Contents  ........  February 1996

Editor's Notes
This Issue's Authors
Feature Articles: How to Balance the Federal Budget and Keep Canada Together
Feature Articles:Deficit Financing, the Decline in Saving, and the Rise in Foreign Borrowing in Canada from 1970-1994
Certification versus Licensure in the Health Care Sector
The Institute is Welcomed onto the Internet
Canada Ranked the Sixth Most Economically Free Country in the World
February graph
More Spending Cuts Needed, Say Canadian Pension Fund Managers
Oh, and Don't Stick a Fork in Your Eye, Either
You Can't Ask That!
Where do Jobs Come From?
Letters
Student Article : Save the Environment With Technological Innovation

Editor's Notes

Many of us are now looking ahead to the impending federal budget, due to be released by Finance Minister Paul Martin in mid-February.

This issue of Fraser Forum contains two feature articles that concentrate on the debt crisis facing Canada and offer some suggestions about what the federal government can do to begin to solve this most pressing worry. In the first article, Michael Walker and Robin Richardson explain why and how the federal budget must and can be balanced, and give some tips on how to avoid ever again getting into the mess we now find ourselves in. They also propose that the bill for the costs of Quebec separation be calculated forthwith by the federal government.

In the second article, Robert Crozier offers a stark and unsettling review of the rapid decline in both individual and business savings over the past quarter century, and, more dramatically, over the last few years.

The authors of both papers call clearly and unequivocally for severe deficit reduction measures to take place as quickly as possible. We will now have to see if the next federal budget can deliver on their most urgent call for action.

This Issue's Authors

Robert Crozier, now retired, is the former Director, National Accounts Division, Statistics Canada, the former Head of Forecasting and Economic Analysis at the Department of Trade and Commerce, and former Senior Economist at both the Economic Council of Canada and the Conference Board of Canada.

Fazil Mihlar is Policy Analyst at The Fraser Institute. He received his B.A. in Economics from Simon Fraser University, his M.A in Public Administration from Carleton University, and a Business Degree from the Chartered Institute of Marketing in London, England.

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

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

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

Cynthia Ramsay is Health Economist at The Fraser Institute. She has her M.A. in Economics from Simon Fraser University.

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

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

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

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

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

Mark Weller is co-ordinator of the Web project at The Fraser Institute. He has a B.A. in International Relations from the University of British Columbia.

Feature Articles:

How to Balance the Federal Budget and Keep Canada Together

Robin Richardson and Michael Walker

This paper contains the essential message of two invited briefs presented to the Standing Committees of the Senate of the Government of Canada and of Finance of the House of Commons. The briefs were presented on November 31, 1995, in Ottawa, and December 1, 1995, in Vancouver, respectively. Both concerned the fiscal outlook, budget policy, and the future of Canada. We present these views as a backgrounder for those concerned about the next federal budget-a budget which could be the last of its kind ever delivered.

Two major challenges

The Government of Canada faces two major challenges in 1996 and beyond: national unity and fiscal responsibility. The challenge is to recommend fiscal measures that will help to keep the country together, while reducing and eventually eliminating the federal deficit and the national debt.

This presentation provides a budgetary proposal to address this two-fold challenge. If the measures proposed here were adopted, the Government of Canada could reduce regional tensions while balancing its budget within two fiscal years, and begin to pay down the national debt for the first time in 33 years.

Emphasize debt elimination

The next federal budget should shift its emphasis from deficit elimination to debt elimination. The sooner it does this, the better. The reason for taking a tough attitude toward debt elimination is that the interest on the public debt has become the single most destabilizing component in the federal budget. The steady increase of the "interest bite" into available revenues must be reversed and greatly reduced or national bankruptcy is inevitable.

Next year's budget should contain the following specific provisions:

     1)     a specified year-by-year target for deficit elimination as is shown in table 1. Our recommendation is that it be a two-year target with the government adopting all of the measures outlined in this submission. The deficit target for fiscal 1996-97 would be $13.1 billion with a surplus of $3.3 billion targeted for fiscal 1997-98.

Click here to view Table 1: Government of Canada Fiscal Outook With Proposed Fraser Institute Budgetary Measures ($ billions)

     2)     a specified penalty on the prime minister's ministerial salary and the salaries of each of his cabinet ministers and parliamentary secretaries for failure to meet the deficit reduction and debt elimination targets. Following the recent excellent example of the government of Manitoba, we recommend that this be a 20 percent per year cumulative penalty for each year in which the targets are not achieved as a demonstration of the willingness of the political leadership to accept responsibility for non-compliance with the provisions of the budgetary plan.

     3)     a statutory prohibition of budgetary deficits once budget balance is achieved, except for specified exceptional situations such as war.

     4)     a long-term plan for eliminating the federal debt with minimum annual payments of interest and principal. These mandated principal and interest instalments on paying off the federal debt will be treated in future budgets as expenditures in calculating the annual balanced budget requirement.

     5)     the setting out in debt elimination legislation of a long-term goal of a Debt Freedom Year for Canada.

     6)     a statutory provision that any future annual budgetary surplus and the proceeds from the sale of federal lands, buildings, and crown corporations be used entirely to pay down the federal debt.

     7)     taxpayer protection on the maximum rates of personal and corporate income taxes and the GST or its replacement.

Full disclosure of the costs of Quebec separation

The next federal budget should also contain a detailed calculation of Quebec's share of the federal balance sheet assets and liabilities in the event of Quebec's eventual departure from Canada. Work done by The Fraser Institute shows Quebec's "Separation Obligation to Canada" to be $143.9 billion at March 31, 1995, while the government of Quebec's consultants put it at $88.5 billion. This difference of $55.4 billion is a "great divide" causing major uncertainty in financial markets and higher interest rates than would otherwise be the case if the federal government made its figures known.

The next budget should also provide a repayment schedule of both principal and interest for Quebec's Separation Obligation to Canada over different acceptable repayment periods-say 25, 30, 35 and 40 years. This should be done in order to provide full disclosure to investors, to demonstrate the importance of government debt retirement in an orderly manner, and to inform Quebecers and other Canadians of one of the more important costs of separation, should there be another Quebec referendum in the next few years.

Additional expenditure reductions

In his recent book, Thirty Million Musketeers: One Canada, For All Canadians (Vancouver: The Fraser Institute and Key Porter Books, 1995), our colleague, Mr. Gordon Gibson, provided Fraser Institute simulations of the federal government's budget to the year 2000 assuming that Quebecers said a clear "No" to separation in the October 30, 1995 provincial referendum. Mr. Gibson made it clear that a "No" vote would not be saying "Yes" to the status quo. Quebecers, like many others in Canada, are concerned about current government policy, the size of the federal debt, and the relationship between the federal government and the provinces.

The closeness of the referendum vote and recent surveys of Quebecers and other Canadians emphasizes the need for the government of Canada to make major changes in the status quo even more quickly than envisaged. A major concern of all Canadians is the size of the national debt. A significant point scored by the separatists in the referendum debate was the fact that confederation shackles Quebec to the third largest public debt of any developed nation.

It is vitally important that all Canadians have their faith in the Canadian confederation restored. The best way to do this is to balance the federal budget and begin reducing the national debt as quickly as possible. Our previous simulations have assumed that the federal budget would have to be brought into balance by the end of the decade regardless of the preferences of the government of the day. If Quebec should leave the federation, the federal government would have no alternative except to balance the budget immediately, because the government would find it almost impossible to borrow new funds. The referendum "near miss" and the increase in separatist sentiment since the vote suggest that we will not have that much time. We may now have to face a separatist victory as early as this year, and this possibility suggests that the federal government should use the opportunity of this budget to make some of the basic adjustments that will have to be made.

In this submission, we demon-strate that the federal budget can be balanced in two years by a combination of departmental expenditure reductions over and above those of the federal Program Review, and the tax recovery of CPP/QPP, OAS, and UI benefits from high income families (see the next section below). Tables 2 and 3 identify $6.3 billion of additional cutbacks which should be made in fiscal 1996-97 and 1997-98. When added to the cutbacks already announced, the two-year total expenditure reduction amounts to $13.2 billion, or 27 percent of the 1995-96 departmental spending of $48.8 billion.

Click here to view Table 2: Government of Canada Expenditure Outlook With Proposed Fraser Institute Budgetary Measures ($ billions)

Click here to view Table 3: Proposed Government of Canada Departmental Operations With Proposed Fraser Institute Additinal Cut-Backs ($ millions)

Table 3 also identifies 14 federal departments or agencies which involve significant overlap and duplication of effort as a result of the federal government's intrusions into provincial spending jurisdictions. This has been a source of irritation to the provinces and has contributed to regional tensions and pressure on the Canadian confederation.

