Two-Tiered Health Care: The Case of Germany

Wilfried Prewo [Dr. Wilfried Prewo gave this speech to a Fraser Institute Economic Advisory Luncheon on March 31, 1995. Dr. Prewo has a Ph.D. from Johns Hopkins University. He has worked as a researcher at the Institut Fur Weltwirtschaft at Kiel, Germany, with which The Fraser Institute has had a long-standing connection through a deep friendship with one of its founders, Herbert Giersch. At the Kiel Institute, Dr. Prewo was the Division Chief in charge of technology and growth, a position which he occupied for 5 years. He then went on to an industrial concern before finding himself, in 1985, as the Chief Executive of the Hannover Chamber of Industry and Commerce where he is presently occupied. In that occupation, he has had a great interest about the organization of health care in Germany. He was active in the debate in the United States about alternative models of health care delivery, in the same way that The Fraser Institute was very active in the United States in that debate--trying to share with Americans some of our research on the Canadian system. He shared research on the functioning of and, in particular, the fiscal aspects of the German health care system.]

The German health plan is a major concern to us at the Chamber of Industry and Commerce because it adds tremendously to our indirect labour costs. In Germany, indirect labour costs amount to about 80 percent of gross wages or gross salary in industry. We basically double our wage costs in Germany with our fringe benefits and government-imposed indirect labour costs. The largest addition to our indirect labour costs is social security--our pension system--but number two is our health care system. (The third largest addition is unemployment insurance.)

Who can buy private insurance?

Health care is financed in Germany typically by a payroll tax; this payroll tax currently amounts to, on average, 13.4 percent of gross wages per month, up to a monthly threshold income level of 5,850 marks per month. In Germany, if you make a salary of 5,850 marks per month or less ($5,500 Canadian), then it is mandatory that you belong to the public health system, and be insured by it. If your income exceeds that level, you may be insured by the public health system, but you have the option to leave the public health system and to obtain private insurance, or no insurance at all.

Of those people who exceed the threshold income level of 5,850 marks a month in Germany--about 26 percent of our population--approximately one third, or roughly 10 percent of the population, obtain private insurance. The others stay in the public health system. The reason why people stay in the public health system when they could opt out of it is that the public health system's premium is solely dependent on income. It does not depend on health characteristics, it does not depend on risk characteristics like age, family status, state of your health, etc. It depends exclusively on your income. It's a payroll tax.

If you obtain private insurance, your insurance premium is actuarially calculated, and it depends not at all on your income, but on your age, health status, family size, etc. For somebody who is 40 or 45 years old, whose income exceeds the 5,850 marks per month where we can opt out of the public system, but who has 2 or 3 dependents in his family that are not working, obtaining private insurance is not a favourable buy because of the premium. In this case, this person, often grudgingly, remains in the public system. Of the 26 percent of Germans who can opt out of the public system, only 10 percent do so, while the other 16 percent stay in the public system. This situation occurs not so much because those who remain think the public system is great, but because they are at a certain age with a certain number of dependents in their family, and opting out is not a good deal for them.

Who benefits?

The two-tiered structure of the German system--a public system and a private system--has major beneficial effects on the way that health care is being provided in Germany. What differentiates us from England and other countries that have nationalized health plans is that when you exceed the specified income level in Germany, you can opt out of the public health system altogether, which means once you pay your premium to your private health insurance company, you no longer pay anything into the public system. You are freed of the 13.4 percent average premium charge, contribution rate, or payroll tax in the public system, and your private insurance premium is typically much lower, unless you have a large number of dependents in your family. If you are, say, 30 years old, if your income already exceeds the specified level, if you are a single person, or if you are part of a two-income earning household, then you can opt out of the public system and go into the private system and your premium is much lower.

The 13.4 percent average premium in Germany is equally shared between employers and employees. The employer pays 50 percent and the employee pays 50 percent. Likewise, if you obtain private insurance, your employer pays 50 percent of your private insurance premium, up to the 50 percent that the employer would pay if you were in the public health system.

What does this two-tiered structure do in Germany?

The private system, although it only covers 10 percent of Germans, is a very powerful fringe competitor of the public system. Personally, I am privately insured. But if I were publicly insured, I would, as would about 40 percent of those who are voluntarily in the public system, quickly leave the public system if problems were to arise in it, even if I had many dependents and even if private insurance were more expensive than public insurance. If, for example, tremendous waiting lines built up in the public system, if I could not get access to modern medical technical equipment and procedures and the like, and if I were being discriminated against in comparison to those who were insured by the private system, I could and would migrate to the private system. The ability to opt out of the public system and into the private system forces the public system to provide its members with assured access to modern procedures and modern technical equipment of roughly the same quality standard as offered by the private system.

So we don't see the situation that we see in other countries, such as in the United Kingdom where the public system has an awful level of quality, tremendous waiting lines, and long waiting periods to get surgery. If you get private insurance in the United Kingdom, it's supplemental insurance. It doesn't free you from paying the taxes that support the public health care system, nor from paying the premium to the public system. The public system, therefore, is not forced by the private system, as a fringe competitor, to adapt to appease its members--to treat its members as customers--the way the public system is forced to do in Germany. This is the very major difference, I think, and is why the German system looks relatively good.

I would say that of all the government health plans in Europe, the German system is the king among the blind. However, it's still one-eyed, it is still inferior compared to a purely private system, I believe. Now, the German system does not guarantee universal coverage: 99 percent of Germans are covered. The German system guarantees universal coverage for everybody below the income level of 5,850 marks per month. The unemployed, the poor, even people who are on welfare and the elderly are covered by this system. What the German system does guarantee is universal access or open access to coverage. Everybody who wants to get coverage can get coverage. Even a billionaire can get covered by the public health care system. That person would then have to pay 13.4 percent on 5,850 marks per month.

The other beneficial effect of the German system is that insurance is permanent, that is, it is portable. In other words, the insurance is not linked to the employer as it is in the United States where the company contracts with health insurers or with health care providers, such as a Health Maintenance Organization. In Germany, the individual is insured, which makes the most sense economically. Therefore, insurance that is vested with the individual is portable from job to job, or from job to self-employment. This is crucial.

Keeping costs in check

The German system is effective in the sense that it offers high quality care. But what the German system isn't, is efficient, in the sense of costing the least possible for high quality care. This is a major concern these days, as in Germany health care amounts to about 11 percent of our GNP. So we have the same concerns as everywhere else. Since 1977, we have had 9 federal laws in Germany that have tried to curb the costs and to lower the premiums of the system to keep it in check. All of them have failed to lower health cost inflation, or to lower the premiums. These laws have failed because most have taken the road of government regulation and intervention.

Our health care system was organized in cooperatives, starting with Friendly Workers Societies in the late 19th century, and is now basically a cooperative situation between employers and employees, since they equally share 50-50 in the payroll tax. They also co-chair the boards of the various health care cooperatives. These health care cooperatives are either organized regionally, similar to what the Clinton plan suggested in the form of so-called regional health alliances, or organized by corporations with about 500 or 1,000 employees--the employers can opt out of the regional organizations and can form their own health care cooperative within the company. We also have cooperatives for certain professions and certain trades. Typically these cooperatives are either organized by companies themselves, or by professional trades that are somewhat homogeneous. These cooperatives are much cheaper than the regional cooperatives that accept anybody that is not in a corporate or professional trades plan. The difference in premiums currently varies from 10 percent to 15 percent between these cooperatives with, as I mentioned, an average of 13.4 percent.

As health costs inflated more and more, the government in Germany stepped in, and now all of the cooperatives are basically run just like utilities. They are really government bureaucracies and government institutions; they are no longer run privately according to self-autonomous rules.

The latest reform was in 1992 when the government imposed budget caps on all the health care sectors within each region. We now have global budget caps for dentists, global budget caps for hospitals, global budget caps for fee-for-service physicians, for doctors, and global budget caps for drugs. Each budget cap is defined within a region, or within a province, to use Canadian terminology. All of the doctors within the region are racing for that budget, and they act like a group of bears sitting around the honey pot; everybody wants to grab their share and get something out of it, and everybody is screaming that the budget cap is being set too low.

How physicians are paid

The way that German physicians are paid is by an appointed schedule. The doctors within each region belong to an organization, a so-called physicians' association, and this physicians' association is the representative of all the doctors within the region, and negotiates their remuneration with the regional health care cooperatives, or alliances, every year according to a point fee schedule. They do it this way: for a certain procedure, they allocate "x" number of points, say, 420 points for an ultrasound. Then they decide how much money a doctor gets per point--currently between 7 and 9 German cents per point. The number of cents per point is now floating, because there is a budget. Since there is a fixed budget, something else has to give, and that something is cents per point. That point which was originally worth 9 cents is now worth 7 cents in my region.

