Feature Article:                                                                                  "L'addition, s'il vous plaît": Calculating and Paying Off Quebec's Separation Obligation to Canada

Robin Richardson

The crisis of a "Yes" vote in the Quebec referendum

Imagine the following scenario: Quebecers have voted to separate from Canada and you have been appointed to head the negotiating team for the government of Canada to determine Quebec's Separation Obligation to Canada. Financial markets are in turmoil because of major uncertainties about the future of Canada and Quebec and the safety of their bonds. The Canadian dollar is rapidly heading for $0.50 U.S. or lower.

The pressure is on both your team and the Quebec negotiators to settle as quickly as possible. Consumer confidence is eroding daily as interest rates rise to the 15 to 20 percent range. Businesses are delaying decisions to invest in plant and equipment because of the growing risk of a major and prolonged Canadian recession.

This is not a Royal Commission. It is crisis management of the highest order. You and your team and the Quebec team must come to an agreement soon to stop people from bailing out of government bonds including their Canada Savings bonds. Confidence must be restored by Quebec and Canada agreeing on a fair division of all federal assets and liabilities.

Negotiating Quebec's separation obligation to Canada

As Chairman of the Canada negotiators, the first thing you do is propose that the two teams meet and discuss the following:

Issue #1--The allocator

How should the assets and liabilities of the government of Canada be allocated to an independent Quebec? Should population be used or some other allocator?

Issue #2--The base upon which Quebec's separation obligation is calculated

What accounting system should be used? How do you handle the thorny issue of contingent liabilities? What about unknown yet potentially very large items such as environmental cleanup costs and aboriginal land claims not yet settled? Should Quebec get a share of Canada's foreign exchange accounts if it continues to use the Canadian dollar? How do you divide up the equity positions of federal crown corporations and non-financial assets such as land, buildings and other structures?

Issue #3-- Repayment terms and conditions for Quebec's separation obligation to Canada

What should be the length of the Canada-Quebec separation debt repayment period? Should the term structure and interest rate on Quebec's Separation Obligation be the same as that of the government of Canada as a whole? What collateral might the government of Canada require during the debt repayment period?

The 1995 Public Debt of an Independent Quebec

Fortunately, as head of Can-ada's negotiating team, you can refer to a recent study from The Fraser Institute, The 1995 Public Debt of an Independent Quebec (Pre-Referendum Edition) that updates and expands a preliminary study on the same subject done in August 1994. This new Fraser Institute study is also available in French. You request that the Quebec team and your team use this study as the basis for discussion and negotiation since it addresses all of the issues that have to be decided.

The new Fraser Institute study presents a creative solution for handling contingent liabilities, the question of foreign exchange reserves, and the use of the Canadian dollar, crown corporations and non-financial assets. André Raynauld, now Senior Fellow of the Montreal-based Institute for Research on Public Policy and former Chairman of the Economic Council of Canada, uses figures from this study in frequent speeches across Canada and says, "The best estimate of the federal debt, in my opinion, is one published by The Fraser Institute and recently updated."

The Bélanger-Campeau Commission revisited

The Quebec team will be especially interested in this new Fraser Institute study since it compares its findings with that of an updated calculation by Marcel Côté of the Separation Obligation estimate of the Secretariat of the 1991 Bélanger-Campeau Commission.

Table 1 shows a comparison of the updated Bélanger-Campeau calculation with the updated Fraser Institute figures contained in this study. It highlights the significant differences in methodology and conclusions about the size of Quebec's Separation Obligation to Canada. The difference between the two estimates is $41.3 billion, which raises the following considerations:

(1) This Fraser Institute study takes the position that an independent Quebec has no claim to Canada's Foreign Exchange Fund Accounts as long as it uses the Canadian dollar. The Bélanger-Campeau Commission wants Quebec to take a share of Canada's foreign exchange reserves and still use the Canadian dollar. This position would be totally unacceptable to the rest of Canada.

(2) Another component of Financial Assets is the government of Canada's equity position in all of its enterprise crown corporations, including that of the Bank of Canada. This Fraser Institute study takes the position that Quebec is entitled to its share by population of this equity position once it separates. This is reflected in the deduction of Financial Assets from Total Liabilities to arrive at the federal government's Accumulated Deficit. Therefore, the government's equity in all of its crown corporations is already reflected in a reduction in the base upon which its Separation Obligation to Canada is calculated.

(3) The Fraser Institute's figure of $30.9 billion for Non-Financial Assets of the Government of Canada comes from Statistics Canada's publication The National Balance Sheet of Canada. The Bélanger-Campeau Commission figure of $80.8 billion is a gross overstatement of the value of these assets.

(4) The Fraser Institute study demonstrates that there are $62.6 billion of contractual commitments and conditional liabilities that should be included in the calculation of Quebec's Separation Obligation to Canada. Moreover, there should be provision made for very large potential liabilities for environmental cleanup costs and aboriginal land claims not yet settled. The Bélanger-Campeau Commission has ignored these important considerations.

(5) Federal Assets Kept by Quebec is another questionable figure in the Bélanger-Campeau study since an independent Quebec would already have been given a credit for its share of all federal assets no matter where they were located if the Canada and Quebec negotiators were to follow the methodology of this Fraser Institute study. Perhaps Quebec would wish to purchase the remaining three-quarters of all federal properties located in Quebec for $16.7 billion, as indicated in table 1. In this event, they would likely find a willing seller in the government of Canada since the recorded value of Quebec's share of all federal non-financial assets located anywhere in the world is only about $7.7 billion. Assuming that 25 percent of these assets are located in Quebec's territory, to purchase the remaining three-quarters would cost Quebec only $5.7 billion, not $16.4 billion as reported by the Bélanger-Campeau Commission.

Rather than going to the expense of appraising non-financial assets in the rest of Canada, this Fraser Institute study suggests that it may be acceptable for the government of Canada to sell all of its non-financial assets inside Quebec's territory to Quebec for $1.00 in return for a release by Quebec of any further claim to the federal government's non-financial assets in the rest of Canada and abroad.

In conclusion, table 1 demonstrates that the people of Quebec have been seriously misled by the Secretariat of the Bélanger-Campeau Commission. The federal debt they could inherit should they decide to separate would be $143.9 billion, not $102.6 billion following the highly questionable Bélanger-Campeau methodology. The $41.3 billion difference needs to be reconciled before the coming referendum so that Quebecers have a correct understanding of the financial costs of a collective decision to divorce Canada.

Other features of the new Fraser Institute Quebec debt study

The 1995 Public Debt of an independent Quebec (Pre-Referendum Edition) will also be helpful to both negotiating teams because it contains (1) an expanded treatment of the impact of Quebec separation on Quebecers' tax burdens (2) a detailed calculation of the deficit of the government of an independent Quebec (see table 2), (3) a comparison of this deficit with and without a post-separation recession, as some studies predict (and as is currently happening in our hypothetical negotiating scenario), (4) a comparison of the deficit of an independent Quebec with the deficits of all OECD countries for which deficit statistics were available (see table 3), a comparison of the all-government debt of an independent Quebec with other severely indebted countries (the Fraser Institute SIC List) and with all OECD countries for which debt statistics are available (see table 4), an expanded bibliography and an appendix which summarizes some of the other studies on the costs of separation.


Conclusion

The negotiations in this hypothetical, and hopefully unnecessary bargaining session, need not drag on if governments were to give serious thought to the matters raised in this Fraser Institute study before the referendum occurs.

