Do you remember where you were when we hit the wall?

Michael Walker

ONE OF THE MOST frequently asked questions at financial seminars these days is, "When are we going to hit the wall?" The person asking means "when is Canada going to experience the same financial consequences of its enormous debt burden and continuing large deficits as have been felt by Italy, Sweden and, most notoriously, New Zealand?" The answer I now give is, "We have already hit the wall, but we have found out that it is made from Indian rubber and is stretching with the impact!"

How can I say that? What does it mean?

Its important to notice that there is one very significant difference between Canada and the European countries which have recently "hit the wall." That difference is the exchange rate regime in place in those countries. Italy and Sweden had both "fixed" the value of their currency in terms of another currency, in the case of Sweden, the Deutch-mark, in Italy's, the European Exchange Rate Mechanism. In both cases, the country had erected a fixed financial wall against which the changes in their financial markets could be measured absolutely.

Canada, on the other hand, has a flexible exchange rate--a rate of exchange which moves with the ebbs and flows of activity in the international balance of payments. Movements in the extent of trade in goods and services cause either a surplus or a deficit in the current account as we buy less or more from foreigners than they buy from us. Movements in the capital account reflect the borrowing and lending activity of Canadians in their dealings with foreigners. Movements in either account cause changes in the value of the Canadian dollar. Paradoxically, while the more goods and services we receive from foreigners, the weaker our currency, the more we borrow the stronger it gets--up to a point!

As governments borrow to finance their deficits, the mechanical effect of this is to increase marginally the interest rate they have to pay. This attracts foreigners to our capital market where they buy government bonds. In order to do so, they sell their own currencies and buy Canadian dollars, with the result that the value of the dollar rises--and indeed has risen--as governments run larger deficits. On the other hand, as investors, both Canadian and foreign, become concerned about the extent of government borrowing and their ability to repay, they begin to move their assets out of Canadian dollars and/or demand a higher interest rate to continue to hold them. In effect they say, "It's getting more risky to hold Canadian assets so I want compensation in the form of a higher rate of interest."

Of course, decisions of this kind are being made by people every day and different people have different margins or risk they will accept for a given interest rate. Some Canadians have already converted all their assets to American dollars because they believe that the current low value of the dollar will persist or get worse. They are concerned, for example, about the situation in the province of Quebec and the possibility of separation and the bad effects this might have on the value of our currency. For these people, the wall has already been hit. They are no longer willing to lend the government of Canada money, nor are they willing to hold Canadian dollars. Some foreigners have made similar decisions.

The more people there are who have such attitudes, the lower will go the value of the Canadian dollar and the higher, for any given size of the deficit and their borrowing requirement, will be the interest rate that governments have to pay to borrow the money they need.

The fact that Canada has a flexible or rubber-like exchange rate means that we don't have the sense of impending and actual crisis which has attended the recent problems in Europe. There doesn't have to be an official devaluation for which governments must take responsibility. There isn't the crisis period which precedes a devaluation in which the government must decide whether it can "hold" the line on the exchange rate which it had selected. The lack of an official exchange rate peg therefore removes the sense of "hitting the wall." But make no mistake: we have hit it.

Joe and Fran in Winnipeg, Martha and George in Vancouver, Franz and Gerda in Munich, the Rosses in New York, the Nishiyamas in Osaka all hit their wall weeks ago and others are doing so as I write this article. In consequence, during the past year, the exchange rate (in terms of U.S. dollars) has fallen 10 percent and during the past two months the bank rate has risen 2.3 percentage points--an increase of 60 percent from its lowest level in February of this year. Have you hit your wall yet? When will you?

The government of Canada does face a fixed wall, of course, and that will be reached once all borrowers decide that no interest rate which the government can pay will compensate them for the risk they must endure to hold Canadian government bonds. Before the government reaches that New Zealand-type wall, they'll encounter considerable rubble impeding their progress in the form of down-grading of their debt by bond rating agencies. Such agencies have the effect of orchestrating or coordinating the timing and actions of investors so that they eventually act like a solid wall, stopping the government's access to financial accommodation. We have not yet reached this particular wall and are unlikely to do so unless federal fiscal conduct deteriorates further, or Quebec separation touches off a chain reaction of fiscal pessimism.

