How do we Solve our Skills Shortage? Take Natural Medicine.

Located near Tanzania and Kenya is the great Serengeti, which is marked by an annual cycle of circular rain patterns. The rain moves around a patch of 150,000 miles of land forcing 1.5 million wildebeest and zebra to follow, in what is called the Great Migration. Whatever land becomes touched by the rain becomes lush and fruitful, and wherever the rain leaves becomes barren and desert-like. Grazers are forced to follow the rain on this 1,200 mile trek, while predators- territorial in nature- lies in waiting for the return of the cycle.

In other words, wildebeest and zebra move to where the food is; while lions sedentarily lie and wait. Because of the length of the wait, some lions do not survive.

Canada’s skills shortage is in vogue. But, this topic often invokes emotions ranging from disbelief to rejection to anger. There is a disbelief that, in a still struggling economy, that labour is in short supply. There is a rejection of, while so many can’t find jobs, companies’ push to bringing in foreign workers. And, there is anger that, with all the money pouring into training, government has not addressed the problem.

A Life without Pleasure Isn't a Life without Joy

Panic struck Homer one December as he realized that Christmas was ruined because the Simpsons family had no money for presents. Marge’s secret stash of Christmas cash had been blown away to remove Bart’s new tattoo. Homer’s annual Christmas bonus was cancelled by his Scrooge-like boss. Homer becomes particularly distressed after seeing Flanders’ amazing Christmas lights and presents. Stupid Flanders. To save Christmas, Homer moonlights as a mall Santa to bring in extra income to buy his family presents but finds out that two-weeks’ worth of work only brought in $13 dollars. So, he gambles it at a racetrack but loses it all. D’oh!

I recently heard someone ask the question, “What is the ontological argument for economic growth?” From economists to politicians to the ordinary Joe on the street, everybody seeks to increase income believing that it would increase happiness. Evidence supports this. In a survey of Canadians, people were asked to rate their life satisfaction from 0 to 10. It turns out, more income increases satisfaction – more for people at the bottom than those at the top. But, it’s not that simple. Nothing really is. 

Figure 1: Satisfaction in Life Increases with Income

People making $80,000 or more are generally older (average age is 45 to 49), more educated and more likely to be married. So is it income that makes people happier or is it education or is it having a life partner? Is it a confluence of the three or the infinite number of other related factors?

Using statistics and a survey of 120,000 Canadians, the impact of income on satisfaction can be determined while controlling for over 40 other factors that could also affect one’s happiness. These other factors include health, family and behaviour. Controlling for these, it turns out that income doesn't directly have much effect on life satisfaction. Using the same scale of life satisfaction from 0 to 10, increasing income doesn't even change satisfaction more than 0.1.

Figure 2: Impact of Household Income on Life Satisfaction*

* All regression results are always interpreted as comparators. So this chart says, keeping all else equal, a person earning $80,000 or more is only 0.07 happier than someone not working or earning less than $20,000, on a scale of 0 to 10.

What matters more is relative income. People in the top 10% of the income distribution are over 0.25 more satisfied than those at the very bottom. Traditionally, money is seen to have three functions: medium of exchange, unit of account and store of value. Due to our primal competitive spirit, it seems that money has a fourth purpose, to promote social status. “Stupid Flanders”.

Figure 3: Relative Income has a Strong Impact on Life Satisfaction*

* This chart says, keeping all else equal, a person earning in the top 10 per cent of income earners are just over 0.25 happier than someone in the bottom 10 per cent, on a scale of 0 to 10.

Age seems to have a strong effect. The survey begins collecting data for those who are 12 years old, who seems to be happier than older age group. They will serve as our defaults. At this age, what is there really to be distressed about? At 40, people seem to be the most unsatisfied but the golden years bring sunshine as people gradually become happier. 

I know what you’re thinking. Kids. And, it is true (although these results are controlled for the presence of kids). Separate statistics show that those with kids that are five and under are 0.05 happier while those with kids less than 11 are 0.05 more distressed. Maggie and Bart?

Figure 4: Age has a Relatively Strong Effect on Satisfaction

Compared to those who are single, married people or those in a common-law relationship seem to be the happiest. Those that are widowed, separated are divorced are obviously less satisfied in life.