The government of Canada should make it clear to the government of Quebec that the price of its co-operation on any and all of the "wish list" items in Quebec's Sovereignty Act of parliament, should Quebecers vote "yes" in the upcoming referendum, is a satisfactory agreement on the size of and terms of payment of Quebec's Separation Obligation to Canada. This includes any agreement or support for the ideas expressed in the Act on the definition of Quebec territory (section 4), dual citizenship (section 5), continued use of the Canadian dollar (section 6), automatic membership in foreign treaties, conventions and alliances (section 7, 8, and 9), and continuity of Canadian laws and institutions until amended or repealed by the National Assembly (sections 10, 11, 12, 13, and 14).

Quebecers need to be told the true costs of separation. These are summarized as follows.

Summary

(1) The author of this study and The Fraser Institute are not predicting that Quebec will separate from Canada. We hope that such an undesirable outcome can be avoided. Nevertheless, the realities of Canadian public life are such that an unfortunate break-up of the Canadian Confederation is possible.

(2) The Quebec debt study provides much-needed information for the public policy debate both within and outside Quebec so that rational decisions may be made on the future of Canada and Quebec.

(3) Should Quebecers decide to separate from Canada, Quebec's Separation Obligation to Canada would be $143.9 billion as of March 31, 1995. This amounts to $19,767 for every man, woman and child in Quebec, or $79,068 per family of four. The study contains a six-step methodology for measuring Quebec's share of Government of Canada assets and liabilities.

(4) Quebecers would face a difficult fiscal choice after separation. Should they wish to continue to enjoy the same level of services and benefits from their new national government in Quebec City as they previously received from Ottawa and balance their new government's budget, their federal taxes that would be going to Quebec City (which presently go to Ottawa), would have to be sharply increased, perhaps by as much as 44.8 percent, even after savings from the elimination of duplication and overlap of services.

(5) The overall tax burden of Quebecers in an independent Quebec (current federal and provincial) would be 31.9 percent higher than currently exists if Quebecers were to enjoy the same level of public services as they currently receive while paying off their Separation Obligation to Canada within an overall balanced budget context. If local governments are included, the overall increase in the tax burden of Quebecers would be 25.7 percent, assuming balanced budgets at all levels of government.

(6) If there is opposition to higher taxes and if Quebecers continue to pay the same amount of tax to their new national government in Quebec City that they presently send to Ottawa and run a budgetary deficit, the services they would receive for federal programs currently enjoyed after the annual payment of their Separation Obligation to Canada would be 45.2 percent of the level of program expenditures received prior to separation within a balanced budget context.

(7) An independent Quebec would find great difficulty borrowing what it needs at existing levels without a substantial further increase in interest rate levels. In the absence of very large tax increases and/or substantial spending cuts, the deficit of the government of an independent Quebec would be from $19.0 billion to $25.8 billion in its first year of existence (or between 10.6 percent and 14.5 percent of GDP) depending on whether or not the new country experienced a post-separation recession as some studies predict.

(8) Even without a post-separation recession, Quebec as an independent country, at 10.6 percent, would have the highest deficit-to-GDP ratio of any OECD country. Quebec's deficit-to-GDP ratio would be 308 percent higher than the average of G-7 countries and 152 percent higher than the average of OECD European nations.

(9) An independent Quebec would have an all-government net debt-to-GDP ratio of 139.7 percent, compared with a Quebec as a Canadian province net debt-to-GDP ratio of 120.4 percent as of March 31, 1995. This measure of debt includes all levels of government in Quebec.

(10) The debt burden of an independent Quebec would be more severe than that of any Canadian province, except Newfoundland, and more severe than that of any OECD country, including Belgium, Ireland, and Italy.

(11) Based on the "Fraser Institute SIC List--1994" of the world's most severely indebted economies, an independent Quebec would be the 21st most severely indebted country in the world, with a government debt burden just behind Liberia and just ahead of the Syrian Arab Republic.

(12) Taking all levels of government into account, total debt charges at current interest rates would be an estimated $24.7 billion as of March 31, 1995 for an independent Quebec compared with $19.0 billion for Quebec within Confederation. This 30.0 percent increase in debt charges will pose a significant financing challenge for an independent Quebec. If interest rates increase, the debt service burden will be even greater.

(13) A final potential consequence of Quebec leaving the Canadian Confederation may be an unwillingness of foreign and domestic investors to lend money, not only to Quebec, but also to the rest of Canada. The negotiations leading to separation would dispel whatever government debt illusion may have existed on the part of investors in Canadian and Quebec government bonds as to the severity of the debt burden facing Canadians and Quebecers and the impossibility of servicing this debt at existing interest rate levels while maintaining government services without unprecedented tax increases and/or further borrowing.

(14) The study considers alternative repayment plans based on Canada-Quebec federal debt repayment periods of 20, 25, and 30 years at different interest rates. Just as with a house mortgage, the quicker Quebec's Separation Obligation to Canada is paid off, the less costly the debt becomes to existing and future taxpayers in Quebec.

(15) It would be in the best interests of an independent Quebec to pay off both interest and principal over, say, a 25 year period so that future generations of Quebecers would have no financial obligation to Canada. The difference between interest only and interest plus principal of an independent Quebec's $143.9 billion Separation Obligation to Canada amortized over 25 years at 10 percent interest per year is $1.5 billion per year. This obligation would be well worth assuming in order to eventually be free of annual payments to the rest of Canada which would otherwise continue forever.

(16) Should an independent Quebec continue to use the Canadian dollar as its currency after separating from Canada, Quebec should continue to contribute to the maintenance of Canada's Total Net Foreign Exchange Accounts.

(17) The government of Canada should immediately make public a "Quebec Federal Property Inventory" that includes all land, residential and non-residential structures, machinery, equipment, and inventories owned by Canada and located in Quebec territory. A "Rest of Canada Federal Property Inventory" should also be published to assist in the final determination of Quebec's Separation Obligation to Canada.

(18) Quebec's $143.9 billion Separation Obligation to Canada is a minimum estimate since it could be increased substantially for environmental cleanup costs and aboriginal land claims. The study urges the government of Canada to lift its veil of secrecy over aboriginal land claims and to provide full disclosure to the Canadian public of the potential future costs of these items.
Quebec should accept its full obligation for all of Canada's environmental cleanup obligations and aboriginal peoples if it chooses to separate from Canada.

"We Have a Plan"

Filip Palda

Governments in Canada are prisoners of an idea. They believe that the state can make jobs and boost investment. A hundred years ago French philosopher Frederic Bastiat explained why the idea was bad. The money that government spends to start a factory, or to create 1000 jobs, has to come from somewhere. That "somewhere" is the private sector, which shrinks every time government grows. When government spends money, it moves resources away from the uses that businessmen thought were important to uses that politicians think are important. No new jobs come out of this reshuffling of resources. All we get are bad investments, and the feeling that our leaders have a short circuit in the part of their brains that lets them learn from experience.

The experience of the last 20 years is that roughly 80 percent of what government spends on stimulating the economy, stimulates nothing. To suggest the economy can run without them is not a polite topic of conversation with politicians. Researchers who have not specialized in polite conversation make the point in two loud and obnoxious bursts:

Businesses do not need subsidies to grow

1) About 60 percent of jobs and investments that government creates with subsidies are phoney because many businesses do not need subsidies to grow. These businesses would have done whatever activity was subsidized even without the public handout. The Organization for Economic Cooperation and Development (OECD) makes this lament often in its reports. As the OECD sees things, the worst culprits are subsidies to hire workers, and subsidies for R&D and investment.

