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The
Economic Freedom
Network

 

FEATURE ARTICLE:

Big Government and the Constitution Crisis

by William Mackness

Editor's notes

EARLY IN DECEMBER, QUEBEC premier Robert Bourassa indicated that he might be persuaded to attend a first ministers' conference on the economy. It is significant that the economy, more than any other single issue, might be able to convince Mr. Bourassa to meet with his counterparts from other provinces.

In no way was he downplaying his concern about the debate swirling around the constitution. But Mr. Bourassa, by even contemplating this action, was indicating how critical an issue our faltering economy has become-not just for Quebeckers, but for all Canadians.

His concern with the economy and its link to the constitutional discussion is mirrored by Mr. William Mackness, Dean of the Faculty of Management at the University of Manitoba, in this month's Feature Article "Big Government and the Constitution Crisis." Mr. Mackness offers some specific and refreshing solutions to the nation's dilemma.

Other articles of particular note are Filip Palda's examination of credit card interest rates, and Isabella Horry's and Filip Palda's assessment of "The Health Care Monopoly."

We've also included an update on The Fraser Institute Prize for Economy in Government-and summarized our 28 finalists' suggestions. The overwhelming response to the prize is heartening; Canada obviously abounds with creative, energetic, talented people. And that's a pretty positive conclusion to 1991.

I wish all Fraser Forum readers a safe and happy holiday season.

Oh, and if you're still looking for a present for that last hard-to-buy-for soul, give us a call-we've got Adam Smith ties and scarves and a wide assortment of books that might solve the problem.

Introducing William Mackness

William Mackness is Dean of the Faculty of Management at the University of Manitoba. In addition to his university responsibilities, Mr. Mackness maintains an active interest in business and public policy matters. He regularly acts as an advisor to business and government, and is a member of a number of corporate boards. Mr. Mackness is a member of the Ontario board of directors of Pearson College, the Winnipeg Symphony Orchestra, and a trustee of The Fraser Institute. He is a past member of the Ontario Economic Council and of the Economic Council of Canada.

Prior to joining the University of Manitoba, Mr. Mackness spent a number of years in the financial sector. For several years he was the Senior Vice-President and Chief Economist with one of Canada's largest banks. Before that, he was a partner in one of Canada's principle investment dealer firms.

Before joining the financial community, Bill Mackness spent several years as a senior advisor to the Department of Finance in Ottawa. During his years in Ottawa, Mr. Mackness acted as a Canadian representative to the Organization for Economic Co-operation and Development (OECD) and served in a similar capacity in the International Monetary Fund consultations with Canada.


Big government and the constitution crisis [From a talk given to a Fraser Institute Round Table Luncheon on October 17, 1991 in Calgary.]  

William Mackness
Dean, Faculty of Management,
University of Manitoba


THESE HAVE BEEN TRYING times for enthusiasts of big government. However, Canadians have been remarkably slow-even reluctant-to appreciate that big, interventionist governments simply cannot compete in a world of global trade and free market economics. Big government has not been kind to Canada, or to the fortunes of our two national political parties.

The first casualty of Canada's failed experiment in big government was the country's financial integrity. Thereafter, in quick succession, Ottawa's credibility, political stability, and constitutional integrity have fallen victim. The growing impotence and declining relevance of Ottawa is perilously undermining our political institutions. This matter has now been propelled far beyond a debate on deficit finance. Suddenly, nothing less than the future of the country is at stake. Although slow to register at first, the realization and the trauma are now beginning to set in. This crisis has been a very rude shock, and it shows every promise of getting a lot ruder.

Resolving the crisis

I would like to offer some ideas that may help us to retrieve the situation. The current crisis is most likely to be resolved by a return to past practice, namely, regional autonomy, free market economics, and sound finance, rather than another desperate, time-constrained and contentious effort at constitutional reform. My argument is that, after having re-established a sound footing, there will be both the time and a firm base from which to develop constitutional renewal.

In my view, the current crisis is the consequence of the predictable failure of Canada's ill-advised experiment in big government. Ottawa's blunder into big government and the associated fiscal breakdown have been critical catalysts in the rising political instability and, more recently, in our full-blown constitutional crisis. The magnitude and intractability of financial failure in Ottawa has thoroughly discredited both this federal government and its predecessor.

As a direct consequence, the capacity of both national parties to lead and to govern has been severely damaged. Those who cannot manage their own affairs do not inspire confidence, respect, or loyalty in others. Ottawa is not in trouble for its fine intentions, and never has been. Ottawa is in trouble for its lack of results. Enthusiasts of big government should reflect on the fact that Canada now has a five-party political system which reflects widespread disappointment and resentment across the country and across the entire political spectrum.

Today's fractious political and constitutional circumstances present greater risks now than in 1984. Then, only one of the two national parties was associated with the fiscal disaster in Ottawa and consequent loss of political support. Today, both national parties are tarred with the same brush. The previous Liberal government is properly identified as having single handedly reduced the national fiscal system from one of the soundest in the industrial world to one of the weakest, all in less than 15 years. Inheriting this mess in 1984, the Tories certainly tried, but lacked the vigour and determination to regain control of the fiscal system when they had the best chance to do so-a bitter disappointment to Canadians of all political stripes.

As difficult as the current situation is, there are sound and compelling reasons for this fine commonwealth to stay together. Canada has produced standards of personal liberty, security and prosperity that are among the highest in the world. Foreign investors and immigrants are a good barometer in this respect. They are clearly betting that the country will have the wit and determination to clear the current hurdle. The hurdle is not really all that complicated or all that high.

Need for reform

There is a pressing need for fundamental reform in the areas of fiscal management and division of powers. However, most of these reforms can be effected without constitutional change. At the same time, there is also a need for constitutional adjustments. But the need for constitutional change is not desperate, and definitely will not benefit from haste, from "deal- breaker" demands, or from arbitrary time constraints.

Ottawa's comparatively recent foray into higher education, income redistribution, industrial planning, and social engineering has not been productive of prosperity, unity, or stability. The country has survived in spite of big government, not because of it. In line with historic constitutional arrangements, regions or provinces wishing to manage their own affairs in areas of provincial competence should be free to do so without coercion or regimentation from the central government. Similarly, inter-regional transfer payments should be agreed among the regions-not brokered by Ottawa.

In preference to rushing headlong into a complex and contentious exercise in constitutional reform, the immediate need is for a major down-sizing in Ottawa. The federal government needs to do less and to do it better.

But there is no need for Ottawa to go out of business. In fact, a number of key federal powers need to be considerably strengthened in practice, and also, in some instances, in statute. Federal government power and authority is indispensable in areas such as security, criminal law, foreign affairs, mobility of labour and capital, domestic and international trade, communications and the payment system. In contrast, Ottawa's record in financial management, industrial planning and social engineering provides a compelling argument for devolution and downsizing. The record is unmistakable. The interests of the federation will be served best by a stronger but less pervasive and intrusive federal government.

Return to past practice

The immediate remedy is a major fiscal reform combined with a prompt devolution of usurped tax and spending authority back to the provinces, at least to those provinces wanting that responsibility. These initiatives represent no radical change, but simply a return to past practice-regional autonomy, free market economics, sound finance. Once re-established, these traditional Canadian values will provide the necessary financial and political stability from which to assess the need for constitutional reform and accommodation.

In these difficult times, Canadians should never forget that the country has a distinguished record of achievement. The industrialization of the country during and following World War II was nothing short of spectacular. By the 1960s, Canada had developed one of the soundest, best-managed economies in the industrial world. For such a small country, Canada's industrialization and post-war record of establishing sound national finances, sophisticated capital markets and world-scale operations in banking and insurance was absolutely outstanding.