Figure 5: Age has a Relatively Strong Effect on Satisfaction

By far, though, health has the strongest impact on life satisfaction. Worsening physical and mental health and increasing workplace stress significantly decreases life satisfaction. Physical activity increases happiness. Relationships also matter. Those who have stronger links to the community are generally more satisfied than those with weaker links.

These results should not be distorted not to say that income does matter. It does – particularly when one doesn’t have any. Income guarantees food security, increases the likelihood of having sex, affects one’s mental health and, all-in-all, allows for a balanced life. But these results suggest increasing income doesn’t always increase happiness or the increases are always not constant. Pass a certain point, increasing income does very little to increase one’s satisfaction. As The Economist puts it, “a life without pleasures isn’t a life without joy.” Having money is only one element of the overall picture. Being active and healthy, having strong relationships and being balanced is also important.

In the end, Homer brings home the dog that lost him $13 dollars in the race. As he admits to the family that he didn’t receive his Christmas bonus, failed to buy presents and ruined Christmas, the dog runs into the house, and Marge said “this is the best gift of all, Homer… it’s something to share our love. And frighten prowlers.” The family circles around and Christmas is saved. Homer discovers that the happiness of his family depends on more than what caused his panic: dough!

Explaining Equalization

Aside from the occasional careless rants, unbeknownst to most Canadians is the federal Equalization program which has been described as either a wealth-sharing scheme, the glue that holds the federation together, or a fraudulent scam. This program is worth $15 billion in 2012 alone, which, for perspective, is the total income for 450,000 average Canadians. And yet, nobody really understands what it is really for. People have tried to explain it using the legalese of the Canadian Constitution or using even more confusing economic theories. Well, to make it simple, I argue that the main purpose of Equalization is to make sure that Canadians are treated the same wherever they reside in this country.

Government redistributes wealth. It's accepted that the wealthy must pay more into the system than they receive in return. The poor, with greater need, should be provided with greater benefit. This redistribution has become one of the principle pillars of our society. Equalization is just another mechanism to aid in this redistribution.

Imagine there is only one government in Canada. Here, there are three rich people and three poorer people living in separate areas of the country. Each rich person shares a portion of their wealth with the poorer person. The burden for the rich is the same, regardless of where they reside and so is the benefit for the poor.

After the redistribution, each wealthy person is equally worse off and each poorer person is equally better off. Well, what happens when you erect borders between these areas? In the following example, there would be two rich people in oil-rich Alberta. Both are transferring to one poorer person. While in the other part of the country, there is two poorer people for the one rich person.

In effect, either the rich in Alberta each have to pay a bit less to help the poor or the poor is tremendously better off compared to his situation in a one government country. Conversely, the rich in Quebec has to pay a lot more compared to the previous example or the poor, having to share the wealth of only one rich person, is worse off. 

Either way, this demonstrates that people are treated differently depending on where they live despite living in one country. This is because provincial borders put barriers around redistribution of wealth – a principle we accepted earlier. 

Equalization addresses this by moving wealth from the rich in one part of the country to the poor in another part of the country. The fact that there are more rich people living in one part of the country and more poor people in another means that, if you are looking at this from a provincial perspective, there would be more money transferred to some provinces than others. The program exists as an extension of the federal tax and transfer system to ensure that people are treated fairly wherever they reside. A poorer person, whether they live in Quebec, Alberta, Ontario or another other part of the country would be treated the same by government.

So, in this spirit, we should stop viewing recipients of Equalization as have and have-nots, or see the situation as subsidizing Quebec or the East, but rather view Equalization for what it really is - a program that ensures that the wealthy equally pays into the system and that the poor receives equally the support that they need, regardless of where people reside. This is not a program that subsidizes Quebecers or Ontarians or Maritimers, but rather a program that helps Canadians.

Note: Before people jump on it, I'd like to admit that this is a rather simplistic explanation. There are other equity, efficiency and effectiveness arguments for and against the program that I abstracted from in writing this post because, quite simply, I didn't want to blow your mind.

"C'est faux!"

"C'est faux Monsieur Charest!"

I've stopped trying to understand Quebec politics a long time ago. In fact, that applies to all politics. It's too subjective. It's too irrational. But, most of all, too misinformed.

Of separation, I fear the toxicity of the political issues; don't understand the legal issues; and dismiss them both as either circular or non-relevant. So, I will default to the economic issues which brings me more mental comfort.

