FEATURE ARTICLE:
Policy and Prospects

summary of remarks by
John Crow
Fred Gorbet
Jerry Jordan

Editor's notes

ON MAY 25, THE FIRST story on CBC's "National" news was about Alberta's high-tech cellular telephone company Novatel. The Alberta government has sold the ailing company, leaving taxpayers in that province to absorb the loss of more than half a billion dollars. And Novatel is just the latest in a series of high technology investments made by the government of Alberta that have soured. Alberta Liberal leader Laurence Decore said to CBC's Kevin Tibbles, "You can't give monies to Novatels, or AGTs or Tellus. Stay out of the marketplace. The business community will do fine just by itself."

Laurence Decore has arrived at a conclusion which The Fraser Institute has been espousing for years. In fact, in this issue of Fraser Forum, Senior Economist Filip Palda explains the overoptimism of a recent Science Council of British Columbia report that advises government to spend more money on high technology. The Novatel case graphically illustrates why Palda is so concerned.

This issue also contains a summary of the talks which Bank of Canada Governor John Crow, Deputy Finance Minister Fred Gorbet and Federal Reserve Bank of Cleveland President Jerry Jordan gave to The Fraser Institute Benefactors Summit on May 1 to 3 in Cambridge, Ontario. "Policy and Prospects" provides readers with an insight into various aspects of fiscal and monetary policy in Canada and North America.

We've also included articles by our regular contributors: Walter Block, Michael Walker, Isabella Horry (do you know what tariffs Mexican imports to Canada face? "June questions and answers" will tell you), John Robson and Walter Williams.

And if you're needing a reason to celebrate (or scream in frustration), Tax Freedom Day is approaching--finally! Look for all the details in the July issue.

Introducing John Crow, Fred Gorbet and Jerry Jordan

JOHN CROW has been governor of the Bank of Canada since February 1, 1987, and before that he was senior deputy governor (since March 1, 1984) and a member of the board of directors of the executive committee since he assumed the senior deputy governor position. He attended Oxford University, then served 2 years in the Royal Air Force, qualifying as a Russian interpreter. He joined the Research Department of the Bank of Canada in 1973, as Deputy Chief, and was appointed Chief in 1974. He was appointed an advisor to the Governor of the Bank in 1979 and Deputy Governor in May, 1981, before which he served the IMF as chief of the North American division.

Trained at the University of Toronto (B.A.) and Duke (Ph.D in Economics), FRED GORBET worked at the Bank of Canada from 1968-73. He then moved to EMR, and then to the Privy Council Office. He also served with the OECD's International Energy Agency in Paris. In July 1982, Fred Gorbet became Assistant Deputy Minister of Finance for Fiscal Policy and Economic Analysis. He rose to the position of Associate Deputy Minister of Finance in September 1985 before returning to the Privy Council Office in June 1987. On May 1, 1988, he was appointed Deputy Minister of Finance.

JERRY JORDAN was appointed president of the Federal Reserve Bank of Cleveland on March 10th of this year, by virtue of which he is also a voting member of the Federal Reserve Open Market Committee. Dr. Jordan has had an academic as well as a private sector career, serving most recently as Senior VP and Chief Economist of the First Interstate Bancorp in Los Angeles, and before that as Dean of the R.O. Anderson School of Management at the University of New Mexico. His major contribution to the conduct of monetary policy was his role in developing the "St. Louis Federal Reserve Bank model" relating movements in the various measures of the money supply to economic activity.

Policy and prospects

John Crow,

Governor, Bank of Canada

Fred Gorbet,

Deputy Minister of Finance

Dr. Jerry Jordan

Cleveland FRB Chairman

Edited by John S.P. Robson

AT THE FRASER INSTITUTE Benefactors' Summit in Cambridge, Ontario, we were privileged to hear the views of three of the most important non-elected policy-makers in North America on the subject of fiscal and monetary policy. We include a summary of their comments. For reasons of space, the question and answer section has been omitted.

John Crow reviews Bank of Canada policy

Governor Crow spoke about the policy being followed by the Bank of Canada, the underlying theory, and the expected result. He underlined that monetary policy neither should, nor can it, be all things to all people. "Monetary policy, as far as we are concerned at the Bank, is about providing confidence in Canada's money. And to provide confidence in that money we have to preserve its value, which means limiting the pace of expansion of its supply." The only way the Bank can affect this, indeed the only thing it can do, is to control the pace at which it expands its balance sheet. This pace should be such as to maintain the value of the currency.

That is not because the Bank of Canada does not value such goals as high employment or growth, but because in its view the contribution monetary policy can make to prosperity in a monetary economy comes through confidence in money. Maintaining the value of the currency, he argued, "is not an end in itself, it is a means to an end. We all want an economy with high employment, rising living standards, and I would argue that at the most basic level the market policy that provides confidence in money to its citizens, in what is after all a monetary economy, is doing fundamentally the best thing it can to promote a strong economy."

"There are no magic solutions, it's all hard work, it all takes time." Crow went on to say "We reject, for example, the view that our policy is a high interest rate policy. It's a low interest rate policy when seen over the right time horizon and in the proper perspective. And we are beginning to show how and why it's a low interest rate policy." Inflationary expectations are lowering, wage settlements are moderating "which is crucial," and there is even a cooling off on the public sector side.

Sound policies to continue

On more theoretical grounds, he explained why a monetary policy that sought to manipulate markets would not succeed, using several recent controversies to illustrate why. In general terms, Governor Crow argued that it was crucial for the economy that there be a clear transmission of the message that the Bank would not finance inflation. This, by boosting confidence, made a sustained, healthy period of recovery and growth more likely. Sound money had laid the foundation for growth by reducing interest rates and by creating confidence that sound policies would be continue to be followed.

As was learned painfully in the 1960s and 1970s, inflationary expectations are very damaging to an economy, and the Bank's achievement in reducing those was therefore a major contribution to prosperity. He indicated that the federal government's attacks on the deficit were also sending a persuasive message that policy was going to create a suitable framework for the economy.

He then pointed to three particular areas of recent concern: an upward twitch in interest rates in February-March 1992; whether interest rates are really low; and the question of the exchange rate.

Interest rate rise in early 1992

In February-March, why did the Bank raise interest rates when the economy was still weak? "The problem is, that's the wrong question. The right question is this: people were demonstrating that they didn't want to hold Canadian dollar assets to the same degree that they did. They were losing their appetite for our currency, and what was the Bank of Canada going to do about that?" With this loss of appetite, short-term rates were rising, long-term rates were rising (and the long-rate spread over US long rates was rising) and the exchange rate was falling. Conventional wisdom, expressed in the popular press, was that the right response is to print Canadian money faster. But this is clearly the wrong response to increasing doubts among holders of assets in Canadian dollars. In fact, the Bank was trying to manage liquidity so as not to discourage people from holding such assets, without creating fear that it would finance a flight from the Canadian dollar. For this it was necessary to hold to a steady policy, even if market interest rates backed up for a while. "In any event, interest rates went up... and interest rates came down." On the short end they came back down all the way. "We can get interest rates down over time, but we can only do so on the basis of a reasonably clear understanding among the people who buy the Canadian dollar liabilities in which interest rates are expressed that they know what we are doing." So it is necessary to send a clear message to savers and investors that the Bank is trying to provide confidence in Canadian money by limiting its supply and by preserving its value.

Are interest rates high?

