Feature Article:

What the Conservative Win in Ontario                                Means for all of Canada

Thomas Long [Thomas Long, Partner of the Toronto office of Egon Zehnder International Inc., and Ontario Premier Mike Harris' campaign chairman, gave this speech to a Fraser Institute Round Table Luncheon on September 11, 1995 in Vancouver.]

I want to begin by saying how proud I am to have been invited to speak to The Fraser Institute. As someone who has been involved for most of my adult life as a small-c conservative activist, I have nothing but the highest regard for The Fraser Institute. It has been a strong, and I'm sure often lonely voice, for putting conservative ideas onto the Canadian political agenda--a voice for common sense in public affairs in our country. I know that Premier Harris has the same very high opinion of your organization, so it is a pleasure for me to be with you here today.

I want to talk about the recent election in the province of Ontario, because for people who care about ideas, it was a very interesting election indeed.

On June 8, 1995, Mike Harris and the Ontario Conservatives won one of the most stunning upsets in Ontario political history. Winning a commanding 82 of the legislature's 130 seats, with a solid 45 percent of the popular vote, Premier Harris turned in the strongest Tory electoral result since Leslie Frost in the 1955 provincial election. The contrast between the sweeping victory that the Harris team celebrated in June, and what the party had to endure in the previous decade just couldn't have been starker.

When he became leader of the party in May 1990, Mike Harris was handed a divided, bankrupt, depleted party. He soldiered on through a discouraging 1990 campaign where the party finished third. In the five years since, with admirable perseverance, he rebuilt the party. And yet, despite his dogged efforts, Mike Harris entered this most recent election campaign as barely a flicker on the radar screen of those who make it their business to watch and comment on political developments.

Allan Fotheringham, who in the 6 months leading up to the election, had variously predicted the election as premier of both Lyn McLeod and Bob Rae, seemed to sum up the general mood in March of this year when he declared, "Everyone knows that the Tories in Ontario are toast." In the same column, he flatly declared that they "Might as well call the Ontario election off, the result, as even the most shy pollster will tell you is decided; the Liberals will win." When all the ballots were counted, however, neither of Mr. Fotheringham's horses stood in the winner's circle.

The 40 days of that election campaign changed more than just an electoral result, it shattered a brace of conventional political myths, and it opened some very important doors for Ontario's and Canada's future.

Ideas matter

What happened in those 40 days? The message of the election of Mike Harris as Premier of Ontario, in my opinion, can be summarized in two words: ideas matter. Mike Harris's astonishing success in the 1995 Ontario election has broader implications than merely a one-time victory at the polls. Premier Harris set out to fundamentally move the goal posts by resetting the agenda and redefining conservatism as a popular, broad-based political philosophy. Confounding the conventional political wisdom that success in the province's political arena depended on blurring political lines and the distinctions between parties and avoiding controversial issues, Premier Harris's new conservative coalition was forged quite to the contrary--by sharply defining a clear policy agenda and aggressively contrasting the real differences that existed between our political parties.

Harris has proved that in politics in Canada, ideas really do matter. Having directly asked the voters for a clear mandate to implement his Common Sense Revolution, Premier Harris will spend the next several years reshaping the policy debate in his province. And the powerful reverberations of that will be felt in Ottawa, and, I would argue, in provinces across the country.

The campaign

Now let's talk about the campaign. Until virtually the end of the campaign, Mike Harris was a long-shot proposition by all conventional political measures. He started the campaign 26 points behind the McLeod Liberals, and only four percent ahead of Bob Rae's NDP. Over the previous decade, our party had rarely broken through the 30 percent support barrier in public opinion polls. The Progressive Conservative Party label was virtually radioactive. Jean Chretien's Liberals held an overwhelming 98 of Ontario's 99 federal constituencies, and continued, as they do now, to enjoy astonishing high levels of popular support.

Where the Ontario Conservatives remained saddled with unpaid campaign bills, many of which were decades old, the smart money habitually filled the provincial Liberal coffers. And yet, from virtually the day that he became leader of the party, Mike Harris had a very clear idea of the hurdles that he faced. He never genuinely ever believed that his true opposition was in the other two parties or was represented by the other two leaders. His real challenge was to surmount the plummeting faith that Ontarians had in their political leadership and their growing skepticism that the real problems that the province faced could ever be dealt with through the political process.

Mike Harris is a leader motivated first and foremost by conviction. His goal wasn't merely to win an election. What he wanted to do was to earn a clear mandate to lead Ontario in a fundamentally different direction. From the beginning, he meant to make conservatism a popular philosophy by focusing his message tightly, and by punching home clear positions on a core group of issues that actually mattered in the day-to-day lives of the people of the province. Mike Harris and the team that he built around him set out to persuade voters that whether they vote, and how they vote actually does matter; that ideas, values, and conviction can make a difference; that political choices have consequences and that things can be changed and not always for the worse. Mike Harris sought to establish that we have it within our power to turn Ontario around, to trim the size, cost, and significance of government in our lives.

The nuts and bolts of the 1995 Mike Harris campaign are really pretty straightforward. He appointed, along with myself and number of others, a largely untested but very committed campaign team very early, barely into the new year of 1994, and nearly 18 months before we expected to go to the polls. He published a bold, clear, and ambitious platform, what we called the Common Sense Revolution, in May 1994, a full year before election day.

With the publication of that policy document, he launched the largest pre-writ campaign in Canadian history. He spent a total of nearly $1 million to bypass the traditional channels of political communication, to go directly to the people through a province-wide bus tour, saturation-level television advertising, and a sophisticated interactive 1-800 telephone system. From May of '94 until the end of the campaign, Mike Harris printed and distributed 2.5 million copies of his plan. On the night that he was elected in North Bay, he repeated the 1-800 number, so that citizens who wanted a copy of the plan could get one, and over the next two days nearly 6,000 calls poured in.

What was critical to this mission was that the election in Ontario be fought on a tightly-focused trio of issues of Mike Harris's choosing: powerful tax cuts to create jobs; work for welfare; and an end to unfair quotas.

The issues

The broader canvas of the Common Sense Revolution is likewise pretty straightforward: a $4 billion job-creating tax cut, and a $2 billion reduction in the deficit, both paid for by a $6 billion reduction in spending. It's a simple mathematical equation: 4 plus 2 equals 6. And the details were all in the plan. To the astonishment of the inside political world, a year before the election, Harris laid all of his cards face up on the table. They included: a 30 percent cut in the personal income tax rate to give Ontario the country's lowest top marginal rate of tax; detailed plans to cut $6 billion out of Ontario government spending, including an end to substantially all of what the Premier calls "corporate welfare"; and a significant reduction in welfare benefits themselves, coupled with the requirement that able-bodied welfare recipients actually work for their welfare benefits.

Incidently, you might be interested to know that within 6 weeks of taking office, the Harris government announced the reduction of welfare benefits to 10 percent above the average of the other nine provinces, and made a $1.9 billion down payment in expenditure cuts towards the overall deficit reduction goal. Thirdly, what he said in his plan was that we needed an aggressive, systematic elimination of barriers to investment and growth in our province, including a total, complete repeal of the NDP's new labour legislation which will get under way shortly.

What Mike Harris offered to the people of Ontario then, is a cohesive, coherent, comprehensive blueprint for change. It represents a fundamental shift in the balance of power between the state on the one hand, and the private sector and the individual citizen on the other. The goal is to make Ontario a magnet for investment in new jobs. We've run this plan both through our own econometric model, which one of the leading financial services firms in Toronto has developed, and also through the University of Toronto's econometric model, which the government uses to test what our plan ought to be able to do. We believe that when it's fully implemented, the plan will enable the private sector to create 725,000 new jobs, and to fully balance the Ontario budget within the first Harris term.

A vote for change

Our campaign was premised on offering voters a positive choice for change. It was grounded in defining the difference between what government is good at doing on the one hand, and what it isn't good at doing on the other. It meant, and it means today, being prepared to make tough choices and to set clear priorities. In our case, what we said our priorities were, what we believe government is good at doing, will be our core businesses--classroom education, health care, and law enforcement. But that also means being prepared to take the tough measures necessary to identify what government should not be doing, and eliminating it without apology and without delay.

There's absolutely no doubt in my mind that Mike's approach ran against the grain of accepted political wisdom. By the same token, I think it would be wrong to think that by taking such a clear and unequivocal stand on policies, that he adopted what could be called a risky or a reckless strategy. In fact, if Mike Harris had done what convention would have dictated, which is to hug the perceived centre ground philosophically, and avoid controversy at all costs, he would have remained mired at 25 percent in the polls. And in the process, he would have ruffled absolutely no feathers as he led the party to another uninspiring third place finish.