The Quebec question has shaped this country beyond all others - affecting the social policies of Canada, our relationships with the rest of the world and the financial flows of the federation.

In many ways, Quebec has defined Canada's fiscal federalism marked by a uniquely decentralized federal government and, yet, with quite large financial flows. Since time immemorial, Quebec has been the main beneficiary of the federation. Focusing on 2009, Quebecers paid $40 billion in federal taxes and received $53 billion in federal spending (either directly on services, or transferred to individuals or the Province). This means that $14 billion was redistributed to Quebec from the rest of Canada (Figure 1).

Figure 1: Federal Financial Flows, 2009

Source: Table 384-0004, Statistics Canada

Fourteen billion dollars. I find that when numbers become larger than what's in my bank account, I lose sight of their significance. So what does this $14 billion mean? To provide a relevant example, it means that had Quebec separated, Quebecers would have paid $40 billion less in taxes in 2009. But they would have received $53 billion less in services and transfers (yes, the numbers don't add, blame rounding). So the difference is the gap, or 

• the amount of additional taxes that they would have needed to pay to maintain current services, or 
• the reduction in spending they would have needed to make to maintain current taxes, or 
• the sustained increase in the deficit that they would have needed to swallow, or
• some combination.

Well, in addition to planning tax increases in the upcoming years, Quebec already has some of the highest tax rates in Canada (and North America). Also, the competition is becoming meaner. One has to question why so many corporate HQs are leaving Quebec rather than sulking in the fact that they are. Can Quebec increase taxes even more? Yes but at a price.

Figure 2: Quebec's Tax Rates are Already the Most Progressive in Canada

Source: Canada Revenue Agency

Fourteen billion dollars isn't easy to come across on the spending side either. $14 billion is basically what Quebec is spending on education, recreation and sport in 2012-13. It's more than three times what Quebec is spending on debt servicing. And, most interestingly, it's almost half of what Quebec is spending on health and social services.

Source: 2012 Quebec Budget

Now this one is I hope a no brainer for everybody like it was for me. Quebec is projecting a balanced budget in 2013-14, which is better than some select Canadian governments. Swallowing an extra $14 billion will blow that target right out of the water - to the multiple of three. It would turn a deficit that is seemingly cyclical to one that's structural and unsustainable. 

Source: 2012 Quebec Budget

Already the most indebted province in Canada, Quebec's debt-to-GDP would certainly grow (likely grow by around 4 percentage points a year). But, the Province gets hit with a double whammy because it must take up its share of the federal budget. Other people have thrown the number 100 per cent debt-to-GDP out there, which would make Quebec one of the most indebted country in the world and growing increasingly worse.

No doubt that a fully sovereign Quebec government would redirect what was originally spent by the federal government to match Quebercers' local preferences. But a lot of what the federal government spent was just transfers to the provincial government and to people. No savings there. Quebec would likely have a military, a central bank, agricultural offices and foreign assemblies (all of these services would lack the same economies of scale by the way). So, again, little savings there. I would argue that soveriegnty would have cost Quebecers more.

But the financial impact that sovereigntists say would materialize isn't a cost but a benefit. So the real comparator to analyzing sovereigntists' arguments is not the status quo but what sovereigntists argue would be the financial benefit. Now THAT gap, between how much it would cost Quebecers for sovereignty and the financial benefit that sovereigntists suggests, is the magnitude of misinformation. And this is why, with politics in Quebec and elsewhere, I've given up on trying to understand.

Note: Despite the primacy of the economic argument here, I don't think that the political and social reasons for separation are trivial. I just think that when you are making a choice, you have to know what the costs are. Elections are marked by catchy slogans. And politics driven by logic and facts that fit within a 120 letter tweet, a cardboard sign or a 30-second TV commercial always end with regret during the hangover. That's why I focus on economics - because they don't make sense to most people, therefore often overlooked and become unexpected consequences.