The minimum wage and worker training: two sorry companions

Filip Palda

INSTEAD OF PROPOSING worker training programs, our governments should get rid of the minimum wage. The minimum wage makes young workers, who lack basic skills, too expensive for employers to hire. Unskilled workers who cannot find entry level jobs have little hope of developing the talents and reputation they need to move to better jobs. The minimum wage is a draft into the army of the unemployed, where basic training is no training at all. The politicians who recruited this army are now pressing taxpayers to pay for the basic skills programs that a labour market, left to its own devices, would have provided. It is typical of governments to meddle in a market, create a disaster, and then propose further meddling to solve the problem. Our leaders are forced into such meddling because of two powerful myths that dominate popular thinking on wages and skills.

Myth: Without a minimum wage, employers will exploit workers.

Reality: The best way to exploit a worker is to make sure you are the only employer. This is usually the case in dictatorships where the state runs the economy. The former Soviet Union is an example of a country where most workers got paid less than they were worth because no one competed for their services. The state was the only employer and it set the wage. Entry level labour markets in Canada are different. Many employers compete to hire good workers. A fast food chain that offers half the wage of its competitor will find itself with few workers. If overall, wages seem low, it is because labour is abundant. Low wages reflect this abundance. Low wages do not reflect the ability of employers to pay workers less than they are worth.

Ironically, the minimum wage encourages exploitation. It protects highly-trained, well-paid workers against competition from the most vulnerable people in the labour market. Why hire an overpriced, untrained youngster when experienced workers can do the job at a slightly higher cost? Thus the young don't gain experience, which reduces their bargaining power vis-à-vis employers. Unions support the minimum wage for the same reason they oppose free trade with less developed countries: to protect themselves from cheap, competing labour.

Myth: The minimum wage protects workers from poverty.

Reality: The minimum wage destroys jobs and guarantees that some people will stay poor for a long time. This is hard to see without some basic idea of how job markets work. Businesses use a mix of people and machines to make their product. Often a business will train its workers to make them more productive. In return for such training, workers accept a lower wage than they would without training. This is how workers "pay" for their practical educations. If wages rise because of a government law, businesses will try to get the same job done by investing in machines instead of people. Minimum wages lead to fewer jobs and shut the door to the university of the workplace. If governments care about poverty, they should focus directly on the problem by giving the poor a basic allowance to cover the essentials of life. Governments should not distort labour markets and stunt careers in a roundabout effort to help the poor.

Even though most economists agree that minimum wages hurt those they are intended to protect, most other people like the idea. Last month the French prime minister tried to get rid of the minimum wage, but had to back down after students took to the streets in protest. The students wanted high wages and jobs. The same reaction would face any Canadian politician who tried such a direct solution to youth unemployment. Until people realize that high wages cannot be decreed, but must be arrived at through years of experience at work, politicians will be forced to destroy jobs with a minimum wage and patch up the mess with worker training programs and make-work projects.

The illogic of food banks

Karen Selick

Karen Selick is a lawyer and columnist for Canadian Lawyer. Portions of this article have appeared elsewhere. -Note. 

ACCORDING TO SEVERAL recent newspaper articles, food banks in Canada are finding it harder and harder these days to attract donations from the general public. Commentators usually attribute this to some sort of "charitable exhaustion" phenomenon; they theorize that people are just plain tired of the constant requests for help.

There may be another explanation, however. Quite simply, food banks have always been an illogical idea, and the public may increasingly have come to recognize this.

It may have made sense for people who wanted to help starving Somalians to send them food shipments. For a variety of reasons (including bad government and war, as well as the more obvious droughts and crop failures), there was simply no food available locally for the Somali people to eat, even if they had been able to pay for it. There were also no functioning market mechanisms left in place to bring food in from elsewhere.

This is not the case in Canada. Here we have an abundance of food and an efficient system of distributing it through supermarkets and small grocery stores. The issue here is to determine the best way of getting some of this abundant food into the hands of those who don't have money to pay for it.

