The New World Order

Margaret, The Lady Thatcher

MR. CHAIRMAN, ALAN, ladies and gentlemen. First may I wish you a very happy 20th anniversary of The Fraser Institute. I'm delighted to be here to spend it with you, and to honour the great work which you have done. The Fraser Institute is very similar to the Institute of Economic Affairs in London, which had a tremendous influence on the whole of economic and political thought in Britain. Second, I'm delighted that Alan Walters of your Editorial Board was here to share it with us. He was my economic adviser, and we wouldn't have got it right without him. When he mentions that 364 economists were against him, they didn't matter at all; it was the half-dozen led by Alan who were with us who prevailed.

I find, as I have been interviewed in Canada, in the few brief hours I've been here this time, that all commentators seem to regard one as something of a phenomenon because one set out in politics with convictions. They don't quite understand that. They say "Well, here we have pragmatism." To this I say, if you are embarking on a great voyage across the oceans, you have to have some stars to steer by, and the stars have to be constant. It's no good steering by shooting stars. So, yes, I had convictions.

I would have liked to have read to them a favourite quote, but I hadn't got the quote with me, but I've got it now. It's by a French 19th century politician, who said: "There go my people. I must find out where they are going so that I can lead them."

Well we didn't start that way. We knew where we were going, we knew the reason why, and we were prepared to persevere until the policies showed good results.

The other thing that I find, is that your commentators are all sold on the idea that politics is the art of the possible. Now my friends, if you take that view in any sphere of life, you will soon lower your sights as to what is possible.

The task that I had ahead of me was enormous, because Britain in 1979 was a country not only in decline but whose people had accepted decline. The task upon which I embarked was to say, politics is the art of making the impossible happen. And that is precisely what we did. I would like in the time available to consider just three examples of making the impossible happen.

I'm going to start off with the economic side of politics. You must get your economics and the enterprise right. For, if you do not, first you'll have no standing in international affairs, and secondly no one else will listen to you at all. So we knew we had to get the economy right. We had to do four things pretty well immediately.

First, we had to get the rate of income tax down. When I took over, the top rate of income tax on earnings was 83 percent, and the standard rate was 33 percent. That was much too high. I believed in incentives, and so in the first budget those rates had to come down immediately and we had to pick up the lost revenue by indirect taxes. Nevertheless, with the extra incentive, people right through the whole piece began to work with more will when there was something to work for. When they knew full well that the lion's share of the earnings would go to them, to enable them to look after themselves and their families and their future standard of living.

Next, we were all tied up with far too many regulations. Even my own party had been prone to enact more regulations. You couldn't determine your prices; there was a Prices Commission. You couldn't determine your incomes; there was an Incomes Commission to determine what was the norm for increase in wages, regardless of the performance of the company. You couldn't, in fact, determine your dividend, and you couldn't get the amount of foreign exchange that you wanted. You couldn't develop your factories where you wanted to because there were Development Certificates.

All of these things went in our very first budget, which was three weeks after we'd taken over. And even some of my best friends said, "Oh come off it, don't you think you're going a bit fast?" I tell you that because it is surprising how socialism penetrates even good conservatives sometimes.

Well now those were the first two things, but that wasn't the end. We had to tackle trade union law. The trade unions had virtually taken over Britain. It had been strike after strike after strike. And gradually I noticed that the trade unions began to understand that although any one of them could attempt to bring Britain to a halt, none of them could protect their own members from the ravages of another trade union. There lay my hope; and in the belief I had that most people would far rather go on working, doing a decent day's work for a decent day's pay, given the chance, than they would come out on strike.

I had a great deal of opposition in changing the Trade Union Law. Opposition which was often based on the idea that one shouldn't do anything very radical; that one shouldn't upset things. Well I took the view that the trade unions had upset enough, and I really had to cope with what they had done and to change things so that we wouldn't have to continue just to cope. And so, we in fact brought forward four different pieces of legislation, one after another, which altered the whole balance of trade union law, as between employer and union, and also altered the whole balance between the ordinary member of the union and the trade union boss. You know we had got to the position where any trade union could bankrupt any employer, even though their own members had no quarrel with that employer. I don't know what your own labour law provides, but we found ours to be intolerable and destructive for the ordinary workers who were the alleged beneficiaries of these laws.

So after the changes, the ordinary member of a trade union could decide by ballot, secret ballot, whether they went on strike, and the officials had to be elected by secret ballot. We stopped the closed shop. It gave the trade union bosses far too much power. And in the end we brought in a law that a trade union's funds could be sequestered by order of the Court, if that trade union did not obey the law. Now that took us until about 1985. We actually got the coal strike, to which Alan has referred, in 1984. You now know that we won it. I had to live through it every day for a year; every day had to decide the tactics. We decided right at the beginning that the task of the police, as we reminded them, because they're independent, was not merely to keep the peace by saying, "Look, don't try to go to work through the picket lines at a colliery, there'll be demonstrations, it'll make it difficult." They had in mind keeping the peace, in that sense.

We took the view, and the Attorney General made the appropriate speech to reflect this view, that the task of the police was to keep the law abiding citizen able to go to his place of work at the time when he was due there. So even though there were terrible pickets, even though there was violence on the picket line, the task of the police was to get through the picket line those miners who wished to go to work. And they did. My belief in the ordinary member of a trade union was upheld many times over, because about one-third of them insisted on working and going through to their pits day after day after day. And my faith in the British character boomed to great heights, as these miners behaved as I had always believed they would. And so we won that.

Fourth, we had 46 major industries in the hands of government, that is, they were nationalized. I took the view that governments don't know very much about running industry. The people who do know are the ones who are in it. What is more, it gives governments far too much power to have control over those industries, and it gives them far too much temptation, as when you want to make the appropriate changes or get rid of surplus labour and people would come streaming to their MP to ask for extra subsidies. That's not how you build a prosperous economy. So we had to privatize 46 major industries. Most of them are now privatized.

In that privatization process, I also carried out one of my other great ambitions. It had not hitherto been possible for ordinary people with an ordinary wage or salary to build up their own capital, except perhaps through purchase of a house, which was restricted to far too few. So, first we managed to start to sell council houses at a very reduced rate to sitting tenants, so that people could buy their own house, reasonably, over a period of years. Secondly, when we privatized, we always held a block of shares for the people who worked in that industry, so they could buy those shares at a discounted price.

In this process, we doubled and trebled and quadrupled the number of shareholders that we had in Britain, and it became obvious that an ordinary person, earning ordinary wages or salary, could build up their own capital and therefore have an interest in the progress of the economy generally and through their share holdings an interest in the future.

All of those things we did, all of those things we had great opposition in doing, but it did transform Britain. We did get rid of the surplus labour, we did get rid of the many, many restrictive practices, we did get rid of the regulations. And as we got the tax rates down, government's revenues did not fall. Indeed, we noticed that as we got the top tax rate down from 83 percent ultimately to 40 percent, the top 5 percent of income tax payers at a 40 percent tax rate actually contributed a bigger proportion of tax to the Exchequer than they had when they were paying 83 percent. That is the power of incentives. And I can tell you on both sides of the border here in North America, that you will find the same thing.

So, by tackling things which other people had found they couldn't or wouldn't tackle, we did in fact transform Britain. And there's one further point about this that I want to make to you. Alan referred to moral courage. I found that as we started to build up prosperity in Britain, we were actually growing faster than they were in Germany. We got another attack, "Oh don't you think your society is too materialistic?" and I said, "Don't be so absurd. If a Labour Government had managed to have that prosperity they'd have all been dancing in the streets and shouting it from the housetops." (If you can do those two things at the same time.)

