Making Canada Relevant Again- The Economic Super-Thread

[Kirkhill]

And, Ladies and Gentlemen, we are open for bids.... who'll give me....

Christy and Allison - that is an old game.  Hopefully, for my sake as an Alberta resident, Allison plays a better hand than Joey Smallwood did.  I'm not too bothered about this latest round of negotiations.

But China, that still presents me with too many unknowns to be comfortable.

It is one thing for a country to be open to business, to investment.  It is important that Canada stay open to private investors, including Chinese ones.

It is difficult for me to accept State investors in Canadian affairs.  State agencies have just too many levers available to them that private citizens don't.  Not least of which is the arrogation of the use of force, the wealth to afford it and the authorization to employ it.

Canadian oil companies can choose to sell or not sell their oil to private concerns. They can break contracts, if they are willing to accept the penalty clauses, as circumstances dictate. 

Russia chooses to accept private investors like BP onto their turf and then declares sovereign rights to break contracts, deny the investors the revenues from their investments and penalize them even as they throw them out of the country.  It is not a course that I would like Canada to adopt but it is a course that Canada could adopt - and that fact is always present during any negotiation.   

Russia acts in that manner, and Canada could act in that manner, because BP's investors can't immediately put a force in the field to support them in their discussions with the state of Russia.  They would have to appeal to the British and Dutch parliaments who would then have to figure out how to get a useful force into Siberia.

China, in my opinion, is more inclined to a Russian interpretation of the rule of law than a British or Dutch interpretation.

If Canada decided it were in the national interest to abrogate an agreement with CNOOC, for whatever reason, perhaps ignoring sanctions against Iran, and stop the flow of oil to China, is it not beyond reason that China would act to secure its own interests?

How about appealing to the UN that Energy is an essential commodity and a right and it cannot be cut off.  I believe we signed off on a clause in the old US-Can Free Trade Agreement?

How about declaring that CNOOC installations and Chinese nationals effectively constituted a commercial colony that needed protecting from Canadian Bandits?

How about China declaring that they needed to act to assist their First Nation allies who granted them right of way for pipelines and installations?

And I don't as readily agree that our good buddies to the South will always act in our best interest.  With them sitting on a fair number of Gigajoules of energy these days SOME American individuals may consider it Canadian Oil wellspent to buy American peace.

 

[Edward Campbell]

Two more articles about the (proposed) CNOOC/Nexen deal from the Globe and Mail:

1. An opinion piece by Derek Burney, a former Canadian ambassador to the United States, and Fen Hampson, a distinguished fellow and director of global security at the Centre for International Governance Innovation  (Prof Hampson is on sabbatical from Carleton University) entitled A dramatic bid, a strategic response. Burney and Hampson provide a clear analysis of the issue and a sensible proposal for assessing all such deals - more sensible than the current "net benefit" test; and

2. A story about a bit of blatant protectionism being proposed by US Democratic Sen Chuck Shumer in which he ... urges Washington to block China’s bid for Nexen]http://www.theglobeandmail.com/report-on-business/us-senator-urges-washington-to-block-chinas-bid-for-nexen/article4443807/]... urges Washington to block China’s bid for Nexen.

 

[GR66]

And, Ladies and Gentlemen, we are open for bids.... who'll give me....

Christy and Allison - that is an old game.  Hopefully, for my sake as an Alberta resident, Allison plays a better hand than Joey Smallwood did.  I'm not too bothered about this latest round of negotiations.

But China, that still presents me with too many unknowns to be comfortable.

It is one thing for a country to be open to business, to investment.  It is important that Canada stay open to private investors, including Chinese ones.

It is difficult for me to accept State investors in Canadian affairs.  State agencies have just too many levers available to them that private citizens don't.  Not least of which is the arrogation of the use of force, the wealth to afford it and the authorization to employ it.

Canadian oil companies can choose to sell or not sell their oil to private concerns. They can break contracts, if they are willing to accept the penalty clauses, as circumstances dictate. 

Russia chooses to accept private investors like BP onto their turf and then declares sovereign rights to break contracts, deny the investors the revenues from their investments and penalize them even as they throw them out of the country.  It is not a course that I would like Canada to adopt but it is a course that Canada could adopt - and that fact is always present during any negotiation.   