The first problem with food banks is that they set up a duplicate distribution system for food which has already been retailed once. They are another way-station between producer and consumer; the cost of their rent, heat, insurance premiums and so on must all be added in when calculating the real cost of the food they distribute.

Donors, who have already made their selections from the neatly ordered supermarket shelves, toss everything helter-skelter into bags or bins, from which it has to be re-sorted and re-shelved--a further waste of effort.

There is even a waste of the effort expended by food bank users. Most of the time, they patronize grocery stores located close to their homes. To get to the food bank, they must make an extra trip, and in most cases--since food banks are fewer in number than grocery stores--a longer trip.

Second, food banks rely on pure luck to match up the random preferences of donors and recipients. When a donor drops a can of peaches into the food bank bag, how does he know that some recipient wouldn't have preferred pears or apple sauce? Maybe everyone else in town donated peaches that week, and it would have been a lot more useful to donate a can of tuna.

Merchants solve this problem through highly refined marketing and price mechanisms. They monitor their inventory closely to see what shoppers prefer. Items that don't sell well are marked down to encourage sales, and restocked only in small quantities. Items that people prefer are restocked generously. If something is in short supply, prices rise, sending a signal to suppliers to increase production.

Food banks lack these feedback mechanisms that permit merchants to make the purchasing decisions most in accordance with consumer preferences. There is no systematic way for users of food banks to communicate their preferences to the broad base of donors who are in effect the purchasing agents for the food banks.

Third, food banks often rely on volunteer labour, which makes their expenses seem low and presumably provides some emotional satisfaction for the volunteers. But how sensible is this? If the volunteers are lawyers, doctors or even plumbers, it would make a lot more sense for them to spend their time doing what they are best at, then donate the money they earn so that the food bank can hire someone with a lower opportunity cost to stock shelves. One hour of a lawyer's time practising law--even after paying income tax--can buy many hours of some teenager's time manning the food bank.

Fourth, donors who dribble in little tokens of philanthropy each week are passing up an opportunity to amplify their contributions through the use of tax credits. They could get a lot more bang for their buck if they donated cash through a registered charity and reduced their income taxes.

The solution is glaringly obvious. If charitably minded individuals want to help feed the poor, the most efficient way to do it is to make use of the existing marketplace food distribution system. Charities should give the needy cash, or food vouchers redeemable at grocery stores. Recipients would be able to select what they wanted most, without making a separate trip. The expense of handling everything twice would be eliminated.

I suspect, however, that this suggestion will not be popular with many food bank donors. They harbour a legitimate concern that if they donated money instead of good, wholesome food, it might be used to purchase potato chips, soda pop, disposable diapers, cigarettes and other items not on Canada's Food Guide and not likely to ameliorate malnutrition.

This puts the anti-poverty lobby in a dilemma. They can't be seen to support this paternalistic argument. For example, in December, 1992, Ontario's Social Services Minister Marion Boyd made the faux pas of announcing that the December welfare cheques would be sent out after Christmas instead of before, because the experience of previous years showed that welfare recipients tended to spend their December cheques on Christmas presents and had to apply for emergency funds to pay the rent in January. Welfare activists howled in outrage. "The poor have just as much right to manage their money as anyone else," said one.

The activists are faced with a double-edged sword. If the poor can manage their money just fine, then cash and food vouchers make a lot more sense than food banks. If they can't manage their money, then this may be the explanation for the predicament they're in, and no amount of donated food is going to remedy their situation permanently until they modify their own behaviour.

May quotation

"'You try to increase the incentive to get out of welfare, and you can inadvertently increase the incentive to get in to it,' he said. It happened before, 'and, by God, if we're not careful we're going to do it again.'"

Charles Murray, National Review, February 7, 1994, p. 45.

May graph

Isabella Horry

Click here to view May Graph

John Robson, chump

John Robson

ONE OF THE THINGS THAT most annoyed me when I began working for The Fraser Institute was that certain people, such as the Globe and Mail's Michael Valpy, dismissed us as predictable. In the first place, Michael Valpy's columns are as predictable as getting a rash from poison ivy (and about as enjoyable). And in the second place, there's nothing wrong with being predictable. Joe Carter is predictable, and that is why his employers, predictably, pay him.