The dentists in our region and state have not negotiated likewise with the regional health care cooperatives. We have a situation whereby, in October, the public budget cap for this year, 1995, will be exhausted. And then the dentists will go on vacation, or they will only treat emergency patients and private patients, and they'll ship everybody else off into the next year. So what you are seeing, and what we are getting with the imposition of budget caps, is the introduction of waiting lines in Germany.

Until recently, we have not had, and typically we don't have, differentiated treatment. The publicly insured are not discriminated against even though the privately insured pays the doctor more than the public patient does. Private patients do not get tremendously preferential treatment despite what some people in other countries are saying. For example, it is said that in Germany doctors have different waiting rooms for the privately insured and the publicly insured and other things of that sort. This was something that we had in the 1950s or '60s. We have not had this situation for decades.

Why do the doctors not discriminate? Well, 90 percent of the patients are publicly insured, and 10 percent are privately insured. The publicly insured would not go for a two-tiered system if the doctor were to discriminate against them in comparison to a privately insured person. They would get up and go to another doctor because in the public system, so far, we have free choice of physicians. We can go to any doctor, as long as this doctor is registered with the public system. Since 90 percent of the patients are in the public system, most doctors are also registered with the public system.

But we now also have quotas on the numbers of doctors admitted to a region. In my region, we no longer admit any doctors or any specialists in the fields of neurology, gynaecology, or dentistry. As a consequence of this supply restraint, we are beginning to see the formation of waiting lines. In hospitals we don't have them yet, but we see a slow creeping in of waiting lines for various procedures.

There is a political war zone. The leftist Social Democrats in Germany want to abolish the private system altogether because they want to do away with this nasty fringe competition that the private system imposes on the public system. Those in the private system, of course, would like to scrap the public system altogether and privatize it, still keeping mandatory insurance for basic coverage and preventative care for everybody, but basically transforming the public system into a private one. So there is considerable tension between the two sides in Germany.

The major reason why we look good in comparison with other countries is that we have had this two-tiered structure where, when you opted out of the public system, you were also freed of payment into the public system. Further, the existence of a private system forced the public system also to offer roughly the same types of services and the same quality of service that you could obtain in the private system. The public cooperative would love for somebody who had a minimal income to leave the system because he or she would only pay the 13.4 percent on the basis of the minimal income. But it's hurt if someone leaves the system who has a high income, because, on the high income person, it can collect 13.4 percent, up to the threshold of 5,850 marks per month, which is about 750 marks per month. The public system does not want and can't afford to have such people leave, so whenever new technology is introduced in the private system, the public system has to quickly offer its patients access to that new medical technology.

Questions for Dr. Wilfried Prewo


Q: What does the German system cost? The big debate in the U.S. and the concern in Canada is that we're spending 10 cents out of every dollar of our income on health care in Canada, and the United States is spending nearly 14 cents. What does it cost in Germany, including both the private and the public systems?

A: In Germany in 1992, our health care expenditures were 10.6 percent of GNP. In the United States they were 14 percent at that time, and so our 10.6 percent looked very good. Now I have always been very cautious when comparing these figures because our countries differ a lot in the way in which we treat our people, in the way in which we treat old people. Is nursing care for the elderly included in health care costs or not? Are sick pay leaves included in health care costs or not? Do we have malpractice insurance? And in the United States there are a lot of malpractice-related costs. Many doctors in the U.S. often opt for more expensive procedures, out of fear of malpractice, so that also has to be factored in. So our countries differ so much that aggregate figures of 10.6 percent or 14 percent in my opinion are absolutely meaningless.

Where we are similar to Canada, the United States, the United Kingdom, Sweden, France, and all other countries is in our rising health care costs--costs which have been on the rise for the last 10 or 20 years at a much higher rate than the rate of the average cost of living--and no wonder. We are getting older, and the major share of health expenses goes towards the last 6 months of our lives.

I also wouldn't be worried about a 14 percent of GNP health figure, as the United States has, if we feel that health is worth it. In Germany, we spend 25 percent of our income on rent. Now is that too much, or too little? I don't know, but if I like to live in a big house, and I like to live comfortably, obviously, for me, 25 percent seems to be the right choice. And if I say I want to be healthy again, I don't care that 14 percent of my income is spent on making me healthy again. I'm not worried about 14 percent. What I'm worried about is that we ensure that whatever share of national income we spend on health is the least possible expenditure for the highest possible quality of care that we can get. And we certainly know in Germany that the care that we get is at a high quality level, and we have modern technical equipment, and we have access to treatment, and we have essentially no waiting lines other than those for organ transplants.

Q: How does the German system compare with other systems, such as the French system, the Belgian system, or the Italian system?

A: The German system is the one-eyed king among the blind, and the others are blind. The Belgian system is basically a single-payer system. It has similarities with the U.K. system, which is a purely nationalized or socialized medical system. The French system also has similarities with the U.K. The medical systems in Italy, France, Belgium, and Denmark are typically financed with a payroll tax, where the employer pays something and the employee pays something. Typically, other European countries have the employer pay a higher share than the employee. So these countries suffer, even more than Germany suffers, from cost illusion. If in Germany our costs increase, our premium increases for everybody in the system and I pay only 50 percent of the increase. If I only pay 20 percent of the increase, as in some other European countries, and the employer pays 80 percent, then this cost illusion is even more rampant. Others would say that the moral hazard problem is even more rampant in other countries than it is in Germany. They're all similar, they all have welfare state systems. But among these countries, the German system is still relatively the soundest system. That's why I say it's the one-eyed king among the blind.

Q: You keep talking about payroll taxes. What about my income from investments?

A: Well, if you are in Germany you should join the conservative party or the free democratic party which say that our payments should remain based on wages and salaries alone. The social democratic party now wants to change the system to a system in which the payroll tax would come from not only gross wages and salaries, but from rental income, interest income, etc., as well. If you do not have any wage or salary income, then you would pay the 13.4 percent on the basis of the 5,850 marks, the maximum threshold. If you are a high-salary employee, then you would pay on that basis as well. You could also, in Germany, as an employer, obtain social security pension insurance, and then you would have an entrepreneurial income imputed to you as if you were a salaried employee.

Q: Are there many people who are not insured in Germany? And who are these people?


A: Typically, these are self-employed people who do not elect to obtain private insurance because, with private insurance, the employer pays 50 percent of the premium. The self-employed, therefore, pay 100 percent of their premium. Often, these are people in the medical profession who can use their connections to get access to medical treatment. Or they are very rich people who in the 1950s or 1960s thought they would not need insurance, and if they elected to obtain a contract with a private insurance company now that they are 60 or 70 years old, of course, their actual premium would be sky high. But the number of people is minimal and is shrinking.

Q: Is it true that once you opt out of the public system in Germany you cannot opt back in?

A: That is correct. This is to prevent people from opting out at 25 years old, and then when they are 60, say, "Well, the public system is much cheaper than my private insurance company, so now I opt back into the public system." You cannot do that.

Q: Is there a requirement for the private insurance agency to insure you even if you become a very expensive client, or can they drop your coverage? And if the insurance company itself goes broke, who takes over the coverage?

A: An insurance company cannot drop you if you become a bad risk. Once you are insured, then they have to keep you, even if you become a very expensive patient and a very expensive case. They can only drop you for fraudulent use or abuse.

What happens if your insurance company goes broke in Germany? Well, we have to pay into a regulated insurance system where an insurance company, because of the type of regulations, cannot easily go broke, and even if it did, it would get covered by a fund or by other insurance companies. So even then you would not lose your coverage; you would get taken over by another insurance company.

Q: There's one thing that always comes up in Canada when the private system option is suggested. Many people say that if a private system became available, then lower income people would get the worst possible care. Now, you've already indicated how competition between the physicians, in effect, and presumably between hospitals as well, keeps that from happening in a certain way. But is it really true that low, low income people get as good care as somebody earning the $5,500 per month crossover point?

A: The differentiation is very minimal in Germany. As I've mentioned, 90 percent of the doctor's patients are in the public system. And so doctors typically cannot cater only to the 10 percent who are in the private system.

There are a few doctors, some cosmetic surgeons for example, who are not registered in the public system, because the public system does not pay for their services unless it is for cosmetic surgery as a result of burns or accidents. Otherwise, just to get a facelift, you would not get that paid for under the public system, so these doctors may only cater to the privately insured. But, simply, the doctors cannot afford to treat public patients in an inferior way because we have fierce competition by fee-for-service doctors.