Russia acts in that manner, and Canada could act in that manner, because BP's investors can't immediately put a force in the field to support them in their discussions with the state of Russia.  They would have to appeal to the British and Dutch parliaments who would then have to figure out how to get a useful force into Siberia.

China, in my opinion, is more inclined to a Russian interpretation of the rule of law than a British or Dutch interpretation.

If Canada decided it were in the national interest to abrogate an agreement with CNOOC, for whatever reason, perhaps ignoring sanctions against Iran, and stop the flow of oil to China, is it not beyond reason that China would act to secure its own interests?

How about appealing to the UN that Energy is an essential commodity and a right and it cannot be cut off.  I believe we signed off on a clause in the old US-Can Free Trade Agreement?

How about declaring that CNOOC installations and Chinese nationals effectively constituted a commercial colony that needed protecting from Canadian Bandits?

How about China declaring that they needed to act to assist their First Nation allies who granted them right of way for pipelines and installations?

And I don't as readily agree that our good buddies to the South will always act in our best interest.  With them sitting on a fair number of Gigajoules of energy these days SOME American individuals may consider it Canadian Oil wellspent to buy American peace.

Are you suggesting that China would potentially send militarily forces to Canada in defence of CNOOC in the case of an economic dispute between the company and the Government of Canada?  I'll admit that I do not have a military background but I do consider myself fairly well read and educated and I do not believe for a moment that China has either the interest or capability in launching any direct military action against Canada.  Could they counter any actions we take against their corporations with counter-actions against our economic interests in China?  Of course.  Could/would they make use of every international trade and legal forum possible to advance their interest within the framework of those legal international bodies?  Of course...and so would we.  China certainly has economic muscle and I don't doubt that they will flex it if they feel their core interests are threatened, but I think the suggestion that we could end up with PLA troops guarding Canadian oil pipelines to ensure we don't turn off the taps quite silly.

 

[Brad Sallows]

In view of the fact information has leaked into the public sphere that the Chinese are trying to buy the services of our own MPs, I am not impressed by apples-to-oranges comparisons of agents of the US government working to further US interests from within the US government.

China is acting like a colonial power in the modern post-colonial era and the force feedback mechanisms between "enterprise" and "state" are entirely too well-coupled for the major Chinese corporations to be treated as if they were Microsoft.

If the country in question were Belize, I would not care.  China is simply too large to be treated with naive disregard.

 

[Kirkhill]

GR66

My position is similar to Brad's CNOOC is not Microsoft. 

It may indeed be silly to contemplate the prospect of the PLA trained CNOOC PSCs on the Northern Gateway but the prospect is not inconceivable.

It is not Intent.  It is Capability....... and, in criminal terms, it is Motive.

 

[SeaKingTacco]

I actually liked Kirkhill's post.  It made me think of the Canton system and wonder if the long Chinese memory is not extracting some revenge, 100 years hence.

 

[Edward Campbell]

I actually liked Kirkhill's post.  It made me think of the Canton system and wonder if the long Chinese memory is not extracting some revenge, 100 years hence.

It is interesting that China is the only country I have ever visited that has a national museum dedicated to humiliation. It is near Guangzhou (Canton) and it 'celebrates' the Opium Wars. It focuses, partially, on the Chinese officials who tried to prevent the opium trade but, mostly, it tells the stories of 100 years of humiliation at the hands of the foreigners - mainly the Brits.

 

[Kirkhill]

It is interesting that China is the only country I have ever visited that has a national museum dedicated to humiliation. It is near Guangzhou (Canton) and it 'celebrates' the Opium Wars. It focuses, partially, on the Chinese officials who tried to prevent the opium trade but, mostly, it tells the stories of 100 years of humiliation at the hands of the foreigners - mainly the Brits.

That is curious.  Does it speak to your oft repeated comment: "Culture Matters"?

Generally our politicians appeal to positive emotions (at least officially) like pride.  The Tories "War of 1812" campaign comes immediately to mind.  On the negative front they are more likely to evoke guilt than hate.

Do the Chinese respond better to the goad?

Actually that conversation should actually be transferred to the China superthread.

