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Finally! Reforming Politics: The BC Blueprint

A Fraser Institute Conference,
November 22, 2001, Vancouver, BC, Canada

[Contents]

Limits to the Power of the People

Herbert G. Grubel
Professor of Economics (Emeritus), Simon Fraser University
Senior Fellow and David Somerville Chair in Fiscal Studies,
Fraser Institute

This is a first draft (November 6, 2001) of speaking notes for a panel on "Checks on Government", at the Fraser Institute Conference "Finally, REFORMING POLITICS: THE BC BLUEPRINT", November 22, 2001, at the Delta Pinnacle Hotel in Vancouver, BC. I thank Gordon Gibson for his throughtful comments, which helped me write a better paper.

Most of today's papers present ideas on how to give "power to the people" through appropriate reforms of existing political institutions. My contribution to today's discussion will be the argument that we also need to consider "limits to the power of the people" exercised through the legislature.

It is not obvious that such limits are needed. After all, the ideal political system and institutions give power to the people and therefore, almost be definition, legislation reflects their collective will. Combine this system with the notion that the people are always right and act in the best interest of all citizens, why do we need limits on the legislative power of an ideal political system?

Those who answer that we do not, have a defensible position. But for my taste it relies too much on faith. My interpretation of human nature and history suggests that this faith in not warranted. The theories of public choice and bureaucracy imply that the motives of governments are driven by more than the desire to maximize the public good. At any rate, there are some influential people who have held the same views as I do. The fathers of the US constitutions and the advocates of the Canadian Charter of Right and Freedoms have not only held these views but were successful in getting them translated into fundamental documents that limit the power of the US and Canadian legislatures.

Protection of Human Rights

The limits are needed because there is the risk that legislatures will pass laws that violate certain fundamental human rights and that subject the minority to the tyranny of the majority. Equality before the law, the right to trial by a jury of peers, free speech, and the right to bear arms are not safe from legislatures interested in the advancement of their political agendas.

Most modern states have imposed such limits on their legislatures. In the United States, they are embodied in the constitution and later amendments. In Canada, they are spelled out in the Charter of Rights and Freedoms.

In practice, questions arise periodically whether specific pieces of legislation are in violation of these limits. In both countries, Supreme Courts are required to rule on these questions and their decisions are binding on the legislatures.

In a dynamic, evolving and growing world, limits can become obsolete or need to be added to. The problem is that such changes to the limits must be possible, but not so easy that determined legislatures can severely limit their effectiveness. For these reasons, changes to the limits require super- majorities in the legislatures, from partner (or junior) governments in the federations, or both. In addition, some countries allow referenda to initiate and ratify constitutional amendments.

It is probably correct to suggest that most Canadians are happy with the limits, which the Charter of Rights and Freedoms has put on the legislature, even if some would prefer the British common law tradition and its history of organically evolving limits. Such a general consensus is consistent with considerable opposition to the role given to the Supreme Court in interpreting some of the limits, especially as they apply to the issue of group versus individual rights and the rights of accused criminals against those of victims and society as a whole. Many experts believe that most of the problems with the Charter are due to the fact that its designers left many of the details so vague that it opened the door to judicial activism by a Supreme Court inclined to advance the political agenda of the social democratic left.

The Need for the Protection of Property Rights

I share the presumed majority view on the merit of the Canadian Charter of Rights and Freedoms. The main theme of my paper today is that the Charter focuses exclusively on human rights and does not protect property rights. During the drafting of the Charter the inclusion of these rights was considered seriously. However, in the end, they were omitted because of the opposition of provincial NDP governments, which threatened to veto the patriation if they did not get their way.

Social democratic parties like the NDP and their governments are ideologically inclined to oppose the constitutional entrenchment of property rights because they fear that such rights would limit their ability to manage the economy and redistribute income and wealth. I confess that for analogous ideological reasons I believe that the public interest would be well served by such limits. My ideology is rooted in economic theory and empirical evidence from history and around the world. Secure property rights encourage investors and entrepreneurs to create capital and innovate products and technology. Capital and innovation are mainsprings of economic growth and prosperity. In addition, property rights are a dimension of human freedom, which includes the freedom of the person as well of possessions. Many value freedom in its own right and independent of any economic benefits.