He then turned to the question: Are interest rates high? They are at the lowest rate in 20 years in nominal terms, but, say critics, in real terms they are high. However, the Governor pointed out, long term rates have inflationary expectations built into them. So what is important for low long-term rates is confidence that inflation will stay down for a long time, particularly if there is uncertainty in other areas outside monetary policy.

Even at the short end, he pointed out, the Bank cannot shift rates around at will. For example, the federal government must refinance a $150 billion debt in Treasury bills "which no one has to hold" and therefore they must be competitively priced. Buyers choose these bills because they have a yield that is competitive with other assets, and their judgement of the credibility of the Bank of Canada's stand leads them to treat the nominal yield as composed of less or more inflation protection as they find that stand more or less credible. And the Bank must in its dealings with the esoteric category of "one-day money" behave in such a way that people will choose to hold T-Bills. Reining in inflation and getting interest rates down is like fishing, he noted, in that while you have to pull the fish in, you must not pull so hard that the line snaps. In monetary terms, you need to build up confidence through steady actions.

Where the exchange rate fits in

Governor Crow then turned to the exchange rate. He said that the Bank treats the exchange rate as "a very important variable" given the task of stabilizing the internal value of the Canadian dollar, but not as a target. Indeed, it is impossible to target internal purchasing power and the exchange rate. "That doesn't mean that we don't care about the exchange rate." Many things matter, including exchange rates, wage rates, consumer spending, consumer confidence, balance of payments, investment intentions. The exchange rate clearly does matter, it is very important. But the point is that the Bank has to pay attention to it within the framework of a commitment to stable domestic purchasing power.

Fundamentally the Governor seemed optimistic about the monetary policy and [non] inflationary outlook in Canada.

Deputy Minster Fred Gorbet on eliminating the deficit

Fred Gorbet spoke to us about the Government's program for reducing and ultimately eliminating the deficit, regarding which he, too, was fundamentally optimistic. His talk focused on two things: his perspective on the evolution of the federal fiscal position since 1984, and his own view of where things are now headed.

Evolution of the federal fiscal position

He began by laying out the important numbers, beginning with the caveat that the bottom line numbers conceal structural changes within overall spending that are important in understanding what has been achieved and in forecasting future developments. The period 1984-92 ought to be subdivided into 1984-85 through 1987-88 and 1988-89 on. In the first period the deficit fell from 8.7 percent of GDP in 1984-85 to 5.1 percent in 1987-88, during a period of relatively balanced, sustained growth. The deficit fell from about $38.5 billion to $28.2 billion over those years. The reduction was balanced between revenue growth (16 percent to 17.7 percent of GDP) and expenditure reduction (24.6 percent to 22.8 percent of GDP).

This resulted from policy actions that were, in retrospect, relatively modest compared to those in the later period. Expenditure reductions were achieved through a modified indexation formula for transfers to the provinces and some program restraint. But the bulk of spending restraint in the first period came from restraint in the operations of government. In 1987-88 the nominal cost of operating the government was lower than in 1984-85. The rate of increase in debt service charges was relatively modest in this period. Program spending fell from 19.6 to 17.5 percent of GDP. Interest charges increased only marginally --from about 5 percent to 5.3 percent of GDP.

Recovery increases revenue 1984-88

On the revenue side the major change was the increase in revenue because of the recovery, plus modified indexation of the income tax system, sales tax increases, and the introduction of personal income tax surtaxes. Comprehensive income tax reform also took place during this period and this made the underlying income tax structure more robust. In retrospect, a relatively large deficit reduction was achieved without significant changes in transfers to persons or provincial governments.

What was significant about the first period, however, is that even though growth helped to bring the deficit down, the government did take actions sufficient to restore the "primary" or "operating" balance (government spending net of interest charges) to a surplus position in this period. This had not happened once since 1975. In 1984-85 the primary balance was $16 billion in deficit. By 1987-88 there was a surplus of some $800 million.

Deficit continues to fall 1987-88

The period from 1987-88 through 1990-91 and on, in terms of the bottom line, appeared to be "one of treading water, of progress interrupted," as it saw the deficit increase steadily from $28.2 to $30.6 billion by 1990-91. Under the surface, however, things were quite different. The Canadian economy was "overheating" because of a boom in Ontario and a highly expansive provincial fiscal policy during that boom. This in turn forced the Bank of Canada to tighten up and raise interest rates, and that in turn pushed up debt service charges. Yet the deficit fell from 5.1 to 4.6 percent of GDP from 1987-88 to 1990-91. This was entirely due to expenditure, as revenue held steady around 17.75 percent of GDP while spending dropped from 22.8 to 22.3 percent. But now program spending fell by 1.5 percent of GDP, from 17.5 to 16 percent (the same level as in the late 1960s), while interest charges increased by 1 percent of GDP, not least because the federal debt is very short term--some 60 percent requiring refinancing or repricing within a 12 month period.

Expenditure restraint moves to programs

In 1990 and 1991 the federal government moved in a sustained and significant way to consolidate the underlying structural gains of the first four years by extending expenditure restraint to programs. In 1990, in response to the impact of higher interest rates and slower economic growth on the deficit, the government introduced the Expenditure Control Program, which totally exempted only three government programs--Old Age Pensions, Unemployment Insurance and Equalization. Everything else was frozen, reduced or limited to a 3 or 5 percent increase. In February of 1991, in mid-recession, the government further strengthened this expenditure restraint program. The intent was to keep the deficit constant in nominal terms by making program changes that would offset higher debt service charges. This would gradually reduce the deficit as a share of GDP and position the government for further progress as inflation and interest rates came down.

Deficit to fall in future

1991-92 was a year of transition from overheating through recession to, one hopes, sustainable growth with low inflation. Fiscally the deficit didn't move much at all as a share of GDP, with program spending and revenue rising as a percent of GDP because the economy shrank. The primary balance had grown from 1987-88's small positive figure to around $12 billion by 1990-91, but in 1991-92 it fell a bit, to $10 billion. And the increase in the primary balance, the change in the structure of programs, the increase in the revenue yield and the transformation of the tax system, both through income tax reform and the GST, to produce a "more robust, more stable" tax system, "really augers very well for where the federal deficit will evolve to over the next five years." The operating or primary balance--given the current fiscal plan which shows program spending increasing 3 percent per year on average over the next five years, with most spending such as transfers now capped legislatively--will grow from around $10 billion to more than $30 billion by mid-decade. Interest payments on the public debt, which in 1984 were $22 billion, had risen to around $29 billion by 1987, and from 1987 to 1990-91 rose to $42 billion. Last year they fell, and will fall again as interest rates decline, so even with 4 percent real interest rates over the medium term they should remain approximately constant at $40-42 billion. These two factors operating together will bring the deficit down "quite smartly" as economic growth resumes. If economic growth resumes at about 4-4.5 percent per year from 1993-96, if nominal interest rates are around 6-7 percent, and if the political will remains over the next four to five years to keep expenditure growth down to around 3 percent, the deficit will fall to less than 1 percent of GDNP ($10 billion) by mid-decade. These are all "big ifs."

In terms of the economic outlook, things do not look quite as good as when the last budget came down, but once the economy turns around growth should be strong and that is what underlies the specific projections. The two toughest questions are consumer confidence and national unity/Constitutional issues and their impact on investment, especially in Quebec.

As far as the prospect for continuing low inflation and interest rates, Mr. Gorbet deferred to John Crow's presentation, adding only that it was crucial to convince people that the federal government was successfully managing its fiscal position, absent which inflationary expectations would be high.