Until recently, we had no quotas limiting the number of doctors per specialty allowed to work in a certain region, city, county, etc. Now we are imposing quotas on the number of doctors. Now in the city of Hannover you may have only so many doctors for internal medicine, so many kidney specialists, and so many dentists. Now that we're getting quotas, the number of doctors is decreasing, but it'll take a lot of time, of course. And now since we also impose budget caps on them, the doctor or his receptionist will soon have to ask me if I am privately or publicly insured. If I say that I am privately insured, I will get an appointment much more quickly than somebody in the public system. Sooner or later, this will happen. It is already happening in the dental profession. But, so far, we have not had quality differences.

One minor quality difference is that if a privately insured person goes to the hospital and needs surgery, he can demand that he gets operated on by the chief of staff. Somebody who's in the public system can't chose the doctor who operates on him in the hospital. Now this may be perceived as a quality difference by some, but it may not be a quality difference objectively. Sometimes being operated on by a good young doctor is certainly not worse, because he will know the state of the art from all of his previous training. But there are only minor differences now. When I need an appointment, I just call in and I get the appointment whether I'm privately insured or publicly insured within the same amount of time. If it's an emergency case, I get it on the same day and, if I need a routine checkup, then any doctor will tell me to come in 3 weeks because he wants to spread out his patients over a period of time.

Q: How do you determine what is in the public system and what is out? In other words, how is it decided that cosmetic surgery is out? As costs rise, will there be a tendency to push more and more of the services off of the list of those which are publicly covered?

A: This is a highly political question. For example, last year in our federal elections the question of whether abortion should be covered by the public system played a major role. It's not certain medical arguments that go into the decision but, in many cases, it's just political pressure. And, in other cases, an important thing is what the private system does. If the private system covers certain procedures, then the high income earners in the public system who have the option to opt out will do so. The public system wants to keep these high income earners within the public system, as they are primary clients. Therefore, it is forced to adopt similar policies as those offered by the private system and to cover these services. Again, it's the reason why the public system hates the private system as a fringe competitor.

Q: Regarding people in the private system who are not allowed back into the public system, what happens to privately insured individuals who become destitute, and who can no longer afford the premiums? Do they get back into the public system under these circumstances?

A: The premium that you pay in the private system does not rise with your age or the medical costs that you incur. The premium that you pay in the private system is set at the time you join. It takes into account your age, family status, etc. It does not go up as you get older. It goes up because we have general health cost inflation. But just like with life insurance, the premium is lower the younger you are when you join.

But if you have private insurance, and suddenly can no longer afford to pay for private insurance, you become a welfare case and the government pays for you to have public insurance.

Q: Are there perceived quality differences in, say, access to technology, between wealthy and less wealthy people of the country, or between urban and rural areas?

A: We basically have no major differences between wealthy and less wealthy regions. We have now, with German reunification, about a 30 percent or 25 percent income differential between East Germany and West Germany, but that will be equalized over the next 10 or 15 years. In West Germany, we have minor differences between north and south or rural and urban areas as far as income differences are concerned. We do have differential services because we have a high density of medical specialists in our cities. In rural areas and in our villages, we might have a family doctor, but certainly we don't have all of the specialists available. But if you go to the next town, 20 miles away, then you will get the attention from the specialists that you need. So there is no true differential as you might have in a country that has a small population, like Canada, spread over a huge, huge area. Germany is a very small country geographically, with a high population density.

Q: Do Workers Compensation costs migrate their way into the public and private systems?

A: That's a very important question because now, since the public system imposes budget caps, there is an attempt by the doctors and patients to shift certain costs to Workers Compensation which is separate from that 6.7 percent.

Q: Can you tell us what percentage of the German population is covered under the welfare program?

A: I don't have that figure in my head, but in Germany we have an unemployment rate of about 9 percent now. After being unemployed for about 2 years, you leave the unemployment system and you become a welfare recipient, where basically you get the same amount of money or goods that you were receiving as an unemployed person. I don't know how many people we have on welfare, but the figures are staggering because they have doubled over the last 3 or 4 years. This increase has been partly due to the influx of people that we have had as a result of the war in Yugoslavia, and partly due to the opening up of the borders with Eastern Europe. A lot of people can enter Germany now claiming political asylum, and then they are registered as welfare recipients in Germany. )

Can Governments Break Contracts?                                 Pearson Airport, Alcan Aluminum, and the
Saskatchwan Upgrader Reconsidered

Patrick Monahan [The complete version of this paper will be published in the Osgoode Hall Law Review.]

[Critical market efficiencies rest upon the Rule of Law prevailing over the Rule of Man in the exercise of government: the greater the discretion of politicians and bureaucrats, the greater the opportunity for the misallocation of collectively-held resources. For reasons good and bad, politicians and bureaucrats, when faced with decisions beyond the application of existing law, will concentrate benefits on swing voters and well-organized interest groups and will disperse the costs among all taxpayers in the hope that a small marginal tax or debt liability increase will provoke little response. This is the "Public Choice" dilemma. The more the Rule of Law binds politicians and bureaucrats, then the less opportunity exists for either special favours or, conversely, special discriminations and punishments. The strengthening of the Rule of Law, therefore, lowers the chance of an arbitrary allocation of public resources for typically non-optimal purposes.

Professor Monahan's paper outlines how the government's cancellation of the Pearson Airport contracts may have violated the Rule of Law as now defined by the Supreme Court of Canada. More importantly, he examines this newly emerging status of the Rule of Law concept.]

--Owen Lippert

Bill C-22, the proposed act to cancel the federal govern-ment's contract with a consortium to redevelop Pearson International Airport in Toronto is virtually unprecedented at the federal level in Canada. Tabled in early 1994, the Bill provided that a series of contracts entered into by the Crown "are hereby declared not to have come into force and to have no legal effect" (s. 3); that "no action or proceeding . . . lies or may be instituted by anyone against Her Majesty . . . for anything done . . . in the performance of any duties" (s. 7); and that "no one is entitled to any compensation from Her Majesty in connection with the coming into force of this Act" (s. 9).

Despite the exceptional nature of these provisions, Justice Minister Allan Rock told the Senate Committee examining the legislation that "there was no question" as to Parliament's ability to enact the bill. Mr. Rock stated that the only issue in terms of the bill's legal effectiveness was whether Parliament had been clear in its intention to exclude any right to compensation. Mr. Rock asserted that Bill C-22 was perfectly clear in this regard and therefore, once enacted, it would effectively nullify the airport contracts. The Minister of Justice confidently asserted that the legislation was perfectly valid and constitutional.

Rock's position was the traditional understanding summarized in the pithy statement of one Ontario judge early in the 20th century: "The prohibition `Thou shalt not steal' has no legal force upon the sovereign body." There is no Crown immunity from the law of contracts, and the Crown is generally bound by its contracts in the same manner as a private citizen. But this general rule in favour of Crown liability is usually said to be subject to being displaced through legislation. Courts will interpret any legislation expropriating rights strictly, and resolve ambiguities in favour of the person whose rights are being affected. But assuming that the statutory intention to expropriate contractual rights is expressed clearly and unambiguously, the courts will give effect to the terms of the statute.

Given that Mr. Rock was expressing the traditional consensus on this issue, one might have expected legal experts to line up in support of his conclusions. In fact, precisely the opposite occurred. The Senate Committee called upon a number of legal experts to opine on the constitutional validity of Bill C-22 and, while opinion was somewhat divided, the majority stated that Bill C-22 was unconstitutional. The reason? According to a number of these experts, Bill C-22 violated the rule of law, and was on that account invalid.

This testimony caused the Senate to propose amendments permitting access to the courts for purposes of obtaining compensation. While the government rejected the arguments against the constitutional validity of the Bill C-22, it did eventually produce amendments of its own designed to permit a limited right to claim compensation for out-of-pocket expenses. But even with these amendments, the Bill remains controversial. The legislation has not been passed by the Senate, and a Senate committee is holding hearings into the circumstances surrounding the cancellation of the airport contracts.

The critical question

Can the Canadian government repudiate a fairly-bargained contract, and deny access to the courts for compensation?

While it has long been assumed that Parliament can shield the Crown from claims for breach of contract, there is a surprising lack of judicial authority directly on this point. This is because the Parliament of Canada (in contrast to a number of provincial legislatures) has very rarely resorted to legislation in order to rewrite contracts in its favour. Thus, while numerous judges and text writers have often affirmed that Parliament can nullify contracts and deny compensation, such statements have almost never been accompanied by any detailed analysis of the issue, since the context did not appear to demand it.