The campaign he waged is a flat rejection of beer-commercial politics where the only thing that distinguishes the bottles are the labels. In fact, this resolutely content-free approach to politics is, in my opinion, in large measure why this country and Ontario are in the messes that they're in today, where we have politicians of all stripes trying to pretend that there aren't differences between them, who go out on the campaign trail and promise one thing, and do quite another once they get into office. This has drained our political process of any sense of legitimacy, and has discouraged people who care, who hold strong views, who are passionately committed to their ideas, from investing any of their time or energy in the democratic system. I don't know what the situation is like here, but in Ontario this problem is particularly acute with our young people who have virtually given up on the system.

What sets him apart is that Mike Harris is a genuinely practising conservative. From the day he took charge, this leader never stopped working and trying to move the goal posts. As he criss-crossed the province, he remained fixed on the objective of communicating directly to people what he believes in. He listens, and he learns, and he takes other people's points of view into consideration. He is open to new ideas, but Mike Harris has never lost his compass. And in the process, he has attracted an exciting new coalition of support based on shared convictions and values and a simple agenda of compelling ideas.

I can tell you as his campaign chairman, that he could never have won if he hadn't been prepared to set out a bold, distinctive blueprint, and if he hadn't stayed the course in fighting for his ideas, even when few were paying attention to him, and even when he was being written off. It was important for people to know when they stepped into the ballot box that these ideas were his ideas, that he really believed in the things he was saying, and that they could count on him to follow through once he was in the premier's office.

It was vital to our success in Ontario that Mike Harris and the message that he was delivering connected with the voters. What Mike Harris struck was a motherlode of desire for change in Ontario, in a decidedly conservative direction. What our candidates discovered as they went door-to-door, is that Ontarians were ready for major, major change. Over the previous decade, they'd seen the need for dramatic change to meet the challenge of the future in their businesses, in their industries, in their communities, and in their own households. Only the government seemed to them to have exempted itself from the need to adjust and to evolve. Our voters decided that it is time for government to do its share.

Baffled pundits

That this caught so many political observers who pride themselves on their influence and insight so totally flat-footed is, in my opinion, the most interesting aspect of the election. The political debate in Ontario--and I would argue in Canada--has been dominated for a very long time by a very narrow opinion elite. Until quite recently, the spectrum of accepted political opinion has been remarkably restricted, particularly when you compare this country to other Western jurisdictions. And anyone who naively or otherwise ventured beyond these cramped boundaries would routinely be met with an instantaneous very negative reaction.

What we've had in Canada is a self-reinforcing, centre-left consensus among influential members of the media, and the political and business elite. They have largely cornered the market on political discourse, exercising remarkable discipline in cloistering any debate about Canada's future or particular issues within narrow bounds of their own making. And over time this created an echo-chamber effect where, quite literally, a handful of people exchanged each other's ideas, and spoke to each other over and over again until they convinced themselves that they represented the views and the will of the entire country.

Ironically, it was this determination to keep a lid on the debate that ultimately caused the opinion elite to become first detached and then totally decoupled from the reality of what everyone else in the country was thinking and saying. In Ontario, the free trade debate represented the first rupture in the opinion elite itself. The referendum on Charlottetown provided proof of how unwilling the population at large was to be dictated to by an elite of any kind any longer.

Ideas do count. Ontario is a conservative province. Many of Mike Harris's most interesting ideas were popular 18 months before the election when the smart set were still laughing at them. We knew these ideas had broad-based support and would sell from the sophisticated market research we carried out in the run-up to the campaign and the during the election period itself. Frankly, it astonished and amused us that the self-declared opinion leaders could have missed it. As usual, they were too busy expressing their opinions to really listen to what other people were saying. And at the risk of taking excessive liberties with the immortal Winston Churchill, never in the history of Canadian politics have so few known so little about so many.

Mike Harris opened up the Conservative Party to people who'd never before considered themselves to be Conservatives. He caused people who'd never voted Tory in their lives to cast ballots for his candidates because they discovered, often to their astonishment, that he saw things their way.

Mike Harris is in the business of making conservatives. The best examples of this are the issues of workfare, and quotas. Because he tackled the issues of employment equity and unfair quotas, he was able to expose the fact that a broad-based consensus exists in Ontario that equality should mean exactly what it says. By championing the notion that able-bodied recipients should actually work for their welfare benefits, and that values such as individual responsibility, self-reliance and the work ethic should be honoured and nurtured, Harris tapped into a deep reservoir of non-traditional Conservative support. It was a measure of the arrogance of many pundits, political operators, and other assorted smart people, that they could only respond to the astonishing success of Mike Harris and his party by attributing it all to mean-spiritedness or dark motives.

All of this would be enormously insulting to a great many people, including the 1.8 million who voted Tory in the election, if it wasn't so ridiculous, and not a little sad. What happened on June the 8th in Ontario was no more complex than this: give people a chance to vote for their values and they will, run a conservative as a conservative and you can win. None of this is to suggest that any of this was or is particulary easy. For instance, let me predict here today that Premier Harris will come under concerted pressure to either delay or abandon altogether his plan to significantly cut personal income taxes.

Tax cuts to come

Some will push for this, and some will advocate delay or abandonment, because they believe that there should be no tax relief until government spending has been brought completely under control. Others make this argument because they honestly don't believe that tax cuts create jobs. Both arguments miss the mark.

Dramatically downsizing the public sector, without taking the necessary steps to upsize the private sector is only doing half the job. Cutting taxes will recalibrate the balance in favour of people who have been paying for these programs all along, giving them their first real increase in their take-home pay in Ontario in about 7 years. It puts dollars back into the hands of people who earned them in the first place, and where the premier believes they will have the largest positive economic benefit for the largest number of people. Thus, the premier will firmly ignore those who are advocating a U-turn on this policy.

In purely political terms, the Harris experience has broadened the options of political leaders at every level, including here in British Columbia. It is no longer a given that leaders should avoid publishing detailed policy documents, or avoid open debate on controversial issues well in advance of an election. It's not to say that those are the only options open to them. Its just good to know that they aren't denied to them any more. And that, I believe, will make for a much healthier political debate in Canada.

Ontarians have given a big boost to the momentum for change in Canada. The signal we have sent is strong and unmistakable: government is too big, and spends way too much of our money. The real source of growth and prosperity will come from individual choices and private enterprise. Individual initiative and responsibility are bedrock values to be celebrated, honoured, and nurtured, not ridiculed and scorned. Choice and enlightenment, not coercion and compulsion, are the road to the betterment of human kind. Ontario has cast its ballot, the debate has been joined, and the future for Ontario and Canada looks brighter every day.

Questions for Tom Long

Q: The cynic says nobody wins an election, it's always the other side that loses because everybody's fed up with the incumbency, and if Mickey Mouse stood, he'd get elected. What single element do you think makes this not the case in Ontario?

A: When we started our planning for Mike Harris 18 months before the election, we found that where he stood on the issues--the need for powerful tax cuts to create jobs, the need for real welfare reform, an end to employment equity, the idea of reverse discrimination, the need for a downsizing of the Ontario government and real spending cuts--was mainstream thinking in Ontario and enjoyed the support of 60 to 70 percent of the population, including a majority of people who said they were going to vote Liberal. The difficulty that we had was two-fold. First of all, in general terms, Ontarians don't trust politicians any longer, and even though that doesn't sound very remarkable, it had gotten to the point where even when our leader was saying the things that clearly they believed in, they would not support the position. They actually had protected themselves against the idea of believing again.

The second problem we had was the Conservative label. The PC label, to put it charitably, was not very popular in the province of Ontario. So, what we had to do was open people's minds on the one hand and convince them that we would do what they wanted to have done on the other. This is what Mike Harris accomplished --he wasn't just the non-government candidate, he was the candidate who earned the attention and the support of Ontarians.

Q: The media appears to be spinning a tale that Harris is hugging Manning, and distancing himself from Charest. Is that true or false?

A: For a long time it has been the case that Mike Harris has been prepared to reach across party lines to work with people who agree with him on issues that matter. He made quite a point in the lead up to the election of singling out for credit, not only Ralph Klein, as you would expect, but also Frank McKenna, whom the premier greatly admires as a change-oriented, new-generation politician. On the federal level, we deal with a situation in Ontario where we have two right-of-centre federal parties, neither of which really has any significant representation in the parliament of Canada, and both of which are sort of vying for supremacy on the federal side in the province and, as I said, the Liberals have 98 of 99 federal members. The premier has been very careful to make sure that he has open lines of communication with Mr. Manning because he represents a very significant body of public opinion in Ontario. Mr. Charest is going through a very difficult period in rebuilding his party. Nobody can help them to go through that process of renewal and rebuilding but themselves. I think the sooner that Charest and the federal Conservative party go through the process of policy renewal and actually take stands on issues that are relevant to Canadians, the sooner that they are going to go about the business of becoming a real alternative to the Chretien Liberals.