The toughest issue of all is political will. Can one confidently predict that there will be strong determination to control spending over the next five years? The Spending Control Act, if passed, ought to help in this regard. Of course any government can change any act of Parliament, but not without a debate that would damage the credibility of any government undertaking to repeal the controls.

Reviewing the past eight years

Looking at the past eight years, Deputy Minister Gorbet adduced one more factor suggesting that the underlying situation is much better now than it was in 1984. That is the performance of the fiscal position in the past recession as opposed to 1981-82. Financial requirements (a better measure than the deficit, which is affected by accounting changes) in this recession went up from 3.2 percent of GDP in 1989-90 to 4 percent last year, and the expectation is that they will fall to under 3 percent in 1992-93. In 1981-82 they went from 2.6 percent to 6.4 percent in 1982-83, and kept rising through 1984-85 to 6.7 percent before they began to fall. This is because the primary balance was fundamentally different then than now.

In the past eight years, the federal government's situation has improved considerably but the provincial situations have deteriorated quite rapidly. Total public sector fiscal position is not improving but worsening. Two years ago total federal and provincial deficits totalled around $40 billion, while last year and this they are around $50 billion. Ontario in particular appears to be facing the kind of dynamics now that the federal government faced in 1981-82. Its underlying program situation is in deficit and is not getting any better. "And the lesson we learned in 1981-82 is that when you get on that treadmill, you start to deteriorate very quickly, and the faster you move to restore the underlying structure the better you are in the long run." He expressed hope that something like that was happening in the just-released Ontario budget but had not had time for a detailed examination.

Gorbet noted that after every budget there is a general feeling that absolutely everything possible has been done to correct the fiscal situation. But the next year more always gets done. It is an interesting systemic question why it always feels as though nothing more could have been done in the current budget, but there always turns out to be more that can be done in the next year. He felt that part of the reason is the changing public mood about the importance of dealing with the deficit. Particularly after the 1989 budget and the introduction of the GST, public resistance to taxes increased, and the public has come to realize that a deficit today is a tax tomorrow. That has changed people's willingness to support tougher measures on the spending side to reduce deficits and control debt.

Should we impose fiscal responsibility?

Gorbet also addressed whether there is the need for more institutional arrangements like the Spending Control Act. Since 1957, there have been only two years in which Ottawa was in surplus. One was in the early 1960s and one in the late 1960s. Has it become systemically impossible for governments to run surpluses, particularly in a situation where deficits have become so common that merely balancing the budget is a major victory? Some provincial officials have told him that the demands on health and education and the municipalities are so intense that no government with a balanced budget could refuse spending requests. Certainly the experience in Ontario in the second half of the 1980s confirms this, since by any reasonable measure the government should have been running surpluses. Instead it received acclaim for balancing its budget, even though expenditures were growing 10.5 to 11 percent per year. So is there something systemic that makes it impossible to run surpluses, and if there is, should we think about mechanisms that make it easier for politicians to say no? "I think that if you can't build the constituency and the coalition and the public demand for responsible fiscal policy, then you can't impose it any other way. But I think that answer, which is often given and which I firmly believe, may be a little too easy and a little too glib, because there may be the need for something in the transition to help build that constituency that we don't have now. And after a number of years I became a convert to the concept of the Spending Control Act and I am a very zealous convert precisely because of those kinds of considerations."

Finally, if we are to manage fiscal policy responsibly in Canada then we must do a better job than we have in the past in coordinating federal-provincial policy. Unfortunately, concrete proposals to reform the federal and provincial budget-making process from Ottawa (released in a background paper on the economic union in September 1991) have become mixed up with Constitutional issues about the division of power when, in fact, they should be considered on a separate track. Once the Constitutional situation is sorted out it will be high on the Department's agenda to pursue those proposals.

Dr. Jerry Jordan on economic policy challenges

Dr. Jordan addressed the intellectual as well as policy crisis of the early 1980s, and argued that the real challenges were in most important respects the same as those twenty-five years ago, however much they may have been misunderstood in those days. Some truths of economics do not seem to have changed much over the centuries.

Inflation versus unemployment

The painful and difficult experience of the 1970s led to the obvious need to re-examine all macroeconomic policies, especially the "Phillips curve"--the concept of a tradeoff between inflation and unemployment. The coincidence of rising inflation and unemployment and the undermining of economic growth could not be ignored. Yet the belief persists that one can choose between inflation and unemployment, and that this is a choice the political system should make. Central bankers no longer believe this but have been unable to communicate their new understanding that it is not possible to pursue "stimulative policies" for a while, then switch back once unemployment has ceased to be a problem, and inflation is becoming one.

Dr. Jordan quoted British economist Peter Jay who, more than fifteen years ago, likened this alternating policy to a teeter-totter with inflation on one end and unemployment on the other, with the two ends going up and down while no one noticed that the fulcrum on which the whole contraption rests was steadily rising. Empirically it is now clear that demand-management policies designed to exploit the Phillips curve create the worst of both worlds. Worldwide, the countries with the lowest inflation have the highest real growth and vice versa. Nevertheless, elected government leaders and the press persist in the belief that the tradeoff exists and can and should be exploited.

People need to be reassured

Despite the failure of demand management, people still respond to economic problems by attempting to identify actions by government that will cause prosperity. "Even people who profess to believe in capitalism and a market economy do not believe that the economy naturally tends to expand in the absence of government pump-priming activities, and that misconception persists today." Only market systems that use prices as signals have an inherent tendency to expand.

These are the ideas of Hayek, William Hutt, and more recently, Milton Friedman, but they "seem to have been lost on an awful lot of people," complicating the task of Eastern Europeans and Latin Americans as they attempt to rebuild their economies. Keynes thought the economy would naturally stagnate at less than full employment, absent some government action--increasing spending, reducing taxes, increasing the money supply, increasing credit availability, lowering the price of credit, lowering reserve requirements, cutting the discount rate--all the tools that are in the textbooks on how government expands the economy, "almost all of which are wrong. If you look at any economic forecasting model from any of the forecasting services, they will always show you that the impact of stimulative government actions on the near term, the next few quarters, is reversed in the subsequent several quarters." This is because any stimulative action they see in the near term will, according to the models, gradually dissipate unless the government undertakes further stimulative actions--what Dr. Jordan labelled the "Junkie theory of economics." The fix wears off, and you need another one.

Alternatives to budget deficits

But such thinking now confronts the reality of huge budget deficits that have failed to produce high output and that now box in politicians who want to "do something to get the economy going again." Obviously this approach can not be expected to work. Nor can national leaders believe that cutting government spending and raising taxes will help, because the short-term impact of these actions will be to depress economic activity, erode the tax base, and make the deficit bigger. The French under the early Mitterand called this the "low-growth trap" and used it as a rationale for nationalizing "everything in sight... which didn't work either." But the trap is still with us today. Fiscal policy has become inoperative. One alternative is markets; perhaps another is monetary stimulation.

"By the early '80s we also learned that nominal instruments (e.g. monetary policy) cannot influence real variables over time." Monetary policy cannot create jobs, output or capital investment, and it would be a mistake to try to use it to influence these variables in the short run. Dr. Jordan noted that Milton Friedman made this point in his 1967 Presidential Address to the American Economic Association, but in fact it was first laid out by central banker Henry Thorton in 1802. "And yet we are still having trouble getting people to understand that you cannot increase and decrease the money supply in ways that have a lasting effect on real output."