 

[Edward Campbell]

The Chinese teach the whole "century of humiliation" thing in, at least, elementary and middle school - once in each I think. The aim is to instill even greater nationalism in a society that is, culturally, already quite chauvinistic. Children are taught that the Qing Dynasty failed China by providing bad governance, allowing the foreigners to take what they wanted without paying an appropriate price. "Unequal treaties" and "extraterritoriality" are stressed and children are taught that modern China will "never again" (shades of Israel) allow foreigners to interfere in China's domestic affairs.

This leads to a foreign policy issue. The schools tell children that:

1. China will, never again, allow foreigners to dictate to it; and

2. China, will equally, eschew interfering in the internal affairs of sovereign states.

The latter principle helps to explain why China vetoes so many UNSC resolutions.

 

[Kirkhill]

China's lack of interest in the internal affairs of sovereign states is encouraging.  Thank goodness they got over all that silliness about Maoism, Marxist-Leninism and exporting the revolution to the proletariat.

But given the number of Chinese industrial activities springing up around the world, and many of them in places that are lawless (without the law) and unsettled (without people) how long is it likely to take until China's "essential" interests come into conflict with the interests of others with greater territoriality.

It is not only Hong Kong that started off as a barren trading post.  You could add Singapore, Calcutta, Capetown and York Factory to the list (not to mention Dublin - but that is another tangen as is the tale of all of those Dubliners down on Bondi Beach).

 

[Edward Campbell]

The fact, and it is a fact more often than not, that China does not interfere in the intenal affairs of sovereign states does not mean that it is not actively engaged. In fact, see Dambisa Moyo's new book (again) in which she explains what she see's as China's resource/materials strategy and its impact on the rest of us. China is very active, indeed aggressive in the global resources and commodities markets - extracting, exploiting, buying, selling and stockpiling. It has as much if not more to do with power, Moyo suggests, than with resource needs.

 

[a_majoor]

China has indeed deployed forces to protect its assets abroad (security contractors in the Sudan), and also attempts to export its own workers to build projects in other nations (not high level workers, engineers and technical staff, actual grunt labourers), and has often built things to Chinese standards in these projects. Kirkhill can point to past behaviour as a possible guide to Chinese behaviour in Canada (Diane Francis wrote a piece in the FP a while ago on this very subject, which I think is posted in the Chinese Superthread)

For the most part, these events happen in Third World nations where the host nation has neither the means or resources to object. Canada is not a Third World nation, and although a very modest middle power, we do indeed have the means and resources to both object and correct behaviour we consider unacceptable. Commercial realities will also come into play. The Chinese are just as aware of the benefits of free trade as anyone else, and if they piss off enough potential customers and partners, they will find themselves isolated in the global marketplace. The internal fallout of that would bring down the Red Dynasty almost at once, so the use of market forces as a corrective is still our high card.

 

[Edward Campbell]

Moe on pipelines and the AB/BC spat in this column which is reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/news/politics/only-harper-can-end-pipeline-politicking/article4448146/

Only Harper can end pipeline politicking

JOHN IBBITSON
The Globe and Mail

Published Monday, Jul. 30 2012

Stephen Harper is going to have to talk to the provinces about energy. And he hates that sort of thing.

In Saturday’s Globe, Premier Christy Clark succinctly outlined her key demands before the British Columbia government will support the Northern Gateway pipeline proposal. Most of them are eminently reasonable: The project must clear the National Energy Board review; there must be the most stringent possible controls to prevent and mitigate spills; first nations in B.C. must benefit from the project.

The final demand, however, is the deal-breaker: “B.C. must receive its fair share of the fiscal and economic benefits,” from the pipeline. B.C. wants a piece of the action.

Alberta Premier Alison Redford made it abundantly clear at last week’s premiers’ meeting that Ms. Clark can have all the revenue she wants, so long as not one penny of it comes from Alberta’s take.

So it’s a standoff, which would be bad enough if the dispute simply concerned the two provinces. But a good chunk of Canada’s future economic growth hinges on exporting energy, with increased exports from the oil sands a crucial component of that growth. Enter the Prime Minister – that is, if he’s willing to take the cue.

