Important Note to Our Members

Due to the rising costs of publishing and distributing Fraser Forum, the Fraser Institute has been forced to amend its membership structure in order to maintain the low price of Fraser Forum. Effective 1 January 1996, the new membership structure outlined on the inside back cover of this month's edition will take effect. By the time you read this, you already should have received a letter explaining in detail the reasons behind this decision. If for some reason you have not received this letter, or if you have any questions regarding these changes, please contact me at the Institute. We regret any inconvenience caused to our members, but we have been forced to follow our own prescription and recognize economic reality.

Brian R. April,
Director of Development
(604) 688-0221, loc. 306

This issue's authors

Isabella Horry worked, until October 1995, as The Fraser Institute's Research Economist. She is the co-author of many Institute books and publications. She received her M.A. in Economics from the University of British Columbia.

Owen Lippert is Senior Policy Analyst at The Fraser Institute. He received his Ph.D. in History from the University of Notre Dame, Indiana.

Lydia Miljan is Director of the National Media Archive, a division of The Fraser Institute. She earned an M.A. in Communications from the University of Calgary. She researches and writes On Balance.

Kate Morrison is Co-ordinator of the National Media Archive. She has a B.A. (Honours) in Economics and Communications from Simon Fraser University.

Filip Palda is Professor at l'École Nationale d'Administration Publique in Montreal, and Senior Fellow of The Fraser Institute. He is the author, co-author, or editor of several Institute books and publications. He received his Ph.D. in Economics from the University of Chicago.

Robin Richardson is Director of the International Centre for the Study of Public Debt, a division of The Fraser Institute. He has an M.A. in Political Economy from the University of Toronto, and is a Chartered Financial Analyst. He is the author or editor of several Institute publications.

John Robson is a freelance writer based in Ottawa. He has his Ph.D. in History from the University of Texas at Austin. He has written several Critical Issues Bulletins and many articles in Fraser Forum.

Christopher Sarlo teaches economics at Nipissing University in North Bay, Ontario. He is the author of Poverty in Canada, published by The Fraser Institute.

Karen Selick practices law in Belleville, Ontario. She is also a columnist for Canadian Lawyer.

Michael Walker is Executive Director of The Fraser Institute. He received his Ph.D. in Economics from the University of Western Ontario. He has written, edited, or co-authored dozens of Fraser Institute publications.

Competition and the Public Sector                                         From a Cross-National Perspective

Dr. Meredith Edwards [Dr. Edwards has a great deal of experience in the public sector of Australia. She is an economist and is currently the Deputy Secretary of the Department of the Prime Minister and Cabinet of Australia. She has spent her career as a lecturer, researcher, and policy analyst. Currently she is responsible for Federal-State Relations and Social Policy issues. Dr. Edwards spoke to a Fraser Institute Executive Advisory Luncheon on September 20, 1995.]

Michael Walker: We are very delighted to welcome our guest because she speaks to a topic that is at the very soul and heart of The Fraser Institute, namely, efficiency in the production of public services. From the Institute's earliest days we have been making contributions in this area; we have published many books on the subject including privatization, contracting out, and on introducing efficiency to the public sector. We have also been running for the past five years our competition on Economy in Government. The ideas from this program, which number more than 2,500, have been circulated widely across the country and in many cases have been adapted by the governments at the federal, provincial, and municipal level. Dr. Meredith Edwards is going to talk about competition and the public sector from a cross-national perspective.

Meredith Edwards: With your 20 or more years of competition history, I'm hoping to learn much from you just before I depart your shores for a place where there has been a lot of reform--New Zealand. Across the globe, people within organizations and countries are joining you in your interest in the issue of whether, and if so how we might get competitive arrangements in the delivery of the services that governments normally provide.

I think that there are a number of factors at work as to why governments are now showing a lot of interest. At least in the context of Australia, we can say, "we have to be a more competitive economy. We know that efficient government performance is a key to private sector competitiveness."

I'll mention in a moment what we're doing in terms of Australia's national competitiveness policy. Apart from wanting to be, and needing to be more competitive, we have had, as you have, a problem of federal government budget deficits. We had one that was rather large when the Labour government came in in 1983 but it did go into surplus just before the last recession. Because of your high budget deficit, our need for fiscal restraint is not as serious as yours. At the same time as we are having to reduce expenditures, we also face consumers demanding a higher level of services, and services and more responsive to their needs--that is a factor governing what we're doing, with our federal government placing more emphasis on ensuring people can access services better.

I think some of these forces operate here as they operate in Australia. However, there are some differences worth mentioning. First, your budget deficit federally is much larger than that in Australia. Your accumulated public debt relative to your national income is also larger by a factor of two and a half. Also, you have provinces that have more autonomy than our own states do, and, as I understand it, they are also having some severe difficulties with their fiscal control. But having said that, I think we have much mutual interest in these reform ideas. Clearly, both our governments have begun to switch their mode of thinking to "How can we steer, rather than row?"

In my travels around the globe (to the United Kingdom, the United States, here, and soon, for a few days, to New Zealand) I have gathered evidence that is perhaps less than we might like, but indicative in many interesting ways. In any event, I'll share my impressions--and, I must emphasize that the views that I give are my own only and certainly do not reflect those of the Australian government.

Please bear in mind that I am operating from within government looking out. Many of you are on the outside looking in, and that's a perspective I particularly value. I, for one, believe the government sector needs close dealings with the private sector, and that's one of the reasons I'm here today.

Clarifying what competition is

Now that might seem to be pretty obvious to you, but it certainly isn't. As I've gone around countries, I've seen governments doing things for different reasons. For example, in the United Kingdom, I think it's fair to say that the privatization-competitive reforms there were very much originally formed by ideology--what some would refer to as Thatcher ideology. Essentially, there was the attitude that, "we have decided that we have got to do this, we don't really want to know whether it works or not, we just want to do it." There was no prior evaluation, particularly in the health reforms, which to someone like me coming along is a great disappointment, since there were no clear expectations of performance established, and it was therefore difficult to see how well they've done. (There seems to be a general sense that the health care reforms have worked, but analytically the situation is less than satisfactory.)

However, I observed while I was there, particularly from talking to people in the Efficiency Unit in the Cabinet Office, that there is now a much greater focus on how government can get more efficient results. There is a concentration on how we can use the purchaser-provider split concept to set up some competition so that we can get efficiency, and create the circumstances in which efficiency will arise. There is now more attention as to how to get the efficiency rather than to just follow the ideology.

I'll give you an example of where this can come in conflict. In the United States, as some of you will know, there is what's called the National Performance Review. It wanted to say to departments, "What are your outcomes? How are you going to get there? And show us that the way you're going to get there is the cheapest possible way so that there is efficient delivery of outcomes." But it hasn't quite worked that way, and the emphasis in Washington, as far as I can judge, is very much on simply producing a smaller-sized government sector. Two hundred and seventy two thousand people had to be got rid of. That means that the managers--the ones I spoke to at least--are going for all sorts of contracting out arrangements without always carefully considering what the implications are, which in some cases has been more costly than providing the services in-house or having them done in a different way. The importance of getting down recorded numbers has driven the reform, and so efficiency has not necessarily been the outcome.

In Canada, as you know, there are questions now being asked about how the costs of government can be reduced. Here, the driving force seems to be the deficits at the federal and provincial levels. I think that the best thing going for Canada at the moment is that there is a sense of crisis. And a crisis will force some thinking and rethinking about how better to do things, how can things be done differently in the interest of clients and the community as well as the taxpayer. That "reinventing government" phrase then becomes quite relevant.

In Australia we have acted quite pragmatically. We have a national competition policy that started off some years ago with quite major microeconomic reforms. Then we hit the barrier of state governments who deliver important services like gas, water, and electricity under public monopoly regimes. So the federal and state governments made a deal at a meeting they held last April, now in legislation, to bring competition to the delivery of what would otherwise be public sector services. So competition, for example, in electricity generation is now being reintroduced to the state of Victoria closely followed by New South Wales.

The competitive policy framework has governed a lot of our activities in Australia, and is now moving into social policy areas as well, such as the one that I'm responsible for within the Department of the Prime Minister and Cabinet. I'll give you very briefly an example of what governments have already done there, and what is being considered.

We have, as of the budget before last, had a major assault on the problem of unemployment, particularly long-term unemployment. We in Australia, like most countries, had an Employment Agency that was a monopolistic organization doing its best given the incentives it faced. But there was clearly room for improvement. So the government decided it would set up competition in the process of dealing with the unemployed. We actually nurtured the creation of competition in a sector which did not really exist, that is, a not-for-profit and private sector designed to find new solutions for the long-term unemployed. We wanted the government sector to do it, but we also wanted the government sector to have some competition.

Now, Canadians might like this: we set up a regulatory body called the Employment Services Regulatory Authority to oversee that competition, to make sure it happened, to nurture it, and to monitor and evaluate what was happening. The not-for-profit and private sector is being paid not just according to the numbers of people that they have trained and got into jobs, and the difficulty involved in doing that, but also according to the outcome. The actual job being achieved brings forward payment just as is the case with private sector placement agencies. If someone gets a job for three months or more, then the placement organization will receive payment accordingly.

This to me is a very good example of using the purchaser-provider split in the interests of the client. I mean, it is just common sense that if you give a service provider an objective and an incentive tied to its achievement, you will get a better outcome than if the supplier of the service is paid regardless of the outcome. That is the situation we used to have in the employment agency sector.

Similar principles are underlying our current consideration of health reform, where we do want to see better delivery of services to consumers, particulary those with chronic needs, but we also want to see more efficiency in delivery or better value for the taxpayer's dollar. Our health ministers and the prime minister are considering that, and that's why I oversee that federal joint working party with our state colleagues at the moment.