The federal government could both contribute to national unity and move even more quickly toward budget balance by withdrawing from these areas of federal intrusion into provincial spending jurisdictions.

In the interests of national unity and demonstrating flexible federalism at this crucial time, a further desirable initiative would be the devolution of some federal responsibilities to the provinces-beyond those suggested here-with tax points in Fisheries and Oceans, Citizenship and Immigration, and Corrections Canada. While there would be no direct impact on the federal budget of this type of devolution, the offer would be a tangible example of flexible federalism at work at this sensitive time in our nation's history.

Tax recovery of CPP/QPP, OAS, and UI benefits from high income families

Attaining budget balance and moving into surplus cannot be done entirely with spending cuts. We also recommend the tax recovery of CPP/QPP, OAS, and UI expenditures based on high family incomes.

In an earlier submission, one of the authors proposed that the federal government adopt the principle that no person who is a member of a household unit with income above its provincial or territorial average should be eligible for any payments from the federal government for the Canada Pension Plan, Unemployment Insurance, Old Age Security, Family and Youth Allowance, or other transfers. Michael Walker and Isabella Horry, "March's Solution: Effective Federal Spending Cuts," Fraser Forum, Vancouver: The Fraser Institute, January 1994, p. 22.Note

The tax recovery route is the most practical method of putting this proposal into practice. We have a tax-back simulation prepared by the federal Department of Finance with tables derived from a sample of income tax returns for the 1992 tax year which show the impact of taxing back CPP/QPP, OAS, and UI benefits based on private family income. A tax recovery already exists on OAS payments for high income seniors. Payments are currently recovered at a rate of 15 percent of individual income over $53,215, which means that the benefit is fully recovered at an income of just under $84,000. This recovery yielded about $400 million in 1994-95.Note The Guaranteed Income Supplement was not included because GIS is already highly targeted, with virtually all recipients having a total family income of less than $25,000.

The results of this tax recovery proposal are very significant in terms of the money that could be saved for deficit reduction. CPP/QPP, OAS, and UI payments are currently added to taxable income. Taxing back these benefits reduces taxable income, which in turn reduces federal taxes. The simulation shows both the gross reduction in benefits from the tax recovery, and the net federal savings from the tax recovery after taking into account the reduction in federal income taxes.

The scenario presented in table 4 shows that the percentage of benefits taxed back would gradually increase from zero for families with incomes at the minimum private family income threshold of $18,176 to 100 percent for families at the maximum private family threshold of $43,870.

Click here to view Table 4: Phase-In Tax-Back Between Top of Deciles 5 ($18,176) and 8 ($43,870) (1992 Tax Simulation)

The overall savings to the federal government after tax would be $7.7 billion, based on this 1992 tax simulation. Should $18,176 be considered too low a starting point for this tax recovery proposal, it should be noted that there would still be an overall savings to the federal government of $5.9 billion if the beginning family income threshold were raised to $33,107. This is the figure used in the deficit reduction example presented in this submission.

The $5.9 billion revenue recovery figure is based on 1992 figures and was increased by 3.5 percent per year to reflect the average annual rate of growth in these expenditure categories. This resulted in an estimated addition to budgetary revenues of $6.7 billion in fiscal 1996-97 and $6.9 billion in fiscal 1997-98.

Even if this proposal were not to include CPP/QPP benefits, the federal government could still achieve a small budgetary surplus in fiscal 1997-98.

Privatization shopping list for the government of Canada

In our presentation to this committee last year, we recommended that the federal government sell its crown corporations beginning with Canadian National and Canada Post, and use the proceeds for deficit and debt reduction.

With the successful privatization of CN, it is important that the government be seen to use the more than $2 billion of its proceeds from this sale to reduce the deficit. This should be a separate line item in the budget, as it is a once-and-for-all non-recurring item.

While public opinion is positive toward privatization, the federal government should announce before, or in its next budget, its plans to privatize other crown corporations. Canada Post is our major recommendation at this time. The government should indicate other crown corporations that it intends to sell or dissolve. What is needed is a two year program and all of the proceeds of these sales should be used to reduce the deficit and eventually the national debt.

Conclusion

With 6 provinces expecting surpluses this year, it is important to shift the focus to debt elimination and away from deficits. The federal deficit can be eliminated in the next two years, following which the federal government must start reducing the national debt. In order to do this, the government of Canada must unilaterally stop its intrusion into provincial jurisdictions. It should sell the physical assets of departments that it shuts down, privatize its remaining crown corporations beginning with Canada Post, and tax back personal income transfer payments from high income Canadians on a family income basis.

Continued public pressure to eliminate the debt coupled with legislation to prohibit deficits, tough penalties on the federal cabinet for non-compliance, and a long-term debt elimination plan with built-in taxpayer protection will ensure that Canada's long-term government debt problem will eventually be resolved without Canada having a major financial crisis.

By balancing its budget within the next two years and beginning to reduce the national debt, the federal government can restore the confidence of most Canadians in the financial, economic, and political viability of one Canada, for all Canadians, into the twenty-first century.

Feature Articles:

Deficit Financing, the Decline in Saving, and the Rise in Foreign Borrowing in Canada from 1970-1994

Robert Crozier

[As the effect of budgetary restraint in the provinces is beginning to be felt, there is an increasing chorus of voices saying that the fight against the deficit is not worth winning. There is even a strain of opinion to the effect that the deficit is not a problem. Those who think that way will have found the preceding presentation on the need for budget balance at the federal level shrill and unnecessary.

This article by a distinguished, retired federal government economist, Robert Crozier, should put any such notions to rest. In it, Crozier shows that the main reason for cutting the deficit is that we are eating our seed corn and will not get the kind of economic growth and development we need to employ our population and preserve our standard of living unless we stop the loss of our savings to public sector deficits. I highly recommend you read Crozier's lucid and penetrating analysis of the most important reason for balancing the budget-now!

-Michael Walker]

This article and the accompanying table summarize in a very broad way Canada's saving and investment performance over the period 1970-1994. The analysis gives particular attention to the past four years when Canada was undergoing a slow and uneven recovery from the effects of the 1990-91 recession. All of the numbers are expressed as a percentage of Gross Domestic Product. The table is arranged to show the inter-connections among the activities which together make up the saving and investment process.

One of the primary purposes of the table is to show the impact of total government borrowing (deficit financing) on the saving and investment of the private sector. Since governments borrow not simply to finance their current expenditures, but also to finance their capital expenditures, the government deficit shown here reflects all government spending, not just government current expenditures. For the overall deficit, see the Government Sector Revenue and Expenditure Table of the National Economic and Financial Accounts, line 18.Note

The decline of net saving

Canada has joined the ranks of the low savers. Indeed, this is an under-statement. As the accompanying table shows, in the period 1991-1994, Canada's rate of net domestic saving virtually disappeared, averaging only 0.8 percent of Gross Domestic Product over the four years (line 3 of the table). This contrasts with an average rate of 7.0 percent in the 1980s and 9.5 percent in the 1970s. There is, in fact, no time in Canada's post-war history when net domestic saving has fallen to the level of the past four years. The only comparable period would be the war years-1942 to 1945-when net domestic saving averaged -1.0 percent of GDP as Canada's huge deficits incurred to finance the war effort absorbed all of the country's net private saving. Under the forced savings programs of war-time Canada, net private saving rose to an average of 15.5 percent of GDP in the four years 1942-1945. The all-government deficit rose to 16.5 percent of GDP leaving net domestic saving at -1.0 percent of GDP.Note

Click here to view Table: Saving, Investment, and Borrowing from Abroad 1970-1994 (Percent of Gross Domestic Product)

