Feature Article:

Welfare Reform in Alberta

Honourable Mike Cardinal [The Honourable Mike Cardinal gave this speech to The Fraser Institute Annual General Meeting Round Table Luncheon on April 18, 1995.]

Introduction

Round Table Luncheon Chairman Michael Walker: Permit me to introduce our guest speaker, the Honourable Mike Cardinal, Minister of Family and Social Services, Minister responsible for Aboriginal Affairs and the Premier's council in support of Alberta families, and MLA for Athabasca-Wabasca. The Minister has worked with the government of Alberta in one form or another since 1969 and has held a number of positions in various government departments, beginning with the Alberta Housing Corporation as a mortgage officer. From 1957-1969, before he joined the government, Mr. Cardinal worked in private industry, in all phases of logging, equipment operation, and farming. In 1968, he became manager of the Colling Lake Logging and Slashing Co-operative Limited. For 35 years, Mr. Cardinal has also been actively involved in his communities in various ways, serving as a chairman or member on several boards and councils. He is a member of the Métis Association of Alberta and of the Interprovincial Association of Native Employment.

Mike Cardinal was born in a small native community in northern Alberta where he saw as a very young person, and throughout his early adult life, the effect of the introduction of well-intentioned welfare programs. He saw his self-sufficient community change into one that was almost totally dependent on the welfare system. He saw first-hand the devastation of northern communities wrought by welfare dependency. He saw many friends die of alcoholism, related in his opinion to this decay of the system induced by well-intentioned people trying to do good.

A few years ago, Mr. Cardinal realized that he had a great deal of experience trying to work inside the system as a public servant to try to help people in Alberta. But he realized he was getting nowhere. The futility that he felt led him ultimately to go into politics, to try to change the system in a more dramatic way. And so he was elected to the legislature of Alberta.

In 1989, Mike Cardinal introduced a motion designed to push the government into welfare reform as the first move in this direction. This motion was passed, enabling him to launch a number of pilot test projects. In December 1992, he was made Minister, and charged with the responsibility of reforming the Family and Social Services Department. Since that time, he has achieved a most astounding record. The Alberta welfare caseload stood at 90,000 when the Minister took office. Today it stands at about 50,000. In the course of achieving this result, not only did the Minister transform welfare dependency in Alberta, but he reduced the budgetary cost of that program by $450 million. A 45 percent reduction in welfare rolls; a saving of $450 million! Please join me in welcoming one of the most astounding ministers in any Canadian government, the Honourable Mike Cardinal.

Alberta's welfare reform

Mike Cardinal: I'm really honoured to have the opportunity to share with you my personal experience with what the welfare system did to our people in northern Alberta, and what has to be done, and what can be done to change it.

When you go back 2 years to 1992-93, our budget in Alberta was over 13 billion dollars. Three departments took over 62 percent of those dollars: health, social services, and education. We knew that in order to control our expenditures without raising taxes we had to reduce expenditures in these 3 main areas. These programs were most dear to Albertans' hearts, and the cuts would be most complicated, and yet I knew we had to make changes. Specifically, we had to change Family and Social Services and Aboriginal Affairs. We knew that the welfare system was not working. The case-load had grown to over 94,000 cases or 180,000 individuals, with a budget of $1.7 billion.

We knew that welfare rates were too high. In fact, we knew that we were paying more to be on welfare than a lot of small businesses could afford to pay workers. Too many young, healthy employables, couples without children, were on the system. Young, healthy Albertans were using up most of the dollars, in fact, over 50 percent of the people on welfare in 1992-93 were young healthy Albertans that were employable and trainable. I always maintain that there are enough dollars in the system as it is today. But the dollars haven't been utilised as well as they could be. Young, healthy, employable Albertans were using the dollars that were meant for persons with disabilities, the elderly, and the children that need protection. But we didn't have the system in place to make the changes required to repair the situation.

Self-sufficiency gone

When the welfare system was introduced back in 1950 or so, intentions were good, but the system was a corrupting influence, and was devastating to the native population in particular. Prior to 1950, communities in northern Alberta--such as the small, 500-person community of Colling Lake where I grew up--were independent from government, and were completely self- sufficient. Everybody worked, there was no welfare system, we had our own health care system, alcoholism was very limited, family breakdowns were very limited, people practised their culture, and lived off the land in a traditional way.

We changed that with good intentions, but within 15 or 20 years (by 1970) 80 to 90 percent of the members in those communities had moved onto the welfare system completely. We didn't allow the change to happen, the change from living a traditional lifestyle where we used the resources off the land, to the modern way of extracting the resources from the land. We didn't provide those opportunities for northerners; what we did was provide welfare, which was, I believe, the easy alternative. But I know now, and we all know now in Canada, that welfare is not the best way of dealing with poverty and unemployment.

We did make changes in the '70s and '80s. Across northern Alberta we introduced the academic upgrading program, community info-structure, better health care facilities, better education facilities, more local governments and more participation. But these changes were overwhelmed by the attraction of an over-generous welfare system.

Changing the system

I personally spent over 25 years trying to make changes within the system, and I did not succeed. Up to 1985-86, the unemployment rate continued to run at 80 to 90 percent in some of the smaller communities in northern Alberta. So, in 1989 I decided that I would seek election to move forward in diversifying the economy in northern Alberta in the areas of agriculture, forestry, pulp, oil and gas, and tourism. The other major platform plank in my campaign was major welfare reform, a change in the way the welfare system would be delivered in Alberta.

I was successful in my campaign, and I was fortunate when the new leader, Premier Ralph Klein, was elected as a leader of our party, and appointed me to cabinet. And it happened that the cabinet post was Family and Social Services and Aboriginal Affairs, which gave me a perfect opportunity to move forward with the changes I had worked on for 25 to 30 years.

But you know, within 2 months of my appointment, I had to go back for a special warrant--$88 million of Albertans' and Canadians' tax dollars, because programs are cost-shared. It took me about 5 minutes to get that special warrant. That's when I realized that it was so easy to add more money to deal with poverty. The easy way was more welfare, but it was not the right way.

That is when we moved forward very quickly to design a new system of welfare delivery in Alberta. In April 1993 we announced a major welfare reform--reform in three phases, actually. We changed from a passive welfare system to an active employment and training system. Within 2 years we had managed to reduce the welfare caseload by 45 percent or over 43,000 cases, or 88,000 individuals. This resulted in over $450 million in budgetary savings, and also a cost saving on the cost-sharing agreement with the federal government of another $150 million.

We concentrated on the target area of young, healthy, employable Albertans, couples without children, and sought to get them into private industry jobs. Private industry was a main player in employing our people, and that will continue. In areas where there is high unemployment, where we could not create jobs through private industry, we did provide short-term job creation programs like the Northern Job Corps, in which people have to participate in the form of providing community work if they are to receive taxpayers' dollars. The Alberta Community Employment Program is another program in which municipalities can participate to employ people on welfare to do community work, as is the Employment Skills Program, and private placement contracts.

Training emphasized

The other area that we concentrated on was to get people back into training, and back into the work force by providing over $60 million in the first year to train over 11,000 individuals to take life skills and academic upgrading to grade 12 level. Interestingly, we were criticized when the training program ended in June. People said, "What are you going to do with the 11,000 students that will come back on your payroll July 1st?" You know what happened? The caseload continued dropping. None of the 11,000 came back on the public welfare roll. That just shows you that given the opportunity, people will participate in the work force.

Another area that I feel is very important across Canada is the co-location of the delivery of services--federal human resources, family and social services, and advanced education. In Alberta, a number of locations are now co-located. We do provide a one-stop service for our clientele, and it works very well.

Budget savings go to needy

We also worked on reducing some of the dollars provided to individuals. I'll give you just a couple of examples. One example is damage deposits. At one time, a family or individual could move any number of times and each time get a new damage deposit, a new furniture grant, a new utility grant. In the first year we saved $10 million by changing the criteria in that particular area. Replacement of lost cheques: $1 million a year we saved in that. Telephone arrears: we used to pay any telephone arrears. We saved $500,000 on that by just making minor changes. What these changes allowed us to do while we reduced the welfare caseloads of employables was provide us with an opportunity to redirect dollars to the high-needs areas. Our changes in the first year allowed us to redirect over $100 million to persons with disabilities, widows, the elderly, and children that need protection. Because of the reduction in the caseload of healthy people, another $100 million will be directed in the next 2 years to high-needs areas, and we will continue moving forward with that.

Child welfare

The second phase of the reforms deals with another budget of over $200 million. Child welfare has become a major budget item in Alberta, as in many other jurisdictions. We had over 8,000 children that received services from our department--over 2,300 in foster homes--and the unfortunate part is that 50 percent of those children in foster homes were of aboriginal ancestry. And it's not that aboriginal people are any different in parenting; the whole issue in that area is tied in with poverty. And I always maintain that governments are never good parents. Parenting should be left to the parents, the extended family, and the community. In the past, anytime there was a problem in the home we walked in and apprehended the child. The children were never the problem, it was always other problems at home. It was a very costly process to remove the children and leave the family to continue struggling with their problems.

In the future, Alberta will be different. Our current system has always been overstaffed by government people, and has never allowed the community to participate. In the future we will maintain responsibility for legislation, funding, standards and monitoring, and evaluation. In the future, the community will plan and deliver services, develop services appropriate to the needs and standards of the local community, and we will focus on early intervention. Instead of apprehending children, we will provide the support services at home, with the family and the community. Our programs will also be very culturally sensitive.

Persons with disabilities

The third phase of the reforms is again focused on another high-budget item. In the very sensitive, very high-needs area of persons with disabilities, we spend over $430 million annually. We will move forward to provide persons with disabilities, wherever possible, the means to live not in institutions, but in the community. And wherever and whenever possible, we will strive to make persons with disabilities productive members of our society. This goal is achievable, and is supported very much by these particular people.