So, the first lesson is that we have to learn about what competition is and how it can be generated in areas and activities where we have not been used to thinking in competitive terms, where, in some instances, we never thought of there being a measurable, deliverable service or product--like finding a job for a client.

How do we know we will increase efficiency?

The second lesson one could learn, which interests me, is that we may be concerned about economic efficiency, but in many instances we don't really know how to measure it. We often don't know what we're including in the costs of production. We often talk about gross costs, but leave out what we economists call the transaction costs of starting and monitoring the contracts which are let. The costs of hiring and firing staff can be quite important as determined by the legislation and procedures which govern how staff changes occur. The fact that the private sector may pay taxes and the public sector doesn't, or the need to impute the costs of capital when calculating the costs in the public sector so that there is more of a level playing field with the private sector--these are the sorts of things that we need to take into account but which sometimes are not.

In the United Kingdom they are starting to get into the methodology of measuring transactions costs--but they are just starting. In the United States they're not always clear about how they measure them. In Australia, we're starting to think about it, but we've not really done it systematically. I understand that in New Zealand there has been a comprehensive analysis of what the costs of government are, and a comprehensive application of accrual accounting so that the total costs of every activity are accounted for on the same basis.

An example from New Zealand was given to me by the New Zealand High Commissioner in Ottawa, who was the Associate Finance Minister recently when reforms were being undertaken in New Zealand. He gave an example of Local Authority Training Enterprises. There the rule is that you can't start contracting out and getting into competition at the local authority level until you've set up a cost centre so that you can price what happens from within. The costs are audited, and only then can you start competing. So that means you're getting the playing field as level as possible, and I thought that interesting and worth following up.

Will there be competition in the long term?

I think that it is also important to show foresight. You might contract out something today only to find out there isn't any competition there in the longer run, and you may indeed end up with a privatized monopoly. What are you going to do to make sure the market remains competitive if you believe, as the textbooks tell us, that it's competition that's got to drive efficiency? What will be the nature of the market in the longer term? Will it be possible to get the government back if that's necessary?

Here are some of the thoughts we need to consider. Regarding, for instance, the longer term relationships between contractor and supplier, do you want a tight contract that changes every year or so? Or are you going to allow five years to elapse before the contract is renewed? What will this mean for competition in the market?

I understand that you have a bit of a problem in the maintenance of highways in British Columbia, where there was some contracting out. I understand that the current government here in British Columbia wanted to come back into that area, but there was no longer any expertise in government in that area by the time that desire surfaced. That does raise questions about having in-house capacity.

On the issue of in-house capacity, one of the strongest findings I uncovered, and one which I didn't totally expect, from the United Kingdom, United States, and also, I understand, in New Zealand, is that if you permit the in-house activity or function to be in a competitive relationship with the bodies that are contending from the outside, you can more likely than not get the best outcome. And the experience is that once the in-house contender has failed in a contract bid, a lot of reorganization takes place within the government agency in terms of improving their equipment, reducing numbers of people, improving their management, etc., and next time around the probability is that they are likely to succeed. One of the messages I will take back home will be not to give up the in-house capacity too quickly, because it may be the best way to go, it may help to retain governmental competition in the field.

Ensuring the quality of the service or product

Now, how we can ensure the delivery of quality if we contract out? It's easier when you're delivering something like an employment outcome than it is, say, when you're delivering services for elderly people in home care. In services of this kind, the process is as important as the outcome, or in fact is part of the outcome. How do you ensure quality in those cases?

This is a challenge, although I think some people tend to overdramatize this as a problem; for example, you can get outsiders or third parties in to examine the quality; you can do spot audits; you can set up conditions in the contract as to what you want (where that's possible to specify); and you can survey the clients as well. In the last case, you would want to do base-line surveys of the satisfaction level with the current service as delivered by the public sector, of course. There are many ways of doing it, but if you were promoting some contracting out, I think one of the major resistances you might meet, particularly in the social policy area, would be questions about the quality, and about how we can be sure we're getting quality service.

How can we avoid goal displacement?

There is a matter related to the delivery of specific outcomes and how to measure getting there, and that is the possibility of goal displacement. Again, to use the examples of the employment area, when you focus on a particular outcome through measurement, you get all the activity around those outcomes and other goals get lost or less emphasis is attached to them. So you get a bit of goal displacement, if you like. In the employment area you find if you pay according to outcomes, but you don't compensate for the difficulty of the placement of the client, you may well get what we call creaming, and the easier case is dealt with rather that the more difficult one. So, it is obviously important to set the incentives appropriately to encompass all of the attributes of the service you want delivered.

What sort of public sector managers are we going to have?

Another issue is what are we going to expect of our public sector managers in the future? In the past, a manager was usually responsible for a program in one particular agency, and for delivering a service at one level of government. He or she would not normally be expected to take account of what was happening in the private sector, or even in other divisions of the government. I think that the new manager of the future in the public sector--if we're going to be delivering more efficiently and more effectively--is a manager who can think across programs, who thinks about the client and not about the program.

The client might be someone out of work who also needs some drug and alcohol rehabilitation, or open housing, or both. And the manager needs to think across levels of government in order to get co-ordination of services. They will certainly need to think about what the private sector can offer, and that means they'll probably need skills in overseeing contracts, if not the management of contracts. They will need negotiation skills, monitoring and evaluation skills, and so on. A very different--at least in the Australian context--public servant, than the one that we've had in the past. And if we're going to think this way about new skills for public servants, we have to think how are we going to get what we want, and keep the good people, and not lose them as uncertainty from within forces some of the better ones out to competitors. I don't see anyone being interested in having a weak government however large it might be; the private sector wants a strong and effective government as well as the public sector.

Shaping markets?

Another concern is that if we get too tied up in our economic rhetoric, we could see competition as the end in itself, and not the means to the end. Some of us will have a lot of trouble in areas like health, for example, in trying to create and shape a market that delivers better to consumers and is more efficient. What I noticed in the United Kingdom, for example, is they wanted to have flexibility at the local level, but they were holding onto the reigns tight at the centre. That's something that we have to think through. Can public servants shape markets when the markets are by no means perfect? Health is a good example of that.

Evaluating the services delivered

Another thought or lesson relates to information and evaluation. As I mentioned, I think there is an enormous amount of power in publicly-presented information about how a market or how agencies are doing. The publication of performance criteria alone can be helpful. And, of course, competition for service provision can only help in this process of discovering whether clients' needs are being appropriately met.

The Citizens' Charter in the United Kingdom is a good example of how simply publishing information about standards can be helpful. A charter such as this creates a level of expectation in the public's mind about what the service level should be. The key in this situation is to develop a system for collecting information that will neither be prohibitive in terms of cost, nor too intrusive on the service delivery itself.

Making service providers accountable

Finally, how do we get accountability, not just as to results, but if things go wrong when the people who are delivering the service are not answerable to Parliament? For example, if you have a health authority that is elected, it's distinct from an appointment by a minister, and if things go wrong, if a health authority says, "we're not going to treat that sort of patient," what do you do about it? I think these are very important issues, but as yet are under-explored areas of discussion about the competitiveness vision. But we are going to have to deal with them sooner or later.

To conclude briefly, I don't think I've got as much evidence as I would like, and I hope to get more, perhaps in New Zealand. I've put a lot of emphasis on what I think is the first step toward competition: namely, the distinction between the purchaser and the provider. This is the key to getting competition at the provider level wherever possible. I think though that reform is necessarily evolutionary. We are all going to learn as we go, and hopefully we can learn from each other and not just from our own experiences. You are at a very critical time now. One Canadian said to me that you have the half-pregnant approach--you've talked a lot, but now it's time for some action. It is a critical time and I'll be looking with a lot of interest at what you've learned and what you do do, and how you do do it, and again I hope that we can share information as we go.

Thank you for listening.

Questions for Dr. Meredith Edwards

MW: You talked quite a bit about the changing role of the public service, and that if introducing competition in the public sector is really going to work, the role of the public servant is going to have change. When we first started our privatization work many years ago, we encountered the fact that at our schools of public administration in Canada there was no course in contracting. Managers were effectively sent out to the public sector without any idea how to set up, manage, or monitor a contract. Only in the past two or three years in Canada has this information begun to be imparted to managers as they learn to become public sector managers.

Now in New Zealand, where you are going, they've taken a kind of root-and-branch approach to this issue, and believe that if you're going to have competitive services in the public sector, then the first thing you've got to do is have a competitive market for the public service jobs themselves. If you don't have a truly competitive selection process, together with performance contracts, together with review of how these public servants are performing relative to very strict performance criteria, then in fact you're not going to get the kind of evolution that you'd like to see in the public service at all. You won't get it because you're hidebound by union contracts, by seniority, and by the attitude that pervades the whole process of public sector employment and service supply.

So someone in your position in the New Zealand government would be on a contract, and that contract would be reviewed on an ongoing basis, and all of the people who worked for you would be on continuing contracts. Have you already adopted some of these ideas in Australia, and what have you seen in other countries, and what lessons can we draw from these experiences?

ME: I think that one important lesson that New Zealand has taught us, and I think Australia is doing it as well (although the United States isn't), is to tie public sector reform of the bureaucracy to the competitive reforms, making the two go together. New Zealand has an extremely comprehensive policy, and by and large, it is consistent from the broadest macro level down to micro. Whatever you think about their policy strategy, you can say it's basically consistent. And I think that we're perhaps not as pure in our policy coherence in Australia as they are, but we're broadly in line with that.

For example, you just mentioned that if you're in the New Zealand bureaucracy, you are on a contact, at least to the high levels, and if you had an agency, you had a contract with your minister which is to deliver certain policy outputs, and as you said it's a contestable situation. (By the way, I think it's the contestability, not the competition per se that counts--it's market testing all of the time, whether it's policy advice or any other service, to make sure you're up with the latest.) Now, I think our view in Australia is a little different. We're not as pure, but we do have performance contracts for our heads of agencies.