Governments think they are being clever when they pay businesses to hire new workers. The clever ones are really the businesses. Most of them would have hired new workers even without handouts. An early example of this sort of scam was Ottawa's Employment Tax Credit Program of 1979-81. The Economic Council of Canada found that 67 percent of the 113,000 jobs the program funded would have been created without any federal help. This means that 67 cents out of every one of the hundreds of millions of dollars that Ottawa has forked out was a straight gift to business. The OECD, and more recently, Canadian studies suggest that job subsidies are as futile today as they were in the late 1970s.

Investment grants obey the same laws of futility as job subsidies. The evidence is alarming enough for civil servants to show it to their political bosses. The Department of Finance found that Ottawa's Cape Breton Investment Tax Credit was a costly flop. Of $2.1 billion of supposedly new investment which qualified for the tax credit, 81 percent was not new.

That is, 81 percent of the $2.1 billion would have been invested in Cape Breton without the credit. The Department of Fisheries and Oceans asked the same troubling question about the Fishing Vessel Assistance Program. Under this program Ottawa paid fishermen $100m to fix their boats between 1976 and 1985. The Department found that fishermen were ready to pay for $70 million of these repairs without any official aid. The $70 million was a gift from taxpayers to fishermen. International evidence on investment tells a similar story. In a study of the U.S and Canada, Mansfield and Switzer found that only 20 percent of government grants to stimulate R&D ended up in new research and development. The rest of the money was an unrequited gift to businesses.

The list of studies and examples goes on, but the evidence passes through our leaders like cosmic rays. How else to explain the Ontario government's recent ad campaign claiming that Queen's park "created" tens of thousands of jobs with its Jobs Ontario subsidy program? How else do we understand why the federal government sticks to its line about "generating" new investments in high-technology sectors?

Jobs subsidized at expense of others

2) About 20 percent of the jobs and investments government creates with subsidies come from putting other workers and businesses out of action. This effect shows up most lethally in subsidies that go to firms on the say-so of a bureaucrat. These so-called "firm specific investment grants" lower the lucky firm's costs and allow it to undercut the competition. In an obscure but fascinating proceeding from the Standing Senate Committee on National Finance in 1990, Senator Stewart explained the problem:

The present government has resorted to a program of grants, part of which is to individual entrepreneurs. . . . In the part of the world from which I come, one of the things that able young men sometimes go into is related to the harvesting of pulpwood. They want a porter, which is a piece of machinery that will cost $115,000. Then they will probably want a good truck . . . and so on. The argument I hear is that the ACOA program which is now in effect is leading to a proliferation of operations. People who before could not afford to get into this are now getting into it and making it unprofitable for them all.

In Senator Stewart's example, firms that are not good enough to make it on their own need a grant to survive. They use the grant to take the market away from more efficient but less subsidized competitors. The grant does not create new jobs. It just puts inefficient producers in the place of efficient producers. This is how you help to keep a region or an industry poor.

The 80 percent failure of hands-on efforts to push the economy ahead should make our leaders humble. Instead, they proclaim economic exploits, like Nordic warriors boasting in the mead hall. This is not surprising. Programs to make work and boost investment allow governments to take credit for opportunities the private sector has uncovered. These programs are a good political parlour trick which we fall for when we accept that government can pull jobs and investments out of thin air. If professional magicians studied politicians they might learn how to convince us that rabbits really do come from hats.

References

Lars Camfors, "Active Labor Market Policy and Unemployment: A Framework for the Analysis of Crucial Design Features," OECD Economic Studies, No. 22, Spring 1994:7-48.

Surendra Gera, Creating Jobs in the Private Sector: Evidence from the Canadian Employment Tax Credit, Ottawa: Economic Council of Canada, 1988.

Edwin Mansfield and L. Switzer, "The Effect of R&D Tax Credits and Allowances in Canada," Research Policy, 1985, 14:97-107.

Comments by Senator Stewart, Proceedings of the Standing Senate Committee on National Finance, March 28, 1990, p. 22:11.

Opening statement by J.F. Thomas, Comptroller, Department of Fisheries and Oceans, Proceedings of the Standing Senate Committee on National Finance, May 17, 1990, pp. 25A:1-25A:25.

May Question and Answer

Isabella Horry

Q: How large is the public sector? How much is paid in remuneration to the public sector?


A: In 1993, the public sector--including government business enterprises, hospitals and school boards--totalled 2.7 million people; total government salaries and wages were $99.2 million. Table 1 details government employment by level of government and province/ territory, and public sector remuneration by province/territory.

The first May graph shows the number of government employees per 100 residents of the province/territory. The ratio varies from 7.5 government employees per 100 residents in Newfoundland to 16.2 government employees per 100 residents in the North West Territories.

The second May graph compares the size of government employment to the total employed labour force. Government employment as a percentage of the employed labour force ranges from 17.6 percent in British Columbia to 27.7 percent in Nova Scotia.

Is the Party Really Over?

Michael Walker

When he was a young boy, my son travelled with me to the Soviet Bloc and experienced first-hand the malfunctioning Soviet system. He also had the great benefit, in terms of his ideological development, to witness a group of secret police and border police club and man-handle a person who had been trying to escape through Checkpoint Charlie to West Berlin. I wasn't surprised, therefore, when, just after the collapse of East Berlin, he sent me a t-shirt emblazoned with a huge Soviet hammer and sickle and the slogan, "The Party's Over."

And certainly, the Communist Party, as it had existed, is certainly over. But much of its rhetoric remains, and it will, for a very long time, if not forever, leave its mark on public discussion of economic and social issues. It was the Communists who developed the notion that there is a rich class and a poor class, the idea that those who achieve less are entitled to some of the income of those who achieve more, the fear that capitalism is inherently evil, the wishful thought that public employment transforms human nature from self-interest to altruism, and most importantly, the belief that appropriately operated, government can solve the problems of the human condition.

Prime Minister Chretien argued in advance of its delivery that the recent federal budget would meet his targets as described in the Red Book, but would not abandon the standard of decency that Canadians had come to expect. In this assertion he was successfully appealing to a residue of these Marxist ideas that, somehow, a higher level of decency is achieved by the federal government spending more on social programs. The very fact that he could get away with such a suggestion in 1995 when the federal government is spending and borrowing us into oblivion is a tribute to the resilience of those old party ideas. The Prime Minister's popularity is a direct result of the fact that a large fraction of the population has not made a connection between the generous entitlement programs which define the peculiar boundaries of Canadian decency and the unsustainable deficit which threatens our standard of living.

There is, however, a glow of hope on an otherwise bleak horizon in the recent developments in the United Kingdom. Of course, many of Canada's most ardent communists/socialists hailed from the U.K. and its labour movement. Those who didn't, like Pierre Trudeau and David Lewis, turned there for inspiration from the likes of Harold Laski, Joan Robinson and other over-zealous followers of Maynard Keynes. The mother of parliaments was also the source for much of the loony leftist thinking that permeated the governments of the Commonwealth.

