The reviews of Budget 2013 are in. It is a big yawn. A nothing Budget, a one- day wonder in terms of press interest, most of the new measures in it having been leaked beforehand.
This misses a core point. Budget 2013 is remarkable for one thing—the Conservative government has embraced a degree of market intervention we have not seen before.
Conservative commentators like Andrew Coyne, the Canadian Taxpayers Federation, the Fraser Institute and the National Citizens Coalition have lamented for years that the Harper government has strayed from conservative principles because it has been big spending and state expanding. The Harper government’s fiscal record, say these critics, is anathema to conservative principles and history. The critics are of course wrong. Big spending has been the hallmark of every national level conservative government in North America for going on thirty five years. Ronald Regan, George Bush 1 and 2 and Brian Mulroney delivered to their electorate massive deficits, ballooning national debts, and major expansions in the size of the state. If you believe the critics that the Harper government has been big spending and has expanded the size of the state you can be secure in the knowledge that this sits squarely within mainstream North American conservative governance history.
What is new for conservative governments in this country, however, and what runs afoul of three centuries of conservative orthodoxy—all the way back to Adam Smith–is micro economic market intervention, what is sometimes pejoratively referred to as “picking winners” or “industrial policy”. Too its credit, the Harper government’s 2013 Budget shows a willingness to depart from the conservative orthodoxy that the free, unfettered market always delivers the superior economic outcome. Fortunately, this orientation sits squarely in the wheel house of most governments, regardless of political stripe, in most advanced industrial countries.
The 2013 Budget, then, gives us a glimpse of a government that is acting much less like a tribe that subscribes to the theology of Milton Friedman and Frederick Hayek, and much more like a government that wants to experiment with ideas that actually work. In this connection, Budget 2013 contains three welcome market interventionist initiatives of note.
The first relates to the well-known problems of the Canadian labour market, specifically the skills mismatch that exists across the country, in which many employers cannot find workers with the requisite skills to fill jobs. Five years ago, the Conservatives introduced Labour Market Agreements (LMAs), whereby Ottawa transferred, with no strings attached, $500 million per year to the provinces to improve labour market outcomes in their jurisdictions. Half a decade of this hands- -off approach has evidently left the feds underwhelmed, as the skills mismatch has intensified. As a result, going forward, Ottawa will play a more active role in labour markets through the creation of a new Canada Jobs Grant—funded out of the LMA envelope—a $5,000 grant to individuals to be matched by employers and provinces to help ensure workers get the training they need to fill the jobs the labour market is offering. The free market and the provinces will no longer be left to their own devices in resolving Canada’s skills mismatch. Ottawa is coming to the rescue.
The second welcome market intervention contained in the 2013 Budget is the response to the panel headed by David Emerson, former Minister of Industry and Trade, mandated to review Canada’s aerospace policies and programs.
It is a truism that the global aerospace industry is dominated by government interventions of various types. Governments the world over have concluded that aerospace is an industry worth having and worth spending taxpayers money on because of the relatively unique positive spillovers that accrue to the economy as a whole from this sector. Subsidizing aerospace is even supported by a body of serious economic theory—so-called strategic trade theory—that Nobel prize winning economist Paul Krugman pioneered thirty odd years ago.
To its credit, the Harper government seems to have been persuaded that a new, yet modest, market intervention in the Canadian aerospace sector is warranted. Hence, Budget 2013 has committed to establish an Aerospace Technology Demonstration Program, with funding of $110 million over four years. This program will help Canadian aerospace firms bridge the financing gap for large scale technology demonstration projects, which if left un-bridged can cost business opportunities. This is a relatively low-cost and welcome market intervention that could make a big difference for the competitiveness of Canadian aerospace firms in the global marketplace.
Finally, after decades of neglect from both Conservative and Liberal governments alike, Budget 2013 is embracing the notion that Canada needs some kind of defence sector industrial policy. This follows on the heels of the recent report led by Tom Jenkins, CEO of Opentext, which basically called for Ottawa to put in place, on an urgent basis, a number of measures that cumulatively amount to a Canadian defence industrial strategy.
Market intervention in the defence sector is of course also contrary to free market orthodoxy. Yet governments the world over have recognized at least since the Second World War that this industry operates in a managed market, where governments are the main, and sometimes only, customers. And for a variety of complex national security, economic and sovereignty related reasons, most governments around the world have chosen to put in place various types of market interventions to support domestic defence suppliers. Canada has been a weird and almost inexplicable outlier in this respect. Budget 2013 fixes our outlier status with its commitment to implement the Jenkins panel report and establish a Canadian defence industrial policy.
This, then, is why Budget 2013 matters. Like all budgets, you can criticize it on many levels. But the idea that it is a pretty meaningless document misses a core feature of it. Budget 2013 signals an important shift—a maturing if you will– in the Harper’s government’s approach to economic policy, from one largely bound by free market orthodoxy to one that is more interested in policies that work in practice, but maybe less so in theory.
