Excessive regulation imposes significant economic costs on the Canadian economy with little evidence of corresponding benefits. The federal government has made some steps towards regulatory reform, particularly in the telecommunications industry, but little progress has been made overall. If the federal government is to ease the regulatory burden, it must work much more swiftly.

For these reasons, the federal government deserves a C for its regulatory policy.

Agricultural Policy

Grade: C

The need for a free market in agriculture

Canada's agricultural industry is one of the most productive in the world. Unfortunately, government intervention in the industry is extensive. Massive agricultural subsidies, price supports, high tariffs, and supply management measures distort market prices and cause significant resource misallocation. See Organization for Economic Cooperation and Development, Agricultural Policies, Markets and Trade in OECD Countries: Monitoring and Evaluation, Paris: OECD, 1996.Note As a result, our agricultural industry is much less efficient than it could be. In the absence of such intervention, Canadian agricultural producers would be forced to operate in a more competitive environment. This would reduce prices and yield benefits to all Canadian consumers.

The Red Book on agricultural policy

Among many Canadians, however, government intervention in the agricultural industry has become a "motherhood issue." Critics of supply management, subsidies, and price supports are considered to be unfeeling individuals who have no sympathy for the plight of the common farmer. This position was echoed by the Liberals in their Red Book of election promises.

Canada's agri-food industry needs policies and programs such as supply-management, the Canadian Wheat Board, and stabilization programs to minimize the impact of market price fluctuations; government support in developing new commercial markets for commodities in which the agri-food industry has a competitive advantage; sustainable agriculture practices to maintain and improve the quality of our land and water; and mission-oriented research to increase productivity and create quality products to meet market demand. From Liberal Party of Canada, Creating Opportunity: The Liberal Plan for Canada, Ottawa: Liberal Party of Canada, 1993, p. 58.Note

According to the Liberals, therefore, farmers and other producers in the agricultural industry are incapable of dealing with the impact of market price fluctuations; furthermore, without the guidance of government, the agri-food industry would be unable to develop new products and realize productivity improvements. Without the helping hand of the state, Canada's agricultural sector would be unstable and unsound. Hence, the Liberals justified a host of interventions.

Actions to date and critique

Fortunately, since it took office, the Liberal government has somewhat changed its policy direction, and has in fact started to reduce government support for the agricultural sector. In particular, federal expenditure to support the agri-food sector has fallen by 20 percent between 1994-95 and 1995-96, and is expected to fall even further in 1996-97. See OECD, op. cit. p 26.Note The federal government has also terminated the Western Grain Transportation Act (WGTA) and the Feed Freight Assistance Program and will be phasing out the Farm Debt Review Boards and the Canadian Rural Transition Program. See Ibid. See also Privy Council Office, Ensuring Opportunity for Canadians: The Record to Date, Ottawa: Privy Council Office, 1996.Note In addition, the federal government announced in a recent document that it is working with the provinces and the industry "to design a collaborative and co-funded system of farm and safety nets." See Privy Council Office, Getting Government Right: A Progress Report, Ottawa: Minister of Supply and Services Canada, March 7, 1996, p. 11.Note When fully implemented, this system, which will be more incentive-neutral and will meet World Trade Organization (WTO) standards, will replace many of the income support measures currently in place. Although it is not clear why farmers need their own income support program in the first place, this initiative must be applauded because such a program, if implemented, should reduce many of the distortions caused by current policies. Why government should provide special support programs for farmers is unclear. It is sometimes argued that this support is needed because agricultural markets are inherently volatile and that farmers have no control over wide swings in prices and climatic conditions. However, while this may be the case, it is also true that stock brokers face a volatile market and that stock and bond prices are subject to wide swings over which the stock broker has no control, yet no special assistance is offered to stock brokers! The same argument can be applied to many other professions. The fact of the matter is that special farm income support programs are a special privilege accorded to farmers simply because they are farmers. This is inherently unfair and uneconomic privilege.Note

However, in other areas, the federal government's record has been less satisfactory. For example, while the federal government, in line with WTO guidelines, has begun to replace agricultural quotas with tariffs, the tariffs are set so high that domestic producers are still protected from foreign competition. Thus, Canadians continue to pay far more for many agricultural products than they would if the market were freely competitive. Furthermore, the Canada Wheat Board (CWB) continues to maintain a monopoly over the sale of wheat. While recent protests by wheat farmers have brought about some changes that will allow farmers to market certain types of wheat on their own, the CWB continues to dominate the industry.

Policy proposals

If the federal government is interested in pursuing reforms that will liberalize the agricultural sector to the benefit of all Canadians, it should adopt the following proposals:

(1)Eliminate the Canada Wheat Board (CWB). The monopoly position granted to the CWB for the sale of wheat represents a grave infringement on the liberties of individual farmers to market their own produce, a freedom that all Canadians should enjoy. If the federal government believes in economic freedom, it must eliminate the CWB.

(2)Phase out all remaining agricultural subsidies, price supports and tariffs. As noted above, agricultural subsidies, price supports, and tariffs induce allocative inefficiencies. Eliminating such measures will therefore improve the efficiency of our agricultural markets and will raise economic welfare.

Conclusion

The federal government has introduced some badly needed reforms to our agricultural sector. In particular, by eliminating the WGTA and reducing other subsidies, it has reduced the industry's dependence on government support. However, there is still much to be done. Until supply management, the Canada Wheat Board, and other vestiges of government intervention are eliminated completely, our agricultural sector will never realize its full economic potential.

For pursuing some reforms, but for dragging its feet over certain issues, the federal government deserves a C.

Immigration Policy

Grade: B

The economics of immigration

The economic case for immigration is clear. Improvements in the mobility of goods and factors of production bring about improvements in economic efficiency and overall welfare. The free movement of goods and resources across national boundaries enables society to maximize the gains from trade and specialization; in this process, wealth is created and society is better off. See James Gwartney and Richard Stroup, What Everyone Should Know About Economics and Prosperity, Vancouver: The Fraser Institute, 1993.Note Since the movement of people across national borders is an important part of this process, it follows that a relatively open immigration policy will raise allocative efficiency and economic welfare. A relatively open immigration policy is thus an important ingredient of a good economic policy, as it improves the mobility of factors of production and increases the opportunities for economic exchange.

Dispelling the myths: stealing jobs?

In spite of this fact, old myths about the economic impacts of immigration still cloud the thinking of politicians and policy makers about immigration policy. Perhaps the most pervasive of these myths is that immigrants somehow "steal jobs" from ordinary Canadians. This view is both fallacious and insidious, and has no basis in economic theory. As economist Herbert Grubel writes:

One of the most fundamental economic propositions about the effects of immigrants is summarized by the idea that immigrants are both producers and consumers, or in a popular vein, each brings along hands and a mouth. The fact has two important implications for issues of great concern to the people in the country receiving the immigrants. First, it means that immigrants occupy jobs but also add to the demand for labour. When they spend their income from work they create the jobs that they fill. Second, it means that the population in the country of immigration does not suffer a reduction in income. To the contrary, the presence of new workers and consumers gives rise to the opportunity for welfare-raising additional trade and specialization among the residents of the country of immigration. From Herbert G. Grubel, "The Economic and Social Effects of Immigration," in Steven Globerman ed., The Immigration Dilemma, Vancouver: The Fraser Institute, 1992, pp. 100-101.Note

In fact, the proposition that immigrants do not "steal jobs" finds empirical support as well. In their 1992 study, economists Ather Akbari and Don DeVoretz examine the impact of immigrants on employment in various industries and find that there is no economy-wide displacement of domestic (i.e. native-born) workers by immigrants. See Ather H. Akbari and Don J. DeVoretz, "The substitutability of foreign-born labour in Canadian production: circa 1980," Canadian Journal of Economics, vol. 25, no. 3, 1992, pp. 604-14.Note

A drain on the treasury?