Despite the paucity of judicial authority directly on point, no legal commentators have ever expressed any doubts about Parliament's unlimited authority to deny compensation for breaches of contract. Legislating away private rights may be manifestly unjust but (it is often said) it is not for the courts to assess the wisdom of Parliament's enactments.

The position argued here is exactly that the Canadian government cannot repudiate a fairly-bargained contract and deny access to the courts for compensation because to do so would violate the rule of law. I also argue that the rule of law limits Parliament's power to expropriate contractual rights without compensation. Therefore, Bill C-22 is unconstitutional.

The Supreme Court's approach

The Supreme Court in the Charter era has clearly become an activist Court, willing to review the wisdom of Parliament's legislative choices in a wide variety of public policy fields. Nor is such heightened judicial activism limited to Charter or constitutional cases. The operating premise for the contemporary Court seems to be that there is no area of state activity that is immune from judicial review and sanction.

Whatever the explanation, the fact that there has been a shift in the Court's approach to these questions is, in my view, unmistakeable. This leads immediately to the question: What is the content and meaning, then, of the principle of the rule of law? To put this another way, assuming that the rule of law binds Parliament, how do we know when legislation offends the principle such that it should be ruled invalid? And how does the analysis relate to the subject with which we began--namely, the ability of the government to repudiate contracts and deny claims for compensation?

What does the post-1985 rule of law require of government?

If the rule of law means anything, it must prevent the Crown from entering into binding contracts and then, for no good reason, rewriting the terms of the contract terms in its favour without paying compensation. To permit the Crown to act in this manner is to authorize decisions that are, by definition, arbitrary and high-handed.

The fact that the state must stand behind its promises does not necessarily mean that the government must perform a contract that it determines not to be in the public interest. What it does mean is that, if the government wishes to cancel or amend a contract, persons whose rights have been affected must be permitted to seek redress through the courts. It is the denial of court access, rather than the decision to repudiate the contract, that is contrary to the rule of law.

The government was perfectly within its rights to decide not to proceed with the Pearson Airport contracts. Where it ran afoul of the rule of law was in seeking to enact legislation to limit access to the courts for redress by persons thereby affected. Such legislation would have had the effect of placing the government above the law and undermined the basic accountability that the rule of law requires.

I conclude that, in principle and apart from any pre-1985 Canadian judicial authority, the rule of law should operate to limit the power of Parliament to bar access to the courts in the manner contemplated by Bill C-22.

What, then, of the statements that have been made by courts and other jurists to the effect that Parliament may expropriate contractual rights and deny compensation, as long as the expropriating statute is clear? Despite the frequency of such statements, they have rarely been made in the context of a statute which actually purported to nullify contractual rights. In fact, in cases where statutes have purported to nullify contractual rights and deny access to the courts for compensation, courts have usually found such legislation to be unconstitutional. In short, my claim--that the rule of law requires government to honour its contractual commitments--could actually be said to be immanent in the Case law. This conclusion is more than a little surprising (to say the least) given the widespread assumption to the effect that Parliament has an unlimited power to expropriate contractual rights and deny compensation.

Implications for Bill C-22 and beyond

Assume that the argument that has been presented thus far is correct, and were accepted by a court. What would be the implications for the constitutional validity of recent Canadian legislation (either proposed or enacted) that purports to rewrite contract terms and deny access to the courts?

Turning first to Bill C-22, it would seem clear that the legislation as originally proposed by the government in early 1994 would be unconstitutional. The legislation purported to nullify a legally binding contractual obligation and to completely bar all court access for purposes of seeking redress. If the constitution protects contractual expectations, then legislation such as Bill C-22 must necessarily be unconstitutional.

What of the government's proposed amendments to Bill C-22, which would have permitted access to the courts for purposes of claiming certain kinds of out-of-pocket expenses? Is a partial limitation on court access a violation of the rule of law?

The government might argue that based on some kind of "interest balancing," the proposed amendments to Bill C-22 should be sufficient to support their constitutional validity. In support of this conclusion, the government might point to a review of the Pearson Airport contracts conducted by Robert Nixon immediately after the election of the Liberal government in October of 1993. The Nixon Report found that the airport contracts simply do not serve the public interest, and should be cancelled. It also recommended that "it would be necessary and indeed desirable to provide reasonable compensation." Such compensation would include any expenditures incurred to date, but "it would not be necessary in my view for these negotiations to include compensation for lost opportunity or profits foregone. Given the circumstances of this transaction, and the very early stage of its life, there is no imperative for such compensation."

The difficulty with relying on the Nixon Report as a basis for limiting compensation is that other independent and detailed audits of the airport contracts had reached quite different conclusions. The Nixon Report was prepared over a 30 day period through a closed-door process that did not provide any guarantees of due process. The report itself essentially raises questions and concerns about the airport contracts, as opposed to undertaking a detailed analysis of what amounted to a very complicated commercial transaction. In short, it seems difficult to conclude that the amended version of Bill C-22 could be justified based on such an inconclusive and hastily prepared internal review.

There have been other recent attempts by governments to rewrite contractual terms and limit access to the courts. In early 1995, the British Columbia government cancelled a major hydro-electric project and stated that no compensation would be payable to Alcan Aluminium Limited, which had invested over $500 million in the project. In 1993, the Saskatchewan government introduced legislation rewriting the terms of certain agreements that it had entered into with respect to a heavy oil upgrader project, but the legislation was never proceeded with when the parties agreed to a settlement of the issues. In general terms, my analysis would suggest that such attempts to rewrite contract terms and deny compensation are open to serious constitutional challenge.

What about any potential financial impact?

Some might question the appropriateness of this result, particularly given the fiscal straitjacket facing all governments in Canada in the mid-1990s. If governments are forced to honour their contractual commitments, this might be regarded as an unwarranted impediment to efforts aimed at reducing public expenditures and balancing budgets.

Yet the short answer to this objection is that there is no reason why expenditure reduction must be achieved by singling out those persons who have contracted with the government. All the contracts in question were freely entered into by the government of the day. Honouring those contractual commitments simply requires that expenditure reductions be achieved in ways other than the unilateral rewriting of binding contracts. Of course, the considerations might well be different in a case where a government was facing insolvency. The law generally recognizes that there must be a mechanism whereby persons who are genuinely insolvent are able to compromise debt. The same considerations suggest that governments must necessarily have some scope for altering their contractual commitments to deal with a genuine threat of insolvency.

Conclusion

Governments should be bound to the same moral standards as private citizens when its comes to making and breaking promises. The suggested limitations will operate to the long-term benefit of the state rather than to its detriment. If governments are permitted to repudiate contracts at will, the state is effectively barred from undertaking permanently binding commitments. Anyone who is contemplating contracting with the government will be aware of the fact that the government can turn around and "skip out" on the contract. This risk may lead the other party to decide that it would be better off investing its resources elsewhere, in jurisdictions which do offer protection for contractual expectations; alternatively, the private party may demand that the government pay a premium in order to discount the risk of future opportunistic behaviour by the state.

If contractual expectations are constitutionally protected, the possibility of a risk premium is eliminated. This will facilitate the achievement of public policy goals, rather than impair them. It will also ensure that short-term political expediency is not permitted to undermine the core values associated with the rule of law--values that serve the long-term interests of both citizens and governments alike.

How to Fashion a Victory for Kids from Newfoundland's Referendum

Michael Walker

The people of Newfoundland have voted marginally to support Premier Clyde Wells' constitutional change to eliminate Newfoundland's unique multi-religion school system. In the process, they presumably believe, along with the premier, that they are going to solve problems of religious bigotry and simultaneously save money for the hard-strapped provincial treasury. A sober analysis of the situation must suggest that government action was unnecessary in the first instance, and unlikely to solve the problem posed by the second. But more importantly, the move is quite likely to create a number of other problems which do not seem to have played a major role in the final decision, but which were certainly raised by the premier's foes in the referendum campaign.

With regard to the issue of bigotry, there is no question that in appealing to this historical fact of Newfoundland life that the premier engendered quite a bit of sympathy for his case. As a Catholic child growing up in Newfoundland, and having to run the gauntlet past a Protestant school every day to get to my own school, I regularly received the kind of physical abuse that made me determined, along with my Catholic colleagues, to deliver the same kind of treatment in return. But this Northern Ireland approach to life by both groups, while typical of the 1950s in Newfoundland, has not been typical for two decades or more. In that sense, the premier's initiative is a cure for which there is no disease.