Category: Opinion
Climate change impacts on Canadian agriculture – no time for complacency
Climate has always mattered in agriculture. Farmers watch the weather, we all know that. But are they paying enough attention to the bigger changes?
In a 2007 study of Ontario farmers, 62 per cent of respondents viewed climate change as a long-term warming trend, and 21 per cent were entirely skeptical about its existence.
A U.S. Department of Agriculture report released in February 2013 — Climate Change and Agriculture in the United States: Effects and Adaptation — refers to this perception problem: “Social adaptation barriers represent a significant challenge to climate change adaptation in U.S. agriculture.” In other words, people are having a hard time accepting that climate change is real.
It would, however, be surprising if more recent data did not show Canadian farmers coming to understand the problem of climate change: 2009 and 2011 were major flood years in the Prairies, while 2012 saw widespread drought in many of Canada’s growing areas.
It’s worth noting that climate change will not affect all of Canada equally: it is likely to hit hardest where it hurts the most. The Canadian Prairies — home to more than 80 per cent of Canada’s agricultural land — already has experienced warming at a faster rate than the global average. The area of the Canadian plains at risk of desertification is estimated to have increased by about 50 per cent between recent conditions (1961-90) and those projected for the 2050s.
So whose head is stuck in the ever-deepening sand?
Perhaps it’s the government’s. Agriculture and Agri-Food Canada’s Medium Term Outlook for Canadian Agriculture, 2011-2021, projects a picture of continuity, with prices of grains, oilseeds and special crops remaining well above historic levels (though below recent peaks).
The catch is that the report “… assumes no impact from climate change and from policy to mitigate climate change nor significant animal disease outbreaks or unusual climatic conditions over the period of the outlook.”
Climate change is likely to hit hardest where it hurts the most. The Canadian Prairies — home to more than 80 per cent of Canada’s agricultural land — already has experienced warming at a faster rate than the global average.
Why the complacency? A host of studies from the early 2000s served to reinforce the belief that there was not too much to worry about in Canadian agriculture. Although the studies considered a wide range of outcomes, the take-home message was that climate change could be positive for Canadian agriculture. Longer growing seasons, increases in arable land and a possible shift to higher-value crops would work in Canada’s favour, enabling us to capture greater market share and, in general, to prosper.
More recently, though, that optimism has been dampened by studies showing that crops are often more sensitive to temperature extremes than to averages. So the effect of temperature on many crops has been found to involve thresholds, above which yields rapidly decline. We have also experienced more extreme climatic events and there appears to be a dawning realization that man-made climate change implies more than just a steady warming trend: it implies intense variability, specifically in precipitation. The impact on crops and agricultural production is consistently negative. Expanded agricultural area is of no benefit if the land is regularly flooded or parched.
Here is what we know we will see more of in the future: moisture stress, droughts, disease outbreaks, weed growth and soil erosion as well as higher average temperatures. A recent report issued by PricewaterhouseCoopers pours cold water on any hope that warming can be limited to 2 degrees C, a widely shared aspiration: “Even doubling our current rate of decarbonisation would still lead to emissions consistent with 6 degrees (C) of warming by the end of the century”.
With changes of this magnitude in store, this is no time for complacency. Agriculture and Agri-Food Canada’s 2012 overview of Canadian agriculture paints a picture of a dynamic agriculture and agri-food system directly providing one in eight jobs and accounting for 8.1 per cent of total GDP. But is it prepared for what comes next? Does it have the adaptive capacity required not only to survive the climate future, but to take advantage of any benefits it may offer — even if they’re short-lived?
Federal and provincial governments are spending $8 billion annually on agriculture, but just $156 million goes into research programs — less than 2 per cent of the total spent. With so much uncertainty ahead, is this enough? Will it enable us to be ready with a flexible toolkit of responses when things change? It would be a different situation if the private sector were stepping up its own research spending, but Canada lags other countries in terms of the proportion of private money going into agricultural research.
There is much to applaud in the agri-sector. We’re seeing greater diversification and a change in farming practices to become less environmentally damaging. The 2011 Census of Agriculture showed that, for the first time, over 50 per cent of the total area prepared for seeding across the country employed the less ecologically-disruptive no-till methods.
But we need to ask ourselves if there is more we can do, both to maximize the potential of the sector (how are all those Asian megacities going to feed themselves, after all?) and to help it prepare for a very uncertain future. If the USDA is right when it says that “… continuing changes in climate conditions … (are) likely to overwhelm the ability of the agricultural system to adapt using existing technologies”, there surely we have no more time to waste.
Productivity and pay – why Canadians are (somewhat) better off
Comparing ourselves with the United States is a national pastime in Canada. Sometimes the comparison makes us look good (health care, public education).