The issue of private property rights historically first arose when sovereigns simply confiscated property without compensation, be it capricously to suppport their own life-styles or to finance defence and military adventures. The right to be compensated for such "takings" was one of the most important clauses in the Magna Carta. It was upheld and strengthened by British parliaments and has been considered to have contributed to the success of the industrial revolution. However, in modern times protection from outright takings is not as important as protection from a wide variety of other government policies, which are not designed explicity to take away property but do so through more or less incidentally. I now discuss these policies individually by considering how they affect property, what current policies are and how they can be protected.

Right to Stable Prices

Inflation results in the reduced value of a country's currency domestically and abroad. It often leads to the redistribution of wealth from creditors to debtors or the government. Future generations are forced to service the debt with their taxes without receiving corresponding benefits. Efficiency and therefore property is lost for society as a whole as inflation induces the public to adjust their behavior in order to minimize its harmful effects on their conditions.

The need to curb inflation has already been accepted by the Bank of Canada, presumably with the consent of the federal government. Since the early 1990s the Bank of Canada has set targets for inflation near zero. This commitment has been driven by the realization that the inflation of the 1970s and 1980s had not brought the lower unemployment and higher economic growth promised by Keynesian economic theory.

The problem with the current practice of the Bank of Canada is that it has been adopted unilaterally. Therefore, it also can be abandoned unilaterally. The whims of economic theory and the political establishment are unpredictable. For these reasons I suggest that the Bank of Canada be forced to pursue price stability through an appropriate clause in the property rights section of the Charter.

Alternatively, as I have suggested in another study, monetary policy can be removed entirely from the control of Canadian politicians through the creation of a North American Central Bank operating under a constitution, which makes it independent of the governments of the member countries and requires it to pursue price stability. My proposal was stimulated by the creation of the European Monetary Union, which was motivated to a considerable degree by the desire of politicians in the member countries to eliminate the historic bouts with inflation caused by the actions of their central banks. To assure price stability in Europe, the European Central Bank in Frankfurt has been required under its constitution to pursue price stability only, not full employment. Its operations have been removed from political influences of national governments and the legislative and oversight bodies of the European Economic Community.

The adoption of the European model in North America would not only provide the limits on the power of legislatures, which is the focus of my analysis today. It would also bring a host of other benefits like lower interest rates and transactions costs in international trade. As a result of these direct benefits, economic growth and prosperity would be raised.

Right to Balanced Budgets

Budget deficits lead to a growing debt, which needs to be serviced through interest payments. The money for these interest payments has to be collected through taxes, which damage incentives to work and invest and cause inefficiencies. As a result, income levels and wealth are reduced and, in effect, the property rights of Canadians are violated. Most important and unfair, this damage is done to the young without a voting franchise and unborn future generations of Canadians. In a sense, these future generations are a "minority" much like the other minorities whose human rights are protected by the Charter.

Because of the longer run damages done by deficits, many US States have constitutional prohibitions against them. Attempts to introduce the same restrictions on the federal government in the United States have failed by narrow margins on several occasions. It is interesting to note that the prohibition of deficits has the expected economic benefits - states with these limits have superior economic performance than those without them.

While I was a Member of Parliament in Ottawa in 1995, I introduced a private members bill that would have prohibited deficits. My experience illustrates the premises underlying many of the papers presented at this conference. sThe government responded the way it responds to virtually all such private bills. I was given the opportunity to present my idea at the end of a day in the House of Commons that was empty, except for the Speaker and two members from the government. The latter read out papers prepared for them by the Department of Finance setting out why my ideas were stupid, though they never quite used these words. After all, we have to uphold the legendary standards of Canadian politeness. My proposals were never considered in committee, debated in the full House or voted on. I had to console myself with the comments from the two government members after the debate. They told me privately that they quite liked my ideas after they had listened to my speech explaining them. Of course, they may have just been nice to me, knowing first hand the frustrations surrounding private members bills they may well have experienced themselves.

