The Latest Senate Outrage

senate_chamber

The Senate last week voted to amend Bill C-377, legislation passed by Members of Parliament that would compel labour unions to disclose their salaries and expenses. For many, the bill represented a welcome move to financial transparency. For others, there was no lack of irony in the Senate’s move considering the recent spectacle over the abuse of expenses by a number of senators.

But as Andrew Coyle correctly argues, the Senate’s actions to amend C-377 are completely wrong, stating that “it is intolerable that that power should be exercised by any but those the people choose.

The 18th Century Irish statesman and philosopher Edmund Burke asserted that parliament was not a congress of advocates of competing interests, but a deliberative assembly seeking to identify a common interest.

The Senate is neither of these institutions. Instead, it is a community of political partisans unaccountable to Canadian citizens whose actions are an affront to political legitimacy.

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The Culture of Canadian Political Patronage

senate_chamber

Published in the Telegraph-Journal 24th May 2013

On Parliament Hill, yet another day has come and gone in which the Duffy affair has brought new questions but no new answers. It’s easy to draw the conclusion that the scandal is another example of how little politics is about accountability. After searching for the right script, the government finally established its official story: the Prime Minister knew nothing of the payment to Mr. Duffy until he heard it on CTV News.

After declaring how annoyed he was by how the matter had been handled by Mr. Duffy and his former chief-of-staff, Mr. Harper said that the appropriate mechanisms of government would be invoked to manage the details of the issue.

According to a statement from the Conservative-controlled Senate conflict of interest committee, because the case is now with the ethics commissioner, it will now be necessary to wait for the committee’s report. So the unfortunate matter was regrettable but it is being investigated by the appropriate authorities. There was no more for the Prime Minister to do.

“That is the reality and we’ve dealt with it promptly,” Mr. Harper said.

The Senate itself appears in no hurry to apply additional accountability to itself. Appointed by Mulroney to the Senate in 1993, Marjory LeBreton, Leader of the Government in the Senate stated that the Conservative government had been victimized by its objectives to reform the Senate over the last seven years.

“The reality is that we are facing this crisis because we flung open the door and revealed what was going on and now rather than being credited for doing so, we are paying the price for taking this important and necessary step,” Ms LaBreton said.

The Senate ethics officer may indeed review the case, but that will not let the government off the hook. Even though the Senate’s Committee on Internal Economy will once again review Mr. Duffy’s expenses, there is every likelihood that, in the absence of a concerted effort by the government, this case will eventually die the entropic death of most matters that do not appear on Mr. Harper‘s agenda.

Government has enough difficulties forging a consensus on economic or social policy without having to face the political debate that will arise over this controversy in Mr. Harper’s administration. Canada is faced with unprecedented fiscal challenges that have shaken the foundation of economies in Ontario, Quebec, New Brunswick and Nova Scotia. Weak government has less flexibility and credibility to undertake the transformational measures required to balance the books. Without strong measures, ensuring prosperity for Canadians will be significantly more challenging.

An inability to introduce new public policy is not the only implication of a loss of support for government action. The trust of Canadians in government eventually will evaporate, especially with abuse of power as demonstrated by the Senate expenses scandal. Taxpayers who are outraged by the unethical behaviour of politicians will eventually prefer to have less government.

Mr. Harper has, since his first election claimed that, for Canada to remain globally competitive, major reforms to public policy will be necessary over coming years. Many of these reforms will involve controversy, regardless of which leader or political party is at the helm when those reforms are introduced. Public support will be critical to achieving these reforms. This public support requires trust, that ineluctable element that increasingly is what is missing in Canadian politics at all levels.

The real problem is that patronage is deeply entrenched in Canadian politics and it will take more than this scandal to dislodge it. From the standpoint of the public, the behaviour of politicians looks like political corruption. But from the standpoint of the traditional political system, politicians are simply doing what politicians have always done. Patronage is deeply embedded in Canadian political culture. The challenge will be to face this fact squarely. We are far from that reality today.