A more important concern is the fact that the amalgamation of the school system into one megalithic public school system is unlikely to provide the economic savings that the premier forecasts, but is highly likely to produce an inferior educational product in due course. The latter outcome is to be particularly regretted since Newfoundland already suffers significant deficits in the area of economic development, and it would be unfortunate to add another in the form of an inferior education system.

With regard to educational outcome, it is ironic that the province of Newfoundland, in 1995, should be making a concerted effort to consolidate a school system, and to make more difficult the election by parents of different educational options. The worldwide movement in education is in precisely the opposite direction. For example, as Premier Wells was pleading his case before the Newfoundland electorate, Mayor Guiliani of New York, undoubtedly enthused by the fact that Hispanic and black constituents are more than 60 percent in favour of some form of school choice, has been urging the state system in New York to emulate the lessons from the Catholic school system!

Amongst the more obvious reasons for Mayor Guiliani's enthusiasm for the Catholic schools in his state is the fact that although they draw their students from the same high-risk populations as the state system, they have a drop-out rate of 0.1 percent compared to the state system, which features a drop-out rate of 18 percent, on average. The success of these schools has less to do with the fact that they are Catholic than that they are independently operated educational establishments.

Detailed research at the left-wing Brookings Institution, undertaken by John Chubb and Larry Moe, determined that educational success was determined not by the availability of resources, the educational level of the teachers, the curriculum, or the religious devotion practised or excluded in the schools, but rather whether or not schools were autonomous, and whether they could be controlled by the local parents and the teachers.

A comparative study of public and private education in British Columbia undertaken by Stephen Easton and Kelly Busche of Simon Fraser University determined long ago that private education is the cheaper of the two options. Contrary to popular expectations, the average student at a private school in this province comes from a family with a household income below the provincial average. Small schools reflecting alternate values, whether religious or otherwise, sprinkled throughout the province, are more typical than the private urban schools established for the children of the affluent, and the overall cost of conducting the affairs of these private schools, Easton and Busche determined, was 30 percent below the provincial average.

All is not lost in Newfoundland. Premier Wells can still fashion educational victory for kids from his referendum victory. He can do so by permitting parents to opt out of the public school system he is going to create. As is currently the case in B.C. and Saskatchewan, parents who opt out ought to be able to transfer at least 50 percent of the cost of a public school attender to the private school of their choice. Failing that, he could adopt the idea of Dr. Joe Freedman, winner in The Fraser Institute Economy in Government Competition, that is, to allow charter schools to develop, of which the new "back to basics" schools in B.C. are an example. These semi-privatized schools operate within the public school system, but convey more control to the parents and the teachers in the classrooms. )

Reducing Government Debt the New Zealand Way: Some Lessons for Canada

Robin M. Richardson

The government of New Zealand is making substantial progress towards reducing net public debt and building its net worth. This continues the policies of previous governments, both socialist and conservative, since New Zealand "hit the wall" in its financial crisis of 1984.

New Zealand is often held up as an example of what might happen to Canada if our governments fail to get the government debt problem under control. Now it is important to consider new Zealand as a "success story," and an example for Canada to learn from as we search for a way out of our government debt problem.

Lesson 1: A determined effort over a long time

The main lesson of New Zealand for Canada is that once a financial crisis occurs, it takes a long time of determined government policy restraint to restore financial, fiscal, and economic conditions. Only in recent years has New Zealand begun to enjoy the results of its government's determined actions since 1984.

New Zealand's fiscal progress is now reflected in the following developments:

The sustained reduction in the levels of public debt has increased the credibility of New Zealand's fiscal policy and supported high levels of business and government confidence in the New Zealand economy. In turn, high levels of confidence have been important factors behind the strong investment and economic growth seen in recent years. In addition, the improvement in the fiscal position was a major factor cited by the international credit rating agency, Standard and Poor's, in upgrading New Zealand's credit rating from AA- to AA in December 1994.

Lesson 2: Set challenging debt reduction goals

Despite the impressive gains since 1990, the government of New Zealand's balance sheet is still weak. Net debt remains too high. The Crown still has a negative net worth position.

Given this, the government has set a clear policy objective to continue its rapid repayment of public debt. In fact, this is referred to by New Zealand's Minister of Finance as "the key contribution of fiscal policy in the coming year." A focus on rapid debt reduction during 1995/96 will also support monetary policy by leaning against inflationary pressures.

Lesson 3: Establish clear guidelines for debt managers

The government of New Zealand sets out clear guidelines for its public debt managers. After meeting capital expenditure commitments, forecast cash surpluses are first used to repay maturing foreign-currency debt when it falls due. Excess cash is then used to build up foreign-currency marketable securities to a level where the net foreign-currency debt is nil (which is forecast to occur in 1996/97.) The remaining excess cash is used to repay New Zealand-dollar debt.

Conclusion

As Canadian governments prepare their 1996/97 budgets, they would be wise to adopt the tough New Zealand attitude toward debt reduction. This is the only way to avoid a Canadian "hit the wall" experience and its painful consequences. )

October Question and Answer

Isabella Horry

Q: What are the provincial and federal government deficits for the past decade?

A: The following table presents federal and provincial government deficits for the period FY 1983-84 to FY 1995-96. During this period, the federal government deficit varied from a low of $28,201 million in 1987-88 to a high of $42,012 million in 1993-94. At the end of this fiscal year (1995-96), the federal deficit is expected to be $32,723 million.

Throughout the same period, provincial deficits varied from a surplus of $736 million in British Columbia in 1988-89 to a deficit of $11,900 million in Ontario in 1992/93. In 1995-96, provincial deficits are expected to range between -$114 million in British Columbia (a surplus) and $8,710 million in Ontario.

This month's graphs show provincial deficits and provincial deficits per capita for the fiscal years 1985-86, 1990-91, 1994-95, and 1995-96. In 1995-96, provincial deficits per capita are expected to vary between -$90 (surplus) in New Brunswick, and $784 in Ontario.


Southern Comfort

Filip Palda

Television, telephones, and taxes are about to change for the better in Canada. Thanks are due to the Americans. Congress is planning to cut the red tape that strangles the telecommunications industry. Congress is also going to bring in a flat tax. These moves will inject U.S. businesses with strength. To give Canadian businesses the same boost, Parliament will have to make the same injections.

Telecommunications are a treasure chest that governments will not allow us to open fully. The U.S. and Canadian telecommunications industries are tied down by regulations. These regulations serve only one purpose: to freeze competition in its tracks. The law says that television companies cannot use their network of wires to send TV signals. The law also says that cable companies cannot send phone signals on their cable networks. Each industry has its turf where it can gouge consumers. There is no fear of losing the market to a competitor. No competitors are allowed. The law sees to that. Congress wants to turn this situation on its head. Open protected turf to competition. Force industry to serve the customer. And watch U.S. business ride to success on cheap telecommunications, and on the exports of a booming entertainment industry.

The drive for prosperity is also moving Congress to work out a proposal for a flat tax. The present U.S. tax code is a document of several thousand pages. It confuses ordinary citizens and makes a living for an army of accountants and lawyers. Researchers believe that the cost of complying with this code may be as large as one tenth of the nation's annual income. Government could raise the same money with a one-page tax code. Just have everyone pay 17 percent of their incomes in tax, with a deduction for people living below the poverty line. No tax shelters, and no marginal tax brackets of 60 percent that make the rewards of hard work small compared to the effort. The flat tax would give workers and businesses a new reason to excel. They would get to keep a greater share of their excellence than they do now.

These political changes will soon come to Canada through the channel of free trade. Free trade between countries means that good political ideas cannot be resisted. The U.S. strategy of designing a simple, efficient tax system, and drawing up sound regulations in telecommunications, will attract Canadian businesses. The only way to stop the exodus will be to imitate the U.S. government.

Making reforms will not be pleasant for our leaders. A clear, comprehensible tax code makes it hard for politicians to hand out tax breaks to select groups of supporters. A stripped down law that admits all competitors into the cable and phone industry also takes a strip out of government. How do you hand out goodies such as monopoly operating licenses if monopolies have been banished? The coming reforms mean that our government is going to lose some of its power to make blunders on our behalf. In losing these powers, politicians will be forced to betray special interest groups. These groups have bribed and lobbied for their privileges, and have kept themselves up by keeping the rest of us down. Thank you America. )

Whaddaya Mean, Every Other Time?

John Robson

The new Ontario government seems to have backed off for the moment on killing legal aid. But public and governmental anger continues to fester with a program that projects a $62 million deficit because it takes $300 million a year ($188 million from the province) to pay 6,900 lawyers $67 an hour or more to defend people, many of whom are repeatedly found to be guilty as charged. People's ire is certainly not soothed by the discovery that "Legal aid constitutes about 75 percent of an average defence attorney's business." [The Ottawa Citizen, July 13, 1995, p. A1.]