You simply have to give people the opportunity to do better. It enriches their lives, they have money left over to give to preserving historic sites, to the arts, to the sciences, to music, and so on. Most importantly, we all want to get other people out of poverty, and you can only do it by the wealth you have created.

But there is another point, in this connection, which is not so very frequently stressed as it should be: capitalism is the moral way of running an economy. Socialism is the planning by the few over the lives of the many. You have seen where it ultimately led to in the Communist society. The many had no freedom. Everything was exercised by the few at the top.

Everyone is born with some God-given talents and abilities, and he has a fundamental right to develop those within a rule of law. In other words, freedom has a moral quality. Developing it is a moral attribute. You can only do that within a civil society, and you have to have a strong rule of law and a rule of justice.

The creative factor in society is a direct result of the responsible exercise of freedom, which is the moral quality. In the context of freedom you can only produce goods and services by the voluntary joint action of a group of people acting together. You can only satisfy people in a capitalist society if you produce what they want to buy, or a service which they also want to buy. People prosper in a capitalist society by serving the needs of others, which are expressed through the market place. We must never forget that it is in fact capitalism which has the moral quality in society, not socialism, which is the elevation of the power of the government over the people.

This moral quality of freedom is reflected in a true democracy in that the people give power to the government so that the people can achieve certain things through government that they might find difficult to do in ordinary ways. But the key is that this power that they give they can also take away and give it to someone else, as you know, from time to time.

My overriding conclusion from my own experience is that in seeking to be rewarded by the people with this gift of power the most important thing is to get your convictions right. Ensure they are based upon the very best values, in the very best traditions, in the very best character of your country, and you'll find there's a good deal of conservatism in a nation. I am certain you will find that here, as I have found it in Britain.

So, that was the first thing, to make the impossible happen by not running away from doing difficult things. The second major issue was when we suddenly were faced with the invasion of the Falkland Islands. Quite suddenly on a Wednesday we found that they might be invaded on the Friday, because the Argentine fleet had sailed. From the equipment on board, and its formation, we knew this was different than when they'd been on an exercise. And we had to face the decision, to make a choice. Would we say there's nothing we can do about it. After all, these islands are 8,000 miles away, if we send a fleet down there they'll go into the Antarctic winter. It is cold, there are bitter winds, how can we fight a war from ships bouncing about in those terrible seas? How we can fight a war with aircraft on aircraft carriers when the enemy has airfields only four hundred miles away from the battle scene (and of course by that time a small airfield on the Falkland Islands)? How can we fight a war when they will know we're coming for three to four weeks; is it possible?

Had you fed all that into a computer, you'd have got the answer "No"! But that denies the spirit and determination and guts of a nation; it denies the sheer professionalism of your armed forces. So we took a decision. The fleet would sail, and it was assembled within 48 hours. We went to Parliament, we called them on a Saturday. And the fleet sailed--the full task force sailed--25 ships led by two aircraft carriers on the Monday, and another group of seven from Gibraltar, where they had been exercising. They sailed, and you know the eventual result.

For the first three weeks we negotiated with the Argentinians: negotiate, negotiate, negotiate. Everyone urged us to negotiate. Gradually it became apparent that there wasn't a single new negotiation to do. The Argentinians weren't going to get off. I'd never expected any dictator to get off those islands. So we had to bring the negotiations to an end, and we had to land and retake them. I can only tell you as a Prime Minister, having been through it, they were the most agonizing days I have ever lived, because no Prime Minister expects to put their people into battle. You hope that the deterrent effect of having strong armed forces will be sufficient. There comes a time when it isn't.

Any invader will ask himself three questions about what his adversary is likely to do. First, has my adversary a strong defence? He can do nothing without that; yes, we had a strong defence. Second, can he get his forces to the scene of action required? Well it was very very difficult, but we did it. Third, has he, or she, the resolve? Yes, we had the resolve. And Galtieri miscalculated totally: about our ability to get there; about our resolve to get there; about our skill and professionalism when we got there. It was the first time in the post Second World War world when an aggressor had been stopped, and the international law that you shall not take anyone else's territory or possessions had been upheld.

Please note: it was not upheld by the United Nations, nor was getting Iraq out of Kuwait done by the United Nations; it was done by lead nation states with a strong defence. And never let it be forgotten.

In all my life in politics, the unexpected has happened. The Falklands was the unexpected. Later, it was the Gulf. But at no time did I ever, I or President Reagan, or President Bush, have to think: have we got the requisite defensive weapons? Because wise foresight had seen to it that we had. Even when we cut down government expenditure, within the total I increased expenditure on defense; we were never prepared to let that go down. And I hope it's a lesson that people have learned.

When it came to Bosnia, I was no longer on the scene, and I'm afraid the invader asked himself the same questions: Has my adversary the defense? Yes. Can he get it there? Yes. Has he the resolve? No. I could wish it had been different, because I had not expected to see those events happening in the heart of Europe, ever again, in my lifetime. But in the Falklands we did the impossible, and for the first time international law was upheld, because of our strength of defense and our resolve.

The third impossible thing that happened during my time in office was the collapse of Communism. I came in in 1979, with the idea we must have a strong defense and strengthen it, although we had to cut our total expenditure, and of course we did. Ronald Reagan came in just at the end of 1980, also with the idea that Communism was an evil empire, that we must strengthen our military capability, and we must also fight the battle of ideas. And we agreed about that. The policy until that time had been the containment of Communism. We couldn't do anything else. And of course the Communist policy was world domination. As you know, they challenged us first in the Korean War, and again under the leadership of America we went in. They challenged again in Vietnam, and it is my view that had the Americans not gone there, Communism would have spread much further throughout southeast Asia than it did. In my view, the Americans fighting there held back Communism in that part of the world long enough for the fight-back to come as it did later.

But Ronald Reagan and I started by saying, let's make it quite clear to the Soviet Union that they will never win militarily; if they start to station new kinds of nuclear weapons, we will station more, and we did. If they start to go ahead with their technology, we will go ahead of them. The critical thing there was Ronald Reagan deciding to go ahead with SDI, which was a great leap forward. The Soviet Union knew they could never compete; they hadn't the computer capacity; they just hadn't either the knowledge of that particular part of science nor the capacity to turn it into action. And of course we learned a fantastic amount from the program.

Don't believe some of the reports that have come out. We learned a fantastic amount about getting everything very, very much smaller. It started very big, and it became very much more minute; fantastic advances in the whole of electronics. That was the last straw. When Mr. Gorbachev first came to see me, he asked if I thought I could prevent Ronald Reagan from going ahead with SDI. I said "No." First, we're helping; secondly, I believe in it; thirdly, and most importantly of all, I am not a mediator between the United States and the Soviet Union.

Mr. Gorbachev had realized that the Soviet Union's economy was not performing and that the West was performing. He knew and realized that with the fantastic number of people from within--the Sakharovs, the Sharanskys, the Ida Nodles, the Bukovskys--working for greater freedom there was an opportunity to break with the past. He eventually (and it would not have happened without him), gave those people what you and I regard as our birthright--personal freedom, freedom of worship, freedom to elect their own representatives--and the whole atmosphere changed. That really helped to bring about, with the other things, a collapse of the Cold War.

Mr. Gorbachev was slow, in fact, to disperse economic power from Moscow to the other Republics, very slow, which Mr. Yeltsin spotted. Yeltsin said, "We will not keep the political liberty unless you have the economic liberty with it. You must have private property, you must have independent industries showing enterprise, you must have dispersal of power from the centre and limitation of the power of government." However, as Mr. Gorbachev was trying to complete that freedom by bringing about this dispersal, there was the attempted coup. The attempted coup failed, but of course in the end the Soviet Union fell apart, and we now have 15 separate Republics, three of which are the Baltic Republics, which should never have been under the Soviet Union.