Note 2: Ok, so last update here. It seems that I might have given the impression that Quebec is the sick man of Canada. It's actually not. Am I suggesting that the $14 billion dollars that flows to Quebec is not a lot of money? Well... relatively, yes. Remember that Quebec does have 8 million people living in that province and so when you look at the financial flows of the federation no a per person level, Quebec's $14 billion doesn't seem that large at all. In fact, among the provinces, PEI, Nova Scotia and the rest of the Atlantic provinces receives the most in the federation. You don't even know what people in the territories receive (some are $20,000+). Lastly, keep in mind that a lot of this dynamic is not explained by political deals or some type of targeted favours but rather by how government works. Quite simply, the rich subsidizes the poor. And in some provinces, there are more poorer Canadians, which explains these differences in net contributions and net benefits.

Think-tank: Transfers should go to citizens, not provinces

Look at what we have here! I think this is a good idea which could pivot the federal government more towards providing social welfare. Think about it. 

• The federal government begins posting increasingly larger surpluses in 2015 and beyond. It has a few choices, reduces taxes, increase direct spending or reduce debt.
• Option two and three aren't bad but taxes are already pretty low here in Canada compared to other times in the past and other countries.
• In addition to reducing debt and direct spending, it slowly increases benefits to individuals over time (which would help it buy votes). These benefits would guarantee that every citizen has a minimum level of income and clawed back as their earned wages increase. 
• This reduces pressure on provincial social assistance programs to the point where they can eventually be eliminated once the universal benefit is fully phased in. Provinces can use that fiscal room for other pressing priorities.

Think-tank: Transfers should go to citizens, not provincesMay 23, 2012 - 7:43pm BY MICHAEL LIGHTSTONE STAFF REPORTER
A Halifax think-tank is suggesting local governments advocate for federal cash transfer payments to be made to individual citizens, not provinces. 

The Atlantic Institute for Market Studies says in a new paper that such a proposed method of delivering Ottawa’s largesse would help municipalities in the long run. 

Report author Juanita Spencer, a policy researcher in Halifax, says communities would benefit from transfers distributed to individuals through municipal governments, in part because such a change could leverage private, public, community and individual assets to focus on specific needs.
“This option would finally begin to constrain the current national ‘sense of entitlement’ and the ongoing growth of provincial governments funded by the largesse of federal taxpayers,” an AIMS release said Wednesday. 

The current equalization pact between the federal government and provinces is to expire in 2014.
“By moving both the money and the service redistribution to the local level, communities could focus on what their residents actually need in specific instances, as opposed to the one-size-fits-all approach we see today,” says AIMS president and CEO Charles Cirtwill. 

“This would meet Canada’s constitutional commitment to ‘make payments’ in support of the principle of comparable levels of service at comparable levels of taxation across the country.”
In Spencer’s report, Put Our Money Where Our Mouths Are, she also highlights “the potential that greater taxable revenue in local communities holds for financially strapped municipalities,” the AIMS release says. 

“She urges them to support sending cheques to people, not provinces, as this opens the door to additional local revenue while at the same time ensuring services are being delivered that meet the specific needs of communities.” 

Lars Osberg, chairman of Dalhousie University’s economics department, said equalization does two things. 

“It ensures that provinces don’t go bankrupt and repudiate their debt, and we know from the European situation right now how disastrous that can be,” he said. 

“It also establishes a citizenship right of all Canadians to a roughly equal treatment by government, wherever you happen to live.” 

In Nova Scotia, Mayor John Morgan of Cape Breton Regional Municipality has argued for proportional transfers made directly to municipalities, the AIMS report notes.

No Jobs. No Hope. No Cash.

Executive Summary

As more people are pushed to the margins, society will increasingly be pressured to address inequality. But competition with emerging countries and the rapidly approaching limits of the environment will also force us to improve efficiency. In economics, equality and efficiency almost never go hand-in-hand. But in this case, our pursuit of efficiency will only be granted - and made more palatable - by the promise of greater equity. 

·         Income inequality has been driven by the automation of the production process and the outsourcing of jobs to emerging countries.

·         This trend will continue due to political and economic developments, which will lead to greater inequality in the future. 

·         Governments will have to respond to maintain social cohesion, alleviate burdens for low income individuals and to increase efficiency.

·         The progressivity of the tax system will need to be increase with greater burdens on the rich but this needs to be done in concert with other global economies.

·         The tax system must become more redistributive by transferring more income from the rich to the poor. 

o   A negative income tax system should be researched and, if beneficial, implemented.

·         Government must reduce its footprint except for services that exhibit clear market and individual failure, externalities and economies of scale. Privatized services would increase welfare for people, rich and poor, by allowing individual choice, competition and innovation (which would increase efficiency and effectiveness).