Notwithstanding these major achievements, the advent of big government has produced a massive reversal. Suddenly, in the space of one generation, the country has become debt-ridden, divided, and reduced to coping with one of the weakest fiscal regimes among the leading industrial countries. It is principally this setback, this great failure of big government, which is now propelling political instability and constitutional crisis.

History will probably record that the National Energy Programme (1980) and the MacEachen Budget (1981) established a high water mark in ill-advised, politically-motivated central planning in Canada. The Tory government, elected in 1984, saw at the outset the need for a return to free market economics and sound finance. The electoral support for reform was overwhelming, but the political response was inadequate. The return to free market economics has been clear and sustained. However, efforts to rein in the out-of-control fiscal system have not been adequate, and today there is a staggering $400 billion debt to prove the point.

What went wrong with the promised reforms in 1984? At the heart of the matter, the character and magnitude of the fiscal problem was underestimated. Consequently, political appraisals and reform measures were inadequate. The record is clear. Seven years of tax hikes and nagging, contentious expenditure restraints have had dear political costs and have not eliminated the deficit or controlled debt and interest costs. Political credibility demands that problems be not only identified, but rectified. Moving in the correct direction is fine, but it only pays dividends on arrival.

The debt problem facing Canada today is much more onerous than at the end of World War II. Today, in addition to the national debt, there are enormous unfunded liabilities in M.P.s' and civil servants' pensions and the Canada Pension Plan, all of which will begin to bite in earnest as we move into the 21st century. Compared to the earlier post war period, interest rates are now much higher in both real and nominal terms. In 1946-47, interest charges amounted to 3.9 percent of G.D.P. compared to 6.2 percent today. The provinces are more deeply in debt today than ever before. Finally, as a direct consequence of unrestrained deficit finance in Ottawa, Canada has become the world's second largest international debtor, owing $240 billion, which puts it right behind the United States at more than double the level of the next closest contenders.

Debt problem

The country is simply spending and borrowing far more than the tax system and competitive pressures can support. Canada's commitment over the last generation to activist, interventionist government-as opposed to traditional, market-based solutions-has brought the country to the brink of insolvency and political disaster.

As for national unity, it is not easy to argue that twenty-five years of Ottawa-inspired interventions have been a big success. Similarly-bankrolled and managed by Ottawa-regional development efforts, along with the Unemployment Insurance fiasco, have been a shameful failure and massive waste of money, plain for all to see. Also, thanks to universality, Canadian social programs are more expensive than necessary and are increasingly vulnerable to cutbacks driven by interest charges on the debt which now consume 35 cents of every tax dollar. In practice, these key policies have fallen far short of reasonable goals. Moreover, at the same time, the headlong spending and deficit finance underlying the programs have wrecked the national finances.

Gradualism not the answer

This federal government, like its predecessor, has maintained an unshakable faith in gradualism, that is, a belief in the power of time and vacillation, rather than substantive action, to solve problems. In essence, Ottawa is still searching for a painless master stroke, something akin to keeping the cab fare down by driving slowly, or easing the dog's pain by docking his tail an inch at a time. I beg to differ. Gradualism in all its silly, soft manifestations is a menace which has already wrecked the national finances, precipitated a constitutional crisis and grievously imperiled the capacity of both national parties to lead and govern. The longer effective remedial action is delayed, the greater is the cost of adjustment, and Canada is paying dearly already.

As a matter of fundamental error, Canada has evolved into a state which literally supports two "sovereign" levels of government. This mad system wastefully increases costs, creates inter-regional resentment, and decimates the effectiveness and accountability of both levels of government. The country needs a clearer and more workable distribution of powers. In the generality, Ottawa needs to butt out of areas of provincial competence, while the provinces and regions must begin taking greater responsibility and being more accountable. Under the current system, with the "feds" taxing and the provinces spending, no one is accountable, and spending adjusts accordingly.

Two-point program of reform

To put some precision to these views, I recommend a two-point program of reform: first, a major fiscal reform including a constitutional prohibition of deficit finance; second, a large-scale devolution of tax and spending power back to the provinces. Both reforms would greatly increase the capacity, credibility and influence of the federal government, thereby creating a sound base from which to initiate future constitutional reforms.

Setting aside technical complications, the basic thrust of devolution proposals is straightforward and meets Canada's historic need for considerable regional autonomy and diversity. Canada is not a unitary state and attempting to force the country into such a mould is highly divisive. Both the economics and the politics of the current situation point directly to devolution and fiscal reform. At this point, devolution is as important as fiscal reform. In the absence of a willingness to devolve extra-constitutional power to the regions, unilateral separation of Quebec and probably the West will almost certainly result.

I would like now to address the fiscal issue. At the outset, and independent of the degree of devolution, there should be a declaration of a fiscal emergency and a commitment to tough, austere measures until the fiscal situation is brought back under control. There is a need for a large, absolute, across-the-board spending cut in the order of 10 to 15 percent. Superseding legislation would be needed to ensure that all spending, including salaries, subsidies and transfer payments, be subject to the initial absolute spending cuts, regardless of prior statutory or contractual commitments.

Beyond the initial spending cut, all program spending remaining in Ottawa should be reviewed for further economies-or outright program terminations, in areas such as advocacy group funding and subsidies to business. In the salary area, a second "leadership" spending cut-in addition to the across-the-board cut-of a further 10 to 20 percent should be applied to the salaries and expenses of M.P.s, Senators and senior bureaucrats. Ottawa pensions should also be brought into line with federal law and norms prevailing in the private sector.

Freeze necessary

Once a comprehensive program of spending cuts is in place there should be a complete freeze on spending, employment and salary increases for the duration of the fiscal emergency. The declaration of a fiscal emergency would remain in force until a modest fiscal surplus has been established. The spending and salary freeze would provide a direct financial incentive for both politicians and bureaucrats to make the process work. The fiscal reform program should aim for the complete elimination of the deficit within 18 to 24 months.

As soon as a fiscal balance has been established, a constitutional prohibition of federal spending commitments beyond reasonably anticipated revenues should be enacted. Inadvertent deficits would be required to be offset by budgeted surpluses. A stabilization fund could be accumulated from small recurrent surpluses and thereafter used for some additional spending power in times of distress. The legislated spending limits enacted in the last budget were an important step in the right direction, but they can be repealed at will and do not preclude deficit budgets. The need is for a tougher, more reliable impediment to deficit finance-something which will preclude a repeat of the fiscal disaster of the last 15 years.

Aside from fiscal reform, the federal government needs to accommodate regional diversity rather than stifle it with monolithic national programs which, in many instances, would not have been supported by regional governments as a matter of choice. For example, left to their own devices, the provinces would never have produced the Unemployment Insurance fiasco, mindless universality, or many of the perverse spending priorities that spring from "free" federal transfers.

Devolution part of the solution

The extent and particulars of a devolution of tax and spending power would have to be determined by negotiation. However, rough orders of magnitude can be indicated by categorizing federal spending according to its potential for devolution. Areas such as health, education, welfare, and subsidies, which account for about 35 percent of federal spending, are eligible for large or complete devolution. About 15 percent of federal spending is on equalization payments. Equalization should probably be reduced and could even be turned over to the provinces with budget surpluses to administer. A further 30 percent of federal spending is for interest on the national debt which has absolutely no potential for devolution. Remarkably, only about 20 percent of federal spending and control is in areas which should be reserved exclusively for the federal government- areas such as security, criminal law, foreign affairs, mobility of labour and capital, domestic and international trade, communications and the payments system.

On this basis, about 50 percent of federal spending and the associated tax base is eligible for some degree of devolution to the provinces. About one-quarter to one-third of total federal spending could be shifted to the provinces.