I'm not at the moment on an employment contract, but it could easily come, and I certainly wouldn't object to that. In some ways there is more security with contracts than without them. We have yet to have that debate about exactly what you put in them. In some ways I think Australia is more outcome-focused than output-focused as compared to New Zealand, but I want to test that. I have an agreement with my boss (we all have performance agreements in Australia), and we actually have performance pay. My contract with the Head of the Department of the Prime Minister and Cabinet expects me to assist in delivering on outcomes. So my job is not just to chair our commonwealth state working group on health reform, and accept what ever emerges; my job is to contribute to achieving particular health care reform outcomes down the track. So once government policy direction is given, I'm responsible for trying to deliver on that.

In the United States, they're not doing that, in the United Kingdom they are, but differently. There are some dangers in parts of the New Zealand approach, where there's not continuity of history of the department. I've seen instances where we have had tight budgets and we think we can solve a lot in contacting out the research, say. Well, you re-invent the wheel every time. I believe that there is something to be said for corporate history, and there is some balance that has to be taken into account. Also performance pay is unpopular, and has been modified recently in Australia. I think the important thing is the performance agreement.

Q: What did you mean by the difference between contestability and competition?

ME: It depends. Basically that you can find a mechanism to test the value of what you're doing against the market without actually putting it up for competition. For example, you might have some secretariat to an organization which spends x number of hours per year getting papers ready. Now you might want to contract that function out, but you might want instead to test that secretariat against another type of secretariat to check on the number of hours it spends on getting ready for a similar type of meeting. This is benchmarking. You may want to do that instead of contracting out because of the capital costs involved, or the transition costs, or the uncertainty it creates in the staff. There may be reasons you may not want to go to tender, but knowing that you're as good as some, benchmarks might help assess the efficiency of the services. What you want is to know that the internal organization is as efficient as the outside one. That's a view from within governments, and is not the only view, of course. But if you have a philosophy about smaller government, then you go straight to the competition.

Q: Just a question on the role of unions. In Canada, one of the obstacles to producing greater competition, perhaps the biggest obstacle to competition in service delivery is the high level of unionization throughout our public sector, particularly at the provincial and local levels, which is where most of the services are delivered. (The national government in Canada doesn't deliver many services.) In Australia, the current government is closely tied to the trade union movement, and I would like to know how that relationship has evolved as you try to introduce some of these reforms in your country.

ME: You're right, there's a very a close relationship between the current Labour government and the Australian Council of Trade Unions, and they relate all the time. Critical to that is what we call the social wage. The government has been quite successful in keeping wages down by bringing in other measures that are of a non-wage kind that can go to things like housing, health, and education. That's one broad aspect of all this.

We currently have our Industry Commission Inquiry--this Commission is sort of attached to the Treasury portfolio--doing a report on contracting and competitive tendering. My work is mirroring theirs. I'm doing a lot of empirical work and they're doing a lot of the other work receiving submissions. One of the best and most important submissions is from the Australia Council of Trade Unions, because it's so detailed as to what they're concerned about. They won't say no to contracting out, but they certainly point to some of the difficulties.

One of them I know, because I spoke to the union people in the United Kingdom, is the concern about the tendency for mergers to occur, and for monopolistic tendencies to come to the market--that's one issue. Another is what happens (and they've resolved this to a large extent in the United Kingdom), to the employees in the transition. In the United Kingdom they're not fired by the government agency; they're taken over by the private agency and then it's in their purview to work it out with the employees as to what they're next steps are. And that seems to be an obvious thing to do.

In both the state of New York and New York City, the issue of what happens to employees is the number one issue for the incoming governor and the mayor. They both think that it's got to be done together and collaboratively. For example, in the city of New York, when they were privatizing parks, they kept some parks in the city under local administration, and they let the others go. One of the things that they got out of the unions was the ability for the city to employ people on workfare in the park administration. Sometimes the unions are cooperative by the City saying, if you can show us that you're improving productivity by x percent over the next two years, we'll hold off on contracting out. So if you're after efficiency rather than the competition this method could achieve the same result.

MW: Let me just follow up a bit on that question. From the view of Canada it would seem that your trade unions are more militant, more syndicalist, and more all of the things that are turning out to be old-fashioned in labour markets than our Canadian unions. Nevertheless, Canadian unions have fought every iota of the movement towards privatization or contracting out. You've mentioned some things that imply that your trade unions are going along with the concept of contracting out and down sizing, but are you really conveying the flavour of their attitude?

ME: Let me give you another perspective. I think one of the hallmarks of Australia's reform, particularly in the social policy area, but also in the economic and employment area, over the last 10 or so years, has been the pursuit of equity alongside of efficiency. We have never forgotten that the two have gone together.

For example, I was involved in the issue of child support, of getting money out of non-custodial parents to put some into the treasury, but at the same time, we were leaving something behind for the sole parent. Another example: helping the long-term unemployed back into work, we use a "job compact" where we effectively guarantee a job for long-term unemployed, but this is efficient too, because when the market picks up, you've got more skilled people in the labour market than you would otherwise have. One way of allaying fears is if you meet some of the key concerns on both sides of the debate; it's about getting that balance right I suppose.

Where you have, as you have in Australia, a close relationship between government and unions, where they understand each other and work together for a long time, it's probably an easier relationship, than I imagine you might have where a new government comes into power and has to deal with that same body. But to go back to that parks example from New York, I can only go by what I've heard, which is that this has had some positive results, and that collaborative arrangements are the only way to go.

I don't understand the position in Canada, but the main concerns of unions and how they can be addressed is obviously something that needs to be explored.

Q: I have come to question this whole belief that what is needed is a reduction in government. There is an assumption that our government is inefficient. Perhaps the question of valuation sits more with whether or not we value our government enough, and whether or not we really realize what the benefits have been of the sort of work the government does. I spent the last two years in the Philippines where they have very low taxes and their country is one of the poorest in southeast Asia; the people are living in poverty, the children are dying of diarrhoea, but they've got low taxes and they have a small government, and they don't overpay their public servants, so I just question this whole assumption that the government is in fact not doing its job.

ME: I think that's a very important question, and perhaps one that The Fraser Institute can take up with you at some stage, because I happen to believe in the role of government. I wouldn't be working for government if I didn't believe in the important functions that governments and public servants perform. My personal view is that if you talk to the people, they don't want to be seeing government go down and go weak--they want to see a better, more effective delivery of services by government. In Australia, at least, we're not talking at this stage about changing responsibilities of government. We're talking about changing roles, and we're talking about who should do what and why, not whether the government should get out of delivering police services, or providing law and order, for example.

The government should be responsible for these things, but the question is who should deliver the services. Our objectives are both to better deliver to the consumer, and to do it in a more cost-efficient way, so the taxpayer gets better value for the dollar. And if I had to prioritize those, at least in the social policy area, I'd focus on better delivery to the consumer. And personally, I believe at times that competition can deliver better to the consumer. As I've noted, you can sometimes get the same outcome by providing contestability, which presumably would be more to your liking.

Q: I just want to say I think maybe the eagerness to hack away at the government is sometimes a little overdone.

ME: Well, you have to have a sense of balance about this. Go back to the very simple example of park maintenance in the city of New York, where instead of giving over all parks to the private sector, some are maintained by the public sector--about 4 out of 28. The parks are maintained, but in two different ways, so the city can simply assess which one is the more cost effective.

You can do the same with policy advice as well. You can have alternative competing sources of policy advice, but not necessarily give it up entirely, as obviously policy advice is not something people within governments would want to completely give up. Nevertheless, they might want to test it against advice they can get from the outside, which is one of the key philosophies in New Zealand.

MW: The Institute has done quite a bit of work on this topic. There's a difference between the question as to the functions that you are going to decide to do through the government, and the question of how, once you've decided that you're going to collect the money for these functions in the form of taxes and extend it through the public sector, you're going to deliver the services or produce the services that you've decided to have within the public ambit. You could, in fact, decide to have a very large number of things run by the government, but have the government do none of them. Like garbage collection, or police protection, or ambulance service, or medical care, or all of the things that we in Canada provide through the public sector--none of those need to be produced by the public sector--and I think our conversation today is more about that question than about the question of how much you want to do through the public sector.

Q: I'd like to ask your opinion on health care. In this province we have a program called New Directions, that has regionalized the delivery of public health care services. I have a friend who is a past medical public health officer in London, England, and he says that was done in England years ago, and they threw it out because it wasn't functioning, do have any ideas on that?

ME: I think there are arguments fairly equally weighed between having a body such as a regional authority with a bucket of money and global budgets, and the alternative model, which is now the United Kingdom model, which is where you have what they call GP fund holders, where they get the bucket of money, but they compete amongst each other for patients. They also go out and get hospitals competing to provide the services to them, so you get competition on both sides. There are two models here. There's no doubt that there is some evidence coming through from the United Kingdom that their fund-holding model is more responsive to the consumer, and they are seeming to put a lid on costs. But there are problems arising about economies of scale in that the patient base of some GP fund holders is not large enough. So, on one hand, the national health authority is trying to encourage the GP fund holder to become larger to get the benefits of economies of scale, but on the other hand they're holding the reigns tight on fund holders, preventing them getting too large, because if you have bigger GP fund holders, you don't have enough competition.

The regional authorities they had before apparently were not working, but what they've got at the moment I think is working, but they're still refining it. I think the important thing is to get some competition somewhere. Now you've got it at the GP fund holder level in the United Kingdom. One possibility here in Canada is to have the regional authority get their buckets of money, and expect the regional authority as the purchasers of health services to go out and have competition amongst the providers in order to get the best for the consumer. My eye would be on what's best for the consumer, not what's best for the provider, and maybe then you can get beneficial competition going.