What has caused this recent collapse in the rate of net domestic saving? As the table shows, there are two main factors. The net private saving of individuals and businesses has declined on average by about a third in the period 1991-1994 compared to the 1980s, from 11.4 percent of GDP to 7.5 percent (line 1(c)), The decline in private saving can be attributed in large part to the fact that real per capita disposable incomes fell by about 5 percent between 1989 and 1994, in marked contrast to the experience from the mid 1970's to the end of the 1980's when real per capita incomes showed an almost unbroken rise. (Royal Bank of Canada, Why Have Canadian Living Standards Declined in the 1990's? May, 1995.) In addition, corporate profits were hit hard by the recession of the 1990s, undercutting the rate of corporate saving. Profits had still not recovered to their prerecession peak by the first half of 1995.NThe decline in private saving can be attributed in large part to the fact that real per capita disposable incomes fell by about 5 percent between 1989 and 1994, in marked contrast to the experience from the mid 1970's to the end of the 1980's when real per capita incomes showed an almost unbroken rise. (Royal Bank of Canada, Why Have Canadian Living Standards Declined in the 1990's? May, 1995.) In addition, corporate profits were hit hard by the recession of the 1990s, undercutting the rate of corporate saving. Profits had still not recovered to their prerecession peak by the first half of 1995.oThe decline in private saving can be attributed in large part to the fact that real per capita disposable incomes fell by about 5 percent between 1989 and 1994, in marked contrast to the experience from the mid 1970's to the end of the 1980's when real per capita incomes showed an almost unbroken rise. (Royal Bank of Canada, Why Have Canadian Living Standards Declined in the 1990's? May, 1995.) In addition, corporate profits were hit hard by the recession of the 1990s, undercutting the rate of corporate saving. Profits had still not recovered to their prerecession peak by the first half of 1995.te 1 and the all-government deficit has risen by over 50 percent, to 6.7 percent of GDP from 4.4 percent in the 1980s (line 2). With lower private savings, and a larger government deficit absorbing most of it, these two developments have caused the level of net domestic saving to virtually disappear (line 3). It is a striking fact that in the 1991-1994 period, almost 90 percent of the net saving of Canadian businesses and individuals was consumed by the deficits of the public sector.

Borrowing from abroad

What happens when a country has no domestically-generated net saving, but still must finance a modest program of investment in new structures, machinery and equipment, and inventories? Such a country must borrow from abroad. And this is what Canada has done-borrowed the savings of other countries, to the extent of 4.0 percent of GDP in the period 1991-1994 (line 4). This borrowing of foreign savings, reflected in the deficit on the current account of the Balance of Payments, has played a much larger role in financing Canada's net investment needs in the 1990s than in any of the earlier periods depicted in the table. Indeed of the total saving (domestic and foreign) available for net investment in 1991-1994 amounting to 4.8 percent of GDP (line 5), 83 percent was borrowed from abroad. Canada now has the largest foreign debt-to-GDP ratio of any of the leading industrial nations, amounting to over 45 percent of GDP.

One consequence of this greater dependence on foreign borrowing has been a substantial rise in interest paid to non-residents. In 1994, net interest paid abroad amounted to $29 billion, or 3.8 percent of GDP, an amount which was itself considerably larger than the overall deficit in the current account.

1994-a beginning

It is, of course, true that the four-year averages (1991-1994) which we have been using here to illustrate the severity of the decline in our domestic saving, and the rise in our dependence on foreign borrowing, serve to conceal the improvement which got under way in 1994. The figures are shown for individual years on the right hand side of the table. With the reduction in the government deficit in 1994, and relative stability in private saving, there was the beginning of a recovery in domestically generated saving in 1994, to 2.6 percent of GDP (see line 3). While this represented a welcome shift from the dismal record of the preceding three years, it was far below the average of the 1970s and 1980s, and far below Canada's basic savings requirements. At the same time, although the deficit on current account with non-residents declined in 1994, we still drew upon the savings of non-residents to the extent of 2.8 percent of our GDP (line 4), representing an additional $21.1 billion added to the country's net international indebtedness.

The international setting

What we have been doing, in effect, is financing our huge public sector deficit with our scarce private saving, and closing the savings gap by drawing upon the savings of other countries (borrowing from abroad). Canada is not alone in this fiscal behaviour-other industrial countries have been following the same path, although Canada tops the list in terms of net international indebtedness as a percent of GDP. The International Monetary Fund points out that there has been a decline in world saving as a percent of world GDP since the 1970s, and that this is mainly due to "the persistent absorption of private sector saving to finance fiscal imbalances in the industrial countries." The IMF also notes that "the high levels of world real interest rates since the early 1980s" may well be related to this decline in the world saving rate. And finally, in words that are totally unambiguous, the IMF states: "experience suggests clear limits on the extent to which world financial markets can be expected to finance persistent external imbalances, especially when a heavy reliance on foreign saving becomes a substitute for adequate domestic saving." International Monetary Fund, 1995 World Economic Outlook (May/1995), pp. 7-8. The report features a special chapter on "Saving in a Growing World Economy."Note

Net and gross saving and investment

To this point, the discussion has focused on net domestic saving and the degree of Canada's dependence on foreign saving. These are critically important elements in the analysis. As the table shows, however, net domestic saving (line 3) is not the only source of the economy's domestically generated saving. Business firms typically make large allocations on their books in the form of capital consumption allowances (line 6) for the purpose of replacing plant and equipment as it wears out or becomes obsolete. These capital consumption allowances constitute a very large and highly stable component of the economy's total (gross) saving.

The point to be emphasized here is the need to make a clear distinction between the economy's net saving-that is, saving that is available for net new investment after making allowance for the replacement of worn out capital stock-and capital consumption allowances which are aimed essentially at providing for the replacement of the capital stock as it wears out and is used up in the production process. In the latter case, the prime objective is to keep the stock of essential capital intact.

It is evident that a country cannot add to its basic productive capacity if it does no more than replace its structures and equipment as they wear out. That is why net saving is such a strategically important part of the saving-investment process. It is net saving (after providing for depreciation and replacement) that makes possible the financing of net new additions to the capital stock, thereby increasing the economy's productive capacity. It is of course true that "replacement" investment may incorporate new technologies which do add to the economy's productive capacity. But this does not take away from the main point, that it is net investment and net saving which drive the process of new business creation and new job opportunities.Note It is net saving and net investment that impart new dynamism and vigour to the system, creating new business enterprises and new opportunities for employment. A country that has very little net saving will end up with very little net investment-unless, of course, it borrows the resources from abroad.

The figures of gross private domestic investment (line 8) are inclusive of both the net new additions to the capital stock (net investment) and that part of investment which represents the replacement of worn out structures and equipment. Statistical presentations of saving and investment are almost always given in terms of gross saving (line 7) and gross investment (line 10) because on the investment side of the account the figures come to us as single undifferentiated totals. However, we have ample evidence from the detail on the savings side to tell us what has happened to net investment. We can also get a rough approximation to net investment by subtracting capital consumption allowances (line 6) from gross investment (line 8), as has been done in line 11 for the convenience of the reader. Capital consumption allowances on the books of business firms are thought to be an imperfect reflection of actual replacement expenditures. But their statistical stability on a year-to-year basis lends credence to the idea that they may in fact be quite a good proxy. Besides, rough estimates of net investment are preferable to no estimates at all.Note

One of the main points that comes out of this rather technical discussion is that, in the aggregate, figures of gross saving and gross investment by themselves do not tell us very much. Because the numbers are boosted by a large amount of saving in the form of depreciation allowances and by capital investment for replacement purposes, they may sometimes give a misleading and reassuring signal. The really important developments in saving and investment are to be found in examining the detail.

Certification versus Licensure in the Health Care Sector

Cynthia Ramsay

In November 1995, the Alberta government proposed that certified optometrists be allowed to prescribe some drugs and to remove foreign objects from the eye, tasks which presently only ophthalmologists can legally perform. The Ophthalmological Society of Alberta objected to this proposal and demanded Health Minister Shirley McClellan's resignation.

The Ophthalmological Society objected to the proposal because it allows optometrists to infringe upon its members' monopoly which was granted to them by the government through licensure. Licensure, which requires practitioners of a discipline to hold a license in order to practise, is one method of regulating an occupation. Although it is the preferred policy option for the group demanding it, it is not the best option for consumers (patients) because it grants a monopoly over a set of services to the members of the licensed group. Monopolies eliminate competition. And it is competition that drives innovation (research and development), creates efficiency, encourages quality of services, and increases the range of consumer choices.

The reasoning behind the health ministry's proposal is that optometrists are qualified to provide such care, and at less cost to the health system than ophthalmologists. The same reasoning could potentially be extended to other less expensive, non-physician practitioners such as midwives, chiropractors, nurse-practitioners, and physiotherapists. Their range of practice could be extended in their areas of expertise. Permitting non-physician practitioners to provide an increasing number of services to patients would not only alleviate some of the cost pressure on the health system, but it would also allow for increased scope as to what constitutes medicine and health, and it would allow for increased patient choice.