For 45 years, Canadian politics was largely defined as an ongoing series of conflicts between Ottawa and the provinces: over national social programs under Lester B. Pearson; over repatriating the Constitution and Quebec separatism under Pierre Trudeau; over fixing the Constitution under Brian Mulroney; over renewed fears of separation under Jean Chrétien; over funding health care under Mr. Chretien and Paul Martin.

Enough, said Stephen Harper. His strategy as prime minister has been to leave the provinces alone. The best example is the Conservatives’ approach to health care. With the current funding formula set to expire in 2014, all 14 capitals were gearing up for months of negotiations. A source says that in the Finance Department, the Prime Minister’s Office and the Privy Council Office, advisers pored over the various strategies, every one of which was complicated, cumbersome and politically controversial.

Then someone suggested: Let’s just give them the money with a reasonable annual increase, and no strings attached. Mr. Harper seized the proposal. No national standards, no reporting mechanism and, best of all, no first ministers’ meeting, in which 13 premiers lock a prime minister in a room and grill him until he gives up the combination to the safe.

The Conservative approach has worked well. Premiers grumble, as they did at least week’s Council of the Federation meeting, that Ottawa still doesn’t give them enough, but the truth is that federal-provincial relations under the Harper government have been quieter than at any time since the 1950s. What’s not to like about that?

Except the pipeline issue involves exactly the sort of protracted negotiations – not to say leadership – that Mr. Harper has sought to avoid in dealing with the provinces. B.C.’s demands for compensation before approving the pipeline are dangerous but understandable. Dangerous, because acknowledging those demands would set the precedent of permitting a province to obstruct a product or piece of infrastructure passing through its jurisdiction unless it’s paid a bribe – sorry, properly compensated.

Understandable, because the pipeline proposal confers nothing but benefit on Alberta, and almost nothing but risk on B.C. In essence, the B.C. government is asking for hazard pay.

And no pipeline is going anywhere unless at least some of the first nations who claim the land the pipeline is traversing agree to let it through, which again is a federal responsibility.

If the Conservative government is truly determined to secure access for the Northern Gateway pipeline, then at some point Mr. Harper is going to have to negotiate: with Enbridge, which wants to build the pipeline; with first nations; and with the other first ministers, especially the first ministers of Alberta and British Columbia. If the next premier of British Columbia is NDP Leader Adrian Dix, he will face an even greater challenge.

Not a promising prospect for a prime minister prepared to do almost anything to avoid being locked in a room with a bunch of premiers who really, really want the combination to the safe.

My guess is that John Ibbitson is right, grosso modo, but I think Prime Minister Harper will find a way to confound the pundits.

Enbridge, the first nations and the BC government must, indeed, come to the table, but: all at once? In my view Alberta and the rest of the provinces need not come because, in principle, AB is not involved - constitutionally Premier Redfod is on solid ground, all she needs to do is repeat her mantra, "If BC wants more money it must find a way to extract it from Enbridge," and go on about her other business. First nations can be bought off - that's the tradition, anyway. That leaves BC and Enbridge.

Premier Clark had a good an excellent case until she turned from reason to extortion. She, the BC government - no matter who leads it - has no power to stop the pipeline if the NEB and first nations agree it can go through ~ delay, yes; impede, yes; stop, no. But the feds can help BC by e.g. helping it, broadly - not necessarily through the BC government, with environmental protection costs. It can also help Enbridge (and other resource companies) through he tax system by making payments for environmental protection measures less costly in tax terms.

So, a series of 'conversations' involving the feds: Enbridge, first nations and the feds on access issues and costs; Enbridge, BC and the feds on environmental risk/cost matters; the feds, unilaterally, on tax changes; and, and, and ... but no first ministers' conference.

 

[GAP]

but no first ministers' conference.

This whole spat is not/never has been about the pipeline....it's all about Clark winning in the upcoming election.....and she will step on a whole host of bodies, native or otherwise to get there.... :

 

[Kirkhill]

IF this thing is truly about finding a more acceptable balance between risk and benefit for all parties, and not (as GAP identifies) about BC showmanship in an election season then PM Harper is being dealt a fair hand.

As Ibbitson points out, most of Premier Clark's requirements are reasonable and in train.  They are a matter of time.