In a way, we again tried to make the impossible happen. If either Ron Reagan or I had said in 1979, or 1980--together with what we did, with what was accomplished by people within the Soviet camp working for us in the sense that they were working for liberty, and with what was done by a new leader in the Soviet Union--that we would, during our terms in office help to bring about the collapse of Communism, no one would have believed us.

But now there are some very important lessons also to be learned, because people tend to think that to bring about the collapse of Communism is equal to bringing about democracy for all nations. It is not. No one in the world has ever had such a big job to do as going from a nation which has been under Communism for 70 years, to democracy. Communism is the most total tyranny. It has all of the most hideous things of Nazism, together with something else: it operated by taking away all private property, at gunpoint. Millions of people were murdered when they resisted as their land was taken away by Stalin. It operated also by taking away everyone's jobs. You had to apply to the Soviet Union, to the Communist Party, for your job. So you had no liberty, you had no land.

Communism was never a revolution from the bottom. Communism was an intellectual idea, by not very good intellectuals, for the power of a Marx and a Lenin and the Bolsheviks over the rest of the people. They who, although made of the same human clay as the rest of us, said they were so marvellous, that they could plan everything, decide everything, and they took away everyone else's liberty; and to make certain that people didn't rise up, they took away everyone's property; and so they created a totally passive society. So it's not easy to bring them to democracy. President Yeltsin made a very good try at it in spite of the fact that he and the Parliament were working with a 1978 Communist Constitution. Also, he was dealing with a Parliament elected before the failed coup. So he's now trying to get it back to democracy with neither a currency on which they can depend, (and hasn't the governor of your central bank done a good job here?) nor the rule of law. Everything was done by dictate of the Communist Party. So they have no rule of contract, no independent courts, and so far they've got very, very little free enterprise. And until you can get a proper law of contract, and a rule of property, which they are beginning to get, it's difficult in fact to get things going.

Don't think either that the end of the cold war means that peace has automatically broken out. There are many many things which Communism suppressed, the ethnic clashes and historic difficulties, and it kept some of its client states under tight control so none of this could come to the surface. What has happened since the end of the Cold War is that we have had two places of hot war. One was the Gulf, where Saddam Hussein was free to go into Kuwait. The second was Bosnia, where Slobodan Milosevic would never have dared to do what he has done at a time when we had the world cleft into two.

But do not let that lead you to the impression that I was in favour of the Cold War stability. I was not. It was a sheer rule of oppression. The collapse of that evil empire is the best event, and the most hopeful event, in my lifetime. But it is going to take some considerable time to bring it to a full democracy in which people begin to accept responsibility for their own lives, begin to accept responsibility in building up new enterprise of every kind, both economic and social, and also get a totally non-corrupt administration. It is little appreciated that what is there now, the natural legacy of the Communist corruption, is corruption and protection rackets from top to bottom. And that is very, very difficult to deal with and to change. It is going to take time even though there are some people working to bring the corruption to an end.

Now the final thing that I have to say is this: the United Nations, important as it is, consists of 184 nations, not all of them democratic by a long shot. You must not rely upon them ever to make peace where there is none. As you have seen this has not happened in Bosnia. They haven't even insisted that the humanitarian convoys get through. A few Serb guerrillas have been able to stop those humanitarian United Nations convoys, which is appalling. The only way to keep peace in the world is through the actions of a very powerful nation, such as America. We should always be extremely grateful that the most powerful nation in the world, the greatest democracy, the greatest believer in freedom and justice from its very Declaration of Independence marvellously drafted by Jefferson (of course he had been an Englishman by descent)--twice this remarkable country, aided and abetted by other people of like mind, in Canada and in Britain, (in the last world war in Europe, of course, it was only Britain that stood out against Hitler), has in fact come to keep freedom alive in the world. At the moment, there still is no substitute for American leadership. All of the united nations I said that fought in the Gulf--there was Britain and France and other nations including your own who came to join in--were a coalition put together of nation states. So, that leadership we hope must continue, and we must all be prepared to help. You've already seen two wars since the end of the Cold War. My friends, we must never, never let our defences go down. Never!

Tyrants and dictators have been born across the ages. They will continue to be born, and we must never let them achieve their aim of taking other people's land or possessions. That is the task which our generation has. This century, which was entered into before your time and mine, with such enormous hopes, (of course it was--there was a new mechanization which was going to bring a high standard of living to everyone); everyone knew what constituted a civilized society, they knew the values of civilization, they knew its manners, they knew its customs. Surely, they hoped, the 20th century would be the greatest century of peace the world has ever known. Not a bit of it. This 20th century spawned the two worst tyrannies the world has ever known--Nazism and Communism. And both had to be defeated, although we had learned, after Nazism, that we could never let our defences down. And so apart from Vietnam and Korea, the Cold War was won without a shot being fired. We do not want to have to fire many more shots, but the way you'll not have to fire many more is by keeping your defences strong, and may it apply to all of us under the leadership of America.

Finally, one little postscript. (They say a woman's postscript is always the most important thing.) I have to tell you that if your task is to get your expenditure down, because you've got too big a budget deficit, it is quite possible, provided you have politicians with conviction at the head. I had a budget deficit. I was very tough on expenditure. I knew the art of saying "no." And whatever the demands for increased expenditure, I said if you want to do this, then someone else must yield up some other expenditure because I'm sure some of you in your departments have got quite a bit that we don't need to have. The result was that in my last four years, we had a budget surplus in each year, and therefore, redeemed some of the debt that our forebears had built up. I commend this course of action to you.

Questions for Lady Thatcher

Q: In view of the fact that we have a very strong student program in The Fraser Institute, we're always thinking of the next generation and what we should be doing about that, and I'd be very anxious to know what you'd be most pleased by the teachers of that generation transmitting to those students as the central lesson of your revolution?

A: Well I think I indirectly gave you the answer in my speech. It is not only the effectiveness of a capitalist society, but the morality of a capitalist society. It is very interesting that there have been two great statesmen in the world who really emphasized the morality of what we do; there was Abraham Lincoln, who said, "Let us ensure that right makes might and not the other way around"; and Winston Churchill, who in 1938 said, "There must be a moral basis to British foreign policy." There is also, as I said, a moral basis to British economic policy. Now I'm not a Roman Catholic, but the Pope, in one of his encyclicals, pointed out that the creative capacity that man has is noble. It should be respected, encouraged, and used. He said this: "In short, besides the earth, man's principal resource is man himself. His intelligence enables him to discover the earth's productive potential, of the many different ways in which human needs can be satisfied." He went on to point out they can only be satisfied in a community of effort in a vast company, and gave really the best theological justification of capitalism that we've ever known. So I think that should be taught.

And finally, may I also say, do get some people over from Russia or from the former Soviet Union, and particularly those from Eastern Europe, from Poland, from Czechoslovakia, and from Hungary, to give them some idea of how to tackle building up a business in a free society.

Q: What is your opinion on the delivery of dollars of foreign aid, to former USSR and CIS countries?