Since 1994 the Liberal government with Paul Martin as the Minister of Finance, has committed itself to balancing the budget. This laudable policy initiative again, like the commitment to price stability, suffers from the fact that it can be reversed at the whim of this or future governments. To protect the property rights of the present and especially future generations, balanced budget requirements need to be enshrined in the Canadian Charter of Rights and Freedoms.

Again, membership in a supra-national organization can be used to achieve the same goals. As is well known, the European Economic Community has imposed fiscal responsibility on its members. If, under the stimulus of the events on September 11, a closer union and common perimeter for the NAFTA countries would be considered officially, the inclusion of a fiscal responsibility clause should be given serious considerations and support by the Government of Canada.

Right to Free Trade and Capital Flows

Tariffs, quotas, red tape, limits on the holding of foreign assets in retirement portfolios and other restrictions on international dealings reduce the property of many Canadians and increase that of others. These policies also induce Canadians to change their behavior to reduce their impact or maximize their benefits. These induced changes in behavior lower the wealth of all Canadians through lower efficiency.

The damaging effects of restrictions on trade and capital flows are appreciated widely by the general public. Politicians have embraced the ideas and, in spite of the well-known risks of punishment at the ballot box by those organized groups losing from free trade, have negotiated treaties aimed at the creation of free trade. NAFTA regionally and the WTO globally are the lasting monuments to these courageous political initiatives. However, the job is not complete as there are still many restrictions on the free flow of capital and host governments discriminate against foreign investors.

The commitment to free trade through international treaties represents an important limit on the freedom of legislatures. While politicians in principle always can withdraw from such treaties, in practice such withdrawal is very difficult. Therefore, the protection of legislated interference of free trade would be stronger if it were enshrined in the Charter.

The Right to Optimal Government Size

Until the 1960s economic models assumed that all policies of government were in the public interest, that they were put into place only after a careful benefit/cost calculus had established their merit. More recently, public choice theory and the theory of bureaucracy have shown that the selfish motives of politicians and bureaucrats play important roles in the creation of many spending and taxation programs. As a result, government is larger than warranted for the maximization of national income and welfare.

Econometric studies involving the history of government spending and economic growth in Canada and some other countries have shown clearly that spending is excessively high. In the early years of the 20^th century when spending as a percent of national income in Canada was low, economic growth was below its maximum. The growth rate was maximized in the early years after the Second World War when spending reached 33 percent of national income. During the last 3 decades or so, spending exceeded this optimal level and economic growth was below its maximum.

The historic relationship between spending and growth can be explained in part by the amount of spending on the bureaucracy and the large amounts of regulations it passed, which burden the productive effort of the private sector. Economic growth also suffered from the detrimental effects on incentives created by social spending, which has been increased beyond its optimal levesl by politicians currying the favor of voters in elections. In addition and most important, the taxation needed to finance this spending has reduced incentives to work, invest, take risks and become educated.

The excessively high levels of taxation and spending during the last 30 years has also been blamed for another important problem, the decrease of the value of the Canadian against the US dollar by about one third. In this context it is important to remember that the fall of the Canadian dollar cannot be explained by the traditional purchasing power parity theory because Canadian and US price levels increased by virtually the same amount. Falling commodity prices in the world are associated statistically with declines in the value of the Canadian dollar. But this assocation does not explain why ever lower returns in the commodity producing sector have not resulted in a larger shift of resources into the high tech and other growing sectors of the economy. The main villain is the high Canadian taxes, which have reduced Canada's attractiveness as a place to invest. American money that did not come to Canada and Canadian money that went to the United States caused an increase in the demand for US dollars and the observed depreciation of the Canadian dollar.

All of the negative effects of excessive Canadian spending and taxation have lowered overall economic growth and the purchasing power of Canadians abroad. In this sense, the excessive spending and taxation have reduced the property of Canadians.

If my analysis is correct, there should be limits on the size of total government spending. The appropriate limits need to be determined after more studies and wide public discussion. My own work has convinced me that a limit for government spending at one third of national income is about right. It would not only maximize economic growth but also assure the stability of the currency's external value.

Limits through Legislation, International Treaties and the Charter

In the preceding analysis I have referred to three ways to limit the power of legislatures in Canada: laws enacted by parliament, treaties creating internationally binding agreements and the enshrinement of property rights in the Charter. Let me now discuss briefly the relative merit of these three approaches.