Intermittently during the century, but most vigorously in the post World War II period, Britain produced interventionist governments that, in varying measure, pursued a policy of building up the socialist (ownership of the economy) welfare (lots of taxes and unearned income entitlements) state. Labour governments did so directly and Conservatives did so on the argument that if they didn't, the other crowd would be elected and then where would you be?! Canada was no slouch in following this British model; we adopted most of the socialist polices which were ultimately to be Britain's downfall.

Socialized medicine, nationalized oil companies, wage and price controls, high levels of taxation, all were pursued by Canadian zealots, many of whom would be embarrassed today to be reminded of the extent to which they mindlessly trod the party line.

But, back to that glimmer of hope. It comes, funnily enough, not from the reassertion of Mrs. Thatcher's presence in British politics, but rather from the preconditions laid down by the latest star of the so-called political left in Britain. Tony Blair, newly elected leader of what is still called the "Labour Party," extracted from his executive committee overwhelming support for his revisions of the party's constitution. The most important of Blair's renovations was the abandonment of Clause IV of the party constitution which committed the Labourites to government ownership of the key industries in the economy. That, plus the fact that Blair has personally forsaken his local government school by placing his son in a private institution, signal a sea change in attitude by the party which once boasted in its theme song that, "we'll keep the red flag flying here." We can expect a corresponding change in the rhetoric in due course.

Now, if only we could persuade the locals in this country that "the party's over."

Capital Punishment No Deterrent?

George Graham

On March 17, The Fraser Institute released what is sure to be one of its most controversial studies ever. Gun Control is not Crime Control by Professor Gary Mauser of Simon Fraser University explodes many of the myths surrounding the federal government's proposed legislation.

This article's purpose, however, is not to repeat Dr. Mauser's well-argued thesis. Rather, I would like to draw attention to one small part of his 30-page study, a graph at the bottom of page 12 (which is reprinted, in part, below).

A 1994 Gallup survey shows that 59 percent of Canadians support a reintroduction of capital punishment. This sentiment is not reflected in Parliament, where the majority of MPs oppose the death penalty. The most-repeated argument against capital punishment is that it is unnecessary, since murder rates have declined since capital punishment was abolished by Parliament in 1976.

This is unquestionably true. In 1976, when the debate over capital punishment reached its peak, the murder rate in Canada was 2.84 per 100,000. Since then, the murder rate has declined to 2.19 per 100,000. But this statistic, the repetition of which has become a mantra to opponents of capital punishment, tells only half of the story.

In 1967, nine years before the death penalty was formally abolished, the supreme penalty was restricted to include only those convicted of murdering on-duty police officers and prison guards. During the period between 1967 and 1975, the murder rate in Canada increased by 82 percent, from 1.66 to 3.02 per 100,000. While capital punishment remained on the books during this period, both Prime Ministers Pearson and Trudeau made it clear that it would never be imposed as long as they were in office. The comparison gets more interesting when one compares current Canadian murder rates with those of 1963, the year after Canada's last execution. In that year, Canada's murder rate was only 1.32 per 100,000. So, between the de facto abolition of capital punishment in 1963 and its formal abolition in 1976, Canada's murder rate increased by 129 percent.

There is another way to look at the issue of capital punishment. One can analyze the kinds of murder committed. When opponents of capital punishment argue against the death penalty, they routinely point out that the vast majority of murders are unplanned and impulsive, committed in "the heat of the moment."

This is also undeniably true, although statistics are only available back to 1983. Of the 553 homicides solved in that year, 88.4 percent involved a victim who was a relative or acquaintance of the killer. These were, for the most part, "crimes of passion." The remaining 11.6 percent were random killings or were committed while engaged in another criminal act such as armed robbery. Since 1983, however, "crimes of passion" have declined slightly to 83.9 percent of all murders. Random murders and murders committed during the commission of a crime have jumped from 11.6 percent to 16.1 percent. Putting it another way, the number of murders committed by strangers and unknown individuals (as a percentage of total solved homicides) has jumped almost 40 percent in the last decade alone. If statistics were available back to 1962, a clearer trend might be observed. If this were the case, one could assume that it was random murders that were being deterred by the death penalty.

Canada has not imposed the supreme penalty on a convicted criminal since Arthur Lucas (who murdered an acquaintance) and Ronald Turpin (who murdered a police officer) were hanged at Toronto's Don Jail on December 11, 1962. On the night of his execution, Turpin was told that because of the political mood in Ottawa, he and Lucas would probably be the last people to hang in Canada. Turpin agreed, although he said he would rather that the honour go to someone who had been hanged earlier. The execution of Lucas and Turpin signalled the end of capital punishment in Canada.

Since then, the murder rate in Canada has increased by almost two-thirds. Murders by strangers have increased dramatically in the last decade. For those genuinely concerned about violence and its control, these are some numbers to chew on, at the very least.

Winners Chosen in Economy in Government Competition

Fazil Mihlar

On April 18, 1995, the winners of the 1994-95 Fraser Institute Economy in Government Competition were announced. The Competition offered prizes of $5,000 in each of the three areas--local, provincial, and federal government--and a $20,000 prize for the best overall idea. Prizes are to be paid in two instalments: three quarters at the time of the award, and the remaining quarter when the idea is adopted by the relevant level of government.

The local government category was won by Mr. Jim Godfrey of Langley, B.C. with his submission, "Restructuring the Budgeting Process of Local Governments"; the federal government category by Professors Colin Hoskins and Stuart McFadyen of Edmonton, Alberta with their proposal, "Restructuring the CBC"; and the provincial government category by Ms. Tina MacDonald, Mr. Duncan MacDonald and Ms. Sheila Blair of Edmonton, Alberta for their idea, "Reducing Fraud and Waste in Income Security Programs." The 1994-95 winner of the grand prize was Ms. Tina MacDonald, Mr. Duncan MacDonald and Ms. Sheila Blair.

The 17 finalists' proposals were of extremely high quality, and the judges had the unenviable task of choosing the winners among them. We are confident that if these and previous years' proposals are implemented, savings will amount to millions of dollars.

Several proposals from the 1994-95 competition have already been adopted by governments across Canada. They include:

•"A Break from Tradition: A New Budgeting Process": Mr. Jim Godfrey (City of Langley, B.C.)

•"Certified Professional Program": Mr. Doug Lychalk (City of Surrey, B.C.)

•"Firefighter Hiring: Re-engineering the Process": Mr. Wayne Bernard (City of Surrey, B.C.)

•"Strategic Cost Management": Mr. Barry Malmsten (City of Ajax, Ontario)

The winners of the 1994-95 Fraser Institute Editorial Cartoon Competition for Economy in Government were also announced: Mr. David Anderson of Toronto, Ontario won the 1st prize of $1,000; Mr. Roy Peterson of Vancouver, B.C. won the 2nd prize of $650; and Mr. Bruce Mackinnon of Halifax, Nova Scotia won the 3rd prize of $350.

For more information, including executive summaries of the winners' ideas, for copies of the winners' cartoons, or to get in touch with the winners and other finalists, please contact Fazil Mihlar at The Fraser Institute by phone at (604) 688-0221 ext. 542, or by fax at (604) 688-8539. Copies of the cartoon winners will be included in subsequent issues of Fraser Forum.

Mr. Martin and Ms. Cull:                                                              Pay Attention to the Business Cycle

Owen Lippert

A failure to fully appreciate the "business cycle" undermines both Paul Martin's 1995/96 budget and British Columbia's recently announced budget. Both budgets assume continued economic growth will fatten government revenues for years to come. Their spending decisions flow from this unhistorical premise. The triumph of political hope over economic experience will cause trouble, if not this year or next, possibly in 1997.