I am in many mindsets at the moment; I don't think anyone knows the answer to health. There's got to be a second-best solution; it could be tailored to need. You've had a particular history here. You have a medicare system which is highly valued by your public, as is ours. The last thing we want to do is give up universal accessibility to our medicare systems, and most Australians in positions of power don't want to go all the way down the track of the United States health maintenance organization model, although there are some lessons to be learned there as well.

MW: Of course it's important for us all to remind ourselves that in Australia you still have a mix of private and public health care provision, whereas in Canada, because of the way in which the federal government administers relationships with provinces and its funding of health care, they've effectively outlawed it by cutting off funds for activities which in any way involve private alternatives.

In answer to the question about New Directions, we've been recently doing a lot of work on that, and in fact we'll soon be coming out with a paper on it. As the question implied, the directions aren't new, and they're wrong. Unlike the New Zealand regional model, which Meredith mentioned, where regional authorities purchase services on a competitive basis from alternative suppliers, in effect New Directions encourages the old regional model that was adopted in the United Kingdom. Under that now defunct model, there tends to be an attempt to achieve economies by conglomerating activities and eliminating "duplicative" services in particular hospitals. The result is that instead of getting more competition, you have in fact monopolization of the services within a particular regional area. We think that the development here is in fact at variance with what's happening everywhere else in the world, and it's completely impenetrable as to why we would be doing it. )

Reacting to a "No" vote

Michael Walker

During the last few days of the Quebec referendum, many of us were preoccupied, given the ominous implications of the polls, by the question of what to do in the case of a "Yes" vote. The fact that we have avoided it led most to breathe a sigh of relief and get on to other things, glad to have escaped the necessity to make fundamental changes to Canada. To the extent we do this, we fool ourselves.

First of all, the vote implied that a clear majority of Francophones and a near majority of the population of our second biggest province don't want to remain in Canada as it is. Second, the significant vote for the "Yes" option implies a continuance of support for the Bloc Quebecois and the Parti Quebecois. In turn, this implies a continuation of the "trips to the dentist" promised by Jacques Parizeau when he launched the campaign.

There is a further implication of the foregoing, as The Fraser Institute pointed out last year. That is, we are very likely to encounter the Irish effect: the presence in the national Parliament of a distaff political party systematically throwing sand into the gears of government. The Bloc Quebecois is a publicly supported and officially recognized political saboteur, dedicated to the destruction of Canada.

The Bloc must be dealt with one way or the other. The solution to the Irish problem, of course, was to relent and grant Ireland home rule. I assume we don't want that to happen in Canada.

It may be that population growth--or rather the lack of it--amongst the separatists will erode the population base of the Bloc, as Mr. Bouchard himself noted in the campaign. However, the increase in support since the 1980 referendum suggests that this is a vain hope. The fact is that the trend is in the P.Q.'s favour.

If we cannot rely on the natural effect of population growth and the forces of history to preserve Canada, we can systematically erode the power base of the separatist movement by recognizing that they have a legitimate criticism. Instead of denying it, we can recognize that we have a problem in Canada--and that problem is the overarching reach of the federal government in its attempts to control the activities of the provinces in areas where, either naturally or constitutionally, it has no place.

During the referendum campaign, the prime minister, faced with the momentum of the "Yes" side, agreed that there would have to be some changes made in the distribution of powers in Canada. As he said it, almost no one heard the echoes from a few days previous of his health minister ordering the province of Alberta to shut down private medical clinics: either close them down or lose "federal" financial support, she said. Is this the manifestation of a government sensitively responding to the aspirations of the provinces?

Of course, this contrast between what the prime minister offered to Quebecers and what his health minister is actually doing to the other provinces is not accidental. The federal government does not want to relinquish power. In this sense, the long term choice we may face is, do we want Canada, or do we want Ottawa? Fortunately, Canada has economics on its side.

The federal budget deficit and the burgeoning interest payments on the national debt are forcing Ottawa to get out of spending in areas that are provincial jurisdictions. The same fiscal pressures are leading to cuts in other programs. The result will be an Ottawa that is restricted to cheque-writing programs for the old, the unemployed, and of course for our many creditors.

While the role of the federal government is going to be cut by necessity, we can do much better than simply chopping to keep ahead of the falling revenues. We could actually plan a decentralization and devolution process that would leave us both better off fiscally, and better prepared to erode the support base for separatism. Such a plan is spelled out in a recent Fraser Institute book entitled, Thirty Million Musketeers: One Canada for All Canadians written by Gordon Gibson.

Let's hope the premiers and the prime minister have the good sense to follow it, and prevent a narrow "No" vote from having been the worst possible outcome of the referendum.

What is Decentralization and Why Should                         Anyone Care?

Filip Palda

One month ago "decentra- lization" was an obscure word used by academics. Today it has become an intellectual herd movement. Decentralization is supposed to save Canada. The media say it. So do the premiers. For once, the people who shape policy in this country are stampeding in the right direction. But what exactly does it mean, and why is it supposed to be so good for us?

The problem with Canada is that government is removed from the people. This distance allows politicians in Ottawa to make big decisions without consulting the citizens who pay for those decisions. A few years ago, federal leaders budgeted a billion dollars to create 10,000 jobs in Newfoundland. The project they signed their names to was an offshore oil rig called Hibernia. Hibernia pleased locals and politicians. It may not have pleased citizens of other provinces. They paid for this exercise in porkbarreling. But no one in office came around to ask Albertans and British Columbians how they felt about setting a billion of their dollars adrift on the Atlantic. Politicians did not bother consulting the people who paid, because most of these people had never heard of Hibernia. Citizens of other provinces were too far from where the money was spent to realise their tax dollars were being squandered.

Follow the money

In a big country such as Canada it is hard for the taxpayer to keep track of where his or her money is going. This means it is hard to judge whether leaders are doing a good job. Local and provincial governments have this problem too, but central governments have it worse. It is true that a strong central government can do good things with its powers. It can enforce free trade between regions. The dark side of central power is that citizens cannot gauge whether that power is being used properly.

Federal handouts to the provinces are a depressing example of the bungling and abuse that happen in the dark. These handouts go by the fancy name of "equalization". In principle, equalization is meant to ensure that no province falls below some acceptable national standard of prosperity. In practice, equalization drags everyone down. It allows a provincial premier in the Maritimes to chase business away with high taxes and silly regulations. His province does not pay the cost because the equalization program forces other provinces to pump money into any local economy that is doing badly. These transfusions do not bring the local economy back to life. Instead, they allow the economy to exist in a state of living death, where the appetite for transfers grows with each feeding. Citizens in healthy provinces do not know enough about these morbid goings-on to object. Like the victims of a secret vampire attack, taxpayers sense they are being drained but cannot discover the cause. In their ignorance, they can only take crude actions such as organizing taxpayer revolts. They cannot pass refined judgements on federal policies.

IMF starts at home

A federation of many small governments would keep citizens informed about where their money is going. Ottawa could no longer act as a screen between the citizens who pay and the citizens who play. In a decentralized state, a province that wanted help would have to ask the other provinces directly. These provinces would knock their heads together to come up with an aid package that stood a chance of pulling the poor province out of its misery. This is what the IMF does. It is a voluntary club of nations that hands out money to developing countries. The money comes with strings attached. The IMF uses these strings to yank governments of developing countries off their entrepreneurs backs. Canadian provinces would have an interest in seeing that the same sort of thing happens here. In a decentralized state, the cost of transfers to other provinces would appear in the budgets of the B.C., Alberta, and Ontario governments. Citizens would want to make sure the transfer dollars they were giving away were being spent productively. The information these citizens needed to make

up their minds would come courtesy of the politicians of poor provinces. These politicians would have to explain why they needed money, what they were going to do with it, and how well they managed the money they got the previous year. In other words, decentralization would set off an explosion of information. It would force citizens to come to an understanding with each other. In a central state, some people can use the central government to nab money from others. In a decentralized state, this sort of poaching is not possible. Groups that need help have to come face-to-face with the groups that give the help, and must explain why they need it.

Say "please"

Another way of thinking about decentralization is to consider it as lesson in politeness. It stops politicians from throwing their weight around, and it puts special interest groups on their best behaviour. Politeness flourishes in a decentralized state because the people who pay the tax bills have information and they have choice. When local governments do most of the taxing and spending, it is easy for citizens to judge whether their governments are doing a good job. All they have to do is look across the border to see how well governments are performing there. If I see that parents in the neighbouring county are paying less tax and getting better education for their children, I will have some hard questions to ask my elected representative. Decentralization gives me a standard of comparison. It throws up the evidence citizens need to call their leaders to account. If my representative does not answer my questions, and proves equally obtuse on other matters, I may decide to sell my house and cross the local border. If enough people like me leave, or simply threaten to leave, the government will have to clean up its act. Otherwise it risks a brain-drain of its best people. The political pressure informed citizens exert on their leaders by threatening to leave is known as "voting with your feet." The combination of information and choice is lethal for slack politicians. If they do not watch what they are doing, they will be outcompeted by neighbouring governments. This fear of political competition explains why the Soviet Union jammed radio signals and surrounded its people with concertina wire and guard dogs. These measures kept people ignorant and immobile.

A tale of two cities

In 1994, competition between the city of Toronto and its suburbs showed how badly politicians rankled when citizens are free to move where they please. The problem facing Toronto city hall was that for years it had squandered money to run a complicated "two-tier" government. Both tiers seemed to have been designed for the benefit of special interest groups and inefficient public bureaucracies. To feed this Moloch, councillors raised taxes beyond the endurance of businesses and middle-class property owners. In the 1980s and 1990s these groups fled to the suburbs. In the suburbs taxes were low, and the regulations made sense.

