The Cost of Public Bike Sharing Systems

The latest status symbol of major cities of the world is the creation of "bike-sharing" systems, which allow the public to rent a bike at one docking station and dropping it off at another, for a small fee paid with a credit card.  The system is hailed as another major step towards a greener world, healthier citizens and more efficient public transportation.  The frequency of bike rentals is used in support of these claims. 

My short article below discusses the results of the few studies that have examined the validity of these claims and raised the forbidden question:  What do these wonderful systems cost?  The article was published in the Vancouver Sun on June 27, 2012 and aimed at the city's taxpayers who will soon be forced to pay for a service 99 percent of them never will use.

What about the Cost of Bike-Sharing?

The High Priests of the Green Religion in Vancouver City Hall are about to please their supporters with another innovation that will save Mother Earth from the users of automobiles who poison the atmosphere with carbon emissions and cause traffic congestion and deaths. 

To minimize opposition to this program the High Priests will launch a carefully designed propaganda campaign pointing to the success of such bike-share programs in the most sophisticated cities of the world, like Paris, London, San Francisco, Montreal and Toronto.  Success indicators will be the number of daily users and glowing testimonials from co-Religionists. 

The supporters of the Religion among lawyers will push for a way out of the conflict between the existing law requiring bicyclists to wear helmets and the absence of a technically feasible and affordable solution to the provision of helmets of the right size and guaranteed free from head-lice.  The solution already floated publicly is to allow cyclists on short trips to go without helmets. 

This propaganda from the High Priests needs to be treated with skepticism and considered in the light of much inconvenient evidence on the true benefits and costs of creating and operating the system.

Benefit sin terms of reduced pollution and congestion cannot be measured by the number of shared bike rides but needs to consider what other means of transport are replaced.  A study by McGill University researchers shows that in Montreal of 100 shared bike users, only ten would otherwise have used their own cars or taxis.  The other 90 would have used public transit, walked or used their own bikes. Not much greenhouse gas reduction here.

Unfortunately,this small gain comes at a high cost to taxpayers, much of it due to the theft of bikes and damages needing repair, in spite of efforts to make them as sturdy as possible.  Such bikes cost Paris$1,050 each. 

The numbers of lost and damaged bikes are staggering.  In Paris, 80 percent of the bikes have either been stolen or had to be replaced for other reasons.  Every day 1,500 bicycles out of 20,600 have to be repaired.  A regular user of the Paris system states: “Finding a decent one is now something of an urban treasure hunt.”  In London, 30 bikes out of 5,400 have to be repaired every day.

There are additional costs associated with the expensive docking stations. In London during the first six months of operation, replacement was needed for three damaged beyond repair and for ten that were stolen.  Twelve needed repairs after damage by motor vehicles or vandals.

Finally,there are the high capital costs associated with the system.  The interest payments plus the normal amortization of the assets should be covered by operating profits.  The experience of Montreal is not encouraging.

Thatcity’s bike-share program in its second year of existence had a total loss of$6.7 million after an operating profit of only $1.5 million.  As a result of these financial problems, in the spring of 2011 the City of Montreal had to save the company from bankruptcy with a loan of $37 million and a $71-million credit guarantee so that the company could pay its suppliers.

It is almost certain that the proposed bike share system in Vancouver will also bring virtually no benefits tithe environment and saddle with a large bill the silent majority of Vancouver taxpayers who will never use them.  The High Priests of the Green religion are very skillful in getting their way, if their success with dedicated bike lanes is any indication.  They can count on the silent majority remaining at home during the next election while the flock of believers will outvote them en masse.

Herbert Grubel
Professor of Economics(Emeritus), Simon Fraser University
Senior Fellow, The Fraser Institute

Letting the Market Determined the Number of Immigrants

This article appeared in the Globe & Mail newspaper on May 11, 2012 as part of a week-long series of articles discussing Canada's immigration policies and the merit of substantial increases in the annual numbers admitted into Canada.

Since the early 1980s, Canada’s immigration selection policies have focussed on the principal applicant’s highest educational achievements and language skills, explicitly to ensure that immigrants would be suitable for employment and economically successful once they arrived.