Premier Redford's position is clear, and reasonable.

Dollars have to be negotiated .... but dollars always have to be negotiated.

This decision is relatively straight forward - and the Health Care issue is indicative.

The PM doesn't do consensus politics in the usual fashion.  He doesn't try to force a consensus at a single time and place.  He allows a consensus to crystallize at its own natural rate. 

In the current situation he now has an effective consensus on a National Energy Plan (which blew the Liberals out of the water) one that even Premier Clark doesn't oppose as a concept.  She only opposes the timing and sequencing with respect to the Northern Gateway.

The PM can now go into a simpler One on One negotiation with Premier Clark, with an understanding of what he wants and what the rest of the premiers are willing to accept, including Premier Redford, and discuss the tariff that BC is going to be allowed to charge the Federal Government to permit inter-provincial trade.  All the discussion of risk will fall away if the benefit is seen to be acceptable.

As long as he doesn't presume to impose tariffs on Alberta, or attempt to tell Alberta to increase its royalties, or spend more of them on BC then he should keep Alberta on side.

According to the Alberta Government and CERI he has 187 BCAD of Federal Revenue on the table, over the next 25 years, to play with.

http://oilsands.alberta.ca/economicinvestment.html

A deal is eminently doable IMHO.

He gets to look like Solomon if he can pull it off.  Inter-provincial trade disputes are entirely within the 1867 remit of the Federal Government, especially those that are in the national interest.  And, for good measure, he may end up delivering on an acceptable NEP and scuttling Trudeau and the Liberals forever. 

 

[Kirkhill]

China has indeed deployed forces to protect its assets abroad (security contractors in the Sudan), and also attempts to export its own workers to build projects in other nations (not high level workers, engineers and technical staff, actual grunt labourers), and has often built things to Chinese standards in these projects. Kirkhill can point to past behaviour as a possible guide to Chinese behaviour in Canada (Diane Francis wrote a piece in the FP a while ago on this very subject, which I think is posted in the Chinese Superthread)

For the most part, these events happen in Third World nations where the host nation has neither the means or resources to object. Canada is not a Third World nation, and although a very modest middle power, we do indeed have the means and resources to both object and correct behaviour we consider unacceptable. Commercial realities will also come into play. The Chinese are just as aware of the benefits of free trade as anyone else, and if they piss off enough potential customers and partners, they will find themselves isolated in the global marketplace. The internal fallout of that would bring down the Red Dynasty almost at once, so the use of market forces as a corrective is still our high card.

Thanks for doing some of my leg work Thuc.

We have been focussing on CNOOC and China in this conversation but in truth I would have the same reservation about any national investors backed by the state - Chinese, Russian, Arab or even (and perhaps especially) Brits and Americans.  If Washington started investing Federal Dollars directly in Canadian Oilsands and Pipelines I would become very worried indeed.

 

[Brad Sallows]

Pipeline objectors are using the word "never" entirely too much.  Getting BC and the native bands onside is just a question of money.  Once that is settled, the greeners will be ignored.

 

[a_majoor]

Milton Friedman's contributions to Canadian economic policy and evolution. A suitable way to celebrate Dr Friedman's life on the 100th anniversery of his birth!

http://fullcomment.nationalpost.com/2012/07/31/michael-walker-on-milton-friedman-everything-we-know-about-monetary-policy/

Michael Walker on Milton Friedman: All we know about monetary policy
Michael Walker, National Post  Jul 31, 2012 – 6:10 AM ET | Last Updated: Jul 31, 2012 4:59 PM ET

REUTERS/University of Chicago
Milton Friedman, the free market economist and winner of a 1976 Nobel Prize.

Milton Friedman was the most influential economist of the 20th century and his work will continue to have an effect as long as humans engage in economic activity. It is, therefore, appropriate that as we celebrate the 100th anniversary of his birth, we remember his impact in Canada and worldwide.

Professor Friedman had a broad view of the applicability of economic analysis. He was a path breaker in its application in many areas of human activity ranging from the organization of schools and professional licensure to the conduct of monetary policy and the possibility of using tax-and-spending policy to manage the level of national economic activity. He was both an academic and a high-profile public educator. His work was disseminated in Newsweek and other popular publications, in his books and through a globally watched TV series that showed how economic policy ideas could both create and destroy wealth and prosperity.