Sometimes it makes us look bad (consumer prices, productivity). Sometimes it reveals an altogether more nuanced story. Sadly, we often miss the nuance.
A month ago, the New York Times published a piece, titled Our Economic Pickle, on the conundrum represented by increasing productivity and declining real wages. Workers are producing more, yet taking home less of the overall pie: wages now represent only 43.5 per cent of GDP, down from over 50 per cent of GDP in the 1970s. Corporate profits are at an all-time high while wages and median household income have both fallen.
Within that 43.5 per cent, it is the top earners who are doing best — a familiar story from the broader income inequality debate. In 1979 the top one per cent took home 7.3 per cent of total wages. By 2010 this had risen to 12.9 per cent. This makes sense to those who have been following trends in income polarization: the ultra-rich are increasingly self-made and they earn wages, in large amounts, rather than rely on inheritances. The fact that their share of the pie has gone up by 50 per cent is no surprise.
At the opposite end of the spectrum, things are looking grim for U.S. workers: labour productivity has increased by 80 per cent since 1973 but median hourly compensation has gone up by only 10 per cent. Real GDP has increased by 18 per cent but median household income has fallen by 12 per cent since 2000. ‘Shared prosperity’, as the basis for societal cohesion, appears to have fallen by the wayside.
Is the same true in Canada? Somewhat. One of the biggest problems in this country is labour productivity: this rose by only about 50 per cent between 1980 and 2012 — about 30 per cent less than in the U.S. Average (mean) real hourly wages certainly did not keep up. They grew by 4 per cent between 1981 and 1998, before advancing at a more rapid rate between 1998 to 2011 for a cumulative 14 per cent increase. While by no means perfect, this is significantly better for workers, when lower labour productivity increases are factored in, than in the U.S.
This Canadian ‘advantage’ is reflected in the aggregate figures. In the U.S., the share of wages, salaries and supplementary labor income to GDP has fallen over time — from a high of nearly 54 per cent in the late 1960s to less than 44 per cent now. In Canada it has remained stable, close to 50 per cent of GDP (51 per cent in 1961 and up to 52 per cent in 2011). And in Canada we have minimum wage rates that substantially exceed those in the U.S.
In this week’s State of the Union address, President Barack Obama proposed raising the federal minimum wage in the U.S. from $7.25/hour to $9/hour. Few feel confident that he will be able to achieve this. Meanwhile, hourly minimum wages in Canada — which are set by provinces — vary from $9.50 in Saskatchewan to $11 in Nunavut (Ontario currently stands at $10.25, Quebec at $9.90 and Alberta at $9.75). Goods certainly cost more here — as was confirmed by a recent Senate report on the Canada/U.S. price gap — but at least those at the bottom of the wage scale take more home per hour.
One reason for this may be the relative rates of unionization in the two countries. Unions now represent around 11 per cent of American workers (though less than 7 per cent in the private sector) as opposed to 28 per cent in the 1960s. In Canada the unionization rate is still above 30 per cent, close to the U.S. mid-1950s peak of 35 per cent.
What does this tell us? That our problems are not as severe as those in the U.S.? Yes, at some level that is certainly true. But societies should judge themselves by what they themselves can bear and not by comparison with others. As is the case in the health care debate, if we stop thinking about the U.S., things do not look that great in Canada.
Collapse is by no means imminent, but we do need to do some soul-searching on how we want to move forward and what value we place on the factors that distinguish us from the U.S.
The need to experiment in healthcare
This month the Health Council of Canada published the 2012 Commonwealth Fund International Health Policy Survey of Primary Care Doctors. This informative study is based on a survey of more than 2,000 primary health-care workers across the country.
It focuses on how front liners perceive the system (Does it require minor or major change? Do patients get too much or too little care? Can they get diagnostic tests when they need them?) and how they themselves operate (Do they make home visits? Prescribe electronically? Monitor their own performance against targets?) (To ready the study, click HERE.)
It provides a fascinating insight not just into how we are doing, but also into how we are doing relative to other countries. Sadly, the answer is “not that well.”
Canada’s health system sits more or less in the middle of the pack on physicians’ perceptions of how much change is required: 40 per cent of respondents say the system needs “only minor changes” and our doctors themselves are happy (82 per cent say they are satisfied or very satisfied with practising medicine).
But does their happiness come at the expense of patient care? The disparity between physician satisfaction and the measures in the survey that would seem to translate directly into patient satisfaction, is telling.
As the report notes: “Compared to physicians in nine other countries, Canadian primary care physicians are the least likely to routinely provide same-day or next-day appointments (47 per cent). They are also among the least likely to make home visits (58 per cent) or have after-hours arrangements so that patients can see a doctor or nurse without going to a hospital emergency department (46 per cent).” But doctors themselves may be oblivious to this, because Canadian primary care physicians are also among the least likely to work in practices that regularly review clinical performance against targets (41 per cent average, varying between 62 per cent for B.C. and 19 per cent for Quebec).