First, what is the business cycle? Descriptively, it is the up and down movement of the growth rate of the Gross Domestic Product (GDP). As far back as biblical times, we have descriptions of "five fat years" followed by "five lean years." The cycles themselves are not always that precise. Yet a look at Canada's and the U.S.'s economic performances since even World War II shows our economies completing a cycle of expansion and recession in a roughly similar time frame.

What causes business cycles? Economists have put great effort into finding an answer to that question. None has yet to give a definitive answer. But my view is that the business cycle represents the variable outcome of a human constant--the drive to risk money, time, and effort in order to achieve a higher return. The risks can include everything from big corporations investing in new plants and machinery to the corner store advertising a new line of ice cream bars in the community paper.

The economy expands when the value of risks succeeding exceed those that fail. The economy contracts when more risks fail than succeed.

Why would the economic decisions of players as diverse as General Motors and Macintosh's Confectionery produce similar results? One answer is that both are taking similar degrees of risk at approximately the same time.

Let's start at the end of a recession. Companies, if they have survived, are typically very efficient at this point. They have learned to make the most of scarce profits. With low inflation and interest rates, companies start to make investments-- they take risks. These are probably good risks given the company's current level of productivity and pent-up consumer demand. The good risk decisions start to pay off. The economy expands and companies accumulate larger profits.

Companies and individuals do not stop looking for new opportunities to earn a higher return just because initial investments succeed. If anything, the reverse is true. Soon, the good risks have all been taken. Attention turns to riskier ventures. For GM, it may be a whole new assembly plant. For Mr. and Mrs. Macintosh, it may be adding a dry cleaning service. As economic growth pushes up inflation and interest rates, these riskier decisions become riskier still.

Higher risk decisions simply fail more often. The reasons can include market saturation, inexperience in new markets, the cost of borrowing and inflation reduces the real level of profit, critical labour shortages, or just plain old bad luck.

The failure of high risk decisions has a cumulative effect. Over-extended companies crash and burn (witness Robert Campeau and the Reichmann brothers). More solid companies retrench. News of lost jobs, wages, and profits cause investors to question even good risk investments and consumers to delay even needed purchases. They view the highest long-term return on money as not losing all of it either in risky investments or in credit-dependent consumption. The economy starts to go into decline as losses mount and investors and consumers take cover.

The nimble, efficient, and thrifty adapt and survive. Others have more trouble. One of the "others" is spendthrift governments. Their revenues decline just when their expenditures rise to meet higher unemployment and welfare. Usually, they are unprepared, having put more effort into planning spending rather than forecasting revenues.

If the business cycle represents the outcome of risk, it is small surprise governments do not understand them. Politicians do not risk their own money. They risk the taxpayers' dough.

Right now, Canada and the U.S. are near--or at--the top of the business cycle. Both governments are hoping for a "soft landing." A quick look at the last fifty years provides little empirical proof of such a creature. There are only degrees of hard landings.

My advice to Paul Martin and the provincial finance ministers, especially British Columbia's Elizabeth Cull, is simple. Stop hoping and start preparing. At the very least, balance your budgets. "Lean year" spending on "fat year" revenues cannot last. Next year you might not have the fat.

Fundamental Flaws in a Debt Management Plan

Robin Richardson

British Columbia can be considered as a case study that illustrates certain principles of debt management--what to do, as well as what not to do--applicable to all other governmental jurisdictions in Canada. Future articles will analyze the debt management programs of other provinces insofar as they, too, help to inform Canadians about how to solve the government debt crisis.

The British Columbia debt management plan

The March 28, 1995 budget of the Government of British Columbia contains a debt management plan that proposes to (1) balance the provincial budget in fiscal 1995-96 and generate small surplus of $114 million, (2) apply this surplus and subsequent surpluses over the next 20 years to eliminating the $10.2 billion in debt incurred from previous budget deficits (the accumulated deficit), (3) reduce total taxpayer-supported debt as a share of B.C.'s Gross Domestic Product from its current level of 18.8 percent to 10.0 percent within 20 years, and (4) cap the interest cost of taxpayer-supported debt to ensure that this cost does not exceed 8.5 percent of provincial revenue over the next 20 years.

While admirable in some respects, the British Columbia debt management plan is fundamentally flawed in that it is based on a very narrow measure of the provincial debt and other obligations. In this regard, it is seriously misleading.

The admirable features of the B.C. debt reduction plan are the principles of (1) managing the budget to generate annual surpluses, (2) using all of these surpluses to reduce government debt, and (3) putting a cap on the "interest bite," or percentage of public debt charges to total revenues collected by the government.

The unfortunate flaws of the B.C. debt reduction plan are (1) the limiting of the debt elimination component of the plan to the accumulated deficit, (2) the setting of the debt service cap at too high a level in relation to current experience and future prospects if government debt were to be seriously constrained.

The government sector as a whole

The $10.4 billion debt that relates to British Columbia's past deficits (accumulated deficit) only accounts for about 23.9 percent of the $43.6 billion government debt and other obligations of the B.C. "government as a whole" as of March 31, 1994. By committing to eliminate less than 25 percent of its entire debt and other obligations, the B.C. government's debt plan gives the false impression that B.C.'s government debt problem is under control. Nothing could be further from the truth.

A comparison of the two most recent audited reporting periods given in the April edition of Fraser Forum emphasizes the importance of basing the B.C. government's debt reduction plan on the most comprehensive measure of provincial debt. Total provincial debt, including guaranteed debt, amounted to $26.0 billion as of March 31, 1994 ($26.9 billion and $27.9 billion estimated at March 31, 1995 and 1996 respectively). This figure increased $2,658 million between 1993 and 1994. Based on the "government sector as a whole" measure of $43.6 billion for March 31, 1994, the year-to-year increase was $4,947 million, or 86 percent greater than the increase based on the less comprehensive figure used in the government's official plan.

Even the debt figure of $43.6 billion for the British Columbia government as a whole understates the size of B.C.'s debt problem since it does not include unknown but potentially very large items such as aboriginal land claims and environmental cleanup costs.

The proposed debt service cap

British Columbia's proposed 8.5 percent cap on taxpayer-supported debt service costs as a percentage of its revenues is inadequate because the 8.5 percent cap proposed in the B.C. government's debt management plan is too high. B.C.'s "interest bite" at 7.4 percent in 1995/96 is already lower than the proposed target. The cap should be lowered to 5.0 percent on a medium-term basis, a target which many U.S. states follow and which is well within the reach of a prudently managed provincial government in British Columbia.

Conclusion

British Columbia made a step in the right direction by accepting the principles of deficit and debt elimination. The B.C. Debt Management Plan needs to be broadened to include all government debt and other obligations to be truly effective. A dollar owed is a dollar owed, no matter where it originates.

Balanced budget legislation should be introduced with full taxpayer protection, including the provision that all surpluses be used for debt elimination. The standard for debt affordability should be that interest costs will not exceed 5.0 percent of total revenues as a medium-term goal by the year 1999/2000. If these changes were adopted, British Columbia would have an exemplary debt management plan which could be a model for other jurisdictions throughout the world.