A: Well, in the beginning we had to help them, really, because in the first winter they were going to be short of food. I personally thought, after that, and after one had tried to help to get rid of those shortages, (because it's not that they don't grow the right amount of food, it's that their distribution system is absolutely appalling, and 30 percent of it never gets to market) I thought, and I think Alan would agree, the best thing we could have done, but we didn't, and I don't think we were very generous, was to offer, if they wanted it, to build a currency board, so we could help them with convertibility of the rouble to other currencies. Alan tells me that we did the same thing in northern Russia after World War I, so we know how to do it. In other words, instead of all of us giving little bits of credit, we should have banded together and given about $50 billion, which is rather less than they've had altogether, to act as reserves for a currency board. We could have taught them how to have a proper central bank and a proper currency board to get the appropriate convertibility, and that would have given their people confidence in their own currency. That to me would have been the single most important economic help we could have given. And, secondly, of course, we should have been more active in bringing people over to learn what rule of law is all about. Would you agree with that, Alan?

Sir Alan Walters: Yes, I think that's the sort of aid, apart from humanitarian aid, that I would give to Russia. Because after all, a lot has been given. I think it was Ed Huett who said, "They got about $50 billion; no one's quite sure where it went." It's not true. It went to the pockets of the apparatchiks. It was not used to ease the pain of transition as it might have done.

Lady Thatcher: That's Alan's way of saying he agrees!

Q: Why did unemployment in the United Kingdom rise from 1,000,000 to 3,000,000 during your regime, and remain high during the whole of your term of office?

A: It didn't remain high during the whole of my term of office; it went down considerably. At first, at the beginning, you may have forgotten that we had a doubling in the price of oil after the Ayatollah went back to Iran. We were without the Iranian oil, and the price of oil actually doubled. I remember that at the time of the coal strike the price of oil was between $30 and $35 a barrel. I know, because we had to buy some of it to substitute for coal. Now, unless you permit a generalized inflation to occur, which we did not want to do, that increase in oil prices meant a colossal withdrawal of purchasing power from the purchase of other goods, which otherwise would have come about. That was one reason. The second reason was that during our time the size of the labour force increased dramatically. The size of the labour force is determined by the number of people coming onto the labour market from the birth rate several years before, and the rate at which people are retiring. The increases meant that we were going to have to have an enormous number of jobs merely to keep unemployment where it was. The number of extra young people leaving school was vastly up, something on the order of 90,000 a year, which meant we had to have 90,000 extra jobs cumulatively just to keep the situation static. The third factor was, yes, we had got rid of restrictive practices, we were getting rid of them all over the place, and therefore the same amount of production was being done by fewer workers. The fourth thing was, as we invested in more and more labour-saving capacity, that we were able to get the same output from fewer people and our productivity rose. All of those combined to produce a very difficult employment situation in the short term. Meanwhile it takes time for small businesses to start to grow to take advantage of the excess labour. As you know, we are now almost entirely dependent upon these small businesses for new job creation.

With those combinations of factors, unemployment did go up to 3,000,000, and then it started to come down in time. It had been down for a year by the time we got to the 1987 election. The policies were working through. The important thing, when you're making fundamental changes, is that you have to persevere until they work. And then you find the unemployment turns down, as the number of jobs created was very considerable indeed. There were far more people at work in Britain than there had been previously, although unemployment was high, far more people at work.

Q: Now here's a tough one: have you ever been wrong? Or, what is your most regretted decision?

A: People always ask that. But you know one is not on a bearing-your-soul exercise here. Nevertheless, I was wrong to give in on the Exchange Rate Mechanism. Alan knows I fought it and fought it and fought it and fought it and fought it, from 1980 onwards until I was the only member in my cabinet who was fighting it. And eventually John Major became Chancellor of the Exchequer after the resignation of Geoffrey Howe. I had put John Major in the Foreign Office and he had only been there about a couple of months when we got the unexpected resignation, and I said I think you better go back and be Chancellor because you know the department, you've been there as chief secretary. And he, too, became a convert to the ERM. I held it off for a very long time, until in the end, as Alan will understand, I relented.

You see, we'd had inflation through shadowing the Deutschmark, and I saw the money supply figures, after a period of very high interest rates, turn sharply. Now you know there's a time lag between putting up interest rates and getting inflation down, and I saw the money supply figures turn sharply, I knew the high interest rate had done its work and inflation would in fact come down in the 18 months following, and lower interest rates would as a consequence materialize.

And therefore as we had in fact had the dominance of money supply over other things, I eventually said to John Major, alright, well you can go in in October after we start to get the interest rate down again, and you can go in on condition that it is not a rigid exchange rate, which it was not at that time, it was a system for having orderly realignment and not a rigid system. It was only after they accepted the objective of a single currency that they made it stage one of a rigid system. I went in on condition that when we got up to the top of our band which was 6 percent either side of our then exchange rate, we would not pour in pounds to keep it down, because that would give us inflation. We also said that if we got to the bottom we would not pour in reserves because no reserves of any one country can stop the market.

Even under those conditions, it was a mistake. If I had known what was going to happen six weeks later I would have held out for another six weeks.

Q: We have just elected in Canada a number of members of a party called the Reform Party, which very much espouses your principles. What advice would you give to Preston Manning, the leader of this party, to advance capitalism in Canada?

A: Well the Reform Party is not in power. What they've got to do, if they believe in those principles, is sell the principles to the party in power. It's no good having principles unless you're prepared to put them into practice. If you're prepared to put them into practice you're constantly putting forward that viewpoint in every single debate, in every bill, in every committee stage on a bill, and hopefully having all of the people who believe the same way also making speeches, also writing to the press, also trying to create the climate of opinion to enable those principles to be turned into practice.

Also, I might note, that while you are not political, this Institute is not a passive organization. It is one which requires active expression of that in which you believe. You must, in your own non-political way, endeavour to make your principles the issues of national debate. I think you should take some solace in the fact that there is now a significant block of parliamentarians who are espousing the principles you have long advocated.

Q: At the party conference in Brighton, when you were the subject of a terrorist attack, did that affect your subsequent policies, or your policy attitudes?

A: No, it only made me more determined about the policies on which I had embarked, particularly that bearing in mind the future of Northern Ireland is determined by ballot of the people of Northern Ireland. You never, never, never allow the bullet and the bomb to oust the express view of the people by ballot, and you do not treat with terrorists ever.

Q: The Canadian health care system is basically modelled after the British health care system. We are currently having difficulties in our health care system. Would you provide us with any advice as to how we might reform our system before it acquires the problems of the National Health Service in Britain?

A: Well, the National Health Service in Britain is now run very efficiently. We have disbursed the power, giving far more of it to the local hospitals to make their own decisions than they had before, and we've altered the financial arrangements. And the whole thing, if I might say so, is run, and really very well run, on 5 percent of GDP, because it's run efficiently. Yes, I think you might have a look at it.

Q: What is your attitude toward the media, and do you think that they're in particular handling the scandals that have rocked the royal family in Britain well?

A: Well you must have a free press, and you must have free radio and broadcasting. You simply can't have a democracy without that. But I do think there are times where there are certain constraints--in our country, for example, on libel; there are constraints upon the press; in France there are certain constraints, there's a law of privacy; we've not had a law of privacy so far. I do think it's not only the freedom you have, I do think it is the way and the discretion and the courtesy and manners with which you use that freedom, which also counts, and that you leave that to the good sense of the media, most of whom observe it, some of whom who don't. But the question now is whether, in our Parliament, in the House of Commons, they will decide to go for a law of privacy or not.

I think a lot will depend upon the way in which some of these matters are handled. But you know there's no need to have a privacy law, if everyone understands there are certain manners, certain courtesies, certain traditions, that you observe.

Q: The final question--for all of the ex-pats here today, who managed to leave the U.K. at the same time as you vacated Number 10, when will it be safe to return home?

A: Well I'm going home now!

Michael Walker: I'd now like to call upon the Chairman of the Fraser Institute, Mr. R. J. Addington, to thank Mrs. Thatcher formally on your behalf.