Another popular myth about immigration is that immigrants take more from the public treasury in the way of social services, health care, and education than they contribute in tax revenues. While economic theory alone cannot resolve this debate, a hard look at the data can. Once again, the empirical evidence shows that this viewpoint is both misinformed and unjustified. In an examination of the tax data, Akbari and finds that, contrary to the popular view, immigrants are net contributors to the public treasury. See Ather H. Akbari, "The Benefits of Immigration to Canada: Evidence on Tax and Public Services," Canadian Public Policy, vol. 15, no. 4, 1989, pp. 424-435.Note He writes:

[A]n immigrant household entering Canada in 1980 when evaluated over 35 years of its stay at the 1980 real discount rate of 2.5 percent, was worth $46,056. Even when we ignore the financing of public goods, the immigrant household was worth $29,185 in net present value transfer payments. This compares with the 1980 average employment earnings of the non-immigrant household which was only $17,311. Hence an immigrant household could be considered a profitable investment for the non-immigrant household in that year. Ibid., p 432.Note

This conclusion is also supported by evidence from the United States. Economist Julian Simon, author of the most authoritative study on the economics of immigration, finds that in the United States, like in Canada, immigrants have been net contributors to the public purse. See Julian L. Simon, The Economic Consequences of Immigration, Oxford: Basil Blackwell Ltd., 1989.Note After studying how much native-born Americans benefit from immigration in terms of benefits received for taxes paid, Simon concluded that:

Taken together, the data on services used and taxes paid show substantial differences in favour of natives . . . the difference is an average of $1,354 yearly for years 1-5 in the U.S., and $1,329, $1,535, and $1,353 for years 6-10, 11-15, and 16-25 respectively, in 1975 dollars. These are the amounts that natives are enriched each year through the public coffers for each additional immigrant family.

Evaluating the future stream of benefits as one would when evaluating a prospective dam or harbour, the present discounted value of a newly-arrived immigrant family discounted at 3 percent (inflation adjusted) was $20,600 in 1975 dollars, almost two years' average earnings of a native family; at 6 percent, the present value was $15,800, and $12,400 at 9 percent. See Julian L. Simon, The Economic Effects of Immigration: Theory and Evidence," in Steven Globerman ed., The Immigration Dilemma, Vancouver: The Fraser Institute, 1992, p. 143.Note

Immigrants to both Canada and the United States, therefore, have been net contributors to the public purse. In terms of taxes paid for benefits received, native-born citizens clearly benefit from immigration.

The Red Book on immigration

The pre-election attitude of the Liberals towards immigration was decidedly optimistic. In the Red Book, the Liberals credit immigrants for their role in Canada's economic development. The Liberals claimed to have historically supported an open immigration policy and promised to maintain roughly the status quo if elected.

For many years, the Liberal Party has been identified with a progressive immigration policy. At the turn of the century, under a Liberal prime minister, the West was opened up to thousands of people who came to farm the prairies and many others came to build our cities and transportation links. Immigration was at its peak in Canada between 1901 and 1911, when we received 1.5 million immigrants, representing 28 percent of Canada's population in 1901.

After World War II, annual immigration often exceeded one percent of the population. Liberals believe that Canada should continue to support a dynamic immigration policy that balances humanitarian considerations with our demographic and economic needs. We should continue to target immigration levels of approximately one percent of the population each year, as has been the case for more than a decade, with priority being given to independent applicants and the family class. As we reach towards this target, we must always consider our ability to absorb and settle immigrants. See Liberal Party of Canada, Creating Opportunity: The Liberal Plan for Canada, Ottawa: Liberal Party of Canada, 1993, p. 87.Note

Actions to date

Since it took office, the Liberal government has more or less held the line when it comes to immigration policy. Canada's yearly intake of new immigrants continues to be high by historical standards. However, in recent years, the number of new immigrants entering Canada has fallen somewhat from 255,934 in 1993 to 212,158 in 1995. Data obtained from the Department of Citizenship and Immigration, Vancouver Regional Office.Note For 1996, the number of new immigrants and refugees permitted to enter Canada is targeted at 195,000 to 220,000. See Citizenship and Immigration Canada, "News Release: Canada's Immigration Levels in Line with 10-Year Plan," November 1, 1995.Note Thus, immigration rates, while still high, have fallen below the 1 percent of total population entry rate promised by the Liberals in their Red Book.

Another interesting development in immigration policy has been the imposition of a $975 fee for every successful adult immigrant applicant. See Department of Finance, The Budget Speech, Ottawa: Department of Finance, 1995.Note This fee was announced in the 1995 budget and will be used to offset the processing costs of immigration. For those unable to pay, a loan will be made available.

Policy analysis

The Liberal government is correct in imposing a processing fee for those immigrant applicants who are admitted into Canada. Government services use real economic resources. Since there are no "free rides" or "free lunches," it makes sense for governments to operate services on a user pay basis where possible. Critics who claim that this policy discriminates against poorer immigrants are mistaken because the provision of income-tested loans ensures that the opportunity to apply to immigrate to Canada is available to all. However, given the evidence showing that immigrants improve the economic well being of all Canadians, it is surprising that the Liberal government has reduced the number of immigrants each year to below 1 percent of the total population. This move is disturbing because it suggests that the Liberal government is bowing to pressure from those who do not completely understand the economics of immigration. If we are to have a sound immigration policy, it must be determined by solid economic theory and evidence, not by the mythology perpetrated by those with an incomplete understanding of the issues.

Another matter of concern relates to the changing composition of our immigrants. Since the late 1970s, the proportion of immigrants who come under the family class has risen, while the proportion of the various independent class immigrants has fallen. Many economists have expressed concerns about this trend since immigrants in the family reunification category are more likely to consume benefits provided by the state than they are to contribute to the treasury because such immigrants do not tend to participate in the labour market. See, for example: Don. J. DeVoretz ed., Diminishing Returns: The Economics of Canada's Recent Immigration Policy, Toronto: The C.D. Howe Institute, 1995.Note However, since the Liberal government took office, there has been a slight reversal in this trend. While the number of independent class, entrepreneur, self-employed, and investor class immigrants has fallen from 79,550 in 1993 to 71,771 in 1995, the number of family class immigrants entering Canada has fallen even faster from 112,189 in 1993 to 77,026 in 1995. Data obtained from the Department of Citizenship and Immigration, Vancouver Regional Office.Note Indeed, for 1996, it is expected that 50 percent of immigrants will be in the independent economic class while 46 percent will be in the family class. See Citizenship and Immigration Canada, op. cit.Note Hence, the proportion of immigrants admitted under the various independent classes has increased over the past few years. From an economic viewpoint this is a positive development; an optimal immigration policy requires that we reconsider the mix of family class and independent class immigrants in favour of the independent class.