Fiscal policy

Dr. Jordan turned to some more specific challenges facing policy-makers. First, with regard to fiscal policy, he said that the key is to adopt clear rules limiting the discretion of fiscal authorities. This does not require balanced budget or spending limitation provisions in a Constitution, but the rules must be clear and credible over time. They have to begin with an understanding that expenditures by government--or tax revenue changes--have little lasting beneficial effect on real output growth or employment. Fiscal policy can affect the allocation of resources over time--e.g. by discouraging savings and encouraging consumption, which is what usually happens regardless of ostensible goals.

Spending is the burden of government on the economy

Dr. Jordan also argued that government spending is the true measure of the burden of government on the economy, and that reducing tax rates will not reduce the burden created by government if it does not reduce the percent of GDP allocated to government [here the editor wishes to add that one must also take into account regulation in measuring the true burden of government]. You may shift the tax burden around, even intergenerationally, but you cannot thereby reduce it. Therefore, you must limit spending as a share of national income, either in relative or in growth rate terms. Government support programs, to assist in this, must be means-tested--in a time of excessive government burden it is ludicrous to transfer resources from one middle income group to another in ways that encourage consumption.

Taxation

With "a proposition about taxes: to tax something is to discourage it," Dr. Jordan pointed out that the tax systems of most industrial countries discourage working, saving, investment, entrepreneurship and invention as though it were "anti-social behaviour." A transition in thinking is now taking place toward a position that the initial incidence of taxes should be on income that is consumed, not on total earnings. Dr. Jordan also attempted to reinforce the point that corporations do not pay taxes but merely collect them from customers, share-holders and workers.

Monetary policy

Dr. Jordan recounted another basic proposition: "Deficit spending is not an alternative to explicit taxation. It's a method of deferring taxation, or trying to transform its nature, depending which monetary policy one follows." He noted that monetary policy is ultimately a fiscal instrument, a method of financing government spending. "In that sense inflation is merely a different way to tax people. It's a divisive, dishonest, regressive and very popular way to tax." There is a public choice problem with inflation, because the people with high rates of voting-- middle or upper income people, by and large--feel hedged against at least mild inflation, because they have real assets (homes) plus financial obligations at fixed rates. But low-income people--renters, those on fixed incomes, etc.--are not protected. And nations that have seen high inflation over time have seen the distribution of income become less equal. Some academics say high inflation helps the poor but empirically (and theoretically) this is most dubious.

Money versus credit

Yet another problem is the confusion over money and credit. There is nothing new in this issue. "It's natural that the public should confuse money and wealth," since for a member of the public to get more money does indeed mean they will be able to command a larger share of the nation's real wealth. But for a nation as a whole this does not work.

Foreign affairs also cause a problem in monetary policy, as Governor Crow also noted, when central bankers come under pressure to target exchange rates. "I am in favour of stable exchange rates; therefore I oppose any action designed to stabilize exchange rates. This often causes confusion." Sterilized interventions have no effect, while non-sterilized ones are a change in monetary policy, and this is not the right sort of reason for a policy change. Like Governor Crow, Dr. Jordan believes that one should pursue the right domestic monetary policy and let the foreign chips fall where they may. He also pointed out that in a world of manipulated exchange rates devaluation can become competitive.

In conclusion, Dr. Jordan argued that central banks and others should place their faith in the "magic of the marketplace" and refrain from engaging in artificial pro-growth type policies that aim to manipulate aggregate demand. "To do so, or to acknowledge that you are trying to do so, suggests you don't believe in capitalism. You really don't believe in the inherent resilience of market mechanisms if you even pretend that you have an influence and can cause growth to be faster than it otherwise would through your wise pushing and pulling on the levers of policy." The key point with regard to both fiscal and monetary policies is to limit the degree of discretion available to policy-makers in order to minimize uncertainty on the part of private economic agents about the environment they will face in the future. Rational expectations theory tells us that the only way to change the course of events even in the short run is to surprise people. "It's not easy to surprise people. After you do surprise them once or twice, it becomes increasingly difficult to continue to do so." And second-guessing the authorities is very difficult for business.

There is no tradeoff between inflation and unemployment, and we should be open and honest about that.

"And finally, to repeat, we have to consistently emphasize that it is false to think that an anti-inflation policy is anti-growth. Achieving price stability is a necessary condition for a high growth environment. There is no alternative."

Buccaneers need help too

Filip Palda

Introduction

AT A TIME WHEN INVESTORS the world over are fleeing from high-technology stocks, the Science Council of British Columbia has come out with a report that advises government to spend more money on high technology. The report wants the B.C. government to follow a formula which other governments have tried and found a failure. The Council held only one public hearing but "separate meetings were held with other interested groups." Unfortunately the conclusions the Council reached may help these "interested groups" carry out chancy ventures while taxpayers bear the risk.

High tech hypnosis

The Council argues that B.C. depends too much on its natural resources and that to develop a "high value-added economy" government must encourage "knowledge-based industrial growth." The report's central insights are that there is too little venture capital in B.C. for "Knowledge Based Companies" (KBCs) and that there are too few good managers. The solution is for government to give two year tax holidays to managers coming from outside B.C. to fill management vacancies in KBCs. Government should also use a state holding company to invest in what it believes are "high potential, high value-added firms" and the province should urge the federal government to provide the $500,000 capital gains exemption only to employees who are investors in or owners of KBCs.

Join ventures in folly

Potential is the key word in all these schemes, and an air of fantasy attaches to it. State holding companies usually end up giving aid to new industries that have been "overlooked" by the private sector, but their performance is often poor. The Alberta Heritage fund is a prominent example. In Europe "Aside from an inability to out-judge the private sector, a common reason for failure (found in Italy, the Netherlands, and probably the United Kingdom) was the side-tracking of these agencies into non-commercial objectives. These have included employment creation, regional development and `rescue operations' of failing enterprises" (Ford and Suyker, 1990).

The failure of SEMATECH

In the U.S., the SEMATECH consortium is the latest example of a government-business partnership that began with high hopes and has gone nowhere. The consortium is a public-private venture with an annual budget of $225 million, of which government contributes half. Major American computer chip makers convinced their government that the U.S. would lose world leadership in the computer industry if the memory chip sector did not get a boost. While the government was forking out millions of dollars to the consortium, small, unsubsidized U.S. entrepreneurs developed the market for specialized logic chips. This is now the most rapidly growing chip market and exists in spite of government's efforts to dictate the course of progress (Lindsey, 1992).

Lobbies behind the report

The Science Council assures us that government would only seek the highest return on its investment and would resist the temptation to invest where lobby groups tell it to. But by choosing to concentrate on knowledge based companies the government would restrict its choices to a small part of the Canadian economy. A further restriction would be that "a certain percentage" of the public funds would be dedicated to "B.C. Only" investments (Science Council of B.C., p. 47). This limits the government's opportunities for profit, but is a great boost to high-tech companies that the market has deemed too risky to bother investing in. The report's enthusiasm for high-tech ventures is perhaps not surprising. Three members of the nine person committee that drafted the report make their living from KBCs. And a venture capital company whose president sat on the committee did important background research for the report.

Taxpayers bear the risk

As with most reports that want government to invest, this one emphasizes average returns and gives little weight to the risks involved. The committee believes that if the province invested a $100 million "critical mass" of seed money in KBCs, it would get a 15 percent average annual return. In the private sector, pension fund managers and currency traders are not judged by their average return but by their risk adjusted rate of return. Why should a government that wants to make money not share these concerns?