R. J. Addington O.B.E.: Well, ladies and gentlemen, you can imagine on your behalf it is magnificent fortune for me to thank Lady Thatcher for giving us the privilege of being with her here today, and for her magnificent presentation. And, of course, on behalf of The Fraser Institute, we could wish for no greater honour than to have her participate as she has today, particularly at no cost, in our 20th anniversary celebration.

In the early '70s, when I came to Canada, torn and bleeding, and bearing the scars of British socialism, it was with a feeling of sadness, frustration, and shame. You know, Britain was an economically defeated nation, the British disease was rampant, as you all know, and the unions were dictating government policy. And millions like me felt ashamed that we had allowed this apparently irreversible horror to happen. What was wanted was a miracle, and of course Margaret Thatcher was that miracle. She produced it, and she made history by achieving the impossible against enormous odds. The term "British disease" is a thing of the past, and the British people have regained their self-esteem, and with it the respect of the world.

Lady Thatcher, you have earned tremendous worldwide admiration for what you have done, but until now, with the publication of your memoirs, we've not really known the key ingredient required to resuscitate a great nation. Well evidently it is quite simple. One must just find a leader with superhuman courage, with boundless energy, with unshakable principles, who requires no more than three hours' sleep each night, and who is driven by the self-imposed discipline of action of, "If not me, who; if not now, when."

Lady Thatcher, as a mark of our esteem, it is with much pride and pleasure that I present to you a lifetime membership in The Fraser Institute, which means you'll hear from us for the rest of your life. We think this is most appropriate because, after all, we are your disciples.

June questions and answers

Isabella Horry

Q: How large are interprovincial trade flows of goods and services?

A: In 1989, provincial exports and imports totalled $305.7 billion and $307.7 billion respectively, of which $145.9 billion were exports and imports that flowed between provinces, $159.8 billion of goods and services were exported to the rest of the world and $161.8 billion of goods and services were imported from the rest of the world. Table 1 details interprovincial trade by province. Only Ontario and Quebec had interprovincial trade surpluses.

Click here to view Table 1: Provincial Trade Flows, 1989 (Millions of dollars)

Q: What is the destination of provincial output?

A: Table 2 shows that, in 1989, on average, 70.7 percent of provincial output (total goods and services) was destined for local markets (i.e. for the same province where it was produced), 14.0 percent to other provinces and 15.3 percent to the rest of the world.

Click here to view Table 2: Destination of Provincial Output, 1989

June graph

Isabella Horry

Click here to view June Graph

Take my seat . . . please

John Robson

ON THE BUS THE OTHER day I saw the end of Western civilization. It happened at rush hour, and I was standing (this is important: standing, not sitting) amid the commuter masses, up near the front of the bus. And suddenly I heard a voice, loudly lecturing some other passengers about their obligation to give up their seats.

I looked up, and saw a gentleman, also standing, in perhaps his early to mid 50s, with a walking stick, and six people sitting in the front seats reserved for elderly and/or handicapped passengers. But something odd was going on.

First, the gentleman with the cane wasn't the one giving the lecture. Second, as far as I could see, five of the six were indeed elderly--older than the gentleman with the cane, in fact--and the sixth was a mother with an infant. Special seats, I quickly thought, are intended for just such folks as these, and one cannot blame them for the fact that there were six seats and not seven. They just ride the buses, they don't make them.

Then, however, I turned my attention to the woman who was delivering the loud and abusive lecture. She was certainly no more than forty, and not visibly handicapped. She was sitting in one of the seats right by the handicapped section. So I took a chance, and asked her why she didn't give up her seat to the gentleman with the cane.

It was a chance, because she might have told me she had a heart condition, or bad knees, or horrible arthritis, or some such affliction. However it turned out that she was not physically but morally challenged. For her reaction--and my companion on that trip will vouch for it--was this: "I don't feel like it."

Of course I observed that once upon a time doing good meant, well, doing something good, even if it was mildly inconvenient or even painful and dangerous. Now, however, it seems to mean taking a pious attitude about someone else's failure to act, while oneself remaining idle in the face of misery. She responded feebly that she did not want to hear my opinion. I told her that I hadn't wanted to hear hers, but had, and now she would hear mine, particularly on the subject of hypocrisy.

What was especially ironical about the situation is that in reading over her shoulder I ascertained that she was studying to work in a Canada Employment Centre, helping people.

A number of things stand out about this experience. First, this is exactly the sort of baggy do-gooder who urges us to take the bus, not our car, adducing all sorts of spurious environmental or land-use reasons but really because in doing so we submerge our bad, outdated individuality in the modern collective consciousness. This person, I'd bet dollars to doughnuts, thinks individualism and capitalism are selfish. But her idea of community values and social conscience is not that she herself should do something, especially not if it involves actually standing rather than sitting for a good ten minutes, but that she should hector someone else about their bad attitude while herself manifesting exactly that same attitude.

Second, there is in fact a "tragedy of the commons" with respect to the virtue the Romans used to call gravitas, a tragedy that is especially severe precisely because making communal things like public transit work requires above all else that we possess it.

Gravitas is the virtue of mature, sober assumption of common responsibilities and their unflinching discharge. It is good for a society. But if it is not to be counterproductive for individuals, then there must be rewards for it. Otherwise he or she who exhibits it is simply a chump.

And yet such arrangements as public transit undermine it. They fail to reward the responsible.

Indeed, it seems clear that the result of all our goody-goody welfare state measures, that decouple rights and responsibilities, is that people get very good at asserting rights and very bad at discharging responsibilities. In technical terms, the human capital necessary for a good society, and the human capital required to deal with those questions that are inescapably political, is being eroded. And it is being eroded by a system whose functioning, because it rejects the notion of humans as responsive to incentives, actually requires a great deal more of that capital than societies that are primarily voluntary and private, with a very small and tightly circumscribed public sphere.

For the third and most significant lesson of this episode is that there is no substitute for gravitas. Written rules and bad-tempered diatribes cannot replace community spirit if it vanishes. Indeed, in more general terms, replacing systems based on informal rules and cooperation with ones based on formal rules and coercion fails. So making formal rules about giving up one's seat does not rekindle the missing virtues that lead people to surrender their seats voluntarily. Rather, it helps create a "work-to-rule" society in which people are on a permanent moral strike but go through the motions of being virtuous.

What was the reaction of my fellow passengers, including the old people this hag was berating? Embarrassed silence; refusal to take a side; and hope that it would all go away.

But it won't. Western civilization will instead. And as we careen toward the abyss, heck, you can have my seat. Me, I'm planning to jump out the window if we slow down even slightly on our way to the edge.

Leave derivatives markets be

Filip Palda

FINANCIAL MARKETS frustrate politicians. The latest sign of this frustration came at a recent meeting of G-10 countries in Washington. Talk at the meeting was of how a new generation of financial instruments known as "derivatives" are destabilizing currencies and interest rates. What the G-10 meant by "destabilizing" is that governments are losing control of currencies and interest rates to private investors. Losing control of these cherished economic indicators can be quite traumatizing to a generation of leaders marinated in the spirit of "government knows best." To ease their trauma, the G-10 may try to pass strict regulations. These regulations will, of course, come at the expense of ordinary citizens.