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Filed under Canadian Senate, Governance

Why History Matters

Lyndon-Baines-Johnson1

Published in the Telegraph-Journal 21st May 2013

A strong and activist state is a fundamental precondition for sustainable economic growth. That is not to say that the state is a sufficient condition, but it is a necessary condition. The converse of this fundamental precondition has been illustrated in every age and across geographies. State breakdown can result in civil war or interstate conflict but other, equally malignant versions can bring a slow economic degradation leading inevitably to political and social distress. There is a veritable library detailing the negative consequences for growth that spin off from the decline of the authority, influence or legitimacy of the state and its institutions.

But if the state and its institutions are so critical to the health of economies, why is so much energy being expended on reducing the scope and scale of government and its agencies at precisely the time when they are most needed? And what is the function of strong governance in the face of rapid and relentless change?

Commentators have emphasised that the reasons for the loss of confidence in the state has its roots in the rise of conservatism and libertarianism. Academics have additionally argued that the defining features of liberal and conservative thought have become blurred. Political parties increasingly have  emphasized the importance of employment and economic growth in the face of global pressures while the role of ideology has declined.

An important implication of the resurgence of the conservatism in the late 20th century is not merely that its adherents energetically seek to repeal the fundamental laws of math and economics. This resurgence began with Ronald Reagan in the 1970s. Before he became president and in his first term as governor of California, Reagan froze government hiring, signalling his early commitment to reducing the size of government. Reagan’s move would hardly register on the scale of contemporary conservative and libertarian anti-government initiatives. But in the 1970s, political expectations had been conditioned by the optimism of Lyndon B. Johnson’s “Great Society”, which highlighted the role of government in promoting civil rights, public broadcasting, medical care, environmental protection and aid to education. Johnson’s “War on Poverty” was predicated on the pervasive role of government as the engine of economic growth.

The decline of Johnson’s liberal America has taken generations to take hold. But the weaknesses of liberal thought have always had their origins in history. There is a substantial literature linking good governance to economic growth where governance means institutions building, rule of law and democracy. The problem is that it is difficult to isolate the correlation between governance and growth. Some argue that good governance is the product of economic growth. If that is so, a key explanation for weak governance in some jurisdictions is that they cannot afford the political institutions that backstop strong governance. Others argue that it was good governance that was responsible for growth.

This leaves open the matter of how changes in governance are initiated. The corrosive forces of globalization — trade liberalization, demographic shifts, changing capital flows and rapidly changing technologies — are placing increasing stresses on political leaders to focus on near-term economic solutions, even as societies are at enormous risk as a consequence of global warming. To reduce expenditures now, in the midst of the turbulence of an ongoing crisis precipitated by free-market ideology and that has resulted in widespread unemployment and the destruction of up to a decade of growth, would inevitably prolong the crisis.

The challenges presented by globalization should have precipitated an evolution of political and economic institutions to create new mechanisms of governance. That we have failed to do so speaks volumes about the urgent need to match the political, social and economic challenges of the 21st century with their appropriate governance institutions.

The idea that economics is subject to forces that exist in social and historical context or even that history matters is a recent amendment to the conventional body of economic thought. Only in the past two decades have governance institutions been viewed as worthy of study by economic development historians. And only more recently have institutions emerged to give this field of study the prominence it deserves.

Photo courtesy Yoichi Okamoto.

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Filed under Economics, U.S.Economy

Moving From Debt to Growth

S&P

Published in the Telegraph-Journal 17th May 2013

The recent downgrade of New Brunswick to AA-minus from A-plus underscores the extent to which the global financial crisis continues to cast its shadow on local economies. Standard and Poor’s (S&P) outlook change took place in June 2011 when New Brunswick became the only province with a negative outlook rating.  According to the credit agency, even with the downgrading, New Brunswick maintained a very strong capacity to meet financial commitments.