The report mentions that because the cost is spread over millions of taxpayers, the risk is negligible. But as taxpayers in many countries are beginning to remark, there is nothing negligible about a lengthy track record of failed government joint enterprises with business. The French have paid the price for their Concordes, fast trains, Honeywell-Bull computers, and plutonium reactors (Palda, 1984). Canada also has an impressive list of high tech flops (remember "Telidon"?) in which government was a partner. If government had ignored the special interest lobbies and considered the potential returns adjusted for risk, it might have avoided many a disaster.

The market fails

The more thoughtful part of the Council's report asks whether venture capitalists face market imperfections that wrongly stunt their chances of success. Here may lie a legitimate role for government help. The question is, does the brokerage community hesitate to fund risky ventures in their early stages because it cannot assess their risks and monitor their progress?

Stiglitz and Weiss (1981) argue that firms and banks can agree on what the average return will be but that the firm has a better idea of its own riskiness. Under these conditions banks can expect only high risk firms to accept high interest loans. In general, firms with great risk have a large chance of winning big and a large chance of losing big. The upside adds to the returns of the borrower. But while there is a limit to how much downside he will pay because his liability is limited by bankruptcy law, no one can sell him into slavery to pay the entire loss. The bankruptcy option (i.e. the limited downside) means that for a given average overall return to a venture, the average return to the entrepreneur increases with the risk. Anyone who has played the options market will know that as the riskiness increases, the value of the call rises. In the above example, the firm's debt is like an option. Upon repayment of the debt (the strike price) the entrepreneur gains full ownership. Past a point, he does not care how bad the downside looks because he will never have to bear the full cost. But he has full claim to the upside which is why the extra risk does not bother him.

High risk interest subsidies

As a result, firms that know their projects to be low risk will decline a high interest rate loan and high risk firms will accept it. "Bad" firms will chase out "good" ones until the only firms ready to accept high interest rate loans are high risk firms. And banks will charge exorbitant rates of interest that are appropriate only to high risk ventures and stifle the opportunities of low risk ventures. An interest rate, or loan, subsidy (which the Science Council favours) would draw low risk firms back into the market. In the Stiglitz-Weiss scenario, government intervention relieves taxpayers of some risk.

DeMeza and Webb (1987) counter that a more realistic scenario is one in which a firm's success brings it a clear return, while its failure brings default, and the bank loses its loan. All firms have the same upside and downside but differ in their chances of success. Thus, firms with the highest chance of success can expect the greatest returns on average, and these low risk firms will be the ones who gladly take high interest loans. In this case, government aid would increase market risk.

The government fails

Instead of concentrating so much on arguments to show the market has failed, the Science Council might have acknowledged that if there is a shortage of capital, government may be to blame. Innovation will thrive in markets which are not burdened by regulation and fear of government confiscation. Free the market and the knowledge based company managers and venture capital buccaneers will make B.C. their port.

References and further reading

DeMeza, David and David Webb (1987), "Too Much Investment: a Problem of Asymmetric Information," Quarterly Journal of Economics, 102:281-292.

Ford, Robert and Wim Suyker (1990), "Industrial Subsidies in the OECD Economies," OECD Economic Studies, 15:38-81.

Grossman, Gene M. (1990), "Promoting New Industrial Activities: A Survey of Recent Arguments and Evidence," OECD Economic Studies, 14:88-125.

Lindsey, Brink (1992), "DRAM Scam," Reason, pp. 40-48.

Palda, Kristian S., Industrial Innovation: Its Place in the Public Policy Agenda, Fraser Institute, Vancouver, 1984.

Science Council of British Columbia, Financing A Knowledge-Based Future, Report prepared by the SPARK Fiscal Committee.

Stiglitz, Joseph E. and Andrew Weiss (1981), "Credit Rationing in Markets with Imperfect Information," American Economic Review, 71:393-410.

A prime case for full-cost university tuition

Michael Walker

THE RISING BURDEN OF taxation and the increasing awareness of the taxpayer will eventually pressure governments to re-organize their spending programs. One of the programs in which I have long had an interest and about which The Fraser Institute has published several book-length studies is education. Second only to health care as an absorber of tax dollars among the service delivery programs, education also has some peculiar characteristics.

It is true, for example, that the most significant beneficiaries of expenditures on post-secondary education (that is, college and university) are the higher income groups. An examination of the tuition deduction claims by taxpayers indicates that the top 30 percent of income earners receive about 48 percent of the benefits of educational expenditure. In other words, education is a service which is financed from general tax revenue but which principally benefits high income earners.

On the basis of this finding we have argued elsewhere that it would be highly preferable if the government charged the full cost of education to the user in the form of tuition fees that actually matched the cost of education and then subsidized only those students whose incomes fell below a certain level. This would ensure that there was efficient targeting of the subsidies which government provides to education. (Of course, family income would have to be the determinant, as is the case at the present time with the bursaries which are offered to worthy, low income students.)

Another aspect of the failure to price university services at their full cost is a concern that there might be a waste of the underpriced services. I recently received a letter from a friend who teaches at a local community college--Langara college--which provides tangible evidence that such concerns are well grounded. The information consists of the percentage of partial and complete withdrawals by students from courses in which they had originally enrolled over the period from 1984 to 1991. The astonishing thing about this information is that it indicates, for example, that in the 1991 summer term the drop-out rate was 14.96 percent. That is to say, nearly 15 percent of the students who originally enroled in a course subsequently withdrew from it. In the spring and fall terms of the 91/92 year, the drop-out rate was 10.94 percent and 13.45 percent respectively.

Since this drop-out and withdrawal percentage is significant throughout the past decade, one assumes that the community college involved made appropriate adjustment in its staffing and other course provisions to take this into account. It is nevertheless the case that from 11 to 15 percent of the total initial demand for courses was not realized in final completion. Undoubtedly, if the students involved faced the full cost of pricing for these courses, their planning and their prior assessment of their interest in these courses would have been much more intensive and much less likely to produce this sort of withdrawal rate.

The only positive thing that can be said about the drop-out rate at the college is that current numbers of drop-outs are somewhat below the 1983/84 academic year where 16.12 percent, 15.55 percent and 20.8 percent of courses were dropped in the spring, summer and fall terms respectively. While I don't know how representative these figures are of the general experience with colleges because we do not have this information at our disposal, to the extent that they are generalized they indicate once again the deficiencies of an education system which has no prices, or at least prices which reflect only about 15 percent of cost.

Towards a more efficient and equitable Canadian health care system

Herbert G. Grubel, Professor of
Economics, Simon Fraser University

THE CANADIAN HEALTH care system was designed to meet a reasonable demand by the public for protection against the financial ravages which high medical costs can bring to individuals and families. Its design and actual operation has turned into a system of government-provided, free medical care from cradle to grave. The Canadian public today considers the receipt of such care a fundamental "right."

The Canadian health care system suffers from the same problems which beset any government schemes that provide benefits at zero cost. Demand at this price is constrained only by the inconvenience associated with visits to physicians and the time-cost, risks, and discomforts of hospital treatment. No scheme for the provision of medical care under these conditions anywhere in the world has been able to avoid the need to limit the growth in demand.

The most widely used method for limiting demand has been rationing of access. In Britain, physician visits involve long and unpleasant waits in offices and low levels of attention by doctors. Certain types of procedures are inaccessible to specified groups of patients. For example, individuals over the age of 60 routinely are denied access to heart by-pass operations.