Toronto councillors faced the sickening prospect of having to lower their taxes, end ridiculous zoning laws, and cut spending on goodies that pleased noisy special interests. Short of putting an iron curtain around the city, there seemed no other way of keeping their citizens put. But in their desperation, Toronto councillors came up with an elegant defence against competition. Why not force the suburbs to raise their taxes? The roundabout way of doing this was to try to convince the provincial government to levy most of municipal taxes. Toronto politicians pleaded with the province to shift the cost of running social services and education off the city tax base, to the provincial tax rolls. With property taxes out of municipal hands, no neighbouring community could offer citizens a better tax deal than Toronto. Everyone in Ontario would pay the same provincial rate of property tax no matter how good or bad their public services were. One inescapable tax rate throughout the entire province would put a convenient end to what Toronto politicians were calling "unfair tax competition" from the suburbs.

Hankering for a common tax rate and an end to tax competition is known in clinical circles as "tax harmonization envy." Tax harmony is a nice expression for an ugly practice that the European Community has written the book on. As the 1992 date for European free trade approached, it dawned on leaders that their tax revenues were in danger. What if France decided to set its GST at half the German rate? Germans would shop in France and the German government would lose tax revenue. To avoid this risk, six members of the EC agreed to harmonize their GST rates at 15 percent. Toronto politicians wanted to protect themselves from the same risk of losing revenue by forcing neighbouring cities and suburbs to keep their taxes high. In the end, Toronto leaders failed to squelch competition. The reality of losing its tax base has forced the city to look for ways to provide good government at low cost.

The great experiment

What blueprint will Toronto use to get better government? It may imitate the suburbs. Or it may come up with innovations of its own. No one can be sure. What is more certain is that the answer to good government will come from experimenting with different styles of management. Launching these experiments is what competition between governments is all about. In a decentralized state, each province and municipality is like a test tube with a unique mix of policies. We can only find what mix works best by trying out many variations. This is how drug companies come up with their potions. This is also how economies grow. Entrepreneurs do not pretend to have a monopoly on wisdom. They try what works. The truth about what works comes after many failures.

A low-risk portfolio of policies

We need a similar humility when it comes to government. The answer to what makes a good government cannot be decided through academic quibblings. Competing tests of what works are the best guides to truth. This means that no single view should be given large weight until it has proved its merit. The problem with a central government is that the notions of a few "visionaries" can guide big government investments that expose society to breathtaking risks. This is why government policies sometimes fail in spectacular style. Our school systems are an example of these failures. Provincial bureaucrats control most of the curriculum in elementary education. They are pleased because they get to put their theories into action on a big scale. Parents who do not like the Pharaonic approach to education may be less pleased. But they have little choice in where to send their children. The educational experiment the bureaucrats have tried on us has given a school system in which students have trouble performing functions that were once thought to be basic, such as reading and writing. A system of education in which each community had more control over its curriculum might have spared us this calamity. Decentralization would have presented society with a portfolio of competing policies. When one local governments vision of good education failed, it would not drag down students in other jurisdictions. Decentralization would have been an insurance policy against government mistakes.

But . . .

People who like big government may object to this vision of decentralization for fear that, in the words of Peter Self, a prominent critic of competing governments, "a fragmented system of local government is highly inegalitarian . . . [it] polarizes rich and poor into separate local governments." It is hard to argue with this point. Inequality is the price that some people pay for being allowed to make their own choices. The question is whether this price is worth paying. If we do not allow some experiments to fail, governments will not improve. Imagine what would have happened in the private economy if in 1900 all new business ventures had been outlawed. Most of us would still be living on the farm in the standard our great-great grandparents knew. Failures of a market economy are eventually patched over by its successes. This is why economies grow. The same principle should hold for competing governments.

If this line of reasoning is too abstract to convince the critics, then a practical piece of information might do the trick: People who cannot afford the basic necessities of life are no more than three percent of the population of developed countries. Taking care of them is no burden on either a centralised state or a loose confederation. There is no need to fear that the destitute will suffer under decentralization. It is likelier that suffering will hit naughty politicians, and special interest groups who were used to getting their favours in secret from Ottawa.

Ottawa's role

Not all central government is bad. Ottawa could act as a competition cop. It could make sure that no region is blocking the free flow of goods and services across its borders. This free flow would be the force that keeps local politicians at the service of their constituents. Each local government in a decentralized union would have to submit to such an authority, otherwise they would no longer be a union; they would be an archipelago of isolated peoples. Canada can work out such a union because most people here believe that part of being Canadian means working anywhere in the country you want to work, and moving your money anywhere you want it to go. Perversely, our federal leaders have been limp-wristed enforcers of the one power they should be flaunting. Free trade between the provinces is almost as hard as free trade with the rest of the world. Enlightened national leaders should hand the power to tax and spend to local communities, and ensure that the borders between communities stay open. This might not please policy makers who were suckled on the notion that all wisdom flows from the centre. Canadians who have been ignored by the centre might think otherwise.

Further reading

Brenner, Reuven. "Canadian Choices." Economic Dimensions of Constitutional Change, Volume I. Edited by Robin W. Boadway, Thomas J. Courchene, and Douglas D. Purvis. Kingston (Canada): John Deutsch Institute for the Study of Economic Policy, 1991, pp. 118-148.

Breton, Albert. "The Existence and Stability of Interjurisdictional Competition." Competition Among States and Local Governments. Edited by Daphne A. Kenyon, and John Kincaid. Washington, D.C.: The Urban Institute Press, 1991, pp. 37-56.

Schneider, Friederich. "The Federal and Fiscal Structures of Representative and Direct Democracies as Models for a European Federal Union: Some Ideas Using the Public Choice Approach." Journal des Economistes et des Etudes Humaines, Volume 3, Number 4, December 1994, pp. 403-438.

Self, Peter. Government by the Market? The Politics of Public Choice. London: The MacMillan Press Ltd., 1993.

Tannewald, Robert. "The U.S. Tax Reform Act of 1986 and State Tax Competitiveness." Competition Among States and Local Governments. Edited by Daphne A. Kenyon, and John Kincaid. Washington, D.C.: The Urban Institute Press, 1991, pp. 177-204.

Tiebout, Charles M. "A Pure Theory of Local Expenditures." Journal of Political Economy. Vol. 64, 1956: 416-24.

Wilson, Tom. "Local Freedom and Central Control: A Question of Balance." The Reform of Local Government Finance in Britain. Edited by S.J. Bailey and R. Paddison. London: Routledge, 1988, pp. 92-108.

Ottawa Should Follow Provincial Lead                                        on Balanced Budget Laws

Robin M. Richardson

There has been a demonstrable increase in interest in balanced budget legislation in Canada in recent years as Canadians have become concerned about rising deficits and public debt which has grown to mountainous levels.

Underlying this concern is a view that government is too large and has grown beyond the preference of voters. The fiscal challenge is to reduce the size of government and eliminate government debt through legislated constraints--the primary one of these, in Canada at least, being the balanced budget law, coupled with a debt elimination plan.

Principles

There are certain principles that should be followed in designing a balanced budget law that will prove to be effective. These principles are:

Coverage

How much of the government as a whole does the balanced budget legislation include? The rule should be to include the entire government universe: departmental operations, interest on the public debt, transfers to persons and to other levels of government and the expenditures of government owned enterprises.

A review of U.S. state-wide legislation shows that most balanced budget laws come far short in the issues of coverage or comprehensiveness. They typically apply to a portion of the Revenue Fund covering operating expenditures only rather than to the Consolidated Fund which includes capital expenditures or, even more desirable, to the Summary Financial Statements of the government sector as a whole, including the operations of government owned enterprises.

Exclusions

How much of the balanced budget restrictions can be circum-vented? What are the loopholes? What is the scope for accounting "tricks"? Do the provisions of the balanced budget law allow for cost shifting to local governments?

Penalties for non-compliance

A review of U.S. legislation shows that tough penalties for non-compliance are needed for an effective balanced budget law. What happens if the balanced budget law provisions for deficit elimination are not met? Who gets penalized and by how much? If a balanced budget law is not adhered to, it ceases to be useful. Tough non-compliance penalties are essential for an effective law and for widespread taxpayer acceptance.

Treatment of surplus

Since the objective of "balancing a budget" or "eliminating a deficit" is to ensure that government debt stops growing, the ideal balanced budget law should specify that any and all surpluses be used to reduce the government's debt as measured by its accumulated deficit.

Canadian experience

Canadian experience with balanced budget laws is very recent, and is limited to 4 provinces. The first piece of legislation was the Taxpayer Protection Act of British Columbia, passed on March 22, 1991 by the Social Credit government. It was repealed the next year by the newly-elected NDP government so that they could raise taxes in their first budget.

New Brunswick introduced a balanced budget law in 1993, Alberta in 1994, and Manitoba in 1995.

The New Brunswick legislation allows for a balance over a three year "fiscal period" (soon to be extended to a 4 year period) and now includes both ordinary and capital expenditures. It contains no effective limit on expenditures and no protection for taxpayers from tax increases to achieve overall balance. There is no provision that a surplus be used to reduce the provincial debt.

Alberta's balanced budget law contains a formula to ensure prudence in its method of forecasting highly cyclical resource revenues and, more recently, corporate tax revenues. It is based on a fully consolidated approach to the government sector as a whole. Beginning in 1996-97, deficits will no longer be allowed, and surpluses will be applied to the elimination of the provincial debt over a 25 year period under the provisions of a separate debt elimination act. There is no protection for taxpayers from tax increases in the Alberta legislation.

Manitoba's recently passed balanced budget law is the most comprehensive in Canada. It covers both current and capital spending and has tough penalties for non-compliance. The premier and each member of his executive council could lose 20 percent of their ministerial pay in each of two years (40 percent overall) if budget goals are not achieved. This is unique in Canada. The Manitoba law includes a mandated payment schedule to retire the provincial debt over a maximum 30 year period. Taxpayer protection is included on about 70 percent of revenues, in that province-wide referendum approval is required for future increases in the provincial income, corporate, and sales taxes. The budget will have to be balanced annually after taking into account mandated principal and interest pay-down instalments on the provincial debt.