The future

What is the future of programs in Alberta? Well, we're 2 years ahead of our schedule in terms of budget reductions. You'll probably never, ever, ever see the welfare system in Alberta as it was in the past because of an attitude change supported by most Albertans; it's supported by the aboriginal groups; it's supported by most clients. Today in Alberta we have the lowest caseload per thousand in Canada. We're running about 19 cases per thousand, while other jurisdictions like Ontario today run 65 cases per thousand. By the year 2000, you will probably not see any employables or trainables on the welfare system because I don't believe we can afford that in Alberta. In fact, I don't believe we can afford that in Canada. In order to control our expenditures, we need to redesign programs across Canada and make sure that we provide opportunities for people to get back to the work force.

Questions for the Honourable Mike Cardinal

Michael Walker: How do you deal with the accusations that the Klein administration is the meanest government in North America, and that you are the meanest of the mean because you have been the instrumental in making such major changes to welfare?

Mike Cardinal: I always call it tough love, to start with. What we've done in the past is to provide the easiest thing there was. And that was to add more money to the welfare system. Anytime there was a complaint, we just handed out more money. What we've done is make sure that that doesn't happen. Spending more money on the welfare system does not deal with poverty. And even the clientele out there will support that.

M.W.: Is there any truth to the allegation that young, healthy employables are being given bus tickets to B.C.?

M.C.: I have been here 2 days now and I haven't seen a Cardinal bus line arrive. No, there is no truth to that, but we do have a policy in Alberta that any employable person who is trainable must participate in a training program, or must participate in a job. There are those who will not participate, and will not receive assistance, but if they ask to have support, and if they happen to be from B.C., and if their family and support systems are in B.C., of course we will provide them with the opportunity to get to their families and home communities. But the actual population in Alberta has grown in the last 2 years, and our unemployment rate has dropped. So we do have more people working and more jobs created.

M.W.: How can British Columbia's welfare system be improved? As you may know, welfare cases here have increased by close to 40 percent since 1991, even during a period of unparalleled economic growth.

M.C.: I think the recommendation would be to make sure that you use your dollars wisely. The welfare system was meant originally to help people who could not help themselves. And keeping that in mind, make sure that both the programs that are designed, and the dollars, go to those people. As for the young, healthy employables and trainables, I think tough love is the answer.

M.W.: Minister, we found in comparing British Columbia with Alberta in a recent project we were doing on welfare in British Columbia that we couldn't explain the big drop in welfare rolls in Alberta simply by looking at the program parameters, like the welfare rates or other things in the program. Was there something else you did that didn't show up in the actual numbers that might have made a difference in how your programs were administered or something along those lines?

M.C.: I believe there is an understanding in Alberta. Number one, there is very strong support for changing the welfare system. The strongest support is to get young, healthy Albertans off the welfare system and back into the work force. The welfare system was just introduced over forty years ago. Before that, most people--native or non-native--would not accept welfare. But people underwent an attitude change; welfare got to be an acceptable lifestyle, which is not a healthy attitude to have. But in Alberta we have again changed the attitude about welfare and support systems, and we realized that is what the clientele wanted. So really, a combination of changes took place to change attitudes.

M.W.: Did you communicate that attitude change to the employees in your department? Did you make it clear to them that their job was to get people off welfare, not to build a maximum caseload?

M.C.: Absolutely. It requires departmental belief in what we're doing, and I believe most of the workers in our department are very supportive of the move we're taking. After all, it is more challenging for people to sit down with an individual and lay out a plan as to how they're going to further develop their own individual abilities to get off welfare and back into the workforce, than to issue a cheque, which is what we've done in the past.

M.W.: How do you deal with an employable person who simply cannot find a job?

M.C.: There are a number of programs designed specifically for that. One is the Employment Skills Program I mentioned earlier. The other is the Northern Job Corps and we are moving forward with those in Edmonton and Calgary. We also plan to have an urban job corps which will provide the people who can't get into private industry with an opportunity to do community work such as municipal services, work with seniors, work in daycares and in other types of facilities.

M.W.: Where did the 45,000 people who moved off welfare go? Did some leave Alberta? What about the rest? Would this have worked in a stagnant economy?

M.C.: If you wait for jobs to be created for all the people on the caseload, you'll probably never make changes. What we did in Alberta was begin the changes, knowing that private industry, if given the opportunity, will hire people on welfare as long as those people are productive workers, and as long as those people don't have an opportunity to quit their job, or not show up on time, or go back on welfare if they're fired. In Alberta, that is not acceptable. We will not accept people who are fired or who quit their job unless there is a good reason. And, therefore, a lot of people ended up in private industry. Almost every day, small business people stop me on the street and say, "I've hired 2 or 3 of your clients and they're very productive workers and very, very happy workers and we are happy in small business that you are no longer competing with us." And I believe that is the truth.

M.W.:How much of your success do you attribute to your own intimate knowledge of the system itself and the people who need welfare?

M.C.: A bit. One of the major obstacles we had was that, to start with, the aboriginal community had to be convinced that welfare had been devastating. All aboriginal leaders in Alberta support what we are doing. They know how devastating the welfare system has been to the aboriginal community. They know that it kept people in poverty and still does. Unless we change, we will continue having people live in poverty, and continue with all the problems that go along with that. Therefore, with that support and being an aboriginal cabinet minister, it made it reasonably possible for me to make changes with very little conflict.

M.W.: How have you got around the cost-sharing issue with the federal government if the conditions you have put on welfare eligibility are incompatible with the Canada Assistance Plan?

M.C.: The whole issue of the social support system is an important one. We have met with Lloyd Axworthy at least 3 or 4 times in the past year and a half, and he realizes also that it's a very complicated issue. He knows that we have to use dollars in a productive way. I think he knows that we can no longer afford to pay people not to work, and not be productive, and not be competitive. Therefore, when we made the changes, we never really had a challenge from the federal government in relation to cost-sharing arrangements. We do have a Canada Assistance Plan. This year and last we will be requiring $150 million less from the federal government than we have had in the past, and our budget continues to be less and still provides a high quality of service for those people in need.

M.W.: What has been the cost of training the employable young, and do they receive benefits while in training?

M.C.: To encourage people to get off welfare and back into training, we provided them with training grants that were actually 30 percent higher than the old welfare rates. That, of course, encouraged people to get back into the workforce.

M.W.: How do you explain the increase in disabled recipients in the last 3 years from 2,241 to 3,041?

M.C.: We have a program called AISH, Assured Income for Severely Handicapped, which I believe you have in B.C. also. Now, because we are moving dollars into high-needs areas, the case-load in that particular area went up by one thousand. And that is what we've always wanted to do--to make sure that those people in need have the dollars to be able to function well in society, and I have no concerns that the caseload has increased in that particular area. That was always our plan. We've always said that there are enough dollars for the people in need, but there are not enough dollars for the employables and trainables. And that is what we've done.

M.W.: You indicated that rural communities used to function better before the current social welfare system. Have you considered setting up or permitting special zones like free enterprise zones within which communities could set up their own social safety nets?

M.C.: Take child welfare, for example. It's a very sensitive and high-needs area. In that particular area, yes, the communities will run the child welfare programs based on community needs and community workload, involving the aboriginal community wherever possible, and the municipalities and other interest groups in the particular community. So yes, we are moving in that direction in some areas of our program. And this could happen also for persons with disabilities in the future, although no decision has been made on that as yet.

M.W.: Finally, has the astonishing success of your welfare reform in Alberta won over any important voices in the Albertan press or electronic media?

M.C.: Generally speaking, there is strong support, although, of course, I do get criticized quite often. However, I believe that when I talk to people like yourselves and to Albertans in the street, the support is good, and the support is good from the clientele. I know we are doing the right thing. And, the press, on balance, has been more positive than negative.

Families in Crisis

Lydia Miljan

There is a vast and burgeoning literature in the United States on the crisis in the family. The children of families belonging to the poor have been identified as being those most at risk. As William J. Bennett, former Reagan and Bush appointee, notes: "The indicators are well-known: low educational achievement, the decline of the two- parent family, moral confusion, and, for a sizable and increasingly large minority, abuse, neglect, and very bleak prospects for the future." [William J. Bennett, "What to do about the Children," Commentary, March 1995, pp. 23-28.] According to Bennett, from 1960 to 1991 the rate of homicide deaths among children under the age of 19 more than quadrupled. Since 1965, the juvenile arrest rate for violent crimes has tripled, while the fastest-growing segment of the criminal population is made up of children. Since 1960, teenage suicides have tripled. The rate of birth for unmarried teenagers has increased by 200 percent in three decades.

Misleading statistics

This crisis is not limited to the United States. According to a report released by the Ottawa-based Canadian Institute of Child Health (CICH) last fall, the problem in Canada is as bad or worse. "Recently, our record has been recognized to be among the worst in the industrialized world, worse even than that in the United States." [Louise Hanvey, et al., The Health of Canada's Children: A CICH Profile, Ottawa: Canadian Institute of Child Health, 1994, p. v.] Given the severity of the problem in the United States, this appears to be somewhat of an exaggeration.

Canada: not as acute a problem

Indeed, according to the data compiled by the CICH, the problems facing Canadian children and families are no where near that of their American counterparts. In fact, all of the cross-national measurements presented by the CICH indicate that Canada's record is one of the best in the industrialized world and that Canadian families and children fare much better than their American counterparts. For example, CICH notes that the infant mortality rate is lower in Canada than it is in America. The mortality ratio of children under one year of age to total live births is 7 per 1000 in Canada. In the U.S., the rate of infant deaths for the same age group is 9 deaths to 1000 live births. When the CICH compared teenage pregnancies and abortion rates cross-nationally, they found that American teens have three times as high a rate for both as Canadian teens. Only Norway and England have lower teenage pregnancy rates than Canada.