But data based on the 2005 census and published by Statistics Canada show these policies have not been successful.  Immigrants who arrived between 1987 and 2004 earned incomes that were on average equal to only 70 percent of the incomes of Canadians.  These recent immigrants have higher than average levels of unemployment and lower labour force participation rates.  They also disproportionately have incomes below the official poverty line.

Significantly, these recent immigrants pay income taxes that are only 54 percent of the national average.  Because of their low incomes, they also pay less than the average in other taxes.  At the same time, these immigrants are entitled to all of Canada’s generous social programs and enjoy at no costs the benefits of the country’s spending on infrastructure and security.

In Fiscal Transfers to Immigrants in Canada: Responding to Critics and a Revised Estimate, my co-author Patrick Grady and I estimated the average new recent immigrant is imposing a fiscal burden on Canadians of about $6,000 annually as they use that much more in government services than they pay in taxes.  The total fiscal burden in 2012 was around $20 billion for immigrants who arrived between 1987 and 2011.

This fiscal burden will never be repaid.  The 2005 employment income of the sons of second generation visible-minority immigrants (where one or both parents were born abroad), was only two thirds of non-immigrant Canadians.  Third and later generations will most likely have the same average incomes as other Canadians and thus will never pay enough taxes to compensate for the fiscal shortfall recorded by their parents.

Reforms of the present immigrant selection policies are needed to prevent a growing future fiscal burden. Immigration Minister Jason Kenney has begun this process. 

One of the most important changes is giving preference to applicants who have a pre-arranged employment contract for work in Canada.  Grady and I recommended this change because it would relieve civil servants of the responsibility of selecting immigrants on the basis of information that by its very nature is imperfect and would allow employers to make the initial decision as to which applicants have the needed occupational and language skills to earn their pay and become economically successful Canadians.

Limited experience with this pre-arranged job-offer criterion, which provincial governments have also embraced enthusiastically, shows much promise.  It is time to use job-offers as the main criterion for the admission of all skilled immigrants, who may be accompanied by their immediate family members.   

The successful operation of this system will require a quick approval process and continued government involvement in its administration and the screening of immigrants to protect public security and health.  Adequate resources must be devoted to monitor the income tax returns of immigrants to make sure they are indeed paid the amount promised in the employment contract and that they have not become unemployed for prolonged periods.

The avoidance of the fiscal burden also requires that the immigrants’ pre-arranged contract offers pay equal to at least the average income of Canadians.  This condition is needed to prevent a flood of low skilled immigrants with little earnings capacity who would not pay enough taxes to cover the cost of the public social programs they are entitled to.

The proposed policy would not only stop the growth of the fiscal burden but would solve two problems associated with the present system.  It would make the number of immigrants responsive to business cycle conditions and would determine how many immigrants were allowed to enter Canada annually. 

This number would no longer be the outcome of arbitrary decisions driven by politicians, bureaucrats and special interest groups but would be determined by labour market conditions and thus better serve the needs of the economy and all Canadians.

Commentary on Canada's New Legislation on Asylum Seekers

Submission to the Hearings of House of Commons Standing Committee on Citizenship and Immigration on Bill C-31 the Protecting Canada’s Immigration System Act on May 2nd, 2012

Chair and Honorable Members of the Committee:

I thank you for inviting me to share with you my views on pending legislation aimed at improving Canada’s immigration system.  Minister Jason Kenney, the government and the members of this Committee deserve much praise for taking on this difficult task.

By now you will have heard much criticism from well organized lawyers and human rights advocates about the short-comings of Bill C-31.  All of these criticisms deserve your attention and some may help to improve some detailed provisions of the Bill.

I will stay away from discussing the issues raised by these critics, except to urge the Committee to remember that the views of the lawyers and rights advocates are not entirely driven by their unselfish desire to protect the rights of asylum seekers.  These witnesses also have much at stake, professionally and personally.

I have no personal stake in the effects and operation of Canada’s refugee legislation.  My remarks are motivated by the desire to discuss how Bill C-31 will affect the well-being Canadians, which is a topic often neglected in discussions that focus on the effects the Bill will have on the well-being of asylum seekers.

However, before I do so, let me make clear that my analysis should not be interpreted as suggesting that Canada should withdraw from its commitment to help people to escape from persecution abroad. The issue, as I see it, is that while our commitment is and should remain firm, it should not be without limit.
 