What is wrong is being predictably wrong or bad.

And The Fraser Institute, though predictable, is predictably right and good.

We do not, therefore, oppose all actions by governments. We apply a consistent set of criteria for evaluating them--that darn predictability again--and those criteria generally reveal to us that a particular government policy is bad for the simple reason that most government policy is bad. Yes, it's true, we are generally against most of what government does, but if anyone is to be blamed for such consistency, surely it is the governments who are consistently doing foolish things, not the humble messengers who say "Yup, they're at it again."

But when government does something unpredictable, when government actually undertakes or at least announces a sound policy, our predictable adherence to the principles of individual liberty leads us to say that it is good. And when B.C. Premier Mike Harcourt promised no new taxes, and no tax increases, I wrote a column saying this was a good idea (and when his Minister of Finance repeated that pledge in her budget address, I incorporated praise for her too into the version of my article that appeared in the April Fraser Forum).

Apparently this surprised some people; at least one published version of my column indicated in the subtitle that it was strange to hear The Fraser Institute complimenting government.

However, as it turns out, I was not being predictable, I was not demonstrating adherence to the principles of individual liberty, and I was not showing my leftist critics that they are yapping, shallow fools. No, I was being a yapping, shallow fool.

For scant weeks after that budget, and after staking their admittedly limited credibility on this no new taxes pledge, and posing as advocates of budget restraint, Mr. Harcourt, Finance Minister Cull, and the rest of the B.C. government slammed the forest industry with half a billion dollars' worth of new taxes and introduced a half-billion dollar spending program, neither of which were in the budget and neither of which are compatible with the Premier's staunch and high-profile pledge.

Doubtless he thinks this is a fee, which is why I took pains in my article to explain the difference. To repeat, stumpage charges are not a fee because forest companies and workers with huge sunk capital have no choice but to pay them; they cannot save the money and do without the service. (And stumpage fees are also not a price or price-like charge because they are not set in competitive auctions.)

What has really happened is that someone has been predictable. The premier and the finance minister are committed to the principle that the larger the public and the smaller the private sector, the better off a society is, and also to the classic leftist beliefs that "it's all in the mind" and that "words mean what I want them to mean: nothing more and nothing less." And they have, predictably, acted exactly consistently with those beliefs: "Taxes are bad, and taking citizens' money is good, so taking citizens' money is not taxation." Or perhaps it's just "Taxes are bad, and I am good, so this is not a tax."

Either way, the syllogism may seem stupid, but as I was saying about consistency . . .

Anyway, I owe my readers an apology. I was trying to be fair-minded about Mike Harcourt, and sacrificed my own predictability to that attempt. The premier, on the other hand, was perfectly predictable.

And I should have known he would be. True fair-mindedness accords principled consistency to others; it does not wishfully think. So it isn't Premier Harcourt's fault that this happened, it's mine.

I was a chump. I'm sorry. It won't happen again.

Sweet deals

Lydia Miljan

Director, National Media Archive

DURING MY RECENT TRIP to South Africa to establish a methodology for monitoring the media coverage of that nation's upcoming election, I witnessed for the first time in my career the blatant misuse of government funding for personal gain. The irony was that I did not have to travel to South Africa to witness it, since it was Canadians who were abusing the system.

There were significant numbers of Canadians arriving for various observer missions and support while I was there. Most of those arriving would be used as monitors of the election for the next three months.

I met one Canadian bureaucrat who was assigned to South Africa for a year. He was quite pleased with the deal he negotiated and couldn't contain his pride about how much he got for the assignment. He confided to me all the perks and privileges he received on this mission. He told me that for his stay in South Africa, he negotiated a luxury car, a top-of-the-line furnished apartment in one of the most fashionable and expensive districts in Johannesburg and to top it off, despite the official Canadian government policy of reducing per diems when an employee lives in an apartment, no reductions in his per diem. As well, he had negotiated three paid trips back to Canada, as well as a trip to South Africa for his wife. What was even more frustrating about this deal was his further admission that his function in South Africa was to advise only when asked, and to "cover his butt," when he did so. The remainder of our conversation was a discussion on other ways to get more money. Never had I spoken with someone either in the private or public sector whose eyes lit up so brightly when the subject of money for nothing came up. It was truly an eye-opener.