Q: You say the party should run conservatives as Conservatives, so what are your thoughts regarding the B.C. Liberal leader's attempts to run as a supposed conservative under a Liberal banner here in B.C.?

A: If I was casting an honest ballot in New Brunswick in the provincial election, I would have no doubt that I would have to vote Liberal for the first time in my life because when you look beyond party labels, it's very clear to me that Frank McKenna is offering a far more conservative alternative than the Progressive Conservative candidate. I do think that there's a point at which voters become very irritated by the inside political game where labels are attached and there's no meaning to the product. I think they're far more interested, to be honest, in the calibre of people's thinking and the degree of their conviction. We don't have any monopoly on common sense in our party and if the B.C. Liberal Party is prepared to put forward pro-free market, smaller government, pro-individual responsibility type policies, all the more power to them. It's very clear to me, in this regard, that British Columbia needs a government other than the one that you have right now.

Q: Will Mike Harris pursue market solutions in health care reform?

A: Health care is a very difficult issue everywhere politically. What we said about health care in Ontario is that we were going to guarantee the level of funding, about $18 billion in Ontario. What we would do is seal the envelope and then create incentives within the system so that we could root out waste and duplication and reinvest those dollars within that envelope into improving frontline services, because anyone who has actually come into contact with the health care system in Ontario knows that the rhetoric is all wrong, and that we have a very significant problem with the quality of our health care in Ontario, which is a great shame because ten years ago when we left office, that was not the case.

But I don't think that that's going to be sufficient, and I know that the current minister of health is working very, very hard right now to come up with other more market-oriented alternatives. Andrew Coyne in the Toronto Globe and Mail had a very interesting piece recently that talked about the need to move towards HMOs, so that we actually created a system of competition in the health care system, and I think given the number of dollars that we put into it, and the stresses and strains that the demographic changes are going to make, we're going to have to move towards the market if we aren't going to be prepared to accept a lower standard of care in Ontario.

Q: In terms of cuts to social programs, education, health care, etc., how close to Ralph Klein will the Mike Harris program be?

A: The premier worked very closely with Ralph Klein and with Alberta treasurer Mr. Dinning throughout the lead-up to the election campaign. They've known each other for quite a long time, but our Common Sense Revolution in Ontario was an Ontario-made plan for Ontario problems.

In Alberta, as we understand it, the major problem facing that government was a spending problem. In Ontario, we not only have a spending problem--we doubled the size of government spending in ten years--we also have a taxation problem, and a regulation problem.

So our plan, by definition, had to be more complex, and had to attack more fronts simultaneously to get our problems under control. We also decided not to take an across-the-board approach to government spending reductions because frankly, there are some things that the Ontario government does that they shouldn't do at all, and there are other areas where we probably need to have more funding in place because the last ten years have been run by socialist and quasi-socialist governments that haven't understood what the private sector is all about.

So in terms of their overall approach, I would think that Mike Harris and Ralph Klein will get along just fine, but in terms of their prescriptions, they have different patients, and ours is on the operating table. If we don't operate soon, we're not going to have a patient left any more. Fortunately for Albertans, they didn't go through what we went through over the last ten years.

Q: The government has promised no cuts in education, health, etc. How do you expect, therefore, to reach your deficit target without cutting health care and education, which are substantial portions of the budget?

A: The decision that Mike Harris took was that we should run the government more like a business. We should decide what our core businesses are, and get out of the things that we shouldn't be in. His conclusion was that there are some things that people in Ontario do turn to the government for. Number one is health care, number two is classroom education (not all of education). We are going to be very aggressive about going after the educrats in our system. About half the teachers in the metro system in Toronto don't actually teach. So our approach will be to make sure that dollars are targeted in the classroom, and we will be very aggressive about rooting out bureaucracy.

We also decided that no one would believe us for a minute if we weren't prepared to outline our spending cuts in detail. So the $6 billion in cuts--with the exception of $500 million which we've targeted as an area where we're looking for the system to come up with some answers, primarily in the areas of duplication and fraud--is detailed in the program. So that there can't be any conjecture, and there can't be any slippage, we are either going to cut these programs or we are not, but in addition, some of the things we have to do will be like the pledge we made to reduce the size of the provincial civil service by 13,000 positions. We mean to do it, and we have to do it if we're going to reach our deficit reduction goals. We actually were very careful to make sure our plan was very detailed, and we let everybody at it, including the opposition parties, the financial writers, the bond traders, etc., and our numbers held up for a year and a half. I dare say there probably isn't another political party that's either had the guts to put all their numbers out front, or that is prepared to defend them over a year and a half.

Now we need to make the cuts, not indulge in more clever thinking. And believe me, its not going to be easy, because every left-wing interest group and the Toronto Star and the CBC are going to be wallowing and bellowing in front of the legislature that this is the end of civilization as we know it. What the premier understands is that his constituency doesn't stand in front of the legislature with a placard and a nose-ring yelling at the building. We speak for the silent majority who haven't been represented for the last 10 years.

Q: What is the Harris government going to do to combat the inevitable distortions of the media? Are they going to engage in rebuttals, or let their actions speak? If you can't say what the answer is, what would you do?

A: I think there's been a change in the relationship between voters and their politicians and the media over the last 10 years. In the last two weeks of our campaign, the Toronto Star, which is the largest daily newspaper in our province, went ballistic. We track Mike Harris' support not only from a party point of view, but from the point of view of how people feel about him and his ability to deal with the issues that matter to them and his qualifications to be premier. The more the Star attacked him, the better his ratings were. The voters have figured out the game here, and they're well ahead of their political leaders. I think they are far more prepared for the tough action that needs to be taken to turn Ontario and Canada around than any politician in this country would understand.

They get it, they know we're losing our quality of life, and they want leadership to do something about it. So my view is that within reason, we have to tell the truth to the media, we have to be accessible to them. I'm strongly encouraging the premier and the caucus to ignore the public opinion polls, and to stop reading the editorials every day and to just go and do what people sent them to do. If they do that, they are going to create the jobs and opportunity in Ontario, and if they create the economic buoyancy that we all know can come if we just let the free enterprise system do its work, we will get re-elected, and it really doesn't matter what the editorial board of the Toronto Star has to say about it. It's about time we started ignoring them, because they've had way too big a say in this country for the last 25 or 30 years.

Q: As you know, many governments that have been looking around for capital and relief from some of the deficits have really adopted fine privatization programs, and the question is, will and when will the Harris government sell off Ontario Hydro, and are there other candidates available for them to consider?

A: First of all, as a philosophical matter, this is a government committed to the idea of privatization. In fact, the downsizing of the government is essential for Mike Harris to get to any of his other public policy aims. So privatization is being very seriously looked at. It would be my opinion that it is more likely that they would start with something like the liquor control board of Ontario or TVO which is our sort of PBS wanna-be in Ontario. I think you'll see them move very quickly on those, both because it's the right thing to do, and because it will help them to understand the mechanics of privatization, to grease the wheels of the political communications effort that you have to do if you're going to privatize.

You know more about privatization in B.C. than we know in Ontario. The privatization of Ontario Hydro is a very serious idea we're considering, and we want to know more about it before we go ahead because it would be the largest single privatization in world history.

Q: Are there any other candidates?

A: The government of Ontario owns a small savings and loan operation which will undoubtably be sold off as well. I think the more interesting opportunity for the government will be to out-source, so we can privatize things like welfare retraining and so forth. I think there's a lot of room for us to do that.

Q: Was photo radar really a big issue in the campaign?

A: No, except for the campaign staff which was being bankrupted by the photo radar. It was an emotional issue, and I can tell you that although we had an undoubtably valid public policy discussion of why photo radar wasn't the right thing to do, my suspicion is that the reason the premier took the position he did is that he is, by and large, a civil libertarian, and he was deeply offended by the government finding yet another way of getting into our pockets, and knew that there were a lot of people sick to death of government creeping into every crevice of our existence and thought that this was a good symbolic effort to show people that things were really going to change. )

Putting the "Insurance" Back                                                     Into Deposit Insurance

Fazil Mihlar

Following a string of trust company collapses, the Canada Deposit Insurance Corporation (CDIC), a federal corporation, has a deficit of $1.75 billion for the fiscal year 1994-95. In addition, CDIC owes the federal government $2 billion. The Chief Executive of CDIC, Jean Pierre Sabourin, says that he hopes to eliminate this deficit and repay the federal government by 1999, both through cost savings and higher premiums for financial institutions. A stiff premium increase in 1994-95 means the CDIC will collect about $500 million, up from the $320 million it collected the year before. Although the premium increase is ostensibly levied on financial institutions, most of it will, needless to say, end up being paid by all depositors and borrowers by way of increased service fees and other charges. But these measures by the CDIC are not long-term solutions.

