Are you feeling disenfranchised?

Alan Hibben

Alan Hibben

The views expressed in this post are of Alan Hibben alone and are very unlikely to be supported by any of the companies with which he is associated.

Perhaps, like me, you voted for the local Conservative candidate in the recent Federal election. Or maybe you voted for the Liberal candidate.

 

But perhaps like me, did you find it very difficult to see yourself truly embodied in the platforms of these parties, but at the same time with a feeling that there really wasn’t much of a choice otherwise? Has the movement of the parties over the last few years left you a bit “wanting”? And did it seem as if neither of the major parties was really interested in grasping the nettle of the many, many issues that keep Canada from its potential? Did it seem as if the answer to every issue was to throw millions of additional and borrowed dollars at the problem (usually by naked or less-often disguised transfers to individuals) but without actually attempting to deal with the root causes of the issues?

 

And did you feel that a number of the pressing issues of the country were either ignored or downplayed or obfuscated?

While perhaps not the textbook definition of “disenfranchised”, it sure seems to feel that way.

 

I set out some examples below of issues that were virtually ignored and those where the proposed “cure” had nothing to do with the underlying issues. I have selected only a few. There are obviously many more that failed to see the light of day in the frenzy to outspend political rivals.

 

Housing Affordability

 

 Housing affordability was one of the top concerns of the electorate broadly in 2021, especially amongst the younger contingent of voters. For good reason. Prices of homes have risen out of the reach of most one- and two-income families under retirement ages. The ability to provide a “safe” level of down-payment for housing acquisition eludes all but the most family supported of young people. Yet the plight of renters was not discussed in this election. And neither was the two primary causes of housing issues, the monetization of the federal debt and the ridiculous range of regulations, taxes, fees. and discriminatory zoning of the major areas of housing demand.

 

There is not a reputable housing economist in Canada (or elsewhere) that would not call out discriminatory zoning as a primary cause of the lack of housing inventory in Canada. And correctly, this is a municipal and provincial matter. However, the major parties, while calling for substantial numbers of new homes to be built, had no real answer to the removal of discriminatory zoning, as well as the myriad of fees, taxes, delays, and regulations that make housing unaffordable. Their answer was to throw more money and looser lending at the situation, without dealing with the fundamentals of supply. And it was not lost on renters that that the loose money that they were throwing around was at least partly coming out of renters’ pockets.

 

Under the terms of the Canada Health Act (more on this later) the Federal government had not been shy at holding the Provinces to ransom over Canada’s idiosyncratic (if you don’t include the health system of Zimbabwe) view of what a health system should look like. Why would a party not feel that they could start to address the fundamentals of housing supply through their own contingent purse strings?

 

Here’s an easy example: “if you want Federal money for transit you will open up automatic 8 story building zoning, condo or rental units for any area within one kilometre of a subway or LRT station and eliminate development charges for these areas for the next five years after transit shovels go in the ground.”

 

While clearly not a comprehensive solution to discriminatory zoning and fees, it’s at least a start. But we really heard nothing in the recent election about focusing the attention of governments on root causes of supply constraint rather than vote getting.

 

Politicization of the Bank of Canada

 

This election will be (in)famous for the Justin Trudeau quote in the context of a question concerning the on-going review of the Bank of Canada mandate: “…When I think about the biggest, most important economic policy this government, if re-elected, would move forward. You’ll forgive me if I don’t think about monetary policy.

 

But if you were to think about the current and perhaps lasting issues that have arisen from a politicized Bank of Canada: current and potential inflation; dangerous monetization of the Federal deficit; mis-priced asset values and mis-directed investment stimulus; excessive loose credit leading to housing price bubbles; all of these issues have arisen from a politicized Bank of Canada seeking to meet political objectives in the very short run. And while one would be correct that this is not just a Canadian issue, the un-winding of this dangerous political strategy will be much more difficult for a country like Canada that is highly integrated from a trade perspective and highly stultified from an investment and productivity environment (more on that later too).

 

Technically, the Bank of Canada is of course independent. However, the degree of alignment that is required to simply monetize $386 billion of government debt (growth in Bank of Canada Federal debt holdings from peak of 2008-2009 crisis) beggars a belief in independence. Artificially low interest rates are government policy executed by the Bank of Canada.