If he were the only Canadian bureaucrat in South Africa out for only his own personal gain, he would not be worth mentioning. But the longer I stayed, the more stories I heard about Canadians coming down to South Africa, using Canadian tax dollars trying to make additional money apart from the very generous per diems and salaries.

A woman who worked with the Public Broadcasting Initiative provided additional anecdotes about the conduct of other Canadians. This Initiative was set out to help change the way the public broadcaster covered the election campaign. To do this, other public broadcasters were brought in to educate the South Africans on fairness in the press. This included the Australians, British, Americans and of course the Canadians. It just so happened that at the same time I was there establishing a methodology to assess media fairness, CBC officials were there to impart their election campaign procedures.

The subject of per diems came up quite often in my discussion with this Public Broadcasting Initiative official. She was justifiably quite confused that some CBC officials had requested that they receive their per diems in Canadian dollars. Apparently, these people wanted their living expenses, such as accommodation, travel and food, to be paid for by the South Africans. They wanted the per diems to be converted into Canadian dollars so that they could take them home. Additionally, while they were getting paid leave of absences from CBC, plus the salaries for being in South Africa, they wanted the Public Broadcasting Initiative to give them an additional credit for the fact that they might want a paid leave of absence later in the year. The amazing part of these demands is that they were met.

As a Canadian I was quite embarrassed that my fellow countrymen could not see how these demands were viewed by the South Africans. Many of the South African people we were dealing with had been marginalized for many years. For them to see Canadians self-righteously waltz in and blatantly pander only to their own greediness was a stark and most unpleasant contrast to our stated mission of "helping the South Africans."

Competition and property rights

Filip Palda

T IGER POACHING AND lobbying have something in common: they are examples of harmful competition. Competition goes wrong when it is not clear who owns a disputed property. To preserve nature, and discourage special interests we need clear property rights and an agency to secure and enforce those rights. Preserving property rights sounds simple and reasonable, but too few people have a feel for how powerful and important such preservation is. Two examples bring the point home.

Tiger poaching: As the price of tiger parts in Asian markets has risen, so has the illegal killing of tigers. In recent years poachers have wiped out several species of tiger. The tiger lives mostly in poor countries whose governments do not have the resources to protect the animals in their national parks. Several years ago Zimbabwe faced the same problem with its elephants. Instead of spending more money to protect national parks, the Zimbabwe government came up with a scheme for allowing villagers to own and sell the elephants. Soon it was the poachers who became the endangered species. Once it was clear who owned the elephants, the owners took the long view. Farmers know that it does not make sense to slaughter all their livestock, because the livestock can breed and bring profits for many years. When it is not clear who owns the livestock there is no point in preserving it. The poacher sees no reason to spare an elephant or a tiger because the chance of being able to profit from that animal's offspring is very small. Another poacher may get the offspring. Another poacher may get the parent. In this climate of uncertainty the best strategy is to take what you can, on the spot. Perhaps the only way to protect the tiger is by allowing people to own it, cull it in the same way farmers cull traditional livestock, and sell the proceeds.

Lobbying: Taxpayer dollars are endangered in the same way that the tiger is endangered. Our government allows interest groups to compete for resources which do not belong to them. When a business lobbies government for subsidies it is asking for somebody else's money. The government can get this money by rasing taxes or by draining subsidy money away from other interest groups. Taxpayers suffer because they have no firm contract with government that spells out how much they will be taxed over, say, the next 20 years. Government leaves things vague. This encourages interest groups to lobby government for more spending. Interest groups also lobby hard to take resources away from other interest groups. Competition for these resources produces nothing of value. Such competition only shuffles the list of who gets government goodies. If government could make its intentions clear, much of this harmful competition would die down.