Canada has achieved remarkable results in the realm of child heath care. Over the last 30 years, the infant death rate in Canada decreased by 75 percent. In the last ten years alone, this rate has decreased by 35 percent. Of industrialized nations, only Finland, Japan, and Sweden have lower infant death rates. The rate of teenage pregnancy in Canada declined among both older and younger teenagers by 24 percent between 1975 and 1991.

What Canada and the U.S. have in common is that the poor are more likely to be a product of illegitimacy or divorce. Further, there is a strong correlation between poverty and the lack of education. The less educated the parents are, the more likely it is that the family will live below the Low Income Cut-Offs determined by Statistics Canada. Despite the inroads made by Canadians, this trend is disturbing.

Single-parent families live in poverty

The overlapping concern in both Canada and the United States is the prevalence and increasing number of children living in single-parent homes. The increase in single-parent families has become so ubiquitous that, according to some projections in the U.S., only 30 percent of white children and only 6 percent of black children born in 1980 will live with both parents through the age of 18. The one area where Americans and Canadians are unfortunately similar is in the rate of poverty for lone-parent households. In Canada, the nature of the crisis is made abundantly clear by evidence that suggests that the highest incidence of poverty occurs among children aged 7 and under who live with a single, never-married mother. Eighty-nine percent of these children live below, or well below, the Low Income Cut-Off. Further, 78 percent of children older than 7 who live with a never-married, single mother live below the Low Income Cut-Off.

Consequences of poverty

The consequences of poverty are well-documented. Economically deprived youths are three times more likely to be school dropouts. Children living in the lowest income neighbourhoods are at the greatest risk of dying from injuries. The death rate for infants younger than 28 days is 1.5 times greater in the poorest neighbourhoods than in the richest. The death rate for infants 28 days to 1 year is more than twice as high in the poorest neighbour-hoods as in the richest. The percentage of low and very low birth weights was 1.4 times higher in the poorest neighbour-hoods than in the richest. And, according to an Ontario Health survey, teenagers 16 to 19 years of age who live in poor families have an increased risk of having an unwanted pregnancy or acquiring a sexually transmitted disease.[ Louise Hanvey, et al., The Health of Canada's Children, p. 126.]

Is more government funding the answer?

While there is a real and vibrant debate on this issue in the U.S., in Canada there is virtual silence. The leading spokespeople for poor families in Canada are unanimous in their solutions: more government funding is needed. The CICH and its partner, Campaign 2000, agree that the solution is to increase funding to the poor and to children: ". . . government involvement at all levels in addressing the health problems identified in the CICH Profile is now more important than ever." Even more troublesome than their calls for increased funding is the failure of these groups to acknowledge the role of parents and extended families as a solution to the problem. According to the CICH, children do not need families as much as they need nurturing adults, the state, the health care system, or the education system: "Our children may be a large and diverse group, but they have similar needs. They need supportive care from nurturing adults; they need to be protected from harm by the state; they need to be cared for by a sensitive and responsive health care system; and they need to be guided and encouraged by an education system to reach their highest individual potential." [Louise Hanvey, et al., The Health of Canada's Children, p. 1.] The family, however, is not part of the solution.

This statist view asserts that supportive care comes from "nurturing adults," not nurturing mothers or fathers. According to Campaign 2000, what these families and children need are "national strategies," a "supportive social security system," a "universally applicable set of social programs that support families," and a "responsive community support system."

The unintended consequences of government policy

However well-intentioned these groups may be, they fail to provide evidence or make a strong case that greater state intervention and increased funding will remedy the problem. Many, if not most, social problems have been worsened by well-meaning public policies. In Ontario, for example, the deleterious effect of government spending on single-parent families could not be more striking. David Brown observed a sudden increase in Canadian lone-parent social welfare caseloads in Ontario. "The increases between 1983 and 1993 for these four provinces were 6.8 percent in Quebec, 22.6 percent in British Columbia, 34.0 percent in Alberta, and an astounding 144.5 percent in Ontario." [David M. Brown, "Welfare Caseload Trends in Canada," in John Richards and Aidan Vining, eds., Helping the Poor: A Qualified Case for "Workfare," Toronto: The C.D. Howe Institute, 1995, pp. 37-90.] Brown also notes that the level of cash assistance available to a family of one parent and two children increased during this time. He goes on to observe that of all the provinces, only Ontario has experienced a welfare "explosion approaching that of the United States." From 1968 to 1989, Ontario had the lowest rate of income assistance to individuals. By 1993, it was in first place with 12 percent of the people in the largest and most economically diversified province receiving social assistance. This increase in the number of people receiving assistance in Ontario can be directly related to the real value of the province's case welfare benefits. "Between 1981 and 1993, the real value of benefits available to single unattached individuals increased by 72 percent, and those for families went up 51 percent." Brown shows a high correlation between enrolments and benefit levels. Clearly, the root of the problem is not the lack of government funding, or universal social programs. Indeed, many American scholars argue that it is the generous social welfare system that is the root of the problem. In short, the incentives inherent in government welfare programs have contributed to the problem.

Did generous social welfare system cause the current problem?

According to William Tucker, history indicates that the welfare system disrupted family formation in African-American culture. As recently as 20 years ago, anthropologists observed that "there was no human society anywhere that did not have some form of marriage. Now we have one." [William Tucker, "All in the Family," National Review, March 6, 1995, pp. 36-44,76.] Anthropologist David W. Murray goes further to argue that the widespread failure to marry "is a sign of impending disaster." [David W. Murray, "Poor Suffering Bastards: An Anthropologist Looks at Illegitimacy," Policy Review, Spring 1994, pp. 9-14.] How does the welfare state and the decline of marriage cause poverty?

The primary role of marriage in all societies has been to enable couples to rear children. It is widely accepted that human offspring require intense nurturing and attention, and that single-parenthood is extremely dificult outside of the social welfare state. Not only are human offspring dependent for parental nurturing and attention, they are also a financial burden. Perhaps the most beneficial result of marriage is that it increases the number of stake-holders in the child's life. According to Murray, traditional societies recognize only two categories of people--relatives and strangers. "Kinsmen bear you, nurse you in illness, initiate you into adulthood, protect you from injustice, and bury you into the order of the ancestors."

The role of marriage in providing social ties is common to all societies. The Zulus have a saying: "They are our enemies, so we marry them." For the Navajos, acting humanely depends on the presence of kinsmen. Marriages are public ceremonies that create formal kinsmen who are bound by a set of reciprocal obligations to help the family. Moreover, marriage creates moral sentiments of commitment and formal responsibility. As Murray observes: "The absence of marriage is not only a major reason why single parents are found so often in poverty, but why their children so often become solitary victims and victimizers."

Apart from imposing morality on individuals, marriage is a central linchpin in the healthy functioning of the political and economic life of a culture. Marriage networks attend the economic success of the couple. The Inuit express a profound understanding of how essential marriage is to the viability of society by their proverb: "We store food in other people's stomachs." For them and for every culture in the world, family means life.

What is so disturbing, then, about the deterioration of the institution of marriage in industrialized nations such as Canada is how seriously the formal ties of kinsmen that bind us by sanctions, duties, and rights that are legal, religious, and ethical have been eroded. As marriage decays, so too does the fabric of society. In place of kinship is the welfare state. Women marry the state, as it were, and have social workers and judges as their families.

The increase in single-parent households and the expansion of the state as a surrogate family go hand in hand. An interesting analysis of African-Americans clearly shows how the state replaced the moral authority of the family. Examining census documents of slaves reveals that prior to the abolition of slavery, 80 percent of blacks lived in two-parent families. Although African-American culture permitted women to have one or two children outside of wedlock, eventually parental pressure forced women to settle down and marry. With the introduction of the Aid to Families with Dependent Children (AFDC) in the United States in 1935, this pressure was removed, and women were given a choice that effectively destroyed the financial checks and balances that were so crucial to family formations. If a woman did not want to marry or burden her parents with her children, she could go to the state. As Tucker explains: "In this case family formation fails." Moreover, the responsibility of men to "do the right thing" diminishes and the role of the family in creating social boundaries is surpassed by the non-judgmental, non-caring state. The state provided an alternative to marriage and thereby lost the socializing function and duty of families.

While traditionally, society upheld marriage as the bedrock of civilization, it is now considered one of many "lifestyle choices," but one that receives fewer and fewer benefits from the state.

Solutions

What is missing in the many solutions addressing child poverty is the role of the nuclear and extended family. Certainly, as more and more families lose the kinship ties that bind them together, their mutual interdependence and concomitant responsibilities diminish. Rather than encourage the formation of single-parent families and dependence on welfare, there needs to be a resurgence in the institution of marriage, and greater emphasis placed on the value of personal responsibility. As Mary Eberstadt argues, the solution to the problems of bad schools and crime is parents: "Parents are the make or break custodians of children's well being." [Mary Eberstadt, "Putting Children Last," Commentary, May 1995, pp. 44-50.] This holds true for adult children as well as for minors. Adult children who marry double their resources. Consider the vicious circle of poverty generated by single parents having children who become single parents. Rather than having two parents, 4 grandparents, and possibly 8 great grandparents, the child born into a cycle of single-parenthood has very few resources to depend on for economic, social, or moral health.