Overall, then, this is not an uplifting survey. It finds that “In overall national performance, Canada shows no relative improvement in any areas of access to care … since 2006.”
Canadians are always wont to compare our system to the U.S. This makes sense, but only in geographic terms. There are numerous examples of mixed public-private systems around the world that exhibit substantially greater cost effectiveness and better medical outcomes than our own. None is perfect and all systems struggle to rein in costs, but should we not be learning from elsewhere? And isn’t the Health Council survey a good place to start identifying our deficiencies?
At Canada 2020, we have been gathering information on an alternative public-private hybrid model currently being tested in the U.K. (a country in which 95 per cent of primary care workers say their patients can get after-hours service outside a hospital emergency department and where 96 per cent of physicians regularly review clinical performance against targets).
In 2012, The Circle Partnership was awarded a 10-year contract to manage a publicly funded, full-service hospital in Huntingdonshire. The National Health Service continues to employ most of the hospital’s staff. Health care remains free and universal at the point of delivery, but private-sector incentives have been introduced. Doctors, nurses, and other Circle employees collectively own 49.9 per cent of the company, while the rest is owned by a group of hedge and venture capital funds.
The model is relatively simple: if efficiencies by Circle yield a surplus at Hinchingbrooke Hospital, profits will be shared by the hospital, the NHS, and Circle. If the hospital continues to post a deficit under Circle’s management, Circle will earn nothing and has agreed in its contract to be responsible for the first £5 million of fresh debt.
It is too early to judge Circle’s success. On the one hand, the hospital’s emergency room, which regularly failed to meet targets in the past, was ranked first of 46 hospitals in eastern England after six months under Circle’s administration. Monthly targets for cancer treatment, which had last been met in June 2010, were being fulfilled every month and the length of a patient’s stay after hip or knee surgery fell from an average of 5.6 days to 2.6 days, allowing for faster turnaround of rooms.
On the other hand, Circle has yet to demonstrate its ability to keep costs under control (although it is early days yet). The hospital’s losses reached £4.1 million within eight months, just over double the £1.9 million of debt that Circle had predicted for the hospital by that point.
Here in Canada, no legislation prevents the introduction of private health-care administration. What’s more, our current system should lend itself well to the transition because Canadian primary-care doctors are already paid under a fee-for-service system, rather than earning a fixed salary.
It seems, though, that the largest roadblock to introducing a similar model to Canada lies in public resistance to change. Opposition to any linkage between the private sector and health care remains strong (back to that American comparison problem) and a number of Canadian facilities that have incorporated private incentives have been closed, despite their success (for example the Canadian Radiation Oncology Services clinic in Ontario and a private clinic at Montreal’s Sacré-Coeur Hospital).
But aren’t we Canadians open-minded people? Surely we can open our minds to alternative ways to deliver universally accessible publicly funded health services. The Circle model may not be the perfect solution, but it is well worth watching from our shores if only for the reason that health care improves most when the medical community does what it does best: experiments.
Barriers to competition must fall if productivity is to gain
Canada’s lacklustre productivity growth has become a preoccupation of policy makers, and a prime suspect is the lack of competition faced by Canadian firms.
Many of Canada’s productivity detectives increasingly suspect that because key sectors aren’t disciplined by adequate competition, many businesses don’t face the “creative destruction” that drives innovation.
The average Canadian worker produces roughly 20 per cent less than her or his U.S. counterpart.
We’ve heard it before: If we want to sustain our living standards, Canada must achieve better productivity growth. Various studies have concluded that our laggard growth owes to a failure to invest and innovate. But why? Wouldn’t any rational firm seek productivity gains to increase profitability?
Reflecting on Canadian businesses’ record retained earnings from 2003 to 2007, economist Don Drummond puzzled: “Why did corporations just sit on their profits over this period? Did they not realize that this was a golden opportunity to ramp up their productivity to better withstand global competition?”
As Mr. Drummond observed, we’ve largely checked off the list on his Economist’s Manifesto for productivity growth with stable government finances, reductions in taxes on capital, predictable inflation and a sound banking system. So what gives? Canada’s competitive landscape seems to be the looming, amorphous challenge with which policy makers have yet to fully grapple.
We now have a world-leading framework for competition law, and the Competition Bureau has ramped up its enforcement activities substantially in past years. However, regulatory barriers to competition remain, particularly for key network sectors, such as telecommunications and airlines, and under foreign investment restrictions.
In a report published Thursday by Canada 2020, we survey Canada’s competitive landscape. As we conclude, the productivity agenda for Canada must shift from macroeconomic and fiscal reforms to the microeconomic foundations of innovation and particularly to competitive intensity as a driver of firm performance.
Many of the main policy levers to boost competition were identified in Red Wilson’s landmark Competition Policy Review Panel. There has been some progress on implementing its recommendations – such as the 2009 amendments to modernize Canada’s Competition Act and the federal government’s liberalization of foreign ownership restrictions in telecommunications.