·         The strengthened tax system must take into account and address the effects on equity from the reduction of government services. 

·         Government will become an organization that facilitates fair and efficient delivery of services and satisfactory of basic needs rather than the primary delivery agent.

o   It can help do this by researching, pin-pointing and imposing taxes on products and services emitting externalities, which would help alleviate individual failures in decision making.

o   It must continually monitor the impacts on equity from new economic and social trends, and, if necessary, act to address them.

o   It must continue to deliver services that exhibit clear market failure such as roads, policing, defence and maintain a basic social safety net.

Note: This is an evolving draft paper, published just for preliminary comments on the thesis (which are all welcome).

Overview

It's hard being funny - even harder while surrounded by so much despair. But one could find humour not only in the crafty signs found at protests (and being funny, I guess is easy when one haven't much to do) but also in absurdities of the situation that brought protesters there. Many view that the gains in income inequalities since the near extinction of the aristocratic class is slowly being reversed. They are doing double takes at the political and economic forces that are unwinding the progress made in creating equal, fair and prosperous communities since the post-war period.

They have a point...

Figure 1: Income Inequality has Increased in Canada

Source: Statistics Canada.   Table   202-0705 -  Gini coefficients of market, total and after-tax income, by economic family type, annual (number),  CANSIM (database). 
Note: Figure represents the Gini coefficient for market income. After-tax income would reduce income inequality substantially because redistribution but was not used to demonstrate inequality before government intervention.

Income inequality has markedly increased since the 1970s, particularly in the era of austerity of the 1990s (Figure 1). Greater inequality has been blamed on a combination of:

·         Globalization which facilitated greater competition from emerging countries; and

·         Advances in technologies which, combined with the previous factor, increased automation in manufacturing and services industries.

In other words,  relatively well-paying jobs that required lower levels of skills have been outsourced to emerging countries where the same level of production could be sustained at lower costs. Companies have also discovered that routine jobs could be better handled by less demanding and error-prone machines. Generally, low-skilled labour is becoming obsolete. 

Seriously, this is what it used to take to make photocopies.

New technologies help us produce more with less. Outsourcing helps lift other countries out of poverty. To most economists, these trends are not sources of problems but are rather solutions. But economists view and judge based on impacts on aggregates. In the real world, impacts on individuals matter. Economically, switching to more efficient methods and locations increases societal benefits. Personally, if you lose your job then to hell with society.

...Fairness matters...

Societies must be fair for individuals to participate in society. Those who choose not to work due to egregious inequities only exhibit a psychological trait common to us all. Experiments show that children who are untreated unfairly will hold back payouts for their partners even at a cost to themselves. It seems that the desire for fairness and the backlash when we are mistreated is primal in us all. So when irritated people ask why won't protesters just return to work. Well "Forbear to judge, for we are sinners all."

Even dogs understand fairness

Poverty breeds social ills. Extreme envy and dire need are hand-in-hand with criminality. Poverty is also an obstruction to education because low-income individuals have less opportunities to fulfill their potential. Greater education would not only reduce crime but also enhance health. Better nutrition, resulting from better education and more resources, could benefit the health of individuals over the course of their lifetime. Physical activity also increases along with income in addition to mental health. 

Figure 2: Low Income People Visit Doctors More Often

Source: Statistics Canada. Canadian Community Health Survey (2009-10) Public-Use Microfile

...But so does efficiency.

The evolution of industry is led by innovation that allows workers to produce more with less. In the modern era, this has meant assembly lines, circuit boards, robotics and now 3D printers. The automation of the production process leads to leaps in efficiency which will increasingly be important as our scarce resources become even scarcer. We face increasing constraints on how much we extract from the Earth; we have to ensure that we produce with as little waste as possible. The future is geared towards more automation.

Figure 3: The Manufacturing Sector in Canada is Increasingly Driven by Machinery

Source: Statistics Canada. Table 381-0013 - Inputs and outputs, by industry and commodity, S-level aggregation and North American Industry Classification System (NAICS), annual (dollars), CANSIM (database).

As more of the production process is captured by capital (machinery), labour is freed for more productive activities. Rather than participating in repetitive and routine processes, people could advance towards designing products and maintaining machinery. Theoretically, the higher that labour is elevated in the value-added process, the more income they receive.