Arguing for a resurgence in marriage is one thing, but changing attitudes into behaviour is more problematic. While it took decades to virtually destroy the family and discredit marriage, it is unlikely that the trend will be reversed overnight. Not only has marriage been diminished in the eyes of many as an effective and appropriate measure to combat issues of poverty and ill health, but government has taken over the responsibilities traditionally reserved for parents. For example, in a 1990 national survey asking respondents about their beliefs about the importance of government action, 80 percent of those 15 and older indicated that it was important for the government to deal with child health issues. For those aged 24-44, the rate was even higher--87 percent. [Louise Hanvey, et al., The Health of Canada's Children, pp. 109-110.]

The problem is that the social welfare activists who lobby governments and provide "educational" programs to the public are the ones who argue most vocally in favour of more government and more outside influences to solve the problems of poverty in society. For example, in their recommendations for youth, the CICH provides no strategies for helping families help teenagers. The 13 strategies for youth include "using government services," "embracing concepts," "encouraging the media to promote health," "using recreational services," "helping the teachers and media influence the values of children and youth," and to "provide healthy sexuality education through the school system." The state has become such an integral part of child health and welfare that families have not merely taken a back seat to government, they have been supplanted by the government in their responsibility for bringing up children.

William Bennett argues that while intelligent public policies can make a difference, they are not the answer to "problems which are at root, moral and spiritual." What is needed from government are policies and laws that provide a "vivid sense of what we as a society expect of ourselves." Murray argues that when people commit with kinship, moral feelings of attachment and integration are created. These feelings of attachment structure social networks of relationships. As a result, marriage encourages patterns of positive behaviour. It may be easier in the short term for a young woman with a child to go to the state for help. When a single, never-married woman goes to her family for help, she enters the world of familial obligations and responsibilities. The family may pressure her to marry, but as statistics reveal, going to the state almost guarantees the woman will more likely live in poverty than had she taken her parent's advice and got married. A moral commitment to marriage builds social capital which results in a much larger job network. Not marrying puts the woman in a greater need for social assistance and lessens her familial network for daycare and job prospects.

While the problem of single-parent families may not be as critical in Canada as it is in the United States, policies that encourage more government and foster less familial involvement with poor families will predictably lead Canadian culture to the same decline that is being felt in America today.

A Tale of Two Provinces: Alberta's Success                              and Ontario's Failure With Social Welfare

Fazil Mihlar

Alberta's welfare case-loads have decreased dramatically, but in Ontario, welfare rolls rose sharply in the early 1990s, and remain high. As of December 1994, Alberta's case-load stood at 19 per 1000 population. In contrast, Ontario's caseload was 65 per 1000 population. Over the last two years, welfare expenditures in Alberta have declined by about $450 million, while Ontario's welfare spending has increased by $1.5 billion over a three-year period. The high number of welfare recipients and high level of spending in Ontario relative to Alberta

is disturbing. The pertinent question is: why is there such a discrepancy between the two provinces? The short answer is: Alberta appears to have understood the adverse impacts of welfare dependency and has initiated corrective measures. Ontario, on the other hand, does not appear to have grasped the idea that welfare traps recipients in the status quo of dependency. In short, Alberta recognized that incentives matter, while Queen's Park decided that incentives were irrelevant.

Policy choices: dependence versus independence

The province of Alberta

The welfare caseload in Alberta reached an all-time high in January 1993. In response, the government introduced an initiative called "Support for Independence." This initiative emphasized the responsibility of individuals and families to look after themselves and refocused welfare spending on the most vulnerable groups in Alberta society. Some of the targets set for this program were: a reduction in welfare caseloads, a reduction in the rate of welfare payment, and increased support for training and employment. After the reforms were introduced, case-loads dropped from 94,087 to 52,243 by March 1995. This represents a decrease of 41,844 cases, approximately 44.5 percent. As mentioned before, expenditures declined by about $450 million.

The province of Ontario

Since 1990, the Ontario government has become increasingly generous with its welfare payments. Welfare benefits there have increased more than in any other province in Canada. For example, a single parent with two children received benefits totalling $14,072 in 1988-89, but by 1991-92, these benefits had risen to $16,004. By 1993, the caseload had risen to 120.6 per 1000 population. Between 1983 and 1993, Ontario's one-parent caseload rose by an astonishing 144.5 percent. In 1993, Ontario partially recognized that the welfare system was not working. Therefore, it attempted to shift the emphasis from passive income support to an active set of programs. JobLink Ontario is a program which provides social assistance recipients with access to training and other practical labour market supports, such as back-to-work plans. Between March and October of 1994, the general welfare assistance caseload had fallen by 36,500. It appeared that Ontario was making progress. However, even with the decrease in welfare rolls, the budget of the Ministry of Community and Social Services increased from $6.4 billion in 1990-91 to about $9 billion in 1993-94, and interim spending projections have put the 1994-95 figure at $9.2 billion. Higher welfare rates have, in part, led to soaring general welfare expenditures and high welfare rolls.

Understanding welfare dependency: incentives matter

Income assistance programs have become a "welfare trap" for Ontarians. With the best intentions, the provincial government has created a set of incentives for Ontarians not to make the most of their lives through personal initiative and work. The provincial government pays high rates of welfare benefits. It also reduces benefits dollar-for-dollar against earned income. This policy exacerbates the welfare trap, since the implicit marginal tax rate facing employment is very high due to the interaction of the tax system and the withdrawal of social assistance benefits. Hence, it provides a strong disincentive for beneficiaries to make a gradual transition from welfare to work. It seems clear that the level of welfare benefits and tax increases in Ontario have contributed to high welfare rolls.

Consequences of welfare dependency

There is also concern about other dynamic effects associated with receiving social assistance. For example, there may be "duration dependence" in the sense that the likelihood of leaving welfare may decline the longer one spends on it. Alternatively, for those experiencing multiple welfare spells, there may be "incidence dependence" in the sense that the probability of leaving welfare may decline with each successive spell. These effects may occur because the human capital of welfare recipients deteriorates during welfare spells. Welfare also engenders long-term, inter-generational dependence. This inter-generational dependence is a clear indication that the welfare system is failing in its goal to lift the poor from poverty to self-sufficiency. Governments, including Ontario's, should recognize and understand these dynamic effects if they are to address soaring social welfare costs effectively.

The challenge

Governments created the welfare trap, and they can break it. They can remove the disincentives to work. The challenge for social policy reform is two-fold: first, to ensure that incentives within the social policy network encourage rather than inhibit the required adjustment on the economic front, and second, to ensure that the social safety net evolves in a manner that reflects the changing needs of citizens. To keep the caseload down and to provide people with the opportunity to succeed in society, the government must ensure that welfare remains an unattractive alternative to employment. Finally, to rebuild confidence in the social safety net, it must be simplified and redirected to those most in need. Ontario would do well to adopt Alberta's prescriptions for reforming its welfare program.

References

Alberta Family and Social Services, Welfare Reform: Two Year Progress Report, April, 1995.

Government of Alberta, A Better Way: A Plan for Securing Alberta's Future (Business Plan: Family and Social Services), 1994.

The Office of the Provincial Auditor General, 1994 Annual Report, Toronto: Queen's Printer for Ontario, 1994.

The Ontario Ministry of Finance, 1995 Ontario Budget Plan, Toronto: Queen's Printer for Ontario, 1995.

OECD Economic Surveys: Canada, Paris: OECD, 1994.

John Richards and William Watson, eds., Helping the Poor: A Qualified Case for "Workfare," Toronto: C.D. Howe Institute, 1994.

Social Programs:                                                                          Where They Come From, Where They Are Going

Al Riggs and Tom Velk  [A longer version of this speech was delivered to a Student Seminar on Public Policy Issues on Feb. 12, 1994.]

Canada's social welfare programs began like those in other developed Western nations: as means-tested charitable aids to low-income persons (this was the case for the Old Age Assistance Act of 1927) or as true contributory insurance programs, complete with risk-based premiums, an investment pool for funds in temporary surplus, and enforcement mechanisms to discourage fraud (as in the case of early Workmen's Compensation plans.)

But early in its history, social welfare's evolution fell under the influence of two contradictory political forces. On the one hand, the ideology of redistribution was invoked to make a moral claim for program expansion--beneficiaries were needy, critics of expansion were greedy. At the same time, the practical necessity of getting citizens to acquiesce in their new tax burdens required politicians to pretend to "protect everyone" with a universal umbrella. It is no political accident that both political forces combined to enlarge the programs' bureaucracy, authority and budgets.

The problem with universality

But "protecting everyone" is impossible unless everyone pays. If everyone pays, the efficiency issue immediately presents itself. The efficient way is to let each buyer make an independent decision as to the level of protection needed. Private market forces will generate a rich variety of true insurance products. Would not a straight income grant--not tied to any requirement to spend the money on this or that politically-supplied product--be a better way to alter income distribution? Should not the exact degree of income redistribution undertaken in a democratic society be easily observed and evaluated by the voting public?

The fraction of national income redistributed by government has doubled in the past 25 years, going from 6 percent to 12 percent. When was there a national debate on this significant change? For the past 25 years, government spending has been growing 33 percent faster than national income. As a result, consumers have not been as free to choose the way their real wages and profits are spent as they were in earlier times.

Twenty five years ago, government used up only about one-third of national income. Today, it controls the fate of over 50 percent of Canadian income, a bigger slice of our national pie than it did at the height of World War II.

Twenty five years ago, the biggest single item in government's budget was education. Today, education is in fourth place, after interest payments, social security, and health. This change is not a trick of inflation or population. On a per capita basis, in constant dollars, government spending has more than doubled in the past 25 years. The inner structure of that growth is of particular interest. Interest spending has increased by about 5 times, social security has tripled, and health spending has doubled. But growth has not been uniform. Education spending has increased only 25 percent. On this true, constant- dollar-per-capita basis, the core government functions show much less growth than the redistributionist ones. Transportation and communication are up 15 percent, while police and defence have increased 60 percent.