The solution rests on the introduction of a market mechanism: co-insurance and/or an experience rating system based on the performance of the financial institution in question. The market will force individual depositors and financial institutions to evaluate their investment decisions based on the trade-off of risk and return, and to face the consequences of their decisions. The discipline induced by the market will help reduce market distortions and eliminate the CDIC's deficit.

The nature of the problem: lack of market discipline

Currently a deposit at a bank or trust company is insured by the CDIC for up to $60,000, and it is funded by premiums paid by the financial institution. Financial institutions have every incentive to make speculative loans, financed with deposits paying accordingly higher rates of interest, since the CDIC charges all financial institutions the same premiums without correlating these premiums to the risk level of the institutions' portfolios. In addition, since depositors are compensated by the CDIC for up to $60,000, the depositors have little incentive to check the soundness of the financial institution offering these relatively high returns. The underlying cause of the problem is the lack of market discipline, and consequently, the incentive for financial entrepreneurs to dissipate the money of shareholders and CDIC members in undiversified and high-risk loan portfolios. The substantial increase in the number of financial institution failures is, by and large, due to the incentive structure inherent in the deposit insurance system.

Between 1923 and 1963, the year the agency was founded, not a single Canadian financial institution closed its doors. Since then, about 30 financial institutions have failed. Deposit insurance has increased both insolvencies and the instability of the Canadian financial system. Insolvencies have been confined to two types of financial institutions: new entrants that strategically exploited the subsidy provided by the CDIC, and institutions with a high proportion of their deposits insured that were subject to minimal depositor monitoring. Far from stabilizing the financial system, deposit insurance encourages the very thing it was supposed to insure against: excessive risk taking. This insurance scheme distorts the trade-off between risk and return.

Despite recent changes, problems still exist

To CDIC's credit, some changes have been made to introduce market discipline into the system. Early last year, CDIC introduced a by-law requiring those financial institutions that it considers to be badly run to pay higher insurance premiums than institutions it believes are well managed. In addition, in 1994, CDIC introduced a surcharge equal to about double the normal premium to be levied on institutions that fail to adhere to guidelines on the prudent management of funds. As Mr. Sabourin says, "a premium surcharge is like a speeding ticket." It is, according to him, a short-term measure, a deterrent designed to push the financial institutions in question to modify their behaviour. But it is precisely a short-term solution, and does not address the fundamental problem of the lack of market discipline.

There is every prospect of worsening CDIC finances. Since 1991, CDIC has provided loans and guarantees totalling $6 billion to rescue failing trust companies. CDIC, however, had to borrow billions of dollars from the federal government, at a cost of hundreds of millions of dollars in interest to do so. The agency, true to its past record, has not made any allowances for future losses. This omission could, according to the federal auditor general, have a significant impact on future operating results. This will translate into still higher deposit insurance premiums which have to be borne ultimately by all consumers of financial services. Lately, however, the CDIC has taken loan-loss provisions to the tune of $430 million for the year ended March 31, 1995.

Market solution

According to The Fraser Institute Senior Investment Managers Survey, the overwhelming majority (75 percent) of those surveyed believe that co-insurance would be the most effective way to reform the deposit insurance scheme. A co-insurance clause would encourage consumers to be more selective about where they invest their money. The clause would mean that consumers would face a deductible portion for their coverage, just like they do with auto insurance. This measure would provide customers the incentive to be more discriminating and to make more informed investment decisions.

Another way of discouraging excessive risk taking by financial institutions is to relate the premiums to the degree of risk incurred. Since premiums are set to cover losses experienced over time, they will be higher for those groups of institutions that have experienced larger risks. This measure would encourage prudent behaviour on the part of financial institutions.

Conclusion

Deposit insurance reform, because it will institute market discipline, will, in the long-run, save general taxpayers and customers of financial services money. It will also provide a relatively stable financial environment. The time is long overdue that we finally put market discipline into deposit insurance.

Bibliography

Auditor General of Canada, Report of the Auditor General to the Parliament of Canada, Ministry of Supply and Services, 1992.

Carr, J.L., G.F. Mathewson, and N.C. Quigley, Ensuring Failure: The Financial Stability and Deposit Insurance in Canada, Toronto: The C.D. Howe Institute, 1994.

The Conference Board of Canada, Safeguarding Depositors and Investors: The Role of Deposit Insurance and Enhanced Supervision, Report 56-90-H, September, 1990.

Economic Council of Canada, Competition and Solvency: A Framework For Financial Regulation, Ministry of Supply and Services, 1986.

The Financial Post, "Deposit Insurance Study Fails," August 26, 1994, p. 5.

The Financial Post, "CDIC aims to wipe out debt by 1988," September 13, 1994, p. 12.

The Financial Post, "CDIC has poured $600M into North America," October 3, 1995, p. 2.

The Vancouver Sun, "Taxpayers won't be forced to pay tab for financial flops, CDIC head says," September 13, 1994, pp. D1-D2. )

Labour Costs in the Hospital Sector

Cynthia Ramsay

Change Sought in Way Doctors are Paid [Craig McInnes, The Globe and Mail, 19 September, 1995, p. A2.]

Help Create Cheaper Medicare! See a Nurse, not a Doctor [Ivory Warner, The Vancouver Sun (27 September 1995) A15.]

Shake Up Health Care, Impose User Fees, Banker Says [Eric Beauchesne, The Vancouver Sun (19 April 1995) A2c.]

Province to Steer Doctors Away from Using `Cadillac Drugs [Rebecca Wigod, The Vancouver Sun (26 August 1995) A1.]

Campaign Launched to Curb Health-Care Costs: Victoria Hopes to Trim $60 Million [Rebecca Wigod, The Vancouver Sun (12 May 1995) B3]

Hike in Hospitals' Money a Relief, Health Head Say [Doug Ward, The Vancouver Sun, 2 June, 1995, p. B2.]

There has been a common theme running through the newspaper stories relating to health care in British Columbia over the last year: costs must be cut. Almost no one has been exempt from the blame for the rising costs of medical care, and the proposed solutions affect almost everyone in the medical system: doctors whose billings might be capped and who might be forced to accept alternatives to fee-for-service payments in order to reduce the "abuse" of the system by physicians; nurse practitioners who may become the initial patient contact person; patients, who may have to pay user fees to curb abuse, who may see their funding for prescription drugs reduced, and who may find that non-medically necessary medical procedures will be delisted.

Hospitals, however, seem to have escaped much of the blame, although they account for almost 50 percent of government expenditures on health in British Columbia [Closer to Home: The Report of the B.C. Royal Commission on Health Care and Costs, Victoria: Crown Publications, 1991, p. A14.] They even received an increase in government funding this year! More surprising, though, is how the cost of many non-technical workers in the hospital sector goes unmentioned. These workers include laundry aides, storekeepers, cooks, and other workers whose jobs do not require specific medical knowledge. This is an incredible oversight--an oversight that we can no longer afford.

The B.C. Ministry of Health's forecasted expenditure for 1995/96 is almost $6.7 billion. The estimated expenditure on acute care hospitals is $2.9 billion. [From the B.C. Ministry of Health Status Quo 5-Year Estimates, 1995-2000, it can be calculated that acute care programs, provincial programs, and hospital debt serving, accounts for 43.5 percent of total estimated Ministry expenditure in 1995/96.] This is not an insignificant amount and given that, as a rule, wages and benefits paid to hospital workers account for about 75 percent of expenditures in acute care hospitals, [Ibid., p. B91.] it is worth questioning whether this money is well spent. (This 75 percent does not include the amount spent on fee-for-service practitioners, as these people are paid by the Medical Services Plan.)

Many jobs in hospitals are similar to those performed in other sectors of the economy. The largest overlap of comparable workers is between the hospital and hotel sectors. Both sectors need food service personnel, laundry service, housekeeping service, maintenance, and clerks. Of course many jobs in the hospital sector cannot be compared directly with any other industry, such as those that require specific medical knowledge. This group includes nurses, technicians, and lab assistants, for example. Excluding these medically-specialized workers from the comparison leaves 18 clearly comparable occupations. The effect of the existing wage differentials between comparable workers is shown in table 1 using Royal Columbian Hospital in B.C. as an example. Even though only 18 occupations are compared, if Royal Columbian Hospital were to pay these workers the wages of their private sector counterparts, the savings would amount to over $2.6 million a year.