We all give more to charity now when we can afford it than we did when we were young and poor, struggling to take care of our families.  The same principle applies to our government.  Bill C-31 will reduce the cost of our commitment to help foreigners.  It is therefore appropriate for our present poor fiscal conditions.

In this spirit, let me remind you of the undisputed existence of Canada’s serious fiscal problems due stubborn deficits and the effects of an aging population on the unfunded liabilities of pensions and health care programs.  In this unstable world we live in, these deficits are likely to be larger than forecast by many.

There is also no doubt about the fact that the administration of the existing refugee system is costly.  As Martin Collacott told you earlier and Joe Bissett will tell you in more detail tomorrow, the direct cost for every claimant has been estimated to be about 60 thousand dollars and the annual costs of dealing with all of the claimants in Canada are in the billions.

In addition, present refugee policies cause successful claimants to settle in Canada without having to pass the points test.  Studies have shown that most of them will have below average incomes and tax payments while they absorb benefits provided by our universal social programs.  My estimates suggest that the annual fiscal burden of such immigrants is about $6,000 on average and greater for admitted asylum seekers.

I believe that Bill C-31 will not only make the system fairer but that it will also reduce the number of asylum seekers and successful claimants.  These reductions will give rise to savings, which will reduce the deficit, allow governments to provide more public services or lower taxes.

These benefits of Bill C-31 going to Canadians are accompanied by costs to asylum seekers.  You have heard much from lawyers and other witnesses about violations of due legal process and the way in which seekers suffer from a reduction in standards of fairness in their treatment.  We are faced here with an iron law of economics.  Government benefits to some impose costs on others.

The trouble with Bill C-31 is that no estimates of the value of these benefits and costs exist.  Yet, in the end, your decision to vote should rationally be built on such calculations.  The value of feeling good about being generous to foreigners and even of meeting to the fullest extent commitments made through international agreements is not infinity.  If the benefits were one billion dollars for each less fairly treated applicant or wrongfully rejected claimant, the Bill would be more desirable than if the benefits were one million or one hundred or one thousand dollars.

In the absence of these numbers, you have the unenviable task of voting for a Bill without full knowledge of the benefits and costs.  My sympathies are with you.

In case you are interested in my personal views, let me tell you that I would vote in favour of Bill C-31 because based on knowledge gained in my study of economics, I believe that the likely benefits for Canadians are high enough to warrant the imposition of costs of somewhat less fair treatment and the likely small numbers of wrongly rejected asylum seekers.

But let me add frankly that I have a moral bias entering these views.  I believe that charity should start at home and that the well-being of foreigners should come second and only after we have gotten our fiscal house in order.

A video of my presentation to the Committee can be found at http://parlvu.parl.gc.ca/Parlvu/TimeBandit/PowerBrowser.aspx?ContentEntityId=8919&EssenceFormatID=848.  The presentation takes less than 10 minutes.  The site also shows the presentation by other witnesses and the questions posed by members of the Committee.

Ending Teacher Strikes - Permanently

Like most striking workers, BC teachers tend to believe they are underpaid and overworked. And like most employers today, the BC government is facing tough economic times and can’t afford to be generous with its workers.

It’s a classic labour relations standoff that stems from attitudes deeply imbedded in human nature and driving the almost universal belief that one’s work is not valued properly.

In market economies this belief is tamed by the invisible hand of competition. Employers who have unfilled vacancies pay more. If they are swamped by job applicants, they pay less. In the end, workers find jobs with the highest pay they can get and employers can afford to pay.

The market solution to the determination of workers’ pay was damaged when governments passed legislation allowing workers to form unions and permitting them to strike without having to pay for damages.

In the private sector, the ability of unions to extract benefits for their members through strikes is limited by market forces. If union demands are excessive, employers go bankrupt and the workers lose their jobs.

However, in the public sector, unions face no such limits. Politicians typically put up some resistance to union demands, but in the end give in and raise taxes to pay for the increased costs. Small tax increases do less electoral damage than do public sector strikes.

As a result of this game, public sector union members now enjoy compensation levels much above those for comparable private sector work. But the game is now over. Deficits are unsustainable, debt has become excessive, and the public opposes higher taxes. Politicians everywhere are looking for ways to deal with this new reality.

In British Columbia they have chosen to freeze the salaries of public sector employees. This policy has been accepted by all public sector unions, except that of the teachers.