But I have a solution, one that easily can preserve legal aid for the indigent without bankrupting the province to feed lawyers. Let's send people to jail if they commit crimes.

You see, our problem isn't that we provide lawyers for those who can't afford them. We should do that. Our problem is that we neglect the role of incentives, and so we design legal and economic structures that encourage people to do and reward them for doing things we don't actually want them to do.

Consider, for instance, the story that appeared on the front page of the September 13th Ottawa Citizen about the impending collapse of the Ontario legal aid system. It profiles a "burly" [Yes, I know this word is banned by the politically correct (for instance, the University of Missouri Journalism School handbook on phrases to avoid) because it has apparently been used of blacks in the past. But the Citizen used it first, not me. Complain to them.] 34-year-old welfare recipient, whose lawyer has done him in by asking to be paid. This aggrieved citizen complains that "I've had the same lawyer for 15 years and now he says he's not going to help me. Every other time, I got legal aid, no problem."

Now, where those whose hearts bleed were struck by his facing charges without counsel, my heart full of unwashed socks was struck by the phrase, "every other time..." Whaddaya mean, every other time? Whaddaya mean, same lawyer for 15 years? I thought if you needed a lawyer constantly for 15 years, you ended up not needing one because you were playing rock hockey under a long-term contract.

Of course, Mr. Burly may actually have been innocent of all charges each and every time he needed legal aid over the past fifteen years, including those currently pending. [He is charged with assault with a weapon, assaulting a police officer, impaired driving and resisting arrest, but says it is all a "misunderstanding that spiralled from one incident."] But I can tell you this: legal aid does not constitute 75 percent of the work of the average defense lawyer, and gobble up almost a third of a billion dollars a year, because of all the innocent poor people facing charges. No, it constitutes and gobbles the way it does because a small but growing group of people keep committing crimes, getting legal aid, getting light sentences, getting out, getting drunk, and doing it all again.

To see why they do this, consider the situation of the typical Mr. Burly. Here he is, constantly in trouble with the law, constantly living at the public's expense while the devil finds work for his idle hands, constantly dinging the public for his lawyer's fees when he does get in trouble, constantly getting off. Generally, criminals are not very bright people, but whether Mr. Burly is smart or not, he certainly has this system wired. Don't work, commit crimes, and you'll live well. Even a dunce can work that one out: there's no reason to behave. There's no reason to get a job, and no reason to obey the law.

I actually do think that if you cannot afford a lawyer one should be provided for you. Heck, at $67 an hour I don't think I could afford one without help. The state has enormous resources at its disposal, and it shouldn't be able to crush people because it can afford to stay in court longer than they can. I'm inclined to think the same should apply in civil suits. I even wonder whether everyone found innocent should have the state pay their legal costs, whoever they are. It's not much consolation to be acquitted and lose your house. If you'd been convicted, at least you'd have had a roof over your head.

But I also think that people who commit crimes, especially if it is a habit, should go to the stony lonesome where they can seek redemption and, if they don't find it, at least they can't steal anything or hurt anybody except other felons. Mr. Burly may not be very bright, but he and his ilk can understand simple rules like: you break this law, you go to jail, you don't get out. I'll bet we can easily afford legal aid for every person who takes us up on that offer, in Ontario, and across Canada.

A Law for the Imprudent

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

The trend these days is that no-one is ever to be held responsible for his or her own actions, no matter how reckless or imprudent--unless, of course the person happens to be a business with deep pockets, in which case it is held responsible not only for its own foolish deeds but for everyone else's as well. The recent case in Ontario of MacKay v. Bank of Nova Scotia is the latest example of this trend.

Thelma MacKay was a 57-year-old woman with an adult daughter Sheriann. Sheriann cohabited with a man named Michael, who had previously been bankrupt. He helped Sheriann fritter away $42,000 of her savings and rack up $30,000 more in debts. Then the couple decided to buy a recreational trailer. When they tried to borrow yet another $15,000, the bank said they'd need a co-signer with security. Sheriann asked her mother, who agreed.

The bank suggested consolidating the couple's existing debts with the new loan. Mrs. MacKay would be shown as the borrower and would give a $45,000 mortgage on her condominium.

The bank also suggested that she get independent legal advice (ILA). The loan officer testified that he even went so far as to phone a lawyer for a fee quote and an immediate appointment, but that Mrs. MacKay declined, saying ILA was unnecessary and too costly. She signed a waiver of ILA instead, got the loan, and lent the money to her daughter.

Sheriann and Michael promised to make the loan payments, but eventually went bankrupt, saddling Mrs. MacKay with the debt. She sued for a declaration that the mortgage was invalid, and won. The court would not permit the bank to collect its $45,000.

The reasoning in this decision is flabbergasting. The court did not find that Mrs. MacKay had any misunderstanding about the transaction. On the contrary, her evidence was that she knew there would be some risk and that her condo would be collateral. In fact, she had hesitated about helping Sheriann, suggesting that other family members be approached first, but Sheriann had already tried that unsuccessfully.

The court's decision was based entirely on the fact that Mrs. MacKay did not get ILA: ". . . the glaring omission in this case [is] that no one ever said to the plaintiff in blunt terms that the transaction is entirely improvident and that she should not go ahead with it."

The bank should simply have refused to grant the loan, said the judge, unless she got ILA. If she had got ILA and then gone ahead foolishly anyhow, she would have been on the hook.

Now hold on just a minute. It didn't take extraordinary perspicacity to see that Sheriann and Michael were not models of fiscal responsibility. Neither the bank nor any lawyer had a better opportunity than Mrs. MacKay to be aware of that. A lawyer giving ILA would have had no better information about the likelihood of them keeping their promise than Mrs. MacKay could herself provide. Besides, lawyers are not particularly qualified to give advice on this subject. It is not a question of law. It's a question of good judgment and common sense. There are no courses in these subjects at law school, as demonstrated by the fact that lawyers (and the professional liability insurance companies they run) sometimes go bankrupt themselves.

The complaint is sometimes made that there is one law for the rich and another law for the poor. This case demonstrates that there is one law for the imprudent and another law for the super-imprudent. The imprudent (who enter into bad deals without seeing a lawyer) don't have to pay their debts. The super-imprudent (who enter into bad deals even after seeing a lawyer) do have to pay their debts. Hmmm . . . perhaps the imprudent aren't so imprudent after all.

In fact, if the implications of this judgment become common knowledge among the general public, the rational course of action for all similar borrowers will be never to get ILA, and never to pay their debts. They needn't worry about the morality of this behaviour; the Ontario Court (General Division) has already given it the official seal of approval.

How far will the rationale of this case be extended? Would Mrs. MacKay have needed ILA if she had taken the loan because she had received an unsolicited call from a stockbroker and wanted to invest in a hot new issue of penny mining stocks? Such a transaction would probably be just as improvident as lending to Sheriann and Michael. Are we coming to the point where no-one will be permitted to do anything without consulting a lawyer first? Are lawyers going to have the final say on the wisdom of all financial transactions? Will they run the whole economy?

Will the next step in our crusade to exonerate the shallow-pocketed be to scrutinize the sufficiency of the ILA? Suppose the lawyer says tactfully (rather than bluntly) that a proposed transaction is "inadvisable" (rather than "entirely improvident") and that the client "might want to reconsider" (rather than "should not go ahead with it"). If the client goes ahead anyhow and loses money, would he then have a claim over against the lawyer for giving insufficiently harsh advice?

It's time we went back to recognizing that people sometimes make foolish mistakes, and that justice consists in ensuring that they, and not someone else, bear the consequences. )

Are Welfare Rates High in Ontario?

Chris Sarlo

It typically costs more to live in large cities. This is particularly true if the city is growing and has become an important regional or international hub. Toronto and Vancouver are prime examples in Canada.

High real estate costs explain most of the cost of living differential between these two cities and virtually all other communities in Canada. In October, 1994, for example, the (unweighted) average cost of a detached bungalow in Toronto and Vancouver was about $225,000. The average cost of the same detached bungalow in all the other major Canadian cities was $131,000 by comparison. [Royal Lepage, Historical Information on Canadian Housing, 1995, table 99.]Apartment rents follow the same pattern. The (again unweighted) average monthly cost of a two bedroom apartment in Toronto and Vancouver in October, 1994 was $799. This is fully 35 percent more than the average of Canada's other major cities. [CHMC, Housing Information Monthly, November 1994.] Toronto and Vancouver are expensive places to live.