As already mentioned, limits adopted unilaterally by parliament or the Bank of Canada and the Minister of Finance are easiest to achieve but also equally easy to abandon. They therefore are the least desirable, though better than having no limits at all.

International treaties are more difficult to negotiate and to abandon or change and on my scale rank second in terms of desirability. However, they have some disadvantages. Institutions charged with adjudicating disputes arising under these treaties are often cumbersome and some say, ineffective. This fact may be illustrated by the many rounds of WTO complaints and rulings that have not yet resulted in any significant changes to Canada's system of agricultural supply management.

In addition, all treaties have escape clauses that allow countries to assert their national interest under certain circumstances. One of these circumstances is when a country believes damage is done to an industry by deliberate policies of a foreign government. The Americans have invoked this clause in the case of softwood lumber imports from Canada.

Unfortunately, no countries may be expected to sign international treaties that do not allow them some room to maneuver if there is a sufficiently important threat to "the national interest". The resultant provisions in the treaties will always be subject to some abuse.

The enshrinement of rights in the Canadian Charter (just like amendments to the US constitution) involves a cumbersome procedure, deliberately and rightly designed to assure success only of amendments that have a broad and deep political backing. However, for the same reasons that it is difficult to amend the Charter, once property rights are enshrined, they are very difficult to change. This fact makes amendments to the Charter the best alternative for the introduction of limits to the power of the people with respect to private property rights.

However, the Charter route also has some shortcomings, the most important of which is the role played by the Supreme Court of Canada in interpreting and implicitly extending the impact of the clause through its rulings. This problem is aggravated by the fact that all vacancies on the bench are appointed by the Prime Minister without the need to seek approvaly by Parliament or its relevant committees. Therefore, the Canadian Supreme Court is much more likely to reflect the ideology of the ruling government than does the Supreme Court of the United States.

Because of the political background of the Supreme Court in Canada, the design of the clause therefore must avoid leaving too much room for the Court to puts it stamp on the way in which the clause is implemented. Many analysts argue that the political biases influenced the Court's interpretations of the human rights clauses of the Charter, which are opposed by many Canadians. A repeat of this record in the interpretation of the property rights clause is a real possibility. Unfortunately, the writers of the property clause face an ever-present dilemma associated with such work. If the wording is too precise, it avoids interference from the Supreme Court, but it also limits the ability of the clause to accommodate changes in the economy and social conditions that are certain to occur in the future.

Arguments against Limits

Opposition to the imposition of limits on the power of the people comes from those who believe that a truly representative legislature can do no wrong. Their view may be summarized by the slogan "the people are always right." I have already noted that I am skeptical of this position because of the theories of public choice and bureaucracy as well as my interpretation of history.

However, even if one accepts the need for limits on the power of the people, there are many devils in the details on how to specify and operate these limits. One of these details is the time period over which the requirements need to be met. Should inflation be zero, the budget balanced, the level of spending at one third of national income every day, month, quarter or year? Or is the full business cycle the appropriate length of time over which the goals have to be achieved?

Another issue arises from the fact that deviation from the required targets may be due to unforeseen developments beyond the control of Canadian policy makers, as when there are natural disasters or man-made problems due to wars or economic policies by foreign governments. Missing targets specified in the Charter may not only be inevitable, it may even be desirable to assure the well being of all Canadians. The imposition of trade barriers under certain circumstances may similarly be in the national interest.

These objections to limits on the power of the people must be taken seriously. However, in principle the objections can be met by the proper design of rules guiding the application of the limits. These rules would be different for each policy area and the details need to be settled only after careful consideration by economists and lawyers. The following analysis presents some examples of such detailed rules.

Target Ranges and Averaging

In practice, the Bank of Canada is committed to the maintenance of price stability defined as a target of, say 2 percent annually. It allows itself an acceptable range around the target of 1 to 3 percent. The property rights clause of the Charter can be specified in the same way.