Fights between the BC teachers union and the government have a long history and transcend party lines. They will always be there. Give people the power to decide what they should be paid, they will always try to use this power to get what they want.

The only permanent solution to this problem therefore is to deprive teachers of the right to strike. The government that granted that right can also withdraw it. Such a policy is consistent with the widely held view that anyone who does not want to work for an organization that is prohibited from striking is free to work for one where the right exists.

The policy will restore the role of market forces. The government as the employer will rationally set wages so that there are neither unfilled vacancies nor teachers looking for work. School curricula and working conditions for teachers will be set in response to demands from parents and the political pressures they generate with input from teachers.

To prevent only strikes but also increase the effectiveness of the educational system, the government should change the current system further by giving all parents vouchers that they spend on schools, which through competition are induced to provide the type and quality of education parents believe their children need.

Under this system, governments continue to meet their commitment to provide universal access to education. The big difference is that parents indirectly hire teachers that meet their standards, replacing the current system which sees teachers hired directly by government agencies that are much less sensitive to their children’s needs than are parents.

The use of vouchers will end some current practices that make contributions of questionable value to teaching effectiveness as determined by parents. Such practices involve time for preparation, further education and other conditions negotiated by the union. Merit will take the place of seniority in setting the pay of individual teachers.

The special needs of some students are readily accommodated under the voucher system by providing them with vouchers that compensate schools for the extra cost they need to incur.

There is no time like now for at least a debate, if not action, on the possible prohibition of strikes by teachers union and the universal use of vouchers. The public is tired of strikes, the deficits and debt caused by excessively generous wage package in the past and never-ending demands for better and costly working conditions. The public is looking for political leadership to deal with these problems, not just the band-aid solutions offered by the type of legislation now used.

(This article was published in the Vancouver Sun on March 14, 2012)

The Untold Tale About Income Inequality

The annual OECD report on income inequality released a short time ago has once again received its ritual media coverage in Canada with headlines like “Rich-poor gap growing in Canada” and “The rich are getting richer and the poor are getting poorer”.

The explanation of the growing income gap found in these stories fundamentally involves blaming free markets for causing the export of middle class jobs to the developing world, the privileged who exploit consumers to get fat salaries and bonuses and the politicians who buy financial support from the rich by lowering their income taxes.

There is never any consideration of the really important causes of income inequality in Canada. One of these arises from the aging of the population, which increases the reported income of the growing numbers who are near retirement and have income from work as well as their nest eggs. Increased income inequality due to this phenomenon should not be considered a blemish on society and require corrective policies.

One of the most important causes of growing inequality in Canada never mentioned in the media is due to the country’s immigrant selection policies. Statistics Canada reports that the incomes of recent immigrants initially is about 60 percent of the incomes of Canadians and rises to a maximum of 80 percent after ten years in the country.

Government data show that these recent immigrants are over-represented by more than 20 percent in LICO poverty statistics. (Low income cut-offs, or LICOs, are a gauge of the income level at which a family may be financially stressed because it has to spend a greater share of its income on basic needs, such as food, shelter and clothing, than an average family of similar size.) Of the immigrants living in poverty, 38 percent receive housing subsidies while only 23 percent of Canadians do. Immigrants with low skills compete with low income Canadians, depressing their wages and increasing inequality.

During the last 10 years alone, about 2.5 million immigrants have entered Canada and contributed to the growth in income inequality. Should it be reversed by raising income taxes on the rich, who already pay for fiscal transfers worth $6,000 a year to each immigrant due to progressive tax rates and universal access to government benefits and who already pay much to support the larger number of Canadians who have been pushed into the low-income class by competition from the many immigrants with low skills?

The media reports on income inequality never mention the life cycle of earnings experienced by all Canadians. After schooling, incomes are low but increase with age, reaching a peak around age 60 and drop again in retirement. Would Canadian society really be better off if the government gave more money to the young starting their careers and take it away from those at stages in life where incomes but also family obligations are highest?

These reports also fail to note the presence of Canadian adults in the low income classes that is due to temporary influences like illness, divorce, unemployment or life style choices that see them travel the world or study for a different career. Similarly those in the top income brackets are there only for a limited period of time, like the athletes, performers and artists whose extra-ordinary success often lasts only a few years. Many entrepreneurs and executives in the private sector earn high incomes for a short time in their work lives.