Environmental Conflicts of Interest in the Turbot Case

Michael Walker

When I was a boy growing up in Newfoundland, one meal that was particularly to be avoided was salted turbot. The salted turbot was just below the salted herring on the culinary scale and there was nothing less attractive, or cheaper, than this bony bottom fish. The smell of salted turbot boiling away on the stove was like a warning bell to eat as much bread and jam as could be acquired before supper so as to "ruin one's appetite" for this particular treat.

Only governments could contrive to elevate the lowly turbot to the level of an international celebrity. By abdicating (again) their responsibility as custodian of common property resources, governments have permitted the stock of turbot to fall to dangerously low levels. And even the `solution' of the current embroglio is likely to involve a continuation of over-fishing.

While there is a conflict between the various governments involved, and while this prevents the adoption of a workable and environmentally sensible approach, this conflict is not the main problem. Rather, the central difficulty is that those, especially environmentalists, who would like to preserve the fish stocks have an ideological conflict of interest. The conflict concerns the role that private property plays in resource conservation on the one hand and the provisions of the United Nations Convention on the Law of the Sea on the other.

The United Nations Convention on the Law of the Sea was meant to preserve and protect the resources beyond the conventional continental shelf as "the common heritage of mankind." There was recognition of the rights of countries to "own" resources up to and including the 200 mile limit but beyond that all nations would have a common claim. Most environmentalists supported this notion of keeping the majority of the sea as a common property resource because they did not relish the prospect of industrial concerns from different nations doing the equivalent of prospecting and homesteading on the ocean floor and staking claims to the minerals and other wealth contained there.

While the concern about pelagic claim-staking has proved to be premature, the ideology of worldwide public ownership of the sea has stuck. And, as we can see in the case of the turbot, to the detriment of the marine life which resides there. The main problem is that it is not clear who owns the turbot.

Environmentalists have supported the idea of collective ownership of the sea because of a belief that in this way the resources of the sea will best be preserved and enjoyed to the benefit of the greatest number of people. This is the international counterpart of the idea that the environment and natural resources will be best looked after if they are publicly owned and managed. However, many environmentalists, ranging from the Environmental Defence Fund in the United States through Canada's Environment Probe to the market-oriented Fraser Institute are moving to a different view. Namely, if you want to preserve the environment, then you'd better be certain that somebody in particular owns it.

In a recent study published by The Fraser Institute entitled "Nature's Case for Restoring Strong Property Rights," Elizabeth Brubaker, Executive Director of Environment Probe, argues that private ownership empowers people to take charge of environmental resources. Her particular concern is the issue of nuclear power, but, as she notes, most problems of environmental degradation result from a failure to assign and protect individual rights to property in the environment.

The turbot, in this sense, is like the buffalo in early America. Nobody owned the buffalo so it was hunted to near extinction. In fact, the only way you could own a buffalo was to kill it. The same is true of the turbot. What fisheries minister Tobin has essentially done is deny the collective ownership of the turbot and asserted Canadian property rights to it. He deserves great credit and the whole-hearted support of environmentalists everywhere.

To make certain that he is effective in his efforts, environmentalists, particularly in the European Union, must pressure their governments to accept Canada's ownership of the turbot. Once that is agreed, Canada can act to ensure that there is no over-fishing. Until Canada's ownership rights are accepted, nothing constructive and permanent will be done to conserve the turbot.

The Poorest of the Poor

Chris Sarlo

If income is any indicator of the standard of living, there should be thousands of Canadians facing starvation every year. Our poorest citizens somehow survive on negative incomes! Impossible? Read on.

For more than two decades, Statistics Canada has conducted a survey of incomes each year. This carefully designed, random sample gives us a detailed picture of the resources available to Canadians. The data from these annual surveys form the basis of virtually all the studies of Canadian poverty and inequality. The expectation is that income will be a reasonably good reflection of a household's standard of living.

Poverty researchers essentially take the data on total income for a particular category, let us say Canadian families of four persons, and rank those incomes from top to bottom. They select some poverty line for a family of four, expressed as a level of income, and count the number of families with incomes below that cut-off. This method purports to measure the number of households living in poverty.

There are several very important problems here. First, we know from Statscan reconciliation checks that both Unemployment Insurance benefits and social assistance benefits are significantly underreported. These, of course, are important sources of income for less well-off Canadians. In addition, studies on the "underground economy" suggest that income from self employment is substantially underreported. Second, income is an incomplete indicator of economic well-being in that "in-kind" benefits, such as subsidized housing, free day care, drug and dental benefits, are not included as income. Similarly, any home production of goods and services as well as loans (of particular importance to the standard of living of college and university students) are not included as income. Third, the definition of income used by Statistics Canada includes the category "net income from self employment" as defined by Revenue Canada. This means that farmers and other self employed persons can deduct business losses against any earnings to determine net income. This results in some households having negative total income.

With this in mind, it is instructive to examine a recent (1990) database of Canadian incomes. Let's focus on all those households with a reported annual income of less than $5,000. The $5,000 figure is chosen because it is below any of the "basic needs" poverty lines. A single person, not to mention a family, presumably could not subsist on this little income. In fact, some 209,537 households, comprising 490,762 persons, had a total income of less than $5,000 in 1990. On the basis of income, these are the poorest of the poor.

The average income of these bottom-end households was just $1,489, compared with the national average of about $39,000. The average household size was lower (2.38 versus 2.72) and the average age of head younger (37 years versus 47 years) than with households in general. In addition, and not surprisingly, these very low income households were more likely to be headed by a female (48 percent versus 24 percent) and were much less likely to have a head of household who was employed (40 percent versus 63 percent). Incomes in this group range from a high of $4,999 to a low of -$95,000.

Let's now look at a subset of this group, that is, those households with reported incomes of zero or less. Again, if income is any indicator, this "zero-or-less" subgroup could not have survived. There were 43,393 households and 115,994 persons in this situation in 1990. (Parenthetically, none of these would be among Canada's several thousand homeless because the survey only includes those with a permanent residence at the time of the survey.) The average income of this group was -$5,122. What is somewhat surprising is that 42% of heads of these households were employed, 26 percent were homeowners (most of those, mortgage free) and 17 percent had university degrees (compared to 14 percent for the population in general).

Those with negative incomes are invariably self-employed persons who declared business losses against other income. In all cases any transfer income (such as welfare benefits, unemployment, pensions or supplements) was quite modest, always well below the basic needs poverty line. For example, there were 521 families of five persons who were homeowners and had self employment earnings of -$123,000 and transfer income of only $1,100 per family. There were 1350 families of two persons living in rental accommodation, with self employment earnings of -$80,000 and transfer income of just $375 per family.

Those with zero reported income had a greater variety of circumstances. For example, there were 75 families of three persons headed by a 35 year old male with a university degree but who was not in the labour force. For the year of 1990, these families had zero earnings, zero investment income, zero transfer income and zero total income. There were also 216 single women, aged 63 who were mortgage free home owners, who were employed as teachers but who reported no income of any kind for 1990.

The essential point here is that income information does not tell us the full story. Income may be a reasonable indicator of economic well being for stable, middle-class families. It is a decidedly poor indicator of economic well being the lower down the distribution we go. As it stands, it is a mystery how the roughly half million Canadians with less than $5,000 of household income survive. They obviously have alternative sources of income or consumption that are not reported. It is not at all clear that all of them are poverty stricken.