Policy proposals

In light of the economic evidence in favour of immigration and the analysis presented above, the federal government should:

(1)Reaffirm its commitment to maintaining an immigration rate of 1 percent of total population per year. There is no reason for the federal government to reduce the total number of immigrants admitted each year as it has done. Immigrants are neither a strain on the public purse nor a cause of unemployment. Canada's yearly intake of immigrants should thus be restored to about 250,000. Indeed, there may be good reasons to increase our intake to 290,000 per year which would more closely approximate the target of 1 percent of Canada's total population.

(2)Continue to increase the proportion of independent class immigrants admitted to Canada each year. Furthermore, an effort should be made to attract more young immigrants who are more likely to participate in the labour market.

Conclusion

The federal government's approach to immigration policy, on the whole, has been reasonable. Efforts to increase the share of independent class immigrants must be applauded. However, the recent reduction in the total number of immigrants admitted each year is unnecessary and sends out a disturbing signal about this government's understanding of the economics of immigration policy. There is no reason why Canada's intake of immigrants should fall below 250,000 per year.

For being too cautious in this area, the Liberal government deserves a B.

Cultural Policy For a concise overview of the nature and scope of government intervention in Canadian cultural industries see Steven Globerman, Culture, Governments and Markets: Public Policy and the Culture Industries, Vancouver: The Fraser Institute, 1987.Note

Grade: F

Introduction: Individual liberty as the benchmark of a viable cultural policy

Fundamental to the notion of individual liberty is the belief that individuals must be free to pursue their own self interest, free to choose among the various alternatives provided by the marketplace. Those who believe in individual liberty must trust that each person has his or her own rational self interest at heart, and that we must respect the sovereignty of each other's preferences in all areas that do not infringe on the rights of others. Cultural policy is no exception. Whether we choose to read a Margaret Atwood novel or attend the opera does not infringe on the rights of other individuals to do the same. Hence, any cultural policy which respects the right of individuals to make their own free choices must be a "bottom up" policy-one which respects consumer sovereignty in the market for culture and treats market outcomes as the correct expression of cultural sentiment.

The federal government's view

Unfortunately, the actions and rhetoric of the current federal government show that they do not believe in individual liberty with respect to cultural issues. For this government, culture is a "motherhood issue;" the Liberals believe that in the absence of a strong Canadian culture, the nation will fold up and disappear. According to the Red Book:

Canadian culture embraces our shared perceptions and beliefs, common experiences and values, and diverse linguistic identities: everything that makes us uniquely Canadian. Cultures is the very essence of national identity, the bedrock of national sovereignty and national pride. It gives meaning to the lives of every Canadian. See Liberal Party of Canada, Creating Opportunity: The Liberal Plan for Canada, Ottawa: The Liberal Party of Canada, 1993, p. 88.Note

Since the survival of "Canadian culture," as defined by the Liberals, is so essential to the survival of Canada, the Liberal government has pursued a decidedly protectionist cultural policy: one which shields Canadian cultural industries from the forces of international competition. To this end, the Liberals promised in the Red Book to do the following:

(1)". . . help Canadian books, films, and sound recordings to increase their share of the domestic market through the establishment of policies and legislation with respect to marketing, distribution, and exhibition."

(2)". . . explore the use of investment tax credits for the production of Canadian films, sound recordings, and books.

(3)". . . take measures to enable Canadian producers of cultural products to export their work to international markets."

(4)". . . [offer] stable multiyear financing for national cultural institutions such as the Canada Council and the CBC." Ibid, pp. 88-89.Note

Actions to date

Sadly, in its first 3 years in office, the Liberal government has fulfilled each of the above pre-election promises. In its publication, Ensuring Opportunities for Canadians: The Record to Date (April 1996), the Liberal government notes that it has:

(1)". . . legislated measures to protect the advertising revenues of Canadian magazine publishers."

(2)". . . reviewed the mandate of the CBC, Telefilm Canada, and the National Film Board (NFB) and reiterated government commitment to the central role of these agencies to government cultural policy."

(3)". . . introduced a new film and video tax credit system to better-target support to film producers rather than third party investors."

(4)". . . changed ownership rules to permit Canadian broadcasters to gain access to increased investment while maintaining clear Canadian control." See Privy Council Office, Ensuring Opportunity for Canadians: The Record To Date, Ottawa: Privy Council Office, 1996.Note

Although funding to the CBC was cut quite significantly in the last budget, Canadian cultural industries continue to operate in a highly protected environment. Canadian film productions that are largely ignored by the general public continue to be the recipients of federal largesse. Publishing houses that print money-losing books which "make culturally significant contributions to Canadian writing" are eligible to receive grants from the Canada Council to cover loses, See National Citizens Coalition, Tales From The Tax Trough III: The Liberal Edition, Toronto: National Citizens Coalition. In 1993-94, $7.37 million in such losses were covered by the federal government.Note and Canadian content regulations determine how much American programming is available on Canadian television channels. Meanwhile, the CBC, with only 12.9 percent of the TV viewing audience and 11.4 percent of the radio listening audience, has had its mandate reaffirmed by the federal government and continues to receive significant public funds. Cited in William Watson, "Ask Canadians directly if they're willing to pay for the CBC," The Financial Post, May 15, 1996, p. 15.Note More disturbing is the suggestion of the Juneau Report that the CBC be supported by a 7 percent tax on long distance telephone and cable TV. Cited in National Media Archive, "Navel Gazing at the CBC," On Balance, vol. 9, no. 3, 1996, Vancouver: The Fraser Institute.Note

Misguided policy choices

The federal government's cultural policy is fundamentally flawed in several respects. To begin with, there is the unquestioned assumption that Canadian culture is "the bedrock of national sovereignty and national pride." However, in the absence of the National Film Board or Margaret Atwood, Canada would continue to exist as a sovereign political entity. The suggestion that somehow Canada would be up for sale if certain Canadian authors or artists were not guaranteed an audience is patently absurd. Indeed, given that the CBC's market share is so small, it is puzzling that some cultural nationalists cling to the belief that it is indeed the CBC that "holds our country together."

Moreover, the view that somehow the bureaucrats in Ottawa know better than anyone what constitutes Canadian culture is both insulting and arrogant; it implies that Canadians, if left to their own devices, would be too ignorant and foolish to determine for themselves what constitutes their own culture. Indeed, what passes for Canadian culture (and hence is worthy of federal funding) would probably not be supported by the majority of Canadians. For example, in 1993-94, 153 theatres received federal subsidies totalling more than $16 million. Of this, $130,000 went to the Mermaid Theatre of Nova Scotia while another $15,000 was collected by the Company of Sirens Theatre Group. National Citizens Coalition, op. cit.Note While it is not the focus of this report to debate the artistic merits of such theatre groups, it is probably fair to suggest that most Canadian taxpayers will not patronize either of the above establishments and hence would not likely vote in support of such subsidies.