This comparison, however, only includes 372 of 766 (medically) non-technical workers at Royal Columbian Hospital. Given that the average wage differential of the 372 workers compared is $3.94 an hour, it is possible to extrapolate the potential savings that could be had if all of the non-technical hospital workers were paid on par with the hotel workers. For the 394 remaining hospital workers, there would be an approximate savings of $1,552.36 an hour, for an annual savings of $2,786,796.67 (based on 149.6 hours worked a month, 12 months a year).

The total annual savings for Royal Columbian Hospital is calculated by combining the savings estimated from the 18 comparable occupations with the savings estimated from the remaining non-technical workers. Total savings, therefore, for the Royal Columbian Hospital would be $5,419,109.33 a year, the equivalent of 3.3 percent of the $166 million annual budget of the Royal Columbian/Eagle Ridge Hospitals. Other B.C. hospitals would be similarly affected, with the opportunity to save nearly 3 to 4 percent of their annual budgets.

If one extrapolates even further, one can gain a general sense of the potential province-wide savings. The HEU has approximately 38,000 members. Royal Columbian Hospital has 1,041 HEU workers, about 275 of whom are technicians or people who require specific medical knowledge to perform their duties. Assuming that the distribution of semi-technical and non-technical (in terms of medical expertise) workers in the HEU is about the same as that in Royal Columbian Hospital, the number of hospital workers with jobs comparable to their hotel counterparts is about 27,968 (73.6 percent of the total membership). With the average wage differential of $3.94, the potential savings of bringing hospital workers' wages in line with those of other unionized workers is $110,193.92 an hour, or $197,820,125.18 a year. (This equals about 6.8 percent of total annual spending on acute care hospitals in the province).

Hospital workers get paid more than their counterparts outside the hospital sector, and their wages have been higher than the general wage level since 1969. The B.C. Royal Commission on Health Care and Costs drew the following conclusion from this fact:

Such trends do not, of course, tell us whether nurses' or other hospital workers' wages are too high or too low. . . . It might . . . be argued that wages in hospitals compare favourably with those in similar occupations elsewhere. But perhaps they are also underpaid. [Closer to Home: The Report of the B.C. Royal Commission on Health Care and Costs, 1991, p. B93.]

With an average wage differential of about $4 per hour between the wages of workers in two closed-shop unions, and a potential savings of over $5.4 million dollars in one B.C. hospital alone, the wages of many hospital workers are more generous than those in similar occupations elsewhere.

The three major unions representing the approximately 88,000 workers in the hospital sector are the Hospital Employees Union (HEU), the B.C. Nurses Union (BCNU) and the Health Sciences Association (HSA). In 1993, the Health Accord was signed by the B.C. government, the Health Employers Association of B.C. (HEABC), and these 3 unions. This agreement remains in effect until March 31, 1996, and, if the government is serious about reducing costs in the health care system, it must re-examine the structure of wages and the conditions of work in hospitals. This brief analysis of wages in the hospital and hotel sectors shows that the potential for enormous savings exists, without endangering lives (as is often claimed when decreases in hospital funding are considered). )

The Economics of Crime Control

Michael Walker

Economics forces you to think about what might have been as well as what is. Everything we do displaces something that we might have done. In the most fundamental way, economics tells us that the answer to the question, "which one would you like?" can never be both. This is particularly true when it comes to the vital functions conducted by government.

As we attempt to come to grips with two horrible multiple slayings in Vancouver during the past few days we are left numb. The fact that most murders are committed by a family member and that these are "crimes of passion" leads to a kind of hopelessness. Much as we would like to, we simply can't do anything about this sort of crime. Or so we might think. But let's see what the economics of the situation suggests.

What has economics got to do with it?

It has quite a number of things to do with it. First of all, it tells us that we really haven't been trying very hard to do anything about this sort of crime--or any other kind of crime for that matter. For whatever the pious statements of politicians à propos the occasion, during the past several decades we, through our governments, have deliberately and consistently made choices which give less priority to the prevention of crime.

The residue of the decisions not to control crime is found in the share of the total government budget dedicated to the "protection of persons and property," which is Statistics Canada's quaint way of talking about police, the courts, and fire protection. In a 400-page compilation of government spending details called Government Spending Facts, The Fraser Institute discovered that during the past two decades, the share of B.C. government budgets spent on protection has fallen from 6.4 percent to 5.6 percent.

In other words, we used to direct 6.4 cents out of every dollar of government spending to police and defend ourselves. We now spend 5.6 cents per dollar in that area. We are, in other words, spending relatively less to control crime than we used to. Instead we spend more, for example, on health care, more on culture and recreation, more on regional planning and development, and a whopping 7.3 cents more to service the debt we have accumulated over the twenty years. Yes, you read it correctly. The increase over the past twenty years in the cost of servicing the provincial and municipal debts in B.C. is larger than the total amount we are spending to protect ourselves.

Of course, we did not have to make the choices that lead to this outcome. We could have spent less on all of these items. We could have got government out of the recreation business and allowed more private sector participation in the health care sector. Did we really need to spend another half a cent per dollar on regional planning? And what about that $10 billion worth of borrowing and the interest charges on it? Find out who voted for all that, and we are hot on the trail of why we are making less effort to fight crime.

Now, some will say, "It doesn't matter what you spend, there is no way to stop this kind of crime, and it only makes the survivors feel bad to suggest that we could have done something to protect their loved ones." Perhaps. But the extent to which a police force can respond to `threat of assault' phone calls and complaints that a violent spouse is violating a court injunction to stay away, must be related to the number of police and the resources they have. Whether we have the technology or even the know-how to electronically tag potential offenders or those who have an injunction on their heads surely depends on the kind of fiscal effort we exert in this direction.

The fact is, we'll never know whether we could prevent this sort of crime or not because, candle-light vigils and loud demonstrations notwithstanding, it just has not been a priority. The minister responsible has suggested that perhaps an electronic monitoring system could be tried to warn the intended victims. Pundits immediately claimed what? Not that it wouldn't work, but that it would be too expensive.

So, that's what economics has to do with it!

By the way, do you suppose that the incessant bike-gang bombs in Quebec and the apparent immunity of the gang members from interference by authorities is related to the fact that Quebec's governments have, over the past twenty years, reduced from 6.4 to 4.8 cents in the dollar the amount they spend on protection? Naw, I guess not. I'm sure it's purely coincidental.

November Questions and Answers

Isabella Horry

Q: What proportion of the total tax bill do the provincial sales and the goods and services taxes represent? How does this compare over time and internationally?

A: In 1993, the provincial sales tax and the goods and services tax comprised 14.9 percent of total tax revenue (or 5.3 percent of the Gross Domestic Product (GDP)) in Canada. Between 1965 and 1993 the proportion of general sales tax to total tax revenue fell 2.9 percentage points. At the same time, general sales taxes as a ratio of GDP rose from 4.6 to 5.3 percent due to the increase in tax revenues from 25.9 to 35.6 percent of GDP. Table 1 presents data on general sales tax collections for a select group of OECD countries. General sales taxes consist of sales taxes, value added taxes, and multi-stage cumulative taxes.

Q: How much of the price of a litre of gasoline consists of tax? How do gasoline prices compare internationally?

A: On average, 27 cents of every 52 cents, or 52 percent of the price paid per litre of gasoline, is collected as tax. Table 2 compares the price of gasoline and the proportion paid in tax in Canada, the U.S., and five European countries. In Italy, 82 percent of the cost of gasoline is tax, whereas in the U.S., it is 33 percent.



Understanding the Underground Economy

Owen Lippert

Who has not heard about the mechanic or house painter who only takes cash payments? Who has not heard of shady characters selling cigarettes on city street corners? Can all of our neighbours' anecdotes be wrong?

The underground economy is that part of the total economy unobserved, unmeasured, and/ or untaxed because some businesses and individuals want it that way. Estimates of the underground economy, depending on what measure you use, vary from 3 percent to 20 percent of GDP. Statisticians look for unmeasured economic activity. Revenue Canada looks for untaxed sales and income. It may be quite possible that only 5 percent of total economic activity is not captured by government income and expenditure statistics, but up to 20 percent is not reported for tax purposes.

Experts agree that the underground economy has grown significantly in Canada, probably as a result of the introduction of the Goods and Services Tax (GST). Peter Spiro of Ontario's Ministry of Finance estimates that between 1991 and 1994 the underground economy may have grown by 2 percent of GDP. This would mean an additional $14 billion in national income was not reported because of the GST. Lost tax revenues for all governments would equal $6 billion. The illegal sales of spirits alone accounted for $1.3 billion in 1993-94, according to Statistics Canada. As a result, Ottawa lost $300 million in tax revenues or 1 percent of its deficit.