More and more I am convinced that those of us who study poverty and inequality are looking at the wrong indicator. It seems clear that consumption, not income, would be a better guide to the actual standard of living that people enjoy. The bias in favour of income cannot be fully explained by its somewhat greater availability. I will have more on this in future articles.

A Brave New Work: Fair New World

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

One of the lawyers in my firm received a letter recently which made us all shake our heads in amazement.

It was from a woman lawyer employed by a government department. Her beef was that a letter from my colleague had opened with the salutation "Dear Sirs." This offended her on the basis of "gender discrimination" and stood a 50 percent chance of offending the other lawyers in her office, she said, since half of them were women. She claimed the salutation was in breach of the Rules of Professional Conduct (she even cited chapter and verse), and threatened that she would lay a complaint with the Law Society if it ever happened again.

It looks as though there is still at least one government office where the employees have too much time on their hands. I am not making this incident up. Believe me, I wish I were.

When I was a kid, there was a little jingle we would recite: "Sticks and stones will break my bones but names will never hurt me."

The kid who had annoyed you would generally reply: "It's a free country," and that would be the end of it.

Times have changed. It's not a free country any more, and everybody knows it. It's now a country where simply being offended allows you to command the services of powerful bureaucratic machines like the Human Rights Commission and the Law Society. There's power and money in being offended these days. No wonder it's happening so often.

It's now a country where a single word, or perhaps even a missing word, can put someone's whole career in jeopardy. Maybe the discipline committee of the Law Society would laugh this complaint out the door, as they should; but then again, maybe the committee is full of people like our correspondent, and would happily disbar anyone who doesn't share their hypersensitivity to salutations in letters.

What can a citizen do when he lives in a country like this? One citizen's solution was to satirize it. Philosophy professor Louis Marinoff, writing under the pen name Lou Tafler, has published a novel called Fair New World. It's the most politically incorrect work of art I have ever seen. It's also hilariously funny and scathingly insightful.

Most of the action in Fair New World takes place in a country called Feminania, where the Radical Femininny Party holds power. Taking offense at a "Dear Sirs" letter would be considered the act of a middle-of-the-road, or maybe even a conservative, citizen, there.

Language in Feminania has been "fairorized" in an effort not only to eliminate gender bias but to redress centuries of male oppression. Thus, not only has the suffix -man disappeared from words like chairman, but history has become herstory and garrison has become garridaughther. The initials VIP stand for Victim in Past.

Males constitute no more than 10 percent of the Feminanian population. Those that are allowed to be born are expected to strive to be as "caring and sharing" as women. If they fail they might be accused of "gendher-crime." The consequences can be severe; the penalty for kissing one's spouse on the mouth without proper written consent is to become "gonadotropically challenged."

The Supreme Court has been replaced by the Supreme Support Group, and the accused are confronted by a new choice of pleas: guilty, or guilty with explanatory feelings.

The policy on employment equity at the Univhersity of Ovaria, contained in subsections 15(1) and 15(2) of its Regulations, is suspiciously reminiscent of a certain similarly numbered and self-contradictory section of Canada's Charter of Rights. Likewise, its method of implementation is one which is becoming all too familiar to contemporary Canadians. When the university needs to hire a writer to help fairorize textbooks, its advertisement especially encourages applications from alpha-numherically challenged VIPs.

It's not surprising that this is a rather sore spot with Professor Marinoff. Formerly a lecturer at the University of British Columbia, he left Canada for a tenure-track position in the U.S. after the Canadian Philosophical Association adopted a female-biassed policy that makes it almost impossible for men to obtain such jobs in the philosophy departments of Canadian universities. For example, one Ontario university received 163 applications for a tenure-track position. It short-listed all 13 of the female applicants, but not a single one of the 150 males. A woman got the job.

Nevertheless, Marinoff cannot be accused of blinding himself to the imperfections of men. The action in Fair New World shifts now and then to the country of Bruteland, where only men can be citizens. Women are chattels, to be owned or rented by the day, month or year. Here Marinoff heaps a fair share of ridicule on the macho attitudes that caused the once-justified, but now corrupted, feminist revolution to take place.

Fair New World is published privately, so you may not be able to find it at your favourite bookstore. It is sold in some university bookstores in Canada, but if you can't find it there, send $19.99 to Backlash Books, Box 18178, 2225 West 41st Avenue, Vancouver, B.C. V6M 4L3. Phone (604) 473-6300.

Whatever else you might do, just don't leave a copy of this book anywhere where the Radical Femininnies in your office can see it. They'd probably complain to the Human Rights Commission.

Letters

The democratic case for a balanced budget amendment

Dear Editor:

As colonies, the original 13 American states were subject to taxation policies dictated by the British parliament, in which they had no elected representatives. When the taxation policies of the British parliament became too extortionate for American tastes, they threw a famous tea party at the Boston harbour, thereby kicking off the American revolution. The rallying cry was "No taxation without representation," which has since become a fundamental democratic principle.

But democratic governments all over the world, and particularly in Canada, have hit upon a clever way to evade this principle. Politicians instinctively recognize that they can maximize the votes they receive by concentrating benefits upon identifiable and well-organized interest groups, while diffusing the corresponding costs widely upon an amorphous and unorganized public. Average citizens don't have the vaguest idea where all their tax dollars are being spent, and even if they did it wouldn't be worth their time and effort to organize a revolution against each profligate, vote-buying government handout, anyway.

Of course, people's expectations have no bounds; each generation expects to receive, as a matter of basic rights, the hard- fought gains of the previous generation. Thus, the demands of interest groups continually escalate over the years, and politicians must find ever more money to fee the monsters they have created, just to keep votes coming their way. But what is to be done when marginal tax rates reach revolution-inducing proportions?

The answer is deficit financing: feed the interest groups with borrowed money. This spreads the costs of buying votes as widely as possible--onto future generations, which have no way of objecting. The problem for today's politicians is that this strategy cannot go on forever, either. The future is now.

As everyone must realize by now, government deficits are nothing but deferred taxes; and public debts are tax burdens imposed upon future generations. In short, deficit financing is essentially taxation without representation. Thus, a balanced- budget amendment to the constitution is not just prudent; it is required as a matter of fundamental democratic principle.

(Naturally, provision should be made for deficit financing in the event of war; but short of that, no democratic government should be permitted to run up a debt higher than it can pay off before the expiration of its term in office.)

Dr. Grant Brown,
Faculty of Management,
Unversity of Lethbridge

Gordon Gibson off track

Dear Editor:

It is disouraging to find Mr. Gibson still pushing his decentralist formula for Canada.

Mercifully in his latest Fraser Forum article "In Hot or Cold Blood" (February 1995 issue), Mr. Gibson does not suggest diminishing the federal presence to that of a service centre for the provinces, as he does in his book Plan B. Throughout his writings on this subject, Mr. Gibson seems to be saying that the way to prevent Quebec splitting the country into two nations is to take the pre-emptive action of dividing Canada into 10 nations.

Some observations:

•No pre-emptive action is required. The majority of Quebecers have indicated that they have no taste for Leon Dion's "knife at the throat" bargaining. Pre-emptive action in the form of devolution of powers would merely encourage the separatist element in all provinces, particularly Quebec.

•Status quo Canada is already the most decentralized federation in the world. What Mr. Gibson is recommending is a loose Confederation. Confederations have a lamentable record of ending in division and ultimate disintegration.

