The Future of Federal Transfers

I was recently invited by the Federal-Provincial Relations Division of Finance Canada to participate in a panel discussion in Ottawa on the future of federal transfers to the provinces. Here is the text of my remarks.

Social change: Paul Wells say Fearful Symmetry shows the way

In this week’s Maclean’s magazine Paul Wells spends a lot of time discussing Fearful Symmetry and the social policy changes it portends:

“For next steps, many conservatives are turning to Fearful Symmetry: The Fall and Rise of Canada’s Founding Values, a new book by Brian Lee Crowley, an economist and founder of the new Macdonald – Laurier Institute.

Crowley does not regard himself as a social conservative. But many who do see themselves that way like what he’s saying. To caricature a complex argument, Crowley says the modern welfare state has overextended itself, is unsustainable, and causes more harm than good to institutions like the family. These trends will only get worse when an aging population sharply increases the cost of delivering most social programs. One size can no longer fit all. Social services will have to be narrowly aimed at those who need them most, and delivered only as long as recipients are willing to improve their behaviour by attending to their family, keeping or seeking a job, and so on.

Government is no good at any of that and, in the opinion of most, shouldn’t try. “It is precisely for this reason, in my view, that we have seen in both the United States and the United Kingdom a growing use of the private sector, including the not-for-profit and so-called faith-based charities, for the delivery of social services,” Crowley writes. “Such private agencies may be more demanding of their clientele and expect more in the way of improvements in behaviour.”

Crowley’s book was published last autumn. It seems to have been barely one step ahead of the news. This month’s Throne Speech contained a single line saying the government “will look to innovative charities and forward-thinking private-sector companies to partner on new approaches to many social challenges.” Such charities and companies were much in evidence at the Manning Centre conference. The changes Crowley anticipates are expected and embraced by social conservatives.

Meanwhile, the federal Liberals are still defending policies from five years ago, policies Harper has taken pains to ensure future federal governments won’t be able to afford, with his GST cuts and his massive cash transfers to the provinces. If the Liberals cannot begin to make a case for a return to larger, more activist — and more expensive — state-run social welfare, then Stephen Harper’s social conservative revolution will only accelerate.

Why cuts are how to balance the budget

In all the blather surrounding Red Ed Clark’s call for higher taxes, and the federal Tories response, most of the attention has been focused on either the issue of whether wealthy bankers should be volunteering other people to pay higher taxes OR whether the PM should be criticising private citizens for voicing their opinions about such matters.

Interesting as those questions are, they are not the most important matter. What really matters is whether raising taxes is the right way to fix the deficit. On this, history and human nature respond with a resounding “No”.

History first: the last time we wrestled successfully with the deficit, under Paul Martin’s stewardship at Finance, we did so chiefly by reducing the size of government. The most startling measure of our success: We went from spending a historic high of 53% of GDP on government in 1993 to roughly 40% in 2008, an unprecedented decline in our history. We were able to do so, by the way, while increasing spending on programmes AND cutting taxes because our fiscal discipline allowed us to stop spending so much on interest on our debt. And we ushered in an era of strong economic growth: we outperformed all the other G7 nations for over a decade after Paul Martin tabled the first balanced budget in the late nineties.

Remember that all other attempts to deal with the budget, including the gig tax reform that led to the creation of the GST, did not bring the budget into balance. It was *only* when we got our *spending* under control that that happened.

And that brings us to the human nature side of the equation. The fact of the matter is that politicians are human beings and subject to many pressures and incentives. When a dollar gets in their hands, it does not come with an endorsement saying “May only be used to reduce the deficit”. Instead it becomes the prize in a tug of war between various interests all wanting to get something out of government. Many and perhaps most politicians regard a dollar in the consolidated revenue fund as a reason to spend that dollar on their favourite programme.

That may be one reason why a recent poll in the US shows Americans deeply sceptical about using tax increases to bring their own public finances into balance. They told Rasmussen pollsters by a margin of 58% that politicians “are more likely to spend the money on new government programs.”

The reality is that if we want to balance the budget, the strategy that has proven itself without a doubt is to control spending. Raising taxes too often just gives politicians comfort that they can continue in the bad old habits. And it is those habits that have to be broken.