However, the Bank has not dealt with the problem that even if inflation is within the allowed range, lengthy periods above the target can result in average inflation higher than the target. To deal with this problem, it may be necessary to require inflation to be below and above the target for some periods so that the target can be attained as an average over a certain length of time. The desirable length of the averaging period is important and needs detailed study. The business cycle should be one candidate for the appropriate averaging period.

The requirement to balance budgets can be specified similarly with allowable ranges around the target of full balance. The business cycle may also be the best period over which the target must be achieved on average.

But ranges around targets and averaging are not the only method for making the limits as flexible as possible without interfering seriously with their functioning. During the 1990s the Canadian Minister of Finance, Paul Martin has developed an excellent tool designed to assure that with a high probability annual budgets are balanced. The tool consists of a contingency spending reserve, which is part of the planned expenditure side of the budget but for which there are no explicit spending plans. If at the end of the budget year actual spending and revenues on the regular items in the budget are exactly as planned, the reserve is not needed and all of it is used for debt reduction. If the actual outlays and revenues on the other budget items result in what traditionally would be considered to be a deficit, drawing down the contingency reserve finances it and debt reduction is correspondingly smaller.

In principle, the size of the contingency can be made large enough to cover all but the most extreme cases where actual spending exceed actual revenues. The tool used by Martin has in effect redefined the nature of the policy target from a balance in planned budget items to the zero borrowing requirements. The experience of the last 7 years in the use of this tool has been very positive, though it remains to be seen how well it works when the economy goes through a recession. The tool certainly has enough promise to be a serious candidate for inclusion in the part of the proposed property rights clause in the Charter, which specifies operating procedures. If this tool were adopted, the use targets and ranges of the sort discussed above would not be necessary.

Emergencies and Super-Majorities

The use of targets, zones, averaging provisions and contingency reserves may not be adequate to deal with cases of genuine emergencies caused by national or international events beyond the control of Canadian policy makers and resulting in the breach of the recommended limits or targets. There is an obvious way to deal with such emergencies. Parliament can suspend the proposed limits through super-majority voting.

In my private members bill I proposed that deficits could be made legal if 75 percent of the votes of MPs present approve the necessary resolution. The appropriate super-majorities required might be more or less than 75 percent, depending on the results of studies of their merit and the political consensus of what would be best for Canada. Similar rules can be applied to make legally acceptable deviations from targets for other policies stipulated in the Charter. In principle, therefore, the operation of the government during genuine national emergencies can proceed without hindrances.

History shows that super-majorities are very difficult to obtain in democratically elected legislatures. However, I have enough faith in the integrity of politicians that they will set aside narrow self-interests and ideology if and when genuine national emergencies require the attainment of such super-majorities. At the same time, I am also confident that the narrow party interests are strong enough to prevent the abuse of the overriding rule on occasions when no true national emergencies exist.

The proposed super-majority voting rule does not work when a government holds virtually all seats, as it does presently in the BC legislature. I welcome suggestions on how to overcome this problem. Presumably the ideal political institutions discussed today would make it rather unlikely that majorities holding more than two thirds or three quarters of all seats would dominate Canadian legislatures and the issue would become insignificant after the appropriate electoral reforms have been adopted.

Manipulation of Data

Another devil in the details lies in the need to assure that the government does not fudge the books to meet targets set out under the property rights clause of the Charter. The temptation to do so is strong, even in the absence of the Charter limits. For example, the NDP government of British Columbia in recent years has managed to achieve balanced budgets (or smaller deficits) by defining some infrastructure spending as "investment". This practice removed the spending from the ordinary budget where it would have contributed to the deficit and shifted it into the capital budget, where it was financed automatically by an increase in the debt and did not contribute to a deficit defined conventionally.

Many economists support this change in budgeting procedures used by the NDP because economic efficiency and the intertemporal allocation of capital are improved if additions to society's capital stock are financed through borrowing. This practice sends appropriate signals to capital markets and the resultant interest rates induce the efficient amount of savings and private investment. Future generations will face a higher debt, but it will be matched by a correspondingly higher capital stock, which increases productivity and facilitates the financing of the debt service charges.