•Mr. Gibson seems to hold the view that, if Quebec should leave, our desparate fiscal situation would cause disintegration. I cannot understand why he seems to think the situation would be any less desparate if the provinces were to take over the helm. Our fiscally irresponsible provincial potentates, serving their own fiefdoms, cannot even agree on how to trade freely between one another.

It is easy, and seemingly sensible, to agree with the principle of subsidiarity for social and cultural matters, but even this bit of decentralization nibbles away at our nationhood. Ask anyone who has lived in all the regions of Canada and you will be told that in many ways we are already 10 countries. Try moving your child from education system to education system or get specialist medical care in a different province. Try getting Moosehead beer in Ontario at regular prices.

Our elites, with the exception of a few academics, seem to support the devolution of powers to the provinces. On the other hand, a majority of ordinary Canadians have made their support for strong central government clear several times. Let us hope the move to decentralization is not permitted to go beyond some mild subsidiarity without public discussion and a referendum.

A. C. Currie, Lanark, Ontario

[Ed: In response to your letter's specific points, Canada is, in fact, not the most decentralized federation in the world. As our recent book The New Federalist details, the Swiss could probably claim that prize--and they have four official languages to boot. Second, the very decentralized European Union is not disintegrating; quite the reverse. Associations that are useful to their citizens will be preserved by those citizens.

You point out that Canadians want a strong central government. Indeed they seem to do so. But is this not because they believe that Ottawa guarantees pensions and medicare? Surely there will be quite a learning experience as we come to understand that the Ottawa Santa Claus is broke.

Gordon Gibson believes that decentralization is going to happen because of strong financial and political forces already in play. The challenge will be to manage it in ways that preserve national norms and connections that Canadians find useful. Mr. Gibson is writing a sequel to Plan B, which will be published in a few weeks, that will contain his specific proposals on this last point.]

Promises, Promises

Filip Palda

The Quebec premier's decision to delay the public vote on separation is an example of what is bad in politics. We are led by men and women who follow polls more closely than they follow their convictions. The polls told the premier that his subjects did not want separation. So the man who had promised a referendum within ten months of coming to office broke his word. He has replaced his broken trust with a promise to hold the referendum before the year is out. The strength of his new resolution may, of course, depend on what the opinion samplers tell him in a few months.

Former Prime Minister John Diefenbaker said that polls are for dogs. Margaret Thatcher in a recent speech to a Fraser Institute audience put it differently. Politicians must follow their convictions, she said, instead of saying, "There go my people; I must find out where they are going so that I can lead them." Today, such sentiments are rare among leaders. The few who show their convictions find that their reward can be banishment or ridicule. Recently, several Liberal MPs disagreed with their party on a new gun control act. Their party bosses yanked them from their seats on prestigious parliamentary committees. Last summer a Reform MP dared to question the govern-ment's treatment of aboriginal people. His party leader quickly sent out a media release saying he had nothing to do with this man's opinions. It seems that if you want to be a success in politics you should follow the example of the current prime minister. Lay low, say nothing that would offend anybody, do not explain where you are going, then sit back and watch your approval ratings soar.

What is so bad about governing by the polls? After all, democracy is about satisfying the public. The problem with poll-driven democracy is that it draws politicians who are more interested in holding power than they are in working for their constituents. These pied-pipers are pleasant to hear but dangerous to follow. Polls show that Canadians do not like government debt. At the same time, they do not want government to cut social spending. This is an inconsistent and unrealistic view. The natural reaction for leaders is to ignore the inconsistency, put off spending cuts, and hope for a miracle boom in the economy that will wipe the debt away. This reaction is dishonest because it hides the truth; Canadians will face great hardship tomorrow if they refuse spending cuts today.

The duty of a leader is to tell his or her people what their options are. If these leaders have convictions and know why they came into power, they will propose a solution and stand by it. Leaders who only care about holding power will tell the public whatever it wants to hear. Some scholars and hard-thinking realists accept this as the only way of doing politics. They call poll-driven politicians "pragmatists" and praise their ability to "reconcile divergent public viewpoints." In our personal lives we call such people "flatterers" and describe them as "oily." Only true friends give us the bad news along with the good news. Only true friends have the courage to tell us things we do not want to hear. We should not hold our leaders to a lower standard.

If leaders had the courage to ignore opinion polls they might find that they do better in public life than a sense of self-interest might lead them to hope. If the Quebec premier had stuck to his promise to hold a referendum in spite of the poor odds he would have impressed many sceptical voters. He would have shown that here was a cause he believed in and was ready to lose power for. He might not have won, but he might not have done as badly as the polls suggest.

Two thousand years ago the Roman politician Cicero wrote that, "It is only when men become capable of displaying high-minded detachment and disregarding outward circumstance that we cannot help admiring their splendid and imposing qualities." Politicians of today should sample these words instead of sampling public opinion. They might find to their surprise that this gives the best results.

Student Article:                                                                                          Why Canada's Deficit Must be Eliminated

David Williams

[Post-secondary students from across Canada are invited to submit articles to The Fraser Institute's student newsletter, The Canadian Student Review. In the Fall and Spring of each year, the best articles are selected and the Review is published. This article is from the Spring 1995 issue. David Williams is an economics student at Simon Fraser University.]

After 20 years of runaway government spending, most Canadians agree that our federal and provincial deficits and debts must be reduced or eliminated. Some commentators insist, however, that spending reductions are unnecessary or that they should be postponed. The following are among the more commonly heard justifications for maintaining or increasing government spending, along with reasons to reject these views:

1. "Deficits aren't a drag on our economy; they're investments in our human capital." Accumulated deficits increase government debt. The cost of servicing rising deficits and debt increases correspondingly. As interest payments consume an ever-increasing fraction of government revenues, the fraction spent on social programs, such as health and education, must fall. In effect, the government puts itself into a financial straight jacket, unable to invest in human capital. Thus, it is imperative that the government eliminate its deficits and its debt.

2. "Deficits don't matter because we owe the money to ourselves." While years ago it was true that most Canadian government debts were held by Canadians, more recently our governments have borrowed substantially abroad. Forty percent of Canadian government debt is now held by foreigners. Interest payments on this foreign debt may never be invested in the Canadian economy. In addition, the effect of interest payments to Canadians is non-neutral as these payments transfer wealth from taxpayers to holders of Canadian government bonds. More importantly, if there were no government debt, these bondholders would be investing their money in the private sector, in more productive investments.

3. "Deficits aren't a problem if the economy is growing faster than the national debt. Governments should increase their spending to keep the economy growing." This argument assumes that government spending stimulates economic growth, and that interest rates are independent of deficits. In fact, deficits represent higher future taxes and a diversion of funds from more productive private sector investment, both of which impair growth.

4. "Ottawa should not reduce spending until after the Quebec referendum." Deficits lead to higher taxes and hurt the economy in the long run. Remaining in Canada will be more attractive to all individuals, including Quebecers, if the federal government brings its finances under control.

5. "Eliminating the deficit would be immoral as it would hit the low-income groups the hardest." The Fraser Institute's research indicates that many federal government transfers are paid to individuals whose families incomes are above the national average. Withdrawing these transfers could significantly reduce the deficit without adversely affecting lower-income individuals. In addition, costly government subsidies to businesses distort the economy without directly benefiting low-income individuals, and should be eliminated. Most importantly, interest payments consume government funds which might otherwise be used to help those who require assistance.

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