Most aspects of economic life in Canada bear the mark of this courageous thinker’s insights. It is impossible to do credit to his ideas here, but two policies are relevant to key international issues of 2012 and give an indication of Professor Friedman’s impact.

Most adult Canadians can remember something of the economic chaos produced in the early 1980s by the dramatic increase, and then collapse, of interest rates and the rate of inflation. Essentially, this episode was a by-product of the failure by the world’s central bankers to pay attention to Friedman’s conclusion from exhaustive historical research that “inflation is always and everywhere a monetary phenomenon.” It followed from that conclusion that the Bank of Canada and its counterparts around the world bore a singular responsibility for the inflationary explosion and its catastrophic impact on employment, income and economic welfare.

Canada learned very quickly from this experience and was an early adopter of monetary policy based on Friedman’s principles. In the 1970s, the Bank of Canada had started doing research that laid the groundwork for the conversion to a new look in the conduct of policy. By the time John Crow took the reins in 1987, the Bank took the confident and appropriate stance that the then-spendthrift policies of the Mulroney government should not be financed by the Bank of Canada because of the inevitable inflationary consequences. While the ongoing and sometimes acrimonious conflict between the government of the day and the Bank proved to be career limiting for John Crow, his insistence on the Friedman approach to policy was triumphant.

All subsequent governors have adhered strictly to a policy of monetary control based on inflation targeting. Moreover, that policy is the subject of an explicit agreement between the Bank and the government of Canada, following a recipe developed by Friedman disciple Don Brash when he was governor of the New Zealand Reserve Bank. The consequence of this history at the Bank, directly attributable to Milton Friedman, was that Canada has had top-notch inflation performance for a quarter century — incomparably better than the world average, distinctly better than the rest of the developed world and even better than the United States.

Canada was able to outperform in the control of inflation because it had the power to adopt a truly independent monetary policy. And that ability could only be had if Canada followed another policy course advocated by Friedman: flexible exchange rates. Incredibly, the eventual adoption of flexible exchange rates can be traced back to a conversation that Professor Friedman had with then-deputy governor of the Bank of Canada, Donald Gordon, in 1948.

Professor Friedman reported the conversation in a keynote address to a conference organized by the Bank of Canada in November 2000 to mark 50 years of floating exchange rates. He related that what occasioned the conversation was the struggle by Gordon and other officials in the Canadian government to deal with the country’s persistent trade deficit. Friedman notes that when he suggested flexible exchange rates it was apparently the first time Gordon had heard the idea. Two years later, the Canadian government floated the exchange rate, and so it has remained with few lapses.

Of course the policy of a floating exchange rate has been considerably criticized by those, including some of my colleagues at the Fraser Institute, who have felt that we would have fared better with a common Canada/U.S. currency. Called the Amero, in imitation of the Euro, such a common currency would eliminate any uncertainty about the future exchange rate between Canada and the United States. Consequently, they argue, capital investment and therefore productivity would be improved. The Euro’s current dilemmas illustrate some of the reasons Milton Friedman advised Canada to opt for floating rates and independent monetary policy rather than pegging to or pursuing currency union with the U.S. dollar.

When, at that same Bank of Canada Conference in 2000, Milton Friedman was asked about the future of the Euro, he said:

“I think the Euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them. Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy… On purely theoretical grounds, it’s hard to believe that it’s going to be a stable system for a long time… “You know, the various countries in the Euro are not a natural currency trading group. They are not a currency area. There is very little mobility of people among the countries. They have extensive controls and regulations and rules, and so they need some kind of an adjustment mechanism to adjust to asynchronous shocks — and the floating exchange rate gave them one. They have no mechanism now.

“If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. Nineteen ninety-two, 1993, you had the crises. Before that, Europe had the snake [the first attempt at European monetary cooperation in the 1970s], and then it broke down into something else. So the verdict isn’t in on the Euro. It’s only a year old. Give it time to develop its troubles.”

It is highly unfortunate for the European countries that they did not pay more attention to these piercing insights — and that Milton Friedman is no longer here to hold them to account.

