Equalization’s Negative-Option Agreement; or How Provinces Learned to Stop Developing and Love the Transfer

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By John Williamson, Vice-President, Research

Under Canada’s equalization program, Ottawa transfers nearly $18-billion to provinces with less-robust economies. Today, the three Maritime Provinces receive $3.8-billion each year. Quebec’s allotment is $10-billion.

Provincial governments collect tax and royalty revenues from natural resource development, like drilling for oil or fracking shale gas. Equalization, at one time, was reduced by one dollar for each new tax dollar a province collected from its non-renewable resources. But for some provinces, losing a dollar in equalization for a dollar earned from resources wasn’t enough of an incentive to encourage economic growth. So Ottawa changed its formula. The equalization clawback dropped from 100% to 50% on new resource revenues. That way any have-not provinces that developed local economies would be financially ahead.

Yet, Quebec and the Atlantic Provinces still do not permit hydraulic fracturing of shale gas deposits. They say it is unsafe. Never mind that Saskatchewan, Alberta and B.C. all frack for gas and have prospered economically while safeguarding the environment. Or that equalization is funded, in part, by the development of shale gas resources in western Canada.

One problem with Canada’s equalization program is how it accepts the attitude behind negative-option billing. Negative-option billing is the practice of companies charging consumers for a good without consent by assuming consumers want the product. Equalization is the mirror opposite. Instead of being billed for something, the equalization recipient provinces are sent federal dollars. No questions asked. If they do nothing, they keep the money. A province only forgoes 50¢ of its transfer for every $1 earned when its acts by developing non-renewable resources. But that requires some economic effort.

Consumers hate negative-option billing for good reason. It’s an gratuitous business practice that assumes acceptance of a transaction without notice or even a handshake. But for eastern governments the offer of receiving equalization dollars for no effort is a perfect arrangement. So long as Quebec and Atlantic governments don’t develop shale gas resources the equalization transfers will continue to arrive. That this arrangement has resulted in slow-growth, high unemployment economies is a regrettable by-product of equalization that should be discussed.

 

Hurting the poor with wage policies

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By Marco Navarro-Génie, President & CEO

Advocates of higher minimum wages often believe that higher wages alone will help lift people out of poverty. While on an individual basis there is a common but simplistic sense that this is true, the aggregated economic reality is different. Forcing wages up artificially hurts those who are employed in low-wage jobs.

Economies are vast collections of transactions and relationships that echo in various directions, often unforeseen.

A new study into Seattle’s minimum wage hike to $11 per hour shows results that were contemplated by market theory. Such results should give Atlantic Canadian (and Alberta) governments pause when suggesting $15 CDN per hour or more.

The study found that workers end up with less money in their pockets:

  1. While some workers made more per hour than before, fewer workers were employed in the same jobs.
  2. Many of those still employed before the increase were subsequently working fewer hours.
  3. There is an increase in automation of low end jobs.  McDonald’s restaurants, as an example, are now experimenting with the automation of food orders.

There is no magic involved in having predicted that this would be so.  When the cost of labour goes up, businesses with limited resources can purchase less of it.  One can afford less labour hours, so one cuts employee positions or the number of work hours if one keeps all employees.

In a robust economy like Seattle’s the net result is that forcing wages upward hurts those the policy claims to help, the poor.  In a region like Atlantic Canada where we already struggle with unemployment, the consequences of pushing minimum wages upward so dramatically could have dire consequences.

 

Is it time to destroy the dogma against private healthcare?

healthcarea.jpgBy Jackson Doughart, Policy Analyst

The 18th-century French political theorist Joseph de Maistre is famous for having written that people get “the government they deserve.” In Atlantic Canada, you could say that we get the healthcare we deserve.

I have no family doctor in Halifax, so like many residents I go to a walk-in clinic to see a doctor. All told, it is a pretty good service. Anyone can go, and provided that they are legal residents or citizens the cost of medical advice is covered by the state’s medicare system. The downside, of course, is wait times. On a recent visit I waited about three hours to get in — not intolerable, but certainly an inconvenience.

Given the popularity of our single-payer, socialized health system, I was surprised to see how many of the co-patrons were visibly frustrated by the wait. About every 15 minutes, someone would walk up to ask the poor receptionist how much longer it would take to see the doctor. But how many of these people would support the introduction of private options to our health system, such that one could pay out-of-pocket, or benefit from insurance coverage, for a similar service that forwent the rationing of the public-only model? For those who could not afford to pay, their wait times in public clinics would surely be reduced, if those who were willing and able to do so decamped to private care.

In my native Prince Edward Island, dissatisfaction with the congested health system is a perennial topic of public discourse. And yet the possibility of deflating the problem through more choice and fee-based services gains no traction. People seem to think that keeping out private health care is some kind of patriotic duty, no matter how bad the public service.

People clearly want to pay for the rickshaw and receive the Mercedes.

It’s all totally irrational: by maintaining the Soviet shoe factory model for health service delivery, we rob ourselves of the chance for more efficient, market-driven options. And things are getting worse: health spending as a share of provincial budgets has risen in recent years, taking valuable funds away from other important programs and contributing to a high tax burden.

If we are to be serious about improving health services, Item #1 has to be destroying the dogma against private care options. Only once people stop seeing the possibility as a taboo can their grievances against the system be legitimate.