Perhaps the greatest cost of unclear property rights is the endless debates people have over how government should act. Last year's dispute over tree-cutting in B.C. probably attracted the attention of most Canadians. The time we spend debating questions over which we have little power is largely a waste. With forest in private hands, Canadians could short-circuit this debate. They could follow the example of the Sierra Club in the U.S. and buy endangered forests. Until this idea is fully appreciated, tigers will keep disappearing, and interest groups will keep lobbying.

How would a personal expenditure tax affect me?

Michael Walker

T HE APRIL ISSUE OF FRASER Forum generated considerable discussion about the Institute's idea for the replacement of the GST with a personal expenditure tax. One of the comments by a reader was that the presentation was too complicated and difficult to understand. In particular, Mr. Isaac Seldstein suggested that the discussion would have been much easier to follow if the examples used had been based on an individual rather than on the country as a whole. In order to respond to this valid criticism, I present in this article a number of examples of how the Personal Expenditure Tax would be calculated for a selection of individuals at different income levels.

It is important to note that in these examples, I have used hypothetical, assumed values for the amount of borrowing by the individuals involved. In addition, I have used savings amounts which include only contributions to RRSPs and Registered Retirement Plans. The effect of these assumptions is probably to make the tax burden of the individual with the highest income seem higher than it would actually be since, typically, higher income people save a greater fraction of their income than lower income people. In these examples, the individual with the income of $95,000 is assumed to save the same fraction of his or her income as the individual with an income of $42,500.

Individuals at every income level would have an incentive to do more saving with the personal expenditure tax in that every dollar saved would be sheltered from the expenditure tax. Of course, it is true that income saved is not taxed by the GST either. Both taxes have this same beneficial effect of all consumption taxes.

The adjustment for food which is used in the examples would not be determined by the individual but would be set by the government--on the basis of surveys--for individuals of different income levels. Generally, the allowance for low income taxpayers is higher than for high income taxpayers because the latter spend a smaller fraction of their income on food.

The tax rate shown in these examples, 4.2 percent, is the tax rate that would be required to replace the amount of tax collected by the existing GST, inclusive of the GST rebates paid to low income Canadians. In practise these would be eliminated in favour of a Personal Expenditure Tax exemption for people whose incomes were below a certain level, to be determined by the government as an exact replacement for the rebates. In other words, the taxpayer with an income of $17,500. would pay much less than indicated in this example once the PET exemption had been instituted.

Click here to view Case I: A person with an income of $17,500

Click here to view Case II: A person with an income of $42,500

Click here to view Case III: A person with an income of $95,000

May questions and answers

Isabella Horry

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

A: The financial parameters of the U.I. program for selected years between 1975 and 1994 are:

Profit without honour

John Robson

T HE MOST BASIC AND widespread reason for opposition to market processes is the fear that the profit motive is "selfish" in the sense of being at least potentially antisocial. Even those who admit that it is in some sense "efficient" tend to believe that there is or can be a conflict between the interests of the private profit-seeker and of the society in which he or she lives and acts. And therefore there is widespread support for measures both to oversee and to influence the behaviour of profit-seekers through the agency of government. These measures are intended to ensure that private profit is also public profit.

But this is exactly wrong. Successful private profit-seeking is necessarily good for the public, unless it is regulated or subsidized or else property rights are inadequately defined and protected. Only when it is regulated or subsidized, including by legal arrangements that permit violations of property rights, does it become at least less socially beneficial and often overtly anti-social.

To see in practise why this theoretical observation is a sound guide to policy and not a statement of blind ideology, consider the small item in the Vancouver Sun from March 8th of this year (p. A5), in which Ontario Premier Bob Rae, in addition to declaring all-out war against "welfare dependency," announced early in March that the government would forgive a $7.65 million loan to Chrysler Canada, Ltd., in return for Chrysler promising to extend the third shift at its Windsor assembly plant for 1997 and 1998, "protecting 1,160 jobs." This sounds superficially like a pretty good deal; these jobs are being "protected" at a cost of only some $6,600 each. This $7.65 million, according to the story, was the last payment on a loan made in 1984 to induce the company to start up its Bramalea assembly plant. "Chrysler said forgiving the loan saved the company enough money to enable it to extend the third-shift arrangement at the Windsor plant."