Ostensibly, the demands by medical doctors in the nineteenth century for licensure were based on their desire to protect the general public from incompetent practitioners and from harmful medications. For further information on licensure in Canadian medicine, see Ronald Hamowy, Canadian Medicine: A Study in Restricted Entry, Vancouver: The Fraser Institute, 1984.Note While protecting the public is a worthy objective, the granting of licensure to medical doctors has given them a monopoly in the health care sector; it has allowed them to define what constitutes medicine and to determine who may offer medical services.

The proposal to allow optometrists in Alberta to perform an expanded range of health services is a step towards eliminating this medical monopoly. However, as people increasingly begin to demand the services of non-physician practitioners (already over 20 percent of Canadians use some type of alternative medicine E. Berger, Canada Health Monitor, Survey #9, Price Waterhouse: Toronto, March 1993.Note), there will be increasing demands by these providers for licensure. They, too, will use the argument that licensure is necessary in order to protect the public from unfit providers. (A few examples of groups lobbying provincial governments for licensure of their occupations are nurses, chiropractors, and midwives.)

Being granted licensure by government provides "official" recognition of an occupation. As such, licensure gives occupations a certain legitimacy in the public eye, whether warranted or not. In addition, it allows the licensed group to restrict entry into the licensed occupation and gives the licensed group dominance over a set of defined activities. In effect, it gives each group a monopoly over a defined set of medical services, i.e., the licensed group does not have to compete with other groups in the provision of the designated services.

Governments should consider abandoning the system of licensure and replacing it with a system of certification, if they are really serious about allowing market forces to work in the health system. The replacement of licensing by an alternative such as certification for all health providers, including such providers as naturopaths (who are licensed in some provinces) and chiropractors (who have been lobbying for licensure but have yet to attain it), would make for a level playing field among health care providers. It would increase competition between the institutions certifying providers, and between the providers themselves.

How do certification and licensure differ?

Licensure reserves a set of activities solely for those licensed; anyone else who performs this set of activities may be charged with a criminal offense. It defines an occupational jurisdiction for a group. For example, medical doctors are a self-governing group whose occupational jurisdiction is the practise of medicine. It is prohibited, by law, for anyone else to "practise or profess to practise medicine." The Medical Act of Nova Scotia Medical Act (Nova Scotia). Queen's Printer: Halifax, 1993.Note provides one of the best definitions of what it means to practise medicine:

     (a)      to allege by advertisement, sign or statement of any kind ability or willingness to diagnose or treat any human disease, defect, deformity or injury;

     (b)      to advertise or claim ability or willingness to prescribe or administer any drug, medicine or treatment, or to perform any operation or manipulation, or to apply any apparatus or appliance for the cure or treatment of any human disease, defect, deformity or injury;

     (c)      to act as the agent, assistant or associate of a person, firm or corporation in the practise of medicine as described in clause (a) or (b).

Although this legislation attempts to protect the public, it places a limit on the suppliers of health care. Licensure forces consumers to purchase services from the members of only one group, i.e., if a person is ill, she must go to a doctor to get the illness diagnosed and treated. Licensure prohibits individuals from seeking the services of other health providers who do not necessarily provide dangerous or worthless cures, and who may even be more able to diagnose and treat specific illnesses than doctors.

Every provincial medical act lists the occupations to which the act does not apply, and these lists are getting longer and longer. For example, most medical acts do not apply to dentists who are covered by their own legislation to practise dentistry or dental surgery, or to pharmacists who are covered by their own legislation to practise pharmacy. Recently, aboriginal healers and midwives have been exempted from Ontario's Regulated Health Professions Act (1991). They are covered by their own acts and governed by their own regulatory bodies to practise traditional healing or midwifery services. All of these practitioners, dentists, chiropractors, and others, are exempted from the medical acts only to practise within their area of specialization. They still are not permitted to practise medicine, as that is the sole preserve of doctors. Instead of simply adding to the list of exceptions, of handling non-physician providers as subsets of the medical system, provinces should consider a system of certification.

Whereas licensure reserves a set of activities exclusively for the licensed group, certification reserves a name. Certification provides a level of quality assurance to the public as it prohibits those who are not certified from claiming that they are and from using the reserved title/name, of, say, medical doctor, chiropractor, or nurse-practitioner. Certification is an indication of the "attainment of certain levels of proficiency" rather than a document specifying certain activities which only the certified group can perform. However, the market for services is more competitive than that with licensure because health services can be purchased legally by consumers from either a certified or a non-certified provider. Certification allows for some overlap in the services which the different providers can legally offer.

In changing to a system of certification, medical licensing bodies would become certification bodies; certifying medical doctors. Other organizations would certify practitioners of the various types of medicine. Practitioners would have set guidelines and regulations to follow which would vary with the type of medicine being practised. No longer would it be illegal for other providers to treat and diagnose illness, or to prescribe medication, but they would still not be able to call themselves doctors. Certification would assure the public that their practitioners met the standards of the discipline's certification body, and that the practitioners would be disciplined when these standards were not met. Periodic re-certification would ensure that health providers were "keeping up with the times" in response to the rapid changes that scientific progress brings.

Organized medicine has often fought against developments in alternative medicine, and it still does, in its effort to maintain its stature, to keep its occupational jurisdiction intact. It tried unsuccessfully to suppress the chiropractic profession, for example. Attitudes are changing, though. A recent survey Dr. L. Sutherland and Dr. M.J. Verhoef, "Alternative Medicine and General Practitioners," Canadian Family Physician, vol. 41 (June 1995): 1005-1011.Note has shown that more than half of general practitioners believe that alternative medicine has ideas and methods from which conventional medicine could benefit. In fact, over half referred their patients to alternative practitioners, while 16 percent actually practised some form of alternative medicine themselves. The replacement of licensure with certification would ensure that this trend continues.

Because of the asymmetry of information in the medical realm, some form of regulation must be in place to provide a standard by which professional competence may be judged, and to provide patients with some level of quality assurance. Granting optometrists a larger scope of practise is a start toward enabling market forces to play a larger role in the health sector, increasing competition between providers and consumer choice. Health Minister McClellan should not be bullied into rescinding the proposal. It could eventually lead to more profound proposals-proposals which abandon licensure in favour of certification for all health providers in Canada.

Other sources

Friedman, M. Dr. and R. Friedman. Free to Choose. Avon Books: New York, 1980.

Fulton, J., Dr. The Regulation of Emerging Health Care Occupations. Canadian Hospital Association: Ottawa, 1988.

Walker, M. Dr. "Anatomy of a Conundrum: Canadian Health Care in the 1980s." In Policies and Prescriptions: Current Directions in Health Policy. Centre for Independent Studies: Australia, 1986.

Woodard, J. "Anything But a Pay Cut." Alberta Report (December 4, 1995).

The Institute is Welcomed onto the Internet

Mark Weller

On January 1, 1996, The Fraser Institute established its presence on the Internet with the opening of its site on the World Wide Web at http://www.fraserinstitute.ca. The Institute's decision to go on-line is an important step in its continuing attempts to bring its research on the role of competitive markets to a wider audience.

This project is the culmination of several months of effort by the Institute working with Information Retrievers, a Vancouver-based web service provider. With this step, the Institute joins an impressive number of free market research groups on the Net including, among others, the CATO Institute and the Progressive Policy Institute.

The Institute site is somewhat unique on the Web because it offers a wealth of research material which can be read on-line. Where the World Wide Web has sometimes been criticized for lacking content, The Fraser Institute has taken pains to ensure that our site is content-based and not simply a "web presence" or a method of advertising.

The site is designed primarily to assist researchers and to provide for the needs of students and journalists. When this phase of our project is complete, the site will contain the text of all of our publications from January 1991 to the present. This will comprise some 400 megabytes of data.

As a relatively unregulated area of the global economy, the Internet has become a gathering place for people and organizations who are interested in free speech and the freedom of information. This suggests that there should be a natural synergy between the interests of the Net community and the work of The Fraser Institute.

Indeed, within hours of our coming on-line, it was apparent that many people had been awaiting our arrival in cyberspace for some time. Several people sent e-mail to the Institute welcoming us to the Web and asking for information on a variety of subjects including where they could find tax rates for Alberta, and how they could get the welfare dependency figures for B.C. Far from being critical of the site, most of our visitors suggested additional material they would like to see there.

One way of measuring our effect is by counting the number of unique visits to the site. In its first week of operation, more than 150 people visited our site, and they downloaded a total of more than 20 megabytes of data.