Beyond the important matter of regional autonomy, devolution of power to the provinces will also produce efficiencies, cost savings and greater political accountability. The double layering of bureaucracies under the current system could be greatly reduced. The regions would almost certainly run more efficiently when spending their own money than under the current system. Finally, and possibly of most value, devolution would tighten the link between voters and the tax-spend process, thereby increasing political accountability at both levels of government.

Some see in devolution a risk of weakening the federation. Others argue that the provinces are not capable of managing their own affairs in any event. In the first instance, there is no evidence that Ottawa's great tax and spending grab after World War II strengthened the federation or national unity-quite the opposite. Eliminating duplication and fostering greater accountability and efficiency of provincially or regionally managed programs would serve to strengthen, not weaken, the federation. Similarly, the provinces and regions would actually be better designers and managers of programs, programs better tailored to specific provincial and regional needs.

Provinces can judge own needs

The issue of national standards is largely a red herring. Surely the various provinces and regions are better judges of their own needs, capabilities and standards than are a group of Ottawa bureaucrats. The problem for the big-government crowd is that Canada simply does not fit neatly into the mould of a unitary state; artificially imposed national standards do nothing to improve the fit. In practice, centrally-determined national standards are often counter-productive or irrelevant because they are inappropriate in much of the country.

The argument that the provinces are incapable of managing their own affairs does not reflect today's reality. The provinces' management record need not take a second place to that of Ottawa. In fact, because they lack a central bank and national taxation power, the provinces are much more subject to market discipline and the dictates of prudent practice than is the federal government.

In all of this, Ottawa has fallen victim to more than random bad luck. In its effort to become all things to all Canadians, the federal government has failed miserably. Ottawa should simply be cut back to size and refocused on its traditional central government role. Ottawa needs to be a central government, not the central planning and income redistribution agency it has become over the last generation.

Cautious approach to constitutional change

It is important to keep a sense of perspective in assessing the need for constitutional and other reforms. Unmistakably, there is an urgent and immediate need for fundamental reform in fiscal affairs and in the division of powers. However, the requirement for constitutional change is more complex and contentious, and should be approached at a more measured and cautious pace. Particularly so, because Ottawa's current low level of credibility has seriously eroded the capacity of the federal government to lead the country, let alone deliver a major constitutional reform. Accordingly, the immediate need is for Ottawa to put its own affairs in good order, and then to lead the country in a period of reform and renewal.

Questions for William Mackness

Q: Yours is a good objective, but how can we practically go about achieving it, particulary when Joe Clark is going around Canada saving the country with his constitutional proposals?

A: I certainly wouldn't take exception to Mr. Clark and government's efforts to improve the constitutional prospects. My only argument is that it's not very likely that we'll be able to put a deal together in anything like the time allotted. Is it naive to reform a fiscal structure? Is it naive to move toward a more appropriate division of powers? I think not. What I'm proposing here is not radical, it is simply a return to past practice. This country became the fine place that it is because it was well managed. We have slipped in one generation and we should simply move back to past practice.

Q: How do you envisage Bank of Canada monetary policy coordinating with your view of required decentralized system policies, i.e. under the administrations of provincial governments?

A: Monetary union and payment system is an irrevocable federal responsibility. There can be only one monetary policy in a country. The experiments that we have attempted in this country with regional financial institutions have been very unfortunate.

Q: What would be the impact of fiscal policy cutbacks on economic activity, that is to say employment, GDP, growth, and so on?

A: A stern program of fiscal reform and devolution would materially improve the short-term and long-term prospects for the Canadian economy. We have one of the highest real interest rate structures in the western world and it's not by accident; it's because of the way we have been managing our affairs. To put the burden of proof on the other side, I would like others to demonstrate to me how mismanaging your affairs can put you ahead.

Q: Is Quebec's political agenda hindering the chance of the fiscal reform and devolution?

A: Quebeckers are not any more impressed with Ottawa's performance than some of the rest of us. There are a number of major parallel interests between Quebec and the West, specifically, sound financial and economic management. The wasteful and inefficient programs are of no advantage to Quebec any more than they are of advantage to other regions. There are also important regional imperatives which are by no means restricted to Quebec, and common interests from various regions of the country that would be better served by a more decentralized posture, particularly with respect to social programs and regional development. In short, increasing federal government power and intervention would be unlikely to improve the situation at all.

Q: Given greater provincial powers, how do you propose to maintain a free market economy and handle provincial trade barriers?

A: Left to their own devices, the provinces put trade barriers up. The short answer is that you will be able to thrive in a free inter-provincial trade environment as soon as the government of Canada takes up its proper responsibilities. I'm unimpressed with the argument that there are important statutory impediments to achieving those aims. When Ottawa decided that they wanted to relieve Alberta of about $50 billion dollars, there were no statutory impediments holding them back. It's a question of will and determination.

Q: With a five-party, no-single-majority federal government almost inevitable in the next federal election, how can any minority federal government achieve the necessary expenditure cutbacks to save Canada from financial disaster?

A: The type of reforms that are necessary will spring from political leadership. The program is not the hurdle. The hurdle is to find the type of leadership that can rise to the fore. I am an optimist. History repeatedly shows that in open, democratic societies, in times of stress, leadership emerges. There's nothing like an ongoing reduction in living standards to concentrate people's thinking on these matters. We're now all in the process of getting quite a rapid education. We may pick up on these things a little more quickly than in the past.

Q: The real issues in Quebec are economic as they are in the rest of Canada. You fail to deal with the "economic" fact that Canada is broke. It has failed. The regional or provincial governments are as culpable in the failure as is Ottawa. Please comment.

A: I agree with the comment that the bottom line here is economic. I take some solace thinking that the economics of keeping this federation together are absolutely first class. We do have a serious financial problem, but nothing that cannot be handled. It will reduce our living standards-that is axiomatic when you behave this way. But it isn't irretrievable. This is one of the richest jurisdictions in the western world. If this were a third world, impoverished country, and one made the argument that it would be impossible to balance the books, you might get a little mileage, but to say in one of the richest countries in the world, with an educated labour force and democratic institutions, that somehow it is impossible to balance the books just defies credulity.

However, we do have a taxation structure in this country that is already seriously impeding our competitiveness. That's why (lifting from a 30-page paper of mine published by the McKenzie Institute) fundamental to fiscal reform is a sizable reduction in absolute spending levels. We need an up-front effort to address spending, and we'll be poorer for it. You can't build up a debt that consumes 35% of all your tax revenue and have nothing happen-there will be a big setback.

Q: You are in favour of devolution of Ottawa's powers down to the provinces and regions, but what about the devolution of significant powers from the provinces, to the cities, towns, and villages?

A: There is potential there. My only qualm is that in most municipalities the electoral system is not party-based, so I'm not sure that you'd get the competitive interplay and the accountability functions that you would have at the provincial level.

Q: Why is Quebec a have-not province? Can any of the Maritime provinces survive without massive federal aid?

A: All regions of the country can survive quite well with little or no aid by way of inter-regional transfers. The numbers are big on the inter-regional transfers, subsidies, area development programs, and so on, but the results aren't there. In many instances, federal programs are absolutely counterproductive. I don't believe that there are inherent debilities in any region of the country. The greatest debility has been Ottawa's proclivity to throw money and subsidies at every problem of any consequence. These programs have been counter productive. They are non-market programs that make the economy work more poorly. I would add that the degree of compassion among Canadians is very high, and to the extent that they are aware of a real legitimate need for inter-regional transfers, I think that they'd be there. Those doing the paying are not much amused with the way the money is being spent. Ottawa should stop brokering these deals, and the transfers should go directly from the surplus regions to the deficit regions on an agreed-upon basis between those regions.