The Aboriginal Wizard of Oz

This is the first in a wonderful series of articles in The Australian by Noel Pearson, an Australian Aborigine and the Director of the Cape York Institute for Policy and Leadership. Mr Pearson is clearly part of a world-wide awakening among young Aboriginal leaders questioning whether the social service state can really solve the problems of Aboriginal peoples, as opposed to Aboriginal people rising up and taking their own fate in their hands. Every word in this series applies with equal justice to the deplorable plight of Aboriginals in Canada. As Mr Pearson writes:

What my opponents and sceptics from the Left have failed to understand is that when we talk about disempowerment being the singular and devastating feature of Aboriginal Australia, we mean that our people have had their responsibilities taken away from us. Responsibility is power. If we want our people to be empowered, then we need to take back the responsibilities that the welfare state has stripped away from us.”

Noel Pearson’s original article generated a plethora of mostly predictable commentary of the type “Non-Aboriginal Australians would love to have the kind of all encompassing tax-financed welfare services that Aboriginals enjoy.” Pearson’s rebuttal, also in The Australian a few days later, is a joy to read:…

There is no freedom of private choice and action when governments have assumed responsibilities that are normally undertaken by responsible parents and individuals. That government intervention has crowded out the responsibilities of individuals, families and communities is my point.

It is a misinterpretation of history to say that service provisioning followed a lack of responsibility. Aboriginal people never chose welfare as the basis of their inclusion in the country’s citizenship. They wanted equal wages, not welfare. They wanted a hand-up, not a handout. They wanted freedom from discrimination and racism.

But the welfare state regarded Aboriginal people as helpless and hopeless. It has never had any expectations of Aboriginal people. Or disadvantaged people generally. That is why it has stepped into their lives to such an extraordinary degree.

Jeffrey Simpson reviews Fearful Symmetry

Fearful Symmetry in the Halifax Herald

This review first appeared in the Halifax Herald on January 3. It is no longer available online so I’m reproducing it here.

Socialist policies will be history, Crowley predicts

By JEFFREY SIMPSON

BRIAN Lee Crowley predicts that Canada is on the cusp of a profound economic and cultural change that will take the country back to its ideological roots, even if they are unfamiliar to many citizens.

Crowley, the well-known conservative thinker who founded the Atlantic Institute for Market Studies, makes a compelling argument in his recently published book, Fearful Symmetry: The Fall and Rise of Canada’s Founding Values, that the last five decades spent as a nation with socialist leanings has been merely an aberration. Read more

Fearful Symmetry on the 2009 “Global Thinkers Book Club list”

Read what Liberal Leader Michael Ignatieff has to say about Fearful Symmetry in the December 2009 edition of Foreign Policy Magazine. FS is his choice for the Global Thinkers Book Club (“What the smart set is reading”).Of course he suggests the book is an attack on modern Canadian liberalism, and I don’t really agree –… I think of it as a call for the Liberal Party to return to the values that served it, and the country, so well for Canada’s first century. But he certainly sees the book as a reasoned critique of the last 50 years of Canadian public policy, and on that we agree…

Here’s what he says: “It’s an attack on everything I believe, so it’s very bracing and interesting…. He’s saying that Canadian liberalism has damaged Canada, and as the Liberal Party leader I have to disagree. But it’s very intelligent and it’s very important to take your adversaries seriously, so I’m taking him seriously.”

For what it’s worth, I think Michael deserves to be taken a lot more seriously by his adversaries…

NB Power: free, free, free at last

To listen to the whining of the New Brunswick Opposition and Newfoundland Premier Danny Williams, you’d think that the recently announced deal to sell NB Power, the New Brunswick Crown-owned power utility to Quebec Hydro was a sell-out of the province’s interests. Balderdash. New Brunswick has been staggering under the weight of the poorly managed utility and its burgeoning debt for years. This deal provides a profitable way out. New Brunswickers should take it and be glad. Here is a piece that Tom Adams and I co-wrote for the NB Telegraph-Journal laying out the reasons why:

N.B. Power Deal: Good News Not Bad

By Tom Adams and Brian Lee Crowley

The proposed deal between NB Power and Hydro-Quebec brightens New Brunswick’s future. Consumers and taxpayers would reap huge savings while the province’s public finances would be transformed for the better overnight. Industrial users would immediately move to rate parity with comparable users in Quebec, where power prices are among the lowest in the world. Households, small businesses and institutional customers, for whom NB Power was planning rate increases of 3% per year out into the future, would get rates frozen for five years and regulated rates after that.

Yet Conservative David Alward, Leader of the Opposition, opines, “This deal is outrageous. If you are an ordinary New Brunswicker, you’re being sold down the river.” MLA Jeannot Volpé, former energy minister in the Bernard Lord government, called it, “a very stupid, stupid deal.”

In this the Opposition is taking their lead from Premier Danny Williams of Newfoundland and Labrador. He derides Quebec’s intention as a “despicable power grab”.  He reserves his most vicious vituperation for New Brunswick’s government, which he accuses of “complete capitulation” in having “agreed to sell away their future.”