However, certain items remain. In particular, the Investment Canada Act places the burden on the foreign investor to prove “net benefit,” and foreign airlines remain restricted from flying domestic routes. As argued in a recent commentary on Economy Lab, the cost of airfare for Canadian travellers would likely be improved by allowing foreign airlines to fly between Canadian cities. As well, Canada should improve the climate for foreign competition by reversing the onus on foreign investment review, placing the burden on the minister to demonstrate “net detriment.”
Yet, recent debates have flared regarding “national champions,” showing that not everyone is sold on competition as the necessary medicine.
Certain policy makers may still feel the lure of protecting “infant industries” from the full brunt of the market. The question is whether protecting certain firms from competition does more harm than good.
As Canadian public policy increasingly turns toward addressing our productivity shortfall, competition in our national economy must be a key issue.
Labour is key to being an energy superpower
For six years now Prime Minister Stephen Harper has been referring to Canada as “an emerging energy superpower.” It is a very ambitious goal that comes with significant geopolitical clout, the likes of which this country has not enjoyed in decades, if ever. And it will not be achieved without considerable public policy action, especially from the federal government
While the idea of a “national energy strategy” has been rejected by the Harper government, this government has, nonetheless, taken two steps over the past year to facilitate achieving its energy superpower objective.
The first step has been to open the door to more foreign investment into the oil and gas sector so that this capital-intensive resource can be developed. This was symbolized by agreeing to a Foreign Investment Protection Agreement with oil-thirsty China. Enter the Chinese National Offshore Oil Company (CNOOC), which promptly walked right through that door with a takeover bid for Nexen. If this transaction is approved by the feds, we can expect much more investment from China in Canada’s oil and gas sector in future
Ottawa’s second step has been to take an unambiguously supportive position on the building of pipelines to get Canada’s oil and gas into global markets. Earlier this year, Mr. Harper said: “Our government is committed to ensuring that Canada has the infrastructure necessary to move our energy resources to those diversified markets.”
These are the first two steps of the government’s energy superpower plan: attracting capital investment into the oil and gas sector from abroad and building pipelines to deliver product to market.
Both are important but turn out to be rather academic because the third step – ensuring we have the skilled labour pool to execute on these projects – has yet to be taken.
Put bluntly, we simply have nowhere near the skilled trades labour force to satisfy even today’s demands, let alone to fulfill our lofty aspiration to become an energy superpower.
The Construction Sector Council estimates a skilled trades deficit of nearly 160,000 people over the next seven years (which, according to the Canadian Energy Research Institute, is still five years before projected peak oil sands capital investment). Labour force growth is slowing to a crawl, as the country ages, while demand for skilled labour is skyrocketing. This is particularly true in the energy sector (including electricity generation and distribution) where a capital investment spree is under way, the likes of which has not been seen since the 1950s.
It is naive to think Canada can become an energy superpower given the labour market constraints we face and lack of public policy action to address this.
So what might a labour market fix look like?
First, Ottawa should play a greater role in co-ordinating the efforts of provincial governments, industry and educational institutions. It should place a particular focus on apprenticeship training needs. According to Statistics Canada, the graduation rate from skilled trades apprentice programs has been stagnant since the early 1990s, when skilled trades demand was vastly lower than it is today. Apprenticeship systems need to be reformed to meet today’s demands. Ottawa can play a direct role in this through tax incentives to encourage employers to hire apprentices and by doubling the Apprenticeship Incentive Grant. The federal government could also consider providing assistance to employers who train and certify the work force of the future.
Second, the federal government should hold provinces more accountable for the billions of dollars transferred in Labour Market Development Agreements to ensure we get the outcomes industry needs.
Canadians deserve value for money in Labour Market Development Agreements.
Third, it is time to assist Canada’s regional work forces to get to where the work is. A tax credit or an Employment Insurance grant that covers travel to seek employment will improve labour market efficiency. The existing provision in the Income Tax Act that offsets costs of permanent relocations does not apply – this would be to assist shorter-term labour mobility as is required in construction.
Fourth, skilled trades workers from the United States, most of whom are already trained to our standards, should be granted special status to enable them to work on large energy projects in Canada.
The idea of becoming an “energy superpower” is bold and ambitious, characteristics not normally associated with Canadian governments. But let us be clear: You do not become a superpower in anything – in military prowess, in economic might, even in Olympic achievement – without significant public policy action. The federal government seems to realize this, and has taken two important steps by attracting investment, and delivering product to market. But all of it – all of it – hinges on whether or not Canada’s labour market is prepared. On this, the federal government can and must show leadership.
Two steps are good; it is time to take the third.
The carbon conversation we’re ready to have
Last Friday, I attended the Economic Club of Canada’s ‘first annual’ Energy Summit – a gathering of government and industry leaders for an all-day session at Calgary’s swanky Petroleum Club.