Derivative financial instruments are perhaps one of the great inventions of our age. Options on stocks or commodities such as grain are examples of derivatives. A call option allows you to buy a stock in the future at a guaranteed price. For this guarantee you pay a premium. Put options allow you to sell at a guaranteed price. Options, and other derivatives, are a form of insurance. This insurance allows investors to protect themselves against risk. For example, if I manage a pension fund and I fear a collapse in the price of some of my stocks within six months, I can protect my clients with put options. Buying puts will allow me to sell my stocks in time of crisis at a guaranteed price. If there is no crisis I keep the stocks. For such protection I pay a premium to the investor who sold me the put, and who took all the risk of a price change upon himself. This is how derivatives allow people with little tolerance for risk to buy protection from people who can tolerate risks well, or from people who have a good sense of how the market will change. The insurance from derivatives encourages timid investors to bring their funds to the stock market. This opens a pool of capital with which to build the future of a nation.

Critics of derivatives speak little of the benefits of spreading risks and tapping new sources of capital. They are keener to explain that derivatives allow speculators to trade on their hunches about the future, and that easy trading leads to big catastrophic shifts in prices. This simple reasoning is easy to digest and makes for sensational media reports.

The truth is harder to understand. Speculators are in the business of guessing what prices will be in the future, buying up supplies of some good or stock, and selling when prices have risen. But buying today on a hunch that prices will rise tomorrow makes prices rise today. And setting aside supplies for tomorrow means that the price rise in the future will not be as great as speculators at first anticipate. In other words, speculators help to spread the shock of a future price increase back to the present, so that the future shock is not so great. This is how speculators can actually stabilize prices over time.

What scares governments about financial instruments, such as derivatives, is that these instruments allow investors to trade better on their beliefs about the future. This means that shocks that people sense will happen in the future can reverberate into the present. If investors pick up the slightest hint that a government plans to devalue its currency, they can get rid of that currency today, send the currency tumbling, and make the anticipated future an embarrassing present reality for the government. Derivatives are not essential to trading on beliefs about the future, but they make such trading easy.

It is almost comical that the G-10 governments pretend to be worried about financial stability. In the 1980s these governments were responsible for some of the biggest risk-taking and financial crises of the century. For example, deposit insurance in the U.S. and Canada discouraged people from worrying about how secure their banks were. This allowed high-risk banks to flourish and then to crash, at a cost of many billions of dollars to taxpayers. G-10 governments regularly come to the rescue of banks who have made bad loans to the third world, and to the rescue of businesses who have made bad choices at home. When entrepreneurs know they can count on government help to get them out of a pickle they will take less heed of risks. If the G-10 governments want to make the financial world a safer place they should clean up their own acts first.

Reactions to violent crime

Lydia Miljan, Director

National Media Archive

RECENTLY, CANADIANS have been shocked by a drive-by shooting in Ottawa, and the killing of an innocent bystander in a trendy restaurant in Toronto. In recent weeks, there have been drive-by shootings in both Calgary and Vancouver.

The killings in Ottawa and Toronto were most striking because of the randomness of the acts and because firearms were involved. While reports about these and other murders focus on the human dimension and on the lives of the victims and the responses of their families, these crimes have also galvanized discussion and debate about the seeming increase in random violent crime in Canada.

While the outrage expressed in the wake of these brutal murders is unanimous, there has been less agreement about the proposed solutions. As part of our continuing series on crime in Canada, in the most recent issue of On Balance we try to get a sense of the debate being waged in the media about the solutions being put forward to stem the increase of random violence. Thus, we surveyed selected major dailies across the country and the national newscasts of CBC and CTV. Our study period followed the two high-profile crimes in Ottawa and Toronto from March 27 to April 18 1994.

Gun control most frequently debated solution

Of the various proposals to curb the seeming increase in violent crime, gun control emerged as the single most-discussed issue in all news outlets examined, with the exception of the Calgary Herald. It should be noted that although most major dailies and the national media covered the two incidents, they were given the most attention in the eastern Canadian papers and on CBC television. The Vancouver Sun, Calgary Herald and Winnipeg Free Press gave scant coverage to the issue resulting from the two incidents.

Gun control supported

In debating the arguments for and against stricter gun control, most news organizations gave the proposal almost unanimous support. CTV News, the Vancouver Sun, the Globe and Mail and the Ottawa Citizen provided few contrary arguments. CBC Prime Time provided three times as many arguments supporting gun control as opposing it, and statements in the Toronto Star twice as frequently supported gun control as rejected it. For example, Bob Brent, writing in the 8 April Toronto Star noted, "[Susan] Eng, [Metro Toronto Police Services Board Chairperson] stressing the need for stronger gun controls, said members of the public should reject any thought of arming themselves in self-defense. She said the priority should be `to get the guns off the street. . . . One gun is too many.'" While the story discussed issues such as police budgets and the soft justice system, there were no statements refuting or challenging Eng's and the Police Board's call for stricter gun control.

The calls for stricter gun legislation also came from the government itself. Much of the discussion centred on Justice Minister Allan Rock's proposal for a total ban on gun ownership in Canadian cities. Susan Delacourt reported in the front page of the 12 April Globe and Mail: "Mr. Rock, a Torontonian, said he leans toward a hard-line, anti-gun stand." This theme was reported in most major dailies across the country.

Stricter penalties second option

While gun control legislation was the most discussed solution to the problem of violent crime, there were some who argued in favour of stricter penalties such as the death penalty or reform of the Young Offender's Act. However, gun control was given almost twice as much attention as stricter penalties or more enforcement.

The emphasis on gun control over stricter penalties fails to reflect public opinion which has been consistently in favour of strict penalties, such as the death sentence, since 1987. According to a 10 March 1994 Gallup report, "if a national referendum were held on the question of executing a person for committing murder, 59 percent of the Canadian public would vote for reinstating the death penalty." It should be noted that this poll was taken before the incidents in question on February 7 to 14. Further, the majority also felt that the death penalty serves as a deterrent to murder. This view has remained relatively constant since 1987 as well.Gallup poll results are based on 1005 telephone interviews with adults. The sample size is accurate within a 3.1 percentage point margin of error, 19 in 20 times.-Note. 

Pro-gun control interest groups used these recent events as justification for their view. For example, Wendy Cukier, a professor of administration and information management at Ryerson Polytechnic University and the president of the Coalition for Gun Control became the focus of much coverage in the debate. Her statements represented 12 percent of the total coverage in the country on the solutions to violent crime stemming from these incidents.

This finding is even more startling considering that in the case of the Globe and Mail, for example, Wendy Cukier's view alone was given 29 percent of the total attention to solutions. In contrast, the Vancouver Sun, Winnipeg Free Press and Calgary Herald did not relate her views. All other news organizations, including CBC Prime Time, in which she was a panellist, the Toronto Star and the Ottawa Citizen provided significant commentary from this one source. And on CTV News, her view was included in Dave Rinn's story, "The majority of Canadians want tougher gun control and they want it before it's too late."

Violent crime and gun control laws

Michael Walker

LYDIA MILJAN, THE DIRECTOR of the National Archive, constantly reminds me that for most people, reality is dictated by television. That is to say, other than the day-to-day contact that we have with our family, friends, and working contacts, we get our impressions about the world around us from television. Naturally enough then, when an item becomes an issue for television, it becomes an issue for us. Recently there has been increasing coverage of violent crime on television news. Thus, there is an increasing preoccupation with violence as an aspect of our lives. Of course violent crime affects only a tiny fraction of the population and the overall incidence of violent crime has actually been falling, both in the United States, where violent crime overall last year was down by one percent, and in Canada.