 

No political party was willing to say that they would take their foot off the gas.

 

Health Care

 

Inevitably during a pandemic, voters were very concerned about health care. Not just from the point of view of the pandemic, but its indirect effects on the demand and supply of nurses, the demand and supply of mental health resources, the structural issues of long-term care and the rising backlogs of ordinary “elective” surgeries.

 

Again, health care is a Provincial matter, but the weight of Federal government money is significant. We can remember many Federal Prime Ministers and Health Ministers proudly announcing that health care in Canada would be “fixed for a generation” (Paul Martin 2004); Jim Flaherty in 2011 announcing a unilateral 6% annual increase in Provincial funding for a multi-year period; Justin Trudeau’s $6 billion “additional down payment “A re-elected Liberal government will make sure every Canadian has access to a family doctor, to mental health services, to affordable prescription drugs and to national pharma care.”.

 

Despite all of this and the somewhat matching funds of the Provincial governments, it is generally recognized that the Canadian health care system was very sick before COVID and remains sicker today in the latter stages of the pandemic. The most recent Commonwealth Fund study in August of 2021 ranked Canada only above the US on key measures of “equity, access to care, affordability, health-care outcomes, and administrative efficiency” amongst 11 high income countries.

 

Canada, for better or worse allows the Federal government to control advances to Provinces for healthcare. Thus far such powers have been limited to ensuring that the system is locked in stasis, or in the case of Harper’s approach, completely hands off. As we are all aware, Canada has a mixed provider and funder system, but with a gloss of “universality”. This gloss of universality has prevented a wide range of innovation in the delivery and funding of “essential” care, such that no populations are cared for well and many populations, especially disadvantaged and indigenous populations are served very badly indeed.

 

But no Federal party seems to be able to once and for all grab the third rail and shake it, by tying funding to true innovation in delivery and funding models. In this last election even a glimmer of an ancient tweet was enough to get the Conservative Party back on its heels. Where is the courage?

 

 

Productivity and Investment

 

The CD Howe organization produced a very useful paper during the election: “Declining Vital Signs: Canada’s Investment Crisis”. Despite their best efforts, a challenge to the political parties to try to address investment climate in the furtherance of economic growth in Canada appears to have fallen on deaf ears. Somehow the parties seem to uniformly believe that large amounts of borrowing to transfer to individuals will produce growth. While some economic studies will draw a conclusion of demand subsidization resulting in productivity growth due to the effects of economies of scale, in an open and import driven economy such as Canada’s, the effects are more muted. Capital investment, intellectual property, innovation, and regulatory efficiency are all stronger determinants of productivity growth and have received almost no play during the election.

 

There are a wide range of studies that indicate that Canada is certainly not highly competitive as a place to do business. The World Bank’s ranking of Canada is 23 of 190, a good but not stellar position in the competition for international capital flows.

 

The lack of investment flows and the lack of domestic investment may have many factors, including a wide range outside of the control of policymakers. However, regulatory over-burden, provincial trade barriers, indigenous consultation and regulatory gridlock are certainly matters that should be of significant interest to the political parties.

 

But in the 2021 campaign, nothing but crickets.

 

 

Defense

 

The 2021 Federal election campaign did give space to the discussion of inappropriate behaviour in the Canadian military as well as issues of governance at the Defense Staff, Ministry and especially the PMO. These topics are serious and troubling, but each of the major parties has likely some smudges on this file over the last decades. This is not an issue that just emerged.

 

However, the other important aspects of the Defense file received nothing but token discussion. The rampant inefficiency, bureaucracy, and lack of focus that was so clearly labelled in General Leslie’s Report on Transformation 2011(!!) and promptly deeply buried in the bowels of Ottawa continues to this day with little to show for the years since the problems were clearly enunciated. The horrible relationship between defense and the rest of the procurement bureaucracy has been well documented. It is clear that the Liberal promise of a new “Defense Procurement Canada” bureaucracy is intended to be announce ware without any specific idea of how the process will be changed.