If cultural policy, as currently practised, does succeed in anything, it is in redistributing wealth from taxpayers to special interest groups. According to economist Jean Luc Migué, who has written the most extensive economic analysis of Canadian cultural industries, the main beneficiaries of government intervention in these industries are Canadian authors, artists, managers, and media specialists. Jean-Luc Migué, Nationalistic Policies in Canada: An Economic Approach, Montreal: C.D. Howe Institute, 1979.Note As a result of interest group politics, the well-focused arts lobby gains untold millions, while ordinary taxpayers cover the bill. In the final analysis, Canadian cultural policy is a fine case study of government failure; it has done virtually nothing to advance the quality of Canadian culture.

Policy proposals and conclusions

By shielding Canadian cultural industries from competition, Canadian cultural policy has promoted mediocrity and lethargy among Canadian artists. Rather than compete with the best from around the world, we have fostered an attitude of complacency and entitlement among some of our artists. Indeed, none has expressed the situation better than Mordecai Richler, who notes that "nationalists are lobbying for the imposition of Canadian content quotas in our bookshops and theatres. . . . In a word, largely second-rate writers are demanding from Ottawa what their talent has denied them, an audience." From Mordecai Richler, "Canadian Identity," in Elliot J. Feldman and Neil Nevitte eds. The Future of North America: Canada, The United States and Quebec Nationalism, Montreal: Institute for Research on Public Policy, 1979, p. 50.Note

Fortunately, not all of our cultural icons have succumbed to this mentality. Indeed, many Canadian artists, writers, musicians, and actors have achieved considerable international reputation, without the assistance of the state. Names such as Bryan Adams, Shania Twain, Oscar Peterson, Cowboy Junkies, and Michael J. Fox come to mind. That these individuals are able to succeed in an intensely competitive environment is a tribute to their talent and originality. Indeed, it is a testimony to the fact that government intervention in the market for culture is neither a necessary nor a sufficient condition for success.

If we are to promote excellence in our cultural industries, we must free them of the shackles of government regulation and subject them to international competition. The evidence from the international trade literature is instructive in this regard. International competition improves the quality and variety of goods available in the marketplace. See James Gwartney and Richard Stroup, What Everyone Should Know About Economics and Prosperity, Vancouver: The Fraser Institute, 1993.Note There is no reason why this should not also be true in the market for culture. In moving towards this goal, it will be necessary to end all government support for the arts and to stop the preferential treatment of Canadian artists. Hence, the federal government should:

(1)Eliminate the Canada Council and all public grant agencies. If cultural industries are to survive, they must do so on their own merits.

(2)Repeal all Canadian content regulations. If we believe in freedom, we must not allow the state to impose its preferred expression of Canadian culture upon us with our own tax dollars.

(3)Privatized the CBC, the most expensive of all our cultural institutions, along the lines recommended by Hoskins and McFadyen in their submission to The Fraser Institute's Prize for Economy in Government Competition. See Colin Hoskins and Stuart McFadyen, "Cost Saving Through Restructuring of the CBC," in Fazil Mihlar ed., The 1995 Fraser Institute Economy in Government Competition: Finalists' Executive Summaries Vancouver: The Fraser Institute, 1995, p. 8.Note

(4)Privatize Telefilm Canada and the National Film Board.

While the current government has made significant cuts to the CBC as well as to the Canada Council, its persistence in pursuing a "top-down" cultural policy that ignores the consumer and transfers real economic resources from taxpayers to special interests is worrying.

Therefore, the federal government must be assigned an F.

Justice Policy This section was written by Owen Lippert, formerly Senior Policy Analyst and Director of the Law and Markets Project at The Fraser Institute. Dr. Lippert holds a Ph.D. in History and Government from Notre Dame University.Note

Grade: D

Objectives of the Department of Justice

The Department of Justice exists to serve its client. But who is its client? Is it individual departments? Is it the Crown, the Cabinet, or the minister? Or should the department ultimately serve the citizen by upholding the rule of law? The rule of law provides citizens with fundamental protection from the arbitrary injuries of either others or the government. In truth, the department serves all. The challenge is to serve the citizen first, then the interests of the Crown, however manifested.

Framework: the Rule of Law

The Rule of Law is fundamental to the protection of citizens from arbitrary state action. It also has a significant economic role. For a discussion of the importance of the rule of law for the social and economic order see F.A. Hayek, The Constitution of Liberty, London: Routledge and Kegan Paul, 1960. See also all 3 volumes of F.A. Hayek, Law, Legislation and Liberty, Chicago: University of Chicago Press, 1973.Note Critical market efficiencies depend upon the Rule of Law prevailing over the Rule of Man in the exercise of government: the greater the discretion of politicians and bureaucrats, the greater the opportunity for the misallocation of collectively-held resources. When faced with decisions beyond the application of existing law, politicians and bureaucrats concentrate benefits on swing voters and well-organized interest groups, and disperse the costs among all taxpayers in the hope that these marginal costs will provoke little response. This is the "public choice" dilemma. The more the Rule of Law binds politicians and bureaucrats, the less the opportunity exists for either special favours or, conversely, special discriminations and punishments. The strengthening of the Rule of Law, therefore, lowers the chance of an arbitrary allocation of public resources to special interests at the expense of the general public.

Issue #1: Pearson Airport Bill

Can the Canadian government repudiate a fairly-bargained contract and deny access to the courts for compensation? No one would deny that Cabinet was well within its rights to cancel the federal government's contract with a consortium to redevelop Pearson International Airport in Toronto. What has become the issue, however, is whether the government could subsequently prohibit the other party from seeking legal redress.

Tabled in early 1994, Bill C-22, the proposed act to cancel the contracts, said that "[the Pearson Airport contracts] are hereby declared not to have come into force and to have no legal effect (s.3); that "no action or proceeding . . . lies or may be instituted by anyone against Her Majesty . . . for anything done . . . in the performance of any duties" (s. 7); and that "no one is entitled to any compensation from Her Majesty in connection with the coming into force of this Act." (s.9.) Cited in Patrick Monahan, "Can Government Break Contracts? Pearson Airport, Alcan Aluminum, and the Saskatchewan Upgrader Reconsidered," in Fraser Forum, October 1995, Vancouver: The Fraser Institute, p. 13.Note

Despite the exceptional nature of these provisions, Justice Minister Allan Rock told the Senate Committee examining the legislation that "there was no question" as to Parliament's ability to enact the bill. Rock stated that the only issue in terms of the bill's legal effectiveness was whether Parliament had been clear in its intention to exclude any right to compensation. Rock asserted that Bill C-22 was perfectly clear in this regard and therefore, once enacted, it would effectively nullify the airport contracts. The Minister of Justice confidently asserted that the legislation was perfectly valid and constitutional.

This position can be summarized in the pithy statement of one Ontario judge early in the 20th century: "The prohibition `Thou shalt not steal' has no legal force upon the sovereign body." Ibid.Note Yet, as Patrick Monahan has written, modern jurisprudence has strengthened the role of the Rule of Law as a check on arbitrary state action at least to the degree of providing greater recourse to the courts. Ibid.Note The Justice Minister should be concerned with upholding the Rule of Law since it has long term economic and social ramifications.