But against this overall decline in violence, there has been an increase in certain kinds of violent crime. Violence involving juveniles--the so-called young offenders--has been going up and the prevalence of weapons and violence in the nation's schools has been increasing. Even more disconcertingly, the murder rate has been increasing. For example in Canada, from 233 murders in 1961, or a rate of 1.28 per 100,000 population, the murder rate surged to 732, or 2.67 per 100,000 in 1992. Scott Newark, General Counsel to the Canada Police Association, cited in the Toronto Globe and Mail, April, Page A1, story entitled, "Maximum terms to be toughened."- Note.

Of course, television coverage of crime also extended to discussion of the cure. As Lydia Miljan notes in the preceding article, the policy recommended most frequently in Canadian television coverage is gun control. According to this view, the reason for the high and rising murder rate is the availability of guns. If they were less available, the murder rate would drop. The evidence offered usually consists of pointing to the United States where, during last year, according to the Federal Bureau of Investigation, 24,500 people were murdered, or 9.49 per 100,000 people. The murder rate in the U.S. is therefore three times higher, more or less, and guns are much more readily available. The conclusion: more guns means more murder!

The conclusion forms a neat package. The view is very widely accepted; it has a very television-like simplicity about it. Most importantly, it is the view that has influenced current policy in Canada. The view is nevertheless incorrect.

Sweden, with a long history of feisty independence, arms virtually everyone. In Switzerland, where every man must enlist in the army for a period, every household has a rifle and 30 rounds of ammunition. Their murder rates are even less than Canada's. So, guns plus people don't necessarily equal murder and mayhem.

In fact, there is a very interesting connection between guns and self-protection which never seems to surface, but was plumbed in a very interesting paper by Professor Gary Mauser of Simon Fraser University."Firearms and Self Defence: the Canadian Case," Gary A. Mauser, Institute of Canadian Urban Research Studies, Simon Fraser University, 1993.-Note His study of Canada shows, amongst other things, that on average each year about 26,000 people use a firearm to protect themselves against attack by another person. About 30,000 protect themselves from attack by an animal. The total number of uses of firearms for self protection from all sources of threat during the year are about 62,000.

Now, I hear you ask, "Well, how often are guns used for malevolent purposes?" You will doubtless be amazed to discover that the total number of incidents involving the criminal misuse of firearms was only 20,338 in 1987 in Canada. Total woundings with a firearm, whether criminal or accidental, were 2,699, and total deaths about 1,500. On the basis of these numbers you would have to conclude that banning firearms will increase the number of injuries because, as 79 percent of Canadians agree, gun control laws affect only law-abiding citizens; criminals will always be able to find firearms. Mauser, Ibid, p. 13, table 6.-Note.

Our research at The Fraser Institute does not yet permit us to say what will deter violent behaviour. We are virtually certain, however, that gun control will not prove effective in achieving this goal.

There's gold in them thar' non-profit houses

Karen Selick

Karen Selick is a lawyer and columnist for Canadian Lawyer. This column is adapted from an article that appeared earlier in Canadian Lawyer.-Note

THE ONTARIO GOVERNMENT'S latest budget, brought down last month, promised that 20,000 non-profit housing units would be built over the next four years.

Sometimes it seems as though politicians think there is something magical about the expression "non-profit." They seem to operate on the theory that the government can produce things more cheaply because it doesn't have to make a profit. It's as though profit were a layer of cream floating atop a bottle of overhead, waiting to be skimmed off by fat, lazy businessmen. Eliminate the cream, and the cost of the finished product would be less.

That's seductive imagery, but inaccurate. The truth is, the non-profit housing bottle actually contains something more like homogenized milk. There's plenty of cream in there, but separating it would be virtually impossible.

Almost every step of a non-profit housing project is carried out by someone who is in it for the profit, from the architect who draws up the plans, to the painter who finishes the walls. You don't find tradesmen or suppliers turning down contracts for these projects because they're unprofitable. In fact, the construction industry promises to be a more effective, if somewhat more subtle, lobby group for non-profit housing than the people who will eventually occupy the houses.

There may be no entrepreneur orchestrating the whole thing and skimming cream off the top, but in every non-profit project, there are people who fill a comparable role. They may be employees of the provincial housing ministry, or they may be members of an emerging class of non-profit development consultants. Pardon the continuing food imagery, but these folks don't work for peanuts either.

If we really wanted to test the layer-of-cream theory, we'd have to set up non-profit corporations for every component of the project: non-profit concrete, steel, lumber, drywall, paint, landscaping, and so on. Of course, each new non-profit enterprise would face the same problem; its suppliers would be trying to make a profit. We'd have to nationalize the whole economy to make a serious effort at squeezing out the cream.

Fortunately, those considerate citizens of the former Soviet Union have already tried this experiment for us. Their economy (not to mention their housing stock) is crumbling around their ears. Maybe we can learn from their mistake without having to repeat it ourselves.

In Belleville, Ontario, where I practice law, the local newspaper reported that a recently constructed non-profit complex of 48 townhouses will receive annual subsidies of $537,000, or $932 per home per month. That ignores capital costs, which were also subsidized. In nearby Trenton, a similar project is subsidized to the tune of $959 per home per month. The classified ads in the same newspaper show that in both cities, you can rent a detached 3-bedroom house for $600 to $875, from a variety of private landlords greedily trying to make a profit.

The Ontario budget revealed that after the 20,000 non-profit units are built, it will cost taxpayers a further $200 million per year to keep them operating. That's an average of $833 per unit per month. This doesn't include the amount that the tenants will pay as rent. The only conclusion we can draw is that non-profit housing is far more expensive than housing produced by the marketplace.

There is mounting evidence that government-produced goods and services invariably cost more, not less, than the same things produced in the marketplace. The Reason Foundation, which reports annually on privatization projects around the world, found that various governments had privatized such diverse functions as garbage collection, transit systems, fire departments, recreational facilities, prisons, airports, and many others, with savings ranging from 10 to 40 percent. Forty-five percent of those governments reported significantly improved quality.

If low-income tenants and buyers have been finding slim pickings in the housing market, the failure is not one of the marketplace. Left free to exercise their ingenuity, entrepreneurs routinely service both the upper and the lower ends of any market, and make money at both ends. The clothing industry is a good example. There are high-priced stores like Holt Renfrew and cut-rate places like Bi-Way. Both make a profit, and nobody's clamouring for the government to establish non-profit clothing stores.

Housing is different because the profusion of controls and regulation has made the lower end of the market a "non-profit" proposition even for those who would like to be in the industry earning a profit.

Rent control is probably the biggest culprit, reducing both the supply and quality of rental housing. Swedish economist Assar Lindbeck has called rent control "the most efficient technique presently known to destroy a city--except for bombing."

Ontario laws have made it very difficult for landlords to evict troublesome tenants, and this has dissuaded many people from investing in rental accomodation.

Some would-be tenants who can't find places to rent decide to buy instead, thereby driving up prices at the lower end of that market too.

The artificial push into home ownership is aggravated by the capital gains tax exemption for principal residences. This increases demand for houses relative to other investments, but doesn't affect supply. The result: higher prices.

Zoning is another culprit. Minimum lot size requirements, for example, allow existing homeowners to drive up the values of their own property, while denying others the opportunity to join their ranks.

A few years ago, the Ontario Home Builders Association catalogued 280 provincial acts, 460 codes and 400 regulations governing housing construction. Complying with all this law means that it takes on average 10 years to convert raw land into housing lots.

Some U.S. studies have estimated that the cost of regulatory compliance constitutes 20 to 30 percent of the price of a new house.

This is all so obvious that one can't help wondering about the motivation of those who impose these laws, then agitate for non-profit housing. Is it stupidity, or is it malevolence? I'm still deliberating.