Where do we go from here?

The federal and other provincial governments should adopt balanced budget laws with legislated debt elimination plans in next year's budgets.

With respect to the government of Canada, next year's budget should contain (i) a specified year-by-year target for deficit reduction, (ii) a specified year for budget balance, (iii) a specified penalty on the prime minister's ministerial salary and the salaries of each of his cabinet ministers and parliamentary secretaries for failure to meet the deficit reduction targets, (iv) the statutory prohibition of budgetary deficits once budgetary balance has been achieved except for specified exceptional situations such as war, (v) a long-term plan for eliminating the federal debt with minimum annual payments of interest and principal, (vi) the setting out in debt elimination legislation of a long-term goal of a Debt Freedom Year for Canada, (vii) a statutory provision that any future surplus and the proceeds from the sale of federal lands, buildings and crown corporations be used entirely to pay down the federal debt, and (viii) taxpayer protection on personal and corporate income taxes and the GST until the federal debt is eliminated.

Another item that should be included in next year's federal budget is a detailed calculation of Quebec's separation obligation to Canada in the event of its separation from Canada. This calculation should show Quebec's share of federal assets and liabilities, and the federal govern-ment's expectations for a repayment schedule of both principal and interest over, say, a 25-year period. This would provide full disclosure to investors, to demonstrate the importance of debt retirement in an orderly manner and to inform Quebecers and other Canadians of one of the more important costs of separation.

With 6 provinces expecting surpluses this year, it is important to shift the focus to debt elimination and away from deficits. Continued public pressure to eliminate the debt coupled with legislation to prohibit deficits, tough penalties on politicians for non-compliance, and long-term debt elimination plans with built-in taxpayer protection will ensure that Canada's long-term public debt problem will eventually be resolved without Canada having a major financial crisis.

What's Wrong with the B.C. Benefit?

Owen Lippert

British Columbia's provincial government just announced the so-called B.C. Benefit. It will provide $103 for each child of a low-income family. There is a sliding scale tax clawback. Families earning $18,000 or less will receive the full amount. A family can earn up to $34,000 before the benefit is fully clawed back. The Minister responsible, Joy McPhail, said the B.C. Benefit will entice people off welfare. The argument goes that the cash benefit will make up the difference between what one can earn in a minimum wage job, and the higher amount one can receive from welfare.

What can be wrong with such seeming generosity for low-income families? Lots. It is not the new cruelty, but old common sense that explains why.

First, a dollar is a dollar is a dollar. If the provincial government wanted to put more money in the pockets of families, all it had to do was cut their taxes. Designing a new government check-writing program is the least efficient means to give people more money. The best is to let them keep more of what they have in the first place.

Second, the B.C. Benefit will provide only a weak incentive to leave welfare for work. To leave welfare, a "client" must give up the certain benefit of a government check for the uncertain return of work. Not only that, but with work you get inconveniences, such as bosses, commuting, and cranky co-workers. How much income would the average person forego not to have to deal with their own version of Mr. Dithers?

Third, the B.C. Benefit will just get more expensive as time goes by. Lobby groups will form to raise the benefit amount and lower the clawback scale. Just before every election, the government will find some compelling reason to sweeten the pot. Any time you increase the client base for social spending, it inevitably ends up costing more.

Meanwhile, of course, individuals higher up the income ladder will just grow irritated with the increased taxes that pay for this income policy experiment. The traditional response was to make benefits universal to buy off middle- to upper-income earners. That is too expensive today. Yet, one can predict the "clawback" point for the B.C. Benefit climbing higher up the income scale from $34,000 to $44,000 to possibly $54,000.

What is depressing is the government's hypocrisy about family income clawbacks. If the principle works for the B.C. Benefit, why not apply it to other social programs. It is very simple. Claw back per capita expenditures on health care, education, and other social services from upper income earners, then let them spend their own money as they see fit.

What should the government have done?

First, remember the B.C. Benefit is a work-around solution to the problem created by welfare in the first place--some people on welfare now receive more money than others working at entry level jobs. Rather than spend more money to solve this disparity, why not spend less money? Cut welfare benefits to the level at which they do not compete with working wages.

Here are two suggestions, one specific and one general. Set welfare rates according to a local Necessities Index. Such an index would track the cost of purchasing basic food, clothing, and shelter in a particular community.

A Necessities Index Committee from the private sector would adjust annually the income assistance rates to reflect changes in prices. Its members would be nominees from organizations such as the Association of Professional Economists of British Columbia, and the Salvation Army, or other private "help" organizations.

The goal ought to be to return welfare to a needy-only system rather perpetuate its current status as an incomes program. If welfare returns to its original purpose of emergency aid and away from a "way of life," then the disparity between welfare benefits and earned income has much less sting for those working for low wages.

One reason that policies and programs ultimately fail, whether measured by soaring costs, rising welfare rolls, or growing public resentment, is that the government ends up trying to do too much for too many. If it helps one group, it ends up doing something for somebody else to compensate.

Hey, Victoria (or Ottawa, Toronto, Quebec City, and so forth) you are not the tooth fairy--you are the dentist. )

How to Regulate the Internet

John Robson

The particular seems to be a great enemy of sound public policy. Just when you start convincing people that, for instance, welfare spending creates dependency, up pops some kid on welfare who has to give up their kitten because of the cutbacks [See for instance the top story in the Ottawa Citizen on Saturday, September 30.] and the public cries out for action. Just when you start convincing people not to go on futile crusades overseas, up pops some Bosnia and off go our troops to provide target practise for maniacal foreigners. And just when you start convincing people that deregulation is a sound policy, up pops some nude girl on the Internet and everyone starts muttering "there oughta be a law." Thus our public policy succumbs to a "tyranny of the particular."

While any attempt to regulate the Net at all would be extremely difficult for technical reasons, there is a genuine problem with it: it provides open access to material unsuitable for some audiences. Any teenager with an IQ over 78 can log onto the Internet and find, copy, and print out pictures of naked women in under five minutes (or so I'm told). Given the peculiar generation gap that opens up with computers, moreover, their parents often can't do it themselves, are dimly aware that it might be possible but have no idea how, and desperately wish someone would do something to stop it.

The Internet does indeed contain pornography, graphic violence, and trash generally. And I readily concede that that does call for regulation. It just does not call for government regulation.

Here, instead, is the private solution, which is better than the government solution because (a) it would work at all and (b) it would work well. Neither is true of the government alternative.

At the moment, there are a variety of programs available for surfing the Net, and they give you access to whatever is out there. Since "whatever is out there" is way beyond the control of parents, governments or anyone else, concentrate instead on the programs.

What we need--and given the nature of markets what we will soon have--is programs that control input. I don't mean they will screen out offensive words. Nor will they scan digital images to make sure there aren't pictures of... well, you know what there would be pictures of (and if you do not, you obviously don't have children to worry about anyway). Rather, they will look for a particular encryption key, and only allow access to files that carry that code.

The code itself, of course, is part of the commercial product that also includes the software that responds to it. The code is secret. Producers must purchase the right to use it from the maker. And since the code-maker's profits depend upon the integrity of the service, the maker will be choosy about what is licensed to carry that code.

It's like the Comics Code Authority. Back in the 1950s, a variety of gruesome American comics offered readers all sorts of lurid, highly explicit gore: severed arteries spouting blood, half kidneys flying through the air, old ladies chopping people up with axes. Calls for censorship began to rumble in the hinterland and rattle in the Congress. And then the clean comic book publishers made a voluntary agreement not to show nudity or excessive and graphic violence, and they pledged to parents that any product carrying the CCA logo would be decent for children.

This arrangement was policed, then, not by police, but by consumers. And just as they would tell their kids, "Yes, you can buy a comic, provided it's a CCA comic," so now parents will tell their children "Yes, you can surf the Net, provided you use Cleanscape." And Cleanscape will rely utterly upon its reputation for only licensing suitable inputs, so it will guard its reputation carefully. Whereas with government everything is innocent until proven guilty, with a private sector quality control gateway, everything is guilty until proven innocent. But no one needs to control what is on the Net, which is by definition wide open. Rather, they just need a good gate-keeper to guard access to a small portion of it.

And with that gate-keeper, children will not get whatever has not been caught, which on the Internet would be virtually everything. Instead they will get only what has been vetted. Doubtless Cleanscape would then subcontract to various Web sites that would certify that all their material was suitable for children, and so forth. But right along the chain there would be accountability, as everything would have to be approved by people who would lose their jobs or get sued, or both, if they did a bad job.

Of course keeping teenagers from getting pornographic or violent material entirely is in principle impossible. Even if you smash your own computer, your kid's friends might be downloading Miss November and giving him printed copies, just as they might have given him magazines in years gone by. This is not a new or a technological problem, and it cannot be regulated away.

Equally obviously, parents who do not care what their children are doing will not insist on it, but these same people are themselves a more disgusting and obscene example to their kids than anything on the Net. This too is not a new problem and cannot be regulated away.

But with the kind of system I describe, everyone else will be able to know that their kids are accessing a world of information without getting details of the Bernardo killings or pictures of ladies with no clothes on. And Al Gore can put his truncheon away.

Many years ago, Henry Hazlitt warned us always to look at the long run and at everyone affected, not just the short run and those immediately involved. That remains the way to avoid the "tyranny of the particular." In this case it shows us that deregulation is good, not just in principle, because it allows cooperation, but in practise, because it can keep rude pictures off your kid's computer screen. )

December Questions and Answers

Isabella Horry

Q: How large are the transfers associated with agricultural support? How do they compare internationally?