At the time, S&P explained their downgrading this way: “Credit concerns include our view of the significant deterioration in the province’s budgetary performance since fiscal 2009 , which continued in fiscal 2011. In addition, New Brunswick’s relatively high net tax-supported debt burden, rose further in fiscal 2011 to about 33% of GDP from about 30.6% in the previous fiscal year. The province expects it to rise further to about 36% in fiscal 2012. The negative outlook reflects our expectation that New Brunswick’s budget plan will not be enough to return the province to a balanced budget position in the medium term.”

Although the downgrade has had no immediate impact on the province, the longer-term effects may be more profound, albeit manifested in subtle ways. Some of the effects of a ratings downgrade are straightforward and manageable. The underlying differences in fundamentals — the set of economic indicators, institutions and policy frameworks that shape the economic outlook — between an AA-minus and an A-plus bond arguably are only minor. Prudential regulations restrict some large institutional investors from holding any asset that is not rated A-plus but this is not an insuperable obstacle to investment.

A small change in fundamentals can result in a relatively large change in bond yields. If the change in yields is large enough and the stock of debt correspondingly high, there is the real possibility that the province could suffer a vicious circle of rising risk premiums and increased debt charges with the consequence of deteriorating economic performance.

There is an expectation that New Brunswick eventually will need greater access to capital to play a more active role in its economic renewal. To achieve this, the fundamentals will need to slant in the province’s favour. Government’s solution to the challenge to date has been to reduce government expenses to draw down its costs. It has been unable to engage in more aggressive austerity policies but additional reductions in health care costs will come with increased unemployment and slowed economic growth. The public policies that will support greater efficiencies — and which will provide real solutions to the growing constellation of health care challenges — will be more transformational than incremental. These policies will require budgets and long-term spending commitments, if they are to reduce costs over time.

To reduce the risk to the province, government would need to avoid introducing discontinuities in the set of policy choices in favour of smooth, orderly adjustments. This may require more time to achieve. Ratings agencies have confirmed their conditional confidence in the direction of the province’s finances. To some extent, the expected sequence of events that will eventually lead to the province’s financial health has already relieved some pressure on New Brunswick and delayed the implementation of greater austerity. The success of this strategy will depend in part on the ability of Finance Minister Blaine Higgs to gain traction on his deficit reduction plans. But success will additionally be predicated on economic growth.

This is where the province’s downgrade could have disproportionate and unexpected effects in the longer term. New Brunswick’s credit worthiness is a synthetic composite of risk and expectations about the future. The objective of government should be to move from current conditions characterized by concerns about the speculation of out-of-control deficits and growing debt, to a desirable equilibrium of improved public finances and a return to growth where government is a committed player.

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Filed under Austerity, Economic Growth, Fiscal Policy, New Brunswick

What Drives the Circular Economy

sharing-economy

Published in the Telegraph-Journal 14th May 2013

Economists continue to insist that the recovery is at hand, even though unemployment remains stubbornly high, global warming continues unabated, GDP growth stagnates one quarter after another and governments stagger under record deficits.

In the face of these set-backs or even outright failures, some are asking whether more economic growth is the single solution to deliver prosperity and well-being for our societies. There is little denying that development and growth is essential for poorer countries but in the advanced economies the argument is gaining momentum that ever-increasing consumption makes little contribution to human satisfaction. In addition, the critics of unconstrained growth charge that the ecosystem that supports economies is straining to the point of breaking under the weight of rising consumption. For these critics, the solution is devising a route to prosperity that does not depend on continued growth.

This limited-growth thesis has startling implications. It proposes that society has reached a fundamental turning point in its economic history in which the growth of industrial civilization can no longer be guaranteed. Economic orthodoxy would view this as heresy. Supporters view the limits to growth as the most urgent task of our times. They see the possibilities of flourishing within the ecological limits of a finite planet. And they see an opportunity to improve the sources of well-being, creativity and lasting prosperity that lie beyond the reach of the market.

This is what became known as the sharing economy. Participants in this economy were developing better ways to share fewer resources for less money, sacrificing or limiting their ownership of things such as living accommodations, vehicles, clothing and consumer technologies. The sharing economy, which can be seen as a circular economy rather than the conventional linear economy, was built on the belief that, because the Internet had connected everyone, a global inventory had been created that could be discounted and shared.