Foreign aid and chaos

Filip Palda

THE WARS WHICH ARE tearing many developing countries apart could not rage without the help of developed countries such as Canada. Canada gives aid dollars but refuses to trade with the Third World. Aid puts money into hands of governments bent on war. Lack of trade kills industries and creates masses of unemployed young men. The only outlet for their energies and talents is revolutionary movements or armies. Canada and other western countries could save themselves the cost of being an international police if they agreed to be an international club of nations open to all trade. If we do not give the third world countries a productive way to channel their energies, their unrest will grow and the west will pay part of the price.

Foreign aid has a bad record. The West has either given money directly to third world governments or it has financed large infrastructure projects. Both types of aid have increased the power of the state and made the people worse off. Direct aid has often been diverted toward building large bureaucracies or to maintaining a powerful military. Indirect help such as building dams and sending food has relieved governments of caring for their suffering people. The food we sent to Ethiopia in the mid 1980s allowed the dictator Mengistu to confiscate domestic food supplies and feed his army. The West very conveniently took charge of feeding Mengistu's starving people.

Dismal stories such as these can be told for many of the countries to whom we send "help" in the form of money. The stories have the same depressing theme: aid helps the governments of poor countries to prosper. This prosperity attracts the best talents in the economy to the government. Since the government is devoted to using up and confiscating resources, and the best people in the country are in government, the private economy shrinks. This leaves people without work. Their best chance of getting ahead is either to create revolutionary movements and seize power, or to join the government army in campaigns to seize the wealth of neighbouring countries. Foreign aid is not responsible for the whole problem, but it plays a role.

We could change the incentives that people in the Third World face if we opened our doors to their trade in goods such as textiles, machine parts, and raw materials. The best people in those countries might then be drawn more towards increasing the size of the economic pie than towards cutting that pie into pieces. However, trade is a bad word among our leaders. Canadian politicians are so opposed to trade that they do not even allow a free flow of goods and services between the provinces. Until word gets out that trade enriches both sides in an exchange, the Third World will continue to suffer, and Canada will miss chances to enrich itself while helping other countries to develop.

References

De Soto, Hernando. The Other Path: The Invisible Revolution in the Third World. New York: Harper and Row, 1989.

Murphy, Kevin M. Shleifer, Andrei and Vishny, Robert. "The Allocation of Talent: Implications for Growth." Quarterly Journal of Economics, May 1991, 503-30.

Visitors

Recent visitors to the Institute include:

•Melvin Smith, Q.C. of Victoria

•Mathis Wackernagel, Ph.D. student at UBC Centre for Human Settlements, Dept. of Family Practice, Faculty of Medicine

•Fred Mannix, Chairman, Trison Investments

•Vice Admiral (retired) Chuck Thomas of Victoria

•Everett Berg, Chairman of Pacific Research Institute in San Francisco

•Mr. Roberto Gamboa-Mascarenas, Consul General of Mexico in Vancouver

•Dr. Graham Parsons, Executive Director, The Development Institute, University of Regina

•Mr. David Radler, President, Hollinger Inc.

Letter

Cleaning homes in Canada is a dirty business

"Living in Canada is a very taxing experience."

--Ed Uluschak, editorial cartoonist, Edmonton Journal

Ed Uluschak is right. Many Canadians argue that we are being "taxed to death," but that's not my argument here. I actually believe that the GST is a good tax since it is fairer than what it replaced. My argument is that the application of GST to low-margin, labour-intensive personal service industries provides an incentive for tax evasion. Even more, it destroys thousands of jobs for lower-educated, yet (once) highly-motivated, honest, tax-paying workers. It kills tens of millions of dollars in government revenues. Perhaps worst of all, it kills morality. As Catherine Swift of the Canadian Federation of Independent Business put it, "Our taxation system makes people into crooks and cheats." To which I will add: Especially the GST as it applies to the residential cleaning industry.

Let me share with you our experience. I have been President of Molly Maid International for the last fourteen years. We are the largest maid service in Canada currently employing 900 honest and hard-working Canadians, a healthy increase of 896 from the 4 we employed in 1980. Yet we had 1500 employees when the GST was introduced in 1991.

So, where are those 600 missing workers in a country which still needs homes cleaned because the majority of adult citizens work outside the home? They have joined the underground economy where they can "charge less" because they pay no GST, pay no income taxes and make no Canada Pension Plan or Unemployment Insurance contributions and where the possibility of being "caught" is next to nothing since with cash there is no audit trail. In fact, they are also likely collecting Unemployment Insurance or welfare payments. Pretty sad, eh? Our workforce decline of 600 was only a 40 percent decline. We actually fared far better than many of our once-legitimate, once-above-ground competitors who went totally belly-up, driven out of business by high taxation, and especially by the GST, which was the single biggest catalyst to their devastation.

Here is the irony. Before 1980, the residential cleaning industry had been almost totally underground, with "cleaning ladies" catering to wealthy, single-income families. With the growth of double-income middle class families in the 1980s, enterprising Canadians created a new, thriving, competitive, and legitimate tax-paying industry which, just before the GST was introduced, was contributing $50 million annually to government coffers. Yet now, with bitter thanks to the GST, we are returning to the pre-1980s, as legitimate, tax-paying operators across Canada have been forced to curtail or discontinue their operations completely, freeing their former employees to join the burgeoning underground economy.

The framers of GST legislation were either ignorant of, or insensitive to, the impact of GST on low-margin, labour intensive, personal service businesses despite the considered, thoughtful representations and recommendations made by our industry to the Ministries of Finance and Revenue pre- and post-GST introduction. The result is obvious and ominous. Here are some statistics:

•Cleaning homes has become the largest single underground activity in Canada today (outside of contraband/criminal) at some $1 billion annually

•Up to 20,000 workers (95 percent of them unskilled who would have difficulty obtaining other legitimate employment, yet many of whom actually chose above-ground, honest, tax-paying work in the residential cleaning industry over social assistance) are being forced into social assistance. And, most will keep cleaning homes--your homes--as they did before, but for cash. No longer will they pay over $50 million in GST, payroll and income taxes. Now they will collect social assistance. Can you think of a better definition of the term "counter productive" than what our government has done to this industry?

The answer to this problem is exceedingly simple. Just apply the Small Trader's Exemption to all businesses with threshold sales per full-time employee of $30,000 a year or less instead of just businesses with the same threshold sales. This would only catch those low-margin, labour-intensive, personal service businesses which are prone to moving underground. It would save investments, protect jobs, protect government revenues and avoid increases in social assistance payments.

Let me conclude by asking you a few questions. Do we want to protect the small business owner in up to 2,000 residential cleaning businesses? Do we want to protect up to 20,000 jobs? Would we prefer protection of government revenues of close to $40 million annually to an increase of over $100 million annually in social welfare payments? Finally, do we want a nation of tax-evading cheats (both the cleaners and those of us who employ them) or a nation of honest tax-paying citizens? The problem is not just the GST; it is us. Underground "cleaning ladies" have been around for so long, we tend to think of them as being legitimate. They have been popularized in television programs such as "Hazel," in television commercials such as "Lysol," and in movies such as "Mrs. Doubtfire." Indeed, the underground cleaner has been so legitimatized, that even a model citizen wouldn't think twice about using one. Sadly, unless government makes changes to the GST--and quickly--there will be many more of these underground workers to choose from and a lot fewer taxes collected to pay for all those safety nets of which we Canadians were once so proud.

Jim MacKenzie, President,

Molly Maid International Inc.

June quotation

"Liberty lies in the hearts of men and women; when it dies there, no constitution, no law, no court can save it."

Judge Learned Hand,

cited in Chronicles, April 1994, p. 27.

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Last Modified: Wednesday, October 20, 1999.