The underground economy grows or shrinks depending upon how individuals view the level of direct and indirect taxes, government regulations, and the value of government spending. Attitudes are important because Canadian governments rely upon voluntary compliance (income-reporting and tax remitting) to pay their bills. Heavy taxes, onerous regulations, and foolish spending all create incentives for Canadians to live by different rules in how they work, spend, and pay taxes.

The growth of the underground economy may, in some ways, serve economic efficiency and public policy. If taxes and regulations are high, underground economic activity will provide the economic growth that has been stifled in the formal economy. Underground suppliers undermine state monopolies by providing consumers with the benefits of greater competition. Increased underground activities send the signal to governments who listen that the public is losing faith in government efficiency and fairness.

The rich and the poor likely benefit the most from the underground economy. This is because they face the highest marginal tax rates and have the greatest opportunity to participate in underground activities. That raises the question of "what is wrong with greater consumption by the well-off and greater production by the less well-off?"

The risk is that the underground economy can unravel the nation's economic and social fabric. It may allow individuals to circumvent certain costs, but it also excludes them from financial credit, social security systems, and the laws and administrative rules governing property relationships, commercial licensing, labour contracts, and the like. Russia and many South American economies have vibrant underground economies. Yet North American and European economies outperform them because their stable political, legal, and institutional frameworks reduce risk and increase certainty.

What should be done? First, politicians and bureaucrats should fear a little more the consequences of their decisions. They should reduce the high marginal tax rates and complicated regulations that create incentives for underground activity in the first place. When the cost of obeying rules is less than benefits of not obeying, the underground economy will subside.

Here are a few tips for government.

Institute Author Honoured for                                  Contributions to Economics

During the past summer a Fraser Institute author and current Member of Parliament, Professor Herbert Grubel, received the Bernard Harms Medal from the Kiel Institute. Professor Grubel received the medal for his combination of scientific research, his work with the Kiel Institute, and his contributions to public policy debate. In making the award to Professor Grubel, who has published many books and articles with The Fraser Institute, the President of the Kiel Institute noted that Grubel had exhibited a unique combination of contributions to progress in economic understanding through the application of economic science, the use of these insights to provide constructive policy alternatives, and finally, in the latter part of his career, as a politician attempting to apply these ideas to the actual conduct of government.

In more than 200 publications in the form of books, articles, and commentaries in professional journals and collected works, Professor Grubel has been a leading thinker in many areas, including international trade, international finance, the economics of labour markets, the conduct of social insurance programs and control of inflation. Dr. Grubel has characteristically and consistently "led the crowd" with his insights about the existence of problems with current policy, and with his determination to find a solution. Many of the ideas that Grubel published in the 1970s and which were regarded at the time as being outlandish and even fringe, have become mainstream in the past few years as the problems they addressed became more evident.

The Fraser Institute is pleased to join with others in congratulating Professor Grubel on his award of the Bernard Harms Medal, and to thank him for his contributions to the understanding of economic issues and the conduct of economic policy.

--Michael Walker

Paying Your Own Way

Chris Sarlo

Currently, tuition fees cover about 25 percent of the cost of a university education. Most of the rest is covered by the government. Should taxpayers subsidize university students?

People who have made it to university are among the brightest and most capable in the nation. They go on to occupy the best jobs in both the private and public sectors. Compared to those who have high school or less, university graduates have incomes that are far higher (almost double, in 1993) and unemployment rates that are far lower (about 5 percent in 1993 versus about 15 percent). Yet only about one-fifth of young people aged 18 to 24 attend university, and only about 12 percent of the Canadian population have university degrees. How do we justify using the state to transfer money to the future (income and wealth) elite of Canada?

The case for public subsidization of universities is based on the "externalities" argument. Higher education results in benefits to society in addition to the `private' benefits to the individual graduate. These social benefits, it is argued, include better economic performance, technological innovation, cultural contributions and greater social and political stability. If students must pay full tuition fees for higher education, only the children of well-off families can afford to attend, and society will lose much of the external benefit. To complete the argument, because private decision-making results in less investment in higher education than is socially optimal, the state should invest using funds from taxpayers, who nevertheless reap external benefits.

But this is a self serving argument. Throughout history, smart people have found ways to use the state to get other folks to pay for their stuff. This situation is no different. If external benefits need to be encouraged, perhaps there is a better case for subsidizing the computer industry. In fact, there is no need to subsidize either computers or higher education. The private returns or profits are well sufficient to ensure both activities. A university education, according to all of the human capital research, is one of the best financial investments a person can make. This is to say nothing of the non-monetary benefits to a higher education.

It is difficult, in light of all the recent evidence, to argue in favour of state subsidies for higher education. It turns out, for example, that the families of university students are, on average, better off than the typical taxpayer. This means that the way in which universities are financed results in a redistribution of income from less well-off to better-off people. I find it incredible that many academics adamantly insist that what they do should be subsidized by people who will never set foot in a university.

The alternative, of course, is that universities operate only with funds received from students and any gift, endowment or investment income. This makes universities completely independent of the state, which, it could easily be argued, is a good thing. Tuition fees would rise substantially, probably to the range of $5,000 to $6,000 for most Arts and Sciences programs. For students living away from home (a clear majority of all university students in Canada), this would raise the direct costs of a university education by about one-third.

How would students finance these additional costs if universities moved to a full tuition fee policy?

Income contingent repayment (ICR) loans are all the rage now. Already in place in some countries, notably Sweden and Australia, an ICR plan would allow students to repay their loans over a 25 to 30 year span (versus the current 10 year limit) and would gear payments to income. If the student had difficulty finding employment after graduation or had a sharp dip in income at any point, the student loan repayment would also decline. If the student's income falls below a certain low income threshold, his or her payments would fall to zero, although interest would continue to accumulate. An excellent review of ICR loans was provided by Professor Ed West in the February 1995 issue of Fraser Forum.

What ICR schemes do is give students greater flexibility in repaying their loans. The state typically remains heavily involved in financing universities, administering the loan plans and absorbing loan defaults. Laurence McDonough (1995) outlined a largely "privatized" ICR plan in which the role of the state is limited to guaranteeing loans and the provision of information to private sector lenders. However, the McDonough plan, which treats investments in human capital (i.e., university education) as tax deductible, would still involve substantial state subsidies in terms of tax expenditures and default costs.

If government subsidies are removed entirely, the question of access and affordability remains. Let me suggest some alternatives:

1.Universities could provide more scholarships for able, low-income students. They could finance these scholarships by setting tuition fees somewhat above full costs.

2.Universities could develop, in conjunction with private financial institutions, flexible loan repayment plans. They have a strong incentive to do so because of the continual need for lots of students. Full "ownership" of any degree or course credits might, as with a real property mortgage, await full payment of debt. This would tend to reduce defaults.

3.In the absence of an effective private market loan plan, parents could co-sign the student loans. It is likely, however, that a small number of low-income parents would be unable to do so.

These alternatives do not cover all the bases. Some students may have to delay entry into university while they improve their financial situation. Others may have to be content with correspondence or other modes of education delivery that the universities put in place. Given sufficient notice, parents will begin saving for their children's university education. The point is that students and/or their parents would be full-paying customers. They would be paying their own way, on a deferred basis if needed, and would not be subsidized by the majority who do not attend university.

References

McDonough, L.C., and R.E. Wright, Funding Post Secondary Education: A Full Tuition, Private Sector, Income Contingent Repayment Plan, discussion paper, 1995.

West, Edwin G., "Mr. Axworthy's Proposals for Reforming Canadian University Finance: A World Perspective," Fraser Forum, February 1995, pp. 43-51. )

Politically Homeless? Find Your Niche

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

We no longer have much use for the horse and buggy or whale oil lamps, but when it comes to our political vocabulary, most of us are still stuck in the nineteenth century.

The terms left-wing and right-wing hark back to post-Revolutionary France, where members of the Chamber of Deputies were seated according to their views on the monarchy. Those who supported the restoration of the king sat on the right, while those who preferred the reforms of the Revolution sat on the left.

There are still times when we hear the terms right and left used in this manner, to signify those who oppose political change and those who favour political change, respectively. For example, some commentators have been labelling hard-line communists in the Russian parliament as right-wing because they oppose the changes of perestroika and want to return to communism.

For most of us, however, the left-right labels have taken on connotations of specific ideological content. Thus, the left has become associated with socialism and the right with free markets. It strikes us as incongruous to hear Russian communists described as right-wing.

And after 60 years of an increasingly mixed economy, it's pretty hard to know which direction those who "favour change" intend to take: do they want the mix to continue moving in its current direction, only faster, or do they want it to reverse course completely? Do those who "oppose change" oppose any movement away from what we have now, or are they still opposing any movement away from what we had 60 years ago?

We could have hobbled along with the horse and buggy forever, but something better came along so we abandoned them. Similarly, we could continue to hobble along with the vague and confusing left-right political spectrum, but fortunately, something better has come along.