Issue #2: Interference with Federal Court war crimes trial

A more troubling development is the federal government's expression of concern, made in a March 1996 meeting between leading figures in the Department of Justice and the Federal Court of Canada, about the slow pace of the Court's deportation hearings of three suspected Nazi war criminals. The implied threat was that if the cases did not proceed more expeditiously, the government would side-step the Federal Court and initiate a reference to the Supreme Court. See the editorial from The Globe and Mail, July 8, 1996.Note

When this development came to light, the justice conducting the hearings removed himself from the case. His replacement then ruled that the cases could not go forward because of the perceived compromise of judicial independence.

The Globe and Mail, in its July 8 editorial, stated that responsibility for the government's action should be extended to Rock on the basis of the concept of ministerial responsibility. Ibid.Note Rock admitted in the House of Commons that the meeting was "inappropriate," but did not resign.

What is at stake is not the prosecution of war crimes. They should go ahead to the best of the government's ability. But judicial independence has been compromised. The government cannot act as a privileged party demanding that cases in which it has an interest be either hurried along or slowed down.

Issue #3: gun control

A study completed by Professor Gary Mauser of Simon Fraser University shows that new gun control legislation, Bill C-68, will cost taxpayers between $500 million to $1 billion, See Gary Mauser, Gun Control is not Crime Control, Vancouver: The Fraser Institute, 1995.Note and will be far too expensive to enforce. "Given the current fiscal problems, taxes would need to be increased or funding for other programs reduced," wrote Mauser.

Advocates of tougher gun control laws say the new law will reduce accidental firearms deaths. Mauser, however, points out that better education and the requirement of safety courses at the provincial level for hunters is responsible for the significant drop in gun related accidental deaths since the 1960s. In 1992 firearms accidents accounted for 66 deaths, or less than 1 percent of the 8,801 accidental deaths in Canada. Since 1994 federal law has required safety courses when applying for a Firearms Acquisition Certificate (FAC). Given the presence of the FAC, the need for gun control legislation is questionable.

The study also shows that gun registration cannot control criminal violence. Mauser points out that of the violent crimes committed in Canada between 1988 and 1991, 2.3 percent were handgun related, and 2.8 percent were rifle or shotgun related, leaving 94.9 percent of violent crime non-firearm related. "If the registration of all guns will help reduce crime, then why hasn't the registration of hand guns since 1934 reduced or eliminated handgun crimes?" Professor Mauser questions. He also points out that Great Britain's extremely restrictive Firearms Amendment Act of 1988 significantly dropped the legal ownership of firearms but has had no visible impact on the level of violent crime.

The study makes the point that we do not have a gun problem in Canada, but a crime problem. New gun control laws allow politicians to appear to be taking action on crime but they do not actually attack the root causes of crime, causes that range from family violence to drug abuse. Moreover, draconian laws only help to create more cynicism about government as well as concern for civil rights and liberties in a democracy. "Bill C-68 has nothing to do with fighting crime or violence. Charging gun owners or the public for this ill-conceived experiment just adds insult to injury," stated Mauser.

Issue #4: Young Offenders' Act

The Young Offenders' Act (YOA) was passed in 1984 to replace the 75-year-old Juvenile Delinquents' Act. It has been a source of public frustration ever since. Victims of youth violence abhor what they see as minimal sentences. Communities are frustrated by the lack of personal accountability and responsibility given to young offenders by the Act. No one is certain whether the YOA is deterring or encouraging youth crime.

Not surprisingly, then, the Liberal Red Book made specific recommendations for reform of the YOA. These included increased sentence lengths for certain violent crimes, treatment and rehabilitation services, and the definition of a dangerous young offender who could be transferred to adult court. Liberal Party of Canada, "Strengthening Our Society," Creating Opportunity: The Liberal Plan for Canada, Ottawa: Liberal Party of Canada, 1993, chapter 5.Note Allan Rock subsequently brought in amendments to the YOA (Bill C-37) to achieve these goals. See Privy Council Office, Ensuring Opportunity for Canadians: The Record To Date, Ottawa: Privy Council Office, 1996.Note Yet response has not been particularly positive. Some provinces have complained that Ottawa has not funded promised rehabilitation services which were to serve as an alternative to incarceration.

The more substantive criticism of the YOA amendments is that they do not address the fundamental lack of responsibility and accountability in the current system. They are mere tinkering around the edges. SFU economist Stephen Easton outlines the problem and a potential solution: See Stephen Easton, "Who's Responsible?" Fraser Forum, July 1996, Vancouver: The Fraser Institute, pp. 13-14.Note

What kinds of problems are we talking about? Most recently in 1994-95, of the 109,000 court cases regarding offenses committed by Canadian young people (who were caught) at or under the age of 17, over 12,000 cases were about acts committed by children ages 12 and 13. Theft and break and enter amounted to 37 percent of all offenses in this age group. Another 39,000 cases dealt with offenses that were committed by 14 and 15 year olds, and a further 55,000 cases concerned crimes committed by 16 and 17 year olds. Over half of these acts involved property related crimes. About 21 percent involved crimes of violence.

When we look at the caseload of young offenders who are actually brought to trial, we find that 40 percent are repeat offenders, and of these repeat offenders, about 25 percent have three or more convictions. We have a significant recidivism problem.

These acts are expensive. Just the costs of the major crimes committed by those young offenders who are caught comes to over $100 million. And this does not include the cost of their processing by the justice system from trial to punishment. That adds millions more. As of 1994-95 there were 4,900 young offenders in custody, and 36,000 on probation. With the cost of our incarceration facilities running at about $136 per day per inmate, incarceration and other youth services adds about $480 million to the cost of dealing with youth crime. Of course this is not the cost of youth crime. There are 3 million crimes that are known to the police each year. We can only put an age structure to those who are caught for particular crimes. For crimes that are more likely to be committed by younger people-break and entry, theft, and motor vehicle theft or vandalism-less than 20 percent of the incidents are resolved by charge or otherwise settled.

Who should bear responsibility and the restitution costs of those criminal acts when we catch the person committing the crime?

Since adults are responsible for themselves and often for their children, one reasonable approach is to allocate the 100 percent of the responsibility associated with a criminal act between the two. Some responsibility must be borne by the miscreant, and if that person is too young or deemed not responsible for himself (80 percent of young offenders are male), then the rest of the financial responsibility must be born by the parents. After all, it is their child. If your kid breaks the neighbour's window, you are expected to pay for the damage. If your child causes criminal harm, then it is you who should be on the hook for costs and whatever restitution your child cannot be induced to make on his own.

It is clear that a parent should bear a different amount of responsibility for a 12-year-old than for a 17-year-old. A 17-year-old is expected to be more responsible for his or her own conduct than a younger child. This leads to the issue of the legal balance of responsibilities. In any given case this balance must be set either by statute or by a judge. One can reasonably imagine a parent being responsible for 95 percent of the costs of their child's behaviour when the child is age 12 (and younger) and 5 percent at age 17. But what the appropriate balance is, remains to be determined. As Charles Harnick, Ontario's Attorney-General notes, there may well be a case for treating 16- and 17-year-olds as adults. They can drive and can contribute to the carnage on the highways, then commensurate with that responsibility is that they be treated as responsible adults. Alternatively, make the driving age 18, and apportion more responsibility to parents.