For this reason, every year many working and retired folks move from these cities to the suburbs or to smaller communities outside the metropolitan area. Some people find jobs away from these large cities entirely in order to improve their living standard.

Unless they live in subsidized housing, and well less than half do, welfare recipients, like everyone else, are going to find it more difficult to live in these two major centres. The limited dollars they receive will simply not go as far in Toronto and Vancouver as they do elsewhere.

Recently, the head of one of Canada's largest food banks, Gerard Kennedy, was reported to be "angry that no one had challenged [Premier Mike] Harris' claim that Ontario pays `lavishly high' welfare benefits compared with the other nine provinces." [Toronto Star, June 25, 1995.] I don't know that the new premier has ever claimed that social assistance rates in Ontario are "lavishly high," but he has suggested that they are high relative to the rest of the country. Kennedy, however, calculates that recipients in Toronto are actually worse off than recipients in "Ralph Klein's" Alberta. His estimates show that a welfare family of four in Edmonton has more money left over after shelter and food expenses than the same family in Toronto.

Kennedy's point, presumably, was that it would be unconscionable for Ontario to cut welfare rates when its recipients are already worse off than those in budget-cutting Alberta. Maybe, suggests Kennedy, Ontario's rates are not high at all when compared to the costs of basic necessities. Since my own research is closely connected to this issue, I wish to present some evidence which examines, more broadly, the question of the adequacy of welfare in our major cities.

The accompanying table shows, for 1994, the incomes of three categories of welfare recipients in a selection of major Canadian cities and compares that income to the costs of shelter and food. Sudbury, Ontario is included because its shelter costs are more relevant for the 65 percent of the province's population living outside of Toronto.

Incomes include not just social assistance itself, but also any federal and provincial tax credits to which the household might be entitled. This is not a trivial consideration. For Kennedy's family of four in Ontario the tax credits/tax benefits add $3,100 or 15 percent to the family's resources.

The column labelled "Shelter Cost" represents the average rents in privately initiated apartment structures with six or more units, as reported by the CMHC. Food costs are estimates, by the author, of the essential cost of a nutritious diet in the various cities. [Please see Christopher Sarlo, Poverty in Canada (Vancouver: The Fraser Institute), 1992, for more detail regarding the methodology of calculating the essential cost of a nutritious diet.] The final column shows what is left of income after shelter and food costs are deducted.

We notice that single employable persons on welfare are hard pressed to cover more than shelter and food in all parts of Canada. Their welfare dollar goes farthest, however, in Ontario away from metropolitan Toronto. As it stands, singles in Edmonton are somewhat better off than those in Toronto. However, Toronto is close to the average for the selected cities. For single parents with one child, recipients in Toronto are actually better off than those in Edmonton and, more importantly, Ontario, including Toronto, offers recipients the highest after-food-and-shelter incomes. Even with a 20 percent cut in assistance rates, most recipients in the province will still be above average in this category. Finally, the family of four on welfare is better off in Ontario, outside of Toronto, than anywhere else in the country. Those in the city of Toronto are nevertheless slightly above the average in the selected cities.

The standard of living of people on welfare is never high. However, fair comparisons of rates between provinces requires data on more than just the most expensive city. A more balanced examination of the evidence reveals that Ontario in 1994 was indeed the most generous provider of social assistance.

Unappreciated Miracles

Walter Williams

Think about shopping for food. In effect, each of us tells our supermarket, "I'm not going to tell you when I'm coming to shop. I'm not going to tell you how much and what I'm going to buy. When I do shop, you'd better have what I want, or I'm going to fire you by taking my business elsewhere." That's a tall, uncompromising order, but it's filled so routinely that we think it nothing. If you think it's nothing, contemplate shopping in the former Soviet Union, a nation with the genius to compete with us in space and weaponry, but a nation that couldn't hold a candle to our supermarkets.

The average North American supermarket stocks over 20,000 different items. Who arranges all that? What's necessary to have those items on the shelves? Who and how many people are involved? The answer is easy: nobody knows. The process defies comprehension. You might think the answer is easy. You might say, "Managers go to the wholesaler and buys what they need." If you think that's all there is, you trivialize the miracle.

Pretend you were appointed Supermarket Czar, and were charged with making all the arrangements for North Americans to have just one of those 20,000 items--bananas, say. How will you get people in Costa Rica, some of whom may not like North Americans, to work hard to grow, harvest, and ship bananas? What are all the arrangements necessary for the shipping crates? Do you know how to make a chain saw or axe to chop down the trees to get to the wood to build the crates? What's necessary to mine iron ore so as to make nails and wire for the crates? Then we have to keep in mind that the bananas have to get from Costa Rica to the supermarket. That means ships and trucks are needed. What do you know about truck and ship building and navigation?

There are literally millions upon millions of inputs and people co-operating with one another to get just one of those 20,000 items to your supermarket. Somehow these inputs show up to do their job at the right time and right place, as if, to use Adam Smith's phrase, they are "guided by an invisible hand." All that good effort occurs without love and caring. The Costa Rican farmer, the crate manufacturer, and the ship captain don't give a hoot about you, but you have the bananas as if they did.

The co-ordination that makes all those other items available at your supermarket is nothing short of a miracle. To think that one human being, or a group of humans, can possess the knowledge and information to accomplish the task is the height of human arrogance and conceit. That knowledge and information is widely dispersed across society in bits and pieces. That's why top-down central planning always produces disappointments, shortages and bottlenecks. The banana czar might have remembered everything except a compass and the banana boat is lost at sea.

The forces behind all that co-ordination and cooperation that put those 20,000 items in your supermarket are three simple things: prices, private property, and human lust for more. That's the beauty and simple magic of markets. )

Letters

Are Government  [Note: "Public" school is a misleading misnomer: these schools do not belong to the public. They belong to the government and the self-perpetuating education bureaucracy. All the public does is pay and pay for something over which it has no say.] Schools Salvageable?

Canadian education professors and administrators have adopted wholesale the "progressivism" of American John Dewey. This philosophy neglects individual excellence and the mastery of specific knowledge, and even rejects the idea of right and wrong. Not surprisingly, many school children need tutoring, especially in reading and math. Many children whose parents can't afford tutors are graduating from government schools unready for a productive life.

The education bureaucracy has felt free to abandon such proven pedagogical principles as selection, teaching basic things before advanced ones, rules, correction, and so forth. Instead, they have irresponsibly instituted such untested notions as holism, the wholesale impartation of false self-esteem, no definite step-by-step curriculum, open classrooms, child-centred education, peer tutoring, no memorization or mechanical practice at all, no letter grades, and so on, ad infinitum. They don't even want teachers to teach (!), but simply to expose children to data and encourage them to be "creative."

This system hurts our whole society. Its main victims are our children. Many teachers also suffer, for they are not allowed to do what they know is best.

Every subject in the curriculum is affected, but let us focus specifically on reading. A method many research studies have shown to be effective, intensive phonics, has been abandoned in all Canadian provinces, by bureaucratic decree, in favour of the untested, progressivist "Whole Language" approach. As Andrew Nikiforuk and Deborrah Howes point out in "Why Schools Can't Teach" (Saturday Night, September 1995), Whole Language has become so dominant in our government schools that effective phonics books have been thrown in trash bins, teachers are forbidden to use phonics, and even principals have been denied the authority to do what they think is best for children.

In Whole Language, written English is treated as if it were Chinese, to be read by whole words instead of through a mastery of the alphabetical principle. Children are forced to much guessing--something not many can do well. The results have been disastrous. Many children are simply not learning to read, much less to enjoy reading. Teachers who object may suffer serious consequences. Parents who complain are ignored. Evidently, the government education bureaucracy couldn't care less about children, parents, or principals.

What is true of reading is also true of every other subject. Can such a system be reformed? It is pointless to hope for reform from within. The philosophy is too deeply embedded, the bureaucracy to deeply entrenched. Many reformers have tried, only to give up in frustration. Reform from the outside is equally impossible as long as the education bureaucracy--which has no intention of changing its imperious ways--is not accountable to parents and society as a whole.

Bureaucracies are by nature unaccountable, since they are not even subject to the voters' will. I had hoped that the government school bureaucracy could be forced to be responsible through the enactment of educational malpractice laws. However, it turns out that malpractice laws are not concerned with results. These laws only punish deviations from the standard practice--and by now Whole Language, French immersion, etc., are standard practice.

What can we do, then, in the face of a government education system that produces very poor results and won't change?

The obvious, logical answer is for us to abandon it. We must put the education of our children back in the hands of those who really care about good results--parents and private schools. This can be done through vouchers and home schooling. While this won't be easy to implement, it can be done if parents unite, and put pressure on provincial governments to return the business of education to the only people who care deeply about its success--parents and private enterprise responsible to parents.