What does the future hold for New Brunswickers under this deal? Mr. Volpé complains that rates for non-industrial customers after the rate freeze expires will increase at inflation and that potential future growth in demand will be served by power at market prices. Of course, NB Power’s rates have been rising faster than inflation and will continue this pace if the deal does not go through. NB Power’s recently acquired new supplies of generation are priced well above market.

NB Power’s government-guaranteed debt, which Hydro Quebec is taking over, is about $12,600 per customer. That monkey will be off New Brunswick’s back. NB Power’s operating costs and rates are some of the highest of any utility in Canada and both are under severe upward pressure. In most years New Brunswickers are lucky if the utility breaks even; punishing losses are frequent.  Those losses will no longer be backstopped by provincial taxpayers.

Notwithstanding guaranteeing rate decreases and freezes, Hydro Quebec says the transaction will be profitable from year one, with an astounding expected return on equity of more than 10 per cent – well above the average return for Canadian utilities.

Hydro Quebec’s decision to take over NB Power is obviously based on Quebec’s assessment that it will have surplus electricity at rock bottom cost well into the future. Hydro Quebec’s sharply declining export revenues, declining load across the region, persistent negative prices in Ontario’s wholesale power market this year, and low market prices in New England, support the view that power will remain cheap for a while. New Brunswickers will benefit from those cheap prices under the proposed deal. Where is Mr. Alward’s proposal for bringing those cheap prices to New Brunswick while servicing NB Power’s debt?

Premier Williams’ opposition actually comes from another source that has nothing to do with New Brunswickers or their interests; the politicians in Fredericton should make sure they know what they’re getting into before following this pied piper.

Premier Williams wants to build a big hydro project on the Lower Churchill in Labrador and sell the power for top dollar. He fears that anything that reinforces Quebec Hydro’s dominant position in eastern North America makes that project less likely. But Premier Williams’ ephemeral dream to press ahead with Lower Churchill cannot proceed in today’s circumstances. This is not because of opposition from Quebec, but precisely because power prices are low and will stay that way for a while. Whatever other virtues Lower Churchill has, its power once delivered to paying customers would be very dear. Taxpayers in that province should be relieved, not outraged, that Nalcor, Newfoundland’s Crown energy company, is not out in the market the trying to sell costly power right now.

Rather than denigrating neighbours for their success, a success that costs his province nothing, Premier Williams should instead turn the Quebec – New Brunswick deal to his long-term advantage. How? By negotiating a transmission access agreement with Quebec to be activated in the future, when Lower Churchill power becomes competitive. Such a deal would cost Quebec little but would help to remove suspicion of their intentions while creating a constructive relationship with a potentially important business partner.

If the Newfoundland government could find the will to be constructive, it would set out terms for the design for a future transmission tolling agreement that allocates costs fairly, moves new Labrador power to market most efficiently, permits Quebec to earn a reasonable return on any prudent investment it makes, enshrines Newfoundland’s right to market access, and establishes an arm’s length dispute resolution mechanism. An excellent model for a deal would be to follow the lead of the transmission access requirements of the U.S. Federal Energy Regulatory Commission that already governs Quebec’s exports. If and when the economics of Labrador power development turn around, the challenging transmission riddle would then be solved.

When neighbouring provinces find creative solutions making both sides much better off, it is corrosive of our federation and antithetical to the essence of Canada for another province to take a bitter, beggar-thy-neighbour position. Instead of fostering acrimony, Premier Williams should butt out of the Quebec-New Brunswick deal and position Newfoundland to get into the power trading game on reasonable terms when the time is ripe.

CanadianImmigrant.ca discovers Fearful Symmetry

CanadianImmigrant.ca posted a review of Fearful Symmetry by George Abraham that shows that *somebody* at least is paying attention to what the book has to say about immigrants, a vital part of Canada’s future.

The review, available here, draws attention to the fact that most commentators in Canada are reluctant to tell it like it is in any politically sensitive areas:

Brian Lee Crowley strikes me as an unlikely Canadian. In his just-published book, Fearful Symmetry: The Fall and Rise of Canada’s Founding Values, he not only debunks many myths about this country, but does it directly and without pulling any punches. Evidently, Crowley is not given to political correctness — that quintessential Canadian value — and does not mind offending a few people, particularly those in Quebec.