The Canadian system is increasingly using such rationing, though without the official codification of criteria. Instead, individual patients find long waiting lists for access to modern diagnostic equipment and procedures involving many types of surgery. In spite of these restraints, Canadian spending on medical care has risen at the same rate as in the much criticized U.S. system. The increasing average age of Canada's population and the availability of ever more expensive diagnostic and treatment possibilities will put further pressures on the system and will raise the use of rationing devices.

Underlying the use of rationing is the fundamental problem facing all societies with free medical care. Who and by what process is it decided who should get what type of medical care? This problem arises in its starkest form when the decision has to be made whether the extension of any person's life for a month can be scheduled to cost a maximum of $10,000, $5 million or any other sum. Somewhat less dramatic is whether a person's discomfort or reduced mobility justifies spending $50,000 for, say, the replacement of a hip.

Under the principles of a free society, such decisions should be made by individuals in consultation with their physicians and should involve their private alternative uses of the money. The intervention of the state has distorted this process. The patient and doctor have no incentives to consider other valuable purposes for which the money could be used. To them the money is free. To society it is not.

Medical care financed privately provides fully the need to consider the alternative uses of money. Medical care financed through large-scale private insurance maintains some of the incentives, but as the U.S. system shows, the basic distortions remain strong. Now a novel system for the restoration of at least some of these incentives has been proposed for Canada.

The proposal is that patients are sent memoranda of the cost of all medical care they consume, promptly after each treatment. The memoranda should be sent by the provincial medical care system which can generate them easily from computers containing all the needed information. This process would raise consumers' awareness of the cost of the public services they use. Beyond the provision of information, and most importantly, the plan envisages that at the end of every year, the total value of the medical care consumed is entered as income into the individual's income tax-return. Under the simplest version of the proposal, this imputed income is taxed at the filer's marginal tax rate on ordinary income.

Under such a system, the fundamental characteristics of the present system are maintained. Accessability is universal since no questions are asked about a patient's financial ability to pay. Poor Canadians with a zero marginal tax rate pay nothing, and those with higher incomes pay according to their ability. The rules are applied throughout Canada so that the cherished country-wide access is maintained. At the same time, the proposed system would restore some--and possibly strong--incentives to consider the true social cost of medical care. It should provide some much-needed relief for the budgets of all Canadian governments.

Of course, the details of the scheme need to be worked out. Some possible variations on the basic idea come to mind readily. To protect against the financial consequences of truly catastrophic medical care costs, caps might be put onto the size of imputed taxable income, or the costs might be spread over a number of tax-years. In "The Fraser Institute Prize for Economy in Government" finalist Stewart Drury suggested that the increase in the tax bill be limited to 5 percent. Alternatively, the tax rate applied to the imputed income could be made a fraction of the marginal rate applied to the regular income tax return. This fraction, in turn, could be made smaller the higher the imputed income to retain the system's most important protection from the consequences of catastrophic illnesses.

As with all proposals for the revision of Canada's medical care system, there will be much opposition to further taxes and even the hint of fees that interfere with free and universal access. However, the basic problems and financial crisis of the present system are so great that increased taxation is necessary and the free universality of access will have to be modified sooner or later. The proposed approach has much to offer in terms of increasing the system's efficiency while retaining its most cherished characteristics.

Ask not for whom the road tolls

John S.P. Robson

IN THE RECENT ELECTION campaign, Mike Harcourt and his colleagues portrayed themselves as free enterprisers with an ambitious social agenda, and it is a relief in these troubled times to report that, so far, this appears to have been an accurate portrayal. One new policy shows particular promise in this direction.

Recently the government announced its intention to cover the cost of certain road and bridge construction projects through tolls. While they unfortunately intend to remove the tolls once the capital cost is recovered, this is an important step in reconnecting rights and responsibilities in our society and, more narrowly, in stopping people from demanding that the government use other people's money to fund projects that, in all cases, are loudly asserted to be in the public interest. (Readers should also note that, in California, construction is beginning on four entirely private toll roads that, the state admits, it would not have been in a position to build in this century).

The B.C. policy announcement was particularly timely because it came shortly before the annual "Peace March" through downtown Vancouver, in which traffic is tied up for hours by an amorphous group with rather unfocused complaints including, this year, a non-existent war. This march takes place every year, at some fairly small individual cost to those with legitimate business in the downtown, and it does so because the people who participate in it are in a position to make life miserable for politicians if they do not authorize it.

The "Peace March" is a classic public choice problem, in fact, because those who wish to use the streets in a normal fashion are more numerous but each has a smaller personal stake in the matter, while the marchers, small in number, all care a great deal and will devote enormmous political energy to accusations of anti-human, pro-war and pro-pesticide attitudes against any who dare refuse the march permit.

But what if these were toll roads, and the government could-and had to-tell prospective marchers that if they wished to use the road for any purpose, be it International Labour Solidarity Day or National Dental Health Month, that they would have to put up more money than the average toll revenue from that day in order to do so? Clearly there are technicalities to be worked out (probably the government would sell passes for different zones of the city at different prices, rather than collecting a quarter every four blocks) but the basic concept is entirely sound. If it allowed too many interruptions in service the government would face a fall-off in downtown pass sales and hence revenue.

Rather than being allocated according to volume and tone of voice, government benefits should be directed toward the most socially productive uses. And the best way to do this is according to the same system we use to allocate oranges: find out through the price system which users can successfully bid for them and still come out with a net gain. Freeloaders of the world, ask not for whom the road tolls: it tolls for thee.

Speculators in Europe--and in Vancouver

Walter Block
College of the Holy Cross
Worcester, MA

STRANGE THINGS ARE GOING on in Brussels. On the one hand, there is an economic boom. New construction is going on all over the city, employment is up, poverty is on the decline. This is due in large part to the fact that the Belgian capital has been chosen as the host of the new European Community, a political and economic amalgamation of the EC's 12 member countries.

But on the other hand, there are problems. These have been brought about, paradoxically, by the same forces responsible for the new economic development. Heading up this new super state has brought with it the arrival of 14,000 "Eurocrats," bureaucrats from all over Europe. These people, acting much like the United Nation officials who infest New York City, have brought with them a plague of limousines, which have hogged up the parking spaces, streets and highways of Brussels. Things have become so bad on this score that the locals have plastered luxury automobiles bearing "Europlates" with stickers castigating "Europarasites." Billboards commonly show yuppie pigs littering Belgian streets.

Resentment has also arisen concerning the high salaries given to these privileged mandarins--as much as $160,000 per year is common--plus the fact that they pay just over half the taxes that local government employees do.

But perhaps most of the anger has focused on the housing crisis. Rents are skyrocketing, and the native Bruxellois are being forced to locate out in the country as they lose a bidding war with the rich newcomers. As a result, homelessness is increasing.

Only instead of blaming the influx of new residents, commentators have singled out the speculator. Says Mr. Herve Onude, director of Atelier de recherche et d'action urbaine, a group determined to preserve the local architectural heritage: "The real problem will not lie with the EC, it is instead with the huge real estate speculation that is going on. Speculators are using the idea of Brussels as the European capital to their own advantage, to drive up rents. That is the beginning of what will cause terrible cases of poverty for people who can't afford it."

Whoa. Hold on just a minute, here. This argument, the one used to "explain" the Vancouver housing crisis in the months before EXPO '86, is a piece of economic illiteracy.