A: The Organization of Economic Cooperation and Development (OECD) compiles estimates of total transfers associated with agricultural support. Agricultural transfers are defined as the sum of all transfers from taxpayers and from consumers resulting from agricultural policies, net of budget revenues from tariffs on imports. Transfers from consumers are an implicit tax on consumers due to market price support. Table 1 presents total agricultural transfers, total transfers per capita, and as a percentage of GDP for Canada, nine other countries, and the European Community. This month's graphs present total transfers per capita and as a percentage of GDP for the years 1989, 1993 and 1994.

Q: What are the total transfers associated with agricultural support per farmer, and per hectare of agricultural land?

A: These two ratios are calculated by the OECD. Farmers, hired farm employees, and unpaid family workers are included in the calculation of agricultural transfers per full-time farmer equivalent. In the estimation of transfers per hectare of agricultural land, agricultural land is the sum of the area of arable land, land under permanent crops, and permanent meadows and pastures. Table 2 shows these ratios for Canada, nine other countries and the European Community. In 1994, transfers per full-time farmer equivalent varied between US $1,198 in New Zealand, and US $38,624 in Norway. That same year, transfers per hectare of agricultural land ranged from US $3 in Australia to US $17,332 in Japan.

The Ramp to Hell

Karen Selick [A version of this article has also appeared in Canadian Lawyer.]

Perhaps the people who first dreamed up Ontario's Human Rights Code had good intentions, but as the old saying goes, that's what the road to hell is paved with. A recent decision of a Board of Inquiry shows just how far we've travelled down that road.

The case involved a disabled woman who uses a wheelchair. She made an appointment with a chiropractor whose office was not accessible by wheelchair. He offered her three alternatives: two doctors would carry her up the stairs, or he would treat her at her home, or he would borrow accessible premises from another chiropractor and treat her there.

Not good enough, said the lady, and lodged a complaint with the Human Rights Commission. Almost seven years later, the decision has come down: the chiropractor is guilty of discrimination. He has to pay the lady $500 in damages and install a ramp in his building at a cost of almost $20,000.

Reading this decision reminds me of the Emperor's new clothes: everyone seems either too embarrassed, too fearful or too politically correct to say what was so pathetically obvious.

For example, one recurrent theme is that the disabled are "seen both by themselves and by society as not the same as everyone else." Okay, I'll be the kid in the crowd who blurts out what everyone already knows: installing wheelchair ramps won't change this. People in wheelchairs will still be unmistakably different--they'll be the ones rolling up the ramps while other people will be walking. To make their differences genuinely unobservable, we'd have to pass a law compelling everyone to use wheelchairs.

A second theme in the judgment is that the disabled don't want charity or pity; they don't want to be dependent upon others. That's understandable--who does? But to pretend that this decision--or indeed, any application of the Human Rights Code--makes the disabled any less the recipients of charity or any more independent requires a prodigious feat of self-delusion. They may not be dependent on someone else to carry them up the stairs, but they are still dependent on someone else to build them a ramp.

If the complainant had wanted to demonstrate true independence, she would have gone to the other chiropractor's office where someone had already installed wheelchair access voluntarily, instead of burdening a stranger with a $20,000 expense. Or she could have offered to pay for the ramp herself, rather than forcing an unwilling victim to provide it for her. The route she chose, of using the coercive power of a state agency to appropriate someone else's assets for her benefit, underscores the very dependency she is attempting to deny.

A third theme of the decision is dignity. We're told that the alternatives offered by the chiropractor offended the woman's dignity. One wonders what she and the Board of Inquiry expected him to do when initially confronted with the situation. Was he supposed to say, "Okay, just wait a few weeks while I get a zoning variance from the city, arrange a new mortgage, and spend $20,000 installing a ramp so that we can see whether you really want me as your chiropractor?"

Most people who need chiropractic services need them now, not a few weeks from now. It made far more sense for the doctor to offer quick expedients than to offer to install a ramp. Even if he had proposed a ramp, the woman might well have sought treatment elsewhere in the meantime, and might either have had her problem completely remedied, or might have been so satisfied with the second chiropractor that she would never have come back to the first one.

In my view, the complainant's own behaviour robbed her of dignity. A dignified response would have been for her to realize that the doctor was trying to accommodate her and to have met him halfway. Instead, she insisted that everything be done entirely her way. That's not dignified--that's bullying.

The Human Rights Code says its purpose is to enhance the dignity of "every person," not just disabled people, but the decision--indeed, the whole proceeding-- overlooks any consideration of the chiropractor's dignity. The judgment reveals details of his assets, his debts, and his earnings over several years. There it all is, in black and white, for his colleagues, his patients, his neighbours, or any other nosy stranger to read. I'm sure he finds that very dignified.

Even worse, his judgment as a businessman regarding the appropriate financial conduct of his business has been completely overridden. No doubt he would willingly have installed a ramp, in order to expand his potential client base, if he had perceived a reasonable prospect that the extra traffic would justify the expense. His opinion was that it wouldn't. The Board of Inquiry couldn't care less. He is the child, it is the parent, and he has to do what it says, regardless of how foolish its decision may be from a business point of view. I'm sure he finds that very dignified too.

One witness, quoted approvingly by the Board, described the proceedings this way: "It really is . . . about persons with disabilities taking control of their own lives." Not at all. It's really about the Human Rights Commission, in the name of a few legally privileged groups, taking control of other people's lives. More about this next month. )

Measuring Economic Well Being

Chris Sarlo

Are we better off than we used to be?

The answer to this question is far more complicated than it might appear to be. We would need to be clear on a number of things prior to even beginning an investigation of the question. Most importantly, we need to know what is meant by the term "better off."

Economists have been interested in this question for a long time. While we certainly understand that there is far more to the well being of people than just material well being, we naturally tend to focus our attention on the economic side of that question. Economic well being is easier, apparently, to measure. The statistical certainty of numbers avoids having to deal with largely qualitative issues such as health, age, attitude, physical appearance, family cohesion and job satisfaction--all of which clearly affect well being. Despite the narrow focus, it would be hard for critics to deny the importance of the economic component of well being.

Gross domestic product (GDP) per capita has been used as a measure of the average economic well being in a nation. Tracking this variable over time shows us, broadly, what has happened to average living standards. It is also useful for making international comparisons of well being as long as we appreciate that GDP typically understates the economic activity of more traditional and less market-oriented societies. What about the measurement of economic well being down at the household level? In Canada, total family income is, by far, the most widely used indicator. We have lots of data on incomes. Statistics Canada publishes information on incomes gathered from the census (every five years) as well as from the smaller sample annual income surveys. These sources are the basis of virtually all studies of poverty and inequality in Canada. The problem is that income is a particularly poor indicator of economic well being at the low end.

Problems with the income indicator

The lifecycle pattern of income

Most Canadian workers have fairly low incomes when they are young. They can expect their income to increase as they gain maturity and experience in their jobs. Young people, whether attending post-secondary institutions or out working, typically borrow against future income to invest in education or to finance the purchase of a range of consumer durables. These loans are not counted as income but do increase well-being. Their actual incomes, often at poverty or near poverty level, will not reflect their true standard of living. Similarly, when workers are in their peak earning years, they typically save a much higher proportion of their income. Upon retirement, income falls sharply but pensioners use past savings and the services of already acquired durables to enjoy a real standard of living beyond their income. This "lifecycle" pattern of income, consumption, and savings suggests that income is not always a good indicator of economic well-being.

Gifts are not counted in income

The income data provided by Statistics Canada does not include gifts (either cash or in-kind). For most middle and upper income families, this omission is of little consequence. However, it may be quite significant for those at the low end of the income distribution. People in this situation would include university students receiving cash from parents or relatives and low income families receiving a rent-subsidized apartment.

Losses from self-employment

Self-employed persons are able to write off business losses against other earnings over a number of years. Thus, every year, we have tens of thousands of Canadian families and individuals who report zero or negative income. It is clear that people in this situation are not homeless and are not starving (although their income would suggest otherwise). They may not even be deprived in any reasonable sense of that term.

Unreported and underreported income

Not everyone accurately reports their income on census and income surveys. Underreporting may be deliberate or inadvertent. Those who understate income to evade taxes are likely to continue to understate income on surveys, perhaps using their tax returns as a guide. Self-employed persons as well as those having casual or part-time employment have greater scope for underreporting than full-time wage earners and are likely to have lower incomes in any case. In addition, Statistics Canada reconciliation checks reveal that both unemployment insurance income and welfare benefits are substantially underreported. These, of course, are significant sources of income for low-income Canadians. Once again, reported incomes do not adequately inform us about the economic well being of many of our fellow citizens.

If we are examining the standard of living of middle-class, middle-aged Canadians, reported income is probably a useful indicator. If, however, we are interested in measuring the economic well being of the poor, or are interested in the question of inequality in Canada, reported incomes are not sufficient.

Conclusion

By way of conclusion, I wish to suggest that consumption rather than income should be the indicator of choice in these matters. People's actual expenditures on a range of commodities will inform us, far better than income, about their material well being. The consumption indicator very nicely gets around the problems related to the income lifecycle, self employment losses, underreported income, and cash (but not in-kind) gifts. In addition, data on consumption, while not as profuse as that on incomes, is quite plentiful. )

Heart of Oakes:                                                                             The Supreme Court of Canada and the Charter

Tom Denholm

[GRAVITAS magazine is privileged to be able to offer the readers of Fraser Forum adaptations of some of the best articles that we have published. As Canada's most thoughtful current affairs magazine, GRAVITAS provides commentary and insight on politics, economics, society, science, and culture-placing today's issues in perspective and defining the debate on emerging ones. The following piece by author Tom Denholm is an article described by David Frum as "a rare critique of the quality of the Supreme Court's thinking." Enjoy the read, and please let us know what you think.