If you have access to the Internet, please make sure you drop by our Web Site. There is place where you can leave comments, or you can e-mail the Institute directly at info@fraserinstitute.ca.

Canada Ranked the Sixth Most Economically Free Country in the World

In conjunction with research institutes in 10 other countries, The Fraser Institute recently released the first comprehensive economic freedom index, rating more than 100 countries over the years 1975 to 1995.

Economic Freedom of the World: 1975-1995 is the product of 10 years' work involving 61 researchers in 11 countries, including many of the world's leading economists. The study measures the extent to which the citizens of a country are free to engage in different economic activities.

Nobel Laureate Milton Friedman said of Economic Freedom of the World, "This measurement of economic freedom is an enormous improvement over anything that has appeared so far. We are all in debt to the authors for the persistence and hard work that has gone into this comprehensive analysis."

The index, which ranks Canada 6th out of 103 nations (see the "February Graph" on page 23), is based on 17 separate measurable components, including:

     •     Ability to hold foreign currency

     •     Capital mobility

     •     Ability to trade with foreigners

     •     Marginal rate of taxation

     •     The extent of transfers and subsidies

     •     Whether there are exchange controls and controls on credit markets

     •     Whether the government employs conscription to raise an army

     •     The fraction of the economy consumed by the public sector

     •     The extent of variation in the rate of inflation, and

     •     The extent to which the government taxes through inflation

The countries which exhibited more economic freedom than Canada were Hong Kong, the United States, New Zealand, Singapore and Switzerland.

The index is different from other indices in that it is based on strictly measurable aspects of each nation's economy. It is also the first index which measures the influence of economic freedom on growth over an extended period of time.

Those countries which had an increase in their economic freedom experienced higher rates of economic growth. Countries like Japan, Singapore and Chile-which experienced a one-unit increase in freedom between 1980 and 1990-had increases in their per capita GDP averaging more than three percent annually. Conversely, countries such as Algeria, Tanzania, Venezuela and Nicaragua-which had the largest reductions in economic freedom-had shrinkage in their levels of per capita income.

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"This measurement of economic freedom is an enormous improvement over anything that has appeared so far. . . ."
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This study also indicates the extent to which a country's economic freedom is related to its level of income. Countries scoring "A" on the economic freedom index had average per capita incomes of $15,834, while those scoring "F" had an average per capita income of $3,180.

The implication is that we must endeavour to increase economic freedom in Canada, and demand that those countries to whom we give foreign aid accord their citizens these same fundamental rights. It costs nothing to permit citizens to engage in economic activity, but it costs a country a lot in terms of foregone growth when they are not permitted to do so.

The report on Canada was a good-news, bad-news mixture. The good news is that Canada's rating has been steady and persistently high throughout the last two decades. We also had the third highest per capita GDP in 1994. However, the study highlighted three areas of "obvious weakness" for Canada: 1) our large government consumption sector-20 percent of GDP is allocated by the political process rather than by markets; 2) our large and growing transfer sector; and 3) our high marginal tax rates, particularly in B.C., Nova Scotia, Ontario, and Quebec.

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The most encouraging aspect of the report is that the world's level of economic freedom is gradually increasing.
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The most encouraging aspect of the report is that the world's level of economic freedom is gradually increasing. In only three of 14 areas of measurement has there been a reduction in freedom since 1975. These include the extent of government consumption, the extent of subsidies and transfers, and the relative size of the international trade sector.

Economic Freedom of the World: 1975-1995, by James Gwartney, Robert Lawson and Walter Block is available from The Fraser Institute for $29.95. Please contact David Hanley at (604) 688-0221, ext. 582, or place an order on our Web site at http://www.fraserinstitute.ca. )

February graph

Click here to view February Graph

More Spending Cuts Needed, Say Canadian Pension Fund Managers

Fazil Mihlar

Canadian money managers responsible for approximately $150 billion in total assets under management hold the view that the federal government should make further spending cuts in the next budget, a Fraser Institute survey has found.

An overwhelming 87 percent of Canadian pension fund managers who responded to The Fraser Institute's Survey of Senior Investment Managers believe that the federal government should reduce the budget deficit through cuts in government spending. Ninety-eight percent of fund managers surveyed also believe that the federal government will need to make further spending cuts in addition to those announced in last year's budget. This consensus opinion suggests that the financial markets expect the Minister of Finance to announce further spending cuts above those disclosed in the last budget.

Deeper spending cuts necessary

No fewer than 92 percent of respondents strongly agreed or agreed that the size of the current federal deficit is not sustainable. When asked to identify the most important issue currently facing the federal government, deficit reduction remains the paramount concern among Canada's senior financial advisors. In fact, 85 percent of respondents rated deficit reduction as the most important issue for Ottawa. The results of the survey send a clear message that deeper spending cuts are necessary.

Ottawa should adopt Manitoba's Balanced Budget Law

Manitoba's recently-passed balanced budget law covers both current and capital spending and has tough penalties for non-compliance. The premier and each member of the executive council could lose 20 percent of their pay in each of two years-40 percent overall-if budget goals are not achieved. The Manitoba law also includes a mandated payment schedule to retire the provincial debt over a maximum 30 year period. In addition, taxpayer protection is included in about 70 percent of revenue sources, in that province-wide referendum approval is required for future increases in provincial income, corporate, and sales taxes.

Respondents were asked if the federal government should adopt a balanced budget law similar to that of Manitoba's. Seventy-seven percent said "yes." A Manitoba-style balanced budget law would help shift the emphasis from deficit elimination to debt reduction. It is important that Ottawa consider a debt reduction plan in the next budget, since interest on the public debt is expected to rise to $50.7 billion in 1996-97 from $38.0 billion in 1993-94.

Current deficit targets inadequate

The Finance Minister recently reaffirmed the Canadian government's commitment to reduce the deficit to 3 percent of GDP ($25 billion) by the Spring of 1997. Most respondents believe that this target is inadequate. When asked what the deficit target should be for 1997, 56 percent of respondents said that the federal government should seek to achieve either a balanced budget or a budget surplus. A further 37 percent believe the 3 percent target is too large a deficit.

Balanced budget by fiscal year 1999-2000 unlikely

Fund Managers are pessimistic about a balanced budget by the year 1999-2000. Indeed, a total of 68 percent surveyed said that it was very unlikely (26 percent), unlikely (24 percent), and somewhat unlikely (18 percent) that the federal government will reach a balanced budget by the year 1999-2000. The ratio of debt-to-GDP is currently at 73.5 percent. A high debt-to-GDP ratio encourages high interest rates, subjects the economy to volatility and can lead to low levels of economic activity. Ottawa, therefore, should embark upon a more aggressive deficit elimination program.

Confidence in the private sector

Fund managers generally view the Canadian economy positively, particularly the corporate sector. The consensus forecast among the respondents is for the Canadian economy to grow by 2.5 percent and for corporate profits to grow at a healthy rate of 10.0 percent in 1996. Inflation is expected to be at 2.0 percent. In fact, Canada's fund managers appear to have more confidence in the private sector of the economy than they do in the federal government.

High approval rating for the Minister of Finance

While having no confidence in the performance of the government in budgetary matters, fund managers appear to have confidence in the Finance Minister. In fact, 75 percent of the respondents rated his performance as either very good or good.

[To find out how you can become a subscriber to the Survey of Senior Investment Managers, please call Fazil Mihlar at (604) 688-0221, loc. 319.]

Oh, and Don't Stick a Fork in Your Eye, Either

John Robson

The lead editorial in the Ottawa Citizen for January 5th of this year began, "A holiday accident in Ottawa probably left many people looking at their clothing with a new wariness." It went on to describe an accident in which an elderly woman was badly burned when the sleeve of her sweater caught fire when stuck into an open flame. And then, after detailing all the ways the federal government tries to stop things from burning up or down, it cautioned readers that no amount of effort and inspection by Ottawa can make the entire universe fireproof.

Now, I'm not in favour of granny catching fire, of course. Nor do I wish to be immolated myself. But when I operate fire and its derivatives, such as electric burners, I must confess that I adopt a rather different procedure than the Ottawa Citizen and the Ottawa government apparently think that I do. I exercise my own judgement. I may be surrounded by government-mandated warning labels telling me not to eat bleach, advising me that I must use a CA11A or CA11AW phone connection arrangement (thank you, Canadian Department of Communications) or assuring me that my mattress is not radioactive. Nevertheless, I attempt to exercise what feeble judgement I possess when it comes to my personal safety, rather than assuming that anything that has been inspected is safe, that anything that hasn't isn't, and that I am far too great a fool to know the difference. I do not allow government labels to substitute for my own judgement.