Useful references

Adams, Marilyn Jager. Beginning to Read: Thinking and Learning About Print. Cambridge Mass: The MIT Press, 1991.

Chall, Jeanne S. Learning to Read: The Great Debate. New York: McGraw Hill, 1967.

Flesch, Rudolf. Why Johnny Can't Read. New York: Harper & Row, 1955.

Flesch, Rudolf. Why Johnny Still Can't Read. New York: Harper & Row, 1981.

Hammerly, Hector. French Immersion: Myths and Reality: A Better Classroom Road to Bilingualism. Calgary: Temeron Books/ Detselig Enterprises, 1989.

Hector Hammerly
Professor of Applied Linguistics
Simon Fraser University
Burnaby, British Columbia

Generational accounting study questioned

Dear Editor:

Concerning your August 1995 issue on generational accounting, may I suggest that your Institute undertake a follow-up study on the generational question itself.

Your study uses federal population projections without questioning the social conditions the projections represent. It takes for granted the declining birthrate as an unalterable fact, as if the birthrate could not be changed by social policy and cultural influences, for example pertaining to the promotion of marriage and family growth, or the reduction of subsidies for single motherhood.

The study also ignores the past quarter century of declining birthrates, as if they too were irrelevant "data" without economic and social valence. It would be illuminating to analyze what the situation vis-à-vis generational debt would be had birthrates continued at their immediate post-war level, and also what the missing one million children who are not here because of abortion would have contributed to our economic mess. The absent children are an unalterable, objective factor in the economic landscape, worthy of dispassionate study independent of one's political or religious point of view.

Population projections are notoriously indeterminate and unpredictable. Any economic research based on such models will necessarily have to be qualified by, at the very least, a presentation of alternates. This is where I believe your Institute could offer valuable research on the Canadian scene.

John Higgins
North Delta, B.C.

[Michael Walker replies:

The difficulty in doing such studies, as you would well appreciate, is that they require a large number of assumptions as the basis for the calculations. The calculations themselves are highly complicated and not without problems.

The purpose of undertaking a generational accounting exercise is to provide some arithmetic about the future implications of current social expenditure commitments. Since the arithmetic produced by such an analysis is, as you quite rightly point out, partly determined by the population projection, we had to be careful to select a population projection that would not be seen as having been contrived in order to produce our "result." For this reason, we use the government's own projections rather than projections of our creation so as to blunt any criticism and to focus people's attention on the social policy problem which is presented by the current social insurance programs.

I agree with your assessment that the future is ours to make, and I hope that over the next few years we will be focusing more attention on the impact that government policy has on choices regarding family matters.]

"Dr. Hayek, I'm Not a Conservative Either!"

Sonia Arrison [Sonia Arrison is a graduate student in political science at the University of British Columbia.]

In his August 18, 1995 Globe and Mail column titled "A few things a true conservative should remember about Canada," Jeffrey Simpson attempts to advise Jean Charest about "modern conservatism." However, two major (and common) mistakes that Simpson makes are that: because of the very definition of conservatism, it cannot be "modern"; and because of Canada's political system, a big-C conservative is radically different from a small-c conservative.

Many people--with good cause--are confused about the terms "conservative," "liberal," and "libertarian." The meanings of these words have changed over time and are further blurred in everyday usage by the press. For example, those who believe in the free market are routinely lumped in with other individuals, such as holocaust denier Ernst Zundel, under the broad terms "right wing" [The "left-right" dichotomy is, in this author's view, an outdated and inaccurate way of charting the differences in ideologies. However, the scope of this article restricts discussion of this point.] or "conservative." This article aims to clear up the confusion surrounding the words "conservative," "liberal," and "libertarian," and will also show why free market thinkers do not belong in the "conservative" category.

First, it should be understood that a genuine "conservative" is not someone who simply belongs to the Conservative party or calls himself or herself a conservative. Likewise, a real liberal is not simply an individual who votes for the Liberal Party of Canada every year. Parties in Canada are not about conservative, liberal, or socialist principles. Rather, Canadian parties are pragmatic. They adopt platforms and ideas that will serve their main purpose: to get elected.

So how are real conservatives, liberals, and libertarians identified? That is determined by the ultimate principles they hold. Friedrich A. Hayek, an Austrian economist who won the Nobel Prize for Economics in 1974, wrote about the confusion between these terms and the problems associated with this confusion. In the postscript (called "Why I am not a conservative") to his book, The Constitution of Liberty, he makes some excellent arguments, some of which I will reiterate here.

The words "liberal" and "conservative" originated in Europe. Their roots reveal their true meanings. At the base of the word liberal is "libre," or free. In the original use of the term, a liberal (also known as a "Whig") was an individual who valued freedom. In contrast, the word conservative has as its root "conserve." To conserve is to preserve, or as Hayek said, it is "opposition to drastic change." [F.A. Hayek, The Constitution of Liberty, (Routledge & Kegan Paul Ltd.: London), 1960, p. 397.] The doctrine of conservatism is a doctrine of clinging to the past and of distrusting new ideas and change.

Conservatives are different from classical liberals because they do not believe in "spontaneous order" like that which occurs in a completely free market. This is because conservatives see order as "the result of the continuous attention of author-

ity."[ Hayek, p. 401.] Therefore, a true conservative cannot support the free market. Unlike the original liberal (or libertarian) who is optimistic that "the self-regulating forces of the market will somehow bring about the required adjustments to new conditions," [Hayek, p. 400.] a conservative is pessimistic. Conservatives in the European sense of the term are Monarchists; the past to which they cling is one of order imposed by a sovereign.

Clearly, the definition of conservatism changes along with history. Conservatives today usually value small government and family values which they believe were in place when Canada was born. [The assertion that small government existed at Canada's inception is debatable; especially when one considers the massive amount of intervention the railway demanded in quest of "uniting Canada."] Jeffrey Simpson was correct when he stated that a conservative "does not take as a starting point that all government is bad per se, or the root of all evils." [Jeffrey Simpson, The Globe and Mail, August 18, 1995, p. A18.]

The interesting thing about conservatism is that which specific past is conserved is a matter of temporal destiny, and therefore there are no ultimate principles of conservatism. Why is this important? The relevance comes from the fact that no guiding principles are bad principles. [To say that conservatives have "no guiding principles" is not to say that they are not moral. Indeed, conservatives have a detailed morality. Here I am referring strictly to a vision of the future for society to progress.] That is, if one has no principles with which to guide oneself, one does not have a "forward looking doctrine" but instead, a backward reaching doctrine, and hence will not advance until pulled along by some strong force, whatever that force may be.

In Canada, the strong force has predominantly been a socialist force. Clues as to what a socialist values are also taken from the foundations of the word itself: "social." Socialists are individuals who argue for collective and social measures such as "socialized medicine." They believe in large government, and that the collective good of society is more important than individual freedoms. For better or for worse, the term "liberal" has come to symbolize socialist ideals in Canada, which explains why many classical liberals have adopted the name "libertarian."

The interaction between theory and practice has resulted in a strange labelling shift. Those Canadians whose principles (not party affiliations) lead them in the past to call themselves "socialists" now call themselves "liberals." Individuals whose highest principle is freedom are now forced to use the awkward term "libertarian" or "classical liberal"; and conservatives are often confused with libertarians who advocate the free market. The confusion between libertarians and conservatives often stems from an agreement between the two that there should be less government. However, there is an enormous difference between conservatives and libertarians in terms of why less government is favoured. Libertarians see it as a way to guarantee individual freedoms while conservatives merely want to "go back to how it was" (or how they think it was).

There are important reasons to make distinctions between those who are truly conservative and prefer a society where "established values can justify the resort to privilege or monopoly or any other coercive power of the state in order to shelter such people against the forces of economic" [Hayek, p. 402.] or social change and those who are incorrectly labelled "conservative" but are in reality libertarian. A most serious blow to freedom would occur if a real conservative was to gain acceptance or power under the guise of a libertarian's value system.

Critical divisions exist in the population which is currently being called "conservative." Under this heading, the media have lumped free market thinkers, racists, and even Bill Clinton. [Lydia Miljan, On Balance, vol. 7, no. 10, The National Media Archive, January 1994, p.7.] It has become a sort of "catch-all" phrase for public actors towards whom the media are hostile. Analysts have tried to remedy this generalizing tendency by adopting the labels "neo-conservative" and "social conservative," but this merely adds to the chaos. This identity confusion has consequences for the future; misuse of ideological titles needs to be remedied because better understanding leads to better decision-making.

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