The problem with this economic argument is that it opens the door to the easy manipulations of the government books. Healthcare and education, representing about two thirds of total spending, result in the formation of human capital, which in principle, like infrastructure spending, should be financed through borrowing. Another problem is that all forms of capital depreciate or become obsolete through time. Therefore, the proper amount of spending on these capital items financed by borrowing is the addition to the stock of capital, net of depreciation. The size of this depreciation is difficult to ascertain and certainly subject to manipulation by politicians.

Another way in which accounting manipulations can be used to disguise problems encountered in meeting the targets specified in the property rights clause of the Charter involves the shifting of spending and taxation between different accounting periods.

The private sector has long manipulated accounting data to improve balance sheets and income statements. However, in recent decades, the scope and magnitude of such private sector manipulation has been limited increasingly through the use of mandatory, professional accounting standards. In my private members bill I required that the government has to follow these same private sector accounting principles and that the Auditor General of Canada is responsible for assuring compliance. I believe that this requirement placed into the proposed property rights clause of the Charter would assure that the problems of accounting manipulations would be minimal.

Enforcement Provisions

A final objection to the enshrinement of property rights in the Charter involves the question of enforceability. What if a government or central bank simply decides to disregard the imposed limits and merrily engages in deficits spending and inflationary policies? The government might believe that is has the right to do so on ideological grounds or simply because its members of parliament have convinced themselves that they represent the people and that the people are always right.

Of course, the same questions arise in the context of the enforcement of human rights. To the best of my knowledge, no Canadian government has ever disregarded human rights provisions deliberately of refused to accept the decisions on contentious interpretation of these rights by the Supreme Court. To the contrary, parliament has always taken such judgements very seriously and typically has either abandoned or rewritten the offending legislation to make it acceptable to the Court. I believe that parliament would show a similar respect for the provisions in the property rights enshrined in the Charter.

The simple fact is that a government disregarding the Charter and decisions by the Supreme Court is likely to face a major constitutional crisis. The Solicitor General would be caught in the unenviable position of having to enforce the laws of the land but is up against the will of the government and its parliamentary majority.

Let me conclude by suggesting that the proposed property rights clause can be made to include financial incentives to meet the required inflation, fiscal and other targets. The Government of New Zealand has adopted such a system for the managers of its government departments and the central bank. If the targets are met or exceeded, these managers are paid bonuses. If the targets are missed, there are financial penalties.

In my private members bill on balanced budgets I proposed the establishment of such financial incentives not just for professional managers but also for ministers of the crown and government MPs. The few media reports on these provisions and the response of the general audience to my presentation in phone-in radio shows indicated that these financial incentives are very popular with Canadians. They obviously believe in the usefulness of financial rewards and punishments to get the best job done in the private and public sector alike.

Summary and Conclusions

The Canadian Charter of Rights and Freedoms limits the power of the people exercised through a properly constituted legislature. The Charter focuses on human rights. My paper today argues that the power of the people needs to be limited also through the entrenchment of private property rights. Such an entrenchment would be fair and increase efficiency, as is suggested by the models of public choice and bureaucracy.

Inflation, deficits, restrictions on foreign dealings and an excessive size of government lead to the expropriation of private property directly and through inefficiencies. These losses of property are best protected by a property rights clause in the Charter, which specifies policy targets in each of these areas that the government is required to meet.

In an uncertain world it is not possible to meet targets at all times. Deviations should be allowed as long as they are within specified boundaries and targets are met over certain lengths of time. In the case of serious emergencies, the targets and bands can be violated for a time if this action is approved through a super-majority vote in parliament.

Limits on the legislature can also be self-imposed or created by international treaties. The latter approach represents an attractive alternative to new clauses in the Charter. It has been used already to limit the power of parliament in the field of international trade through NAFTA and the WTO. A North American Monetary Union constrained by a proper constitution would prevent inflationary policies by the Bank of Canada.

There are many devils in the details for implementing these limits. My analysis has identified some of them and suggested how they can be dealt with.

Of course, the enshrinement of property rights in the Charter and limits on government through international treaties are no panaceas to the ills of democracies. However, they offer enough hope for improvement so that they deserve the attention of the policy makers already considering reforms of political institutions designed to make parliaments more representative of and responsive to the will of the people.