Q: I agree with your ideas on fiscal responsibility, but how do you sell these ideas to the $30,000/year family of four? They can't cut. What can they do if some free services are removed? How can they buy into your plan?

A: I don't subscribe to the view that to continue to mismanage our affairs is in the interests of anyone, and particularly not in the interests of lower income groups. The cutbacks that I am talking about are largely in transfer payments. The program that I advocate would see the economy work immensely better, and lower income people, like everyone else, will be much off in a well-functioning economy. The welfare of all Canadians is best secured by a prudent management of our affairs, not by a continuation of ineffective, however altruistic, mismanagement of the economy.

Credit cards and the fair rate of interest

Filip Palda

CANADA IS A SMALL country that cannot afford to follow major economic policies independently of the U.S. However, the recent initiative by the American Congress to limit the interest rate on credit cards to 14% is not worth imitating. The limit appears to be a political ploy to curry favour with voters. Nearly half of all credit card holders do not pay their full bill on time, and as a result feel the sting of 19% interest. Arguments from Congress and Parliament that card rates should drop with the prime rate are wrong and show a poor understanding of the functions of credit. As with many simple-minded government interventions, this one may hurt those it was intended to protect.

An interest limit on credit cards would transfer wealth from the shareholders of credit card companies to their customers. The accumulated outstanding balance owed by Canadians on credit cards at the end of 1990 was $13 billion. A legislated 5% drop in credit card rates would cost the companies $650 million in the first year. Because the interest rate reflects the cost of lending, a limit on the rate would also restrict the supply of credit. Shorter lines of credit would make it harder to plan budgets and costlier to conduct personal business. The prospect of future interest rate limits would further restrict credit because such limits transfer wealth from creditors to debtors.

To justify intervention, politicians such as Corporate Affairs Minister Pierre Blais must resort to the awkward argument that the credit card companies do not compete. Blais has the support of the Consumers Association of Canada which accuses the companies of hypocrisy and of pretending that bad debts are what keep the interest rates high. Though competition is hard to measure, there are indications that it thrives when firms can contest each other's actions. There is no reason to believe that VISA would not undercut AMEX to gain a larger share of the market if it had a cost advantage which allowed it to do so. The rate of interest companies charge has not changed because it depends on delinquency and fraud in the use of credit, and, as Joanne De Laurentis of the Canadian Bankers Association argues, these growing problems "counteract in a major way our ability to decrease rates."

It is touching to see our politicians worry that prices are too high and that consumers are suffering. However, it is confusing to watch them argue against high interest rates at the same time as they affirm their support for agricultural marketing boards. Marketing boards exact a heavy toll on Canadian consumers by causing artificial shortages of food, which inflate food prices. Politicians could indulge their concern for consumers by dismantling obvious monopolies such as the marketing boards, instead of regulating the competitive credit card industry.

Don't laugh at me, Argentina

John S.P. Robson

A RECENT ALARMING SET OF figures in the Financial Post indicates that our total national indebtedness includes not only the $420 billion federal debt, but also some $290 billion in provincial debts, almost $50 billion in municipal debts and also more than $300 billion in unfunded Canada Pension Plan liabilities, which produces a horrendous total of over $1 trillion, or $40,000 per capita. I have already argued that we cannot pay back the $15,000 each represented by the federal debt, so it would be redundant to make the same point about the $40,000. To put it bluntly, we have run up public debts that are unrepayable even on the most heroic assumptions about spending control, growth, tax revenues, and so on, unless we make it our top priority.

And yet we are ignoring it, in the very important sense that our national debate goes on as though it didn't exist. Looking at recent provincial elections, or contemplating a federal one, how much attention is given to this problem, to its consequences, or to its origins? If we do get a new government in Ottawa, only after the election will they "discover" that there is a problem in the national budget that cannot be fixed by "eliminating waste" or "cutting off subsidies to Mulroney's corporate buddies." The nation is bleeding to death financially, and no one seems to know or care.

How did this happen? According to William Mackness, Dean of the Faculty of Management at the University of Manitoba, our federal debt stood at 17% of GDP in 1974 when Pierre Trudeau got out of his minority government with the NDP, 45% by the time Brian Mulroney was first elected, and over 60% today. It is tempting, therefore, to blame Trudeau, to say that the debt was caused by his inattention or indifference to fiscal matters. Cognoscenti will recall the mayor of New York saying in 1965 that "I do not propose to permit our fiscal problems to set the limits of our commitments to meet the essential needs of the people of the city." (Cited by Milton Friedman, Free to Choose, p. 92.) New York City duly went bankrupt. So it is easy to see that Trudeau, and the mayor of New York City, are the guilty parties, right?

Wrong! There is no shortage of people with bad ideas out there, no shortage of people who ignore or misunderstand economics. The fundamental fault lies not with our politicians, but with the citizens who elect and re-elect them and hence encourage their behaviour. There are a number of arguments for placing Constitutional limits on the ability of government to spend and the time has probably come to implement some of them. But the most fundamental point is that the electorate has not been voting wisely or responsibly.

As Michael Porter has recently pointed out, we have not been pulling our weight lately-we have allowed ourselves to become lazy and inefficient. We have then demanded that the government redeem our personal failings without pain or effort on our part. We have all, rich as well as poor, regarded public policy questions solely from the standpoint of "do I get more out than I put in?" instead of asking "is this the right thing to do?" More than half of UIC goes to people in the top half of income earners, education and cultural spending goes disproportionately to the rich, etc., so whatever the argument may be about welfare, it must be understood that everyone has indeed been trying to hop on the gravy train and make someone else pull it. Michael Walker recently put a group of UBC students concerned about the debt on the spot by asking if they would give up their educational subsidies. But they must, because the approach we have been following is wrong, and it is also futile.

Proof of the latter is that we have taken a country with the second-highest standard of living and labour productivity in the world, and in seventeen years we have placed it in serious fiscal jeopardy with cries of "more, more, more for me!" This is, in fact, dishonourable, and we do not have the excuse that some Latin American or African countries could offer (though not Argentina), which is that they were so poor and ignorant that they panicked. We are rich, and well-informed. We just got lazy, both physically and mentally.

Therefore, while certain constitutional devices may make such behaviour less likely in years to come, we can only correct our current problems, and guard ourselves against future ones, by resolving individually and collectively to restore rectitude in our public life. As Charles Evans Hughes said, it is not paper promises but an aroused public opinion that protects our liberties. Recently that public opinion has been too busy fighting for a place at the trough to worry about the food supply. We must now resolve, as Michael Porter suggests, to make our living the old fashioned way: we must earn it. The alternative is to draw the curtains, to promise the unions pay raises that can only be met by ruinous inflation, and to denounce as unpatriotic anyone who suggests this is bad policy. If we do that, don't laugh at us, Argentina. You didn't have an excuse either.

The health care monopoly

Isabella Horry and Filip Palda

CANADIANS ARE OFTEN accused of being too averse to risk. Trade Minister Michael Wilson heard this message from businessmen while promoting trade on his recent tour of the Orient. This crude caricature of the national spirit neglects that Canadians run many giant enterprises fraught with risk. The provincial health care system is a good example of our taste for uncertain ventures and our willingness to hand huge responsibilities to administrators who are not fully accountable.

The following table indicates that provincial voters pay nearly 26 cents of each tax dollar to state-run health monopolies. Opinion polls show that these numbers do not worry the public and that the public supports state ownership of the health system. The same is true of the U.K. Most Britons do not want the Conservatives to privatise health care. This devotion to state ownership is remarkable because the state has shown little regard for its customers. By many accounts, state medicine is mismanaged and costs too much. A recent report to the British Columbia government suggests that the quality of medicine will have to fall for government to balance its health budget. Ontario faces a similar crisis and will have to increase spending by 8.6%, or $630 million, to maintain its present level of service.