In a 1971 article in The Individualist, Denver advertising executive David F. Nolan proposed the use of a two-dimensional political graph--a rectangle--to replace the old one-dimensional line. He reasoned that what really defines a person's position politically is the degree of government activism he or she advocates. The two extremes are no government at all (anarchy) and pervasive, totalitarian government (which Nolan dubbed "omnarchy").

However, people are often inconsistent in the degree of government involvement they desire in the various spheres of human activity. There are many package-deal philosophies that embrace a large degree of state control over certain areas but reject any significant control over others.

Religious conservatives, for example, frequently want the state to regulate strictly things such as pornography, gambling, drug use and sexual practices, but take a hands-off position when it comes to regulating commercial activity or property rights.

On the other hand, there are groups like the hippies of the 1960s and 1970s who championed complete freedom on issues such as drugs and sex, but who were essentially Marxists, advocating total state control over all property and economic activity.

Nolan's graph divides political issues into two categories: economic and social. He places economic freedom on one axis, and social (or "personal") freedom on the other, each with a scale from zero to 100 percent. Plotting an individual's position on this graph conveys far more information about his or her beliefs than was possible on the old left-right spectrum.

The graph has generated increasing interest over the past two decades, especially among those who felt they were "politically homeless"--that is, not accurately represented by the terms left and right. Refinements have been added by admirers of the original graph. One enthusiast developed a ten-question quiz you can use to determine your position in the rectangle.

This has now been transformed into an amusing little computer program called The World's Smallest Political Quiz. When I brought it in to my office, everyone wanted to try it out, plotting their own positions and those of their colleagues.

If you have Internet access and a World Wide Web browser, you can take the quiz at http://www.self-gov.org/quiz.html.

The program is also available on disk for DOS, Windows or Macintosh. Those without a computer can take the quiz in printed form from a postcard-sized card. Both disks and cards are available from Advocates for Self-Government, 3955 Pleasantdale Road, Suite 106A, Atlanta, Georgia 30340. Their toll-free phone and fax number is 800-932-1776. For a disk, send U.S. $5 to cover the cost of the disk and postage.

Don't be surprised, however, if your parcel arrives, as mine did, already opened, with the words "Examined/Released" stamped on it. Apparently the phrase "self-government" in the sender's name struck fear into the hearts of Canada Customs officials. I think we could safely position these bureaucrats somewhere towards the bottom corner of the graph.

The World's Smallest Political Quiz

You'll Find it on the Internet

John Robson

The Fraser Institute doesn't yet have a World Wide Web site on the Internet. But it will soon. And when it does, you'll be able to go to it and download knowledge, wisdom and information. And we will be proved right, not just by what you download, but that you can download it. The Internet is a remarkable demonstration and vindication of how markets work, a veritable paragon of "order without commands."

To see why, consider what happens when you go into the Internet. Abracadabra clickity click and here comes what you've selected. But how?

Unless you are my brother-in-law, you won't actually know. If you are like me, you will have a very dim idea of how HTML works and how your mouse works. But how the dickens does your system find what you are looking for on the Internet? And how do the files download? You don't know, in all likelihood, and you don't care any more than you care how pencils are made. You know you can do it, just as you know that pencils write. That is what you need to know. Someone else made sure it was true.

That person, in turn, doesn't know how you do what you do, whether you are a plumber, or a lawyer, or a telephone sanitizer. And they don't need to know. You pay your web server for access, they send you software, the function of which you comprehend dimly or not at all, and it works.

The great advantage of all this is that it allows there to be much more information in the system than any particular person has. If everyone who used the "Net" had to understand it, and if everyone who used a car had to understand it, and everyone who dialled a phone number had to understand how that works (yes, I know, you think you do, but the days of the mechanical switcher are long gone, and you don't, any more than I do) and everyone who went to court had to understand what lawyers understand, no one could ever move. And--the punchline--if it all had to be planned, someone would have to understand not only how it all worked, but how it all fit together. Since no one can, planning would produce a ghastly parody of what was aimed at, as it did in the USSR.

In fact, our politicians have been making spectacles of themselves lately by demonstrating in their comments that they didn't have clue one how the Internet works. First there was Al Gore and his infamous "information highway." Highways are big, unidirectional, government-owned, simple in principle and, in case you didn't know it, Al Gore Sr.'s finest achievement as a Senator was the National Defense Highway Act in the United States. Highways are exactly the sort of thing that government can and should do. Al Gore Jr., who thinks everything is exactly the sort of thing that governments can and should do, naturally mistook the incredibly decentralized, complex, and subtle Internet for a strip of asphalt. Dawk!

But Canadian politicians have talked about regulating it; Maclean's has done a breathless issue on Internet porn: people worry about alt.fan.karla.homolka (don't worry, everyone who cared knew about it long ago). But the origin of the Internet was a concern about a major catastrophe, say a nuclear war, devastating the fixed communication nodes that the old phone system relied on. People worked very hard to develop a set of communication, display, and file transfer protocols that would find their way from place to place regardless of the obstacles in their way, such as politicians, telecommunications regulation regimes, or Canada Post.

In that, too, the Net is like the market. Just as any given price control, instead of causing things to sit where politicians want them, leads to consequences that flow over, under and around the prohibition, so the information on the Internet flows over, under and around any conceivable obstacle. Millions of people use it, add to it, comment on it, invent strange smileys and so on. (For those in the dark, the most common smiley is this :-) a happy face (turn it sideways) followed by :-(. If you want more, go to http://www/emoticon.com/emoticon/smiley.html? and download a list.) Why smileys? Because typed communications lack emotional depth and these help. Order without commands!

So, what's on the Net? I don't know. More than I could ever read. In fact, the Net contains more information than I can begin to describe. Doubtless its commercial features are going to develop rapidly, Al Gore or no Al Gore, in response to a set of desires and capacities whose complex interactions could never be contained in one brain, one computer or one symbolic representation. It's just like the market.

That's how the it works. All of it. And yes, we told you so. So log on and learn.

>>:->> (That's me smirking at Canada Post as I e-mail this to my editors. Look, ma, no stamp!)

The People's Tax Form

Filip Palda [Adapted from Filip Palda's testimony before the Parliamentary Finance Committees Pre-Budgetary Consultations on September 28, 1995.]

Every year millions of Canadians go through the agony of filling out their tax returns (T-1s). Filling out these T-1s is painful because people have no sense that they can control where the money is going. I suggest that we add a sheet to the T-1 that gives people that control. This sheet, which I call the People's Tax Form, would list the categories of government spending, and invite taxpayers to decide what fraction of their tax bill should go to each category. Churches and charities call this earmarking. The People's Tax Form would allow citizens to earmark where their tax dollars go.

When I suggest this to my academic colleagues I get a shocked reaction: "But that's putting power directly into the hands of people who know nothing about government! That's direct democracy! Why would you want to do that?" I want to do that for one reason: to make sure that Canadians know what is happening with government. Giving Canadians the power to directly influence government spending would create a panic in the ministries responsible for that spending, and among the groups who benefit from that spending. Special interest groups could no longer ignore the public. They could no longer count on quietly pulling favours out of sympathetic politicians. Now they would have to bring their case directly to the Canadian people. University students would stop protesting in front of Parliament and would start explaining to working people why they need subsidies to educate themselves for well-paying jobs. Hibernia executives would have to explain why it makes economic sense to sink a billion taxpayer dollars into an oil venture that the private market finds too risky to take on without government help.

For the first time, Canadians would have a sense of what government is up to. This sense would allow them to judge the performance of their leaders. The great expert on international competition, Michael Porter, said that smart consumers make for smart producers. The same is true in a democracy. Smart voters force their politicians to find intelligent solutions to government problems and to account for their performance. Professor Douglas Hartle, who was a moving force behind the Carter Commissions 1966 report on the economy and a long-time consultant to government, delivered a blistering testimony to the Senate Finance Committee in 1990. He said that ministries did not properly evaluate or try to justify their programs. Efficiency was the casualty. But the People's Tax Form would force government to give a better account of itself than it now does. This is how private enterprise works. Businesses face a vote of confidence by their customers every day. And shareholders keep managers on their toes. If you want to get the same result for government, ask all Canadians for their opinions.

Perhaps you have some objections. Here are some I have heard:

Canadians do not have the ability to judge whether spending on programs is good or bad. This is the age-old cry of people who do not like democracy--intellectuals and politicians are high on this list. But voters are more educated than before. They are hungry for information about government. They remember what their leaders have been up to in recent years. And they know what programs they do not like. None of this means that voters are perfect judges of what is good for them. What it suggests is that they do not need leaders to make all the choices.