National Post

Michael Walker is a senior fellow at The Fraser Institute.

 

[a_majoor]

The equalization formula was never designed for a contingency like Ontario's fiscal mismanagment, and now the stresses may pull the entire program down. Considering that it may be possible (using current trends) for Ontario to have a $30 billion/year deficit and $400 billion dollar debt by the time the next election period rolls around, this is of more than academic interest:

http://fullcomment.nationalpost.com/2012/08/01/matt-gurney-ontario-goes-and-ruins-the-confederation-party-for-everyone/#more-86546

Matt Gurney: Ontario goes and ruins the Confederation party for everyone
Matt Gurney  Aug 1, 2012 – 10:41 AM ET | Last Updated: Aug 1, 2012 10:53 AM ET


Andrew Vaughan / The Canadian Press
"OK, so, guy on the left gives me and guy on the right money. Is this good for everyone?"

Reading the latest report from the Institute for Research on Public Policy, discussing how Canada’s current system of equalization is now actually becoming a threat to national unity, one theme shines brightly amid all the eye-glazing charts and discussing of equalization caps and resource revenue shares. Put simply, Ontario has totally harshed our national mellow.

The problem is simple enough, but the consequences are wide-ranging and complicated. The equalization formula (to put this extremely simply) compares how much a province would collect in revenue using national averages for tax rates in five revenue-generating areas (property tax, corporate taxes, etc.),  and determines how much that province actually is collecting. Equalization payments then flow to the provinces that fall below the national average, so that the provinces have the “fiscal capacity” to pay for the services their citizens need. Ontario used to be the ultimate have province, but is not a have-not. And worse — it’s a really big have not. Even though it only misses the national average by a tiny amount on a per capita basis, that tiny amount, multiplied by the many millions of Ontarians, means that the province consumes more and more of the overall equalization pie.

The authors of the report, including former Bank of Canada governor David Dodge, not that there are two ways that this is bad. First of all, since the total amount of equalization Ottawa distributes is capped, the more Ontario consumes, the less the remaining have-not provinces get as Ontario gobbles up their lunch. And, just as bad, given that Ontario is almost 40% of the total national population, the few are paying to support the many. Newfoundland’s resource revenues mean that it has become a have province, bumping Ontario into the have-nots. But Newfoundland has half a million people. Ontario has 26 times that many. The have provinces now make up less than 30% of the population. The have-nots? Sixty five percent.

Both of these factors, the report warns, will place tremendous stress on Canada’s federation. The have provinces — Newfoundland, Saskatchewan, Alberta and B.C. — won’t want to pay for Ontario and Quebec forever. And every have-not province but Ontario will resent how much money Canada’s most populous province is gobbling up. Meanwhile, Ontarians are understandably miffed that after decades of paying into equalization, they are getting blowback for daring to take something out of the pot, and probably not just a little bit embarrassed that their province’s economic decline threatens to break the country. Sorry, guys. Our bad.

It’s a pickle, all right, and one that could only really be slowed down by a sudden economic recovery in Ontario (which, incidentally, doesn’t seem all that likely). And the report, sadly, doesn’t have much to offer by way of solutions. The problems are beyond the capacity of local governments to address. The have provinces are driven by resource exports, and Ontario is being pounded by the annihilation of its manufacturing sector, a problem that was largely created beyond our borders. None of these trends is likely to reverse themselves. Nor can equalization simply be turned off by flipping a switch — not only would that be political suicide for the party that kicked the have-nots off the welfare rolls, but equalization — at least in some form — is written into the constitution.

The report doesn’t have the answers to that, and to its credit, doesn’t pretend to. It suggests some tweaks that might improve the current system of equalization, but mostly just sounds the alarm. And it’s an important alarm to sound. The problems with our equalization formula, combined with other national unity issues such as the spat between B.C. and Alberta over Northern Gateway revenues and the ever-present headache of Quebec separatism, suggest that a deep, unpleasant conversation about the true nature of Canada is looming in our near future.

Are we a nation or a loose economic federation? If the former, how can we do a better job with equalization. If the latter, what’s the point? Such a conversation is worth having, but would be better had before economic and demographic pressures lend the whole affair an air of panic and hysteria, as increasingly cash-strapped provinces demand more, more, more. Assuming, of course, it’s not too late already.