But this reviewer, unlike many others, also recognises that I am not out to single out Quebec. There are lots of people who are benefiting from the ill-advised policies of the last 50 years, policies instituted in large part to accommodate the Boomer rush into the workforce plus the rise of Quebec nationalism. On the other hand, it is not often recognised that those poor policies harm the most vulnerable in our society, including immigrants:

To sum up, in Crowley’s reckoning, immigrants who are down on their luck and have been ejected from the workforce during this recession will benefit from the looming labour shortages. But even then they will be hobbled by what the writer rightly calls a “scandal” unworthy of Canada, the non-recognition of immigrant qualifications. He calls it like it is: “Theirs is a transparent effort to protect not the interests of supposedly vulnerable and ignorant consumers but rather the interests of those already exercising these professions in Canada.”

Bélanger and Migué on Fearful Symmetry

Economists Gérard Bélanger and Jean-Luc Migué have an interesting piece in the National Post of 5th October arguing against some of the case I make in Fearful Symmetry attributing the rapid growth in government in Canada to a combination of the rise of the Boomer generation and a separatist Quebec nationalism.

One of the main points they raise against my argument is that growth in government was occurring all over the world, and especially in the western world, and therefore to attribute the growth in government in Canada to these two factors in Canada is to miss the larger picture of change affecting all western societies.

This would be a fair criticism, if it were true. But of course it isn’t. Indeed I spent an important part of the book tracing the growth of government spending in Canada, comparing it to our counterparts in the US (with whom we shared almost identical patterns of government growth for over a century, until the 1960s), and demonstrating that there were in fact two “camps” among Western industrialised societies. One was essentially the US, Canada and Australia, the other was much of Western Europe. The first group proved remarkably more resistant to the growth of government than the latter. But Canada in the Sixties and Seventies essentially changed teams. After a century of following in America’s footsteps, we suddenly and brutally changed camps. Over the ensuing few decades, America’s share of GDP devoted to government rose 6 percentage points. Ours rose over 20. As I say in the book, the zeitgeist in favour of larger government no doubt explains part of the growth in Canada. But it is the speed and size of the change over such a short period, that requires supplementary explanation in Canada, especially since the political class remained committed to small and limited government right up until the early 1960s, as I again show in the book.

As for the rise of a separatist Quebec nationalism only emerging in the 1970s, Migué and Bélanger must have lived through a very different history than I did. The Sixties were a time of radical nationalist ferment that was frightening the life out of the political class in Ottawa. The B&B Commission was named in response. The PQ was formed in the late Sixties from the merger of two other separatist political parties that had been agitating for some time. This was the time that mailboxes were blowing up in Montreal and the FLQ was issuing manifestos. Jean Lesage won the 1960s election on a platform of Maîtres chez nous, and Daniel Johnson won the 1966 election on the slogan of Égalité ou indépendence. The federal Liberal Party went and recruited les trois sages (Trudeau, Marchand and Pelletier) in the mid-Sixties as an attempt to strengthen their response and Trudeau was clearly made leader of the party because he was seen as the man able to respond forcefully to what was happening in Quebec, as indeed he did in the FLQ crisis in 1970.

It is historical revisionism pure and simple to say that because the PQ only made its entrée into the National Assembly in 1970 with a quarter of the vote or because the first referendum only occurred in the late Seventies (with half of French-speakers voting to give the government a mandate to negotiate sovereignty-association) that therefore nothing had happened in the decade preceding or that politicians in Quebec City and Ottawa were not already responding to the rise of a separatist nationalism in the province.

Tom Courchene responds, after a fashion

One of Canada’s most respected social thinkers and a man who has been a great inspiration to me personally, Tom Courchene of Queen’s University, wrote an op-ed in The Globe responding to my own. Mine was a summary of some of the arguments in Fearful Symmetry, focused in particular on the recent news that Ottawa was about to expand the number of seats in the Commons to reflect the growth of BC, Alberta and Ontario. Quebec and all the other provinces would gain no seats, implying a relative loss of not only population but political influence as well. Professor Courchene’s article was clearly intended to be a rebuttal to my piece, but like Andrew Coyne and several other readers who wrote to me, I found its arguments to be a bit mystifying.

OK, he spends the first third of the article agreeing with me. But the place where apparently he and I diverge is when I wrote that the shifting distribution of seats was a symptom of a larger malaise, especially for Quebec, which I described as “a society that cannot pay its own way or reproduce itself, that is highly dependent on transfers from the rest of the country, and that is losing its political influence.” Professor Courchene felt called upon to defend Quebec’s honour.