The importance of life-cycle incomes and temporary influences on the distribution of income is documented in studies of the incomes of individuals through time. Statistics Canada tracked low-income earners between 2002 and 2007 and found that 60 per cent moved into a higher income group after one year, 79 per cent did so after two, and nearly 90 per cent after six. In the United States, of 100 workers who were in the bottom 20 percent of earners in 1996, 45 percent had moved to higher brackets nine years later. Of 100 in the top quintile of earners, 39 percent had moved to lower ones.

It is a tragedy that these truths about causes of income equality in Canada rarely reach the public and leave it with a seriously distorted view of conditions in Canada.

Bad News from the Immigration Front

Immigration Minister Jason Kenney announced recently that Canada will allow the entry of 240,000 permanent residents to enter the country next year. This is bad news for Canada struggling with a large fiscal deficit, unemployment, income inequalities and environmental problems.

A recent study, which I co-authored with Patrick Grady, showed that recent immigrants who arrived between 1987 and 2004 cost taxpayers an average of $6,000 every year. Applying this figure to the projected number of immigrants, by the end of next year, the tax payer burden will have increased by $1.4 billion and will continue to do so for many years.

This burden does not appear in any government budgets. It arises from a fact, found in data published by Statistics Canada: Recent immigrants on average earn about 70 percent of what other Canadians earn. Because of the progressive income tax system, they pay only half of what other Canadians do. Their low incomes also cause them to pay lower amounts of other taxes.

At the same time, the immigrants are entitled to and use all of the benefits provided by Canada’s welfare state. The result is the annual net fiscal burden of $6,000 per immigrant.

This cost does not account for the other negative effect the immigrants have on unemployment, congestion, pollution and the number living in poverty. Protests about income inequality should be directed at immigration and other government policies, not the free market system.

The Minister should be praised for a shift of emphasis on the selection of immigrants in the Canadian Experience Class program, which fast tracks skilled foreign workers and graduate students who have spent time in Canada on temporary permits or student visas, but the effect on the fiscal deficit is minimal. The number in the Canadian Experience Class in the first full year of the program in 2009 was 2,545. Assuming that on average they have a spouse and one child, under the existing classification system, the program will affect 7,635 immigrants, which comes to 3.2 percent of the 240,000 total to be admitted next year. Nor will the numbers grow much in the future. Only small numbers of temporary workers and students qualify.

According to the Minister, immigrants are needed to meet labour shortages. This argument involves circular reasoning. These immigrants create demand for labour through their needs for housing, schools, hospitals, universities, roads, bridges, sewers, water supply, consumer goods and services. In fact, most of the current and projected labour shortages are the result of recent mass immigration.

The demand for housing from immigrants is especially notable. Assuming an average family size of three and the same settlement pattern as in recent years, new immigrants next year in Toronto will require 27,272 dwelling units, 2,273 every month or 568 every week of the year. The corresponding weekly figures are 235 for Vancouver and 233 for Montreal. To build these accommodations requires much labour and scarce land. It will also lead to higher housing costs and the number of homeless.

Worth noting also is the effect of these immigrants on health care. Given that the average physician in Canada has 240 patients, by the end of next year one thousand additional doctors will be needed. Canada already has a growing shortage of physicians, so waiting lists will lengthen even more, as will crowding in the emergency departments of hospitals.

If the past is guide to the future, there will not be enough doctors in next year’s cohort to meet the new demand. The granting of medical licenses to all immigrants who claim to be a doctor is not a solution either. Canadians will not stand for the deterioration in the quality of services they receive from their doctors.

Canada’s immigration policy needs to be reformed. The influence of politicians, civil servants and the immigration industry on its formulation should be minimized. The heralded points system has failed and needs to be scrapped.

In its place should be market forces used in the selection of economic immigrants (refugees raise a different set of issues and are a small proportion of the total anyway). The basic concept is that landed immigrant visas will be issued only to applicants who have a verified, pre-arranged employment contract at a pay equal to at least that of the average of Canadian. They may be accompanied by spouses and under-age children.

With this minimum income, immigrants will no longer impose a fiscal burden on taxpayers and have a positive effect on average per capita incomes of all Canadians. In addition, the annual inflows will vary according to cyclical labour market conditions, reducing unemployment when economic growth is slow.