Click here to view Table: Provincial Government Spending on Health

State monopolies often produce such results not because they are run by incompetents, but because they give bad incentives to managers and workers. Monopolies charge more for their services than those services cost, and thus make abnormally high profits. In monopolies maintained by the state, unionized employees tend to capture these profits. They receive higher wages and better working conditions than their productivity warrants. Kim (1984) found that labour and fuel suppliers gained most from trucking regulation which restricted competition. Gillen, Oum, and Tretheway (1989) argued that Air Canada workers were the biggest beneficiaries of state ownership.

It may be hard to think of OHIP, for example, as a monopoly, because it does not charge user fees. However, its monopoly power is not in raising prices but in varying the quality of services it provides. OHIP receives a budget from the treasury and decides how much of that budget to allocate to consumers. It may divert the rest to salary increases and improving working conditions. For example, of the extra $630 million sought for 1992 by the Ontario Hospital Association to maintain the same level of services, $150 million is for "pay equity" and safety regulations, and a further sizeable sum is for increases in salary to account for inflation. These figures may indicate that employees of the Ontario medical system are capturing a large part of the budget for themselves.

Private corporations are subject to similar pressures from their employees. Shareholders must watch that managers and workers do not live high at the company's expense. In a private market, firms which reward employees to the detriment of the consumers generally do not survive the competition of other more efficient firms. State-run medical systems face no market competition and are thus in a position to exploit consumer-taxpayers. Competition can only make itself felt through slow, political channels.

Unfortunately, our politicians were not very alert and did not present us with reasonable alternatives at the dawn of medicare. All the objectives of the present system could have been met by allowing well-to-do Canadians to buy health insurance from their own pockets, while the state subsidized health insurance for the poor. Instead, we have ten province-run state medical monopolies facing a very costly and uncertain future.

References:

Gillen, David, Tae H. Oum, and Michael W. Tretheway (1989), "Privatization of Air Canada: Why it is Necessary in a Deregulated Environment," Canadian Public Policy, 15:285-299.

Kim, M. (1984), "The Beneficiaries of Trucking Regulation Revisited," Journal of Law and Economics, 27:227-41.

How to run a better monetary policy

Michael Walker

IN THE JUNE 1991 EDITION OF Fraser Forum, I suggested that we should govern Canadian monetary policy by following the suggestion made by Mr. Robert Hetzel, Vice President of the Federal Reserve Bank of Richmond, Virginia. Hetzel had suggested that at the base of arguments about monetary policy are different assumptions about the impact monetary policy will have on the rate of inflation. In Canada, for example, those who claim that the Bank of Canada has set monetary policy too tightly in terms of higher interest rates implicitly argue for a faster pace of increases in the supply of money in Canada. Opponents argue that the increased monetary growth would cause inflation, and this would not be a desirable outcome in the short term and in the long term would cause interest rates to rise even higher as savers moved to protect themselves from the higher rate of inflation. Those wishing to have lower interest rates argue that the inflationary impact of lower rates is exaggerated and in any event is less damaging than the unemployment and slow growth induced by a tight monetary policy.

So, as Hetzel claims, the debate about monetary policy comes down to a debate about the impact that changing the monetary policy will have on future inflation rates.

Hetzel's proposal is at once both simple and intriguing. He suggests that the federal government be required to split its bond issues into two equal slices. The first slice would be bonds of the ordinary type which the federal government currently issues and which bear interest at some market rate. The other slice would be indexed bonds. That is, interest and principal payments on the indexed bonds would be linked to a price index, say the consumer price index, and holders of such a bond would, therefore, be compensated for any changes in the rate of inflation over the term of the bond. Once a significant market for each of the bonds had developed, the difference in the rate of interest required to induce the general public to hold the two bonds would be an ongoing barometer of inflationary expectations.

In June when I wrote this article and argued strongly that monetary policy be conducted so as to reduce the inflation premium on indexed bonds to a very low, and perhaps zero level, there were no indexed bonds in Canada. However, in the middle of October the Department of Finance indicated its intention to launch a new program of "real return" bonds that will offer investors a return adjusted for movements in the consumer price index. This is precisely the kind of bond that I spoke of in my June article. We now have the opportunity to conduct monetary policy in an appropriate and effective way.

There need be no more debate about what the impact of monetary policy is. We simply need to look at what is happening to the rate of interest on the bonds which are not indexed for inflation, and compare it with the interest rate on the bonds which are indexed for inflation. Those that are indexed for inflation will reflect the true underlying rate of interest, excluding the impact of inflation, since any inflation that occurs will be separately compensated for. Those bonds which must compensate their holder for inflation via the interest rate that they bear, on the other hand, will sensitively reflect on a week to week and month to month basis the changes which are occurring in investors' expectations about future inflation in response to current monetary policy. The Bank of Canada now has an unambiguous indicator of what it is doing, and it is to be hoped that the Bank will begin to use this new barometer of the impact of monetary policy in its day to day management of monetary policy.

Why we don't want to solve the national deficit problem

Michael Walker

AT A RECENT SPEECH TO the Canadian Club of Toronto, I pointed out that there are two reasons why we don't appear to want to do anything about the nation's deficit problem.

The first is that those who are direct beneficiaries of the current spending and taxing activities of all three levels of government are in a clear political majority. In fact, 63.5% of the total group of electors in the country are net beneficiaries from current government expenditures.

A second reason we don't want to do anything about the deficit is that many of the programs that would have to be cut, such as education, health care, and recreation and cultural spending, to name only three, primarily benefit those whose incomes are above the national average. In the case of culture and recreation, fully 54 percent of all of the benefits accrue to the top 30 percent of income earners, while the same group receives 37 percent of the benefits of education spending.

Recently, I discovered a third reason. There is a group in our society which directly benefits from the volume of expenditure that flows through the public sector. This was made quite clear just the other day by the newly elected president of the Canadian Union of Public Employees, Judy Darcy. Speaking at her union's leadership convention in Winnipeg, Darcy noted that "we have an enormous potential to have an impact on the direction of this country if our members become better advocates of public services. According to a report by Virginia Galt of The Globe and Mail, Miss Darcy also stated that the membership is "mobilizing" to fight government restraint programs which have resulted in cuts in public services. Miss Darcy said, "I think the message from this convention is that delegates want to see this union in the forefront a lot more . . . speaking out in defense of public services, social programs . . ."

As spokespeople for public services and social programs, they may well find the Canadian electorate receptive; there is overwhelming support for public expenditure in Canada. Nevertheless, it is quite clear that in the case of the Canadian Union of Public Employees, this is quite a self-interested preoccupation, one about which Judy Darcy is unabashedly clear. MIss Darcy appreciates the power that the Canadian Union of Public Employees has been given with its widespread membership, the monopoly supply of many public services and therefore the union's ability to bring to a grinding halt many of the services that Canadians take for granted.

Of course, with aggressive, and one might even say entrepreneurial, spokespeople like Judy Darcy arguing in favour of enhanced government spending and nobody with any real incentive arguing against it, it is not difficult to understand why deficits are proving to be one of the most difficult aspects of public policy with which to deal.

Iraq receives more positive attention from CBC than from CTV or U.S. TV

Lydia Miljan, Director National Media Archive

THE NATIONAL MEDIA Archive has released its final report on the television coverage of the Gulf War. The Archive found a total of 101 statements praising Saddam Hussein on CBC, compared to only 16 such statements on all the U.S. networks and 18 such statements on CTV.