Lost opportunities for legal reform

Lord Mackay, Britain's Lord Chancellor, provides a stellar example of what a Commonwealth Mini-ster of Justice can achieve. See "The subversive Scot," The Economist, August 10, 1996, pp. 41-42.Note In his nine years in office, Mackay has brought fundamental reforms to legal aid, to the system for appointing judges, and to family law. Most recently, he has championed Lord Woolf's inquiry into the cost and efficiency of the British civil justice system. "More justice is more just," The Economist, July 27, 1996, p. 15.Note

In contrast, the federal government has simply frozen legal aid spending without proposing any reforms of its own. Unaccountable patronage appointments still typify judicial appointments and those of government legal agents. The Department of Justice continues to study fundamental civil justice reform, but has accomplished nothing.

Across Canada, governments are cutting the $7 billion in public funding for the legal system. Those who serve and use the courts, legal aid, and regulatory tribunals are growing anxious as to how and where to cut costs while preserving services.

One conclusion is certain. Trying to provide the same legal services in the same way for less money is not going to work for long. The legal system must change how it operates. It is not enough to throw one's hands in the air, declare the justice system an absolute necessity at any price, and resist both cutbacks and change. With Canada's public debt now at about 73 percent of its GDP, public funding for the legal system is going to get tighter before it gets looser. To save money while providing the same or better services requires reform based upon clear, independent, and tough-minded economic and managerial analysis.

The Liberal government's actions: progress on some fronts

The federal government should, however, be given credit for a number of initiatives. These include: See Privy Council Office, Ensuring Opportunity for Canadians: The Record To Date, Ottawa: Privy Council Office, 1996.Note

(1)improved communications between provinces in identifying high-risk dangerous offenders;

(2)legislation to prevent early release of pedophiles;

(3)legislation to combat child prostitution, child sex tourism, stalking, and female genital mutilation;

(4)legislation that prevents extreme intoxication from being used as a defense for violence;

(5)amendments to the Criminal Code to allow more sentencing options in cases of violent crime; and

(6)amendments to the Immigration Act to prevent serious criminals from abusing the refugee determination process.

Policy recommendations

The federal government should follow on this success by:

(1)Requesting the House of Commons Legal Affairs committee to review the client mandate of the Department of Justice.

(2)Not re-introducing Pearson Airport bill.

(3)Including cost restitution in the Young Offenders' Act and removing anonymity protection.

(4)Repealing the Firearms Registration requirement.

(5)Consolidating and reforming legal aid funding.

(6)Initiating a substantial civil justice reform initiative along the lines of the Woolf Inquiry.

(7)Publicly tendering all outside government legal work.

(8)Submitting judicial nominees to approval of a parliamentary committee.

In each of the aforementioned cases, more might have been done, but government policy at least moved in the right direction. However, in other areas, the federal government has shown utter disrespect for the Rule of Law.

For conducting such a confused justice policy, the federal government deserves a D.

The Constitution and National Unity File The authors wish to thank Gordon Gibson, Senior Fellow in Canadian Studies at The Fraser Institute, for helpful comments and suggestions on this section.Note

Grade: F

A close shave

Today's Canada is a product of 129 years of building, brick by brick. On October 30, 1995, after about 10 hours of voting and a margin of only 53,498 votes, our brick house nearly came to pieces. While Canada survives for now, the narrow margin which kept us together suggests that the future of our country still hangs precariously in the balance. Throughout the referendum campaign, the federal government, and in particular the Prime Minister, severely underestimated the strength of the sovereigntist movement. Even when the sovereigntists began to gain popular support, Ottawa did not have a "Plan B." A proposal on how to hold the ROC together in the event that the Quebec voted to separate was first proposed in Gordon Gibson, Plan B: The Future of the Rest of Canada, Vancouver: The Fraser Institute, 1994.Note In addition, the federal government did not offer a positive alternative to the status quo by way of deeper decentralization that would have helped to appease not only the Quebecers but other disaffected Canadians.

Since the October 30 referendum, pressure to restructure confederation has been mounting from the rest of Canada (ROC), particularly from Ontario, British Columbia, and Alberta. For the Chrétien government, however, Ottawa is still the centre of the universe; it is the quarterdeck of the nation, the upholder of "national standards," and the source of all good governance. This centralist view is likely to be severely tested in the months to come.

The status quo is dead

One clear conclusion that can be drawn from the referendum results is that the status quo cannot survive. The Liberal government should not pretend for a moment that Quebec voted to preserve things as they are. All polls indicate that Quebecers want neither separation nor the status quo; Quebecers appear to want a new federation with more power for Quebec.

As Gordon Gibson points out, the problem is not Quebec, but Ottawa. In any meaningful decentralization, Ottawa has much to lose. Therefore, Ottawa has refused to give the provinces a degree of decentralization that would satisfy both Quebec and the rest of Canada as well. Michael Walker in his pre`face to Plan B: The Future of the Rest of Canada has succinctly captured the problem:

In this rigid adherence to the well-meaning, even if self-serving notion that a strong central government is essential for our future, Ottawa imperils that future. It is time for federal politicians to recognize the extremely precarious position in which this inflexible centralist stance places the country. Ibid, p. xv.Note

The "fiscal straight jacket"

Ottawa is in the midst of a major fiscal crisis. The federal net debt has grown from $508 billion in 1993-94 to $603 billion in 1996-97, an increase of almost $100 billion in just four years. Interest costs to service the debt have increased from $38 billion to $50 billion over the same period. As a result of these developments, the federal government's net debt-to-GDP ratio of 73.4 percent is one of the highest among industrialized countries. See Department of Finance, Budget in Brief, Ottawa: Department of Finance, 1995.Note Canada now has the largest foreign debt-to-GDP ratio of any of the industrialized nations, at around 45 percent. In 1994, this level of foreign dependence resulted in $29 billion being paid in net interest to non-residents. See Robert Crozier, "Deficit Financing, the Decline of Savings, and the Rise in Foreign borrowing in Canada from 1970-1994," in Fraser Forum, February 1996, Vancouver: The Fraser Institute, pp. 13-17.Note This formidable combination of a massive debt load, high foreign dependence, and heavy debt servicing costs has locked the federal government into a "fiscal straight jacket."

If the federal government is to escape this straight jacket, it must balance its budget by the year 2000. This move towards budget balance must be achieved exclusively through spending cuts and not by tax increases. The ratio of taxes-to-GDP is nearly 7 percent higher in Canada than in any of its top five trading partners, See Ted Dixon, Survey of Senior Investment Managers: Results for Winter 1994/95, Vancouver: The Fraser Institute, 1995.Note and this does not include the massive tax hike that will be necessary if Canada is to preserve its ailing pension system. Moreover, government spending as a portion of GDP is about 10 percent higher in Canada than in any of our major trading partners. Economic studies indicate that high tax rates and high government spending retard economic growth, and consequently job creation. For evidence on the negative impact of high taxes on growth see Keith Marsden, "Links Between Taxes and Economic Growth: Some Empirical Evidence," World Bank Staff Paper No. 605, 1983. For evidence on the negative impact of government spending on economic growth see Daniel Landau, "Government Expenditure and Economic Growth: A Cross-Country Survey," Southern Economic Journal, vol. 49, 1983, pp. 783-792.Note Therefore, tax and spending increases would be highly imprudent.