In fact, P.J. O'Rourke has suggested that government itself should carry a warning label, on the grounds that government incompetence, idiocy, and malice have killed far more people in this century than any other factor. I agree, and if I were asked to write that label, it would run something like this:

WARNING: While government has some important uses, it is dangerous if abused. It thinks it is a lot smarter than you are, and if you let it, it will gradually encroach on all areas of your life, from overruling freedom of association to removing your right to enter into contracts that supersede general tort law. If this happens, your powers of judgement, from forced inactivity, will atrophy, as will your ability to build and function in communities based on voluntary consent. Eventually the government's insulting portrait of you will become reality, if you don't fight back. DO NOT REMOVE THIS TAG!

For Canadians, the greatest danger of government is that by treating us like foolish children it will ultimately succeed in reducing us to that status. Obviously the editors of the Citizen believe the process has gone further than, in fact, it has. Most of us still realize independently that we should not place our clothing in an open flame. (For one thing, I'm usually inside my clothing while moving it around, and since I'm no G. Gordon Liddy, I avoid placing my body parts in open flames even when they are wrapped in flame-resistant fabrics.)

Therefore it just might be superfluous (or worse) for the Citizen editorial to conclude: "If the holiday accident has shattered the mistaken notion that all clothing has been tested for fire hazard, that is a good thing. So is the reminder that sleeves must be kept away from burners and fireplaces."

Well, I'm glad we got that sorted out! However, as a public service, just in case, I'd like to mention a few other things you shouldn't do, even though there are government safety standards.

Don't stick your finger in an electric outlet. Don't jump out of a high window, assuming you find one that isn't, by law, unopenable. Don't eat a light bulb even if it has burned out. Don't believe the government when it says you and your fellow citizens are incompetents protected only by Big Sister from oppressing, mangling, and killing yourselves or others at random.

If you follow these and similar rules, you'll do okay.

Oh, one more thing. Don't stick a fork in your eye, either. Not even one that meets government standards.

You Can't Ask That!

Karen Selick

Part of the training for would-be lawyers in Canada involves working at a law firm for a year-a procedure known as "articling." Every summer, there's a mad scramble as firms interview students, seeking the best students for their firms before someone else snaps them up. Several years ago, Ontario's Law Society tried to put a lid on this feeding frenzy by prescribing rules to govern the timing of interviews and job offers. Recently, however, the Law Society deemed it necessary to dictate not only the scheduling of interviews, but the content. I have in front of me the new official guidelines on how to conduct a politically correct articling interview.

Is it possible that real lawyers actually wrote this thing? It's so full of contradictions and non sequiturs that I wouldn't trust any of the draftsperdaughters who penned it to write a shopping list, let alone a will or a contract.

On page two, for example, we're told it's forbidden to ask students any questions which would elicit information about their disabilities. Then on page five we're told, "It is a good idea to ask all applicants (not just visibly disabled applicants) what accommodation, if any, they would need to meet the job requirements." Well, heck, if I ask them that, won't they naturally have to spill the beans about their disabilities?

We are also forbidden to ask questions that would elicit information about other personal characteristics, including sex and ethnic origin. Unfortunately, most people's names give away this top-secret info.

I guess when we advertise for students to send us their resumes, we'd better instruct them to identify themselves by their social insurance numbers only. Oops, wasn't there talk of making that illegal, too?

Then there's the part that says the purpose of the interview is to give potential employers a chance "to assess whether the candidate has the requisite skill, knowledge, and dedication to fill the position available" (emphasis added).

Yet the list of forbidden questions includes all inquiries about the applicant's child-rearing plans. Okay, we all know the law says we can't discriminate against women because they might get pregnant. It's a ridiculous law, even by the standards of anti-discrimination laws. Pregnancy is not an unexpected affliction beyond a woman's control. It's simply a lifestyle choice, just like being a lawyer is. Unfortunately, the two lifestyles often conflict.

What amazes me is the Law Society's hypocrisy in suggesting employers have a fair chance to assess an applicant's dedication to the position when we can't ask about this very important aspect of someone's life. It's downright dishonest to imply that family plans never have any bearing on people's dedication to their jobs.

It's also anachronistic, paternalistic, and anti-individualistic to assume that being asked such questions will automatically place all female applicants at a disadvantage.

Some women may not want kids. Some may intend to give birth and return immediately to a 50-hour work week while their husbands or nannies stay home with the children. Others may intend to stay home for nine months after each birth and work only part-time in between. That's a big range in dedication to the practice of law, in my view. Women who place priority on their careers should have the opportunity to tell us their plans and avoid being lumped in with women whose priorities lie elsewhere.

There may be firms who can't afford a full-time employee but would welcome a part-timer. Women with children would fit in perfectly. Why can't employers ask about this and sort out the people who meet our requirements from those who don't?

Another question on the sample list of untouchables is "Would your wife be happy living in Ottawa?" Most firms hire students with a view to hiring them back as associates. If a student has no roots in that town, and the spouse has a good job and family ties elsewhere, the couple probably won't end up staying. Why should we be forbidden from preventing these costly mismatches before they occur?

Another inexplicable taboo is the question "What clubs do you belong to?" Maybe the fear here is that someone might-Heaven forbid-belong to a club that denotes their ancestry or ethnic origin. For years this country has poured money into multiculturalism programs designed to make hyphenated Canadians feel proud of their origins and "ordinary" Canadians respectful of the hyphenated. Don't we ever expect this policy to pay off? Will members of minority groups never feel proud enough to proclaim their ethnic identities? How do we know we haven't already reached the stage where interviewers are so impressed by the achievements of minority groups that they favour, rather than disfavour, them? Some firms may already have a large Ruritanian clientele who would welcome being served by a Ruritanian lawyer.

Finally, the Law Society gives employers this ominous advice: "Do not interview applicants on your own."

The reason? "A panel of at least two interviewers is likely to reduce the possible incidence of discrimination."

Heck, no. If discrimination among employers is as rampant as the authors of these guidelines seem to think, then having two interviewers would double the possibility of discrimination, not reduce it.

Ironically, this may be the one piece of advice worth taking. In a world where gynaecologists won't examine patients without a nurse present and university professors won't meet with students alone in their offices, maybe it's time lawyers started protecting themselves by having witnesses present, too.

Fortunately, though, the average articling applicant seems to have a better grip on reality than the people who wrote these guidelines. Most students have the common sense and self-confidence to talk freely about themselves even as we interviewers sit there mute, terrified of transgressing against the guidelines.

When word gets around that volunteering information gives applicants the edge, will the Law Society try to forbid that too?

Where do Jobs Come From?

Chris Sarlo

The best welfare program is a job! This sentiment is shared by everyone regardless of their ideological position. Employment provides a person with more than just income. It promotes a sense of self worth and confidence in a way that few other activities can. Except for those few who are permanently unable to work, recipients of welfare and the unemployed, in general, desperately want to work. But, as we are told so often, there are no jobs.

The Canadian unemployment rate has moved upward in the past three decades. Averaging roughly five percent during the 1960s, the overall rate of unemployment in the (post recession) mid-'90s is just below 10 percent. The current rate for young people (15-24) is about 16 percent, although about 5 percent higher for young males than young females. This is almost triple the youth unemployment rate during the 1960s. There is little doubt that the probability of being unemployed, using unemployment rates as an indicator, has increased over time. It is now more difficult, on average, to find a job. Why is that?

To answer this, it is useful to pose a more fundamental question: Where do jobs come from? On the surface, the answer to this might appear obvious: the source of jobs is demand. As demand for a product increases, firms devote more resources (including labour) to its production. Earlier in this century, demand for automobiles rose rapidly, and employment of autoworkers increased rapidly as a result. More recently, demand for the personal computer (a product that barely existed two decades ago) has increased sharply, and with it, a wide range of employment opportunities in that industry.

But demand for this or that product, by itself, cannot create net jobs in the economy. An increase in the demand for product A might simply be at the cost of demand for some other product B. Jobs created in industry A may be offset by job losses in industry B, leaving the economy with no net gain in employment. This happens as tastes change or as people make substitutions in consumption. Unless "aggregate" demand increases, there is not likely to be any net job creation.