The key to this whole arrangement is that Chrysler was extending the shift not because it was inherently profitable, not because of the proceeds from selling the cars, minus the cost of producing them, but in return for $7.65 million of taxpayers' money. The third shift, by itself, is not an efficient arrangement. If Chrysler was making money off that shift, it would not, regardless of its financial condition, want to terminate it, because more money would be coming out of it than was going in. And it should be obvious to the government of Ontario, though it apparently isn't, that giving Chrysler $7.65 million--or for that matter giving it $100 billion, or penalizing it $7.65 million, or ten trillion--will have no effect on the profitability of that third shift. It is still consuming more resources, all things considered, than it is creating. Ontario, Canada, and the world will continue to be marginally poorer because that shift is running. However, thanks to the Ontario government, Chrysler will not be poorer. Chrysler will be richer, because it just got handed $7.65 million to continue it. So long as the company was going to lose less than that by maintaining the third shift for the two years it has now agreed to maintain it, the firm will be better off under the new arrangement. And this is obviously the case, otherwise Chrysler would not have agreed, in return for the loan forgiveness, to maintain it.

Contrast this situation, in which private profit is at public expense, with that which would have existed without the subsidy. So long as Chrysler was compelled to function in a private market, seeking profit by satisfying customers, it had only one way to operate: it had to create wealth. It had to take resources, including time and effort, and turn them into something worth more than the inputs, in order to offer profitable deals to its suppliers and its customers, and itself make a profit along the way. That is why private profit is also social gain in free markets. Profit, like income, is our reward for helping others (for more on this, see Part I of our recent book What Everyone Should Know About Economics and Prosperity, particularly sections 7, 8 and 10).

Now, however, that the wise and benevolent hand of government has smashed the piggy bank and handed out the coins, that situation has ceased to obtain. Now, for Chrysler, profit is to be found in activities and operations that destroy rather than creating value. Thus the great irony of interventionism is that it is only when economic activity is subsidized that it is possible to make a profit without benefitting society; then and only then, does profit-seeking becomes an antisocial activity.

It is therefore worth noting that this particular mess began in 1984 under the provincial Progressive Conservatives, ostensibly the intellectual as well as political opponents of the socialist NDP. For though we see vigorous political debates in which one or more parties claim to be, or are accused of being, advocates of free enterprise, our governments almost regardless of their statements or partisan affiliations have reached the wrong conclusion about the social costs or benefits of subsidies such as this. And in the process they have committed the classic error so eloquently described in Henry Hazlitt's 1944 classic Economics in One Lesson: looking only at the short run and at the immediately affected parties. Chrysler is indeed better off now; so are its workers and shareholders and so indeed are local businesses dependent on auto workers' custom. But Ontario as a whole is worse off. Government-subsidized businesses are anti-social, while private ones are not, even though both pursue profit. Structures matter, not motives.

But there is nothing special about Chrysler. If it is entitled to subsidies, so are thousands of other firms, whose workers are neither better nor worse people than those at Chrysler's plant in Windsor. Unfortunately the more firms get subsidies, particularly if they get them in return for doing specific things they would not otherwise do, the more of the economy becomes devoted to activities that destroy, rather than enhancing, value. Admittedly the Ontario government tends to respond in this manner to crises, rather than running down a list checking them off as they get given subsidies. But since each of these increases the tax burden and further distorts the economy away from productive activity, the list of clients needing help urgently to avoid layoffs keeps getting longer, and the ratio of unproductive to productive activity continues to rise.

And it all happens because politicians--and citizens--don't understand what profit is and what it means.

Government-created poverty

Walter Williams,

John M. Olin Distinguished

Scholar, George Mason

University, Fairfax, VA

I'VE VISITED A NUMBER OF poor countries. In places like South Africa, Mexico, Brazil, Jamaica and the Bahamas, poor people are much poorer than poor people in North America. But you don't have to be in those countries long before you develop an appreciation for their rich entrepreneurial spirit. In some cases, you see that spirit when you leave customs and face a bombardment of people selling everything from food, watches, and clothing to taxi rides and tours. With that spirit, you really have to wonder why they're still poor.