The cure: decentralization

Ottawa will have to cut expenditures drastically. In practice, this means cutting transfers to the provinces, except for constitutionally guaranteed equalization payments. In this process of retrenchment, Ottawa will no longer be able to enforce so-called "federal standards" by providing cash grants to the provinces, for the simple reason that it will not have the cash to do so. Accordingly, the provinces will demand greater control over how social programs are delivered and financed. As the old saying goes, "He who pays the piper picks the tune."

Decentralizing power to lower levels of government (i.e. provincial and municipal) would force politicians and bureaucrats to provide services at costs that are acceptable to members of their jurisdictions. Under a decentralized regime, provincial and local governments are forced to become more efficient because citizens who do not like the level, quality, or price of a particular set of services can "vote with their feet." These citizens can move to neighbouring jurisdictions that offer a package of services at a price to their liking. By being able to move from one jurisdiction to another, voters continually put pressure on governments to perform, just as consumers, through their ability to change products, place pressure on commercial firms. This is democracy in its most direct form. Direct democracy of this nature also provides an avenue leading to much smaller, more efficient and more affordable government. For an excellent discussion on this subject see Gordon Tullock, The New Federalist, Vancouver: The Fraser Institute, 1994. The basic idea behind "voting with your feet" was developed by Charles Tiebout. See Charles M. Tiebout, "An Economic Theory of Fiscal Decentralization" in Public Finances: Needs, Sources, and Utilization, Princeton: Princeton University Press/National Bureau of Economic Research, 1961.Note In any event, the fiscal situation eventually will force the federal government to undertake decentralization, whether it likes it or not.

The campaign promise: jobs, not constitution

The Prime Minister campaigned on a promise not to talk about that dreaded "c" word-the constitution. Circumstances, however, have obliged him to do precisely the opposite. Lately, it appears that Ottawa, to some degree, has recognized that the status quo is no longer viable and that, in addition to Quebec, the three "have provinces," Ontario, British Columbia and Alberta, find the current state of affairs unsatisfactory. This is a good sign.

Actions to date: limited devolution

Towards this end, the federal government has established a study group to look at ways to reduce duplication of services between Ottawa and the provinces. In other words, the government is studying the process of disentanglement.

So far, the federal government has undertaken several minor initiatives to bring about a limited form of flexible federalism. See Privy Council Office, Ensuring Opportunity For Canadians: The Record To Date, Ottawa: Privy Council Office, 1996.Note In particular, it has:

(1)planned with the provinces and territories to reduce overlap and duplication in areas such as the environment and natural resource management;

(2)negotiated the transfer of responsibilities for programs in areas of provincial jurisdiction, including a commitment to withdraw from labour market training within three years;

(3)made an agreement with all provinces on the development of a "whole farm" policy framework on safety nets; and

(4)given provinces relatively more flexibility under the Canada Health and Social Transfer to determine their own priorities in higher education and social programs. Ibid.Note

While these initiatives are laudable, they do not go far enough to meet the demands of Quebec and other provinces for deeper decentralization. Indeed, by underestimating the strength of the sovereigntist movement, the federal government has badly mismanaged the unity file. In doing so, it has brought Canada to the brink of dissolution.

Policy proposals

Canada already pays a price for our "constitutional nightmare" in the form of increased uncertainty and its associated economic costs of high unemployment and high real interest rates. To avoid this, the federal government will have to balance its budget by the year 2000 and devolve power to the provinces. In order to achieve this goal, the federal government should adopt the following policy proposals:

(1)Follow the principle of subsidiarity: devolve power to the provinces by way of administrative rather than constitutional change. This process should include a comprehensive review of government, function by function, in every area of government activity. At each stage of the process, the fundamental question must be asked: should government be involved in this activity at all? If the answer is no, leave it to the private sector. If yes, determine which level of government is best equipped to handle the particular task. For details of these policy proposals see Gordon Gibson, "A Sensible Solution for Saving Canada," in Fraser Forum June 1996, Vancouver: The Fraser Institute, 1996, pp 5-14.Note

(2) Pursue more inter-governmental co-ordination. Start the process of minimizing or eliminating government overlap and duplication. Presently, there is much duplication and overlap in almost all areas of government activity. If Canadians are to have affordable government, it is imperative that duplication be minimized. In the past, and unfortunately today too, the federal government has used its "power of the purse" to impose so-called "national standards," which are in fact Ottawa's standards, on the provinces. If there is to be a meaningful devolution of power, this policy should be abandoned, and provinces given the flexibility to meet their unique needs.

(3) Develop a "Plan B." While working on the above proposals, the government should concurrently prepare a contingency plan to hold the rest of Canada together in the event that Quebec votes to separate in spite of all attempts to devolve power to the provinces.

For pursuing a short-sighted strategy and for not offering a viable alternative to the status quo, the Liberal government deserves a grade of F.

Conclusion

Overall grade: D

According to a much cited United Nations study, Canada is the best country in which to live. The findings of this United Nations Human Development Report are summarized in Joe Woodward, "A great place to be unemployed," British Columbia Report, August 12, 1996, p. 38.Note This should not be a surprise. In 1993, our per capita GDP was 11th best in the OECD. Organization for Economic Cooperation and Development, OECD National Accounts: Main Aggregates Volume 1, Paris, 1995.Note In terms of purchasing power parities, there is no question that the standard of living for the average Canadian is one of the highest in the world. We are indeed a blessed nation.

However, pressing problems threaten to undermine our economic and political status. Since 1993, our federal net debt has grown by almost $100 billion. Among industrialized nations we have one of the highest debt-to-GDP and foreign debt-to-GDP ratios. Department of Finance, Budget in Brief, Ottawa: Department of Finance, 1996.Note Our economy is both heavily taxed and heavily regulated, and our job creation statistics are shameful when compared to the United States. Our medicare system, touted by some as one of the finest, is plagued by long waiting lists, and the CPP is seriously underfunded. To make matters worse, the federation threatens to fall apart as regional differences resurface and provincial discontents are more strongly articulated. In short, we are in the midst of a crisis: a crisis with economic, social, and political dimensions.

Since they took office, the Liberals have tried to address these problems. However, their overall record has been ambiguous. Some measure of fiscal sanity has returned to the government's balance sheet, while valiant efforts have been made to deregulate our trade and transportation sectors. This is all to the good. But unfortunately, our tax system remains burdensome, our medical system is caught in an ideological time warp, and the top-down industrial and cultural policies pursued by the federal government are an awkward anachronism in an era of open, competitive markets. Ottawa's failure to embrace a more decentralized confederation may ultimately lead to the breakup of Canada as provincial demands for more autonomy remain unanswered. Politically and economically, ours is not a happy state.