Throwing a wrench in the works is the stubborn and persistent barriers to education to low-income families. The participation in postsecondary education is closely tied with parental income but not solely due to financial barriers. Rather, participation is mainly dictated by the culture at home and in the neighbourhood. Parents of low-income families place lower value on tertiary education and less pressure on their children. Kids from low-income neighbourhoods are exposed to friends that may tend to mock rather than embrace education. These cultural barriers are far tougher to break than financial barriers.

Since low-income families face barriers to education and are unable to compete for higher value-added jobs, labour shortages will become worse which propels the wages of skilled and high-income earners even further. Investors, a class of income earners who have savings (ie. not poor), will receive an increasingly greater share of the production process. Everybody else will fall behind. Income inequities will increase further.

The rich man's burden...

From the world's richest man to the poor men of the world, people have been pushing for more taxes on the rich by calling high-income earners to pay their "fair share". Warren Buffet famously said that his secretary pays more in taxes than him. People ask where is their bailout after the rescue of corporations. The 99 demands fairness from the 1. The principle behind this movement may be right despite some facts and arguments being so wrong.

Warren Buffet claims that he pays 17 per cent tax, half of his secretary. True but this disingenuously omit the 35 per cent implicit tax he pays on his corporate profits (he doesn't pay all of this because capital gains get taxed less than other income but I'm not looking this up). Corporations were rescued in 2008 and 2009, which in the end turned out to be loans because much was paid back. People neglect to consider billions in social assistance payments a year when they ask where are their bail outs. In fact, government is a large redistributive machine. The rich pays more into the system than they receive back in transfers and services. The poor pays less and get more. How about that for a bail out? How about that for fair share?

...Should become a bit heavier.

Money and value are not necessarily the same thing. Money is a human creation. We place a number on a piece of paper, and before that, a piece of metal, to guesstimate its value for an individual. Well, a penny a few decades ago could buy you a piece of candy. A penny today isn't even worth a penny (seriously, it takes 11 cents to print one which is why they're being phased out). More importantly, ten dollars for you isn't worth the same as ten dollars for a millionaire. Money, like everything else, exhibit diminishing marginal returns [More on this topic later]. The more you have, the less its valued. 

The lesson is that the rich have more and so for a given amount of money, it is valued less to them than to the poor. We know that the rich pays more into the system than the poor and I am of the view that they pay more than their fair share. I disingenuously measured it in cash terms but only because I don't know how to measure it in personal value. If a person makes over a million dollars and contributes at the highest tax brackets at 50 per cent, how much value does this person lose compared to a 30 per cent tax for a person making $70,000? I can't answer this but I assume less for the sake of the rest of the argument.

Diminishing returns also affect other things: food, medical services, education, etc. A rich person consuming copious amounts of resources not only gets less value for it than a poor person without those luxuries, but the rich will also incite envy which adversely affects them. For the altruistic motive of equalizing values across individuals and the selfish motive of survival, the rich has the responsibility, incentive and capacity to pay more.

Tax man by day? Robin Hood by night?

People hate taxes. In fact, the United States of America was founded on the refusal to pay taxes. Everybody hates them equally but the rich have more avenues to avoid them. In high demand in any country of the world are high income earners, rich in skills and assets. This means that increases in the progressivity of the tax system cannot happen in any lone country. It  must be done in concert with others but the public discourse has finally shifted which opens a window of opportunity (in now small part to those on the streets, voluntarily or otherwise).

Through the tax system lays the opportunity for redistribution but not only by bringing down the rich but also by pulling up the poor. The tax system already funnels money to low income individuals through an array tax credits such as the Universal Child Care Benefit and the HST/GST rebates.

But perhaps the greatest redistributive tool within the income tax system is the negative income tax which guarantees every citizen a minimum amount of cash. This designated income floor is clawed back as people earn more. Designed properly, the added benefits to society from lower hospitalization, crime and social cohesion more than makes up the loss to labour supply from free money.

So potent and efficient can the income tax system be at redistribution that it allows us to re-examine the delivery of public services without the anchor of equity considerations. In other words, because the tax system could be rejigged to counter any subsequent effects to equity, we can now have an adult and emotion-free conversation on the efficiency of public services - a conversation that is overdue and needs to happen.