If voters are not complete dunces, they could be given a chance to learn what a People's Tax Form really means. The first three years of the Form could be a dry run. Public decisions would not bind the government. Interest groups and politicians could use the results of these dry runs to explain to us that we are playing with fire and that our decisions do not make sense. They might be right. But right now, Canadians have no choice but to take their leaders words for it.

The People's Tax Form could be simple. One box that says "How much do want earmarked for debt reduction?" Provided the economy does not grow, a tax dollar earmarked for debt reduction adds up to a cut in government spending. If your tax dollar goes toward reducing the debt, that means that it has to come from the government service it was paying for. A second box on the form would ask, "Do you want the cuts to come across the board, or do you want to let politicians decide where the cuts will be made?" Most people would probably want across-the-board cuts. Giving politicians the discretion to cut means some special interest groups who beg hard will be exempted from the hardship. Giving taxpayers the choice to enforce across-the-board cuts would solve the central problem of democracy: that large groups cannot commit themselves to any plans. The option of voting for across-the-board cuts is a powerful way of binding large numbers of people to each other. When you walk into a restaurant with ten people and a common tab it helps to have one person ordering the same dish for everyone. Otherwise, some guests may be tempted to plead with the waiter for special side orders. With across-the-board cuts there are no side orders.

Why would anybody want to go through the tedium of figuring how much should be spent on what? Aren't politicians there to manage those details for us? To the constant surprise of politicians, voters take a sharp interest in how government works. If the strain of earmarking is too great for a voter, he or she can check the box that says "Please allow the politicians to decide how my money will be spent." I do not think you would find too many such voters. Not because all voters are diligent and dutiful, but because they would be getting help. "Voter Information Groups" would form to advise voters on how to fill out their tax forms. These groups would be similar to the consumer groups that publish magazines and warn shoppers of frauds.

Why make the People's Tax Form binding? Why not just make it an opinion poll that lets leaders know what their subjects think? Opinion polls that ask people how much they want to pay are not worth much. Why think hard about how you want your money spent if you know that your advice is probably going to be ignored? The value of a People's Tax Form is that it gives people the incentive to think about where their tax money should go.

Some programs have spending committed. You cannot suddenly change them. A certain fraction of each program could be protected. Perhaps only 20 percent of any given program would be open to change by taxpayer choice. What is "committed" though, should eventually be open to question. Otherwise everyone will argue that their program is essential and cannot be tampered with. The government could also indicate that anyone living below the poverty line cannot be touched by changes in the budget.

The People's Tax Form is undemocratic because wealthy taxpayers would get more say than the poor on how government spends its money. Democracy is about making government accountable. It goes beyond one-person-one-vote. The reason our democracy is feeble is that we have too few instruments for controlling our leaders. The wealthy will always have advantages that allow them to better pull the strings of power than most other people. The People's Tax Form may actually diminish this power. Lobbyists for special corporate interests try to get their hands on the tax payments of ordinary citizens through roundabout methods. With a People's Tax Form they would have to appeal to the people directly. The result might be fewer tax breaks for the wealthy, and fewer business subsidies and regulations. This is conjecture on my part though. If I am wrong you could ease your fears about the influence of the wealthy by stating that the average income tax paid is the maximum anyone can allocate by choice through the People's Tax Form.

Government controls more than our tax dollar. It controls resources through regulations. How can a People's Tax Form control this sort of regulatory "spending"? Two years ago the Parliamentary Standing Committee on Finance made an excellent report on regulations. It concluded that Canadian regulations should pass a cost-benefit test. The committee was particularly cross about regulations that took money away from some citizens and gave it to others. These types of regulations are like licenses to tax that the government gives to select citizens. Cable companies have such a license. The law divides Canada into fiefdoms where each cable baron rules and may set rates that please him. The law protects him from competitors. In his fiefdom no one can undercut the cable baron with a low price. Researchers can come up with some idea of how much tax the cable baron can impose on his TV-watching subjects. The tax form I am suggesting could indicate how much each citizen is paying. The question on the form would be, "By how much should the government cut the cable barons taxing power?" The People's Tax Form could help overthrow the regulatory nobility who impose their tithes on us through their government granted monopolies.

Your proposal is unrealistic. Politicians will never give so much power to the people. It is unrealistic to think that our democracy can go on the way it has for the past 125 years. In that time government has changed beyond the recognition of the Fathers of Confederation. But the way we elect our leaders and make political choices belongs to the era of buggies and horsewhips. As voters come to understand this, they will demand politicians who give them responsive government. As much as Gorba-chev wanted, he could not preserve the Communist party's monopoly on power. His stubborn refusal to change cost him his job and opened the door to more innovative leaders such as Boris Yeltsin. )

Letter

Dear Fraser Institute:

Four months as a Fraser Institute student intern has been an amazing and unforgettable experience. I have studied public policy in university, but at the Institute, it was the real thing! For me, public policy has never been so exciting!

Over the course of my internship I was able to expand on previous research skills while learning about new areas and methods of inquiry. I gained first hand experience in policy analysis while working with Fazil Mihlar to produce a document on government regulation of business in Canada.

The Fraser Institute is a hot-bed of knowledge, activity, and sound principles. But one of the things which struck me most about the Institute was the quality of all the people who compose it. These are bright, free thinking people who care about what they are doing, and are willing to do their best to help students, the public, and each other.

As I end my summer internship and go back to graduate school at UBC, I am confident in the idea that hard work, good theory, and honest people really can make a difference. How do I know? I saw it first hand this summer at The Fraser Institute.

Thank you to everyone at The Fraser Institute for all you have done to help me and other students in Canada!

Sonia Arrison, Graduate Student, Political Science,
University of British Columbia

Student Essay:

Turnaround by Young People in Quebec

by Eric Duhaime [Eric Duhaime is a student at École national d'administration publique. This article was recently accepted for publication in the November/December 1995 issue of Canadian Student Review.]

As part of its approach to the referendum, the Parti Québécois government set up travelling commissions responsible for ascertaining the political mood of various religious and age groups.

The government believed that the work of the Commission des jeunes sur l'avenir du Québec (Youth Commission on the Future of Quebec), as part of this exercise in information and participation, would be a real sovereigntist pep talk that would confirm, once again, that young people as a whole support the government's approach to the referendum. How surprised the government was when the report by the Commission des jeunes was finally submitted on March 20, 1995!

The report hardly mentioned the plan for sovereignty. Its first three recommendations called for the elimination of three things: job security for public servants; the Conseils régionaux de concertation et de développement (Regional Consultation and Development Boards); and school boards. The report also recommended the passage of basic legislation on deficit control; challenged the sacrosanct universality of social programs; and called for a return to the principle of responsible schools, over which parents would have real power, offering courses which instill entrepreneurial values.

Those were the findings of six of the eight commissioners on the Commission des jeunes after it had received over 300 briefs and heard from more than 5,000 young people. In other words, if the message of giving responsibility to individuals and phasing out government participation and bureaucracy is being expressed in Quebec society, it is the young generation that is proclaiming it.

Another encouraging sign is the recent emergence of a group of young libertarians in Quebec. Calling themselves "Amis de la liberté" (Friends of Freedom), some 30 individuals, mainly young people, meet every month in order to attend a lunchtime talk and debate the advantages of the free market, individualism, and tolerance.

The turnaround by young people in Quebec may not be surprising, given their situation. Young people in Quebec are more affected by damaging government obesity than are young people in other Canadian provinces or American states.

Quebec's per capita debt is the highest of all the provinces. The province's unemployment rate in 1994 for people aged 15 to 29 was 15.7 percent--not counting the 12.1 percent already receiving social assistance or the incalculable number of young people who had artificially become students because of lack of work. Young people aged 15 to 29 accounted for only 22 percent of the population in 1991, down 7 percent from ten years earlier. That means fewer young people to pay for ever-more generous and numerous pensions for baby boomers and for the skyrocketing health care costs of an aging population.

The gravity of the situation for the upcoming generation undermines not only the finances, but the enthusiasm and energy of tomorrow's labour force. We are now seeing record suicide and dropout rates among young people in Quebec.

Although most young people still support the sovereignty option, they do so for very different reasons than did their parents 30 years ago. They see Canada as a country whose fragile unity is held together through the massive indebtedness of all its citizens. Young people no longer want to support the federal government at the cost of their future. They see sovereignty as Quebec's only available means to end the federal government's irresponsibility, duplication of services, and ruinous jurisdictional overlap.

As popular journalist Lysiane Gagnon perceptively noted in her comment on the Commission des jeunes report, young people are not changing; the times are changing. How right she is! What ideals, if not individualism and freedom of choice, can this generation afford--a generation that knows it will have to bear the burden of interventionism inherited from the Quiet Revolution?

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Last Modified: Wednesday, October 20, 1999.