Economic efficiency is a primary source of new net demand, although the connection is indirect. Greater efficiency means that costs fall and, with competitive market forces, prices decline as well. Consumers pay less for those commodities produced more efficiently and, consequently, have more of their disposable income available to purchase other goods. This is the source of new aggregate demand and this raises real incomes. While the process of improving efficiency may involve some displacement of labour, lower prices increase the quantity demanded, and expand overall employment. The most efficient firms and industries are typically also the fastest growing in terms of net job creation. The computer industry is just one example. Firms are driven to increase efficiency by both the profit motive and competition. Both are essential ingredients.

Can the state create jobs? Governments are good at "transferring" demand and jobs. They "create" jobs in the public sector or spend money on them in the private sector by taxing citizens who have correspondingly less to spend themselves. We have more demand in the public sector, and less in the private. It's a saw-off! However, to the extent that the state operates inefficiently, there is, in fact, net job loss over time. It is important to remember that the state has no incentive to operate efficiently, and it has no competition.

Aside from the possibility of Keynesian-style fiscal stimulus in a deep recession, it would be hard to make a case that governments can actually create jobs. Indeed, some proponents of big government acknowledge that promoting fairness and equity will involve a loss in efficiency. Of course, any reduction in efficiency in the economy directly costs jobs. It's not clear how higher unemployment is fair. More importantly, it's not clear how "creating" jobs in one sector at the expense of jobs in another sector is fair. The statist "spin" on those little matters is that rising unemployment is, somehow, the fault of the market system with its profit motive. The solution-you guessed it-is even more government.

The long term rise in unemployment can be largely attributed to declining efficiency due to state encroachment and to poorly conceived social programs. The fact that needy people are having more difficulty finding employment and escaping welfare results, mainly, from these two factors. Without denying that structural change in the economy has made it more difficult for job seekers with old-line skills, it must be said that other nations, such as the U.S., that are undergoing the same structural change, have sharply lower unemployment rates than Canada. The very size and scope of the state, together with the debt overhang, have reduced efficiency in the economy. High taxes and a variety of regulations have undermined private sector job creation. Generous social programs have discouraged work effort and promoted dependency. The very programs which were established to cushion the effect of the loss of paid employment have themselves increased the probability of unemployment. Good intentions and compassion are not enough. We all need a safety net, but one in which employment is always a feasible and attractive alternative to welfare. )

Letters

Re: July 1995 article-"Oh... Oh... Ozone"

Dear Dr. Walker:

I believe in the proposition that most good works are done in the environmental movement by people who would never dream of calling themselves environmentalists. People who work for a profit and people who outfit themselves with the academic qualifications needed to work intelligently with the environment create lasting solutions. Their work is not usually subject to publicity. Most, but not all, people who call themselves environmentalists tend to be talkers not doers, amateurs not professionals, and seekers of publicity not seekers of results.

Please allow me to cite two true cases to demonstrate my point. (I will not mention the name of the individual in the first case.)

Case 1

In the mid-1970s a forestry company in Nova Scotia warned the provincial government that a spruce budworm infestation in the highlands of Cape Breton had reached epidemic proportions. In the absence of an aerial spraying program, their foresters predicted 10 million cords of wood would be destroyed. A young waitress circulated a petition to protest against aerial spraying. Her petition grew into a movement which pressured the Regan government to stop the spraying program. This task completed, she wrote a book in which she claimed that "only" 7.6 million cords of wood was destroyed before the budworm infestation was halted, naturally. Convincing Dalhousie University that her experience as an environmentalist was an adequate substitute for formal studies at the undergraduate level, she entered law school and obtained a law degree.

Actually, the final total of trees directly or indirectly killed by budworms amounted to 12 million cords. A high percentage of this damage was inflicted by a secondary infestation of insects killing trees left weakened by budworm. Our amateur environmentalist forgot that trees live a long time and the cycles of nature go on forever. What she claimed as a success in 1981 was reversed. The damage inflicted because there was no spraying program exceeded the original estimate by 20 percent. It exceeded our environmentalist's claim of 7.6 million cords by 70 percent.

She ignored what provincial etymologists tried to explain to her. Budworm populations ebb and flow, following a cycle. Her book was published and her "victory" was proclaimed when egg counts dropped as part of a natural cycle. In the years following the publication of her book, the budworm population rebounded to inflict far worse damage than originally forecast. Apparently, they did not know she had proclaimed their defeat. The provincial foresters who cleaned up after the infestation in Cape Breton had to conduct the largest single clearcut operation in the world up to that time.

Let's put this loss into perspective. We can toss numbers like 12 million cords around without really grasping what is involved. It is a pile of wood 4 ft. wide by 4 ft. high stretching for 18,181 miles, fully 3/4 of the circumference of the globe at the equator! It could also be thought of as a gigantic wooden tombstone 1000 feet square at the base and reaching upward for 1,536 feet! This would make it the highest mountain in Cape Breton. What part of this memorial will our untrained environmentalist claim as her personal contribution?

Today, she is a respected authority on the environment, the president of an environmental movement and a frequent guest expert on radio and television. I guarantee she seldom speaks about her victory in Cape Breton.

Case 2

A fellow I know, named Jack Dangermond, was an idealistic young geography graduate from Harvard University. He developed a geographic information system by marrying his academic qualifications as a geographer with his acquired skills as a computer programmer. He started a company called Environment Systems Research Institute (ESRI) in California. I met him, in 1982, when I was selling computer systems in Atlantic Canada. The New Brunswick Department of Natural Resources had a major problem looming in their Crown land forests. There was a danger that there would not be enough wood fibre available for harvest, by 2015, to sustain the province's paper mills. This would, in turn, lead to a high level of unemployment.

The Minister, Bud Bird, concluded there was only one sensible course of action available to him. With the assistance of Dr. Gordon Baskerville, a professor of silviculture at the University of New Brunswick, he rationalized the forest holdings of the pulp companies so that their woodlots were close to their plants, thus reducing the cost of transportation and its attendant pollution. Then he caused the entire province to be photographed from the air. These photos were photo-interpreted and digitized into computer codes on an ESRI-based computer system. Each forestry company was given an initial twenty-five year lease. They received a report card at the end of each five year period. If their holdings increased, they were rewarded by having their lease bumped back up to twenty-five years. If they raped the forests, their lease would be cancelled. If there was the same amount of fibre, their lease was counting down from twenty years, but the government would work with them to improve their practices. In 1994, the government was able to announce that forestry in New Brunswick was operating on a sustainable basis.

Significantly, none of the participants in this project would have called themselves environmentalists. Politicians, academics, photointerpreters, geographers and computer professionals solved New Brunswick's environmental problem with very little publicity. Today, New Brunswick, Nova Scotia, and Newfoundland have similar systems based on ESRI software. The Nova Scotia College of Geographic Sciences in Lawrencetown, Nova Scotia, trains computer professionals to work with these systems because I introduced Jack Dangermond to John Wightman, the president of NSCGS. Jack donated some software and John built a program which made his students more employable. Forestry companies, in the provinces mentioned above, have similar systems assisting them to manage their forests. Everything happened the way it did because a sustainable forestry industry is profitable. All the participants made a profit or a wage based on the skills they brought to the exercise.

Conclusions

Profit is a wonderful thing because it makes people want to do good things automatically. There are no libraries of regulations and armies of inspectors to ensure compliance with the system envisaged by Vird and Baskerville. A wise man I once met told me there are two ways to handle a problem: You can surround it with people, throw money at it and contain it, or you can invent a system to deal with it. I made money selling the computer hardware. Jack Dangermond made money selling his software and opened up a new market for his products by finding a way to train people to make his system run. The NSCGS and John Wightman added a new dimension to their manpower training program which made their graduates more employable. The forestry companies bought the solution because it could also be used to determine which stands of timber should be harvested to earn the best return on their forestry investments. The system knows what environmental limits are in play (setbacks from roads, trees and scenic vistas) and how much wood fibre is in each stand of trees. It also knows what transportation costs are involved and where the plants are located. The manager simply tells the system to select, say, a million cunits of wood for "X" plant to yield a cost of $"Z" per cunit. The computer does the rest. The province knows that what is cut will be replaced because it performs periodic five year checks.

The most important result of a profitable system is that it is usually self-regulating and sustainable. The heavy hand of government, something environmentalist seem to always invoke, is not needed. The inventiveness of the human mind is the finest, most under-used instrument at play in the environment. If environmentalists would treat science, governments and businesses as potential allies, they would win more battles. They might, however, be forced to give up the personal publicity they always seem to crave. Unfortunately, the image of an environmentalist is, too often, a picture of Bridget Bardot arriving in Newfoundland wearing a seal skin coat made from the hides of the very creatures she professes to defend.