In so doing he said, for example, that while obviously Quebec’s weight would fall in the Commons, it would remain the same in the Senate. True but, as the French say, quel rapport? Is Professor Courchene seriously suggesting that the ultimate backwater in Canadian political institutions, our unelected Senate, will suddenly become the new avenue through which Quebec will exercise the kind of powerful political influence it has enjoyed in recent decades? If that were the case, I think you’d find Senate reform, giving Quebec the same number of seats as all other provinces, would rapidly move up the public agenda. He argues that falling seats in the Commons for Quebec will mean an abandonment by Quebec voters of the Bloc and a return to the fold of one or more federalist parties. But part of the argument I made in my op-ed is that as the Commons expands, and Quebec’s representation remains static, their ability to cause minority governments (as is the case today thanks to the Bloc) or to bestow majorities (as in much of the previous century), will be heavily diluted. It won’t disappear. It will just become less and less decisive. It is just arithmetic. Michael Bliss makes a similar point about Conservative Party electoral fortunes in today’s Globe.

But what really mystified me, coming from the father of the argument about “transfer dependency” which Professor Courchene helped to popularize in Canada in the 70s and 80s, was his attempt to make it appear that Quebec was the source of many highly desirable changes in Canada, most of which were only made possible by big, and badly designed, transfer programmes. Now far be it from me to deny that Quebec has been a valued and welcome member of Confederation, and I agree with him that the legal and linguistic diversity that Canada enjoys is in large part due to our perfectly legitimate efforts to accommodate Quebec and French-speakers. But as Professor Courchene quite well knows, because he has read my book and I have discussed it with him, many of the changes he singles out as gifts Quebec has bestowed on Canada, I argue have been the result of a sordid bidding war between Ottawa and Quebec City to keep Quebeckers from voting to leave Canada. Moreover this bidding war, by putting huge piles of cash on the table for Quebeckers to quarrel over, has created a society deeply mired in rent-seeking, or what I call PUPPETRY (people using political power to enrich themselves by plundering you).

The whole reason that Quebec is losing political and demographic weight is because its vast expansion of the state and its shift from being a society concerned with productive effort to one concerned with PUPPETRY have caused the emergence of that “society that cannot pay its own way or reproduce itself, that is highly dependent on transfers from the rest of the country, and that is losing its political influence.”

Among the many social dysfunctions that have emerged in Quebec since the Quiet Revolution, let’s list a few: low employment rates, low productivity per capita, low investment rates, low in-migration, low fertility, low family formation rates, high welfare dependency, high out-migration, high taxes, high debt, high divorce, suicide and abortion rates. Now why ever would you describe that as “a society that cannot pay its own way or reproduce itself, that is highly dependent on transfers from the rest of the country, and that is losing its political influence”?

Yes, as Professor Courchene points out, Quebec has been an innovator in social policy, although my gloss on that is that the innovation helps to create dependence on the state and is part of the problem. He cites cheap daycare as an example. On the other hand, that is a policy so far looked on in much of the rest of the country with scepticism, is very expensive and by no means an unalloyed blessing to parents and children, and is only possible in Quebec because of large transfers from other provinces who do not offer such services, when the transfers are supposed to guarantee that less well-off provinces can offer reasonably comparable services to richer ones. I think our history of transfers has been an unhappy one that has fuelled Quebec’s economic and population weakness and Professor Courchene’s defence of them makes him, in my view, a defender of a system that has done Quebec little good and much harm.

He attributes our “multiculturalism” to Quebec. Again, I disagree. In fact multiculturalism was opposed by Quebec as a dilution of their preference for a narrower and old-fashioned two-nation Canada, and the debate over the extent to which cultural minorities should be accommodated has been loudest and most ill-tempered in Quebec, leaving aside the extent to which Quebec has used its provincial powers under the constitution to marginalize the English-speaking population, a stain on Canada’s record of linguistic tolerance and diversity which I document in Fearful Symmetry.

And that brings us to Professor Courchene’s last point: Quebec has been the spear-tip of a movement in favour of “collective rights” that helps to distinguish us from the United States. Well, as a Laurier liberal, a believer in individual liberty, responsibility and accountability under the rule of law, I personally think that “collective rights” are harmful to democracy, are an unwelcome departure from our legal, moral and political tradition, and are unnecessary to distinguish us from the United States. Canadians were different from Americans before e.g. Bill 101 allowed the French-speaking majority in Quebec to oppress the French-speaking minority that wanted to send their kids to English-language schools (an example of how collective rights are really code for majorities oppressing minorities). Surely we only need to distinguish ourselves from American on points where they are wrong and we can do better. Anything else is difference for its own sake, an unworthy prize and one for which we should be unwilling to sacrifice our freedoms and moral tradition.

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