Saving the Sinking Ship of State...

Government is inefficient at most things and ineffective at some and yet we demand that government step in at the sight of any problem. The inefficiency and ineffectiveness isn't solely because of incompetent public services and venal politicians. Rather, many of governments' problems are due to its leviathan size, and impossible and conflicting tasks. 

We expect government to solve most of our problems. But as organizations become larger, they become less effective. Specializations become generalization and the quality of each public service is slightly diluted. Accountability becomes more difficult because the organization becomes more complex. Responding to emerging trends becomes slower because there is more to consider and more conflicting issues to reconcile. This large and slow behemoth, disincentivized to compete with itself, becomes slower in adopting new technologies and ideas. The delivery of services become outdated and inefficient. The public dollar becomes ever increasingly wasted.

Furthermore, government is expected to serve everybody but is criticized when the service isn't catered to somebody. People are different - but centrally provided services are always pressured to be similar. Education is pressured to be uniform although people have different learning styles. Health care is pressured to be similar although people have different preferences on treatment. By not catering to individual preferences, a lot of potential satisfaction is uncaptured.

... By Dumping Excess Cargo, Plugging Leaks, Providing Life Rafts...

You can't please everybody - but you can come closer. The more choices people have, the better they are able to pick what suits them best. Benefits from individual choice could be huge but government face natural barriers to catering its services. The market, being made up of millions of small and nimble individual organizations that could quickly be bred and die, is more capable of catering to individual needs and responding to emerging trends. A business must to respond to demand from people else people will demand it elsewhere.

This competition for business not only benefits people by catering to their needs but by reducing unit costs. Competition generally breeds innovation which reduces waste and cost. The parts that make up government generally do not compete because they have monopolies over their responsibility and because they respond to a central hierarchy. Without competition, the processes in government are slow and wasteful.

On the other hand, competition also brings waste. The more products and more organizations that exists reduces savings from bulk purchases and mass production. These economies of scale have brought us cheap generic drugs, and quick cataract surgery and are best provided by government (the desire for scale is also a reason for the lack of responsiveness).

And the benefits from individual choice may be large for the individual but sometimes not for society. Given their own choice and the market price in each product, people would elect to under consume education, over indulge in tobacco and not produce infrastructure at all. That's because people would pay for education up to the point where they value the job they get from that higher education and not a dollar more for the benefits to society and democracy. People would decide to smoke for all the benefits that accrue to them now without any consideration for the cost to them in the future not to mention to those around them. Lastly, people, operating in committee, will never agree to appropriate and demolish a strip of residence to put a road through there so that the majority would benefit. Externalities exist and only government can effectively address them.

Figure 4: The Balance

So in the end, these opposing forces must be weighed against each other for individual government services (as well as those currently being provided by the market). When resources are becoming scarcer and the demand for goods, luxuries and necessities, are ever increasing, we have to find better ways of using the resources that we have.

... And steering in a new direction.

Who is we? Well, government of course and the people too. This dialogue over which services to be decentralized (or nationalized) should be held publicly but can only be done with the help of the bureaucracy. The public service is a giant information generating machine with legions of analysts, economist and talented decision makers. As government moves from an organization that directly provides public services to one that facilitates an environment where a fair and prosperous society can thrive, the government is required more than ever to become the final mediator, inspector, judge and aid-worker. 

As more services are transferred to the market, government must reinforce its role as a regulator to ensure that monopolies do not emerge to drive up costs, risks are not irrationally taken and public safety is not endangered. The government must be ready to take a stand in disputes that will emerge between competing organizations, and that rules are made clear and are obeyed.

Furthermore, government can continually observe, research and rectify flaws in individuals' decision making. Tobacco, alcohol, marijuana and carbon are taxed to reflect their true societal cost. Education, physical activities and culture subsidized to reflect their true societal benefits. In other words, government can use its powers to price-in externalities into individuals' decisions.

But, one of the most important roles of government should be jealously guarded and obediently performed. Government must continually observe changes in equity (both because of its decisions, and other societal, economic and political forces) and address it through its tax system. Now and in the future, equity will be increasingly challenged and government must be a central player in the defense of fairness. The tax system, through higher progressivity of income taxes and larger payments to low-income individuals, is a potent device to solve inequality.