There is nothing inevitable about the status quo, however. The predicament we are in could have been avoided; it is not the product of insurmountable evil forces, but the result of bad ideas and bad logic, supported by sentimentality and good intentions. Good results are the product of sound logic and good ideas, based on the fundamental laws of economics and human nature. These have always been with us. The idea of economic freedom is as old as Adam Smith.

It is not clear that the federal government quite understands these good ideas. In some areas the lessons seem well learned. In others, the government remains naive, maintaining the rhetoric of good intentions and "government knows best." Until our government fully understands the principles of economics and prosperity, we will remain in this state of limbo. Unless we fully embrace the concept of economic freedom and abandon the old ideologies of planning and control, we will never have the strong economy and strong society we so desire.

The Report Card

Course Grade Comments Budget Policy: Deficits and Debt B Enacted relatively deep spending cuts. Deficit target of 3% of GDP by 1996-97 has been met. Operating balance shows significant surplus. Should plan to eliminate the deficit by year 2000 and make plans to reduce the accumulated debt. Should also adopt a balanced budget amendment. Taxation Policy D Increased the Large Corporation Tax and the corporate surtax. Imposed and extended a "temporary" capital tax on large financial institutions. Otherwise no major tax increases. Unsuccessfully tried to harmonize sales taxes by offering a $1 billion subsidy to Atlantic Canada. Should work to reduce the tax burden and reduce the deadweight loss of taxation by introducing a flat rate income tax, replacing the GST with a harmonized sales tax, and reducing job-killing payroll taxes. A taxpayer protection amendment would help prevent the tax burden from rising again. Industrial Policy F Implemented a number of activist industrial policy measures including the Atlantic Venture Capital Fund, the National Technology Network, and Technology Partnerships Canada. Funding for "regional economic diversification" continued. Canada Infrastructure Works implemented. A weak interprovincial free trade agreement was negotiated. Attitude towards industrial policy is "top-down" and this will ultimately result in a misallocation of resources. Microeconomic efficiency would be enhanced by the elimination of all the above programs and the pursuit of greater interprovincial free trade. Social Policy C Will replace OAS and GIS with the Seniors Benefit. Unemployment Insurance (UI) replaced by Employment Insurance (EI). Increased spending on training programs. No significant reforms to the Canada Pension Plan (CPP) implemented. Has moved in the right direction overall but is moving far too slowly as reforms are still not affordable. Should replace CPP with a fully funded, private pension plan. EI should be turned into a true insurance scheme. Training programs should be terminated and the Seniors Benefit should be scaled down significantly. Health Policy D Consolidated the Canada Assistance Plan (CAP) and the Established Programs Financing (EPF) into a single block grant: the Canada Health and Social Transfer (CHST). Continues to uphold the provisions of the flawed Canada Health Act and refuses to allow provinces to liberalize the financing and delivery of health care services. Should repeal the Canada Health Act , permit provinces to liberalize the health care sector, and direct funds directly to the consumer through a system of Medical Premium Accounts. International Trade and Foreign Aid Policy A Many very positive developments here. Signed the North American Free Trade Agreement (NAFTA), negotiated a free trade deal with Israel, and worked on a number of other trade liberalization initiatives. Should open up NAFTA to more states, refrain from any further environmental and labour standards "side deals," and eliminate foreign aid spending. Transportation Policy A Excellent progress here. Turned over ports and airports to local authorities. Privatized CN and the Air Navigation System. Commercializing the St. Lawrence Seaway. Signed the "open skies" agreement with the U.S. and cut rail transportation subsidies. Should avoid getting involved in the Windsor-Quebec City high speed train (TGV) and all future transportation mega-projects. Labour Policy F Has made the labour market more rigid by passing the Employment Equity Act . Proposed changes to the Canada Labour Code (Part 1) will strengthen the power of unions and impede job creation if implemented. If job creation is the goal, the federal government should repeal the Employment Equity Act as well as Part 1 of the Canada Labour Code . Should also enact Right-to-Work legislation. Regulatory Policy D Has made some changes that will reduce red-tape and compliance costs. Insisted on the Regulatory Impact Assessment Statement (RIAS). Tighter scrutiny of proposed new regulations in place. Broke down regulatory wall separating the telephone and television sectors. Failed to pass the Regulatory Efficiency Act . Should reduce the regulatory burden even further by introducing more market mechanisms and imposing a moratorium on all new regulations. Should also deregulate the financial services industry by demolishing regulations and opening up industry to foreign competition. Agricultural Policy C Some positive developments here. Western Grain Transportation Act repealed and other agricultural subsidies have been reduced. Working with the provinces to develop a "whole farm" system of safety nets for farmers. Has replaced agricultural quotas with tariffs along World Trade Organization (WTO) guidelines. Should eliminate all tariffs, quotas, and price supports. Should also eliminate the Canada Wheat Board. Immigration Policy B Immigration rates have fallen below the 1% of total population threshold per year. Proportion of independent class immigrants has risen. Should reaffirm commitment to keeping immigration intake rate at 1% of total population (approximately 250,000 to 290,000 new immigrants) per year. Cultural Policy F Extensive state intervention in cultural industries continues to be a fact of life. Needs an "attitudinal facelift" with respect to cultural policy. Reaffirmed the mandate of the CBC, Telefilm Canada, and the National Film Board. Legislated measures to protect advertising revenues of Canadian magazines. Also persists in ignoring consumer preferences through the enforcement of Canadian content regulations. Proposed 7% tax on cable and long distance telephone calls to support the CBC is most disturbing. Should end all arts-welfare and allow consumer preference to prevail by (a) privatizing the CBC, Telefilm Canada, and the National Film Board, (b) repealing all Canadian content regulations, and (c) ending state funding of all arts councils. Justice Policy D Has shown its disrespect of the Rule of Law by pursuing the Pearson Airport Bill and by compromising judicial independence in the war crimes trials. Passed gun control legislation that is likely to be expensive and ineffective. Reforms to the Young Offenders Act do not address the fundamental lack of responsibility and accountability in the system. Should introduce cost restitution into the Young Offenders Act , repeal firearms registration requirements, and submit judicial nominations to approval of parliamentary committees. Constitution and National Unity File F Indifferent approach to the Quebec Referendum and the separatist movement nearly cost us the country. Has introduced some measures to devolve power to the provinces but these are insufficient. Insistence on "federal standards" is both uneconomic and destructive to national unity. Should embrace a more decentralist constitutional stance by devolving more power to the provinces by way of administrative arrangements. Should also work with the provinces to reduce overlap and duplication. Development of a "Plan B," a contingency plan to hold the rest of Canada together in the event that Quebec separates, would signal the federal government's commitment to preserving national unity.

About the authors

Marc Law has a B.A. in Honours Economics from the University of British Columbia. He is currently an M.A. candidate in Economics at Queen's University in Kingston, Ontario. His fields of interest include macroeconomics and international economics.

Fazil Mihlar is policy analyst at the Fraser Institute. He received his B.A. in Economics from Simon Fraser University, his M.A. in Public Administration from Carleton University, and a business degree from the Chartered Institute of Marketing in London, England.

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