Is it really true that almost one out of three Canadian families needs help from its neighbours to get by? Even if it is true, can we afford the effect on incentives? Cutting social welfare spending would not mean a revolutionary change in the Canadian political landscape. The Canadian "safety net" is a recent development. In fact, Canada has lagged behind the United States in the evolution of every single major welfare program. It's valuable to acknowledge this fact, since the Americans (or at least some of them) now recognize the need to cut entitlements and reform government spending. In other words, just as the Americans were ahead of us in weaving the social safety net, they have been early to notice the failings of the nanny state. Maybe we can learn from their attempts at reform.

The U.S. led the way

Arizona developed North America's first old-age pension plan in 1913--28 states had similar plans by the time of the 1935 Social Security Act. Canada's first national plan--a federal grant to provinces to finance means-tested welfare for the aged (not really a pension at all)--was introduced in 1927.

The first North American Workmen's Compensation laws were passed in the United States between 1906 and 1911. Canada's first such plan was Ontario's in 1914. By 1931 seven other provinces had followed. But 20 U.S. states had workmen's compensation laws as early as 1916.

In 1930, three states--Wisconsin, New York and Ohio--had Unemployment Insurance. The American plan went national in 1935 with the Social Security Act. Canadians had to wait until 1940 for their Unemployment Insurance Act.

President Johnson's Medicare Bill (the mid-'60s) is chronologically ahead of Canada's national legislation (the late '60s.) Of course, the Canadian system is universal, and the American is focused on people in need. But universality is not necessarily a virtue.

The American "lead" extends to spending. As recently as 1985, Canada spent a smaller percentage of GDP (5.4 percent) on old age pensions than any other OECD country except Australia (4.9 percent) and Japan (5.3 percent). The U.S. spent 7.2 percent of its GDP on old age pensions in that year. Ever since 1972, Canada's OAS benefit for single old folks has been constant at about 14 percent of average wages, although today's guaranteed income supplement (GIS) program, when combined with OAS, produces a low, but survivable level of minimum income.

Canadian universality is also a recent innovation. It was opposed by the Trudeau government in a 1970 white paper: "greater emphasis should be placed on anti-poverty measures," it said. "This should be accomplished in a manner which enables the greatest concentration of available resources upon those with the lowest incomes. Selective payments based on income should be made where possible in place of universal payments which disregard the actual income of the recipient."

Handouts are not insurance

People speak of welfare plans as pensions, or insurance, as in job or employment insurance. They are not really either, in that government schemes do not pay enough to replace lost earned income, nor do the plans have adequate investment pools behind them. In fact, most government programs have incentives built into them that are inconsistent with good insurance practice, and that encourage acts which would be properly called fraud if they were perpetrated by one group of contributors to an insurance pool upon another group of contributors. For example, most of the persons receiving unemployment "insurance" payouts in the Atlantic provinces have worked just enough--10 weeks--to have "earned" the right to quit fishing and start cashing their taxpayer-financed government cheques. It doesn't take training at insurance investigation school to know that something is amiss about their claim upon the insurance pool.

Whether or not the Americans were ahead of us in inventing the social welfare state, we can't afford it any more. In the past 25 years, social welfare spending has increased about 800 percent, but our dollar incomes have increased only 600 percent. (The inflation obvious in those numbers was in part created by this excessive expenditure. To help you keep track of things, remember that between 1968 and 1992, real income went up by 125 percent and prices rose by 350 percent. In other words, for every dollar of real income generated in 1968, Canada created $2.25 of real income in 1992, and it required $4.50 in 1992 to equal the purchasing power of one 1968 dollar).

Politicians make us pay for these programs with new taxes, with borrowed money, and with program cut-backs in the traditional core areas of government service. The trouble is, each of these financing sources has reached its limit. Social welfare simply cannot grow faster than our ability to pay for it any longer.

Taxes now cost the average Canadian family more than food, clothing, and housing combined. Canada's $800 billion total government debt divided up among our 10 million families means an extra $80,000 mortgage-sized debt for each of us. Traditional government programs have been stripped bare.

The total value of everything we produce in a year--our national income--is about $700 billion. Canada's total federal, provincial and local government debt (including the so-called "unfunded" or non-securitized debts like the present value of promised future pensions) is at least $800 billion. Our total government deficit--that's the extra borrowing we are adding to our debt this year--is $50 billion. Each and every day Canada's politicians borrow $160 million more and add $220 million to our national interest bill.

What do these numbers mean? Take away some zeros and think of Canada as a family with an annual income of $70,000. Our mortgages and debts total $80,000, and our annual interest bill is $8,000. We are not paying off any of the debt. Instead, we are borrowing $500 more each month!

We don't only borrow inside the Canadian family; $16,000 of our $80,000 debt is in foreign money. We borrow American, German and Japanese money, and promise to pay back those same foreign currencies plus interest, even if our dollar loses international value in the meantime. And these are just government debt figures. Canadians still have private debts to worry about.

One out of every three of your tax dollars goes to pay interest on Canada's government debt. The debt gets in the way of everything--government can't pay for programs and you are taxed 'til it hurts to make the interest payments. Your private needs go unmet because government has not only spent away half the nation's income, but it has also soaked up a giant slice of all the money that is available to borrow. Instead of paying our debts down, we borrow more every year.

It's tough to cut spending

But it's difficult to cut spending for two reasons.

First, politicians design spending laws in ways that concentrate subsidies on a small number of politically sensitive beneficiaries, while distributing costs over a much larger number of more-or-less inattentive general taxpayers. Senator Phil Gramm of Texas (an economist) has calculated that the average money bill in the U.S. Congress confers a per capita benefit of $700 to $1000 on its target beneficiaries, while adding only 10 cents to the tax bill of the average member of the taxpaying group having to foot the bill. The result is a noisy special interest group demanding the program spending, but no concentrated dollar-driven interest opposing it.

The second reason it's so hard to cut spending is that a majority of taxpayers are net beneficiaries of spending programs. Like most G-7 countries, Canada churns the money of the middle classes. The upper middle class pays for more than it gets, the lower middle class gets more than it pays for.

The average Canadian family earns about $40,000 and it pays about one dollar in taxes for every dollar of benefits. Families earning twice the average--$80,000--pay almost three dollars for every dollar of benefit they get back. Families earning half the average--$20,000--pay only 30 or 40 cents for every dollar of benefit they get.

What's wrong with that? Dramatic income redistribution of this kind, along with inefficiencies that are magnified once government directly or indirectly controls over 50 percent of the national economic destiny, means an over-all reduction in output and income. The pure transfer of money means everybody works less. Less work means less production. The taxed don't work as hard as they used to because they don't keep enough, the subsidized don't work as hard as they are able because they don't have to. Everybody wastes time and effort trying to manipulate the political levers so as to change the redistribution formula in their favour. The average $40,000 a year family would have an added $2,000 a year in income if the worst inefficiencies of this kind were eliminated.

Between 1983 and 1991 real income grew 25 percent. That's not bad--in fact, it's quite good economic performance. But it doesn't keep pace with pension claims growth. In 1968, benefits paid out under all Canada and Quebec pension plans totalled about $30 million. In 1992-93, the aggregate had jumped two and one-half orders of magnitude to $17.2 billion. Over the same time, the number of beneficiaries grew from 190,000 to 2.6 million. In just 8 years, between 1983 and 1991, the number of beneficiaries doubled and the dollar outlay more than tripled.

And old age pensions aren't the only social welfare program with an out-of-sight growth rate. Federal payments for veterans and civilians disability pensions went from $223 million in 1968 to $1.1 billion in 1992-93, while the number of beneficiaries rose slightly, from 140,000 to 150,000. It's interesting to note that the number of claimants under the war veterans and civilian war allowances program--a group to whom the average taxpayer might really owe something--fell from 85,000 in 1968 to 38,000 in 1992. It is the only major transfer program with a shrinking constituency.

Social services and social assistance to Indians on crown lands, on and off reserves, including care of adults, child care, rehabilitation and other welfare services, but excluding special awards and land settlements grew in value from $29 million in 1968 to $750 million in 1992. That means for every dollar transferred to Indians from other Canadians in 1968, $26 was given in 1992. While inflation was significant over the interval (remember that 4.5-to-one price level ratio discussed above), it certainly does not explain the main part of the spending explosion. The disproportion between transfer claims like that of the Indians and the underlying real growth that pays for them is the reason such programs cannot grow any longer at their former rate.

Despite the stress on the national wallet, programs proliferate and grow. Between 1968 and 1985, there existed two schemes called National Training Programs for Institutional and Industrial Training. After 1985, a new, single program appeared, called Canadian Jobs Strategy. Spending on this sequence of programs went from $116 million in 1968 to $1.1 billion by 1992; the number of recipients climbed from 342,000 to 1.1 million over the same time span.

Disability pensions display the same pathology. The number of beneficiaries doubled 7 times in 22 years (from 2,000 in 1970 to 276,000 in 1992--another generation like that, and the entire nation will be in wheelchairs) and disability payments expanded by a factor of 156 ($16 million in 1969 to $2.5 billion in 92-93!).

Program after program, the story is the same. Unemployment insurance beneficiaries (all benefits) went from 414,000 in 1968 to 1.4 million in 1992-93; payments to the unemployed climbed from $460 million to an astonishing $20 billion dollars in 1992-93! Total payments under the Workmen's Compensation scheme increased from $238 million in 1968 to $5.3 billion in 1992-93. The number of injured workers and dependents being compensated nearly doubled, from 265,000 to 485,000 during those years. Payments for permanent disability rose from $69 million (29 percent of the 1968 total) to $1.9 billion (36 percent of the 1992-3 total).