Jon Coates,

Halifax, N.S.

Don't be Beguiled by the Flat Tax

Dear Editor:

Though I usually appreciate Filip Palda's articles, his recent comments on tax acts in "Southern Comfort" were naive and/or misleading. While most in the "army of accountants and lawyers" would appreciate a simplified tax act, reducing the act to one page would require a revolution. For such a change would require one of two things: changing what is taxed to something much easier to measure than income or wealth (are we really prepared to go back to raising government revenue by poll taxes?); or taxing income, but letting someone other than our elected representatives decide how income is to be defined (are we now prepared to have taxation without representation?).

Mr. Palda is right that we do not now have a flat tax on income. Rather the tax rate increases as income increases. But we do have flat taxes on real estate (the property tax), on consumption (provincial sales taxes), and on value added (the GST). The last time I looked at any of the acts imposing those taxes, they were much longer than a page. "Just having everyone pay 17 percent of their incomes in tax" is not going to have a significant effect on the size of the income tax act either, for its size results not from the difficulties in defining the tax rate(s) but from the difficulties in defining the tax base.

Economists like Mr. Palda get so used to talking about income that they forget it is not easy to measure. If I chose a person at random from the phone book, I doubt that any two economists chosen at random would agree on what that person's income for 1994 was. Indeed, it's doubtful if two accountants would, either. Someone has to translate economists' ivory tower concept of income into something workable and fair in the real world. We can have our elected representatives do this, and put up with the resulting large tax act, or we can delegate it to others. In the latter case, we'll have a much smaller tax act (maybe only one page), but the rules won't take up any less paper than they now do.

Alastair Murdoch, Ph.D., C.A.,
Dept. of Accounting and Finance,
University of Manitoba

Filip Palda responds:

Mr. Murdoch is bound by the notion that income is a subtle notion that needs detailed definition to make it into "something workable." Where has this "workable" definition landed us? In a position where Canadians spend a good chunk of their year keeping receipts they can deduct from income and consulting with accountants on what their income is. Our tax system puts a terrible burden of proof on ordinary citizens. In the U.S., it is estimated that citizens spend upwards of $300 billion complying with tax codes. If this figure carries over to Canada then $30 billion, or slightly less than five percent of national income, goes down the drain every year just to deliver money into government hands. The idea behind a flat tax form is that we should not worry too much about what "true income" means. Better to settle on a simple definition that everyone can understand, that raises enough money for government, and that does not encourage people to look for loopholes. The payoff to this simplicity goes beyond a saving of administrative costs. Our tax system is complex because of the many deductions individuals and business make when calculating income. Large deductions have to be balanced by large tax rates. As thirty years of economic studies have shown, a high tax rate slows down economic growth. Why not lower deductions, and at the same time lower the tax rate? Government will get the same income as before but without discouraging economic growth.

Save the Environment With Technological Innovation

Pierre Desrochers Pierre Desrochers is a student in Urban Studies, National School for Scientific Research, Quebec. This essay tied for second place in The Fraser Institute's Student Essay Competition in June 1995.Note

According to some popular myths, economic growth and technological progress are destroying our environment. But how can we then explain the undeniable fact that deforestation, soil depletion, and water pollution are much more prevalent in so-called developing nations and in the former Eastern Bloc than in the Western world? Could it be that technological progress and economic growth are the only way out of our environmental problems?

That is indeed the conviction of many scientists, among them, James Lovelock, the father of the Gaia hypothesis. The Gaia hypothesis states that the biosphere is a self-regulating entirety that struggles and stands up to the excesses that might damage it. James Lovelock, La terre est un etre vivant. L'hypothese Gaia, (Paris: Flammarion [1979] 1993).Note According to Lovelock, pollution (understood as waste discharge) is as natural to the "living earth" as breathing is to animals. Although he thinks that nothing we do in terms of pollution is likely to kill the planet (after all, Gaia has survived volcanic eruptions and meteor impacts that would "make total nuclear war seem, by comparison, as trivial as a summer breeze" Geoffrey Cowley, "The Earth is One Big Ecosystem. And it's High Time, says Theorist James Lovelock, for Scientists to Think about It that Way," Newsweek. November 7, 1988, pp. 98-99.Note), he warns us that we might deal ourselves, and a lot of other species out of the game if we do not keep coming up with new and better technologies.

Unfortunately, technological progress is often as misunderstood as some environmental issues. Thus, who knows that it is now widely appreciated that technological mastery has always run far ahead of science? that most innovations are made by people working on the factory floor and are thus undramatic and unnoticed? that the most dazzling commercial breakthroughs are more likely to come from small and medium sized firms than from multinationals or research laboratories? that what matters most is what companies do for themselves, and that government policies are almost irrelevant? and, more than anything, that the root of innovation is the combination of many older things? See the special issue of Technology and Culture 17(4) 1976, "The Interaction of Science and Technology in the Industrial Age." Note

But how does technological progress improve the quality of our environment? For one thing, most new technologies are more efficient, use fewer resources, produce less waste, and cause less ecological disruption than old ones. Two historical examples that always amaze ecological activists are coal exploitation, which put an end to deforestation in the late Middle Ages, and petroleum, which brought to and end the great whale massacres of the 19th century. However, the most important aspect of technological progress is probably, as the great Victorian economist Alfred Marshall noted long ago, that everywhere and at anytime in history new uses were found for what had hitherto been considered a waste product. Alfred Marshall, Principles of Economics, 8th edition (London: The MacMillan Press, [1920] 1976).Note It is, however not the "integral recycling" so popular today, where a material is mandated to go back to its former use (for example glass bottle in glass bottle, newspaper in newspaper), but rather a new and profitable use of these wasted resources.

Daily papers remind us from time to time of this process: a fish cannery is transforming its waste into fish flour; a thermal station sells its coal dust to a cement works and converts its sulphurous emanations into sulphuric acid; a dairy and a municipal rubbish dump convert the emanations from their waste into methane gas, and so on. Ray Tomalty and David Pell, Le developpement durable et les villes canadiennes: etudes de cas (Ottawa: The Royal Society of Canada, 1994).Note Whether the transformation is made by the waste producer or by another firm that buys the waste doesn't matter. What can be taken for granted is that the process will involve a new device or a process already used in another industry.

Many people who recognize that technological progress is a good thing nonetheless fear that technology will somehow not be able to keep up with our production of waste. They are, however, forgetting that if innovations result from new combinations of old technologies, then the number of possible innovations will go up very rapidly as more and more technologies become available. M. Mitchell Waldrop, Complexity. The Emerging Science at the Edge of Order and Chaos (NY: Simon and Schuster, 1992).Note Petroski has also pointed out that, because the form of made things is always subject to change in response to their real or perceived shortcomings, and because even our ideas of perfection are not static, everything is subject to change over time. Henry Petroski, The Evolution of Useful Things (New York: Random House, 1992).Note

However, technological progress must not be taken for granted under all circumstances. The mathematician Rene Thom and the late metallurgist Cyril Stanley Smith Cyril Stanley Smith, A Search for Structure. Selected Essays on Art, Science and History (Cambridge, MA: The MIT Press, 1992); Guy Sorman, Les vrais penseurs de notre temps (Paris: Seuil, 1989).Note have reminded us that technological breakthroughs between 1880 and 1940-things like electricity, radio, telephone, internal combustion engine, cars, planes, antibiotics and many others- have been much more qualitatively significant than what we have known since the end of World War II.

How can that be? To me, the only plausible explanation is that this lack of inventiveness was the logical outcome of an interventionist ideology according to which economic growth meant simply doing more of what was already being done instead of adding new kinds of work, and that the solution to pollution lies in reducing production instead of trusting creative people to find new uses for wasted resources. It is also well known that the creation of new technological devices is subject to market signals conveyed through the pricing mechanism. We can thus be sure that government interventions and their subsequent price distortions, such as, for example, artificially low energy prices or huge subsidies to car makers through the building of highways-has extended the life-cycle of some technologies, and prevented the coming of age of new ones.

Environmental protection has long been considered a governmental intervention stronghold. There is, however, no empirical evidence to support this claim. When, in the past, new uses for waste products have been found, these solutions have not placed an economical or ecological burden upon their societies, but have rather increased true wealth. Pollution problems are not those of free, creative, and developing societies. They are the result of the stagnation brought by interventionist ideologues.

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