Both U.S. and Canadian television networks mentioned that Saddam Hussein had supporters in the Jordanian and Palestinian populations, but none made the case as often as CBC.

These results provoke questions about how journalists should report war-time news. Did CTV and the U.S. networks unconditionally accept the UN coalition position and produce their stories accordingly, or was the CBC so concerned that it provide balanced coverage that it presented Saddam Hussein's position in too positive a light?

CBC describes Iraqi defeats as gains, American victories as losses

While many CBC statements evaluating Saddam Hussein positively were demonstrations of his allies' support, a disturbing trend emerged in CBC's analysis of the war. Specifically, losses on the Iraqi side were seen as victories while victories for the Allies were seen as politically tentative.

On the 3 February, "National," Terry Milewski presented this argument: "For Americans, the daily toll of war-even when it's going well-is provoking renewed debate on the home front about the aims of war and about how long it has to last...There is also increasing concern that every day he survives, the Iraqi leader is becoming more of a hero in the Arab world-turning military defeat into political victory."

On CBC, analysts describe George Bush as obsessional

CBC, CTV and the U.S. networks provided less attention to George Bush than to the Iraqi leader.

The majority of attention towards George Bush was negative on Canadian television. Eighty-four percent of CBC's evaluations of Bush were unfavourable. On CTV, negative statements comprised 67 percent of his evaluations.

While many of the negative comments directed at Bush were from Iraqi sources portraying him as the "enemy of God," or the "friend of the devil," some Western analysts assessed Bush's involvement in the war on a personal level. On 1 March, CBC spoke with commentators who speculated on his personal motives. Elizabeth Drew, who was introduced as the "respected Washington reporter for the New Yorker magazine" made the following analysis: "There's been an enormous amount of speculation about what was going on in Bush's head during this entire time, and why was it an issue of principle. And I know Senators who would meet with him and see that he would be quite indignant about Kuwait, but also be a little bit troubled about what they saw and felt was an obsession, a personal obsession, with Saddam Hussein."

We are strong; they are weak

For all major North American networks, a consistent theme was that we are strong and they are weak. Coalition superiority was uniformly reported during the war. Canadian and American television reports about the U.S. military praised their capabilities. Many of these assessments praised the strengths of the American weapons.

They are the victims; we are the aggressors

All major North American networks depicted the Americans as the aggressors and Iraq as the victim. Given the overwhelming success of the Allied coalition, it does not come as too much of a surprise that the Americans were portrayed in such a light.

In both Canada and the United States, American actions received the most coverage. Twice as many unfavourable as favourable comments about U.S. policy were heard. The most damaging was the U.S. bombing of an alleged civilian shelter which the American government insisted was a military command control centre.

Stop me before I vote again

John S.P. Robson

ALL OVER THE WESTERN world people seem to be getting interested in ways of restraining government power. I'm not quite sure what took them so long, but evidently with the collapse of Communism it has become clear that big government is worse than useless. Before 1989 some assumed that Communism had some good features, that it protected the environment and provided a social safety net that was treasured by the East Europeans. But, as the London Economist recently put it, when the lid was lifted off the Communist stew "the pot was revealed to be scorched and empty." Now this new awareness is reflected in recent American initiatives to limit the number of terms representatives can serve, and in Canada by suggestions that we entrench private property rights and put limits on government spending right into our constitution.

Let us, since we are determined to have a written constitution and judge-made law, write ourselves a constitution that strictly limits the powers of government. Let us include a Bill of Rights without a "notwithstanding" clause. Let us entrench property rights. Let us strictly define the powers of the federal and provincial governments, and let us write explicitly that the federal government may not, as it has done here and south of the border, encroach on local powers by cranking taxes up and then offering rebates to provinces that follow federal guidelines. Let us write into our constitution an explicit cap on the percentage of GDP that the government may spend in peacetime.

The reason is quite straightforward. People are good judges of their own circumstances, but not those of other people. The more abstract and distant an issue is, the less likely voters are to understand it. Citizens who know very well whether they need a new stop-light, or better garbage collection, do not know if the gold standard is a man or a horse. People who run successful businesses write about trade in a way that is utterly incoherent. People with locks on their own doors rail against those who are unsympathetic toward criminals. People who manage their own finances well do not know whether the GDP is six billion dollars, six hundred billion dollars or sixty trillion dollars.

And the same thing is true of governments. Not only should we avoid trying to decide on large policy questions as voters, we should try to prevent our government from doing so. It makes sense to declare that government shall be as decentralized as possible, because people are the best judges of their own circumstances. Voting should be on issues that concern oneself, not "them" (whoever they may be). Let us by all means seek such Constitutional mechanisms as promote this end, but let us above all aspire as voters to elect governments modeled on the ideas of Calvin Coolidge, a man who once said that he was a good President because he slept 11 hours a day and while he was asleep he didn't initiate anything. If we vote for people like that, we can indeed return to the days when, as Coolidge also declared approvingly, if the federal government ceased to exist it would take months for people to notice. Those were the days.

Hurray for Brian Mulroney!

Michael Walker

PRIME MINISTER BRIAN Mulroney deserves a ringing endorsement for his recent leadership on the issue of foreign aid and civil rights in the countries receiving that aid. Mr. Mulroney has indicated that Canada will increasingly decide the allocation of its 2 billion dollar annual aid budget on the basis of the recipient country's record on rights and freedoms. While he was not able to get a strong endorsement from other leaders at the Commonwealth Conference where he enunciated the policy, clearly there will be a shift on the part of the donor countries in this direction.

Mr. Mulroney's actions parallel an activity in which The Fraser Institute has been engaged since 1985, namely, attempting to construct empirical measurements of the extent of civil, political and economic freedoms. It is also matched by a movement led by Senator Connie Mack in the United States Senate to have a measurement of economic rights attached to the awarding of the aid by the U.S. agency AID. The idea-such a sensible one that it's a wonder that nobody thought of it before 1985-is that there may be a connection between the extent to which a country can achieve economic development and the rights and freedoms that it accords to its own citizens.

The Fraser Institute program that researches the measurements of economic freedom has not yet produced a definitive set of indicators to determine when a country is or is not economically free. But the indicators that are available certainly indicate that there is a connection between the extent to which a country offers its citizens some economic freedom and the extent to which that country is successful economically.

The interesting thing about economic and civil rights is that it costs a country nothing to provide them. It costs nothing for a developing country to grant its citizens freedom of speech, freedom from incarceration without due process, freedom from having their property seized without due process or just compensation. Because these rights to freedom from interference by the state cost nothing, there is no good reason for people like Zimbabwean leader Robert Mugabe to object when a well- meaning person like Prime Minister Mulroney indicates his intention to cut off aid unless civil rights are respected. It is not the case, as Mugabe implied, that the economic conditions in his country are very different from those in the first world, making the granting of certain rights impossible.

From a pragmatic point of view, it makes no sense for Canada to provide 900 million dollars in aid to African countries if those countries insist on pursuing domestic policies which stifle the very growth which the international aid aims to produce. Certainly Brian Mulroney deserves an enormous vote of thanks to have the courage in the face of a rather hostile audience to raise this issue at the Commonwealth Meeting. Those who want more information on why the maintenance of rights is important for economic development can pursue this in two Fraser Institute books: Freedom, Democracy and Economic Welfare and, just published in 1991, Rating Economic Freedom: Toward a Theory of Measurement.

Worker investment plan poor use of resources

Filip Palda

LAST MONTH ONTARIO'S Treasurer, Floyd Laughren, announced the final details of a scheme to help workers invest in companies.