(That’s 2 layers of club-hood, for those counting.)
The purpose of the event was to have an insightful, forward-looking discussion about the state of Canada’s energy resources, with a particular focus on implications for Canada–U.S. relations (read: pipelines). Approximately 200 industry leaders and observers gathered to hear what government officials – MPs, Ministers, MLAs, regulators and even Ambassadors – had to say about the future of Canadian energy.
Throughout the day, some universal truths coalesced:
- Canada and the United States are in this (whatever this is) together;
- North America will be energy independent by… sometime in the future;
- Growth in the oil sands can, should and will continue;
- Pipelines = good; and
- ‘Extreme environmentalists’ = bad.
Not entirely breaking news for those keeping even a cursory eye on our energy debate. I’m reasonably sure my mom could have rhymed each of those off over breakfast.
But what was interesting – and ultimately very sad and disappointing – was the carbon conversation that bubbled beneath the surface of each panel, flaring every so often only to be promptly extinguished by the artful dodge of government talking points.
We live, rather unfortunately, in an era of Canadian politics where there are a multitude of non-traditional ‘third rails’ – political no-fly zones that are non-starters for policy discussions. In some cases this can be for the best (e.g. no one is well served by reopening the abortion debate), but in others it is very much for the worst: nowhere is this problem more pronounced than with the carbon debate.
So thoroughly did the idea of a carbon price get eviscerated in 2006 that it has been portrayed as scorched earth ever since – a dead policy from a dead party leading to a dead end. Dead.
But it’s not, really. About half-way through the summit, two things clicked for me:
- Industry is ready to talk about carbon pricing – and has been for some time; and
- The federal government is not – and that’s a problem.
As a think tank, we simultaneously try and do two things: first, we advocate certain policy positions to decision-makers operating in the here and now, and second, we attempt to think beyond governments entirely. If I were to be a bit folksier about it: we try and skate to where the puck is going.
Harnessing market forces to reduce emissions is where we are headed. It is the inevitable solution to a long-standing, and increasingly pressing environmental catastrophe. The federal government may anecdotally rely on the perception that big business is against a pricing carbon, but this is simply not true. Many of Canada’s biggest energy producers already operate with an internal “shadow” price on carbon. Read that sentence again.
And what’s more, many are actively advocating one be put in place. The Canadian Chamber of Commerce’s Energy and Environment Committee has a standing policy ask on a market-base carbon pricing scheme. And, as linked above, the Canadian Council of Chief Executives has been calling for a ‘unified national policy’ on carbon pricing since 2009.
This does not sound like the cracked and barren wasteland of a dead debate.
Ultimately it boils down to this: last Friday, a series of government officials were placed on stage in front of a room full of oil and gas industry leaders, and each and every one of them told the crowd what they thought they wanted to hear: that this government will not move on a carbon price – or any market distortion – that hinders the growth of the oil sands.
It may very well come to pass that a carbon price is not the most efficient means by which Canada should reduce its GHG emissions. While generally acknowledged as one of the most economically efficient methods for doing so, we know other jurisdictions (see: Australia, British Columbia, pockets of the Eurozone, etc.) have experienced frustrating routes to implementation.
But these experiences should not preclude talking about a carbon price. We need to talk about it, consider the options and think about what will work best for Canada. It’s why we are convening a panel entitled ‘How to sell carbon pricing to Canadians’ and it’s why we believe closed doors have no place in a policy dialogue about a concern as grave as the very future of our planet.
A report from PwC UK released this week is pretty forthright in suggesting that, globally, we will not meet our emissions reduction targets and thus that we will be unable to stick to a 2 degree target for warming. The question is where we go from here.
During the last session of the day at the Economic Club meeting, Conservative MP and Parliamentary Secretary for the Environment Michelle Rempell said she hoped the environmental debate would become less political – that the terms ‘Big Oil’ and ‘Environmentalist’ would cease to be pejorative. I support this, I really do, and I so wish that her colleague, the Honorable Joe Oliver, had stuck around to hear it.
The New Clintonomics
Two weeks ago, two policy think tanks based in the U.S. and the UK — the Center for American Progress, founded by Bill Clinton’s former Chief of Staff John Podesta, and Policy Network, founded by former Labor Cabinet Minister Peter Mandelson and a group of former advisors to the government of Tony Blair — hosted a meeting of Europeans and North Americans in London. Canada 2020 was invited to attend this summit as the only non-European, non-American participant.
The meeting was framed as a trans-Atlantic dialogue on some of the major issues facing progressives today, in particular how to tackle the fiscal crises in Europe and the United States in the context of weak economic growth, and in a manner that doesn’t betray core progressive principles and values. The conference was also designed to bring together a new generation of progressive thinkers and politicians from Europe and North America, to regenerate the trans-Atlantic Third Way dialogue of the late 1990s that Tony Blair and Bill Clinton led.