What we have in both cases is what the economist calls an outward shift in the demand curve: more people suddenly appear on the spot with ready spending money; this bids up prices.

However, they buy up all sorts of things besides housing: paper clips and ribbons, restaurant meals and bicycles. Why is there no crisis with regard to these other items? Where are the speculators for these goods and services? Are they asleep at the switch?

Not a bit of it. In the market, the first response to an increase in demand is a price rise. This means more profits, as entrepreneurs are led--by Adam Smith's invisible hand--to get off their duffs and bring more of the good to market. The ensuing outward shift in the supply curve, to match the one on the demand side, reduces prices and profits back to normal levels, thus ending the shortage. If the increased demand had been anticipated, the crisis need never even have arisen; if it somehow did, it would be a molehill, not a mountain.

But surely, the coming of the EC to Brussels, and of EXPO to Vancouver, was known years in advance. Why didn't the market work?

Simple. With regard to the crowding of roads, streets and highways, there is no private market allowed. This vital sector of the economy has been monopolized by an institution which can't produce its way out of a paper bag. Government, the institution responsible for the economic unravelling of the Soviet Union, is also responsible for vehicular transportation arteries.

As for housing, this sector has been visited with a welter of government restrictions, such as rent control, zoning, building codes, taxes . . . the list goes on and on. No wonder the usual market flexibility has not appeared.

As for the speculator, far from being part of the problem, he is part of the solution. He earns profits by anticipating future needs, doing so with the least disruption possible. If, two or three years before the advent of the EC in Brussels, or of EXPO in Vancouver, a speculator got wind of these occurrences, he would have started building at that time--under free market conditions, that is. Then, when the massive immigration finally took place, instead of the excess demand leading to higher prices and profits as a signal to capital, this investment would already taken place, thanks to our man, the speculator. There would be no need to move the poor out of their housing to accommodate the newcomers; the requisite structures would already have been erected, obviating what would otherwise be a painful economic necessity.

So, hats off to the speculators and a loud, raucous Bronx cheer for the socialists who try to hem them in.

Less is more

Filip Palda

WHY MUST A COUNTRY BE paid to do what is good for it? This is the $24 billion question hanging over the Confederation of Independent States (CIS). Last month the major Western nations offered $24 billion in loans to the Confederation on condition that it free its markets and get government out of the economy. This is a risky investment for the West because it is not clear that loans, even with sensible conditions attached, can help a country develop. What may matter more is the mood of the electorate and the opportunities for trade.

Foreign aid over the past twenty years has not been of much help to developing nations. In spite of a $23 billion dollar infusion since 1971, Bangladesh is still a poor country with a bleak future. Sub-Saharan Africa gets 8 percent of its income in foreign aid, and as its share of world aid has risen, its income has fallen further behind. The problem for many developing countries is that when a donor gives aid for a specific project, the home government can escape the political obligation to spend its own money on the task. The money it saves by letting foreign agencies do the job can be diverted to government pets such as the military, and pork barrel projects that benefit a few narrow interests. This happened in Ethiopia when Western grain shipments allowed the Ethiopian government to divert resources from feeding its own people to its military project of forcing mass migrations of able bodied men from areas where rebels might recruit them (Korn, 1986). It also happens in the U.S., where for every dollar the federal government gives to support state education, the States reduce their spending on education by seventy cents (McGuire, 1978).

Paradoxically, foreign aid may be of help only in a political climate where it is not needed. The CIS is made up of people who have a limited idea of the benefits a free market can bring. It is also a country with little appreciation for property rights and due process of the law. Without this knowledge it will be very difficult to make reforms last. Western lenders may persuade the CIS to disband state enterprises, reform agriculture, and privatize property. But can these measures survive beyond the period of foreign aid if the people of the CIS do not demand them to begin with? They now have a democratic system through which they can show what they think more clearly than under the Communists. Perhaps we should wait and listen to these preferences before sending money. We may find that no money is needed. In Czechoslovakia for example, where the people support reform, foreign and domestic private investment is growing. The same is true of Mexico.

The danger is that if the CIS is not ready, our transplanted Western ideas of how to organize markets may simply wither away. For the graft to take, the CIS may need to change its attitudes. Social scientists do not understand how attitudes change, nor what changes them, but they know that it is costly to change one's mind. People spend a lifetime building ideas and attitudes. If the people of the CIS are not forced to bear the costs of changing their minds, foreign aid will amount to little more than a welfare payment. And welfare payments have a way of obscuring reality and putting off changes.

What it takes to make the CIS ready for Western ideas is impossible to know. This is why it is pretentious to think that the West can dictate the conditions of a CIS recovery and guide it with carefully directed infusions of money. Many Western leaders probably hope that conditional aid will work as well in the CIS as it did in Europe from 1947 to 1951. Then, the Marshall plan gave Europe $14 billion, on condition that the free market be encouraged. Those who use the Marshall plan as a model should keep in mind that Europe may have needed no coaxing to adopt the free market and that the plan may have been unnecessary. In the CIS, such a plan may be unworkable if there is no belief in the free market to begin with.

Western heads of State had no control over the fall of their beloved Gorbachev, in spite of all their concessions to him. The political mood of the country was outside their power. The lesson may be that a passive policy that gives the CIS opportunities to help itself may be of more use than active policies which cost money and whose outcomes we cannot foresee. The greatest opportunity we could offer would be to let the CIS trade freely with the West. In spite of all the advice the CIS is getting to adopt a free market, there is little chance that Western nations want to give this more meaningful style of help. The West cannot even rid itself of its $250 billion dollars in agricultural subsidies nor can it agree on a new GATT. If we cannot do this for the CIS, then unfortunately, as Zbigniew Brezinski predicts, the CIS may spend the next ten years going nowhere.

References

Korn, D.A. Ethiopia, the United States, and the Soviet Union, Southern Illinois University Press, 1986.

McGuire, Martin C., "A Method for Estimating the Effect of a Subsidy on the Receiver's Resource Constraint: With an Application to U.S. Local Governments, 1964-1971," Journal of Public Economics, 10:25-44, 1978.

June questions and answers

Isabella Horry

Q: What tariffs do Mexican imports into Canada face?

A: In 1989 the average tariff on Mexican imports was between 2.2 percent and 6.4 percent, which is lower than the average tariff on American imports to Canada preceding the FTA. 34.2 percent of the total value of imports faced a zero tariff, while another 32.2 percent faced partial tariffs of zero. The remaining imports faced nonzero tariffs, with only 0.66 percent of the value of imports facing a single rate between 10 and 25 percent. Mexico benefits both from generalized system of preferences offered to developing nations and Most Favoured Nation status extended to Mexico under Canadian law. ( W. Watson, "North American Free Trade," Canadian Public Policy, March 1992.)

Q: What portion of provincial output is consumed by local markets?

A: As the following table shows, in 1984, on average, 63.2 percent of provincial output was destined for local markets (i.e. for the same province where it was produced), 19.3 percent to other provinces and 17.5 percent to the rest of the world, of which 75 percent went to the U.S.

Click here to view Table: Destination of Provincial output, 1984 (percent)

U.S. Civil Rights visions

Walter Williams
John M. Olin Distinguished
Professor of Economics, George
Mason University, Fairfax, VA

RECENTLY A GROUP OF U.S. senators introduced the "Minority Farmers Rights Act." If enacted, it would require the secretary of agriculture to create a "National Minority Farmer and Land Registry containing the names of all minority farmers and a legal description of their land holdings." The new agency will be required to "establish policies and programs that contribute to the expansion of such land base." The bill also mandates that "in the case of agricultural land held or administered by the Department (of Agriculture) . . . such land owned by the United States . . . be used to reverse the contraction of the minority agricultural land base."