Transfers between individuals are not the only money-churning programs of the Canadian government. Each of the 10 provincial members of the Canadian family kicks earnings into the common pot. Trouble is, of the annual family income of $70,000, sister Alberta and brother British Columbia together contribute $17,000 but are only allowed to spend $15,000. The other $2,000 goes to supplement the low incomes of sister Quebec and the Atlantic brothers. One dollar out of every 12 spent by the Quebec government comes from the richer provinces. Thirty-five cents of every single dollar--whether government or private--in little Prince Edward Island is a political gift from the rest of the Canadian family.

Big debts tempt politicians to cheat--cheat foreign and domestic lenders by paying them off with printing-press money. Every super-inflation in our century was set off by governments cheating their way out of too-heavy debt. It doesn't work. Inflation destroys the cheater's money. Banks collapse. There are mobs in the street, and madmen in power. We are not facing anything so dire: but financial markets are worried, and it shows in the periodic debt rating crises we have experienced in the last few years.

What is to be done?

What can we do? If all of the elected officials in the country had their salaries cut to zero, and not a single cent was spent on general government administrative services, if we completely eliminated insurance outlays that now benefit politicians and ended all contributions to government worker's pension plans, the total savings would barely pay three month's interest on total government debt. Cut defence? Kim Campbell's defunct helicopters would have cost $87 million apiece. Junking them all, and ending early retirement for M.P.s in the bargain, makes a big contribution to eliminating the deficit--for one month.

Surrender? Mr. Chretien will allow the debt to grow by 3 percent a year: that's as fast or faster than the general economy has been growing. What do you think your banker would say to you if you asked to borrow a dollar for every dollar your income went up, at a time when you are already in debt for about 14 or 15 month's income? That's what foreign lenders might tell Mr. Chretien.

Taxes? Is your family ready to pay another $10,000 a year in taxes? That's what it would take to end federal, provincial and local deficits--and it wouldn't pay one cent on old debt. Are you ready to sell your house? Where else would you get the $128,000 in taxes per family needed to pay off the accumulated debt?

There are lots of ideas: freeze spending (it's now or later; government cannot grow faster than the rest of the economy forever), fire government workers (about one in four employed Canadians works for government), cut welfare (a Toronto mother recently announced she does better on welfare than with a $42,000 a year job), cut frills (we spend over $50,000 a year per crook in our jails), cut welfare for the rich (families earning more than $54,000 a year get a total of $20 billion in welfare-type hand-outs), but nothing on the list is close to being big enough.

The only solution that works with the numbers--but not with political reality--is broad-based big-time cuts in subsidy spending, and a shift to old-fashioned investment-grade spending. Every single existing program needs to be cut 15 percent to 25 percent to eliminate the deficit and begin debt reduction.

One novel idea is to create entitlement groups of taxpayers to whom would be paid (with tax credits) the lion's share of specific spending cuts in specific programs. The number of randomly selected persons in each such entitlement group would be made roughly equal to the number of persons currently benefiting from one or another specific spending program. In other words, a good way to privatize the social dividend flowing from program cuts is to make the gains from eliminating even the smallest subsidy noticeable by a politically significant number of persons. Instead of Senator Gramm's problem of $1000 beneficiaries fighting 10-cent taxpayers, this plan would force the subsidy-getters to fight opponents of their own size. Combined with wide-ranging cuts in all programs, the plan would have enough tax-credit entitlement slots to distribute so that every taxpayer would be assigned to one or another of them. Finally, an active, dollar-driven lobby for serious spending cuts would arise to counter-balance beneficiary and bureaucrat interest groups who now defend the status quo. More to the point, politicians would have something significant to hand out as a result of program cuts. Given that politicians will buy votes with whatever currency they have, this plan provides a way for some votes to be bought with prudence and moderation.

Perhaps this last scheme is a little far-fetched. On the other hand, it does tap into the tax rebellion that is everywhere in the air, and it does remind the citizenry that cuts in public budgets mean additions to private budgets. In any case, $50 billion a year must be found if the deficit is to be eliminated, and progress is to be made in reducing the outstanding debt. Different political parties will have alternative fine tunings for the distribution of cuts, but cut they must--or inflation, a weakened dollar, recession, and a collapse in productivity will force a much rougher cut in our ability to borrow, tax, and spend.

Is there any politically practical scheme, acceptable to the voters, that will cut spending $50 billion a year? After all, the money won't be lost. Taxpayers will still have it (or the borrowing power to get it) if government will only refrain from usurping it. If you, as a participant in The Fraser Institute Student Seminar program have the answer, don't tell me: run for office. You are the political hero (not to say genius) of our age.

June Questions and Answers

Isabella Horry

Q: How much does the federal government transfer to the provincial/territorial and municipal governments?

A: During the 1994/95 fiscal year, the federal government transferred $41,423 million in both cash and tax transfers to the provincial/territorial and municipal governments under the following programs: Equalization; Territorial Financial Agreements; Established Programs Financing; Canada Assistance Plan; Other Specific Cash Transfers; and Tax Transfers. Transfers under Established Programs Financing are directed to spending on insured health services and post-secondary education. Transfers under the Canada Assistance Plan cover the federal govern-ment's share of the cost of providing provincial government social assistance programs.


The federal transfers and the total federal transfer per capita by province/ territory are given in table 1. The June Graph also presents the transfers on a per capita basis by province/territory.

Q: How do Canada's unemployment rate, youth unemployment rate, and long-term unemployment compare internationally?

A: Table 2 details these three rates using the Organization of Economic Cooperation and Development's (OECD) standardized unemployment rates for 1993. Youths are defined as persons under 25. Long-term unemployment refers to all persons unemployed continuously for one year or more.

The Implications of an Economic Slow Down

Michael Walker

There are definite signs, though they are not yet absolutely confirmed, that the North American economy is beginning to slow down. Perhaps we are beginning the "soft landing" so often discussed. For those who pay any attention to statistical regularity, columnist Terry Corcoran of the Globe and Mail recently pointed out that although there has been much discussion of soft landings in the period since the Second World War, there is no evidence that they have actually occurred! Why there should be, upon each cyclical turning point, a discussion of a soft landing is, therefore, a matter for some considerable discussion.

If the current slow down is indicative of a cyclical turning point, the odds are that we aren't going to have a soft landing but, at the very least, a mild recession. That is, a mild falling back from peak levels of output and income to which the economy had risen during the expansion phase.

The leading indicators of this downturn are the current weakness in automobile sales, and the dramatic downturn for most automobile sellers from the pace of sales achieved this time last year; sluggishness in the U.S. housing market marked by the widening array of unsold housing available for sale; and the distinct likelihood that the federal reserve will have to continue to tread firmly on the monetary brakes as there is unfortunately an indication of an increase in the inflation rate, perhaps in part associated with the recent declines in the value of the U.S. dollar relative to the yen and the deutschmark.

The implications for Canada of this slow down are fairly significant. First, much of Canada's recent economic resurgence has been related to an unprecedented surge in exports destined for the U.S. marketplace. (For example, the recent recovery of Ontario has been significantly impelled by the very large increase in automobile exports to the booming auto markets of the U.S.) The implications of this economic slow down are important for the private sector and for the maintenance of employment growth and the growth in real income. The most important effect of an economic slow down if it comes, however, will be on the finances of the federal government and the provinces, who have predicated their fiscal positions on continuing growth in the economy and thus in their revenues. This fiscal year will not prove to be a particular difficulty unless there were to be a precipitous collapse of the economy, something which nobody at this point anticipates. This year will not be a problem because the growth in the gross domestic product in the latter part of 1994 is proving to be stronger than was anticipated when the Department of Finance struck its budget in February of this year.

That unanticipated growth spurt boosted the level of incomes in the economy, and hence boosted the "tax base" of the federal government. The federal government collects its tax revenue from the whole economy, and to the extent that the whole economy is operating at a higher level, the revenues received by the federal government will be also at a higher level. Roughly speaking, the federal government gets about 17 cents out of each dollar of economic activity, and since the level of economic activity is now higher than was anticipated, so will be the level of federal revenues. So it's likely that the federal government will meet its projections on the revenue side for 1995/96. The problems come on two other fronts.

The first is the extent of unemployment insurance payments, as they are quite sensitive to the emergence of an economic slow down. The second source of difficulty will be in revenue flows for the fiscal year 1996/97, which is the year during which the federal government will have to make its most dramatic yardage against the federal deficit if it is to achieve its own modest and unacceptable target of 3 percent of GDP. A slow down in the economy will also mean a reduction in the effective rate of federal tax--in the last recession it fell to 16 cents out of every dollar of economic activity from nearly 18 cents at the cyclical peak. This softening of revenues, along with an escalation of expenditures on unemployment insurance, could prove to be a real challenge to the government's fiscal framework and cause it to begin to miss its targets.

We can rely, however, on the fact that the government is not going to miss its targets. The Prime Minister has made it quite clear, as has the Finance Minister, that missing targets is something that they simply won't tolerate. Therefore, the implications of the economic slow down are further cuts to departmental spending, further cuts to interprovincial transfers and further difficulties for provincial governments who will, of course, also be experiencing the same kind of economic downturn.

The bottom line, as they say, is that anybody who thinks that government restraint has been tough up to this point had better brace themselves, because "we ain't seen nothing yet."

Forty-One Million Dollars of Heartache

Filip Palda

What is the measure of a man or a woman? Philosophers answer that goodness, devotion to duty, and excellence are the proper yardsticks. These qualities allow you to be of help to yourself and to others. The private market seems to think that making money is a better yardstick. Recently Canadian newspapers reported the pay of top corporate executives. The biggest earner made $41 million, and others made tens of millions. Reading these numbers makes people jealous and angry. It is hard to understand how any one man or woman can be worth these fabulous sums. Is the private market so degraded and misguided that it rewards people out of proportion to what they contribute to society?