The profit margin from the sharing business was significantly smaller than anyone thought even a few years ago. With time and perspective, the circular economy has failed to take over in the way it was anticipated. Instead, its resilience has been uneven and limited to specific segments of the market. The ideal sharing economy customers are young urbanites who value flexibility and savings over consumer purchases. The question is how much of their decisions are ideological and driven by concerns for the planet.

But the limited success of the circular economy is only part of the story. Tim Jackson, professor of sustainable development at the University of Surrey and an economic adviser to the UK government, makes a compelling case against continued economic growth in developed nations. Mr. Jackson argues that “prosperity goes beyond material concerns”, and at beyond a certain point growth does not increase human well-being. Mr. Jackson asks if it is conceivable that economic growth may not deliver lasting prosperity.

These concerns have some resonance in New Brunswick. Some are beginning to question if conventional economic growth is the solution for everyone in all parts of the province. New Brunswick is a society with not insignificant economic problems. Life in this province can be, for an increasing number of its residents, more difficult than in other places. But New Brunswick also possesses greater strengths and assets and it is clear that most residents find it a rewarding place to call home.

Facing a slowing economy, increasing regional disparities and a chronic skilled human resource scarcity, governments and businesses will soon be forced to review the prospect that unorthodox directions should be considered alongside those traditional policy solutions that have shown limited effectiveness for an increasing number of New Brunswickers.

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Filed under Economic Growth, Innovation, Sharing Economy, Social policy

The Great Unwinding

IMF

Published in the Telegraph-Journal 10th May 2013

In an uncharacteristic show of pessimism, the International Monetary Fund (IMF) recently warned that an “uneven recovery is also a dangerous one” for the global economy. The IMF downgraded its growth forecasts for 2013 for a second time, while professing optimism of a substantial upturn in performance late in the year.

There is ample evidence that this pessimism is warranted. In its twice-yearly World Economic Outlook, the IMF outlined high medium-term risks arising from its skepticism about the euro zone’s ability to pull its way out of its crisis and of the ability of the U.S. to adequately reduce its public sector deficits and debt.

The IMF also recognized that some short-term risks have been reduced. Financial markets showed their approval of both the euro zone’s crisis management initiatives in 2012, and the eventual willingness of American authorities to come to terms with limiting automatic and rapid fiscal tightening under sequestration.

The IMF’s most recent downward revision was shared among emerging and advanced economies. The exception was Japan, where the IMF has become significantly more optimistic following the strenuous efforts of Tokyo to defeat deflation by revising its monetary policy.

We are beginning to see an important evolution of the IMF’s perspective over the past two years. Before 2011, it stressed how most economies were recovering at similar rates. But rather than viewing the global economy as a homogeneous entity, the IMF now believes that the world economy is running at three speeds. It views developing economies such as the BRICS as fundamentally strong. And its analysis has the performance of the U.S. improving while the euro zone lags among advanced economies.

This nuanced view of the global economy underscores how growth has always been uneven across economies and even within them. Projections by the IMF have been persistent in their optimism. Each setback has been treated as only a momentary deviation from the normal trajectory of inexorable growth. Rather than settle on an evaluation of the global economy as possessing structural weakness, each of these deviations have been assigned their own unique cause, whether the Greek bailout, falling prices in the wake of the Japanese tsunami or the uncertainty following Standard & Poor’s downgrade of U.S. debt. Optimists have been unaffected by these temporary setbacks and simply revised their forecast for 4.5 per cent world growth. The latest push-back is to 2015.

The central theme of this economic crisis is that it is a crisis of growth. Financial institutions and markets have long assumed that productivity would continue to accelerate at the pace of the late 1990’s. This is the assumption that fostered an asset-price boom that painted over a spectrum of risk to create an illusion of stability.