A large part of the responsibility for the grinding Third World poverty lies with these countries' governments. Jamaica has a serious transportation problem. Entreprene- urial Jamaicans could buy mini-vans to provide jitney services. But because of the government's policy of granting restrictive and exclusive import licenses, combined with high taxes, a mini-van that could be purchased here for $16,000 might cost a Jamaican close to $50,000. Similar handicaps can be found in many other areas of potential business ownership.

Then take South Africa. Here is a country faced with great political pressures for economic development. You'd think it would welcome its citizens importing computer software programs, mobile and portable telephones, educational equipment and other high-tech goods. However, in many cases, there are high tariffs and, in some cases, outright prohibition on their importation--talk about shooting yourself in the foot.

In many countries, most notably those in South America and Africa, in order for a person to get into even the simplest business they must hurdle a system of impossible regulations and official corruption where bribes and kickbacks are the order of the day. In addition, simple tools required for the business are likely to cost multiples of what an American business person pays.

When you see the robust entrepreneurial spirit in some of these countries, you can easily understand why these people are such successes when they immigrate to North America. Because these countries are too poor to have our kind of welfare, the people must work to survive. That necessity coupled with a greater measure of economic freedom helps explain their success here.

In order for the world's poor to become more prosperous, what they need is a greater measure of economic liberty. You can prove this several ways. Most American immigrants hit these shores poor. We were once a Third World country. There was no foreign aid. What we had going for us was a large measure of economic liberty. There weren't the economic roadblocks found in may countries today. A simpler proof of the benefits of economic liberty comes if you list today's most prosperous countries. Richer countries like the United States, Hong Kong and Japan have a larger measure of economic liberty, while countries with grinding poverty, like Brazil, Mexico and most of Africa, have extensive government control and regulation of the economy.

During my visits, I found that the elite and politicians feed their poor people the same attention-diverting line fed by our elite. They say that more handouts (foreign aid) are needed. They blame the poverty on colonialism. That's just like our elite, who address poverty by calling for handouts and blaming racism. What these elites should propose is economic liberty and the right to be free from government interference.

Institute staff

Recently, Institute staff participated in the following engagements

•Attended a meeting organized by the Pacific Academy for Advanced Studies held in Alamos, Mexico

•Speech to the University Womens' Club of White Rock on "Current Economic Issues"

•Made two presentations to the Standing Committee on Finance, Parliament of Canada on "An Expenditure Tax and Other Alternatives to the Goods and Services Tax," Ottawa

•Speech to Bentall Corp. in Vancouver

•Chaired a student seminar in Halifax organized by The Fraser Institute

•Speech to Canadian Pension and Benefits Conference on "The Future of Canadian Social Programs," Vancouver

•Speech to RBC Dominion Securities on "Reasons for Economic Optimism," Nanaimo

•Speech to the Vancouver Electric Club on "Implications and Effects of the Federal Budget to BC and Canada," Vancouver

•Speech to Downtown Kiwanis in Vancouver on "A Real Alternative to the GST"

•Speech to Canadian Adjusters Association and Insurance Claims Managers in Vancouver on "Reasons for Economic Optimism"

•Speech to West Vancouver Chamber of Commerce on "Hitting the Wall and the GST"

•Speech to Canadian Chamber of Commerce and Committee on Canada-U.S. Relations in San Antonio, Texas

•Speech to the Canadian Society of Industrial Engineers on "NAFTA as an Historical Event."

Today's Liberal

"Today's Liberal is seldom engaged in acts of liberation but in acts of regimentation instead; his object is not to free people from the coercions of the State but to impose new coercions upon them; and in the sense of being bountiful, today's Liberal is mostly bountiful with other people's money.

A Conservative Examines the Liberal,

James J. Kilpatrick, December, 1965. Submitted by

Dr. G. Allan Taylor, Ottawa. Taken from "The Rotarian".

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Last Modified: Wednesday, October 20, 1999.