Fittingly, then, the keynote speaker was President Clinton. In a forty-minute address, Mr. Clinton provided a road map for how America should deal with the fiscal and economic issues it faces. His prescription could be seen as amounting to a macro economic policy doctrine for the U.S. — a new Clintonomics if you will.
The foundation for the new Clintonomics rests on the notion that governments need to pursue what some might regard as two contradictory courses of action at once, what the President called “walk and chew gum’ economics. For Mr. Clinton, it is imperative that Washington invest significantly now, when US government borrowing rates are historically low, in the many things America needs to make it a more productive and competitive economy, notably infrastructure and education, but also in new industrial policy initiatives aimed at developing innovative sectors of the future. This investment will also provide needed short-run stimulus to an economy that is still operating well below potential over three years after the recession.
This bold investment agenda must, however, be anchored by a serious, credible, fiscal consolidation effort that will be planned, and expected, to kick in once economic growth takes firm hold. This, in Mr. Clinton’s view, is necessary in part to anchor expectations to help prevent the inevitable interest rate increases from rising too far and too fast and crowding out needed private sector investment.
While this was a serious policy talk from the President, he remains ever the pragmatic, centrist politician, not for a minute under-estimating the difficulty selling his economic remedy to the American public. Mr. Clinton observed that most Americans are fiscal conservatives, even if they are Democrats. Regardless of the economic merits of deficit spending in some situations, many Americans see piling on debt as immoral. As a result, those that argue for austerity now — the American right and the business community — will, in Mr. Clinton’s view, have an easier political sell to the American electorate than those that push for some variation of his agenda.
Nevertheless, the President made a compelling case that the complexity and variety of America’s core problems today — a grave fiscal situation, growing productivity and competitiveness issues, serious income inequality, and weak, post-recession growth — call for an equally complex range of actions, which might even appear contradictory to many people.
In the domain of American political economy, it seems walking and chewing gum is a lot harder than it sounds.
Inequality – defining the defining issue of our time
Growing inequality is, according to President Barack Obama, “the defining issue of our time.” In the week following his re-election, the president has vowed not to abandon his resolve to raise taxes on those earning over $250,000.
This fascinates me. What is it that has propelled the issue of inequality to these dizzying heights? Which straw broke which camel’s back? And why do other, arguably more critical, issues such as climate change and our energy future seemingly fail to ignite the imagination of the public and the president?
Much has been written about the causes and effects of inequality in the U.S. I am going to focus my attention on Canada, where a good deal of ink also has been spilt, often without clear reference to the underlying facts and forces.
Globally, income inequality has never been higher. Certain countries are managing to keep it in check (Brazil, for example), but most middle- and high-income countries are more unequal now than they have been since at least the 1920s. This is certainly true of Canada, which sits near the middle of the OECD inequality rankings. But what do we learn if we dig a little deeper into the various measures of inequality?
The most common of these is the Gini coefficient, which measures the variance between actual income distribution and a theoretical, perfectly equal distribution. Thus, a Gini of zero tells us that there is no deviation and that everyone is perfectly equal. A Gini of 1 means that one individual has all the income, everyone else has nothing: winner takes all, writ large. Three categories of Gini are typically employed: the market income Gini, the total income Gini and the Gini after taxes and transfers (the ‘outcome Gini’ as I like to think of it: this overlays first-cut distributions with societal choices about taxation and supports).
To simplify, let’s take look at the market income and outcome Ginis for the past three decades. Between 1981 and 2010 the market Gini in Canada went up 19 per cent from .434 to .518. Over the same period the outcome Gini went up only 13.5 per cent from .348 to .395. So, overall inequality in Canada has risen — quite a bit, in fact — but taxes and transfers have, over time, offset an increasing portion of this rise (though not enough to smooth the outcome Gini completely).
Now, let’s look at when the big jumps in overall inequality took place. Judging by the recent prominence of the topic, one would imagine that the last few years had been particularly inequitable, but this is not borne out by the data. Pretty much all the increase in the Gini coefficients took place in the 1980s and 1990s. For each measure, the increase between 2000 and 2010 was less than 1 per cent.
This is unexpected. Most of us certainly feel that the world is becoming more unequal (which, in the end, is what matters). So what’s going on?
First, some groups have been doing much worse than others. Median family income rose by about 38 per cent between 2000 and 2010, but if you look at single-earner male couple families, there was no rise — in fact, there was a 1 per cent drop.
So burdens are not equally shared. There are those who have ample cause to complain, though I don’t know if they’re actually the ones doing the complaining.
The ones truly burdened by income inequality typically hail from the very bottom of the income spectrum, and this is where the limitations of the Gini coefficient come into play. Ginis are best at measuring changes in the middle, where most people are clustered. They are less good at capturing change at the very top and the very bottom of the distribution — the tails. In Canada this is where a good deal of the action takes place. Although we sit in the middle of the overall OECD inequality ranking, we are third in the OECD (after the U.S. and the U.K.) in terms of share of pre-tax income going to the top 1 per cent.