 

The highly ill-advised ‘Buy Canada” policies are supported broadly through the political parties but have resulted in poor outcomes, high costs and no creation of any significantly advanced capabilities to compete in global markets. They remain very inefficient corporate welfare schemes. Although all corporate welfare schemes are inefficient, perhaps that is a pleonasm.

 

And most importantly, no political party is willing to step out and question the fitness of the Canadian military for the challenges of the 2050’s. There is still a significant emphasis on talent and equipment that is not relevant for the future challenges as well as a tendency to use the military as a very expensive stand-by work force for strictly Canadian issues. A ground-up re-think of the purpose of the Canadian military is required, but again too sensitive a topic for politicians.

 

 

Carbon Management

 

It is not an exaggeration to say that determining the essential differences between the major party’s carbon strategies would be difficult.

 

All major parties are in the business of announcing, but much less in the business of affecting real change. In addition, all the major parties would like voters to believe that “this won’t hurt a bit”.  The current carbon strategies try to find a way to buy voters by sending them cheques, while at the same time hiding the cost of carbon reduction in the wide range of non-trade sensitive small and medium sized businesses.

 

There are two distinct approaches to applying a carbon tax. A carbon tax can be applied at the emitter level with the understanding that costs to the emitter will increase and thus will need to be passed on to the consumer, thus hopefully (as has been the approach to tobacco) reducing overall consumption of carbon. Alternatively, carbon taxes could be applied to the consumer such that taxes would be levied on all products, domestically produced or foreign. Canada has a mixture of these approaches.

 

The taxation of emitters results in a wide range of rules and exceptions in order to protect the business of trade-exposed emitters, who could not compete globally unless there were a global standard (which does not look imminent). However, these rules and exceptions are very complicated and have to date mainly been applied to substantial companies with sensitive exports (the OBPS system). However, a broadly based carbon tax also affects mid-sized companies competing internationally or competing with non-taxed imports. There are very few companies in Canada that are not “trade-exposed” The result of this is either a set of complex exemptions or an incidence of tax that is unequal amongst emitting sectors. Given the current plan that provides rebates to voters, but not taxpayers, the net incidence of carbon taxes falls to the multitude of industries and companies that are somewhat trade exposed , but not part of the OBPS system.

The other issue with carbon taxes is that even if they start off “revenue neutral”, that phase does not tend to last very long. This process of creating net revenues, even if they are restricted from being included in “general revenues” distorts investment processes as the government attempts to pick winners from technologies in the area. Governments simply cannot resist the appeal of a ribbon cutting.

 

All of this suggests that a serious re-think needs to occur by the political parties to start to make carbon pricing efficient and effective.

 

In my view a broadly based carbon regime that applied only to individual consumers in Canada would be a much better way to approach the problem. Carbon content of goods (and services) both domestic and foreign would need to be calculated, and this is not an inconsequential task. But applying a tax to goods and services, wherever made and having the ultimate consumer pay is much more likely to have the GHG reduction effects that are sought, versus a patchwork of exemptions, rebates etc.

 

Revenue neutrality should be the goal, in order to avoid giving more investment dollars to bureaucrats with no real capacity to make good choices. A combination of tax rebates (to the same limited population and in the same manner as currently exists for HST) and a general reduction of income tax rates is likely the right approach to get efficiency and effectiveness.

 

It might be argued that it would be difficult to get political approval for a carbon plan that makes the cost very explicit on each invoice that a voter pays. However, if the real purpose of a carbon tax regime is to reduce consumption of GHG’s, I believe that this is the best alternative for review. And from a market perspective, this is much more transparent and efficient.

 

 

Conclusion

 

It is very unlikely that the Liberal Party will decide that 2021 is the right time to try to deal seriously with serious issues. More likely they will bask in the “victory” and start to plan the next election strategy.

 

However, the Conservative Party and the New Democratic Party will have an opportunity and an obligation to try to delve into issues of great concern to meeting Canada’s potential and will perhaps find the courage to think away from the pressures of retail politics – at least for a short while.

 

None of the parties “won” and in my view all have failed.

 

Perhaps this time will allow for some reflection on whether the Canadian electorate of 2023, 2024 or 2025 will have grown up a bit and be ready for real and innovative choices.