Individuals buying into union-sponsored venture capital corporations will receive 20 cents of tax credit for every dollar they invest, up to a maximum credit of $3500 a year, to be supplemented by an equal tax credit from the federal government. Non-union employees in failing companies will receive similar tax credits to invest in their employer's business. Mr. Laughren correctly argues that there is nothing inconsistent in using tax credits for workers to stimulate investment. Businesses receive such credits all the time. Unfortunately this argument ignores the fact that tax credits to businesses have made Canada a less competitive country, have stunted healthy investments, have served as a vehicle for ripoff artists, and have imposed a painful and unjustified burden on the taxpayer.

The tax credit is the latest product of the Ontario government's Dickensian obsession with the importance of heavy industry and its belief in the superior virtue of unions. Part of its plan for a healthy economy is to persuade investors to put their money in failing enterprises such as deHavilland Aerospace and the Urban Transport- ation Development Commission. The prosperity of Ontario does not rest on this narrow base. Most of Ontario's workforce is white collar and most Ontarians are training for white collar jobs. Under pressure from international competition, the province is moving away from heavy industry and manufacturing towards the supply of services. The tax credit will siphon funds away from healthy industries and put them in failing ones.

The other part of the plan is to stimulate investment by bribing union members to buy stock in a venture capital fund. Such a fund may promote risky investments because the tax credit insulates workers from the failure of an enterprise.

The tax credit may also increase the price of certain stocks, thereby helping shareholders of companies in which the venture capital fund invests. In this light, the worker tax credit looks more like a device to promote the transfer of wealth than a device to promote its creation.

There is no sound economic reason for giving money to unionized workers to spend on capital ventures. Why not give to the elderly, or to the Native Peoples, or to members of the YMCA for this purpose?

Nor is there evidence that Ontario needs more investment. Investment for its own sake is not necessarily good. For 50 years the Soviet Union upheld a proud record of investment by diverting resources from people's consumption to heavy industry. The failure of this policy is now evident. If the Ontario government wishes to help unions it should do so honestly, by giving them direct subsidies, not by the costly, hidden method of tax credits.

December questions and answers

Isabella Horry

Q: What impact would separation have on Quebec's economy?

A: Patrick Grady, in his book The Economic Consequences of Quebec Sovereignty, estimates that the loss of output to Quebec could be as high as 10 percent in the short run. If Quebec were to separate right now, it could experience a loss of as much as $15 million in 1992. This figure is based on the Conference Board of Canada's forecast of Quebec's GDP in 1992 of $150.7 million.

Q: How has the Unemployment Insurance program changed over the years?

A: The financial parameters of the U.I. program for selected years between 1975 and 1991 are:

QUESTION1.GIF (6144 bytes)


As of January 1992, the maximum weekly insurable earnings will go up to $710 and the premium rate per insurable $100 for employees will rise to $3.00 from $2.80 and for employers to $4.20 from $3.92.

Q: How does provincial government debt per capita vary across the country?

A: Provincial government debt per capita varies from $977 per person in the Territories to $10,133 in Newfoundland, with an average debt per capita in Canada of $7,434. Since provinces assume different types of debt at different levels of the public sector, both direct provincial government debt and the debt of government enterprises and local governments guaranteed by the provincial government are viewed in interprovincial comparisons. Total direct and guaranteed debt per capita as of December 1989 are from lowest to highest:


QUESTION2.GIF (2048 bytes)

Property rights: a brief summary [Reprinted from a pamphlet distributed by The Fraser Institute at M.P. Garth Turner's conference in Ottawa on property rights on October 28, 1991.]

John S.P. Robson

What property rights are

The right not to have your possessions arbitrarily taken away.

The right not to have the use of your property, including your labour, unreasonably restricted because you own yourself and your own creative effort.

Why property rights are good

They make a society richer because they are a spur to creative effort to improve one's circumstances. The historical record shows unambiguously that societies in which they are protected flourish and those in which they are not stagnate. Being poor in Canada is nothing compared to being poor in Poland, either in terms of its relative probability or of its negative consequences.

They protect the freedom of individuals because they allow people to make their own decisions about how to make the best use of their existing possessions including their labour, and in the long run the right to make one's own decisions about one's life and work is the foundation of human dignity.

They protect the environment because the problem of pollution is not that people pollute their own surroundings but that they pollute other people's (including their air and water). Without property rights a distant government rather than the afflicted individual makes a judgement about how much pollution should be allowed. The government must weigh the political benefits of allowing such pollution against the political costs, while the individual must weigh the benefit to themselves of a particular source of pollution continuing to pollute against the cost to their health. The calculations are different, and the latter favour the individual while the former favour the polluter.

Why property rights should be In our constitution

They are an important right and if others are entrenched and property rights are not they will be relegated to subordinate status in a way that will harm both individual Canadians and Canadian society as a whole.

Objections

Most objections to property rights are spurious property rights do not allow but prevent pollution and exploitation. Specifically, since these questions have been raised, it should be stated that property rights would not invalidate zoning laws, native land claims, pollution control measures, a spouse's right to property in the dissolution of a marriage, etc. Theoretically this is clear, and the record of other countries, most notably the United States, also shows that entrenching property rights does not interfere with such laws.

Some people have objected that entrenching property rights would foreclose political debate. This is not true because of the "free and democratic" clause to which the entire Bill of Rights is subject. Quite apart from the points made above, society would be free to pass measures that infringed property rights if those measures befitted a free and democratic society. However, entrenchment would tend to compel the equal weighting of property and other rights.

Conclusion

Property rights are an important component of human freedom.

The Canadian Charter of Rights and Freedoms should be amended by inserting the following clause:

8. Everyone has the right to ownership and enjoyment of property, and shall not be deprived thereof except by due process and with just compensation.

A cheer for the Bank of Canada

Michael Walker

THE BANK OF CANADA, which I have long admired for its persistent attack on inflation, has again done itself proud. This time the Bank has led the pack in Ottawa by beginning the process of contracting out the cleaning of its buildings in nine cities across Canada. At the moment, the Bank employs 146 janitors across the country. It has calculated that, by contracting out its cleaning services, it will save $1.5 million a year. The Bank has also cut costs by eliminating 120 other staff positions and initiating a $2 a head user fee for the national currency museum.

The amazing thing about contracting out the janitorial services is that roughly 33 percent saving is involved. Currently, the Bank spends $4.5 million to clean its buildings; the $1.5 million saving is therefore a 33 percent cost reduction. Obviously, similar considerable savings would be available to the federal government if it took the same attitude as the Bank of Canada.

This 33 percent saving is not unusual for services which are contracted out. A careful study of garbage collection in Canada by Professor James McDavid of the University of Victoria (summarized in the Fraser Institute book, Privatization: Tactics and Techniques) demonstrated why. McDavid's study showed that the productivity increase which occurs in the presence of competition generates not only significant savings, but also profits for the entrepreneurs who provide the service, and the wage levels demanded by unionized employees. In the case of garbage, contracted out services average 1.24 tons of garbage per crew person, per hour, as opposed to .64 tons in the public sector.

It is to be hoped that the federal government will quickly follow the Bank's lead and cut its level of costs.

Once again, a bouquet for the Bank of Canada and its cost-cutting activities.

Seeing the invisible

Vaclav Klaus, Minister of Finance, Czechoslovakia

I KNOW THAT THE CHOSEN title offers an opportunity for those who seek to attack me and criticize our present economic and social developments. In spite of this criticism, I want to use these words for the title of this article because they were the exact words used by a woman (a nurse by occupation) in a letter to me. She expressed exactly what I have been feeling: "Walking through Prague, I am witnessing a unique phenomenon. I see the invisible. I see the invisible hand of the market at work and its visible and encouraging results."