This bill doesn't only call for farmland quotas; it goes further: "The secretary shall review minority participation compared to non-minority participation in all crop programs of the department on a state-by-state and county-by-county basis." It also requires the Department to "include specific numerical goals for increased training and promotion of the minority employees of the agencies and for the increased participation of minorities in the programs," and "establish a timetable for the achievement of the goals . . . ."

Black farmers should be outraged by the act. It mandates: "encourage any sale or transfer of any portion of the minority agricultural land base to other minority farmers." That means when blacks sell their land, they can only sell it to black buyers. Simple economics says that the fewer the number of potential buyers, the lower the expected price. Therefore, the "Minority Farmers Rights Act" will lower the value of all land held by blacks.

If we are going to prevent racial chaos in our country, decent Americans of all races must outlaw official and unofficial racist policy.

T.V. identifies racism as cause of L.A. and Toronto riots

Lydia Miljan
Director, National Media Archive

THE NATIONAL MEDIA Archive recently completed a study which examined tele-vision's coverage of the riots in Los Angeles and Toronto following the acquittal of the four police officers involved in the Rodney King beating. The study found that during the week of the L.A. and Toronto riots, CBC and CTV National News focused on racism as the leading cause of the violence. The agents of racism were almost uniformly identified as the white population.

Rodney King tape highlighted in riot coverage

The networks played the Rodney King tape in order to provide a context in which to discuss the verdict. The underlying theme was that what was seen on the tape should have resulted in an open and shut case. On the "National," the videotape was shown in its entirety with Knowlton Nash describing the visuals. On CTV, the tape was also aired with commentary which questioned the verdict. The King tape accounted for 11 percent of CBC and 5 percent of CTV's visuals of the riots and aftermath.

Racism identified as primary cause

In the L.A. riots, racism accounted for 22 percent of the causes identified by CBC and 38 percent of those identified by CTV. Similarly, coverage of the Toronto riot identified racism as the primary agent in 35 percent of CBC and 54 percent of CTV causes. While the pictures of the riots showed wide-spread rioting predominantly by blacks, the media stressed that whites were also involved in the rioting.

Hooliganism was identified as the cause of the L.A. riots in only 3 percent of CBC and 14 percent of CTV coverage. For the Toronto riots, hooliganism was identified in 6 percent of CBC's and 10 percent of CTV's reasons for the violence.

Toronto riots caused by disenfranchised youth

While coverage of both the Los Angeles and Toronto riots focused on racism as the cause of the riots, Canadian analysts argued that the destruction in Toronto was also due to disenfranchised youth. Twenty percent of CBC and 11 percent of CTV statements linked the problem of the riots to disenfranchised youth.

CBC focuses lens on aftermath of riots

There was a significant difference in the frequency of images that the two Canadian networks presented on the Los Angeles riots. CBC presented far more visuals of the cleanup and aftermath of the riots, whereas CTV's focus was clearly on the rioting. On CBC, 41 percent of the pictures shown were of calm restored and people attempting to rebuild their lives. 18 percent focused on the rioting, fires and looting. On CTV the reverse was displayed: 35 percent of the visuals showed the rioting, fires and looting. Only 19 percent showed the aftermath with calm restored.

While CTV showed more of the riots, they did show more of the police as well. Pictures of the police comprised 12 percent of CBC and 15 percent of CTV's coverage of the riots. Of the pictures of police action, CTV presented twice as many as CBC.

Descriptions of the events comprised almost 8 in 10 statements on CBC and almost 9 in 10 statements on CTV. Not surprisingly, almost half of this coverage on CBC and half on CTV consisted of describing the rioting and violence.

Reginald Denny tape used to show violence against motorists

One of the most graphic visuals shown of the riots was the truck driver, Reginald Denny, being taken out of his truck and severely beaten. Each network gave this image roughly the same attention. Each made it sound as though this kind of beating happened to more than one motorist. For example, on 29 April, Peter Mansbridge used the Denny tape to illustrate the violence: "People have been pulled from their vehicles and given savage beatings." Similarly, Lloyd Robertson reported on 30 April: "The violence has been brutal, with motorists pulled from their vehicles and beaten in front of the cameras by rioting blacks." Neither network showed any motorists other than Denny being beaten.

Take my land... please

John S.P. Robson

WITH THE SLOGAN "SAVE the trees... Sell the forests!" Larry Solomon of Pollution Probe risked cutting himself off forever from the environmental mainstream. Instead he now leads a small but rapidly growing band of practically-minded, deeply committed environmentalists. The logic of his position is that free markets reflect human preferences including the preference for a clean environment, provided that property rights are respected. And it offers an opportunity to solve two of our most pressing problems at a stroke.

The reason that private ownership would protect the forests depends on the different incentives faced by government and private owners with respect to, for instance, logging. Currently the government owns our forests, and it grants logging companies the right to use various pieces of land for a specified time period. The land then reverts to the government, without any consideration by either party of how its underlying value may have changed in the meantime. Naturally, therefore, the logging companies seek to extract the maximum possible short-term value from the land, often by clear-cutting. They will derive no benefit from protecting the long-term value of this asset, so they waste no resources and forego no income to do so.

The cry then goes up that private companies are short-sighted, but the reverse is true. It is the government, the owner of the land, that has been short-sighted.

Since the long-term value of an asset is the present value of the long-term stream of income from it, a private owner with secure property rights will act to preserve that long-term income stream. Such an owner would neither clear-cut nor permit clear-cutting, because that would damage the long-term prospect for income from the land and hence depress the asset price, leading to a shareholder revolt in a firm or personal impoverishment in an individual.

The government, on the other hand, holds as its most productive asset the wallets of taxpayers, but--like the logging company with its twenty-year lease--it only holds them for its term in office and will gain nothing by maintaining their long-term value. Therefore it has no real incentive to maintain either the long-term total wealth of taxpayers nor of any of the other assets it holds, such as companies, roads... or forests.

But if it is true that private ownership would protect the forests, we have a truly glorious opportunity to strike at two of our most pressing problems simultaneously. The natives in this country have suffered horribly as wards of the state, and there can be little dispute that they are morally entitled to some sort of generous land settlement (to say nothing of their iron-clad legal claim to the land on which the actual reservations sit, which the government has also refused to give them).

And since the argument made above about private ownership of assets makes no reference to who the owners are or need to be, a settlement of the native land claims that transferred large sections of our wilderness to the natives would also protect the environment. It would have to be a real transfer, however, not the sort of bogus arrangement now in force whereby they "own" the reservation land but can neither sell nor improve it because Ottawa actually makes the rules. To give the natives "responsibility" for the forests but not the right to benefit from them would be both patronizing and environmentally useless.

Obviously the aboriginals cannot have Vancouver back, nor the 120 percent of BC that by some counts they are claiming. Nor can we ever undo historic wrongs, because the victims are either dead or have had their lives blighted in ways that cannot now be retrieved.

But we can look to a future in which our native people become self-determining, responsible individuals, and in which our environment is safeguarded by responsible private owners. In fact, the only obstacle to achieving both these results at a stroke is the increasingly untenable attitude that government knows best.

The June graph

Isabella Horry

Click here to view June Graph

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