But the financial crisis served to unwind these artificial gains and in the process caused a great realignment across industries. This process affected regions unevenly and had no respect for companies that might have operated successfully in their markets for years. As demand declined in the wake of the subsequent recession, industries consolidated and retrenched, cutting costs until growth would return. When the recessionary pressures began to lift, new lower-cost or higher-productivity players had emerged. A new blueprint for competition had rendered the old rule-book obsolete. This is one of the chief reasons for the multi-speed recovery that the IMF now recognizes as the reality of the newest economy.

We are faced with the challenge of recognizing that the old rules no longer apply and that the new growth reality bears little resemblance to the old. In spite of this, policymakers have continued to benchmark the prospects of economic recovery to the growth performance of the pre-financial crisis period. The cardinal assumption underpinning this thinking is that we need not abandon the dynamics of past economic growth because they have merely been postponed and they will return. The greatest obstacle faced by policymakers everywhere is that we continue to justify postponing difficult decisions on the need for the resumption of the pre-crisis growth period.

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We Need to be Ready for Immigration in New Brunswick

Shanghai Times Square, and bus 926

Published in the Telegraph-Journal 7th May 2013

The shortage of skilled labour in the Alberta oil sands has become a vexing issue that today is emblematic of our thinking about how Canada can maintain its prosperity in the 21st century. A similar lack of labour exists across the country. The Conference Board of Canada has forecast that within 10 years, there will be a shortage of more than a million workers across Canada. This shortage is a serious risk to our potential to compete into the future.

In Atlantic Canada, a third of the population will be over 65 in less than two decades. In the absence of Atlantic Canadians suddenly having radically larger families, the region will need to dramatically increase its immigration levels in order to compensate for the steady out-migration that continues to characterize the region. Even promising growth in some industries, in ship building in Nova Scotia and oil and gas finds in Newfoundland and Labrador, has not stemmed the flow of young people from the Atlantic provinces to the West.

For New Brunswick, the great challenge for the 21st century will be to find and attract the people we need to rebuild our economy and way of life. To achieve this, we will need to provide immigrants with real opportunities. We will need to embrace the ways they will reshape this province and integrate them into our communities.

The solution would appear straightforward enough: simply open New Brunswick’s borders to immigrants and wait for people from other countries to populate the province. The reality is more complex.

To grow our population and maintain our standard of living, we will need to welcome thousands of immigrants, a far larger number than are attracted to the province today. To compete with the magnetic pull of cities such as Toronto, Montreal, Calgary and Vancouver, New Brunswick communities must grow substantially and sustainably. Immigration is not a panacea, but ignoring immigration and its attendant diversity, as well as its beneficial effects on trade, innovation and international networks, is not an option. We need to realize that an essential and defining part of New Brunswick’s identity and brand must be that the province is recognized as an open and welcoming society.

Enormous transformation will be necessary for New Brunswick to achieve economic success in the near and medium term. Radical alterations in immigration policy — and the dramatic demographic changes that will be brought about by the large-scale arrival of immigrants to this province — will not come without wrenching dislocation.

In her 1961 classic, The Death and Life of Great American Cities, urban activist Jane Jacobs argued that “economic development, no matter when or where it occurs, is profoundly subversive of the status quo.” This is a succinct explanation for the failure of many policies and programs that generate and support economic development and why they are not implemented. New rules of the game can be an inherent threat to those that benefit from the status quo.

This argument has it that the real preference of those with entrenched influence in many cases is the maintenance of the status quo rather than disruptive economic development. It is also an explanation for why there is so much public obsessing over labour shortages, lack of innovation and shortfalls in investment, but relatively less discussion of the more radical approach that substantial increases of immigration would represent.

Currently, the issue is largely moot. While the imperative to stabilize New Brunswick’s population is real enough, there are substantial challenges associated with keeping immigrants in this province. Attracting skilled workers is one obstacle to be overcome but retaining them is another. New Brunswick first needs to be viewed by the world not as a second-class destination but as a place of opportunity equal to Ontario, Alberta and Saskatchewan.

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Filed under Immigration, Innovation, Job creation, Unemployment