National Post
mgurney@nationalpost.com

 

[Edward Campbell]

I wish someone on the National Post editorial staff proofread Mat Gurney's stuff:

Matt Gurney: Ontario goes and ruins the Confederation party for everyone
Matt Gurney  Aug 1, 2012 – 10:41 AM ET | Last Updated: Aug 1, 2012 10:53 AM ET


Andrew Vaughan / The Canadian Press
"OK, so, guy on the left gives me and guy on the right money. Is this good for everyone?"

Reading the latest report from the Institute for Research on Public Policy, discussing how Canada’s current system of equalization is now actually becoming a threat to national unity, one theme shines brightly amid all the eye-glazing charts and discussing of equalization caps and resource revenue shares. Put simply, Ontario has totally harshed our national mellow.

The problem is simple enough, but the consequences are wide-ranging and complicated. The equalization formula (to put this extremely simply) compares how much a province would collect in revenue using national averages for tax rates in five revenue-generating areas (property tax, corporate taxes, etc.),  and determines how much that province actually is collecting. Equalization payments then flow to the provinces that fall below the national average, so that the provinces have the “fiscal capacity” to pay for the services their citizens need. Ontario used to be the ultimate have province, but is notw a have-not. And worse — it’s a really big have not. Even though it only misses the national average by a tiny amount on a per capita basis, that tiny amount, multiplied by the many millions of Ontarians, means that the province consumes more and more of the overall equalization pie.

The authors of the report, including former Bank of Canada governor David Dodge, note that there are two ways that this is bad. First of all, since the total amount of equalization Ottawa distributes is capped, the more Ontario consumes, the less the remaining have-not provinces get as Ontario gobbles up their lunch. And, just as bad, given that Ontario is (poor word choice) almost 40% of the total national population, the few are paying to support the many. Newfoundland’s resource revenues mean that it has become a have province, bumping Ontario into the have-nots. But Newfoundland has half a million people. Ontario has 26 times that many. The have provinces now make up less than 30% of the population. The have-nots? Sixty five percent.

Both of these factors, the report warns, will place tremendous stress on Canada’s federation. The have provinces — Newfoundland, Saskatchewan, Alberta and B.C. — won’t want to pay for Ontario and Quebec forever. And every have-not province but Ontario will resent how much money Canada’s most populous province is gobbling up. Meanwhile, Ontarians are understandably miffed that after decades of paying into equalization, they are getting blowback for daring to take something out of the pot, and probably not just a little bit embarrassed that their province’s economic decline threatens to break the country. Sorry, guys. Our bad.

It’s a pickle, all right, and one that could only really be slowed down by a sudden economic recovery in Ontario (which, incidentally, doesn’t seem all that likely). And the report, sadly, doesn’t have much to offer by way of solutions. The problems are beyond the capacity of local governments to address. The have provinces are driven by resource exports, and Ontario is being pounded by the annihilation of its manufacturing sector, a problem that was largely created beyond our borders. None of these trends is likely to reverse themselves. Nor can equalization simply be turned off by flipping a switch — not only would that be political suicide for the party that kicked the have-nots off the welfare rolls, but equalization — at least in some form — is written into the constitution.

The report doesn’t have the answers to that, and to its credit, doesn’t pretend to. It suggests some tweaks that might improve the current system of equalization, but mostly just sounds the alarm. And it’s an important alarm to sound. The problems with our equalization formula, combined with other national unity issues such as the spat between B.C. and Alberta over Northern Gateway revenues and the ever-present headache of Quebec separatism, suggest that a deep, unpleasant conversation about the true nature of Canada is looming in our near future.

Are we a nation or a loose economic federation? If the former, how can we do a better job with equalization. If the latter, what’s the point? Such a conversation is worth having, but would be better had before economic and demographic pressures lend the whole affair an air of panic and hysteria, as increasingly cash-strapped provinces demand more, more, more. Assuming, of course, it’s not too late already.

National Post
mgurney@nationalpost.com

I have yet to read the Dodge article -I will later this week, but I agree, broadly, with what he is reported to have written.