The adoption of the proposed policy will make immigrants serve Canada, not Canada serve immigrants. Voters, including past immigrants, are bound to reward politicians who make this change.

Herbert Grubel
Professor of Economics (Emeritus), Simon Fraser University
Senior Fellow, The Fraser Institute

Bad Fiscal News from the Immigration Front

Immigration Minister Jason Kenney just announced that Canada will allow 240,000 permanent residents to enter the country next year. This is bad news for Canada struggling with a large fiscal deficit, unemployment, income inequalities and environmental problems.

The Minister should be praised for a shift of emphasis on the selection of immigrants in the Canadian Experience Class program, which fast tracks skilled foreign workers and graduate students who have spent time in Canada on temporary permits or student visas, but the effect on the fiscal deficit is minimal.

A recent study, which I co-authored with Patrick Grady, showed that recent immigrants who arrived between 1987 and 2004 cost taxpayers an average of $6,000 every year. Applying this figure to the projected number of immigrants, by the end of next year, the tax payer burden will have increased by $1.4 billion and will continue to do so for many years.

This burden does not appear in any government budgets. It arises from a fact, found in data published by Statistics Canada: Recent immigrants on average earn about 70 percent of what other Canadians earn. Because of the progressive income tax system, they pay only half of what other Canadians do. Their low incomes also cause them to pay lower amounts of other taxes.

At the same time, the immigrants are entitled to and use all of the benefits provided by Canada’s welfare state. The result is the annual net fiscal burden of $6,000 per immigrant.

This cost does not account for the other negative effect the immigrants have on unemployment, congestion, pollution and the number living in poverty. Protests about income inequality should be directed at immigration and other government policies, not the free market system.

The new policy aimed at increasing the earnings power and tax payments of immigrants is laudable, but in effect laughably small. The number in the Canadian Experience Class in the first full year of the program in 2009 was 2,545. Assuming that on average they have a spouse and one child, under the existing classification system, the program will affect 7,635 immigrants, which comes to 3.2 percent of the 240,000 total to be admitted next year. Nor will the numbers grow much in the future. Only small numbers of temporary workers and students qualify.

According to the Minister, immigrants are needed to meet labour shortages. This argument involves circular reasoning. These immigrants create demand for labour through their needs for housing, schools, hospitals, universities, roads, bridges, sewers, water supply, consumer goods and services. In fact, most of the current and projected labour shortages are the result of recent mass immigration.

The demand for housing from immigrants is especially notable. Assuming an average family size of three and the same settlement pattern as in recent years, new immigrants next year in Toronto will require 27,272 dwelling units, 2,273 every month or 568 every week of the year. The corresponding weekly figures are 235 for Vancouver and 233 for Montreal. To build these accommodations requires much labour and scarce land. It will also lead to higher housing costs and the number of homeless.

Worth noting also is the effect of these immigrants on health care. Given that the average physician in Canada has 240 patients, by the end of next year one thousand additional doctors will be needed. Canada already has a growing shortage of physicians, so waiting lists will lengthen even more, as will crowding in the emergency departments of hospitals.

If the past is guide to the future, there will not be enough doctors in next year’s cohort to meet the new demand. The granting of medical licenses to all immigrants who claim to be a doctor is not a solution either. Canadians will not stand for the deterioration in the quality of services they receive from their doctors.

Canada’s immigration policy needs to be reformed. The influence of politicians, civil servants and the immigration industry on its formulation should be minimized. The heralded points system has failed and needs to be scrapped.

In its place should be market forces used in the selection of economic immigrants (refugees raise a different set of issues and are a small proportion of the total anyway). The basic concept is that landed immigrant visas will be issued only to applicants who have a verified, pre-arranged employment contract at a pay equal to at least that of the average of Canadian. They may be accompanied by spouses and under-age children.

With this minimum income, immigrants will no longer impose a fiscal burden on taxpayers and have a positive effect on average per capita incomes of all Canadians. In addition, the annual inflows will vary according to cyclical labour market conditions, reducing unemployment when economic growth is slow.

The adoption of the proposed policy will make immigrants serve Canada, not Canada serve immigrants. Voters, including past immigrants, are bound to reward politicians who make this change.