Ian Garrick Mason,
Editor-in-Chief

(For comments, or for information about or subscriptions to GRAVI-TAS, please write GRAVITAS, Dept. "F," Manulife P.O. Box 19544, 55 Bloor St. West, Toronto, Ontario M4W 1B0, phone (416) 928-0238, fax (416) 928-0623, or e-mail gravitas@passport.ca)]

By almost any measure, the Supreme Court of Canada has let us down. In recent years, it has provided neither stability nor social vision, and has done a poor job of telling Canadians what the Charter of Rights and Freedoms is supposed to mean in our lives as citizens.

Indeed, recent Supreme Court decisions make it difficult to believe that the justices feel bound in any serious way by the Charter. Their judgments are long, contradictory, and avoid or deny Charter issues whenever possible. This loss of judicial nerve stems from a deep malaise: put simply, the Supreme Court of Canada is incapable of carrying out the role assigned to it by the Charter of Rights and Freedoms, and this failure has affected every aspect of the Court's existence. It has changed the nature of judging, while lessening our confidence in the determinacy and objectivity of Canadian law.

This incapacity of Canadian judges stems from a crucial flaw in the Charter document itself. Section 1 of the Charter allows governments to infringe individual rights and freedoms where that infringement can be justified as being necessary in a free and democratic society. There is no equivalent to section 1 in either European constitutions or in the American Bill of Rights. In those instruments, an implicit limit is built into the very definition of a right or freedom, recognizing that rights cannot all be absolute or they would clash with one another. In Canada, however, there are no limits aside from those that are justified by government. With rights and freedoms left broad and essentially abstract, the potential reach of the Charter has been enormous. No court of appeal could realistically hope to satisfy the claims for entitlement that were unleashed.

Blithely unaware of the dangers which lay ahead, the Supreme Court set out to faithfully follow the internal logic of the Charter. In 1986, the Court decided R. v. Oakes, probably the most significant Charter judgment ever delivered. David Oakes had been charged with unlawful possession of hashish oil for the purpose of trafficking. The Narcotics Control Act obliged any person in possession of a narcotic to prove he was not a trafficker. The Court held that the Act violated Oakes' right to be presumed innocent. This case determined not only the meaning of section 1, but also the framework for assessing Charter complaints.

According to the Oakes decision, the process of constitutional review should be a two-stage dialogue between the citizen and the state. First, the citizen must show that a right or freedom has been infringed by a particular law. Then the government must show that the objective behind the law is "pressing and substantial," and that the means chosen to pursue the objective are reasonable and demonstrably justified in a free and democratic society.

Thus, Charter jurisprudence is really a struggle between the abstract rights claimed by citizens and the limits to those rights defended by the government. Under the Oakes test, the courts in almost every case are forced to determine whether the provisions of an impugned law are rationally connected to the government's objective as well as being less intrusive than alternative measures. Since almost every law in Canada violates an abstract right or freedom in some way, this places a very heavy burden on the judiciary.

Unfortunately, courts are simply not equipped to evaluate the full range of policy alternatives available to government. Once the Oakes standard had been established, it soon became apparent that judges were unable to meet it in many cases. In an attempt to manage the situation, the Court eventually decided that Oakes applied only to laws that either constrained or threatened in a coercive way. This effectively privileged Charter complaints by persons accused of crime.

The retreat from Oakes has continued to the present day. Whenever possible, the Court has stopped Charter enquiries at the first stage of the analysis, making it unnecessary for the government to justify its actions. Even worse, the Court has frequently taken on the government's role of defending the public interest, leaving the burden of proof on the citizen to justify his right or freedom.

In short, the Supreme Court of Canada has failed. After teasing out the logic of the Charter and formulating the Oakes test, the justices came to realize that the task set for them was impossible to fulfil. In the interests of preserving the apparent integrity of the justice system, they are forced to soldier on with a document that is seriously flawed. The end result is that all Canadians have seen their legal rights, and indeed the rule of law itself, eroded in the span of less than ten years.

Like the Wizard of Oz, the Supreme Court is caught in an Emerald City of its own design. The abstract rights enumerated in the Charter are like requests for courage, or a heart, or brains, or the way home: they cannot be satisfied. For both the Wizard and the Supreme Court, the only option is to become less accessible, while maintaining the facade of being in control. The people of Oz were quite happy with autocracy; the people of Canada, on the other hand, have earned the right to expect their governments to act within certain limits. We do not have a strong tradition of criticism of the judiciary in this country. In the interests of democracy and freedom, however, perhaps it is time we developed one. )

The Case for Market-based Solutions to Environmental Problems

Norman Groot [Norman Groot is a 3rd Year Economics Major at Wilfrid Laurier University. This essay tied for second place in the 1995 Student Essay Competition.]

On Tuesday May 23, 1995, an article by Fabrice Taylor in the Globe and Mail entitled "Industrial Compost Finds Fertile Markets" gave an excellent account of the potential of using free market initiatives to both solve ongoing environmental concerns and develop a new growth industry. In a nutshell, the industrial composting industry is being paid by both private industry and government to collect waste, such as animal remains from privately-owned meat processors, discarded wood bark from privately-owned pulp mills, and domestic organic garbage and sewage sludge from municipal government landfill sites and sewage lagoons. With the acquired waste products, industrial composting firms are producing soil and soil conditioners which are sold to farmers, nurseries, and foreign countries with desert terrain, as well as harnessing the heat produced by the composing process to produce their own power with excess to sell to public utility firms. This article is an account of a win-win story: what is good for the environment is good for the economy; what is good for the economy is good for the environment.

Can such successful market-based solutions to environmental problems be applied to the rest of the economy? This essay will show that properly respected and protected property rights in a free market economy are the key to a sustainable solution. Only with properly respected property rights can a free market deliver efficiently and with equity economic growth that reflects environmental sustainability.

The case for property rights

Although private interests have indeed polluted the environment, their behaviour was, in large measure, encouraged, and in some instances determined, by the legislation and laws passed by the public sector. Although commercial transactions are easily the most identifiable aspect of the marketplace, of even greater importance are the laws that underlie them. For a true free enterprise system to successfully and sustainably operate, especially in light of environmental sensitivity, the rights of the individual and his or her property are sacrosanct. These rights can not be rendered inoperable by philosophically meaningless concepts such public interest or the common good. Unfortunately, in the crucial area of property rights, both our legislatures and our courts have failed to perform their assigned tasks. Environmental problems have largely been the result of judicial findings based on government failure, not of market failure. The pollution problem is essentially a manifestation of this breakdown.

In a long series of decisions that have established precedents which rule us now, the courts have admitted that private property rights have indeed been violated by many industrial and governmental defendants. However, plaintiffs have commonly been denied compensation for violations of their property rights on the grounds that 1) the environmental nuisance was common to all of society and 2) the nuisance was determined to have been created by a project or a service that was undertaken by a government authority either directly through a Crown corporation or indirectly through licensing. It was therefore deemed to be in the interest of the country's economy and common interest as a whole. A critique of these fallacious assumptions is examined by way of a hypothetical case study.

The case for private garbage collection

A plausible case for the argument of strictly-enforced property rights and free markets can be made concerning public garbage disposal. As current public garbage disposal is a "free" service provided by your municipal government, it provides no incentive for residents to reduce the quantity of waste they produce. As there has not been an incentive to decrease waste, consumers pay little or no attention to the "environmental friendliness" of the containers they purchase, and producers in turn package their products with concern for cost and convenience, but without regard to the waste it creates. The resulting "free ride" by producers results in excessive demand for landfill, thereby increasing the cost to the municipality, degrading the environment, and eventually leading to higher taxation for producers and consumers alike. This government-run program results in an improper allocation of the costs of production. An alternative is an incentive-based program through private ownership of garbage collection agencies with strictly enforced property laws and rigidly-observed property rights.

If private companies were involved in the garbage collection industry, they would charge collection fees based on quantity and type. This charge rate scheme would give consumers the incentive to separate their garbage into recyclable and non-recyclable materials. As different collection rates would apply to different types of waste products based on the potential recycle value or the cost to the collection firms to place in a landfill, consumers would pay attention to the packaging of the products they purchase. As producers became aware that consumers were, in part, making purchase decisions based on the type of packaging material their products came in, producers, to maintain their market share, would have the incentive to use packaging materials that would have the lower disposal cost to the consumer. As the lowest disposal cost would be the package materials that are most readily recyclable, package materials would reflect inputs that would cause the least environmental problems.

The key to such a program is a competitive private market for garbage collection, the strict enforcement of property laws, and the strict recognition of property rights. The competitive private market for garbage collection is necessary to keep cost of collection in line with cost of disposal. This arguably would be notably lower than the present allotment of municipal tax that is currently paid by consumers and producers alike. The strict enforcement of property laws would resolve the problem of the producer being a "free rider" to the waste created from packaging materials. Property laws would include the strict enforcement of illegal disposal of garbage, quantity of garbage allowed to be stored on urban lots, and regularity of garbage disposal with private collection firms.

The adherence to the strict recognition of property rights by the courts in the case of individual and government defendants would underlie the success of the program. Private property rights, although much reviled by self-styled structuralist defenders of the environment, is the key to its protection. The concept of the public service for the public good does not wash.

References

Block, Walter E., ed. Economics And the Environment: A Reconciliation. Vancouver: The Fraser Institute, 1990.

Silverstein, Michael. The Environmental Economic Revolution: How Business Will Thrive and the Earth Survive in Years to Come. New York: St. Martin's Press, 1993.

Taylor, Fabrice. "Industrial Compost Finds Fertile Markets." The Globe And Mail, Tuesday, May 23, 1995.

info@fraserinstitute.ca You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.

If you know someone who would be interested in this web page, please enter their email address below, and we will forward this URL to them: Email Address:

Last Modified: Wednesday, October 20, 1999.