It would be helpful if the notorious pessimists and defeatists who see everything only through the darkest of lenses would begin walking with this woman through the Prague streets with their eyes finally open. They perceive the world in this negative way not because the reality is so bad, but because they are angry at not being able to satisfy political ambitions that were inspired in them by the previous regime.

Some of these people have reached into an arsenal of modern economics in an attempt to confuse the relatively inexperienced public. Economics is a very complicated science, and at the end of the 20th century it is as complicated as physics or biology. The public is therefore presented with an oversimplification of fine scientific nuances. A classic example is the recent bestseller by Robert Kuttner, The End of Laissez-Faire. This book attempts to convince the reader that faith in the advantages of the free market is a matter of the past, is founded on outdated science, and that modern economics has long been in favour of active state intervention.

Economists have spent more time analyzing the advantages and limitations of the market than anybody else, and they use this knowledge to make the market more efficient. It is not true that they do not point out the defects of the free market. The difference between real economists and authors like Kuttner is not in the depth of understanding the individual problems of the market as a universal economic system, but in the kind of practical solutions and political programs they propose. Kuttner wants to treat all market problems by state intervention. On the other hand, modern economists believe that the defects of the market do not necessarily provide any justification for economic intervention by the state.

Kuttner's book swept America and review followed review. The politicians on the left memorize passages for the next campaign while the ones on the right memorize arguments from disagreeing reviews. But top economists, real creators of today's revolution in economic analysis in the direction of non-traditional thinking, do not write books about the end of laissez-faire. Fortunately, in Czechoslovakia laissez-faire is not dead, but is only now being incorporated into the foundations of our society. We should make sure that nothing else gets mixed in.

Mass transit in the U.S.: lessons for Canada

Walter Block

PRIVATIZATION OF MASS transit may be a dirty word in some Canadian transportation and planning circles, but dozens of cities in the U.S. have expanded services, and lowered costs, by contracting out part of their bus, trolley and subway lines to private enterprise.

Consider the following examples: almost 20% of the San Diego public transit system has been delegated to private management, through open bidding. In the decade 1979-1989, this southern California city has saved over 40% in total costs-more than $75 million. The competitive environment engendered by this experiment in privatization has even lead toa 10% reduction in public spending on the part of the public authorities. City and county officials in Los Angeles auctioned off the rights to manage several moribund Southern California Rapid Transit routes. According to Price Waterhouse, this changeover resulted in savings of 41%, with improvements in safety and reliability of service. Houston, Texas, contracted out its park and ride service, and is saving more than 30%, compared to previous costs racked up by the civil service. St. Louis, Missouri, posted approximately 50% in savings by contracting out its suburban bus routes. When Fort Wayne, Indiana, arranged with private firms to manage part of its mass transit system, the resultant savings allowed it to expand service by 60%, and to increase ridership by 40% in three years.

In addition to the U.S., the Conservatives in the U.K. and the Labour Party in New Zealand have undertaken similar initiatives, with similar results. In none of these cases were government employees fired outright. Rather, private concerns supplanted the state as natural employee attrition made room for them, or provision was made to transfer the ex-bureaucrats to the private sector. The municipal authorities still retained overall authority for the transit facilities, controlling the choice of service, the schedules, fare levels, etc.

Even so, the improvement has been remarkable wherever it has been tried. Is there a lesson in all of this for Canada?

And late word on this issue comes from New York City. There, entrepreneurs are not waiting for politicians to contract out bus services. Instead, in a sort of do-it-yourself policy, people-mainly from the Caribbean Islands where such activities are well entrenched-are putting their own mini vans into instant use as jitney-buses. They charge $1.00 instead of the $1.15 extracted by the statist service, and are heavily out-competing them.

The lesson from the Big Apple seems to be that private enterprise is "gonna getcha," one way or another.

Finalists chosen in Prize for Economy in Government

A PANEL OF DISTINGUISHED judges with experience in government, the private sector, and academia reviewed the entries for "The Fraser Institute Prize for Economy in Government" and have selected 28 finalists. Originally, prize co-ordinator John Robson expected that about 15 finalists would be chosen from about 300 entries, but the Institute received almost 800 entries, and many were of such high quality that the judges asked 28 people to prepare full-scale plans. The ideas were chosen because they present the most promising combination of saving potential and feasibility. In fact, the ideas generated from this contest, if implemented, would make an excellent response to the Auditor-General's recent report.

The number and quality of entries reflect the Canadians' concern about their country, and their willingness and ability to deal with its problems. When the finalists have refined their proposals, the judges will choose the winners of the First Prize of $25,000, Second Prize of $10,000, and Third Prize of $5,000.

Some 773 submissions were received: over 200 from BC, 100 from Alberta, 20 from the Prairies, 250 from Ontario, 125 from Quebec, 20 from the Maritimes and five from the Territories. They came from professors, accountants, big business people, small business people, homemakers, civil servants, members of the Armed Forces, farmers, manual workers, retired folks, and from many other occupations and ways of life. All the entrants deserve to be congratulated. Many ideas merit serious attention although not all of them could be selected as finalists.

The finalists are: Dr. John Chant of Burnaby, B.C., who suggested a new way to sell government bonds; Dr. Dan Usher of Vancouver, B.C., for his proposal on equalization payments; and Dr. Jonathan R. Kesselman of Vancouver, B.C., who suggested selling government bonds in different currencies. Rob Farrow of Victoria, B.C., was also a finalist for proposing a restructuring of Research and Development, as was J.B. Reesor of Kelowna, B.C., who felt it would be beneficial to establish a Government Ideas Council. Jack W. Bonney of Vancouver, B.C., thought of reforming government policy and procedure manuals, and Brian Brown of Penticton, B.C., suggested effective bureaucratic decentralization.

Other finalists were Ron Churchill of Burnaby, B.C., who proposed user fees for customs; K.L. Grandia of Calgary, Alberta, for a suggestion to privatize air navigational aids inspections; Grant Tolley of Beaumont, Alberta, with his proposal to reform the government budgetary process; and Gerry Fewster of Calgary, Alberta, for his proposal to reform the delivery of mental and social health services.

Suggestions from R. Hay of Winnipeg, Manitoba, who proposed converting government information to electronic form, and from Sam Albert of Nepean, Ontario, who submitted a series of suggestions, and from G.G. Blackburn of Ottawa, Ontario, who suggested reforming the civil service hiring process, made them finalists. Also Bruce Anderson of Almonte, Ontario, who offered proposals regarding the minting of coins; Harvey Dust of London, Ontario, who suggested ways of restructuring Via Rail; Douglas Roberts of Ottawa, Ontario, who proposed restructuring the prison system; B. Clark from the Ottawa area, Ontario, with a suggestion for restructuring the coast guard inspection system; Marjory Loveys of Ottawa, Ontario, who thought of ideas for encouraging cost savings within the civil service; W.P. Baird of Waterloo, Ontario, for a proposal to restructure government employee relocation; Joe McLinden of Peterborough, Ontario, with ways of reforming the social service system; J. Douglas McCullough of Toronto, Ontario, who suggested reforming the health care payments system; and David Rodgers of Ottawa, Ontario, with a series of suggestions, all became finalists.

So did M.P. Dennis Mills of Toronto, Ontario, who proposed a single tax system; Alan W. Blyth of Stittsville, Ontario, who wants to eliminate waste in our embassies; Stewart Drury of Dartmouth, Nova Scotia, who suggested reforming the health care payments system; Mike Jessome of Windsor Jct., Nova Scotia, who has a proposal for eliminating waste in military warehousing; and William R. Ranger of Kanata, Ontario, who has an idea to restructure government information management.

The finalists will complete their detailed proposals by January 31, 1992.

December graph

Isabella Horry

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