Before we rush to confiscate high earnings or to intimidate corporate stars we might want to remember that job markets are complicated systems. Obvious solutions seldom apply. A salary of $41 million can be a fair and noble thing, even if the person earning it does nothing but sit on his backside all day, and look out the window. To see why, we need to look beyond the instant explanations that the media provide.

Fabulous salaries are like buried treasure. There is nothing like the prospect of finding gold to get people moving. The toil people put into finding maps and digging pits shows that a prize can bring the best out in the contestants. Juicy corporate pay tries to bring out the same drive and ingenuity in aspiring executives. The chance of being promoted from vice-president to president pushes all vice-presidents in a company to distinguish themselves.

The vice-president who has shown himself most capable may find that his salary triples on promotion. This does not mean that he is all of a sudden three times as productive as he was just before the promotion. In fact, he may decide to slack off and become useless. No matter. The promise of the big pay raised everyone in the running to the summit of effort.

Contests for pay work their magic by giving huge rewards to the vice-president whose department does just a little better than other departments. One vice-president figures "If I just push a little harder than the other vice-presidents I will get top pay." His rivals have the same idea and try to push a little harder themselves. Push and counter-push leads to a chain reaction that brings out the best in the vice-presidents.

The toil of executives shows up in company profits and in products that consumers find useful and affordable. Their toil does not show up in newspaper spreads about the unfairness of top corporate pay. Corporate races are cruel. The losers sweat their lives away. They end the race with measly salaries that cannot make up for the broken marriages and depressions that fall out of countless weekends lost behind an office desk. The media never mention these hidden agonies in their lopsided reports of who makes what at the top of the heap. Perhaps if reporters gave us the broader picture there would be less criticism of corporate compensation.

Mired in Poverty? No, Mired in Poor Stats

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

If you approached a dozen people at random on the street and asked them what characterizes living in poverty, most of them would probably say it has something to do with not being able to afford the basic necessities of life: food, shelter and clothing.

Strangely, this is not the way most politicians, the media, and poverty lobbyists approach the issue. They rely instead on "poverty lines" calculated by Statistics Canada or the Canadian Council on Social Development (CCSD), even though those organizations themselves have said that their low-income lines should not be construed as such.

These unofficial poverty lines make no attempt to measure how many people cannot afford to buy the necessities. On the contrary, Statistics Canada's low-income lines measure the number of families who have to spend more than 56 percent of their income on food, shelter and clothing (which leaves as much as 44 percent for non-necessities--also known in some circles as luxuries). Similarly, CCSD's line is simply fixed at an arbitrary 50 percent of the average family's income (adjusted for family size), which produced the implausible poverty rate of over 25 percent in 1986.

Defining poverty in these ways produces some intriguing results. These were pointed out by economics professor Christopher Sarlo in his 1992 book Poverty in Canada and his 1994 update, recently published by Vancouver's Fraser Institute. Here is a sampling of some of the anomalies.

Using the CCSD's methods, even if every family's income doubled, tripled, or quadrupled in real terms over a period of years, it still wouldn't make a dent in the 25 percent poverty rate. By using relative rather than absolute standards, this method of measurement ensures that there will always be a "poverty problem." Someone whose income is a princely $1 million would still be defined as poor if the average income were $2 million.

Furthermore, if this method were applied in Third World countries, many of them might well show lower rates of poverty than Canada. Says Sarlo: "...recent reports from Cuba suggest that the typical diet in 1993 is virtually at subsistence level, with less than half the recommended caloric intake. If these reports are true, then more than half (probably closer to 75 percent to 80 percent) of Cubans are currently poor using a basic needs approach. However, if most incomes in Cuba are clustered around a low, inadequate average, then a relative approach would reveal almost no poverty in Cuba."

Another curiosity is this: if you were to index Canada's average family income for the year 1951 according to increases in the consumer price index, and then apply current Statscan or CCSD "poverty lines," you would learn that in 1951, the average Canadian family was what we would now be required to label "poor." This would come as a great surprise to everyone I know who can remember back to 1951.

My favourite part of the book, though, is the appendix. Here, Sarlo tackles the perennial "quintile problem." Most readers have undoubtedly seen those troubling statistics showing, for example, that in 1988, the bottom one-fifth of Canadian households received a scant 4.6 percent of the country's total household income, while the top one-fifth received a whopping 43.2 percent.

The first noteworthy fact is the remarkable stability of these percentages over time. In 1951, these figures were 4.4 and 42.8 percent respectively--almost identical to what they were in 1988. Yet those 37 intervening years wrought enormous changes in Canada's social welfare legislation. Massive transfer payments have been syphoned out of middle- and upper-income households and directed into programs designed to raise the lowest quintile. Why don't the figures reflect this?

Sarlo points out that incomes vary drastically according to age, even among people in the same social class. A high school graduate starting his first job will earn much less than his 50-year-old father, who is in his peak earning years, but perhaps more than his 75-year grandfather who is retired on a pension. Each generation moves through various quintiles at different stages of their lives. Sarlo constructs a simulation model which assumes that every individual in society follows an identical life pattern. Everyone does everything at the same age: starts working, marries, has children, retires and dies. Everyone gets the same starting salary, the same annual increases over their working career, and the same pension. In other words, everyone earns the same lifetime income. The only difference among people is the year of their birth, which is staggered evenly among the population.

It's difficult to imagine an income structure more uniform than this. Yet when this fictitious population is divided into income quintiles by household, the lowest 20 percent still receive only 9.21 percent of total income, while the highest 20 percent receive 31.57 percent.

When the model is modified to include two categories of employment (ordinary workers who start working at age 21 and professionals who start at age 26 with higher salaries), the bottom quintile ends up with 7.19 percent, and the top quintile with 38.38 percent.

This is not far removed from the real world results, yet it takes no account of individuals' varying tastes for work, leisure, responsibility and so on. Adjusting for those factors might well demonstrate that there is nothing inherently unfair about the quintile figures.

Statscan: It's Time to Dump LICO!

Chris Sarlo

The truth about poverty in Canada is elusive! This is because we have an unofficial "official" poverty line that is badly flawed.

For the past several years, I have argued that Statistics Canada's Low-Income Cut-Off (LICO) is not a useful or credible tool for measuring poverty. In a companion column, Karen Selick has summarized some of my findings in this regard.

LICO is too arbitrary, too complex, and is set too high. Despite these problems, and despite the fact that Statscan lamely declares that LICO is not a poverty line, most poverty reports continue to use the cut-off to measure the number of poor. Why? Partly it is from habit, but mainly, I think, it is because many people rely on the (well deserved) reputation of the agency. If Statscan continues to produce LICO and give it some prominence, it will be used to measure poverty.

Let's go back to the beginning. In 1968, Jenny Poduluk, a Statistics Canada researcher and the person credited with having "invented" LICO, said the following:

There is no official statistical concept of poverty in Canada, primarily because no minimum standard budgets have been constructed that would allow for a location of points in the income distribution below which income inadequacy might exist. [Jenny Poduluk, Incomes of Canadians, Dominion Bureau of Statistics, 1968, p. 185.]

Needing some kind of indicator to measure the low income population of Canada, she assumed that any family spending the great majority (70 percent, to be specific) of their income on the three basic necessities--food, shelter, and clothing--"might be in straightened circumstances." Her argument was that such families would have little discretionary income left after spending on these basic needs to pay for health care, their children's education, recreation, or saving. Formally, she defined a low income cut-off as an income such that the average family at that income level actually spent 70 percent or more on the three above-listed basic needs. Have I lost you yet?

The low income cut-offs constructed by Poduluk for 1960 for households of 1, 2, 3, and 4 persons were, respectively: $1,500, $2,500, $3,000 and $3,500. Those cut-offs, in 1995 dollars, are: $8,438, $14,063, $16,875, and $19,688. The actual LICO values for 1995 are, in fact, much higher than these "updated" lines. This is because LICO is geared to average expenditure patterns and, especially, to average spending on the three essentials: food, clothing, and shelter. This connection to average living standards makes LICO a relative measure. So, generally, as Canadian material living standards have increased, so has LICO. The actual LICO values for 1995 for the same four households are, respectively: $15,758, $21,359, $27,150 and $31,261. [National Council of Welfare, Poverty Profile 1993, Spring 1995. Note: The LICO lines are those for large urban centres (500,000 people or more).]

It is my view that these LICO are too high to represent "poverty" lines. My own understanding of the term "poverty" (which conforms, incidentally, with dictionary definitions) is that it is a state of deprivation of basic needs and that people who live "in poverty" are likely to be miserable and in some degree of distress. The problem with high, relative "poverty" lines is that they end up including as poor a lot of folks who are not in any state of privation and who would not classify themselves as poor. We trivialize poverty and the predicament of the genuinely poor when we use these high relative poverty lines.

As an alternative, I have proposed a set of basic needs poverty lines. These lines are constructed by adding up the costs of a range of necessities. My lines for 1995 are very close to the inflation-adjusted LICO lines of 1960. In other words, most of the people classified as "low-income" in 1960 by Poduluk's definition would be classified as "poor" now by my definition. The most important function of these poverty lines is to help us determine how many Canadians simply cannot afford the basic necessities of life. One would think that, regardless of your politics, if you are concerned about poverty, this would be interesting and useful information.