This scale also likely tilts towards government for education. People having different learning styles and the sector could surely be improved from more innovation and competition but education is too key of a sector to decentralized. Education is a key indication of individuals' future success and driver of inter-generational mobility. One could argue that this very-public service should be subsidized (perhaps to even the fullest of extent) but only if it is mandatory for all.

Far too many are living in rags in our world of riches. 

As more people are pushed to the margins, society will increasingly be pressured to address inequality. But competition with emerging countries and the rapidly approaching limits of the environment will also force us to improve efficiency. In economics, equality and efficiency almost never go hand-in-hand. But in this case, our pursuit of efficiency will only be granted - and made more palatable - by the promise of greater equity. 

Note

I've been some very bold assertions in this article and I hope to back them up soon with subsequent, separate and more detailed posts. 

Expanding Quebec's Tuition Debate

This was supposed to be a comment on the following post on the Quebec student strikes but for some reason it would not go live. But it works just as well as a standalone piece discussing Quebec's tuition issue.

The importance of tertiary education in an increasingly specialized and globalized world is unquestioned - but so are other public services and a competitive tax system. I don't pretend to know what the right answers for Quebec are but all I can comment on is how precarious of a situation they are in.

Adjusted for price, Quebec has one of the most generous but costly array of government programs across Canada (Figure 1). These programs, which stretch from subsidized day-care to generous pensions to employees to cheap universities, are funded by Canada’s most progressive and onerous tax system (Figure 2), and $8 billion a year in Equalization payments (1). 

Figure 1: Price-Adjusted Per Capita Program Spending, 2008-09

Source: Replication of the calculation from Quebec's report "Le québec face à ses défis" using data from Statistics Canada's Financial Management System, Intercity Price Index and Population.

Figure 2: Comparison of Provincial Personal Income Taxes

Source: BC Budget, Page 131
Note: This data is from February 21, 2012.


What’s not funded by these own-source revenues and federal transfers is accumulated in an ever growing debt – already the highest in Canada using most metrics (Figure 3). Economically, the province has not kept pace with the rest of Canada for years and looking forward, Quebec is not anticipated to grow nearly as fast as the Canadian average for the next decade to come (2) – at least.

Figure 3: Net Debt to GDP Ratios

Source: Calculations based on data from the Department of Finance Canada's Fiscal Reference Tables and Statistics Canada.

The growth of federal transfers, which make up around 20 per cent of Quebec’s revenues, are anticipated to decline fairly significantly (Figure 4 and also see the 2012 Quebec budget). In order to combat this reduction in transfers, the relatively large deficit and growing debt, the most recent budgets announced tax increases and other revenue measures, as well as reductions in program spending. 

Figure 4: Quebec's Projected Revenues

Source: Quebec's 2012 budget

Lastly, the population of Quebec is projected to age faster than the Canadian average (Figure 5) putting further strain on their economy, and therefore revenues, and pressure on their network of social programs.

Figure 5: Proportion of Population Projected to be 65 and Over

Source: Statistics Canada's population projections using M4 scenario.

All this is to say – Quebec is in a bind, stuck between a rock and a hard place - much like many other provinces. While they need to maintain support for tertiary education to improve their competitiveness, this decision has to be balanced with ensuring enough resources to support other social programs that an increasingly aging population relies on, and a fair but competitive tax system in a country that has low-taxed Alberta and a continent that has low-taxed America.

I think the current discussion is too narrow. As with any other discussion on public policy, it has to be expanded to include other economic, social and public policy issues. In a world where priorities are increasingly competing for scarce resources, what is lacking from the current discussion are ideas on how to fund inexpensive tuition. What is lacking are debates on the best use of public dollars. What is lacking is a comprehensive discussion on the value and effectiveness of all public services and which society judges to be worthwhile. The debate has to be expanded to be relevant to Quebec's current situation and useful to find a solution.

Notes:

As with anything I produce, I encourage you to fact check these arguments which are just my personal opinion. In fact, if anybody is interested, I'm willing to provide the supporting worksheets with all the data.

Sources:
1) Quebec's 2012 Budget, Page C.22

2) Royal Bank of Canada, http://www.rbc.com/economics/market/pdf/provfcst.pdf & Conference Board of Canada’s Provincial Economic Outlook (Paid subscription required).