Second, there is a markedly higher sense of overall economic insecurity today than in the recent past. Unemployment in Canada peaked at 8.5 per cent in late 2009, having fallen to below 6 per cent a few years earlier (it is now 7.4 per cent). Youth unemployment, though, is significantly higher at 14.7 per cent. So younger people are hurting, especially as they contemplate making their way onto the property ladder. The cost of new housing has gone up by 55 per cent since 2000 — significantly outstripping the increase in median wages which, as you will recall, has been only 37 per cent.
Third, we Canadians tend to see ourselves reflected in the experience of the U.S. — and things are a lot worse there. Especially during the election campaign we were inundated with tales of real woe from many of the formerly blue-collar regions of the United States.
By contrast, readers might be surprised to discover that the real hourly wages of Canadians in full time employment actually grew by 14 per cent between 1981 and 2011. Even more surprising is that fully 10 per cent of that 14 per cent growth took place between 1998 and 2011. Another interesting marker here is that all of the jobs lost in the recession in Canada have, according to the Bank of Canada, now been replaced. Ninety percent of the new jobs are in industries paying above average wages.
Again, though, not everyone had the same experience. Between 1981 to 2011 average (real) hourly wages increased by 17 per cent for men aged 45-54 but only 1 per cent for men aged 25-34 (youth gets nailed again). Another surprising fact is that, having risen sharply in the 1980s and the 1990s, the wage gap between those with bachelor’s degrees and those with high school diplomas or trade certificates has actually fallen since 2000. It is likely that this modest degree of wage convergence is attributable to Canada’s energy and resources boom: demand for skilled trades is at an all-time high, just as our tech sector — which employs more highly educated people — has contracted. Nonetheless, the “education gap” in income between those with post-secondary and those without remains significant: in 2011 it was about 37 per cent for men but a shocking 55 per cent for women.
Reflecting on these data points brings me to conclude that it may not be in the top-line numbers that the real story of inequality lies, at least in Canada. We have to dig a little deeper. I see three root causes of our concern with inequality in Canada (three seems to be the magic number).
First, there is a general lack of confidence in our economic future, as a country and as individuals. In March 2012, polling by Ekos found that 57 per cent of Canadians felt that they would be worse off in 25 years than they are today. This is a staggeringly large number of people in a country that has been an outlier (on the positive side) in terms of economic mobility — the decoupling of one’s own prospects from those of one’s parents.
Related to this is a lack of vision for the future at a political level. Even our supposed destiny as an energy superpower seems hard to grasp and if we fail in that regard it is not clear what the back-up plan is. Without an alternative vision, it is reasonable to expect that trends around income consolidation at the top of the spectrum will continue, to the detriment of the majority.
Second, the politics of division are coming home to roost. The grass is always greener on the other side and the Occupy movement has provided a voice to many unhappy people. The visibility and excess of the top 0.1 per cent — the group that has been almost solely responsible for shifts in Canada’s overall inequality rate since 2000 — play a part. (The share of income going to the top 0.1 per cent increased from 2 per cent in 1980 to 5.3 per cent immediately pre-recession in 2007: the share going to the top 1 per cent is up from about 7 per cent to 10 per cent over a similar period.) So does the bursting of the credit bubble that previously masked some of the inequality. Another big factor in Canada is regional inequality, but there is no space to go into details about that here.
Third, I perceive a fear that the institutions that underpin our country and the global system are either threatened, rotten or inadequate to face down the challenges of the future. The global financial system comes first to mind, but with so many recent scandals in the worlds of politics and business it’s no wonder people are nervous. In Canada this disquiet extends to our education and health systems, both of which have been key to our high levels of economic mobility and both of which face myriad challenges.
How, then, should we address these three root causes? It seems to me that the common thread between them is their relationship to equality of opportunity. People feel that this is slipping from their grasp. The good news — as esteemed economist and recent Canada 2020 guest Larry Summers suggested recently — is that this may be a policy area around which progressives and conservatives can come together. Bolstering this may end up being the single most important thing that we can do for our economies in the near future.
The promotion — using a wide array of policy tools — of equality of opportunity should help not only to encourage entrepreneurism and boost productivity (which we badly need) but also to remedy the dangerous social fragmentation that goes hand-in-hand with a perception of deepening inequality. If you are in any doubt about the nature of such fragmentation, I strongly advise reading the book The Spirit Level, which correlates almost every societal ill with inequality, and the lack of hope and aspiration that such a condition engenders.
So, let’s embrace inequality as the defining issue of our time and confront it head-on by promoting greater opportunities for all. Then, my hope is that the climate agenda – which I perceive as far more intractable – will steal the spotlight and forcefully demand serious policy action.