While LICO is not consistent with the traditional definition of poverty and lacks credibility because its lines relate more to social wants than basic needs, a concern of at least equal importance is its complexity. Because poverty is one of the major socio-economic problems of our time, it seems to me that a definition which is easily understood would be essential. It is important that all of us understand what it is we are talking about. LICO's construction is sufficiently complex that it lends itself to misinterpretation and misrepresentation.

For example, the Prime Minister of Canada recently stated that he was enormously saddened because Quebec's poverty rate was higher than any other province. He used the term "misery" to describe the state of the poor. [The Toronto Star, May 1, 1995.] While it is true that Quebec has a higher rate of "low-income" than the other provinces, Mr. Chretien (or at least his advisors) should know that LICO is not a poverty line and is set sufficiently high to include much more than basic needs. Most of those below LICO are not in distress or misery in the sense of lacking physical necessities. The PM is one of a long line of prominent individuals to have, intentionally or unintentionally, "switched" poverty definitions in mid-stream.

Regarding Quebec, it will interest many readers to know that while it has the highest low-income rate of any province, it also has the lowest rate of basic needs poverty. [Sarlo, Christopher, Poverty in Canada, The Fraser Institute, 1994, p. 34.] Quebec has the lowest proportion of people living in "misery." Thus, by his own understanding of the term "poverty," Mr. Chretien couldn't have had it more wrong. Yet the message sent across the country via the media was much different than the truth.

Another example of the misrepresentation of LICO comes to us from the Toronto Star, Canada's largest circulation daily newspaper. The Star tells us, "By Statistics Canada definition, people are living in poverty when they must spend at least 56.2 percent of their income on food and shelter." [The Toronto Star, April 9, 1995.] There are three factual errors in this one sentence. First, Statscan never has had nor does it have now, a definition of poverty. Indeed, they emphasize that their low-income line is not a

a poverty line. Second, the cut-off does not refer to what people must spend on some basic needs but what people do in fact spend, on average, on them. Since the average household in Canada spends 36.2 percent of its income on food, clothing and shelter, Statscan has deemed that a household is low-income if its income is such that households at that same income spend on average 20 percent more or 56.2 percent of their income on the three basics. Please understand this. Not all low-income households spend 56.2 percent of their income on food, clothing and shelter. And it is certainly true that not all of them must spend that percentage on the basics. It is also the case that many well-off households spend in excess of 56 percent on those items. The point is that the Star's version of the definition wasn't even close. Third, and finally, the Star left clothing out of the definition.

These are merely a couple of the many examples of the misinterpretation of LICO. If the Prime Minister and the Toronto Star can't get it right, what about the average citizen? Poverty is too important an issue for us to be in a state of confusion about its nature and extent. In 1990, Statistics Canada itself declared that there were problems with LICO and that they were looking to replace it with a simpler and more credible indicator. Very little has happened since. I urge Statscan to scrap LICO and consider a basic needs approach to defining and measuring Canada's poor.

Where to Cut Spending

Walter Williams

Republicans in the U.S. have a chance to rise above political expediency and become a party of principle. They are absolutely right in pushing for welfare reform. Welfare and liberal visions of the War on Poverty haven't simply been failures; they've made whole classes of Americans indolent, dependent and immune to the traditional cure for poverty--a growing economy. But how about other welfare recipients?

This year, the U.S. Congress plans to hand out $431 million to IBM, Hewlett-Packard and Eastman Kodak to develop new computer storage systems. Over the last decade, Congress has given winemaker Ernest and Julio Gallo $15.9 million for overseas advertisement. Sunkist latched on to the same handout agenda for $66.9 million, and Tyson Foods got $9.9 million.

According to a story in Reason magazine (March 1995), Congress has given General Motors, Ford, and Chrysler $250 million to develop better cars. In order to promote corporate equality of opportunity to raid taxpayer pockets, $587 million is going to AT&T, Rockwell International, and Xerox to support their flat-panel research. The Export-Import Bank and the Overseas Private Investment Corp. give out close to $1 billion in credit loans, loan guarantees and grants to U.S. businesses trying to sell overseas.

There is neither moral nor constitutional justification for government handouts to corporate welfare queens. Moreover, there's no public support for these handouts. So if Republicans moved to eliminate them, they wouldn't face irate voters. However, they would face an outraged corporate lobbyist community that make large contributions to their campaign coffers. But we should press Republicans with this question: How can you possibly talk about slamming the door on a welfare recipient while at the same time sponsoring handouts for members of America's Fortune 500?

The Washington-based Heritage Foundation has come up with 40 independent federal agencies ripe for the cutting block at a savings of $2 billion a year. Included among them are: the Corporation for Public Broadcasting (PBS), the Legal Services Corp., the National Endowment for the Arts, and the National Endowment for the Humanities. Other independent agencies that you've never heard of (but your paycheque has) that should be eliminated are: the Christopher Columbus Fellowship Foundation, the Appalachian Regional Commission, the Commission on National Community Service, and the State Justice Institute.

Liberals protest, asking: "How can PBS and the educational programs it airs exist without handouts?" PBS can certainly exist without the handouts, because Bell Atlantic recently offered to buy PBS outright. Programming such as The Arts and Entertainment Network, The Learning Channel, The Discovery Channel and National Empowerment Television give the lie to claims that educational/cultural shows require taxpayer subsidies. The people at PBS simply want the luxury of reduced accountability and the right to live at the expense of taxpayers.

Republicans would be on far greater moral, persuasive and principled footing if their version of welfare reform included government corporate handouts. Contrary to Labor Secretary Robert Reich's claim, allowing corporations to keep more of their earnings through tax cuts is not corporate welfare. Giveaways are.

The Hippo Died That Others Might Argue

Owen Lippert

In her book, Shooting the Hippo: Death by Deficit and Other Canadian Myths, Linda McQuaig tries to prove three things. One: then-Governor of the Bank of Canada, John Crow, ordered a radical fight against inflation in 1987 as part of a cabal of bondholders to protect rich people's money and to strip away "our newfound social rights." Two: the high interest rates used to "fight" inflation, not social spending, caused the deficit to grow. Three: The government ought to set interest rates politically in order to ensure full employment, and it should raise taxes to pay for ever larger social programs.

Her "proofs" include ridiculing antagonists for how and what they eat. For example, steak "grease glistens" on the lips of W-5 journalist, Eric Malling. She describes C.D. Howe analyst, Bill Robson, "munching on a bun filled with ricotta cheese and spinach." If John Crow had cared to dine with her, she would have, no doubt, portrayed him gobbling hippo tartare. Despite McQuaig's liberal economic outlook, there is no "free lunch" with her.

(Hippos get into the story by way of the baby one supposedly shot in a New Zealand zoo because the government ran out of the money to feed and house it. McQuaig denies that New Zealand ever "hit the wall." She believes the Labour Party [she really says this] used a currency crisis to promote their neo-conservative agenda.)

Besides character mastication, what is wrong with McQuaig's ideas--the hippo meat in her sandwich, so to speak? Three things.

For a book extolling "mild" inflation, she never defines what inflation is. She calls the deficit a "myth" without saying how large it is. She says what the Bank of Canada ought to do, but shows no sense of the limits as to what central banks can do.

That she does not define inflation is the most telling. She simply equates "mild"--and no indication of what level that is--inflation with prosperity for working people. The Monetarist definition of inflation, identified with Nobel Laureate economist Milton Friedman, she reduces to "too much money floating around the economy." She then dismisses it as an "ancient theory" and Friedman, himself, as "somewhat eccentric."

Friedman's "ancient theory," backed up now by two decades of scholarly empirical research, describes inflation as a process of continually rising prices and, conversely, of a continuing loss in the purchasing power of money. The cause of inflation is the money supply growing faster than the production of goods and services. As this imbalance becomes known throughout the economy, it understandably leads to heightened concern that prices will rise further and money will buy less. To compensate for future lost purchasing power, individuals and companies seek higher wages and set higher prices. Inflation, ultimately, is a numeric representation of people's insecurity about their economic future.

The most effective institution that can calm these dreads is a central bank that aligns the growth of the money supply to the growth of goods and services. Perhaps the greatest fear contributing to the rise of inflation is that central banks will not step in and arrest an inflationary spiral.

For the record, Canada has a run a deficit every year since 1975. The 1995/96 federal deficit is $32.7 billion. The net public debt is $581 billion, roughly three-quarters of Canada's Gross Domestic Product. Our debt as percentage of GDP is the highest among G-7 nations. Tax revenues as a percentage of GDP place us at a level only surpassed by France and Italy. These numbers cause people to worry, and rightly so.

Finally, McQuaig accuses Crow of repudiating the goals contained in the preamble to the Bank of Canada Act, "to mitigate by its influence fluctuations [my italics] in the general level of production, trade, prices and employment." McQuaig interprets this passage as a commitment to full employment. That's a very long stretch.

If there is a myth, it is that central banks create jobs. All a central bank can do is to influence the supply of money and hence the stability of prices--the stability of individuals' perceptions about their economic security. Innovation and productivity create jobs. A central bank can provide some certainty that the fruits of good ideas and hard work will not be stolen by rising prices. And, yes, they do not always get it right. Central banks, to have greater credibility in the pursuit of lower inflation, need more, not less, independence from short-term political interests.

Elected officials can do their part by eliminating deficits in good economic times. As to the relative contributions of interest payments and social spending to the deficit, this is a nonsensical division because current interest payments reflect past borrowing to fund unsupported spending.

McQuaig has it backwards. Fiscal responsibility and price stability ensure long-term social progress. She prescribes a superficial "feel-good" fix. As to her conspiracy of bondholders, perhaps half of Canada's bonds are held by pension funds paid into by working Canadians. Incredibly, McQuaig would risk the retirements of millions of Canadians rather than have Ottawa take a critical look at social spending.

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Last Modified: Wednesday, October 20, 1999.